ITEM 1 - -BUSINESS
(a) General Development of Business.
The Registrant was incorporated under the laws of the State of Illinois in July, 1985, and in May, 1994, the Registrant changed its state of incorporation to Delaware. Until July 1, 1996, the Registrant's primary business activity was the conduct of commodity brokerage business through its principal operating subsidiary, Index Futures Group, Inc. ("Index").
On July 1, 1996, 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 ("Sale of Assets") were sold to E.D.& F. Man International, Inc. ("MINC"). MINC is a unit of E.D.& F. Man Group, plc, a London-based international trading and finance conglomerate.
As a condition of the Sale of Assets, the Registrant has changed its name to IFX Corporation, and Index has changed its name to FX Chicago Inc. ("FX Chicago").
As a result of the Sale of Assets, 207 employees were offered employment at MINC, including, Burton J. Meyer, formerly president and a director of the Registrant, and Philip Tanzar, formerly General Counsel and a director of the Registrant, both of whom accepted such employment, and 85 employees resigned or were terminated.
Another result of this transaction, is that FX Chicago no longer acts as a futures broker for public customers and has withdrawn as a clearing member from all commodity exchanges. FX Chicago's operations are currently limited to earnings from the Sale of Assets.
Currently, the Registrant's primary, majority-owned, operating subsidiary is IFX Ltd. (formerly Index FX, Ltd.), a British corporation. IFX Ltd. continues to conduct foreign exchange business as a registrant of the British Securities and Futures Authority ("SFA"). IFX Ltd. commenced trading operations in October, 1995 and became an SFA registrant in November, 1996.
Effective July 1, 1996, the Registrant's revenue stream consists of the earnings from the Sale of Assets, as defined in the Sale of Assets agreement, interest on its capital and income from operations of IFX Ltd. During fiscal 1998 and 1997, FX Chicago earned $4,159,600 and $2,157,900 respectively from the Sale of Assets.
(b) Narrative Description of Business.
General
The Registrant is a holding company with its businesses conducted through its wholly-owned subsidiary, FX Chicago, and its majority-owned subsidiary, IFX Ltd.
Prior to the Sale of Assets, FX Chicago, formerly known as Index, was a futures commission merchant registered with the United States Commodity Futures Trading Commission ("CFTC") and the SFA in the United Kingdom and was a member of the National Futures Association ("NFA"). It was involved in all aspects of brokerage of futures and options on futures contracts. It was a clearing member of the Chicago Mercantile Exchange, the Chicago Board of Trade, the Mid-America Commodity Exchange, the Commodity Exchange, Inc., the New York Mercantile Exchange, the New York Futures Exchange, the New York Cotton Exchange and the Coffee, Sugar & Cocoa Exchange. It provided a full-range of futures brokerage, clearing and back office services for professional, institutional and public commodities traders and, through a subsidiary, IMSI, Inc. (formerly Index Management Services, Inc.), until July 1, 1996 acted as a commodity pool operator. Index, until July 1, 1996, was the clearing agent for other non- clearing futures commission merchants, financial institutions, regional brokerage houses and introducing brokers. Operations at FX Chicago currently relate primarily to the net income derived from the Sale of Assets.
FX Chicago presently has one wholly-owned subsidiary, IMSI, Inc., which was organized in May, 1986. IMSI was previously registered with the CFTC as a commodity pool operator and was a member of the NFA. IMSI was organized to create and offer to the public, either by itself or in cooperation with others through joint ventures, various commodity futures fund offerings which may be marketed through broker-dealers or through participating regional brokerage houses. As of July 1, 1996, IMSI no longer operates commodity pools. Currently, IMSI, Inc. is a partner with a 50% interest in a trading partnership.
IFX Ltd. continues to conduct foreign exchange business as a registrant of the British SFA. IFX Ltd. commenced trading operations in October, 1995 and became an SFA registrant in November, 1996. The operations of IFX Ltd. are currently the Registrant's primary source of income, other than income from the Sale of Assets.
While the principal business of IFX Ltd. remains that of a primary market maker in both spot and forward foreign exchange, IFX Ltd. has also now become a recognized market maker for both Chicago Mercantile Exchange ("CME") Currency Exchange for Physical (EFP) transactions and OTC options.
IFX Ltd. works closely with many U.S. commodity trading advisors, many of whom, for historical reasons, track and trade currency futures contracts, rather than the cash market. Due to the relative illiquidity of the international monetary market of the CME, and the limited trading hours, both the creditworthiness of the CME (assets $42 billion) and the liquidity of the cash market (daily volume of $1,200 billion), make EFP execution through IFX Ltd., an independent market maker, an increasingly practical solution.
During fiscal 1998, in addition to the above described subsidiaries, the Registrant had one other majority-owned subsidiary, Stark Research, Inc. ("Stark"). In September, 1993, the Registrant purchased a controlling interest in Stark and became the majority shareholder in that company. Stark is an investment research company which publishes monthly and quarterly magazines regarding investments with a primary focus on funds investing in commodities. Stark is in the process of liquidation, and had no activity during fiscal 1998.
In addition, the Company formed a new wholly owned subsidiary during the past year, IFX/Telcom, Inc. The Company intends to utilize IFX/Telcom, Inc. as its holding company for any internet or telecommunication related ventures into which it may enter (if any). However, at the present time, IFX/Telcom, Inc. has no assets, liabilities, revenues or activity and there can be no assurance that IFX/Telcom, Inc. will enter into any business activities in the future.
Customers
The Registrant is a holding company and as such, does not directly have customers. Prior to the Sale of Assets, Index was the Registrant's principal source of revenue and was the Registrant's principal operating subsidiary responsible for commodity and futures related activities for customers. Subsequent to the Sale of Assets, the Registrant's only operating subsidiary with customers is IFX Ltd. IFX is a primary market maker and actively makes competitive 24 hour markets in spot and forward foreign exchange, from the opening of the market in New Zealand at the start of the week, at 8:00 pm London time each Sunday continuously until the close of business in New York, at 10:00 pm London time, each Friday. IFX Ltd.'s customers are primarily non- private, second tier banks, institutions, fund management companies, CTA's and high net worth individuals.
