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 September 30, 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 or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15050 NW 79th Court, Ste. 200
Miami Lakes, Florida 33016
(Address of principal executive officers) (Zip code)
---------------------------------------------------------------
(305) 512-1100
---------------------------------------------------------------
(Registrant's telephone number, including area code)
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,
14,276,495 shares outstanding as of September 30, 2001.
IFX CORPORATION AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Condensed consolidated balance sheets as of September 30, 2001 (unaudited) and June
30, 2001 3
Condensed consolidated statements of operations (unaudited) for the three months
ended September 30, 2001 and 2000 4
Condensed consolidated statements of cash flows (unaudited) for the three months
ended September 30, 2001 and 2000 5
Notes to condensed consolidated financial statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk 18
PART II OTHER INFORMATION
Item 4 Submission of matters to a vote of shareholders 19
Item 6 Exhibits and reports on Form 8-K 19
(a) Exhibits
(b) Reports on Form 8-K
SIGNTAURES 20
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
IFX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2001 2001
------------- ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 608,200 $ 7,647,700
Restricted cash 1,174,100 981,400
Receivables, net of allowance for doubtful accounts of $1,769,100 and
$1,955,800 at September 30, 2001 and June 30, 2001, respectively 3,070,700 2,692,400
Due from related party 1,099,200 910,500
Net assets of discontinued operations 267,500 138,900
Prepaid expenses 1,197,700 1,261,200
------------ ------------
Total current assets 7,417,400 13,632,100
PROPERTY AND EQUIPMENT, NET 21,665,500 24,284,500
OTHER ASSETS
Restricted cash - non-current 941,100 1,131,700
Acquired customer base, net of accumulated amortization of $5,208,800
and $4,493,500, at September 30, 2001 and June 30, 2001, respectively 3,238,600 3,953,900
Investments 2,768,500 3,009,000
Foreign taxes recoverable 2,302,600 1,976,100
Other assets 495,700 536,300
------------ ------------
Total other assets 9,746,500 10,607,000
------------ ------------
TOTAL ASSETS $ 38,829,400 $ 48,523,600
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 10,645,900 $ 10,926,300
Accrued expenses 4,178,900 5,257,200
Deferred revenues 1,374,200 1,102,700
Capital lease obligations - current portion 7,263,900 7,926,000
------------ ------------
Total current liabilities 23,462,900 25,212,200
LONG-TERM LIABILITIES
Notes payable and other long-term liabilities 278,700 296,400
Deferred gain on sale of investment -- 4,451,900
Capital lease obligations, less current portion 7,983,000 8,142,100
------------ ------------
Total long-term liabilities 8,261,700 12,890,400
------------ ------------
TOTAL LIABILITIES 31,724,600 38,102,600
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, convertible, $1.00 par value; 10,000,000 shares
authorized, 6,449,131 issued and outstanding at both
September 30, 2001 and June 30, 2001. 40,463,900 40,463,900
Common stock, $.02 par value; 50,000,000 shares authorized, 14,276,495
shares issued and outstanding at both September 30, 2001 and
June 30, 2001 285,500 285,500
Additional paid-in capital 76,515,800 77,054,600
Accumulated deficit (103,385,600) (99,415,000)
Accumulated other comprehensive loss (1,522,900) (1,118,500)
Deferred compensation (5,251,900) (6,849,500)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 7,104,800 10,421,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,829,400 $ 48,523,600
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
IFX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
2001 2000
-------------- -------------
REVENUES
Dial-up $ 1,180,000 $ 2,317,200
Dedicated line services 3,162,600 792,300
Sales to related party 1,994,800 3,265,700
Web hosting and design services 289,400 301,300
Other 403,000 814,000
-------------- -------------
Total revenues 7,029,800 7,490,500
COSTS AND EXPENSES
Cost of revenues 3,923,600 4,927,300
General and administrative 5,859,300 6,776,900
Sales and marketing 486,500 292,300
Depreciation and amortization 3,608,300 3,476,800
Non-cash stock compensation 1,058,800 2,680,100
-------------- -------------
Total operating expenses 14,936,500 18,153,400
-------------- -------------
Operating loss from continuing operations (7,906,700) (10,662,900)
OTHER INCOME (EXPENSE)
Interest income 61,900 276,500
Interest expense (598,100) (94,600)
Equity in loss of investee (239,500) (3,721,400)
Deferred gain on sale of investment 4,451,900 --
Other (47,200) (47,300)
-------------- -------------
Total other income (expense) 3,629,000 (3,586,800)
-------------- -------------
Loss from continuing operations before income taxes (4,277,700) (14,249,700)
Income tax benefit 107,500 1,029,300
-------------- -------------
Loss from continuing operations (4,170,200) (13,220,400)
Income from discontinued operations, net of taxes 199,600 1,911,700
-------------- -------------
NET LOSS $ (3,970,600) $(11,308,700)
============== =============
BASIC AND DILUTED (LOSS) INCOME PER SHARE:
Continuing operations $ (0.29) $ (0.99)
Discontinued operations 0.01 0.14
