<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File # 0-15187
IFX CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-3399452
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
707 Skokie Blvd Ste 580, Northbrook, Illinois 60062
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(Address of principal executive offices) (Zip Code)
(847) 412-9411
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
----- -----
As of September 30, 1999, the issuer had outstanding 8,438,803 shares of common
stock, $.02 par value per share.
1
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IFX CORPORATION AND SUBSIDIARIES
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed consolidated balance sheets as of
September 30, 1999 (Unaudited) and June 30, 1999. 3
Condensed consolidated statements of operations
for the three months ended September 30, 1999
(Unaudited) and 1998 (Unaudited). 4
Condendsed consolidated statements of cash flows
for the three months ended September 30, 1999
(Unaudited) and 1998 (Unaudited). 5
Notes to consolidated financial statements. 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
for the Period Ended September 30, 1999. 10
Item 3 - Quantitative and Qualitative Disclosures
about Market Risk 15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 6 - Exhibits and reports on form 8-K 16
(A) Exhibits
Exhibit 11.2 Master Conditional Sale Agreemet
Exhibit 27 Financial Data Schedule (EDGAR only)
Exhibit 99.1 Risk Factors
(B) Reports on Form 8-K
2
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PART I--FINANCIAL INFORMATION
IFX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Item 1--Financial Statements
Certain information in the financial statements presented below, except for net
income and basic net income per share, differs from amounts previously reported
due to the reclassification of certain revenues and operating expenses to
discontinued operations, reflecting the disposition of the Company's trading
business.
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
(Unaudited)
------------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 7,535,800 $ 5,482,800
Receivables, net of allowance for doubtful accounts of
$311,000 and $80,100, respectively...................... 672,900 458,300
Net assets of discontinued operations.................... 637,900 3,726,900
----------- -----------
Total current assets................................... 8,846,600 9,668,000
----------- -----------
PROPERTY AND EQUIPMENT:
Equipment, furniture and leasehold improvements.......... 4,019,200 2,253,500
Assets under capital lease............................... 2,855,700 --
----------- -----------
6,874,900 2,253,500
Less: accumulated depreciation and amortization.......... (908,700) (369,300)
----------- -----------
Total property and equipment, net...................... 5,966,200 1,884,200
----------- -----------
OTHER ASSETS:
Acquired customer base, net of amortization of $656,500
and $155,500 respectively.............................. 8,135,800 2,686,600
Investment in Yupi Internet Inc.......................... 3,113,500 3,113,500
Investments in and advances to affiliated partnerships... 233,200 241,500
Notes receivable......................................... 615,000 612,500
Deferred income taxes.................................... 876,400 --
Other assets............................................. 1,427,900 655,200
----------- -----------
Total other assets..................................... 14,401,800 7,309,300
----------- -----------
TOTAL ASSETS............................................... $29,214,600 $18,861,500
=========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................... $ 7,640,000 $ 2,447,200
Capital lease obligation................................. 114,800 --
----------- -----------
Total current liabilities.............................. 7,754,800 2,447,200
----------- -----------
LONG-TERM LIABILITIES:
Notes payable............................................ 496,400 316,900
Capital lease obligation................................. 2,740,800 --
----------- -----------
Total long-term liabilities............................ 3,237,200 316,900
----------- -----------
TOTAL LIABILITIES.......................................... 10,992,000 2,764,100
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.02 par value; 150,000,000 shares
authorized, 8,438,803 and 6,830,240 shares issued
and outstanding, respectively........................... 168,800 136,600
Paid-in capital......................................... 17,289,700 11,299,100
Retained earnings....................................... 1,128,000 4,817,200
Accumulated other comprehensive income.................. 5,900 (26,000)
Deferred compensation.................................... (369,800) (129,500)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY................................. 18,222,600 16,097,400
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $29,214,600 $18,861,500
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
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IFX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Dial Up...................................... $ 910,600 $ -
Dedicated.................................... 179,400 -
Hosting and Design Web Services.............. 54,900
Other........................................ 73,700 -
----------- -----------
Total revenues............................... 1,218,600 -
Cost and expenses:
Cost of revenues............................. 1,076,600 -
General and administrative................... 4,390,600 150,300
Depreciation and amortization................ 852,400 -
----------- -----------
Total operating expenses..................... 6,319,600 150,300
----------- -----------
Operating loss from
continuing operations........................ (5,101,000) (150,300)
Other income (expense):
Interest income.............................. 85,000 93,400
Income (Loss) on operations of equity
investee................................... (22,000) 6,700
Other........................................ 30,100 (14,300)
----------- -----------
Total other income........................... 93,100 85,800
----------- -----------
Loss from continuing
operations before income taxes............... (5,007,900) (64,500)
(Provision)/Benefit from income tax.......... 876,400 (59,000)
----------- -----------
Loss from continuing operations................. (4,131,500) (123,500)
Income from discontinued
operations, net of taxes..................... 442,300 946,700
----------- -----------
Net income (loss)............................... $(3,689,200) $ 823,200
=========== ===========
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Loss from continuing operations..................... $ (0.56) $ (0.02)
Income from discontinued operations................. $ 0.06 $ 0.15
----------- -----------
Net Income (loss)................................... $ (0.50) $ 0.13
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted............................... 7,423,547 6,155,539
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
IFX CORPORATION AND SUBSIDIARIES
CONSDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $(3,689,200) $ 823,200
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation....................................... 351,400 -
Amortization....................................... 501,000 -
Deferred taxes..................................... (876,400) -
Bad debt expense................................... 230,900 -
Compensation associated with stock options......... 815,400 -
Equity in net (gain) loss of affiliated
partnerships................................... 22,000 (6,700)
Changes in operating asset and liabilities:
Receivables...................................... (315,500) (17,500)
Other assets..................................... (730,100) -
Due to/from affiliates........................... 13,000 (155,800)
Accounts payable and accrued expenses............ 1,358,300 150,600
Change in net assets from discontinued
operations..................................... 3,089,000 154,100
------------ ------------
Cash provided by operating activities.............. 769,800 947,900
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, primarily customer base............ (774,000) -
(Increase) decrease in investments in and
advances to affiliated partnerships............ (13,700) 62,400
Increase (decrease) in notes receivable.......... (2,500) 500
Purchase of PP&E................................. (1,115,000) -
------------ ------------
Cash provided by (used in) investing activities.... (1,905,200) 62,900
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable...................... 156,500 -
Issuance of common stock......................... 3,000,000 -
------------ ----------
Cash provided by financing activities.............. 3,156,500 -
------------ ----------
Effect of exchange rate changes on cash.............. 31,900 -
------------ ----------
Increase (decrease) in cash and cash equivalents..... 2,053,000 1,010,800
------------ ------------
Cash and cash equivalents, beginning of period....... 5,482,800 5,633,200
------------ ------------
Cash and cash equivalents, end of period............. $ 7,535,800 $ 6,644,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes....................... - $ 250,000
============ ============
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITIES DISCLOSURE:
Value of stock issued in conjunction with
acquisitions................................... $ 1,967,200 -
============ ============
Acquisition of equipment through assumption of
capital lease obligations...................... $ 2,855,700 -
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of IFX
Corporation and its majority-owned subsidiaries for which it has a controlling
financial interest. All material intercompany accounts and transactions,
including those related to the Company's former subsidiaries, are eliminated in
consolidation.
These condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation have been
reflected in these condensed consolidated financial statements. The balance
sheet at June 30, 1999, has been derived from the audited financial statements
at that date but does not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended June 30, 1999. Operating results for the quarter ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending June 30, 2000. Certain reclassifications have been made in the 1999
financial statements to conform to the fiscal 2000 presentation. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's financial statements on Form 10-K for the year
ended June 30, 1999.
NOTE 2. DISCONTINUED OPERATIONS
In June 1999, IFX divested itself of its 50.1% interest in IFX Ltd. in
exchange for approximately $2.45 million and a redeemable preference share
entitling IFX to quarterly payments equal to approximately 30% of the net
profits, as specifically defined, of IFX Ltd. through June 30, 2002. Following
the sale of its U.K. subsidiary, IFX decided not to invest the sales proceeds in
the trading business and, instead, decided to continue to develop businesses in
the Internet industry. Accordingly, the Company has accounted for this disposal,
and the disposal of operations related to the same business segment made in
prior years, as noted below, as discontinued operations.
On May 31, 1996, an agreement was reached to sell, transfer and assign to
E.D. & F Man International Inc. ("MINC") substantially all of the brokerage
accounts maintained by FX Chicago, Inc. (formerly Index Futures Group, Inc., or
"Index"), together with all positions, securities and other assets held in or
for such accounts and other agreed-upon assets used in the conduct of the
brokerage activities. MINC is a unit of E.D.& F. Man Group, plc, a London-based
international trading and finance conglomerate. This sale was completed as of
July 1, 1996. During 1997, Index ceased being a clearing member at all
exchanges, and ceased being a registered futures commission merchant.
The purchase price payable by MINC in connection with this transaction
is based on a percentage of the net income (as defined in the sales agreement)
of the transferred activities during the sixty-six month period following the
sale. Because the purchase price is contingent upon the future earnings of the
customer accounts sold, none of which is guaranteed, income is recognized as
earned beginning in fiscal year 1997, over the five and one-half years after the
date of the sale. The sales contract required Lee S. Casty to sign a
non-competition agreement. As compensation for providing such an agreement, a
portion of the purchase price was to be paid to Lee S. Casty. Mr. Casty
irrevocably transferred his right to receive payments under such agreement to
the Company. Accordingly, a portion of the purchase price which would otherwise
have been received by Lee S. Casty is being included in revenue by the Company.
In addition, in conjunction with the sale, the Company issued a limited
indemnification agreement to MINC. The agreement covers potential customer
6
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claims arising from activity prior to the sale.
The following table summarizes financial information related to the
discontinued trading business:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Total revenues...................................... $ 723,800 $2,031,300
========== ==========
Income from discontinued
operations before income taxes..................... $ 680,500 $1,417,400
Income tax provision on discontinued operation...... 238,200 470,700
---------- ----------
Income from discontinued operations, net of taxes. $ 442,300 $ 946,700
========== ==========
</TABLE>
The information set forth in the remaining Notes to the Financial
Statements relates to continuing operations unless otherwise specified.
NOTE 3. ACQUISITIONS AND RECENT DEVELOPMENTS
During August and September 1999 International Technology Investments, LC
exercised its right to purchase 1,500,000 shares of the Company's common stock
for $3.0 million.
In August 1999 the Company entered into a conditional sale agreement with
Lucent Technologies Inc., providing the Company with the option to purchase up
to $10 million of Lucent equipment. Under the agreement, Lucent will provide the
Company with up to $10 million in networking equipment to upgrade and expand the
Company's Internet operations, but the Company is under no obligation to
purchase equipment from Lucent. Through September 30, 1999, the Company has
purchased approximately $2.9 million of equipment under the agreement. A copy of
the agreement is filed as Exhibit 11.2 to this report.
During July 1999 the Company entered into an $500,000 lease agreement with
Softech Financial (the "Softech Lease"), a division of EAB Leasing Corporation,
to provide the financing for the cost of the Company's implementation of Portal
software(R). Under the terms of the agreement, Portal was contracted to develop
a consolidated billing and accounts receivable system that should allow the
Company to provide invoicing services to its customers across all Latin
America.
In August 1999 the Company signed a five-year lease for new office space in
Hallandale, Florida, to commence October 1, 1999. This lease provides for
aggregate payments totaling approximately $535,900 over the next 5 years.
Interactiva, LTDA. On July 2, 1999, a subsidiary of the Company acquired
substantially all of the capital stock of Interactiva, LTDA ("Interactiva"), an
ISP based in Santiago, Chile. Interactiva currently serves customers throughout
Santiago, providing standard dial-up connections. The Company intends to
consolidate the operations of Interactiva into its existing operations in Chile.
Sistemas de Diseno y Manufactura, S.A. de C.V. On July 21, 1999, the
Company's Mexican subsidiary acquired certain assets of Sistemas de Diseno y
Manufactura, S.A. de C.V. ("SDM Net"), an ISP based in Monterrey, Mexico. SDM
Net currently serves customers throughout Monterrey, providing dial-up
connections, dedicated Internet products and web hosting.
Intermedia. On August 13, 1999, the Company's Chilean subsidiary acquired
substantially all of the users from Servicios de Informacion Electronica
7
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Limitada ("Intermedia"), an ISP located in Santiago, Chile. The Company intends
to consolidate the customers acquired from Intermedia into its Chilean
subsidiary.
E-Net Teleinformatica, Limitada. On August 20, 1999, IFX purchased all of
the capital stock of E-Net Teleinformatica, Limitada ("E-Net"), an ISP located
in Salvador, Brazil. E-Net currently serves customers in Brazil, providing dial-
up connections, dedicated Internet products and web hosting.
Vianet, S.A. de C.V. On August 23, 1999, IFX purchased all of the capital
stock of Vianet, S.A. de C.V. ("Vianet"), an ISP located in San Salvador, El
Salvador. Vianet currently serves customers in El Salvador, providing dial-up
connections, dedicated Internet products and web hosting.
ITS Networks, S.A. On August 24, 1999, IFX purchased all of the capital
stock of ITS Networks, S.A., an ISP located in Tegucigalpa, Honduras. ITS
currently serves customers in Honduras, providing dial-up connections, dedicated
Internet products and web hosting.
For the acquisitions during the first quarter of fiscal 2000, the total
purchase prices were approximately $6,112,500, of which approximately $1,363,300
was paid or will be paid in cash, and approximately $4,749,200 was paid or will
be paid by issuing approximately 263,500 shares of the Company's common stock.
The total cash acquired in those acquisitions was $72,900. Each of the
acquisitions was accounted for under the purchase method of accounting. The
purchase price in excess of the net tangible assets aggregated approximately
$5,950,300 and was allocated to Acquired Customer Base. This allocation is
preliminary and is subject to finalization of the Company's valuation analysis.
The Acquired Customer Base is being amortized using the straight-line method
over an estimated life of 3 years. The consolidated financial statements include
the accounts of these acquisitions since the date of purchase.
The following unaudited pro forma data summarize the results of operations
for the periods indicated as if these acquisitions had been completed on July 1,
1998, the beginning of the 1999 fiscal year. The pro forma data gives effect to
actual operating results prior to the acquisitions and adjustments to goodwill
amortization and income taxes. These pro forma amounts do not purport to be
indicative of the results that would have actually been obtained if the
acquisitions had occurred on July 1, 1998 or that may be obtained in the
future. The pro forma data does not give effect to acquisitions completed
subsequent to September 30, 1999.
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------------
1999 1998
----------- --------
<S> <C> <C>
(Unaudited)
Total revenues............................ $ 1,712,300 $684,200
Net income (loss)......................... (4,020,100) 146,800
Basic and diluted net income (loss) per
common share......................... (0.54) 0.02
</TABLE>
NOTE 4. STOCK BASED COMPENSATION PLANS
Employee Stock Option Plan
On October 13, 1999, the Company filed a Proxy Statement Pursuant to
Section 14(a) of the Securities Exchange Act of 1934, in which, among other
things, it requested shareholder approval for an amendment to the IFX
Corporation 1998 Stock Option and Incentive Plan (the "Option Plan") to increase
the number of shares of common stock available for issuance under the Option
Plan. On November 9 the shareholders voted in favor of the amendment increasing
the number of common shares available under the Option Plan from 900,000 to
1,800,000.
Directors Stock Option Plan
On October 13, 1999, the Company filed a Proxy Statement Pursuant to
Section 14(a) of the Securities Exchange Act of 1934, in which, among other
things, it requested shareholder approval for the IFX Corporation Directors
Stock Option Plan (the "Directors Plan"). The purpose of the Directors Plan is
to assist the Company in securing individuals who are not already employees or
officers of the Company to serve on its Board of Directors, and to provide
financial incentives to such directors to exert their best efforts on behalf of
the Company. In general, the Directors Plan provides that, each eligible
director automatically will receive an option to purchase (i) 450 shares of
Common Stock, upon such director's initial election to the Board of Directors of
the Company, provided such director is elected after the effective date of the
Directors Plan, and (ii) for each year thereafter and on the date of each annual
meeting of the stockholders of the Company (including this annual meeting), 450
shares of Common Stock for service as a director and 75 shares of Common Stock
for each Committee of the Board of Directors upon which such director serves. On
November 9 the shareholders voted in favor of the Directors Plan.
