UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended December 31, 2001 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______ .
Commission file number 0-15187
IFX CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 36-3399452
- ------------------------------- ------------------------------------
(State 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)
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(305) 512-1100
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(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 February 7, 2002.
IFX CORPORATION AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Condensed consolidated balance sheets as of December 31,
2001 (unaudited) and June 30, 2001 3
Condensed consolidated statements of operations (unaudited)
for the three and six months ended December 31, 2001 and 2000 4
Condensed consolidated statements of cash flows (unaudited)
for the six months ended December 31, 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 13
Item 3 Quantitative and Qualitative Disclosures about Market Risk 20
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 6 Exhibits and reports on Form 8-K 20
(a) Exhibits
(b) Reports on Form 8-K
SIGNATURES 21
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
IFX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2001 2001
--------------- -------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 510,300 $ 7,647,700
Restricted cash 1,302,700 981,400
Receivables, net of allowance for doubtful
accounts of $1,721,200 and $1,955,800 at December 31, 2001
and June 30, 2001, respectively 2,731,600 2,692,400
Due from related party 1,396,700 910,500
Net assets of discontinued operations 1,879,000 138,900
Prepaid expenses 848,800 1,261,200
------------- --------------
Total current assets 8,669,100 13,632,100
PROPERTY AND EQUIPMENT, NET 21,602,600 24,284,500
OTHER ASSETS
Restricted cash - non-current 814,100 1,131,700
Acquired customer base, net of accumulated amortization of
$4,391,400 and $4,493,500, at December 31, 2001 and
June 30, 2001, respectively 1,853,000 3,953,900
Investments 2,492,500 3,009,000
Foreign taxes recoverable 1,621,400 1,976,100
Other assets 661,600 536,300
------------- --------------
Total other assets 7,442,600 10,607,000
------------- --------------
TOTAL ASSETS $ 37,714,300 $ 48,523,600
============= ==============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 11,773,100 $ 10,926,300
Accrued expenses 4,618,600 5,257,200
Convertible notes payable 4,600,000 --
Deferred revenues 1,744,500 1,102,700
Capital lease obligations - current portion 8,390,000 7,926,000
------------- --------------
Total current liabilities 31,126,200 25,212,200
LONG-TERM LIABILITIES
Other long-term liabilities 259,900 296,400
Deferred gain on sale of investment -- 4,451,900
Capital lease obligations, less current portion 6,079,600 8,142,100
------------- --------------
Total long-term liabilities 6,339,500 12,890,400
------------- --------------
TOTAL LIABILITIES 37,465,700 38,102,600
------------- --------------
REDEEMABLE PREFERRED STOCK
Preferred stock, convertible, $1.00 par value;
10,000,000 shares authorized, 6,449,131 issued
and outstanding at both December 31, 2001 and June 30, 2001 40,463,900 40,463,900
STOCKHOLDERS' EQUITY
Common stock, $.02 par value; 50,000,000 shares authorized,
14,276,495 shares issued and outstanding at both
December 31, 2001 and June 30, 2001 285,500 285,500
Additional paid-in capital 76,476,700 77,054,600
Accumulated deficit (110,789,200) (99,415,000)
Accumulated other comprehensive loss (2,015,800) (1,118,500)
Deferred compensation (4,172,500) (6,849,500)
------------- --------------
TOTAL STOCKHOLDERS' EQUITY (40,215,300) (30,042,900)
------------- --------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY $ 37,714,300 $ 48,523,600
============= ==============
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
IFX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2001 2000 2001 2000
------------- -------------- --------------- --------------
REVENUES
Dial-up $ 1,123,600 $ 1,470,800 $ 2,303,600 $ 3,788,000
Dedicated line services 3,467,400 1,493,100 6,630,000 2,285,400
Sales to related party 1,994,600 4,551,000 3,989,400 7,816,700
Web hosting and design services 276,300 330,800 565,700 632,100
Other 556,200 482,400 959,200 1,296,400
-------------- --------------- ---------------- ---------------
Total revenues 7,418,100 8,328,100 14,447,900 15,818,600
Cost of revenues 3,988,200 5,386,400 7,911,800 10,313,700
-------------- --------------- ---------------- ---------------
Gross profit 3,429,900 2,941,700 6,536,100 5,504,900
General and administrative 7,561,200 8,517,100 14,479,300 17,974,100
Sales and marketing 345,300 1,536,000 831,800 1,828,300
Depreciation and amortization 3,149,000 3,953,400 6,757,300 7,430,200
Impairment of acquired customer base 670,200 -- 670,200 --
-------------- --------------- ---------------- ---------------
Total operating expenses 11,725,700 14,006,500 22,738,600 27,232,600
-------------- --------------- ---------------- ---------------
Operating loss from continuing
operations (8,295,800) (11,064,800) (16,202,500) (21,727,700)
OTHER INCOME (EXPENSE)
Interest income 20,000 183,200 81,900 459,700
Interest expense (633,300) (223,000) (1,231,400) (317,600)
Loss in equity of investee (276,000) -- (515,500) (3,721,400)
Gain on sale of investment -- -- 4,451,900 --
Other (76,500) 109,900 (123,700) 62,600
-------------- --------------- ---------------- ---------------
Total other income (expense) (965,800) 70,100 2,663,200 (3,516,700)
-------------- --------------- ---------------- ---------------
Loss from continuing operations before
income taxes (9,261,600) (10,994,700) (13,539,300) (25,244,400)
Income tax benefit 650,300 213,200 757,800 1,242,500