-------------- -------------
Net loss $ (0.28) $ (0.85)
============== =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic and diluted 14,276,495 13,319,066
============== =============
The accompanying notes are an integral part of the condensed consolidated
financial statements
IFX CORPORATION AND SUBSIDIARIES
CONDENDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
2001 2000
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,970,600) $ (11,308,700)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation 2,893,000 1,066,300
Amortization 715,300 2,410,500
Deferred gain on sale of investment (4,451,900) --
Bad debt expense, net of write-offs (43,800) 340,200
Non-cash stock compensation 1,058,800 2,680,100
Equity in loss of investees 239,500 3,721,400
Effect of deconsolidation of Tutopia.com, Inc. -- (2,391,700)
Change in net assets of discontinued operations (128,600) 389,100
Changes in operating assets and liabilities:
Foreign taxes recoverable (368,800) (120,900)
Receivables (563,400) (1,138,300)
Due from related party (214,600) --
Income tax receivable -- 636,600
Prepaid expenses (10,900) (480,400)
Other assets 30,900 451,300
Deferred revenues 294,200 (52,300)
Liabilities related to acquisitions -- 356,600
Accounts payable and accrued expenses (904,700) 1,119,100
------------ -------------
Cash used by operating activities (5,425,600) (2,321,100)
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash (2,100) --
Purchases of property and equipment (760,200) (2,163,100)
------------ -------------
Cash used by investing activities (762,300) (2,163,100)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 159,600 30,800
Payments of capital lease obligations (1,014,900) (34,900)
Issuance of preferred shares -- 10,100,000
------------ -------------
Cash (used) provided by financing activities (855,300) 10,095,900
Effect of exchange rate changes on cash and cash equivalents 3,700 356,500
------------ -------------
(Decrease) increase in cash and cash equivalents (7,039,500) 5,968,200
Cash and cash equivalents, beginning of period 7,647,700 13,835,500
------------ -------------
Cash and cash equivalents, end of period $ 608,200 $ 19,803,700
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 598,100 $ 94,600
============ =============
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES DISCLOSURE:
Value of stock issued in conjunction with acquisitions $ -- $ 523,000
============ =============
Acquisition of equipment through assumption of capital lease
obligations $ 617,500 $ 634,300
============ =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 accounting principles generally accepted
in the United States 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 fiscal year ending June
30, 2002. 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 for the
fiscal year ended June 30, 2001.
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"). Certain reclassifications have been made to
the prior period financial statements to conform to the September 30, 2001
presentation.
All significant intercompany transactions have been eliminated in consolidation.
IFX is a region-wide provider of Internet access and value-added IP based
services focused on offering network solutions including region-wide wholesale
and private label Internet access, dedicated fixed wireline and wireless
Internet access, unlimited dial-up roaming access to IFX Network's POPs
throughout the Latin American region, web design, web-hosting and co-location,
dial-up local area network, or LAN services as well as virtual private network,
or VPN services, and full technical support. IFX's network operations are based
in Miami, Florida with the IFX network currently spanning over 63 cities in 14
countries: Argentina, Bolivia, Brazil, Chile, Colombia, El Salvador, Honduras,
Guatemala, Mexico, Nicaragua, Panama, Uruguay, Venezuela and the United States.
Restricted Cash
During fiscal 2001, IFX entered into capital lease agreements for the purchase
of computer equipment. In connection with certain of these capital lease
agreements, the Company is required to maintain a minimum amount of cash
(approximately $2.1 million at September 30, 2001) in restricted
interest-bearing accounts for the terms of the respective leases.
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 in the
Company's view 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 estimated 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 for the three months ended September 30,
2001.
Yupi Investment
During fiscal 2000, the Company sold a portion of its investment in Yupi
Internet, Inc. ("Yupi") to Lee S. Casty for $5.0 million. The sale resulted in a
gain to the Company of approximately $4.5 million which was deferred since the
terms of the sale included certain provisions that guaranteed Mr. Casty a
minimum return under certain circumstances on the Yupi shares and thus prevented
immediate recognition of the gain. In August 2001, Yupi entered into a merger
agreement with T1MSN which did not require that Mr. Casty receive the benefits
of the minimum return provisions of the original terms of the sale. Accordingly,
the Company recognized the deferred gain on the original sale of Yupi shares in
the first quarter of fiscal 2002. The sale of Yupi to T1MSN resulted in net
proceeds to the Company of approximately $30,000.
