<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REGISTRATION STATEMENT
ON
FORM SB-2
UNDER
THE SECURITIES ACT OF 1933
HUGO INTERNATIONAL TELECOM INC.
(Name of Small Business Issuer in its charter)
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DELAWARE 4812 98-0226479
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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6 WATERSIDE DRIVE
LANGLEY BUSINESS PARK, LANGLEY SLOUGH,
BERKSHIRE SL3 6EZ UNITED KINGDOM
011-44-1753-542-828
(Address and telephone number of principal executive offices
and principal place of business)
DAVID W. FODEN
PRESIDENT
HUGO INTERNATIONAL TELECOM, INC.
6 WATERSIDE DRIVE
LANGLEY BUSINESS PARK, LANGLEY SLOUGH,
BERKSHIRE SL3 6EZ UNITED KINGDOM
011-44-1753-542-828
(Name, address and telephone number of agent for service)
COPY TO:
PAUL J. POLLOCK, ESQ.
PIPER MARBURY RUDNICK & WOLFE LLP
1251 AVENUE OF THE AMERICAS
NEW YORK, NY 10020
(212) 835-6000
FAX NO.: (212) 835-6001
Approximate date of commencement of proposed sale to the public: AS
SOON AS PRACTICAL AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. / / ___________
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ___________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
-----------
If this Form is a post-effective amendment filed pursuant to Rule
464(d) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier registration statement for the same
offering. / / ___________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / / ___________
CALCULATION OF REGISTRATION FEE
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Title of Each Class Amount to Proposed Maximum Proposed Maximum Amount of
of Securities to be Offering Price Per Aggregate Offering Registration
be Registered Registered Share (1) Price Fee
------------- ---------- --------- ----- ---
<S> <C> <C> <C> <C>
Common Shares, par value $.0001 per 20,500,000 $5,412
share
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(1) The registration fee has been calculated pursuant to Rule 457(c) under the
securities act as follows: 20,500,000 multiplied by $1.00, which was the most
recent sales price (rounded to the nearest cent) for shares of our common stock
issued in a private placement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
PROSPECTUS
HUGO INTERNATIONAL TELECOM, INC.
20,500,000 SHARES OF COMMON STOCK
-----------------
This prospectus relates to the sale of up to an aggregate of 20,500,000
shares of our common stock, which may be offered for sale from time to time by
the selling stockholders listed on page 43.
This prospectus is filed to comply with our undertaking to register
shares of our common stock issued in recent private placements.
We will not receive any part of the proceeds from the sale of any of
these shares by the selling stockholders.
We have been advised that the selling stockholders intend to sell the
shares offered hereby at various times for their own account in the open market
at the then prevailing prices or in individually negotiated transactions at such
prices as may be agreed upon. The selling stockholders will bear all expenses
with respect to the offering and sale of shares owned by them except the costs
associated with this registration of their shares under the Securities Act and
the preparation and printing of this Prospectus.
There is currently no public market for our common stock.
WE URGE YOU TO READ CAREFULLY THE "RISK FACTORS" SECTION BEGINNING ON
PAGE 6 WHERE WE DESCRIBE SPECIFIC RISKS ASSOCIATED WITH AN INVESTMENT IN HUGO
AND THESE SECURITIES BEFORE YOU MAKE YOUR INVESTMENT DECISION.
---------------------------
SUBJECT TO COMPLETION
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES
OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
THE DATE OF THIS PROSPECTUS IS AUGUST 10, 2000.
---------------------------
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY...........................................................................................3
RISK FACTORS.................................................................................................6
USE OF PROCEEDS.............................................................................................18
DIVIDEND POLICY.............................................................................................18
CAPITALIZATION..............................................................................................19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION.....................................................................................19
DESCRIPTION OF BUSINESS.....................................................................................26
MANAGEMENT..................................................................................................37
DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITES ACT LIABILITIES........................................................39
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT....................................................................................40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................................41
DESCRIPTION OF SECURITIES...................................................................................42
SELLING STOCKHOLDERS........................................................................................43
PLAN OF DISTRIBUTION........................................................................................44
LEGAL MATTERS...............................................................................................45
EXPERTS.....................................................................................................45
WHERE YOU CAN GET MORE INFORMATION..........................................................................46
FINANCIAL STATEMENTS F-1
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. It is not complete and may not contain all of the information that
you should consider before investing in our common stock. You should read the
entire prospectus carefully, including the "Risk Factors" section and the
financial statements and the notes to those statements.
Some of the statements contained in this prospectus under "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis or Plan of
Operation" and "Business" are forward-looking. We generally identify
forward-looking statements by the use of terminology such as "may," "will,"
"expect," "intend," "plan," "estimate," "anticipate," "believe," or similar
phrases. We base these statements on our beliefs as well as assumptions we made
using information currently available to us. Because these statements reflect
our current views concerning future events, these statements involve risks,
uncertainties and assumptions. Our actual future performance could differ
materially from these forward-looking statements. These forward-looking
statements involve a number of risks and uncertainties. Important factors that
could cause actual results to differ materially from our expectations include
matters not yet known to us or not currently considered material by us. Actual
results may differ materially from those suggested by the forward-looking
statements for various reasons, including those discussed under "Risk Factors."
OUR BUSINESS
Hugo International Telecom, Inc.'s operations commenced in 1992. We
provide radio and data communications solutions and telephone airtime access to
business customers primarily in the United Kingdom. Our expertise and broad
range of distribution of various mobile and data communications equipment and
technology, allows us to be a single-source provider of mobile and data
communications, network design, equipment sales, installation and systems
integration, consulting and maintenance to businesses and government agencies.
Hugo supplies four main product offerings:
- RADIO COMMUNICATIONS EQUIPMENT AND SYSTEMS
- includes complex private mobile radio and public access mobile
radio systems that, among other features, provide instant call
set-up communications for workgroups.
- MOBILE COMMUNICATION SYSTEMS VIA GSM AND TETRA DIGITAL NETWORKS
- includes a range of GSM mobile phones that operate under the
European Standard for mobile technology. This technology is
currently being upgraded to enable the mobile user to transfer
data at 64 kilobits/sec (a 6 times increase in speed) and to
maintain a virtual connection to a centrally based computer or
network, accessing and transferring data as and when needed.
- Tetra (Terrestrial Trunked Radio Access) is the only digital
mobile radio technology that has been accepted throughout
Europe. It combines the benefits of cellular telephony, public
access mobile radio, virtual connection and instant ability to
access/transfer data.
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- TRACKING SYSTEMS AND COMPLEX MOBILE DATA APPLICATIONS
- flexible sophisticated tracking systems provide, among other
features, security for customers' valuable assets and can
define the need for human action to maintain an optimal level
of service. Our systems are employed to track vehicles
(security and location), report vending machine stock levels,
as metering devices, remote sensors and alarms (can define
when security or repair action is required).
- we tailor complex data applications that allow mobile office
users, while in the United Kingdom or abroad, to access their
company's Intranet, databases, receive and transmit
information with full video capability.
- PABX TELEPHONE SWITCHES AND DECT SYSTEMS
- our solution to the need for mobile communication within the
workplace. The switch allows digitally enhanced cordless
phones to be linked through a company's main switchboard. The
in office user has the advantage of mobility within the work
environment along with a PABX system that provides the latest
telephone technology features.
We believe that technology advances in radio, fixed telephone and
cellular telephone systems has created enormous opportunities in business
communications. Our expertise and added value comes from our ability to
integrate and build complex communication systems from products currently
available from vendors. We are building innovative solutions to the applications
required by businesses to improve their customer service levels and control
their communications costs.
Our executive offices are located at 6 Waterside Drive, Langley
Business Park, Langley Slough, Berkshire SL3 6EZ United Kingdom, and our
telephone number is 011-44-1753-542-828.
We will not receive any proceeds from the sale of our common stock by
the selling stockholders listed herein.
Investing in our common stock is speculative and involves a high degree
of risk. You should not invest in the common stock unless you can afford to lose
your entire investment. See "Risk Factors" beginning on Page 6.
THE OFFERING
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Shares offered by the selling stockholders.......................................20,500,000 shares of common stock.
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<PAGE> 6
SUMMARY FINANCIAL INFORMATION
The following summary financial information is taken from our
Consolidated Financial Statements included elsewhere in this prospectus and
should be read along with the Consolidated Financial Statements and the related
Notes.
Income Statement Data:
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Years ended Three Months
December 31, Ended March 31,
------------ ---------------
1998 1999 1999 2000
---- ---- ---- ----
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Net Revenue................................ 3,915,293 5,094,575 1,070,290 1,324,679
Operating Expenses......................... 1,628,477 1,827,442 364,897 670,653
Interest Expense........................... 59,123 75,159 21,782 41,786
Net Loss Available to Common Stockholders.. (218,342) (191,675) (48,656) (205,404)
Net Loss per Share of Common Stock......... (.01) (.01) (.00) (.01)
Average Number of shares................... 15,000,100 15,000,100 15,000,100 15,054,945
</TABLE>
Balance Sheet Data:
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<CAPTION>
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Total Assets 2,767,914 2,208,921
Cash and Cash Equivalents 175,604 32,132
Long-Term Debt 384,921 945,885
Working Capital (540,361) (203,537)
Stockholders' Equity (Deficit) 318,394 (255,637)
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<PAGE> 7
RISK FACTORS
The securities we are offering involve a high degree of risk,
including, the risks described below. You should carefully consider the
following risk factors that affect our business and this offering before
investing in the securities.
RISKS RELATED TO OUR BUSINESS
WE WILL LIKELY NEED ADDITIONAL FINANCING IN ORDER TO FULLY IMPLEMENT OUR
BUSINESS PLAN
To date, we have had insufficient revenues to satisfy our ongoing
expenses of operation and we have been funded, in part, by loans from David W.
Foden our controlling stockholder. Due to our history of losses, we cannot
assure you that we will ever be profitable. If we do not become profitable or
obtain additional financing, we will be unable to continue our current level of
operations and fully implement our growth objectives outlined in our business
plan. See "Management's Discussion and Analysis or Plan of Operations" and
"Accountants Reports" for a more detailed discussion of our losses, sources of
funds for operations and other financial information and "Description of
Business" for a more detailed discussion of our growth objectives.
Moreover, we currently have no legally binding commitments or
understandings with any third parties to obtain any additional financing. We
cannot assure you that we will be able to obtain any additional financing in the
amounts or at the times we may require the financing, or if we do obtain any
financing that it would be on acceptable terms. As a result, we cannot assure
you we will have adequate capital to implement future expansion and enhancement
of our communications systems, to maintain our current level of operation or to
pursue strategic acquisitions. Our failure to obtain sufficient additional
financing could result in the delay or abandonment of some or all of our
development, expansion and acquisition plans and expenditure, which could have
an adverse effect on us and on the value of our common stock.
THERE IS NO MARKET FOR OUR COMMON STOCK.
There is no trading market for our common stock and it is not
anticipated that a trading market will develop in the foreseeable future. If no
market develops, it may be difficult or impossible for you to resell your shares
if you should desire to do so. We cannot assure you that you will be able to
resell your shares at the purchase price paid or at any price.
BECAUSE WE OPERATE IN A NEW AND RAPIDLY DEVELOPING MARKET, OUR FUTURE
PROFITABILITY IS UNCERTAIN
When making your investment decision, you should consider the risks,
expenses and difficulties that we may encounter or incur in a new and rapidly
evolving market. We have spent limited resources on promoting and marketing our
products and services to our government and corporate customers. We expect to
spend significant resources on expanding our products and services and promoting
our brand name for the foreseeable future. Consequently, you should view us as
an early stage enterprise notwithstanding the fact that we have been engaged in
our
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<PAGE> 8
business operations for several years. We face a number of risks encountered
by early stage companies in the wireless data and equipment communications
industry, including:
- the uncertainty of market acceptance of our new products and services;
- our substantial dependence on products with only limited market
acceptance to date;
- our need to introduce reliable and robust products that meet the
demanding needs of mobile individuals, wireless network operators,
Internet media networks, corporate enterprises and wireless handset
manufacturers;
- our need to expand our product development, marketing, sales,
consulting and support organizations, as well as our distribution
channels; and
- our ability to anticipate and respond to market competition.
WE EXPECT NET LOSSES TO OCCUR
We incurred net losses in 1998 of $218,342 and in 1999 of $191,675, and
we expect to continue experiencing losses through at least 2000. Because we
expect to continue to incur significant product development, sales and
marketing, and administrative expenses, we will need to generate significant
revenues to become profitable and sustain profitability on a quarterly or annual
basis. We may not achieve or sustain or revenue or profit goals. To the extent
that increases in operating expenses are not matched by increased revenue, our
business, operating results and financial condition will be harmed. We cannot
guarantee that we can attract the number of new customers necessary to offset
these operating expenses.
FACTORS OUTSIDE OUR CONTROL MAY ADVERSELY IMPACT OUR ACCESS TO ADDITIONAL
FINANCING
Our access to additional funds may be limited by:
- general market conditions that adversely affect the
availability or cost of financings;
- market conditions affecting the business communications
industry in general; and
- specific factors affecting our attractiveness as a borrower or
an investment vehicle including:
- the potential commercial opportunities and risks
associated with implementation of our business plan;
- the market's perception of our performance and
assets; and
- the actual amount of cash we need to pursue our
business strategy.
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<PAGE> 9
BECAUSE BOTH OUR BUSINESS MODEL AND THE USE OF WIRELESS AND MOBILE DEVICES TO
ADDRESS BUSINESS COMMUNICATIONS NEEDS ARE EVOLVING AND UNPROVEN WE CANNOT
PREDICT WHETHER OUR PRODUCTS AND SERVICES WILL GENERATE REVENUE
Our business model is relatively new, is unproven and is likely to
continue to evolve. Accordingly, it may not be successful, and we may have to
adjust it. We cannot predict whether demand for our products and services will
continue to develop, particularly at the volume or prices that we need to become
cash flow positive. We intend to continue to develop our business model as we
explore opportunities domestically and internationally.
Although wireless and mobile device usage is growing rapidly, we cannot
be certain that this growth will continue in its present form, or at all.
We believe our success ultimately will depend upon, among other things,
our ability to:
- increase awareness of Hugo's brand and the availability of our
products and services;
- continue to attract and develop relationships with wireless
data communications technology and equipment providers; and
- continue to attract and retain customers.
BECAUSE WE HAVE NON-EXCLUSIVE AGREEMENTS WITH BT CELLNET, DOLPHIN, MOTOROLA,
KENWOOD AND NITSUKO WHICH SUPPLY US WITH TECHNOLOGY AND EQUIPMENT, OUR
COMPETITORS MAY BE ABLE TO OBTAIN ARRANGEMENTS SIMILAR TO OURS
Our existing agreements with the companies that supply a significant
portion of our equipment and technology are non-exclusive. All of these
suppliers have established relationships with our competitors. If our
competitors were able to obtain similar or more competitive arrangements with
our suppliers, our business and growth prospects would suffer.
BT CELLNET, DOLPHIN, MOTOROLA, KENWOOD AND NITSUKO MAY BECOME OUR COMPETITORS
The companies that supply our equipment and technology could become our
competitors by offering the same or similar equipment and services directly to
our targeted markets. These companies are substantially larger, more established
than Hugo and have access to greater financial, technical, and marketing
resources. If these companies began competing directly with us, our business and
growth prospects would suffer.
