UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2002 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
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(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 ___
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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,
11,963,399 shares outstanding as of October 31, 2002.
IFX CORPORATION AND SUBSIDIARIES
Page
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Part I FINANACIAL INFORMATION
Item 1 Financial Statements
Condensed consolidated balance sheets as of September 30, 2002
(unaudited) and June 30, 2002 3
Condensed consolidated statements of operations (unaudited) for the three
months ended September 30, 2002 and 2001 4
Condensed consolidated statements of cash flows (unaudited) for the three
months ended September 30, 2002 and 2001 5
Notes to condensed consolidated financial statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 18
Item 4 Controls and Procedures 19
Part II OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 6 Exhibits and reports on Form 8-K 19
(a) Exhibits
(b) Reports on Form 8-K
Signatures 20
Certifications 21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
IFX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2002 2002
--------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 542,500 $ 1,782,400
Receivables, net of allowance for doubtful accounts of $604,600
and $578,600 at September 30, 2002 and June 30, 2002, respectively 2,670,700 2,699,100
Due from related party 238,700 271,800
Prepaid expenses and other current assets 467,200 427,900
------------- -------------
Total current assets 3,919,100 5,181,200
------------- -------------
Property and equipment, net 6,264,700 8,909,200
Other assets:
Acquired customer base, net 62,500 266,600
Investments 303,100 402,600
Foreign value added taxes recoverable 1,049,100 1,129,000
Prepaid service agreements 1,002,300 500,600
Other assets 580,400 585,500
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Total other assets 2,997,400 2,884,300
------------- -------------
Total assets $ 13,181,200 $ 16,974,700
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 9,083,500 $ 9,556,600
Accrued expenses 2,601,000 2,635,200
Current portion of capital lease obligations 1,173,500 1,809,200
Convertible note payable 1,100,000 -
Deferred revenues 507,900 597,400
Net liabilities of discontinued operations 336,800 73,400
Foreign value added taxes payable 29,600 21,000
------------- -------------
Total current liabilities 14,832,300 14,692,800
Long-term liabilities:
Notes payable and other long-term liabilities 282,700 347,800
Capital lease obligations, less current portion 477,800 489,000
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Total long-term liabilities 760,500 836,800
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Total liabilities 15,592,800 15,529,600
------------- -------------
Stockholders' equity (deficit):
Preferred stock, convertible $1.00 par value; 40,000,000 shares authorized,
16,007,980 shares issued and outstanding at September 30, 2002 and
June 30, 2002, respectively 52,775,900 52,775,900
Common stock, $.02 par value; 110,000,000 shares authorized, 11,963,399
and 12,099,095 shares issued and outstanding at September 30, 2002 and
June 30, 2002, respectively 239,300 242,000
Additional paid-in capital 76,465,000 76,610,200
Treasury stock - (150,000)
Accumulated deficit (129,291,400) (124,012,100)
Accumulated other comprehensive loss (1,596,800) (2,000,300)
Deferred compensation (1,003,600) (2,020,600)
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Total stockholders' equity (deficit) (2,411,600) 1,445,100
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 13,181,200 $ 16,974,700
============= =============
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 September 30,
2002 2001
------------ ------------
REVENUES:
Dedicated line services $ 3,263,800 $ 2,686,200
Dial-up services 332,400 1,109,000
Web hosting and design services 207,300 284,700
Sales to related party 1,515,800 1,994,800
Other 271,200 312,300
------------ ------------
Total revenues 5,590,500 6,387,000
Cost of revenues 2,834,700 3,513,900
------------ ------------
Gross profit 2,755,800 2,873,100
OPERATING EXPENSES:
General and administrative 5,186,700 6,446,100
Sales and marketing 293,000 425,200
Depreciation and amortization 1,654,900 3,555,400
------------ ------------
Total operating expenses 7,134,600 10,426,700
------------ ------------
Operating loss from continuing operations (4,378,800) (7,553,600)
OTHER INCOME (EXPENSE):
Interest income 9,400 61,900
Interest expense (164,300) (596,700)
Gain on sale of investments - 4,451,900
Equity in net loss of investee (148,500) (239,500)
Deferred gain on sale of subsidiary 22,900 -
Loss on sale of capital leased asset (370,800) -
Other, net (323,700) (41,900)
------------ ------------
Total other income (expense), net (975,000) 3,635,700
------------ ------------
Loss from continuing operations before income taxes (5,353,800) (3,917,900)
Income tax benefit (provision) 26,100 (18,200)
------------ ------------
Loss from continuing operations (5,327,700) (3,936,100)
Income (loss) from discontinued operations, net of
income taxes 48,400 (34,500)
------------ ------------
Net loss $ (5,279,300) $ (3,970,600)
============ ============
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Loss from continuing operations $ (0.44) $ (0.28)
Discontinued operations 0.01 -
------------ ------------
Net loss per share $ (0.43) $ (0.28)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 12,137,020 14,276,495
============ ============
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)
Three Months Ended
September 30,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,279,300) $ (3,970,600)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation 1,450,800 2,840,100
Amortization 204,100 715,300
Stock related compensation 970,400 1,058,800
Bad debt expense 97,800 32,900
Gain on sale of investment - (4,451,900)
Equity in net loss of investee 148,500 239,500
Deferred gain on sale of subsidiary (22,900) -
Loss on sale of capital leased asset 370,800 -
Change in net liabilities of discontinued operations 263,400 6,900
Changes in operating assets and liabilities:
Receivables (370,800) (496,200)
Due from related party 14,300 (214,600)
Prepaid expenses and other current assets (55,500) (8,700)
Prepaid service agreements (501,700) -
Other assets (71,200) 24,800
Foreign value added taxes, net 15,600 (389,200)
Accounts payable and accrued expenses 1,216,400 (869,000)
Deferred revenues (64,300) 235,100
------------ ------------
Cash used in operating activities (1,613,600) (5,246,800)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash - (2,100)
Purchases of property and equipment (337,500) (763,800)
------------ ------------
Cash used in investing activities (337,500) (765,900)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and other long-term liabilities 1,100,000 15,800
Payments of capital lease obligations (443,100) (1,014,900)
------------ ------------
Cash provided by (used in) financing activities 656,900 (999,100)
------------ ------------
Effect of exchange rate changes on cash and cash equivalents 54,300 3,700
------------ ------------
Net decrease in cash and cash equivalents (1,239,900) (7,008,100)
Cash and cash equivalents, beginning of period 1,782,400 7,573,300
------------ ------------
Cash and cash equivalents, end of period $ 542,500 $ 565,200
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 157,900 $ 596,700
============ ============
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of equipment through capital lease obligations $ - $ 617,500
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(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, 2003. 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, 2002.
The condensed consolidated financial statements include the accounts of IFX
Corporation and its wholly-owned subsidiaries (collectively referred to herein
as "IFX", or the "Company"). Certain reclassifications have been made to the
prior period financial statements to conform to the September 30, 2002
presentation. All significant intercompany transactions have been eliminated in
consolidation.
IFX provides Internet network connectivity services and offers a broad range of
Internet-related services to Internet service providers, multinational
corporations, telecommunications carriers, small to medium-sized businesses and,
to a lesser extent, individual consumers, in Latin America. IFX operates
networks in Argentina, Brazil, Chile, Colombia, Mexico, Panama, Uruguay,
Venezuela and the United States. The Company also operates networks in El
Salvador, Honduras, Guatemala and Nicaragua (collectively, the "Central American
Operations"), which the Company plans to sell or otherwise dispose of during
fiscal 2003. As a result of this plan, the Company began accounting for the
Central American Operations as discontinued operations during the quarter ended
September 30, 2002. Accordingly, the Company restated prior periods to reflect
this change. This restatement had no effect on the Company's loss or loss per
share as previously reported. Excluding the Central American Operations, IFX has
over 50 Company-owned Points of Presence ("POPs")and 385 employees in the United
States and Latin America.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from customer contracts related to dial-up access, dedicated internet
lines and web hosting fees are recognized ratably over the term of the
underlying contract, which is generally from one month to three years. Cash
received in advance of revenues earned is recorded as deferred revenues.
Revenues derived from other services are recognized as earned.
Revenues related to amounts received under revenue sharing agreements with
telecommunications companies are generally recognized when such services are
utilized by the Company's end users. Revenues related to sales to Tutopia.com,
Inc. ("Tutopia") are generally not recognized until collection is reasonably
assured because of the insufficiency of Tutopia's cash flows.
