<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, 2000
[ ] 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)
--------------------------------------------------------------------------------
(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, 2000, the issuer had outstanding 13,368,693 shares of common
stock, $.02 par value per share.
<PAGE>
IFX CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C>
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed consolidated balance sheets as of
September 30, 2000 (Unaudited) and June 30, 2000 3
Condensed consolidated statements of operations
for the three months ended September 30, 2000
(Unaudited) and 1999 (Unaudited) 4
Condensed consolidated statements of cash flows
for the three months ended September 30, 2000
(Unaudited) and 1999 (Unaudited) 5
Notes to condensed consolidated financial
statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
for the Period Ended September 30, 2000 14
Item 3 - Quantitative and Qualitative Disclosures
about Market Risk 20
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 21
Item 2 - Changes In Securities And Use Of Proceeds 21
Item 6 - Exhibits and reports on form 8-K 21
(a) Exhibits
27 Financial Data Schedule (EDGAR only)
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1--Financial Statements
IFX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
------------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................................ $ 19,803,700 $ 13,835,500
Receivables, net of allowance for doubtful accounts of $851,800 and $922,500
at September 30, 2000 and June 30, 2000, respectively.................................. 2,006,700 1,208,600
Net assets of discontinued operations.................................................... 563,500 952,600
Income taxes receivable.................................................................. 996,000 1,632,600
Prepaid expenses......................................................................... 1,226,400 746,000
-------------------------------------------------------------------------------------------------------------------------------
Total current assets................................................................... 24,596,300 18,375,300
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET................................................................ 16,866,800 15,190,300
-------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Acquired customer base, net of accumulated amortization of $7,891,100 and $5,511,800,
at September 30, 2000 and June 30, 2000, respectively.................................. 20,327,500 21,220,500
Investments.............................................................................. 2,990,900 3,180,600
Foreign taxes recoverable................................................................ 1,543,300 1,422,400
Other assets............................................................................. 391,800 843,100
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Total other assets............................................................... 25,253,500 26,666,600
-------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS............................................................................... $ 66,716,600 $ 60,232,200
===============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................................................... $ 7,530,500 $ 7,036,200
Accrued expenses......................................................................... 4,670,500 3,993,500
Deferred revenues........................................................................ 309,600 361,900
Liabilities related to acquisitions...................................................... 4,062,900 1,568,000
Current portion of capital lease obligations............................................. 1,671,500 1,935,300
-------------------------------------------------------------------------------------------------------------------------------
Total current liabilities.............................................................. 18,245,000 14,894,900
-------------------------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Notes payable............................................................................ 405,500 374,700
Deferred gain on sale of investment...................................................... 4,451,900 4,451,900
Capital lease obligations, less current portion.......................................... 9,895,700 9,032,500
-------------------------------------------------------------------------------------------------------------------------------
Total long-term liabilities............................................................ 14,753,100 13,859,100
-------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES.......................................................................... 32,998,100 28,754,000
-------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.02 par value; 10,000,000 shares authorized, 2,030,869 and 1,210,398
issued and outstanding at September 30, 2000 and June 30, 2000, respectively........... 25,000,000 14,900,000
Common stock, $.02 par value; 50,000,000 shares authorized, 13,368,693 and 13,295,183
shares issued and outstanding at September 30, 2000 and June 30, 2000, respectively.... 267,400 265,900
Additional paid-in capital............................................................... 71,549,200 69,833,600
Accumulated deficit...................................................................... (52,368,500) (41,059,800)
Accumulated other comprehensive income (loss)............................................ 27,500 (329,000)
Deferred compensation.................................................................... (10,757,100) (12,132,500)
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TOTAL STOCKHOLDERS' EQUITY................................................................. 33,718,500 31,478,200
-------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................................. $ 66,716,600 $ 60,232,200
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
IFX Corporation and Subsidiaries
Condensed Consolidated Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
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Three Months Ended
September 30,
-------------------------------------
2000 1999
-------------------------------------
(unaudited) (unaudited)
<S> <C> <C>
REVENUES:
Dial-up.............................................. $ 2,317,200 $ 910,600
Dedicated line services.............................. 792,300 179,400
Sales to related party............................... 3,265,700 -
Web hosting and design services...................... 301,300 54,900
Other................................................ 814,000 73,700
--------------------------------------------------------------------------------------------------
Total revenues..................................... 7,490,500 1,218,600
--------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of revenues..................................... 4,927,300 1,076,600
General and administrative........................... 6,776,900 2,467,700
Sales and marketing.................................. 292,300 1,107,500
Depreciation and amortization........................ 3,476,800 852,400
Non-cash stock compensation.......................... 2,680,100 815,400
--------------------------------------------------------------------------------------------------
Total operating expenses......................... 18,153,400 6,319,600
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Operating loss from continuing operations........ (10,662,900) (5,101,000)