Computation of Earnings or Loss per Common Share
Basic earnings per common 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 14.8 million and 4.3 million of potentially
dilutive securities have been excluded from the calculation of diluted loss per
share for the three-month periods ended September 30, 2001 and 2000,
respectively, since their effect would have been anti-dilutive.
Recent Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141, "Business Combinations," ("SFAS
141") and Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 141 requires that the purchase method of accounting be used for all
business combinations completed after June 30, 2001. SFAS 141 also specifies
that intangible assets acquired in a purchase method business combination must
meet certain criteria to be recognized and reported apart from goodwill. SFAS
142 will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead they will be tested for impairment at
least annually in accordance with the provisions of SFAS 142. SFAS 142 will also
require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company is currently evaluating what, if any, impact these Statements will
have on its financial statements.
At the July 2001 Emerging Issues Task Force meeting the SEC staff announced
that, among other things, preferred securities that are redeemable upon the
occurrence of an event outside the control of the issuer, such as a change in
control, are required to be classified outside of equity (EITF D-98
Classification and Measurement of Redeemable Securities). The Company is
currently evaluating the impact of this EITF, which may result in the Company
reclassifying its preferred stock as mezzanine debt.
Liquidity Assessment
The Company expects to utilize existing cash and cash-equivalents together with
operating cash flows, funds from earn-out payments, additional funding from UBS
Capital Americas as discussed below, and amounts to be paid by Tutopia.com, Inc.
("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
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
continue raising funds in the future through the issuance of securities or
through other means on acceptable terms, or at all. The inability to raise
sufficient funds in the future could affect IFX's ability to meet its working
capital, or satisfy capitalized lease obligations and other obligations. Cash
needs will also be affected by whether Tutopia is able to fulfill its
obligations to make cash payments under its network agreement with IFX.
As discussed in a Form 8-K filed on October 22, 2001, pursuant to a Stock
Purchase Agreement dated as of October 11, 2001, UBS Capital Americas III, L.P.
and UBS Capital LLC (referred to herein collectively as UBS) agreed to invest an
additional $7 million of cash and surrender 1.5 million shares of IFX's common
stock currently held by UBS in exchange for approximately 3.8 million shares of
newly issued IFX Series C preferred stock. Each share of Series C preferred
stock will initially be convertible into one share of common stock. The Series C
preferred stock carries a liquidation preference such that, upon a bankruptcy,
liquidation, dissolution or unwinding of IFX, each holder of Series C preferred
stock will be entitled to receive $3.00 per share plus 10% of such amount per
annum from the date of issuance (the "Stated Preference") and will also
participate with the holders of common stock after UBS receives their
liquidation preference and accrued dividends, provided that the maximum amount
which can be received with respect to the Series C preferred stock after taking
into account the participation feature is limited to 3-1/2 times the Stated
Preference.
UBS's investment in IFX is expected to close promptly following the Company's
annual meeting (which is expected to take place on December 7, 2001) and the
completion of other customary closing conditions. UBS and certain other
shareholders of the Company (together constituting holders of a majority of the
outstanding voting shares) have entered into a voting agreement obligating them
to vote in favor of this transaction. This investment will cause the conversion
ratio of the approximately 2 million shares of Series A preferred stock held by
UBS to be
adjusted so that each share of Series A preferred stock will be convertible into
approximately 4.1 shares of common stock, rather than 3.52 shares of common
stock as currently provided. This investment will also cause the conversion
ratio of the approximately 4.4 million shares of Series B preferred stock held
by UBS to be adjusted so that each share of Series B preferred stock will be
convertible into approximately 1.167 shares of common stock, rather than one
share of common stock as originally provided. The change in conversion ratio
will not result in a beneficial conversion feature since the conversion price
will remain greater than the market price of the Company's common stock on the
date the Series B preferred stock was originally sold. No beneficial conversion
feature will be recognized on the Series A preferred stock since previous
adjustments to the conversion ratio of the Series A preferred stock resulted in
recognition of a beneficial conversion in a prior period which equaled the
proceeds received from the original sale of the Series A preferred stock. The
terms of both the Series A and B preferred stock will be amended to add the same
limited participation feature as in the Series C preferred stock. As part of
this transaction, IFX will also provide to UBS and the other Tutopia preferred
and common shareholders the ability to exchange their equity investment in
Tutopia (in which IFX holds a minority investment) for additional shares of
IFX's preferred stock at a price of $3.00 per share and common stock,
respectively within one year of closing. After the purchase of the Series C
preferred stock, UBS will own approximately 57% of the common shares of IFX
(assuming conversion of all the Company's convertible preferred stock into
common stock) and will be entitled to appoint a majority of the Company's Board
of Directors. After the close of this investment, IFX would have approximately
30 million shares of Common Stock outstanding if all of the Company's
outstanding convertible preferred stock were converted into common stock.