OUR FUTURE PERFORMANCE WILL DEPEND ON OUR ABILITY TO SUCCEED IN THE HIGHLY
COMPETITIVE WIRELESS COMMUNICATIONS INDUSTRY
Our ability to compete effectively with established and prospective
business communications service and product providers depends on many factors,
including:
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IF OUR NEW WIRELESS COMMUNICATIONS TECHNOLOGY DOES NOT PERFORM IN A
MANNER THAT MEETS CUSTOMER EXPECTATIONS, WE WILL BE UNABLE TO ATTRACT
AND RETAIN CUSTOMERS
Customer acceptance of the services we offer is and will continue to be
affected by technology-based differences and by the operational performance and
reliability of transmissions on our communications systems. If we are unable to
address and resolve satisfactorily performance or other transmission quality
issues as they arise, or if these issues limit our ability to expand the
coverage or capacity as currently planned, or if these issues were to place us
at a competitive disadvantage to other wireless communications equipment and
service providers in our markets, we may have difficulty attracting and
retaining customers.
OUR ABILITY TO COMPETE BASED ON THE PRICE OF OUR PRODUCTS AND SERVICE
OFFERINGS WILL BE LIMITED
Factors affecting our ability to provide competitive pricing in our
targeted markets include the following:
- Some of our competitors are financially stronger than we are,
which allows them to price their service packages at levels
below those that we can or are willing to match.
- Our equipment may be more expensive than some competitors,
which may adversely affect our growth and operating results.
WE MAY FACE CONTINUING PRESSURE TO REDUCE PRICES, WHICH COULD ADVERSELY
AFFECT OPERATING RESULTS AND THE VALUE OF YOUR INVESTMENT.
Our technology and equipment are sourced from leading suppliers in each
segment of the market to be addressed so that we can have the best of breed
products in each market. The competitiveness of the pricing of these products is
therefore dependent on the choice of the product supplier.
Over the past several years, as the number of wireless communications
service and product providers in our market areas has increased, our
competitors' prices in these markets have generally decreased. We may encounter
further market pressures to:
- reduce our digital mobile communications products offering
prices;
- respond to particular short term, market specific situations,
for example, special introductory pricing or packages that may
be offered by new providers launching their service in a
particular market; or
- reduce prices if BT Cellnet and Dolphin generally continue to
reduce the prices charged to their customers.
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BECAUSE OUR BUSINESS HAS GROWN RAPIDLY, WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE
OUR GROWTH
Our growth has placed, and any further growth is likely to continue to
place, considerable strain on our management team and other personnel, our
internal accounting and management information systems and the third-party
systems on which we depend. If we fail to manage our growth effectively our
business will be adversely affected. Our growth plans are likely to continue to
place a significant strain on our personnel, and we believe that our current
accounting and management information systems are inadequate to handle our
anticipated growth. We are actively attempting to hire new employees to help us
manage our growth, and we are evaluating supplementing or replacing our
accounting and other systems to enable us to manage our expansion. Our failure
to hire additional personnel or to improve our systems increases the risk that
we will not be able to achieve our growth objectives or, if achieved, we will
not be able to manage our operations effectively.
OUR INTERESTS MAY CONFLICT WITH THOSE OF OUR TECHNOLOGY AND EQUIPMENT SUPPLIERS.
ANY CONFLICT COULD ADVERSELY AFFECT OUR GROWTH, OPERATING RESULTS OR STRATEGIC
FLEXIBILITY AND THE VALUE OF YOUR INVESTMENT
Our technology and equipment suppliers and their affiliates presently
engage in and may in the future engage in, additional businesses which do or may
compete with some or all of the services and products we offer. Although we
believe that our relationships with our technology and equipment suppliers
reflect the realities of purchasing from a competitor, we cannot assure you that
the potential conflict of interest will not adversely affect us in the future.
SINCE WE OPERATE IN A REGULATED INDUSTRY, WE MAY BE ADVERSELY AFFECTED BY
GOVERNMENTAL REGULATION
Our wireless technology and equipment suppliers are subject to
regulation by governmental agencies and regulations that affect them and as a
result us, could increase our costs or reduce our ability to continue
distributing their products and services. In addition, there are an increasing
number of laws and regulations pertaining to wireless telephony and the Internet
under consideration in the United Kingdom and elsewhere.
CONCERNS ABOUT HEALTH RISKS RELATING TO THE USE OF WIRELESS COMMUNICATIONS
DEVICES MAY AFFECT OUR PROSPECTS AND THE VALUE OF YOUR INVESTMENTS
Portable communications devices have been alleged to pose health risks,
including cancer, due to radio frequency emissions from these devices. Studies
performed by wireless telephone equipment manufacturers have investigated these
allegations, and additional studies are ongoing. The actual or perceived risk of
wireless communications devices could adversely affect us through a reduced
customer growth rate, a reduction in customers, reduced network usage per
customer or through reduced financing available to the mobile communications
industry.
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BECAUSE OUR FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS, WE MAY
NOT MEET EXPECTATIONS OF INVESTORS AND ANALYSTS AND OUR STOCK PRICE, IF A MARKET
IS ESTABLISHED, MAY DECLINE
The rapidly evolving business communications market makes it difficult
to predict our operating results. Our profitability depends on a variety of
factors, including the following:
- continued growth in the use and quality of wireless
communications products;
- the rate at which we are able to acquire new customers;
- introduction of new vehicle and asset tracking solutions;
- changes in our revenue arrangements with wireless network
operators;
- timing of introduction of new products and services;
- changes in pricing policies and product offerings by us or our
competitors;
- costs associated with advertising, marketing and promotional
efforts to acquire customers; and
- capital expenditures and other costs and expenses related to
improving our business, expanding our operations and adapting
to new technologies and changes in customer preferences.
In addition, our operating expenses are based on our expectations of
the future demand for our products and services. Moreover, we frequently will
incur expenses in connection with integration and offering of products and
services, which are likely to be incurred substantially in advance of related
revenues. We may be unable to adjust spending quickly enough to offset any
unexpected demand shortfall or delay in offering our products and services. As a
result, our operating results are likely to fluctuate from period to period. If
we do not meet expectations of investors and analysts in a particular quarter,
the price of our common stock could decline.
DEPENDENCE UPON CURRENT KEY PERSONNEL FOR OUR SUCCESS
If any officers or the following key personnel cease employment with us
before we find qualified replacements, it might have a significant negative
impact on our operations and overall business. Our success is dependent upon the
personal efforts and abilities of our executive officers, including David W.
Foden, Chairman and Chief Executive Officer and Michael Christmas, Chief
Financial Officer. Currently, we maintain key man life insurance solely on David
W. Foden.
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IF WE LOSE KEY MANAGEMENT OR OTHER PERSONNEL, WE MAY EXPERIENCE DELAYS IN OUR
PRODUCT DEVELOPMENT AND OUR GROWTH PROSPECTS
Our growth and success also depends on our ability to attract, hire and
retain additional highly qualified management, technical, marketing and sales
personnel. These individuals are in high demand and we may not be able to
attract the staff we need. The hiring process is intensely competitive, time
consuming and may divert the attention of our management from our operations.
Competitors and others have in the past, and may in the future, attempt to
recruit our employees. If we lose the services of any of our senior management
or key technical personnel, or if we fail to continue to attract qualified
personnel, our business could suffer.
We need to expand our marketing and direct sales operations in order to
increase market awareness of our product and service offerings and generate
increased revenue. However, competition for qualified sales personnel is intense
and we may not be able to hire enough qualified individuals in the future. Our
products and services require a sophisticated sales effort targeted at the
senior management of our prospective customers. New hires require extensive
training and typically take at least six months to achieve full productivity. In
addition, we have limited experience marketing our products broadly to a large
number of potential customers.
There can be no assurance that we will be able to expand our marketing
staff and sales force or that the cost of establishing such a marketing staff or
sales force will not exceed our revenues.
BECAUSE THE ADOPTION CYCLE FOR OUR PRODUCTS AND SERVICES BY OUR CUSTOMERS WHO
BUY OUR PRODUCTS AND SERVICES MAY BE LONG, OUR STOCK PRICE COULD DECLINE IF
REVENUES ARE DELAYED
We cannot predict the rate of adoption by government agencies and business
customers of our products and services or the price they may be willing to pay
for our products and services in the future. Fluctuations in our operating
performance are exacerbated by the length of time between our first contact with
a potential customer and the first revenue from sales of products and/or
services to such customer.
BECAUSE WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS OR AVOID CLAIMS
THAT WE INFRINGED THE PROPRIETARY RIGHTS OF OTHERS, WE MAY INCUR SUBSTANTIAL
COSTS TO DEFEND OR PROTECT OUR BUSINESS AND INTELLECTUAL PROPERTY
If we fail to protect our intellectual property, we may be exposed to
expensive litigation or risk jeopardizing our competitive position. The steps we
have taken may be inadequate to protect our technology and other intellectual
property. We may have to litigate to enforce our intellectual property rights,
to protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. This litigation could result in substantial costs
and the diversion of our management and technical resources that would harm our
business.
Although we have taken steps to avoid infringement claims from others,
these measures may not be adequate to prevent others from claiming that we
violated their patents, other
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<PAGE> 14
trademarks or other proprietary rights. Any claim of infringement could cause us
to incur substantial costs defending against the claim, even if the claim is
invalid, and could distract our management from our business. A party making a
claim could secure a judgment that requires us to pay substantial damages.
BECAUSE WE INTEND TO EXPAND INTERNATIONALLY, WE WILL BE SUBJECT TO RISKS OF
CONDUCTING BUSINESS IN FOREIGN COUNTRIES
If, as we anticipate, we expand our operations outside of the United
Kingdom, we will be subject to the risks of conducting business in foreign
countries, including:
- our inability to adapt our products and services to local
cultural traits, customs and mobile user preferences,
- our inability to locate qualified local employees, partners
and suppliers,
- the potential burdens of complying with a variety of foreign
laws, trade standards and regulatory requirements, including
the regulation of wireless communications and products and the
uncertainty regarding liability for information retrieved and
replicated in foreign countries;
- general geopolitical risks, such as political and economic
instability and changes in diplomatic and trade relationships;
- political, economic and social conditions in the foreign
countries where we conduct operations;
- currency risks and exchange controls;
- potential inflation in the applicable foreign economies;
- the impact of import duties on the cost or prices of
equipment;
- foreign taxation of earnings and payments received by us from
our subsidiaries and affiliates; and
- regulatory changes affecting the telecommunications industry
and wireless communications.
We cannot assure that the risks associated with our anticipated foreign
operations will not adversely affect our operating results or prospects,
particularly as these operations expand in scope, scale and significance.
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IF WE ACQUIRE OR INVEST IN ANOTHER COMPANY, THIS MAY DISRUPT OUR BUSINESS OR
DISTRACT OUR MANAGEMENT
We have limited experience in acquiring businesses, technologies,
services or products. From time to time, we engage in discussions and
negotiations with companies regarding our acquiring or investing in these
companies' businesses, products, services or technologies. If we acquire or
invest in another company, we could have difficulty assimilating that company's
personnel, operations, products, services, technology and software. In addition,
the key personnel of the acquired company may decide not to work for us. These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of operations.
Furthermore, we may incur indebtedness or issue equity securities to pay for any
future acquisitions. The issuance of equity securities would be dilutive to our
existing stockholders. As of the date of this prospectus, we have no agreement
to enter into any material investment or acquisition transaction.
RISKS RELATED TO OUR CUSTOMERS
WE DEPEND ON INCREASED BUSINESS FROM OUR CURRENT CUSTOMERS
If we fail to generate repeat and expanded business from our current
customers, our business and operating results would be seriously harmed. Many of
our customers initially make a limited purchase of our products and services for
pilot programs. These customers may not choose to purchase additional products
or services from us. Because the total amount of maintenance and support fees we
receive in any period, which constitutes a substantial portion of our revenues,
depends in large part on the products we previously sold, any downturn in our
sale of products would negatively impact our future service revenues. In
addition, if customers elect not to renew their maintenance agreements, our
service revenues could be significantly adversely affected.
IF WIRELESS AND MOBILE DEVICES MARKETED BY US ARE NOT WIDELY ACCEPTED BY
BUSINESSES TO ADDRESS THEIR COMMUNICATIONS NEEDS, A SIGNIFICANT PORTION OF OUR
BUSINESS WILL SUFFER
Our future success depends upon on the acceptance of the wireless and
mobile devices marketed by us by businesses to address their communications
needs. Most businesses currently use computers to access the Internet and
remotely retrieve real-time information and e-mail. Computers are generally
designed for the visual presentation of data, while wireless telephones and
pagers historically have been limited to messaging by letters, numbers and a
limited number of symbols. We cannot assure you that wireless and mobile users
will accept the use of handheld devices to receive data and services essential
to their business operations.
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<PAGE> 16
BECAUSE WE DEPEND UPON WIRELESS NETWORKS FOR ACCESS TO SUFFICIENT CAPACITY AND
LEVEL OF SERVICE QUALITY, WE MAY BE UNABLE TO DELIVER OUR PRODUCTS AND SERVICES
TO OUR USER BASE AND REVENUE COULD DECREASE
Our ability to grow and achieve profitability depends in part on our
ability to access sufficient capacity on the networks of wireless carriers such
as BT Cellnet and Dolphin and on the reliability and security of their systems.
The airtime purchased by our customers is provided by transmission services of
these third parties. We depend on these companies to provide uninterrupted and
quality service and would not be able to service our mobile phone users' needs
if our wireless network operators fail to provide the required capacity or level
of service.
RISKS RELATED TO OUR SUPPLIERS
WE DEPEND UPON THIRD-PARTY DISTRIBUTION RELATIONSHIPS
We have a limited number of distributorship agreements and we may not
be able to increase our number of distribution relationships in the future or
maintain existing relationships or obtain rights to new product offerings.
Currently, our distributorship agreements authorize us to act as a distributor
of communications products and technology for various vendors, including:
- BT Cellnet
- Dolphin
- Motorola
- Kenwood
- Nitsuko
Our current agreements with these suppliers do not prevent them from
doing business with others, and we cannot guarantee that we will continue to
receive the volume of products that we need at all times. Certain of our
distribution agreements are merely oral contracts that may be terminated by
either party at will. This is also true of certain of our written contracts.
Therefore, we cannot be certain that any vendor with whom we do business will
elect to continue their relationship with us in the future on substantially the
same terms and conditions. We believe that an interruption, or substantial
modification of our distribution relationships, particularly with BT Cellnet or
Dolphin, could have a material adverse effect on our business, operating results
and/or financial condition. Periodically, these distribution agreements expire
and must be renegotiated in order to continue distributing each vendor's
products at competitive prices.
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<PAGE> 17
RISKS RELATED TO OUR MARKET AND INDUSTRY
OUR MARKETS ARE HIGHLY COMPETITIVE
Our markets are new, rapidly evolving and highly competitive, and we
expect this competition to persist and intensify in the future. Our failure to
maintain and enhance our competitive position could seriously harm our business
and operating results. We encounter current or potential competition from a
number of sources, including:
- Equipment manufacturers
- Equipment distributors
- Network integrators
The size of a client, the geographic scope and product platform
preferences of our target client base dictates the competition we face. The
market for wireless mobile and data communications services and products sales
is highly competitive on a national and international basis. The level of
competition intensifies, while the number of qualified competitors diminishes as
the level of technological and design expertise rises and product distribution
rights narrow.
Our goal is to continuously expand our geographic coverage on the
national and international level, as well as expand upon our growing expertise
within the wireless mobile and data equipment platforms.
We face competition in our targeted markets. This competition covers
larger mobile and network design, installation, maintenance and monitoring
projects and contracts on a national and international basis.
