As filed with the Securities and Exchange Commission on February 14, 2000
Registration No. 333-88179
Securities and exchange commission
Washington, DC 20549
--------------------------------------------------
Amendment No. 1
to
FORM SB-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
--------------------------------------------------
International Test Systems, Inc.
(Name of small business issuer in its charter)
--------------------------------------------------
Delaware 3670 74-2796396
- --------------------------------------------------------------------------------
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
--------------------------------------------------
Carey Birmingham, President
4703 Shavano Oak, Suite 102, San Antonio, Texas 78249; (210) 479-3756
(Address and telephone number of principal executive offices,
principal place of business or intended principal place of business
and name, address and telephone number of agent for service)
--------------------------------------------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this registration statement.
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 of the earlier effective
registration statement for the same offering. |_|
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. |X|
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
--------------------------------------------------
With copies to:
Adam S. Gottbetter, Esq.
Kaplan Gottbetter & Levenson, LLP
630 Third Avenue, 5th floor
New York, New York 10017-6705
(212) 983-6900
--------------------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Proposed Proposed
Amount Maximum Maximum Amount of
To be Offering Price Aggregate Registration
Title of each Class of Securities Being Registered Per Security(1) Offering Fee
Registered Price(1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock(2) . . . . . . . . . . . . . . . 3,250,000 $0.40 $1,300,000(1) $ 371.00(1)
Class A Warrants(.. . . . . . . . . . . . . . 1,250,000 $0.10 $ 125,000 $ 35.00
Class B Warrants.. . . . . . . . . . . . . . . 1,250,000 $0.10 $ 125,000 $ 35.00
Common Stock Underlying Class A Warrants(2) . 1,250,000 $2.50 $ 3,125,000 $ 869.00
Common Stock Underlying Class B Warrants(2) . 1,250,000 $4.50 $ 5,625,000 $ 1,564.00
TOTAL . . . . . . . . . . . . . . . . . . . . 8,250,000 $ 10,300,000 $ 2,874.00
- ----------------------------------------------------------------------------------------------------- ----------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee and
includes shares being sold by selling stockholders.
(2) Includes 2,000,000 shares being registered for resale by the selling
stockholders on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act. Pursuant to Rule 416 there are also registered hereby
such additional number of shares as may become issuable to prevent dilution
resulting from stock splits, stock dividends or similar transactions.
--------------------------------------------------
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 become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission,
acting pursuant to Section 8(a), may determine.
Disclosure alternative used (check one): Alternative 1 [X]; Alternative 2 |_|
<PAGE>
[GRAPHIC OMITTED] Initial Public Offering
Prospectus
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 14, 2000
International Test Systems, Inc.
4703 Shavano Oak, Suite 102
San Antonio, Texas 78249
An offering of up to 1,250,000 shares of common stock @ $.40 per share,
1,250,000 class A warrants @ $.10 per warrant and 1,250,000 class B warrants @
$.10 per warrant
Minimum gross offering of $125,000 in sales of
any combination of our common stock and warrants
Maximum gross offering of $750,000 prior to warrant exercises
Underwriting
Discounts &
Price to Public Commissions Proceeds to Company
--------------- ----------- -------------------
Per Share $.40 -0- $.40
Per Warrant $.10 -0- $.10
Total Minimum $125,000 -0- $125,000
Total Maximum $750,000 -0- $750,000
This offering involves a significant degree of risk and prospective investors
need to read the section called "Risk Factors" which begins on page 6.
We have also registered the sale of 2,000,000 shares of our common stock owned
by shareholders. The price of these shares are undetermined at this time.
However, the selling shareholders have agreed not to resell their common stock
at prices below our initial offering price. Any proceeds and profits from their
sale will go to these shareholders and not to us.
An investor may purchase either shares of our common stock, class A redeemable
warrants, or class B redeemable warrants.
However, we must sell a combination of these securities in an amount equal to
$125,000 within 12 months from the effective date of this prospectus in order
for the offering to be continued. Amounts received will be escrowed and promptly
returned, without interest, if this threshold is not reached.
These securities will be offered in a self underwritten offering by our officers
and directors. We can give you no assurance that we will be able to find
purchasers for them.
Neither the Securities and Exchange Commission, nor any state securities
commission, has approved or disapproved these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The Date of this Prospectus is February 14, 2000
<PAGE>
International Test Systems, Inc.