In connection with the transaction described above, the Company anticipates
increasing the number of shares of common stock authorized from 50 million to 60
million and increasing the number of shares of preferred stock authorized from
10 million to 20 million.
UBS has advanced $2.0 million of the $7 million previously discussed herein to
IFX through November 12, 2001 and may, but is not required to, make additional
advances prior to closing. The advance accrues interest at 10% per annum. At
closing, the outstanding principal and accrued interest of the advances will be
repaid with shares of Series C preferred stock at a price of $3.00 per share.
The Company has also received a commitment letter for a deferral of
approximately $4.0 million of principal on certain of its capital lease
commitments through next year. In consideration for this deferral and
extension, the Company will grant to the lessor 500,000 warrants to purchase
shares of the Company's common stock at $1 per share. Such warrants will be
immediately exercisable and expire 10 years from date of grant.
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 that 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.
3. CAPITAL LEASE OBLIGATIONS
As of June 30, 2001, the Company did not meet a revenue covenant that required
IFX to have $38 million in total revenues for fiscal 2001 versus the $32 million
actually recognized during fiscal 2001. As a result, $1.6 million of long-term
lease obligations were reclassified as current liabilities at June 30, 2001. As
of September 30, 2001, the Company is in negotiation to attempt to obtain a
waiver of this requirement. Until such waiver is obtained the Company will
continue to recognize the lease obligations as current ($1.4 million at
September 30, 2001).
4. INCOME TAX PROVISION
Income tax benefits consist of the utilization of net operating losses against
income from 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, 2001 and September 30, 2001.
5. 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.
6. SEGMENT REPORTING
The Company is structured primarily around the geographic markets it serves and
operates reportable segments in Argentina, Bolivia, Brazil, Chile, Colombia,
Mexico, Venezuela, Central America and the United States and all other. All of
the segments provide Internet-related 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.
Selected unaudited financial information for the three months ended September
30, 2001 and 2000 by segment is presented below:
Three months ended September 30, 2001 Three months ended September 30, 2000
----------------------------------------------------------------------------------------------------------
Income (Loss) Loss from
from continuing continuing
operations before operations before
Revenues income taxes Total assets Revenues income taxes Total assets
----------------------------------------------------------------------------------------------------------
Argentina $ 1,568,400 $ 93,900 $ 2,863,000 $ 101,400 $ (935,700) $ 1,419,300
Bolivia 237,400 (246,600) 941,800 325,700 (137,500) 1,640,800
Brazil 1,647,700 (672,600) 12,951,400 1,395,800 (1,647,500) 18,424,900
Chile 877,600 (11,700) 2,249,800 792,400 (194,700) 4,841,900
Colombia 274,600 (382,400) 1,367,800 39,800 (594,300) 1,135,100
Mexico 628,700 (262,100) 4,311,500 461,300 (1,128,900) 6,970,500
Venezuela 537,000 (219,300) 2,036,400 498,800 (314,700) 3,005,000
Central America 710,500 (501,300) 1,425,600 406,200 (585,700) 2,849,900
United States and
all other 547,900 (2,075,600) 10,682,100 3,469,100 (8,710,700) 26,429,200
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 7,029,800 $(4,277,700) $ 38,829,400 $ 7,490,500 $ (14,249,700) $66,716,600
================================================================================================================================
Included in the above table are revenues from services provided to Tutopia of
approximately $2.0 million and $3.3 million for the three months ended September
30, 2001 and 2000, respectively or approximately 28.4% and 43.6% of IFX's total
revenues for the three months ended September 30, 2001 and 2000, respectively.
7. TUTOPIA OPERATING RESULTS
During September 2000, the Company's voting interest in Tutopia was reduced from
approximately 85% to approximately 48%. As a result of this reduction, the
Company deconsolidated Tutopia and began accounting for Tutopia under the equity
method. Accordingly, the Company restated its consolidated financial statements
as if Tutopia had been accounted for under the equity method since its inception
in January 2000.
During the three-month periods ended September 30, 2001 and 2000, IFX derived
approximately 28.4% and 43.6%, respectively, of its revenue from Tutopia. As of
September 30, 2001, IFX has a net accounts receivable from Tutopia in the amount
of approximately $1.1 million.