During the quarter ended September 30, 2002, the Company entered into certain
non-monetary (barter) transactions with unrelated third parties for which
revenues of approximately $179,200 were recorded in the condensed consolidated
statement of operations with a corresponding amount recognized in cost of
revenues. The barter transactions primarily consist of exchange for connectivity
related services between the Company and telecommunication providers. Fair
value of such exchanges is determined based on the amount the Company is
charging or is charged for similar services.
Impairment of Long-Lived Assets
The Company accounts for the possible impairment of long-lived assets in
accordance with the Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 requires that long-lived assets
to be held and used by the Company be reviewed for possible impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If changes in circumstances indicate that the carrying
amount of an asset that an entity expects to hold and use may not be
recoverable, future cash flows expected to result from the use of the asset and
its disposition must be estimated. If the undiscounted value of future cash
flows is less than the carrying amount of the asset, an impairment charge is
recorded.
6
Comprehensive Loss
During the three-month periods ended September 30, 2002 and 2001, the Company's
comprehensive loss was $4.9 and $4.4 million, respectively, compared with a net
loss of $5.3 million and $4.0 million, respectively. The primary difference
between comprehensive loss 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 45.4 million and 14.8 million shares of
potentially dilutive securities have been excluded from the calculation of
diluted loss per share for the three-month periods ended September 30, 2002 and
2001, respectively, since their effect would have been anti-dilutive.
Investments
The Company uses the equity method to account for its less than 50% interest in
Tutopia. Under the equity method, the Company's proportionate share of Tutopia's
net losses is included in the Company's condensed consolidated statements of
operations. The Company periodically evaluates its investment in Tutopia for
indications of impairment such as, recent security sales, deterioration of
financial condition, near-term prospects for financial improvement, and other
relevant factors. As a result of such analysis, the Company reduced the carrying
value of its investment in Tutopia by approximately $1.7 million during the
fourth quarter of fiscal 2002. Management estimated the amount of the impairment
by comparing a recent sale of Tutopia preferred stock with that of the carrying
value of its investment in Tutopia. Tutopia is controlled by UBS Capital
Americas III, L.P. and UBS Capital LLC (collectively "UBS Capital"), which also
have a controlling interest in IFX.
Foreign Currency Translation
The functional currency of the Company's active subsidiaries is the local
currency. Foreign currency transactions and financial statements (except for
those relating to countries with highly inflationary economies) are translated
into U.S. dollars at the rate in effect on the date of the transaction or the
date of the financial statements, except that revenues, costs and expenses are
translated at average exchange rates during each reporting period. Resulting
translation adjustments and transaction gains or losses attributable to certain
intercompany transactions that are of a long-term investment nature are excluded
from results of operations and reported in accumulated other comprehensive
income (loss), a separate component of consolidated stockholders' equity
(deficit). Gains and losses attributable to other intercompany transactions are
included in results of operations.
2. GOING CONCERN AND LIQUIDITY ASSESSMENT
The Company's working capital deficit increased by $1.4 million to a $10.9
million deficit at September 30, 2002 from a $9.5 million deficit at June 30,
2002. The Company's available cash remains at a level that substantially limits
the Company's operations. Although the Company raised $1.1 million through the
issuance of a convertible promissory note during the three-month period ended
September 30, 2002 and $12.0 million through the sale of convertible preferred
stock during fiscal 2002, the Company continues to incur losses and operating
cash flow deficiencies. The Company has experienced operating losses amounting
to $4.4 million for the quarter ended September 30, 2002 (compared with $7.6
million for the same period of the prior year) and losses of $30.6 million,
$54.4 million and $38.7 million for the years ended June 30, 2002, 2001 and
2000, respectively. Further, the Company experienced negative cash flows from
operations of $1.6 million for the quarter ended September 30, 2002 (compared
with a negative cash flow of $5.2 million for the same period of the prior year)
and negative cash flows from operations of $12.7 million, $15.0 million and
$15.8 million for the years ended June 30, 2002, 2001 and 2000, respectively. As
a result, the Company must obtain substantial additional capital to sustain its
operations. The Company is dependent upon capital from outside sources,
including existing shareholders, to fund its operations and meet ongoing
commitments and obligations. There can be no assurance that such capital will be
available to the Company on acceptable terms, or at all.
The Company is taking actions in an effort to improve cash flow, including: (1)
reducing the scope of, selling or otherwise disposing of certain operations that
have operating cash flow deficiencies (e.g., Central American Operations); (2)
selling equipment and other assets that should generate cash in the short term
and (3) decreasing its overhead and personnel costs in the United States and,
selectively, in its Latin American operating units. Although the Company has
made reductions in personnel and overhead costs to reduce the operating losses,
additional reductions in personnel may have to be made in the near term. The
Company also believes that additional cost savings can be generated by combining
its operations with those of Tutopia in certain countries in which both entities
operate. In general, cash needs will also be affected by whether Tutopia is able
to fulfill its payment obligations under its network agreement with IFX.
In September 2002, the Company received $1.1 million from ROF/IFX, LLC ("ROF")
in exchange for a 10% promissory note due June 30, 2003 that is convertible into
shares of either Series D Preferred Stock or a new series of preferred stock
(yet to be issued) at the option of the note holder. As part of the transaction,
ROF was also provided the right to exchange up to 400,000 shares of IFX common
stock for shares of that class of Company preferred stock described in paragraph
3(a) of the Amended And Restated Put Agreement among the Company and UBS
Capital, with an exchange ratio of 6 shares of common stock for each share of
newly issued preferred stock.
In addition, as reported in the Company's Form 8-K dated November 8, 2002, on
October 31, 2002, the Company received $2.9 million of funding from UBS Capital
Americas III, L.P. and UBS Capital LLC, its controlling shareholders, and
executed two convertible promissory notes in that aggregate amount (the
"Notes"). The Notes bear interest at the rate of 10% per annum and the principal
and all accrued but unpaid interest are due and payable on September 30, 2007
("Maturity Date"). At the option of the note holders, at any time prior to the
Maturity Date, the outstanding principal amount of the Notes plus accrued and
unpaid interest thereon may be converted into shares of Series D Preferred Stock
at a conversion price equal to $1.20 per share of Series D Preferred Stock. The
Series D Preferred Stock to be issued upon such conversion will have the same
rights, preferences and privileges as the currently outstanding shares of
Series D Preferred Stock. Under the terms of the Notes, once the notes holders
of a majority of the outstanding principal amount of the Notes have elected to
convert, then all the remaining note holders shall be deemed to have also made
such a conversion.
In the event the company enters into an agreement ("Qualified Financing Purchase
Agreement") which provides the Company with debt or equity financing in
connection with the issuance of securities ("Qualified Financing Securities") by
the Company consisting of IFX common stock or other securities that are
convertible, exercisable or exchangeable into shares of IFX common stock, prior
to the Maturity Date, at the option of the note holders, the principal amount of
the Notes plus accrued and unpaid interest thereon may be converted, in whole
and not in part, into Qualified Financing Securities at a conversion price equal
to the purchase price per Qualified Financing Security set forth in the
Qualified Financing Purchase Agreement.
The Company estimates that the $2.9 million of capital provided at the end of
October should be adequate to support the cash needs through January 2003.
Further, management of the Company is continuing to work with UBS Capital in an
attempt to obtain additional funding to enable the Company to have sufficient
capital to meet its current and projected operating expenditures through June
30, 2003, which is estimated to be no less than $3.0 to $3.5 million. There can
be no assurances, however, that the Company will be able to continue raising
funds from UBS Capital or other sources through the issuance of securities or
through other means on acceptable terms, or at all. The Company's inability to
raise sufficient funds in the future would affect its ability to meet its
working capital needs, satisfy capital and operating lease obligations and would
cause the Company to eliminate capital expenditures.
There is no guarantee that projected decreases in expenses will be sufficient to
ensure the continued viability of the Company or that such decreases will not
affect the Company's customer service levels or ability to generate revenues.