Marketing
The Registrant's marketing activities are limited to promoting and maintaining direct contact with IFX Ltd.'s customers. The expense associated with such efforts is reflected in the Registrant's travel and entertainment expenses.
Competition
IFX Ltd.'s competitors are primarily the US and European futures commissions merchants which have their own inter-bank foreign exchange desks, as well as a growing number of clearing banks which have margin foreign exchange operations. Competition among firms such as IFX Ltd. is intense and is primarily based upon both price and service. Other institutions offer their customers the same or more services than those provided by IFX Ltd. At the same time, the number of active participants in the foreign exchange market is relatively small when compared to those engaged in futures and securities trading
Regulation
In order to maintain its listing on the NASDAQ SmallCap Market the Registrant must satisfy NASDAQ's revised entry and maintenance standards for NASDAQ listed stocks. There is no assurance that the Registrant will be able to maintain eligibility for NASDAQ.
As a registrant, IFX Ltd. is subject to the financial resources requirements adopted and administered by the SFA. As of June 30, 1998, IFX Ltd.'s financial resources, as defined by the SFA, were $7,047,000, which was $4,233,000 in excess of its requirements. The SFA requires all members to meet and maintain specified financial requirements, and maintain segregated accounts for all customers' funds, property and positions, and specified books and records on customer transactions, all of which are open to inspection by the staff of the SFA. Failure to meet its regulatory requirements could subject IFX Ltd. to disciplinary actions including fines, censure, suspension or revocation of registration.
Employees
As of August 31, 1998, the Registrant had 39 full and part-time employees working for it, FX Chicago and IFX Ltd. As of June 30, 1997, the Registrant and its subsidiaries had 30 full and part-time employees.
ITEM 2
ITEM 2 - -PROPERTIES
The Registrant leases office space at 200 West Adams Street, Chicago, Illinois. This location serves as the Registrant's corporate headquarters. IFX Ltd. leases office space at America House, 2 America Square, London, England, which serves as the primary business location. Both of these facilities are leased at rates competitive for the respective locations.
ITEM 3
ITEM 3 - -LEGAL PROCEEDINGS
As a brokerage firm having numerous customers and correspondents, Index, from time to time, was subject to various lawsuits, including civil litigation, arbitrations and reparations proceedings and administrative proceedings by regulators in the commodity futures industry relating to customers and regulatory requirements incidental to carrying on such brokerage business. Such matters range from those in which Index was a party plaintiff against customers to collect deficit amounts due from customers, to customer complaints, allegations by regulatory authorities of alleged improprieties by, or lack of registration of, employees of Index and the like. It also may be likely in some of these actions that allegations requesting such items as monetary penalties, license suspensions or revocations and the like will be made. The number of such complaints, matters of litigation and administrative proceedings amounted to a small percentage of Index's total business. Management of the Registrant, after consultation with legal counsel, is of the opinion that neither the Registrant, nor any of the Registrant's subsidiaries, is involved in any current civil litigation or administrative proceeding which it believes would have a material adverse effect on the Registrant's, or its subsidiaries financial condition.
Notwithstanding that the following matters are ordinary and routine litigation incidental to the business, the Registrant believes it appropriate to set forth the following information:
On November 24, 1997, the trustee of a pension plan filed a Demand for Arbitration with the National Futures Association against Index and several other respondents, including an introducing broker guaranteed by Index. In the Demand, the trustee alleges breach of fiduciary duty, churning, misrepresentation, failure to supervise, breach of contract, aiding and abetting, and violation of ERISA. Claimant seeks actual damages of $141,000 and punitive damages of $460,000. The Company believes the claim is without merit and will defend vigorously.
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, 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 file on September 29, 1992. In a related action, the equity receiver of an alleged 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.
Edward Schwarz ("Schwarz"), a former executive of Index whose employment was terminated as a result of the Sale of Assets, had rejected Index's severance payment offer. Schwarz had made a demand for $500,000, alleging age discrimination and breach of an alleged oral partnership agreement. The Registrant settled this case in July, 1997 for $75,000.
A lawsuit was commenced in Germany against an affiliate of E.D. & F. Man International Inc. ("MINC") by a German citizen seeking damages of Deutschmark 6,403,519.19 (approximately $4,000,000 given the exchange rate as of September 15, 1998). The Complaint arises out of transactions which occurred in an account introduced by Index Futures Group, AG ("Index AG"), an introducing broker of Index Futures Group, Inc., 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 interest 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. However, as the Company received notice of this suit on September 16, 1998, it does not have information as to the extent of any potential liability under the suit or legal costs required to defend such suit, at the present time.
ITEM 4
ITEM 4 - -SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended June 30, 1998, no matters were submitted to a vote of security holders.
PART II
ITEM 5
ITEM 5 - -MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Registrant's stock is traded on the NASDAQ SmallCap Market.
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 in January, 1998.
On August 31, 1998, the closing price per share of common stock, as reported through NASDAQ, in the over-the-counter market was $1.91.
- -------- (1) Includes the period July 1, 1998 through August 31, 1998.
Approximate Number of Holders of Securities
As of August 31, 1998, there were 922 holders of record of the Registrant's common stock. The Registrant believes it has a greater number of shareholders 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.
ITEM 6
ITEM 6 - -SELECTED FINANCIAL DATA
SUMMARY FINANCIAL INFORMATION
The following table presents summary historical information for the Registrant. This summary information is derived from the audited historical financial statements of the Registrant.