The unaudited operating results of Tutopia.com are as follows:
Three months ended September 30,
2001 2000
---------------- ----------------
(unaudited) (unaudited)
Revenues $ 2,517,500 $ 91,200
Cost of Revenues 2,747,000 4,333,200
---------------- ----------------
Gross loss (229,500) (4,242,000)
Net loss $ (1,916,000) $ (6,943,900)
================ ================
During the first quarter of fiscal 2001, the Company's investment in Tutopia was
reduced to $0 under the equity method of accounting. In May 2001, IFX invested
an additional $3.1 million in Tutopia. For the three-month period ended
September 30, 2001, IFX expensed $0.2 million of losses related to its
proportionate share of Tutopia's losses.
Selected financial information from Tutopia's unaudited balance sheet:
September 30, 2001
----------------------
(unaudited)
Current assets $ 3,709,800
Total assets 5,007,000
Current liabilities 2,015,800
Total liabilities 2,015,800
Stockholder's equity $ 2,991,200
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").
In addition, during September 2000, the Company's voting interest in Tutopia
fell below 50%. As a result, the Company deconsolidated Tutopia and began
accounting for its investment under the equity method. Accordingly, the Company
restated its fiscal 2000 consolidated financial statements as if Tutopia had
been accounted for under the equity method since its inception in January 2000.
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 for the year ended June 30, 2001. 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 for the year ended June 30, 2001.
The following table sets forth the percentage of revenues represented by certain
items in the Company's condensed consolidated statement of operations, for the
following periods:
Three Months Ended
September 30,
2001 2000
------------ ----------
Dial-up 16.8% 30.9%
Dedicated line services 45.0 10.6
Web hosting and design services 4.1 4.0
Sales to related party 28.4 43.6
Other 5.7 10.9
----------- ----------
TOTAL REVENUES 100.0 100.0
Cost of revenues 55.8 65.8
----------- ----------
Gross profit 44.2 34.2
General and administrative 83.3 90.5
Sales and marketing 6.9 3.9
Depreciation and amortization 51.3 46.4
Non-cash stock compensation 15.1 35.8
----------- ----------
156.6 176.6
----------- ----------
Operating loss from continuing operations (112.4) (142.4)
----------- ----------
OTHER INCOME (EXPENSE): (51.6) (47.9)
----------- ----------
Loss from continuing operations before income taxes (60.8) (190.3)
Income tax benefit 1.5 13.7
----------- ----------
Loss from continuing operations (59.3) (176.6)
Income from discontinued operations, net of taxes 2.8 25.5
----------- ----------
Net loss (56.5)% (151.1)%
=========== ===========
CONTINUING OPERATIONS
Revenues
IFX provides Internet access service to customers under contracts that typically
range from one month for dial-up access services to one year or more for
dedicated access services. IFX also derives revenues by providing wholesale
Internet access to businesses that resell such access on a branded or private
label basis. Fees for wholesale access are generally billed on a monthly basis
after services are rendered and such fees are calculated on a per port basis or
a per hour basis. Wholesale Internet access service revenues are recognized in
the period in which the services are provided.
Revenues from value-added Internet services come from web hosting, domain name
registration and co-location services. These revenues are recognized in the
period in which the services are provided.
Internet access charges and fees for value-added services vary among the
countries in which IFX does business, depending on competition, economic and
regulatory environments and other market factors. In some markets, the Company
has reduced prices, such as for access services, as a result of competitive
pressure. The Company expects that price reductions will continue in IFX's
markets as the demand for, and supply of, Internet services continue to grow.
For the three-months ended September 30, 2001, total revenues decreased to $7.0
million from $7.5 million, a decrease of $0.5 million or 6.2% from the same
period in fiscal 2000. Revenue relating to dial-up services decreased to $1.2
million for the first quarter of fiscal 2002 as compared to $2.3 million for the
same period during fiscal 2001, a decrease resulting from the Company's pursuit
of its business strategy of focusing on business clients and not individual
dial-up consumers. Revenues from dedicated line services increased by $2.4
million to $3.2 million for the three-month period ended September 30, 2001 as
compared to the same period for the preceding fiscal year. Web hosting and
design services revenue for the first quarter of fiscal 2002 and fiscal 2001 was
approximately $0.3 million. Services provided to Tutopia, a related party,
resulted in approximately $2.0 million in revenues, or a decrease of $1.3
million during the first quarter of fiscal 2002 as compared to the same period
of fiscal 2001, a decrease attributable to reduced rates per hour of usage. In
addition, the Company is currently in the process of renegotiating its network
services agreement with Tutopia to include, among other changes, a decrease in
the monthly minimum connectivity charge from $1 million to $650,000. The revised
agreement is expected to be effective as of July 1, 2001. Other revenues
decreased to $0.4 million for the quarter ended September 30, 2001 as compared
to $0.8 million for the quarter ended September 30, 2000.