Further, there can be no assurance that even if such capital is obtained and
such cost reductions are made, that the Company will achieve profitability or
positive cash flows. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The condensed consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
3. PREPAID SERVICE AGREEMENTS
During fiscal 2002, the Company entered into various agreements to lease network
capacity between Miami, Florida and several cities in South America through
separate indefeasible rights of use ("IRU") for each STM-1 circuit, with lease
payments due over 36 months. The agreements state that the lessor will provide
the Company with portability of the STM-1s to the extent that there is capacity
on the lessor's network. At its option, the Company has the right to terminate
such agreements prior to expiration, subject to certain predefined penalties.
Future minimum payments under these agreements as of September 30, 2002 (net of
amounts related to certain waived periods) are treated as operating lease
obligations, which
7
total approximately $9.3 million. The 36-month leases will convert into 15-year
IRUs on the payment by the Company of the purchase option amount at the end of
the lease. The STM-1s are being amortized on a straight-line basis over an
estimated useful life of 10 years.
4. CONVERTIBLE NOTE PAYABLE
In September 2002, the Company received $1.1 million from ROF/IFX, LLC ("ROF")
in exchange for a 10% promissory note due June 30, 2003, that is convertible
into shares of either Series D Preferred Stock or a new series of preferred
stock at the option of the note holder. As part of the transaction, ROF also was
provided the right to exchange up to 400,000 shares of IFX common stock for
shares of that class of Company preferred stock described in paragraph 3(a) of
the Amended and Restated Put Agreement-among the Company, UBS Capital Americas
III, L.P. and UBS Capital LLC, with an exchange ratio of 6 shares of common
stock for each share of newly issued preferred stock.
5. LEASE OBLIGATIONS
During the quarter ended September 30, 2002, the Company, one of its lessors,
and an unrelated third party agreed to the sale of capital leased equipment with
a carrying value of approximately $0.6 million and extinguishment of
approximately $0.5 million in capital lease obligations. The capital lease
obligation was paid by the Company with approximately $0.2 million cash and
cancellation of a deposit retained by the lessor of $0.3 million. The purchaser
paid to the Company approximately $0.2 million for the capital leased assets. As
a result of this transaction, the Company recorded a loss of $0.4 million. The
loss was computed as the difference between the carrying value of the related
assets and the cash received by the Company from the purchaser of the equipment.
6. DISCONTINUED OPERATIONS
Income from discontinued operations primarily consists of amounts received under
earn-out agreements that were based on the financial performance of entities
divested prior to July 1, 2000. In the future, the Company does not expect to
receive any additional significant earnings from its discontinued operations.
The Company in an effort to improve cash flow intends to sell or otherwise
dispose of the operations that comprise its Central American reportable segment.
The Company is in the process of negotiating the sale of its operations in three
of the four countries - i.e., El Salvador, Honduras and Nicaragua. While no
assurances can be made regarding consummation of the proposed transaction, the
Company does expect to complete the sale during the quarter ended December 31,
2002. For the three-month periods ended September 30, 2002 and 2001, the
revenues for the three operations expected to be sold were $0.4 million for both
periods, respectively. The loss from discontinued operations before income taxes
were $0.3 million and $0.4 million for both periods, respectively. At September
30, 2002, the total assets of these operations were $0.6 million which primarily
consisted of property and equipment and receivables. On October 30, 2002, the
Company received a $50,000 deposit from the expected purchaser related to this
transaction. The Company does not expect a material gain or loss as a result of
this transaction.
As a result of this plan, the Company began accounting for the Central American
Operations as discontinued operations during the quarter ended September 30,
2002 in accordance with SFAS No. 144. Accordingly, the Company restated prior
periods, including the June 30, 2002 balance sheet, to reflect this change. This
restatement had no effect on the Company's net loss or net loss per share as
previously reported.
The information set forth in the remaining notes to condensed consolidated
financial statements relates to continuing operations unless otherwise
specified.
7. INCOME TAX PROVISION
Income tax benefit consists 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 September 30, 2002 and June 30, 2002.
8. CONTINGENCIES
The Company may be threatened with legal proceedings arising from its regular
business activities. On February 28, 2002, IFX do Brazil Ltda, ("IFX Brazil")
filed a lawsuit against IBM Leasing Brazil ("ILB") in the 11th Civil Court, Sao
Paulo, Brazil requesting the modification of IFX Brazil's equipment lease
agreement with ILB. The basis for the complaint by IFX Brazil was that the
leased equipment was delivered late by ILB. The complaint also stated that the
denomination of the lease in U.S. dollars resulted in an excessive exchange rate
variation in breach of the Brazilian consumption law. The object of this suit
was to obtain reduction of the contract value from approximately $568,600 to
approximately $189,500, the return of unused equipment and compensation for
installments already paid.
On August 18, 2002, the court denied IFX Brazil's claim and ordered IFX Brazil
to pay attorney's fees of approximately $21,700. IFX Brazil appealed the verdict
on September 3, 2002 and ILB responded to such appeal on September 30, 2002. No
verdict on the appeal has been reached. On September 24, 2002, IFX Brazil was
granted an injunction to prevent ILB from registering a complaint in Brazil that
IFX Brazil was in default on the lease until there is a final decision on the
appeal. Such injunction is subject to ILB response, which was filed on October
29, 2002.
On June 3, 2002, ILB demanded payment of $939,200 from IFX under the Continuing
Contract of Parent Guaranty of Payment dated September 29, 2000 between IFX and
ILB. IFX has not responded to this demand pending resolution of the lawsuit in
Brazil. There can be no assurances as to the outcome of this litigation. Based
on the advice of legal counsel, the Company has recorded certain accruals to
provide for this contingency.
On September 4, 2002, TELESC, an affiliate of Brasil Telecom, filed a credit
enforcement suit in the Second Civil Court, Florianopolis, Brazil, to collect
the confession of indebtedness executed by IFX Brazil in the amount of
approximately $502,600. TELESC is a vendor to IFX Brazil and IFX Brazil had
executed a promissory note in the amount claimed for services rendered to IFX
Brazil by TELESC. IFX Brazil has not yet responded to this suit but
approximately the full amount of the claim has been reserved by IFX
Brazil.
On October 23, 2002, the Finance Department of the Municipality of Sao Paulo,
Brazil made an administrative tax claim in the amount of approximately $424,700
for Imposto Sobre Servicos ("ISS") taxes asserted with respect to IFX Brazil's
Internet services. IFX Brazil has until November 22, 2002 to respond to the
claim. On January 29, 2001, IFX made a claim against the Municipality of Sao
Paulo and obtained temporarily the suspension of the ISS tax. IFX's affirmative
claim is currently on appeal at the Sao Paulo Fifth Civil Court on the basis
that the Municipality is not authorized by the legislature to tax Internet
services. IFX Brazil is awaiting the outcome of this appeal (which is expected
in 2003) and intends to ask the Municipality in its November response to
postpone further proceedings on the most recent claim until the final outcome of
the appeal. Based on consultations with Brazilian counsel handling this matter
the Company believes the ultimate liability, if any, resulting from this
proceeding should not have a material effect on the financial position or
results of operations of the Company.
In addition, the Company is a defendant in, and may be threatened with, various
other legal proceedings
8
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 such pending action or proceedings should not have a material
effect on the financial position or results of operations of the Company.
9. SEGMENT REPORTING
The Company is structured primarily around the geographic markets it serves and
operates reportable segments in Argentina, Brazil, Chile, Colombia, Mexico,
Venezuela and 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-month periods ended
September 30, 2002 and 2001 by segment is presented below (in thousands):
United
States
and all
Argentina Brazil Chile Colombia Mexico Venezuela other Total
--------- ------ ------- -------- -------- --------- ------- -------
Three-month period ended September 30, 2002:
Revenues $ 572 $1,079 $ 1,125 $ 1,065 $ 560 $ 528 $ 662 $ 5,591
========= ====== ======= ======== ======== ======== ======= =======
Income (loss) from continuing operations
before income taxes 12 (738) 250 275 (339) (389) (4,425) (5,354)
========= ====== ======= ======== ======== ======== ======= =======
Total assets $ 904 $5,898 $ 1,035 $ 1,727 $ 1,082 $ 706 $ 1,829 $13,181
========= ====== ======= ======== ======== ======== ======= =======
Three-month period ended September 30, 2001:
Revenues $ 1,568 $1,648 $ 878 $ 274 $ 629 $ 537 $ 853 $ 6,387
========= ====== ======= ======== ======== ======== ======= =======
Income (loss) from continuing operations
before income taxes 94 (673) (12) (382) (262) (219) (2,464) (3,918)
========= ====== ======= ======== ======== ======== ======= =======
Total assets * $ 2,863 $6,023 $ 1,733 $ 1,368 $ 3,629 $ 2,036 $21,177 $38,829
========= ====== ======= ======== ======== ======== ======= =======
* Allocation of total assets between the reportable segments as of September 30,
2001 has been reclassified to conform to the presentation as of September 30,
2002.
