UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2001 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______ .
Commission file number 0-15187
IFX CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 36-3399452
- --------------------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
707 Skokie Blvd., Suite 580
Northbrook, Illinois 60062
--------------------------
(Address of principal executive offices)
(847) 412-9411
--------------
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock: $.02 Par Value, 14,233,654 shares as of March 31, 2001.
Page 1
IFX CORPORATION AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Condensed consolidated balance sheets as of
March 31, 2001 (unaudited) and June 30, 2000 3
Condensed consolidated statements of operations
for the three and nine months ended March 31, 2001
(unaudited) and 2000 (unaudited) 4
Condensed consolidated statements of cash flows
for the nine months ended March 31, 2001
(unaudited) and 2000 (unaudited) 5
Notes to condensed consolidated financial statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures about Market Risk 13
PART II OTHER INFORMATION
Item 4 Submission of matters to a vote of shareholders 14
Item 6 Exhibits and reports on Form 8-K 14
(a) Exhibits
(b) Reports on Form 8-K
SIGNTAURES 15
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
IFX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2001 2000
-------------- -------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 2,999,800 $ 13,835,500
Restricted cash 1,559,300 --
Receivables, net of allowance for doubtful
accounts of $1,461,000 and $922,500 at
March 31, 2001 and June 30, 2000, respectively 2,593,200 1,208,600
Receivable, related party 729,000 --
Net assets of discontinued operations 442,800 952,600
Income taxes receivable 1,571,300 1,632,600
Prepaid expenses 1,616,700 746,000
-------------- --------------
Total current assets 11,512,100 18,375,300
PROPERTY AND EQUIPMENT, NET 22,305,200 15,190,300
OTHER ASSETS
Acquired customer base, net of accumulated
amortization of $12,657,800 and $5,511,800,
at March 31, 2001 and June 30, 2000, respectively 16,385,300 21,220,500
Investments 2,991,900 3,180,600
Foreign taxes recoverable 1,018,300 1,422,400
Other assets 496,800 843,100
-------------- --------------
Total other assets 20,892,300 26,666,600
-------------- --------------
TOTAL ASSETS $ 54,709,600 $ 60,232,200
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,514,700 $ 6,683,300
Accrued expenses 4,051,900 3,243,500
Deferred revenues 598,300 361,900
Liabilities related to acquisitions 134,900 1,568,000
Notes payable - current portion 32,900 --
Capital lease obligations - current portion 5,055,200 1,935,300
-------------- --------------
Total current liabilities 19,387,900 13,792,000
LONG-TERM LIABILITIES
Notes payable and other long term liabilities 1,437,400 1,477,600
Deferred gain on sale of investment 4,451,900 4,451,900
Capital lease obligations, less current portion 9,748,200 9,032,500
-------------- --------------
Total long-term liabilities 15,637,500 14,962,000
-------------- --------------
TOTAL LIABILITIES 35,025,400 28,754,000
-------------- --------------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 10,000,000 shares authorized,
2,030,869 and 1,210,398 issued and outstanding at March 31,
2001 and June 30, 2000, respectively. 25,000,000 14,900,000
Common stock, $.02 par value; 50,000,000 shares authorized,
14,233,654 and 13,295,183 shares issued and outstanding at
March 31, 2001 and June 30, 2000, respectively 284,700 265,900
Additional paid-in capital 74,863,100 69,833,600
Accumulated deficit (72,142,500) (41,059,800)
Accumulated other comprehensive loss (157,800) (329,000)
Deferred compensation (8,163,300) (12,132,500)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 19,684,200 31,478,200
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 54,709,600 $ 60,232,200
============== ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Page 3
IFX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
2001 2000 2001 2000
-------- --------- -------- --------
REVENUES
Dial-up 1,634,200 2,076,900 5,422,200 5,004,300
Dedicated line services 2,163,500 1,066,100 4,448,900 1,497,600
Sales to related party 3,597,300 -- 11,414,000 --
Web hosting and design services 354,600 125,200 986,700 293,100
Other 1,038,200 1,000 2,334,600 290,800
----------- ------------ ------------ -------------
Total revenues 8,787,800 3,269,200 24,606,400 7,085,800
COSTS AND EXPENSES
Cost of revenues 5,213,900 2,385,600 15,527,600 4,933,500
General and administrative 6,450,100 5,359,200 20,634,300 12,725,600
Sales and marketing 820,000 4,668,900 2,648,300 6,713,500
Depreciation and amortization 4,390,900 2,262,600 11,821,100 4,617,500
Non-cash stock compensation 1,184,800 2,289,500 4,974,700 3,930,000
----------- ------------ ------------ -------------
Total operating expenses 18,059,700 16,965,800 55,606,000 32,920,100
----------- ------------ ------------ -------------
Operating loss from continuing operations (9,271,900) (13,696,600) (30,999,600) (25,834,300)
OTHER INCOME (EXPENSE)
Interest income 80,000 83,800 539,700 233,900
Interest expense (857,900) (44,400) (1,175,500) (44,400)
Loss from operations of equity investees - (6,400) (3,721,400) (41,900)
Gain on sale of investment, related party - 1,900,000 - 1,900,000
Other (538,800) 700 (476,200) 68,900
----------- ------------ ------------ -------------
Total other income (expense) (1,316,700) 1,933,700 (4,833,400) 2,116,500
----------- ------------ ------------ -------------
Loss from continuing operations before
income taxes (10,588,600) (11,762,900) (35,833,000) (23,717,800)
Income tax benefit 794,000 301,600 2,036,500 1,728,600
----------- ------------ ------------ -------------
Loss from continuing operations (9,794,600) (11,461,300) (33,796,500) (21,989,200)
Income from discontinued operations, net of
taxes 406,300 494,600 2,713,800 1,434,600
----------- ------------ ------------ -------------
NET LOSS $(9,388,300) $(10,966,700) $(31,082,700) $ (20,554,600)
=========== ============ ============ =============
BASIC AND DILUTED LOSS PER SHARE:
Continuing operations $ (0.70) $ (1.01) $ (2.48) $ (2.41)
Discontinued operations 0.03 0.04 0.20 0.16
----------- ------------ ------------ -------------
