-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N6Y4YgWW7sW+MCpFhA7cV4XJ6EMqNHk249mXITIYXX1LGeq7hRo37uDAR7S0Nh96 e+x4kyreF3hJf7Q8RXzdGw== 0000950131-99-005508.txt : 19991227 0000950131-99-005508.hdr.sgml : 19991227 ACCESSION NUMBER: 0000950131-99-005508 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IFX CORP CENTRAL INDEX KEY: 0000792861 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 363399452 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15187 FILM NUMBER: 99719131 BUSINESS ADDRESS: STREET 1: 707 SKOKIE BLVD 5TH FLOOR CITY: NORTHBROOK STATE: IL ZIP: 60062 BUSINESS PHONE: 8474129411 MAIL ADDRESS: STREET 1: 707 SKOKIE BLVD 5TH FLOOR CITY: NORTHBROOK STATE: IL ZIP: 60062 FORMER COMPANY: FORMER CONFORMED NAME: CARL JACK 312 FUTURES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: 312 FUTURES INC DATE OF NAME CHANGE: 19860916 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ___________________ to ____________________ Commission file number 0-15187 IFX Corporation (Exact name of registrant as specified in its charter) Delaware 36-3399452 - ------------------------------------------- ---------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 707 Skokie Blvd Ste 580, Northbrook, Illinois 60062 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (847) 412-9411 -------------- Securities registered pursuant to Section 12(g) of the Act: $.02 Par Value Common Stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of August 31, 1999, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $56,606,700. As of August 31, 1999, there were outstanding 7,695,377 shares of the Registrant's common stock. PART I Item 1 - Business - ----------------- HISTORICAL BACKGROUND IFX Corporation (IFX Corporation and its subsidiaries are referred to herein as "IFX" or the "Company") was incorporated under the laws of the State of Illinois in July 1985 and changed its state of incorporation to Delaware in May 1994. Prior to July 1996, IFX's primary business was providing commodity brokerage services through its principal operating subsidiary, Index Futures Group, Inc. ("Index"). On July 1, 1996, IFX sold substantially all of its brokerage assets (other than the assets of its 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. The purchase price for such sale consisted of cash earn-out payments based upon the sold business' profitability 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 U.K. subsidiary, IFX Ltd., which conducts foreign exchange business as a registrant of the British Securities and Futures Authority. From July 1996 through June 30, 1999, IFX has received approximately $10.4 million of earn-out payments from the sale of its brokerage assets. Prior to January 1, 1999, the earn-out payments were based on 40% of the sold business' profitability. In calendar year 1999, the earn-out payments were based on 30% of the sold business' profitability and, in calendar years 2000 and 2001, will be based on 20% of the sold business' profitability. In June 1999, IFX divested itself of 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 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 but decided, rather, to continue to develop its businesses in the Internet industry. IFX believes that the Internet industry presents significant opportunities for IFX's future investment and growth. In particular, IFX believes that the market for Internet services in Latin America may present substantial growth potential due to the increasing demand for Internet services, relatively low market penetration and the absence of any dominant regional or pan-regional (i.e., intercountry) service providers. Accordingly, IFX has begun to pursue, and intends to continue to pursue, the acquisition and development of Internet access and related services businesses, initially in South America and Mexico. Ultimately, IFX seeks to form a Latin American pan-regional network of ISPs, under the brand name Unete. Unete is the Spanish word for `Join Us,' which IFX is using as a marketing term for people to join us and become members of our Unete service and Internet community. The Unete service would enable a subscriber traveling in major Latin American and North American cities to access the Internet by making a local telephone call, regardless of whether or not such subscriber was in his or her home country. EMPLOYEES IFX's success is dependent in part upon its ability to attract and retain qualified, experienced employees. As of September 15, 1999, IFX employed approximately 245 employees. IFX believes that its relationship with its employees is good. COMPETITION The market for Internet connectivity and related services is extremely competitive, characterized by rapidly changing technology and evolving standards -2- which can be significantly influenced by the marketing and pricing decisions of the largest industry participants. IFX anticipates that competition will continue to intensify as the use of the Internet grows. Companies in this industry compete primarily on the basis of quality and consistency of service, price (including the free ISP business model), accessibility and geographic coverage. IFX competes with U.S.-based and foreign-based Internet service providers and also with government-owned or subsidized telecommunications providers. RECENT DEVELOPMENTS AND ACQUISITIONS Agreement with International Technology Investments, LC. In November 1998, IFX entered into an agreement with International Technology Investments, LC ("International Technology") with respect to the provision of Internet services and the acquisition of existing Internet service providers (ISPs) and related businesses, primarily in Latin America and other international markets. IFX pursued this agreement because it believes that International Technology has extensive experience and existing business relationships with participants in the computer distribution industry in Latin America, which relationships should be useful in developing IFX's Internet access and related services business in these markets. As part of the November 1998 agreement, International Technology contributed an initial $1,000,000 to IFX and International Technology received 500,000 shares of common stock and the right to purchase an additional 5.5 million shares from IFX, at a price of $2.00 per share, for its contribution. International Technology is not required to make any additional capital contributions; however, as of the date of this report, International Technology has contributed $1,500,000 in additional capital to IFX and International Technology has received 750,000 shares of Common Stock from IFX, at a purchase price of $2.00 per share, for its additional contribution. In addition, in September 1999 International Technology contributed to IFX $1.5 million for which 750,000 shares have not yet been issued. The November 1998 agreement grants International Technology the right to acquire up to 5,500,000 shares of Common Stock for $2.00 per share in addition to the initial 500,000 shares acquired by International Technology. International Technology's purchase option, which now covers 4,000,000 shares of Common Stock, expires in January 2004. Joseph M. Matalon, a director of the Company, and Michael Shalom, the Company's Chief Executive Officer, are affiliates of International Technology. Investment in Telcom.Net, L.P. In December 1998, IFX acquired a 25% limited partnership interest in Telcom.Net, L.P. ("Telcom.Net"), a telecommunications and Internet software development company based in Aventura, Florida. Through its investment in Telcom.Net, IFX plans to offer its subscribers various value added services, including the option to receive voice-over Internet services, electronic-commerce merchant services and web hosting services, provided by Telcom.Net. The general partner and co-founder of Telcom.Net is Joel M. Eidelstein, IFX's President. IFX's limited partnership interest entitles it to receive priority distributions of up to $200,000, which is the amount of capital IFX invested in Telcom.Net. In addition, after all of Telecom.Net's other partners have received priority distributions equal to their aggregate invested capital, IFX is entitled to receive between 20 to 25% of the profits of Telcom.Net, depending on cash flow and possible dilution of its interest. IFX had made certain loans to Telcom.Net and guaranteed certain liabilities owed by Telcom.Net to Qwest/LCI, International. Argentinean License. On March 23, 1999, an affiliate of IFX was granted a license from the government of Argentina to offer full value added telecommunications services and data transmission throughout the country of Argentina. -3- Colombian License Lease. IFX is presently leasing, and is awaiting approval of, a license from the government of Colombia which would permit it to offer full value added telecommunications services and data transmission throughout the country of Colombia. Agreement to contract Direct U.S. Internet Connection. On March 25, 1999, IFX entered into an agreement with InterPacket Group, Inc. ("InterPacket"), a provider of high speed Internet access and telephony services to the international wholesale market. Under the agreement, InterPacket will provide IFX up to 50 Mbps of Internet connectivity to be allocated among IFX's planned sites throughout Latin America. Interweb Mexico, S.A. de C.V. On April 8, 1999, IFX purchased all of the capital stock of Interweb Mexico, S.A. de C.V., a leading ISP in Mexico City, Mexico. Interweb currently serves customers throughout Mexico City, providing standard dial-up connections, dedicated Internet products and web hosting. International Connection Service 1500, C.A. On April 15, 1999, IFX acquired all of the capital stock of International Connection Service 1500, C.A. ("Intercon"), an ISP based in Caracas, Venezuela. Intercon currently serves customers throughout Venezuela's nine largest cities, providing standard dial-up connections, dedicated Internet products and web hosting. Eldish Marketing, C.A. On April 16, 1999, through Intercon, the Company acquired certain Internet service-related assets, including customer lists, from Eldish Marketing, C.A., an ISP located in Caracas, Venezuela. The Company intends to consolidate the customers acquired from Eldish into Intercon. Yupi Internet, Inc. On April 23, 1999, IFX entered into an agreement with Yupi Internet, Inc. ("Yupi"), a Miami, Florida based Internet company. Yupi has developed a Spanish-language web navigation and portal site where consumers and businesses from Latin America, Spain and the U.S. may gather, interact and transact business with one another. Pursuant to such agreement, IFX invested approximately $3.1 million in Yupi in exchange for convertible preferred stock, common stock and the right to acquire up to 25,901 shares of the common stock of Yupi at a predetermined price. Interaccess, S.A. On May 13, 1999, IFX purchased all of the capital stock of Interaccess, S.A., a leading ISP located in Santiago, Chile. Interaccess currently serves customers throughout Chile, providing standard dial-up connections, dedicated Internet products and web hosting. Zupernet Ltda. On May 27, 1999, IFX purchased substantially all of the capital stock of Zupernet, Ltda., an ISP located in La Paz, Bolivia. Zupernet currently serves customers throughout Bolivia, providing standard dial-up connections, dedicated Internet products and web hosting. Interactiva, LTDA. On July 2, 1999, 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 Interactiva into ENI de Chile, S.R.L. Sistemas de Diseno y Manufactura, S.A. de C.V. On July 21, 1999, the Company acquired substantially all of the 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 standard dial-up connections, dedicated Internet products and web hosting. Intermedia. On August 13, 1999, the Company acquired all of the user base from Servicios de Informacion Electronica Limitada ("Intermedia"), an ISP located in Santiago, Chile. The Company intends to consolidate the customers acquired from Intermedia into ENI de Chile, S.R.L. -4- 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 standard 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 standard 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 standard dial-up connections, dedicated Internet products and web hosting. INTERNET BUSINESS IFX is a pan-regional Internet Service Provider, or ISP, in Latin America. The Company focuses on serving individuals and small businesses. Our primary service is dial-up Internet access, which the Company offers through our Unete service, in various price and usage plans designed to meet the needs of our subscribers. Our business services include dedicated phone lines, web hosting, web page design, and domain name registration. IFX offers subscribers Internet access in English, Spanish, and Portuguese, with user-friendly and easy to install software. The software contains a complete set of the most popular Internet applications including electronic mail, World Wide Web access, File Transfer Protocol and Internet Relay Chat. Through our infrastructure of IFX owned subsidiaries and third-party providers, our subscribers are able to access the Internet in 9 countries in Latin America, and in most major cities in the United States and Canada via a local telephone call and with no roaming fees. By June 30, 1999, the Company had approximately 25,000 subscribers. Over the past year, IFX has rapidly established a regional presence and customer base by acquiring the stock or assets of established independent ISPs throughout Latin America. Since January 1, 1999, the Company has established operations in 9 countries in 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 seeks to acquire an "anchor" ISP in each of its target countries, which can provide both local management talent and serve as the ISP consolidator for its respective country. In addition to its team of corporate development professionals, IFX relies upon its local management teams to identify strategic acquisitions. CUSTOMERS As of June 30, 1999, the Company had approximately 25,000 customers. The majority of the customers are dial-up residential users, with a small percentage constituting small business users. SERVICES Dial-Up Internet Access. IFX's primary service offering is dial-up Internet access through it's Unete service. The basic equipment requirements for an individual dial-up subscriber are a Windows 3.1 or later operating system or Macintosh computer with at least 8MB of RAM and a modem of 14.4 Kbps speed or faster. The subscriber's connection is a direct, point-to-point protocol, or "PPP," connection to the Internet. A direct PPP connection enables a subscriber to use any standard Internet capable software that will run on the subscriber's -5- computer. IFX currently offers different price plans for dial-up subscription. Each plan is adapted to the consumers of each county and the usage. The Company tries to maintain the most competitive rates at each of the markets the Company serves. While the plans that IFX offers are subject to change due to changes in the market, some of the most common plans offered include: Platinum. Individual subscribers receive unlimited access to the entire Unete Network at all of its points of presence through a local dial-up connection. Local Unlimited Access. Individual subscribers get unlimited usage at their local point of presence in their home country. Limited. Individual subscribers get a pre-determined number of hours for usage at their local point of presence in their home country. Most of our subscribers are on month-to-month subscriptions. IFX currently offers new users 150 free hours that must be used in the first month. Billing is monthly, with payments made by credit card, check or cash. Payments are mostly made at the beginning of each billing cycle. Subscribers, as well as IFX, may cancel an account at any time, with the cancellation taking effect as of the first day of the following billing month. A subscriber who is within local dialing range of one of the IFX points of presence ("POPs") or a designated third-party provider POP can access the Internet with a local telephone call. All dial-up subscribers can connect to our network (including the third-party provider POPs) via modem at speeds up to 56.6-Kbps (kilobytes-per-second.) All dial-up subscribers also have the option of using IFX servers to publish information on the Internet through the World Wide Web or File Transfer Protocol (FTP). Business Services. IFX's Latin American subsidiaries provide the following services for small businesses: Dedicated phone lines. Businesses can have a direct connection to the Internet, 24 hours a day, 7 days a week, without the need to dial an access number. Web hosting. IFX offers web hosting accounts for customers that wish to create their own World Wide Web sites without maintaining their own Web servers and high-speed Internet connections. Web page design. IFX can design Internet Web sites for its subscribers. Domain name registration. IFX will process all documentation necessary to register a domain name in any of the countries in which we operate. Support Services. IFX's services and operations are supported (i) by its national Network Operating Centers (NOCs), which ensure efficient network operations, (ii) by its national Customer Service Centers, which provide comprehensive customer support, and (iii) by its fully integrated information systems. Network Operating Center. The Company's NOCs monitor IFX's network, including the Company's backbone, POPs, servers, and client co-located servers, as well as all individual client circuits. The Company tracks network utilization patterns, proactively adding capacity as needed to maintain performance standards and minimize network congestion. In addition, the Company's NOC technicians run systems and network diagnostics in order to quickly respond to customer inquiries. -6- Fully Integrated Operating and Financial Support Systems. The Company is installing and customizing Portal software, which integrates the Company's various back office activities including order processing, billing and customer service, network operations and telecommunications facilities provisioning. Once implemented, Portal software will allow IFX to readily access a current, comprehensive database of operating and customer information. Customer Care Center. The Customer Care Center representatives respond to inquires from our subscribers. Representatives are available to assist customers with such matters as dial-up software installations, e-mail box set-up and a variety of other service-related issues. Once implemented, Portal software will allow IFX customer service representatives to have instant access to current, detailed customer profiles, which chronicle customer service and account histories. Such information will allow Customer Care Center representatives to offer timely and informed responses to customer inquires. NETWORK AND RELATED INFRASTRUCTURE The network infrastructure utilized by IFX consists of three primary tiers: local POPs; a middle tier, which connects the POPs to national hubs; and a backbone tier, which connects the national hubs to the Internet. The IFX network currently covers 10 countries and includes approximately 25 IFX-owned POPs and 540 POPs owned by third party network providers. Each POP is connected to the Company's network operating center in its respective country through a dedicated point-to-point line, typically provided by a local telecommunications carrier. The principal backbone capacity utilized by IFX is provided by InterPacket Inc., a U.S. based provider of high speed Internet access via satellite, and GlobalOne. The company currently has committed capacity agreements with InterPacket for up to 10 Mbps and the right to additional capacity of up to 50 Mbps in total. Geographic Coverage. Through our network of IFX-owned and third-party provider-owned POPs, our subscribers are able to access the Internet in 10 countries via a local telephone call. The countries with IFX-operated POPs are: Argentina, Bolivia, Brazil, Chile, Colombia, Mexico, El Salvador, Honduras, Venezuela and the U.S. Network Operations Center. IFX maintains a Network Operations Center at our Aventura, Florida, office through which our technical staff monitors network traffic, service quality, and security, as well as equipment at individual POPs, to ensure reliable Internet access. In addition, the Company continues to invest in improved network monitoring software and hardware systems. IFX SOFTWARE AND LICENSES A key component of our service offering for dial-up subscribers is the Unete starter software. The software includes these applications: - IFX installation program. It enables the user to input all required information regarding user name, billing information and passwords. - World Wide Web Navigation Software. It allows its user to navigate through the different multimedia presentations across the different Web sites. Users can choose between Netscape Navigator (R) and Microsoft Internet Explorer (R). - Electronic Mail. It allows subscribers to exchange messages electronically with anyone else who has an e-mail address. The messages can include text and attachments such as images, computer programs, or word processing documents. Users can choose between Outlook Express (R) and Eudora Light (R). -7- - Internet Relay Chat. It allows users to participate in more than 10,000 Internet Communities using Tribal Voice's PowWow (R) software. The software allows the user to communicate over the Internet using instant-voice, instant messaging, chatting, and buddy lists. - Winzip 7.0 (R). With this trial version, users can compress large files into smaller zip files and decompress zipped files to their original version. - WS FTP LE(R). It allows users to send and retrieve files in order to create their web sites. The main objective of the software package is to automatically configure the individual's Internet access programs after the initial one-time entries by the user. Once the initial set-up is completed, the user will be able to log on to our network with the click of a button and be able to use the different applications that are included. Subscribers IFX acquired from its recent ISP acquisitions connect to the Internet using software provided to such subscribers by the acquired ISPs. Those subscribers may switch to IFX's software at their option at any time, a migration that IFX encourages by mailing an Unete starter software kit to these subscribers. In addition, their e-mail address from the previous account can be forwarded to their new Unete e-mail address. IFX has obtained permission and, in certain cases, licenses from each manufacturer of the software that the Company bundles in its software starter kit. RISK FACTORS Lack of Operating History and Experience in the Internet Service Business. Because IFX has recently begun to pursue the development of Internet services and the acquisition of Internet service providers in Latin America, its acquisition and development strategy 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 in the ISP 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 or that the services it offers over any such network will be profitable. Dependence 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 success also depends upon the ability of its customers to access this network with ease of use and to have a high quality Internet experience with consistency of service throughout the network. -8- 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 its 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: the elimination of redundant staffing positions; personnel relocation; 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. Challenges of Growth By Acquisitions. IFX depends on its ability to identify and acquire ISPs 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 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 -9- - 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 future acquisitions. In addition, future acquisitions could materially adversely affect its 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. Risks Associated With an Internet Business. IFX is new to the Internet service provider business and, therefore, lacks operating history and experience in the industry. In addition, IFX's business is vulnerable to risks associated with the ISP 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. Although IFX will implement 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 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. Changes in the regulatory environment relating to the Internet connectivity market, including regulatory changes which 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 addition, its subscribers 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. 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. -10- However, IFX believes that it will need to move quickly into international markets in order to establish critical market presence and credibility, though it can give no assurance that it will be able to do so. 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. Competition; Pricing Fluctuation. 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 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 -11- be able to purchase such services at a reasonable price or at all. In addition to the risks associated with its previously described competitors, foreign competitors may pose an even greater risk, as they 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. Our Competitors. The Company currently competes or expects to compete with the following types of companies: - established national Internet service providers in Latin America, such as Universal On Line in Brazil or Prodigy in Mexico; - computer hardware and software and other technology companies that will start bundling Internet access in their products, such as IBM Corp. and Microsoft Corporation; - 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; - 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, 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 us. The ability of our 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 us at a significant competitive disadvantage. Equipment. IFX cannot guarantee that it will be able to obtain the necessary equipment, or the financing to acquire such equipment, to enable it to expand its Latin American network. In addition, IFX cannot guarantee that the equipment it maintains will be the most current and up to date equipment for its subscribers' connectivity to the Internet, which could have an impact in the number of subscribers it has. Dependence on Key Personnel. 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. The process of locating personnel with the combination of skills and attributes required to carry out our 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. Need for Additional Financing. The Company must continue to enhance and develop our network in order to maintain our competitive position and continue to meet the increasing demands for service, quality, availability, and competitive pricing. -12- 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, to further expand our subscriber base, the company will probably have to spend significant amounts of money on additional equipment to maintain the high speed and reliability of our Internet access services. The Company may also need to spend significant amounts of cash to fund growth, operating losses and respond to unanticipated developments or competitive pressures. Presently, the Company derives most of its funds from the earn-out payments from the sale of assets of discontinued operations. For the E.D.