Included in the above table are revenues from services provided to Tutopia of
approximately $1.5 million and $2.0 million for the three-month periods ended
September 30, 2002 and 2001, respectively, or approximately 27.1% and 31.2% of
IFX's total revenues, respectively.
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. Prior to that
date, the Company's Bolivian operation had been treated as a reportable segment.
Amounts related to Bolivia and its operations for the period ended September
30, 2001 are included in United States and all other in the above segment
information.
In August 2002, IFX partially sold the Company's Brazilian dial-up subscribers
from Sao Paulo to an unrelated third party. Under the terms of the 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. A gain of approximately $0.1 million has been recorded as of
September 30, 2002 related to this transaction. Future revenues will be recorded
as proceeds are received.
The Company intends to sell or otherwise dispose of the operations that comprise
its Central American reportable segment. The Company is in the process of
negotiating the sale of its operations in three of the four countries - i.e., El
Salvador, Honduras and Nicaragua. While no assurances can be made regarding
consummation of the proposed transaction, the Company does expect to complete
the sale during the quarter ended December 31, 2002. For the three-month periods
ended September 30, 2002 and 2001, the loss from discontinued operations before
income taxes of the three operations expected to be sold were $0.3 million and
$0.4 million, respectively. At September 30, 2002, the total assets of these
operations were $0.6 million. On October 30, 2002, the Company received a
$50,000 deposit from the expected purchaser related to this transaction.
10. TUTOPIA OPERATING RESULTS
In September 2000, the Company's voting interest in Tutopia, was reduced from
approximately 85% to less than 50%. As a result of this reduction, the Company
deconsolidated Tutopia and began accounting for Tutopia under the equity method.
During the three-month periods ended September 30, 2002 and 2001, IFX derived
approximately 27.1% and 31.2%, respectively, of its revenue from Tutopia. As of
September 30, 2002, IFX has net accounts receivable from Tutopia of
approximately $0.2 million.
9
The unaudited operating results of Tutopia are as follows:
Three Months Ended
September 30,
2002 2001
----------- -----------
(unaudited) (unaudited)
Revenues $ 1,870,700 $ 2,517,500
Operating expenses 3,288,400 4,447,200
----------- -----------
Operating loss $(1,417,700) $(1,929,700)
=========== ===========
Net loss $(1,421,100) $(1,916,000)
=========== ===========
For the three-month periods ended September 30, 2002 and 2001, IFX recognized
$148,500 and $239,500 respectively, of losses related to its proportionate share
of Tutopia's losses.
Selected unaudited financial information from Tutopia's balance sheet is as
follows:
September 30, 2002 September 30, 2001
------------------ ------------------
(unaudited) (unaudited)
Current assets $ 1,069,800 $ 3,709,800
Total assets 1,928,000 5,007,000
Current liabilities 5,555,900 2,015,800
Total liabilities 5,583,400 2,015,800
Stockholders' equity (deficit) $ (3,655,400) $ 2,991,200
11. SUBSEQUENT EVENTS
Loan from UBS Capital Americas III, L.P. and UBS Capital LLC
On October 31, 2002, the Company received funding of $2.9 million from UBS
Capital Americas III, L.P. and UBS Capital LLC, its controlling shareholders, in
exchange for two convertible promissory notes (the "Notes"). The Notes bear
interest at an annual rate of 10% and the principal and all accrued but unpaid
interest are due and payable on September 30, 2007 ("Maturity Date"). At the
option of the note holders, at any time prior to the Maturity Date, the
outstanding principal amount of the Notes plus accrued and unpaid interest
thereon may be converted into shares of Series D Preferred Stock at a conversion
price equal to $1.20 per share of Series D Preferred Stock. The Series D
Preferred Stock to be issued upon such conversion will have the same rights,
preferences and privileges as the currently outstanding shares of Series D
Preferred Stock. Under the terms of the Notes, once the note holders of a
majority of the outstanding principal amount of the Notes have elected to
convert, then all the remaining note holders shall be deemed to have also made
such a conversion.
In addition, in the event the Company enters into an agreement ("Qualified
Financing Purchase Agreement") which provides the Company with debt or equity
financing in connection with the issuance of securities by the Company
consisting of IFX common stock or other securities that are convertible,
exercisable or exchangeable into shares of IFX common stock ("Qualified
Financing Securities"), prior to the Maturity Date, at the option of the note
holders, the principal amount of the Notes plus accrued and unpaid interest
thereon may be converted, in whole and not in part, into Qualified Financing
Securities at a conversion price equal to the purchase price per Qualified
Financing Security set forth in the Qualified Financing Purchase Agreement.
Agreement with T1msn
On March 15, 2002, IFX entered into a binding term sheet agreement to provide
T1msn, Corp. ("T1msn") with Internet access services for its dial-up access
service in Argentina and Chile, and potentially for other Latin American
markets. T1msn is a joint venture between Microsoft Corp. and Telefonos de
Mexico, S.A. de C.V. The access services include "free" Internet access in
certain countries and fee-for use Internet access in other jurisdictions, as
well as technical support for those services. As of September 30, 2002, IFX was
providing service for T1msn end users in Argentina, Chile, El Salvador,
Guatemala, Panama and Venezuela. Under the agreement, IFX and T1msn will share
time-on-line revenues attributable to the access service provided to T1msn's end
users. Also, under the terms of the agreement, IFX has provided a service level
agreement committing to maintain its network to specified standards.
Under a document executed by the Company on October 29, 2002, the term sheet
agreement will expire on
10
December 31, 2002, if not otherwise extended, if the parties have not entered
into definitive transaction documents by that date. It is anticipated that the
definitive agreement will have a term of one year from the effective date of
such agreement with elections for T1msn to renew for eight additional six-month
periods.
As part of its binding term sheet agreement with T1msn, IFX will grant to T1msn
warrants potentially enabling T1msn to acquire up to 15% of the common stock of
IFX (approximately 8.3 million warrants as of September 30, 2002, treating
preferred shares on an "as converted" basis) if certain performance and
contract renewal provisions are met by T1msn. Determination of the number of
warrants would be made at the date of the definitive agreement. The definitive
agreement may provide T1msn with additional cash bonus provisions instead of
some or all of the warrants.
NASDAQ Listing
IFX's stock is traded on the NASDAQ SmallCap Market under the symbol "FUTR". On
February 14, 2002, the NASDAQ Staff notified the Company that the bid price of
its common stock had closed at less than $1.00 per share over the previous 30
consecutive trading days and, as a result, did not comply with Marketplace Rule
4310 (c) (4) (the "Price Rule"). In accordance with Marketplace Rule 4310 (c)
(8) (D), the Company was provided 180 calendar days, or until August 13, 2002,
to regain compliance with the Price Rule. On August 14, 2002, the NASDAQ Staff
advised the Company that while it had not regained compliance in accordance with
Marketplace Rule 4310 (c) (8) (D), the staff noted that the Company did meet the
initial listing requirements for $5.0 million of stockholders' equity (based on
pro forma stockholders' equity as reported in the Company's Form 10-Q for the
quarter ended March 31, 2002). Hence, the Company was provided with an
additional 180 days, or until February 10, 2003, to regain compliance with the
applicable requirements.
On October 17, 2002, NASDAQ staff notified IFX that it was not in compliance
with Marketplace Rule 4310(c)(2)(B), which requires IFX to have a minimum of
$2,000,000 in net tangible assets or $2,500,000 in stockholders' equity or a
market capitalization of $35,000,000 or $500,000 of net income for the most
recently completed fiscal year or two of the three most recently completed
fiscal years. The NASDAQ staff is reviewing IFX's eligibility for continued
listing on the NASDAQ SmallCap Market and has requested that IFX provide by
October 31, 2002 its specific plan to achieve compliance with the listing
requirements. IFX provided a response to NASDAQ on October 31, 2002, requesting
the opportunity to provide NASDAQ with a further update at a later date.