TABLE OF CONTENTS
THE COMPANY
THE OFFERING
RISK FACTORS
USE OF PROCEEDS
PLAN OF DISTRIBUTION
CAPITALIZATION
BUSINESS OF THE COMPANY
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
MANAGEMENT'S DISCUSSION AND ANALYSIS
DESCRIPTION OF SECURITIES
DIVIDENDS, DISTRIBUTION AND REDEMPTION
DIRECTORS, OFFICERS AND KEY PERSONNEL OF THE COMPANY
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
MANAGEMENT RELATIONSHIPS, TRANSACTIONS AND REMUNERATION
LITIGATION
FEDERAL TAX ASPECTS
MISCELLANEOUS FACTORS
FINANCIAL STATEMENTS
CHARTER AND BY LAW PROVISIONS ON INDEMNIFICATION
AND LIMITATION OF DIRECTOR LIABILITY
<PAGE>
Prospectus Summary
This is a brief summary of the information in this prospectus. Potential
investors should read the entire prospectus before investing.
The Company
International Test Systems, Inc., a Delaware corporation, was incorporated
September 20, 1999. Our company began its business through predecessor
operations in 1996. Under our corporate charter documents, we may engage in any
activity for which corporations may be organized under the Delaware General
Corporation Law. We intend to market, sell and distribute a family of hardware
and software products used to test and troubleshoot components on printed
circuit boards. We are seeking to grow our business by (i) marketing these
products, (ii) developing new technologies and new products and (iii) seeking
market opportunities such as strategic alliances which we believe will
strengthen our company and maximize our future value.
The Offering
o Each share of common stock is being sold for $0.40 per share. Each class A
redeemable warrant and class B redeemable warrant is being sold for $0.10
per warrant.
o An investor can purchase either shares of our commons stock, class A
redeemable warrants or class B redeemable warrants.
o We must raise a minimum offering amount of $125,000 within 12 months from
the effective date of this prospectus in order for the offering to be
continued.
o Assuming the maximum number of 1,250,000 shares of common stock are sold,
there will be 3,250,000 shares of common stock outstanding.
o Assuming the entire offering is sold and all the warrants are exercised,
there will be an additional 3,750,000 shares of common stock. When added to
the 2,000,000 shares of common stock previously issued, we will have a
total of 5,750,000 shares of common stock outstanding.
o There shall be net proceeds to our company of $120,000, assuming the
minimum offering amount is raised.
o There shall be net proceeds to our company of $733,000, assuming the
maximum offering amount is raised.
o In summary, our net proceeds shall be used:
o to pay distribution fees under our distribution agreement, which is
described in this prospectus;
o to pay marketing expenses,
o to pay wages,
o to pursue strategic alliances;
o to finance corporate marketing; and
o for general corporate and working capital purposes including to fund
the capital requirements associated with our growth, including,
without limitation, the retention and training of personnel, the
establishment of a secondary trading market for our securities and an
4
<PAGE>
investor relations program, and to acquire or invest in complementary
businesses, products or technologies.
Registration of Additional Shares Offered by Selling Shareholders
We will be registering, concurrently with the offering, the sale of 2,000,000
shares of our common stock issued to certain shareholders in connection with
organizational activities rendered to us. Upon a sale of these securities, any
proceeds and profits will go to these shareholders and not to us. The selling
shareholders have agreed not to sell any of their shares until one year from the
effective date of this registration statement. They have also agreed not to sell
their securities below the initial offering price. There is currently no public
market for these securities.
Offices of the Company
Our corporate offices are located at 4703 Shavano Oak, Suite 102, San Antonio ,
TX 78249. Our telephone number is (210) 479-3756. Our e-mail address is
[email protected].
Risk Factors
An investment in these securities involves a high degree of risk and should only
be made by investors who can afford to lose their entire investment. Before
purchasing these securities, you should consider carefully the following risk
factors, in addition to the other information in this prospectus.
We will need additional financing: Current funds are insufficient to finance our
operations and plans for growth. We could be required to cut back or stop
operations if we are unable to raise or obtain needed funding.
Our ability to continue operations will depend on our positive cash flow, if
any, from future operations and on our ability to raise funds through equity or
debt financing. We do not know if we will be able to raise additional funding or
if such funding will be available on favorable terms. We could be required to
cut back or stop operations if we are unable to raise or obtain such funding.
Our negative cash flow from operations has been as follows:
As of September 30, 1999 our company had working capital of $3,823.
We have a history of losses and if we do not achieve profitability, we
may not be able to continue our business in the future. As of September 30,
1999, we accumulated losses of approximately $292,260.