& F Man sale, the amount of the earn-outs payments will depend on the profitability (as specifically defined) 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 (as specifically defined) 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, or that those earn-out will be sufficient to continue to fund the majority of the operations. If the Company does not have enough cash on hand, cash generated from earn-out payments from our discontinued operations, or cash available under vendor financing agreements, the Company will need to seek alternative sources of financing, such as borrowings or placements of debt or equity securities, to carry out our growth and operating plans. The Company may not be able to raise needed cash on terms acceptable to us or at all. If alternative sources of financing are required, but are insufficient or unavailable, the Company will be required to modify our growth and operating plans to the extent of available funding, if any. No assurance can be given that actual cash requirements will be met, that such requirements will not exceed IFX's budget or that anticipated revenues will be realized. Risk of Internet Technology Trends and Evolving Industry Standards. IFX's products and services target users of the Internet. The number of Internet users has experienced rapid growth. 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 its 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 business market. 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: -13- - inconsistent quality of service; - lack of availability of cost-effective, high-speed options; - 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. Volatility of Stock Price. IFX's Common Stock 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. 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 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 of such an evaluation have not been material. To date, it has not discovered Year 2000 issues in the course of its assessment that would have a material adverse effect on its business, results of operations or financial condition; however, 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 Year 2000 preparedness may not be adequate. -14- Concurrently with the analysis of its internal systems, IFX has begun to survey 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 is in the process of evaluating the Year 2000 preparedness of its telecommunications providers, on which it is reliant for the network services crucial to web hosting and Internet connectivity services. It is actively working to mitigate any potential impact by maintaining diverse providers for such network services. However, failure of any one provider may have a material adverse impact on Company operations. IFX does rely heavily on various third party equipment and service providers, and the Company expects to complete the survey to adequately address Year 2000 issues by October 1999. 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. -15- Item 2 - Properties - ------------------- The Registrant leases office space at 707 Skokie Boulevard, Northbrook, Illinois. This location serves as the Registrant's corporate headquarters. The company leases office space in 200 West Adams Street, Suite 1500, Chicago, IL 60606. This space served as the Company's previous corporate headquarters. However, this office space has been sub-leased in its entirety until the end of the lease, and for an amount equal to the lease payments. During fiscal year 1999, the Company entered into lease agreements for the following locations: - Aventura, Florida. The lease for this facility expires on December 31, 1999. It serves as the main office for coordinating and supporting the Company's Latin American Operations. - Bogota, Colombia. The lease for this facility expires on June 30, 2000. The Company has the option to extend it for additional periods. - Buenos Aires, Argentina. The lease for this facility expires on July 31, 2003. The Company has the option to extend it for additional periods. In addition, the Company has assumed the operating leases of the companies it acquired at the following locations: - La Paz, Bolivia. The lease for this facility expires on June 30, 2001. The Company has the option to extend it for additional periods. - Santiago, Chile. The lease for this facility expires on January 31, 2001. The Company has the option to extend it for additional periods. - Monterrey, Mexico. The lease for this facility expires on December 31, 2000. The Company has the option to extend it for additional periods. - Mexico City, Mexico. The lease for this facility expires on December 31, 2001. The Company has the option to extend it for additional periods. - Caracas, Venezuela. The lease for this facility expires on June 30, 2002. The Company has the option to extend it for additional periods. -16- Item 3 - 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. Legal Proceedings With Respect To Discontinued Operations. On May 16, 1996, Index filed suit in the Circuit Court of Cook County--Law Division against Doug Niemann, a former customer, for breach of contract, seeking to recover a debit balance of $88,200 (Index Futures Group, Inc. v. Doug Niemann, case no. 96L-5506). On January 14, 1997, Niemann filed a counterclaim for $688,200. The Company believes that the counterclaim is without merit and will defend it vigorously. In April 1994, Index, without admitting or denying the allegations, paid $100,000 to the CFTC, settling an administrative action filed on September 29, 1992. In a related action, the equity receiver of a commodity pool operator brought an action to recover losses of approximately $600,000, alleging various theories such as constructive trust, negligence, breach of fiduciary duty and conversion. On May 29, 1996, the district judge dismissed the complaint in its entirety. On December 4, 1997, the Court of Appeals affirmed the district judge's dismissal of all claims against Index. On January 13, 1998, the Court of Appeals denied the Supplemental Plaintiffs' request for a rehearing of its appeal. On October 2, 1998, the attorney for the equity receiver of the commodity pool filed a class-action suit on behalf of a putative class composed of persons who had given money to the commodity pool operator to invest, some of which was deposited in brokerage accounts at Index by the commodity pool operator. (Wesselhoff v. FX Chicago, Inc. et al., Circuit Court of Cook County, Chancery Division, case number 98-CH-13396). The plaintiff seeks damages of $600,000 plus prejudgment interest, punitive damages, and lost investment opportunity. The Company believes that the allegations in the complaint against FX Chicago, Inc. and the Company are without merit and will defend vigorously. A German citizen, seeking damages of 6,403,519.19 Deutschmark (approximately $3,420,000 given the exchange rate as of September 25, 1999), filed a lawsuit in September 1998, in Germany, against an affiliate of MINC. The complaint arouse out of transactions that occurred in an account introduced by Index Futures Group, AG ("Index AG"), an introducing broker of Index, prior to the Sale of Assets. The Plaintiff alleges that under German law, MINC's affiliate is successor to Index AG, and thus assumed any liabilities of Index AG. Pursuant to the Sale of Assets agreement, Index is responsible for any liability "arising out of any state of facts with respect to such Assigned Contract existing on or prior to the Closing Date". MINC has retained counsel in Germany to represent its interests in this matter. As Index AG was an introducing broker of Index and not a former subsidiary of the Company or Index, the Company does not believe that it will ultimately be liable for damages. In April 1999, MINC's German counsel reported that the Dusseldorf District Court dismissed all claims against MINC. However, the plaintiff has filed an appeal with the Dusseldorf Court of Appeals. On December 28, 1998, John and Christina Blazina, filed an NFA arbitration against Index and others, alleging breach of fiduciary duty, fraud, breach of contract and negligence in the solicitation and trading of a series of managed accounts opened at Index in 1995. Claimant seeks an award of $500,000, composed of alleged actual damages of $262,500, punitive damages of $170,000 and various other costs and fees. IFX believes that the allegations are without merit and will defend vigorously. On August 23, 1999, a lawsuit 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. -17- Settlement Of Claim Related To L. Luria & Son. On October 27, 1998, a complaint was filed by James Feltman as liquidating agent of L. Luria & Son, Inc. (Case No. 97-16731-BKC-RAM) seeking recovery from the Company of $368,188.84. Starting in the winter of 1996, IFX entered into an arrangement with the suppliers of L. Luria & Son, Inc. pursuant to which IFX advanced funds on behalf of L. Luria & Son, Inc. in order to allow it to purchase inventory. L. Luria & Son, Inc. reimbursed IFX for amounts that it had advanced. The complaint alleges that IFX was an insider of L. Luria & Son, Inc. because of Joel Eidelstein's relationship to L. Luria & Son, Inc. and that the amounts that L. Luria & Son, Inc. paid IFX constituted preferences under the Bankruptcy laws. On March 1, 1999, the Company reached an agreement to settle this complaint for $92,222. -18- Item 4 - Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ No matters were submitted to a vote of IFX's stockholders during the fourth quarter of its fiscal year ended June 30, 1999. -19- PART II Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters - ------------------------------------------------------------------------------ The Registrant's stock is traded on the NASDAQ SmallCap Market under the symbol "FUTR." Set forth below is the range of high and low trade prices per share of the common stock in the over-the-counter market as reported by NASDAQ for the periods indicated. The quotations do not include retail markups, markdowns, or commissions. All previously disclosed data has been restated for the one-for-five reverse split of common stock effected on January 12, 1998. On August 31, 1999, the closing price per share of common stock, as reported through NASDAQ, in the over-the-counter market was $19.00. Quarter Type of Security Ended High Trade Low Trade - ---------------- ------- ---------- --------- Common Stock 9/30/97 $ 1.09 $ 0.94 12/31/97 2.50 0.94 3/31/98 2.63 1.41 6/30/98 2.94 1.81 9/30/98 2.44 1.81 12/31/98 12.50 1.25 3/31/99 12.63 5.88 6/30/99 21.50 9.38 8/31/99 (1) 24.00 14.81 (1) Includes the period July 1, 1999 through August 31, 1999. Approximate Number of Holders of Securities As of August 31, 1998, there were 875 holders of record of the Registrant's common stock. The Registrant believes it has a greater number of stockholders because the Registrant believes that a substantial amount of its common stock is held of record in street name by broker-dealers for their customers. Dividends The Registrant has never paid a cash dividend on its common stock and does not expect to pay a cash dividend in the foreseeable future, but intends to devote all funds to the operation of its business. -20- Item 6 - Selected Financial Data - -------------------------------- The following table summarizes selected historical financial information of the Registrant and its subsidiaries for each of the last five years. All amounts presented have been restated on a continuing operations basis. Accordingly, the operating results of discontinued operations have been segregated from continuing operations and reported as a separate line item on the statement of operations. The selected financial information shown below has been derived from the Registrant's consolidated financial statements. This table should be read in conjunction with the other financial information of the Registrant, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial results included elsewhere herein. HISTORICAL FINANCIAL INFORMATION FROM CONTINUING OPERATIONS
Year Ended June 30, --------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Revenues from continuing operations...... $ 725,300 $ - $ - $ - $ - Cost and expenses from continuing operations: Cost of revenues...................... 445,500 - - - - General and administrative............ 2,978,400 733,100 1,306,000 1,566,700 1,471,900 Depreciation and amortization......... 232,400 - - 62,300 69,600 ---------- ---------- ---------- ----------- ---------- Total operating expenses.............. 3,656,300 733,100 1,306,000 1,629,000 1,541,500 ---------- ---------- ---------- ----------- ---------- Operating loss continuing operations................. (2,931,000) (733,100) (1,306,000) (1,629,000) (1,541,500) Other Income (Expense): Interest income....................... 376,100 290,100 410,600 5,028,700 5,008,600 Loss on operations of equity investee. (107,700) Other................................. 136,200 126,500 247,100 - - ---------- ---------- ---------- ----------- ---------- Total other income.................... 404,600 416,600 657,700 5,028,700 5,008,600 ---------- ---------- ---------- ----------- ---------- Income (loss) from continuing operations before income taxes........ (2,526,400) (316,500) (648,300) 3,399,700 3,467,100 Income tax provision (benefit)........ (811,000) (108,000) (220,000) 452,800 1,349,200 ---------- ---------- ---------- ----------- ---------- Income (loss) from continuing operations................. (1,715,400) (208,500) (428,300) 2,946,900 2,117,900 Discontinued operations, net of taxes.......................... 3,117,600 3,575,200 3,612,100 (4,080,000)(a) 293,700 ---------- ---------- ---------- ----------- ---------- Net income (loss)........................ 1,402,200 3,366,700 3,183,800 (1,133,100) 2,411,600 Assumed cumulative dividend on class A preferred stock............... - - (23,300) (40,000) (40,000) ---------- ---------- ---------- ----------- ---------- Net income (loss) available to common shareholders................... $1,402,200 $3,366,700 $3,160,500 $(1,173,100) $2,371,600 ========== ========== ========== =========== ========== BASIC AND DILUTED INCOME (LOSS) PER SHARE: Income (loss)from continuing operations...... $ (0.26) $ (0.03) $ (0.07) $ 0.44 $ 0.35 Income (loss) from discontinued operations... $ 0.48 $ 0.57 $ 0.55 $ (0.61) $ 0.04 ---------- ---------- ---------- ----------- ---------- Net income............................... $ 0.22 $ 0.54 $ 0.48 $ (0.17) $ 0.39 ========== ========== ========== =========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic and Diluted........................ 6,498,204 6,246,545 6,616,893 6,744,236 6,136,105 BALANCE SHEET DATA: Total assets............................. $18,861,500 $11,543,400 $10,030,900 $6,331,000 $7,479,100 Total debt............................... $ 316,900 $ - $ 1,586,600 $ - $ - Total stockholders' equity............... $16,097,400 $11,335,100 $ 8,203,700 $6,216,500 $7,364,100
(a) Includes a restructuring charge in the amount of $1,556,500. -21- Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations for the Year Ended June 30, 1999 - -------------------------------------------------------------------------------- The following discussion should be read in conjunction with our Consolidated Financial Statements and notes that follow it. This discussion and analysis reflects the adjustments made to segregate the discontinued operations ("discontinued operations") that resulted from 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 from 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 for Fiscal Years 1999, 1998 and 1997; and for the balance sheet for Fiscal Years 1999 and 1998. 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 1999, 1998 and 1997 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. We focus on serving individuals and small businesses. Our primary service is dial-up Internet access, which IFX offers through our Unete service, in various price and usage plans designed to meet the needs of our 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 complete set of the most popular Internet applications including electronic mail, World Wide Web access, File Transfer Protocol and Internet Relay Chat. Through our infrastructure of IFX owned subsidiaries and third-party providers, our subscribers are able to access the Internet in 9 countries in Latin America, and in most major cities in the United States via a local telephone call and with no roaming fees. As of June 30, 1999, the Company had approximately 25,000 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 seeks to acquire an "anchor" ISP in each of its target countries, which can provide both local management talent and serve as the ISP consolidator for its respective country. 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 Prior to July 1996, the primary business of IFX was providing commodity 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 -22- of cash earn-out payments based upon the sold business's profitability 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 of IFX Ltd. through June 30, 2002. As discussed above, in November 1998 the Company entered into an agreement with International Technology and made the strategic decision to focus on the Internet industry. The Company is presently in the process of developing and acquiring ISP related businesses. In December 1998 the Company acquired a limited partnership interest in Telcom.Net, L.P., a domestic telecommunications and Internet software development company that was co-founded in 1997 by Joel M. Eidelstein, the Company's President. During 1999 the Company has completed acquisitions and investments, and intends to complete future acquisitions, to develop a Latin American pan-regional network of ISPs. The following is a summary of the Company's acquisition activities to date:
Date Acquisition Or Investment Business Country - ---- ------------------------- -------- ------- December 1998 Telcom.net Telcom/Internet Software Regional - -------------------------------------------------------------------------------------------------- April 1999 Interweb Mexico ISP Mexico International Connection Service ISP Venezuela Eldish Marketing ISP Venezuela Yupi Internet, Inc. Spanish Language Portal Regional - -------------------------------------------------------------------------------------------------- May 1999 Interaccess ISP Chile Zupernet ISP Bolivia - -------------------------------------------------------------------------------------------------- July 1999 SDM Net ISP Mexico Interactiva ISP Chile - -------------------------------------------------------------------------------------------------- August 1999 Intermedia ISP Chile E-Net ISP Brazil Via Net ISP El Salvador ITS Network ISP Honduras
LIQUIDITY AND CAPITAL RESOURCES For the year ended June 30, 1999, cash provided by on going and discontinued operations was approximately $4.0 million compared to cash provided by on going and discontinued operations of $1.2 million for the same period in fiscal 1998, an increase of approximately 233%. The majority of cash in 1999 was provided by the earn-out payments related to the sale of all of the brokerage assets (other than certain assets of its majority owned U.K. subsidiary) to E.D. & F. Man International, Inc. The cash used in operations is related to the start-up and general operating expenses of the ISP business. In addition, 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. As of June 30, 1999, the Company held approximately $5.5 million in cash and short-term investments. For the year ended June 30, 1999, cash used in investment activities was approximately $4.8 million compared to cash used in investment activities of $1.2 million for the same period in fiscal 1998. The majority of cash used in 1999 was related to a $3.1 million investment in Yupi Internet Inc. and $1.4 million incurred in the ISP acquisitions in Latin America. -23- For the year ended June 30, 1999, cash provided by financing activities was approximately $1.0 million compared to cash used in financing activities of $1.8 million for the same period in fiscal 1998. The majority of cash provided in 1999 was related to a $1.0 million investment received from International Technology Investments in exchange for 500,000 shares and stock purchase rights. Stockholders' equity at June 30, 1999 was approximately $16.1 million. The Company effected a one-for-five reverse split of its common stock, par value $0.004, effective on January 12, 1998 (the "Effective Date"). Each five shares of such common stock were reclassified and reflected as one share of common stock having a par value of $.02, as of January 12, 1998. Outstanding shares of the Company's common stock were reduced to 6,279,130 shares from 31,395,649 shares outstanding before the split. Management believes existing cash and short-term investments together with operating cash flows from the earn-out payments from the sale of assets and access to equity capital provide adequate resources to fund ongoing operating requirements and future capital expenditures related to the expansion of existing businesses and development of new projects. Subsequent Credit Agreements On 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 to upgrade and expand the Company's Internet operations, but the Company is under no obligation to purchase equipment from Lucent. On July 1999, the Company entered into an $500,000 lease agreement with SoftBank to provide the financing for the implementation of the 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. On 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 $535,873 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 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 of such an evaluation have not been material. To date, it has not discovered Year 2000 issues in the course of its assessment that would have a material adverse effect on its business, results of operations or financial condition; however, 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 Year 2000 preparedness may not be adequate. -24- Concurrently with the analysis of its internal systems, IFX has begun to survey 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 is in the process of evaluating the Year 2000 preparedness of its telecommunications providers, on which it is reliant for the network services crucial to web hosting and Internet connectivity services. It is actively working to mitigate any potential impact by maintaining diverse providers for such network services. However, failure of any one provider may have a material adverse impact on Company operations. IFX does rely heavily on various third party equipment and service providers, and the Company expects to complete the survey to adequately address Year 2000 issues by October 1999. 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. RESULTS OF OPERATIONS - FISCAL 1999 COMPARED TO FISCAL 1998 - ----------------------------------------------------------- Revenues. In fiscal 1999, IFX derived $616,300, or 84% of 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 fiscal 1999, IFX derived $109,100, or 12% of continuing revenues from certain small business services which include web-hosting, web design, full-time dedicated access connections to the Internet, and other value-added services such as domain name registration. 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 offers Internet site development services for small businesses. Full-time dedicated lines offer small businesses direct and uninterrupted connections to the Internet without the need to dial any number. Revenues for fiscal 1998 from continuing operations are $0, since the Company had not yet been involved in the Internet business. They are shown as a segregated item 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 our subscribers with local telephone dialing numbers to our 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 CD-Rom with our starter kit software. Cost of revenues were $445,400 and $0 for the year ended June 30, 1999 and June 30, 1998, respectively. General and Administrative Expenses. General and administrative costs are primarily for salaries, legal, accounting and consulting fees incurred mostly in the Company's acquisitions in Latin America, and advertising and trade show expenses which are related to the promotions of our ISP service. General and administrative expenses were $2,978,400 and $733,100 for the years ended June 30, 1999 and June 30, 1998, respectively. The increase of approximately 302% was due to the expenses of growth the Company experienced as it entered the Internet service business in fiscal 1999. 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 our net income. However, the Company believes that over the long-term these POPs should have a positive impact on 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. -25- 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 on schedules 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 $232,400 and $0 for the years ended June 30, 1999 and June 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 and cash flow, but the Company believes that these increased costs will be more than 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 the $5.0 million invested in short-term government notes. Interest income was $376,000 and $290,200 for the years ended June 30, 1999 and June 30, 1998, respectively. Other Income and Gains from Discontinued Operations. In 1999, the Company earned approximately $2.4 million of net earn-out payments from the 1996 sale of its brokerage asset to E.D. & F. Man International, Inc., a unit of E.D. & F. Man Group, plc, a London-based international trading and finance conglomerate. In addition, the Company recorded approximately $0.9 million representing the net results from the operations of its disposed UK subsidiary. All the proceeds of the gains were invested in the Internet operations in Latin America. Income tax provision. For the year ended June 30, 1999, the Company recorded a tax benefit of approximately $811,000 from its continuing operations. The effective tax rate for 1999 and 1998 was 32% and 34%, respectively. Including the Company's discontinued operations, the net tax provision was $0.9 million. For the year ended June 30, 1998, the Company recorded a tax provision of $2.2 million. Net income (loss) and income (loss) per share. As a result of the factors discussed above, IFX's loss from continuing operations for the year ended June 30, 1999 was approximately $1.7 million, or $(0.26) per share, compared to a net loss of $0.2 million, or $(0.03) per share, for the year ended June 30, 1998. Including discontinued operations, the Company earned $1.4 million, or $0.22 per share, compared to a net income of $3.4 million, or $0.54 per share, for the year ended June 30, 1998. RESULTS OF OPERATIONS - FISCAL 1998 COMPARED TO FISCAL 1997 - ----------------------------------------------------------- As a result of the sale in 1999 of IFX Ltd. and the prior sale in 1996 of E.D.