-------------- --------------- ---------------- ---------------
Loss from continuing operations (8,611,300) (10,781,500) (12,781,500) (24,001,900)
Income from discontinued operations,
net of taxes 1,207,700 395,800 1,407,300 2,307,500
-------------- --------------- ---------------- ---------------
NET LOSS $ (7,403,600) $ (10,385,700) $ (11,374,200) $ (21,694,400)
============== =============== ================ ===============
BASIC AND DILUTED LOSS PER SHARE
Continuing operations $ (0.60) $ (0.79) $ (0.90) $ (1.78)
Discontinued operations 0.08 0.03 0.10 0.17
-------------- --------------- ---------------- ---------------
Net loss $ (0.52) $ (0.76) $ (0.80) $ (1.61)
============== =============== ================ ===============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic and diluted 14,276,495 13,628,972 14,276,495 13,473,444
============== =============== ================ ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
IFX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
2001 2000
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (11,374,200) $ (21,694,400)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation 5,326,600 2,617,500
Amortization 1,430,700 4,812,700
Deferred gain on sale of investment (4,451,900) --
Bad debt expense, net of write-offs (175,000) 789,400
Non-cash stock compensation 2,099,000 3,789,900
Impairment of acquired customer base 670,200 --
Equity in loss of investees 515,500 3,721,400
Effect of deconsolidation of Tutopia.com, Inc. -- (2,391,700)
Change in net assets of discontinued operations (1,740,100) 141,700
Changes in operating assets and liabilities:
Foreign taxes recoverable (331,200) (61,500)
Receivables (753,400) (1,717,400)
Due from related party (499,100) --
Income tax receivable -- 636,600
Prepaid expenses 383,400 (130,300)
Other assets (69,200) 424,200
Deferred revenues 649,000 296,500
Accounts payable and accrued expenses 377,100 987,000
---------------- -----------------
Cash used by operating activities (7,942,600) (7,778,400)
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash (3,700) (850,000)
Acquisitions, primarily customer base -- (456,600)
Purchases of property and equipment (2,076,600) (5,329,600)
---------------- -----------------
Cash used by investing activities (2,080,300) (6,636,200)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, net 4,600,000 123,700
Payments of capital lease obligations (1,659,900) (623,900)
Issuance of preferred shares -- 10,100,000
---------------- -----------------
Cash provided by financing activities 2,940,100 9,599,800
Effect of exchange rate changes on cash and cash equivalents (54,600) 428,900
---------------- -----------------
Decrease in cash and cash equivalents (7,137,400) (4,385,900)
Cash and cash equivalents, beginning of period 7,647,700 13,835,500
---------------- -----------------
Cash and cash equivalents, end of period $ 510,300 $ 9,449,600
================ =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,231,400 $ 317,600
================ =================
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES DISCLOSURE:
Acquisition of equipment through assumption of capital
lease obligations $ 1,280,000 $ 2,753,900
================ =================
Value of stock issued in conjunction with acquisitions $ -- $ 2,042,000
================ =================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Unaudited)
1. BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by 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 December 31, 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 60 cities in 13
countries: Argentina, 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 ($2.1
million at December 31, 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 of such assets is performed. If
in the Company's view an evaluation is required, the estimated future
undiscounted cash flows 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.
In accordance with SFAS 121, "Accounting for the Impairment of Long Lived Assets
and for Long-Lived Assets to Be Disposed of" the Company recorded an impairment
charge of approximately $0.7 million during the three-month period ended
December 31, 2001. The impairment charge was related to the partial sale of the
Company's dial-up customers in Brazil and is more fully discussed in Note 8.
6
Yupi Investment
During fiscal 2000, the Company sold a portion of its investment in Yupi
Internet, Inc. ("Yupi") to Lee S. Casty (a shareholder of the Company) for $5.0
million. The sale resulted in a gain to the Company of approximately $4.5
million which was deferred for reporting purposes since the terms of the sale
included certain provisions that potentially guaranteed Mr. Casty a minimum
return on the Yupi shares under certain circumstances and thus prevented
immediate recognition of the gain. In August 2001, Yupi entered into a merger
agreement with T1MSN Corp. that resulted in net proceeds to the Company of
approximately $30,000 and negated the minimum return provisions of the original
terms of the sale to Mr. Casty. Accordingly, during the first quarter of fiscal
2002, the Company recognized the deferred gain on the sale of the Yupi shares to
Mr. Casty.
Comprehensive Income
During the three month period ended December 31, 2001 and 2000, the Company's
comprehensive loss was $7.9 and $10.3 million, respectively compared with net
loss of $7.4 million and $10.4 million, respectively. During the six-month
period ended December 31, 2001 and 2000, the Company's comprehensive loss was
$12.3 and $21.3 million, respectively compared with net loss of $11.4 million
and $21.7 million, respectively. The primary difference between comprehensive
and net loss was due to foreign currency translation adjustments.