Net loss $ (0.67) $ (0.97) $ (2.28) $ (2.25)
=========== ============ ============ =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic and diluted 13,953,797 11,315,382 13,631,545 9,121,522
=========== =============== ============== =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Page 4
IFX CORPORATION AND SUBSIDIARIES
CONDENDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED MARCH 31,
--------------------------------------
2001 2000
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (31,082,700) $ (20,554,600)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation 4,675,100 1,453,400
Amortization 7,146,000 3,164,100
Deferred taxes - (1,728,600)
Bad debt expense 858,300 644,700
Non-cash stock compensation 4,974,700 3,930,000
Equity in net (income) loss of equity investees 3,721,400 41,900
Effect of deconsolidation of Tutopia.com (2,391,700) -
Change in net assets of discontinued operations 509,800 3,969,500
Changes in operating assets and liabilities:
Foreign taxes recoverable 404,100 (799,700)
Receivables (2,242,900) (856,900)
Receivable, related party (729,000) -
Income tax receivable 61,300 -
Prepaid expenses (870,700) -
Other assets 346,300 (1,196,300)
Due from affiliates - (112,500)
Deferred revenues 236,400 90,700
Accounts payable and accrued expenses 3,402,100 6,479,700
-------------- -------------
Cash provided (used) by operating activities (10,981,500) (5,474,600)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, primarily customer base (656,600) (1,927,500)
(Increase) decrease in investments and advances to affiliates - 3,205,200
Increase (decrease) in notes receivable - (7,500)
Purchase of property and equipment (6,131,500) (4,382,600)
------------ -------------
Cash provided (used) by investing activities (6,788,100) (3,112,400)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) of notes payable (7,300) 111,900
Payments of capital lease obligations (1,770,700) (43,900)
Restricted cash (1,559,300) -
Issuance of common stock - 16,634,400
Issuance of preferred shares 10,100,000 -
------------ -------------
Cash provided (used) by financing activities 6,762,700 16,702,400
Effect of exchange rate changes on cash and cash equivalents 171,200 482,600
------------ -------------
Increase (decrease) in cash and cash equivalents (10,835,700) 8,598,000
Cash and cash equivalents, beginning of period 13,835,500 5,482,800
------------- -------------
Cash and cash equivalents, end of period $ 2,999,800 $ 14,080,800
============= =============
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
DISCLOSURE:
Value of stock issued in conjunction with acquisitions $ 2,977,800 $ 12,854,500
============= =============
Acquisition of equipment through assumption of capital lease obligations $ 5,606,300 $ 6,679,100
============= =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Page 5
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
1. BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 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, these
unaudited condensed consolidated financial statements reflect all material
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the consolidated financial position and consolidated
results of operations for the interim periods presented. Operating results for
the interim reporting periods presented are not necessarily indicative of the
results that may be expected for the year ending June 30, 2001. These unaudited
interim condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K/A for the year ended June
30, 2000.
The condensed consolidated financial statements include the accounts of IFX
Corporation, its wholly-owned subsidiaries, and investments in which the Company
has a controlling financial interest (collectively referred to herein as "IFX"
"IFX Networks" or the "Company"). On August 31, 2000, the Company's investment
in its majority-owned subsidiary, Tutopia.com ("Tutopia"), was reduced from
approximately 85% to approximately 47%. As a result of this reduction, the
Company began accounting for Tutopia under the equity method. Accordingly, the
Company restated prior periods to reflect this change in reporting entity and
this restatement had no effect on the Company's loss or loss per share as
previously reported. Certain reclassifications have been made to the prior
period financial statements to conform to the March 31, 2001 presentation.
All significant intercompany transactions have been eliminated in consolidation.
IFX has created an extensive pan-regional Internet platform as a leading
provider of Internet-based network products and services throughout Latin
America. IFX's network operations are based in Miami, Florida with the IFX
network currently spanning over 57 cities in 14 countries: Argentina, Bolivia,
Brazil, Chile, Colombia, El Salvador, Honduras, Guatemala, Mexico, Nicaragua,
Panama, Uruguay, Venezuela and the United States.
Long-Lived Assets
In the event that facts and circumstances indicate that the costs of assets may
be impaired, an evaluation of the recoverability is performed. If an evaluation
is required, the estimated future undiscounted cash flow associated with the
asset is compared to the asset's carrying amount to determine if a write-down to
market value is required. The Company evaluates the possible impairment of long-
lived assets by reviewing cash flows generated on a country-by-country basis,
which is consistent with the way the Company's segments are reported. The
Company does not believe that any significant impairment has occurred at March
31, 2001.
Computation of Earnings or Loss per Common Share
Basic earnings per share are computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per common share
is calculated based upon the sum of the weighted average number of shares
outstanding and the weighted average number of potentially dilutive securities
which consist of stock options and common shares issuable upon the conversion of
Preferred Stock. Approximately 4.3 million and 1.6 million of potentially
dilutive securities have been excluded from the calculation of diluted loss per
share from continuing operations for the three and nine month periods ended
March 31, 2001 and 2000, respectively, since their effect would have been anti-
dilutive.
