<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: JULY 31, 2000
DYNAMIC I-T, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
COLORADO 0-12139 82-0379959
(STATE OR OTHER (COMMISSION (IRS EMPLOYER
JURISDICTION OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
</TABLE>
2504 ELEVENTH STREET, SANTA MONICA, CALIFORNIA 90405
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 392-8179
<PAGE> 2
Item 1. Changes in Control of Registrant
The Company amended the Share Purchase Agreement dated January 28, 2000 which
changed said Closing Date from "on or before February 28, 2000" to "on or before
July 31, 2000." As a result, Complex Holdings, LTD. has acquired control of the
Company pursuant to the Share Purchase Agreement for 30,400,000 shares, which
was issued to acquire all of the outstanding common stock of BankNet KFF as
described in Item 2 below.
Item 2. Acquisition or Disposition of Assets
The Company has acquired Banknet KFT, a Hungarian corporation (Banknet).
Consideration was an issuance of 30,400,000 shares of common stock of Dynamic
I-T, Inc.
Banknet KFT is a Hungarian limited liability company and the company was
established in the early 1990's to take advantage of the liberalisation of the
Central and Eastern European telecommunications markets and the pent up demand
that existed.
BankNet started its professional and business activities by introducing
satellite data communication technology in Hungary, then practically unknown to
the general public, and proving that it had the potential to become a
trustworthy player in the data communication market. BankNet installed a hub
which was the first of its kind in Eastern Europe in June 1993.
Banknet provides data communications services within Hungary and neighbouring
states. It owns a hub in Budapest with an installed base of 600 remote sites.
The service is carried on Eutelsat II F4 which has coverage across Europe and
Russia as far as the Urals. The ground equipment is Hughes PES (personal earth
stations) VSATs. Furthermore Banknet operates a number of SCPS connections as
well as a growing Internet business with ISPs providing links and services.
These use a number of different carriers and equipment. It also has hub
operations in Winchester, England and Washington DC. Banknet offers Infonet's
data services for multi national corporate intranets in Hungary through its hub
in Budapest. This is one of the fastest growing business areas in Banknet. Its
customer base is strongly represented in the following sectors -
Banking and insurance
State owned organizations
ISPs (Internet Service Providers)
Multi-National Corporations (mainly Western)
Banknet operates a contract with a Euronet company for services to the banking
sector. This contract is expected to develop to encompass up to 5,000 remote
automatic teller machines ("ATM's") to be sited across Europe.
1
<PAGE> 3
Banknet operates as a service provider for Infonet supplying frame relay
services to over 70 multi-national clients throughout Hungary. Infonet and
Banknet together account for 5% of the total International private data market
in Hungary today.
Banknet has 21 employees, half of these are focused on technical support and
have all been well trained in the technologys that Banknet uses. Service levels
have resulted in high levels of customer satisfaction. The Accounting utilizes a
fully computerized general ledger package and accounts are prepared both to
Hungarian and international IAS and GAAP standards.
Currently, the main functional areas of BankNet's services are as follows:
- data communication and information technology systems integration
- implementation and operation of special-demand private business networks
- applications development and operation in the Infonet world network Internet
services for ISPs and dedicated clients
BankNet holds licences for and offers these services through:
- satellite communication
- optic cables
- microwave system
with the following transport methods:
- Frame Relay
- ATM
HUBs which represent the basis of these services are located in the following
cities:
- Washington DC (United States of America) VSAT/Internet
- Moscow (Russia) VSAT
- Budapest (Hungary) VSAT/SCPC/Internet/Infonet
- Frankfurt (Germany) Infonet
Business Philosophy:
BankNet offers its comprehensive, turn-key services regardless of country
borders, although the primary focus is on Central and Eastern Europe as well as
on trans-Atlantic contacts.
According to BankNet's experience, data communication services can only be
cost-effective for users if telecommunications are utilized through integration
with information technology.
BankNet aims to effectively research the circumstances in which clients use
telecommunications resources in order to assess client demands and negotiate and
evaluate the various technical and business opportunities open to the customer.
Each phase requires a complex approach and the route taken must facilitate later
development, as well as the immediate solution. Banknet is able to adapt its
services to the changes in user needs. BankNet involves the user in network
planning and customization BankNet's alternative proposals always consider and
support users' efforts to increase cost-efficiency.
2
<PAGE> 4
For the selected data communication method, BankNet often uses other technology
rather than VSAT, which proves its dedication to offering clients the optimal
service, regardless of technology.
BankNet offers 24-hour service seven days per week to guarantee immediate error
detection and correction without delay. BankNet's round-the-clock hot-line
service is also available to its users. In case of defects, BankNet goes to the
site in just a few hours and immediately replaces faulty parts. This guarantees
the reliability of BankNet's networks. The guaranteed availability of BankNet's
services is 99.5% in line with our contracts. BankNet becomes a part of
technological development also through its partners who play a leading role in
the development and utilization of new technology - the results of which appear
in BankNet's services.
Main BankNet Networks
Virtual Closed Data Communications VSAT System
BankNet operates Hughes Network System Inc.'s ISBN TM (Integrated Satellite
Business Network) and VSAT (Very Small Aperture Terminal) satellite private
networks in Hungary and all over Europe. These systems support two-way data and
digital sound transmission and broadcast image transmission.
This highly reliable network enables the establishment of a large number of
separate sub-networks by allocating dedicated resources. The size of these
sub-networks or virtual closed data communication VSAT networks varies according
to demand, ranging from a two-terminal communication to the limit resulting from
the application.
BankNet operates this type of network in more than 500 sites and orders for
installation at an additional 400 sites are underway.
Point-to-point and point-to-multipoint Dedicated Networks
In addition to time-share VSAT services, BankNet operates through its technical
partners SCPC (Single Channel Per Carrier) satellite point-to-point and
point-to-multipoint dedicated data, image and sound transmission networks in
Europe and between Europe and North America.
These high-capacity networks offer a wide range of services by utilizing varied
technology (from shared service hub technology, through virtual networks to
dedicated digital connections). They operate at capacities in a range between
9.6 kbps and 8 mbps in the field of data communication (X.25, LAN-LAN
communication, frame relay; interactive and file transfer data communication),
telephone (PABX-PABX communication and private telephone communication) and
videoconferencing.
Point-to-multipoint Digital Microwave Networks
3
<PAGE> 5
BankNet exclusively uses that type of technology which is up to the standard of
satellite telecommunications services. These strict conditions are met in the
operation of a subscriber microwave system.
BankNet represents the Infonet world network in Hungary and Central-Eastern
Europe. Infonet has been developed for closed business communication. It
operates in 187 countries and has distribution and access points in 58
countries.