Costs of Revenues
IFX Network's costs of revenues primarily consist of costs incurred to
carry customer traffic to and over the Internet. IFX leases lines that connect
the Company's POPs to IFX's national hubs. The Company pays third party network
providers for transit that allows IFX Networks to transmit the Company's
customers' information to or from the Internet. IFX also has other recurring
telecommunications costs, including the cost of local telephone lines that
customers use to reach IFX Network's POPs and access the Company's services, and
satellite bandwidth costs to connect the national hubs to the Internet backbone.
Management expects operating costs from providing Internet services to increase
as capacity is increased to meet customer demand. The Company expects that costs
of revenues will decline as a percentage of revenues as IFX expands the
Company's network facilities under long-term leases.
As a percentage of total revenues, cost of revenues decreased to 55.8% for the
three-month period ended September 30, 2001 as compared to 65.8% for the
three-month period ended September 30, 2000. The decrease in cost of revenues
results from management's continued efforts to increase efficiencies of the
Company's use of its equipment as well as solidifying IFX's network throughout
Latin America resulting in the reduction of third party costs.
General and Administrative Expenses
IFX's general and administrative expenses are comprised primarily of
compensation costs. Compensation costs include salaries, related benefits and
bonuses. Other general and administrative expenses include the costs of travel,
rent, utilities, telecommunications, insurance and professional fees.
General and administrative expenses decreased to $5.9 million for the quarter
ended September 30, 2001 as compared to $6.8 million for the quarter ended
September 30, 2000. The decrease is primarily due to increased efficiencies and
cost reduction efforts. As a percentage of total revenues, general and
administrative expenses decreased to 83.3% for the three-month period ended
September 30, 2001 from 90.5% for the three-month period ended September 30,
2000.
Sales and Marketing
Sales and marketing expenses consist primarily of sales commissions, advertising
costs, distribution costs and related production costs. Sales and marketing
expenses were $0.5 million and $0.3 million for the three-month periods ended
September 30, 2001 and 2000, respectively. Sales commissions increased primarily
as a result of the Company's increased dedicated sales.
Depreciation and Amortization
A large component of the Company's depreciation and amortization expense is
related to the amortization of acquired customer base. The value of acquired
customer bases, which is amortized over three years using the straight-line
method, was created as a result of the allocation of the price paid to acquire a
company that was in excess of the value of its tangible assets. Depreciation
expense is primarily related to telecommunications equipment, computers and
network infrastructure. Assets are depreciated over their useful lives,
generally ranging from three to ten years.
Depreciation and amortization expense increased to $3.6 million from $3.5
million for the three-month period ended September 30, 2001 as compared to the
three-month period ended September 30, 2000. The increase is a direct result of
additional depreciation expense related to the acquisition of fixed assets
offset by decreased amortization of acquired customer base due to the Company
recognizing a $10.9 million impairment charge of acquired customer base during
the fourth quarter of fiscal year 2001.
Non-Cash Stock Compensation Expense
For the three-months ended September 30, 2001, the Company recorded non-cash
stock compensation of $1.1 million as compared to the $2.7 million expensed
during the three-month period ended September 30, 2000. This decrease resulted
from non-cash stock compensation related to acquisitions of $1.2 million
recorded in September 2000. In addition, the amortization of deferred
compensation expense decreased by $0.3 million as a result of employee
separations.
Other Income/(Expense)
During the three-month period ended September 30, 2001, IFX had other income of
$3.6 million as compared to other expense of $3.6 million for the three-month
period ended September 30, 2000. Other income for the quarter ended September
30, 2001 is primarily attributable to recognition of $4.5 million deferred gain
on sale of the Company's investment in Yupi Internet, Inc. In addition, the
Company incurred interest expense of $0.6 million and realized a loss on equity
investees of $0.2 million during the quarter ended September 30, 2001. The $3.6
million in other expense during the three-month period ended September 30, 2000
is primarily attributable to the treatment of Tutopia as an equity investee
rather than as a consolidated subsidiary.
Income tax benefit
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, 2001 and September 30, 2001.
Income from discontinued operations, net
For the three-month period ended September 30, 2001, the Company had income from
discontinued operations of approximately $0.2 million, net of taxes, as compared
to $1.9 million earned for the three-month period ended September 30, 2000. The
decrease in 2001 from 2000 was related to the September 2000 sale for $2.4
million of the Company's preference share of a divested entity, thereby reducing
future earn-out payments.
FINANCIAL CONDITION
Liquidity and Capital Resources
For the three-month period ended September 30, 2001, cash used by operating
activities was approximately $5.4 million compared to $2.3 million for the
three-month period ended September 30, 2000. Cash used by operating activities
is mainly related to the connectivity expenses of the Company's network,
operating leases, payroll and advertising. IFX invests cash not needed for
operations at any of its subsidiaries in short-term investments such as U.S.