& F. Man, all revenues and costs related to these businesses are included in "Discontinued Operations". The Company, on a continuing operations basis, had no revenues or cost of revenues in 1998 or 1997. -26- General and Administrative Expenses. General and administrative costs are primarily for salaries, legal, accounting and consulting fees incurred mostly in the Company's general operations. General and administrative expenses were $733,100 and $1,306,000 for the years ended June 30, 1998 and June 30, 1997, respectively. Corporate governance costs were reduced in 1998 reflecting the Company's decreased level of operations. Depreciation and Amortization. Depreciation refers to the Company's fixed assets which were all furniture related. IFX depreciates its assets on schedules that range from three to five years. Depreciation expense was insignificant during 1998 and 1997. There was no amortization expense during 1998 or 1997. Income from Discontinued Operations. In 1998, the Company earned approximately $2.3 million of net earn-out payments from the 1996 sale of its brokerage asset to E.D. & F. Man International, Inc., a unit of E.D. & F. Man Group, plc, a London-based international trading and finance conglomerate. In addition, the Company recorded approximately $1.2 million representing the net results from the operations of its disposed UK subsidiary. Income tax provision. For the year ended June 30, 1998, the Company reflected a tax benefit of $108,000 from its continuing operations. The effective tax rate for 1998 and 1997 was 34% in each year. Net income (loss) and income (loss) per share. As a result of the factors discussed above, IFX's loss from continuing operations for the year ended June 30, 1998 was approximately $208,500, or $(0.03) per share, compared to a net loss of $428,300, or $(0.07) per share, for the year ended June 30, 1997. Including discontinued operations, the Company earned $3.4 million, or $0.54 per share, compared to a net gain of $3.2 million, or $0.48 per share, for the year ended June 30, 1998 and June 30, 1997, respectively. 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 Prospectus. 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. -27- Item 7A - Quantitative and Qualitative Disclosures About Market 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, through IFX/EN Inc., 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. This fluctuation can cause the Company to gain or lose on the translation to US Dollars. -28- Item 8 - Financial Statements and Supplementary Data - ---------------------------------------------------- For financial information, see the financial statements and notes thereto set forth at Item 14 hereof. -29- Item 9 - Changes In and Disagreements With Accountants On Accounting and Financial Disclosures - ------------------------------------------------------------------------ On July 1, 1999, IFX filed a Current Report on Form 8-K with the Securities and Exchange Commission to disclose that on June 28, 1999 it had dismissed Arthur Andersen LLP and appointed Ernst & Young LLP as its independent auditors for the fiscal year ending June 30, 1999. The decision to dismiss Arthur Andersen LLP was not based upon any disagreement between IFX and Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. The reports of Arthur Andersen LLP as of and for the fiscal years ended June 30, 1998 and 1997 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or application of accounting principles. During the registrant's fiscal years ended June 30, 1998 and 1997, and during the subsequent interim periods prior to June 28, 1999, there were no (i) disagreements between the registrant and Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which disagreements, if not resolved to the satisfaction of Arthur Andersen LLP, would have caused it to make reference to the subject matter of the disagreement in connection with its reports on the registrant's financial statements, or (ii) "reportable events" within the meaning of Item 304(a)(1)(v) of Regulation S-K promulgated under the Securities Act of 1933, as amended. -30- PART III -------- Item 10 - Directors and Executive Officers - ------------------------------------------ The Directors and Executive Officers of IFX as of September 15, 1999 were as follows: Name Age Office - ------------------- --- --------------------------------------------- Joel M. Eidelstein 32 Chairman of the Board, President and Director Michael Shalom 28 Chief Executive Officer Jose Leiman 39 Chief Financial Officer Zalman Lekach 32 Vice President of Mergers and Acquisitions and Director Colleen M. Downes 36 Secretary, Treasurer and Director George A. Myers 48 Director Joseph M. Matalon 40 Director Burton J. Meyer 52 Director Joel M. Eidelstein has served as a director of the Company since November 1990 and, since November 9, 1996, he has served as the President of the Company. Mr. Eidelstein graduated from Brandeis University in May 1988. From June 1988 until June 1996, he was an independent commodity futures trader and a floor manager with Index Futures Group, Inc. Mr. Eidelstein also is the owner and sole officer of Alerica, Inc., a general partner of Telcom.Net, L.P., an Internet communications software development company in which IFX owns an interest. Michael Shalom was elected as IFX's Chief Executive Officer on September 8, 1999 and has served as a director of Emerging Networks, Inc., a subsidiary of IFX, since November 1998. Prior to July 1998, Mr. Shalom was a principal of, and was actively involved in the management of the INTCOMEX group of companies, which group is a Latin American wholesale distributor of microcomputers, networking products, mass storage products, multimedia products, computer peripheral equipment and computer components. In July 1998, the INTCOMEX group of companies was sold to CHS Electronics, a Fortune 500 company. Mr. Shalom is also a principal at International Technology Investments. Jose Leiman has served as Chief Financial Officer of the Company since August 1, 1999. From March 1996 to June 1999, Mr. Leiman was a CPA and tax attorney with Ernst & Young LLP, an international accounting firm. Prior to joining Ernst & Young LLP, Mr. Leiman was an attorney with Dewey Ballantine LLP, an international law firm. Mr. Leiman has also worked as a CPA with Price Waterhouse. Zalman Lekach has served as a director of the Company since February 1997 and, since May 24, 1999, has served as the Company's Vice President of Mergers and Acquisitions. Mr. Lekach served as President and Chief Operating Officer of Parlux Fragrances, Inc., an international designer, manufacturer and marketer of fragrances ("Parlux") from 1995 until December 1998. He became a director and an executive officer of Parlux, S.A., Parlux's French subsidiary, in May 1990. Mr. Lekach received a B.A. from Cornell University. Colleen M. Downes became Secretary of the Company in November 1998. Ms. Downes has served as a director and as the Treasurer of the Company since February 1997, as a Vice President of the Company since June 1998 and has been employed by the Company or its subsidiaries since January 1985. Ms. Downes served as acting Chief Financial Officer of the Company from November 1998 through July 1999. George A. Myers has served as a director of the Company since November 1990. Mr. Myers has been managing general partner of MC Capital, a diversified real estate company with offices in Chicago, Illinois, Phoenix, Arizona, and San Diego, California since 1981. -31- Joseph M. Matalon has served as a director of the Company since February 1999. Since January 1998, Mr. Matalon has served as the Director of Investments and Chairman of the Finance Committee of Mechala Group Jamaica Limited, a diversified business enterprise primarily engaged in development and construction, manufacturing and trading and financial services. From January 1996 to December 1997, Mr. Matalon served as Executive Vice President and Chief Operating Officer of Mechala Group Jamaica Limited and, prior thereto, he served for 10 years as Senior Vice President of the ICD Group. Mr. Matalon is a graduate of the London School of Economics and also serves as a director of The Bank of Nova Scotia Jamaica Limited; Scotiabank Jamaica Trust and Merchant Bank Limited; the Gleaner Company Limited; and the Institute of Management and Production. Mr. Matalon also is Chairman of Prime Life Assurance Company Limited and British Caribbean Insurance Company Limited. Additionally, Mr. Matalon has also served as Deputy Chairman of Cable & Wireless Jamaica. Mr. Shalom is a principal at International Technology Investments. Burton J. Meyer has served as a director of the Company since May 1999. Mr. Meyer previously served as director of the Company from August 1986 until July 1, 1996 and as President of the Company from July 1987 until July 1, 1996. Mr. Meyer has served as an Executive Vice President of E.D. & F. Man International, an international futures and conglomerate brokerage, since July 1996. Directors are elected and serve until the next annual meeting or until their successors are elected and qualified. Officers are elected annually by the Board of Directors. Pursuant to the agreement dated as of November 23, 1998, by which International Technology acquired its equity interest in the Company, each of IFX, Lee S. Casty and International Technology have agreed to use its or his reasonable best efforts to vote all of its or his shares of Common Stock, at any annual or special meeting of IFX stockholders, to elect to the Board of Directors one individual nominated by International Technology and one individual nominated by Mr. Casty. Joseph M. Matalon is International Technology's nominee for election to IFX's Board of Directors and Joel Eidelstein is Mr. Casty's nominee. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's officers and directors, and persons who own more than 10% of the Company's Common Stock, to file with the Securities and Exchange Commission reports of ownership and changes in ownership and to provide copies of such reports to the Company and to the Nasdaq Stock Market. Based solely on a review of the copies of such reports furnished to the Company, or written representations that no reports on Form 5 were required, the Company believes that all officers, directors and 10% beneficial owners complied with all Section 16(a) filing requirements during fiscal year 1999, except for the following: Burton J. Meyer filed his Form 3 one week late; Joseph M. Matalon filed his Form 3 several months late; and Joel M. Eidelstein filed a Form 4 one week late; and Zalman Lekach filed his Form 5 several weeks late. -32- Item 11 - Executive Compensation - -------------------------------- The following table sets forth all cash compensation paid by the Company to its President, Joel Eidelstein, who in fiscal year 1999 acted in a capacity similar to the Company's chief executive officer. There were no other executive officers of the Company whose compensation for fiscal year 1999 exceeded $100,000. Annual Long Term Compensation Compensation ------------- ------------------ Name and Principal Position Year Ended Securities - --------------------------- June 30 Salary Bonus Underlying Options ---------- ------ ----- ------------------ Joel M. Eidelstein, President 1999 $50,000 - 300,000 1998 $24,000 - - 1997 $16,000 - - Fiscal Year 1999 Option Grants and Exercises The following table sets forth information with respect to options to purchase shares of Common Stock of the Company that were granted in fiscal year 1999 to the named executive officers. Option Grants in Fiscal Year 1999
Option Grants in Fiscal Year 1999 --------------------------------- Number of Securities Percent of total Potential Realizable Value at Name and Underlying Options Granted Exercise Expiration Assumed Annual Rates of Stock Principal Options to Employees in Price Date(2) Price Appreciation for Option Position Granted(1) Fiscal Year ($/Sh) Term(3) --------- ---------- ---------------- -------- ----------- ----------------------------- 5% 10% -- --- Joel M. Eidelstein, 300,000 86.5% $3.00 11/10/08 ($44,830) $461,715 President...
- ----------------- (1) A total of 150,000 shares of Common Stock subject to the option are currently exercisable. The remainder of the option vests on January 1, 2000 and January 1, 2001. (2) The option expires 10 years after the date of the grant. (3) The potential realized value is calculated assuming that the fair market value on the date of the grant appreciates at the indicated annual rate (set by the Securities and Exchange Commission), compounded annually, for the 5-year or 10-year term of the option. The $3.00 exercise price of Mr. Eidelstein's option is greater than the $1.75 closing price of the Common Stock on the date of the grant. The Potential Realizable Value is not intended to predict the possible future appreciation of the price of the Common Stock. Compensation Committee Interlocks and Insider Participation In February 1999 the Company established a standing compensation committee of the Board of Directors. Prior to that time, all functions normally delegated to a compensation committee were performed by the full Board of Directors. From February 1999 until May 1999, the members of the Compensation Committee of the Board of Directors were George Myers and Zalman Lekach. On May 17, 1999, and following his election to IFX's Board of Directors, Burton J. Meyer was appointed to the Compensation Committee and Zalman Lekach resigned therefrom, so that the current members of the Compensation Committee are George Myers and Burton J. Meyer. Mr. Meyer previously served as an officer of IFX from 1987 to June 1996. On May 24, 1999, Mr. Lekach was appointed as IFX's Vice President of Mergers and Acquisitions. -33- In July 1, 1996, the Company sold certain assets to E.D.& F. Man International, Inc. As a result of the sale, E.D.& F. Man International, Inc. made payments to the Company in the aggregate amount of approximately $4 million for fiscal year 1999. Burton J. Meyer, a director of the Company and a member of the Company's Compensation Committee, serves as Executive Vice President of E.D.& F. Man International, Inc. COMPENSATION COMMITTEE REPORT In February 1999, the Board of Directors established a Compensation Committee of the Board of Directors (the "Compensation Committee") to, among other things, develop and oversee the Company's compensation policy and approve salaries and annual bonuses for senior management of the Company. Prior to such time, the Board of Directors performed the functions typically delegated to a compensation committee. George Myers and Zalman Lekach served as the initial members of the Compensation Committee until May 17, 1999, when Burton J. Meyer was appointed to replace Mr. Lekach. The Compensation Committee currently consists of George Myers and Burton J. Meyer. Compensation Policy. The Company's compensation policy for senior management historically has consisted almost exclusively of cash salaries and, from time to time, discretionary performance bonuses. In fiscal year 1999, the Board of Directors implemented a change in the Company's compensation policy to add a significant long-term equity component to the compensation paid to its senior management. The Board expects that this change will strengthen the Company's ability to recruit, motivate and retain highly-qualified individuals. The Compensation Committee believes that stock options and restricted stock, which vest over time and will be subject to forfeiture, better align the interests of the Company's senior management with the interests of the Company's stockholders. The Committee also believes that substantial equity ownership by individuals in leadership positions within the Company will help to ensure that such individuals remain focused on building stockholder value. To effectuate this change in policy, the Company's 1998 Stock Option and Incentive Plan (the "Plan") was adopted by the Board of Directors in November 1998 and was approved by the IFX stockholders at the 1998 annual meeting. Joel M. Eidelstein, the President of the Company, has authority to hire all members of senior management of the Company and, subject to the Compensation Committee's approval, to determine the compensation to be paid to such executives. In determining annual salary and salary increases for senior management, Mr. Eidelstein and the Compensation Committee consider various factors, such as the executive's contribution to the Company's operating effectiveness and profitability; the executive's achievement of pre-established goals and performance targets; the level of responsibility, scope and complexity of such executive's position relative to other executive management; and the salary levels of other companies in the same industry. Zalman Lekach, IFX's Vice President of Mergers and Acquisitions, was issued 3,771 shares of restricted Common Stock under the Plan and also is eligible to receive options to purchase Common Stock if and to the extent he achieves certain performance targets and acquisition goals, as specified in his employment agreement. Mr. Lekach has been granted options to purchase an aggregate of 23,308 shares of Common Stock under the Plan, which options vest on an annual basis over the four years following the date of grant. Jose Leiman, who has served as IFX's Chief Financial Officer since August 1999, was granted several options to purchase an aggregate of 115,000 shares of Common Stock under the Plan, which options vest primarily on an annual basis over the four years following the date of grant. Compensation of the President. The compensation paid to Joel -34- M. Eidelstein, the President of the Company, during the last three fiscal years is listed in the Executive Compensation table located elsewhere in this report. During fiscal years 1997 and 1998, Mr. Eidelstein accepted a significantly reduced salary because the operations of the Company had decreased materially following the Company's July 1996 sale of its commodities brokerage business. In recognition of Mr. Eidelstein's pivotal role in evaluating the Company's future business prospects and managing the Company's transition into the Internet business, the Board of Directors authorized an increase in Mr. Eidelstein's salary to $50,000 for fiscal year 1999 and granted him an option to purchase a significant number of shares of Common Stock. The revision to Mr. Eidelstein's compensation package is consistent with IFX's emphasis on equity based compensation. On November 10, 1998 Mr. Eidelstein was granted an option to purchase 300,000 shares of Common Stock, which is an incentive stock option to the extent it qualifies for treatment as such. Mr. Eidelstein's option vested 25% on each of November 10, 1998 and January 1, 1999, and will vest an additional 25% on each of January 1, 2000 and January 1, 2001. The exercise price of the option is $3.00 per share and the sale price of the Common Stock as reported by the Nasdaq Stock Market as of the date of grant was $1.75 per share. The Board of Directors approved the option grant to Mr. Eidelstein in recognition of his dedication to the Company during the transition following the Company's July 1996 sale of its commodities brokerage business and Mr. Eidelstein's acceptance of a below-market salary during fiscal years 1997 and 1998. September 25, 1999 SUBMITTED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORES George A. Myers Burton J. Meyer -35- COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* AMONG IFX CORPORATION, THE NASDAQ STOCK MARKET (U.S.) INDEX AND THE NASDAQ FINANCIAL INDEX [CHART APPEARS HERE]
CUMULATIVE TOTAL RETURN ----------------------------------- 6/94 6/95 6/96 6/97 6/98 6/99 IFX CORPORATION 100 63 63 75 153 1,480 NASDAQ STOCK MARKET (U.S) 100 133 171 208 274 393 NASDAQ FINANCIAL 100 114 149 218 283 285
* $100 INVESTED ON 6/30/94 IN STOCK OR INDEX - INCLUDING REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING JUNE 30. -36 Item 12 - Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ The following table sets forth, as of September 15, 1999, certain information regarding the Common Stock beneficially owned by (i) each director of the Company, (ii) the Company's President, who is the only executive officer of the Company whose compensation is required to be disclosed in the "Executive Compensation" table contained elsewhere herein, (iii) each person known by the Company to own more than five percent of the Common Stock of the Company, and (iv) the executive officers and directors of the Company, as a group.
Amount and Nature of Approximate Name/Address (1) Beneficial Ownership Percent of Class - ---------------- -------------------- ---------------- Joel M. Eidelstein..................... 184,945 (2) 2.4% Zalman Lekach.......................... 4,871 * Colleen M. Downes...................... 500 (3) * Joseph M. Matalon...................... 6,000,000 (4) 48.2% Michael Shalom......................... 6,006,425 (4) 48.3% Burton J. Meyer........................ 371,812 (5) 4.8% George A. Myers........................ 733 (6) * Lee S. Casty........................... 3,393,282(7)(8) 44.1% International Technology Investments, 6,000,000 (9) 48.2% LC..................................... All officers and directors as a group 6,579,286 51.8% (8 persons)............................ - -----------------
(1) The address of each director and executive officer of the Company is in care of the Company, 707 Skokie Blvd., 5th Floor, Northbrook, IL 60062. (2) Includes 150,000 shares of Common Stock subject to an option granted to Mr. Eidelstein pursuant to the IFX 1998 Stock Option and Incentive Plan, which option currently is exercisable. (3) Consists of 500 shares of Common Stock owned by Ms. Downes' spouse. (4) Includes 1,250,000 shares of Common Stock held by International Technology and 4,750,000 shares of Common Stock subject to an option that is currently exercisable. See note 9 below. Each of Mr. Matalon and Mr. Shalom may be deemed to be an affiliate of International Technology and, accordingly, each of Mr. Matalon and Mr. Shalom may be deemed to beneficially own the shares of Common Stock held by such entity. (5) Includes 100,000 shares of Common Stock that Mr. Meyer may acquire upon exercise of an option granted to him by Lee S. Casty, which option currently is exercisable. (6) Consists of 333 shares of Common Stock held by Mr. Myers' spouse as custodian for Mr. Myers' minor children and 400 shares of Common Stock held by Mr. Myers under the Uniform Gifts to Minors Act as custodian for two of his minor children. (7) Mr. Casty's address is in care of French-American Securities, Inc., 707 Skokie Blvd., 5th Floor, Northbrook, IL 60062. -37- (8) Includes 100,000 shares subject to an option granted to Burton J. Meyer. Also includes 50,390 shares of Common Stock owned by Mr. Casty's minor children and 250,000 shares held by a third party custodian under the Uniform Gifts to Minors Act for the benefit of Mr. Casty's minor children. (9) Includes 4,750,000 shares of Common Stock subject to an option granted by IFX that currently is exercisable. International Technology's address is in care of Adorno & Zeder, 2801 S. Bayshore Drive, Suite 1600, Miami, Florida 33133. -38- Item 13 - Certain Relationships and Related Transactions - -------------------------------------------------------- Prior to fiscal year 1996, FX Chicago, Inc. made loans of $611,400 to C. Adam Ltd. (successor in interest to SRC, Inc.), an entity affiliated with Mr. Casty. The loans were evidenced by a demand note bearing interest at 8%, which rate subsequently was amended to equal the prime rate. In October 1998, this note was amended again to provide that (i) the interest rate will be adjusted each month to equal the interest rate actually earned by the Company on its short-term savings or money market account during the immediately preceding month plus one-half percent, and (ii) amounts outstanding under the note may be repaid by transfer to FX Chicago, Inc. of shares of Common Stock with an aggregate fair market value equal to the amount outstanding. The fair market value of shares tendered to repay the note will be valued at the average of the closing bid and ask price of Common Stock as reported by the Nasdaq SmallCap Market (or such other stock exchange on which the Common Stock may then be listed) on each of the three trading days ending on the trading date immediately prior to the delivery of the Common Stock to FX Chicago, Inc. The Company earned interest income of $39,400, $52,400 and $51,700 on this note, on a consolidated basis, during the fiscal years ended June 30, 1999, 1998, and 1997, respectively. In December 1998, IFX/Telcom, Inc., a wholly-owned subsidiary of the Company, purchased a limited partnership interest in Telcom.Net, L.P., an Internet communications software development company that was co-founded in 1997 by Joel M. Eidelstein, the Company's President. The limited partnership interest was purchased from Alerica, Inc., a corporation that is wholly-owned by Mr. Eidelstein and which is a general partner of Telcom.Net, L.P. The purchase price of such limited partnership interest was $200,000. The limited partnership interest entitles IFX/Telcom, Inc. to receive priority distributions up to $200,000, the amount of the Company's invested capital, plus approximately 20% to 25% of the profits of Telcom.Net, L.P., after all of its other partners have received priority distributions equal to their aggregate invested capital. In addition, the Company purchased from Alerica, Inc. an outstanding promissory note of Telcom.Net in the principal amount of $50,000. The Board of Directors (excluding Mr. Eidelstein, who abstained from discussion or voting) determined that the purchase price for this note was fair and that the purchase was in the best interests of the Company. The Company has guaranteed certain liabilities owed by Telcom.Net, L.P., a limited partnership, to Qwest/LCI, International. One of the general partners of Telcom.Net, L.P. is Alerica, Inc., a company that is wholly-owned by Joel Eidelstein, the Company's President. There is no maximum amount payable under this guarantee; however, the Company reasonably believes, based on the business of the limited partnership, that its potential liability under this guarantee will not exceed $100,000. During fiscal year 1999, the Company made a short-term loan to Telcom.Net, L.P. in the amount of $50,000 and paid expenses of approximately $65,000 on behalf of Telcom.Net, L.P. As of June 30, 1999, $7,000 remained outstanding under the loan and the Company had approximately $38,000 in accounts receivable from Telcom.Net, L.P., which it expects to receive in the ordinary course. Each of Joseph M. Matalon, a director of the Company, and Michael Shalom, the Company's Chief Executive Officer, is an affiliate of International Technology Investments, LC ("International Technology"). In November 1998, IFX entered into an agreement with International Technology in which it contributed $1,000,000 to IFX and International Technology received 500,000 shares of Common Stock from IFX, at a price of $2.00 per share, for its contribution and the option to acquire 5.5 million IFX shares. As of the date of this report, International Technology has contributed $3,000,000 in additional capital to IFX and International Technology has received 750,000 shares of Common Stock from IFX, at a purchase price of $2.00 per share, for its additional contribution and is entitled to receive an additional 750,000 shares. International Technology's purchase option expires in January 2004. -39- Certain information regarding Burton J. Meyer is set forth under the caption "Compensation Committee Interlocks and Inside Participation." The