Liquidity Assessment
Management expects to utilize existing cash and cash-equivalents together with
operating cash flows, funds from the earn-out payments, and amounts to be paid
by Tutopia to fund the Company's operations. Due primarily to slower than
anticipated reductions in general and administrative expenses and slower
dedicated-line revenue growth than anticipated, IFX raised additional equity
capital during the quarter ended June 30, 2001, as described below. In the
past, the Company has raised funds through the issuance of debt and equity
securities and IFX may issue debt or make equity offerings in the future,
depending on prevailing market conditions. Management is not certain whether
the Company in the future will be able to continue raising funds through the
issuance of securities or through other means on acceptable terms, or at all.
The Company's inability to raise sufficient funds in the future could affect
IFX's ability to meet its expansion plans, or satisfy capitalized lease
obligations, and other obligations and IFX could have to postpone most of the
Company's expansion goals and capital expenditures until financing is
obtained. Cash needs will also be affected by whether Tutopia is able to
fulfill its obligations to make cash payments under its network agreement
with IFX.
2. DISCONTINUED OPERATIONS
Income from discontinued operations primarily consists of amounts earned, net of
related expenses, based on the financial performance of entities divested prior
to July 1, 2000. Such amounts are expected to continue, depending upon the
financial performance of the divested entities, through the Company's fiscal
year ending June 30, 2002. In September 2000, the Company sold for $2.4 million
a preference share which entitled the Company to future earn-out payments from
one of the divested entities. Such amount was recognized in discontinued
operations in the accompanying condensed consolidated statements of operations.
The information set forth in the remaining Notes to Condensed Consolidated
Financial Statements relates to continuing operations unless otherwise
specified.
Page 6
3. RECENT DEVELOPMENTS
In January 2001 the Company entered into an agreement with Speedcom Finance to
increase the Company's $1.2 million lease line to $2 million, providing the
Company financing for the purchase of wireless networking equipment from
Speedcom Wireless Corporation. The agreement required the Company to obtain an
irrevocable letter of credit, which caused the Company to place approximately
$0.6 million in restricted cash. As of March 31, 2001, IFX has leased
approximately $2 million of equipment under this agreement.
CrossKeys Agreement. In November 2000, the Company entered into an agreement
with CrossKeys to purchase CrossKey's Dyband software for approximately $0.4
million. CrossKeys provides bandwidth management software and services.
IBM Global Financing. In November 2000, the Company entered into an agreement
with IBM Global Financing, providing the Company financing for approximately
$2.1 million of IBM equipment and services. As a result of entering into the
agreement, the Company obtained an irrevocable letter of credit that required
the Company to place approximately $0.5 million in restricted cash.
Nortel Networks Agreement. In October 2000, the Company entered into an
agreement with Nortel Networks (CALA), Inc., providing the Company with the
option to lease up to $5.0 million of Nortel networking equipment, software and
consulting services. The equipment will be used to continue to expand the
Company's network. As of March 31, 2001, approximately $1.0 million has been
leased under the agreement.
Inktomi Agreement. In September 2000, IFX entered into a $0.5 million agreement
with Inktomi, a software caching management company. Under the terms of the
agreement, IFX will purchase the Inktomi software caching solution to help
improve the Company's bandwidth utilization and quality of service.
Network Appliance. In September 2000, IFX entered into a $1.4 million lease
agreement with Network Appliance, a storage and caching provider. Under the
terms of the agreement, IFX has the option to lease up to $1.4 million of
storage and caching equipment from Network Appliance. As of March 31, 2001
approximately $0.4 million has been leased under the agreement.
UBS Capital Americas III, L.P. led a $20 million investment in Tutopia.com. On
August 31, 2000, Tutopia.com, Inc., received $20 million of private equity
financing from a group led by UBS Capital Americas. An entity controlled by Mr.
Lee Casty, a former significant shareholder of the Company, participated in this
group, and accounted for approximately $4.9 million of the group's investment.
Following this financing, IFX owned approximately 47% of the outstanding stock
of Tutopia. UBS Capital Americas and its affiliates which purchased Tutopia
Series A Preferred Stock have the right to appoint a majority of Tutopia's
directors, the entity controlled by Mr. Casty has the right to appoint one
director of Tutopia, and IFX has the right to appoint one director of Tutopia.
Prior to the UBS-led investment; Tutopia represented one of the Company's two
major business lines. IFX has entered into an agreement with Tutopia to be the
provider of Internet connectivity services to Tutopia for a period of three
years. Either IFX or Tutopia can renew the interconnectivity agreement for a
fourth year. After that agreement terminates, there can be no assurances that
the Company will be the sole supplier of Internet connectivity services to
Tutopia.
UBS Capital Americas III, L.P., $25 million investment in IFX. On June 15, 2000,
IFX received a $14.9 million round of private equity financing led by UBS
Capital Americas III, L.P. ("UBS Capital Americas"). An additional $10.1 million
was received on July 17, 2000, from a group lead by UBS Capital Americas. In
exchange, IFX issued in total 2,030,869 Series A Preferred Shares. The proceeds
were used in part to further the integration of IFX's information systems
infrastructure, to increase marketing activities and to expand the Company's
direct sales force to service the corporate market in Latin America. The Company
also used these funds for working capital purposes. (See Note 10)
4. TUTOPIA.COM OPERATING RESULTS
As discussed in Note 1, during September 2000, the Company's ownership interest
in Tutopia was reduced from approximately 85% to approximately 47% and, as a
result, the Company began accounting for its investment in Tutopia under the
equity method. During the three-month period ended March 31, 2001 and the nine-
month period ended March 31, 2001, IFX derived approximately 40.9% and 46.4%,
respectively, of its revenue from Tutopia. As of March 31, 2001, IFX has
accounts receivable from Tutopia in the amount of approximately $729,000.