HISTORICAL FINANCIAL INFORMATION
- -------- (1) Represents minority interest from sale of interest in IFX Ltd., the Registrant's London subsidiary. (2) Earnings per share are computed on the basis of the weighted average number of shares of common stock outstanding during each year, adjusted for the effect of common stock equivalents arising from the assumed exercise of stock options and warrants if dilutive. All earnings per share data has been restated for the one-for-five reverse stock split in January, 1998.
ITEM 7
ITEM 7 - -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1998
IFX Corporation (formerly Jack Carl / 312-Futures, Inc.) (which when consolidated with its subsidiaries is henceforth referred to as the "Registrant") is a holding company which operates its business through its subsidiaries. Index Futures Group, Inc. ("Index"), until July 1, 1996, the Registrant's principal operating subsidiary, provided a full range of futures brokerage, clearing and back office services for institutional and public commodity traders. It was a clearing member of all major U.S. commodity exchanges. Effective July 1, 1996, Index sold, transferred and assigned substantially all of its brokerage accounts ("Sale of Assets") to E.D. & F. Man International, Inc. ("MINC"). As a result of the Sale of Assets, Index immediately withdrew as a clearing member from all commodity exchanges, and terminated its registration as a futures commission merchant in December, 1996. In addition, as a condition of the Sale of Assets, Index changed its name to FX Chicago, Inc. IFX Ltd. (formerly Index FX, Ltd.), a British corporation and a majority-owned subsidiary of IFX Corporation, continues to conduct foreign exchange business as a registrant of the British Securities and Futures Authority ("SFA"). IFX Ltd. commenced trading operations in October, 1995 and became an SFA registrant in November, 1996. The other subsidiaries of IFX Corporation and FX Chicago currently have minimal operations.
Liquidity and Capital Resources
The Company maintains a highly liquid balance sheet with a majority of the Company's assets consisting of short-term investments, which are reflected at market. IFX Ltd.'s role as a market maker in spot and forward foreign exchange markets for customer activities, results in significant levels of customer- related balances on the Company's balance sheet.
The Company's cash and short-term investment portfolio totaled $36,604,000 at June 30, 1998. Included in this amount is approximately $25,406,000 of funds from IFX Ltd. customers, which have been invested by IFX Ltd. on the customers' behalf or are held in segregated cash accounts, pursuant to rules of the SFA. The Company's positions are generally liquid. The portfolio is invested primarily in U.S. dollar denominated securities, but also includes foreign currency positions deposited by IFX customers.
As a registrant, IFX Ltd. is subject to the financial resources requirements adopted and administered by the SFA. As of June 30, 1998, IFX Ltd.'s financial resources, as defined by the SFA, were $7,047,000, which was $4,233,000 in excess of its requirements.
From time to time the Company has obtained loans from its principal stockholder, affiliates of its principal stockholder and executive officers of the Company. The proceeds of these loans were used for working capital of the Company. (See Notes 4 and 7 of the footnotes to financial statements.) During February, 1998, the Company repaid an $836,600 note payable, which was issued in January, 1997, to its principal stockholder. During September, 1997, the Company repaid a $750,000 note payable, which was issued in January, 1997, to an affiliate of its principal stockholder.
Stockholders' equity at June 30, 1998 was $11,335,200. The Company effected 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 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. Any holder of fractional shares resulting from this reverse split will be 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 than 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 of June 30, 1998, the Company had repurchased approximately 3,500 shares.
The Company continues to repurchase and retire shares of its common stock, pursuant to a repurchase program which permits the Company to purchase up to 1,000,000 shares. Pursuant to this program, the Company repurchased and retired 120,070 shares for $228,100 during fiscal 1998.
In November, 1996, the Board of Directors authorized the issuance of options for 250,000 shares of common stock at $1.20 per share, terminating June 30, 1998. These options replaced those that were originally issued in February, 1994 and terminated upon the former President accepting employment with MINC. In June, 1998, the Company purchased and terminated these options for $200,000.
As a result of the repurchase of fractional shares and odd-lots, as well as the repurchase and retirement of shares, outstanding shares of common stock as of June 30, 1998 totaled 6,155,539.
As of June 30, 1998, the Company had outstanding lease commitments of approximately $2,100,000 through the year 2002. The majority of this commitment related to space leased in Chicago. While the Company remains legally committed under terms of the lease, subsequent to June 30, 1998, the Company subleased its' office space in Chicago, through the end of the lease term. The Company has signed a sublease to occupy a much smaller space in Chicago through June 1999, providing for aggregate lease payments of approximately $70,000.
For the year ended June 30, 1998, cash used in operations was $1,551,400 compared to cash provided by operations of $8,891,800 for the same period in fiscal 1997. The majority of cash provided by or used in operations is related to customer funds from customers of IFX Ltd. Cash flows from operations include the changes in customer funds and customer payables, and will vary depending on the amount of excess customer funds at a given time. In fiscal 1997, the amount of excess customer funds was greater than the excess in 1998, thus contributing to greater cash provided by operations in 1997. In addition, the Company invests cash not needed for operations at FX Chicago, Inc. in short-term investments such as U.S. Government obligations and overnight time deposits. As of June 30, 1998, the Company held $5,311,300 in U.S. short-term investments.
Management believes existing cash and short-term investments together with operating cash flows, access to equity capital, and borrowing capacity through its principal stockholder, provide adequate resources to fund ongoing operating requirements and future capital expenditures related to the expansion of existing businesses and development of new projects.
Year 2000
The Company is currently in the process of evaluating its information technology infrastructure for Year 2000 compliance. The Company does not expect that the cost to modify its information technology infrastructure to be Year 2000 compliant will be material to its financial position or results of operations. The Company does not anticipate any material disruption in its operations as a result of any failure by the Company to be in compliance. The majority of the Company's suppliers have indicated that they are in the process of or have already achieved Year 2000 compliance. In the event that any of the Company's significant suppliers or customers does not successfully and timely achieve Year 2000 compliance, the Company's business or operations could be adversely affected.