Government obligations and overnight time deposits. As of September 30, 2001,
the Company had approximately $0.6 million in unrestricted cash and equivalents.
For the three month period ended September 30, 2001, cash used by investing
activities was approximately $0.8 million compared to cash used in investing
activities of $2.2 million for the same period in fiscal 2001. A majority of the
cash used in investing activities relates to approximately $0.8 million of
acquisitions in property and equipment.
For the three-month period ended September 30, 2001, cash used by financing
activities was approximately $0.9 million compared to $10.1 million of cash
provided by financing activities during the three-month period ended September
30, 2000. Cash of approximately $1.0 million was used for payments of capital
lease obligations and $0.2 million was increased in notes payable. Cash provided
by financing activities in the prior year included the $10.1 million sale of
preferred stock.
In connection with certain of its capital lease agreements, the Company is
required to maintain cash of $2.1 million in restricted interest-bearing
accounts. In addition, certain capital lease agreements contain covenants that
require the Company to maintain operating ratios, limitations on debt and a
minimum level of total revenues. At June 30, 2001, IFX did not meet a revenue
covenant that required the Company to have $38 million in total revenues for
fiscal 2001 versus the $32 million actually recognized. As a result, $1.4
million of long-term lease obligations have been reclassified as current
liabilities. The Company is negotiating to attempt to obtain a waiver of this
requirement at September 30, 2001.
At September 30, 2001, the Company had a working capital deficit of $16.0
million. The Company has also incurred significant operating losses and
operating cash flow deficiencies during the past several fiscal years. As a
result, the Company is dependent on funding from outside sources and existing
shareholders to meet its ongoing commitments and obligations. As discussed in a
Form 8-K filed on October 22, 2001, pursuant to a Stock Purchase Agreement dated
as of October 11, 2001, UBS agreed to invest an additional $7 million of cash
and surrender 1.5 million shares of IFX's common stock currently held by UBS in
exchange for approximately 3.8 million shares of newly issued IFX Series C
preferred stock. Each share of Series C preferred stock will initially be
convertible into one share of common stock. The Series C preferred stock carries
a liquidation preference such that, upon a bankruptcy, liquidation, dissolution
or unwinding of IFX, each holder of Series C preferred stock will be entitled to
receive $3.00 per share plus 10% of such amount per annum from the date of
issuance (the "Stated Preference") and will also participate with the holders of
common stock after UBS receives their liquidation preference and accrued
dividends, provided that the maximum amount which can be received with respect
to the Series C preferred stock after taking into account the participation
feature is limited to 3-1/2 times the Stated Preference.
UBS's investment in IFX is expected to close promptly following the Company's
annual meeting (which is expected to take place on or before December 7, 2001)
and the completion of other customary closing conditions. UBS and certain other
shareholders of the Company (together constituting holders of a majority of the
outstanding voting shares) have entered into a voting agreement obligating them
to vote in favor of this transaction. This investment will cause the conversion
ratio of the approximately 2 million shares of Series A preferred stock held by
UBS to be adjusted so that each share of Series A preferred stock will be
convertible into approximately 4.1 shares of common stock, rather than 3.52
shares of common stock as currently provided. This investment will also cause
the conversion ratio of the approximately 4.4 million shares of Series B
preferred stock held by UBS to be adjusted so
that each share of Series B preferred stock will be convertible into
approximately 1.167 shares of common stock, rather than one share of common
stock as originally provided. The change in conversion ratio of the Series B
preferred stock will not result in a beneficial conversion feature since the
conversion price will remain greater than the market price of the Company's
common stock on the date the Series B preferred stock was originally sold. No
beneficial conversion feature will be recognized on the Series A preferred stock
since previous adjustments to the conversion ratio of the Series A preferred
stock resulted in recognition of a beneficial conversion in a prior period which
equaled the proceeds from the original sale of the Series A preferred stock. The
terms of both the Series A and B preferred stock will be amended to add the same
limited participation feature as in the Series C preferred stock. As part of
this transaction, IFX will also provide to UBS and the other Tutopia preferred
and common shareholders the ability to exchange their equity investment in
Tutopia.com, Inc. (in which IFX holds a minority investment) for additional
shares of IFX's preferred stock within one year of closing. After the purchase
of the Series C preferred stock, at a price of $3.00 per share and common stock,
respectively UBS will own approximately 57% of the shares of IFX (assuming
conversion of all the Company's convertible preferred stock into common stock)
and will be entitled to appoint a majority of the Company's Board of Directors.