Company believes that all transactions disclosed above have been, and the Company's board of directors intends that any future transactions with its officers, directors, affiliates or principal stockholders will be, on terms that are no less favorable to the Company than those that are obtainable in arm's length transactions with unaffiliated third parties. -40- PART IV ------- Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------- (a) The following documents are filed as a part of this report: (1) Financial Statements: The following financial statements are attached to this Form 10-K commencing on page 45. Page ---- Report of Independent Certified Public Accountants 43 Report of Independent Certified Public Accountants 44 Consolidated Balance Sheets as of June 30, 1999 and 1998 45 Consolidated Statements of Operations for the Years Ended June 30, 1999, 1998 and 1997 46 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended June 30, 1999, 1998 and 1997 47 Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 1998 and 1997 48 Notes to Consolidated Financial Statements 50 (2) Schedules Schedule II - Valuation and qualifying accounts All other schedules called for under Regulation S-X are not submitted because they are not applicable or not required or because the required information is not material or is included in the financial statements or notes thereto. (3) Exhibits The list of exhibits is attached to this Form 10-K on page 42. (b) Reports on Form 8-K 1. Current Report on Form 8-K filed on July 1, 1999 pursuant to Item 4, regarding change in the Company's certifying accountant 2. Current Report on Form 8-K filed on July 13, 1999 pursuant to Item 2, regarding sale of the Company's shares of IFX Limited -41- Exhibit No. Description ------- ----------- 3.1 * Amended By-laws of IFX 3.2 * Restated Certificate of Incorporation 10.1 * Employment Agreement dated May 1999 with Zalman Lekach 10.2 IFX 1998 Stock Option and Incentive Plan, which is incorporated by reference to Exhibit 4.1 to IFX's Registration Statement on Form S-8 filed on April 14, 1999 10.3 Asset Sale and Purchase Agreement regarding IFX's sale of assets of Index Futures Group to E. D. & F. Man International, Inc., which is incorporated by reference to Exhibit A to the Company's Definitive Information Statement on Schedule 14C filed on June 12, 1996 10.4 Share Sale Agreement dated June 30, 1999 regarding IFX's disposition of its shares of IFX Limited, which is incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed on July 13, 1999 10.5 Subscription and Joint Venture Agreement dated November 23, 1998 with International Technology Investments, LC, which is incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K filed on November 25, 1998 10.6 Letter from Arthur Andersen LLP regarding the change in the registrant's certifying accountant, which is incorporated by reference to Exhibit 16.1 to IFX's Current Report on Form 8-K filed on July 1, 1999 21.1 List of subsidiaries of the Company 23.1a Consent of Ernst & Young LLP 23.1b Consent of Arthur Andersen LLP 27 Financial Data Schedule -------------------------------- * Filed herewith -42- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------------------- To the Stockholders of IFX Corporation and Subsidiaries: We have audited the accompanying consolidated balance sheet of IFX Corporation (a Delaware corporation) and subsidiaries ("the Company") as of June 30, 1999, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year ended June 30, 1999. Our audit also included the financial statement schedule for the year ended June 30, 1999 listed at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IFX Corporation and Subsidiaries as of June 30, 1999, and the consolidated results of their operations and their cash flows for the year ended June 30, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the year end June 30, 1999, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Miami, Florida, September 24, 1999 -43- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------------------- To the Stockholders of IFX Corporation and Subsidiaries: We have audited the accompanying consolidated balance sheet of IFX Corporation (a Delaware corporation) and subsidiaries ("the Company") as of June 30, 1998, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years ended June 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IFX Corporation and Subsidiaries as of June 30, 1998 and 1997, and the results of their operations and their cash flows for the years ended June 30, 1998 and 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Chicago, Illinois, September 24, 1999 -44- IFX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS ------ June 30, ---------------------------- 1999 1998 ---- ---- CURRENT ASSETS: Cash............................................................ $ 482,800 $ 321,900 Short-term investments.......................................... 5,000,000 5,311,300 Receivables, net of allowance for doubtful accounts of $80,100 for 1999 and $0 for 1998.............................. 458,300 104,900 Net assets of discontinued operations........................... 3,726,900 5,034,500 ----------- ----------- Total current assets....................................... 9,668,000 10,772,600 LONG-TERM ASSETS: Investment in Yupi Internet Inc................................. 3,113,500 - Investments in and advances to affiliated partnerships.......... 241,500 120,200 Notes receivable................................................ 612,500 611,400 Furniture, equipment, and leasehold improvements................ 2,253,500 14,400 Less: accumulated depreciation and amortization................. (369,300) (1,700) ----------- ----------- Furniture, equipment, and leasehold improvements, net........... 1,884,200 12,700 Acquired customer base, net..................................... 2,686,600 - Other assets.................................................... 655,200 26,500 ----------- ----------- Total long-term assets..................................... 9,193,500 770,800 ----------- ----------- TOTAL ASSETS $18,861,500 $11,543,400 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses.......................... $2,447,200 $ 208,200 LONG-TERM LIABILITIES: Notes payable................................................... 316,900 - STOCKHOLDERS' EQUITY: Common stock, (restated for reverse-split)$.02 par value; 150,000,000 shares authorized, 6,830,240 and 6,155,550 shares issued and outstanding in 1999 and 1998, respectively......... 136,600 123,100 Paid-in capital............................................... 11,299,100 7,842,700 Retained earnings............................................... 4,817,200 3,415,100 Accumulated other comprehensive income............................. (26,000) (45,700) Deferred compensation.............................................. (129,500) - ----------- ----------- TOTAL STOCKHOLDERS' EQUITY............................................ 16,097,400 11,335,200 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................ $18,861,500 $11,543,400 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. -45- IFX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Year Ended June 30, --------------------------------------------- 1999 1998 1997 ---- ---- ---- STATEMENT OF OPERATIONS DATA: ISP Revenues: Dial Up................................ $ 616,300 $ - $ - Hosting................................ 28,200 - - Dedicated and Design Web Services...... 80,800 - - ---------- ---------- ---------- Total revenues......................... 725,300 - - Cost and expenses: Cost of revenues....................... 445,500 - - General and administrative............. 2,978,400 733,100 1,306,000 Depreciation and amortization.......... 232,400 - - ---------- ---------- ---------- Total operating expenses............... 3,656,300 733,100 1,306,000 ---------- ---------- ---------- Operating loss from continuing operations.................. (2,931,000) (733,100) (1,306,000) Other Income (Expense): Interest income........................ 376,100 290,100 410,600 Loss on operations of equity investee.. (107,700) - - Other.................................. 136,200 126,500 247,100 ---------- ---------- ---------- Total other income..................... 404,600 416,600 657,700 ---------- ---------- ---------- Loss from continuing operations before income taxes......... (2,526,400) (316,500) (648,300) Benefit from income tax................ (811,000) (108,000) (220,000) ---------- ---------- ---------- Loss from continuing operations........... (1,715,400) (208,500) (428,300) Income from discontinued operations, net of taxes............... 3,117,600 3,575,200 3,612,100 ---------- ---------- ---------- Net income................................ 1,402,200 3,366,700 3,183,800 Assumed cumulative dividend on Class A preferred stock................ - - (23,300) ---------- ---------- ---------- Net income available to shareholders...... $1,402,200 $3,366,700 $3,160,500 ========== ========== ========== BASIC AND DILUTED INCOME (LOSS) PER SHARE: Loss from continuing operations............... $ (0.26) $ (0.03) $ (0.07) Income from discontinued operations........... $ 0.48 $ 0.57 $ 0.55 ---------- ---------- ---------- Net Income.................................... $ 0.22 $ 0.54 $ 0.48 ========== ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic and diluted......................... 6,498,204 6,246,545 6,616,893
The accompanying notes are an integral part of the consolidated financial statements. -46- IFX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Class A Retained Accumulated Preferred Paid in Deferred Earnings Other Stock Shares Amount Capital Compensation (Deficit) Comprehensive Total Costs Income --------- --------- -------- ---------- ------------ ----------- ------------- ---------- Balance June 30, 1996.......... $400,000 6,724,906 $134,500 $8,395,300 -- $(2,698,800) (14,500) $6,216,500 Repurchase of common stock... -- (445,776) (8,900) (319,900) -- -- -- (328,800) Retirement of class A preferred stock (400,000) -- -- -- -- -- -- (400,000) Repayment of Preferred stock -- -- -- -- -- (436,600) -- (436,600) dividends...... Comprehensive Income: Net income..... -- -- -- -- -- 3,183,800 -- 3,183,800 Foreign currency -- -- -- -- -- (31,200) (31,200) translation.... ----------- Comprehensive Income........ 3,152,600 ------------------------------------------------------------------------------------------- Balance June 30, 1997........... -- 6,279,130 125,600 8,075,400 48,400 (45,700) 8,203,700 Repurchase of fractional shares pursuant -- (10) -- -- -- -- -- to one-for five reverse split.. Repurchase of common stock and odd-lots... -- (123,580) (2,500) (232,700) -- -- (235,200) Net and comprehensive income......... -- -- -- -- 3,366,700 -- 3,366,700 ------------------------------------------------------------------------------------------- Balance June 30, 1998........... -- 6,155,540 123,100 7,842,700 3,415,100 (45,700) 11,335,200 Stock issued for -- 500,000 10,000 990,000 -- -- 1,000,000 cash Stock and options issued for Acquisitions... -- 174,700 3,500 2,297,900 -- -- 2,301,400 Compensation associated with grant of stock options and warrants...... -- 39,000 -- -- 39,000 Deferred compensation associated with grant of stock -- -- -- 129,500 (129,500) -- -- -- options........ Comprehensive Income:........... Net Income........ -- -- -- -- 1,402,100 1,402,100 Foreign currency -- -- -- -- -- 19,700 19,700 translation.... ----------- Comprehensive income......... 1,421,800 ------------------------------------------------------------------------------------------- Balance June 30, 1999........... $ -- 6,830,240 $136,600 $11,299,100 $(129,500) $4,817,200 $(26,000) $16,097,400 ===========================================================================================
The accompanying notes are an integral part of the consolidated financial statements. -47- IFX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997 ------------- ------------ ------------ CASH FLOWS FROM OPEARTING ACTIVITIES: Net income..................................... $1,402,200 $3,366,700 $3,183,800 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation................................. 76,900 1,700 - Amortization................................. 155,500 - - Deferred taxes............................... - - - Bad debt expense............................. 80,100 - - Compensation associated with stock options... 39,000 - - Equity in net (gain) loss of affiliated partnerships................................ 107,700 (70,200) - Change in net assets from discontinued operations 1,307,600 1,853,500 (1,184,200) Changes in operating asset and liabilities: Short term investments....................... 311,300 (3,784,200) (1,527,100) Receivables.................................. (218,700) (89,500) - Other assets................................. (129,500) 1,900 (28,400) Accounts payable and accrued expenses........ 800,700 (32,400) 126,200 ---------- ---------- ---------- Cash provided by operating activities........... 3,932,800 1,247,500 570,300 CASH FLOWS FROM INVESTING ACTIVITIES: Investment in Yupi Internet Inc.............. (3,113,500) - - Acquisitions, primarily customer base........ (443,800) - - (Increase) decrease in investments in and advances to affiliated partnerships........ (229,000) 219,200 (284,600) Increase (decrease) in notes receivable...... (1,100) 7,500 8,300 Purchase of PP&E............................. (991,200) (14,400) - ---------- ---------- ---------- Cash used in investing activities.............. (4,778,600) 212,300 (276,300) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds (payments) of notes payable......... (13,000) (1,586,600) 1,586,600 Issuance (repurchase) of common stock........ 1,000,000 (235,300) (328,800) Redemption of preferred stock................ - - (400,000) Payment of preferred dividends............... - - (436,600) ---------- ---------- ---------- Cash provided by (used in) financing activities 987,000 (1,821,900) 421,200 ---------- ---------- ---------- Effect of exchange rate changes on cash........ 19,700 - (31,200) ---------- ---------- ---------- Increase (decrease) in cash.................... 160,900 (362,100) 684,000 Cash, beginning of period...................... 321,900 684,000 - ---------- ---------- ---------- Cash, end of period............................ $ 482,800 $ 321,900 $ 684,000 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. -48- IFX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended June 30, 1999, 1998 and 1997 Supplemental Information of Non Cash Investing and Financing Activities and Other Cash Flow Data 1999 During the year, the Company acquired several entities (see note 7). In connection with those acquisitions, the Company assumed liabilities in the amount of $1,813,500 and issued stock valued at approximately $2,301,300. The non cash effects of the acquisitions is excluded from the accompanying consolidated statements of cash flows. Interest paid during the years ended June 30, 1999, 1998 and 1997 was $1,000, $53,900 and $690,300 respectively, substantially all of which was paid to related parties. Income taxes paid during the year ended June 30, 1999, 1998 and 1997 was $1,025,000, $750,000 and $200,000, respectively. Interest payments to customers related to discontinued operations during the year ended June 30, 1999, 1998 and 1997 was $758,600, $1,867,100 and $2,323,300, respectively. 1998 None. 1997 In January, 1997, notes payable aggregating $5,450,000 due January 31, 1997 were extended to January 31, 1998. $4,700,000 of these notes payable were repaid prior to June 30, 1997. In January, 1997, a note payable for $836,600 was issued to Lee S. Casty as payment for the redemption of preferred stock and dividends accrued thereon. -49- IFX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION OF IFX CORPORATION IFX Corporation ("IFX" or the "Company") has begun to pursue, and intends to continue to pursue, the acquisition and development of Internet access and related services businesses, initially in Venezuela, Chile, Colombia, Argentina, Bolivia and Mexico, with the proceeds from the sale of its brokerage assets and private equity offerings. Ultimately, IFX seeks to form a Latin American pan-regional network of ISPs under the brand name Unete (http://www.unete.com), such that a subscriber traveling in Latin America would be able to access the Internet by making a local telephone call, regardless of whether or not such subscriber was in his or her home country. Prior to July 1996, the primary business of IFX was providing commodity 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 net profit (as defined in the sales 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 remaining 50.1% interest in IFX Ltd. in exchange for approximately $2.45 million, of which approximately $1.9 million was received subsequent to June 30, 1999 (with the remainder due under a note receivable at prime plus three-percent on or before June 30, 2000)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. Through June 30, 1999, IFX received approximately $10.4 million of earn-out payments from the July 1996 sale of its brokerage assets. Prior to January 1, 1999, the earn-out payments were based on 40% of the sold business' profitability. In calendar 1999, the earn-out payments were based on 30% of the sold business' profitability and, in calendar years 2000 and 2001, will be based on 20% of the sold business' profitability. The Company has not received any earn-out payments from the sale of IFX Ltd. As a result of the sales, the results of operations and net assets of these disposed entities have been segregated and reclassified as discontinued operations in the accompanying financial statements. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The 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. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition -50- The Company recognizes revenue when services are provided. Internet access services are generally billed at the beginning of the month services are to be provided. Revenues from the earn-out payments related to the discontinued operations are recorded as they are earned. Credit Risk The Company's accounts receivable potentially subject the Company to credit risk, as collateral is generally not required. The Company's risk of loss is limited due to billings to customers for services, the use of pre-approved charges to customer credit cards, and the ability to terminate Internet access on delinquent accounts. In addition, the concentration of credit risk is mitigated by the large number of customers comprising the customer base. The carrying amount of the Company's receivables approximates their fair value. Sources of Supplies The Company relies on third-party networks, local telephone companies, and other companies to provide data communications capacity. Although management feels alternative telecommunications facilities could be found in a timely manner, any disruption of these services could have an adverse effect on operating results. Short-Term Investments Short-term investment represents the Company's investments of certain cash balances in overnight or short-term (less than 12 months) investments, which generally consist of U.S. Government obligations. Income related to these investments is recorded as earned. Fair value of the investments approximates book value. Financial Instruments The carrying amounts for the Company's cash, short term investments, receivables, other assets, accounts payable, accrued and expenses and notes payable approximate fair value. Long-Lived Assets The Company periodically evaluates the recovery of the carrying amount of long lived assets by determining if a permanent impairment has occurred. Indicators of a permanent impairment include duplication of resources resulting from acquisitions, the estimated undiscounted cash flows of the entity over the remaining amortization period and other factors. The amount of impairment, if any, would be measured based on comparison of the fair value and carrying vale of the assets. The Company does not believe that any impairment has occurred at June 30, 1999. Investments The Company has investments in partnerships with ownership interest of approximately 25% and which are accounted for on the equity method. The Company also has an interest in Yupi Internet Inc., which amounts to less than a 20% ownership interest, and does not have the ability to exercise significant influence over the Investee. Accordingly, the Company accounts for this investment on the cost method. Furniture, Equipment and Leasehold Improvements Furniture and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets, commencing when assets are installed or placed in service. Leasehold improvements are amortized using the straight-line method over the lesser of their useful lives or the remaining terms of the leases. The estimated useful lives generally range between 3 and 5 years. -51- Acquired Customer Base The Company capitalizes specific costs incurred for the purchase of customer bases from other Internet Service Providers ("ISPs"). The customer acquisition costs include the actual fee paid to the selling ISP. Subscriber acquisition costs capitalized at June 30, 1999 were approximately $2,4 million. Amortization is provided using the straight-line method over three years commencing when the customer base is acquired. Amortization expense for the year ended June 30, 1999 and accumulated amortization at June 30, 1999 was approximately $155,500 and $155,500, respectively. Advertising and Marketing Expenses The Company expenses all advertising and marketing expenses as they are incurred. Advertising expenses were $247,600, $3,700 and $2,600 during 1999, 1998 and 1997, respectively. Income Taxes Deferred income taxes are provided to reflect the tax effects of temporary differences between financial and tax reporting. Risks and Uncertainties The Company's operations are subject to certain risks and uncertainties, including those associated with: lack of operating history and experience in the Internet business; loss from continuing operations; negative cash flow and fluctuations in operating results; funding expansion and acquisitions; international expansion; dependence on key personnel; dependence on suppliers; financing arrangement terms that may restrict operations; and pending litigation. Reclassification Certain amounts previously reported have been reclassified to conform to the current method of presentation. Earnings per Common Share Basic earnings per common share is based upon the weighted average number of common shares outstanding during each year. 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 potential common shares outstanding. Potential common shares consist of the outstanding options. On January 8, 1998, the Company authorized a one-for-five reverse split of its common stock, par value $.004, effective on January 12, 1998. All references in the financial statements and notes thereto related to number of shares and per share amounts reflect this decrease in number of shares outstanding. Recent Accounting Pronouncements Effective July 1, 1998, the Company adopted Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities", which requires that requires costs of start-up activities and organization costs to be expensed as incurred. The adoption of this pronouncement did not have a material effect on the Company's financial position or results of operations. -52- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" which would have been effective for fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB issues SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" which amended SFAS 133 to change the effective date to fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company plans to adopt SFAS No. 133 in fiscal 2001 and is currently assessing the impact this statement will have on its consolidated financial statements. Effective July 1, 1998, the Company adopted Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", which requires that certain costs for the development of internal use software should be capitalized, including the costs of coding, software configuration, upgrades and enhancements. The adoption of this pronouncement did not have a material effect on the Company's financial position or results of operations. Foreign Currency Translation. Foreign currency transactions and financial statements (except for those relating to countries with highly inflationary economies) are translated into U.S. dollars at the rate in effect on the date of the transaction or the date of the financial statements, except that revenues, costs and expenses are translated at average exchange rates during each reporting period. Resulting translation adjustments and transactions gains or losses attributable to certain intercompany transactions that are of a long-term investment nature are excluded from results of operations and accumulated in accumulated other comprehensive income, a separate component of consolidated stockholders' equity. Gains and losses attributable to other intercompany transactions are included in results of operations. The financial statements of subsidiaries located in countries with highly inflationary economies are remeasured as if the functional currency were the U.S. Dollar. The remeasurement creates translation adjustments that are reflected in net income. Comprehensive Income As of July 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". The adoption of this Statement had no impact on the Company's net income or stockholders' equity. SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components. SFAS No. 130 requires foreign currency translation adjustments to be included in other comprehensive income. Prior to the adoption of SFAS No. 130, the Company reported such adjustments in a separate component of stockholders' equity. For the twelve months ended June 30, 1999 and June 30, 1998, comprehensive income was $1,421,800 and $3,366,700, respectively. Disclosure of reclassification amounts: Foreign currency translation arising during prior periods included in net income due to the discontinued operations discussed in note 3 $45,700 Foreign currency translation arising during the period (26,000) --------- Net foreign currency translations $19,700 ======= -53- NOTE 3 - 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 MINC substantially all of the brokerage accounts maintained by 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. As 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 claims arising from activity prior to the sale. Given the Sale of Assets, the Company no longer has a need to own exchange memberships or clearing corporation stock. All memberships and stock owned were sold during fiscal 1997 at a net gain of $737,700. During the years ended June 30, 1998 and 1997, the Company earned $4,159,600 and $2,157,900, respectively, from the Sale of Assets. Earnings from these transactions are included in discontinued operations. The following table summarizes financial information related to the discontinued trading business:
Year Ended June 30, ----------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Total revenues.................................. $11,409,200 $12,244,600 $12,422,000 =========== =========== =========== Income from discontinued operations before income taxes.............. 4,785,500 5,852,400 6,067,600 Income tax provision on discontinued operation.. 1,667,900 2,277,200 2,455,500 ----------- ----------- ----------- Income from discontinued operations, net of taxes. 3,117,600 3,575,200 3,612,100 =========== =========== ===========