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OTHER INCOME (EXPENSE):
Interest income...................................... 276,500 85,000
Interest expense..................................... (94,600) -
Loss from operations of equity investees............. (3,721,400) (22,000)
Other................................................ (47,300) 30,100
--------------------------------------------------------------------------------------------------
Total other income, net............................ (3,586,800) 93,100
--------------------------------------------------------------------------------------------------
Loss from continuing operations before income taxes.... (14,249,700) (5,007,900)
Income tax benefit..................................... 1,029,300 876,400
--------------------------------------------------------------------------------------------------
Loss from continuing operations........................ (13,220,400) (4,131,500)
--------------------------------------------------------------------------------------------------
Income from discontinued operations, net of taxes...... 1,911,700 442,300
--------------------------------------------------------------------------------------------------
Net loss .......................................... $(11,308,700) $(3,689,200)
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BASIC AND DILUTED LOSS PER SHARE:
Continuing operations................................ $ (0.99) $ (0.56)
Discontinued operations.............................. 0.14 0.06
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Net loss........................................... $ (0.85) $ (0.50)
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted.................................... 13,319,066 7,423,547
==================================================================================================
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
IFX Corporation and Subsidiaries
Condensed Consolidated Statements Of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
---- ----
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................. $(11,308,700) $(3,689,200)
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation............................................................ 1,066,300 351,400
Amortization............................................................ 2,410,500 501,000
Deferred taxes.......................................................... 0 (876,400)
Bad debt expense........................................................ 340,200 230,900
Non-cash stock compensation............................................. 2,680,100 815,400
Equity in net (income) loss of equity investees......................... 3,721,400 22,000
Effect of deconsolidation of Tutopia.com................................ (2,391,700) -
Change in net assets of discontinued operations......................... 389,100 3,089,000
Changes in operating asset and liabilities:
Foreign taxes recoverable............................................ (120,900) -
Receivables.......................................................... (1,138,300) (315,500)
Income tax receivable................................................ 636,600 -
Prepaid expenses..................................................... (480,400) -
Other assets......................................................... 451,300 (730,100)
Due from affiliates.................................................. - 13,000
Deferred revenues.................................................... (52,300) -
Accounts payable and accrued expenses................................ 1,119,100 1,358,300
Liabilities on acquisitions.......................................... 356,600 -
--------------------------------------------------------------------------------------------------- ---------------
Cash (used) provided by operating activities.............................. (2,321,100) 769,800
--------------------------------------------------------------------------------------------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, primarily customer base..................................... - (774,000)
(Increase) decrease in investments, equity basis.......................... - (13,700)
Increase (decrease) in notes receivable................................... - (2,500)
Purchases of property and equipment....................................... (2,163,100) (1,115,000)
--------------------------------------------------------------------------------------------------- ---------------
Cash (used) provided by investing activities.............................. (2,163,100) (1,905,200)
--------------------------------------------------------------------------------------------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) of notes payable...................................... 30,800 156,500
Proceeds (payments) of capital lease obligation........................... (34,900) -
Issuance of common stock.................................................. - 3,000,000
Issuance of preferred stock............................................... 10,100,000 -
--------------------------------------------------------------------------------------------------- ---------------
Cash provided (used) by financing activities.............................. 10,095,900 3,156,500
--------------------------------------------------------------------------------------------------- ---------------
Effect of exchange rate changes on cash and cash equivalents.............. 356,500 31,900
--------------------------------------------------------------------------------------------------- ---------------
Increase (decrease) in cash and cash equivalents.......................... 5,968,200 2,053,000
Cash and cash equivalents, beginning of period............................ 13,835,500 5,482,800
--------------------------------------------------------------------------------------------------- ---------------
Cash and cash equivalents, end of period.................................. $ 19,803,700 $ 7,535,800
====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................................. $ 94,600 $ -
============ ===============
SUPPLEMENTAL NONCASH DISCLOSURE:
Value of stock issued in conjunction $ 523,000 $ 1,967,200
with acquisitions ============ ===============
Acquisition of equipment through assumption $ 634,300 $ 2,855,700
of capital lease obligations ============ ===============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Description of Business
The condensed consolidated financial statements include the accounts
of IFX Corporation, its wholly-owned subsidiaries, and investments in which
the Company has a controlling financial interest (collectively referred to
herein as "IFX", "IFX Networks" or the "Company"). On August 31, 2000, the
Company's investment in its majority-owned subsidiary, Tutopia.com, was
reduced from approximately 85% to approximately 47%. As a result of this
reduction, the Company began accounting for Tutopia.com under the equity
method. Accordingly, the Company restated prior periods to reflect this
change in reporting entity. This restatement had no effect on the Company's
loss or loss per share as previously reported. The Company's fiscal year
end is June 30.
IFX has created an extensive pan-regional Internet platform as a
leading provider of Internet-based network products and services throughout
Latin America. IFX's Internet operations are based in Miami, Florida. The
IFX network currently covers over 58 cities in 15 countries: Argentina,
Bolivia, Brazil, Chile, Colombia, Costa Rica, El Salvador, Honduras,
Guatemala, Mexico, Nicaragua, Panama, Uruguay, Venezuela and the United
States.