BankNet has been offering closed network services to public Internet Service
Providers (ISPs) in Hungary and neighbouring countries since 1994 BankNet offers
Internet services to Hungarian users only if they request Internet access in
addition to the virtually closed network services BankNet provides. Such
customers must have separate Internet equipment to qualify for this service. It
is an important strategic decision on the part of BankNet that it offers "End
User" services in Hungary only in this sense, which means that BankNet does not
become a competitor of those Internet service providers for whom it is a carrier
or an access provider. The BankNet technical hub in Budapest operates one router
and one server which control the IP traffic in a network arranged in the form of
star topology. BankNet's Internet network has three hubs: Budapest (TDMA and
SCPC VSAT), Cambridge/London and Washington (both SCPC VSAT). The
Cambridge/London point is expandable to several directions in Africa, Asia and
Europe. The point in Washington is prepared to handle in additional 25
connections at minimum 64 kbps capacity and is connected to Internet by a CISCO
7010 router.
Item 3. Bankruptcy or Receivership
None.
Item 4. Changes in Accountants
None.
Item 5. Other Events
None.
Item 6. Resignation and Appointment of Directors.
None.
Item 7. Financial Statements Pro Forma Financials & Exhibits
Pro Forma Financial Statements of Dynamic I-T, Inc. and Banknet
Kft.
Interim Financial Statements for Banknet Kft. for the period
ended June 30, 2000.
Financial Statements of Banknet Kft. for the years ended
December 31, 1999 and December 31, 1998 which will
have been conformed to US GAAP.
4
<PAGE> 6
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 2, 2000
---------------------
DYNAMIC I-T, INC.
/s/ Raymond King
------------------------
Raymond King
Chief Financial Officer
<PAGE> 7
DYNAMIC I-T, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial statements
present the acquisition of all of the outstanding shares of BankNet Kft.
("BankNet") by Dynamic I-T, Inc. ("Dynamic") in exchange for 30,400,000 shares
of Dynamic.
The transaction has been reflected as a reverse acquisition of Dynamic, a shell
company, effectively a recapitalization of BankNet (the operating
company/accounting acquirer).
The unaudited pro forma condensed consolidated balance sheet gives effect to the
transaction as if it occurred on June 30, 2000.
The unaudited pro forma condensed consolidated statement of operations gives
effect to the transaction as if it occurred on January 1, 1999 and combines the
historical statement of operations of BankNet for the year ended December 31,
1999 with the historical statement of operations of Dynamic for the year ended
March 31, 2000. The information shown is based on numerous assumptions and
estimates and is not necessarily indicative of the results of future operations
of the combined entities or the actual results that would have occurred had the
transaction occurred on January 1, 1999.
<PAGE> 8
DYNAMIC I-T, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
(000's)
<TABLE>
<CAPTION>
ASSETS BankNet Kft. Dynamic I-T, Inc. Adjustments Pro Forma
------ ------------ ----------------- ----------- ---------
<S> <C> <C> <C> <C>
Cash $ 47 $ 272 $ 319
Accounts receivable 1,040 1,040
Other current assets 420 420
Other assets 61 61
Fixed assets 2,147 2,147
------- ------- -------
Totals $3,654 $ 333 $3,987
====== ======= ======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 679 $ 570 $1,249
Accounts payable - related party 513 513
Short-term debt - related party 1,434 258 1,692
Due Dynamic I-T, Inc. 11 $ (11)(A)
Other liabilities 23 23
--------- ----------- ----------- ---------
Total liabilities 2,660 828 (11) 3,477
------- -------- --------- -------
Stockholders' equity (deficiency):
Common stock 4,131 3,714 (1,411)(D) 6,434
Paid-in capital 2,787 (2,787)(B)
Accumulated deficit (5,824) (4,209) 4,209 (C) (5,824)
Foreign currency translation
adjustment (100) (100)
-------- ----------- ----------- --------
Total stockholders' equity
(deficiency) 994 (495) 11 510
-------- -------- --------- --------
Totals $3,654 $ 333 $ - $3,987
====== ======= ========== ======
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
<PAGE> 9
DYNAMIC I-T, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(000's)
<TABLE>
<CAPTION>
BankNet Kft.
Year Ended Dynamic I-T, Inc.
December Year Ended
31, 1999 March 31, 2000 Adjustments Pro Forma
------------ ----------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue $3,598 $3,598
Cost of revenue 2,296 2,296
------- -------
Gross profit 1,302 1,302
Operating expenses (963) $(196) (1,159)
Other expense (2) (2)
---------- --------- ----------
Net income (loss) $ 337 $(196) $ 141
======= ===== =======
Earnings (loss) per share,
basic and diluted $.01 $ -
==== =====
Average shares outstanding 30,400 31,401
====== ======
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
<PAGE> 10
DYNAMIC I-T, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation
:
On July 31, 2000, Dynamic I-T, Inc. ("Dynamic") acquired BankNet
Kft. ("BankNet") in a reverse acquisition transaction whereby,
for accounting purposes, BankNet (the operating company) acquired
Dynamic (the shell company), effectively a recapitalization of
BankNet.
Note 2 - Adjustments:
(A) To eliminate intercompany payable.
(B) To eliminate paid-in capital of BankNet. Such amount was
reclassified to common stock.
(C) To eliminate accumulated deficit of Dynamic.
(D) To reflect net result of (A), (B) and (C) above.
* * *
<PAGE> 11
BANKNET KFT.
UNAUDITED QUARTERLY FINANCIAL
STATEMENTS AS OF JUNE 30, 2000 AND 1999
<PAGE> 12
BANKNET KFT.
UNAUDITED CONDENSED QUARTERLY FINANCIAL STATEMENTS AS OF
JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
TABLE OF CONTENTS: PAGE
-----------------------------------------------------------------------------------
<S> <C>
UNAUDITED BALANCE SHEETS 1
UNAUDITED STATEMENTS OF INCOME 2
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS 3
UNAUDITED CONDENSED NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 4 - 6
INDEPENDENT ACCOUNTANTS' REVIEW REPORT 7
</TABLE>
<PAGE> 13
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
THE STOCKHOLDERS
BANKNET KFT.
We have reviewed the accompanying balance sheet of BankNet Kft. at June 30,
2000, the related statements of income for the three-month and six months
periods ended June 30, 2000 and 1999, and the condensed statements of cash flows
for the six month periods ended June 30, 2000 and 1999. These financial
statements are the responsibility of the company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles in the
United States."
/s/ ERNST & YOUNG
ERNST & YOUNG
Budapest, Hungary
August 8, 2000
1
<PAGE> 14
QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)
BankNet Kft.