8
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NOTE 5. SUBSEQUENT EVENTS
ACQUISITIONS
NetSpace, S.A. de C.V. On October 1, 1999, IFX purchased the subscriber
base of NetSpace, S.A. de C.V. ("NetSpace"), an ISP located in Toluca, Mexico.
NetSpace currently serves customers in Toluca, providing standard dial-up
connections, dedicated Internet products and web hosting.
Conex Brasil and affiliated companies. On October 6, 1999, IFX purchased
all of the capital stock of Conex Brasil S.A., W3 Informatica Ltda., K3
Informatica Ltda, and Conex Canoas Ltda. (referred to collectively as the "Conex
Group"), which provide Internet services in the Brazilian city of Porto Alegre
and the surrounding cities of Novo Hamburgo, Santa Maria, and Canoas. The Conex
Group currently serves customers providing standard dial-up connections,
dedicated Internet products and web hosting. On October 21, 1999, the Company
filed a Form 8-K with respect to the acquisition of the Conex Group and its
affiliated companies.
Sistemas Integrales, Servicios y Comunicacion, S.A. de C.V. On November 10,
1999, IFX purchased all of the users and assets of Sistemas Integrales,
Servicios y Comunicacion, S.A. de C.V. ("SISCO"). SISCO provides dial-up, Web
design and Web hosting services to consumers and corporations in Guadalajara,
Jalisco, Mexico.
OTHER
Authorization Of Preferred Shares. On November 9, 1999, the shareholders
approved an amendment to the Company's Restated Certificate of Incorporation
providing the Company the authority to issue up to 10,000,000 shares of
preferred stock and, with respect to such shares, to establish among other
things, the price and the rate and nature of dividends, the terms and conditions
on which shares may be redeemed, the terms and conditions for conversion or
exchange into any other class or series of the stock and the voting rights.
Decrease In The Number Of Shares Of Authorized Common Stock. IFX's Restated
Certificate of Incorporation authorized the issuance of 150,000,000 shares of
Common Stock, $.02 par value. As of September 30, 1999, 8,438,803 shares of
Common Stock were issued and outstanding and as of June 30, 1999, approximately
6,500,000 shares of Common Stock were reserved for issuance by the Company upon
the exercise of options and warrants. On November 9, 1999, the shareholders
approved an amendment to the Restated Certificate of Incorporation providing
that the authorized number of shares of Common Stock be decreased from
150,000,000 shares to 50,000,000 shares.
NOTE 6. GEOGRAPHIC INFORMATION
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information". The new standard changes the information the Company reports about
its operating segments.
The Company is structured primarily around the geographic markets it serves
and operates three reportable segments in Chile, Mexico and Venezuela. All of
the segments provide internet connectivity services. The accounting policies of
the segments are the same as those described in the Significant Accounting
Policies footnote. The Company evaluates performance based on profit or loss
from operations before income taxes excluding interest income and expenses,
equity income, and gains or losses from securities and other investments.
The Company does not derive more than 10% of its revenues from any
individual customers.
Selected unaudited financial information for the three months ended
September 30, 1999 by segment is presented below:
<TABLE>
<CAPTION>
United States Chile Mexico Venezuela Other Total
<S> <C> <C> <C> <C> <C> <C>
Revenues.... $ $ 410,700 $ 268,900 $ 262,600 $ 276,400 $ 1,218,600
Income (loss)
from continuing
operations
before taxes.. (2,645,100) (593,300) (199,300) (103,300) (1,466,900) (5,007,900)
</TABLE>
Information by product lines is presented on the Condensed Consolidated
Statement of Operations.
9
<PAGE>
NOTE 7. Cash & Cash Equivalents
Cash and cash equivalents includes cash and investments of less than three
months in duration.
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Period Ended September 30, 1999.
The results shown herein are not necessarily representative of the results
that may be expected in any future period. A discussion of certain risk factors
that could cause future results to differ materially from the results reported
herein is filed herewith as Exhibit 99.1 to this Form 10-Q.
OVERVIEW
The following discussion should be read in conjunction with its
Consolidated Financial Statements and notes that follow it and with its audited
consolidated financial statements, notes thereto, and management's discussion
and analysis for the year ended June 30, 1999, included in its annual report
filed on Form 10-K for such period. This discussion and analysis reflects the
adjustments made to segregate the discontinued operations ("discontinued
operations") that resulted from (i) the sale of the Company's brokerage assets
in July 1996 to E.D. & F. Man International, Inc., a unit of E.D. & F. Man
Group, plc, a London-based international trading and finance conglomerate, and
(ii) from the divesture in June 1999 of its 50.1% interest in IFX Ltd.
Discontinued operations are shown under a separate line item on the Income
Statement and Balance Sheet for fiscal years 2000 and 1999.
Due to the discontinued operations, IFX's primary source of revenues
changed from trading revenues and from foreign exchange operations to subscriber
fees from Internet operations. IFX's revenues from 2000 and 1999 related to
discontinued operations are shown as "Income from Discontinued Operations, net
of income taxes." The revenues from the ISP acquisitions are accounted from the
date of purchase.
Due to the discontinued operations, IFX's expenses changed from consisting
mostly of interest, commissions and other related brokerage costs to local dial-
up lines, local Internet connections, and depreciation and amortization
expenses. The expenses from the ISP acquisitions are accounted from the date of
purchase.
GENERAL
IFX is a pan-regional Internet Service Provider, or ISP, in Latin America.
The Company's focus is on serving individuals and small businesses. The
Company's primary service is dial-up Internet access, which IFX offers through
its Unete service, in various price and usage plans designed to meet the needs
of its subscribers. Our business services include dedicated phone lines, web
hosting, web page design, and domain name registration.
IFX offers subscribers complete Internet access in English, Spanish, and
Portuguese, with a user-friendly and easy to install software. The software
contains a set of popular Internet applications including electronic mail, World
Wide Web access, File Transfer Protocol and Internet Relay Chat. Through its
infrastructure of IFX owned subsidiaries and third-party providers, its
subscribers are able to access the Internet in nine countries in Latin America,
and in many major cities in the United States via a local telephone call and
with no roaming fees. As of October 15, 1999, the Company had approximately
32,000 subscribers.
Over the past year, IFX has established a regional presence by acquiring
the stock or assets of established independent ISPs throughout Latin America.
The Company intends to continue its strategy of acquiring ISPs in order to
deepen and broaden its market presence in Latin America. The Company hopes that
it will attain economies of scale (as the number of subscribers increases, the
costs and expenses per subscriber decrease) in selling, general and
administrative costs, particularly in the areas of numbers of employees and
salaries, operating leases, and marketing expenses. However, there can be no
assurance that the Company will achieve these anticipated cost reductions. In
addition to providing Internet access service, the Company hopes to expand its
Latin American Internet offerings to include content and e-commerce.
Prior to July 1996, the primary business of IFX was providing commodity
10
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brokerage services. On July 1, 1996, IFX sold substantially all of its brokerage
assets (other than certain assets of its majority-owned U.K. subsidiary) to E.D.
& F. Man International, Inc., a unit of E.D. & F. Man Group, plc, a London-based
international trading and finance conglomerate, for a purchase price consisting
of cash earn-out payments based upon the sold business's profitability (as
defined in the sale agreement) during the sixty-six months following the sale.
Since July 1996, IFX's revenues have consisted primarily of earn-out payments
from such asset sale, interest income and income from operations of the
Company's former majority-owned British subsidiary, IFX Ltd., which conducts
foreign exchange business as a registrant of the British Securities and Futures
Authority. In June 1999, IFX divested its 50.1% interest in IFX Ltd. in exchange
for approximately $2.45 million in cash and a note receivable, and a redeemable
preference share entitling IFX to quarterly payments equal to approximately 30%
of the net profits (as specifically defined) of IFX Ltd. through June 30, 2002.
During the quarter ended September 30, 1999 the Company completed the
following acquisitions and investments:
<TABLE>
<CAPTION>
Date Acquisition Or Investment Business Country
- ---- ------------------------- -------- -------
July 1999 SDM Net ISP Mexico
Interactiva ISP Chile
- ------------------------------------------------------------------
<S> <C> <C> <C>
August 1999 Intermedia ISP Chile
E-Net ISP Brazil
Vianet ISP El Salvador
ITS Network ISP Honduras
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 30, 1999, cash provided by continuing
and discontinued operations was approximately $.8 million compared to cash
provided by continuing and discontinued operations of $.9 million for the same
period in 1998, a decrease of approximately 11%. The majority of cash for the
quarter ended September 30, 1999, was used by the Company's continuing
investments and general operating expenses in the Internet operations. In
general, the Company invests cash not needed for operations at any of its
subsidiaries in short-term investments such as U.S. Government obligations and
overnight time deposits which are classified as cash equivalents. As of
September 30, 1999, the Company held approximately $7.5 million in cash and cash
equivalents.
For the three months ended September 30, 1999, cash used in investment
activities was approximately $1.9 million compared to cash provided in
investment activities of $0.1 million for the same period in 1998. The increase
was primarily due to the purchases of equipment.
For the three months ended September 30, 1999, cash provided by financing
activities was approximately $3.2 million compared to no financing activities in
the same period in 1998. The increase was due to the $3.0 million of stock that
was issued for the ITI Agreement.
Stockholders' equity at September 30, 1999 was approximately $18.2 million
as compared with $16.1 million at June 30, 1999.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 1999 COMPARED TO 1998
Revenues. In the three months ended September 30, 1999, IFX derived
$910,600, or 75% of the total continuing revenues from subscriptions from
individuals for dial-up access to the Internet. Monthly subscription fees vary
by billing plan. With the current pricing plans, customers have several choices
including unlimited local, unlimited pan-regional and limited local plans.
In addition, in the three months ended September 30, 1999, IFX derived
$179,400 or 15% of the total continuing revenues from full-time dedicated access
connections to the Internet. Full-time dedicated lines offer small businesses
direct and uninterrupted connections to the Internet without the need to dial
any number.
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<PAGE>
The remaining $128,600 or 10% of the total continuing revenues were derived
from certain small business services which include web-hosting, web design, and
other value-added services such as domain name registration, and from the sale
of such items as modems and computer cameras related to promotions. IFX's web-
hosting services allow a business or individual to post information on the World
Wide Web through IFX's servers. IFX's Web design services offer Internet site
development services for small businesses.
Revenues for three months ended September 30, 1998 from continuing
operations are $0, since the Company had not yet been involved in the Internet
business. Revenues for the period ended September 30, 1998 are shown in the
income statement as discontinued operations.
Costs of Revenues. IFX's cost of revenues include all the costs that are
primarily related to the number of subscribers. The primary costs are the local
Internet connection fees paid to the telecommunication companies in each country
and the subscriber start-up expenses. The telecommunication expenses include the
costs of providing its subscribers with local telephone dialing numbers to its
POPs, the costs related to third-party POPs, and the costs of the connections of
IFX's hubs to the Internet backbone. Start-up expenses include the cost of
distributing the compact disk with its starter kit software. Cost of revenues
were $1,076,600 and $0 for the three months ended September 30, 1999 and
September 30, 1998, respectively.
General and Administrative Expenses. General and administrative costs are
primarily for salaries, legal, accounting and consulting fees, and advertising,
market analysis, and trade show expenses related to the promotions of its ISP
service. General and administrative expenses were $4,390,600 and $150,300 for
the three months ended September 30, 1999 and September 30, 1998, respectively.
The increase was due to the expenses of growth the Company experienced as it
entered the Internet service business in November of 1998.
IFX believes that it is necessary to purchase or install POPs in each major
country in Latin America. As IFX continues with that expansion into new markets,
both costs of sales and selling, general and administrative expenses will
increase. IFX expects that these costs will have a short-term negative impact on
its net income. In countries where the Company does not want to establish a
presence, but wants its subscribers to have access to the Internet, it will use
third-party POPs.
Depreciation and amortization. Depreciation and amortization are related to
the depreciation of fixed assets and the amortization of the acquired customer
base from other ISPs. IFX depreciates its assets based on estimated useful lifes
that range from three to five years. IFX amortizes purchased customer bases
using the straight-line method over a period of three years, commencing when the
purchase is completed. This amortization has a negative effect on net income.
Depreciation and amortization expense was $852,400 and $0 for the three months
ended September 30, 1999 and September 30, 1998, respectively.
The Company will continue to invest heavily in purchases of computer
equipment and acquisitions in Latin America, which will increase its
depreciation and amortization costs. These costs should have a short-term
negative impact on net income, but the Company believes that these increased
costs should be offset by anticipated increases in revenue attributable to
overall subscriber growth. However, there can be no assurance that the Company
will be able to build, increase or maintain its subscriber base in a given
market to the extent necessary to generate sufficient revenues to offset these
expenses.
Interest Income. The interest income is mostly derived from investment in
short-term government notes. Interest income was $85,000 and $93,400 for the
three months ended September 30, 1999 and September 30, 1998, respectively.
Other Income and Gains from Discontinued Operations. In the three months
ended September 30, 1999, the Company earned approximately $442,300 net of taxes
and other expenses of earn-out payments from the 1996 sale of its brokerage
asset to E.D. & F. Man International, Inc., and from the 1999 sale of IFX Ltd.
All the proceeds were invested in the Internet operations in Latin America.
12
<PAGE>
Income tax provision. For the three months ended September 30, 1999, the
Company recorded a tax benefit of approximately $876,400 from its continuing
operations. The effective tax rate for the three months ended September 30, 1999
was 17.5%. Including the Company's discontinued operations, the net tax
provision was $638,200.
Net income (loss) and income (loss) per share. As a result of the factors
discussed above, IFX's loss from continuing operations for the three months
ended September 30, 1999 was approximately $4.1 million, or $(0.56) per share,
compared to a net loss of $0.1 million, or $(0.02) per share, for the three
months ended September 30, 1998. Including discontinued operations, the Company
recorded a net loss of $3.7 million, or $(0.50) per share, compared to a net
income of $0.8 million, or $0.13 per share, for the three months ended September
30, 1998.
CREDIT AGREEMENTS
In July 1999, the Company entered into an $500,000 lease agreement with
Softech Financial, a division of EAB Leasing Corp., to provide the financing for
the Company's implementation of Portal software(R). Under the terms of the
agreement, Portal will develop a consolidated billing and accounts receivable
system that should allow the Company to provide invoicing services to its
customers across Latin America.
In August 1999, the Company entered into an agreement with Lucent
Technologies Inc., providing the Company with the option to purchase up to $10
million of Lucent equipment. Under the agreement, Lucent will provide the
Company with up to $10 million in networking equipment and financing to upgrade
and expand the Company's Internet operations, but the Company is under no
obligation to purchase equipment from Lucent. A copy of the agreement is filed
herewith as Exhibit 11.2.
In August 1999, the Company signed a five-year lease for new space in
Hallandale, Florida, to commence October 1, 1999. This lease provides for
aggregate payments totaling approximately $535,900 over the next 5 years.
YEAR 2000 COMPLIANCE
IFX is aware of the "Year 2000" problem, which relates to whether computer
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information will generate
wrong data and could fail. The Year 2000 problem is pervasive and complex, as
virtually every company's computer operations will potentially be affected in
some way. IFX has identified two main areas of Y2K risk:
1. Internal computer systems or embedded chips could be disrupted or
fail, causing an interruption or decrease in productivity in its
operations; and
2. Computer systems or embedded chips of third parties including, without
limitation, financial institutions, suppliers, vendors, landlords,
customers, international suppliers of telecommunications services and
others, could be disrupted or fail, causing an interruption or
decrease in its ability to continue its operations. This risk is
particularly acute in Latin America, where many older computer systems
are still in use.
State of Readiness
- ------------------
IFX is currently engaged in a process to evaluate its internal status with
respect to the Year 2000 issue, utilizing certain employees in its evaluation of
possible Year 2000 problems. The costs and expenses the Company has incurred in
the evaluation have not been material. Most of its PCs, Laptops, Servers,
Routers and any other computer equipment are Y2K Compliant. To date, IFX has not
discovered any major Year 2000 issues in its internal operations.
Concurrently with the analysis of its internal systems, IFX has surveyed
third-party entities with which it transacts significant business, including
critical vendors and financial institutions, for Year 2000 compliance. With
respect
13
<PAGE>
to its most critical vendors, IFX has evaluated the Year 2000 preparedness of
its telecommunications providers, on which it is reliant for the network
services crucial to Internet connectivity and web hosting services. It is
actively working to mitigate any potential impact by maintaining, when possible,
diverse providers for such network services.