Results of Operations--Fiscal 1998 Compared to Fiscal 1997
IFX Ltd., the Company's London-based operation, continues to grow. IFX Ltd.'s target customer base is beginning to recognize it as an effective and efficient alternative to the larger money center banks. In addition,
the Company's earnings from the Sale of Assets have continued to increase as MINC generates additional business from the brokerage accounts it purchased from Index, and reduces the costs associated with that business. As such, revenues of the Company are currently increasing at a much greater rate than are expenses. Pursuant to the Sale of Assets agreement, the Company's percentage of earnings from the brokerage accounts will decrease based upon a predetermined schedule as defined in the sales agreement, over the remainder of the original sixty-six month period following the sale. As such, earnings from the Sale of Assets may decrease accordingly.
Revenues were $15,465,100 during the year ended June 30, 1998, representing a decrease of 7% from the same period a year ago. Commission revenues continue to increase as the IFX Ltd. business continues to expand. Trading revenues decreased by 25% for the year ended June 30, 1998, compared to the same period a year ago, largely as a result of the lack of volatility in the foreign currency market during the year.
Revenues from the Sale of Assets increased by $2,001,700, or 93%, for the year ended June 30, 1998, compared to the same period a year ago. Reported revenues during previous quarters of fiscal 1997 were subsequently adjusted and increased by $308,000 by MINC. These adjustments are reflected in the earnings from the Sale of Assets for the year ended June 30, 1998. The Company's earnings from the Sale of Assets continue to increase as MINC generates more and more business from the brokerage accounts it purchased from Index.
Other revenue decreased by $956,700 during the year ended June 30, 1998, compared to the same period a year ago. Included in other revenue during the year ended June 30, 1997 was a net gain of $885,600 on the sale of exchange memberships and clearing corporation stock. No revenues were generated from these sources during 1998.
Total expenses were $8,891,300 for the year ended June 30, 1998, representing a decrease of 13% from the same period a year ago. The decrease in expenses resulting from the Sale of Assets has been somewhat offset by the increasing expenses from the expanding operations of IFX Ltd. Operating expenses should continue to decrease in fiscal 1999, given the sublease of the office space in Chicago.
As a result of the aforementioned changes in revenues and expenses, net income for the year ended June 30, 1998 is $3,366,700 or $.54 per share compared to net income of $3,183,800 or $.48 per share for the year ended June 30, 1997.
The Board of Directors is exploring various business opportunities for the Company now that FX Chicago, Inc. no longer acts as a futures commission merchant, and as a result has capital available for investments. The Company has formed a wholly-owned subsidiary, IFX/Telcom, Inc., in order to explore and/or pursue telecommunications or Internet related projects.
Results of Operations--Fiscal 1997 Compared to Fiscal 1996
As a result of the Sale of Assets in July, 1996, FX Chicago (formerly Index) no longer acts as a futures commission merchant. Differences between revenues and expenses for the years ending June 30, 1997 and June 30, 1996 are primarily a result of the Sale of Assets, unless otherwise noted below.
Revenues were $16,549,000 in fiscal 1997, a decrease of 60% from fiscal 1996. The decrease in revenues resulting from the Sale of Assets has been offset somewhat by the increased revenues from IFX Ltd.
Trading gains increased by $6,799,700 during the year ended June 30, 1997, compared to the same period a year ago. The primary component in trading gains in fiscal 1997 is the revenue from IFX Ltd.
Other revenue increased $3,072,400 during the year ended June 30, 1997, compared to same period a year ago. Included in other revenue for the year ended June 30, 1997 is $2,157,900 from the Sale of Assets, and a net gain of $737,700 on the sale of clearing corporation stock and exchange memberships.
Total expenses were $10,194,100, or 76% lower than the prior fiscal year. The decrease in expenses as resulting from the Sale of Assets has been offset somewhat by the increasing expenses from the expanding operations of IFX Ltd. The expenses for fiscal 1997 reflect the ongoing expenses of IFX Ltd., IFX Corporation and FX Chicago, transitional expenses from the Sale of Assets, and minimal expenses for other subsidiaries.
As a result of the aforementioned changes in revenues and expenses, net income for the year ended June 30, 1997 is $3,183,800 or $.48 per share compared to a net loss of $1,133,100 or $.17 per share for the year ended June 30, 1996.
Forward-Looking Statements
Statements contained in this Form 10-K regarding the Company's prospective business opportunities, anticipated future results of operations and planned expansion are forward-looking statements that involve substantial risks and uncertainties. Such forward-looking statements include (i) the Company's belief that it will not incur material costs or operational disruptions as a result of Year 2000 problems that may be resident in its, or its customers' and suppliers' computer information systems, (ii) the expected continued expansion and profitability of IFX Ltd.'s operations, (iii) the amount of future revenues the Company expects to receive from MINC pursuant to the Sale of Assets Agreement, (iv) the amount and nature of planned capital expenditures, (v) the Company's belief that its existing cash, short-term investments, operating cash flows, access to equity capital and borrowing capacity will be sufficient to finance the Company's ongoing operations and future capital expenditures, and (vi) statements relating to the Company or its operations that are preceded by terms such as "anticipates", "expects", "believes" and similar expressions.
In accordance with the Private Securities Litigation Reform Act of 1995, following are important factors that could cause the Company's actual results, performance or achievements to differ materially from those implied by such forward-looking statements: The Company has not determined (and may be unable to determine), with certainty, the magnitude and scope of any Year 2000 problems that may be resident on its, or on its customers' or suppliers' information systems. There can be no assurance that IFX Ltd. can maintain or increase its historic growth rate or profitability. The amount of revenues the Company receives pursuant to the Sale of Assets agreement is dependent upon (i) the amount of earnings MINC generates from the brokerage accounts it purchased from Index and (ii) the contractual percentage of such earnings to which the Company is entitled, which is set forth in the agreement and decreases over time.
