UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File # 0-15187
IFX CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-3399452
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
707 Skokie Blvd Ste 580, Northbrook, Illinois 60062
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(Address of principal executive offices) (Zip Code)
(847) 412-9411
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
----- -----
As of September 30, 1999, the issuer had outstanding 8,438,803 shares of common
stock, $.02 par value per share.
1
IFX CORPORATION AND SUBSIDIARIES
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed consolidated balance sheets as of
September 30, 1999 (Unaudited) and June 30, 1999. 3
Condensed consolidated statements of operations
for the three months ended September 30, 1999
(Unaudited) and 1998 (Unaudited). 4
Condendsed consolidated statements of cash flows
for the three months ended September 30, 1999
(Unaudited) and 1998 (Unaudited). 5
Notes to consolidated financial statements. 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
for the Period Ended September 30, 1999. 10
Item 3 - Quantitative and Qualitative Disclosures
about Market Risk 15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 6 - Exhibits and reports on form 8-K 16
(A) Exhibits
Exhibit 11.2 Master Conditional Sale Agreemet
Exhibit 27 Financial Data Schedule (EDGAR only)
Exhibit 99.1 Risk Factors
(B) Reports on Form 8-K
2
PART I--FINANCIAL INFORMATION
IFX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Item 1--Financial Statements
Certain information in the financial statements presented below, except for net
income and basic net income per share, differs from amounts previously reported
due to the reclassification of certain revenues and operating expenses to
discontinued operations, reflecting the disposition of the Company's trading
business.
ASSETS
September 30, June 30,
1999 1999
(Unaudited)
------------- -----------
CURRENT ASSETS:
Cash and cash equivalents................................ $ 7,535,800 $ 5,482,800
Receivables, net of allowance for doubtful accounts of
$311,000 and $80,100, respectively...................... 672,900 458,300
Net assets of discontinued operations.................... 637,900 3,726,900
----------- -----------
Total current assets................................... 8,846,600 9,668,000
----------- -----------
PROPERTY AND EQUIPMENT:
Equipment, furniture and leasehold improvements.......... 4,019,200 2,253,500
Assets under capital lease............................... 2,855,700 --
----------- -----------
6,874,900 2,253,500
Less: accumulated depreciation and amortization.......... (908,700) (369,300)
----------- -----------
Total property and equipment, net...................... 5,966,200 1,884,200
----------- -----------
OTHER ASSETS:
Acquired customer base, net of amortization of $656,500
and $155,500 respectively.............................. 8,135,800 2,686,600
Investment in Yupi Internet Inc.......................... 3,113,500 3,113,500
Investments in and advances to affiliated partnerships... 233,200 241,500
Notes receivable......................................... 615,000 612,500
Deferred income taxes.................................... 876,400 --
Other assets............................................. 1,427,900 655,200
----------- -----------
Total other assets..................................... 14,401,800 7,309,300
----------- -----------
TOTAL ASSETS............................................... $29,214,600 $18,861,500
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................... $ 7,640,000 $ 2,447,200
Capital lease obligation................................. 114,800 --
----------- -----------
Total current liabilities.............................. 7,754,800 2,447,200
----------- -----------
LONG-TERM LIABILITIES:
Notes payable............................................ 496,400 316,900
Capital lease obligation................................. 2,740,800 --
----------- -----------
Total long-term liabilities............................ 3,237,200 316,900
----------- -----------
TOTAL LIABILITIES.......................................... 10,992,000 2,764,100
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.02 par value; 150,000,000 shares
authorized, 8,438,803 and 6,830,240 shares issued
and outstanding, respectively........................... 168,800 136,600
Paid-in capital......................................... 17,289,700 11,299,100
Retained earnings....................................... 1,128,000 4,817,200
Accumulated other comprehensive income.................. 5,900 (26,000)
Deferred compensation.................................... (369,800) (129,500)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY................................. 18,222,600 16,097,400
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $29,214,600 $18,861,500
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements.
3
IFX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
--------------------------
1999 1998
---------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues:
Dial Up...................................... $ 910,600 $ -
Dedicated.................................... 179,400 -
Hosting and Design Web Services.............. 54,900
Other........................................ 73,700 -
----------- -----------
Total revenues............................... 1,218,600 -
Cost and expenses:
Cost of revenues............................. 1,076,600 -
General and administrative................... 4,390,600 150,300
Depreciation and amortization................ 852,400 -
----------- -----------
Total operating expenses..................... 6,319,600 150,300
----------- -----------
Operating loss from
continuing operations........................ (5,101,000) (150,300)
Other income (expense):
Interest income.............................. 85,000 93,400
Income (Loss) on operations of equity
investee................................... (22,000) 6,700
Other........................................ 30,100 (14,300)
----------- -----------
Total other income........................... 93,100 85,800
----------- -----------
Loss from continuing
operations before income taxes............... (5,007,900) (64,500)
(Provision)/Benefit from income tax.......... 876,400 (59,000)
----------- -----------
Loss from continuing operations................. (4,131,500) (123,500)
Income from discontinued
operations, net of taxes..................... 442,300 946,700
----------- -----------
Net income (loss)............................... $(3,689,200) $ 823,200
=========== ===========
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Loss from continuing operations..................... $ (0.56) $ (0.02)
Income from discontinued operations................. $ 0.06 $ 0.15
----------- -----------
Net Income (loss)................................... $ (0.50) $ 0.13
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted............................... 7,423,547 6,155,539
The accompanying notes are an integral part of the consolidated financial
statements.