June 30, 2000
--------------------------------------------------------------------------------
BANKNET KFT.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(in USD) 2000 1999
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 47,037 $ 27,344
Accounts receivable 1,039,665 1,022,245
Receivable from employees 16,765 15,757
Receivables from related parties 377,985 362,530
Restricted cash 7,059 7,619
Prepaid expenses 18,222 10,482
Other assets 968 1,045
---------------------------------------------------------------------------------------
Total Current Assets 1,507,701 1,447,022
---------------------------------------------------------------------------------------
Property, plant and equipment
HUB and telecom 1,175,635 1,179,055
Very small aperture terminals and related
Equipment 1,517,800 1,673,598
Infonet assets 306,085 330,402
Office equipment 140,364 148,483
Leasehold improvements 158,789 169,155
Less allowances for depreciation (1,151,640) (1,120,030)
------------ -------------
Total property, plant and equipment 2,147,033 2,380,663
---------------------------------------------------------------------------------------
Total Assets $ 3,654,734 $ 3,827,685
---------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 679,303 $ 881,503
Related party payables 513,592 428,330
Related party short-term debt 1,433,927 1,568,470
---------------------------------------------------------------------------------------
Total Current Liabilities 2,626,822 2,878,303
---------------------------------------------------------------------------------------
Long-term payable to affiliates - Satnet Ltd
assets - 193,913
Loan from Dynamic I-T 11,006 -
Other long-term liabilities 23,498 36,838
------------
---------------------------------------------------------------------------------------
Total Liabilities 2,661,326 3,109,054
---------------------------------------------------------------------------------------
Stockholders' Equity
Issued capital 4,131,361 4,131,361
Additional paid-in capital 2,787,145 2,715,437
Accumulated deficit (5,824,544) (6,154,543)
Cumulative translation adjustment (100,554) 26,376
---------------------------------------------------------------------------------------
Total Stockholders' Equity 993,408 718,631
---------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 3,654,734 $ 3,827,685
---------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 15
QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)
BankNet Kft.
June 30, 2000
--------------------------------------------------------------------------------
BANKNET KFT.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
(in USD) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenue from telecommunication services $ 826,909 $ 855,444 $ 1,848,785 $ 1,781,607
Cost of telecommunications services (599,700) (568,058) (1,157,849) (1,125,507)
------------------------------------------------------------------------------------------------------------------
GROSS MARGIN 227,209 287,386 690,936 656,100
------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses (109,365) (286,166) (324,792) (621,159)
------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 117,844 1,220 366,144 34,941
------------------------------------------------------------------------------------------------------------------
Other income/(expense):
Interest income 371 331 758 620
Interest expense - - - (7,334)
Foreign currency gains/(losses) - net (16,289) 10,571 (36,903) (73,342)
------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 101,926 12,122 329,999 (45,115)
------------------------------------------------------------------------------------------------------------------
Income taxes - - - -
------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 101,926 $ 12,122 $ 329,999 $ (45,115)
------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 16
QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)
BankNet Kft.
June 30, 2000
--------------------------------------------------------------------------------
BANKNET KFT.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(in USD) Six Months Ended June 30,
2000 1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 217,105 $ (108,427)
-----------------------------------------------------------------------------------------------------------
Investing Activities
Purchases of property and equipment (209,765) (44,323)
-----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (209,765) (44,323)
-----------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from Dynamic I-T loan 22,144 -
Increase(decrease) in related party loans (20,000) 175,876
Repayment of capital lease - (17,758)
-----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,144 158,118
-----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 10,209 (8,986)
-----------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 19,693 (3,618)
Cash and cash equivalents at beginning of year 27,344 64,841
-----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 47,037 $ 61,223
-----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE> 17
CONDENSED NOTES TO THE QUARTERLY
FINANCIAL STATEMENTS (UNAUDITED)
BankNet Kft.
June 30, 2000
--------------------------------------------------------------------------------
NOTE 1: BASIS OF PRESENTATION
BankNet Kft. ("BankNet" or the "Company") is a limited liability company
incorporated under the laws of the Republic of Hungary. The Company provides a
broad range of telecommunication services consisting of terrestrial data,
satellite data and Internet services to Hungarian and multinational corporations
in Hungary and Central Europe, through the operation of its telecommunications
hub located in Budapest and with international gateway partners.
The Company is 100% owned by Satnet Ltd. On February 14, 2000, Satnet agreed to
sell its investment in BankNet Kft. to Dynamic I-T, Inc., Colorado, USA, in
exchange for 30,400,000 shares of Dynamic I-T. This agreement was subsequently
revised to be effective on July 31, 2000. This will be accounted for as a
reverse merger in the consolidated financial statements of Dynamic I-T Inc. as
of September 30, 2000 to be filed with the Securities and Exchange Commission.
These consolidated financial statements will reflect the fair values of the
assets and liabilities of Dynamic I-T Inc. while the assets and liabilities of
BankNet will continue to be carried at their book values.
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three
months period and six months period ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2000. These quarterly financial statements should be read in conjunction with
the audited financial statements and the footnotes thereto for the year ended
December 31, 1999.
PRINCIPLES OF ACCOUNTING
The Company maintains its official accounting records and prepares financial
statements for domestic purposes in accordance with the accounting regulations
of Hungary. The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in the United States.
Hungarian Accounting Law varies in certain significant respects from US GAAP.
Accordingly, the Company has recorded certain adjustments in order to present
the accompanying financial statements in accordance with US GAAP.
FOREIGN CURRENCY TRANSLATION
The Company follows a translation policy in accordance with SFAS No. 52,
"Foreign Currency Translation," (as amended by SFAS No. 130, "Reporting
Comprehensive Income"). The functional currency of the Company is Hungarian
Forint. The United States Dollar has been designated as the reporting currency.
Transactions arising in foreign currency are translated into the functional
currency at the rate of exchange at the date of the transaction. Assets and
liabilities denominated in foreign currencies are translated into Hungarian
Forints at the rates of exchange at the balance sheet date. Income and expense
accounts are translated into USD, the reporting currency, at average monthly
rates of exchange. The resultant translation adjustments are included in other
comprehensive income, a separate component of stockholders' equity.
USES OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of these financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect amounts in the financial statements and accompanying
notes and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
5
<PAGE> 18
CONDENSED NOTES TO THE QUARTERLY
FINANCIAL STATEMENTS (UNAUDITED)
BankNet Kft.
June 30, 2000
--------------------------------------------------------------------------------
NOTE 2: STATUTORY REDUCED EQUITY
Under the strict terms of the Hungarian Companies Law, the Company has not met
the technical requirements of capitalization. According to this law, the equity
must at the minimum equal to half of the issued capital. The Company's equity
based on the accounts prepared in accordance with Hungarian Accounting Law is
approximately $ 112,813 at June 30, 2000.
The stockholders passed a resolution dated July 28, 2000 in which US$ 1,438,413
of debt due to stockholders was forgiven. Such debt forgiveness increases
BankNet's Hungarian equity position which results in compliance with the capital
maintenance limits.
NOTE 3: LOAN FROM DYNAMIC I-T
The Company signed a loan agreement with Dynamic I-T Inc, USA on May 2, 2000. As
per this agreement, Dynamic I-T has agreed to provide a loan of US$ 200,000 (two
hundred thousand US dollars), which can be drawn by the Company in HUF
instalments. This loan is for a period of three years. The loan is repayable in
US Dollars, with the exact amount payable in respect of each HUF instalment
being calculated according to the HUF/USD exchange rate that was used when the
particular instalment was credited on the Borrower's bank account. The loan is
unsecured and carries an interest rate of 5% per annum. Out of the above
mentioned loan, the Company has drawn a sum of HUF 6,404,931 (or US $ 22,144) on
May 5, 2000.