We anticipate incurring additional losses until we can successfully
market and distribute products, develop new technologies and produce
commercially viable future products and/or enter into successful strategic
ventures with other entities. The "Going Concern" assumption in Note J of our
audited financial statements may hurt our ability to raise additional financing.
We are a development stage company with limited operating history; We have no
history of profits and our future profitability remains uncertain
We have a limited operating history and have yet to produce a profit. Our future
success will be materially dependent upon our raising capital to fund our
ongoing operations and to position ourselves so as to be capable of exploiting
market opportunities. We expect that losses will continue for the near future,
and there is no certainty we will become profitable. As a new enterprise, we
could be subject to risks we have not anticipated.
5
<PAGE>
We do not own the technology upon with the products we will distribute are
based. This technology is owned by Pensar Technologies, LLC.
We do not own the technology upon which the products we will distribute are
based. In June 1999, we transferred all of our assets to Pensar Technologies,
LLC ("Pensar") in exchange for which Pensar assumed all of our liabilities and
agreed to enter into a distribution agreement with us. Our agreement with Pensar
has a ten year term and grants to us the exclusive right to market and sell
Pensar's intellectual property at a substantial discount off the retail price as
well as to design, develop, sell, promote and distribute new printed circuit
board test products throughout the world. We have the option to renew our
distribution agreement with Pensar for an additional five year term by
delivering written notice to Pensar 90 days prior to the expiration of the
initial term and by guaranteeing them an additional $90,000 in payments over the
renewal period. We have the option to terminate the agreement on thirty days
written notice to Pensar. Nor can we assure you that competitors will not
develop, patent or gain access to similar know-how and technology, or reverse
engineer our products. We cannot assure you that any confidentiality agreements
upon which we or Pensar may rely to protect trade secrets and other proprietary
information will be adequate to protect proprietary technology. The occurrence
of any such events could have a material adverse effect on the results of our
operations and financial condition. We may receive communications from third
parties claiming that we or Pensar may be infringing certain parties' patents
and other intellectual property rights. Any infringement claim or other
litigation against or by us or Pensar could have a material adverse effect on
the results of our operations and financial condition. We rely on third party
suppliers and manufacturers.
The unwillingness or inability of these suppliers or manufacturers to fulfill
their obligations to us can delay, halt and/or add expense to our production and
delivery and could, therefore, materially adversely affect our revenues and
financial condition.
Pensar has told us that it is currently dependent entirely upon third party
suppliers, fabricators, manufacturers and assemblers for the manufacture of the
products we distribute. There can be no assurance that they will be able to
obtain adequate quantities of necessary parts within a reasonable period of time
or at commercially reasonable rates. If a fabricator, manufacturer or assembler
is unable or unwilling to produce adequate supplies of our products on a timely
basis, it could cause delays and added expense to our production and delivery of
commercial quantities of our products, which in turn could materially adversely
affect our revenues and financial condition.
We may not be able to successfully market the products.
Even if we are successful in obtaining the minimum or maximum financing, we seek
under this offering, we will have to market the products to the public. We
cannot give any assurance that we will be able to successfully market the
products.
The failure of us or of entities that do business with us, to be year 2000
compliant could negatively impact our business.
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the change in the century. If not corrected, many computer
applications could fail or create erroneous results during the Year 2000. Our
code has been formulated within the Microsoft Windows' platform and other
Microsoft software products. We believe that the Y2K compliance of our code is
dependant upon the Y2K compliance status of Microsoft. We have not experienced
any Y2K difficulties and, thus, it appears that the Microsoft Windows' platform
we are using is Y2K compliant. However, we cannot assure you that there are no
difficulties that have not yet surfaced.
We have arbitrarily determined the offering price, which exceeds the book value
of the securities
We arbitrarily selected the price for the common stock and the warrants offered
in this offering, as well as the exercise price for the warrants. Since a
principal underwriter has not been retained to offer the securities, our
establishment of the offering price of the shares has not been determined by
negotiation with an underwriter as is customary in underwritten public
offerings. The offering price and the warrant exercise prices do not bear any
relationship whatsoever to our assets, earnings, book value or any other
objective standard of value.
We are controlled by our executive officer and directors
Our executive officers and directors (and their affiliates) own 1,873,800 shares
of our outstanding common stock prior to the effective date of this offering. If
only the minimum offering amount is received, prior to the exercise of any
warrants, this group will own 61.5% of our common stock. As a result, these
shareholders, if they were to vote together, would likely continue to have the
ability to control our company and direct our affairs and business, including
the election of directors and approval of significant corporate transactions.
This concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of our company and may make it difficult or
impossible to attain the necessary shareholder vote required for corporate
actions contrary to the wishes of management.
Our management will have substantial discretion over the use of proceeds of this
offering and may not apply them effectively
We intend to use the net proceeds of the offering for capital expenditures and
general corporate purposes, including increasing our working capital and
possible acquisitions. We are not currently engaged in any discussions for any
material acquisitions and we cannot assure you that any such acquisitions will
be consummated in the future. Pending such uses, the net proceeds will be
invested in short-term, investment grade securities, certificates of deposit, or
direct or guaranteed obligations of the United States government. Furthermore,
to fully capitalize on changes in the automatic test equipment marketplace, and
in technology in general, we may be called upon by the owners of Pensar to
commit additional funds for the design, development and production of new
products. Such funds will be at the discretion of management and may come from
proceeds from this offering, yet will be subject to the terms of our
distribution agreement with Pensar.
The Pensar technology subject to our Distribution Agreement with Pensar is
substantially untested in the marketplace.
While Pensar and its predecessor companies have had sales of the products
subject to our distribution agreement with Pensar, many standards in the
industry might define the product as in the prototype stage of development.
Although we believe the products have been market-tested, there are many aspects
of a complex technology which may require additional upgrades, changes or
improvements, calling for additional capital in the future. We may be required
to fund such upgrades, changes or improvements out of operating income or
proceeds from this offering.
This is a self-underwritten offering and we may not be able to successfully sell
our securities
This is a self-underwritten offering. No one will have any commitment to buy any
of the shares being offered even after the registration statement becomes
effective. Therefore, the amount of funds available to us as a result of this
offering will depend upon the success of the sales efforts of our officers,
directors and employees, who will be selling the offering on our behalf. No
broker or dealer has been retained or is under any obligation to purchase any of
these securities. However, we may use brokers or dealers and may pay a
commission of up to 7% on such sales. In addition, we may pay a broker or dealer
additional compensation in the form of a non-accountable expense allowance equal
to up to 3% on such sales. If we utilize the services of a broker-dealer, we
will file a post-effective amendment to the registration statement of which this
prospectus is a part, and the compensation of the broker-dealer will have to be
reviewed by the NASD for fairness.
6
<PAGE>
There is no market for our securities and therefor an investment in our
securities may be an illiquid long-term investment.
There will be no market for the securities after our offering. We cannot give
investors any assurance that we will succeed in developing a market.
Consequently, the securities we are offering may be an illiquid long-term
investment. We have held discussions with several potential market-makers to
make a market in our common stock once the stock becomes sufficiently
distributed, but we cannot give any assurance that we will achieve sufficient
distribution or that we will be able to get a market-maker. Even if we do get a
market maker there may be only a limited trading market for the shares we are
offering. We expect that initially our market would be the OTC Bulletin Board
market. Shares that are "thinly" traded on the Bulletin Board often trade only
infrequently and experience a significant spread between the market maker's bid
and asked prices. As a result, an investment in our shares may be illiquid even
if there is a market. In addition, the price of the shares, after the offering,
can vary due to general economic conditions and forecasts, our general business
condition, the release of financial reports, and because our principals may
eventually sell shares they owned before the offering into any market that
develops.
"Penny stock" regulations impose certain restrictions on marketability of
securities that could make selling our securities more difficult.
Our common stock will be a "penny stock," under Rule 3a51-1 under the Securities
and Exchange Act of 1934, unless and until the shares reach a price of at least
$5.00 per share, we meet certain financial size and volume levels, or the shares
are registered on a national securities exchange or quoted on the NASDAQ system.
The shares are likely to remain penny stocks for a considerable period of time
after the offering. A "penny stock" is subject to Rules 15g-1 through 15g-10 of
the Securities and Exchange Commission. Those rules require securities
broker-dealers, before effecting transactions in any "penny stock," to deliver
to the customer, and obtain a written receipt for a disclosure document set
forth in Rule 15g-10. (Rule 15g-2); to disclose certain price information about
the stock (Rule 15g-3); to disclose the amount of compensation received by the
broker-dealer (Rule 15g-4) or any "associated person" of the broker-dealer
(Rule15g-5); and to send monthly statements to customers with market and price
information about the "penny stock" (Rule 15g-6). Our common stock will also be
subject to Rule 15g-9, which requires the broker-dealer, in some circumstances,
to approve the "penny stock" purchasers account under certain standards, and
deliver written statements to the customer with information specified in the
rules (Rule 15g-9). These additional requirements could prevent broker-dealers
from effecting transactions and limit the ability of purchasers in this offering
to sell their shares into any secondary market for our Common Stock.