4
IFX CORPORATION AND SUBSIDIARIES
CONSDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
--------------------------------------
1999 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $(3,689,200) $ 823,200
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation....................................... 351,400 -
Amortization....................................... 501,000 -
Deferred taxes..................................... (876,400) -
Bad debt expense................................... 230,900 -
Compensation associated with stock options......... 815,400 -
Equity in net (gain) loss of affiliated
partnerships................................... 22,000 (6,700)
Changes in operating asset and liabilities:
Receivables...................................... (315,500) (17,500)
Other assets..................................... (730,100) -
Due to/from affiliates........................... 13,000 (155,800)
Accounts payable and accrued expenses............ 1,358,300 150,600
Change in net assets from discontinued
operations..................................... 3,089,000 154,100
------------ ------------
Cash provided by operating activities.............. 769,800 947,900
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, primarily customer base............ (774,000) -
(Increase) decrease in investments in and
advances to affiliated partnerships............ (13,700) 62,400
Increase (decrease) in notes receivable.......... (2,500) 500
Purchase of PP&E................................. (1,115,000) -
------------ ------------
Cash provided by (used in) investing activities.... (1,905,200) 62,900
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable...................... 156,500 -
Issuance of common stock......................... 3,000,000 -
------------ ----------
Cash provided by financing activities.............. 3,156,500 -
------------ ----------
Effect of exchange rate changes on cash.............. 31,900 -
------------ ----------
Increase (decrease) in cash and cash equivalents..... 2,053,000 1,010,800
------------ ------------
Cash and cash equivalents, beginning of period....... 5,482,800 5,633,200
------------ ------------
Cash and cash equivalents, end of period............. $ 7,535,800 $ 6,644,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes....................... - $ 250,000
============ ============
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITIES DISCLOSURE:
Value of stock issued in conjunction with
acquisitions................................... $ 1,967,200 -
============ ============
Acquisition of equipment through assumption of
capital lease obligations...................... $ 2,855,700 -
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of IFX
Corporation and its majority-owned subsidiaries for which it has a controlling
financial interest. All material intercompany accounts and transactions,
including those related to the Company's former subsidiaries, are eliminated in
consolidation.
These condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation have been
reflected in these condensed consolidated financial statements. The balance
sheet at June 30, 1999, has been derived from the audited financial statements
at that date but does not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended June 30, 1999. Operating results for the quarter ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending June 30, 2000. Certain reclassifications have been made in the 1999
financial statements to conform to the fiscal 2000 presentation. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's financial statements on Form 10-K for the year
ended June 30, 1999.
NOTE 2. DISCONTINUED OPERATIONS
In June 1999, IFX divested itself of its 50.1% interest in IFX Ltd. in
exchange for approximately $2.45 million and a redeemable preference share
entitling IFX to quarterly payments equal to approximately 30% of the net
profits, as specifically defined, of IFX Ltd. through June 30, 2002. Following
the sale of its U.K. subsidiary, IFX decided not to invest the sales proceeds in
the trading business and, instead, decided to continue to develop businesses in
the Internet industry. Accordingly, the Company has accounted for this disposal,
and the disposal of operations related to the same business segment made in
prior years, as noted below, as discontinued operations.
On May 31, 1996, an agreement was reached to sell, transfer and assign to
E.D. & F Man International Inc. ("MINC") substantially all of the brokerage
accounts maintained by FX Chicago, Inc. (formerly Index Futures Group, Inc., or
"Index"), together with all positions, securities and other assets held in or
for such accounts and other agreed-upon assets used in the conduct of the
brokerage activities. MINC is a unit of E.D.& F. Man Group, plc, a London-based
international trading and finance conglomerate. This sale was completed as of
July 1, 1996. During 1997, Index ceased being a clearing member at all
exchanges, and ceased being a registered futures commission merchant.
The purchase price payable by MINC in connection with this transaction
is based on a percentage of the net income (as defined in the sales agreement)
of the transferred activities during the sixty-six month period following the
sale. Because the purchase price is contingent upon the future earnings of the
customer accounts sold, none of which is guaranteed, income is recognized as
earned beginning in fiscal year 1997, over the five and one-half years after the
date of the sale. The sales contract required Lee S. Casty to sign a
non-competition agreement. As compensation for providing such an agreement, a
portion of the purchase price was to be paid to Lee S. Casty. Mr. Casty
irrevocably transferred his right to receive payments under such agreement to
the Company. Accordingly, a portion of the purchase price which would otherwise
have been received by Lee S. Casty is being included in revenue by the Company.