NOTE 4: ADDITIONAL PAID IN CAPITAL
The Company imported certain equipment into Hungary on temporary import status
from Satnet Ltd. until December 31, 1998, in order to defer payment of customs
duty over a 50 month period at 2% of the relevant duty per month at which point
the remaining customs duty is paid by the Company. During the period of
temporary import status the Company utilizes these assets for providing services
to its customers and generating revenues. Under the agreement between Satnet Ltd
and BankNet, the risks and awards have passed to BankNet. Under the Hungarian
law the legal title to these assets remains with Satnet Ltd. up to the point of
final import clearance. These assets are recognized and depreciated from the
date they were taken into service and a corresponding liability to Satnet Ltd.
was recognized. Upon final import clearance BankNet recognizes a liability in
its statutory records to Satnet based on the original value as reduced by 20%
annually as permitted by the Hungarian customs authority. The difference between
this value and the purchase price is effectively contributed by Satnet to
BankNet and has consequently been shown as additional paid in capital. In the
quarter ended June 30, 2000 this amounted to US $ 71,707.
6
<PAGE> 19
CONDENSED NOTES TO THE QUARTERLY
FINANCIAL STATEMENTS (UNAUDITED)
BankNet Kft.
June 30, 2000
--------------------------------------------------------------------------------
NOTE 5: SEGMENT DISCLOSURE AND RELATED INFORMATION
The Company operates in four segments within the telecommunications service
provision industry. These are satellite data transmission, terrestrial data
transmission and frame relay services, Internet service provision and other
services. The satellite data transmission segment provides data communication
services, using VSAT technology, to banks, governmental organizations, insurance
companies and other corporations mainly in Hungary and in other parts of Europe.
Terrestrial data and frame relay services are provided to Infonet's
multinational clients in Hungary, under a contract with Infonet, USA. Internet
services are provided to Internet service providers and local Hungarian
companies. Other services include provision of ground operations for major
multinational telecommunication companies in Hungary and single channel per
carrier links.
The above mentioned segments are managed and evaluated separately because each
segment possesses different economic characteristics requiring different
marketing strategies.
The accounting policies adopted for each segment are the same as those described
in the summary of significant accounting policies. The Company's management
evaluates performance based on operating contribution, where segment revenues
are reduced by those costs that are allocable to the segments. Non-allocable
general, administrative, and marketing costs are treated as Corporate costs and
not charged to the segments.
The summarised financial information concerning the Company's reportable
segments is shown in the following table:
<TABLE>
<CAPTION>
OTHER
(in USD) VSAT INFONET INTERNET SERVICES TOTAL
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 2000
Total revenue $ 325,490 $ 342,062 $ 73,284 $ 86,073 $ 826,909
Operating Income 17,968 155,872 (3,479) 25,276 195,637
---------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1999
Total revenue $ 388,771 $ 255,911 $ 84,995 $ 125,767 $ 855,444
Operating income 70,550 70,929 (11,262) 26,342 156,559
---------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2000
Total revenue $ 725,357 $ 766,661 $ 130,050 $ 226,717 $ 1,848,785
Operating Income 134,075 391,661 (25,485) 41,023 541,274
---------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999
Total revenue $ 835,840 $ 477,368 $ 204,617 $ 263,782 $ 1,781,607
Operating Income 144,913 146,594 (977) 63,955 354,485
---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
RECONCILIATION OF OPERATING INCOME FROM ENDED ENDED ENDED ENDED
REPORTABLE SEGMENTS TO NET INCOME / JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
(LOSS) BEFORE INCOME TAXES
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Income from reporatable segments $ 195,637 $ 156,559 $ 541,274 $ 354,485
-------------------------------------------------------------------------------------------------------------
Other non-allocable costs (77,793) (155,339) (175,130) (319,544)
-------------------------------------------------------------------------------------------------------------
Interest income / (expense) - net 371 331 758 (6,714)
-------------------------------------------------------------------------------------------------------------
Foreign currency gains / (-) losses (16,289) 10,571 (36,903) (73,342)
-------------------------------------------------------------------------------------------------------------
Income / (Loss) before income taxes $ 101,926 $ 12,122 $ 329,999 $ (45,115)
-------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 20
BANKNET KFT.
FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
TABLE OF CONTENTS: PAGE
------------------------------------------------------------------------------------
<S> <C>
REPORT OF INDEPENDENT AUDITORS 1
BALANCE SHEETS 2
STATEMENTS OF INCOME 3
STATEMENTS OF CASH FLOWS 4
STATEMENT OF STOCKHOLDERS' EQUITY 5
NOTES TO THE FINANCIAL STATEMENTS 6 - 16
</TABLE>
<PAGE> 21
REPORT OF INDEPENDENT AUDITORS
THE STOCKHOLDERS
BANKNET KFT.
We have audited the accompanying balance sheets of BankNet Kft. as of December
31, 1999 and 1998, and the related statements of operations, cash flows, and
stockholders' equity for each of the two years in the period ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 BankNet Kft. at December 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG
ERNST & YOUNG
Budapest, Hungary
April 11, 2000
1
<PAGE> 22
NOTES TO THE FINANCIAL STATEMENTS
BankNet Kft.
December 31, 1999
--------------------------------------------------------------------------------
BANKNET KFT.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(in USD) Note 1999 1998
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 27,344 $ 64,841
Accounts receivable 3 1,022,245 1,243,822
Receivable from employees 15,757 836
Receivables from related parties 8 362,530 70,064
Restricted cash 7,619 8,933
Prepaid expenses 10,482 116
Other assets 1,045 1,244
---------------------------------------------------------------------------------------
Total Current Assets 1,447,022 1,389,856
---------------------------------------------------------------------------------------
Property, plant and equipment
HUB and telecom 1,179,055 1,283,973
Very small aperture terminals and related
equipment 1,673,598 1,814,049
Infonet assets 330,402 387,358
Office equipment 148,483 162,180
Leasehold improvements 169,155 158,800
Less allowances for depreciation (1,120,030) (1,070,022)
------------ -------------
Total property, plant and equipment 2,380,663 2,736,338
---------------------------------------------------------------------------------------
Total Assets $ 3,827,685 $ 4,126,194
---------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses 3 $ 881,503 $ 1,895,780
Related party payables 8 428,330 -
Short-term debt 4 - 600,000
Related party short-term debt 8 1,568,470 443,307
Current portion of obligations under
capital leases - 19,685
---------------------------------------------------------------------------------------
Total Current Liabilities 2,878,303 2,958,772
---------------------------------------------------------------------------------------
Long-term payable to affiliates - Satnet Ltd
assets 193,913 639,695
Other long-term liabilities 36,838 84,592
---------------------------------------------------------------------------------------
Total Liabilities 3,109,054 3,683,059
---------------------------------------------------------------------------------------
Stockholders' Equity
Issued capital 5 4,131,361 4,131,361
Additional paid-in capital 5 2,715,437 2,715,437
Accumulated deficit (6,154,543) (6,491,801)
Cumulative translation adjustment 5 26,376 88,138
---------------------------------------------------------------------------------------
Total Stockholders' Equity 718,631 443,135
---------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 3,827,685 $ 4,126,194
---------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 23
NOTES TO THE FINANCIAL STATEMENTS
BankNet Kft.