Risks
- -----
IFX can give no assurance that all Year 2000 issues were discovered during
the assessment or that it will not discover additional Year 2000 issues that
could have a material adverse effect. In addition, IFX faces Year 2000 risks
with respect to the acquisitions it makes, especially in Latin America, where
many of the computer systems are older and where Year 2000 preparedness may not
be adequate. Failure of any one provider may have a material adverse impact on
Company operations. At this time, IFX cannot estimate the effect, if any, that
non-compliant systems at these entities could have on it, and IFX can give no
assurance that the impact, if any, will not be material. If any of its material
third parties are not Y2K ready and their non-compliance causes a material
disruption to any of their respective businesses, its business could be
materially adversely affected and the Company could suffer a large reduction of
its revenue due to cancellations from its subscribers. Disruptions could
include, among other things:
- the failure of a material third party's business;
- a loss of power to IFX's facilities;
- a loss of voice and data connections;
- the loss of the e-mail system;
- a subscriber's loss of power and/or telecommunication lines;
- a financial institution's inability to take and transfer funds;
- an interruption in delivery of supplies from vendors; and
- other interruptions in the normal course of its operations, the nature
and extent of which the Company cannot foresee.
The Company will continue to evaluate the nature of these risks, but at
this time the Company is unable to determine the probability that any such risk
will occur, or if it does occur, what the nature, length or other effects, if
any, of such a risk may have on it. If any of its material third parties
experience significant failures in their computer systems or operations due to
Y2K non-compliance, it could affect its ability to process transactions or
otherwise engage in similar normal business activities. For example, IFX and its
customers who communicate internationally will be dependent upon the Y2K-
readiness of many non-U.S. providers of telecommunication services and their
vendors and suppliers. If these providers and others are not Y2K ready, IFX and
its customers will not be able to send and receive data and other electronic
transmissions, which would have a material adverse effect on its revenues and
business and that of its customers.
Contingency Plans
- -----------------
In some cases, the Company has been able to find different vendors for a
service. However, most telecommunication and power companies providers in Latin
America are government-owned monopolies, preventing the Company from finding
alternative suppliers for those services. Furthermore, the Company cannot be
assured that the statements provided by those third party providers regarding
Y2K are accurate.
14
<PAGE>
Item 3. - Quantitative and Qualitative Disclosures about Market Risk
The Company's continuing operations are focused primarily in Latin America,
subjecting the Company to certain political, currency, economic and commercial
risks and uncertainty not typically found in the U.S. The Company's exposure to
market risk is directly related to its role as a Latin American ISP. The
Company's primary market risk exposure relates to foreign exchange rate risk.
Foreign exchange rate risk arises from the possibility that changes in foreign
currency exchange rates will adversely impact the value of the Company's assets,
liabilities and/or equity. When the Company operates in a foreign country, the
value of the local currency will probably fluctuate, especially in Latin
America. This fluctuation can cause the Company to gain or lose on the
translation to US Dollars.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PRECEDINGS
The Company is a defendant in, and may be threatened with, various legal
proceedings arising from its regular business activities. Management, after
consultation with legal counsel, is of the opinion that the ultimate liability,
if any, resulting from any pending action or proceedings will not have a
material effect on the financial position or results of operations of the
Company.
On August 23, 1999, a lawsuit related to the Company's discontinued
operations was filed in the Circuit Court of Cook County naming Index and two
individuals as defendants (Craig Bordon v. Sean S. Mayo, et al., 99L-09368). The
complaint alleges breach of contract and damages "in excess of" $50,000. The
Company has not yet been served with the complaint. Based upon the allegations
as set forth in the complaint, the Company believes that the claim is without
merit.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
11.2 Lucent Technologies Agreement
27 Financial Data Schedule (EDGAR only)
99.1 Risk Factors
(B) REPORTS ON FORM 8-K
On October 6, 1999, IFX Corporation (the "Company") filed a Current
Report on Form 8-K that contained certain exhibits with respect to its
acquisition, through its wholly owned subsidiary Unete.com do Brasil S/C
Ltda, of all the issued and outstanding ownership interests (quotas) of
Conex Brasil S.A, W3 Informatica Ltda, K3 Informatica Ltda, and Conex
Canoas Ltda., referred to collectively herein as the "Conex Group", for
aggregate consideration (including commissions) of approximately $5.2
million, of which approximately $1.8 million was paid or is payable in
cash, approximately $3.3 million was paid or is payable by issuing shares
of the Company's common stock and assuming liabilities in the approximate
amount of $0.1 million. The purchase was determined through arms' length
negotiations with the sellers of the Conex Group, which are unrelated third
parties with respect to the Company.
On July 1, 1999, IFX Corporation filed a Current Report on Form 8-K to
report that on June 30, 1999, the Company sold all of its shares of capital
stock of IFX Ltd., a British company, to The Park Trust. Prior to the sale,
IFX Corporation owned 50.1% and The Park Trust owned 49.9% of IFX Ltd.'s
outstanding capital stock. IFX Ltd. provides institutional brokerage and
foreign exchange services to clients in the foreign exchange and futures
business. As consideration for its shares of IFX Ltd., The Park Trust paid
U.S.$1,950,000 to IFX Corporation and agreed to pay IFX Corporation the sum
of U.S.$500,000 (plus interest at a rate of prime plus three-percent) on or
before June 30, 2000. The parties intended that the consideration paid to
IFX Corporation for its shares of IFX Ltd. would equal approximately one-
half of the net book value of IFX Ltd. as of June 30, 1999. The
consideration payable to IFX Corporation is subject to adjustment if and to
the extent that, on or before the third anniversary of the closing date,
(i) the auditors of IFX Ltd. determine that the net book value and/or the
net profits of IFX Ltd. upon which the consideration paid to IFX
Corporation was calculated were incorrect, or (ii) The Park Trust sells any
of its shares of IFX Ltd. capital stock to a third party at a price per
share that is greater than the price per share paid by The Park Trust to
IFX Corporation.
16
<PAGE>
On July 1, 1999, IFX Corporation filed a Current Report on Form 8-K to
report that on June 28, 1999, the registrant dismissed Arthur Andersen LLP
as its independent auditors and appointed Ernst & Young LLP as its
independent auditors for the fiscal year ended June 30, 1999. The decision
to dismiss Arthur Andersen LLP and to retain Ernst & Young LLP was
recommended by the registrant's audit committee and approved by the
registrant's Board of Directors.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IFX CORPORATION
--------------------------
(Registrant)
Dated: November 15, 1999 By: /S/ JOEL EIDELSTEIN
-------------------------
Joel Eidelstein
President
Dated: November 15, 1999 By: /S/ JOSE LEIMAN
-------------------------
Jose Leiman
Chief Financial Officer
18
<PAGE>
EXHIBIT 11.2
================================================
MASTER
CONDITIONAL SALE AGREEMENT
between
Lucent Technologies Inc., InterNetworking Systems
and
Communications Equipment Leasing Corp.
================================================
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS............................................................ 2
2. SALE OF EQUIPMENT...................................................... 5
2.1 Delivery and Sale................................................. 5
2.2 Shipping Documents................................................ 5
3. PURCHASE PRICE; PAYMENT AND PREPAYMENT................................. 6
3.1 Purchase Price.................................................... 6
3.2 Payments of Purchase Price Balance................................ 6
3.3 Overdue Amounts................................................... 6
3.4 Payments.......................................................... 6
3.5 Prepayment........................................................ 6
3.6 Purchaser's Obligations Unconditional............................. 7
3.7 Purchase Price Balance............................................ 8
4. TITLE TO EQUIPMENT; SELLER COVENANTS................................... 8
4.1 Retention of Title by Seller; Grant of Security Interest......... 8
4.2 Transfer of Title................................................ 9
4.3 Application of Payments.......................................... 10
4.4 Seller Covenants................................................. 10
5. CONDITIONS PRECEDENT AND CONDITIONS SUBSEQUENT........................ 10
5.1 Conditions Precedent to Seller's Conditional Sale................ 10
5.2 Conditions Precedent to Lease of Equipment....................... 11
6. REPRESENTATIONS AND WARRANTIES........................................ 12
6.1 Warranties of Seller............................................. 12
6.2 Representations and Warranties of Purchaser...................... 13
7. COVENANTS............................................................. 14
7.1 Reports, Etc..................................................... 14
7.2 Preservation of Corporate Existence.............................. 15
7.3 Maintenance...................................................... 15
8. POSSESSION AND USE OF THE EQUIPMENT................................... 15
8.1 Use of the Equipment............................................. 15
8.2 Transfer of Title or Possession.................................. 15
8.3 Liens............................................................ 15
-i-
<PAGE>
9. TAXES 16
10. INSURANCE............................................................. 16
11. RISK OF LOSS.......................................................... 16
12. INDEMNIFICATION....................................................... 17
13. EVENTS OF DEFAULT..................................................... 17
14. REMEDIES.............................................................. 18
15. RETURN OF EQUIPMENT................................................... 19
16. IDENTIFICATION........................................................ 19
17. NOTICES............................................................... 19
18. GENERAL............................................................... 20
18.1 Expenses........................................................ 20
18.2 Relationship Of The Parties.................................... 21
18.3 Entire Agreement, Merger And Modification, No Waivers,
Severability.................................................. 21
18.4 Limitation Of Liability......................................... 21
18.5 Interpretation.................................................. 21
18.6 Submission to Jurisdiction...................................... 22
18.7 Immunity........................................................ 22
18.8 Assignment...................................................... 22
18.9 Further Acts.................................................... 22
18.10 No Waiver of Rights............................................. 22
18.11 No Oral Modification; Oral Agreements........................... 23
18.12 Survival........................................................ 23
18.13 Successors and Assigns.......................................... 23
18.14 Counterparts.................................................... 23
18.15 Confidentiality................................................. 23
-ii-
<PAGE>
MASTER CONDITIONAL SALE AGREEMENT
THIS MASTER CONDITIONAL SALE AGREEMENT dated as of August ___, 1999, is entered
into by and between Lucent Technologies Inc., InterNetworking Services (together
with its successors and assigns, "Seller"), a corporation organized and existing
under the laws of the State of Delaware, U.S.A., and Communications Equipment
Leasing Corp. (together with its permitted successors and assigns, "Purchaser"),
a corporation organized and existing under the laws of the British Virgin
Islands.
RECITALS
WHEREAS, the Seller is in the business of, among other things, selling
telecommunications equipment;
WHEREAS, the Purchaser is an Affiliate of various operating companies that,
among other businesses, provide telecommunications services;
WHEREAS, the Purchaser and the Seller desire to structure a master
arrangement whereby, from time to time, the Purchaser will purchase
telecommunications equipment from the Seller and Seller will sell such equipment
to Purchaser on a conditional sale basis;
WHEREAS, from time to time Purchaser may lease such equipment, on an
operating lease basis, to certain of its Affiliates in North, Central and South
America (the "Region");
WHEREAS, CELC/IFX, LLC owns all of the outstanding shares of the Purchaser
and has agreed, in favor of the Seller, to guarantee the obligations of the
Purchaser hereunder, and in connection herewith, and to provide a charge over
shares of the Purchaser to the Seller to secure its obligations under such
guarantee; and
WHEREAS, the ultimate parent of the Purchaser, IFX Corporation has agreed,
in favor of the Seller, to guarantee the obligations of the Purchaser hereunder,
and in connection herewith; and
WHEREAS, among other conditions, it is a condition precedent to the entry
by the Seller into this Agreement that CELC/IFX, LLC and IFX Corporation deliver
such guarantees and CELC/IFC, LLC delivers such charge over shares;
NOW THEREFORE, in consideration of the foregoing, the promises set forth
herein and other good and valuable consideration, the receipt and sufficiency of
which hereby are acknowledged, the Seller and the Purchaser agree as follows:
AGREEMENT
<PAGE>
1. DEFINITIONS
Unless the context otherwise requires, the following terms shall have the
following meanings for all purposes of this Agreement and shall apply equally to
the singular and the plural forms of the terms herein defined:
"Affiliate" with respect to any Person, means any other Person, at the time such
determination is made, directly or indirectly controlling, controlled by or
under common control with such Person. For the purposes of this definition,
"control" (including "controlled by" and "under common control with") means, at
the time such determination is made, the power, directly or indirectly, to
direct or cause the direction of the management and policies of such Person
whether through the ownership of voting securities or by contract or otherwise.
"Agreement", "this Agreement", "herein", "hereunder", "hereof" or other words of
like import mean this Conditional Sale Agreement, as it may hereafter be
amended, supplemented or modified from time to time.
"Bill of Sale" means, with respect to any item of Equipment, a bill of sale to
be executed by Seller in favor of Purchaser in respect of such Equipment, which
bill of sale shall be substantially in the form of Exhibit A hereto.
"Business Day" means any day other than a Saturday, Sunday or other day on which
commercial banking institutions in New York, New York, or Alameda, California
are authorized or required by law to close.
"Charge Over Shares" means the charge over shares governed by the laws of the
British Virgin Islands provided by CELC/IFX, LLC with respect to the shares of
the Purchaser to the Seller to secure its obligations under the Guarantee in
favor of Seller by CELC/IFX, LLC.
"Claim" means any and all liabilities, losses, damages, actions, suits, demands,
claims of any kind and nature (including, without limitation, claims relating to
environmental discharge, cleanup or compliance), and all costs and expenses
whatsoever to the extent they may be actually incurred or suffered by an
Indemnified Person in connection therewith (including, without limitation,
reasonable attorneys' fees and expenses), fines, penalties (and other charges of
applicable governmental authorities), licensing fees relating to any item of
Equipment, damage to or loss of use of property (including, without limitation,
consequential or special damages to third parties or damages to Purchaser's
property), or bodily injury to or death of any person (including, without
limitation, any agent or employee of Purchaser).
"Collateral" has the meaning specified in Section 4.1.
"Conditional Sale Documents" means this Agreement, each Shipping Document, the
Note, each Lease, each Lease Assignment, each Guarantee, the Charge Over Shares
and any other supplement, document, instrument, certificate, amendment,
modification, assignment or agreement related to, contemplated by or executed in
connection with any of the foregoing.
PAGE 2
<PAGE>
"Default" means any event or condition that, with the giving of notice or the
passage of time, or both, would constitute an Event of Default.
"Dollars" or "$" means the legal currency of the United States of America.
"Equipment" means any or all of the equipment, from time to time, sold by the
Seller to the Purchaser and identified in each Shipping Document delivered by
Seller in accordance with the provisions hereof.
"Event of Default" has the meaning specified in Section 14.
"Event of Loss" means, in respect of any item of Equipment, the occurrence of
any event or circumstance that has resulted (i) in such item of Equipment being
lost, stolen, destroyed or damaged beyond economic repair, (ii) in the
condemnation, confiscation, seizure or requisition of title to or use of such
item of Equipment or (iii) in an insurance settlement on the basis of a total
loss or compromised total loss of such item of Equipment.
"Governmental Approval" means all licenses, permits, consents and approvals of,
the giving of notices to, and the registration, recording and filing of all
documents with, and the taking of all other actions in respect of any
governmental or quasi-governmental authority (including, without limitation, any
court or judicative body) in the United States, any state or municipality
therein or in the British Virgin Islands or any other applicable country or
jurisdiction.
"Guarantee" means the Guarantee in favor of Seller by each Guarantor
substantially in the form of Exhibit C hereto.
"Guarantor" means each of IFX Corporation, a Delaware corporation, IFX/EN Inc.,
a Delaware corporation, Emerging Networks, Inc., a British Virgin Islands
corporation, CELC/IFX, LLC, a Delaware limited liability company and any other
Affiliate of the Purchaser that owns, directly or indirectly, outstanding shares
of a Lessee.
"Indemnified Person" means Seller and its officers, directors, shareholders,
partners, and employees.
"Lease" means each lease entered into between the Purchaser and a Qualified
Lessee pursuant to which Equipment is leased, which lease shall be substantially
in the form of Exhibit D hereto; provided that the parties may, by mutual
agreement, modify the terms or form of such lease to address country specific
issues, including without limitation any relevant regulatory and tax issues, in
accordance with Section 8.2.
"Lien" means any mortgage, pledge, lien, charge, assignment, encumbrance, lease,
exercise of rights, security interest, claim or right of another.
"Mandatory Prepayment Event" means any of the events, conditions or
circumstances specified in Section 3.5(b).