There could be an adverse effect from the redemption of warrants
The class A redeemable warrants are exercisable at a price of $2.50 per warrant
until the third anniversary of this offering and the class B redeemable warrants
are exercisable at a price of $4.50 per warrant until the fifth anniversary of
this offering. We may redeem both classes of warrants at any time if the trading
price of our common stock is at least 150% of the then current exercise price of
the warrant for a period of 20 consecutive trading days. Thus, based on the
current exercise price for the warrants, the class A redeemable warrants could
be redeemed if the trading price of our common stock were $3.75 or greater, and
the class B redeemable warrants could be redeemed if the trading price of our
common stock were $6.75 or greater, in each case for the required twenty (20)
day trading period. A "Notice of Redemption" for these warrants would force the
holders to (i) exercise them and pay the exercise price at a time when it might
be disadvantageous to do so, (ii) sell them at the current market price when
they might otherwise wish to hold them, or (iii) accept the redemption price,
which may be substantially less than the market value of the warrants would
otherwise be but for the redemption. In addition, exercise of these warrants may
have an adverse effect upon the trading price of and market for our common
stock, if any such market develops, and result in dilution to stockholders.
Plan of Distribution
We are initially seeking to raise a minimum offering amount of $125,000
and a maximum offering amount of $750,000 (without the exercise of any
warrants). We are offering these securities through our officers and directors
on a self-underwritten basis. The public offering price of our securities will
not change until completion of the public offering distribution. We are planning
to manage the offering without the use of an underwriter, and because of that,
there will not be any underwriting discounts or sales commissions. The
securities will be offered and sold by our officers and directors, who will
receive no sales commissions or other compensation, except for reimbursement of
expenses actually incurred on our behalf for such activities. In connection with
their efforts, they will rely on the "safe harbor" provisions of Rule 3a4-1 of
the Securities and Exchange Act of 1934, as amended (the "1934 Act"). Generally
speaking, Rule 3a4-1 provides an exemption from the broker/dealer registration
requirements of the 1934 Act for persons associated with an issuer. Following
the receipt of $125,000 in gross proceeds, all subscriptions will be paid
directly to us upon receipt. No person or group has made any commitment to
purchase any or all of the securities. Nonetheless, the officers and directors
will use their best efforts to find purchasers for the securities. We cannot
state at this point how many of the securities will be sold. Our officers and
directors anticipate making sales of the securities to parties whom we believe
may be interested, or who have contacted us expressing an interest in purchasing
the securities. Insiders and affiliates will not purchase units in order to
reach the minimum but anticipate purchasing securities in excess of the minimum.
We will be calling upon the expertise of our chief executive officer, Mr. Carey
Birmingham, to market our securities. During the past 14 years, in addition to
his work in venture capital and individual investments, Mr. Birmingham has
served in various capacities as Asset Manager, Portfolio Director, Assistant
Vice President, Vice President and consultant for companies which include New
York Life Insurance, United Services Automobile Association (USAA), Fidelity
Mutual Life Insurance and Mutual Benefit Life. In these roles, Mr. Birmingham
has been responsible for the asset and property management of real estate
portfolios valued in excess of $1 billion, and generated proceeds of over $700
million in the sale of properties. We anticipate that Mr. Birmingham will
solicit subscriptions through business contacts both in person, by mail and by
telephone. We may sell securities to parties if they reside in a state in which
the securities may be sold legally and we are also permitted to sell the
securities. However, we are not obligated to sell securities to any parties and
we may refuse to do so.
We will sell our securities in the following states:
Colorado
Connecticut
Illinois
Maryland
New Jersey
New York
Washington D.C.
If all of the securities we are offering are sold, we will have outstanding
3,250,000 shares of common stock prior to exercise of any of the warrants we are
offering. The shares of common stock sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
except for any shares purchased by an "affiliate" of ITS, which may be sold only
while this registration statement or another registration statement covering
sales by those affiliates is effective, or in accordance with Rule 144. An
affiliate is a person controlling, controlled by or under common control with
ITS.
All securities held by existing shareholders will be subject to a one year
"lockup" agreement during which they will be unable to offer and/or sell shares
currently held by them. After the expiration of such period, there will be no
limitations on any such shareholder's ability to sell shares assuming that a
registration statement with respect to such shares is then in effect. If a
registration statement is in effect, the shareholders may sell all, or any
portion, of their shares. The selling shareholders have agreed not to sell their
securities below the public offering price and not until the twelve (12) month
anniversary of the date of the effectiveness of this offering document.