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 shares of
potentially dilutive securities have been excluded from the calculation of
diluted loss per share for the six-month periods ended December 31, 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 requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually.
SFAS 142 also requires that intangible assets with definite useful lives be
amortized over their respective 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.
Preferred Stock
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 (EITT D-98
Classification and Measurement of Redeemable Securities). The Company has
determined that its preferred stock would be redeemable under certain
circumstances that are beyond its control. As a result, the Company,
reclassified its preferred stock from Stockholders' Equity to Redeemable
Preferred Stock as of December 31, 2001 and June 30, 2001.
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 would affect IFX's ability to meet its working
capital needs, or satisfy capitalized lease and other obligations. In addition,
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.
7
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.
Pending the closing of the Series C preferred round, UBS advanced funds to the
Company in exchange for 10 percent convertible notes which will be automatically
converted to Series C preferred shares on closing. UBS has funded $4.6 million
as of December 31, 2001 ($5.5 million through February 10, 2002). Certain of the
10% convertible notes were due on December 11, 2001. The Company has received a
deferral of payment until March 31, 2002. The Series C round is expected to
close during the Company's quarter ending March 31, 2002. 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 would 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 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 therefore UBS 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 authorized common stock from 50 million to 60
million and increasing the number of shares of authorized preferred stock from
10 million to 20 million. Such increase has already been approved by the
Company's shareholders.
8
The Company is currently negotiating with UBS, International Technology
Investments ("ITI") and Lee Casty (all current shareholders of the Company) to
increase their investments in the Company. The parties intend that these
investors will invest a total of $5 million and surrender IFX stock in exchange
for IFX convertible Series D participating preferred stock priced at $1.20 per
share and convertible to two shares of IFX common stock for each share of Series
D preferred stock. It is anticipated that each share of preferred stock will
have a liquidation preference of $6.00 per share and will also participate with
the holders of common stock after the Series D holder receives their liquidation
preference and accrued dividends, provided that the maximum amount which can be
received with respect to the Series D preferred stock after taking into account
the participation feature is limited to 3-1/2 times the stated preference. As
part of this transaction, the parties intend that in addition to the cash
investment of approximately $3.3 million, UBS will surrender 750,000 shares of
its Series C preferred stock in exchange for 1,875,000 shares of newly issued
Series D preferred stock. In addition, ITI and Mr. Casty will each invest
approximately $0.8 million and surrender approximately 340,000 IFX common shares
in exchange for approximately 170,000 of newly issued shares of Series D
preferred stock.
At December 31, 2001, the Company had received a commitment letter from a lessor
for a deferral of approximately $4.0 million of principal on certain of its
capital lease commitments. As an alternative to the deferral, the Company is
negotiating with the lessor to purchase the leased equipment for a reduced
amount and a complete retirement of lease obligations owed to the lessor. In
consideration of the extinguishment of approximately $9 million in capital lease
obligations, the Company is negotiating to pay the Lessor approximately $2
million in addition to granting the lessor 500,000 warrants allowing the lessor
to purchase shares of the Company's common stock at $1 per share that 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. During the quarter ended December 31, 2001, the Company earned
its final payment under the Company's earn-out agreement with EDF & Man
International, Inc. The Company will not receive future income from discontinued
operations. Such amounts have been 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. LEASE OBLIGATIONS
As of June 30, 2001, the Company did not meet an equipment lease revenue
covenant that required IFX to have $38 million in total revenues for fiscal 2001
versus the $32 million actually recognized, resulting in the lessor asserting a
default under the lease agreement. As of December 31, 2001, the Company was
negotiating to attempt to obtain a waiver of this requirement and a
restructuring of lease payments. Until such waiver and restructuring is
obtained, the Company will continue to recognize all the lease obligations as
current ($2.4 million at June 30 and December 31, 2001).
On October 1, 2001, the Company entered into an agreement to lease network
capacity infrastructure through a 15 year indefeasible right of use (IRU) with
payments due over 36 months. The agreement states that the lessor shall provide
the Company with portability of the STM-ls to the extent that there is capacity
on the lessor's network. As of December 31, 2001, the Company had activated two
of the three available STM-1s under this agreement. Future minimum payments
under this lease agreement were $8.9 million, including $1.0 million in fiscal
2002, $3.8 million in fiscal 2003, $3.9 million in fiscal 2004, and $0.2 million
in fiscal 2005. The STM-1s are being amortized on a straight-line basis over ten
years.
Subsequent to December 31, 2001, the Company and the lessor amended the October
2001 lease agreement to effect price reductions commencing in fiscal 2003.
Taking into account such price reductions and the subsequent purchase of
additional network capacity for an STM-1 between Miami, Florida and Caracas,
Venezuela, the revised future minimum lease payments are $6.6 million,
consisting of $1.0 million in fiscal 2002, $2.5 million in fiscal 2003, $2.5
million in fiscal 2004 and $0.6 million in fiscal 2005. In addition, the Company
is in the process of entering into an agreement to lease network capacity
infrastructure between Miami, FL and Bogota, Colombia with total future minimum
lease payments of $4.8 million over a three-year term.
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 December 31, 2001.