ITEM 7A
ITEM 7A - -QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk is directly related to its role, through IFX Ltd., as a foreign exchange market maker in customer-related transactions. IFX Ltd.'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 financial instruments. When IFX Ltd. buys or sells a foreign currency or a financial instrument denominated in a foreign currency, exposure exists from the net open currency position. Until the position is covered by selling or buying an equivalent amount of the same currency, IFX Ltd. is exposed to the risk that the exchange rate may move against it. In general, IFX Ltd. offsets it open customer positions, thus substantially reducing its foreign exchange rate risk. IFX Ltd. is also exposed to credit risk. Credit risk arises from the potential inability of market counterparties, such as exchanges and banks, or customers to perform an obligation in accordance with the terms of the contract. IFX Ltd. has established policies and procedures to manage credit risk. A Credit Committee is responsible for approving and reviewing new and existing customer accounts. The Committee is responsible for establishing margin requirements and margin call levels, position limits and trade restrictions (i.e., 1 month forward trading, instrument types, etc.). The Finance Officer is responsible for monitoring all customer accounts on a daily basis to ensure that they are in compliance with the agreed terms of trading. Customer trading positions, equity balances, margin excess amounts, and margin calls are monitored daily. As IFX Ltd. conducts the majority of its business for its customers in foreign currencies on the spot market, its trades generally settle on the next business day. However, if margin calls are necessary and not satisfied in a timely manner, (within 5 days), IFX Ltd. reserves the right to liquidate all or part of the customer's open positions. Management believes that with trades settling the next business day and the margin policies it employs, its credit risk is reduced substantially.
ITEM 8
ITEM 8 - -FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For financial information, see the financial statements and notes thereto set forth at Item 14 hereof.
ITEM 9
ITEM 9 - -CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
The Registrant did not have any changes in, or any material disagreements on accounting and financial disclosure with, its independent public accountants in fiscal 1998 or 1997.
PART III
ITEM 10
ITEM 10 - -DIRECTORS AND EXECUTIVE OFFICERS
The Directors and Executive Officers of the Registrant as of June 30, 1998 were as follows:
Joel M. Eidelstein was elected Director and President of the Registrant effective November, 1990 and November, 1996, respectively. Mr. Eidelstein graduated from Brandeis University in May, 1988. Since June, 1988, until immediately prior to the Sale of Assets, he was an independent commodity futures trader and a floor manager with Index.
Christina S. Donka was the Assistant Chief Financial Officer of the Registrant from November, 1996, until June, 1997, when she became the Chief Financial Officer and Secretary. Prior to joining the Registrant, she was manager in the financial services division of Arthur Andersen LLP. She is a Certified Public Accountant.
Colleen M. Downes has been an employee at Index since January, 1985. She has been Director and Treasurer of the Registrant since February, 1997. She became Vice President in June, 1998. She is pursuing a bachelor's degree at DePaul University in Chicago, Illinois.
George A. Myers was elected Director of the Registrant effective November 16, 1990. Mr. Myers, since 1981, has been managing general partner of MC Capital, a diversified real estate company with offices in Chicago, Illinois, Phoenix, Arizona, and San Diego, California.
Zalman Lekach has been a Director of the Registrant since February, 1997. He is President and Chief Operating Officer of Parlux Fragrances, Inc. ("Parlux"). He became a director and an executive in Parlux, S.A., Parlux's French subsidiary, in May 1990. In May 1993, he resigned his executive position and owned and operated a company exporting foods and health/beauty aids to South America. In January of 1995, he rejoined Parlux as its Chief Operating Officer and a director. In June 1996, Mr. Zalman Lekach also assumed the position of President of Parlux.
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.
ITEM 11
ITEM 11 - -EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid by the Registrant as well as the number of stock options earned by the Registrant's President, who is acting in a capacity similar to a chief executive officer. There were no other executive officers of the Company whose compensation for fiscal 1998 exceeded $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Fiscal 1998 Option Grants
No options were granted to the Registrant's President during fiscal 1998.
Fiscal 1998 Option Exercises
There were no options exercised during fiscal 1998 and the Registrant's President did not hold any options as of June 30, 1998. During June, 1998, the Registrant purchased for 200,000, 250,000 options previously issued to the Registrant's former president which were exercisable at $1.20 per share.
Compensation of Directors
Directors are not currently compensated in connection with their duties as directors, but may be reimbursed for expenses incurred by them, in connection with their services as directors.
Compensation Committee Interlocks and Insider Participation Compensation Decisions
The Registrant does not have a compensation committee. Prior to the Sale of Assets, Mr. Burton J. Meyer, at the time, President and a Director of the Registrant, participated in the negotiations of employment agreements for executive officers of the Registrant.
ITEM 12
ITEM 12 - -SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of August 31, 1998, certain information regarding the common stock beneficially owned by each present director, the Registrant's President, each person known by the Registrant to own more than five percent of the common stock of the Registrant and all present executive officers and directors as a group:
- -------- *Less than 1% (1) Mr. Casty may be deemed a parent and promoter of the Registrant as those terms are defined under the Securities Act of 1933, as amended. (2) c/o French-American Securities, Inc., 200 West Adams Street, Suite 1500, Chicago, Illinois 60606. (3) Resigned as director and executive officer effective close of business July 1, 1996.
ITEM 13
ITEM 13 - -CERTAIN TRANSACTIONS
Effective November 30, 1985, Mr. Casty, the principal shareholder, loaned the Registrant $400,000 evidenced by a "satisfactory subordination agreement" approved by the regulatory authorities to which the Registrant was at that time subject. This subordinated loan was due to mature on December 1, 1988. On March 5, 1986, the Registrant amended its Articles of Incorporation to authorize 400,000 shares of Preferred Stock, par value $1.00 per share, 10% cumulative, all of which Preferred Stock was thereupon issued to Mr. Casty in satisfaction of such subordinated loan. The Preferred Stock is redeemable, with cumulative dividends, at the option of the Registrant under certain circumstances. No liability for these dividends had been recorded as dividends are not payable until declared. In 1986, the Articles of Incorporation of the Registrant were amended and the Preferred Stock was redesignated "Class A Preferred Stock." On January 31, 1997, the Registrant redeemed and retired the 400,000 issued and outstanding shares of its Class A preferred stock. 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 Registrant issued to Mr. Casty a promissory note in the amount of $836,600, bearing interest at the prime rate and maturing on January 31, 1998. This note was repaid in February, 1998.