Many of our competitors have significantly greater financial, technical
and marketing resources, and/or greater name recognition. Our competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements than we can. Some of our competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do. Many of these companies have more extensive customer bases
and broader customer relationships that they could leverage, including
relationships with many of current and potential customers. These companies also
have significantly more established customer support and professional services
organizations than we do. In addition, these companies may adopt aggressive
pricing policies.
Increased competition could lead to price reductions, decreased
sales-volume, under-utilization of employees, reduced operating margins and loss
of market share. There can be no assurance that we will be able to successfully
compete for customers in our markets.
THE INDUSTRY IN WHICH WE OPERATE IS RAPIDLY CHANGING
New products and technologies will emerge and existing products and
technologies will further develop. We cannot predict the effect of these
technological changes on our business. While change in technology can create new
demand for products and services that we may provide, these new products and
technologies may reduce the demand in the future for products
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<PAGE> 18
and services that we currently offer. Alternately, such changes in technology
may be made available to us for sale or distribution. As a result, our most
significant competitors in the future may be new entrants to our markets with
access to new technology and products, who would not be burdened by a technical
personnel base familiar with older technology and equipment. Although we are
constantly training our personnel on the latest technologies and equipment, it
may be cost prohibitive for us to retrain personnel on an entirely new
hardware/software platform. Our future success depends, in part, on our ability
to anticipate and adapt in a timely manner to technological changes.
IF WE ARE UNABLE TO MAINTAIN, IMPROVE AND DEVELOP OUR PRODUCTS AND SERVICES, WE
MAY NOT ACHIEVE PROFITABILITY
We may not be able to develop and introduce new products, services and
enhancements that respond to technological changes, evolving industry standards
or customer needs and trends on a timely basis, in which case our business would
suffer. We believe that our future business prospects depend in part on our
ability to maintain and improve our current products and services and to develop
or license new ones on a timely basis. Our products and services will have to
achieve market acceptance, maintain technological competitiveness and meet an
expanding range of customer requirements. As a result of the complexities
inherent in our offerings, major new wireless data services, applications,
business communications systems and service enhancements may require long
development and testing periods. We may experience difficulties that could delay
or prevent the successful development, introduction or marketing of new products
and services and service enhancements. Additionally, our new products, services
and enhancements may not achieve market acceptance. Also, our competitors may
develop alternative technologies that gain broader market acceptance than our
products and services. If we cannot effectively maintain, improve and develop
products and services we may not be able to recover our fixed costs or otherwise
become profitable.
RISKS RELATED TO OUR TECHNOLOGY
IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL
CHANGE, OUR PRODUCTS AND SERVICES MAY BECOME OBSOLETE AND WE MAY LOSE SALES
The market for business communications is characterized by rapidly
changing technologies, industry standards, customer needs and competition, as
well as by frequent new product and service introductions. Our products and
services must also be compatible with a variety of communications networks. We
must respond to technological changes affecting both our customers and
suppliers. We may not be successful in developing and marketing, on a timely and
cost-effective basis, new products and services that respond to technological
changes, evolving industry standards or changing customer requirements. Our
ability to grow and achieve profitability will depend, in part, on our ability
to accomplish all of the following in a timely and cost-effective manner:
- effectively use and integrate new wireless and data
technologies;
- continue to develop our technical expertise;
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<PAGE> 19
- enhance our wireless data, engineering and system design
services;
- develop applications to suit business customer needs; and
- influence and respond to emerging industry standards and other
changes.
RISKS RELATED TO INVESTING IN OUR SHARES
BECAUSE OUR COMMON STOCK PRICE, LIKE THAT OF MANY TECHNOLOGY COMPANIES, IS
LIKELY TO BE HIGHLY VOLATILE, IF A MARKET FOR OUR COMMON STOCK DEVELOPS, THE
MARKET PRICE OF OUR COMMON STOCK MAY BE LOWER THAN YOU EXPECTED
Even if a market were to develop for our stock, the market price of our
common stock is likely to be highly volatile, because the stock market in
general, and the market for technology companies in particular, have experienced
significant volume and price fluctuations. You may not be able to resell your
shares following periods of volatility because of the market's adverse reaction
to that volatility. The trading prices of many technology companies' stocks have
reached historical highs within the last year and have reflected relative
valuations substantially above historical levels. However, during the same
period, these companies' stocks have also been highly volatile and several
companies' stocks have recorded lows well below their historical highs. We
cannot assure you that our stock will trade at the same levels as other
technology stocks.
Many of these factors are beyond our control. These factors may
materially and adversely affect the price of our common stock, regardless of our
operating performance.
WE ARE CONTROLLED BY OUR DIRECTORS AND OFFICERS
As of August 10, 2000, our current directors and officers beneficially
own approximately 56% of outstanding common stock. As a result, our current
directors and officers will continue to exercise control over the affairs of
Hugo.
USE OF PROCEEDS
We will not receive any of the proceeds of this offering.
Expenses we are expected to incur in connection with this registration
are estimated at approximately $256,280. The selling stockholders will pay all
of their underwriting commissions and discounts and counsel fees and expenses in
connection with the sale of the shares covered by this prospectus.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock.
We currently intend to retain future earnings, if any, to finance the
development and expansion of our business
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<PAGE> 20
and, therefore, we do not anticipate declaring or paying any cash dividends on
our common stock in the foreseeable future. Our payment of cash dividends, if
any, will depend upon our general financial condition and other factors deemed
relevant by our board of directors.
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000
and such capitalization as adjusted to give effect to the sale of additional
shares by us subsequent to March 31, 2000:
<TABLE>
<CAPTION>
Pro Forma
Adjustments As Adjusted
For Sale of For Sale of
Additional Additional
Actual Shares Shares
------ ------ ------
<S> <C> <C> <C>
Long-term debt $ 384,921 $ 384,921
----------- ----------
Stockholders' equity:
Preferred stock; $.0001 par value; 1,000,000
shares authorized; zero shares issued and
outstanding at March 31, 2000 and after
additional sale of shares 0
Common stock; $.0001 par value; 50,000,000
shares authorized; 20,500,000 shares
issued and outstanding at March 31, 2000;
20,500,000 shares issued and outstanding
after additional sale of shares 2,000 $ 500 2,500
Additional paid-in capital 957,731 252,000(1) 1,209,731
-----------
Accumulated other comprehensive income 3,597 3,597
Accumulated deficit (609,934) (609,934)
Stock subscriptions receivable (35,000) (35,000)
----------- ----------
Total stockholder's equity 318,394 570,894
----------- ----------
Total capitalization $ 703,315 $ 955,815
=========== ==========
</TABLE>
(1) To record the net proceeds to us from the sale of 500,000 shares
subsequent to March 31, 2000.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of Hugo's
results of operations and financial condition. The discussion should be read in
conjunction with our audited consolidated financial statements and notes thereto
included elsewhere in this Registration Prospectus.
BACKGROUND AND OVERVIEW
During the past two fiscal years we have concentrated on positioning
ourself to exploit each of the following main areas of business.
AREA 1 - EXPORTS
We are a licensed reseller of Motorola products to certain regions in
Southern Africa. Historically, we had a physical presence in both South Africa
and Zimbabwe. In 1998, we recognized that economic instability in Zimbabwe and
the competitive pressure on margins in both countries could not justify the
continued overhead structure. As a result, we reorganized our operations to
withdraw from Zimbabwe and make all exports therefore direct from the United
Kingdom. The effect of this included the initial costs of withdrawals and an
initial drop of sales. Current export sales are now growing, and costs involved
are minimized. We have been granted licenses by Motorola to also supply
equipment in Romania, Algeria and Oman. We are currently negotiating to obtain
licenses to supply equipment in Egypt and Morocco and to obtain world wide key
account status for BP/Amoco. The principal costs related to the above are
reflected in selling, general and administrative expenses as $337,000 in the
year ended December 31, 1998.
AREA 2 - BASIC PRODUCTS
In addition to Motorola, we sell products from a number of
manufacturers including Kenwood and Tait in the United Kingdom. This market is
highly competitive with a number of suppliers in the market place. Success in
this area requires the services of top quality sales persons. The investment in
this area has been in recruitment costs, vehicle and motoring costs and payroll
costs for the first three months for each salesperson while they develop their
contacts and perfect their product knowledge. Our principal costs related to the
above are reflected in selling, general and administrative expenses as
recruitment costs of $28,000 in 1999 and $17,000 in 1998, and $13,000 in the
first quarter of 2000. Initial costs of establishing new salespersons are
estimated at $15,000 in 1999 and $10,000 in 1998, and $6,000 in the first
quarter of 2000.
AREA 3 - ONGOING REVENUE STREAMS
We also seek to secure repetitive income streams. These income streams
derive from providing maintenance and airtime contracts, and to a lesser extent
short and long term
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<PAGE> 22
equipment rental. During 1998, it became clear that the future of airtime
providing was going to be fundamentally altered by the investment being made by
Dolphin in the new TETRA network (See "Description of Business.") As a result,
we recognized the need to become a service provider for Dolphin products. Such
approval required a minimum number of airtime users to win a 5-year service
provider license. To achieve this, we acquired the airtime users of Procomm.
However, Dolphin experienced development problems, which delayed TETRA's full
deployment. These delays caused us a loss of income and an increase in costs.
Currently, we are a provider of Dolphin products and airtime and are receiving
additional revenues from migration of our customer base to the Dolphin system,
and have a base of some 3,000 airtime users. The principal costs related to the
above was the purchase of certain assets of Procomm for approximately $749,000
in the first quarter of 1999, and estimated costs in connection with the delay
of migrating users to the Dolphin system of $150,000 during 1999.
AREA 4 - TELECOMMUNICATIONS SOLUTIONS
During 1999 opportunities began to become evident for us to enter the
telecommunications marketplace, in particular the switch (a telephone exchange
unit) and DECT (digitally enhanced cordless telephony) markets. The market is
established and growing and with the right strategy profitable. We have
approached the market by recruiting two sales people, one in 1999 and the second
in the first quarter of 2000. We have also become approved resellers of Nitsuko
products, and have access to Lucent and Siemens Telephony products. Currently,
we are marketing Call Center Solutions, a software driven application designed
to improve the productivity, reliability and customer service of business call
centers/switchboards. The principal costs of recruitment were $12,000 in the
first quarter of 2000, which is included in selling, general and administrative
expenses.
AREA 5 - SOLUTION PROVIDERS
Hugo has always recognized that technology could do more for customers
than customers ever realized. Our professionals are able to assist customers in
identifying their problems, and then create a solution to that problem. The most
successful demonstration of this involves a customer that rents out equipment,
which is moveable, frequently towed behind vehicles, and valuable. The customer,
however, encountered a problem with tracking and controlling the whereabouts of
these products. Conventional tracking products were not suitable due to
unavailability of a reliable energy source, and the need for the product to be
covertly fitted. We created the solution by developing a product which has since
been tested and approved. The product is being supplied to the customer on a
regular basis.
AREA 6 - TRADECOM AND ONWARDS
We continue to recognize and develop further related areas of business.
We are currently developing an Internet e-commerce site primarily making trade
sales called Tradecom. Costs are currently being expended on setting up the
site, and revenues are expected to come on stream by the first quarter of 2001.
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<PAGE> 23
RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
Revenues for the year ended December 31, 1999 were $5,094,575 as
compared to $3,915,293 for the year ended December 31, 1998, an increase of
$1,179,282 or 30.1%. This increase is primarily the result of the additional
airtime revenue due to the Procomm asset purchase and revenue from the
implementation of the Dolphin system of approximately $277,000.
COST OF REVENUES
Cost of revenues for the year ended December 31, 1999 was $3,368,718 or
66.1% of revenues as compared to $2,451,712 or 62.6% of revenues for the same
period in 1998. The increase in cost of revenues is due primarily to the costs
associated with increased revenues.
As a result of the foregoing, Hugo realized an increase in gross profit
in 1999 of $262,276, from $1,725,857, or 33.9% of revenues for the year ended
December 31, 1999, compared to $1,463,581, or 37.4% of revenues achieved during
the same period in 1998. The reduction in gross profit margin is primarily due
to the increase in airtime revenue that yields a gross margin of 24-28%.
Pressure on sales prices of private mobile radio products eroded the gross
margins by between 8-10% year on year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $1,827,442 or 35.9%
of revenues for the year ended December 31, 1999, as compared to $1,628,477 or
41.6% of revenues for the same period in 1998. The increase of $198,965 is
primarily due to the increase in legal and professional fees of $65,000, in part
related to the purchase of the Procomm assets. The increase in the number of
employees from fifteen to nineteen resulted in a $64,000 increase in salaries
and $74,000 in travelling expenses.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1999 was $75,159 as
compared to interest expense of $59,123 for the year ended December 31, 1998.
The primary reason for the $16,036 increase in interest expense was due to an
increase in our indebtedness during 1999 compared to the prior year.
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES
There are no significant elements of income or loss that do not arise
from our continuing operations.
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<PAGE> 24
There are no significant seasonal aspects that have had a material
effect on the financial conditions or results of operations.
The preceding factors combined to produce a loss before income taxes of
$188,530 for the year ended December 31, 1999 as compared to a loss before
income taxes of $231,689 for the year ended December 31, 1998. Loss per share
was $.01 for the years ended December 31, 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been funded primarily through bank borrowings and
accounts receivable factoring. Other sources of cash were the deferral of
payments on accounts payable and the utilization of assets. Our operating
activities provided cash of $410,395 for the year ended December 31, 1999. Our
operating activities used cash of $87,680 for the year ended December 31, 1998.
Financing operating activities were the principal uses of cash.
We have an agreement with Five Arrows Commercial Finance Limited to
sell our receivables with recourse. Under the terms of the agreement, if a
customer defaults we must repurchase the receivable from Five Arrows. Our
agreement with Five Arrows will terminate on November 30, 2000 and we are
currently investigating a replacement facility.
Our investing activities used cash of $780,574 for the year ended
December 31, 1999. The acquisition of equipment and certain assets of Procomm
were the primary uses of cash. Our investing activities used cash of $3,750 for
the year ended December 31, 1998. The principal use of cash was to purchase
equipment.
Our financing activities provided cash of $337,471 and $11,655 for the
years ended December 31, 1999 and 1998, respectively. The primary source of cash
for these years was proceeds from borrowings.
RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUES
Revenues for the period ended March 31, 2000 were $1,324,679 as
compared to $1,070,290 for the period ended March 31, 1999, an increase of
$254,389 or 23.8%. This increase is due to increased export sales of $69,000 and
airtime revenues increased by $191,000 resulting from the Procomm asset
purchase.
COST OF REVENUES
Cost of revenues for the period ended March 31, 2000 was $846,989 or
63.9% of revenues as compared to $732,612 or 68.5% of revenues for the period
ended March 31, 1999. The increase in cost of revenues was primarily due to the
increased revenues.
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<PAGE> 25
As a result of the foregoing, gross profit increased by $140,012 in
2000 to 36.1% of revenues from 31.6% of revenues in 1999. The increase in gross
profit percentage is primarily due to the change in revenue mix. New markets in
telecommunications have yielded revenues of $110,000 in the quarter at
approximately 40% gross margin. Revenues from the implementation of the Dolphin
system of $128,000 are at approximately 50% gross margin. Neither of these
market sectors was in place during the first quarter of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses amounted to $670,653 or
50.6% of revenues in 2000 as compared to $364,897 or 34.1% of revenues in 1999.
The increase of $305,756 is primarily due to the accrual of the cost of this
registration statement of $100,000, extra recruitment fees of $30,000, salaries
of $103,000, and the consulting expenses associated with the purchase of the
Procomm assets of $30,000.