If the shares of the Company's common stock were to be suspended or delisted
from the NASDAQ system, it would be more difficult to dispose of the common
stock or obtain accurate quotations as to the price of the securities. This, in
turn, could also make it more difficult for the Company to issue securities
pursuant to debt or equity offerings in the future.
ROF/IFX, LLC
On October 10, 2002 ROF submitted to the Company a share certificate
representing 400,000 shares of IFX common stock pursuant to its right to
exchange those shares for shares of that class of Company preferred stock
described in paragraph 3(a) of the Amended And Restated Put Agreement among the
Company, UBS Capital Americas III, L.P. and UBS Capital LLC, with an exchange
ratio of 6 shares of common stock for each share of newly issued preferred
stock.
Chief Financial Officer
On November 7, 2002, Howard F. Zuckerman resigned as Chief Financial Officer.
Joel M. Eidelstein, IFX's President, has been appointed the Interim Chief
Financial Officer.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Basis of Presentation
The Company's condensed balance sheets and condensed consolidated statements of
operations in this quarterly report include the accounts of IFX Corporation and
its wholly-owned subsidiaries (collectively referred to herein as "IFX", or the
"Company").
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 herein. Factors that could cause or contribute to such differences
include, but are not limited to, those mentioned in this section and those
discussed in the Company's Annual Report on Form 10-K for the year ended June
30, 2002. The information provided below should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the Form
10-K and the condensed consolidated financial statements and notes thereto for
the three-month periods ended September 30, 2002 and 2001 contained elsewhere
herein.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles in the United States requires IFX to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
11
expenses during the reporting period. To the extent there are material
differences between the Company's estimates and the actual results, IFX's future
results of operations may be affected. Management believes the following
critical accounting policies require the Company to make significant judgments
and estimates in the preparation of its condensed consolidated financial
statements:
. Revenue recognition;
. Impairment of long-lived assets.
Revenue Recognition
The Company recognizes revenue when each of the following criteria is met;
. Persuasive evidence of an arrangement exists,
. Delivery has occurred or services have been rendered,
. The seller's price to the buyer is fixed or determinable, and
. Collectibility is reasonably assured.
Revenue is recognized on the majority of the services offered by the Company as
its customers utilize such services. Generally, the Company's sales transactions
are not multi-element and do not subject the Company to significant credit risk;
thus management is reasonably assured of collection at the time the services are
utilized by the customer. The Company's services are generally fixed price. In
addition, when services require a contract, revenue is not recognized until such
contract has been executed and is enforceable. Revenues related to sales to
Tutopia (a related party) are generally not recognized until collection is
reasonably assured because of the insufficiency of Tutopia's cash flows.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment in accordance with SFAS
No. 144. If indicators are present, the Company computes the estimated
impairment based on the difference between the carrying value of an asset and
the estimated cash flows to be received over the remaining useful life of the
respective asset or related group of assets. Cash flows are determined based
upon management's projections of operating performance and are consistent with
those utilized in obtaining funding. If management's revenue and cost reduction
projections are not met, the Company may incur additional impairments of
long-lived assets in the future.
Going Concern
The Company's working capital deficit increased by $1.4 million to a $10.9
million deficit at September 30, 2002 from a $ 9.5 million deficit at June 30,
2002. The Company's available cash remains at a level that substantially limits
the Company's operations. Although the Company raised $1.1 million through the
issuance of a convertible promissory note during the three-month period ended
September 30, 2002 and $12.0 million through the sale of convertible preferred
stock during fiscal 2002, the Company continues to incur losses and operating
cash flow deficiencies. The Company has experienced operating losses amounting
to $4.4 million for the quarter ended September 30, 2002 (compared with $7.6
million for the same period of the prior year) and losses of $30.6 million,
$54.4 million and $38.7 million for the years ended June 30, 2002, 2001 and
2000, respectively. Further, the Company experienced negative cash flows from
operations of $1.6 million for the quarter ended September 30, 2002 (compared
with a negative cash flow of $5.2 million for the same period of the prior year)
and negative cash flows from operations of $12.7 million, $15.0 million and
$15.8 million for the years ended June 30, 2002, 2001 and 2000, respectively. As
a result, the Company must obtain substantial additional capital to sustain its
operations. The Company is dependent upon capital from outside sources,
including existing shareholders, to fund its operations and meet ongoing
commitments and obligations. There can be no assurance that such capital will be
available to the Company on acceptable terms, or at all.
The Company is taking actions in an effort to improve cash flow, including: (1)
reducing the scope of, selling or otherwise disposing of certain operations that
have operating cash flow deficiencies (e.g., Central American Operations); (2)
selling equipment and other assets that should generate cash in the short term
and (3) decreasing its overhead and personnel costs in the United States and,
selectively, in its Latin American operating units. Although the Company has
made reductions in personnel and overhead costs to reduce the operating losses,
additional reductions in personnel may have to be made in the near term. The
Company also believes that additional cost savings can be generated by combining
its operations with those of Tutopia in certain countries in which both entities
operate. In general, cash needs will also be affected by whether Tutopia is able
to fulfill its payment obligations under its network agreement with IFX.
In September 2002, the Company received $1.1 million from ROF/IFX, LLC ("ROF")
in exchange for a 10% promissory note due June 30, 2003 that is convertible into
shares of either Series D Preferred Stock or a new series of preferred stock
(yet to be issued) at the option of the note holder. As part of the transaction,
ROF was also provided the right to exchange up to 400,000 shares of IFX common
stock for shares of that class of Company preferred stock described in paragraph
3(a) of the Amended And Restated Put Agreement among the Company, UBS Capital
Americas III, L.P. and UBS Capital LLC, with an exchange ratio of 6 shares of
common stock for each share of newly issued preferred stock.
In addition, as reported in the Company's Form 8-K dated November 8, 2002, on
October 31, 2002, the
12
Company received $2.9 million of funding from UBS Capital, its controlling
shareholders, and executed two convertible promissory notes in that aggregate
amount (the "Notes"). The Notes bear interest at the rate of 10% per annum and
the principal and all accrued but unpaid interest are due and payable on
September 30, 2007 ("Maturity Date"). At the option of the note holders, at any
time prior to the Maturity Date, the outstanding principal amount of the Notes
plus accrued and unpaid interest thereon may be converted into shares of Series
D Preferred Stock at a conversion price equal to $1.20 per share of Series D
Preferred Stock. The Series D Preferred Stock to be issued upon such conversion
will have the same rights, preferences and privileges as the currently
outstanding shares of Series D Preferred Stock. Under the terms of the Notes,
once the note holders of a majority of the outstanding principal amount of the
Notes have elected to convert, then all the remaining note holders shall be
deemed to have also made such a conversion.
In the event the Company enters into an agreement ("Qualified Financing Purchase
Agreement") which provides the Company with debt or equity financing in
connection with the issuance of securities ("Qualified Financing Securities") by
the Company consisting of IFX common stock or other securities that are
convertible, exercisable or exchangeable into shares of IFX common stock, prior
to the Maturity Date, at the option of the note holders, the principal amount of
the Notes plus accrued and unpaid interest thereon may be converted, in whole
and not in part, into Qualified Financing Securities at a conversion price equal
to the purchase price per Qualified Financing Security set forth in the
Qualified Financing Purchase Agreement.
The Company estimates that the $2.9 million of capital provided at the end of
October should be adequate to support the cash needs through January 2003.
Further, management of the Company is continuing to work with UBS Capital in an
attempt to obtain additional funding to enable the Company to have sufficient
capital to meet its current and projected operating expenditures through June
30, 2003, which is estimated to be no less than $3.0 to $3.5 million. There can
be no assurances, however, that the Company will be able to continue raising
funds from UBS Capital or other sources through the issuance of securities or
through other means on acceptable terms, or at all. The Company's inability to
raise sufficient funds in the future would affect its ability to meet its
working capital requirements, satisfy capital and operating lease obligations,
and would cause the Company to eliminate capital expenditures.
There is no guarantee that projected decreases in expenses will be sufficient to
ensure the continued viability of the Company or that such decreases will not
affect the Company's customer service levels or ability to generate revenues.