Minimum Offering Amount
We have established a minimum offering amount of $125,000 from the sale of
common stock and warrants and will escrow investor money pending sale of this
amount. Upon receipt of the minimum amount, each subscription for securities in
this offering that is accepted by us will be credited immediately to our company
cash accounts, and such funds may be spent by us at our discretion, without any
waiting period or other contingency. We anticipate that our funds will be
escrowed with Kaplan Gottbetter & Levenson, LLP, 630 Third Avenue, New York, New
York 10017, (212) 983-6900.
Determination of The Offering Price
Prior to this offering, there has been no market for the common stock
and/or warrants of the company, and, as a development stage company, we have
essentially had no substantial business operations to date. The offering price
has been determined arbitrarily by our board of directors.
7
<PAGE>
For the years ended December 1998 and 1997, losses were $(166,886) and
$(55,409), respectively.
Our net tangible book value as of September 24, 1999: $0.01 per share.
Per share based upon number of shares outstanding after this offering if
all securities sold: $0.15.
The reason for the discrepancy between net tangible book value per
share and the per share offering price is that this offering is being sold on a
future earnings capacity basis and that the average sales price represents an
average of total number of shares sold over an aggregate consideration of
$750,000 less offering costs.
We reserve the right to reject any subscription in full or in part, and
to terminate the offering at any time.
No person, individual or group has been authorized to give any
information or to make any representations in connection with this offering
other than those contained in this prospectus and, if given or made, such
information or representation must not be relied on as having been authorized by
us or our officers. This prospectus is not an offer to sell, or a solicitation
of an offer to buy, any of the securities it offers to any person in any
jurisdiction in which that offer or solicitation is unlawful. Neither the
delivery of this prospectus nor any sale hereunder shall, under any
circumstances, create any implication that the information in this prospectus is
correct as of any date later than the date of this prospectus.
The securities may only be offered, sold or traded in those states
where the offering and/or securities have been registered, or where there is an
exemption from registration.
Purchasers of securities, either in this offering or in any subsequent
trading market which may develop, must be residents of states in which the
securities are registered or exempt from registration. Some of the exemptions
are self-executing, that is to say that there are no notice or filing
requirements, and compliance with the conditions of the exemption render the
exemption applicable. See "Risk Factors - We May Be Subject to Government
Regulation".
Use of of Proceeds
The net proceeds of the offering, excluding warrant exercises, are
approximately $125,000 if the minimum offering is sold and $750,000 if the
maximum offering is sold, prior to warrant exercises. We expect all of our
organizational and offering expenses will be paid prior to the effective date of
this prospectus, including legal, accounting and other professional fees,
printing costs, transfer and escrow agent fees and other related offering
expenses. We are offering the securities through our officers and directors. No
commissions or other compensation will be paid to our officers and directors in
connection with this offering. We will not receive any proceeds from the sale by
the selling stockholders of their common stock. We will, however, receive
proceeds from the exercise of the warrants, if any warrants are exercised. We
presently intend to use the net proceeds as follows:
8
<PAGE>
<TABLE>
<CAPTION>
BUDGET DETAIL IF MINIMUM SOLD IF INTERIM AMOUNT IS IF MAXIMUM NUMBER SOLD
SOLD (Absent Warrant Exercises)
<S> <C> <C> <C>
Gross Proceeds $125,000 $500,000 $750,000
-------- -------- --------
Printing & Postage $2,500 $4,000 $10,000
Transfer & Escrow Agents $2,500 $5,000 $7,000
Legal Prepaid Prepaid Prepaid
Accounting Prepaid Prepaid Prepaid
Total Offering Costs1 $5,000 $9,000 $17,000
------ ------ -------
NET OFFERING PROCEEDS $120,000 $491,000 $733,000
======== ======== ========
USE OF NET PROCEEDS
Distribution Agreement
Advance $5,000 $5,000 $5,000
Monthly @ $1,500 $18,000 $18,000 $18,000
Bonus $5,000 $5,000 $5,000
Total Distribution Fees $28,000 $28,000 $28,000
Directors' Fees and Insurance^1 $0 $15,000 $60,000
Marketing
Advertising 5,000 $50,000 $85,000
Direct Mail $2,000 $36,000 $45,000
Trade Shows 5,000 $10,000 $20,000
TOTAL MARKETING $12,000 $96,000 $150,000
Wages & Salaries
President $45,000 $60,000 $75,000
Product Developer ------- $65,000 $65,000
Marketing Support ------- $45,000 $45,000
Administrative Support $12,000 $24,000 $36,000
Benefits & Insurance $15,000 $18,000
TOTAL WAGES & SALARIES $57,000 $209,000 $239,000
Pursuing Strategic Alliances & Corporate $9,500 $36,000 $45,000
Marketing
Office Operating Expenses $5,000 $25,000 $40,000
General Corporate and Working Capital $8,500 $82,000 $171,000
------ ------- --------
Total Use of Net Proceeds $120,000 $491,000 $733,000
======== ======== ========
</TABLE>
- --------
1 Director compensation and insurance benefits will commence after we raise
at least $300,000. Thereafter, director compensation will be allocated in
accordance with a director's level of engagement with the company and at
the discretion of the board of directors.