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements have been
prepared by the Company and are unaudited pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
related to the Company's significant accounting policies and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States have been condensed or omitted. In the opinion of management, these
unaudited condensed consolidated financial statements reflect all material
adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the consolidated financial position and consolidated
results of operations for the interim periods presented. These results are
not necessarily indicative of a full year's results of operations. Certain
reclassifications have been made to the prior period financial statements
to conform to the September 30, 2000 presentation.
Although the Company believes that the disclosures provided are
adequate to make the information presented not misleading, these unaudited
interim condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K/A for the year
ended June 30, 2000.
The Company's condensed consolidated financial statements include the
activity of the Company, its wholly-owned subsidiaries and investments in
which the Company has a controlling financial interest. All significant
intercompany transactions have been eliminated in consolidation.
<PAGE>
Long-Lived Assets
In the event that facts and circumstances indicate that the costs of
assets may be impaired, an evaluation of the recoverability is performed.
If an evaluation is required, the estimated future undiscounted cash flow
associated with the asset is compared to the asset's carrying amount to
determine if a write-down to market value is required. The Company
evaluates the possible impairment of long-lived assets by reviewing cash
flows generated on a country-by-country basis, which is consistent with the
way the Company's segments are reported. The Company does not believe that
any impairment has occurred at September 30, 2000.
Investments
The Company has minority investments in ePagos.com, Inc., Yupi
Internet, Inc. and Centronet.com, Inc., in which the Company does not have
the ability to exercise significant influence over either investee.
Accordingly, the Company accounts for these investments under the cost
method. The Company has as of August 31, 2000 an approximate 47% investment
in Tutopia.com, Inc. and accounts for this investment under the equity
method. The Company's investment in Yupi Internet, Inc. is subject to an
agreement with Lee Casty, formerly a significant shareholder of the
Company.
Comprehensive Income
During the three months ended September 30, 2000 and 1999 the
Company's comprehensive loss was $11.0 million and $3.7 million,
respectively, compared with net loss of $11.3 million and $3.7 million,
respectively. The primary difference between comprehensive and net loss was
due to foreign currency translation adjustments.
<PAGE>
Computation of Earnings or Loss per Common Share
Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per common
share is calculated based upon the sum of the weighted average number of
shares outstanding and the weighted average number of potentially dilutive
securities which consist of stock options and common shares issuable upon
the conversion of Preferred Stock. Approximately 4,256,800 and 744,600 of
potentially dilutive securities have been excluded from the calculation of
diluted loss per share from continuing operations for the three months
ended September 30, 2000 and 1999, respectively, since their effect would
have been anti-dilutive.
<PAGE>
2. DISCONTINUED OPERATIONS
Income from discontinued operations primarily consists of amounts
earned, net of related expenses, based on the financial performance of
entities divested prior to July 1, 1999. Such amounts are expected to
continue, depending upon the financial performance of the divested
entities, through the Company's fiscal year ending June 30, 2002. In
September 2000, the Company sold for $2.4 million a preference share which
entitled the Company to future earn-out payments from one of the divested
entities.
The information set forth in the remaining Notes to Condensed
Consolidated Financial Statements relates to continuing operations unless
otherwise specified.
3. RECENT DEVELOPMENTS
IBM Global Financing. In August 2000, IBM Global financing increased the
amount of financing available to the Company under a lease agreement from
$0.4 million to $2.2 million subject to certain conditions.
Speedcom Wireless International Corporation. In July 2000, the Company
entered into a $1.2 million lease agreement with Speedcom, a wireless
equipment provider. Under the terms of the agreement, IFX will lease up to
$1.2 million of wireless equipment from Speedcom to develop the Company's
network in Latin America. As of September 30, 2000, IFX has leased
approximately $0.6 million of equipment under this agreement.
<PAGE>
Network Appliance. In September 2000, IFX entered into a $1.4 million lease
agreement with Network Appliance, a storage and caching provider. Under the
terms of the agreement, IFX has the option to lease up to $1.4 million of
storage and caching equipment from Network Appliance.
UBS Capital Americas III, L.P., $25 million investment in IFX. On June 15,
2000, IFX received a $14.9 million round of private equity financing led by
UBS Capital Americas III, L.P. ("UBS Capital Americas"). An additional
$10.1 million was received on July 17, 2000, from a group lead by UBS
Capital Americas. In exchange, IFX issued in total 2,030,869 Series A
Preferred Shares. Each Series A Preferred Share is currently exchangeable
for 1 share of IFX common stock. The proceeds will be used in part to
further the integration of IFX's information systems infrastructure, to
increase marketing activities and to expand the Company's direct sales
force to service the corporate market in Latin America. In addition, IFX
plans to use the proceeds to increase the number of company-owned POPs in
Latin America as well as broaden its value-added service offerings to its
growing corporate base.