Further, there can be no assurance that even if such capital is obtained and
such cost reductions are made, that the Company will achieve profitability or
positive cash flows. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The condensed consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
13
Analytical Summary of Condensed Consolidated Statements of Operations
The following table sets forth, for the three-month period indicated, the
percentage of total revenues represented by certain items in the Company's
condensed consolidated statements of operations:
Three Months Ended
September 30,
2002 2001
------ ------
Revenues:
Dedicated line services 58.4 % 42.1 %
Dial-up services 5.9 17.3
Web hosting and design services 3.7 4.5
Sales to related party 27.1 31.2
Other 4.9 4.9
------ ------
Total revenues 100.0 100.0
Cost of revenues 50.7 55.0
------ ------
Gross profit 49.3 45.0
Operating Expenses:
General and administrative 92.8 100.9
Sales and marketing 5.2 6.7
Depreciation and amortization 29.6 55.7
------ ------
Total operating expenses 127.6 163.3
------ ------
Operating loss from continuing operations (78.3) (118.3)
Total other income (expense), net (17.5) 56.9
------ ------
Loss from continuing operations before income taxes (95.8) (61.4)
Income tax benefit (provision) 0.5 (0.3)
------ ------
Loss from continuing operations (95.3) (61.7)
Income (loss) from discontinued operations,
net of income taxes 0.9 (0.5)
------ ------
Net loss (94.4)% (62.2)%
====== ======
CONTINUING OPERATIONS
The Company has decided to sell or otherwise dispose of substantially all of its
Central American Operations during 2003. As of September 30, 2002, generally
accepted accounting principles require that this segment be treated as a
discontinued operation in the condensed consolidated financial statements for
the quarter ended September 30, 2002. Hence, the assets, liabilities and results
of operations of this segment have been segregated in the condensed consolidated
financial statements of the Company. For the quarter ended September 30, 2002,
the revenues and loss from discontinued operations before income taxes of the
three operations in Central America that the Company is planning to sell were
$0.4 million and $0.3 million, respectively. At September 30, 2002, the total
assets of these operations were $0.6 million.
Quarters ended September 30, 2002 and 2001
Revenues
Management plans to grow IFX's customer base and revenues primarily by marketing
Internet access and value-added services to ISPs, multinationals,
telecommunications carriers and small to medium-sized businesses in the markets
in which the Company operates and, to a lesser extent, to individual consumers.
Accordingly, management expects that revenue from value-added services (such as
dedicated line and web hosting and design services) will increase faster than
revenue from Internet access services. IFX's current customer and revenue mix is
not expected to be fully indicative of the Company's future customer and revenue
mix.
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 generated revenues of $0.3 million during the
quarter ended September 30, 2002 (compared with approximately $1.1 million in
the same quarter of fiscal 2001), those revenues continue to decrease 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 using a dedicated Internet access line.
IFX provides Internet access services to customers under contracts that
typically range from one month
14
for dial-up access services to one year or more for dedicated access services.
IFX also derives revenues by providing wholesale Internet access to businesses
that resell such access on a branded or private label basis. Fees for wholesale
access are generally billed on a monthly basis after services are rendered.
Wholesale access customers are billed on either a per port basis or a per hour
basis. Wholesale Internet access service revenues are recognized in the period
in which the services are provided.
Revenues from value-added Internet services come from web hosting, domain name
registration and co-location services. These revenues are recognized in the
period in which the services are provided.
Internet access charges and fees for value-added services vary among the
countries in which IFX does business, depending on competition, economic and
regulatory environments and other market factors. In some markets, the Company
has reduced prices, such as for access services, as a result of competitive
pressure. The Company expects that price reductions will continue in the markets
in which IFX operates as the supply of Internet services continues to grow.
For the three-month period ended September 30, 2002, total revenues declined to
$5.6 million from $6.4 million, a decrease of $0.8 million, or 12.5%, from the
same period in fiscal 2002. Revenues resulting from dedicated line services
increased by $0.6 million to $3.3 million for the first quarter of fiscal 2003
as compared to $2.7 million for the same period during fiscal 2002 as a result
of the Company's increased focus on corporate clients. Sales to related party
(Tutopia) declined by $0.5 million for the three-month period ended September
30, 2002, primarily because of a reduction in revenue recognized until
collection is reasonably assured because of the insufficiency of Tutopia's cash
flows. Revenues relating to dial-up services decreased 70.0% for the three-month
period ended September 30, 2002 to $0.3 million from $1.1 million as compared to
same period for the preceding fiscal year, as a result of the sale of the
Bolivian operations and sale of dial-up customers in Brazil and an expected
decline as the Company continues to pursue its strategy of focusing on business
clients and not individual dial-up consumers. Other revenues, which consist
primarily of amounts earned from co-location services, equipment rental and
earnings from revenue-sharing agreements with telecommunications carriers,
decreased marginally to $0.3 million for the three-month period ended September
30, 2002 as compared with the three-month period ended September 30, 2001.
Cost of Revenues
IFX's cost of revenues primarily consists of costs incurred to carry customer
traffic to and over the Internet. IFX leases lines that connect the Company's
POPs to IFX's national hubs. The Company pays third party network providers for
transit that allows IFX to transmit the Company's customers' information to or
from the Internet. IFX also has other recurring telecommunications costs,
including the cost of local telephone lines that customers use to reach IFX's
network POPs and access the Company's services, and trans-oceanic fiber and
satellite bandwidth costs to connect the national hubs to the Internet backbone
through IFX's Miami facilities. Management expects total operating costs from
providing Internet services to increase as capacity is increased to meet
customer demand. The Company expects that costs of revenues should decline as a
percentage of revenues as the Company expands its network facilities under
long-term leases and as competition drives down the overall price of such
services. Management also expects that cost of revenues should decrease as
wireless technology usage expands and the telecommunication markets in Latin
America deregulate.
Gross profit increased to 49.3% of total revenues for the three-month period
ended September 30, 2002 as compared with 45.0% of total revenues for the
three-month period ended September 30, 2001. The increase in gross margin is
primarily a result of management's continued efforts to reduce cost of revenues
by increasing efficiencies of the Company's use of its network equipment, as
well as solidifying IFX's leased network throughout Latin America, resulting in
the reduction of third party costs.
General and Administrative Expenses
General and administrative expenses are comprised primarily of compensation
costs, which include salaries and related benefits, commissions, bonuses and
non-cash stock-based compensation. Other general and administrative expenses
include costs of travel, rent, utilities, telecommunications services, insurance
and professional fees. While management expects that general and administrative
expenses will increase proportionately with IFX's growth, specific actions are
being taken by management in efforts to reduce personnel and other overhead
costs.
General and administrative expenses decreased 19.5% to $5.2 million for the
three-month period ended September 30, 2002 from $6.4 million as compared to the
same period for the preceding fiscal year. The decrease is primarily from cost
reduction programs initiated during fiscal 2002, despite the growth needed to
support the increase in "core" product revenues during fiscal 2002. As a
percentage of total revenues, general and administrative expenses decreased 8.1
percentage points to 92.8% for the three-month period ended September 30, 2002
from 100.9% for the three-month period ended September 30, 2001.
Sales and Marketing
Sales and marketing expenses consist primarily of advertising costs,
distribution costs and related production costs. Sales and marketing expenses
decreased $0.1 million to $0.3 million for the three-month period ended
September 30, 2002 as compared with $0.4 million for the same period of fiscal
year 2002 as management focused on generating dedicated connectivity revenues
requiring lower marketing and selling costs. As a percentage of total revenues,
sales and marketing expense decreased 1.5 percentage
15
points to 5.2% for the three-month period ended September 30, 2002 from 6.7% for
the same period of fiscal year 2002 as a result of the Company's marketing
expenditures decreasing at a much faster pace than sales.
Depreciation and Amortization
A large component of the Company's depreciation and amortization expense is
related to the amortization of the acquired customer base, which is being
amortized over three years using the straight-line method. The acquired customer
base results from the allocation of the price paid to acquire entities in fiscal
years 2000 and 1999 that was in excess of the fair value of their net tangible
assets. The Company expects the remaining capitalized cost of the acquired
customer base as of September 30, 2002 to be fully amortized by December 31,
2002.
Depreciation expense is primarily related to telecommunications equipment,
computers and network infrastructure. Assets are depreciated over their
estimated useful lives, which generally range from three to five years.
Depreciation and amortization expense decreased $1.9 million to $1.7 million for
the three-month period ended September 30, 2002 from $3.6 million as compared to
same period of fiscal 2002. The reduction in depreciation and amortization
expense is primarily due to the reduction in carrying value of assets under
capitalized leases which occurred during fiscal 2002.