In January, 1997, The Company repaid all notes payable (other than the note for the redemption of the preferred stock) due to Mr. Casty, which aggregated to $940,000. The Registrant, during the years ended June 30, 1998 and 1997, paid Mr. Casty, approximately $42,900 and $91,100 in interest on such notes payable.
In January, 1997, all notes payable to French-American Securities, Inc., a company wholly-owned by Mr. Casty, which aggregated to $5,450,000 were extended to January 31, 1998. In June and September, 1997, $4,700,000 and $750,000, respectively, of the notes payable to French-American Securities, Inc. were repaid. The Registrant, during the years ended June 30, 1998 and 1997, paid French-American Securities, Inc. $11,000 and $520,000 in interest on such notes payable.
A note receivable in the amount of $811,400 arose in connection with advances made by the Company to SRC, Inc. an affiliated entity of Mr. Casty. These demand receivables were converted into a demand note bearing interest at 8% and was subsequently changed to the prime rate of interest. The Company earned $52,400, $51,700, and $53,500 of interest income on this note during the years ended June 30, 1998, 1997 and 1996, respectively.
In November, 1996, the Board of Directors authorized the issuance of options to Mr. Burt Meyer, the Company's former President, for 250,000 shares of common stock at $1.20 per share, terminating June 30, 1998. These options replaced those that were originally issued in February, 1994 and terminated upon Mr. Meyer's acceptance of employment with MINC. In June, 1998, the Company purchased and terminated these options for $200,000.
The Company had an employment agreement pursuant to which Philip A. Tanzar served, effective December 31, 1995, as the Registrant's Vice President and General Counsel for a base annual compensation of $138,200 for a term ending December 31, 1996. In the event that the terms of Mr. Tanzar's employment were not extended by the Registrant for reasons other than "good cause," on terms substantially equivalent to the current terms, the Registrant was obligated to pay Mr. Tanzar a severance of $100,000. Effective July 1, 1996 Mr. Tanzar accepted employment at MINC, thereby terminating his employment contract with the Registrant. As an inducement for Mr. Tanzar to accept employment with MINC and as a settlement of his contract, the Registrant has agreed to pay him up to $100,000 as severance if he is terminated by MINC prior to January 1, 1999.
The Company has guaranteed certain liabilities of a limited partnership to Qwest/LCI, International. The general partner of this limited partnership is 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.
PART IV
ITEM 14
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 17.
(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 following exhibits required by Item 601 of Regulation S-K to be filed herewith are incorporated by reference to previously filed documents:
(b) REPORTS ON FORM 8-K:
The Registrant did not file any reports on Form 8-K during the fourth quarter of fiscal 1998.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of IFX Corporation and Subsidiaries:
We have audited the accompanying consolidated statements of financial condition of IFX Corporation (a Delaware corporation) and subsidiaries ("the Company") as of June 30, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity, changes in liabilities subordinated to claims of general creditors and cash flows for the years ended June 30, 1998, 1997 and 1996. 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, 1997 and 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois, September 16, 1998
IFX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998 AND 1997
The accompanying notes are an integral part of the consolidated financial statements.
IFX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
The accompanying notes are an integral part of the consolidated financial statements.
IFX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
The accompanying notes are an integral part of the consolidated financial statements.
IFX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
The accompanying notes are an integral part of the consolidated financial statements.
IFX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
The accompanying notes are an integral part of the consolidated financial statements.
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
None.
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.
Also in January, 1997, a note payable for $836,600 was issued to the Company's principal stockholder as payment for the redemption of preferred stock and dividends accrued thereon.
Notes payable aggregating $6,390,000 due January 31, 1996 were extended to January 31, 1997.
In February, 1996, $1,000,000 of a $1,690,000 subordinated loan was extended to February 24, 1997. The remaining $690,000 was repaid.
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION OF IFX CORPORATION
Until July 1, 1996, IFX Corporation ("formerly Jack Carl/312-Futures, Inc."), through its subsidiaries, engaged principally in the business of effecting transactions in futures and options on futures contracts for the accounts of customers and the operation of commodity pools. Index Futures Group, Inc. ("Index"), until July 1, 1996, was the principal operating subsidiary of Jack Carl/312-Futures, Inc. Effective July 1, 1996, Index sold, transferred and assigned substantially all of its brokerage accounts ("Sale of Assets") to E.D. & F. Man International Inc. ("MINC"). Index ceased being a registered futures commission merchant with the Commodity Futures Trading Commission ("CFTC") in December, 1996. As a condition of the Sale, Index changed its name to FX Chicago, Inc. ("FX Chicago"). IFX Ltd., (formerly Index FX, Ltd.), a British corporation and a majority owned subsidiary of IFX Corporation, continues to conduct foreign exchange business as a registrant of the British Securities and Futures Authority. Another subsidiary of IFX Corporation was a registered broker-dealer until it withdrew its registration in April 1997. In addition, the Company formed a new wholly owned subsidiary during the past year, IFX/Telcom, Inc. The Company intends to utilize IFX/Telcom, Inc. as its holding company for any internet or telecommunication related ventures into which it may enter (if any). However, at the present time, IFX/Telcom, Inc. has no assets, liabilities, revenues or activity and there can be no assurance that IFX/Telcom, Inc. will enter into any business activities in the future.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of IFX Corporation and its wholly-owned subsidiary, FX Chicago, as well as those of its majority-owned subsidiaries, IFX, Ltd. and Stark Research, Inc. At the present time, IFX/Telcom, Inc. has no assets, liabilities, revenues or activity. All material intercompany accounts and transactions are eliminated in consolidation. Brokers Resource Corp., Index Securities, Inc. and Jack Carl Management and Trading, Inc., all former subsidiaries of IFX Corporation, were dissolved during fiscal 1996 and 1997.