UBS Capital Americas III, L.P. led a $20 million investment in Tutopia.com.
On August 31, 2000, Tutopia.com, Inc., received $20 million of private
equity financing from a group led by UBS Capital Americas. An entity
controlled by Mr. Lee Casty, a former significant shareholder of the
Company, participated in this group, and accounted for approximately $4.9
million of the group's investment. Following this financing, IFX owns
approximately 47% of the outstanding stock of Tutopia. UBS Capital Americas
and its affiliates which purchased Tutopia Series A Preferred Stock have
the right to appoint a majority of Tutopia's directors, the entity
controlled by Mr. Casty has the right to appoint one director of Tutopia,
and IFX has the right to appoint one director of Tutopia. Prior to the UBS-
led investment, Tutopia represented one of the Company's two major business
lines. IFX has entered into an agreement with Tutopia to be the provider of
Internet connectivity services to Tutopia for a period of three years.
Either IFX or Tutopia can renew the interconnectivity agreement for a
fourth year. After that agreement terminates, there can be no assurances
that the Company will be the sole supplier of Internet connectivity
services to Tutopia.
Inktomi Agreement. In September 2000, IFX entered into a $0.5 million
agreement with Inktomi, a software caching management company. Under the
terms of the agreement, IFX will purchase the Inktomi software caching
solution to improve the Company's bandwidth utilization and quality of
service.
<PAGE>
4. TUTOPIA.COM OPERATING RESULTS
As discussed in Note 1, during the quarter ended September 30, 2000, the
Company's ownership interest in Tutopia.com was reduced from approximately 85%
to approximately 47% and, as a result, the Company began accounting for its
investment in Tutopia under the equity method.
The operating results of Tutopia.com are as follows:
<TABLE>
<CAPTION>
Three months ended September 30,
2000 1999
---------- ----------
<S> <C> <C>
Revenues...................................... $ 90,900 $ --
Cost of revenues.............................. 4,326,100 --
----------- ----------
Gross loss.................................... (4,235,200) --
Net loss...................................... $(6,950,800) $ --
</TABLE>
5. GEOGRAPHIC INFORMATION
The Company is structured primarily around the geographic markets it serves
and operates reportable segments in Argentina, Bolivia, Brazil, Chile, Mexico,
United States and Venezuela. All of the segments provide Internet-related
network services. The Company evaluates performance based on profit or loss
from operations before income taxes excluding interest income and expense,
income (loss) from investees accounted for under the equity method, and gains
or losses from securities and other investments. During the period ended
September 30, 2000, the Company derived approximately 44% of its revenue from
Tutopia.com, Inc.
<PAGE>
Selected financial information for the three months ended September 30,
2000 and 1999 by segment is presented below:
<TABLE>
<CAPTION>
Three months ended September 30, 2000 Three months ended September 30, 1999
------------------------------------------ ------------------------------------------
Revenues Loss from Total Revenues Loss from Total
continuing Assets continuing Assets
operations operations
before income before income
taxes taxes
------------------------------------------ -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Brazil $1,395,800 $(1,647,500) $21,959,700 $ 108,500 $ (106,800) $ 120,800
Chile 792,400 (194,700) 6,068,400 410,700 (597,000) 1,835,200
Mexico 461,300 (1,128,900) 8,255,900 268,900 (195,800) 911,800
Venezuela 498,800 (314,700) 3,736,000 262,600 (103,300) 670,900
Bolivia 325,700 (137,500) 1,809,000 101,500 (126,800) 1,128,700
Argentina 101,400 (935,700) 1,419,300 - (215,400) 400,900
United States 3,306,500 (8,658,800) 17,092,900 - (2,645,100) 23,178,000
All Other 608,600 (1,231,900) 6,375,400 66,400 (1,017,700) 968,200
-------------------------------------------- ------------------------------------------
Total $7,490,500 $(14,249,700) $66,716,600 $1,218,600 $(5,007,900) $29,214,500
============================================ ==========================================
</TABLE>
6. STOCKHOLDERS' EQUITY
During the three months ended September 30, 2000, the Company issued
approximately 73,500 shares of common stock. As of September 30, 2000, there
were approximately 2,460,000 shares of the Company's common stock reserved for
stock options and warrants, and 210,000 warrants had been issued in order to
terminate a certain agreement with Spinway.
On June 15, 2000, IFX entered into a stock purchase agreement (the "Stock
Purchase Agreement") to sell $25 million of preferred stock of which $14.9
million was received by the Company on June 15, 2000 and $10.1 million was
received on July 17, 2000, from UBS Capital Americas III, L.P. and UBS Capital
LLC (collectively, "UBS Capital Americas"), to be used for working capital
purposes. Pursuant to the Stock Purchase Agreement, IFX has issued 2,030,869
shares of IFX Series A Preferred Stock to UBS Capital Americas III, L.P. and
UBS Capital LLC in exchange for $25 million. Each share is exchangeable for 1
share of common stock, subject to adjustment if IFX issues shares of common
stock (or certain common stock equivalents) at less than $12.31 per share.