The unaudited operating results of Tutopia.com are as follows:
Three months ended March 31, Nine months ended March 31,
---------------------------- ---------------------------
2001 2000 2001 2000
Unaudited Unaudited Unaudited Unaudited
------------ ----------- ------------ -----------
Revenues $ 654,200 $ - $ 914,200 $ -
Cost of revenues 3,997,400 - 13,347,500 -
------------ ----------- ------------ -----------
Gross loss 3,343,200 - 12,433,300 -
Net loss $ 4,928,300 $ - $ 18,768,500 $ -
============ =========== ============ ===========
During the first quarter of fiscal 2001, the Company's investment in Tutopia was
reduced to $0 under the equity method of accounting. Accordingly, the Company
has not recognized its proportionate share of Tutopia's losses since the first
quarter.
Selected financial information from Tutopia's unaudited Balance Sheet:
March 31, 2001
Unaudited
--------------
Current assets $ 4,023,100
Total assets 5,601,600
Current liabilities 1,709,200
Total liabilities 1,709,200
Stockholder's equity $ 3,892,400
5. SEGMENT REPORTING
The Company is structured primarily around the geographic markets it serves and
operates reportable segments in Argentina, Bolivia, Brazil, Chile, Mexico, and
Venezuela. All of the segments provide Internet-related network services. The
Company evaluates performance based on results of operations before income taxes
excluding interest income and expense, income (loss) from investees accounted
for under the equity method, and gains or losses from securities and other
investments. During the three and nine month periods ended March 31, 2001, the
Company derived approximately 40.9% and 46.4%, respectively, of its revenue from
Tutopia.
Selected unaudited financial information for the three months ended March 31,
2001 and 2000 by segment is presented below:
Three months ended March 31, 2001 Three months ended March 31, 2000
------------------------------------------------- ------------------------------------------------
Total Revenues Loss from continuing Total Revenues Loss from continuing
operations before operations before
income taxes income taxes
Unaudited Unaudited Unaudited Unaudited
------------------- ------------------------ ------------------- -----------------------
Argentina $ 1,042,100 $ (383,700) $ 86,400 $ (699,300)
Bolivia 419,800 (194,700) 149,600 (286,300)
Brasil 1,386,500 (1,893,800) 1,435,300 (1,647,100)
Chile 963,400 (333,100) 409,400 (250,100)
Mexico 1,326,500 (347,300) 537,700 (495,600)
Venezuela 751,600 (208,400) 391,400 (50,200)
All Other 2,897,900 (7,227,600) 259,400 (8,334,300)
-------------- ------------ ------------- -------------
Total $ 8,787,800 $(10,588,600) $ 3,269,200 $ (11,762,900)
============== ============ ============= =============
Page 7
Selected unaudited financial information for the nine months ended March 31,
2001 and 2000 by segment is presented below:
Nine months ended March 31, 2001 Nine months ended March 31, 2000
-------------------------------------------------------- --------------------------------------------------------
Total Revenues Loss from continuing Total Assets Total Revenues Loss from continuing Total Assets
operations before at 3/31/01 operations before at 3/31/00
income taxes income taxes
Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited
--------------- -------------------- --------------- ---------------- ------------------ ----------------
Argentina $ 2,335,300 $ (1,543,200) $ 2,611,200 $ 105,800 $ (1,404,800) $ 1,083,800
Bolivia 1,087,200 (596,000) 2,228,200 376,300 (545,300) 1,256,800
Brasil 4,002,200 (5,137,400) 17,591,900 2,443,300 (2,185,500) 13,843,600
Chile 2,785,700 (669,900) 4,988,300 1,215,100 (1,478,100) 5,322,700
Mexico 2,945,500 (2,225,900) 7,150,100 1,227,500 (832,300) 3,752,700
Venezuela 1,929,300 (1,195,000) 2,514,200 1,124,500 (518,200) 1,490,200
All Other 9,521,200 (24,465,600) 17,625,700 593,300 (16,753,600) 26,276,000
------------- --------------- -------------- ------------- --------------- --------------
Total $ 24,606,400 $ (35,833,000) $ 54,709,600 $ 7,085,800 $ (23,717,800) $ 53,025,800
============= =============== ============== ============= =============== ==============
6. ACCRUED LIABILITIES ON ACQUISITIONS
A majority of IFX's acquisitions have been structured such that the Company pays
an agreed upon percentage of the purchase price at closing ("first payment")
with the remainder of the purchase price paid 60 to 360 days after closing
("second payment"). The amounts owed by IFX to the Internet Service Providers
("ISP's") it has acquired are classified as liabilities related to acquisitions.
As of March 31, 2001 and June 30, 2000, IFX had accrued approximately $0.1
million and $1.6 million, respectively of such amounts. In general, the amounts
are payable in cash or common stock of the Company at the fair market value on
the date the obligation is settled.
7. STOCKHOLDERS' EQUITY
During the three months ended March 31, 2001, the Company issued approximately
350,100 shares of common stock which a majority was issued as second payments
related to acquisitions of ISPs. During the three months ended March 31, 2001,
the Board of Directors approved the reservation of an additional 731,790 shares
of common stock for stock options and warrants bringing the total number to
approximately 4.6 million shares of the Company's common stock reserved for
stock options and warrants under the Company's 1998 Stock Option and Incentive
Plan. The Board of Directors also approved the adoption of the IFX Corporation
2001 Stock Option Plan and reserved approximately 1.3 million common shares for
issuance under such plan.