Other Income (Expense)
IFX earns interest income primarily by investing available cash in short-term
securities. The Company incurs interest expense primarily as a result of lease
financing transactions.
During the three-month period ended September 30, 2002, the Company reported
$1.0 million of other expense, compared with other income of $3.6 million during
the same period of fiscal 2002. Other expense in fiscal 2003 is primarily
attributable to interest expense of $0.2 million , equity in the losses of
Tutopia of $0.1 million, and the $0.4 million loss on the sale of a capital
leased asset. Other income in fiscal 2002 includes a realization of the deferred
gain on the sale of the Yupi investment of $4.5 million offset by interest
expense of $0.6 million, and $0.2 million on the Company's share of losses
resulting from its equity investment in Tutopia.
Income tax benefit (provision)
Income tax benefits or provision are recorded to the extent that the Company
recorded a tax provision or benefit 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 September 30, 2002 and
June 30, 2002.
Income (loss) from discontinued operations
For the three-month period ended September 30, 2002, the Company had income from
discontinued operations of approximately $0.05 million, net of taxes, as
compared with a loss of $0.03 million for the same period of fiscal 2002. The
Company does not expect to realize any additional significant earnings or losses
from these discontinued operations.
FINANCIAL CONDITION
Liquidity and Capital Resources
Going Concern
The Company's working capital deficit increased by $1.4 million to a $10.9
million deficit at September 30, 2002 from a $9.5 million deficit at June 30,
2002. The Company's available cash remains at a level that substantially limits
the Company's operations. Although the Company raised $1.1 million through the
issuance of a convertible promissory note during the three-month period ended
September 30, 2002 and $12.0 million through the sale of convertible preferred
stock during fiscal 2002, the Company continues to incur losses and operating
cash flow deficiencies. The Company has experienced operating losses amounting
to $4.4 million for the quarter ended September 30, 2002 (compared with $7.6
million for the same period of the prior year) and losses of $30.6 million,
$54.4 million and $38.7 million for the years ended June 30, 2002, 2001 and
2000, respectively. Further, the Company experienced negative cash flows from
operations of $1.6 million for the quarter ended September 30, 2002 (compared
with a negative cash flow of $5.2 million for the same period of the prior year)
and negative cash flows from operations of $12.7 million, $15.0 million and
$15.8 million for the years ended June 30, 2002, 2001 and 2000, respectively. As
a result, the Company must obtain substantial additional capital to sustain its
operations. The Company is dependent upon capital from outside sources,
including existing shareholders, to fund its operations and meet ongoing
commitments and obligations. There can be no assurance that such capital will be
available to the Company on acceptable terms, or at all.
The Company is taking actions in an effort to improve cash flow, including: (1)
reducing the scope of, selling or otherwise disposing of certain operations that
require cash (e.g., Central American Operations); (2) selling equipment and
other assets that should generate cash in the short term and (3) decreasing its
overhead and personnel costs in the United States and, selectively, in its Latin
American operating units. Although the Company has made reductions in personnel
and overhead costs to reduce the
16
operating losses, additional reductions in personnel may have to be made in the
near term. The Company also believes that additional cost savings can be
generated by combining its operations with those of Tutopia in certain countries
in which both entities operate. In general, cash needs will also be affected by
whether Tutopia is able to fulfill its payment obligations under its network
agreement with IFX.
In September 2002, the Company received $1.1 million from ROF/IFX, LLC ("ROF")
in exchange for a 10% promissory note due June 30, 2003 that is convertible into
shares of either Series D Preferred Stock or a new series of preferred stock
(yet to be issued) at the option of the note holder. As part of the transaction,
ROF was also provided the right to exchange up to 400,000 shares of IFX common
stock for shares of that class of Company preferred stock described in paragraph
3(a) of the Amended And Restated Put Agreement among the Company, UBS Capital
Americas III, L.P. and UBS Capital LLC, with an exchange ratio of 6 shares of
common stock for each share of newly issued preferred stock.
In addition, as reported in the Company's Form 8-K dated November 8, 2002, on
October 31, 2002, the Company received $2.9 million of funding from UBS Capital,
its controlling shareholders, and executed two convertible promissory notes in
that aggregate amount (the "Notes"). The Notes bear interest at the rate of 10%
per annum and the principal and all accrued but unpaid interest are due and
payable on September 30, 2007 ("Maturity Date"). At the option of the note
holders, at any time prior to the Maturity Date, the outstanding principal
amount of the Notes plus accrued and unpaid interest thereon may be converted
into shares of Series D Preferred Stock at a conversion price equal to $1.20 per
share of Series D Preferred Stock. The Series D Preferred Stock to be issued
upon such conversion will have the same rights, preferences and privileges as
the currently outstanding shares of Series D Preferred Stock. Under the terms of
the Notes, once the note holders of a majority of the outstanding principal
amount of the Notes have elected to convert, then all the remaining note holders
shall be deemed to have also made such a conversion.
In the event the Company enters into an agreement ("Qualified Financing Purchase
Agreement") which provides the Company with debt or equity financing in
connection with the issuance of securities ("Qualified Financing Securities") by
the Company consisting of IFX common stock or other securities that are
convertible, exercisable or exchangeable into shares of IFX common stock, prior
to the Maturity Date, at the option of the note holders, the principal amount of
the Notes plus accrued and unpaid interest thereon may be converted, in whole
and not in part, into Qualified Financing Securities at a conversion price equal
to the purchase price per Qualified Financing Security set forth in the
Qualified Financing Purchase Agreement.
The Company estimates that the $2.9 million of capital provided at the end of
October should be adequate to support the cash needs through January 2003.
Further, management of the Company is continuing to work with UBS Capital in an
attempt to obtain additional funding to enable the Company to have sufficient
capital to meet its current and projected operating expenditures through June
30, 2003, which is estimated to be no less than $3.0 to $3.5 million. There can
be no assurances, however, that the Company will be able to continue raising
funds from UBS Capital or other sources through the issuance of securities or
through other means on acceptable terms, or at all. The Company' s inability to
raise sufficient funds in the future would affect its ability to meet its
working capital requirements, satisfy capital and operating lease obligations
and would cause the Company to eliminate capital expenditures.
There is no guarantee that projected decreases in expenses will be sufficient to
ensure the continued viability of the Company or that such decreases will not
affect the Company's customer service levels or ability to generate revenues.
Further, there can be no assurance that even if such capital is obtained and
such cost reductions are made, that the Company will achieve profitability or
positive cash flows. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The condensed consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
For the three-month period ended September 30, 2002, cash used by operating
activities was approximately $1.6 million compared with cash used of $5.2
million for the same period of fiscal 2002. The cash used in operations is
mainly related to the connectivity expenses of the Company's network, including
payments under capacity lease agreements, operating leases, costs of personnel
and related overhead and, to a lesser extent, sales, marketing and advertising
costs. In addition, IFX invests cash not needed for operations at any of its
subsidiaries in short-term investments such as U.S. Government obligations and
overnight time deposits. As of September 30, 2002, the Company had approximately
$0.5 million in cash and equivalents.
For the three-month period ended September 30, 2002, cash provided by financing
activities was approximately $0.7 million compared with $1.0 million of cash
used by financing activities for the same period of fiscal 2002. This increase
in cash was a result of the $1.1 million convertible note payable from ROF
(described above) and a reduction of $0.6 million in payments of capital lease
obligations.
NASDAQ Listing
IFX's stock is traded on the NASDAQ SmallCap Market under the symbol "FUTR". On
February 14, 2002, the NASDAQ Staff notified the Company that the bid price of
its common stock had closed at less than $1.00
17
per share over the previous 30 consecutive trading days and, as a result, did
not comply with Marketplace Rule 4310 (c) (4) (the "Price Rule"). In accordance
with Marketplace Rule 4310 (c) (8) (D), the Company was provided 180 calendar
days, or until August 13, 2002, to regain compliance with the Price Rule. On
August 14, 2002, the NASDAQ Staff advised the Company that while it had not
regained compliance in accordance with Marketplace Rule 4310 (c) (8) (D), the
staff noted that the Company did meet the initial listing requirements for $5.0
million of stockholders' equity (based on pro forma stockholders' equity as
reported in the Company's Form 10-Q for the quarter ended March 31, 2002).