In addition, in conjunction with the sale, the Company issued a limited
indemnification agreement to MINC. The agreement covers potential customer
6
claims arising from activity prior to the sale.
The following table summarizes financial information related to the
discontinued trading business:
Three Months Ended
September 30,
------------------------
1999 1998
----------- -----------
Total revenues...................................... $ 723,800 $2,031,300
========== ==========
Income from discontinued
operations before income taxes..................... $ 680,500 $1,417,400
Income tax provision on discontinued operation...... 238,200 470,700
---------- ----------
Income from discontinued operations, net of taxes. $ 442,300 $ 946,700
========== ==========
The information set forth in the remaining Notes to the Financial
Statements relates to continuing operations unless otherwise specified.
NOTE 3. ACQUISITIONS AND RECENT DEVELOPMENTS
During August and September 1999 International Technology Investments, LC
exercised its right to purchase 1,500,000 shares of the Company's common stock
for $3.0 million.
In August 1999 the Company entered into a conditional sale agreement with
Lucent Technologies Inc., providing the Company with the option to purchase up
to $10 million of Lucent equipment. Under the agreement, Lucent will provide the
Company with up to $10 million in networking equipment to upgrade and expand the
Company's Internet operations, but the Company is under no obligation to
purchase equipment from Lucent. Through September 30, 1999, the Company has
purchased approximately $2.9 million of equipment under the agreement. A copy of
the agreement is filed as Exhibit 11.2 to this report.
During July 1999 the Company entered into an $500,000 lease agreement with
Softech Financial (the "Softech Lease"), a division of EAB Leasing Corporation,
to provide the financing for the cost of the Company's implementation of Portal
software(R). Under the terms of the agreement, Portal was contracted to develop
a consolidated billing and accounts receivable system that should allow the
Company to provide invoicing services to its customers across all Latin
America.
In August 1999 the Company signed a five-year lease for new office space in
Hallandale, Florida, to commence October 1, 1999. This lease provides for
aggregate payments totaling approximately $535,900 over the next 5 years.
Interactiva, LTDA. On July 2, 1999, a subsidiary of the Company acquired
substantially all of the capital stock of Interactiva, LTDA ("Interactiva"), an
ISP based in Santiago, Chile. Interactiva currently serves customers throughout
Santiago, providing standard dial-up connections. The Company intends to
consolidate the operations of Interactiva into its existing operations in Chile.
Sistemas de Diseno y Manufactura, S.A. de C.V. On July 21, 1999, the
Company's Mexican subsidiary acquired certain assets of Sistemas de Diseno y
Manufactura, S.A. de C.V. ("SDM Net"), an ISP based in Monterrey, Mexico. SDM
Net currently serves customers throughout Monterrey, providing dial-up
connections, dedicated Internet products and web hosting.
Intermedia. On August 13, 1999, the Company's Chilean subsidiary acquired
substantially all of the users from Servicios de Informacion Electronica
7
Limitada ("Intermedia"), an ISP located in Santiago, Chile. The Company intends
to consolidate the customers acquired from Intermedia into its Chilean
subsidiary.
E-Net Teleinformatica, Limitada. On August 20, 1999, IFX purchased all of
the capital stock of E-Net Teleinformatica, Limitada ("E-Net"), an ISP located
in Salvador, Brazil. E-Net currently serves customers in Brazil, providing dial-
up connections, dedicated Internet products and web hosting.
Vianet, S.A. de C.V. On August 23, 1999, IFX purchased all of the capital
stock of Vianet, S.A. de C.V. ("Vianet"), an ISP located in San Salvador, El
Salvador. Vianet currently serves customers in El Salvador, providing dial-up
connections, dedicated Internet products and web hosting.
ITS Networks, S.A. On August 24, 1999, IFX purchased all of the capital
stock of ITS Networks, S.A., an ISP located in Tegucigalpa, Honduras. ITS
currently serves customers in Honduras, providing dial-up connections, dedicated
Internet products and web hosting.
For the acquisitions during the first quarter of fiscal 2000, the total
purchase prices were approximately $6,112,500, of which approximately $1,363,300
was paid or will be paid in cash, and approximately $4,749,200 was paid or will
be paid by issuing approximately 263,500 shares of the Company's common stock.
The total cash acquired in those acquisitions was $72,900. Each of the
acquisitions was accounted for under the purchase method of accounting. The
purchase price in excess of the net tangible assets aggregated approximately
$5,950,300 and was allocated to Acquired Customer Base. This allocation is
preliminary and is subject to finalization of the Company's valuation analysis.
The Acquired Customer Base is being amortized using the straight-line method
over an estimated life of 3 years. The consolidated financial statements include
the accounts of these acquisitions since the date of purchase.
The following unaudited pro forma data summarize the results of operations
for the periods indicated as if these acquisitions had been completed on July 1,
1998, the beginning of the 1999 fiscal year. The pro forma data gives effect to
actual operating results prior to the acquisitions and adjustments to goodwill
amortization and income taxes. These pro forma amounts do not purport to be
indicative of the results that would have actually been obtained if the
acquisitions had occurred on July 1, 1998 or that may be obtained in the
future. The pro forma data does not give effect to acquisitions completed
subsequent to September 30, 1999.