9
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, 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 December 31,
2001 and 2000 by segment is presented below:
Three Months Ended December 31, 2001 Three Months Ended December 31, 2000
------------------------------------------------ ------------------------------------------------
Income (Loss) from
continuing Loss from continuing
operations before operations before
Revenues income taxes Total assets Revenues income taxes Total assets
----------- ------------------- ------------ ----------- -------------------- ------------
Argentina $1,557,800 $ 91,300 $ 1,301,600 $1,191,800 $ (223,800) $ 2,248,800
Brazil 1,661,700 (1,449,200) 12,446,700 1,219,900 (1,595,100) 18,044,500
Chile 939,700 79,400 2,239,200 1,029,900 (142,100) 5,694,500
Colombia 796,100 (12,600) 1,544,900 809,800 (84,800) 1,879,000
Mexico 664,700 (465,200) 3,521,700 1,157,700 (749,700) 6,909,900
Venezuela 598,000 (326,700) 1,976,600 678,900 (671,900) 2,839,100
Central America 728,400 (392,600) 1,423,400 509,400 (718,700) 2,943,200
United States and
all other 471,700 (6,786,000) 13,260,200 1,730,700 (6,808,600) 19,162,400
---------- ----------- ----------- ---------- ------------ -----------
Total $7,418,100 $(9,261,600) $37,714,300 $8,328,100 $(10,994,700) $59,721,400
========== =========== =========== ========== ============ ===========
Included in the above table are revenues from services provided to Tutopia of
approximately $2.0 million and $4.6 million for the three months ended December
31, 2001 and 2000, respectively or approximately 26.9% and 54.6% of IFX's total
revenues for the three months ended December 31, 2001 and 2000, respectively.
10
Selected unaudited financial information for the six months ended December 31,
2001 and 2000 by segment is presented below:
Six Months Ended December 31, 2001 Six Months Ended December 31, 2000
------------------------------------------------ ------------------------------------------------
Income (Loss) from
continuing Loss from continuing
operations before operations before
Revenues income taxes Total assets Revenues income taxes Total assets
----------- ------------------- ------------ ----------- -------------------- ------------
Argentina $ 3,126,200 $ 185,200 $ 1,301,600 $ 1,293,200 $ (1,159,500) $ 2,248,800
Brazil 3,309,400 (2,121,800) 12,446,700 2,615,700 (3,242,600) 18,044,500
Chile 1,817,300 67,700 2,239,200 1,822,300 (336,800) 5,694,500
Colombia 1,070,700 (395,000) 1,544,900 849,600 (679,100) 1,879,000
Mexico 1,293,400 (727,300) 3,521,700 1,619,000 (1,878,600) 6,909,900
Venezuela 1,135,000 (546,000) 1,976,600 1,177,700 (986,600) 2,839,100
Central America 1,438,900 (893,900) 1,423,400 915,600 (1,304,400) 2,943,200
United States and
all other 1,257,000 (9,108,200) 13,260,200 5,525,500 (15,656,800) 19,162,400
----------- ------------ ----------- ----------- ------------ -----------
Total $14,447,900 $(13,539,300) $37,714,300 $15,818,600 $(25,244,400) $59,721,400
=========== ============ =========== =========== ============ ===========
Included in the above table are revenues from services provided to Tutopia of
approximately $4.0 million and $7.8 million for the six months ended December
31, 2001 and 2000, respectively or approximately 27.6% and 49.4% of IFX's total
revenues for the six months ended December 31, 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.
The unaudited operating results of Tutopia are as follows:
Three Months Ended Six Months Ended
December 31, December 31,
2001 2000 2001 2000
------------ ----------- ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues $ 2,966,000 $ 169,200 $ 5,483,500 $ 260,100
Cost of Revenues 3,210,400 5,295,900 5,957,400 9,622,000
----------- ----------- ----------- ------------
Gross loss (244,400) (5,126,700) (473,900) (9,361,900)
Net loss $(2,208,000) $(7,116,200) $(4,124,000) $(14,067,000)
=========== =========== =========== ============
During the first quarter of fiscal 2001, the Company's carrying value of its
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
and six month periods ended December 31, 2001, IFX recognized $0.3 and $0.5
million, respectively, of losses related to its proportionate share of Tutopia's
losses.
11
Selected unaudited financial information from Tutopia's balance sheet is as
follows:
December 31, 2001
-----------------
(unaudited)
Current assets $1,795,500
Total assets 2,866,800
Current liabilities 1,983,300
Total liabilities 1,983,300
Stockholders' equity $ 883,500
8. SUBSEQUENT EVENTS
IFX entered into an agreement to sell the stock of its Bolivian subsidiary as of
January 1, 2002 to the original shareholders of this subsidiary. Per the terms
of the agreement, IFX received two promissory notes for a total amount of
$275,000 to be paid in 24 equal monthly installments and the original
shareholders agreed to return 200,000 shares of IFX common stock held by the
former shareholders. Until all amounts due under this agreement have been
received by IFX, shares of the Bolivian entity will reside in an escrow account
maintained by an agent.
On February 6, 2002, the IFX Board of Directors approved the partial sale of the
Company's Brazilian dial-up subscribers to an unrelated third party. Under the
terms of agreement, the amount of sales proceeds to be received by the Company
will be dependent on the number of dial-up subscribers that successfully migrate
to the system of the purchaser. Total dial-up revenues in Brazil accounted
for approximately $0.5 million, or 7%, of the Company's total revenues for
the three-month period ended December 31, 2001. The Company recorded a $0.7
million impairment to its acquired customer base related to its Brazilian dial-
up customers as a result of this sale. Such write-off was recognized during the
quarter ended December 31, 2001.