INTEREST EXPENSE
Interest expense was $41,786 in 2000 as compared to $21,782 in 1999.
The increase is the result of obtaining more debt.
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES
There are no significant elements of income or loss that do not arise
from our continuing operations.
There are no significant seasonal aspects that have had a material
effect on the financial conditions or results of operations.
The preceding factors combined to produce a loss before income taxes of
$205,404 in 2000 as compared to a loss before income taxes of $48,656 in 1999.
Loss per share was $.01 in 2000 as compared to $.00 in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have primarily been funded through sales of private
securities and advances from David W. Foden. Other sources of cash were the
collection of accounts receivable and the deferral of payments on accounts
payable. Our operating activities used cash of $443,517 for the three months
ended March 31, 2000. The principal use of cash was to finance operating
activities. Our operating activities provided cash of $254,541 for the three
months ended March 31, 1999.
Our investing activities used cash of $8,958 for the three months ended
March 31, 2000. The principal use of cash was to purchase equipment. Our
investing activities used cash of
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<PAGE> 26
$753,248 for the three months ended March 31, 1999. The principal use of cash
was to purchase certain assets of Procomm.
Our operations for the three months ended March 31, 2000 have been
financed primarily through the sale of common stock in a Regulation S offering
during the first quarter of 2000, that netted proceeds of approximately
$465,000. Other sources of cash provided were advances from a stockholder. Our
financing activities provided cash of $430,319 for the three months ended March
31, 1999. Proceeds from borrowings were the principal sources of cash for the
period.
During the next 12 months, our cash requirements will include, among
other things, the recruitment of already identified members of staff, in
operations and technical areas, and the reduction of our long-term debt
liabilities. The upgrading of the technical and office facilities, the
introduction of a new billing platform, the introduction of Tradecom, marketing
and research and development for new solutions.
We anticipate that our existing cash resources and cash generated from
operations will be insufficient to fund our day to day operations and that we
will require additional funding in the range of $150,000 for the remainder of
2000. We anticipate that cash generated from operations during the final quarter
of 2000 will be approximately $75,000. In an effort to improve cash flow, we
have hired a credit manager to collect overdue accounts receivable. As a result,
we anticipate additional collections of approximately $100,000. We intend to use
some of these funds to reduce debt. We anticipate the reduction of debt will
increase cash flows approximately $15,000 per month. We believe that these
factors combined will help meet the required additional funding. We anticipate
that cash generated from operations will be sufficient enough to fund the day to
day operations for the first quarter of 2001.
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<PAGE> 27
DESCRIPTION OF BUSINESS
OVERVIEW
We supply radio and wireless data communications solutions to business
customers primarily in the United Kingdom who seek to improve their customer
service levels and control their communications costs. Our added value is in our
ability to build complex communication systems from basic products currently
available from wireless communications equipment and technology providers. We
believe technology advances in radio, fixed telephone and cellular telephone
systems has created enormous opportunities in business communications.
Previously, because of infrastructure costs, complex business
communications systems could only be afforded by large corporations. The new
communications technology provides the basis for business customers to
re-consider their communication systems. We provide mobile and data
communications, network design, equipment sales, installation, systems
integration, consulting, and maintenance to businesses and government agencies.
We work with a customer to understand its communication systems requirements and
then build solutions for business customers. We select the best technology for
the customers' application from the range of technology available adding
software service and support to provide the complete solution to the customer.
Our expertise in wireless data and mobile communications permits us to
offer customers a wide range of professional services, including network
planning, design, implementation, management, maintenance and optimization. Our
broad range of distribution of various wireless mobile and data equipment and
technology suppliers allows us to serve our customers as a vendor-neutral,
single-source provider of communications solutions, equipment and service. By
offering equipment and technology from a variety of vendors, we can provide
businesses with tailored, scalable solutions.
We currently market our products and services to businesses in the
following industries:
- Banking, Insurance and Financial Services
- Government Agencies
- Local and Higher Education Institutions
- Healthcare, Medical, and Pharmaceutical institutions
- Retail and Service Companies
We also intend to pursue an acquisition strategy to broaden our
customer base substantially. In March 1999, we purchased certain assets of
Procomm Radio Communications, an airtime supplier. The primary asset acquired
was Procomm's 3,000 airtime users. This acquisition allowed us to obtain a five
year service provider license with Dolphin.
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<PAGE> 28
We incorporated in the State of Delaware on February 17, 2000 and
acquired our operating subsidiary Hugo International Limited on February 24,
2000.
THE UNITED KINGDOM BUSINESS COMMUNICATIONS MARKET
The United Kingdom business communications market is large and growing.
According to the Department of Trade & Industries Statistics, it consists of
approximately 8,998,000 business telephone lines, an estimated 13,000,000
business mobile phone users and over 1,000,000 private and public access mobile
radio users.
BUSINESS MOBILE TELEPHONE OPPORTUNITIES
Mobile phones were originally developed to allow mobile communications
using speech. This required low communications bandwidth. The new world of
communications requires the mobile phone to handle data as well as speech.
Currently, most widely available mobile telephones can transfer data at 9.6
kilobytes/sec using conventional GSM mobile telephone technology. This data rate
limits the way in which applications can operate with poor capability to handle
images. According to A. D. Little, the growth in business mobile data in the
United Kingdom market has rapidly increased from 400,000 users in 1997 to over
2,000,000 users this year within our target markets.
RADIO COMMUNICATION MARKET
According to A. D. Little, there are currently approximately 1,000,000
mobile radio subscribers in the United Kingdom using PMR (Private Mobile Radio)
or PAMR (Public Access Mobile Radio) systems. Most of these users currently
operate systems that use analog technology that has performance limitations.
Mobile radio users are generally businesses and government service
agencies that require fast call set up, push-to-talk (allows instant
communication between individuals or members of a workgroup) and group call
features as fundamental features for their daily operations. Many of these
business and government users also need wide area voice and data with workgroup
coverage and virtual private network features to enhance solutions to their
particular operational problems.
Currently these mobile radio users see the benefits of digital cellular
technology while maintaining the benefits offered from PMR and PAMR. We believe
that a very large percentage of these PMR and PAMR users would transfer their
communication to cellular technology for coverage, price and telephony reasons,
if mobile phone networks offered the full set of features required by the PMR /
PAMR business user.
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<PAGE> 29
MOBILE COMMUNICATIONS WITHIN THE WORKPLACE
Businesses also have need for mobile communication within the
workplace. This can be defined simply as the need for the telephone to be with
people when they are away from their work location but within the facility.
Similarly in hotels, guests or staff require the ability to roam the hotel
complex and still be accessible. We believe that an opportunity exists to supply
mobile communication solutions within the workplace.
We believe that we are positioned to take advantage of the numerous
opportunities in the business communications industry described above, as well
as, the following changes and developments described immediately below:
INNOVATIONS IN TECHNOLOGY
Advances in switching and electronics have increased the bandwidth, or
transmission capacity available for telecommunications networks. Historically,
carriers have built telecommunications networks based on circuit switching.
Circuit switching establishes and keeps open a dedicated path until a call is
terminated. Although circuit switching worked well for decades to provide voice
communication, it does not efficiently use transmission capacity. Once a circuit
is dedicated, it is unavailable to transmit any other information, even when
particular users of that circuit are not speaking or otherwise transmitting
information. Packet switching is replacing circuit switching. Packet switching
divides signals into small "packets" which are then independently transmitted to
their destination via the quickest path. Upon their arrival, the packets are
reassembled. Packet switching provides more efficient use of transmission
capacity because it does not require a network to establish inefficient
dedicated circuits that waste unused capacity. New packet networking
technologies include Internet Protocol (IP), asynchronous transmission (ATM) and
frame relay. Networks that employ packet switching technology are especially
efficient at carrying data signals. ATM service quality controls support
high-quality voice and video signals. Similar quality controls are being
developed for IP.
Telecommunications network designs have traditionally created separate
networks using separate equipment for voice, data and video signals. The
evolution from analog to digital technologies, which convert voice and other
signals into a stream of "1"s and "0"s, eliminates the traditional distinctions
between data, voice and video transmission services and systems. High-bandwidth
networks that use advanced packet-switched technology transmit mixed digital
voice, data and video signals over the same network. This enables mobile users
to use a single device for voice, data and video communications.
INCREASING DEMAND FOR COMMUNICATIONS SERVICES
We believe that there is and will continue to be significant growth in
the demand for mobile data, Internet, voice and video services. The increase in
computing power, number of computers networked over the Internet, and connection
speeds of networked computers are driving tremendous increases in communications
uses for the Internet and data services. Prices for cellular and long distance
voice services have decreased, resulting in increased demand for
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<PAGE> 30
these services. In addition, cost savings and network efficiencies are driving
demand for more robust voice and data network equipment.
PRODUCTS AND SERVICES
CORE PRODUCT GROUPS:
We distribute the products and services of a number of leading
communications suppliers. In radio and cellular equipment, we are an authorized
dealer for Motorola, Kenwood and Tait. In data and communications technology, we
are authorized service providers of BT Cellnet and Dolphin. In fixed line
telephony we are authorized dealers of Nitsuko but also sell and support Lucent
and Siemens products. Moreover, three new technologies are now becoming
available which combine cellular mobile telephony, high-speed packet data, and
other functions into a number of solutions to address the business customer's
mobile communications requirements.
The changes in technology and the growth in the telecommunications
industry has led to the rapid development of the market for telecommunications
equipment and mobile applications. Hugo has positioned itself to take advantage
of the foregoing market opportunities by developing three core internal product
groups.
TELECOMMUNICATIONS:
Providing complete solutions to business, including:
- Switches
- High bandwith
- Digital mobile telephony
- Value added products
- Least call routing
- Service and maintenance
NETWORK SERVICES:
Mobile applications solutions such as:
- Vehicle tracking
- Security monitoring
- Supply chain e-commerce Internet solutions
- Fleet management via the Internet
SYSTEMS:
Sale of private and public access mobile radio communication equipment
and systems.
- Design / manufacture
- Installation
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<PAGE> 31
- Maintenance
- Service
The portfolio of products and services encompasses state-of-the-art
telecommunications equipment, tailor-made technical communication solutions,
data applications, components, airtime sales, and equipment rental and
maintenance activities.
The following product groups outline the solutions that we offer to
target customers.
BUSINESS MOBILE TELEPHONE SOLUTION
BT CELLNET AND THE NEW GPRS TECHNOLOGY
GPRS or "GENERAL PACKET RADIO SERVICE" is a new data network being
developed alongside BT Cellnet's existing analog and digital networks.
It uses existing radio base stations linked to a new network based on
'packet switch' technology. The major benefit is data rates of 64
kilobytes/sec using packet switch technology, six times faster than the
current GSM networks.
With its packet technology, GPRS allows a user to log into a data
network, typically a company local network or an Internet Service
Provider, and then send and receive data as and when required
throughout the day. The GPRS network is only utilized when data is
being transmitted, but the user retains a virtual connection to his
computer network throughout the day, thereby eliminating the need for
to reconnect each time a user wants to connect to a network.
Like existing mobile data services, initially most GPRS users will be
business people, but as GPRS integrates two of the worlds fastest
growing industries, mobile phones and the Internet, we believe it will
spread rapidly to cover many consumers too. There will also be the
capability to have GPRS devices hidden from view in the form of
machines that will communicate to control centers, for example:
- vehicle tracking systems
- vending machines reporting stock levels
- metering devices
- remote sensors
- alarms, etc.
The largest single application of this new technology is expected to be
for the 'mobile office' user accessing the company Intranet for sending
and receiving emails while working away from the office, whether in the
United Kingdom or abroad. There will be many business applications
tailored to the needs of specific groups of workers. Users will be able
to access company databases and download plans, parts lists, customer
information and history, maps, pictures and other information. For
example, users can transmit information on fault diagnosis, parts used,
and fault repair times can be transmitted back to the office for
immediate invoicing and updating of stock records. Also, users will be
able to view product details including full pictures or videos. Order
information from mobile salesmen will be a simple operation as will the
ability to browse
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<PAGE> 32
stock levels.
GPRS is based on the Internet Protocol (IP). This provides ease of
connectivity from mobile data terminals to the Internet and to IP-based
company Intranets. Existing IP applications will not need to be
rewritten to work in a mobile environment, and will therefore provide
the same look and feel as when they are in the office. GPRS is suitable
for video and multi-media applications.
Collectively these individual benefits combine to provide a real
advantage to business users. Companies can utilize the benefits of GPRS to keep
constantly in touch with their employees, their vehicles, and their machines,
and provide more efficient and responsive services to their customers.
Most companies today are heavily dependent on their local area networks
(LAN). It is the heart of a business's daily operations and the information it
carries is its lifeblood, from e-mail and Intranet to customer databases and
order process systems. The introduction of GPRS is an important step in the
convergence of internet and mobile phone technologies.
RADIO COMMUNICATIONS MARKET SOLUTION
DOLPHIN AND THE TETRA TECHNOLOGY
Dolphin, the largest public mobile radio operator in Europe with over
200,000 analog subscribers and licenses covering over 210 million people, was
formed to establish and operate a digital mobile radio network in the United
Kingdom, France, Germany and Spain, based on TETRA (Terrestrial Trunked Radio
Access) technology that would meet all of the mobile communications requirements
of mobile business workgroups.
TETRA BACKGROUND INFORMATION
TETRA is the only digital mobile radio technology that has been
accepted throughout Europe. It is a standard defined by ETSI, the European
Telecommunications Standards Institute, and combines the benefits of cellular
telephony, PAMR radio and packet-switched data transfer. The TETRA standard
defines an open interface, hand over algorithms and allows for multiple vendors,
which offers users the promise of competition and attractive pricing.
A TETRA telecommunications system can offer:
- mobile phone style handsets
- almost instantaneous call set up times
- 'press to talk' capability
- group call facilities
- hand over between cells
- excellent voice quality; and
- packet data capability
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<PAGE> 33
The 'press to talk' function allows instant individual or multiple
communications between all members of a working group. This is made possible by
call set-up times of less than half a second. By comparison, GSM phones have a
set-up time of several seconds and is not designed to offer group call services.
This feature is required by the police, fire and ambulance services. In
addition, a number of applications where the ability to call one to many, or
even one to one with very short call set up times is a "must have". There is an
additional market in organizations where the company internal call rate is high,
in this environment there are financial advantages to using the "on net" calling
capability of Dolphin to minimize communications costs. The Dolphin network
therefore offers an upgrade path to the radio user and a wide range of features
to benefit specific business users operating in vertical markets.
The Dolphin users like their counterparts in the GSM mobile phone
market also need access to mobile data.
PMR AND PAMR SYSTEMS
Currently, we supply PMR and PAMR systems that have been fundamental in
providing instant call set-up communications for the following market segments:
- Police / Fire / Ambulance
- Security
- Utilities
- Health
- Social services
- Retail
- Construction
- Transport
The analog PMR radio markets currently support approximately 1,000,000
voice users, many of which are network owners. These users need instant call
set-up and group working which has not previously been available from a digital
network. TETRA will offer a National and Pan European public digital radio
network with exactly these features.
The analog PAMR radio markets currently supports approximately 85,000
users, all of which will transfer to a digital network over the next 2-5 years.
These private and public networks have supplemented the mainstream audio, data
and visual fixed networks operated by BT, Cable and Wireless etc. The market
has, thus far, tolerated these fixed communications mediums.