PAGE 3
<PAGE>
"Maturity Date" means, with respect to an item of Equipment, the date that is
(i) the first day after the conclusion of the forty second (42nd) Monthly Period
in respect of such Equipment, provided that if such date is not a Business Day,
the Maturity Date shall be the last Business Day of such Monthly Period or (ii)
such earlier date to which the Maturity Date may be accelerated in accordance
with the provisions of this Agreement.
"Monthly Period" means, with respect to any Equipment, (i) initially, the period
from, and including, the first day of the calendar month following the calendar
month in which the Shipment Date for such Equipment occurs to, and including,
the last day of such calendar month and (ii) thereafter, each calendar month
prior to the Maturity Date in respect of such Equipment, provided, however, that
if the Shipment Date in respect of such Equipment occurs on or prior to the
first Business Day of a calendar month then, in respect of such Equipment,
subclause (i) of this definition shall not be applicable and the first Monthly
Period in respect of such Equipment shall commence on the first day of the
calendar month in which the Shipment Date of such Equipment occurs.
"Note" means the promissory note evidencing the payment obligations of the
Purchaser hereunder, which promissory note shall be substantially in the form of
Exhibit B hereto.
"Overdue Rate" means the per annum interest rate that equals the lesser of (i)
the maximum rate of interest permitted by applicable law and (ii) 15.75%.
"Payment Date" means, with respect to each Monthly Period, the first Business
Day of such Monthly Period.
"Payment Event" means, in respect of each item of Equipment and as determined by
the Seller, the full, final and unconditional payment by the Purchaser of the
Purchase Price in respect of such item of Equipment together with all accrued
and unpaid interest thereon and all other amounts then due and owing in respect
of such item of Equipment hereunder.
"Permitted Liens" means (a) the title and interest of Seller under this
Agreement and the rights of Seller hereunder and under the Conditional Sale
Documents and of any Qualified Lessee under a Lease, and (b) prior to the
expiration or termination of the Term, liens for Taxes, assessments or other
governmental charges or levies imposed on Purchaser or any Lessee which are not
delinquent, or which are in good faith being contested by Purchaser or such
Qualified Lessee by appropriate proceedings (and for the payment of which
adequate reserves satisfactory to Seller have been provided), so long as such
proceedings do not involve any risk of the sale, forfeiture or loss of the
Equipment, or Seller's interests with respect thereto.
"Person" means any individual, sole proprietorship, corporation, partnership,
joint venture, association, joint-stock company, trust, unincorporated
organization, institution, entity or government (national, federal, state,
provincial or local, or any agency, instrumentality, division or body thereof).
"Prepayment Value" means, in respect of any item of Equipment, an amount
calculated in respect of such Equipment in accordance with Section 3.5(a).
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"Purchase Price" means, in respect of any item of Equipment, the amount due to
the Seller for the purchase of such item of Equipment (exclusive of costs to be
paid by Purchaser in connection with the delivery of such Equipment for freight,
installation, maintenance, professional services and taxes), which amount shall
be set out in the invoice issued by the Seller in respect of such item of
Equipment.
"Purchase Price Balance" means, in respect of any item of Equipment at any time,
the amount of the Purchase Price for such Equipment that has not then been paid
which amount will be determined in accordance with Section 3.7 hereof.
"Qualified Lessee" means any Person organized under the laws of a jurisdiction,
and conducting business in, the Region which is an Affiliate of the Purchaser
and a direct or indirect subsidiary of IFX Corporation.
"Shipping Documents" means, with respect to each item of Equipment, the
documents delivered by Seller in respect thereof in accordance with Section 2.2.
"Shipment Date" means, in respect of any Equipment, the date on which such
equipment is shipped by, or on behalf of, the Seller to the Purchaser (or to its
direction) which date shall be the date designated as such in a Shipping
Document.
"Standard Terms" means Seller's standard terms of sale as such terms may be
amended, modified or supplemented from time to time.
"Term" means the period from the first Shipment Date hereunder until the date on
which all obligations of Purchaser to Seller hereunder and under the other
Conditional Sale Documents shall have been satisfied.
2. SALE OF EQUIPMENT
2.1 Delivery and Sale. From time to time on any Business Day on or prior
to June 30, 2000, Seller will sell, and Purchaser will purchase, Equipment
subject to the terms of this Agreement and to the Standard Terms provided that
at no time may the aggregate Purchase Price in respect of all Equipment sold and
purchased hereunder exceed $10,000,000. On each Shipment Date, the Seller shall
be deemed to sell, and the Purchaser shall be deemed to purchase, the relevant
Equipment subject to the terms of this Agreement and to the Standard Terms. In
the event of any inconsistency between the provisions of this Agreement and the
Standard Terms, the provisions of this Agreement will prevail.
2.2 Shipping Documents. Concurrently with the shipment of each item of
Equipment to Purchaser, Seller shall deliver to the Purchaser shipping documents
that identify such Equipment and the Shipping Date for such Equipment. The
information set forth in such shipping documents shall be binding on the
Purchaser absent manifest error.
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3. PURCHASE PRICE; PAYMENT AND PREPAYMENT
3.1 Purchase Price. In consideration of the shipment by Seller of any
Equipment, Purchaser hereby agrees to pay the Purchase Price for such Equipment,
together with interest on the Purchase Price Balance for such Equipment from
time to time, on the dates and in the amounts determined in accordance with
Section 3.2. The interest with respect to the Purchase Price Balance of each
item of Equipment shall accrue (x) from, and including, the first day of the
calendar month following the calendar month in which the Shipment Date in
respect of such Equipment occurs (y) to, but excluding, the Maturity Date for
such Equipment.
3.2 Payments of Purchase Price Balance. On each Payment Date in respect of
each Monthly Period for each item of Equipment, the Purchaser shall pay to
Seller, an amount that equals the product of (i) the Purchase Price for such
Equipment and (ii) the factor set forth as the payment factor in Schedule I
hereto opposite such Monthly Period. The Purchaser shall also pay the
outstanding Purchase Price Balance in respect of any Equipment in full on the
Maturity Date in respect of such Equipment together with any other amounts due
in respect of such Equipment hereunder.
3.3 Overdue Amounts. If (i) any amount payable by Purchaser pursuant to
Section 3.2 is not paid in full within ten (10) days of the due date therefor or
(ii) any other amount payable by the Purchaser under this Agreement (including,
without limitation, Section 13) or any other Conditional Sale Document is not
paid in full when due, then Purchaser shall pay to Seller, to the extent
permitted by law, an additional amount equal to interest at the Overdue Rate on
the amount not paid for each day during the period from, and including the due
date to, but excluding, the date on which such amount is paid in full.
3.4 Payments. All payments to Seller hereunder shall be made, in Dollars,
by wire transfer in immediately available funds to Seller c/o the account of
Ascend Communications, Inc. at Wells Fargo Bank, Oakland Main Office, Oakland,
California, Account No. 52298073, ABA No.: 011 000 390, or to such other
person(s) or account(s) as Seller may designate from time to time.
3.5 Prepayment.
(a) Optional Prepayment. So long as no Event of Default shall have
occurred and be continuing hereunder, the Purchaser shall have the right, upon
giving at least thirty (30) days' prior written notice to Seller, to prepay the
Purchase Price Balance which is then outstanding with respect to all or any
items of Equipment provided that any prepayment in respect of less than all
items of Equipment shall be in a minimum amount of $500,000. Such notice shall
specify the amount and the date of such prepayment (which date shall be a
Payment Date) and, in the case of a prepayment in respect of less than all items
of Equipment, the Equipment to which such prepayment relates. Once given, any
such notice shall be irrevocable. On the date specified for prepayment, the
Purchaser shall pay to the Seller the amounts payable by the Purchaser on such
Payment Date pursuant to Section 3.2, the Prepayment Value of the Equipment in
respect of which the Purchase Price Balance is being prepaid and any other
amounts payable in respect of such Equipment hereunder. The Prepayment Value in
respect of any item of Equipment shall be the amount determined by the Seller to
equal the then present
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value of the amounts that would have been payable by the Purchaser under Section
3.2 with respect to such Equipment discounted at a rate equal to the per annum
yield to maturity for United States Treasury obligations (as published in the
Wall Street Journal) as of the prepayment date with a like term maturity to the
weighted average life of such remaining payments plus 150 (one hundred fifty)
basis points.
(b) Mandatory Prepayments. Purchaser shall immediately prepay the
aggregate Purchase Price Balance of all Equipment which is then outstanding, all
unpaid interest determined by Seller to have accrued on such amount, the
Prepayment Value in respect of such Equipment and all other amounts outstanding
hereunder, under the Note and under the other Conditional Sale Documents within
five (5) Business Days following receipt of notice from Seller (stating in
reasonable detail the basis for such notice), that this Agreement or any other
Conditional Sale Document has become, or is determined to be, illegal, invalid
or unenforceable, or for any other reason does not constitute a valid
reservation of title in the Equipment in favor of Seller, or is not effective to
continue a validly perfected first priority security interest, as the case may
be, in favor of Seller in respect of all of the Collateral, or Purchaser or any
Affiliate of Purchaser takes any action, directly or indirectly, to challenge
the legality, validity or binding effect of this Agreement, or any other
Conditional Sale Document provided that Purchaser shall not be required to make
any payment of Prepayment Value if prepayment under this Section 3.5(b) results
from facts or circumstances not within the control of, or caused by, Purchaser.
3.6 Purchaser's Obligations Unconditional. Purchaser's obligation to pay
the full amount of the Purchase Price and interest thereon for the Equipment and
all other amounts payable to Seller hereunder, under the Note and under the
other Conditional Sale Documents (each, a "Payment") shall be absolute and
unconditional under any and all circumstances, shall not be subject to notice or
demand unless otherwise provided herein, and shall not be affected by any
circumstance of any character, including, without limitation: (a) any setoff,
counterclaim, deduction, recoupment, abatement, suspension, deferment,
diminution, proration, defense or other right which Purchaser may have against
Seller or any other Person for any reason whatsoever, including any claim of
Purchaser against Seller or any other Person; (b) any defect in the title,
condition, design, operation or fitness for use, or any damage to, or loss or
destruction of, or any Lien upon the Equipment or the interruption or cessation
or restriction in the use or possession thereof by Purchaser for any reason
whatsoever; (c) any condemnation, expropriation, requisition or other taking of
the Equipment; (d) any bankruptcy, insolvency, reorganization, composition,
adjustment, dissolution, liquidation or other like proceedings by or against
Purchaser, Seller or any other Person; (e) any change, extension, waiver,
indulgence or other act or omission in respect of any obligation or liability of
Purchaser or Seller except as otherwise expressly provided thereby; (f) any
failure by Purchaser or any Affiliate to obtain any anticipated tax allowances
or other tax benefits in the United States or elsewhere; or (g) any other
circumstance, happening or event whatsoever, whether or not similar to the
foregoing and whether or not Purchaser or Seller shall have had any knowledge,
actual or otherwise, of any of the foregoing. If for any reason whatsoever this
Agreement shall be terminated in whole or in part by operation of law or
otherwise, except as specifically provided herein, Purchaser nonetheless agrees
to pay to Seller an amount equal to the aggregate Purchase Price Balance of all
Equipment at the time of payment, plus interest accrued to the date of payment,
the Prepayment Value in respect of such Equipment and all other amounts payable
hereunder and
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under any other Conditional Sale Document, and, upon such payment in full,
Seller shall, to the extent permitted by applicable law, transfer the title to
the Equipment which has been retained by Seller hereunder to Purchaser and
otherwise comply with the provisions of Section 4.2. Except as otherwise
expressly provided hereunder, to the extent permitted by applicable law,
Purchaser waives and disclaims all rights now or hereafter conferred by statute
or otherwise to terminate, cancel, quit or surrender this Agreement or the
Equipment or to any abatement, suspension, deferment, diminution, reduction or
proration of any payment on account of any occurrence described in this
Agreement. Each payment paid by Purchaser hereunder shall be final, and
Purchaser shall not seek to recover all or any part of such payment from Seller,
or from whosoever may be entitled thereto, for any reason whatsoever.
Notwithstanding the foregoing, Purchaser shall not be required to make any
payment of Prepayment Value if payment under this Section 3.6 results from facts
or circumstances not within the control of, or caused by, Purchaser.
3.7 Purchase Price Balance. As long as no Default or Event of Default has
occurred and is continuing, the Purchase Price Balance, at any time of the
determination thereof, in respect of any item of Equipment will equal (x) the
product of (i) the Purchase Price for such Equipment and (ii) the factor set
forth as the purchase price balance factor in Schedule I hereto opposite the
then most recent Monthly Period in respect of which a Payment Date has occurred
minus (y) any other payments allocated to reduce the Purchase Price Balance of
such Equipment hereunder. Upon the occurrence, and during the continuation of,
a Default or an Event of Default, the Purchase Price Balance at such time in
respect of any item of Equipment shall be such amount as the Seller may, in good
faith, determine. The Seller shall maintain in its records a running
calculation of the Purchase Price Balance in respect of such Equipment which
calculation, absent manifest error, shall be deemed conclusively correct. The
aggregate Purchase Price Balance of any Equipment may be adjusted upward if and
to the extent that at any time all or any part of any payment theretofore
received by Seller from or on behalf of Purchaser pursuant to Section 3.2 or
3.5(a) in respect of such Equipment, or any of the other obligations of
Purchaser hereunder or under the Note or any other Conditional Sale Document, is
or must be rescinded, released, rebated or returned by Seller to Purchaser, any
Qualified Lessee or any other person for any reason whatsoever (including,
without limitation, the insolvency, bankruptcy, winding-up or reorganization of
Purchaser, any Qualified Lessee or any other person, or in respect of any
obligation owed to any Qualified Lessee under the Lease Documents), in which
case, the obligations of Purchaser, shall, for purposes of this Agreement and
the other Conditional Sale Documents, be deemed to be readjusted or reinstated
to the extent of any such recovery notwithstanding such payment, as though such
payment had not been made. The allocation of any such upward adjustment to the
Purchase Price Balance of the Equipment shall be made by Seller in the good
faith exercise of its reasonable discretion.
4. TITLE TO EQUIPMENT; SELLER COVENANTS
4.1 Retention of Title by Seller; Grant of Security Interest.
Notwithstanding the shipment of the Equipment to Purchaser and its possession
and use thereof by Purchaser or any Qualified Lessee, Seller shall and does
hereby retain, to the exclusion of Purchaser to the extent permitted by
applicable law, the full title to and property interest in the Equipment and all
proceeds thereof.
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In addition, to secure its obligations hereunder and under each other
Conditional Sale Document, Purchaser hereby grants, pledges, transfers, assigns
and sets over to Seller and hereby mortgages, charges and assigns to Seller all
of Purchaser's right, title and interest in and to the following:
(w) the Equipment;
(x) any lease of all or any part of the Equipment (including, without
limitation, any Lease), any contract assigning or otherwise transferring to
Purchaser any right, title or interest in, to or under any lease or granting to
Purchaser any security interest in any lease or in amounts due thereunder,
together with all renewals of any such lease, sublease or any such contract
executed from time to time, and all payments, including, without limitation, all
payments of rent, all insurance proceeds (other than public liability insurance
proceeds) and all other amounts due or to become due thereunder;
(y) all rents, deposits, commitment fees, option payments, reserves,
agreed value payments, issues, profits, revenues, products and other income,
together with and the right to receive any of the foregoing, relating to all or
any portion of the Equipment or any other of the foregoing, whenever acquired,
including, without limitation, the proceeds of any insurance maintained with
respect to any of the foregoing and all proceeds of any condemnation,
expropriation or requisition payable with respect to any of the foregoing and
all proceeds payable or received with respect to an Event of Loss; and
(z) all proceeds of the foregoing.
All of the property described in this Section 4.1 shall be referred to
hereinafter collectively as the "Collateral".
Subject to Section 4.2, Seller shall continue to retain such title,
interest and property in the Equipment and the other Collateral, as security for
the prompt payment when due of the Purchase Price Balance, and interest thereon,
any other sums due and owing to Seller pursuant to the terms of this Agreement
and the other Conditional Sale Documents, and the performance and observance by
Purchaser of all the agreements, covenants and provisions herein and in the
other Conditional Sale Documents.