Three months ended
September 30,
------------------------
1999 1998
----------- --------
(Unaudited)
Total revenues............................ $ 1,712,300 $684,200
Net income (loss)......................... (4,020,100) 146,800
Basic and diluted net income (loss) per
common share......................... (0.54) 0.02
NOTE 4. STOCK BASED COMPENSATION PLANS
Employee Stock Option Plan
On October 13, 1999, the Company filed a Proxy Statement Pursuant to
Section 14(a) of the Securities Exchange Act of 1934, in which, among other
things, it requested shareholder approval for an amendment to the IFX
Corporation 1998 Stock Option and Incentive Plan (the "Option Plan") to increase
the number of shares of common stock available for issuance under the Option
Plan. On November 9 the shareholders voted in favor of the amendment increasing
the number of common shares available under the Option Plan from 900,000 to
1,800,000.
Directors Stock Option Plan
On October 13, 1999, the Company filed a Proxy Statement Pursuant to
Section 14(a) of the Securities Exchange Act of 1934, in which, among other
things, it requested shareholder approval for the IFX Corporation Directors
Stock Option Plan (the "Directors Plan"). The purpose of the Directors Plan is
to assist the Company in securing individuals who are not already employees or
officers of the Company to serve on its Board of Directors, and to provide
financial incentives to such directors to exert their best efforts on behalf of
the Company. In general, the Directors Plan provides that, each eligible
director automatically will receive an option to purchase (i) 450 shares of
Common Stock, upon such director's initial election to the Board of Directors of
the Company, provided such director is elected after the effective date of the
Directors Plan, and (ii) for each year thereafter and on the date of each annual
meeting of the stockholders of the Company (including this annual meeting), 450
shares of Common Stock for service as a director and 75 shares of Common Stock
for each Committee of the Board of Directors upon which such director serves. On
November 9 the shareholders voted in favor of the Directors Plan.
8
NOTE 5. SUBSEQUENT EVENTS
ACQUISITIONS
NetSpace, S.A. de C.V. On October 1, 1999, IFX purchased the subscriber
base of NetSpace, S.A. de C.V. ("NetSpace"), an ISP located in Toluca, Mexico.
NetSpace currently serves customers in Toluca, providing standard dial-up
connections, dedicated Internet products and web hosting.
Conex Brasil and affiliated companies. On October 6, 1999, IFX purchased
all of the capital stock of Conex Brasil S.A., W3 Informatica Ltda., K3
Informatica Ltda, and Conex Canoas Ltda. (referred to collectively as the "Conex
Group"), which provide Internet services in the Brazilian city of Porto Alegre
and the surrounding cities of Novo Hamburgo, Santa Maria, and Canoas. The Conex
Group currently serves customers providing standard dial-up connections,
dedicated Internet products and web hosting. On October 21, 1999, the Company
filed a Form 8-K with respect to the acquisition of the Conex Group and its
affiliated companies.
Sistemas Integrales, Servicios y Comunicacion, S.A. de C.V. On November 10,
1999, IFX purchased all of the users and assets of Sistemas Integrales,
Servicios y Comunicacion, S.A. de C.V. ("SISCO"). SISCO provides dial-up, Web
design and Web hosting services to consumers and corporations in Guadalajara,
Jalisco, Mexico.
OTHER
Authorization Of Preferred Shares. On November 9, 1999, the shareholders
approved an amendment to the Company's Restated Certificate of Incorporation
providing the Company the authority to issue up to 10,000,000 shares of
preferred stock and, with respect to such shares, to establish among other
things, the price and the rate and nature of dividends, the terms and conditions
on which shares may be redeemed, the terms and conditions for conversion or
exchange into any other class or series of the stock and the voting rights.
Decrease In The Number Of Shares Of Authorized Common Stock. IFX's Restated
Certificate of Incorporation authorized the issuance of 150,000,000 shares of
Common Stock, $.02 par value. As of September 30, 1999, 8,438,803 shares of
Common Stock were issued and outstanding and as of June 30, 1999, approximately
6,500,000 shares of Common Stock were reserved for issuance by the Company upon
the exercise of options and warrants. On November 9, 1999, the shareholders
approved an amendment to the Restated Certificate of Incorporation providing
that the authorized number of shares of Common Stock be decreased from
150,000,000 shares to 50,000,000 shares.
NOTE 6. GEOGRAPHIC INFORMATION
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information". The new standard changes the information the Company reports about
its operating segments.
The Company is structured primarily around the geographic markets it serves
and operates three reportable segments in Chile, Mexico and Venezuela. All of
the segments provide internet connectivity services. The accounting policies of
the segments are the same as those described in the Significant Accounting
Policies footnote. The Company evaluates performance based on profit or loss
from operations before income taxes excluding interest income and expenses,
equity income, and gains or losses from securities and other investments.
The Company does not derive more than 10% of its revenues from any
individual customers.