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<PAGE> 34
MOBILE COMMUNICATIONS WITHIN THE WORKPLACE SOLUTION
DECT AND SWITCHES
We believe that an opportunity exists to supply mobile communication
solutions within the workplace. The ideal solution is to have a digitally
enhanced cordless telephone (DECT) system linked with a business' main
switchboard. The solution offered by Hugo includes the switch plus DECT supplied
by Nitsuko of Japan, one of the largest manufacturers of telephone systems in
the world. DECT supplies the mobile capability within the office which, when
combined with a switch (PABX), supports the functions used by DECT handsets. The
PABX switch provides a range of 1 kilometer from the central cordless unit to
the base stations. The switches offered by us are a range targeted at the small
to medium enterprise with the latest telephone technology supported and includes
many advanced features.
We have already sold DECT systems and PABX switches to a hotel chain and a
call center. Active marketing has now started to the small and medium size
companies where the switch provides the most benefits to the user.
COMMUNICATIONS AND DATA SOLUTIONS (INTERCONNECT SERVICES)
Businesses seek solutions to the challenges of selecting, maintaining and
upgrading communications technologies and services amid rapid technological
advances. As a result, the demand for consultant services in systems integration
and communications networks has been growing rapidly. We assess the customers'
communications and technology needs, evaluate equipment and services options,
supply equipment and services including installation, implement efficient
network solutions and manage the combination of technologies.
PROFESSIONAL SERVICES
We design, build and operate advanced voice, data and integrated
communications systems. To meet our customers' needs, we evaluate technologies
such as Internet Protocol, frame relay, DSL and ATM, and then select, integrate
and deploy the appropriate routers, switches, access devices and mobile
equipment.
We offer our customers a variety wireless data and voice equipment. We
also install, configure and integrate all the equipment we sell to our
customers.
We provide service, maintenance and support for our customers' growing
data and voice communications systems, as well as sell and install data and
mobile communications equipment. We maintain and service our clients' voice and
data systems primarily through maintenance plans or project specific plans based
on time and materials.
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<PAGE> 35
CUSTOM SOLUTIONS
TRACKING HIGH VALUE MATERIAL VIA AN INTERNET WEB SITE
There is a requirement for high value equipment being transported across
Europe to have a multifunctional tracking system capable of using several
communication networks. This together with operational requirements needs a
complex tracking and monitoring system coordinated via an Internet site.
Working with one particular client, we have developed such a system and we
believe it will lead to multiple revenue streams. We are currently marketing
this product to customers with similar tracking and monitoring requirements to
the customer for which the product was originally developed.
VENDOR RELATIONSHIPS
We have agreements with the wireless voice and data
equipment/technology manufacturers and providers listed below:
- BT Cellnet
- Dolphin
- Motorola
- Kenwood
- Tait
- Nitsuko
Our agreements with the above manufacturers and technology providers allow
for the distribution, resale or integration of products, and/or acting as agents
for these equipment manufacturers and technology providers. Normally, we receive
volume discounts on these manufacturers and service providers products and
services.
RESEARCH & DEVELOPMENT
TRADECOM
One of the most important changes in business operations is the use of the
Internet for commercial transactions. The United Kingdom Internet subscriber
base is currently concentrated in large businesses. Any strategy to use the
Internet in United Kingdom, therefore must have a call center solution included.
The United Kingdom Internet subscriber base now exceeds 4,500,000 users from a
total population of some 57,000,000 (8%). Internet usage and thus the
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<PAGE> 36
ability to reach customers is still low in United Kingdom compared to the United
States but changing very quickly.
Hugo is building a new route to market which will increasingly be Internet
focused. This product, called TradeCom, will enable customers to order products
online and have a simple and fast delivery. The focus is on providing the
ability to supply standard products or previously supplied products off the
shelf with minimum lead-time with any standard service requested.
TRADECOM will afford a low cost of sales operation which utilizes the
Internet, telesales, direct marketing, and fax ordering that provides the
customer with the product or service he wants in the most efficient manner
possible.
HUGO'S INTERNET APPLICATION DEVELOPMENT
The Internet is providing a first class mechanism to change business
processes to reduce cost in many areas of business. The catalyst for the change
is the combination of the new communications technology with the Internet that
provides the ability to process large volumes of data remotely at low cost. A
simple example is that now images of a product range can easily be displayed to
a customer using the GPRS mobile phone and a portable computer for them to
select the product they require.
Using the Internet, plus the national communications network of BT
Cellnet, Hugo is developing a link between members of staff on remote sites and
a warehouse. Using a hand held computer the on site personnel can order
materials for delivery or browse a product list before ordering. Advantages
arise for Hugo from the capital sale, ongoing network service revenue and
Internet call receipts.
This product is in development for a large United Kingdom User with 65,000
+ small customers.
This application will provide benefits across a wide range of vertical
markets. Many markets require information to be entered remotely or can
reduce the business processes required to complete order entry:
- On Site Retail Ordering
- Vending equipment
- Service Engineers
- Remote Sales Order Processing
MARKETING AND SALES STRATEGY
We seek to build a strong base of blue chip customers as clients. We
believe that long-term relationships built on quality solutions, equipment,
customer service, short response time and competitive pricing are the most
effective way of attaining our
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<PAGE> 37
business objectives. We are seeking expansion of our client base through
targeted solicitation of clients in our existing geographic and vertical
markets. We are also undergoing a public relations campaign to gain the maximum
visibility for our products and services by creating awareness of the technology
with senior executives, chief information or technology officers and IT/IS
managers. We also advertise in order to establish Hugo's identity in the
marketplace. The intent is to re-enforce our direct marketing effort and to
build confidence among targeted customers in our products and services.
We believe it is important to use follow on opportunities from the public
relations campaign and re-enforce the benefit gained from public relations or to
preview our products before public relations activity in order to gain the
maximum impact.
COMPETITION
The business marketplace for communications products is highly
competitive. The size of a client, the geographic scope and product platform
preferences of our target client base dictates the competition we face. The
market for wireless mobile and data communications services and products sales
is highly competitive on a national and international basis. The level of
competition intensifies, while the number of qualified competitors diminishes as
the level of technological and design expertise rises and product distribution
rights narrow.
Within the market for voice and data solutions area, PMR and PAMR our
direct competitors come from the existing PMR and PAMR industry including:
- London Communications Ltd.
- Relcom Ltd.
- Airsys Technologies Ltd.
- Two-Way Radio Communications
- Mobile Radio (Banbury)
- Securicor Radio Services
The competition base in the GSM mobile phone area is large with many
companies supplying product. The difference in Hugo supplying products is that
the supply is only to business and focused on adding value to the basic
technology. Other potential competition may come from cable operators,
commercial vehicle distributors, facilities management companies and business
communications retailers.
CORPORATE HISTORY
We incorporated in the State of Delaware on February 17, 2000 and acquired
our operating subsidiary Hugo International Limited effective on February 24,
2000. As a result of the merger, we succeeded to the business that had been
carried on by the predecessor company since 1992.
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<PAGE> 38
EMPLOYEES
We have 24 full-time and 2 part-time employees. Of these, 11 are in sales
and marketing, 10 are in technical and distribution, and five are in
administration. We believe our relationship with our employees are satisfactory.
PROPERTIES
Our principal executive offices are located at 6 Waterside Drive, Langley
Business Park, Langley Slough, Berkshire SL3 6EZ United Kingdom, where we occupy
approximately 4,500 square feet of leased space under a lease that expires in
2008. We have an option to terminate the lease upon giving notice 6 months prior
to December 25, 2003. Annual base rent under the lease is approximately $90,000.
We believe the space occupied by our staff is adequate for our current needs.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors, executive officers and other significant employees and
their ages and positions are as follows:
<TABLE>
<CAPTION>
Name of Individual Age Position with company and Subsidiaries
------------------ --- --------------------------------------
<S> <C> <C>
David W. Foden 46 Chairman of the Board, President and Director of the company
Michael Christmas 44 Director, Secretary and Treasurer of the company
Iain Bowles 53 Director of the company
Jan O'Hara 28 Sales Manager of Hugo International Ltd.
Bruce Hall 37 Engineering Manager of Hugo International Ltd.
</TABLE>
DAVID W. FODEN has been a director and Chairman of the Board and President
of Hugo since its formation in February 2000. Mr. Foden also has been a managing
director of Hugo International Ltd., our United Kingdom subsidiary since 1992.
MICHAEL CHRISTMAS has been a director, Secretary, Treasurer and Financial
Controller of Hugo since its formation in February 2000. Mr. Christmas also has
been the finance director of Hugo International Ltd. since February 2000. He
also has been the financial controller of Hugo International Ltd. since
September 1999. Mr. Christmas was the financial controller of Thatch
International Ltd., a private United Kingdom company, from September 1997 until
September 1999 and the financial controller of United Barcode Industries Ltd., a
private United Kingdom company and a subsidiary of United Barcode Industries Ab,
a public company organized under the laws of Sweden, from September 1994 until
September 1997.
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<PAGE> 39
IAIN BOWLES has been a director of Hugo since its formation in February
2000. Mr. Bowles also has been a non-executive director of Hugo
International Ltd. since February 2000. Mr. Bowles also is a managing
director of Beechfirst Ltd., a private United Kingdom company. Mr. Bowles
also has served as a consultant to Beechfirst Ltd. since January 1997.
JAN O'HARA has been the Sales Manager of Hugo International Ltd. since
September 1997. Prior to working at Hugo International, Mr. O'Hara worked at
Contact One/Coronet Communications, a private United Kingdom company. Mr.
O'Hara was employed in the following positions at Contact One/Coronet
Communications: (i) sales manager from January 1997 until September 1997,
(ii) sales engineer from September 1995 until January 1997, and (iii) radio
technician from June 1994 until September 1995.
BRUCE HALL has been the Engineering Manager of Hugo International Ltd.
since March 1999. Prior to working at Hugo International, from 1994 through
February 1999, Mr. Hall was self-employed and through his company, TWR
Communications, Ltd., a private United Kingdom company, Mr. Hall performed
sub-contract work installing PMR and PAMR radios. From September 1997 through
March 1999, Mr. Hall also was employed at Procomm Radio Communications, a
partnership, on a self-employed subcontractor basis as a technical manager. Mr.
Hall is a director of TWR Communications, Ltd.
The directors serve until the next annual meeting of stockholders and
until their respective successors are elected and qualified. Officers serve at
the discretion of the Board of Directors. There are no family relationships
among the directors, officers or key employees.
DIRECTOR COMPENSATION
We have no established compensation arrangements with our directors but
directors may be reimbursed for their reasonable expenses incurred in connection
with the attendance at board and committee meetings.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information for Hugo and Hugo International
Limited for each of the fiscal years ended December 31, 1999, 1998 and 1997
concerning compensation of:
- all individuals serving as the company's chief executive officer
during the fiscal years ended December 31, 1999, 1998 and 1997; and
- each other executive officer or key employee of the company whose
total annual salary and bonus exceeded $100,000 for the fiscal years
ended December 31, 1999, 1998 and 1997:
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<PAGE> 40
<TABLE>
<CAPTION>
Other Annual
Annual Compensation Compensation
-----------------------------------------------------------------------
Salary Bonus
Name and Principal Position Year ($) ($) ($)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David W. Foden, Chairman of the Board and 1999 $74,228(1) $0 $ 0
Board and President of the 1998 $49,600(2) $0 $ 8,851(4)
company and Hugo 1997 $49,237(3) $0 $11,188(5)
International Ltd.
</TABLE>
(1) $68,000 of Mr. Foden's salary was paid to RCI as management fees, a
company that Mr. Foden controls.
(2) All of Mr. Foden's salary was paid to RCI as management fees, a company
that Mr. Foden controls.
(3) All of Mr. Foden's salary was paid to RCI as management fees, a company
that Mr. Foden controls.
(4) During 1998, $8,851 was paid by the Company for premiums on life insurance
and health insurance for Mr. Foden.
(5) During 1997, $11,188 were paid by the Company for premiums on life
insurance and health insurance for Mr. Foden.
STOCK OPTION GRANTS IN LAST FISCAL YEAR. There were no grants of stock
options during the fiscal year ended December 1999.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
INDEMNIFICATION
Hugo's Certificate of Incorporation and Bylaws provide that no director of
Hugo shall have any personal liability to Hugo or its stockholders for breach of
fiduciary duty as a director, except:
- for any breach of the director's duty of loyalty to Hugo or its
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derived an improper
personal benefit.
As a result of this provision, Hugo and our stockholders may be unable to
obtain monetary damages from director for certain breaches of his fiduciary
duty. This provision does not, however, eliminate the directors' fiduciary
responsibilities and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of non-monetary relief will
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<PAGE> 41
remain available under Delaware law. The provision also does not affect a
director's responsibilities under any other laws, such as the federal securities
laws or state or federal environmental laws.
Our bylaws provide for the indemnification of our directors and officers
to the fullest extent authorized by the Delaware General Corporation Law. Such
indemnification may include, if we so decide, the right of the indemnified party
to be paid expenses in advance of any proceeding for which indemnification may
be had, provided that the payment of these expenses incurred by a director or
officer in advance of the final disposition of a proceeding may be made only
upon delivery to us of an undertaking by or on behalf of the director or officer
to repay all amounts paid in advance if it is ultimately determined that the
director or officer is not entitled to be indemnified. In addition, our
certificate of incorporation provides that our employees and other agents may be
indemnified in accordance with the Delaware General Corporation la w to the
extent determined by our board of directors in its sole discretion.
To the extent indemnification for liabilities arising under the securities
act may be permitted to our directors, officers and controlling persons of our
company under the provisions described above, or otherwise, we have been advised
that in the opinion of the SEC, this type of indemnification is against public
policy as expressed in the securities act and is, therefore, unenforceable.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership of
our common stock, as of August 10, 2000, and as adjusted to reflect the sale of
the shares offered hereby by each person known by us to own beneficially more
than 5% of the outstanding common stock, by each person who is a director of the
company, by each person listed in the Summary Compensation Table above and by
all directors and officers of the company as a group.
The information contained in the table was furnished by the persons listed
therein. The calculations of the percent of shares beneficially owned before the
offering are based on 20,500,000 shares of common stock outstanding on August
10, 2000. The calculations of the percent of shares beneficially owned after the
offering are based on 20,500,000 shares of common stock anticipated to be
outstanding after the offering.
<TABLE>
<CAPTION>
Percent of Shares Beneficially Owned
-----------------------------------------------------
After Offering
Number of Shares Before After if all Shares Offered
Name and Address Beneficially Owned Offering Offering are Purchased
---------------- ------------------ -------- -------- -------------
<S> <C> <C> <C> <C>
David Foden 11,558,000 56.38% 56.38% 0
Hugo International Ltd.
6 Waterside Drive
Langley Slough, Berkshire SL3 6EZ
United Kingdom
</TABLE>
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<PAGE> 42
<TABLE>
<CAPTION>
Percent of Shares Beneficially Owned
-----------------------------------------------------
After Offering
Number of Shares Before After if all Shares Offered
Name and Address Beneficially Owned Offering Offering are Purchased
---------------- ------------------ -------- -------- -------------
<S> <C> <C> <C> <C>
Michael Christmas 10,000 * * *
61 Franklin Avenue
Tadley Hants, United Kingdom
RG26 4EZ
Iain Bowles 10,000 * * *
34 Barrows Green Road
Oxted Surrey United Kingdom
RH8 ONL
Christopher Sukornyk 1,900,000 9.27% 9.27% 0
70 Richmond Street East
Suite 301
Toronto, Ontario, Canada
M5C IN8
Gillian Foden 1,310,000 6.39% 6.39% 0
Hugo International Ltd.