4.2 Transfer of Title. Upon a Payment Event in respect of any item of
Equipment, and without releasing or limiting any obligations of Purchaser under
this Agreement or any other Conditional Sale Documents which by their terms
survive the Maturity Date of such Equipment or the expiration or termination of
this Agreement, Seller shall (a) release its security interest in such Equipment
and the Collateral related thereto, (b) transfer to Purchaser good and
marketable title to such Equipment, free of any Liens created by or through the
Seller, by execution and delivery to Purchaser of a Bill of Sale for the
Equipment, and (c) execute and deliver (at Purchaser's sole cost and expense)
such documents or take such actions evidencing such release of security interest
and transfer of title as Purchaser shall reasonably request including, without
limitation, the cancellation of all filings in respect of such Equipment which
reflect Seller's interest therein.
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4.3 Application of Payments.
(a) As long as no Event of Default has occurred and is continuing,
Seller shall apply any amount realized or received pursuant to the Conditional
Sale Documents promptly upon the receipt of same in the following order: first,
to payment of any interest payable pursuant to Section 3.3; second, to payment
of any Prepayment Value, cost, expense or indemnity payable hereunder; third, to
payment of any amount payable pursuant to Section 3.2; fourth, to payment of any
other amounts (other than Purchase Price Balance) payable hereunder; and fifth,
to payment of the Purchase Price Balance in respect of such Equipment.
(b) As long as an Event of Default has occurred and is continuing,
Seller shall apply amounts realized or received pursuant to the Conditional Sale
Documents, promptly upon receipt of the same, against the Purchase Price
Balance, any Prepayment Value, all interest thereon and any other amounts then
due to Seller under any Conditional Sale Document in such manner as Seller, in
its sole discretion, deems appropriate.
4.4 Seller Covenants. Seller hereby agrees for the benefit of Purchaser
that, unless an Event of Default shall have occurred and be continuing, Seller
shall not interfere with or deprive the Purchaser or applicable Qualified Lessee
of the peaceful and quiet enjoyment of the Equipment or exercise any right of a
"Lessor" under any Lease.
5. CONDITIONS PRECEDENT AND CONDITIONS SUBSEQUENT
5.1 Conditions Precedent to Seller's Conditional Sale. The obligation
of Seller to sell the Equipment to Purchaser hereunder is subject, to the extent
described below in this Section 5.1, to the satisfaction of each of the
following conditions precedent:
(a) Purchaser Documents. Seller shall have received, on or prior to
the first Shipment Date hereunder, (i) the Note duly executed by the Purchaser
and in full force and effect; (ii) the Guarantee of each of IFX Corporation,
IFX/EN, Inc., Emerging Networks, Inc. and CELC/IFX, LLC duly executed and
delivered by the Guarantor thereof and in full force and effect; and (iii) the
Charge Over Shares duly executed and delivered by CELC/IFX, LLC thereof and in
full force and effect.
(b) Certain Conditions. On each Shipment Date, the representations
and warranties of Purchaser in Section 6 will be true and correct and by its
acceptance of the Equipment Purchaser shall be deemed to have represented to
Seller that, such representations and warranties are true and correct.
(c) Proof of Corporate Action. On or prior to the first Shipment Date
hereunder, Seller shall have received copies of the corporate resolutions,
delegations and all other documents supporting and evidencing all corporate
action taken by Purchaser and each Guarantor to authorize the execution and
delivery of each Conditional Sale Document to which it is a party, certified by
the Secretary or other duly authorized officer of Purchaser or Guarantor, as the
case may be, and all other documents which Seller may reasonably request
relating to the legal existence of Purchaser and each Guarantor, the corporate
authority for and the validity of
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this Agreement and all other Conditional Sale Documents thereunder and any other
matters relevant thereto, all in form and substance reasonably satisfactory to
Seller.
(d) Insurance. On or prior to each Shipment Date, Seller shall have
received the broker's report and certificates of insurance with respect to the
insurance required to be maintained pursuant to Section 10 in respect of the
related Equipment, in each case, in form and substance satisfactory to Seller.
(e) Opinions of Counsel. On or prior to the first Shipment Date
hereunder, Seller shall have received an opinion of British Virgin Islands
counsel to the Purchaser, in form and substance reasonably satisfactory to
Seller, dated the date of this Agreement and addressed to Seller.
(f) Registration and Recording. On or prior to the first Shipment
Date hereunder, Seller shall have received evidence satisfactory to Seller that
(i) Uniform Commercial Code financing statements have been duly executed and
delivered by Purchaser, as debtor, and Seller, as secured party, and have been
duly filed in all places within the States of Illinois and Florida; (ii) all
registrations, recordings, filings or any other action with any relevant
government authority in the British Virgin Islands have been duly completed; and
(iii) all registrations, recordations, filings or any other action have been
duly completed in all other places in which such filings are necessary or
advisable, in the opinion of counsel for Seller, to establish, maintain,
preserve, perfect and protect Seller's rights, titles and interests under the
Conditional Sale Documents in and to the Collateral.
(g) Consents and Approvals. On or prior to the first Shipment Date
hereunder, all approvals and consents of any trustee or holder of any
indebtedness or obligation of Purchaser or any Guarantor which are required in
connection with any of the transactions contemplated by the Conditional Sale
Documents, shall have been duly obtained, and evidence thereof reasonably
satisfactory in form and substance to Seller, certified by duly authorized
officers of Purchaser or Guarantor, as the case may be, shall have been
delivered to Seller.
(h) Other Matters. On each Shipment Date, all other matters incident
to the purchase and conditional sale of the Equipment, the Lease Agreements
shall be reasonably satisfactory to Seller. Without limiting the generality of
the foregoing, (i) in Seller's reasonable good faith judgment (A) all action
necessary or advisable to protect or maintain Seller's rights, titles and
interests under the Conditional Sale Documents and in the Equipment have been
taken, and (B) the Conditional Sale Documents and the transactions contemplated
thereby shall comply in all material respects with legal and regulatory
requirements of the jurisdiction in which the Equipment is to be located, and
(ii) no sales, use, value added, stamp or transfer type tax (however named or
described) that has not been paid or indemnified by Purchaser shall be imposed
on Seller as a result of the Conditional Sale Documents or the transactions
contemplated thereby, including, without limitation, sales tax imposed in the
country and local jurisdiction in which the Equipment is, or is intended to be,
located.
5.2 Conditions Precedent to Lease of Equipment. The Purchaser agrees that
the lease of any Equipment to a Qualified Lessee is subject, to the extent
described below in this Section 5.2, to the satisfaction of each of the
following conditions precedent:
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(a) Lease Documents. Prior to the lease of any Equipment to a
Qualified Lessee, Seller shall have approved the form of Lease, the Lease shall
be in full force and effect and Seller shall have received (i) a chattel paper
counterpart of the Lease, (ii) any relevant Guarantee, (iii) the organizational
documents of the Qualified Lessee and (iv) originals, or copies, duly certified
in a manner satisfactory to Seller, of all documents to be delivered to
Purchaser at the closing with respect to the Lease.
(b) Registration and Recording. Prior to the lease of any Equipment
to a Qualified Lessee, Seller shall have received evidence satisfactory to
Seller that:
(i) upon the lease of such Equipment, the Seller will retain
full ownership rights to and interest in the Equipment, and the Seller will have
a first-priority security interest in the corresponding Lease and other
Collateral under applicable law of the jurisdiction in which such Equipment is
to be located; and
(ii) precautionary Uniform Commercial Code financing statements
and all registrations, recordations, filings or any other similar action with
any relevant government authority in the British Virgin Islands or any other
relevant jurisdiction have been duly executed by the relevant Qualified Lessee,
as lessee, and Purchaser, as lessor, and listing Seller as assignee, and shall
be promptly duly filed in the States of Illinois and Florida, the British Virgin
Islands or any other applicable jurisdiction, to establish, maintain, preserve,
perfect and protect Seller's rights, titles and interests in and to the relevant
Lease.
(c) Consents and Approvals. On or prior to the lease of any Equipment
to a Qualified Lessee, all appropriate action, if any, required to have been
taken in connection with such Lease shall have been duly taken by any
governmental authority or agency having jurisdiction, and Purchaser shall have
furnished to Seller copies of all governmental consents, permits and approvals,
if any, required for the execution, delivery or performance of such Lease.
6. REPRESENTATIONS AND WARRANTIES
6.1 Warranties of Seller. SELLER MAKES NO REPRESENTATION OR WARRANTY IN
THIS AGREEMENT OF ANY KIND, EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE
EQUIPMENT, ITS MERCHANTABILITY, OR ITS FITNESS FOR A PARTICULAR PURPOSE. SELLER
SHALL NOT BE LIABLE TO PURCHASER OR ANY OTHER PERSON (INCLUDING ANY LESSEE) FOR
DIRECT, INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING FROM THE
USE OF THE EQUIPMENT, OR FOR DAMAGES BASED ON STRICT OR ABSOLUTE TORT LIABILITY
OR SELLER'S PASSIVE NEGLIGENCE. EACH OF PURCHASER AND SELLER HEREBY ACKNOWLEDGES
THAT ANY MANUFACTURER'S OR SUPPLIER'S WARRANTIES WITH RESPECT TO THE EQUIPMENT
ARE FOR THE BENEFIT OF BOTH PURCHASER AND SELLER. NOTWITHSTANDING THE FOREGOING,
PURCHASER'S OBLIGATIONS TO MAKE EACH PAYMENT DUE, OR OTHERWISE PERFORM ITS
OBLIGATIONS, UNDER THIS AGREEMENT ARE ABSOLUTE AND UNCONDITIONAL.
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6.2 Representations and Warranties of Purchaser. Purchaser makes the
following representations, warranties and covenants as of the date hereof and as
of each Shipment Date that:
(a) Corporate Status and Power. The Purchaser (a) is a corporation
duly organized, validly existing and in good standing or the equivalent under
the laws of the jurisdiction of its organization, (b) has all powers required to
conduct its business, (c) has full corporate power, authority and legal right to
execute, deliver and perform this Agreement and each other Conditional Sale
Document to which it is party and to carry out the transactions contemplated
hereby.
(b) Due Execution and Enforceability. Each of this Agreement and
each other Conditional Sale Document to which it is party has been duly executed
and delivered by the Purchaser and constitutes the valid and binding obligation
of the Purchaser, enforceable against Purchaser in accordance with its terms
except as such enforceability may be limited by bankruptcy or similar laws
applicable to creditors generally or by general principles of equity.
(c) Non-Contravention. Neither the execution and delivery by the
Purchaser of this Agreement or any other Conditional Sale Document to which it
is a party nor the consummation by the Purchaser of the transactions
contemplated hereby or thereby is an event that, of itself or with the giving of
notice or the passage of time or both, will (a) conflict with the certificate of
incorporation or by-laws of the Purchaser; (b) violate any material judgment,
decree or order or statute, rule or regulation applicable to the Purchaser, (c)
contravene or result in any breach of, or constitute a default under any
indenture, mortgage, material contract or other material agreement to which
Purchaser is a party or by which Purchaser or any of its properties may be bound
or affected, or (d) result in the creation of any Lien (excepting the Lien
arising pursuant to the Conditional Sale Documents), charge or encumbrance upon
any property of Purchaser.
(d) Government Approvals. All Governmental Approvals, if any,
required in connection with the execution and delivery by Purchaser of the
Conditional Sale Documents to which Purchaser is a party, the consummation of
the transactions by Purchaser contemplated thereby, and the performance of its
obligations thereunder, have been, or will be contemporaneously with the
delivery of the Equipment hereunder, obtained, given or accomplished.
(e) Litigation. There is no action or proceeding pending or, to the
knowledge of Purchaser, overtly threatened against or affecting Purchaser or any
of the Collateral before any court or other governmental authority or
arbitration body which, if adversely determined, is reasonably likely to
materially and adversely affect the financial condition of Purchaser or the
ability of Purchaser to perform its obligations under the Conditional Sale
Documents to which it is party, or which questions in any respect, directly or
indirectly, the legality, validity, binding effect or enforceability of any of
the Conditional Sale Documents or any part or portion thereof, or any action
contemplated thereby.
(f) No Default. No Default or Event of Default has occurred and is
continuing or will result from the purchase of the relevant Equipment or
consummation of the other
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transactions contemplated by the Conditional Sale Documents; and to the best of
Purchaser's knowledge, there does not exist any material default or failure of
condition or performance under any Lease by a Qualified Lessee or by Purchaser
in its capacity as Lessor thereunder.
(g) All Disclosures Made. No document, certificate or statement
furnished by Purchaser to Seller in connection with the transactions
contemplated by this Agreement contains any untrue statement of a material fact
or omits a material fact necessary to make the statements contained therein not
misleading. There is no fact which Purchaser has not disclosed to Seller in
writing which materially adversely affects or, so far as Purchaser can
reasonably foresee, will materially adversely affect the ability of Purchaser to
carry on its business and perform its obligations under this Agreement and the
other Conditional Sale Documents.
(h) Leases Comply with Applicable Law. In respect of any Lease, to
the knowledge of Purchaser after reasonably inquiry, the form of Lease to be
entered into by the Purchaser and the Qualified Lessee in connection with the
corresponding Equipment complies with the requirements of all applicable laws
and contains all information and disclosures required by such applicable laws.
7. COVENANTS
Purchaser agrees that during the Term, unless Seller shall otherwise consent in
writing:
7.1 Reports, Etc. Purchaser shall furnish to Seller the following
described reports, notices and information:
(a) Notice of Default or Event of Default. Promptly upon becoming
aware of the existence of any condition or event which constitutes a Default or
an Event of Default, a written notice signed by a senior officer of Purchaser
specifying the nature and period of existence thereof and what action Purchaser
is taking or proposes to take with respect thereto;
(b) Equipment Location. Promptly upon installation or relocation of
any Equipment, a list showing the installation locations of such Equipment and
the serial numbers of such Equipment, if any.
(c) Financial Performance of Purchaser. Promptly, but in any event
no later than 30 days from the date on which they are filed with the Securities
and Exchange Commission, copies of the 10K and 10Q filings of IFX Corporation.
Promptly, but in any event no later than 60 days after the end of each fiscal
quarter and 90 days after the end of each fiscal year, financial statements of
the Purchaser for such period certified by a senior officer of Purchaser as
having been prepared in accordance with generally accepted accounting principles
and fairly presenting the financial condition of the Purchaser.
(d) Requested Information. Promptly upon request, such other data
and information as from time to time Seller may reasonably request, including
information on the operating performance and projected performance, periodic
information regarding acquisition activity and the subscriber base in each
country in the Region in which the Purchaser and its
PAGE 14
<PAGE>
Affiliates operate. Information provided to the Purchaser pursuant this clause
(d) shall be subject to the confidentiality provisions of Section 18.15 hereof.
7.2 Preservation of Corporate Existence. (a) Purchaser shall maintain and
preserve its corporate existence; (b) Purchaser shall do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
franchises and all rights necessary to carry on its business and operations; and
(c) Purchaser shall not, without the prior written consent of Seller,
consolidate with or merge or amalgamate into (or attempt any such consolidation,
merger or amalgamation) any other corporation or permit any other corporation to
merge into it, provided that the foregoing shall not apply to any consolidation
or merger of Purchaser with any Guarantor or with any subsidiary of Purchaser so
long as such Guarantor or Purchaser, as applicable, is the survivor and no
Default or Event of Default will result therefrom.
7.3 Maintenance. Purchaser shall maintain, or cause to be maintained, the
Equipment in good operating order and appearance, protect the Equipment from
deterioration, other than normal wear and tear, and will not use, or permit to
be used, the Equipment for any purpose other than that for which it is intended
and is permitted by applicable law.
8. POSSESSION AND USE OF THE EQUIPMENT
8.1 Use of the Equipment. Purchaser shall not, and shall not permit any
third party to, operate, use or locate the Equipment, or any part thereof,
except as otherwise provided in this Agreement.
8.2 Transfer of Title or Possession. Purchaser shall not, and shall cause
each Lessee not to, without the prior written consent of Seller, lease, sublease
or otherwise in any manner deliver, transfer or relinquish possession of the
Equipment, or sell or convey any or all of its right, title and interest in or
to any part thereof; provided, however, that, Purchaser may, without the prior
written consent of Seller but subject to the conditions precedent set out
herein, lease the Equipment to a Qualified Lessee pursuant to a Lease; further,
provided, that if the Purchaser and Seller are unable to agree to amendments to
the Lease required for a particular jurisdiction within 30 days from the
Shipment Date for such Equipment, the Equipment shall be deemed sold to the
Purchaser on the Standard Terms.