Each share of preferred stock has a liquidation preference equal to the sum
of: a) $12.31 per share and b) dividend rate on $12.31 for each year that the
preferred share is outstanding. The liquidation preference is payable both on
a liquidation of IFX as well as a merger, recapitalization, reorganization,
sale of voting control to a single buyer or a group of related buyers in one
or a series of related transactions, or other business combination transaction
involving IFX in which the shareholders of IFX immediately prior to the
consummation of such transaction do not own at least a majority of the
outstanding shares of the surviving corporation or IFX (as applicable)
immediately following the consummation of such transaction or sale of all or
substantially all of the assets of IFX. Dividends accrue on the shares at the
same rate that dividends accrue on shares of IFX common stock. The holders of
the preferred stock have the right to elect one director to IFX's Board of
Directors. In addition, under a Stockholders Agreement entered into as of June
15, 2000, as amended, UBS Capital Americas, International Technology and the
Casty Grantor Subtrust have agreed to vote for the election of an additional
<PAGE>
director designated by UBS Capital Americas, a director designated by Mr.
Eidelstein (the Company's President), a director designated by
International Technology, a director jointly designated by International
Technology and Mr. Eidelstein, and two independent directors reasonably
acceptable to UBS Capital Americas.
7. ACCRUED LIABILITIES ON ACQUISITIONS
On most of IFX's acquisitions, the Company pays a certain amount of the
purchase price at the closing ("first payment") and another amount 60 to
360 days after closing ("second payment"). The amounts owed by IFX to the
ISP's it has acquired are classified as liabilities related to
acquisitions. As of September 30, 2000 and June 30, 2000, IFX had accrued
liabilities on acquisitions of approximately $4.1 million and $1.6 million,
respectively. In general, the amounts are payable in cash or common stock
of the Company at the fair market value on the date the obligation is
settled.
8. FOREIGN VALUE ADDED TAXES
In general, IFX's foreign subsidiaries pay a Foreign Value Added Tax
("VAT") on their purchases. The foreign taxes recoverable is the difference
between what IFX has paid in VAT Taxes and what it has collected in VAT
from it's customers. At September 30, 2000 and June 30, 2000, IFX had a net
difference of approximately $1.5 million and $1.4 million, respectively,
which was classified as Foreign Taxes Recoverable.
9. INCOME TAX PROVISION
For the three months ended September 30, 2000, the Company recorded a tax
benefit of approximately $1.0 million from its continuing operations
compared to a benefit of $0.9 million for the three months ended September
30, 1999. For the three months ended September 30, 2000, the Company
recorded a tax provision of approximately $1.0 million from its
discontinued operations compared to a tax provision of approximately $0.2
million for the corresponding period in the prior year. Operating losses
which could not be utilized to recover prior year tax liabilities have been
fully provided for with a valuation allowance at June 30, 2000.
10. LITIGATION
The Company is a defendant in, and may be threatened with, various legal
proceedings arising from its regular business activities. Management, after
consultation with legal counsel, is of the opinion that the ultimate
liability, if any, resulting from any pending action or proceedings will
not have a material effect on the financial position or results of
operations of the Company. In addition, certain of the Company's
discontinued operations are involved in litigation which may impact the
Company in the event of an unfavorable outcome. The Company believes that
any loss which may be incurred will not have a material effect in the
Company's financial position or results of operations.
11. SUBSEQUENT EVENTS
Nortel Networks Agreement. In October 2000, the Company entered into a
lease agreement with Nortel Networks (CALA), Inc., providing the Company
with the option to purchase up to $5.0 million of Nortel networking
equipment, software and consulting services. The equipment will be used to
continue to expand the Company's network.
CrossKeys Agreement. In November 2000, the Company entered into an
agreement with CrossKeys to purchase CrossKey's Dyband software for
approximately $0.4 million.
<PAGE>
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company's statement of position and results of operations include the
accounts of IFX Corporation, its wholly-owned subsidiaries, and investments in
which the Company has a controlling financial interest (collectively referred to
herein as "IFX", "IFX Networks" or the "Company"). The Company's June 30, 2000
balance sheet has been restated to exclude the balances of Tutopia.com. On
August 31, 2000, the Company's ownership interest in Tutopia.com was reduced to
approximately 47% and, as a result, the Company did not consolidate Tutopia.com
at September 30, 2000 and now accounts for this investment under the equity
method. In addition, the Company's income from discontinued operations primarily
consists of amounts earned, based on the financial performance of entities
divested prior to July 1, 1999, net of related expenses incurred. Such income is
expected to continue, depending upon the financial performance of the divested
entities, through the Company's fiscal year ending June 30, 2002. In September
2000, the Company sold for $2.4 million a preference share which had entitled
the Company to future earn-out payments from one of the divested entities.