Hence, the Company was provided with an additional 180 days, or until February
10, 2003, to regain compliance with the applicable requirements.
On October 17, 2002, NASDAQ staff notified IFX that it was not in compliance
with Marketplace Rule 4310(c)(2)(B), which requires IFX to have a minimum of
$2,000,000 in net tangible assets or $2,500,000 in stockholders' equity or a
market capitalization of $35,000,000 or $500,000 of net income for the most
recently completed fiscal year or two of the three most recently completed
fiscal years. The NASDAQ staff is reviewing IFX's eligibility for continued
listing on the NASDAQ SmallCap Market and has requested IFX to provide by
October 31, 2002, IFX's specific plan to achieve compliance with the listing
requirements. IFX provided a response to NASDAQ on October 31, 2002, requesting
the opportunity to provide NASDAQ with a further update at a later date.
If the shares of the Company's common stock were to be suspended or delisted
from the NASDAQ system, it would be more difficult to dispose of the common
stock or obtain accurate quotations as to the price of the securities. This, in
turn, could also make it more difficult for the Company to issue securities
pursuant to debt or equity offerings in the future.
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, for example, the timing, costs and scope
of the Company's acquisition of, or investments in, existing or future ISPs, the
revenue and profitability levels of the ISPs in which the Company invests, the
anticipated reduction in operating costs, the economic, political, currency and
other risks associated with international operations, especially in Latin
America, IFX's ability to attract significant additional financing and continue
to incur losses and negative cash flow from operations, and other matters
contained herein regarding matters that are not historical facts, are only
predictions. In addition, the auditors' report on IFX's June 30, 2002
consolidated financial statements contained an explanatory paragraph relating to
IFX's ability to continue as a going concern and NASDAQ staff has advised IFX
that it is reviewing IFX's eligibility for continued listing on the NASDAQ
SmallCap Market. 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. These estimates and projections may not be
realized, and actual results may vary materially.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Exchange Rate and Inflation Risk
The Company's continuing operations are focused primarily in Latin America,
subjecting IFX to certain political, economic and commercial risks and
uncertainty not typically found in the United States. The Company's exposure to
market risk is directly related to its role as a Latin American Internet
services company. 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 results of operations, assets, liabilities and/or equity. The
value of local currencies generally fluctuate in foreign countries. This
fluctuation can cause the Company to gain or lose on the translation of foreign
currency to U.S. Dollars. For example, recent economic and political conditions
in Argentina, Brazil, Colombia and Venezuela have contributed to significant
fluctuations in the values of the currencies of those countries.
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.
18
ITEM 4 - CONTROLS AND PROCEDURES
Based on the most recent evaluation, which was completed within 90 days of the
filing of this Form 10-Q, the Company's Chief Executive Officer and Chief
Financial Officer believe the Company's disclosure controls and procedures (as
defined in Exchange Act Rule 13a-14) are effective. It should be noted that the
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote. There were no significant changes in
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company may be threatened with legal proceedings arising from its regular
business activities. On February 28, 2002, IFX do Brazil Ltda, ("IFX Brazil")
filed a lawsuit against IBM Leasing Brazil ("ILB") in the 11th Civil Court, Sao
Paulo, Brazil requesting the modification of IFX Brazil's equipment lease
agreement with ILB. The basis for the complaint by IFX Brazil was that the
leased equipment was delivered late by ILB. The complaint also stated that the
denomination of the lease in U.S. dollars resulted in an excessive exchange rate
variation in breach of the Brazilian consumption law. The object of this suit
was to obtain reduction of the contract value from approximately $568,600 to
approximately $189,500, the return of unused equipment and compensation for
installments already paid.
On August 18, 2002, the court denied IFX Brazil's claim and ordered IFX Brazil
to pay attorney's fees of approximately $21,700. IFX Brazil appealed the verdict
on September 3, 2002 and ILB responded to such appeal on September 30, 2002. No
verdict on the appeal has been reached. On September 24, 2002, IFX Brazil was
granted an injunction to prevent ILB from registering a complaint in Brazil that
IFX Brazil was in default on the lease until there is a final decision on the
appeal. Such injunction is subject to ILB response, which was filed on October
29, 2002.
On June 3, 2002, ILB demanded payment of $939,200 from IFX under the Continuing
Contract of Parent Guaranty of Payment dated September 29, 2000 between IFX and
ILB. IFX has not responded to this demand pending resolution of the lawsuit in
Brazil. There can be no assurances as to the outcome of this litigation. Based
on the advice of legal counsel, the Company has recorded certain accruals to
provide for this contingency.
On September 4, 2002, TELESC, an affiliate of Brasil Telecom, filed a credit
enforcement suit in the Second Civil Court, Florianopolis, Brazil, to collect
the confession of indebtedness executed by IFX Brazil in the amount of
approximately $502,600. TELESC is a vendor to IFX Brazil and IFX Brazil had
executed a promissory note in the amount claimed for services rendered to IFX
Brazil by TELESC. IFX Brazil has not yet responded to this suit but
approximately the full amount of the amount claimed has been reserved by IFX
Brazil.
On October 23, 2002, the Finance Department of the Municipality of Sao Paulo
made an administrative tax claim in the amount of approximately $424,700 for
Imposto Sobre Servicos ("ISS") taxes asserted with respect to IFX Brazil's
Internet services. IFX Brazil has until November 22, 2002 to respond to the
claim. On January 29, 2001, IFX made a claim against the Municipality of Sao
Paulo and obtained temporarily the suspension of the ISS tax. IFX's affirmative
claim is currently on appeal at the Sao Paulo Fifth Civil Court on the basis
that the Municipality is not authorized by the legislature to tax Internet
services. IFX Brazil is awaiting the outcome of this appeal (which is expected
in 2003) and intends to ask the Municipality in its November response to
postpone further proceedings on the most recent claim until the final outcome of
the appeal.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Payment and Release Agreement dated as of November 7, 2002 between
the Company and Howard F. Zuckerman
(b) Reports on Form 8-K
The Company filed reports on Form 8-K on October 23, 2002 with respect to its
fiscal year 2002 financial results press release and on November 8, 2002 with
respect to its issuance of notes to UBS Capital and its revised employment
agreements with certain executive officers of IFX.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IFX CORPORATION
(Registrant)
Dated: November 14, 2002 By: /S/ MICHAEL SHALOM
----------------------
Michael Shalom
Chief Executive Officer
(Principal Executive Officer)
Dated: November 14, 2002 By: /S/ JOEL M. EIDELSTEIN
---------------------------
Joel M. Eidelstein
Chairman of the Board, President and
Interim Chief Financial Officer
(Principal Financial Officer)
20
CERTIFICATIONS
I, Michael Shalom, do hereby certify that:
(1) I have reviewed the September 30, 2002 quarterly report on Form 10-Q filed
by IFX Corp. (the "Company");
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the condensed financial statements and other
financial information included in this quarterly report fairly present, in
all material respects, the financial condition, results of operations and
cash flows of the Company as of and for the periods presented in this
quarterly report.
(4) The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
(i) Designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(ii) Evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report ("Evaluation Date"); and
(iii) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of the board of directors (or persons performing the equivalent function):
(i) All significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to
record, process, summarize and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
(ii) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
(6) The Company's other certifying officer and I have indicated in the
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
-------------------------
/s/ Michael Shalom
- -------------------------------
Chief Executive Officer
- -------------------------------
21
I, Joel M. Eidelstein, do hereby certify that:
(1) I have reviewed the September 30, 2002 quarterly report on Form 10-Q filed
by IFX Corp. (the "Company");
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the condensed financial statements and other
financial information included in this quarterly report fairly present, in
all material respects, the financial condition, results of operations and
cash flows of the Company as of and for the periods presented in this
quarterly report.
(4) The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
(i) Designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(ii) Evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report ("Evaluation Date"); and
(iii) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of the board of directors (or persons performing the equivalent function):
(i) All significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to
record, process, summarize and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
(ii) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
(6) The Company's other certifying officer and I have indicated in the
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
--------------------------------
/s/ Joel M. Eidelstein
- -------------------------------------
Chairman of the Board, President and
Interim Chief Financial Officer
22
Exhibit Index
Exhibit Description
Exhibit
Number
10.1 Payment and Release Agreement dated as of November 7, 2002 between the
Company and Howard F. Zuckerman