6 Waterside Drive
Langley Slough, Berkshire SL3 6EZ
United Kingdom
All Directors and Executive Officers as 11,578,000 56.48% 56.48% 0
a Group (3 persons)
</TABLE>
-----------------------------
* Less than one percent.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1998, we paid $49,600 in management fees to RCI Management. Our
majority stockholder, chief executive officer and a director, David W. Foden,
is a partner in RCI.
In 1998, we borrowed $57,253 from David W. Foden. These advances are
unsecured and non-interest bearing.
In 1998, we had sales of $154,600 to Hugo Zimbabwe, a company in which
David W. Foden held a majority interest.
In 1999, we had sales of $87,879 to Hugo Ireland, a company in which David
W. Foden holds a minority interest.
In 1999, we paid $68,000 in management fees to RCI Management.
In 1999, we received borrowed $626,226 from David W. Foden. These
advances are unsecured and non-interest bearing.
In 1999, we had sales of $53,598 to Hugo Ireland.
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<PAGE> 43
In the first quarter of 2000, we paid $22,500 in management fees to RCI
Management.
In the first quarter of 2000, we received $211,500 in advances payable
from David W. Foden. These advances are unsecured and non-interest bearing.
In the first quarter of 2000, we had sales of $4,880 to Hugo Ireland.
DESCRIPTION OF SECURITIES
Hugo is presently authorized to issue 50,000,000 shares of common stock,
of which 20,500,000 shares are issued and outstanding, and 1,000,000 shares of
preferred stock, no one of which shares are issued and outstanding.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share of
record on all matters which stockholders are entitled to vote, including the
election of directors. At the annual meeting, the stockholders elect the
directors by a plurality vote. Holders of our common stock are entitled to
receive, if declared, such dividends and other distributions in cash, stock or
property from our assets or funds legally available for such purposes, subject
to any dividend preferences that may be attributable to preferred stock. There
are no preemptive, conversion, redemption or sinking fund provisions applicable
to our common stock. All outstanding shares of common stock are fully paid and
non-assessable. In the event of our liquidation, dissolution or winding up,
holders of common stock are entitled to share ratably in the assets available
for distribution, subject to any preference that may be attributable to the
holders of preferred stock, if any. Registered stockholders may transfer their
shares by surrendering to us or to our transfer agent their share certificates
duly endorsed or accompanied by proper evidence of succession, assignation or
authority to transfer.
PREFERRED STOCK
The Certificate of Incorporation of Hugo authorizes the issuance of
1,000,000 shares of preferred stock. No shares of preferred stock are
outstanding, and we have no plans to issue a new series of preferred stock. Our
Board of Directors may, without stockholder approval, issue shares of preferred
stock from time to time in one or more series and, subject to the limitations
contained in the Certificate of Incorporation and any limitations prescribed by
law, establish and designate any such series and fix the number of shares and
the relative rights, conversion rights, voting rights and terms of redemption
(including sinking fund provisions) and liquidation preferences. The issuance of
preferred stock, could, under certain circumstances, have the effect of delaying
or preventing a change in control of the company, but also may adversely affect
the rights of holders of our common stock by placing restrictions upon payments
of dividends to holders of our common stock or by diluting the voting power of
such holders.
-42-
<PAGE> 44
TRANSFER AGENT
The company's Transfer Agent is Interwest Transfer Company, Inc., 1981
East Murray Holladay Road, Suite 100, Salt Lake City, Utah 84117.
SELLING STOCKHOLDERS
The following table sets forth the name of each selling stockholder, the
number of shares owned by the selling stockholder, and the number of shares that
may be offered for resale pursuant to this prospectus. Because each selling
stockholder may offer all, some or none of the shares it holds, and because
there are currently no agreements, arrangements, or understandings with respect
to the sale of any of the shares, no definitive estimate as to the number of
shares that will be held by each selling stockholder after the offering can be
provided. The following table has been prepared on the assumption that all
shares offered under this prospectus will be sold to parties unaffiliated with
the selling stockholders. Except as indicated, none to the selling stockholders
has had a material relationship with us within the past three years, other than
as a result of the ownership of our shares or other securities. Unless otherwise
indicated, the selling stockholders have sole voting and investment power with
their respective shares. Percentages in the table below are based on 20,500,000
shares of our common stock outstanding as of August 10, 2000.
<TABLE>
<CAPTION>
SHARES SHARES
OWNED PRIOR TO NUMBER OF SHARES OWNED AFTER
THE OFFERING WHICH MAY BE THE OFFERING
----------------------------- SOLD IN ----------------------------------
NAME NUMBER PERCENT THIS OFFERING NUMBER PERCENT
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
David Foden(1)(1a)(2) 11,558,000 56.39 11,558,000 11,558,000 56.39
Brian Gundry(1) 262,000 1.278 262,000 262,000 1.278
Gillian Foden(1) 1,310,000 6.390 1,310,000 1,310,000 6.390
Christopher Sukornyk(3) 1,900,000 9.268 1,900,000 1,900,000 9.268
Richard Tkaczyk(2) 10,000 * 10,000 10,000 *
Lisa Moroney(2) 10,000 * 10,000 10,000 *
Julie Smith(2) 10,000 * 10,000 10,000 *
Chris Griffiths(2) 10,000 * 10,000 10,000 *
Raj Sangha(2) 20,000 * 20,000 20,000 *
Beer and Partners Ltd.(2) 10,000 * 10,000 10,000 *
John Scott(2) 20,000 * 20,000 20,000 *
Alomo Ltd.(2) 10,000 * 10,000 10,000 *
Thomas Grady(2) 10,000 * 10,000 10,000 *
Christopher Ireland(2) 10,000 * 10,000 10,000 *
Michael Christmas(2)(2a) 10,000 * 10,000 10,000 *
Graeme Spurr(2) 10,000 * 10,000 10,000 *
Doreen Grant(2) 20,000 * 20,000 20,000 *
Aidan Rawlins(2) 10,000 * 10,000 10,000 *
Iain Bowles(2)(2b) 10,000 * 10,000 10,000 *
Angeles Martinez-Bodi(2) 5,000 * 5,000 5,000 *
Irene Foden(2) 10,000 * 10,000 10,000 *
William Foden(2) 10,000 * 10,000 10,000 *
Caliz Martinez-Bodi(2) 5,000 * 5,000 5,000 *
Barbara Chaudhry(2) 5,000 * 5,000 5,000 *
Warren Bouchier(2) 10,000 * 10,000 10,000 *
Mark S. Lewis(2) 20,000 * 20,000 20,000 *
Bruce Hall(2)(2c) 20,000 * 20,000 20,000 *
Jan O'Hara(2)(2d) 10,000 * 10,000 10,000 *
Vladimir Rumyantsev(2) 10,000 * 10,000 10,000 *
Antonia Davies(2) 10,000 * 10,000 10,000 *
</TABLE>
-43-
<PAGE> 45
<TABLE>
<CAPTION>
SHARES SHARES
OWNED PRIOR TO NUMBER OF SHARES OWNED AFTER
THE OFFERING WHICH MAY BE THE OFFERING
----------------------------- SOLD IN ----------------------------------
NAME NUMBER PERCENT THIS OFFERING NUMBER PERCENT
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ian Edwards(2) 5,000 * 5,000 5,000 *
Mario de Vargas(2) 5,000 * 5,000 5,000 *
Anthony Christmas(2) 5,000 * 5,000 5,000 *
Samuel Dehaney(2) 10,000 * 10,000 10,000 *
David Hashmi(4) 350,000 1.707 350,000 350,000 1.707
Stephen Andrew Jackson(4) 900,000 4.390 900,000 900,000 4.390
Brownstone International Limited(5) 850,000 4.146 850,000 850,000 4.146
Seaflight Limited(5) 800,000 3.902 800,000 800,000 3.902
Hutton Limited(5) 900,000 4.390 900,000 900,000 4.390
N.E.I. Acquisition Corporation(5) 200,000 * 200,000 200,000 *
Futuris Shipping Corp.(6) 650,000 3.171 650,000 650,000 3.171
Acrobat Limited(7) 450,000 2.195 450,000 450,000 2.195
Christopher John Crabtree(8) 50,000 * 50,000 50,000 *
</TABLE>
---------------------------
* Represents less than 1% of our outstanding shares of common stock.
(1) Received shares in Hugo pursuant to an Exchange Agreement dated as of
February 24, 2000 by and among Hugo International Telecom Inc., David W.
Foden, Brian H.C. Gundry and Gillian L. Foden.
(1a) Chairman of the Board, President and Director of the company.
(2) Purchased shares in a March 3, 2000 private offering.
(2a) Director, Secretary and Treasurer of the company.
(2b) Director of the company.
(2c) Engineering Manager of Hugo International Ltd.
(2d) Sales Manager of Hugo International Ltd.
(3) Acquired shares March 1, 2000 in a private transaction with Hugo
shareholders.
(4) Purchased shares in a February 24, 2000 private offering.
(5) Purchased shares in a March 12, 2000 private offering.
(6) Purchased shares in a March 9, 2000 private offering.
(7) Purchased shares in a June 30, 2000 private offering.
(8) Purchased shares in a July 14, 2000 private offering.
PLAN OF DISTRIBUTION
The selling stockholders, including any donees or pledgees who receive
shares from a selling stockholder named above, may offer their shares of common
stock at various times in negotiated transactions or otherwise, or on any
securities exchange where our common stock may be listed in the future.
-44-
<PAGE> 46
The selling stockholders may sell their shares at market prices prevailing
at the time of sale, at prices related to such prevailing market prices, at
negotiated prices or at fixed prices.
The selling stockholders may sell their shares directly to purchasers or
may use broker-dealers to sell their shares. Broker-dealers who sell the shares
may receive compensation in the form of discounts, concessions, or commissions
from the selling stockholders or they may receive compensation from purchasers
of the shares for which they acted as agents or to whom they sold the shares as
principal, or both. (The compensation as to a particular broker-dealer might be
in excess of customary commissions.)
The selling stockholders and these broker-dealers may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended. Any
commissions received by such broker-dealers and any profit on the resale of the
shares sold by them while acting as principals might be deemed to be
underwriting discounts or commissions under the Securities Act of 1933.
Hugo will pay all fees and expenses incurred in connection with preparing
and filing this prospectus and the registration statement. The selling
stockholders will pay any brokerage commissions and similar selling expenses, if
any, attributable in connection with the sale of the shares of common stock
including stock transfer taxes due or payable in connection with the sale of the
shares.
Hugo will indemnify the selling stockholders and any underwriter of a
selling stockholder against certain liabilities, including liabilities under the
Securities Act of 1933. The selling stockholders, each individually and not
jointly, will indemnify Hugo against certain liabilities, including liabilities
under the Securities Act of 1933. The selling stockholders may agree to
indemnify any agent, dealer, or broker-dealer that participates in transactions
involving sales of the shares against certain liabilities, including liabilities
under the Securities Act of 1933.
Selling stockholders also may resell all or a portion of the shares in
open market transactions in reliance upon Rule 144 under the Securities Act of
1933 provided they meet the criteria and conform to the requirements of Rule
144.
LEGAL MATTERS
The validity of the shares of common stock and shares of common stock
issuable upon exercise of warrants offered by this prospectus and other legal
matters relating to this offering will be reviewed by Piper Marbury Rudnick &
Wolfe LLP, New York, New York.
EXPERTS
Our financial statements and schedule as included in this prospectus and
in the registration statement have been audited by Pender, Newkirk & Company
CPA's, independent certified public accountants, to the extent and for the
periods set forth in their reports, which contain an explanatory paragraph
regarding our ability to continue as a going concern, and which
-45-
<PAGE> 47
appear elsewhere in this prospectus and in the registration statement, and are
included in reliance upon those reports given upon the authority of that firm as
experts in accounting and auditing.
WHERE YOU CAN GET MORE INFORMATION
This Prospectus constitutes part of a Registration Statement on Form SB-2
that we filed with the SEC under the Securities Act with respect to the Shares.
This Prospectus does not contain all of the information contained in the
Registration Statement. For further information about us and the securities
offered hereby, refer to the Registration Statement and its Exhibits. Any
statements contained in this Prospectus concerning the provisions of any
documents are not necessarily complete, and in each instance, reference is made
to the copy of such document filed as an Exhibit to the Registration Statement
or otherwise filed with the SEC. Each such statement is qualified in its
entirety by such reference. At your request, we will provide you, without
charge, a copy of any exhibits to the registration statement incorporated by
reference in this prospectus. If you want more information, write or call us at:
6 Waterside Drive
Langley Business Park, Langley Slough
Berkshire SL 3 6EZ United Kingdom
011-44-1753-542-828
Attn: David W. Foden
Upon the effectiveness of the Registration Statement of which this
prospectus forms a part, we will become subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and will
file reports and other information with the SEC in accordance therewith. Such
reports and other information filed by the Company are available for inspection
and copying at the public reference facilities of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20459, and at the SEC's Regional Offices located at 7
World Trade Center, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material may be obtained by mail from the Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. The SEC also maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, that file electronically with the SEC.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE FORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON
THE DATE OF THIS DOCUMENT.
-46-
<PAGE> 48
CONSOLIDATED FINANCIAL STATEMENTS
HUGO INTERNATIONAL TELECOM, INC.
Three Months Ended March 31, 2000 and 1999 (Unaudited)
and Years Ended December 31, 1999 and 1998
Independent Auditors' Report
F-1
<PAGE> 49
Hugo International Telecom, Inc.
Consolidated Financial Statements
Three Months Ended March 31, 2000 and 1999 (Unaudited)
and Years Ended December 31, 1999 and 1998
CONTENTS
<TABLE>
<S> <C>
Independent Auditors' Report on Consolidated Financial Statements......... 1
Consolidated Financial Statements:
Consolidated Balance Sheets............................................ 2
Consolidated Statements of Operations.................................. 3
Consolidated Statements of Changes in Stockholders' Equity (Deficit)... 4
Consolidated Statements of Cash Flows.................................. 5-6
Notes to Consolidated Financial Statements............................. 7-16
</TABLE>
F-2
<PAGE> 50
INDEPENDENT AUDITORS' REPORT
Board of Directors
Hugo International Telecom, Inc.
Berkshire, United Kingdom
We have audited the accompanying consolidated balance sheet of Hugo
International Telecom, Inc. as of December 31, 1999 and the related consolidated
statements of operations, changes in stockholders' equity (deficit), and cash
flows for the years ended December 31, 1999 and 1998. These consolidated
financial statements are the responsibility of the management of Hugo
International Telecom, Inc. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. These standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully discussed in
Note 3, the Company has negative working capital of approximately $1,120,000 and
liabilities exceed assets by approximately $398,000 as of December 31, 1999.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of liabilities
that might be necessary in the event the Company cannot continue in existence.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Hugo International Telecom, Inc. as of December 31, 1999 and the results of its
operations and its cash flows for the years ended December 31, 1999 and 1998 in
conformity with accounting principles generally accepted in the United States of
America.