8. INCOME TAX PROVISION
Income tax benefits are recorded to the extent that the Company has realized tax
provisions. Operating losses that could not be utilized to recover prior year
tax liabilities have been fully provided for with a valuation allowance at June
30, 2000 and March 31, 2001.
9. LITIGATION
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 should not have a
material effect on the financial position or results of operations of the
Company. In addition, certain of the Company's discontinued operations are
involved in litigation that may impact the Company in the event of an
unfavorable outcome. The Company believes that any loss that may be incurred
should not have a material effect on the Company's financial position or results
of operations.
Page 8
10. SUSEQUENT EVENTS
UBS Capital Investment In IFX. As reported on the Company's Reports on Forms
8-K dated March 13, 2001 and May 10, 2001, the Company received approximately
$15.4 million in funding from UBS Capital Americas III, L.P. and UBS Capital LLC
(collectively, the "Purchasers"), to be used for working capital purposes.
Pursuant to the Stock Purchase Agreement dated as of March 13, 2001, by and
among the Company and the Purchasers, as amended by Amendment No. 1 to the Stock
Purchase Agreement dated as of May 7, 2001, the Purchasers purchased 3,994,127
shares of IFX's Class I Series B Convertible Preferred Stock and 424,135 shares
of IFX's Class II Series B Convertible Preferred Stock on May 7, 2001. All of
the shares were purchased at $3.50 per share. The Class I Series B Convertible
Preferred Stock has full voting rights and each preferred share is convertible
into one share of the IFX's common stock. The Class II Series B Convertible
Preferred Stock has the same rights as the Class I Series B Convertible
Preferred Stock except that it may not vote for the Board of Directors. At the
election of Purchasers, each share of the Class II Series B Convertible
Preferred Stock is convertible after one year into one share of Class I
Convertible Preferred Stock. Under the terms of the Series A Preferred Stock
previously issued by IFX, this investment caused the conversion ratio of the
approximately 2 million shares of Series A Preferred Stock held by the
Purchasers to be adjusted so that each share of Series A Preferred Stock will be
convertible into approximately 3.52 shares of the Registrant's common stock,
rather than one share of the Registrant's common stock as originally provided.
In accordance with EITF 98-5, the Series A conversion ratio adjustment results
in a beneficial conversion feature, which will be recognized as a noncash
dividend to preferred shareholders.
IFX Board Of Directors. Following this transaction, the Board of Directors of
IFX has been increased to eight directors from seven directors. The Purchasers
are entitled to select three directors. Further, the Casty Grantor Subtrust
("Casty") is entitled to appoint one director and International Technology
Investments, LC ("ITI") is entitled to appoint one director. ITI and Casty are
entitled to jointly select an additional director. Also, ITI, Casty and the
Purchasers are jointly entitled to select two additional directors who qualify
as "independent directors" in accordance with NASDAQ rules. Effective with the
purchase of the Series B Convertible Preferred Stock, Zalman Lekach resigned as
a director of IFX and Charles Delaney and Patrick Delhougne were appointed as
directors.
Investment In Tutopia.com, Inc. On the closing of the sale of the IFX
Corporation Series B Preferred Stock to the Purchaser, the Purchasers and IFX
invested approximately $1.8 million and $3.2 million, respectively, in Series A
Convertible Preferred Stock of Tutopia.com, Inc. ("Tutopia"), a former indirect
subsidiary of the Company. After the investments, the Company's investment in
Tutopia remained at less than 50% of Tutopia's outstanding shares.
Page 9
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company's statement of position and results of operations include the
accounts of IFX Corporation, its wholly owned subsidiaries, and investments in
which the Company has a controlling financial interest (collectively referred to
herein as "IFX," "IFX Networks" or the "Company"). On August 31, 2000, the
Company's 85% ownership interest in Tutopia was reduced to approximately 47%
and, as a result, the Company did not consolidate Tutopia at March 31, 2001 and
now accounts for this investment under the equity method. The Company's June
30, 2000 balance sheet has been restated to exclude the balances of Tutopia as a
result of this change in percentage ownership in Tutopia. The Company's income
from discontinued operations primarily consists of amounts earned, based on the
financial performance of entities divested prior to July 1, 2000, net of related
expenses incurred. Such revenues are expected to continue, depending upon the
financial performance of the divested entities, through the Company's fiscal
year ending June 30, 2002.
Except for the historical information contained herein, the following discussion
and analysis contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, and those
discussed in the Company's Form 10-K/A for the year ended June 30, 2000. The
information provided below should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K/A for the year ended June 30, 2000.
RESULTS OF OPERATIONS
Revenues
The companies that IFX has acquired generally had both business and consumer
customers at the time of acquisition. IFX plans to increase its customer base
and revenues by marketing Internet access and value-added services to business
users in the Company's markets. Management expects the number of business
customers to grow more rapidly than the number of consumer customers and
revenues from the sale of our business services should increase more rapidly
than revenues from the sale of dial-up Internet access services. As a result,
management believes the Company's current customer and revenue mix is not an
indication of the Company's future customer and revenue mix. IFX Networks
provides Internet access service to customers under contracts that typically
range from one month for dial-up access services to one year or more for
dedicated access services. The majority of dial-up subscribers pay their
subscription fees in advance. IFX currently offers a premium dial-up Internet
access service for a single fee although customers that were on various rate
plans have been allowed to continue those plans. The Company intends to
encourage these users to migrate to the Company's premium dial-up plan. If a
significant number of users migrate to free Internet access services, revenues
from dial-up subscribers will decrease. All of the Company's access revenues
are recognized as they are earned.