Notwithstanding any lease of the Equipment permitted under this
Section 8.2, (1) Purchaser shall remain primarily liable hereunder for the
performance of all of the terms of this Agreement to the same extent as if such
permitted lease had not occurred, and (2) in connection with any permitted lease
hereunder, Purchaser, at its own expense, shall take or cause to be taken all
action reasonably requested by Seller to be taken, including filings,
registrations and recordations, to preserve, and to continue to evidence the
retention by Seller of title to the Equipment and the security interest in the
other Collateral and Seller's other rights under the Conditional Sale Documents.
8.3 Liens. Purchaser shall not, directly or indirectly, create, incur or
assume or suffer to be created, incurred, assumed or to exist any Lien of any
kind (other than Permitted Liens) on any of its rights, titles and interests in
or under this Agreement or any of the other Conditional
PAGE 15
<PAGE>
Sale Documents or its rights and interests in and to the Equipment or any part
thereof or any of the other Collateral, and if any such Lien other than any
Permitted Lien does exist, Purchaser, at its sole cost and expense, shall
promptly remove the same.
9. TAXES
Purchaser hereby assumes liability for, and shall pay when due, and, on a net
after-tax basis, shall indemnify, protect and hold harmless Seller against all
fees, taxes and governmental charges (including, without limitation, interest
and penalties) of any nature imposed on or in any way relating to Seller,
Purchaser, any Qualified Lessee, any item of Equipment, this Agreement or any
Lease, except state and local taxes on or measured by Seller's net income (other
than any such tax which is in substitution for or relieves Purchaser from the
payment of taxes it would otherwise be obligated to pay or reimburse to Seller
as herein provided) and federal taxes on Seller's net income. Purchaser shall,
at its expense, file when due with the appropriate authorities any and all tax
and similar returns, and reports required to be filed with respect thereto, for
which it has indemnified Seller hereunder or, if requested by Seller, notify
Seller of all such requirements and furnish Seller with all information required
for Seller to effect such filings. Any fees, taxes or other charges paid by
Seller upon failure of Purchaser to make such payments shall, at Seller's
option, become immediately due from Purchaser to Seller and shall be subject to
the Overdue Charge from the date paid by Seller until the date reimbursed by
Purchaser. Purchaser shall have no obligation to indemnify Seller under this
Section 9 to the extent that any tax or governmental charge results from the
failure by Seller to take all steps which are reasonable and customary in the
ordinary course of Seller's business to avail itself of any and all exemptions
from liability for, or reductions in, any such taxes or governmental charges.
10. INSURANCE
The Purchaser shall, or shall cause the corresponding Lessee, to maintain
insurance with financially sound and reputable insurers, of the kinds and in the
amounts customarily insured against by companies engaged in the same or similar
business and similarly situated. The Purchaser shall, or shall cause the
corresponding Lessee, to pay all insurance premiums payable as and when due. The
Seller shall be named as sole loss payee or additional insured, as applicable,
with respect to each such insurance policy.
11. RISK OF LOSS
Risk of loss in respect of each item of Equipment shall pass to Purchaser on the
Shipment Date in respect thereof. Upon the occurrence of an Event of Loss,
Purchaser shall promptly pay to Seller the applicable Purchase Price Balance of
the Equipment subject to the Event of Loss, interest on the Purchase Price
Balance thereof from the most recent Payment Date in respect thereof to the date
of payment at a per annum rate of 13.75% and the Prepayment Value determined by
Seller with respect to such Equipment. Upon payment by Purchaser of the amounts
in the preceding sentence, Seller will transfer to Purchaser, "AS IS, WHERE IS,
PAGE 16
<PAGE>
WITHOUT RECOURSE, REPRESENTATION OR WARRANTY," all of Lessor's right, title and
interest, if any, in such items of Equipment.
12. INDEMNIFICATION
Purchaser assumes liability for, and shall pay when due, and shall indemnify,
reimburse and hold each Indemnified Person harmless from and against all Claims,
directly or indirectly relating to or arising out of the acquisition, use,
manufacture, purchase, shipment, transportation, delivery, installation, lease
or sublease, ownership, operation, possession, control, storage, return or
condition of any item of Equipment (regardless of whether such item of Equipment
is at the time in the possession of Purchaser), the falsity of any non-tax
representation or warranty of Purchaser or Purchaser's failure to comply with
the terms of this Agreement during the Term. The foregoing indemnity shall
cover, without limitation, (i) any Claim in connection with a design or other
defect (latent or patent) in any item of Equipment, (ii) any Claim for
infringement of any patent, copyright, trademark or other intellectual property
right, or (iii) any Claim for negligence or strict or absolute liability in
tort; provided, however, that Purchaser shall not indemnify Seller in respect of
any Claim to the extent resulting from the gross negligence, willful misconduct
or bad faith of Seller.
Such indemnities shall continue in full force and effect, notwithstanding the
expiration or termination of this Agreement. Upon Seller's written demand,
Purchaser shall assume and diligently conduct, at its sole cost and expense, the
entire defense of any Indemnified Person against any indemnified Claim described
in this Section 12. Purchaser shall not settle or compromise any Claim against
or involving Seller without first obtaining Seller's written consent thereto,
which consent shall not be unreasonably withheld. Purchaser shall give Seller
prompt notice of any occurrence, event or condition in connection with which
Seller may be entitled to indemnification hereunder. The provisions of this
Section 12 are in addition to, and not in limitation of, the provisions of
Section 9.
13. EVENTS OF DEFAULT
An Event of Default shall occur if (i) Purchaser fails to make any payment due
under Section 3.2 hereof within ten (10) days of the due date therefor or any
other payment required under this Agreement when due and such failure continues
for a period of three (3) days after written notice from Seller, or (ii)
Purchaser fails to perform or observe any other covenant, condition or agreement
to be performed or observed by it or breaches any provision contained in this
Agreement or in any other document furnished to Seller in connection herewith,
and such failure or breach continues for a period of thirty (30) days after
written notice from Seller, or (iii) Purchaser without Seller's consent,
attempts to assign this Agreement or sell, transfer, encumber, part with
possession (other than under a Lease permitted hereunder) of any item of
Equipment; or (iv) Purchaser makes any representation or warranty herein or in
any document furnished by Purchaser in connection herewith, which shall have
been materially false or inaccurate when made or at the time to which such
representation or warranty relates; (v) an Event of Default (as therein defined)
under any Guarantee shall occur; or (vi) Purchaser or any Qualified Lessee shall
commit an act of bankruptcy or become insolvent or bankrupt or make an
assignment for the benefit of creditors or consent to the appointment of a
trustee or receiver or either shall be
PAGE 17
<PAGE>
appointed for them or for a substantial part of its property without its
consent, or bankruptcy reorganization, or insolvency proceedings shall be
instituted by or against them, and if instituted against them, shall not be
vacated or dismissed within sixty (60) days. Any Event of Default shall be
deemed material and a substantial impairment of Seller's interests for the
purposes of this Agreement, the UCC, and any other applicable law.
14. REMEDIES
Upon the occurrences of any Event of Default and at any time thereafter,
provided such Event of Default is then continuing, Seller may, in its
discretion, do any one or more of the following:
(a) accelerate the Maturity Date in respect of any or all Equipment;
(b) recover any accrued and unpaid amounts which are due and owing
under any Conditional Sale Document plus interest at the Overdue Rate;
(c) recover any amounts due under any indemnity then determinable,
plus interest at the Overdue Rate;
(d) require that Purchaser return the Equipment in accordance with
Section 15 hereof;
(e) enter the premises where such Equipment is located and take
immediate possession of and remove the same, all without liability to Seller or
its agents for such entry;
(f) exercise the rights of "Lessor" under any Lease;
(g) sell any or all of the Equipment at public or private sale, with
or without notice to Seller or advertisement, or otherwise dispose of, hold,
use, operate, lease to others or keep idle such Equipment, all free and clear of
any rights of Purchaser and without any duty to account to Purchaser for such
action or inaction or for any proceeds with respect thereto; and
(h) exercise any other right or remedy which may be available to it
under the UCC or other applicable law including the right to recover damages for
the breach hereof.
In addition, Purchaser shall be liable for, and reimburse Seller for, all
reasonable legal fees and all commercially reasonable costs and expenses
incurred by Seller as a result of the foregoing defaults or the exercise of
Seller's remedies, including without limitation, recovering possession of the
Equipment, selling or leasing the Equipment (including broker's and sales
representative's fees and commissions), and placing any Equipment in the
condition required by Section 15. No remedy referred to in this Section is
intended to be exclusive, but each shall be cumulative and in addition to any
other remedy referred to above or otherwise available to Seller at law or in
equity. No express or implied waiver by Seller of any default shall constitute
a waiver of any other default by Seller, or a waiver of any of Seller's right.
PAGE 18
<PAGE>
15. RETURN OF EQUIPMENT
If required to return any Equipment to the Seller hereunder, Purchaser shall, at
its expense and risk, cause such Equipment to be removed, disassembled, and
placed in the same condition as when delivered to Seller (reasonable wear and
tear excepted) and properly crate such Equipment for shipment and deliver it to
a common carrier designated by Seller. Purchaser will ship such Equipment,
F.O.B. destination, to any address specified in writing by Seller within the
continental United States. All additions, attachments, alterations and repairs
made or placed upon any of the Equipment shall become part of such Equipment and
shall be the property of Seller. The Equipment when returned to Seller pursuant
to this Section 15 shall comply with the requirements of this Agreement.
16. IDENTIFICATION
The Equipment shall bear the respective manufacturers' serial numbers.
Purchaser, at its sole cost and expense, shall mark, or cause to be marked,
legibly each item of Equipment on or before placing such Equipment into service
and thereafter during the Term for so long as such Equipment is subject to the
terms hereof, with a metal plate, disc, or other marking of the customary size
no smaller than ten centimeters by seven centimeters (10cm. x 7cm) and bearing a
legend as follows:
"THIS EQUIPMENT IS OWNED BY LUCENT TECHNOLOGIES INC., INTERNETWORKING SERVICES
AND IS SUBJECT TO A CONDITIONAL SALE AGREEMENT BETWEEN LUCENT TECHNOLOGIES INC.,
INTERNETWORKING SERVICES AND COMMUNICATIONS EQUIPMENT LEASING CORP. AND IS
LEASED TO [QUALIFIED LESSEE NAME] AND MAY NOT BE USED BY ANY OTHER PERSON
WITHOUT THE PRIOR WRITTEN CONSENT OF LUCENT TECHNOLOGIES INC. INTERNETWORKING
SERVICES AND COMMUNICATIONS EQUIPMENT LEASING CORP."
or such other legend as may be reasonably requested by Seller to evidence the
fact that the Equipment are subject to this Agreement. Purchaser shall not
remove or deface, and shall require each Lessee to agree not to remove or
deface, any metal plate, disc or other marking so placed on the Equipment or the
identifying serial number of the Equipment or any part thereof and, in the event
of such removal or defacement, shall promptly cause such metal plate, disc,
other marking or serial number to be replaced.
17. NOTICES
Except as otherwise specifically set forth in this Agreement, all notices,
demands, requests or other communications which may be or are required to be
given, served, or sent by any party pursuant to this Agreement shall be in
writing and shall be personally delivered, mailed by first-class, registered or
certified mail, return receipt requested, postage prepaid, sent by Federal
Express or other recognized overnight delivery service, addressed as follows:
PAGE 19
<PAGE>
If to the Purchaser, to:
----------------------
----------------------
with a copy to:
----------------------
----------------------
Attn:
----------------------
If to the Seller, to: Maribeth Harper
Assistant Secretary
Lucent Technologies Inc., InterNetworking Systems
1701 Harbor Bay Parkway
Alameda, CA 94502
with a copy to: David Sousa, Manager of Corporate Finance
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request or communication which shall be delivered, mailed
or transmitted in the manner described above shall be deemed sufficiently given,
served, sent or received for all purposes at such time as is delivered to the
addressee (with an affidavit of personal delivery, the return receipt or the
delivery receipt being deemed conclusive, but not exclusive, evidence of such
delivery) or at such time as delivery is refused by the addressee upon
presentation.
18. GENERAL
18.1 Expenses. Without limitation of the terms of Section 12, Purchaser agrees,
promptly upon demand, to pay to Seller all out-of-pocket costs and expenses
(including reasonable attorneys fee) incurred by Seller in connection with this
Agreement, the enforcement of any rights and remedies created in connection with
the Conditional Sale Documents, or the entering into or giving or withholding of
any future amendments or supplements or waivers or consents with respect
thereto, as well as,
(a) out of pocket costs payable to third parties arising with respect to
the documentation of the Lease, perfection of the Seller's security first
priority interest in the Collateral and rights to the Equipment located outside
the continental United States, subject to the prior approval of the Purchaser,
such approval not to be unreasonably withheld or delayed; and
(b) all other expenses in connection with such transactions including,
without limitation, all fees, taxes, expenses, and other charges (including,
without limitation, reasonable fees and expenses of counsel) payable in
connection with (i) any transfer of possession of or the replacement of the
Equipment as provided in this Agreement, (ii) the recording or filing of
PAGE 20
<PAGE>
instruments, including the Conditional Sale Documents, any financing statements,
company charges and other filings described in this Agreement, (iii) any
transfer of title to the Equipment pursuant to Section 4 and the removal of any
Liens on the Equipment in connection therewith other than any fees, charges or
expenses incurred in connection with the removal of any Seller Liens, and (iv)
the taking, possession, removing, storing, repairing, leasing or selling of the
Equipment as part of Seller's enforcement of any remedies under this Agreement,
the Note or the other Conditional Sale Documents. Except as set forth herein,
each party hereto shall pay its own expenses (including legal and accounting
fees) incurred in the negotiation, documentation and review of the Agreement and
any due diligence efforts expended in connection with its execution.
18.2 Relationship Of The Parties. Nothing in this Agreement shall be
construed as making either party a joint venturer, partner, agent,
representative, or employee of the other party. The parties' status is that of
independent contractors and, except as otherwise expressly set forth herein, the
parties shall be responsible for determining the method, details, and means of
performing their obligations described herein. Each party shall solely be
responsible for its own employees. This Agreement is not intended to confer any
right upon any person other than the parties to this Agreement.
18.3 Entire Agreement, Merger And Modification, No Waivers, Severability.
This Agreement and the Exhibits contains the entire understanding between the
Seller and the Purchaser with respect to the subject matter hereof and merges
and supersedes all prior and contemporaneous agreements, dealings and
negotiations. No modification, alteration or amendment shall be effective unless
made in writing, dated and signed by duly authorized representatives of both
parties. No waiver of any breach hereof shall be held to be a waiver of any
other or subsequent breach. If any provision of this Agreement is determined by
a court of competent jurisdiction to be invalid, illegal or unenforceable, such
determination shall not affect the validity of the remaining provisions unless
the Seller determines in its discretion that the court's determination causes
this Agreement to fail in any of its essential purposes.
18.4 Limitation Of Liability. In no event shall either party be liable to
the other for any speculative, indirect, special or consequential damages,
including but not limited to lost profits, even if advised of the possibility of
such damages, in connection with performance under this Agreement.
18.5 Interpretation.
(a) Headings. Table of contents and section headings used herein are
for convenience only and shall not in any way affect the construction of, or be
taken into consideration in interpreting, this Agreement.
(b) References. Any reference to a specific Section or Section
number shall be interpreted as a reference to that Section of this Agreement
unless otherwise expressly provided.
(c) Incorporation of Exhibits and Schedules. All annexes, schedules
and exhibits referenced in and attached to this Agreement are by this reference
incorporated into and made a part of this Agreement.
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<PAGE>
(d) Governing Law. THIS AGREEMENT AND THE NOTE AND ALL THE RIGHTS
AND OBLIGATIONS HEREUNDER AND THEREUNDER AND ALL MATTERS OF CONSTRUCTION,
VALIDITY AND PERFORMANCE THEREOF SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS., BUT NOT THE CHOICE OF LAW PROVISIONS, OF THE
STATE OF CALIFORNIA, U.S.A..
18.6 Submission to Jurisdiction. The parties hereto hereby irrevocably and
unconditionally submit to the non-exclusive jurisdiction of the California
courts and of any United States federal courts sitting in California with
respect to any disputes arising out of or in connection with this Agreement.
18.7 Immunity. Purchaser agrees that in any legal action or proceedings
against it or its assets in connection with this Agreement or the other
Conditional Sale Documents, no immunity from legal action or proceedings
(including, without limitation, suit, attachment prior to judgment, other
attachment, the obtaining of judgment, execution or other enforcement) shall be
claimed by or on behalf of Purchaser or with respect to its assets, irrevocably
waives any such right of immunity which it or its assets now have or may
hereafter acquire or which may be attributed to it or its assets and consents
generally in respect of any such legal action or proceedings to the giving of
any relief or the issue of any process in connection with such action or
proceedings including, without limitation, the making, enforcement or execution
against any property whatsoever (irrespective of its use or intended use) of any
order or judgment which may be made or given in such action or proceedings.