The following discussion and analysis addresses the Company's results of
operations and financial condition and should be read in conjunction with the
Company's condensed consolidated unaudited financial statements listed in Part
I, Item I and the notes thereto appearing elsewhere in this Form 10-Q, and the
Company's audited Consolidated Financial Statements listed in Part II, Item 7
and the Notes thereto appearing in the Company's fiscal year 2000 Annual Report
on Form 10-K/A.
IFX Corporation, a Delaware corporation, was incorporated in 1985. IFX has
created an extensive pan-regional Internet platform as a leading provider of
Internet-based products and services throughout Latin America. IFX's operations
are headquartered in Miami, Florida. Since November 1998, IFX has established a
pan-regional Internet Protocol ("IP") network through a series of acquisitions
and Company start-up operations. The IFX network currently covers over 58 cities
in 15 countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, El
Salvador, Honduras, Guatemala, Mexico, Nicaragua, Panama, Uruguay, Venezuela and
the United States.
<PAGE>
RESULTS OF OPERATIONS
Revenues
The companies that we have acquired generally had both business and
consumer customers at the time we acquired them. We plan to grow IFX's customer
base and revenues primarily by marketing Internet access and value-added
services to businesses users in our markets. In light of
our focus, we expect the number of our business customers to grow more rapidly
than the number of our consumer customers. We also expect that revenue from the
sale of our value-added services will increase more rapidly than revenue from
the sale of dial-up Internet access services. As a result, our current customer
and revenue mix is not expected to be indicative of our future customer and
revenue mix.
We provide Internet access service to our customers under contracts that
typically range from one month for dial-up access services to one year or more
for dedicated access services. Existing dial-up subscribers will continue to pay
at the end of each subscription month. Following the introduction of our Portal
software, all new dial-up access customers will pay their subscription fees in
advance. We currently offer only a premium dial-up Internet access service for a
single fee. However, we have allowed customers that were on various rate plans
to continue those plans. We intend to encourage these users to migrate to our
premium dial-up plan. If a significant number of users migrate to free Internet
access services, revenues from dial-up subscribers will decrease. All of our
access revenues are recognized as they are earned.
We also derive revenues from providing wholesale Internet access to
businesses that resell such access on a branded or private label basis. Fees
for wholesale access are generally billed on a monthly basis after services are
rendered. Wholesale access customers are billed on either a per port basis or a
per hour basis. Revenues from our wholesale Internet access services are
recognized in the period in which the services are provided.
Our revenues from value-added Internet services come from web hosting,
domain name registration and co-location services. Services such as web hosting
and collocation services are sold on a monthly subscription basis and are paid
for in advance. Our domain name registration service is billed through a one-
time fee. These revenues are recognized in the period in which the services are
provided.
Internet access charges and fees for value-added services vary among the
countries in which we do business, depending on competition, economic and
regulatory environments and other market factors. In some markets, we have
reduced prices, especially for access services, as a result of competitive
pressure. We expect that this pressure will continue in our markets as the
demand for, and supply of, Internet services continues to grow. The period-to-
period comparisons of our results of operations set forth below include the
results of operations from acquisitions that we made during the applicable
period. Results of operations from acquisitions completed during a period have
been included from the time of the closing of each acquisition.
Revenues from continuing operations increased to $7.5 million for the three
months ended September 30, 2000, from $1.2 million for the three months ended
September 30, 1999. The increase in revenues was primarily related to the
Company's acquisitions and expansion of its user base resulting from the growth
in value added services such as dedicated access and from wholesale access sold
to Tutopia.com ("Tutopia"). During the three months
<PAGE>
ended September 30, 2000, the Company reflected approximately $3.3 million in
revenue from Tutopia for network access fees.
Three Months Ended September 30,
--------------------------------
2000 1999 % Increase
---------------------------------------------
Dial-up $2,317,200 $ 910,600 155%
Dedicated line services 792,300 179,400 342%
Sales to related party 3,265,700 - -
Web hosting and design services 301,300 54,900 449%
Other 814,000 73,700 1,005%
--------------------------------------------------------------------------------
Total $7,490,500 $1,218,600 515%
Costs of Revenues
Our cost of revenues from providing Internet services are the costs we
incur to carry customer traffic to and over the Internet. We lease lines that
connect our POPs to our national hubs. We pay other network providers for
transit, which allows us to transmit our customers' information to or from the
Internet over their networks. We also have other recurring telecommunications
costs, including the cost of local telephone lines our customers use to reach
our POPs and access our services, and satellite bandwidth costs to connect the
national hubs to the Internet backbone. We expect that our operating costs from
providing Internet services will increase as we increase capacity to meet
customer demand. We expect that these costs will decline as a percentage of
revenue, however, as we expand our owned network facilities and as competition
drives the overall price we pay for network capacity down. We also expect costs
to decline as wireless technology usage expands and the telecommunication
markets in Latin America deregulate.