IFX Networks also derives revenues from providing wholesale Internet access to
businesses that resell such access on a branded or private label basis. Fees
for wholesale access are generally billed on a monthly basis after services are
rendered. Wholesale access customers are billed on either a per port basis or a
per hour basis. Revenues from our wholesale Internet access services are
recognized in the period in which the services are provided.
The Company's revenues from value-added Internet services come from web hosting,
domain name registration and co-location services. Services such as web hosting
and co-location services are sold on a monthly subscription basis and are paid
for in advance. The Company's domain name registration service is billed
through a one-time fee. These revenues are recognized in the period in which
the services are provided.
Internet access charges and fees for value-added services vary among the
countries in which we do business, depending on competition, economic and
regulatory environments and other market factors. As a result of competitive
pressure, IFX has reduced prices in some markets, especially for access
services. Management expects that these pressures will continue in the
Company's markets as the demand for and supply of Internet services continue to
grow. The period-to-period comparisons of our results of operations set forth
below include the results of operations from acquisitions that were made during
the applicable period. Results of operations from acquisitions completed during
a period have been included from the time of the closing of each acquisition.
Revenues from continuing operations increased to $8.8 million for the three
months ended March 31, 2001, from $3.3 million for the three months ended March
31, 2000. Revenues from continuing operations increased to $24.6 million for
the nine months ended March 31, 2001, from $7.1 million for the nine months
ended March 31, 2000. The increase in revenues was primarily related to the
Company's acquisitions completed during fiscal 2000 and expansion of its user
base resulting from the growth in value added services such as dedicated access
and from wholesale access sold to Tutopia. During the three months ended March
31, 2001 and during the nine months ended March 31, 2001, the Company recognized
approximately $3.6 million and $11.4 million, respectively, in revenue from
Tutopia for network access fees, which represented approximately 40.9% and
46.4%, respectively, of the Company's total revenues.
Page 10
Three Months Ended March 31,
------------------------------------------
2001 2000 % Increase
Unaudited Unaudited (Decrease)
------------ ------------ -------------
Dial-up $1,634,200 $2,076,900 (21.3)%
Dedicated line services 2,163,500 1,066,100 102.9%
Sales to related party 3,597,300 - n/a
Web hosting and design services 354,600 125,200 183.2%
Other 1,038,200 1,000 103,720.0%
------------ ------------ -------------
Total $8,787,800 $3,269,200 168.8%
Nine Months Ended March 31,
--------------------------------------
2001 2000
Unaudited Unaudited % Increase
--------------------------------------
Dial-up $ 5,422,200 $5,004,300 8.4%
Dedicated line services 4,448,900 1,497,600 197.1%
Sales to related party 11,414,000 - n/a
Web hosting and design services 986,700 293,100 236.6%
Other 2,334,600 290,800 702.8%
------------- ---------- ---------
Total $24,606,400 $7,085,800 247.3%
Costs of Revenues
The Company's costs of revenues from providing Internet services are incurred to
carry customer traffic to and over the Internet. IFX Networks leases lines that
connect the Company's POPs to IFX's national hubs. Payments are made to other
network providers for transit that allow the Company to transmit customers' data
to or from the Internet over the providers' networks. IFX has other recurring
telecommunications costs that include the cost of local telephone lines
customers use to reach the Company's POPs and access IFX Network's services, and
satellite bandwidth costs to connect the national hubs to the Internet backbone.
Management expects operating costs from providing Internet services to increase
as capacity to meet customer demand increases. Management expects that costs of
revenues will decline as a percentage of revenue through the expansion of
Company owned network facilities. Management also expects costs to decline as
wireless technology usage expands and the telecommunication markets in Latin
America deregulate.
Costs of revenues increased to $5.2 million for the three months ended March 31,
2001 from $2.4 million for the three months ended March 31, 2000. Costs of
revenues increased to $15.5 million for the nine months ended March 31, 2001
from $4.9 million for the nine months ended March 31, 2000. The increase was
primarily related to the Company's network expansion to accommodate the growth
in the user base, especially for Tutopia and for dedicated access.
During the three months ended March 31, 2001, costs of revenues decreased as a
percentage of total revenues to 59.3% from 73.0% for the same period in the
prior fiscal year. During the nine months ended March 31, 2001, costs of
revenues as a percentage of total revenues decreased to 63.1% from 69.6% for the
same period in the prior fiscal year due to the scalability of the company's
business.
General and Administrative Expenses
General and administrative expenses include the costs of employee compensation,
rent, utilities, insurance, telecommunications, travel and professional fees.
Compensation costs include salaries and related benefits, commissions and
bonuses. Management expects general and administrative expenses to increase as
IFX Networks continues to grow to meet the demands of its customers.
General and administrative expenses increased to $6.5 million for the three
months ended March 31, 2001 from $5.4 million for the three months ended March
31, 2000. General and administrative expenses increased to $20.6 million for
the nine months ended March 31, 2001 from $12.7 million for the nine months
ended March 31, 2000. The increase in general and administrative expenses is
primarily attributable to the increase in payroll resulting from the increased
support of the Company's expansion in Latin America.
As a percentage of total revenues, general and administrative expenses reduced
during the three months ended March 31, 2001 to 73.4% from 163.9% for the three
months ended March 31, 2000. For the nine months ended March 31, 2001, general
and administrative expenses as a percentage of total revenues was 83.9% as
compared to 179.6% for the same period from the prior fiscal year.