18.8 Assignment. Seller may at any time, without notice to or the consent
of Purchaser or any other Person, sell, assign, transfer, convey, grant
participations in or otherwise dispose of to one or more persons, and any
assignee, transferee, participant or other recipient may resell, reassign,
retransfer or reconvey, at any time and from time to time, all or any portion of
the Note any interest of Seller in any of the Collateral and/or the Conditional
Sale Documents, and the rights, benefits and advantages of Seller hereunder and
under the other Conditional Sale Documents. Seller shall promptly notify
Purchaser of any such sale, assignment, transfer, conveyance, participation or
disposal provided that the failure to provide such notice shall not adversely
affect the transfer contemplated thereby.
18.9 Further Acts. Subject to the limitations otherwise provided herein,
Purchaser shall from time to time do and perform such other and further acts and
execute and deliver any and all such other and further instruments as may be
required by law or reasonably requested by Seller to establish, maintain and
protect the rights, title, interests and remedies intended to be created or
provided hereunder and under the other Conditional Sale Documents in favor of
Seller and to carry out and effect the intent and purposes of this Agreement and
the other Conditional Sale Documents. Without limiting the generality of the
foregoing, Purchaser shall, at its own cost and expense, promptly furnish to
Seller such information as may be required to enable Seller to file any reports,
including tax returns, required to be filed by Seller with any governmental
authority because of Seller's interests in the Equipment or in the other
Collateral.
18.10 No Waiver of Rights. No waiver of or delay or omission in the
exercise of any right or remedy provided herein or in any other Conditional Sale
Document or otherwise
PAGE 22
<PAGE>
available to Seller shall impair, affect or be construed as a waiver of its
rights thereafter to exercise the same. Any single or partial exercise by Seller
of any right or remedy provided herein or in any other Conditional Sale Document
shall not preclude any other or further exercise of any other right or remedy.
Any extension of time for payment hereunder or other indulgences granted to
Purchaser shall not alter, affect or waive Seller's rights or the obligations of
Purchaser hereunder or under any other Conditional Sale Document, except in
accordance with the explicit terms of such extension.
18.11 No Oral Modification; Oral Agreements. No term or provision of this
Agreement or the Note may be waived, modified, terminated or discharged orally,
but only by an instrument in writing signed by the party against which the
enforcement of the change, waiver, discharge or termination is sought.
18.12 Survival. Any other provisions contained in this Agreement to the
contrary notwithstanding, it is hereby agreed that, except as otherwise provided
herein, the provisions of Sections 9, 12, 14, 15 and 18, shall survive the
expiration, cancellation, completion or termination hereof to the extent
required thereby for their full observance and performance.
18.13 Successors and Assigns. This Agreement shall be binding on and shall
inure to the benefit of the parties hereto and their respective successors and
permitted assigns, including, without limitation, the subrogees and participants
of Seller.
18.14 Counterparts. This Agreement may be executed by the parties hereto in
several counterparts, each of which when so executed shall be deemed to be an
original, and all such counterparts shall together constitute but one and the
same instrument.
18.15 Confidentiality. Purchaser and Seller understand that certain
commercial and financial information contained in this Agreement and each other
Conditional Sale Agreement is considered by Purchaser and Seller as privileged
and confidential. Purchaser and Seller each agree that it shall treat this
Agreement and the terms hereof as privileged and confidential and will not, or
permit its agents and advisers to, without the prior written consent of the
other, disclose the terms and conditions of or the existence of this Agreement
or the agreements of the parties contained herein to any third person or persons
except (i) to legal counsel or auditors in connection with the transactions
contemplated hereby, (ii) as may be required by law or in connection with legal
proceedings, and (iii) to any transferee or assignee of Seller hereunder. In
connection with any permitted disclosure of the terms and conditions of or the
existence of this Agreement and each other Conditional Sale Agreement or the
agreements contained herein to any person or entity, Purchaser or Seller, as the
case may be, and such party's agents and advisers, shall request, and shall use
reasonable efforts to obtain, confidential treatment of such information.
PAGE 23
<PAGE>
IN WITNESS WHEREOF, the Seller and the Purchaser have caused this Agreement
to be executed as of the date stated at the beginning of this Agreement.
LUCENT TECHNOLOGIES INC., COMMUNICATIONS EQUIPMENT
INTERNETWORKING SERVICES LEASING CORP.
By: By:
-------------------------- --------------------------
Name: Name:
-------------------------- --------------------------
Title: Title:
-------------------------- --------------------------
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Purchase Purchase Price
Month Price Factor Balance Factor
----- ------------- --------------
<S> <C> <C>
1 0.00000 1.0103531
2 0.00000 1.0204760
3 0.00000 1.0195812
4 0.01146 1.0183365
5 0.01146 1.0173907
6 0.01146 1.0121751
7 0.01572 1.0062315
8 0.01572 1.0009007
9 0.01572 0.9951815
10 0.01572 0.9897366
11 0.01572 0.9839058
12 0.01572 0.9704845
13 0.02358 0.9569247
14 0.02358 0.9429061
15 0.02358 0.9290614
16 0.02358 0.9147644
17 0.02358 0.9006551
18 0.02358 0.8785397
19 0.03144 0.8553152
20 0.03144 0.8327304
21 0.03144 0.8096337
22 0.03144 0.7865759
23 0.03144 0.7630168
24 0.03144 0.7394764
25 0.03144 0.7156923
26 0.03144 0.6914229
27 0.03144 0.671414
28 0.03144 0.6423856
29 0.03144 0.6175963
30 0.03144 0.5846903
31 0.03930 0.5508579
32 0.03930 0.5172610
33 0.03930 0.4831436
34 0.03930 0.4488456
35 0.03930 0.4140427
36 0.03930 0.3790293
37 0.03930 0.3436535
38 0.03930 0.3077966
39 0.03930 0.2716833
40 0.03930 0.2351053
41 0.03930 0.1982394
42 0.03930 0.0002918
0.20000
</TABLE>
<PAGE>
Exhibit 99.1
RISK FACTORS
IFX HAS LIMITED OPERATING HISTORY AND EXPERIENCE IN THE INTERNET SERVICE
BUSINESS. IFX's strategy of developing Internet services and acquiring
Internet service providers in Latin America is in the early development stages.
IFX has limited experience in providing Internet services and, accordingly, a
limited operating history upon which an evaluation of its prospects can be made.
Such prospects must be considered in light of the substantial risks, expenses
and difficulties encountered by new entrants, such as IFX, in the Internet
services industry. These risks include identification of entry opportunities,
intense competition, changing technology and evolving industry standards,
changing user demand for Internet access and other Internet services, dependence
upon the Internet and general economic conditions in the region. If IFX fails to
add significantly to its user base in Latin America, the Company may not be able
to grow revenues, implement its business plan or achieve economies of scale.
IFX'S SUCCESS IS DEPENDENT UPON THE CREATION OF A NETWORK INFRASTRUCTURE.
IFX's success depends in part upon its ability to create an Internet network
infrastructure that covers significant regions or areas of Latin American
countries. IFX's primary strategy for creating the necessary infrastructure is
to acquire ISPs that have an existing network infrastructure, qualified
personnel and an existing subscriber base and, in certain countries, to develop
new ISPs. IFX also anticipates that expansions and adaptations of its network
infrastructure will be necessary to supplement its acquisition strategy. This
will require substantial financial, operational and managerial resources. IFX
can give no assurance that it will be able to acquire and develop the network
infrastructure in Latin America necessary to compete successfully with the
industry's evolving standards on a timely or cost-effective basis, or at all.
Also, it may not be able to deploy successfully any expanded and adapted network
infrastructure. Failure to create a successful infrastructure may materially
adversely affect IFX's business and operating results.
The process of consolidating IFX's ISPs and integrating its regional
operations may take a significant period of time, may place a significant strain
on its resources, and could prove to be more expensive than predicted. IFX may
be required to increase current expenditures in order to accelerate the
integration and consolidation of its ISPs with the goal of achieving longer-term
cost savings and improved profitability. These expenses may include the
following, among others: severance expenses related to the elimination of
redundant staffing positions; personnel relocation; termination fees related to
the cancellation of overlapping Internet access contracts; the closure of
redundant points of presence; system upgrades; and the integration of these
ISPs' operations onto IFX's network, customer care, billing, financial and other
international support systems. However, IFX has limited practical experience
related to the process of consolidating ISPs and can give no assurance that
these projected long-term cost savings and improvements in profitability can or
will be realized. Further, IFX can give no assurance that customer support or
network infrastructure resources will be sufficient to manage the growth in its
business or that it will be successful in implementing its expansion program in
whole or in part.
IFX MAY CONTINUE TO INCUR LOSSES AND NEGATIVE CASH FLOW FROM CONTINUING
OPERATIONS. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in new and rapidly
evolving markets, as well as difficulties encountered by companies operating in
emerging markets. The Company must, among other things, respond to competitive
developments, attract and retain qualified persons, upgrade its management and
financial systems, and upgrade its technologies and commercialize its network
services incorporating such technologies. The Company cannot assure you that it
will be successful in addressing such risks, and the failure to do so could have
a material adverse effect on its business, financial condition and results of
operations. Although the Company has experienced revenue growth from continuing
operation from quarter to quarter, it has incurred net losses and experienced
negative EBITDA from continuing operations during those quarter. The Company
expects to continue to operate at a net loss and to experience negative EBITDA
as it continues its acquisition program and the expansion of its Latin America
network operations. The Company cannot assure you that it will be able to
achieve or sustain profitability or sustain positive EBITDA in the foreseeable
future. The Company's operating results may fluctuate in the future as a result
of a variety of factors, some of which are outside its control. These factors,
include, among others:
- general economic conditions and specific economic conditions in the
Internet access industry;
- user demand for Internet services;
- capital expenditures and other costs relating to the expansion of
operations of the Company's network;
- pricing changes and new product introductions by the Company and
its competitors;
- delays in obtaining sufficient supplies of sole or limited source
equipment and telecom facilities; and
- potential adverse regulatory developments.
As a strategic response to a changing competitive environment, the Company may
elect from time to time to make pricing, service or marketing decisions that
could have a material adverse effect on its business, results of operations and
cash flow.
IFX MAY NEED SIGNIFICANT ADDITIONAL FINANCING. The Company must continue to
acquire, develop and upgrade its network in order to maintain its competitive
position and continue to meet the increasing demands for service, quality,
availability, and competitive pricing. The Company intends to expand or open
POPs or make other capital investments as dictated by subscriber demand or
strategic considerations. The Company must spend significant amounts of money
for acquisitions, new equipment, leased telecommunications facilities ,
compensation expenses and advertising. In addition, the Company probably will be
required to spend significant amounts of money on additional equipment to
maintain the high speed and reliability of its Internet access services. The
Company also will be required to spend significant amounts of cash to fund
growth, continuing operating losses and respond to unanticipated developments or
competitive pressures.
Presently, in addition to Internet Revenues, the Company derives funds from
the earn-out payments from the sale of assets of discontinued operations. For
the E.D.& F Man sale, the amount of future earn-outs payments will depend on the
profitability of that business and the percentage earn-out decreases,
successively, over the remainder of the payment period, which ends on December
31, 2001. For the IFX Ltd. sale, the amount of the earn-out payments depends
upon the profitability of the business that was sold over the remainder of the
payment period, which ends on June 30, 2002. There can be no assurance that such
payments will continue at their current levels.
To the extent the Company does not have enough cash on hand, cash generated
from earn-out payments from its discontinued operations, or cash available under
vendor financing agreements, the Company will need to seek alternative sources
of financing. Such financing may include borrowings or placements of debt or
equity securities. The Company may not be able to raise needed cash on terms
acceptable to it or at all. If alternative sources of financing are required,
but are insufficient or unavailable, the Company will be required to modify its
growth and operating plans, which could have a material adverse effect on IFX's
business, financial condition or results of operations.
IFX'S STRATEGY OF GROWTH BY ACQUISITIONS MAY BE INCREASINGLY DIFFICULT TO
IMPLEMENT. IFX depends in part on its ability to identify and acquire ISPs in
IFX's target locations and that meet its acquisition criteria. IFX seeks to
create a market presence internationally, to gain strength in Internet
connectivity and web hosting core service platforms, and to add additional
enhanced service capabilities. IFX faces and may continue to face significant
competition for appropriate
1
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acquisition candidates. IFX may compete with other communications or Internet
companies with similar acquisition strategies, many of which may be larger, have
greater financial and other resources and be owned or partially-owned by foreign
governments. Competition for independent ISPs is based on a number of factors,
including price, terms and conditions, size and access to capital, ability to
offer cash, stock or other forms of consideration and other matters. IFX can
give no assurance that it will be able to identify suitable ISPs or be able to
complete any acquisitions of or investments in those targeted ISPs on acceptable
terms and conditions.
Once consummated, these acquisitions will continue to present certain
risks, including:
- the difficulty of integrating the acquired operations, technology
and personnel;
- the possible inability of IFX's management to maximize its
financial and strategic position by the successful incorporation of
acquired technology and products into its service offerings and to
maintain uniform standards, controls, procedures and policies;
- the possible acquisition of substantial contingent or undisclosed
liabilities;
- the risks of entering markets in which it has little or no direct
prior experience; and
- the potential impairment of relationships with employees and
customers as a result of changes in management or other business
operations.
IFX may not be successful in overcoming these risks or any other problems
encountered in connection with acquisitions. In addition, acquisitions could
materially adversely affect operating results as a result of dilutive issuances
of equity securities, the incurrence of additional debt or the amortization of
expenses related to acquired customer bases, goodwill or other intangible
assets. Further, IFX's ability to complete transactions with ISPs may require
significant additional financial resources.
As with each of its recent acquisitions, the purchase price of many of the
businesses that might become attractive acquisition candidates for the Company
likely will significantly exceed the fair values of the net assets of the
acquired businesses. As a result, material goodwill and other intangible assets
would be required to be recorded which would result in significant amortization
charges in future periods. Furthermore, in connection with acquisitions or
strategic alliances, the Company could incur substantial expenses, including the
expenses of integrating the business of the acquired company or the strategic
alliance with its existing business.
PRICES FOR INTERNET CONNECTIVITY SERVICES ARE VERY COMPETITIVE AND
FLUCTUATE GREATLY. The market for Internet connectivity and related services is
extremely competitive and characterized by rapidly changing technology and
evolving standards which can be significantly influenced by the marketing and
pricing decisions of the largest industry participants. IFX anticipates that
price competition will continue to intensify as the use of the Internet grows.
The tremendous growth and potential market size of the Internet access market
has attracted and likely will continue to attract many new start-ups as well as
existing businesses from different industries. In addition, new business models,
such as the free Internet service provider model in which users do not pay for
connectivity service, may pose a significant risk to the Company.
In some cases, IFX will be forced to compete with and/or buy services from
government-owned or subsidized telecommunications providers. Some of these
providers may enjoy a monopoly on telecommunications services essential to IFX's
business or other competitive advantages. IFX can give no assurance that it will
be able to purchase such services at a reasonable price or at all. In addition,
foreign competitors may possess a better understanding of their local markets
and customs, and enjoy better relationships with customers and suppliers. IFX
can give no assurance that it can obtain similar levels of local knowledge,
access or expertise. Failure to obtain that knowledge could place IFX at a
significant competitive disadvantage.
The Company currently competes or expects to compete with the following
types of companies:
- established national Internet service providers in Latin America,
- computer hardware and software and other technology companies that
will start bundling Internet access in their products;
- numerous regional and local commercial ISPs which vary widely in
quality, service offerings, and pricing;
- national and regional Web hosting companies that focus primarily
on providing Web hosting services;
- cable operators and on-line cable services;
2
<PAGE>
- local telephone companies providing ISP services; and
- free Internet service providers that may enter the market.
IFX believes that new competitors, including established ISP and
telecommunications companies, will continue to enter the Internet access market,
resulting in even greater competition. In addition, telecommunications companies
may be able to offer customers reduced communications costs in connection with
ISP services, reducing the overall cost of their Internet access and
significantly increasing pricing pressures on the Company. The ability of its
competitors to acquire other ISPs, to enter into strategic alliances or joint
ventures or to bundle other services and products with Internet access or Web
hosting could also put the Company at a significant competitive disadvantage.