Selected unaudited financial information for the three months ended
September 30, 1999 by segment is presented below:
United States Chile Mexico Venezuela Other Total
Revenues.... $ $ 410,700 $ 268,900 $ 262,600 $ 276,400 $ 1,218,600
Income (loss)
from continuing
operations
before taxes.. (2,645,100) (593,300) (199,300) (103,300) (1,466,900) (5,007,900)
Information by product lines is presented on the Condensed Consolidated
Statement of Operations.
9
NOTE 7. Cash & Cash Equivalents
Cash and cash equivalents includes cash and investments of less than three
months in duration.
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Period Ended September 30, 1999.
The results shown herein are not necessarily representative of the results
that may be expected in any future period. A discussion of certain risk factors
that could cause future results to differ materially from the results reported
herein is filed herewith as Exhibit 99.1 to this Form 10-Q.
OVERVIEW
The following discussion should be read in conjunction with its
Consolidated Financial Statements and notes that follow it and with its audited
consolidated financial statements, notes thereto, and management's discussion
and analysis for the year ended June 30, 1999, included in its annual report
filed on Form 10-K for such period. This discussion and analysis reflects the
adjustments made to segregate the discontinued operations ("discontinued
operations") that resulted from (i) the sale of the Company's brokerage assets
in July 1996 to E.D. & F. Man International, Inc., a unit of E.D. & F. Man
Group, plc, a London-based international trading and finance conglomerate, and
(ii) from the divesture in June 1999 of its 50.1% interest in IFX Ltd.
Discontinued operations are shown under a separate line item on the Income
Statement and Balance Sheet for fiscal years 2000 and 1999.
Due to the discontinued operations, IFX's primary source of revenues
changed from trading revenues and from foreign exchange operations to subscriber
fees from Internet operations. IFX's revenues from 2000 and 1999 related to
discontinued operations are shown as "Income from Discontinued Operations, net
of income taxes." The revenues from the ISP acquisitions are accounted from the
date of purchase.
Due to the discontinued operations, IFX's expenses changed from consisting
mostly of interest, commissions and other related brokerage costs to local dial-
up lines, local Internet connections, and depreciation and amortization
expenses. The expenses from the ISP acquisitions are accounted from the date of
purchase.
GENERAL
IFX is a pan-regional Internet Service Provider, or ISP, in Latin America.
The Company's focus is on serving individuals and small businesses. The
Company's primary service is dial-up Internet access, which IFX offers through
its Unete service, in various price and usage plans designed to meet the needs
of its subscribers. Our business services include dedicated phone lines, web
hosting, web page design, and domain name registration.
IFX offers subscribers complete Internet access in English, Spanish, and
Portuguese, with a user-friendly and easy to install software. The software
contains a set of popular Internet applications including electronic mail, World
Wide Web access, File Transfer Protocol and Internet Relay Chat. Through its
infrastructure of IFX owned subsidiaries and third-party providers, its
subscribers are able to access the Internet in nine countries in Latin America,
and in many major cities in the United States via a local telephone call and
with no roaming fees. As of October 15, 1999, the Company had approximately
32,000 subscribers.
Over the past year, IFX has established a regional presence by acquiring
the stock or assets of established independent ISPs throughout Latin America.
The Company intends to continue its strategy of acquiring ISPs in order to
deepen and broaden its market presence in Latin America. The Company hopes that
it will attain economies of scale (as the number of subscribers increases, the
costs and expenses per subscriber decrease) in selling, general and
administrative costs, particularly in the areas of numbers of employees and
salaries, operating leases, and marketing expenses. However, there can be no
assurance that the Company will achieve these anticipated cost reductions. In
addition to providing Internet access service, the Company hopes to expand its
Latin American Internet offerings to include content and e-commerce.
Prior to July 1996, the primary business of IFX was providing commodity
10
brokerage services. On July 1, 1996, IFX sold substantially all of its brokerage
assets (other than certain assets of its majority-owned U.K. subsidiary) to E.D.
& F. Man International, Inc., a unit of E.D. & F. Man Group, plc, a London-based
international trading and finance conglomerate, for a purchase price consisting
of cash earn-out payments based upon the sold business's profitability (as
defined in the sale agreement) during the sixty-six months following the sale.
Since July 1996, IFX's revenues have consisted primarily of earn-out payments
from such asset sale, interest income and income from operations of the
Company's former majority-owned British subsidiary, IFX Ltd., which conducts
foreign exchange business as a registrant of the British Securities and Futures
Authority. In June 1999, IFX divested its 50.1% interest in IFX Ltd. in exchange
for approximately $2.45 million in cash and a note receivable, and a redeemable
preference share entitling IFX to quarterly payments equal to approximately 30%
of the net profits (as specifically defined) of IFX Ltd. through June 30, 2002.