Both the minimum and the maximum proceeds from this offering are
expected to satisfy our cash requirements for the next 12 months. However, if
only the minimum is raised, we will implement a modified growth plan. This will
result in slower development and introduction of new products, as well as a more
limited sales and acquisition plan. If only the minimum offering amount is
raised, we may reduce our planned operations, raise additional equity capital
through either a private placement exemption or a registered public offering
and/or may incur short or long-term debt, as needed. However, we cannot assure
you that we will be able to raise additional funds on favorable terms, if at
all.
9
<PAGE>
We are not in default on, nor in breach of, any loan, note, lease or
any other obligation or indebtedness. We are not subject to any unsatisfied
judgments, liens or settlement obligations. We have no significant amount of
trade payables that have not been paid within the stated trade term. While we do
anticipate cash flow problems in the event this offering is unsuccessful, we
have scaled back operations and have deferred growth until we receive a capital
infusion.
General corporate and working capital purposes.
We will use the estimated net proceeds of this offering allocated to
general corporate and working capital purposes to fund the capital requirements
associated with our growth, including, without limitation, the retention and
training of personnel, the establishment of a secondary trading market for our
securities and an investor relations program. We may, when the opportunity
arises, use a portion, or all, of the net proceeds to acquire or invest in
complementary businesses, products or technologies. We may use the net proceeds
to obtain the right or license to use complementary technologies, and may enter
into joint ventures and strategic relationships with other companies that may
expand or complement our business. Although we anticipate that we will evaluate
possible acquisition candidates, we are not currently engaged in any discussions
for any material acquisitions, and have no agreements, plans or arrangements
with respect to any acquisition or investment.
The foregoing represents our best estimate of the allocation of the net
proceeds of the sale of the securities offered in this offering based on our
contemplated operations, our business plan, and current industry conditions and
is subject to reapportionment of proceeds among the categories listed above or
to new categories in response to changes in our plans, regulations, industry
conditions, and future revenues and expenditures. The amount and timing of our
expenditures will vary depending on a number of factors, including the timing of
offering receipts, changes in our contemplated operations or business plan, and
changes in economic and industry conditions.
Until we use the net proceeds for a particular purpose, we will invest
them in short-term interest bearing securities, which may be investment grade
securities, money market funds, certificates of deposit, or direct or guaranteed
obligations of the United States government.
Dilution
The following table shows, on a pro forma basis determined as of
September 30 1999, the difference between existing stockholders and new
investors purchasing securities in this offering.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
Number Percent of Total Amount Percent of Total
------ ---------------- ------ ----------------
Average Price Per Share
<S> <C> <C> <C> <C>
Present stockholders 2,000,000(1) 61.5% $307,000 71.1%
New stockholders 1,250,000 38.5% 125,000 28.9%
-------- ------- --------- -------
Total 3,250,000 100.0% $432,000 100.0%
========= ===== ======== =====
</TABLE>
(1) Proforma number of shares outstanding includes sale of 750,000 shares to
present shareholders' subsequent to the date of the financial statements for an
aggregate consideration of $75,000.