The Company intends to implement an employee retention program under which all
employees will be given the opportunity to cancel one or more Company stock
options previously granted to them in exchange for a certain number of new stock
options. The new options will be granted six months and one day from the date
the old options are cancelled, provided the individual is still employed or
providing service on such date. The number of new options granted to employees
is subject to the discretion of the stock option committee of the Company's
Board of Directors. The exercise price of the new options will be the fair
market value of IFX Common Stock on the date they are granted. It is
anticipated that the new options will have the same vesting schedule as the old
options and will be immediately exercisable as to vested shares when granted.
12
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 this investment 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.
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.
13
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 Six Months Ended
December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----
Dial-up 15.1% 17.7% 15.9% 24.0%
Dedicated line services 46.8 17.9 46.0 14.4
Sales to related party 26.9 54.6 27.6 49.4
Web hosting and design services 3.7 4.0 3.9 4.0
Other 7.5 5.8 6.6 8.2
------ ------ ------ ------
TOTAL REVENUES 100.0 100.0 100.0 100.0
Cost of revenues 53.8 64.7 54.8 65.2
------ ------ ------ ------
Gross profit 46.2 35.3 45.2 34.8
General and administrative 101.9 102.3 100.2 113.6
Sales and marketing 4.7 18.4 5.8 11.6
Depreciation and amortization 42.5 47.5 46.8 47.0
Impairment of acquired customer base 9.0 -- 4.6 --
------ ------ ------ ------
158.1 168.2 157.4 172.2
------ ------ ------ ------
Operating loss from continuing operations -111.8 -132.9 -112.1 -137.4
------ ------ ------ ------
OTHER INCOME (EXPENSE): -13.0 0.8 18.4 -22.2
------ ------ ------ ------
Loss from continuing operations before income taxes -124.9 -132.1 -93.7 -159.6
Income tax benefit 8.8 2.6 5.2 7.9
------ ------ ------ ------
Loss from continuing operations -116.1 -129.5 -88.5 -151.7
Income from discontinued operations, net of taxes 16.3 4.8 9.7 14.6
------ ------ ------ ------
Net loss -99.8% -124.7% -78.7% -137.1%
====== ====== ===== ======
CONTINUING OPERATIONS
Quarters ended December 31, 2001 and 2000
Total revenues for the second quarter of fiscal 2002, ended December 31, 2001,
decreased $0.9 million to $7.4 million from $8.3 million during the same period
in fiscal 2001. Revenue relating to dial-up services decreased to $1.1 million
for the three month period ended December 31, 2001 as compared to $1.5 million
for the same period during fiscal 2001. Revenues from dedicated line services
increased by $2.0 million to $3.5 million for the second quarter of fiscal 2002
as compared to $1.5 million for the same period of fiscal 2001. The decrease in
dial-up related revenue and the increase in revenue relating to dedicated line
service results from the Company's pursuit of its business strategy of focusing
on business clients and not individual dial-up consumers.
14
Services provided to Tutopia, a related party, resulted in approximately $2.0
million of revenues, or a decrease of $2.6 million during the second quarter of
fiscal 2002 as compared to revenue of $4.6 million for the same period of fiscal
2001. The decrease is attributable to a reduction of rates per hour of usage
during fiscal 2002 and the Company's renegotiation of its network services
agreement with Tutopia to include, among other changes, a decrease in the
monthly minimum connectivity charge from approximately $1.0 million to
approximately $0.65 million. The revised agreement with Tutopia was effective as
of July 1, 2001. Web hosting and design services revenue for the three-month
period ended December 31, 2001 and 2000 was approximately $0.3 million. Other
revenues increased to $0.6 million for the quarter ended December 31, 2001 as
compared to $0.5 million for the quarter ended December 31, 2000.
Subsequent to December 31, 2001, the Company sold its Bolivian operations which
accounted for $0.2 million in revenues, or 3% of the Company's total revenues
for the three-month period ended December 31, 2001. In addition to the sale of
the Bolivian operation, IFX sold part of its dial-up customer base in its
Brazilian operations. Revenues of approximately $0.5 million, or 7% of the
Company's total revenues, were recognized for the three-month period ended
December 31, 2001 related to all of the Company's dial-up customers in Brazil.
Cost of revenues as a percentage of revenues in the second quarter of fiscal
2002 decreased 10.9 percentage points to 53.8% from 64.7% in the comparable
period of fiscal 2001. The decrease in costs of revenues is attributable to
management's continued efforts to increase efficiencies in 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 decreased to $7.6 million for the three-
months ended December 31, 2001 as compared to $8.5 million for the comparable
period ended December 30, 2000. The decrease is primarily due to increased
efficiencies and cost reduction efforts including, but not limited, to a
decrease in the number of staff throughout the Company's operations. As a
percentage of total revenues, general and administrative expenses decreased to
101.9% for the second quarter of fiscal 2002 as compared to 102.3% for the
second quarter of fiscal 2001.