After the close of this investment, IFX would have approximately 30 million
shares of Common Stock outstanding if all of the Company's outstanding
convertible preferred stock were converted into common stock.
In connection with the transaction described above, the Company anticipates
increasing the number of shares of common stock authorized from 50 million to 60
million and increasing the number of shares of preferred stock authorized from
10 million to 20 million.
UBS has advanced $2.0 million of the $7 million discussed above to IFX through
November 12, 2001 and may, but is not required to, make additional advances
prior to closing. The advance accrues interest at 10% per annum. At closing, the
outstanding principal and accrued interest of the advances will be repaid with
shares of Series C preferred stock at a price of $3.00 per share.
The Company has also received a commitment letter for a deferral of
approximately $4.0 million of principal on certain of its capital lease
commitments through November 2002. In consideration for this deferral and
extension, the Company will grant to the lessor 500,000 warrants to purchase
shares of the company's common stock at $1 per share. Such warrants will be
immediately exercisable and expire ten years from date of grant. As of September
30, 2001, such warrants have not been granted to the lessor.
In the past, the Company has raised funds through the issuance of debt and
equity securities. Management is not certain whether the Company will be able to
continue raising funds in the future through the issuance of securities or
through other means on acceptable terms, or at all. The inability to raise
sufficient funds in the future could affect IFX's ability to meet its working
capital requirements, or satisfy capitalized lease and other obligations. Cash
needs will also be affected by whether Tutopia is able to fulfill its
obligations to make cash payments under its network agreement with IFX.
Shares of the Company's common stock are currently listed on the NASDAQ SmallCap
Market. Due to the decline in the price of the Company's common stock, trading
of such shares could be suspended or the Company's shares could be delisted from
the NASDAQ due to their minimum trading requirements, particularly if the
Company's stock price is below $1.00 per share for a prolonged period or certain
financial requirements imposed by NASDAQ are not met. However, NASDAQ has
announced that it has suspended enforcement of these minimum-trading
requirements until January 2, 2002. If trading of the Company's common stock
were to be suspended or the Company's shares were delisted from the NASDAQ
system, it would be much more difficult to dispose of common stock or obtain
accurate quotations as to the price of the securities. This in turn could make
it more difficult to make future convertible debt or equity offerings.
Forward-Looking Statements
The statements contained herein that are not historical facts are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements can be identified by the use of forward-looking
terminology such as "believes," "intends," "plans," "continue," "expects,"
"may," "will," "should," or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. The Company wishes to caution you that these
forward-looking statements addressing the timing, costs and scope of the
Company's acquisition of, or investments in, existing or future ISP's, the
revenue and profitability levels of the ISP's in which the Company invests, the
anticipated reduction in operating costs resulting from the integration and
optimization of those ISP's, the liquidity accounts of the Company, and other
matters contained herein regarding matters that are not historical facts, are
only predictions. The Company can give no assurance that the future results
indicated, whether expressed or implied, will be achieved. These projections and
other forward-looking statements are based upon a variety of assumptions
relating to the Company's business, which, although the Company considers
reasonable, may not be realized. Because of the number and uncertainties of the
assumptions underlying the Company's projections and forward-looking statements,
some of the assumptions may not materialize and unanticipated events and
circumstances may occur subsequent to the date of this report. These
forward-looking statements are based on current expectations, and the Company
assumes no obligation to update this information. The inclusion of projections
and other forward-looking statements should not be regarded as a representation
by the Company or any person that these estimates and projections will be
realized, and actual results may vary materially.
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 months or less. Therefore, changes in market
interest rates should not significantly affect the value of the Company's
investments.
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Annual Meeting of Stockholders of IFX Corporation will be held at the
offices of the Company, 15050 N.W. 79 Court, Suite 200, Miami Lakes, Florida
33016 at 10:00 a.m. local time on December 7, 2001 for the following purposes:
1. To approve the amendment of the Restated Certificate of Incorporation
of the Company to increase the number of authorized shares of common
stock and preferred stock of the Company;
2. To approve the issuance of additional shares of stock of the Company,
the "New Stock";
3. To approve amendments to the Certificates of Designation of the
Company's Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock;
4. To elect eight directors to the Board of Directors;
5. To ratify the appointment of Ernst & Young LLP as independent auditors
for the Company's fiscal year ending June 30, 2002; and
6. To transact such other business as may properly come before the
meeting.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on October 22, 2001.
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: November 14, 2001 By: /S/ MICHAEL SHALOM
-------------------------------
Michael Shalom
Chief Executive Officer
Dated: November 14, 2001 By: /S/ JOSE LEIMAN
------------------------------
Jose Leiman
Chief Financial Officer