THERE ARE INHERENT RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND
EXPANSION. IFX focuses its Internet business on Latin American markets. It can
give no assurance that acceptance of the Internet or demand for Internet
connectivity, web hosting and other enhanced Internet services will increase
significantly in these markets. However, IFX believes that it needs to move
quickly into Latin American markets in order to establish critical market
presence and credibility.
IFX may need to enter into joint ventures or other strategic relationships
with one or more third parties in order to conduct its foreign operations
successfully. However, it can give no assurance that it will be able to identify
desirable joint venture or strategic partners in these markets or that it will
be able to obtain the permits and operating licenses required to conduct
business and offer Internet services in these markets. In addition to the
uncertainty of IFX's ability to create an international presence, IFX faces
certain additional risks inherent in doing business on an international level.
Such risks include:
- competition from government-owned or subsidized businesses,
including telecommunication companies and ISPs;
- unexpected changes in or delays resulting from regulatory,
licensing and foreign investment requirements, tariffs, customs,
duties and other trade barriers;
- difficulties in staffing and managing foreign operations;
- longer payment cycles and problems in collecting accounts
receivable;
- political instability, expropriation, nationalization, war,
insurrection and other political risks;
- high levels of inflation, fluctuations in currency exchange rates
or foreign exchange controls which restrict or prohibit
repatriation of funds;
- poor quality of telecommunications and lack of technological
advances;
- technology export and import restrictions or prohibitions; and
- potentially adverse tax consequences.
IFX can give no assurance that such factors will not have an adverse effect
on its future international operations. In addition, it can give no assurance
that laws or administrative practice relating to telecommunications, taxation,
foreign exchange or other matters of countries within which it may operate will
not change in a manner adverse to its business. Any such change could have a
material adverse effect on IFX's business, financial condition and results of
operations.
THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH AN INTERNET BUSINESS. IFX's
business is vulnerable to risks associated with the Internet business in
general, many of which are significant. For example, the laws relating to the
regulation and liability of Internet access providers in relation to information
carried or disseminated is undergoing a process of development in many
countries. Legal decisions, laws, regulations and other activities regarding
regulation and content liability may significantly affect the development and
profitability of companies offering on-line and Internet access services,
especially in Latin America. Although IFX has and will continue to update
certain network security measures, such as limiting physical and network access
to its routers, the network's infrastructure is potentially vulnerable to
computer viruses, break-ins and similar disruptive problems caused by its
customers or other Internet users, which could lead to interruptions of, delays
in or cessation of service to its customers. Furthermore, inappropriate use of
the Internet by third parties could also potentially jeopardize the security of
confidential information stored in the computer systems of IFX's customers and,
in turn, could deter potential customers and adversely affect existing customer
relationships. IFX relies on local Latin American telephone companies and other
companies to provide data communications capacity via local telecommunications
lines. IFX may experience disruptions or capacity constraints in these
telecommunications services and may have no means of replacing these services on
a timely basis, or at all.
3
<PAGE>
Changes in the regulatory environment relating to the Internet connectivity
market, including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition from
telecommunications companies, could affect IFX's pricing. Additional laws could
cover issues such as content, user pricing, privacy, libel, intellectual
property protection and infringement, and technology export and other controls.
IFX can give no assurance that violations of local laws will not be alleged or
charged by foreign governments, that it might not unintentionally violate such
laws or that such laws will not be modified, or new laws enacted in the future.
Any of the foregoing developments could have a material adverse effect on IFX's
business, results of operations and financial condition.
In general, IFX does not sign long term service agreements with its
subscribers, which may discontinue their service at the end of any month for any
reason. IFX's revenue will depend on its ability to attract and retain such
subscribers.
IFX may be dependent on third parties to stimulate demand for its products
and services where it does not have a direct sales force. These channel
distributors may include computer and telecommunications resellers, value added
resellers, original equipment manufacturers, systems integrators, web designers
and advertising agencies. If IFX fails to gain commercial acceptance in certain
markets, these channel distributors may discontinue their relationships with
IFX. The loss of channel distributors, the failure of such parties to perform
under agreements with IFX, or the inability to attract other channel partners
with the expertise and industry experience required to market its products and
services could have a material adverse effect on IFX's operating results.
TO REMAIN COMPETITIVE, IFX MUST UPDATE AND CONTINUALLY MAINTAIN ITS
EQUIPMENT. IFX's operations are dependent upon its computer and
telecommunications equipment and software systems. There can be no assurance
that IFX will be able to obtain the equipment, or generate sufficient cash flow
or financing to purchase equipment, necessary to expand its Latin American
network or maintain the quality of its network. IFX's failure to maintain the
most current and up to date equipment and software for Internet connectivity
could impede its ability to obtain new subscribers, which could have a material
adverse effect on IFX's business, financial condition or results of operations.
IFX FACES INTENSE COMPETITION FOR KEY PERSONNEL. IFX's success in the
Internet business will also depend upon its ability to hire and retain qualified
executive and management employees with significant experience in managing and
expanding an Internet services business in the markets in which it seeks to
operate. IFX can give no assurance that it will be able to successfully hire,
retain or motivate qualified employees. Further, IFX can give no assurance that
it will be successful in acquiring or building the necessary Internet service
network infrastructure or that the services it offers over any such network will
be profitable.
Competition for qualified employees and personnel in the Internet services
industry is intense and there are a limited number of people with knowledge of
and experience in the Internet service industry, especially in the Latin
American market. The process of locating personnel with the combination of
skills and attributes required to carry out its strategies may often be lengthy.
IFX's success depends to a significant degree on its ability to attract and
retain qualified management, technical, marketing and sales personnel and on the
continued contributions of such people. IFX's employees may voluntarily
terminate their employment at any time. IFX can give no assurance that it will
be successful in attracting and retaining qualified executives and personnel.
The loss of the services of key personnel, or the inability to attract
additional qualified personnel, could have a material adverse effect on IFX's
business, financial condition or results of operations.
TO REMAIN COMPETITIVE, IFX MUST KEEP PACE WITH INTERNET TECHNOLOGY TRENDS
AND EVOLVING INDUSTRY STANDARDS. The market for Internet access and related
services is relatively new and characterized by rapidly changing technology,
evolving industry standards, changes in customer needs and frequent new product
and service introductions. IFX's future success will depend, in part, on its
ability to effectively use leading technologies, to continue to develop and
improve its technical expertise, to enhance its current services, to develop new
products and services that meet changing customer needs, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis. IFX can give no assurance that it will be
successful in accomplishing any of these tasks or that such new technologies or
enhancements will achieve market acceptance. IFX believes that its ability to
compete successfully also depends upon the continued compatibility and
interoperability of its services with products and architectures offered by
various third party vendors. IFX can give no assurance that it will be able to
effectively address the compatibility and interoperability issues raised by
technological changes or new industry standards. In addition, IFX can give no
assurance that services or technologies developed by others will not render
IFX's services or technology uncompetitive or obsolete. If the market for
Internet access services fails to develop, develops more slowly than expected,
or becomes saturated with competitors, or if the Internet access and services
offered by IFX through its ISPs is not broadly accepted, IFX's business,
operating results and financial condition will be materially adversely affected.
In addition, critical issues concerning the commercial use of the Internet
remain unresolved and may impact the growth of Internet use, especially in IFX's
target markets. Despite growing interest in the many commercial uses of the
Internet, many businesses have been deterred from purchasing Internet access
services for a number of reasons, including:
- inconsistent quality of service;
- lack of availability of cost-effective, high-speed options;
4
<PAGE>
- a limited number of local access points for corporate users;
- inability to integrate business applications on the Internet;
- the need to deal with multiple and frequently incompatible vendors;
- inadequate protection of the confidentiality of stored data and
information moving across the Internet; and
- a lack of tools to simplify Internet access and use.
In particular, numerous published reports have indicated that a perceived
lack of security of commercial data, such as credit card numbers, has
significantly impeded commercial use of the Internet to date. There can be no
assurance that encryption or other technologies will be developed that
satisfactorily address these security concerns. Published reports have also
indicated that capacity constraints caused by growth in the use of the Internet
may, unless resolved, impede further development of the Internet to the extent
that users experience delays, transmission errors and other difficulties. The
adoption of the Internet for commerce and communications, particularly by those
individuals and enterprises which have historically relied upon alternative
means of commerce and communication, generally requires the understanding and
acceptance of a new way of conducting business and exchanging information. In
particular, enterprises that have already invested substantial resources in
other means of conducting commerce and exchanging information may be
particularly reluctant or slow to adopt a new strategy that may make their
existing personnel and infrastructure obsolete. The failure of the market for
business-related Internet solutions to continue to develop would adversely
impact IFX's business, financial condition and result of operations.
THE MARKET PRICE FOR IFX'S STOCK MAY BE VOLATILE. IFX's Common Stock has
experienced, and may be subject to significant price fluctuations in response to
a variety of factors, including quarterly variations in operating results,
public announcements of acquisitions, strategic alliances and joint ventures,
general conditions in the Internet industry, and general economic and market
conditions in the markets in which the Company operates. In addition, the stock
market has experienced significant price and volume fluctuations that have
adversely affected the market prices of equity securities of some companies,
including companies in the Internet service business, and that often have been
unrelated to the operating performance of such companies.
IFX IS SUBJECT TO SIGNIFICANT CURRENCY AND EXCHANGE RISKS IN LATIN AMERICA.
Most of IFX's revenues are derived from operations outside the United States and
the majority of its assets are located outside of the United States. The Company
anticipate that a significant percentage of its future revenue and operating
expenses will continue to be generated from operations outside the United States
and the Company expects to continue to invest in Latin American businesses.
Consequently, a substantial portion of its revenue, operating expenses, assets
and liabilities will be subject to significant
5
<PAGE>
foreign currency and exchange risks. Obligations of customers and of IFX in
foreign currencies will be subject to unpredictable and indeterminate
fluctuations in the event that such currencies change in value relative to U.S.
dollars. Furthermore, those customers and IFX may be subject to exchange control
regulations which might restrict or prohibit the conversion of such currencies
into U.S. dollars. Although the Company has not entered into hedging
transactions to limit its foreign currency risks, as a result of the increase in
its foreign operations, the Company may implement such practices in the future.
The Company cannot assure you that the occurrence of any of these factors will
not have a material adverse effect on its business, financial position or
results of operations.
IFX IS DEPENDENT ON ITS SUPPLIERS AND TELECOMMUNICATION PROVIDERS. The
Company is dependent on third party suppliers for its phone line connections,
bandwidth and e-mail. Some of these suppliers are or may become competitors of
the Company, and such suppliers are not subject to any contractual restrictions
upon their ability to compete with the Company. If these suppliers change their
pricing structures, the Company may be adversely affected. Moreover, any failure
or delay on the part of the Company's network providers to deliver bandwidth to
it or to provide operations, maintenance and other services with respect to such
bandwidth in a timely or adequate fashion could adversely affect the Company.
The Company is also dependent on third party suppliers of hardware
components. Although the Company attempts to maintain a minimum of two vendors
for each required product, some components used for providing its networking
services are currently acquired or available from only one source. A failure by
a supplier to deliver quality products on a timely basis, or the inability to
develop alternative sources if and as required, could result in delays which
could have a material adverse effect on the Company. Our remedies against
suppliers who fail to deliver products on a timely basis are limited by
contractual liability limitations contained in supply agreements and purchase
orders and, in many cases, by practical considerations relating to its desire to
maintain good relationships with the suppliers. As its suppliers revise and
upgrade their equipment technology, the Company may encounter difficulties in
integrating the new technology into its network.
Many of the vendors from whom the Company purchase telecommunications
bandwidth, including the local phone companies, competitive local exchange
carriers and other local exchange carriers, currently are subject to tariff
controls and other price constraints which in the future may be changed. In
addition, recently enacted legislation will produce changes in the market for
telecommunications services. Moreover, the Company is subject to the effects of
other potential regulatory actions which, if taken, could increase the cost of
its telecommunications bandwidth through, for example, the imposition of access
charges.
YEAR 2000 COMPLIANCE. IFX is aware of the "Year 2000" problem, which
relates to whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information will generate wrong data and could fail. The Year
2000 problem is pervasive and complex, as virtually every company's computer
operations will potentially be affected in some way. IFX has identified two main
areas of Y2K risk:
1. Internal computer systems or embedded chips could be disrupted or
fail, causing an interruption or decrease in productivity in its
operations; and
2. Computer systems or embedded chips of third parties including,
without limitation, financial institutions, suppliers, vendors,
landlords, customers, international suppliers of
telecommunications services and others, could be disrupted or
fail, causing an interruption or decrease in its ability to
continue its operations. This risk is particularly acute in Latin
America, where many older computer systems are still in use.
State of Readiness
IFX is currently engaged in a process to evaluate its internal status with
respect to the Year 2000 issue, utilizing certain employees in its evaluation of
possible Year 2000 problems. The costs and expenses the Company has incurred in
the evaluation have not been material. Most of its PCs, Laptops, Servers,
Routers and any other computer equipment are Y2K Compliant. To date, IFX has not
discovered any major Year 2000 issues in its internal operations.
Concurrently with the analysis of its internal systems, IFX has
surveyed third-party entities with which it transacts significant business,
including critical vendors and financial institutions, for Year 2000 compliance.
With respect to its most critical vendors, IFX has evaluated the Year 2000
preparedness of its telecommunications providers, on which it is reliant for the
network services crucial to Internet connectivity and web hosting services. It
is actively working to mitigate any potential impact by maintaining, when
possible, diverse providers for such network services.
Risks
IFX can give no assurance that all Year 2000 issues were discovered during
the assessment or that it will not discover additional Year 2000 issues that
could have a material adverse effect. In addition, IFX faces Year 2000 risks
with respect to the acquisitions it makes, especially in Latin America, where
many of the computer systems are older and where Year 2000 preparedness may not
be adequate. Failure of any one provider may have a material adverse impact on
Company operations. At this time, IFX cannot estimate the effect, if any, that
non-compliant systems at these entities could have on it, and IFX can give no
assurance that the impact, if any, will not be material. If any of its material
third parties are not Y2K ready and their non-compliance causes a material
disruption to any of their respective businesses, its business could be
materially adversely affected and the Company could suffer a large reduction of
its revenue due to cancellations from its subscribers. Disruptions could
include, among other things:
6
<PAGE>
- the failure of a material third party's business;
- a loss of power to IFX's facilities;
- a loss of voice and data connections;
- the loss of the e-mail system;
- a subscriber's loss of power and/or telecommunication lines;
- a financial institution's inability to take and transfer funds;
- an interruption in delivery of supplies from vendors; and
- other interruptions in the normal course of its operations, the
nature and extent of which the Company cannot foresee.
The Company will continue to evaluate the nature of these risks, but at
this time the Company is unable to determine the probability that any such risk
will occur, or if it does occur, what the nature, length or other effects, if
any, of such a risk may have on it. If any of its material third parties
experience significant failures in their computer systems or operations due to
Y2K non-compliance, it could affect its ability to process transactions or
otherwise engage in similar normal business activities. For example, IFX and its
customers who communicate internationally will be dependent upon the Y2K-
readiness of many non-U.S. providers of telecommunication services and their
vendors and suppliers. If these providers and others are not Y2K ready, IFX and
its customers will not be able to send and receive data and other electronic
transmissions, which would have a material adverse effect on its revenues and
business and that of its customers.
7
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the quarterly report filed on Form 10-Q for the period ended September 30, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,535,800
<SECURITIES> 0
<RECEIVABLES> 983,900
<ALLOWANCES> (311,000)
<INVENTORY> 0
<CURRENT-ASSETS> 8,846,600
<PP&E> 6,874,900
<DEPRECIATION> (908,700)
<TOTAL-ASSETS> 29,214,600
<CURRENT-LIABILITIES> 7,754,800
<BONDS> 0
0
0
<COMMON> 168,800
<OTHER-SE> 18,053,800
<TOTAL-LIABILITY-AND-EQUITY> 29,214,600
<SALES> 1,218,600
<TOTAL-REVENUES> 1,218,600
<CGS> 1,076,600
<TOTAL-COSTS> 6,319,600
<OTHER-EXPENSES> 22,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,007,900)
<INCOME-TAX> 876,400
<INCOME-CONTINUING> (4,131,500)
<DISCONTINUED> 442,300
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,689,200)
<EPS-BASIC> (.50)
<EPS-DILUTED> (.50)
</TABLE>