December 31, 1999
--------------------------------------------------------------------------------
BANKNET KFT.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
(in USD) Note 1999 1998
<S> <C> <C> <C>
Revenue from telecommunication services $ 3,598,819 $ 4,491,186
Cost of telecommunications services (2,295,935) (3,870,697)
---------------------------------------------------------------------------------
GROSS MARGIN 1,302,884 620,489
---------------------------------------------------------------------------------
Selling, general and administrative
expenses (962,873) (1,407,820)
---------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 340,011 (787,331)
---------------------------------------------------------------------------------
Other income/(expense):
Interest income 1,583 3,132
Interest expense (6,979) (54,727)
Foreign currency gains/(losses) - net 2,643 (98,305)
Gain on sale of fixed assets - 30,857
---------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 337,258 (906,374)
---------------------------------------------------------------------------------
Income taxes 6 - -
---------------------------------------------------------------------------------
NET INCOME (LOSS) $ 337,258 $ (906,374))
---------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 24
NOTES TO THE FINANCIAL STATEMENTS
BankNet Kft.
December 31, 1999
--------------------------------------------------------------------------------
BANKNET KFT.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in USD) Year Ended December 31,
1999 1998
<S> <C> <C>
Operating Activities
Net income/loss $ 337,258 $ (906,374)
Adjustments to reconcile net income/loss to net cash used in operating
activities:
Depreciation and amortization 236,912 278,042
Revenue realized on assets contributed by Infonet - -
Gain on sale of fixed assets - (30,857)
Changes in assets and liabilities:
Accounts receivable 40,920 (134,166)
Receivables from employees (15,911) (859)
Receivables from related parties (320,218) (563,084)
Prepaid expenses (10,982) (119)
Other assets 17 -
Accounts payable and accrued expenses (327,539) 979,060
Related party payables 453,016 241,819
Obligations under capital lease current portion (17,758) (34,301)
Other current liabilities 272 (9,161)
Lease obligations, less current portion (94,014)
Long-term liabilities from affiliates (371,992) -
Other long-term liabilities (37,351) -
-----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES (33,356) (274,014)
-----------------------------------------------------------------------------------------------------------
Investing Activities
Purchases of property and equipment (285,973) (290,798)
Proceeds on sale of fixed assets - 433,321
-----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (285,973) 142,523
-----------------------------------------------------------------------------------------------------------
Financing Activities
Increase in related party loans 248,354 -
-----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 248,354 -
-----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 33,478 13,403
-----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (37,497) (118,088)
Cash and cash equivalents at beginning of year 64,841 182,929
-----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 27,344 $ 64,841
-----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 25
NOTES TO THE FINANCIAL STATEMENTS
BankNet Kft.
December 31, 1999
--------------------------------------------------------------------------------
BANKNET KFT.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Additional Accumulated translation
Issued paid-in deficit adjustment Total
capital capital
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 $ 4,131,361 $ 1,852,782 $ (5,585,427) $ 90,058 $ 488,774
Comprehensive income:
Translation adjustment (1,920) (1,920)
Net loss (906,374) (906,374)
------------
Total comprehensive income (908,294)
Fixed assets contribution from 98,381 98,381
shareholder
Forgiveness of related party loans 764,274 764,274
-----------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 4,131,361 $ 2,715,437 $ (6,491,801) $ 88,138 $ 443,135
-----------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Translation adjustment (61,762) (61,762)
Net income 337,258 337,258
------------
Total comprehensive income 275,496
-----------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ 4,131,361 $ 2,715,437 $ (6,154,543) $ 26,376 $ 718,631
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 26
NOTES TO THE FINANCIAL STATEMENTS
BankNet Kft.
December 31, 1999
--------------------------------------------------------------------------------
NOTE 1: NATURE OF BUSINESS OPERATIONS
BankNet Kft. ("BankNet" or the "Company") is a limited liability company
incorporated under the laws of the Republic of Hungary. The Company provides a
broad range of telecommunication services consisting of terrestrial data,
satellite data and Internet services to Hungarian and multinational corporations
in Hungary and Central Europe, through the operation of its telecommunications
hub located in Budapest and with international gateway partners.
The Company was 100% owned by Satnet Ltd, until February 14, 2000.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF ACCOUNTING
The Company maintains its official accounting records and prepares financial
statements for domestic purposes in accordance with the accounting regulations
of Hungary. The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in the United States.
Hungarian Accounting Law varies in certain significant respects from US GAAP.
Accordingly, the Company has recorded certain adjustments in order to present
the accompanying financial statements in accordance with US GAAP.
CASH AND CASH EQUIVALENTS
The Company classifies cash on hand and deposits in banks as cash and cash
equivalents. The Company had $7,619 and $8,933 of restricted cash at December
31, 1999 and 1998, respectively. The restricted cash is related to cash held on
bank deposit for a performance guarantee, which expires on December 31, 2000.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets - fifteen
years for telecommunications equipment and five years for furniture, fixtures
and equipment and other assets. Maintenance and repairs are charged to expense
as incurred.
The Company has received assets without any consideration from Infonet Inc., a
multinational telecommunication company, to facilitate the development of
Infonet business in Hungary. These assets were given to BankNet pursuant to a
Network Node Agreement dated 1st April, 1996 between BankNet Kft. Hungary and
IINS Inc., USA. According to this agreement, BankNet agrees to use these assets
wholly and exclusively for the provision of services mentioned in the agreement
and not to transfer, assign, or otherwise dispose, all or any part of the
hardware without Infonet's prior written consent. These assets have been
recorded at fair value and depreciated over their estimated useful lives. Based
on the agreement, BankNet pays a guaranteed monthly minimum fee to Infonet for
assets usage for a period of three years. Consequently a corresponding capital
lease liability has been shown by reference to these minimum payments and the
remaining amounts included as revenue.
6
<PAGE> 27
NOTES TO THE FINANCIAL STATEMENTS
BankNet Kft.
December 31, 1999
--------------------------------------------------------------------------------
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of," long-lived assets to be
held and used by the Company are reviewed to determine whether an event or
change in circumstances indicates that the carrying amount of the asset may not
be recoverable. For long-lived assets to be held and used, the Company bases its
evaluation on such impairment indicators as the nature of the assets, the future
economic benefit of the assets, any historical or future profitability
measurements, as well as other external market conditions or factors that may be
present. If such impairment indicators are present or other factors exist that
indicate that the carrying amount of the asset may not be recoverable, the
Company determines whether an impairment has occurred through the use of an
undiscounted cash flows analysis of assets at the lowest level for which
identifiable cash flows exist. If impairment has occurred, the Company
recognizes a loss for the difference between the carrying amount and the
estimated value of the asset. The fair value of the asset is measured using
discounted cash flow analysis or other valuation techniques. No impairment
expense was recognized in 1999 or 1998.