The information set forth in the remaining Notes to the Financial Statements relates to continuing operations unless otherwise specified. -54- NOTE 4 - FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Furniture, equipment and leasehold improvements are summarized below:
June 30, ------------------------------------ 1999 1998 ----------------- --------------- Furniture.......................... $176,600 $14,400 Equipment.......................... 1,833,100 - Leasehold improvements............. 243,800 - ----------------- --------------- $2,253,500 $14,400 Less: Accumulated depreciation and amortization................. (369,300) (1,700) ----------------- --------------- Net ............................... $1,884,200 $12,700 ================= ===============
NOTE 5 - NOTES PAYABLE In connection with certain acquisitions, the Company assumed notes payable aggregating to a principal amount of approximately $300,000. NOTE 6 - STOCKHOLDERS' EQUITY Class A Preferred Stock As of June 30, 1999, there were no Class A preferred shares outstanding. On January 31, 1997, the Company redeemed and retired the 400,000 issued and outstanding shares of its Class A preferred stock, all of which were owned by Lee S. Casty. The preferred stock was redeemed at a price equal to the aggregate par value thereof plus the cumulative but previously undeclared and unpaid dividends thereon, totaling $836,600. As payment, the Company issued Lee S. Casty a promissory note bearing interest at the prime rate and maturing on January 31, 1998. This note was repaid in February, 1998. Common Stock On January 8, 1998, the Company authorized a one-for-five reverse split of its common stock, par value $.004, effective on January 12, 1998 (the "Effective Date"). Each five shares of such common stock was reclassified and reflected as one share of common stock having a par value of $.02, as of January 12, 1998. Outstanding shares of the Company's common stock were reduced to 6,279,130 shares from 31,395,649 shares outstanding before the split. Any holder of fractional shares resulting from this reverse split was paid an amount equal to the mean between the bid and the offer prices for the Company's Common Stock on the NASDAQ SmallCap market on the Effective Date multiplied by the amount of the fractional share. The one-for-five reverse split also resulted in certain shareholders owning "odd lots," that is, less than one hundred shares of Common Stock. In order to reduce the disproportionately high costs to the Company of servicing numbers of such shareholder accounts, and to enable those shareholders to dispose of their securities without incurring the brokerage fees that normally attend odd-lot transactions, the Company offered to purchase from its shareholders all odd lots (i.e., holdings of less one hundred shares). The purchase amount was based upon the number of odd-lot shares multiplied by the mean between the bid and offer prices on the date of purchase, without commissions. The Company maintained its offer to repurchase such odd lots until February 26, 1998, forty-five days immediately following the Effective Date. As a result of the odd-lot offer, the Company repurchased approximately 3,500 shares. The Company has issued approximately 674,700 shares in fiscal 1999. As of June 30, 1999, there were 6,830,240 outstanding shares of common stock and 6,500,000 shares of the Company's common stock reserved for stock options and warrants. -55- Sale of Stock and Right to Purchase Common Stock The Company entered into an agreement (the "Agreement") with International Technology Investments, LC ("ITI"), a then unrelated third party, and another major shareholder pursuant to which the Company formed Emerging Networks Inc., a 100% owned subsidiary, and other related companies to pursue opportunities in providing Internet services in Latin America and other international locales. In connection with the Agreement, the Company issued to ITI 500,000 shares of Common Stock and the right to purchase up to 5,500,000 additional shares of Common Stock for $2.00 per share (the "Purchase Right"), for a total price of $1,000,000, effective November 23, 1998. STOCK BASED COMPENSATION PLANS Employee Stock Option Plan Under the Company's 1998 Stock Option Plan, as amended (the "Stock Option Plan"), 900,000 shares of common stock are reserved and authorized for issuance upon the exercise of options. The compensation committee (the "Committee") of the Board of Directors administers the Stock Option Plan and determines who is eligible. Options generally become exercisable as follows: (i) 25% of the options become exercisable one year after the date of grant or, in certain cases, the commencement date of the holder's employment; (ii) an additional 25% of the options become exercisable 2 years after the date of grant or, in certain cases, the commencement date of the holder's employment; (iii) an additional 25% of the options become exercisable 3 years after the date of grant or, in certain cases, the commencement date of the holder's employment; (iv) the remaining 25% of the options become exercisable 4 years after the date of grant or, in certain cases, the commencement date of the holder's employment. The Option Price may be greater than, less than, or equal to Fair Market Value on the Option Date, as determined in the sole discretion of the Committee. In fiscal year 1999, the Company granted approximately 372,000 options (including Directors Stock Option Grant) to employees during fiscal 1999. Directors Stock Option Grant In November 1998, the Board of Directors granted to the Company's President an option to purchase 300,000 shares of Common Stock, exercisable at $3.00 per share (the price of the stock as reported by the NASDAQ Stock Market as of the date of the grant was $1.75 per share), which is included in number of options granted under the Stock Option Plan. This option vested 25% on each of November 10, 1998 and January 1, 1999 and will vest an additional 25% on each of January 1, 2000 and January 1, 2001. Statement of Financial Accounting Standards No. 123 The Company has elected to account for its stock based compensation plans under Accounting Principle Board Opinion number 25, Accounting for Stock Issued to Employees (APB No.25); however, the Company has computed for pro forma disclosure purposes the value of all options granted during 1999 using the Black-Scholes option-pricing model as prescribed by SFAS No. 123 using the following weighted average assumptions used for grants in 1999: 1999 --------- Risk-Free Interest Rate 5.50% Expected Dividend Yield 0.00% Expected Lives 5.0 years Expected Volatility 1.25 -56- The total value of options granted during 1999 was computed as approximately $1,929,000. 1999 ---------- Net Income As reported $1,402,200 Pro forma $1,288,600 Basic and diluted As reported $ 0.22 Earnings per share Pro forma $ 0.20 A summary of the status of the Company's option plan at June 30, 1999 and the changes during the year then ended are presented in the following table: Weighted Average Shares Exercise (In Thousands) Price Per Share -------------- ---------------- June 30, 1998 - ------------- Grants 372,000 $5.19 Exercised 0 0.00 Cancelled 0 0.00 Forfeitures 0 0.00 -------- June 30, 1999 372,000 $5.19 ======== The weighted average fair value of options granted during 1999 was $3.59. The following table summarizes the number of options outstanding by year of grant:
Weighted Weighted Average Exercise Average Remaining Contractual Year of Grant Number of Shares Price Range Exercise Price Life - ------------- ---------------- -------------- -------------- --------------------- June 30, 1999 72,000 $4.63 - $22.50 $14.30 9.9 years June 30, 1999 300,000 $3.00 $ 3.00 9.4 years
The following table summarizes the options exercisable as of June 30, 1999: Weighted Weighted Average Average Remaining Contractual Year of Grant Number of Shares Exercise Price Life - -------------- ---------------- -------------- ---------------------- June 30, 1999 150,000 3.00 9.4 years -57- NOTE 7 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
YEAR ENDED JUNE 30, 1999 1998 1997 ------------ ------------- ------------ Numerator for basic earnings per share Loss from continuing operations.......................... $(1,715,400) $ (208,500) $ (428,300) Assumed cumulative dividend on Class A Preferred Stock... - - (23,300) ----------- ----------- ----------- Loss from continuing operations available to common shareholders.......................................... (1,715,400) (208,500) (451,600) =========== =========== =========== Income from discontinued operations...................... 3,117,600 3,575,200 3,612,100 =========== =========== =========== Net income 1,402,200 3,366,700 3,183,800 Assumed cumulative dividend on Class A Preferred Stock... - - (23,300) ----------- ----------- ----------- Net income available to common shareholders.............. 1,402,200 3,366,700 3,160,500 =========== =========== =========== Denominator Denominator for basic and diluted per share Weighted average shares................................ 6,498,204 6,246,545 6,616,893 =========== =========== ===========
Outstanding options and warrants to purchase shares of the Company's Common Stock at June 30, 1999, 1998 and 1997 were excluded from the computation of diluted earnings per share because their effect on loss per share from continuing operations was antidilutive. NOTE 8 - RELATED PARTY TRANSACTIONS The Company has a note receivable in the amount of $612,500 at June 30, 1999, in connection with advances made by the Company to an affiliated entity. This demand receivable was converted into a demand note bearing interest at 8% and was subsequently changed to the prime rate of interest. The Company earned $39,400, $52,400 and $51,700 of interest income on this note during the years ended June 30, 1999, 1998 and 1997, respectively. NOTE 9 - ACQUISITIONS During fiscal 1999, the Company acquired Interaccess, S.A., a Chilean corporation, International Connection Service 1500, C.A., a Venezuelan corporation, Zupernet Ltda., a Bolivian limited liability company and Interweb Mexico S.A. de C.V., a Mexican corporation, for total purchase prices of approximately $2,907,700, of which approximately $488,500, which includes cash acquired of $44,700, was paid in cash, approximately $117,800 was paid subsequent to year end, approximately $2,061,600 was paid by issuing approximately 174,000 shares of the Company's common stock and approximately $239,800 was paid by issuing options to purchase 25,000 shares of the Company's common stock for $10.00 per share for a period of 5 years. -58- In addition, the Company is obligated to pay the sellers additional purchase price based on the number of users, as defined by the respective agreements, existing at the end of a period ranging from 6 to 18 months times a per user amount ranging from $175 to $285. The additional amounts are to be paid in cash, issuing shares of the Company's common stock or a combination of cash and common stock. The Company did not record any of the additional purchase price due to an estimate of the number of users that exists at the end of the contingency period not being known beyond a reasonable doubt. 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 $2,125,000 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, 1997, the beginning of the 1998 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, 1997 or that may be obtained in the future. The pro forma data does not give effect to acquisitions completed subsequent to June 30, 1999. Year ended June 30 ------------------------- 1999 1998 ---------- ---------- (Unaudited) Total revenues.............................. $2,557,800 $1,853,100 Net income.................................. 394,900 2,189,200 Basic and diluted net income per common share................................... $0.06 $0.35 NOTE 10 - 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. Operating segment information for prior years has been restated to conform to the 1999 presentation. The Company is structured primarily around the geographic markets it serves and operates three reportable segments in Mexico, Venezuela and Chile. 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 expense, equity income, and gains or losses from securities and other investments. The Company does not derive more than 10% of its revenue from any individual customer. -59- Selected financial information for the year ended June 30, 1999 by segment is presented below:
United States Mexico Venezuela Chile Other Total Revenues....... $ - $ 137,600 $ 335,000 $ 200,200 $ 52,500 $ 725,300 Income (loss) from continuing operations before taxes.. $(1,394,700) $(104,400) $ (16,000) $ (77,800) $ (933,500) $(2,526,400) Assets......... $ 6,580,900 $ 990,600 $1,785,400 $1,623,300 $7,881,300 $18,861,500
Information by product lines is presented on the Consolidated Statement of Operations. The Company does not allocate long lived assets to those product lines. NOTE 11 - INCOME TAXES The benefit for Federal income taxes for each of the years ended June 30, is as follows: 1999 1998 1997 --------- --------- --------- Current $ 811,000 $ 108,000 $ 220,000 Deferred 0 0 0 --------- --------- --------- Total provision $ 811,000 $ 108,000 $ 220,000 ========= ========= ========= State income tax expense is immaterial for the years ended June 30, 1999, 1998 and 1997. Reconciliation of the total provision for income taxes to the Federal statutory rate for the years ended June 30, is as follows: 1999 1998 1997 ------ ------ ------ Income tax provision (benefit) at statutory rate (34)% (34)% (34)% State Income Tax and other 2 % 0 0 ----- ----- ----- Total income tax provision (benefit) (32)% (34)% (34)% ===== ===== ===== The Company has no material deferred tax assets or liabilities related to continuing operations for the years ended June 30, 1999, 1998 or 1997 NOTE 12 - COMMITMENTS AND CONTINGENCIES The Company maintains facilities and offices at various locations throughout the United States and Latin America for general corporate purposes, including technology centers, customer call centers, office space and headquarters. At June 30, 1999, the operating lease commitments for these facilities represented approximately $2,182,000 through the year 2004. The majority of this commitment is related to office space leased in Chicago. While the Company remains legally committed under terms of that lease, subsequent to August 28, 1998, the Company subleased all of that space, through -60- the end of the lease term. Lease expenses related to continuing operations, amounted to $60,400, $28,800 and $28,800 in 1999, 1998 and 1997 , respectively. In 1999, the Company entered into lease agreements in the United States for offices in Aventura, Florida and Northbrook, Illinois; and internationally, for offices in Argentina, Bolivia, Chile, Colombia, Mexico and Venezuela. A list of the operating lease commitments as of June 30, 1999 is as follows: Operating Leases ---------------- 2000 $ 776,700 2001 657,100 2002 546,900 2003 134,600 2004 67,100 ----------- Total Lease Obligations 2,182,400 Sublease Income (Chicago Office) (1,223,900) ----------- Net Lease Obligations $ 958,500 =========== Consulting Agreements At June 30, 1999, the Company had entered into several consulting agreements. The terms of the consulting agreements are from one to three years and the Company is obligated to pay approximately $198,000 in cash and issue a minimum of 44,000 and a maximum of 69,000 options to purchase shares of the Company's common stock the number of which is based on certain performance criteria. The exercise prices of the options ranges from approximately $2 per share to $13 per share, the options are exercisable over periods ranging from 3 to 10 years, vesting over periods ranging from 1 to 4 years. For the grants for which the quantity and terms are unknown at the date of grant and there is not significant disincentive for nonperformance, the Company records expense associated with the grants, based fair value of options issuable as of June 30, 1999, using Black Scholes pricing model. Compensation expense associated with these grants was approximately $17,000 for the year ended June 30, 1999. These grants will be revalued at the end of each quarter based on the fair value of the options at that date. For the grants for which the quantity and terms are known at the date of grant and there is significant disincentive for nonperformance compensation expense is recorded based on the value of the options, using the Black Scholes model, at the date of grant. The amount of related expense amounted to approximately $19,000. Acquisition Agreements The Company may be obligated to pay cash or issue shares of its common stock for additional purchase price as discussed in Note 7, however, the additional purchase price to be paid, if any, and the amount of such additional purchase price are not known. Other A limited indemnification agreement was issued to MINC related to the Sale of Assets. This agreement covers potential customer claims arising from activity prior to the sale. The Company has guaranteed certain liabilities of a limited partnership to Qwest/LCI, International. The general partner of this limited partnership is -61- owned by an officer of the Company. There is no maximum amount payable under this guarantee. However, the Company does not expect that the potential liability will exceed $100,000 based on the business of the limited partnership. NOTE 13 - 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. Legal Proceedings With Respect to Discontinued Operations. On May 16, 1996, Index filed suit in the Circuit Court of Cook County--Law Division against Doug Niemann, a former customer, for breach of contract, seeking to recover a debit balance of $88,200 (Index Futures Group, Inc. v. Doug Niemann, case no. 96L-5506). On January 14, 1997, Niemann filed a counterclaim for $688,200. The Company believes that the counterclaim is without merit and will defend vigorously. In April 1994, Index, without admitting or denying the allegations, paid $100,000 to the CFTC, settling an administrative action filed on September 29, 1992. In a related action, the equity receiver of a commodity pool operator brought an action to recover losses of approximately $600,000, alleging various theories such as constructive trust, negligence, breach of fiduciary duty and conversion. On May 29, 1996, the district judge dismissed the complaint in its entirety. On December 4, 1997, the Court of Appeals affirmed the district judge's dismissal of all claims against Index. On January 13, 1998, the Court of Appeals denied the Supplemental Plaintiffs' request for a rehearing of its appeal. On October 2, 1998, the attorney for the equity receiver of the commodity pool filed a class-action suit on behalf of a putative class composed of persons who had given money to the commodity pool operator to invest, some of which was deposited in brokerage accounts at Index by the commodity pool operator. (Wesselhoff v. FX Chicago, Inc. et al., Circuit Court of Cook County, Chancery Division, case number 98-CH-13396). The plaintiff seeks damages of $600,000 plus prejudgment interest, punitive damages, and lost investment opportunity. The Company believes that the allegations in the complaint against FX Chicago, Inc. and the Company are without merit and will defend vigorously. A German citizen, seeking damages of 6,403,519.19 Deutschmark (approximately $3,420,000 given the exchange rate as of September 25, 1990), filed a lawsuit in September 1998, in Germany, against an affiliate of MINC. The complaint arouse out of transactions that occurred in an account introduced by Index Futures Group, AG ("Index AG"), an introducing broker of Index, prior to the Sale of Assets. The Plaintiff alleges that under German law, MINC's affiliate is successor to Index AG, and thus assumed any liabilities of Index AG. Pursuant to the Sale of Assets agreement, Index is responsible for any liability "arising out of any state of facts with respect to such Assigned Contract existing on or prior to the Closing Date". MINC has retained counsel in Germany to represent its interests in this matter. As Index AG was an introducing broker of Index and not a former subsidiary of the Company or Index, the Company does not believe that it will ultimately be liable for damages. In April 1999, MINC's German counsel reported that the Dusseldorf District Court dismissed all claims against MINC. However, the plaintiff has filed an appeal with the Dusseldorf Court of Appeals. On October 27, 1998, a complaint was filed by James Feltman as liquidating agent of L. Luria & Son, Inc. (Case No. 97-16731-BKC-RAM) seeking recovery from the Company of $368,188.84. Starting in the winter of 1996, the Company entered into an arrangement with the suppliers of L. Luria & Son, Inc. pursuant to which the Company advanced funds on behalf of L. Luria & Son, Inc. in order to allow it to purchase inventory. L. Luria & Son, Inc. reimbursed the Company for amounts that it had advanced. The complaint alleges that the Company was an insider of L. Luria & Son, Inc. because of Joel Eidelstein's relationship to L. Luria & Son, Inc. and that the amounts that L. Luria & Son, Inc. paid the Company constituted preferences under the Bankruptcy laws. On March 1, 1999, the Company reached an agreement to settle this complaint for $92,222. -62- On December 28, 1998, John and Christina Blazina, filed an NFA arbitration against Index and others, alleging breach of fiduciary duty, fraud, breach of contract and negligence in the solicitation and trading of a series of managed accounts opened at Index in 1995. Claimant seeks an award of $500,000, composed of alleged actual damages of $262,500, punitive damages of $170,000 and various other costs and fees. The Company believes that the allegations are without merit and will defend vigorously. On August 23, 1999, a lawsuit 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. NOTE 14 -SUBSEQUENT EVENTS Acquisitions and Recent Developments On July 2, 1999, the Company, through a wholly owned subsidiary, purchased all of the capital stock of Interactiva, SA. ("Interactiva"), an ISP based in Santiago, Chile. The aggregate purchase price was approximately $420,000 to be paid in cash. On July 21, 1999, the Company, through a wholly owned subsidiary, purchased all of the capital stock of Sistema de Diseno y Manufactura S.A. de C.V. ("SDM Net"), an ISP based in Monterrey, Mexico. The Company intends to consolidate the operations acquired from SDM Net into Interweb de Mexico in Mexico City. The aggregate purchase price was approximately $646,000, 50% of which was paid or payable in cash and 50% to be paid by issuing shares of the Company's common stock. On August 20, 1999, the Company, through a wholly owned subsidiary, purchased all of the capital stock of e-Net Teleinformatica Ltda ("e-Net"), an ISP operating in Salvador, Brazil. The aggregate purchase price was approximately $3.1 million, 20% of which is to be paid in cash and 80% to be paid by issuing shares of the Company's common stock. On August 23, 1999, the Company, through a wholly owned subsidiary, purchased all of the capital stock of Vianet S.A. de C.V. ("Vianet"), an ISP located in San Salvador, El Salvador. The aggregate purchase price was approximately $1 million, to be paid by issuing shares of the Company's common stock. On August 24, 1999, the Company, through a wholly owned subsidiary, purchased all of the capital stock of ITS Networks S.A. ("ITS Networks"), an ISP located in Tegucigalpa, Honduras. The aggregate purchase price was approximately $200,000, to be paid by issuing shares of the Company's common stock. During August and September 1999, International Technology exercised its right to purchase 1,500,000 share of the Company's common stock for $3.0 million, 750,000 shares have been issued, the Company is committed to release the remaining 750,000 shares. Credit Facility On 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 to upgrade and expand the Company's Internet operations, but the Company is under no obligation to purchase equipment from Lucent. -63- On July 1999, the Company entered into an $500,000 lease agreement with SoftBank to provide the financing of the implementation of the Portal software(R). Under the terms of the agreement, Portal will develop a consolidated billing and accounts receivable system that will allow the Company to provide invoicing services to it's customers across all Latin America. On 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 $535,873 over the next 5 years. NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarters ended ---------------------------------------------------------------- 9/30/98 12/31/98 3/31/99 6/30/99 Total ------- -------- ------- ------- ------- Revenue - - - $ 725,300 $ 725,300 ========== ========== Loss from continuing operations $(123,500) (135,700) (542,000) (914,200) (1,715,400) Income from discontinued operations 946,700 784,800 1,036,000 350,100 3,117,600 Net income (loss) 823,200 649,100 494,000 (564,100) 1,402,200 Per share - basic and diluted: Continuing operations $(0.02) $(0.02) $(0.08) $(0.13) $(0.26) Discontinued operations $ 0.15 $ 0.12 $ 0.16 $ 0.05 0.48 Net income $ 0.13 $ 0.10 $ 0.07 $(0.08) 0.22 Weighted average numbers of shares 6,155,539 6,367,496 6,655,539 6,778,108 6,498,204
Quarters ended ---------------------------------------------------------------- 9/30/97 12/31/97 3/31/98 6/30/98 Total ------- -------- ------- ------- ------- Revenue - - - - - Income (loss) from continuing operations $ (87,300) $ (126,400) $ (32,100) $ 37,300 $ (208,500) Income from discontinued operations 974,900 899,800 796,800 903,700 3,575,200 Net income (loss) 887,600 773,400 764,700 941,000 3,366,700 Per share - basic and diluted: Continuing operations $(0.01) $(0.02) $(0.01) $0.01 $(0.03) Discontinued operations $ 0.16 $ 0.14 $ 0.13 $0.14 0.57 Net income $ 0.15 $ 0.12 $ 0.12 $0.15 0.54 Weighted average numbers of shares 6,279,130 6,279,130 6,278,584 6,215,579 6,246,545
The Quarterly information presented above, 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. -64- SCHEDULE II IFX CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts (For Continuing Operations)
Additions --------------------- Charged to (Benefits Charged Balance at Against) to Other Balance Beginning Costs and Accounts Deductions at End of Description of Period Expenses (Describe) (Describe) Period - ----------- ---------- ---------- ---------- ---------- --------- Allowance for doubtful accounts For the year ended June 30, 1999(a) $ -0- $ 80,100 -0- $ -0- $ 80,100 For the year ended June 30, 1998(a) $ -0- -0- -0- -0- $ -0- For the year ended June 30, 1997(a) $ -0- -0- -0- -0- $ -0-