Sales and Marketing
Sales and marketing expenses consist primarily of advertising costs,
distribution costs and related production costs. Sales and marketing expenses
decreased to $0.8 million for the three months ended March 31, 2001 from $4.7
million for the three months ended March 31, 2000. For the nine months ended
March 31, 2001 and the nine months ended March 31, 2000, sales and marketing
expenses were $2.6 million and $6.7 million, respectively. The decrease in sales
and marketing results from the deconsolidation of Tutopia in that in the three
months ended March 31, 2000, sales and marketing was primarily attributable to
the launch of Tutopia.com.
Depreciation and amortization
A large component of depreciation and amortization expense is the amortization
of acquired customer base. The value of acquired customer bases, which are
amortized over three years using the straight-line method, was created as a
result of the allocation of the price paid to acquire a company that was in
excess of the value of its tangible assets. IFX also recognizes depreciation
expense that is primarily related to telecommunications equipment, computers and
network infrastructure. These assets are depreciated over their useful lives
that typically range from three to ten years. Depreciation expense will
increase as the Company expands its network infrastructure and thereby acquiring
additional equipment as the Company expands and improves its operations.
Depreciation and amortization expenses increased to $4.4 million for the three
months ended March 31, 2001 from $2.3 million for the three months ended March
31, 2000. Depreciation and amortization expense increased to $11.8 million for
the nine months ended March 31, 2001 from $4.6 million for the nine months ended
March 31, 2000. The increase in depreciation for the three months ended March
31, 2001 is attributable to the increase in fixed assets, capitalized software
and capital leases of approximately $17.4 million from the same period of fiscal
2000. The increase in amortization expense is due to approximately $29.1
million of acquired customer base due to acquisitions the Company completed in
Latin America during fiscal year 2000.
Page 11
Non-Cash Stock-Based Compensation Expense
For the three months ended March 31, 2001, IFX recorded non-cash stock
compensation expense of approximately $1.2 million compared to $2.3 million for
the three months ended March 31, 2000. For the nine months ended March 31,
2001, the Company recorded non-cash compensation expense of approximately $5.0
million compared to $3.9 million for the nine months ended March 31, 2000. The
increase is attributable predominantly to the current-year amortization related
to the issuance of additional employee option grants during the prior year.
Also, as of March 31, 2001, the Company had recorded as a reduction of
Stockholders Equity approximately $8.2 million of deferred compensation, which
will be amortized in future years over the vesting period of the individual
options (generally 3 years).
Other Income (Expense)
Interest income decreased to $80,000 for the three months ended March 31, 2001
from $83,800 for the three months ended March 31, 2000. Interest income
increased to $539,700 for the nine months ended March 31, 2001 from $233,900 for
the nine months ended March 31, 2000. Interest income increased as the result
of increased cash and cash equivalents attributable to the equity funding
received by the Company in June and July 2000.
Interest expense increased to $857,900 from $44,400 for the three months ended
March 31, 2001 as compared to the three months ended March 31, 2000. Interest
expense increased to $1,175,500 from $44,400 for the nine months ended March 31,
2001 as compared to the nine months ended March 31, 2000. The increase is a
result of the increase in borrowings under capital lease agreements.
No loss from operations of equity investees was realized for the three months
ended March 31, 2001 as compared to $6,400 for the three months ended March 31,
2000. Loss from operations of equity investees increased to $3,721,400 from a
loss of $41,900 for the nine months ended March 31, 2001 and 2000, respectively.
The increase is related to the treatment of Tutopia as an equity investee rather
than as a consolidated subsidiary as further discussed in the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000.
The decrease of other to an expense of $476,200 during the nine months ended
March 31, 2001 as compared to income of $68,900 during the nine months ended
March 31, 2000 is primarily attributable to a private equity fee related to UBS
capital funding during fiscal 2001.
Income tax provision
Income tax benefits are recorded to the extent that the Company recorded a tax
provision from its discontinued operations. Operating losses that could not be
utilized to recover prior year tax liabilities have been fully provided for with
a valuation allowance at June 30, 2000 and March 31, 2001.
Income from discontinued operations, net
For the three months ended March 31, 2001, the Company earned approximately $0.4
million from its discontinued operations, compared to $0.5 million earned for
the three months ended March 31, 2000. For the nine months ended March 31,
2001, the Company earned approximately $2.7 million from its discontinued
operations, compared to $1.4 million earned for the nine months ended March 31,
2000. This increase is due to the $2.4 million sale of the preference share.
Net loss and loss per share
IFX's loss from continuing operations for the three months ended March 31, 2001
was approximately $9.8 million, or $0.70 per share, compared to a net loss of
$11.5 million, or $1.01 per share, for the three months ended March 31, 2000.
The loss of $9.8 million includes non-cash charges of $5.6 million related to
depreciation, amortization, stock compensation, and loss from operations of
equity investees. Including discontinued operations, the Company lost $9.4
million, or $0.67 per share, compared to a net loss of $11.0 million, or $0.97
per share, for the three months ended March 31, 2000.
IFX's loss from continuing operations for the nine months ended March 31, 2001
was approximately $33.8 million, or $2.48 per share, compared to a net loss of
$22.0 million, or $2.41 per share, for the nine months ended March 31, 2000.
The loss of $33.8 million includes non-cash charges of $20.5 million related to
depreciation, amortization, stock compensation, and loss from operations of
equity investees. Including discontinued operations, the Company lost $31.1
million, or $2.28 per share, compared to a net loss of $20.6 million, or $2.25
per share, for nine months ended March 31, 2000.
Page 12
FINANCIAL CONDITION
Liquidity and Capital Resources
For the nine months ended March 31, 2001, cash used by ongoing and discontinued
operations was approximately $11.0 million compared to cash used by ongoing and
discontinued operations of $5.5 million for the nine months ended March 31,
2000. The majority of cash provided in the nine months ended March 31, 2001 is
primarily attributed to Internet operations and the earn-out payments related to
discontinued operations. The cash used in operations is mainly related to the
connectivity expenses of our network, operating leases, payroll and advertising.