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
Foreign exchange revenue is recorded on a per transaction basis, based upon marking underlying positions to market. Such revenue is included in trading gains on the Statements of Operations.
Commission revenues on commodity futures and options transactions and related commission expenses were recorded on a half-turn basis.
U.S. Government Obligations and other Short-term Investments
U.S. Government obligations and other short-term investments are valued at market. The change in unrealized appreciation on house and customer funds invested is reflected in interest income.
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investments in Partnerships
The investments in partnerships are accounted for on the equity method.
Furniture, Equipment and Leasehold Improvements
Furniture and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the lesser of their useful lives or the remaining terms of the leases. See Note 14 for the effect of the Sale of Assets on furniture, equipment and leasehold improvements.
Goodwill
Prior to the Sale of Assets, the excess of cost over estimated fair value of net assets acquired was reflected as goodwill and was being amortized over twenty years. Goodwill arose as a result of business combinations which occurred in 1985 and 1986. As a result of the Sale of Assets, the remaining goodwill was written off as of June 30, 1996. See Note 14 for further information.
Income Taxes
Deferred income taxes are provided to reflect the tax effects of timing differences between financial and tax reporting. The nature of the timing differences are discussed in Note 8.
Reclassification
Certain amounts previously reported have been reclassified to conform to the current method of presentation.
Earnings per Common Share
In fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 128. "Earnings Per Share" (FAS No. 128), which establishes standards for computing and presenting earnings per share ("EPS"). FAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. FAS No. 128 also requires presentation of diluted EPS which is computed similarly to fully diluted EPS previously presented. The adoption of FAS No. 128 did not have a material impact on the Company's EPS or EPS trends and comparisons.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130. "Reporting Comprehensive Income" (FAS No. 130). This statement establishes standards for the reporting and display of comprehensive income and its components. This statement is effective for fiscal years beginning after December 15, 1997. The Company will adopt this statement in fiscal 1999. Adoption will require additional disclosure, but will not have a material effect on the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133. "Accounting for Derivative Instruments and Hedging Activities" (FAS No. 133), which establishes standards for reporting and displaying derivatives and hedging. This statement is effective for all
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
fiscal quarters of fiscal years beginning after June 15, 1999. The Company does not believe that the application of this statement will have a significant impact on the financial position, results of operations or financial statement disclosures of the Company.
NOTE 3--OTHER SHORT-TERM INVESTMENTS
Other short-term investments consist of $30,757,500 and $44,875,100 of time deposits at June 30, 1998 and 1997, maturing at various dates through July, 1998 and 1997, respectively.
NOTE 4--NOTES PAYABLE
Notes payable at June 30, consist of the following:
The $750,000 note was repaid in September, 1997. The note for $836,600 was repaid in February, 1998.
Interest paid on notes payable during the years ended June 30, 1998, 1997 and 1996 was $53,900, $634,900 and $801,400, respectively, substantially all of which was paid to related parties.
The weighted average interest rates on short-term borrowings outstanding at June 30, 1997 was 10.4%. The weighted average interest rate was calculated by dividing interest expense by the related average amount outstanding in June.
NOTE 5--LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Liabilities subordinated to claims of general creditors were borrowed in accordance with the terms of a revolving subordinated debt line totaling $4,000,000 as of June 30, 1996. The full amount of the borrowing was repaid in August, 1996, and the line was canceled.
Interest expense on liabilities subordinated to claims of general creditors during the years ended June 30, 1998, 1997, and 1996 was $0, $38,100, and $352,000 respectively.
NOTE 6--STOCKHOLDERS' EQUITY
Class A Preferred Stock
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 its principal stockholder. 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 its principal stockholder 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 effected 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 were reclassified
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 will be 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 continues to repurchase and retire shares of its common stock, pursuant to a repurchase program which permits the Company to purchase up to 1,000,000 shares. Pursuant to this program, the Company repurchased and retired 120,070 shares for $228,100 during fiscal 1998. During fiscal 1997, the Company repurchased and retired 445,776 shares (as adjusted for the one- for-five reverse split) for $328,800.
As a result of the repurchase of fractional shares and odd-lots, as well as the repurchase and retirement of shares, outstanding shares of common stock as of June 30, 1998 totaled 6,155,539.
Stock Option Plan
In March, 1986, the Company adopted an incentive stock option plan reserving 100,000 shares (as adjusted for the one-for-five reverse split) of common stock. The Company also has granted options other than in accordance with the March 1986 incentive stock option plan.
In November, 1996, the Board of Directors authorized the issuance of options for 250,000 shares of common stock at $1.20 per share, terminating June 30, 1998. These options replaced those that were originally issued in February, 1994 and terminated upon the former President accepting employment with MINC. In June, 1998, the Company purchased and terminated these options for $200,000. All other previously issued options expired upon termination of former employees. As a result, there are no outstanding options as of June 30, 1998.
NOTE 7--RELATED PARTY TRANSACTIONS
A note receivable in the amount of $811,400 arose in connection with advances made by the Company to an affiliated entity. These demand receivables were converted into a demand note bearing interest at 8% and was subsequently changed to the prime rate of interest. The Company earned $52,400, $51,700, and $53,500 of interest income on this note during the years ended June 30, 1998, 1997 and 1996, respectively.
The Company receives funds, in the form of loans, from its principal shareholder, an affiliated company and, prior to the Sale of Assets, an officer and director of the Company. See Note 4 for the terms and balances at June 30, 1998 and 1997.