Certified Public Accountants
Tampa, Florida
June 9, 2000
F-1
<PAGE> 51
Hugo International Telecom, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 175,604 $ 67,812
Accounts receivable, net of allowance for doubtful accounts
of $138,147 and $52,214 as of March 31, 2000 and
December 31, 1999, respectively 1,106,676 756,616
Income tax refund 50,470 10,799
Inventory 111,905 92,270
Prepaid expenses and other current assets 79,583 105,981
----------- -----------
Total current assets 1,524,238 1,033,478
Property and equipment, net of accumulated depreciation 159,132 164,068
Goodwill, customer lists, and other intangibles,
net of accumulated amortization 1,084,544 1,125,034
----------- -----------
$ 2,767,914 $ 2,322,580
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft $ 322,768 $ 131,085
Accounts payable 1,029,075 882,726
Current portion of long-term debt 198,437 284,783
Stockholder advances 356,784 626,226
Current portion of capital lease obligations 37,513 55,279
Accrued expenses 71,476 125,209
Deferred income 48,546 48,390
----------- -----------
Total current liabilities 2,064,599 2,153,698
----------- -----------
Long-term debt 384,921 567,353
----------- -----------
Stockholders' equity (deficit):
Preferred stock; $.0001 par value; 1,000,000 shares
authorized; 0 shares issued and outstanding
Common stock; $.0001 and $1.60 par value as of 2000
and 1999, respectively; 50,000,000 and 100 shares
authorized as of 2000 and 1999, respectively;
20,000,000 and 100 shares issued and outstanding
as of 2000 and 1999, respectively 2,000 161
Additional paid-in capital 957,731
Accumulated other comprehensive income 3,597 5,898
Stock subscriptions receivable (35,000)
Accumulated deficit (609,934) (404,530)
----------- -----------
Total stockholders' equity (deficit) 318,394 (398,471)
----------- -----------
$ 2,767,914 $ 2,322,580
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-1
<PAGE> 52
Hugo International Telecom, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
-------------------------------- --------------------------------
2000 1999 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 1,324,679 $ 1,070,290 $ 5,094,575 $ 3,915,293
Cost of revenues 846,989 732,612 3,368,718 2,451,712
------------ ------------ ------------ ------------
477,690 337,678 1,725,857 1,463,581
Selling, general and
administrative expenses 670,653 364,897 1,827,442 1,628,477
------------ ------------ ------------ ------------
Loss from operations (192,963) (27,219) (101,585) (164,896)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 13 345 1,246 513
Interest expense (41,786) (21,782) (75,159) (59,123)
Loss on disposal of
fixed assets (13,032) (8,183)
------------ ------------ ------------ ------------
(41,773) (21,437) (86,945) (66,793)
------------ ------------ ------------ ------------
Loss from continuing operations
before taxes (234,736) (48,656) (188,530) (231,689)
Income tax benefit (expense) 29,332 (3,145) 13,347
------------ ------------ ------------ ------------
Net loss $ (205,404) $ (48,656) $ (191,675) $ (218,342)
============ ============ ============ ============
Basic loss per share $ (.01) $ (.00) $ (.01) $ (.01)
============ ============ ============ ============
Weighted average number of
common shares used in loss
per share computation 15,054,945 15,000,100 15,000,100 15,000,100
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE> 53
Hugo International Telecom, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
Three Months Ended March 31, 2000 (Unaudited)
and Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Common Stock
-----------------------------
Shares Amount
---------- -----------
<S> <C> <C>
Balance, December 31, 1997 100 $ 161
Foreign currency translation adjustment
Net loss for year
---------- -----------
Balance, December 31, 1998 100 161
Foreign currency translation adjustment
Net loss for the year
---------- -----------
Balance, December 31, 1999 100 161
Common stock issued to reduce related
party debt (unaudited) 284,000 459,570
Acquisition of company (unaudited) 15,000,000 1,500
Recapitalization of company (unaudited) (284,100) (459,731)
Common stock issued under subscription
agreements (unaudited) 5,000,000 500
Foreign currency translation adjustment (unaudited)
Net loss for the period (unaudited)
---------- -----------
Balance, March 31, 2000 (unaudited) 20,000,000 $ 2,000
========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 54
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER STOCK
PAID-IN ACCUMULATED COMPREHENSIVE SUBSCRIPTION
CAPITAL DEFICIT INCOME RECEIVABLE
<S> <C> <C> <C>
$ 5,487
$ (1,161)
(218,342)
------------- ------------ --------- ------------
(212,855) (1,161)
7,059
(191,675)
------------- ------------ --------- ------------
(404,530) 5,898
$ (1,500)
459,731
499,500 $ (35,000)
(2,301)
(205,404)
------------- ------------ --------- ------------
$ 957,731 $ (609,934) $ 3,597 $ (35,000)
============= ============ ========= ============
</TABLE>
F-4
<PAGE> 55
Hugo International Telecom, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
------------------------------------------------------------
2000 1999 1999 1998
------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(205,404) $ (48,656) $(191,675) $(218,342)
--------- --------- --------- ---------
Adjustments to reconcile net loss to net cash
(used) provided by operating activities:
Depreciation and amortization 54,384 42,135 212,007 92,984
Foreign currency translation adjustment (2,301) 6,874 7,059 (1,161)
Loss on disposal of property and equipment 13,032 8,183
(Increase) decrease in:
Accounts receivable (350,060) 219,808 (106,400) 261,351
Income tax refund (39,671) 394 2,623 (13,422)
Inventories (19,635) (18,878) 68,961 (20,072)
Other current assets 26,398 (74,320) (71,737) (32,419)
Increase (decrease) in:
Accounts payable 146,348 129,264 460,379 (165,788)
Income taxes payable (20,793) (48,630) 586
Accrued expenses (53,732) 11,863 57,956 (82)
Deferred income 156 6,850 6,820 502
--------- --------- --------- ---------
Total adjustments (238,113) 303,197 602,070 130,662
--------- --------- --------- ---------
Net cash (used) provided by operating activities (443,517) 254,541 410,395 (87,680)
--------- --------- --------- ---------
INVESTING ACTIVITIES
Acquisition of property and equipment (8,958) (4,069) (35,700) (18,132)
Proceeds from the sale of property and equipment 4,305 14,382
Purchase of goodwill, customer lists, and other intangibles (749,179) (749,179)
--------- --------- --------- ---------
Net cash used by investing activities (8,958) (753,248) (780,574) (3,750)
--------- --------- --------- ---------
FINANCING ACTIVITIES
Increase (decrease) in bank overdraft 191,684 (129,641) (74,886) (27,890)
Payments on capital lease obligations (17,768) (20,791) (60,801) (52,881)
Net borrowings (payments) on stockholder advances 190,128 (65,670) (42,077) (59,764)
Proceeds from borrowings 661,173 661,173 171,207
Payments on borrowings (268,777) (14,752) (145,938) (19,017)
Proceeds from the issuance of common stock 465,000
--------- --------- --------- ---------
Net cash provided by financing activities 560,267 430,319 337,471 11,655
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH 107,792 (68,388) (32,708) (79,775)
CASH, BEGINNING OF PERIOD 67,812 100,520 100,520 180,295
--------- --------- --------- ---------
CASH, END OF PERIOD $ 175,604 $ 32,132 $ 67,812 $ 100,520
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 56
Hugo International Telecom, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
------------------------------------------------------------
2000 1999 1999 1998
------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND
NONCASH INVESTING AND FINANCING ACTIVITIES:
Cash paid during the period for:
Interest $ 46,021 $ 8,022 $ 71,658 $ 50,247
========= ========= ========= =========
Income taxes $ 0 $ 20,793 $ 51,775 $ 0
========= ========= ========= =========
</TABLE>
During the year ended December 31, 1998, the Company entered into capital leases
for equipment with a fair market value of $93,385.
During the period ended March 31, 1999, the Company purchased certain assets of
Procomm Radio Communications for $749,179. In conjunction with the acquisition,
liabilities assumed were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 1,030,667
Cash paid for acquisition (749,179)
-----------
Liabilities assumed $ 281,488
===========
</TABLE>
During the period ended March 31, 2000, the Company issued 284,000 shares of
common stock in payment of a stockholder advances payable in the amount of
$459,570.
During the period ended March 31, 2000, the Company issued 350,000 shares of
common stock in exchange for common stock subscription agreements amounting to
$35,000.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 57
Hugo International Telecom, Inc.
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2000 and 1999 (Unaudited)
and Years Ended December 31, 1999 and 1998
1. BACKGROUND AND CONCENTRATION INFORMATION
Hugo International Telecom, Inc. was incorporated in the state of Delaware on
February 17, 2000 and merged effectively in February 2000 with Hugo
International Limited, a private company incorporated in Berkshire, United
Kingdom in 1992.
Pursuant to this merger, Hugo International Telecom, Inc. issued 15,000,000
shares of its common stock for all of the common stock of Hugo International
Limited. As a result of this acquisition, the stockholders of Hugo International
Limited effectively acquired Hugo International Telecom, Inc., and control
thereof. Accordingly, this acquisition has been accounted for as a reverse
acquisition for consolidated financial statement purposes, with the historical
financial statements of Hugo International Limited being shown for all periods
presented prior to the date of acquisition.
The aforementioned companies will hereinafter be referred to as the "Company."
The Company's principal line of business is the sale of mobile radio and data
communication systems and airtime. The headquarters of the Company are located
in Berkshire, United Kingdom.
The Company currently buys all of its equipment and airtime from four suppliers.
Although there are a limited number of suppliers of this type, management
believes that other suppliers could provide products on comparable terms. A
change in suppliers, however, could cause a possible loss of sales, which would
affect operating results adversely.
For the three months ended March 31, 2000 and the year ended December 31,
1999, purchases from four suppliers amounted to approximately $776,000 and
$2,419,000 (or 92 and 72 percent, respectively, of cost of revenues). As of
March 31, 2000 and December 31, 1999, accounts payable included approximately
$585,000 and $416,000 due to these four suppliers.
For the three months ended March 31, 1999 and the year ended December 31,
1998, purchases from three suppliers amounted to approximately $602,000 and
$1,356,000 (or 82 and 55 percent, respectively, of cost of revenues). As of
March 31, 1999 and December 31, 1998, accounts payable included approximately
$134,000 and $102,000 due to these three suppliers.
F-7
<PAGE> 58
Hugo International Telecom, Inc.
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2000 and 1999 (Unaudited)
and Years Ended December 31, 1999 and 1998
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed are:
The consolidated financial statements for the period ended March 31, 2000
include the accounts of Hugo International Telecom, Inc. and Hugo
International Limited. All significant accounts and transactions have been
eliminated in consolidation. The financial statements for the year ended
December 31, 1999 and 1998 and for the period ended March 31, 1999 reflect
the accounts of Hugo International Limited.
The consolidated financial statements as of March 31, 2000 and 1999 and for
the three months then ended are unaudited. In the opinion of management of
the Company, the unaudited consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements
and include all adjustments necessary for a fair presentation of the
financial position and results of operations of the Company as of March 31,
2000 and 1999 and the three months then ended. Results of the three months
ended March 31, 2000 are not necessarily indicative of the results to be
expected for the entire fiscal year.
The preparation of consolidated 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 consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
The Company extends credit to its various customers based on the customer's
ability to pay. Based on management's review of accounts receivable, an
allowance for doubtful accounts of $138,147 and $52,214, is considered
necessary as of March 31, 2000 and December 31, 1999, respectively.
Inventory is stated at the lower of cost (first-in, first-out) or market.
At March 31, 2000 and December 31, 1999, inventory was $111,905 and
$92,270, respectively, and consisted of radios and radio components.
F-8
<PAGE> 59
Hugo International Telecom, Inc.
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2000 and 1999 (Unaudited)
and Years Ended December 31, 1999 and 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment are recorded at cost. Depreciation is calculated by
the reducing balance method over the estimated useful lives of the assets,
ranging generally from three to seven years. Maintenance and repairs are
charged to operations when incurred. Betterments and renewals are
capitalized when property and equipment are sold or otherwise disposed of,
the asset account and related accumulated depreciation account are
relieved, and any gain or loss is included in income.
Goodwill, customer lists, and other intangibles are amortized using the
straight-line method over their estimated useful lives of 2 to 10 years.
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the consolidated
financial statements carrying amounts of existing assets and liabilities
and their respective income tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized as income in the period that included the
enactment date.
Advertising costs are charged to operations when incurred. Advertising
expense for the three months ended March 31, 2000 and 1999, and the years
ended December 31, 1999 and 1998 were $15,254; $9,453; $20,066; and
$27,528, respectively.
The Company follows Statement of Financial Accounting Standards No. 130
(SFAS No. 130), "Reporting Comprehensive Income." SFAS No. 130 established
standards for the reporting and display of comprehensive income (net income
and other comprehensive income) and its components in consolidated
financial statements. Other comprehensive income includes all
non-stockholder changes in equity and is reflected in the stockholders'
equity (deficit) section of the consolidated balance sheets.
Other comprehensive income consists of foreign currency translation
adjustments associated with the translation of the functional currencies of
Hugo International Limited (United Kingdom pounds) into the reporting
currency of Hugo International Telecom, Inc.
(U.S. dollars).
The Company recognizes revenue under the accrual method as revenue is
earned.
F-9
<PAGE> 60
Hugo International Telecom, Inc.
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2000 and 1999 (Unaudited)
and Years Ended December 31, 1999 and 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Maintenance revenue is deferred and recognized ratably over the term of the
maintenance agreement, which is typically three months.
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted average number of shares of common stock
outstanding for the period as if the reverse acquisition had occurred at
the beginning of all periods presented.
3. GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. However, the Company has
sustained substantial losses for the three months ended March 31, 2000 and the
year ended December 31, 1999, has negative working capital of approximately
$540,000 and $1,120,000 at March 31, 2000 and December 31, 1999, respectively,
and its liabilities exceed its assets by approximately $398,000 as of December
31, 1999. These factors raise substantial doubt about the Company's ability to
continue as a going concern. These consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded assets or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.
4. PURCHASE OF GOODWILL, CUSTOMER LISTS, AND OTHER INTANGIBLES
On March 8, 1999, the Company purchased certain assets of Procomm Radio
Communications. The total cost of the assets purchased was $1,030,667, which
exceeded the fair market value of those assets by $997,934. The excess, which is
recorded as goodwill, customer lists, and other intangible assets, is being
amortized on the straight-line method over their estimated useful life of 2 to
10 years.
F-10
<PAGE> 61
Hugo International Telecom, Inc.
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2000 and 1999 (Unaudited)
and Years Ended December 31, 1999 and 1998
5. ACCOUNTS RECEIVABLE FACTORING
On March 18, 1999, the Company entered into an agreement with Five Arrows
Commercial Finance Limited to sell its receivables with recourse. In the event
of a customer's default, the Company must repurchase the receivable from Five
Arrows Commercial Finance Limited. Losses resulting from defaults have not been
significant. At March 31, 2000 and December 31, 1999, the Company is
contingently liable for the amounts of $166,255 and $380,516, respectively,
relating to receivables sold with recourse.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
Office furniture and fixtures $138,633 $133,136
Demo equipment 118,401 118,020
Automobiles 61,621 61,428
-------- --------
318,655 312,584
Less accumulated depreciation 159,523 148,516
-------- --------
$159,132 $164,068
======== ========
</TABLE>
The following is a summary of the property included above that is held under
capital leases:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
Demo equipment $ 56,983 $ 56,800
Automobiles 61,626 61,428
-------- --------
118,609 118,228
Less accumulated depreciation 71,791 64,904
-------- --------
$ 46,818 $ 53,324
======== ========
</TABLE>
F-11
<PAGE> 62
Hugo International Telecom, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2000 and 1999 (Unaudited)
and Years Ended December 31, 1999 and 1998
7. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Note payable; interest at base rate plus 2.5%
(8.0% and 7.5% at March 31, 2000 and
December 31, 1999, respectively); varying
monthly payments of principal and interest
of approximately $8,500; collateralized by
property owned by a related party $ 405,356 $ 559,288
Note payable; interest at base rate plus 2.5%
(8.0% at December 31, 1999); monthly
principal payments of approximately
$3,400; guaranteed by a related party 91,223
Note payable; interest at 7.5%; $8,617
payable monthly including interest;
unsecured 178,002 201,625
------------ ------------
583,358 852,136
Less amounts currently due 198,437 284,783
------------ ------------
$ 384,921 $ 567,353
============ ============
</TABLE>
The following is a schedule by year of the principal payments required on these
notes payable and long-term debt as of March 31, 2000:
<TABLE>
<S> <C>
2001 $198,437
========
2002 $182,250
========
2003 $101,340
========
2004 $101,331
========
</TABLE>
F-12
<PAGE> 63
Hugo International Telecom, Inc.