- ------------------------------- (a) Activity for 1997 and 1998 reclassified to net assets of discontinued operations. -65- SIGNATURES - ---------- Pursuant to the requirements of Section 13 or 15(d) 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 - ----------------------------------------------------------------------------- By: /S/JOSE LEIMAN -------------------------------------------------------------------------- Jose Leiman, Chief Financial Officer Date: September 28, 1999 POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Jose Leiman his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him or her in his or her name, place and stead, in any and all capacities, to sign this Form 10-K and all amendments thereto and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /S/JOSE LEIMAN Chief Financial Officer September 28, 1999 - --------------------- (Principal Financial and Jose Leiman Accounting Officer) /S/MICHAEL SHALOM Chief Executive Officer September 28, 1999 - --------------------- (Principal Executive Officer) Michael Shalom /S/JOEL M. EIDELSTEIN President and Director September 28, 1999 - --------------------- Joel M. Eidelstein /S/GEORGE A. MYERS Director September 28, 1999 - --------------------- George A. Myers /S/COLLEEN M. DOWNES Vice President and Director September 28, 1999 - --------------------- Colleen M. Downes /S/ZALMAN LEKACH Vice President and Director September 28, 1999 - --------------------- Zalman Lekach /S/JOSEPH M. MATALON Director September 28, 1999 - --------------------- Joseph M. Matalon /S/BURTON J. MEYER Director September 28, 1999 - --------------------- Burton J. Meyer EX-3.1 2 AMENDED BY-LAWS OF IFX Exhibit 3.1 As of 11/10/98 AMENDED BY-LAWS OF IFX CORPORATION ARTICLE I --------- OFFICES ------- SECTION 1. REGISTERED OFFICE. The registered office shall be established and maintained at 1013 Centre Road, City of Wilmington, in the County of New Castle in the State of Delaware. SECTION 2. OTHER OFFICES. The corporation may have other offices, either within or without the State of Delaware, at such place or places as the Board of Directors may from time to time appoint or the business of the corporation may require. ARTICLE II ---------- MEETING OF STOCKHOLDERS ----------------------- SECTION 1. ANNUAL MEETINGS. Annual meetings of stockholders for the election of directors and for such other business as may be stated in the notice of the meeting, shall be held at such place, either within or without the State of Delaware, and at such time and date as the Board of Directors, by resolution, shall determine and as set forth in the notice of the meeting. In the event the Board of Directors fails to so determine the time, date and place of meeting, the annual meeting of stockholders shall be held at the main business office of the corporation in Delaware on the last Friday of October of each year. If the date of the annual meeting shall fall upon a legal holiday, the meeting shall be held on the next succeeding business day. At each annual meeting, the stockholders entitled to vote shall elect a Board of Directors and may transact such other corporate business as shall be stated in the notice of the meeting. SECTION 2. OTHER MEETINGS. Meetings of stockholders for any purpose other than the election of directors may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting. SECTION 3. VOTING. Each stockholder shall be entitled to vote in accordance with the terms and provisions of the Certificate of Incorporation and these By-Laws, in person or by proxy, but no proxy shall be voted after three years from its date unless such proxy provides for a longer period. All elections for directors shall be decided by plurality vote; an other questions shall be decided by majority vote except as otherwise provided by the Certificate of Incorporation or the laws of the State of Delaware. SECTION 4. PROXIES. A stockholder may execute a writing authorizing another person or persons to act for him as proxy. Execution may be accomplished by the stockholder or his authorized officer, director, employee or agent signing such writing or causing his or her signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. SECTION 5. FIXING OF RECORD DATE. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or to receive payment of any dividend, or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion or exchange of shares or for the purpose of any other lawful action, the board of directors of the corporation may fix in advance a record date which shall not be more than sixty days and not less than ten days, or in the case of a merger or consolidation, not less than twenty days, before the date of such meeting. If no record date is fixed, the record date for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of the business day on the day next preceding the day on which notice is given and the record date for the determination of shareholders for any other purpose shall be the date on which the board of directors adopts the resolution relating thereto. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting. SECTION 6. QUORUM. In all matters, except as otherwise required by law, by the Certificate of Incorporation or by these By-Laws, the presence, in person or by proxy, of stockholders holding a majority of the stock of the corporation entitled to vote shall constitute a quorum at all meetings of the stockholders. In case a quorum shall not be present at any meeting, a majority in interest of the stockholders entitled to vote thereat shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite amount of stock entitled to vote shall be present. At any such adjourned meeting at which the requisite amount of stock entitled to vote shall be represented, any business may be transacted which might have been transacted at the meeting as originally noticed; but only those stockholders entitled to vote at the meeting as originally noticed shall be entitled to vote at any adjournment or adjournments thereof SECTION 7. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by Board of Directors. SECTION 8. NOTICE OF MEETINGS. Written notice, stating the place, date and time of the meeting, and the general nature of the business to be considered, shall be given to each stockholder entitled to vote thereat at his address as it appears on the records of the corporation, not less than ten nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the president, or the secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his address as it appears on the records of the corporation, with the postage thereon prepaid. -2- Whenever any notice whatever is required to be given under the provisions of any law, or under the provisions of the Certificate of Incorporation of the corporation or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed proper notice. SECTION 9. ACTION WITHOUT MEETING. Any action that is ordinarily taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, and shall be delivered to the Corporation by delivery to its registered office, its principal place of business or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or regular mail, return receipt requested. ARTICLE III ----------- DIRECTORS --------- SECTION 1. NUMBER. The minimum number of directors which shall constitute the entire Board of Directors shall be one. The number of directors to constitute the Board of Directors shall be fixed from time to time by resolution of the Board of Directors. The directors shall be elected at the annual or special meeting of the stockholders (except as otherwise provided in Section 8 of this Article III), and each director elected shall hold office until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. Directors need not be stockholders. SECTION 2. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the board of directors and publicized among all directors. A notice of such regular meeting shall not be required. SECTION 3. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the President or any two directors and shall be held at such place, on such date and at such time as they or he shall fix Notice of the place, date and time of each such special meeting shall be given each director by whom it is not waived, by mailing written notice not less than two days before the meeting or, by telegraphing the same not less than 18 hours before the meeting, to each director at his business address. If mailed, such notice shall be deemed to be delivered, when deposited in the United States mail so addressed, with postage thereon prepaid. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of any regular or special meeting of the Board of Directors need be specified in any written waiver of notice. SECTION 4. QUORUM. At any meeting of the Board of Directors, one-half of the numbers of directors then in office, but not less than two, shall constitute a quorum for all -3- purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date or time without further notice or waiver thereof. SECTION 5. PARTICIPATION AND MEETINGS BY CONFERENCE TELEPHONE. Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment that enables all persons participating in a meeting to hear each other. Such participation shall constitute presence in person at such meeting for all purposes. SECTION 6. CONDUCT OF BUSINESS. The act of a majority of the directors present at a meeting of which a quorum is present shall be the act of the Board of Directors, except as otherwise provided herein or provided by law. SECTION 7. RESIGNATIONS. Any director, member of a committee or other officer may resign at any time. Such resignation shall be made in writing, and shall take effect at the time specified therein, and if no time be specified, at the time of its receipt by the President or Secretary. The acceptance of a resignation shall not be necessary to make it effective. SECTION 8. VACANCIES. If the office of any director, member of a committee or other officer becomes vacant, the remaining directors in office though less than a quorum by a majority vote, may appoint any qualified person to fill such vacancy, who shall hold office for the unexpired term and until his successor shall be duly chosen. SECTION 9. REMOVAL. Any director or directors may be removed either for or without cause at any time by the affirmative vote of the holders of a majority of all the shares of stock outstanding and entitled to vote, at a special meeting of the stockholders called for this purpose, or by written consent as provided by law. Any director or directors may be removed for cause by the majority vote of the other directors. SECTION 10. INCREASE OF NUMBER. The number of directors may be increased or decreased by amendment of these By-Laws by the affirmative vote of a majority of the directors, though less than a quorum, or, by the affirmative vote of a majority in interest of the stockholders, at the annual meeting or at a special meeting called for that purpose, and by like vote the additional directors may be chosen at such meeting to hold office until the next annual election and until their successors are elected and qualified. SECTION 11. COMPENSATION. Directors shall not receive any stated salary for their services as directors or as member of committees, but by resolution of the Board of Directors, fixed fees and expenses of attendance may be allowed for attendance at each meeting. By resolution of the Board of Directors, directors may also be granted coverage under the Corporation's health insurance, life insurance or other benefit plans. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent or otherwise, and receiving compensation therefor. SECTION 12. ACTION WITHOUT MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting, if prior to such action a written consent thereto is signed by all members of -4- the board, or of such committee as the case may be, and such written consent is filed with the minutes of proceedings of the board or committee. SECTION 13. PRESUMPTION OF ASSENT. A director of the corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be conclusively presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 14. RELIANCE ON CORPORATE RECORDS. A member of the board of directors, or a member of any committee designated by the board of directors, shall, in the performance of his duties, be fully protected in relying in good faith upon the records of the corporation and upon such information, opinions, reports or statements presented to the corporation by any of the corporation's officers or employees, or committees of the board of directors, or by any other person as to matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the corporation. ARTICLE IV ---------- OFFICERS -------- SECTION 1. OFFICERS. The officers of the corporation shall consist of the President, Secretary and such other officers as determined by the Board of Directors. None of the officers of the corporation need be directors. The officers shall be elected at the first meeting of the Board of Directors after each annual meeting. More than one office may be held by the same person. SECTION 2. SALARIES. The salaries of the officers shall be fixed from time to time by the board of directors and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the corporation. ARTICLE V --------- STOCK ----- SECTION 1. CERTIFICATES OF STOCK. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the chairman or vice-chairman of the board of directors, or the president or a vice-president and the treasurer or an assistant treasurer, or the secretary of the corporation, certifying the number of shares owned by him in the corporation. The designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations, or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be -5- set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Where a certificate is countersigned (1) by a transfer agent other than the corporation or its employee, or (2) by a registrar other than the corporation or its employee, the signatures of such officers may be facsimiles. SECTION 2. LOST CERTIFICATES. New certificates of stock may be issued in the place of any certificate issued by the corporation, alleged to have been lost or destroyed, and the directors may, in their discretion, require the owner of the lost or destroyed certificate or his legal representatives, to give the corporation a bond, in such sum as they may direct, not exceeding double the value of the stock, to indemnify the corporation against it on account of the alleged loss of any such new certificate. SECTION 3. TRANSFER OF SHARES. The shares of stock of the corporation shall be transferable only upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the corporation by the delivery thereof to the person in charge of the stock and transfer books and ledgers, or to such other persons as the directors may designate, by who they shall be canceled, and new certificates shall thereupon be issued. A record shall be made of each transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer. SECTION 4. RETIREMENT OF STOCK. The corporation, by resolution of its board of directors, may retire any shares of its capital stock that are issued but are not outstanding. Whenever any shares of the capital stock of this corporation are retired, they shall resume the status of authorized and unissued shares of the class or series to which they belong unless the certificate of incorporation otherwise provides. SECTION 5. DIVIDENDS. Subject to the provisions of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefor at any regular or special meeting, declare and pay dividends upon the shares of its capital stock. ARTICLE VI ---------- FISCAL YEAR ----------- SECTION 1. FISCAL YEAR. The fiscal year of the corporation shall be determined by resolution of the Board of Directors. ARTICLE VII ----------- NOTICES ------- SECTION 1. NOTICES. Whenever notice is required to be given to any stockholder, director, officer or agent, such requirement shall not be construed to mean personal notice. Such notice may in any instance be effectively given by depositing a writing in a post office or letter box in a pre-paid, sealed wrapper, or by dispatching a pre-paid telegram, addressed to such -6- stockholder, director, officer or agent at his or her address as the same appears on the books of the corporation. The time when such notice is dispatched shall be the time of the giving of the notice. SECTION 2. WAIVERS. A written waiver of any notice, signed by a stockholder, director, officer or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, director, officer or agent. Neither the business nor the purpose of any meeting need to be specified in such a waiver. ARTICLE VIII ------------ AMENDMENTS ---------- SECTION 1. These By-Laws may be amended and/or repealed and new or additional By-Laws may be made at any annual meeting of the stockholders or at any special meeting thereof if notice thereof is contained in the notice of such special meeting by the affirmative vote of a majority of the stock issued and outstanding or entitled to vote thereat, or by the regular meeting of the Board of Directors, or at any special meeting of the Board of Directors, if notice thereof is contained in the notice of such special meeting. SECTION 2. A resolution authorizing a proposed amendment to the certificate of incorporation may provide that at any time prior to the filing of the amendment with the Secretary of State, notwithstanding authorization of the proposed amendment by the stockholders of the corporation or by the members of a nonstock corporation, the board of directors or governing body may abandon such proposed amendment without further action by the stockholders or members. ARTICLE IX ---------- INDEMNIFICATION OF OFFICERS DIRECTORS, EMPLOYEES AND AGENTS ------------------------------- SECTION 1. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director or officer of another corporation, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. -7- SECTION 2. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 3. No director of the corporation shall be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for (a) any breach of the director's duty of loyalty to the corporation or its stockholders; (b) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (c) acts under Section 174 of the Delaware General Corporation Law; or (d) any transaction from which the director derived an improper personal benefit. SECTION 4. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding as authorized by the board of directors in the specific case upon receipt of an undertaking by or on behalf of the director or officer, to repay such amount unless it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article Ninth. Such expenses (including attorneys' fees) incurred by other employees or agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. SECTION 5. Any indemnification under Section (1) and (2) above (unless ordered by a Court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections (1) and (2). Such determination shall be made (a) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable and a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders. SECTION 6. The indemnification provided by this Article IX shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-laws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. -8- SECTION 7. The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director or officer of another corporation, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article IX. SECTION 8. For the purposes of this Article IX, reference to "the corporation" shall include all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation so that any person who is or was a director or officer of such a constituent corporation or is or was serving at the request of such constituent corporation or other enterprise shall stand in the same position under the provisions of this section with respect to the resulting or surviving corporation in the same capacity. EX-3.2 3 RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.2 RESTATED CERTIFICATE OF INCORPORATION OF IFX CORPORATION It is hereby certified that: 1. (a) The present name of the corporation (hereinafter called the "Corporation") is IFX Corporation. (b) The name under which the Corporation was originally incorporated is 312 Merger Corporation, and the date of filing the original Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware is April 5, 1994. 2. The provisions of the Certificate of Incorporation of the Corporation as heretofore amended and/or supplemented, are hereby restated and integrated into the single instrument which is hereinafter set forth, and which is entitled Restated Certificate of Incorporation of IFX Corporation, without further amendment and without any discrepancy between the provisions of the Certificate of Incorporation as heretofore amended and supplemented and the provisions of the said single instrument hereinafter set forth. 3. The Board of Directors of the Corporation has duly adopted this Restated Certificate of Incorporation pursuant to the provisions of Section 245 of the General Corporation Law of the State of Delaware in the form set forth as follows: "Restated Certificate of Incorporation of IFX Corporation" FIRST: The name of the Corporation is IFX Corporation. SECOND: The Registered Office of the Corporation is located at 1013 Centre Road, Wilmington, New Castle County, Delaware, 19805-1297. The name of its Registered Agent at that address is Corporation Service Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: (1) The authorized capital stock of the Corporation is
Class Par Value Number of Shares Authorized - ----- --------- --------------------------- Common $0.02 150,000,000
(2) The preferences, qualifications, limitations, restrictions and the special or relative rights in respect of the shares shall be designated by the Board of Directors by resolution. FIFTH: The Corporation is to have perpetual existence. SIXTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under Subsection 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under Subsection 279 of Title 8 of the Delaware Code order a meeting of the creditors or a class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such a manner as the said court directs. If a majority in number representing three fourths in value of the creditors or class of creditors, and or stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all creditors or class of creditors, and/or on all the stockholders or class of stockholders of this Corporation, as the case may be, and also on this Corporation. SEVENTH: For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation, and regulation of the powers of the Corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided: (1) The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the Bylaws. The phrase "whole Board" and the phrase "total number of directors" shall be deemed to have the same meaning to wit, the total number of directors which the Corporation would have if there were no vacancies. No election of directors need be by written ballot. (2) In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the board of directors is expressly authorized and empowered to -2- make, alter, amend and repeal by-laws, subject to the power of the stockholders to alter or repeal by-laws made by the board of directors. EIGHTH: The personal liability of the directors of the Corporation is hereby eliminated to the fullest extent permitted by paragraph (7) of Subsection (b) of Subsection 102 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented. NINTH: The Corporation shall, to the fullest extent permitted by Subsection 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, have the power to indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said section, and the power provided for herein shall not be deemed exclusive of any other right to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders, or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. TENTH: The Corporation hereby expressly elects not to be governed by Section 203 of the General Corporation Law of the State of Delaware, in its entirety, as the same may be amended and supplemented. ELEVENTH: From time to time any of the provisions of this Certificate of Incorporation may be amended, altered, or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of this Corporation by this Certificate of Incorporation are granted subject to the provisions of this Article ELEVENTH. Signed on the 27th day of September, 1999. By: /s/ Scott J. Bakal --------------------------------------- Its: Assistant Secretary --------------------------------------- -3- EX-10.1 4 EMPLOYMENT AGREEMENT DTD MAY 1999 W/ZALMAN LEKACH Exhibit 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of May 24, 1999, by and between IFX CORPORATION, a Delaware corporation ("IFX" and, collectively with its subsidiaries, "Employer"), and ZALMAN LEKACH ("Employee"). W I T N E S S E T H: ------------------- WHEREAS, Employer desires to employ Employee on the terms and subject to the conditions set forth herein; and WHEREAS, Employee has had an opportunity to review the terms and conditions of this Agreement, to negotiate the terms hereof and to engage legal counsel on his behalf if he so desires. NOW THEREFORE, in consideration of Employer's employment of Employee, the terms, conditions and covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Employee and Employer, intending to be legally bound, hereby agree as follows: 1. Employment. Employer hereby agrees to employ Employee and ---------- Employee agrees to accept such employment upon the terms and conditions herein set forth. 2. Employment Period. ----------------- (a) The initial term of employment hereunder shall commence on the date hereof and shall expire on May 23, 2001, and shall automatically be extended for an additional two (2) year period, unless either party to this Agreement gives the other party written notice of such party's intention to terminate this Agreement and the employment of Employee at least sixty (60) days prior to May 23, 2001 (such period, including any extensions thereof, the "Term"). In the event that Employee continues to be employed by Employer at any time following the initial or any extended term hereof, such employment shall be governed by this Agreement, except that it will be "at-will," without a fixed term, and may be terminated by Employer or Employee at any time, with or without notice, for any reason or no reason (and no reason need be given), and without obligation of severance or additional compensation beyond that owed for periods that Employee was actually employed by Employer. 3. Position and Duties. ------------------- (a) Position. Employee hereby agrees to serve as Vice President -------- of Mergers and Acquisitions of IFX, the Vice President-Acquisitions of Emerging Networks, Inc., an indirect wholly-owned subsidiary of IFX, and the Vice President-Business Development of IFX/Communications Ventures, Inc., an indirect wholly-owned subsidiary of IFX. Employee shall devote his best efforts and full business time and attention to the performance of services to Employer in accordance with the terms hereof and as may reasonably be requested by the Board of Directors of Employer (the "Board") or a person or persons designated by the Board. Employer shall retain full direction and control of the means and methods by which Employee performs the above services. (b) Other Activities. During the Employment Period, Employee shall ---------------- not engage in any other business or professional activities, either on a full- time or part-time basis, as an employee, consultant or in any other capacity, whether or not he receives any compensation therefor, without the prior written consent of the Board; provided, however, that nothing herein shall prevent Employee from making and managing personal investments consistent with Sections 10 and 11 of this Agreement, engaging in community and/or charitable activities or sitting on the board of any of the Parlux Fragrances, Perfumania, or Telcom.Net, L.P., so long as such activities, either singly or in the aggregate, do not interfere with the proper performance of his duties and responsibilities to Employer. 