INCOME TAXES
Taxation is provided in accordance with Hungarian fiscal regulations. The
Company uses the liability method of accounting for income taxes. Deferred
income taxes result from temporary differences between the tax basis of assets
and liabilities and the basis as reported in the financial statements.
FOREIGN CURRENCY TRANSLATION
The Company follows a translation policy in accordance with SFAS No. 52,
"Foreign Currency Translation," (as amended by SFAS No. 130, "Reporting
Comprehensive Income"). The functional currency of the Company is Hungarian
Forint. The United States Dollar has been designated as the reporting currency.
Transactions arising in foreign currency are translated into the functional
currency at the rate of exchange at the date of the transaction. Assets and
liabilities denominated in foreign currencies are translated into Hungarian
Forints at the rates of exchange at the balance sheet date. Income and expense
accounts are translated into USD, the reporting currency, at average monthly
rates of exchange. The resultant translation adjustments are included in other
comprehensive income, a separate component of stockholders' equity.
REVENUE RECOGNITION
Revenue from telecommunications services is recognized based on a fixed monthly
fee and the volume of data traffic. Revenue from connection fees and other
services are recognized when the connections are made and the services are
provided. Billings received in advance of services being performed are deferred
and recognized as revenue as the service is performed.
ADVERTISING COSTS
All costs associated with advertising are expensed in the year incurred.
Advertising expenses included in selling, administrative and general expenses
were $3,108 and $34,053 in 1999 and 1998, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, accounts receivable, accounts payable and accrued
liabilities approximate their fair value.
7
<PAGE> 28
NOTES TO THE FINANCIAL STATEMENTS
BankNet Kft.
December 31, 1999
--------------------------------------------------------------------------------
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of cash equivalents and accounts receivable. The
Company restricts investments in cash equivalents to financial institutions with
high credit standing. The Company extends credit to various customers and
establishes an allowance for doubtful accounts for specific customers that it
determines to have significant credit risk. The Company provides allowances for
credit losses when necessary.
USES OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of these financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect amounts in the financial statements and accompanying
notes and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3: SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
(in USD) DECEMBER 31,
1999 1998
ACCOUNTS RECEIVABLE CONSISTS OF:
<S> <C> <C>
Trade accounts receivable $1,418,850 $1,546,010
Taxes receivable (VAT) 143,850 151,896
Other receivables 7,315 7,093
Less allowance for doubtful accounts (547,770) (461,177)
--------------- --------------
Total accounts receivable, net $1,022,245 $1,243,822
--------------- --------------
</TABLE>
<TABLE>
<CAPTION>
(in USD) DECEMBER 31,
1999 1998
<S> <C> <C>
ACCOUNTS PAYABLE AND ACCRUED EXPENSES CONSISTS OF:
Accounts payable $ 662,783 $1,333,545
Taxes payable:
Late interest on social security 64,407 37,459
Customs and import VAT 32,247 29,676
Local tax 11,346 29,611
Personal income tax 12,462 130,127
Employer and employee contribution - 18,278
Social security 1,251 54,069
Wage guarantee fund 198 232
Pension fund 1,905 803
Educational contribution - 8,078
Accrued telecommunications expense 2,796 148,619
Accrued late fee on taxes and social security - 74,335
Accrued customs duties and interest 47,196 -
Accrued late interest on payables 33,047 -
Other accrued expenses 11,865 30,948
------------- --------------
Total accounts payable and accrued expenses $ 881,503 $1,895,780
------------- --------------
</TABLE>
8
<PAGE> 29
NOTES TO THE FINANCIAL STATEMENTS
BankNet Kft.
December 31, 1999
--------------------------------------------------------------------------------
NOTE 4: SHORT-TERM DEBT
The Company held a short-term loan of $600,000 with an annual interest rate of
7% from CIB Kozep-europai Nemzetkozi Bank Rt. until February 1999. The funds
were advanced for repayment of the loan by Satnet Ltd. and this amount was added
to a short-term loan from Satnet Ltd.
NOTE 5: STOCKHOLDERS' EQUITY
ISSUED CAPITAL
As of December 31, 1999 and 1998, the issued capital in the amount of $
4,131,361 was solely held by Satnet Ltd.
ADDITIONAL PAID-IN-CAPITAL
The additional paid-in-capital is composed of the following:
<TABLE>
<CAPTION>
(in USD)
---------------------------------------------------------------------------
<S> <C>
Additional capital related to capital increase in 1995 $ 4,898
Related party loan forgiveness 1997 1,548,447
Assets received from Satnet Ltd., 1993-1998 397,818
Related party loan forgiveness 1998 764,274
---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 AND 1998 $ 2,715,437
---------------------------------------------------------------------------
</TABLE>
A loan of $1,548,447 to finance working capital requirements of the Company from
its sole stockholder, Satnet Ltd. was forgiven in 1997.
CUMULATIVE TRANSLATION ADJUSTMENT
The adjustment, which arises due to translation of the income statement at the
average rate of exchange, assets and liabilities at the exchange rate prevailing
at the balance sheet date, and issued capital and additional paid-in-capital at
the historical rate, has been included as a translation reserve in the
stockholder's equity.
DISTRIBUTABLE EARNINGS
The Company has no distributable earnings. Retained earnings available for
distribution are based on the financial statements of the Company prepared in
accordance with Hungarian Accounting Law, as opposed to these accounts prepared
in accordance with the accounting principles generally accepted in the United
States. The Company's accumulated deficit in accordance with the Hungarian
Accounting Law was $1,827,764 and $2,839,839 as of December 31, 1999 and 1998,
respectively.
DIVIDENDS
The Company has never paid dividends.
9
<PAGE> 30
NOTES TO THE FINANCIAL STATEMENTS
BankNet Kft.
December 31, 1999
--------------------------------------------------------------------------------
NOTE 6: INCOME TAXES
The Company did not pay any taxes on income in 1999 and 1998. The Company had a
100% exemption from payment of income taxes until December 31, 1998. For the
next 5 years, from 1999 to 2003, the Company benefits from a 60% exemption.
The reconciliation of the net income to taxable income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(in USD) 1999 1998
--------------------------------------------------------------------------
<S> <C> <C>
Income (loss) before taxes $ 337,259 $ (906,374)
Tax base decreasing items (417,252) (410,188)
Tax base increasing items 694,082 1,463,958
Related party debt forgiveness - 1,374,977
--------------------------------------------------------------------------
TAXABLE INCOME 614,089 1,522,373
--------------------------------------------------------------------------
Usage of loss carryforwards
from 1993, 1994, 1995 and 1996 (614,089) (1,522,373)
--------------------------------------------------------------------------
INCOME TAX LIABILITY $ 0 $ 0
--------------------------------------------------------------------------
</TABLE>
BankNet is subject to periodic audit by the Hungarian Tax Authority ("APEH").