During the three-month period ended December 31, 2001, sales and marketing
expenses decreased $1.2 million to $0.3 million as compared to $1.5 million for
the three-month period ended December 31, 2000. The decrease is a result of
management's decision to reduce advertising costs throughout the Company's
operations.
Depreciation and amortization expense decreased to $3.1 million from $4.0
million for the three-month period ended December 31, 2001 as compared to the
three-month period ended December 31, 2000. The decrease results from decreased
amortization of acquired customer base due to the Company recognizing $10.9
million and $0.7 million of impairment charges to its acquired customer base
during the fourth quarter of fiscal 2001 and the second quarter of fiscal 2002,
respectively. This decrease in amortization is partially offset by increase in
depreciation expense related to the acquisition of fixed assets.
During the second quarter of fiscal 2002, IFX recorded other expense of $1.0
million as compared to other income of $0.1 million for the second quarter of
fiscal 2001. The expense of $1.0 million for the three-month period ended
December 31, 2001 consists of interest expense of $0.6 million and a
$0.3 million expense recorded to realize a loss in equity of investee. The
increase in interest expense is primarily due to the increase in capital lease
obligations.
15
Six Months ended December 31, 2001 and 2000
Total revenues for the six months ended December 31, 2001 decreased $1.4 million
or 8.7% to $14.4 million from $15.8 million during the same period in fiscal
2001. Revenue relating to dial-up services decreased $1.5 million to $2.3
million for the six month period ended December 31, 2001 as compared to $3.8
million for the comparable period during fiscal 2001. Revenues from dedicated
line services increased by $4.3 million to $6.6 million for the six-months ended
December 31, 2001 as compared to $2.3 million for the same period of fiscal
2001. The decrease in dial-up related revenue and the increase in revenue
relating to dedicated line services results from the Company's pursuit of its
business strategy of focusing on business clients and not individual dial-up
consumers.
Services provided to Tutopia, a related party, resulted in approximately $4.0
million in revenues, or a decrease of $3.8 million during the six month period
ended December 31, 2001 as compared to $7.8 million for the same period of
fiscal 2001. The decrease is attributable to a reduction of rates per hour of
usage during fiscal 2002, in addition, the Company renegotiated its network
services agreement with Tutopia to include, among other changes, a decrease in
the monthly minimum connectivity charge from approximately $1.0 million to
approximately $0.65 million. The revised agreement with Tutopia was effective as
of July 1, 2001. Web hosting and design services revenue for the six-month
period ended December 31, 2001 and 2000 was approximately $0.6 million. Other
revenues decreased to $1.0 million for the six-month period ended December 31,
2001 as compared to $1.3 million for the comparable period ended December 31,
2000.
Subsequent to December 31, 2001, the Company sold its Bolivian operations which
accounted for $0.5 million in revenues, or 3% of the Company's total revenues,
for the six month period ended December 31, 2001. In addition to the sale of the
Bolivian operation, IFX sold part of its dial-up customer base in its Brazilian
operations. Revenues of approximately $1.1 million, or 8% of the Company's total
revenues, were recognized for the six-month period ended December 31, 2001 as
total dial-up revenue in the Brazil operations.
Cost of revenues as a percentage of total revenues decreased 10.4 percentage
points to 54.8% during the first six months of fiscal 2002 from 65.2% in the
comparable period of fiscal 2001. The decrease in costs of revenues is
attributable to 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 decreased $3.5 million to $14.5 million for
the six-month period ended December 31, 2001 as compared to the $18.0 million
for the comparable period ended December 31, 2000. The decrease is primarily due
to increased efficiencies and cost reduction efforts throughout the Company's
operations. This decrease resulted from payments of non-cash stock compensation
related to acquisitions of $1.0 million recorded in September 2000 without a
corresponding charge in the current period. In addition, the amortization of
deferred compensation expense decreased by $0.7 million as a result of employee
separations. As a percentage of total revenues, general and administrative
expenses decreased to 100.2% for the first and second quarter of fiscal 2002 as
compared to 113.6% for the first and second quarter of fiscal 2001.
During the six-month period ended December 31, 2001, sales and marketing
expenses decreased $1.0 million to $0.8 million as compared to $1.8 million for
the six-month period ended December 31, 2000. The decrease is a direct result
of management's decision to reduce advertising expenses.
Depreciation and amortization expense decreased to $6.8 million from $7.4
million for the six-month period ended December 31, 2001 as compared to the six-
month period ended December 31, 2000. The decrease results from the decreased
amortization of acquired customer base due to the Company recognizing $10.9
million and $0.7 million of impairment charges to its acquired customer base
during the fourth quarter of fiscal 2001 and the second quarter of fiscal 2002,
respectively. This decrease in amortization is partially offset by increase in
depreciation expense related to the acquisition of fixed assets.
16
During the six-months ended December 31, 2001, IFX recorded total other income
of $2.7 million as compared to total other expense of $3.5 million for the six-
month period ended December 31, 2001. The other income during the six-month
period ended December 31, 2001 is primarily attributable to the recognition of
$4.5 million deferred gain on sale of the Company's investment in Yupi Internet,
Inc. offset by interest expense of $1.2 million and an expense recorded to
realize a loss in equity of investee of $0.5 million. The $3.5 million in other
expense during the six-month period ended December 31, 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 December 31, 2001.