In addition, 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. As of March 31, 2001, the Company held approximately
$3.0 million in cash and equivalents.
For the nine months ended March 31, 2001, cash used in investing activities was
approximately $6.8 million compared to cash used in investing activities of $3.1
million for the same period in 2000. Cash used in investing activities was
related primarily to the purchase of property and equipment of approximately
$6.1 million.
For the nine months ended March 31, 2001, cash provided by financing activities
was approximately $6.8 million compared to cash provided by financing activities
of $16.7 million for the nine months ended March 31, 2000.
Management expects to utilize existing cash and cash-equivalents together with
operating cash flows, funds from the earn-out payments, and amounts to be paid
by Tutopia to fund the Company's operations. In the past, the Company has
raised funds through the issuance of debt and equity securities and IFX may need
to raise additional funds for expansion and/or working capital purposes. IFX
may issue debt or make equity offerings in the future, depending on prevailing
market conditions. Management is not certain whether the Company will be able to
raise sufficient funds on acceptable terms, or at all. The Company's inability
to raise sufficient funds in the future could affect IFX's ability to meet its
expansion plans, or satisfy capitalized lease obligations and other obligations
and IFX could have to postpone most of the Company's expansion goals and capital
expenditures until financing is obtained. Cash needs will also be affected by
whether Tutopia is able to fulfill its obligations to make cash payments under
its network agreement with IFX.
Forward-Looking Statements
The statements contained herein that are not historical facts are "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). These statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. The Company wishes to caution you
that these forward-looking statements addressing the timing, costs and scope of
the Company's acquisition of, or investments in, existing or future ISPs, the
revenue and profitability levels of the ISPs in which the Company invests, the
anticipated reduction in costs of sales and operating costs resulting from the
integration and optimization of those ISPs or otherwise, and other matters
contained herein regarding matters that are not historical facts, are only
predictions. The Company can give no assurance that the future results
indicated, whether expressed or implied, will be achieved. These projections and
other forward-looking statements are based upon a variety of assumptions
relating to the Company's business, which, although the Company considered
reasonable, may not be realized. Because of the number and uncertainties of the
assumptions underlying the Company's projections and forward-looking statements,
some of the assumptions may not materialize and unanticipated events and
circumstances may occur subsequent to the date of this report. These forward-
looking statements are based on current expectations, and the Company assumes no
obligation to update this information. The inclusion of projections and other
forward-looking statements should not be regarded as a representation by the
Company or any person that these estimates and projections will be realized,
actual results may vary materially.
Item 3. - Quantitative and Qualitative Disclosures about Market Risk
Exchange Rate and Inflation Risk
The Company's continuing operations are focused primarily in Latin America,
subjecting the Company to certain political, economic and commercial risks and
uncertainty not typically found in the U.S. The Company's exposure to market
risk is directly related to its role as a Latin American network company and its
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 revenues,
assets, liabilities and/or equity. When the Company operates in a foreign
country, the value of the local currency will probably fluctuate. This
fluctuation can cause the Company to gain or lose on the translation to US
Dollars.
Interest Rate Risk
The Company's short-term investments are classified as cash and cash equivalents
with original maturities of three month or less. Therefore, changes in the
market's interest rates should not significantly affect the value of the
investments as recorded by IFX.
Page 13
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
On January 9, 2001, the Company held its 2000 annual meeting of stockholders, at
which there were 9,510,771 shares of Common Stock, or approximately 67% of the
shares of Common Stock entitled to vote, and 1,227,825 shares of Series A
Preferred Stock, or approximately 60% of the shares of Series A Preferred Stock
entitled to vote, present or represented by proxy. At the annual meeting, the
following matters were approved by more than the requisite number of
stockholders.
All persons nominated to become directors of the Company were elected. The
number of votes cast for and withheld for each director were as follows:
Votes Cast For Withheld
-------------- --------
Joel M. Eidelstein 9,519,668 967
Michael Shalom 9,519,668 967
Zalman Lekach 9,519,668 967
George A. Myers 9,519,668 967
Burton J. Meyer 9,519,668 967
Mark O. Lama 9,519,668 967
Charles W. Moore 9,519,668 967
A proposal to approve an amendment to the IFX Corporation 1998 Stock Option
and Incentive Plan (the "Plan") to increase the number of shares of common stock
available for issuance under the Plan was approved, with 11,395,623 shares voted
for and 31,855 shares voted against the proposal, and 22,482 shares abstaining.
A proposal to ratify the appointment of Ernst & Young LLP as independent
auditors for the Company's fiscal year ending June 30, 2001 was approved, with
11,449,193 shares voted for and 255 shares voted against the proposal, and 512
shares abstaining.
On March 13, 2001, the holders of 10,991,151 shares, or 68.7% of the
Company's stock entitled to cast votes for such matters consented, in writing,
to the following proposals made by the Company's Board of Directors:
The issuance of 4,418,262 shares of Series B Convertible Preferred Stock.
Amendment of the Certificate of Designation for the Series A Convertible
Preferred Stock.
Amendment of the 1998 Stock Option Plan.
Adoption of the 2001 Stock Option Plan.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
The Company filed reports on Forms 8-K on March 16, 2001, and May 10,
2001.
Page 14
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, 2001 By: /s/ MICHAEL SHALOM
-------------------------
Michael Shalom
Chief Executive Officer
Dated: May 15, 2001 By: /s/ JOSE LEIMAN
-----------------------
Jose Leiman
Chief Financial Officer
Page 15