Because the application of tax laws and regulations to many types of
transactions is susceptible to varying interpretations, amounts reported in the
financial statements could be changed at a later date upon final determination
by the tax authorities. As of December 31, 1999, the tax authorities have not
completed tax inspections at BankNet.
Deferred tax assets and liabilities are recorded based on temporary differences
between earnings as reported in the financial statements and earnings for income
tax purposes. The following table summarizes major components of the Company's
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
(in USD) 1999 1998
--------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Loss carry-forwards $ 93,600 $ 158,747
Other deferred tax assets 67,862 100,719
------------ -------------
Total deferred tax assets 161,462 259,466
--------------------------------------------------------------------------
DEFERRED TAX LIABILITY (35,244) (40,387)
--------------------------------------------------------------------------
NET DEFERRED TAX ASSET 126,218 219,079
--------------------------------------------------------------------------
less: valuation allowance (126,218) (219,079)
--------------------------------------------------------------------------
TOTAL $ 0 $ 0
--------------------------------------------------------------------------
</TABLE>
Due to the uncertainty of realization of the deferred income tax assets a 100%
valuation allowance was recorded against these assets.
As of December 31, 1999, the Company had loss carry-forwards for Hungarian
income tax purposes of approximately $1,300,000. The utilization of the
Company's loss carry-forwards is subject to a five year limitation. The loss
carry-forwards expire as follows:
<TABLE>
<CAPTION>
(in USD)
---------------------------------------------------
<S> <C>
December 31, 2000 $ 254,605
2001 466,296
2002 579,099
---------------------------------------------------
TOTAL $ 1,300,000
---------------------------------------------------
</TABLE>
10
<PAGE> 31
NOTES TO THE FINANCIAL STATEMENTS
BankNet Kft.
December 31, 1999
--------------------------------------------------------------------------------
NOTE 7: COMMITMENTS AND CONTINGENCIES
LEASES
The Company operates in leased facilities. The lease contract for the premises
is cancelable upon 12-month cancellation notice after the term of the lease has
expired on March 1, 2003.
The Company also leases telecommunication equipment, VSATs and routers, under
operating lease agreements. The lease term for VSATs is 60 months and the
contracts are non-cancelable.
The routers are leased for a term of 36 months. Lease agreements for routers can
be canceled upon 60 days notice. The master agreement under which routers are
leased offers the company an option to buy these routers at a nominal value at
the end of the lease period.
In addition, the Company leases cars. The car lease agreement has a cancellation
clause of 3 months and expires in August, 2000.
Rent expense under operating leases consists of:
<TABLE>
<CAPTION>
(in USD) 1999 1998
--------------------------------------------------------------
<S> <C> <C>
Operating facilities $ 133,339 $ 174,290
VSATs 33,284 26,054
Routers 66,724 25,300
Car rentals 33,557 53,559
--------------------------------------------------------------
TOTAL $ 266,904 $ 279,203
--------------------------------------------------------------
</TABLE>
Future minimum payments, by year and in the aggregate, under non-cancelable
operating leases with initial or remaining terms in excess of one year as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
<S> <C>
December 31, 2000 $ 79,691
2001 79,691
2002 93,552
2003 22,843
-------------------------------------------------------
TOTAL MINIMUM LEASE PAYMENTS $275,777
-------------------------------------------------------
</TABLE>
PERFORMANCE GUARANTEE
The Company has obtained a bank guarantee in the amount of $7,619 for
performance of its services to one customer. The guarantee is covered by deposit
account in full amount and expires on December 31, 2000.
11
<PAGE> 32
NOTES TO THE FINANCIAL STATEMENTS
BankNet Kft.
December 31, 1999
--------------------------------------------------------------------------------
NOTE 7: COMMITMENTS AND CONTINGENCIES (CONTINUED)
STATUTORY NEGATIVE EQUITY
Under the strict terms of the Hungarian Companies Law, the Company has not met
the technical requirements of capitalization. According to this law, the equity
must at the minimum equal half of the issued capital. The Company's equity
based on the accounts prepared in accordance with Hungarian Accounting Law is ($
392,416) at December 31, 1999.
The Company must resolve this issue before June 16, 2000, otherwise the Company
could be subject to Hungarian Court of Registration proceedings. Depending on
the severity of the cause, the Court of Registration may make any of the
following decisions: give written notice to the company to restore lawful
operations; impose a fine between $190 and $1,900 on the company, suspend or
annul the resolution of the shareholders and may call for a new resolution if
necessary, summon the company's board to ensure lawful operations, suspend the
company's operations for a certain period of time, or forbid further operations
and dissolve the company if lawful operations cannot be ensured otherwise.
Management's plans to comply with Hungarian capital maintenance regulations
include debt forgiveness, contribution-in-kind of assets, and repurchase of
revenue stream. Management is confident that one or a combination of these
options will result in the necessary compliance.
NOTE 8: RELATED PARTY TRANSACTIONS
Related parties of BankNet are defined as companies in which Mannai Corporation,
Doha, Qatar is a majority shareholder.
Related party transactions include provision of telecommunication services to
related parties. The Company generated revenue provided services to the
following related parties:
<TABLE>
<CAPTION>
(in USD) 1999 1998
--------------------------------------------------------------------------
<S> <C> <C>
Ramor Communications Ltd., Cyprus $171,729 $342,214
STNS Ltd., UK - 835,394
--------------------------------------------------------------------------
</TABLE>
The Company imported certain equipment into Hungary on temporary import status
from Satnet Ltd. until December 31, 1998, in order to defer payment of customs
duty over a 50 month period at 2% of the relevant duty per month at which point
the remaining customs duty is paid by the Company. During the period of
temporary import status the Company utilizes these assets for providing services
to its customers and generating revenues. Under the agreement between Satnet Ltd
and BankNet, the risks and awards have passed to BankNet. Under the Hungarian
law the legal title to these assets remains with Satnet Ltd. up to the point of
final import clearance. These assets are recognized and depreciated from the
date they were taken into service and a corresponding liability to Satnet Ltd.
was recognized. These liabilities have been forgiven and consequently the
amounts are shown as additional paid-in-capital in the financial statements. The
net value of the assets with temporary import status is $469,468 and $598,686
at December 31, 1999 and 1998, respectively. The liability of BankNet to Satnet
Ltd. regarding these assets as of December 31, 1999 and 1998 was $545,636 and
$639,695, respectively.
The Company received short-term interest free funding from its sole stockholder,
Satnet Ltd., during 1999 and 1998. Such funds were paid directly to BankNet or
to its creditors in discharge of BankNet's obligations. These were accounted for
by increasing the short-term funding from Satnet Ltd.
12
<PAGE> 33
NOTES TO THE FINANCIAL STATEMENTS
BankNet Kft.
December 31, 1999
--------------------------------------------------------------------------------
NOTE 8: RELATED PARTY TRANSACTIONS (CONTINUED)
BankNet and its related parties agreed to forgive a sum of $764,274 during 1998.