Income From Discontinued Operations, net
For the three-month period ended December 31, 2001 and 2000, the Company had
income from discontinued operations of approximately $1.2 million and $0.4
million, net of taxes, respectively. The increase in the second quarter of
fiscal 2002 as compared to the same period of fiscal 2001 is a direct result of
the final payment that was earned in the quarter ended December 31, 2001. For
the six-months ended December 31, 2001 and 2000, the Company had income from
discontinued operation of approximately $1.4 million and $2.3 million, net of
taxes, respectively. The decrease in 2001 from 2000 was related to the September
2000 sale of the Company's preference share, thereby reducing future earn-out
payments. The Company will receive no additional income from discontinued
operations.
FINANCIAL CONDITION
Liquidity and Capital Resources
For the six-month period ended December 31, 2001, cash used by operating
activities was approximately $7.9 million compared to $7.8 million for the
comparable period in fiscal 2001. 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 December 31, 2001, the Company had
approximately $0.5 million in unrestricted cash and equivalents.
For the six-month period ended December 31, 2001, cash used by investing
activities was approximately $2.1 million compared to $6.6 million for the same
period in fiscal 2001. Cash used in investing activities primarily consists of
acquisitions of property and equipment.
For the six-month period ended December 31, 2001, cash provided by financing
activities was approximately $2.9 million compared to $9.6 million of cash
provided by financing activities during the comparable period in fiscal 2001.
Cash of approximately $1.7 million was used for payments of capital lease
obligations and approximately $4.6 million was provided through the issuance of
convertible promissory notes to UBS. Cash provided by financing activities in
the prior year included the $10.1 million sale of preferred stock.
The cash flows associated with the Company's acquired customer base represent
revenues generated from IFX's paid dial-up Internet access line of business.
While that line of business continued to generate revenues during the quarter
ended December 31, 2001, ($1.1 million), those revenues are decreasing in
absolute terms and as a percentage of the Company's total revenues. The
Company's primary focus has changed from targeting paid consumer dial-up account
customers to targeting small and medium sized businesses seeking to gain access
to the Internet via a dedicated Internet line. In addition, the Company is
focusing on providing "carrier" type Internet network services to other
companies. Although the decrease in dial-up revenues will have an adverse effect
on the short-term cash flows of the Company, the Company expects to grow the
revenues from its other lines of business to offset the decrease, in whole or in
part.
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 as of December 31, 2001. 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. The
Company is negotiating to attempt to obtain a waiver of this requirement and a
restructuring of lease payments. Until such waiver and restructuring is obtained
the Company will continue to recognize all the lease obligations as current
($2.4 million at June 30 and December 31, 2001).
17
At December 31, 2001, the Company had a working capital deficit of $22.5
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.
Pending the closing of the Series C preferred round, UBS advanced funds to the
Company in exchange for 10 percent convertible notes which will be automatically
converted to Series C preferred shares on closing. UBS has funded $4.6 million
as of December 31, 2001 ($5.5 million through February 10, 2002). Certain of the
10% convertible notes were due on December 11, 2001. The Company has received a
deferral of payment until March 31, 2002. The Series C round is expected to
close during the Company's quarter ending March 31, 2002. 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 would 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 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 therefore UBS 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 authorized common stock from 50 million to 60
million and increasing the number of shares of authorized preferred stock from
10 million to 20 million. Such increase has already been approved by the
Company's shareholders.
18
The Company is currently negotiating with UBS, International Technology
Investments ("ITI") and Lee Casty (all current shareholders of the Company) to
increase their investments in the Company. The parties intend that these
investors will invest a total of $5 million and surrender IFX stock in exchange
for IFX convertible Series D participating preferred stock priced at $1.20 per
share and convertible to two shares of IFX common stock for each share of Series
D preferred stock. It is anticipated that each share of preferred stock will
have a liquidation preference of $6.00 per share and will also participate with
the holders of common stock after the Series D holder receives their liquidation
preference and accrued dividends, provided that the maximum amount which can be
received with respect to the Series D preferred stock after taking into account
the participation feature is limited to 3-1/2 times the stated preference. As
part of this transaction, the parties intend that in addition to the cash
investment of approximately $3.3 million, UBS will surrender 750,000 share of
its Series C preferred stock in exchange for 1,875,000 shares of newly issued
Series D preferred stock . In addition, ITI and Mr. Casty will each invest
approximately $0.8 million and surrender approximately 340,000 common shares in
exchange for approximately 170,000 of newly issued shares of Series D preferred
stock.
At December 31, 2001, the Company had received a commitment letter from a lessor
for a deferral of approximately $4.0 million of principal on certain of its
capital lease commitments. As an alternative to the deferral, the Company is
negotiating with the lessor to purchase the leased equipment for a reduced
amount and a complete retirement of lease obligations owed to the lessor. In
consideration of the extinguishment of approximately $9 million in capital lease
obligations, the Company is negotiating to pay the lessor approximately $2
million in addition to granting the lessor 500,000 warrants allowing the lessor
to purchase shares of the Company's common stock at $1 per share that will be
immediately exercisable and expire 10 years from date of grant.