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2000 and 1999 (Unaudited) and Years
Ended December 31, 1999 and 1998
8. OBLIGATIONS UNDER CAPITAL LEASES
The Company has capitalized rental obligations for the lease of equipment and
vehicles. The obligations, which mature in 2002, represent the total present
value of future rental payments discounted at the interest rates implicit in the
leases. Future minimum lease payments under these capital leases as of March 31,
2000 are:
<TABLE>
<S> <C>
2001 $39,958
2002 7,473
-------
Total minimum lease payments 47,431
Less amount representing interest 9,918
-------
Present value of net minimum lease payments $37,513
=======
</TABLE>
9. PENSION PLAN
The Company has a non-contributory pension plan that covers its executives.
Contributions to the plan are made at the discretion of the Board of Directors
of the Company. The Company did not make a contribution to the plan for the
years ended December 31, 1999 and 1998, nor does it plan to make a contribution
for the year ending December 31, 2000.
10. COMMITMENTS
The following is a schedule by year of future minimum rental payments required
under operating leases that have an initial or remaining noncancelable lease
term in excess of one year as of March 31, 2000:
<TABLE>
<CAPTION>
Period Ending
March 31,
------------------------
<S> <C>
2001 $ 169,523
2002 152,298
2003 104,466
2004 96,629
2005 96,629
Thereafter 362,360
$ 981,905
=========
</TABLE>
F-13
<PAGE> 64
Hugo International Telecom, Inc.
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2000 and 1999 (Unaudited)
and Years Ended December 31, 1999 and 1998
10. COMMITMENTS (CONTINUED)
Rent expense amounted to $43,246; $38,917; $168,234; and $97,968 for the
three months ended March 31, 2000 and 1999 and the years ended December 31, 1999
and 1998, respectively.
On March 8, 1999, the Company entered into consulting agreements with two
individuals in connection with the acquisition discussed in Note 4. Under the
terms of the agreements, the Company is to pay each individual approximately
$4,000 per month through September 2002.
11. RELATED PARTY TRANSACTIONS
One of the Company's directors is a partner in a related entity, to which
the Company paid approximately $22,500; $17,200; $68,000; and $49,600 in
management fees for the three months ended March 31, 2000 and 1999, and the
years ended December 31, 1999 and 1998, respectively.
The Company has advances payable from one of its majority stockholders in
the amounts of $356,784 and $626,226 as of March 31, 2000 and December 31, 1999,
respectively, that are unsecured and non-interest bearing.
The Company had sales to related parties of $4,880; $11,718; $55,598; and
$242,479 for the three months ended March 31, 2000 and 1999 and the years ended
December 31, 1999 and 1998, respectively. Related party balances from these
transactions, which are included in accounts receivable at March 31, 2000 and
December 31, 1999, consist of $0 and $24,308, respectively. During 1998, the
Company wrote off approximately $340,000 of accounts receivable due from one of
these entities.
The above related party transactions are not necessarily indicative of the
amounts and terms that would have been incurred had comparable transactions been
entered into with independent parties.
F-14
<PAGE> 65
Hugo International Telecom, Inc.
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2000 and 1999 (Unaudited)
and Years Ended December 31, 1999 and 1998
12. INCOME TAXES
The Company is a corporation that reports and files its corporate business tax
returns with the Inland Revenue, which governs the administration of income
taxes for the United Kingdom. The components of the provision for income tax
(benefit) expense as of December 31, 1999 and 1998 consist of:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
--------------------------- -----------------------
2000 1999 1999 1998
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Currently payable $ 3,145
Income tax refund due to carryback $ (29,332) $ (13,347)
----------- --------- -------- ----------
$ (29,332) $ 3,145 $ (13,347)
=========== ========= ======== ==========
</TABLE>
The following is a reconciliation of income taxes at the statutory rates
to the amount of income taxes at the Company's effective rates:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
--------------------------- ------------------------
2000 1999 1999 1998
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Tax benefit at statutory rate $ (38,604) $(8,819) $ (32,108) $ (49,480)
Decrease due to non-deductible
expenses 9,272 8,819 35,253 36,133
---------- ------- --------- ----------
Income tax (benefit) expense $ (29,332) $ 0 $ 3,145 $ (13,347)
========== ======= ========= ==========
</TABLE>
The United Kingdom's tax laws do not allow a deduction for amortization of
intangible assets; however, this amount may be used to reduce the gain from the
sale of a business enterprise. Management has elected to establish a valuation
allowance equal to the amount of the deferred tax asset as of March 31, 2000 due
to the uncertainty of the Company's realization of this benefit.
<TABLE>
<S> <C>
Tax benefit of non-deductible amortization $311,417
Valuation allowance (311,417)
--------
Net deferred tax asset $ 0
========
</TABLE>
F-15
<PAGE> 66
Hugo International Telecom, Inc.
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2000 and 1999 (Unaudited)
and Years Ended December 31, 1999 and 1998
13. SEGMENT INFORMATION
The Company's operations are classified into two principal reportable
segments that provide services to different geographic regions. Revenues and
long-lived assets of these reported segments are as follows:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
--------------------------- ----------------------------
2000 1999 1999 1998
-----------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Europe $ 1,129,254 $ 944,236 $ 4,596,818 $ 3,414,380
------------ ----------- ----------- ------------
Africa 195,425 126,054 497,757 500,913
------------ ----------- ----------- ------------
$ 1,324,679 $ 1,070,290 $ 5,094,575 $ 3,915,293
============ =========== =========== ============
Operating (loss) income:
Europe $ (232,048) $ (52,430) $ (201,136) $ (265,079)
Africa 39,085 25,211 99,551 100,183
------------ ----------- ----------- ------------
$ (192,963) $ (27,219) $ (101,585) $ (164,896)
============ =========== =========== ============
Depreciation expense:
Europe $ 15,815 $ 15,872 $ 53,026 $ 56,067
Africa 0 0 0 0
------------ ----------- ----------- ------------
$ 15,815 $ 15,872 $ 53,026 $ 56,067
============ =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------------------
(Unaudited)
<S> <C> <C>
Identifiable assets:
Europe $ 2,767,914 $ 2,322,580
------------ -------------
Africa 0 0
------------ -------------
$ 2,767,914 $ 2,322,580
============ =============
</TABLE>
F-16
<PAGE> 67
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following sets forth the estimated expenses payable in connection with
the preparation and filing of this Registration:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............... $ 5,280
*Printing and Engraving Expenses.................................. 10,000
*Accounting Fees and Expenses..................................... 110,000
*Legal Fees and Expenses.......................................... 120,000
*Blue Sky Fees and Expenses....................................... 10,000
*Transfer Agent's and Registrar's Fees and Expenses............... 1,000
Miscellaneous Expenses............................................
--------
*Total................................................. $256,280
</TABLE>
-----------------------
* Estimated.
ITEM 25. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Hugo is required by its By-Laws and Certificate of Incorporation to
indemnify, to the fullest extent permitted by law, each person that Hugo is
permitted to indemnify. Hugo's Charter requires it to indemnify such parties to
the fullest extent permitted by Sections 102(b)(7) and 145 of the Delaware
General Corporation Law.
Section 145 of the Delaware General Corporation Law permits Hugo to
indemnify its directors, officers, employees or agents against expenses,
including attorney's fees, judgments, fines and amounts paid in settlements
actually and reasonably incurred in relation to any action, suit, or proceeding
brought by third parties because they are or were directors, officers, employees
or agents of the corporation. In order to be eligible for such indemnification,
however, the directors, officers, employees or agents of Hugo must have acted in
good faith and in a manner they reasonably believed to be in, or not opposed to,
the best interests of Hugo. In addition, with respect to any criminal action or
proceeding, the officer, director, employee or agent must have had no reason to
believe that the conduct in question was unlawful.
In derivative actions, Hugo may only indemnify its officers, directors,
employees and agents against expenses actually and reasonably incurred in
connection with the defense or settlement of a suit, and only if they acted in
good faith and in a manner they reasonably believed to be in, or not opposed to,
the best interests of the corporation. Indemnification is not permitted in the
event that the director, officer, employee or agent is actually adjudged liable
to Hugo unless, and only to the extent that, the court in which the action was
brought so determines.
Hugo's Certificate of Incorporation permits it to indemnify its directors
except in the event of: (1) any breach of the director's duty of loyalty to Hugo
or its stockholders; (2) any act
II-1
<PAGE> 68
or omission not in good faith or involves intentional misconduct or a knowing
violation of the law; (3) liability arising under Section 174 of the Delaware
General Corporation Law, relating to unlawful stock purchases, redemptions, or
payment of dividends; or (4) any transaction in which the director received an
improper personal benefit.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following securities were issued by Hugo International within the past
three years and were not registered under the Securities Act of 1933, as amended
(the "Act"). Each of the transactions is claimed to be exempt from registration
with the Securities Exchange Commission pursuant to Section 4(2) of the Act as
transactions by an issuer not involving a public offering or Regulation S
promulgated thereunder. All of such securities are deemed to be restricted
securities for the purposes of the Act. All certificates representing such
issued and outstanding restricted securities of the company have been properly
legended and the company has issued "stop transfer" instructions to its transfer
agent with respect to such securities.
1. On February 24, 2000, we entered into a share exchange with all of the
stockholders of Hugo International Limited, a company formed under the laws of
United Kingdom and Wales ("Hugo United Kingdom"), pursuant to which we issued
15,000,000 shares of our common stock in exchange for 284,100 shares of Hugo
United Kingdom's capital stock, which constitutes all of Hugo United Kingdom's
issued and outstanding capital stock. All 15,000,000 shares of our common stock
contemplated by the exchange have been issued. Upon the consummation of the
share exchange, Hugo United Kingdom became a wholly owned subsidiary of Hugo.
2. On February 24, 2000 we issued 1,250,000 restricted shares of our
common stock to purchasers in a private offering to persons resulting in gross
proceeds of $125,000. No commissions were paid.
3. On March 3, 2000, we issued 350,000 restricted shares of our common
stock to purchasers in a private offering to persons resulting in gross proceeds
of $35,000. No commissions were paid.
4. On March 9, 2000, we issued 650,000 restricted shares of our common
stock to purchasers in a private offering to persons resulting in gross proceeds
of $65,000. No commissions were paid.
5. On March 12, 2000, we issued 2,750,000 restricted shares of our common
stock to purchasers in a private offering to persons resulting in gross proceeds
of $275,000. No commissions were paid.
6. On June 30, 2000, we issued 450,000 restricted shares of our common
stock for purchasers in a private offering to persons resulting in gross
proceeds of $202,500. No commissions were paid.
7. On July 14, 2000, we issued 50,000 restricted shares of our common
stock to purchasers in a private offering to persons resulting in gross proceeds
of $50,000. No commissions were paid.
II-2
<PAGE> 69
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
2.1 Agreement for the Sale and Purchase of the Assets and Business of
Pro-Comm Radio Communications dated March 8, 1999 between M.L. Temple and
A.R. Temple, Hugo International Limited and D. W. Foden
2.2 Exchange Agreement dated as of February 24, 2000 by and among Hugo
International Telecom Inc., David W. Foden, Brian H.C. Gundry and Gillan L.
Foden
3.1 Certificate of Incorporation of Hugo International Telecom Inc.
filed with the Secretary of State of the State of Delaware on February 17, 2000
3.2 By-laws of Hugo International Telecom Inc.
4.1 Form of Common Stock Certificate of Hugo International Telecom Inc.
4.2 Form of Preferred Stock Certificate of Hugo International
Telecom Inc.
5 *
10.1 Letter from Hugo International Limited to David Foden dated June 26,
2000 regarding loan from Mr. Foden in the amount of pound sterling 220,482
10.2 Consulting Agreement between Hugo International Limited and RCI
10.3 Reseller Agreement dated August 9, 1999 between Nitsuko UK Limited
and Hugo International Limited
10.4 Purchase Order dated July 7, 1999 between Siemens Communications
Limited and Hugo International Limited
10.5 Confidential Invoice Discounting Agreement with Term Sheet dated
March 18, 1999, between Hugo International Limited and Five Arrows Commercial
Finance Limited
10.6 Deed of Guarantee and Indemnity dated April 20, 2000, between Hugo
International Telecom Incorporated and Five Arrows Commercial Finance Limited,
10.7 Service Provider Agreement dated March 15, 1999 between Dolphin
Telecommunications Limited and Hugo International Limited
10.8 Business Loan Agreement dated March 11, 1999 between Lloyds Bank Plc
and Hugo International Limited
10.9 Lease of Cookham House dated January 26, 1999 between Chaselands
Limited and Hugo International Limited
10.10 Service Provider Agreement dated July 29, 1998 between Dolphin
Telecommunications Limited, National Bank Three Limited, Fleetcomm Limited T/A
Fleetcomm Mobile Radio Networks and Hugo International Limited
II-3
<PAGE> 70
10.11 Private Business Radio Suppliers License issued to Hugo
International Limited by the Secretary of State for Trade and Industry by the
Radiocommunications Agency on May 7, 1998
10.12 Reseller Agreement dated September 1, 1997 between Motorola Limited
and Hugo International Limited
10.13 Motorola Customer Programming Software License Agreement dated as of
November 1998, between Motorola, Inc. and Hugo International
10.14 Retainer Agreement dated as of March 16, 1999 between Hugo
International Limited and Mark Lawrence Temple.
10.15 Retainer Agreement dated as of March 16, 1999 between Hugo
International Limited and Andrew Robert Temple.
21 Subsidiaries of the Company
23.1 Consent of Pender, Newkirk & Company
27 Financial Data Schedule
-----------
* To be filed by amendment
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-4
<PAGE> 71
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set forth the
results of the subscription offer, the transactions by the Underwriter during
the subscription period, the amount of unsubscribed securities to be purchased
by the Underwriter, and the terms of any subsequent reoffering thereof. If any
public offering by the Underwriter is to be made on terms differing from those
set forth on the cover page of the prospectus, a post-effective amendment will
be filed to set forth the terms of such offering.
(c) "Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as express in the Act and is, therefore, unenforceable.
(d)(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post- effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 72
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 10th day of August, 2000.
HUGO INTERNATIONAL TELECOM, INC.
By /s/ David W. Foden
---------------------------------------
David W. Foden, Chief Executive Officer
Each person whose signature appears below hereby constitutes and appoints
David W. Foden his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying all that said attorney-in-fact and agent or his substitute or
substitutes, or any of them, may lawfully do or cause to be done by virtue
hereof.
In accordance with the requirements of the Securities Act of 1933, this to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ David W. Foden Director, Chief Executive Officer and Chairman August 10, 2000
------------------------------- (Principal Executive Officer)
David W. Foden
/s/ Michael Christmas Director, Treasurer and Secretary August 10, 2000
------------------------------- (Principal Financial and Accounting Officer)
Michael Christmas
/s/ Iain Bowles Director August 10, 2000
-------------------------------
Iain Bowles
</TABLE>
II-6