The loan forgiveness has been accounted for as an additional capital
contribution as shown below:
<TABLE>
<S> <C>
Satnet Ltd. 708,837
Satnet Ltd. 616,100
Mannai Investment Ltd. 40,404
Mannai Telecommunications Ltd. 264,196
Mannai Corporation 552,791
------------------------------------------------------
TOTAL LIABILITIES FORGIVEN 2,182,328
------------------------------------------------------
Satcom Telecommunications 21,239
Ramor Communications Ltd 313,829
Satellite News Service 1,082,986
------------------------------------------------------
TOTAL RECEIVABLES FORGIVEN 1,418,054
------------------------------------------------------
NET FORGIVENESS 764,274
------------------------------------------------------
</TABLE>
The year end balances with related parties comprise the following:
<TABLE>
<CAPTION>
(in USD) 1999 1998
----------------------------------------------------------------------------
<S> <C> <C>
RECEIVABLES:
Ramor Communications Ltd. $ 36,460 -
Satnet Ltd. 326,070 $ 70,064
----------------------------------------------------------------------------
PAYABLES:
Satnet Ltd. short-term $ 428,330 $ -
Long-term 193,913 639,695
----------------------------------------------------------------------------
SHORT-TERM INTEREST FREE LOAN:
Satnet Ltd., $1,568,470 $ 443,307
----------------------------------------------------------------------------
</TABLE>
NOTE 9: SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes non-cash investing and financing activities for
the Company:
<TABLE>
<CAPTION>
(in USD)
---------------------------------------------------------------------------------------------------------
<S> <C>
1999
The Company's sole stockholder, Satnet Ltd. repaid the Company's
bank loan (see NOTE 4) $ 603,122
---------------------------------------------------------------------------------------------------------
1998
The Company received assets from Infonet without any consideration (see NOTE 2) $ 72,134
The Company received assets from Satnet Ltd. without any consideration (see NOTE 5) 98,381
Net forgiveness of the Satnet group to BankNet Kft. (see NOTE 5) 764,274
---------------------------------------------------------------------------------------------------------
</TABLE>
The following table discloses other supplemental cash flow information:
<TABLE>
<CAPTION>
Cash paid during the year for: 1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Income taxes $ - $ -
Interest 6,979 54,727
----------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 34
NOTES TO THE FINANCIAL STATEMENTS
BankNet Kft.
December 31, 1999
--------------------------------------------------------------------------------
NOTE 10: SEGMENT DISCLOSURE AND RELATED INFORMATION
The Company operates in four segments within the telecommunications service
provision industry. These are satellite data transmission, terrestrial data
transmission and frame relay services, Internet service provision and other
services. The satellite data transmission segment provides data communication
services, using VSAT technology, to banks, governmental organizations, insurance
companies and other corporations mainly in Hungary and in other parts of Europe.
Terrestrial data and frame relay services are provided to Infonet's
multinational clients in Hungary, under a contract with Infonet, USA. Internet
services are provided to Internet service providers and local Hungarian
companies. Other services include provision of ground operations for major
multinational telecommunication companies in Hungary and single channel per
carrier links.
The above mentioned segments are managed and evaluated separately because each
segment possesses different economic characteristics requiring different
marketing strategies.
The accounting policies adopted for each segment are the same as those described
in the summary of significant accounting policies. The Company's management
evaluates performance based on operating contribution, where segment revenues
are reduced by those costs that are allocable to the segments. Non-allocable
general, administrative, and marketing costs are treated as Corporate costs and
not charged to the segments.
LINE OF BUSINESS DATA:
<TABLE>
<CAPTION>
OTHER
(in USD) VSAT INFONET INTERNET SERVICES CORPORATE TOTAL
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Total revenue $1,689,575 $ 1,075,808 $ 311,853 $ 521,583 $ - $ 3,598,819
Gross margin 635,238 448,101 (11,587) 231,132 - 1,302,884
Operating income 371,138 376,217 (37,885) 165,350 (534,809) 340,011
Interest income 1,583 1,583
Interest expense (6,979) (6,979)
Foreign exchange losses 2,643 2,643
Income before taxes 371,138 376,217 (37,885) 165,350 (537,562) 337,258
Identifiable operating
assets 2,381,645 617,912 122,540 146,715 558,873 3,827,685
Depreciation (186,731) (23,959) (8,584) - (17,638) 236,912
----------------------------------------------------------------------------------------------------
1998
Total revenue $2,632,939 $ 414,720 $ 598,137 $ 845,390 $ - $ 4,491,186
Gross margin 320,535 46,881 298,947 (45,872) - 620,491
Operating income 72,151 (104,430) 258,647 (85,633) (928,066) (787,331)
Interest income 3,132 3,132
Interest expense (54,726) (54,726)
Foreign exchange losses (98,305) (98,305)
Sale of fixed assets 30,857 30,857
Income before income taxes 72,151 (104,430) 258,646 (85,633) (1,047,108) (906,374)
Identifiable operating
assets 2,488,266 550,327 159,034 569,121 359,446 4,126,194
Depreciation (215,378) (26,192) (11,045) - (25,427) (278,042)
----------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 35
NOTES TO THE FINANCIAL STATEMENTS
BankNet Kft.
December 31, 1999
--------------------------------------------------------------------------------
NOTE 10: SEGMENT DISCLOSURE AND RELATED INFORMATION (CONTINUED)
GEOGRAPHIC INFORMATION:
<TABLE>
<CAPTION>
1999 1998
---------------------------
<S> <C> <C>
Austria $ - $ 9,600
Belgium - 13,418
Czech Republic 33,474 105,762
Germany - 9,292
Italy 160,886 817,072
Macedonia - 82,800
Poland 89,718 -
Romania 187,377 170,888
Russia 144,986 136,227
Slovakia - 155,413
Sweden 53,655 -
UK - 455,759
Zambia 113,618 -
---------------------------
TOTAL REVENUE $ 783,714 $ 1,956,231
</TABLE>
The figures are presented in invoiced United States Dollar amounts.
MAJOR CUSTOMER INFORMATION:
Revenues from major customers include the following:
<TABLE>
<CAPTION>
Customer Revenue Segment
----------------------------------------------
<S> <C> <C> <C>
1999 Infonet $1,075,808 Infonet
1998 Customer 1 751,186 VSAT
Customer 2 659,059 VSAT
</TABLE>
NOTE 11: SUBSEQUENT EVENTS
The Company was 100% owned by Satnet Ltd. until February 14, 2000. Effective
that date, Satnet Ltd. sold its investment in BankNet Kft. to Dynamic I-T, Inc.,
Colorado, USA, in exchange for 1,400,000 shares of Dynamic IT. This will be
accounted for as a reverse merger in the consolidated financial statements of
Dynamic I-T Inc. as of June 30, 2000 to be filed with the Securities and
Exchange Commission. These consolidated financial statements will reflect the
fair values of the assets and liabilities of Dynamic I-T Inc. while the assets
and liabilities of BankNet will continue to be carried at their book values.
15