During the quarter ended September 30, 1999 the Company completed the
following acquisitions and investments:
Date Acquisition Or Investment Business Country
- ---- ------------------------- -------- -------
July 1999 SDM Net ISP Mexico
Interactiva ISP Chile
- ------------------------------------------------------------------
August 1999 Intermedia ISP Chile
E-Net ISP Brazil
Vianet ISP El Salvador
ITS Network ISP Honduras
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 30, 1999, cash provided by continuing
and discontinued operations was approximately $.8 million compared to cash
provided by continuing and discontinued operations of $.9 million for the same
period in 1998, a decrease of approximately 11%. The majority of cash for the
quarter ended September 30, 1999, was used by the Company's continuing
investments and general operating expenses in the Internet operations. In
general, the Company invests cash not needed for operations at any of its
subsidiaries in short-term investments such as U.S. Government obligations and
overnight time deposits which are classified as cash equivalents. As of
September 30, 1999, the Company held approximately $7.5 million in cash and cash
equivalents.
For the three months ended September 30, 1999, cash used in investment
activities was approximately $1.9 million compared to cash provided in
investment activities of $0.1 million for the same period in 1998. The increase
was primarily due to the purchases of equipment.
For the three months ended September 30, 1999, cash provided by financing
activities was approximately $3.2 million compared to no financing activities in
the same period in 1998. The increase was due to the $3.0 million of stock that
was issued for the ITI Agreement.
Stockholders' equity at September 30, 1999 was approximately $18.2 million
as compared with $16.1 million at June 30, 1999.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 1999 COMPARED TO 1998
Revenues. In the three months ended September 30, 1999, IFX derived
$910,600, or 75% of the total continuing revenues from subscriptions from
individuals for dial-up access to the Internet. Monthly subscription fees vary
by billing plan. With the current pricing plans, customers have several choices
including unlimited local, unlimited pan-regional and limited local plans.
In addition, in the three months ended September 30, 1999, IFX derived
$179,400 or 15% of the total continuing revenues from full-time dedicated access
connections to the Internet. Full-time dedicated lines offer small businesses
direct and uninterrupted connections to the Internet without the need to dial
any number.
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The remaining $128,600 or 10% of the total continuing revenues were derived
from certain small business services which include web-hosting, web design, and
other value-added services such as domain name registration, and from the sale
of such items as modems and computer cameras related to promotions. IFX's web-
hosting services allow a business or individual to post information on the World
Wide Web through IFX's servers. IFX's Web design services offer Internet site
development services for small businesses.
Revenues for three months ended September 30, 1998 from continuing
operations are $0, since the Company had not yet been involved in the Internet
business. Revenues for the period ended September 30, 1998 are shown in the
income statement as discontinued operations.
Costs of Revenues. IFX's cost of revenues include all the costs that are
primarily related to the number of subscribers. The primary costs are the local
Internet connection fees paid to the telecommunication companies in each country
and the subscriber start-up expenses. The telecommunication expenses include the
costs of providing its subscribers with local telephone dialing numbers to its
POPs, the costs related to third-party POPs, and the costs of the connections of
IFX's hubs to the Internet backbone. Start-up expenses include the cost of
distributing the compact disk with its starter kit software. Cost of revenues
were $1,076,600 and $0 for the three months ended September 30, 1999 and
September 30, 1998, respectively.
General and Administrative Expenses. General and administrative costs are
primarily for salaries, legal, accounting and consulting fees, and advertising,
market analysis, and trade show expenses related to the promotions of its ISP
service. General and administrative expenses were $4,390,600 and $150,300 for
the three months ended September 30, 1999 and September 30, 1998, respectively.
The increase was due to the expenses of growth the Company experienced as it
entered the Internet service business in November of 1998.
IFX believes that it is necessary to purchase or install POPs in each major
country in Latin America. As IFX continues with that expansion into new markets,
both costs of sales and selling, general and administrative expenses will
increase. IFX expects that these costs will have a short-term negative impact on
its net income. In countries where the Company does not want to establish a
presence, but wants its subscribers to have access to the Internet, it will use
third-party POPs.
Depreciation and amortization. Depreciation and amortization are related to
the depreciation of fixed assets and the amortization of the acquired customer
base from other ISPs. IFX depreciates its assets based on estimated useful lifes
that range from three to five years. IFX amortizes purchased customer bases
using the straight-line method over a period of three years, commencing when the
purchase is completed. This amortization has a negative effect on net income.
Depreciation and amortization expense was $852,400 and $0 for the three months
ended September 30, 1999 and September 30, 1998, respectively.
The Company will continue to invest heavily in purchases of computer
equipment and acquisitions in Latin America, which will increase its
depreciation and amortization costs. These costs should have a short-term
negative impact on net income, but the Company believes that these increased
costs should be offset by anticipated increases in revenue attributable to
overall subscriber growth. However, there can be no assurance that the Company
will be able to build, increase or maintain its subscriber base in a given
market to the extent necessary to generate sufficient revenues to offset these
expenses.
Interest Income. The interest income is mostly derived from investment in
short-term government notes. Interest income was $85,000 and $93,400 for the
three months ended September 30, 1999 and September 30, 1998, respectively.
Other Income and Gains from Discontinued Operations. In the three months
ended September 30, 1999, the Company earned approximately $442,300 net of taxes
and other expenses of earn-out payments from the 1996 sale of its brokerage
asset to E.D. & F. Man International, Inc., and from the 1999 sale of IFX Ltd.