4. Compensation. ------------ (a) Base Salary. Employer shall pay to Employee salary at the ----------- rate of US$140,000 per year for the period from June 1, 1999 through May 23, 2000 ("Year 1"), and salary at the rate of $150,000 per year for period from May 24, 2000 through May 23, 2001 ("Year 2") (in each case, the "Base Salary"). Payments of Base Salary shall be made in accordance with Employer's generally applicable compensation policies and shall be net of applicable tax withholdings. In the event that the Term of this Agreement is extended pursuant to Section 2 hereof, Base Salary shall be $200,000 for the period from May 24, 2001 through May 23, 2002, and $208,000 for the period from May 24, 2002 through May 23, 2003. (b) Bonus Compensation. In addition to Base Salary, Employee ------------------ shall be entitled to receive bonus compensation based on: (i) Employer's purchase or start-up of Internet service providers; and (ii) customer growth, in each case pursuant to the terms and conditions set forth on Exhibit A attached --------- hereto (the "Bonus Compensation"). (c) Holidays and Vacation Time. Employee shall be entitled to -------------------------- such paid holidays as are consistent with Employer's policy for executive employees with respect to such matters as of the date hereof. Employee is entitled to three (3) weeks of paid vacation per year, but shall not be compensated for, or entitled to carry-over, any unused vacation time. (d) Other Benefits. Subject to Employer's rules, policies and -------------- regulations as in effect from time to time (and subject to applicable eligibility requirements, including a minimum employment period), Employee shall be entitled to (i) group life insurance, disability or accident, death or dismemberment insurance, (ii) medical and/or dental insurance program (90-day minimum employment period, for which Employer will reimburse the COBRA expenses of Employee), (iii) 401(k) benefit plan when the Company has the plan established, or (iv) other employee benefits that Employer may, in its sole discretion, make generally available to employees of Employer of the same level and responsibility as Employee. In addition to the 3 foregoing, Employer agrees that it shall pay for fifty percent (50%) of any premiums for Employee's health insurance policy (PPO or equivalent) and Employee agrees that he shall pay fifty percent (50%) of any premiums for such policy. (e) Life and Other Insurance. Subject to Employee meeting ------------------------ applicable underwriting criteria, Employer will provide term life and such other types of insurance for Employee as shall be agreed upon between Employee and Employer from time to time. 5. Participation in Stock Plan. --------------------------- (a) Stock Plan Benefits. Subject to Employer's rules, policies ------------------- and regulations as in effect from time to time (and subject to applicable eligibility requirements, including minimum employment period), Employee will be eligible to receive certain benefits under the IFX Corporation 1998 Stock Option and Incentive Plan or any other stock option plan adopted by IFX (the "Stock Plan"). Benefits under the Stock Plan will be granted in the sole and absolute discretion of the committee administering the Stock Plan and shall be subject to the terms of the Stock Plan, as the same may from time-to-time be amended and/or modified. (b) Restrictions on Stock Plan Benefits. No options or other ----------------------------------- benefits shall be granted to Employee under the Stock Plan unless, in Employer's judgment based on the advice of its legal counsel, such issuance complies with applicable state and federal securities laws, and other laws and regulations related thereto. All such Stock Plan benefits shall be subject to Employee signing such option agreements or other instruments that Employer deems to be necessary or appropriate and to such other restrictions as are required by the Stock Plan and/or applicable law. (c) Employer's Sole Discretion Regarding Stock, Etc. Subject to ----------------------------------------------- the provisions of this Agreement, Employee acknowledges and agrees that Employer has the right, in its sole discretion, to make all decisions regarding its stock, stock rights, Stock Plan benefits, 4 profits, debt and equity configuration, including but not limited to what types, when and to whom to issue stock, stock rights, Stock Plan benefits, profits, debt and equity interests. (d) Sign-on Bonus. Upon the execution of this Agreement, Employer ------------- shall grant to Employee, as a sign-on bonus, an aggregate of 3,371 shares of Restricted Stock, as defined in and subject to the terms of the Stock Plan. Upon issuance to Employee, such 3,371 shares of Restricted Stock shall be deemed fully vested and shall not be subject to forfeiture. 6. Termination of Employment. ------------------------- (a) Permanent Disability. In the event of the Permanent -------------------- Disability (as defined below) of Employee, the Company, in its sole discretion, may elect either (i) to the extent feasible consistent with Employee's mental and physical condition and consistent with applicable law, to reassign Employee to other duties within the Company that Employee is able to perform despite his Permanent Disability at the compensation and benefit levels commensurate with Employee's reassigned duties, or (ii) to terminate this Agreement and Employee's employment hereunder. In the event that the Company elects to terminate Employee as provided in clause (ii) above, the Company shall, subject to following sentence, pay to Employee (A) within sixty (60) days after the date of such termination, all amounts of Base Salary and Bonus Compensation accrued pursuant to Section 4 above prior to the date of such termination, and (B) compensation on the basis of 60% of the then current Base Salary for the first ninety (90) days of such Permanent Disability and, thereafter, compensation on the basis of 60% of the then current Base Salary through the end of the Permanent Disability period. This benefit may be provided by the Company to Employee through the purchase of a disability insurance policy that is contingent upon the insurability of Employee; provided, however, that the maximum premium that the Company shall be required to pay towards this benefit will not exceed US$100,000 per year. Notwithstanding the foregoing, all payments hereunder shall end upon the earlier to occur of Executive's attaining the age of sixty-five (65) and the cessation of such Permanent Disability (whether as a result of recovery, rehabilitation, death or otherwise), and, thereafter, the Company shall have no further obligations to Employee under this Agreement. Additionally, if prior to the termination of the Company's obligation to make payments to Employee pursuant 5 to this Section 6(a) Employee receives compensation for services rendered, whether as an employee or otherwise, such compensation shall reduce the payments due under this Section 6(a), dollar for dollar. Employee shall promptly inform the Company of all such compensation received by him on a monthly basis during such period. (b) Death. In the event of Employee's death, the Company shall pay to ----- Employee's personal representative (on behalf of Employee's estate), within sixty (60) days after the Company receives written notice of such representative's appointment, all amounts of Base Salary and Bonus Compensation accrued pursuant to Section 4 above as of the date of Employee's death which payment shall constitute full and complete satisfaction of the Company's obligations hereunder. Employee's dependents shall also be entitled to any continuation of health insurance coverage rights, if any, under applicable law. (c) Termination for Cause or Voluntary Termination Without Good ----------------------------------------------------------- Reason. The Company may in its sole discretion terminate this Agreement and - ------ Employee's employment with the Company for Cause (as defined in Section 7(a) below) at any time and with or without advance notice to Employee. If Employee's employment is terminated for Cause, or if Employee Voluntarily Terminates (as defined in Section 7(b) below) his employment with the Company without Good Reason (as defined in Section 7(c) below), the Company shall promptly pay to Employee all amounts of Base Salary accrued pursuant to Section 4 above through the date of termination (but not Bonus Compensation), whereupon the Company shall have no further obligations to Employee under this Agreement. Employee and his dependents shall also be entitled to any continuation health insurance coverage rights, if any, under applicable law. Without waiving any rights the Company or any of its affiliates may have hereunder or otherwise, the Company hereby expressly reserves its right to proceed against Employee for damages in connection with any claim or cause of action that the Company may have arising out of or related to Employee's employment hereunder. In the event the Company terminates Employee's employment for Cause or Employee voluntarily terminates his employment without Good Reason, all unexercised options and other awards granted to Employee under the Stock Plan, as Bonus Compensation or otherwise shall be cancelled and forfeited by Employee. 6 (d) Termination Without Cause; Voluntary Termination With Good Reason. ----------------------------------------------------------------- Subject to the penultimate sentence of this paragraph, the Company may terminate this Agreement and Employee's employment with the Company without Cause at any time, with or without notice, for any reason or no reason (and no reason need be given). Employee may terminate this Agreement and Voluntarily Terminate his employment with the Company with Good Reason upon thirty (30) days' prior written notice to the Company, provided that the Company does not correct the circumstances giving Employee Good Reason during such thirty (30) day period. In the event Employee's employment with the Company is terminated pursuant to this Section 6(d), (i) the Company shall pay to Employee all amounts of Base Salary for the entire length of the Term (including any renewal period) and if such termination occurs within the initial term of this Agreement, the Bonus Compensation payable to Employee pursuant to Section 4(b) shall be calculated based on the assumption that Employer made 10 Initial ISP Purchases in Year 1 and 10 ISP Purchases in Year 2, (ii) Employee shall be relieved of his obligations under Sections 1 and 3 hereof, and (iii) Employee shall be free to seek other employment subject to the terms of Sections 8, 9, 10 and 11 hereof. Employee and his dependents shall also be entitled to any continuation health insurance coverage rights, if any, under applicable law. (e) Termination Obligations. ----------------------- (i) Employee hereby acknowledges and agrees that all personal property and equipment furnished to or prepared by Employee in the course of or incident to his employment by the Company, belongs to the Company and shall be promptly returned to the Company upon termination of the Employee's employment. The term "personal property" includes, without limitation, all books, manuals, records, reports, notes, contracts, requests for proposals, bids, lists, blueprints, and other documents, or materials, or copies thereof (including computer files), and all other proprietary information relating to the business of the Company or any of its affiliates. Following termination, Employee will not retain any written or other tangible material containing any proprietary information of the Company or any of its affiliates. 7 (ii) Upon termination of the Employment Period, Employee shall be deemed to have resigned from all offices and directorships then held with the Company and each of its affiliates. (iii) The representations and warranties contained herein and Employee's obligations under Sections 6(e), 8, 9, 10, 11 and 17 shall survive termination of the Employment Period and the expiration of this Agreement. (iv) If the average of the closing bid and ask price of the common stock of Employer (or any successor to Employer) equals or exceeds 100% of the exercise price of any options granted pursuant to Section 4(b) hereof for 5 consecutive trading days after the termination of Employee's employment, any options held by Employee must be exercised within 90 days after the end of such 5 day period. Any options which are not exercised at the end of such 90 day period will be forfeited by Employee. (f) Change of Control. In the event of a Change of Control (as ----------------- defined below), the remaining Base Salary payable under the Term of this Agreement shall be doubled and shall be payable in one lump-sum within 30 days after the effective date of the Change of Control. Also, in the event of a Change of Control, the Bonus compensation will be computed and paid out in the same manner as if Employee were terminated without Cause. Further, in the year of a Change of Control, the number of options granted under Exhibit A shall be the greater of: a) the number of options which Employee is entitled to be granted for such year under Exhibit A and b) 150,000. In addition, if so requested by Employee in writing within 15 days prior to the effective date of the Change of Control, Employer will repurchase Employee's options within a period beginning five (5) business days before and ending five (5) business days after the effective date of the Change of Control based on the average of the closing bid and ask prices of IFX's common stock for the twenty trading days ending with the day that Employee provides the above notice. 8 7. Definitions. For the purposes of this Agreement the following ----------- terms and phrases shall have the following meanings: (a) "Cause" The Company shall have "Cause" to terminate the ----- Employee's employment under this Agreement upon (a) the willful and continued failure by the Employee to substantially perform his duties under this Agreement (other than any failure resulting from the Employee's incapacity due to physical or mental illness) for thirty (30) days after written demand for substantial performance is delivered by the Company specifically identifying the manner in which the Company believes the Employee has not substantially performed his duties or (B) the willful engaging by the Employee in misconduct (including embezzlement and criminal fraud) which is materially injurious to the Company, or (C) the willful violation by the Employee of Sections 8, 9, 10 or 11 of this Agreement, provided that the violation results in material injury to the Company, or (D) the conviction of the Employee of a felony. for purposes of this paragraph, no act, or failure to act, by the Employee shall be considered "willful" unless done or permitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the interest of the Company. The Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of a majority of the Board of the Company at a meeting of the Board called and held for such purposes (after a reasonable notice to the Employee and an opportunity for him, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Employee was guilty of conduct set forth above in clause (a), (B), (C), or (D) and specifying the particulars of the conduct in detail. (b) "Change in Control" means (i) a merger or consolidation of the ----------------- Company with or into any other entity unless after such event at least a majority of the voting power of the surviving or resulting entity is beneficially owned by persons who beneficially own a majority of the voting power of the Company immediately prior to such event, (ii) the sale of all or substantially all the assets of the Company, (iii) the 9 dissolution of the Company, or (iv) a change in the identity of a majority of the members of the Company's Board of Directors within any twelve-month period, which change or changes are not recommended by the incumbent directors determined immediately prior to any such change or changes; provided, however, that no "Change of a Control" will arise as a result of the issuance of shares of the stock of the Company in connection with the exercise of an option granted to International Technology Investments, LC on November 23, 1998. (c) "Good Reason" shall mean, with respect to a Voluntary ----------- Termination, if (i) such Voluntary Termination promptly follows a permanent material reduction of Employee's duties and responsibilities or a permanent change in Employee's duties and responsibilities such that Employee's duties and responsibilities are materially inconsistent with the type of duties and responsibilities of Employee in effect immediately prior to such reduction or change, (ii) such Voluntary Termination promptly follows a material reduction in Employee's benefits if such reduction results in Employee's receiving benefits which are, in the aggregate, less than the benefits received by other comparable employees of the Company generally, (iii) the Company is in material breach of its payment obligations under this Agreement, which breach has not been cured within fifteen (15) days following the Company's receipt of written notice thereof, or (iv) the Board of Directors of the Company otherwise determines that a Voluntary Termination by Employee is for "Good Reason" under the circumstances then prevailing. (d) "Voluntary Termination" (including "Voluntarily Terminates") --------------------- ---------------------- shall mean the termination by Employee of his employment by the Company by voluntary resignation or any other means other than death, retirement or Permanent Disability and other than simultaneous with or following termination for Cause or an event which, whether or not known to the Company at the time of such Voluntary Termination by such Executive, would constitute Cause. 10 8. Records and Confidential Data. ----------------------------- (a) Employee acknowledges that, in connection with the performance of his duties during the term of this Agreement, the Company and its affiliates will make available to Employee, and/or Employee will have access to, certain Confidential Information (as defined below) of the Company and its affiliates. Employee acknowledges and agrees that any and all Confidential Information learned or obtained by Employee during the course of his employment by the Company or otherwise (including, without limitation, information that Employee obtained through or in connection with his ownership of equity interests in, or services as a director of, the Company), whether developed by Employee alone or in conjunction with others or otherwise, shall be and is the property of the Company and its affiliates. (b) The Confidential Information shall be kept confidential by Employee, shall not be used in any manner which is detrimental to the Company or any of its affiliates, shall not be used other than in connection with Employee's discharge of his duties hereunder, and shall be safeguarded by Employee from unauthorized disclosure. (c) Following the first to occur of the termination of this Agreement or Employee's termination hereunder, as soon as possible after the Company's written request, Employee shall return to the Company all written Confidential Information which has been provided to Employee and Employee shall destroy all copies of any analyses, compilations, studies or other documents prepared by Employee or for Employee's use containing or reflecting any Confidential Information. Within five (5) business days of the receipt of such request by Employee, Employee shall, upon written request of the Company, deliver to the Company a notarized document certifying that such written Confidential Information has been returned or destroyed in accordance with this Section 8(c). (d) For the purposes of this Agreement, "Confidential Information" shall mean all confidential and proprietary information of the Company and/or its affiliates, including, without limitation, information derived from reports, investigations, experiments, research, trade 11 secrets, work in progress, drawing, designs, plans, proposals, requests for proposals, bids, codes, marketing and sales programs, client lists, client mailing lists, medical, psychological, academic and other records and reports, supplier lists, financial projections, cost summaries, payor information, pricing formulae, marketing studies relating to prospective business opportunities and all other concepts, ideas, materials, or information prepared for performed for or by the Company and/or any of its affiliates. For purposes of this Agreement, the Confidential Information shall not include and Employee's obligations under this Section 8 shall not extend to (i) information which is generally available to the public without undue expense or effort, (ii) information obtained by Employee from third persons not under agreement to maintain the confidentiality of the same and (iii) information which is required to be disclosed by law or legal process (after giving the Company prior written notice thereof and an opportunity to contest such disclosure). Without in any way limiting the foregoing, "Confidential Information" also includes all information relating to any options or other awards granted to Employee, pursuant to the Stock Plan or otherwise, including the amount of any such award, the exercise price and the rate of vesting thereof. (e) Employee hereby acknowledges that each subsidiary and affiliate of Employer is expressly made a third party beneficiary hereto for purposes of protecting its rights and interests hereunder. 9. Inventions and Other Matters. ---------------------------- (a) Employee agrees that all ideas, inventions, discoveries or improvements made during the period of Employee's employment with Employer, including, without limitation, new machines, devices, computer software (including source code, operating systems and specifications, data, data bases, files documentation and other materials related thereto), programs, processes, uses, apparatuses, specialized information relating in any way to or that is useful in the business or products of Employer or Employer's actual or demonstrably anticipated research or development, designs or compositions of any kind that Employee, individually or with others, may originate or develop while employed by Employer (collectively, 12 "Inventions"), shall belong to and be the sole property of Employer and shall constitute works specially ordered or commissioned as "works made for hire" under the United States Copyright Act and other applicable law. Without limiting the foregoing, Employee hereby assigns and transfers to Employer all rights of whatever nature that Employee may have, including, without limitation, any patent, trade secret, trademark or service mark rights (and any goodwill appurtenant thereto), any rights of publicity and any right, title and interest in any copyright and any right that may affix under any copyright law now or hereinafter in force and effect in the United States of America or in any other country or countries, in and to any Invention. Employee acknowledges and agrees that Employer shall have the royalty-free right to use in its businesses, and to make and sell products, processes, programs, systems designs, methods, formulas, apparatus, techniques, and services derived from any Inventions (whether or not patentable or copyrightable), as well as all improvements thereof or know-how related thereto. (b) For purposes of this Agreement, an Invention shall be deemed to have been "made during the period of Employee's employment" if, during such period, the Invention was conceived, in part or in whole, or first actually reduced to practice. Employee agrees that any patent, copyright or trade mark application filed by or for the benefit of Employee or any of his affiliates within a year after termination of Employee's employment shall be presumed to relate to an Invention made during the term of his employment and Employee shall have the burden of proof to prove otherwise. (c) This Section 9 shall not apply to an Invention for which no equipment, supplies, facilities or Confidential Information (as defined below) of Employer was used and that was developed entirely on Employee's own time, unless (i) the invention relates in any way to or is useful in the business or products of Employer, or Employer's actual or demonstrably anticipated research or development, or (ii) results from any work performed by Employee for or on behalf of Employer. (d) Employee agrees, without further consideration, to (i) promptly disclose each such Invention to Employer, to Employee's immediate supervisor and to such other 13 individuals as Employer may direct, (ii) execute and to join others in executing such applications, assignments and other documents as may be necessary or convenient to vest in Employer, or its designee, full title to each such Invention and as may be necessary or convenient to obtain United States and foreign patents and copyrights thereon, to the extent Employer may so choose in its sole discretion, (iii) testify in any legal proceeding relative to such Invention whenever requested to do so by Employer, and (iv) furnish all facts relating to such Inventions or the history thereof. (e) Employee agrees that he will not at any time, except as authorized or directed by Employer, publish or disclose any information or knowledge concerning any Inventions. 