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--INCOME TAXES
The provision for Federal income taxes for each of the years ended June 30, is as follows:
State income tax expense is immaterial for the years ended June 30, 1998, 1997 and 1996.
Reconciliation of the total provision for income taxes to the Federal statutory rate for the years ended June 30, is as follows:
The primary components of the Company's deferred tax assets and liabilities are as follows:
No valuation allowance has been provided as management believes deferred tax assets are realizable.
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--COMMITMENTS AND CONTINGENCIES
The Company has two noncancellable leases for office space. The Company's lease for space in London expires in the year 1999, and its lease for space in Chicago expires in the year 2002. Minimum annual rentals, excluding escalations and increases in operating expenses and taxes, are as follows:
Subsequent to June 30, 1998, the Company subleased its office space in Chicago, through the end of the lease term. The Company has signed a sublease to occupy a much smaller space in Chicago through June 1999, providing for aggregate lease payments of approximately $70,000.
The Company has entered into employment agreements which expire at varying dates through fiscal 1999 with certain of its employees, providing for aggregate minimum annual payments for the year ending June 30, 1999 of approximately $272,000. The Company has also entered into a consulting contract which expires during fiscal 1999, providing for aggregate minimum payments totaling $26,000.
As a result of the Sale of Assets, if certain conditions occur over the next year, the Company may be subject to additional severance payments of up to $100,000.
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. See Note 14.
The Company has guaranteed certain liabilities of a limited partnership to Qwest/LCI, International. The general partner of this limited partnership is 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 10--FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
IFX Ltd. conducts the majority of business for its customers in foreign currencies on the spot market, in which trades generally settle on the next business day. It also conducts a limited amount of business in foreign currencies in the futures market. Futures contracts are short-term in nature. As of June 30, 1998, the majority of IFX Ltd.'s futures transactions had an expiration in September, 1998. IFX Ltd. offsets its customer positions to manage its currency risk. It also requires certain customers to post margin deposits. Management believes that with the trades settling the next business day and the margin policy that IFX Ltd. employs, credit risk is reduced substantially. At June 30, 1998 and 1997, respectively, IFX Ltd. held long foreign currency positions with an aggregate notional value of $3,332,978,000 and $2,993,671,900 respectively and short foreign currency positions with an aggregate notional value of $3,332,380,900 and $2,993,109,600 respectively. The notional value of the foreign currency positions provides only a measure of involvement in these types of transactions and does not represent the amounts subject to various types of market risk, nor the future cash requirements of these instruments.
At June 30, 1998 and 1997, the IFX Ltd. foreign currency business was transacted with several international financial institutions.
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--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.
On November 24, 1997, the trustee of a pension plan filed a Demand for Arbitration with the National Futures Association against Index and several other respondents, including an introducing broker guaranteed by Index. In the Demand, the trustee alleges breach of fiduciary duty, churning, misrepresentation, failure to supervise, breach of contract, aiding and abetting, and violation of ERISA. Claimant seeks actual damages of $141,000 and punitive damages of $460,000. The Company believes the claim is without merit and will defend vigorously.
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 an alleged 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.
A former officer of Index whose employment was terminated as a result of the Sale of Assets rejected Index's severance payment offer. The officer had made a demand for $500,000. The Company settled this case in July, 1997 for $75,000.
A lawsuit was commenced in Germany against an affiliate of E.D. & F. Man International Inc. ("MINC") by a German citizen seeking damages of Deutschmark 6,403,519.19 (approximately $4,000,000 given the exchange rate as of September 15, 1998). The Complaint arises out of transactions which occurred in an account introduced by Index Futures Group, AG ("Index AG"), an introducing broker of Index Futures Group, Inc., 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 interest 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. However, as the Company received notice of this suit on September 16, 1998, it does not have information as to the extent of any potential liability under the suit or legal costs required to defend such suit, at the present time.
NOTE 12--CAPITAL REQUIREMENTS
IFX Ltd. became a registrant of the Securities and Futures Authority ("SFA") in London during November, 1996. As such, IFX Ltd. is subject to the financial resources requirements adopted and administered by the SFA. As of June 30, 1998 and 1997, IFX Ltd.'s financial resources, as defined by the SFA, were $7,047,000 and $8,976,000, which was $4,233,000 and $6,040,000 in excess of its requirements, respectively.
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 13--CASH FLOWS
For purposes of reporting cash flows, cash does not include segregated or secured cash, as defined in the Commodity Exchange Act. Interest paid during the years ended June 30, 1998, 1997 and 1996 amounted to $1,921,000, $3,013,600, and $4,043,800 respectively. The Company made income tax payments in the amount of $2,390,000, $1,190,000, and $1,184,000 during the years ended June 30, 1998, 1997 and 1996, respectively.
NOTE 14--SALE OF ASSETS
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, no gain on the sale was reflected in the financial statements for the year ended June 30, 1996. Rather, income will be recognized as earned over the five and one-half years after the date of the sale. The sales contract required the principal shareholder to sign a non-competition agreement. As compensation for providing such an agreement, a portion of the purchase price was to be paid to the principal shareholder. The principal shareholder 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 the principal shareholder is being included in revenue by the Company.
A net pre-tax, restructuring charge of $1,556,500, related to the sale, was reflected in the income statement for fiscal year 1996. As all restructuring charges were expensed in 1996, no restructuring charges remain payable as of June 30, 1998. Restructuring charges consisted of the following:
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 as of June 30, 1996 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. Such earnings are included in other revenue in the Statements of Operations.
SCHEDULE II
IFX CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
- -------- (a) Uncollected receivables written off. (b) Collection of receivables previously written off.
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
/s/ Christina S. Donka By: _________________________________ Christina S. Donka Chief Financial Officer
Date: September 16, 1998
POWER OF ATTORNEY
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS CHRISTINA S. DONKA 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.