All the proceeds were invested in the Internet operations in Latin America.
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Income tax provision. For the three months ended September 30, 1999, the
Company recorded a tax benefit of approximately $876,400 from its continuing
operations. The effective tax rate for the three months ended September 30, 1999
was 17.5%. Including the Company's discontinued operations, the net tax
provision was $638,200.
Net income (loss) and income (loss) per share. As a result of the factors
discussed above, IFX's loss from continuing operations for the three months
ended September 30, 1999 was approximately $4.1 million, or $(0.56) per share,
compared to a net loss of $0.1 million, or $(0.02) per share, for the three
months ended September 30, 1998. Including discontinued operations, the Company
recorded a net loss of $3.7 million, or $(0.50) per share, compared to a net
income of $0.8 million, or $0.13 per share, for the three months ended September
30, 1998.
CREDIT AGREEMENTS
In July 1999, the Company entered into an $500,000 lease agreement with
Softech Financial, a division of EAB Leasing Corp., to provide the financing for
the Company's implementation of Portal software(R). Under the terms of the
agreement, Portal will develop a consolidated billing and accounts receivable
system that should allow the Company to provide invoicing services to its
customers across Latin America.
In August 1999, the Company entered into an agreement with Lucent
Technologies Inc., providing the Company with the option to purchase up to $10
million of Lucent equipment. Under the agreement, Lucent will provide the
Company with up to $10 million in networking equipment and financing to upgrade
and expand the Company's Internet operations, but the Company is under no
obligation to purchase equipment from Lucent. A copy of the agreement is filed
herewith as Exhibit 11.2.
In August 1999, the Company signed a five-year lease for new space in
Hallandale, Florida, to commence October 1, 1999. This lease provides for
aggregate payments totaling approximately $535,900 over the next 5 years.
YEAR 2000 COMPLIANCE
IFX is aware of the "Year 2000" problem, which relates to whether computer
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information will generate
wrong data and could fail. The Year 2000 problem is pervasive and complex, as
virtually every company's computer operations will potentially be affected in
some way. IFX has identified two main areas of Y2K risk:
1. Internal computer systems or embedded chips could be disrupted or
fail, causing an interruption or decrease in productivity in its
operations; and
2. Computer systems or embedded chips of third parties including, without
limitation, financial institutions, suppliers, vendors, landlords,
customers, international suppliers of telecommunications services and
others, could be disrupted or fail, causing an interruption or
decrease in its ability to continue its operations. This risk is
particularly acute in Latin America, where many older computer systems
are still in use.
State of Readiness
- ------------------
IFX is currently engaged in a process to evaluate its internal status with
respect to the Year 2000 issue, utilizing certain employees in its evaluation of
possible Year 2000 problems. The costs and expenses the Company has incurred in
the evaluation have not been material. Most of its PCs, Laptops, Servers,
Routers and any other computer equipment are Y2K Compliant. To date, IFX has not
discovered any major Year 2000 issues in its internal operations.
Concurrently with the analysis of its internal systems, IFX has surveyed
third-party entities with which it transacts significant business, including
critical vendors and financial institutions, for Year 2000 compliance. With
respect
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to its most critical vendors, IFX has evaluated the Year 2000 preparedness of
its telecommunications providers, on which it is reliant for the network
services crucial to Internet connectivity and web hosting services. It is
actively working to mitigate any potential impact by maintaining, when possible,
diverse providers for such network services.
Risks
- -----
IFX can give no assurance that all Year 2000 issues were discovered during
the assessment or that it will not discover additional Year 2000 issues that
could have a material adverse effect. In addition, IFX faces Year 2000 risks
with respect to the acquisitions it makes, especially in Latin America, where
many of the computer systems are older and where Year 2000 preparedness may not
be adequate. Failure of any one provider may have a material adverse impact on
Company operations. At this time, IFX cannot estimate the effect, if any, that
non-compliant systems at these entities could have on it, and IFX can give no
assurance that the impact, if any, will not be material. If any of its material
third parties are not Y2K ready and their non-compliance causes a material
disruption to any of their respective businesses, its business could be
materially adversely affected and the Company could suffer a large reduction of
its revenue due to cancellations from its subscribers. Disruptions could
include, among other things:
- the failure of a material third party's business;
- a loss of power to IFX's facilities;
- a loss of voice and data connections;
- the loss of the e-mail system;
- a subscriber's loss of power and/or telecommunication lines;
- a financial institution's inability to take and transfer funds;
- an interruption in delivery of supplies from vendors; and
- other interruptions in the normal course of its operations, the nature
and extent of which the Company cannot foresee.
The Company will continue to evaluate the nature of these risks, but at
this time the Company is unable to determine the probability that any such risk
will occur, or if it does occur, what the nature, length or other effects, if
any, of such a risk may have on it. If any of its material third parties
experience significant failures in their computer systems or operations due to
Y2K non-compliance, it could affect its ability to process transactions or
otherwise engage in similar normal business activities. For example, IFX and its
customers who communicate internationally will be dependent upon the Y2K-
readiness of many non-U.S. providers of telecommunication services and their
vendors and suppliers. If these providers and others are not Y2K ready, IFX and
its customers will not be able to send and receive data and other electronic
transmissions, which would have a material adverse effect on its revenues and
business and that of its customers.