Cost of revenues increased to $4.9 million for the three months ended
September 30, 2000 from $1.1 million for the three months ended September 30,
1999. The increase was primarily related to our network expansion in order to
accommodate the growth in the user base, especially for Tutopia and for
dedicated access.
General and Administrative Expenses
Our general and administrative expenses are comprised primarily of
compensation costs. Compensation costs include salaries and related benefits,
commissions and bonuses. Other general and administrative expenses include the
costs of travel, rent, utilities, insurance and professional fees. We expect
that our general and administrative expenses will increase to support our
growth.
General and administrative expenses increased to $6.8 million for the three
months ended September 30, 2000 from $2.5 million for the three months ended
September 30, 1999. General and administrative expenses increased primarily
because of the increase in payroll, which was increased to support the Company's
expansion in Latin America.
Sales and Marketing
Sales and marketing expenses consist primarily of advertising costs,
distribution costs and related production costs. Sales and marketing expenses
decreased to $0.3 million for the three months ended September 30, 2000 from
$1.1 million for the three months ended September 30, 1999.
Depreciation and amortization
A large component of our depreciation and amortization expense is the
amortization of our acquired customer base. The value of our acquired customer
bases, which we amortize over three years using the straight-line method, was
created as a result of the allocation of the price we paid to acquire a company
which was in excess of the value of its tangible assets. We also recognize
depreciation expense primarily related to telecommunications equipment,
computers and network infrastructure. We depreciate these assets over their
useful lives, generally ranging from three to ten years. We expect that our
depreciation expense will increase as we expand our network infrastructure.
<PAGE>
Depreciation and amortization expenses increased to $3.5 million for the
three months ended September 30, 2000 from $0.9 million for the three months
ended September 30, 1999. The increase in depreciation is attributable to the
increase in fixed assets, capitalized software and capital leases of
approximately $2.7 million. The increase in amortization expense is due to
approximately $28.2 million of acquired customer base due to acquisitions the
Company completed in Latin America during fiscal 2000.
Non-Cash Stock-Based Compensation Expense
For the three months ended September 30, 2000, we recorded non-cash stock
compensation expense of approximately $2.7 million compared to $0.8 million for
the three months ended September 30, 1999. The increase is attributable
predominantly to the current-year amortization related to the issuance of
additional employee option grants during the prior year. Also, as of September
30, 2000, we reflected as a reduction of Stockholders Equity approximately $1.4
million of deferred compensation, which will be amortized in future years over
the vesting period of the individual options (generally 3 years).
Other Income (Expense)
Interest income increased to $276,500 for the three months ended
September 30, 2000 from $85,000 for the three months ended September 30, 1999.
Interest income increased as a result of the increase in cash and cash
equivalents attributable to equity funding received by the Company in June and
July 2000.
Interest expense increased to $94,600 from $0 for the three months ended
September 30, 2000 and 1999, respectively, as a result of increase in
borrowings under capital lease agreements.
Loss from operations of equity investees increased to $3.7 million from
$22,000. The increase is related to the treatment of Tutopia as an equity
investee rather than as a consolidated subsidiary as further discussed in
footnote 1 to the unaudited condensed consolidated financial statements.
Income tax provision
For the three months ended September 30, 2000, the Company recorded a tax
benefit of approximately $1.0 million from its continuing operations compared to
a benefit of $0.9 million for the three months ended September 30, 1999.
Operating losses which could not be utilized to recover prior year tax
liabilities have been fully provided for with a valuation allowance at June 30,
2000.
Income from discontinued operations, net
For the three months ended September 30, 2000, the Company earned
approximately $1.9 million from its discontinued operations. That compares to
$0.4 million earned for the three months ended September 30, 1999. The increase
was related to the settlement of the remaining contingent sales price relating
to IFX, Ltd. for $2.4 million.
Net loss and loss per share
As a result of the factors discussed above, IFX's loss from continuing
operations for the three months ended September 30, 2000 was approximately $13.2
million, or $(0.99) per share, compared to a net loss of $4.1 million, or
$(0.56) per share, for the three months ended September 30, 1999. The loss of
$13.2 million includes non-cash charges of $9.9 million related to depreciation,
amortization, stock compensation, and loss from operations of equity
investees. Including discontinued operations, the Company lost $11.3 million,
or $(0.85) per share, compared to a net loss of $3.7 million, or $(0.50) per
share, for the three months ended September 30, 1999.
FINANCIAL CONDITION
Liquidity and Capital Resources
For the three months ended September 30, 2000, cash used by ongoing and
discontinued operations was approximately $2.3 million compared to cash provided
by ongoing and discontinued operations of $0.8 million for the three months
ended September 30, 1999. The majority of cash in the three months ended
September 30, 2000 was provided by the revenues from the Internet operations and
the earn-out payments related to discontinued operations. The cash used in
operations is mainly related to the connectivity expenses of our network,
operating leases, payroll and advertising. In addition, the Company invests cash
not needed for operations at any of its subsidiaries in short-term investments
such as U.S.