10. Non-Competition. --------------- (a) Employer and Employee recognize that Employee has been retained to occupy a position that constitutes part of the professional, management and executive staff of Employer, whose duties will include the formulation and execution of management policy. Employee, for and in consideration of the payments, rights and benefits provided herein, agrees that so long as he is employed by Employer and, if Employer terminates his employment for Cause or if Employee voluntarily terminates his employment with Employer, for a period of one (1) year thereafter, Employee shall not (i) work, (ii) assist, (iii) own any interest, directly or indirectly and whether individually or as a joint venturer, partner, member, officer, director, shareholder, consultant, employee or otherwise, in or (iv) make a financial investment, whether in the form of equity or debt, in any business that is directly or substantially competitive with the Business in the United States, Latin America or in any other market in which Employer is conducting the Business at the time Employee's employment with Employer is terminated, with respect to Employer's clients or customers. (b) Notwithstanding the foregoing, nothing herein shall prohibit Employee from holding five percent (5%) or less of any class of voting securities of any entity whose 14 equity securities are listed on a national securities exchange or regularly traded in the over-the-counter market and for which quotations are readily available on the National Association of Securities Dealers Automated Quotation system. (c) Upon the termination of Employee's employment with Employer, and for one (1) year thereafter, Employee shall immediately notify Employer of each employment or agency relationship entered into by Employee, and each corporation, proprietorship or other entity formed or used by Employee, the business of which is directly or indirectly, similar to or in competition with the Business. The provisions of this Section 10 shall survive termination of this Agreement for any reason. (d) Employee agrees that the restrictions contained in this Section 10 are reasonable as to time and geographic scope because of the nature of the Business and Employee agrees, in particular, that the geographic scope of this restriction is reasonable because companies in the same industry as the Business, compete on a nationwide basis. Employee acknowledges that Employer is in direct competition with all other companies that provide services and products similar to Employer's products and services throughout the United States, Latin America and other markets in which Employer may be conducting the Business at the time Employee's employment with Employer is terminated, and because of the nature of the Business, Employee agrees that the covenants contained in this Section 10 cannot reasonably be limited to any smaller geographic area. 11. Non-Solicitation and Non-Interference. ------------------------------------- (a) Employee acknowledges that Employer has invested substantial time and effort in assembling its present staff of personnel. Employee agrees that so long as he is employed by Employer and, if Employer terminates his employment for Cause or if Employee voluntarily terminates his employment with Employer, for a period of one (1) year thereafter, Employee shall not either directly or indirectly employ, solicit for employment, or advise or 15 recommend to any other person that such other person employ or solicit for employment, any of Employer's employees. (b) Employee acknowledges that all customers of Employer, which Employee has serviced or hereafter services during Employee's employment by Employer and all prospective customers from whom Employee has solicited or may solicit business while in the employ of Employer, shall be solely the customers of Employer. Employee agrees that so long as he is employed by Employer and, if Employer terminates his employment for Cause or if Employee voluntarily terminates his employment with Employer, for a period of one (1) year thereafter, Employee shall not either directly or indirectly solicit business, as to products or services competitive with the Business of Employer, from any of Employer's customers with whom Employee had contact during his employment with Employer. (c) Employee agrees that so long as he is employed by Employer and, if Employer terminates his employment for Cause or if Employee voluntarily terminates his employment with Employer, for a period of one (1) year thereafter, Employee shall not either directly or indirectly interfere with any relationship between Employer and any of its suppliers, clients or employees. Employee agrees that during such one (1) year period, he will not influence or attempt to influence any of the customers or clients of Employer not to do business with Employer. (d) Employee agrees that the restrictions contained in this Section 11 are reasonable as to time and geographic scope because of the nature of the Business and Employee agrees, in particular, that the geographic scope of this restriction is reasonable because companies in the same industry as the Business compete on a nationwide basis. Employee acknowledges that Employer is in direct competition with all other companies that provide services and products similar to Employer's products and services on an outsourced basis throughout the United States, Latin America and other markets in which Employer may be conducting the Business at the time Employee's employment with Employer is terminated and, 16 because of the nature of the Business, Employee expressly agrees that the covenants contained in this Section 11 cannot reasonably be limited to any smaller geographic area. 12. Employment Relationship. The relationship between Employer and ----------------------- Employee is and shall be specifically limited to an employer/employee relationship. As a result, nothing contained in this Agreement or relating to any past, present or future relationship between Employee and Employer (employment or otherwise) shall be construed as creating any partnership, joint venture, trustee/beneficiary or other type of fiduciary or business relationship between the parties. 13. Prior Obligations. Employee represents and warrants that (a) ----------------- Employee has no obligation of confidence or other commitments to any previous employer or any others that conflict with this Agreement or restrict Employee's field of activities, and (b) no other agreement to which Employee is subject will conflict with, prevent, be breached by, interfere with or in any manner affect the terms and conditions of this Agreement. 14. Dedication Of Services. Subject to the provisions of Section ---------------------- 3(b) hereof, Employee agrees that while employed with Employer, Employee shall devote his entire productive time, ability and attention to the business of Employer during Employer's normal business hours. Employee further agrees that during his employment by Employer, Employee will not, without Employer's prior written consent, directly or indirectly engage in any employment, consulting, or other activity which would conflict with Employee's duties and obligations to Employer. 15. Jurisdiction; Service of Process. Each of the parties hereto -------------------------------- agrees that all any action or proceeding initiated or otherwise brought to judicial proceedings by either Employee or Employer concerning the subject matter of this Agreement shall be litigated in the United States District Court for the Northern District of Illinois or, in the event such court cannot or will not exercise jurisdiction, in the state courts of the State of Illinois (the "Courts"). Each of the parties hereto expressly submits to the jurisdiction and venue of the Courts and consents to 17 process being served in any suit, action or proceeding of the nature referred to above either (a) by the mailing of a copy thereof by registered or certified mail, postage prepaid, return receipt requested, to his or its address as set forth herein or (b) by serving a copy thereof upon such party's authorized agent for service of process (to the extent permitted by applicable law, regardless whether the appointment of such agent for service of process for any reason shall prove to be ineffective or such agent for service of process shall accept or acknowledge such service); provided that, to the extent lawful and practicable, written notice of said service upon said agent shall be mailed by registered or certified mail, postage prepaid, return receipt requested, to the party at his or its address as set forth herein. Each party hereto agrees that such service, to the fullest extent permitted by law, (i) shall be deemed in every respect effective service of process upon him or it in any such suit, action or proceeding and (ii) shall be taken and held to be valid personal service upon and personal delivery to him or it. Each party hereto waives any claim that the Courts are an inconvenient forum or an improper forum based on lack of venue or jurisdiction. Each party shall bear its own costs and attorneys' fees incurred in connection with any such actions or proceedings. 16. Injunctive Relief. Employee acknowledge that damages would be an ----------------- inadequate remedy for Employee's breach of any of the provisions of Sections 8, 9, 10 and/or 11 of this Agreement, and that breach of any of such provisions will result in immeasurable and irreparable harm to Employer. Therefore, in addition to any other remedy to which Employer may be entitled by reason of Employee's breach or threatened breach of any such provision, Employer shall be entitled to seek and obtain a temporary restraining order, a preliminary and/or permanent injunction, or any other form of equitable relief from any court of competent jurisdiction restraining Employee from committing or continuing any breach of such Sections, without the necessity of posting a bond. It is further agreed that the existence of any claim or cause of action on the part of Employee against Employer, whether arising from this Agreement or otherwise, shall in no way constitute a defense to the enforcement of the provisions of Sections 8, 9, 10 and/or 11 of this Agreement. 18 17. Miscellaneous. ------------- (a) Notices. All notices and other communications hereunder shall ------- be in writing and shall be deemed given (i) when made, if delivered personally, (ii) three (3) days after being mailed by certified or registered mail, postage prepaid, return receipt requested, or (iii) two (2) days after delivery to a reputable overnight courier service, to the parties, their successors in interest or their assignees at the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid: To Employer: IFX Corporation 200 West Adams Street Chicago, Illinois 60606 Attention: President To Employee, to his home address as recorded in the payroll records of Employer from time to time. (b) Governing Law. This Agreement shall be governed as to its ------------- validity and effect by the internal laws of the State of Illinois, without regard to its rules regarding conflicts of law. (c) Successors and Assigns. This Agreement shall be binding upon ---------------------- and shall inure to the benefit of (i) the heirs, executors and legal representatives of Employee, upon Employee's death, and (ii) any successor of IFX, and any such successor shall be deemed substituted for Employee or Employer, as the case may be, under the terms hereof for all purposes. As used in this Agreement, "successor" shall include any person, firm, corporation or other business entity that at any time, whether by purchase, merger, consolidation or otherwise, directly or indirectly acquires a majority of the assets, business or stock of Employer. Employee acknowledges and agrees that the rights and obligations of IFX hereunder may be 19 assigned to and assumed by any of its wholly or majority-owned subsidiaries, without Employee's consent, which assignment and assumption shall constitute a release of IFX, its subsidiaries or any of their respective affiliates that is then bound by the terms of this Agreement, of all of its obligations and liabilities hereunder. (d) Integration. This Agreement (together with any option ----------- agreement Employer may require Employee to execute in order to avail himself/herself of any Stock Plan benefits specifically contemplated herein and any agreement to release and hold harmless Employer executed concurrently herewith) constitutes the entire agreement between the parties with respect to all matters covered herein, including but not limited to the parties' employment relationship and Employee's entitlement to compensation, commissions and benefits from Employer or any of its affiliated companies and/or the termination of Employee's employment. This Agreement supersedes all prior oral or written understandings and agreements relating to its subject matter and all other business relationships between Employer and/or its affiliated companies. (e) No Representations. No person or entity has made or has the ------------------ authority to make any representations or promises on behalf of any of the parties which are inconsistent with the representations or promises contained in this Agreement, and this Agreement has not been executed in reliance on any representations or promises not set forth herein. Specifically, no promises, warranties or representations have been made by anyone on any topic or subject matter related to Employee's relationship with Employer or any of its executives or employees, including but not limited to any promises, warranties or representations regarding future employment, compensation, commissions and benefits, any entitlement to stock, stock rights, Stock Plan benefits, profits, debt and equity interests in Employer or any of its affiliated companies or regarding the termination of Employee's employment. In this regard, Employee agrees that no promises, warranties or representations shall be deemed to be made in the future unless they are set forth in writing and assigned by an authorized representative of Employer. 20 (f) Amendments. This Agreement may be modified only by a written ---------- instrument executed by the parties that is designated as an amendment to this Agreement. (g) Counterparts. This Agreement is being executed in one or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (h) Severability and Non-Waiver. Any provision of this Agreement --------------------------- (or portion thereof) which is deemed invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction and subject to this Section, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions thereof in such jurisdiction or rendering that or any other provisions of this Agreement invalid, illegal, or unenforceable in any other jurisdiction. If any covenant should be deemed invalid, illegal or unenforceable because its scope is considered excessive, such covenant shall be modified so that the scope of the covenant is reduced only to the minimum extent necessary to render the modified covenant valid, legal and enforceable. No waiver of any provision or violation of this Agreement by Employer shall be implied by Employer's forbearance or failure to take action. (i) Attorneys Fees. In the event that any action or proceeding is -------------- commenced by any party hereto for the purpose of enforcing any provision of this Agreement, the parties to such action, proceeding or arbitration may receive as part of any award, settlement, judgment, decision or other resolution of such action or proceeding, whether or not reduced to a court judgment, their costs and reasonable attorneys fees as determined by the person or body making such award, settlement, judgment, decision or resolution. (j) Voluntary and Knowledgeable Act. Employee represents and ------------------------------- warrants that Employee has read and understands each and every provision of this Agreement and has freely and voluntarily entered into this Agreement. 21 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. EMPLOYER: IFX CORPORATION By: /s/ Joel Eidelstein ------------------------------- Name: Joel Eidelstein Title: President EMPLOYEE: /s/ Zalman Lekach ----------------------------------- Zalman Lekach 22 EXHIBIT A TO EMPLOYEE AGREEMENT (Zalman Lekach) Bonus Compensation ------------------ The Bonus Compensation payable by Employer to Employer shall be payable in shares, or Options to purchase shares, of the common stock, par value US$.02 per share, of IFX (the "Common Stock"), which terms are defined in, and which awards shall be granted under the Stock Plan, and calculated and paid as follows: 1. with respect to Year 1: (a) for every ISP purchased or created by Employer or an affiliate of Employer from and after June 1, 1999, and prior to the last day of Year 1, whether by means of a share or asset purchase, merger, consolidation, start-up, purchase of users or otherwise, in a country in which Employer does not, on the date hereof, currently own an ISP (each, an "Initial ISP Purchase"), Employee shall receive that number of shares of Restricted Stock with an aggregate value of US$10,000 (based on the average closing price of the Common Stock as reported by the Nasdaq Small Cap Market for the five (5) trading days immediately prior to (x) the closing date of such Initial ISP Purchase or (y) the first date on which the ISP provides services to third party customers, as the case may be, without applying any restricted stock discount), which shares of Restricted Stock shall be issued to Employee within fifteen (15) days following the closing date of such Initial ISP Purchase; provided, however, that even though Employer currently owns an ISP in Argentina, if the Employer purchases an additional ISP prior to the last day of Year 1, such additional ISP purchase in Argentina shall be treated as an Initial ISP Purchase; (b) upon the closing of the fourth (4th) Initial ISP Purchase for which Employee receives Bonus Compensation pursuant to Section 1(a) above during Year 1, Employee shall receive an additional one-time bonus of that number of shares of Restricted Stock with an aggregate value of US$50,000 (based on the average closing price of the Common Stock as reported by the Nasdaq Small Cap Market on the five (5) trading days immediately prior to the closing date of such fourth (4th) Initial ISP Purchase, without applying any restricted stock discount), and which shares of Restricted Stock shall be issued to Employee within fifteen (15) days following the closing date of such fourth (4th) Initial ISP Purchase; A-1 (c) (i) for each internally generated net New User (a "New Users") of an ISP described in Section 1(a) above (including, for this purpose, any ISPs acquired by Employer which were acquired prior to the effective date of this Agreement but which would have been described in Section 1(a) if they had been acquired after the effective date of the Agreement), other than a Retained User (as defined below) or an Acquired User (as defined below), who or which becomes a client of Employer, Employee shall receive an Option to acquire two (2) shares of Common Stock, which Option shall have an exercise price of US$8.75 per share, (ii) for each net New User of an ISP described in Section 1(a) above (including, for this purpose, any ISPs acquired by Employer prior to the effective date of this Agreement but which would have been described in Section 1(a) if they had been acquired after the effective date of the Agreement), other than a Retained User or a New User, who or which becomes a client of Employer as the result of an acquisition of another Internet service provider by Employer or any wholly-owned subsidiary of Employer (each, an "Acquired User"), Employee shall receive an Option to acquire one (1) share of Common Stock, which Option shall have an initial exercise price of US$8.75 per share; and (iii) for each Retained User of an ISP described in Section 1(a) above, (including, for this purpose, any ISPs acquired by Employer prior to the effective date of this Agreement but which would have been described in Section 1(a) if they had been acquired after the effective date of the Agreement), Employee shall not be entitled to receive any Options to purchase shares of Common Stock or other compensation pursuant to this Agreement. 2. with respect to Year 2: (a) for every ISP purchased or created by Employer or an affiliate of Employer during Year 2, whether by means of a share or asset purchase, merger, consolidation, start-up, purchase of users or otherwise, including ISPs purchased in countries where Employer already owns an ISP (each, an "ISP Purchase"), Employee shall receive that number of shares of Restricted Stock with an aggregate value of US$7,500 (based on the average closing price of the Common Stock for the five (5) trading days immediately prior to the closing date of such ISP Purchase), which shares of Restricted Stock shall be issued to Employee within fifteen (15) days following the closing date of such ISP Purchase; (b) upon the closing of the tenth (10th) ISP Purchase for which Employee receives Bonus Compensation pursuant to Section 2(a) above during Year 2, Employee shall receive an additional one-time bonus of that number of shares of Restricted A-2 Stock with an aggregate value of US$50,000 (based on the average closing price of the Common Stock for the five (5) trading days immediately prior to the closing date of such tenth (10th) ISP Purchase), which shares of Restricted Stock shall be issued to Employee within fifteen (15) days following the closing date of such tenth (10th) ISP Purchase. (c) (i) for each net New User of an ISP described in Section 2(a), other than a Retained User or an Acquired User, who or which becomes a client of Employer, Employee shall receive an option to acquire shares of Common Stock, which option shall have an exercise price or US$8.75 per share; (ii) for each Acquired User of an ISP described in Section 2(a) above, Employee shall receive an option to acquire one (1) share of Common Stock, which option shall have an exercise price of US$8.75 per share; (iii) for each Retained User of an ISP described in Section 2(a) above, Employee shall not be entitled to receive any options to purchase shares of Common Stock or other compensation pursuant to this Agreement. All shares of Restricted Stock granted to Employee hereunder as Bonus Compensation shall be deemed fully vested on the date of grant to Employee and shall not be subject to forfeiture. With respect to Sections 1(c) and 2(c) above, the parties agrees as follows: A. the number of Options to be granted as compensation to Employee shall be determined and issued and delivered to Employee on a quarterly basis for the prior quarter, commencing with July 1, 1999 (each such date, a "Determination Date"); B. all calculations of changes in the number of Users shall be on a net basis (i.e., options shall only be granted to the extent that there is a total increase in the number of Users and any decreases in the number of Users in a given category described above -- new Users, Retained Users and/or Acquired Users -- shall offset increases in Users in the other categories and any loss of Users in a given category in excess of the gain of Users in a different category shall be carried forward to offset any increase in the number of Users with respect to any subsequent periods); C. no Options shall be issued or shares shall be granted unless Employee is employed on each Determination Date, all Options shall become vested and exercisable on the one (1) year anniversary of the date of issuance, if Employee is Terminated Without Cause or Voluntarily Terminates with Good Reason, then any unvested Options shall vest and be exercisable immediately and any vested but unexercised Options shall be subject to A-3 forfeiture in the event Employee's employment is terminated by Employer for Cause or Employee Voluntarily Terminates without Good Reason; D. all shares of Restricted Stock and Options to acquire shares of Common Stock granted hereunder to Employee shall, except as otherwise expressly provided herein, be subject to the terms and conditions of the Stock Plan, and, as applicable, a Stock Option Agreement to be executed between Employer and Employee; E. for the purposes hereof, the term "User" shall mean each single client of Employer (i) who or which has been a client of Employer, including any subsidiary of Employer, for a period of at least three (3) consecutive months, (ii) whose account is current (i.e., no amounts due from such client are more than sixty (60) days past due) as of the applicable Determination Date, and (iii) for whom or which Employer has current billing and address information; provided, however, that: (x) any client who uses one of the ISPs to maintain or host a web site shall be counted as one User for each such maintained or hosted web site, and with respect to dedicated lines, (y) the parties agree that the number of Users shall be deemed to be the greater of (i) fifteen (15) Users for each 64k dedicated line, and (ii) that number as shall be determined by dividing (A) the actual amount received by Employer per month the dedicated line, by (B) the average dial-up account price charged by Employer (on a monthly basis) as of the applicable Determination Date, and (z) for any Internet service that is at least twice the price of the average dial up service (and not described above), the number of users shall be deemed to equal the price of that service divided by the price of the average dial-up service charged by that ISP; and F. for the purposes hereof, the term "Retained User" shall mean any User who or which is a client of Employer acquired pursuant to an Initial ISP Purchase, which User remains continuously active and current in payments from the date thereof for a period of at least three (3) consecutive months thereafter. A-4 EX-21.1 5 LIST OF SUBSIDIARIES OF THE COMPANY Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary Jurisdiction ------------------ ------------ 1. IFX/Communications Ventures, Inc. State of Delaware 2. FX Chicago, Inc. State of Delaware (a) IMSI, Inc. State of Illinois 3. IFX/Telecom, Inc. State of Delaware (a) Telcom.Net, L.P. State of Delaware 4. IFX/EN, Inc. State of Delaware (a) Emerging Networks, Inc. British Virgin Islands (i) IFX Online, Inc. State of Delaware (ii) IFX/ENI-SPC I, Inc. British Virgin Islands (A) Internacional Conection Service 1500, C.A Venezuela (iii) IFX/ENI-SPC II, Inc. British Virgin Islands (A) ENI Costa Rica SRL Costa Rica (iv) IFX/ENI-SPC III, Inc. British Virgin Islands (A) ENI Colombia Limitada Columbia (v) IFX/ENI-SPC IV, Inc. British Virgin Islands (A) Servicios de Internet ENI Chile, Limitada Chile (B) Interaccess, S.A. Chile (vi) IFX/ENI-SPC V, Inc. British Virgin Islands (A) ENI de Argentina SRL Argentina (vii) IFX/ENI-SPC VI, Inc. British Virgin Islands (A) ENI de Honduras SRL Honduras (viii) IFX/ENI-SPC VII, Inc. British Virgin Islands (A) ENI de Nicaragua SRL Nicaragua (ix) IFX/ENI-SPC VIII, Inc. British Virgin Islands (A) Zupernet Limitada Bolivia (x) IFX/ENI-SPC IX, Inc. British Virgin Islands (xi) IFX/ENI-SPC X, Inc. British Virgin Islands (xii) ENI Mexican Holdings, Inc. State of Delaware (A) Interweb de Mexico, S.A. de C.V. Mexico (xiii) IFX/ENI-SPC Ecuador, Inc. British Virgin Islands (xiv) IFX/ENI-SPC El Salvador, Inc. British Virgin Islands (xv) IFX/ENI-SPC Guatemala, Inc. British Virgin Islands (xvi) IFX/ENI-SPC Nicaragua, Inc. British Virgin Islands (xvii) IFX/ENI-SPC Honduras, Inc. British Virgin Islands (xviii)IFX/ENI-SPC Panama, Inc. British Virgin Islands (xix) IFX/ENI-SPC Uruguay, Inc. British Virgin Islands (xx) Minority Stock Holding Corp. British Virgin Islands (xxi) ENI Brazilian Holdings, Inc. State of Delaware (xxii) CELC/IFX, LLC State of Delaware (A) Communications Equipment Leasing Corp. British Virgin Islands
EX-23.1A 6 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1A CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANT We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-76257) pertaining to the 1998 Stock Option and Incentive Plan of IFX Corporation of our report dated September 24, 1999, with respect to the consolidated financial statements of IFX Corporation included in the Annual Report (Form 10-K) for the year ended June 30, 1999. Miami, Florida September 28, 1999 /S/ ERNST & YOUNG LLP EX-23.1B 7 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1B CONSENT OF INDEPENDENT ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed S-8 Registration Statement File No. 33-76257. Chicago, Illinois September 24, 1999 /S/ ARTHUR ANDERSEN LLP EX-27 8 FINANCIAL DATA SCHEDULE
5 12-MOS 12-MOS JUN-30-1999 JUN-30-1998 JUL-01-1998 JUL-01-1997 JUN-30-1999 JUN-30-1998 482,000 321,900 5,000,000 5,311,300 538,400 104,900 80,100 0 0 0 9,668,000 10,772,600 2,253,500 14,400 (369,300) (1,700) 18,861,500 11,543,400 2,447,200 208,200 0 0 0 0 0 0 136,600 123,100 15,960,800 11,212,100 18,861,500 11,543,400 725,300 0 725,300 0 445,500 0 3,656,300 733,100 107,700 0 0 0 0 0 (2,526,400) (316,500) (811,000) (108,000) (1,715,400) (208,500) 3,117,600 3,575,200 0 0 0 0 1,402,200 3,366,700 0.22 0.54 0.22 0.54
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