Contingency Plans
- -----------------
In some cases, the Company has been able to find different vendors for a
service. However, most telecommunication and power companies providers in Latin
America are government-owned monopolies, preventing the Company from finding
alternative suppliers for those services. Furthermore, the Company cannot be
assured that the statements provided by those third party providers regarding
Y2K are accurate.
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Item 3. - Quantitative and Qualitative Disclosures about Market Risk
The Company's continuing operations are focused primarily in Latin America,
subjecting the Company to certain political, currency, economic and commercial
risks and uncertainty not typically found in the U.S. The Company's exposure to
market risk is directly related to its role as a Latin American ISP. The
Company's primary market risk exposure relates to foreign exchange rate risk.
Foreign exchange rate risk arises from the possibility that changes in foreign
currency exchange rates will adversely impact the value of the Company's assets,
liabilities and/or equity. When the Company operates in a foreign country, the
value of the local currency will probably fluctuate, especially in Latin
America. This fluctuation can cause the Company to gain or lose on the
translation to US Dollars.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PRECEDINGS
The Company is a defendant in, and may be threatened with, various legal
proceedings arising from its regular business activities. Management, after
consultation with legal counsel, is of the opinion that the ultimate liability,
if any, resulting from any pending action or proceedings will not have a
material effect on the financial position or results of operations of the
Company.
On August 23, 1999, a lawsuit related to the Company's discontinued
operations was filed in the Circuit Court of Cook County naming Index and two
individuals as defendants (Craig Bordon v. Sean S. Mayo, et al., 99L-09368). The
complaint alleges breach of contract and damages "in excess of" $50,000. The
Company has not yet been served with the complaint. Based upon the allegations
as set forth in the complaint, the Company believes that the claim is without
merit.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
11.2 Lucent Technologies Agreement
27 Financial Data Schedule (EDGAR only)
99.1 Risk Factors
(B) REPORTS ON FORM 8-K
On October 6, 1999, IFX Corporation (the "Company") filed a Current
Report on Form 8-K that contained certain exhibits with respect to its
acquisition, through its wholly owned subsidiary Unete.com do Brasil S/C
Ltda, of all the issued and outstanding ownership interests (quotas) of
Conex Brasil S.A, W3 Informatica Ltda, K3 Informatica Ltda, and Conex
Canoas Ltda., referred to collectively herein as the "Conex Group", for
aggregate consideration (including commissions) of approximately $5.2
million, of which approximately $1.8 million was paid or is payable in
cash, approximately $3.3 million was paid or is payable by issuing shares
of the Company's common stock and assuming liabilities in the approximate
amount of $0.1 million. The purchase was determined through arms' length
negotiations with the sellers of the Conex Group, which are unrelated third
parties with respect to the Company.
On July 1, 1999, IFX Corporation filed a Current Report on Form 8-K to
report that on June 30, 1999, the Company sold all of its shares of capital
stock of IFX Ltd., a British company, to The Park Trust. Prior to the sale,
IFX Corporation owned 50.1% and The Park Trust owned 49.9% of IFX Ltd.'s
outstanding capital stock. IFX Ltd. provides institutional brokerage and
foreign exchange services to clients in the foreign exchange and futures
business. As consideration for its shares of IFX Ltd., The Park Trust paid
U.S.$1,950,000 to IFX Corporation and agreed to pay IFX Corporation the sum
of U.S.$500,000 (plus interest at a rate of prime plus three-percent) on or
before June 30, 2000. The parties intended that the consideration paid to
IFX Corporation for its shares of IFX Ltd. would equal approximately one-
half of the net book value of IFX Ltd. as of June 30, 1999. The
consideration payable to IFX Corporation is subject to adjustment if and to
the extent that, on or before the third anniversary of the closing date,
(i) the auditors of IFX Ltd. determine that the net book value and/or the
net profits of IFX Ltd. upon which the consideration paid to IFX
Corporation was calculated were incorrect, or (ii) The Park Trust sells any
of its shares of IFX Ltd. capital stock to a third party at a price per
share that is greater than the price per share paid by The Park Trust to
IFX Corporation.
16
On July 1, 1999, IFX Corporation filed a Current Report on Form 8-K to
report that on June 28, 1999, the registrant dismissed Arthur Andersen LLP
as its independent auditors and appointed Ernst & Young LLP as its
independent auditors for the fiscal year ended June 30, 1999. The decision
to dismiss Arthur Andersen LLP and to retain Ernst & Young LLP was
recommended by the registrant's audit committee and approved by the
registrant's Board of Directors.
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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 15, 1999 By: /S/ JOEL EIDELSTEIN
-------------------------
Joel Eidelstein
President
Dated: November 15, 1999 By: /S/ JOSE LEIMAN
-------------------------
Jose Leiman
Chief Financial Officer
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