In the past, the Company has raised funds through the issuance of debt and
equity. 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,
expansion plans, 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. On February 14, 2002,
NASDAQ notified the Company that for the prior 30 consecutive trading days, the
price of the Company's common stock closed below the minimum $1.00 per share
requirement for continued inclusion under Marketplace Rule 4310(c)(4).
Therefore, in accordance with Marketplace Rule 4310(c)(8)(D), the Company was
provided 180 calendar days, or until August 13, 2002, to regain compliance. 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.
Argentina continues to experience recessionary conditions and difficulty in
accessing international capital markets, and has recently faced internal
disruption and social unrest. On December 20, 2001, the Argentine government
placed restrictions on the exchange of currency. Subsequently, on January 6,
2002, the government of Argentina officially ended the one-to-one peg with the
U.S. dollar, which was previously in effect. On January 11, 2002, the Peso began
market trading and resulted in a closing exchange rate of 1.65 Argentine Pesos
to one-dollar U.S. currency. In February 2002, the Argentine government
announced measures to "pesofy" or re-denominate the entire Argentine economy
into pesos and has permitted the peso to float freely against other global
currencies. The continued uncertain economic, social and political conditions in
Argentina could have a negative effect on the Company's revenues. As a result of
this devaluation, and in accordance with Statement of Financial Accounting
Standards No. 52, Foreign Currency Translation and guidance addressed in
Emerging Issues Task Force D-12 Foreign Currency Translation - Selection of
Exchange Rate When Trading is Temporarily Suspended, at December 31, 2001, the
Company recorded a $0.8 million write-down of net assets and a corresponding
currency translation adjustment as a reduction to shareholders' equity, as part
of accumulated other comprehensive loss.
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.
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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 currency fluctuations, inflation, interest
rates, taxation and other political, social, economic developments 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.
In particular, Argentina continues to experience recessionary conditions and
difficulty in accessing international capital markets, and has recently faced
internal disruption and social unrest. On December 20, 2001, the Argentine
government placed restrictions on the exchange of currency. Subsequently, on
January 6, 2002, the government of Argentina officially ended the one-to-one peg
with the U.S. dollar, which was previously in effect for many years. On January
11, 2002, the currencies began market trading and resulted in a closing exchange
rate of 1.65 Argentine Pesos to one-dollar U.S. currency. In February 2002, the
Argentine government announced measures to "pesofy" or re-denominate the entire
Argentine economy into pesos and has permitted the peso to float freely against
other global currencies. The continued uncertain economic, social and political
conditions in Argentina could have a negative affect on the Company's revenues.
As a result of this devaluation, and in accordance with Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation and guidance addressed
in Emerging Issues Task Force D-12 Foreign Currency Translation - Selection of
Exchange Rate When Trading is Temporarily Suspended, at December 31, 2001, the
Company recorded a $0.8 million write-down of net assets and a corresponding
currency translation adjustment as a reduction to shareholders' equity, as part
of accumulated other comprehensive loss.
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 SECURITY HOLDERS
On December 7, 2001, the Company held its 2001 annual meeting of stockholders,
at which there were present or represented by proxy 9,076,463 shares of Common
Stock, or approximately 64% of the shares of Common Stock entitled to vote;
2,030,869 shares of Series A Preferred Stock, or 100% of the shares of Series A
Preferred Stock entitled to vote; and 3,994,127 shares of Series B Preferred
Stock, or 100% of the shares of Series B Preferred Stock entitled to vote. At
the annual meeting, the following matters were approved by more than the
requisite number of stockholders.
All persons nominated to become directors of the Company were elected. The
number of votes cast for and withheld for each director were as follows:
Votes Cast For Withheld
-------------- --------
Michael Shalom 20,211,697.85 1,750
Joel M. Eidelstein 20,211,647.85 1,800
Patrick Delhougne 20,211,797.85 1,650
Charles Delaney 20,211,797.85 1,650
Burton J. Meyers 20,211,685.85 1,762
Mark O. Lama 20,211,797.85 1,650
Charles W. Moore 20,211,747.85 1,700
George A. Myers 20,211,747.85 1,700
A proposal to approve an amendment to the Company's Certificate of Incorporation
to increase the number of shares of common stock and preferred stock authorized
was approved, with 20,633,963.35 shares voted for and 3,234.5 shares voted
against the proposal, and 385 shares abstaining.
A proposal to ratify the appointment of Ernst & Young LLP as independent
auditors for the Company's fiscal year ending June 30, 2002 was approved, with
20,637,445.83 shares voted for and 137 shares voted against the proposal, and no
shares abstaining.
A proposal to approve the issuance of Series C Convertible Preferred Stock was
approved, with 20,633,705.15 shares voted for and 3,409.5 shares voted against
the proposal, and 468.2 shares abstaining.
A proposal to approve an amendment of the Certificates of Designation for the
Series A and Series B Convertible Preferred Stock was approved, with
20,633,755.15 shares voted for and 3,409.5 shares voted against the proposal,
and 418.2 shares abstaining.
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.
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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: August 27, 2002 By: /S/ MICHAEL SHALOM
--------------------------------
Michael Shalom
Chief Executive Officer
Dated: August 27, 2002 By: /S/ HOWARD F. ZUCKERMAN
-------------------------------
Howard F. Zuckerman
Chief Financial Officer
21