<PAGE>
Government obligations and overnight time deposits. As of September
30, 2000, the Company held approximately $19.8 million in cash and equivalents.
For the three months ended September 30, 2000, cash used in investing
activities was approximately $2.2 million compared to cash used in investing
activities of $1.9 million for the same period in 1999. Cash used in investing
activities was related to the purchase of property and equipment of
approximately $2.2 million.
For the three months ended September 30, 2000, cash provided by financing
activities was approximately $10.1 million compared to cash provided by
financing activities of $3.2 million for the three months ended September 30,
1999. The increase is primarily related to the second portion of the investment
from UBS Capital Americas for $10.1 million.
Management believes existing cash and cash-equivalents together with
operating cash flows from the earn-out payments from the sale of assets and
amounts to be paid by Tutopia should provide adequate resources to fund ongoing
operating requirements and future capital expenditures related to the expansion
of existing businesses and development of new projects at least the next 12
months.
Forward-Looking Statements
The statements contained herein that are not historical facts are "forward-
looking statements" (within the meaning of the Private Securities Litigation
Reform Act of 1995). The safe harbor provisions provided in Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), apply to
forward-looking statements the Company makes. These statements can be identified
by the use of forward-looking terminology such as "believes," "expects," "may,"
"will," "should," or "anticipates" or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy that involve
risks and uncertainties. The Company wishes to caution you that these forward-
looking statements addressing the timing, costs and scope of the Company's
acquisition of, or investments in, existing or future ISPs, the revenue and
profitability levels of the ISPs in which the Company invests, the anticipated
reduction in operating costs resulting from the integration and optimization of
those ISPs, and other matters contained herein regarding matters that are not
historical facts, are only predictions. The Company can give no assurance that
the future results indicated, whether expressed or implied, will be achieved.
These projections and other forward-looking statements are based upon a variety
of assumptions relating to the Company's business, which, although the Company
considered reasonable, may not be realized. Because of the number and
uncertainties of the assumptions underlying the Company's projections and
forward-looking statements, some of the assumptions may not materialize and
unanticipated events and circumstances may occur subsequent to the date of this
report. These forward-looking statements are based on current expectations, and
the Company assumes no obligation to update this information. The inclusion of
projections and other forward-looking statements should not be regarded as a
representation by the Company or any person that these estimates and projections
will be realized, and actual results may vary materially.
<PAGE>
Item 3. - Quantitative and Qualitative Disclosures about Market Risk
Exchange Rate and Inflation Risk
The Company's continuing operations are focused primarily in Latin America,
subjecting the Company to certain political, economic and commercial risks and
uncertainty not typically found in the U.S. The Company's exposure to market
risk is directly related to its role as a Latin American network company and its
primary market risk exposure relates to foreign exchange rate risk. Foreign
exchange rate risk arises from the possibility that changes in foreign currency
exchange rates will adversely impact the value of the Company's revenues,
assets, liabilities and/or equity. When the Company operates in a foreign
country, the value of the local currency will probably fluctuate. This
fluctuation can cause the Company to gain or lose on the translation to US
Dollars.
Interest Rate Risk
The Company's short-term investments are classified as cash and cash
equivalents with original maturities of three month or less. Therefore, changes
in the market's interest rates should not affect the value of the investments as
recorded by IFX.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
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.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On July 17, 2000, IFX sold 820,471 shares of Series A Class II Convertible
Preferred Stock (the "Preferred Stock").
(b) The Preferred Stock was sold to UBS Capital Americas III L.P. and UBS
Capital LLC.
(c) the Preferred Stock was sold for $12.31 per share for an aggregate offering
price of $10,100,000.
(d) The Preferred Stock was sold pursuant to Section 4(2) of the Securities Act
of 1933.
(e) The Preferred Stock is convertible at any time upon option of the holders
into the number of shares of Common Stock determined by dividing (i) the
Stated Value of the Preferred Stock (currently $12.31) by (ii) the
Conversion Price on the date of conversion (currently $12.31). The
Preferred Stock is automatically converted based on the formula stated in
the preceding sentence upon the closing of an underwritten public offering
of at least $75 million of Common Stock, in which IFX receives gross
proceeds of at least $56.25 million and in which the IFX equity is valued
at no less than $400 million pre-offering. Under the terms of the Preferred
Stock, the holders of Preferred Stock must approve any dividend payable to
the holders of the Common Stock.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (EDGAR only)
(b) Reports on Form 8-K dated July 17, 2000 regarding the July 17, 2000 UBS
Capital Americas preferred stock investment.
<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 20, 2000 By: /S/ MICHAEL SHALOM
-------------------------
Michael Shalom
Chief Executive Officer
Dated: November 20, 2000 By: /S/ JOSE LEIMAN
-----------------------
Jose Leiman
Chief Financial Officer