10
<PAGE>
On September 30, 1999, we had a net book value of $75,000, or $0.04 per
share (based on the proforma 2,000,000 shares outstanding which gives effect to
issuance of an additional 75,000 shares of common stock issued in consideration
for the receipt of $75,000 cash subsequent to the date of the financial
statements. The net tangible book value per share is equal to the company's
total tangible assets, less our total liabilities, and divided by our total
number of shares of common stock outstanding. After giving effect to the maximum
sale of the common stock and associated warrants at the public offering price of
$0.40 per share and $0.10 per warrant, the application of the estimated net
offering proceeds, our pro forma net tangible book value, as of September 30,
1999, would have been $0.06 per share. This represents an immediate increase in
net tangible book value of $0.02 per share to existing stockholders, and an
immediate dilution of $0.44 per share to new investors purchasing shares in this
offering. Based on the above, the following table illustrates the per share
dilution in net tangible book value per share to new investors:
Minimum
Public offering price per share $ 0.40
of common stock
Value per share due to sale of warrants $ 0.10
Net tangible book value per share
as of September 30, 1999 $ 0.04
Increase per share attributed to
investors in this offering $ 0.02
Net tangible book value dilution per
share to new investors $ 0.44
CAPITALIZATION
We have authorized the issuance of twenty million shares of common stock,
par value $0.001 per share. Capitalization Table -- September 30, 1999
<TABLE>
<CAPTION>
Actual(1) As Adjusted: Maximum
-------------------- ---------------------
<S> <C> <C>
Long term debt $ -0- $ -0-
Preferred Stock authorized 5,000,000
shares, $.001 par value each. At September
30, 1999 there are -0- shares outstanding -0- -0-
Common Stock authorized 20,000,000 shares,
$.001 par value each. At September 30,
1999, there are 1,250,000 shares
outstanding . 2,000(1) 3,250
Additional paid in capital: 305,000 423,750
Deficit accumulated during development stage (205,200) (205,200)
------- ---------
Total stockholders' equity 101,800 221,800
------- -------
Total Capitalization: 101,800 221,800
======= =======
</TABLE>
(1) Includes the purchase by the board of directors of 750,000 at $0.10 per
share for an aggregate consideration of $75,000 subsequent to the date of the
financial statements
11
<PAGE>
Forward Looking Statements
Some of the information in this prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "may", "will", "expect", "anticipate", "continue", or other
similar words. These statements discuss future expectations, contain projections
of results of operations or of financial condition or state other
"Forward-Looking" information. When considering such forward-looking statements,
you should keep in mind the risk factors and other cautionary statements
included in this prospectus. The risk factors noted in the "Risk Factors"
section and the other factors noted throughout this prospectus, including
certain risks and uncertainties, could cause the actual results of the company
to differ materially from those contained in any forward-looking statement.
Business of the Company
Company Background and History.
We are a Delaware corporation that was formed on September 20, 1999
("ITS Delaware"). We intend to market, sell and distribute a family of hardware
and software products used to test and troubleshoot components on printed
circuit boards.
Predecessors to our company have designed and sold these test products
since 1994. Our management team experienced difficulties in growing our
operations, became overburdened with debt and sought the assistance of outside
consultants. On June 16, 1999, International Test Systems, Inc. of Texas (a
predecessor entity) ("ITS Texas") entered into a Reorganization and Subscription
Agreement with Unifund America, Inc. Unifund America agreed to provide
management with business and marketing advice. It reviewed all aspects of our
business. Its chief executive officer, Scott Barter, joined our board. Unifund
believed that a leaner operation devoted to marketing and distributing a
successful technology would be a more successful direction for our company to
take. Unifund America helped engineer a reorganization of ITS Texas. ITS Texas
transferred all of its technology to Pensar Technologies LLC ("Pensar") in
exchange for which Pensar assumed all of the liabilities of ITS Texas.
Simultaneously, Pensar and ITS Texas entered into a ten-year distribution
agreement granting ITS Texas the exclusive, worldwide right to market, sell and
distribute products based on Pensar technology. Pursuant to the reorganization,
our company (ITS Delaware) was organized on September 20, 1999. On that date,
the shareholders of ITS Texas exchanged all their shares for our shares and we
were assigned the distribution agreement with Pensar.
Terms of the Pensar distribution agreement include the right to
purchase products from Pensar at a 40% discount off the price for resale or
wholesale in the electronics repair, manufacturing and related markets. In
addition, the agreement contains a right of first refusal to purchase the
existing technology. We have the option to renew the distribution agreement for
an additional five (5) year term by delivering written notice to Pensar 90 days
prior to the expiration of the initial term and by guaranteeing an additional
$90,000 in payments to Pensar over the course of the renewal period. We have the
right to subcontract our rights and obligations to any subcontractor,
value-added reseller or other distributor. We can terminate this agreement at
any time upon thirty days written notice to Pensar.
12
<PAGE>
The Products we intend to distribute.
The products we will distribute, known as the CircuiTest 2000S Base
System and the CircuiTest 2100 Scanner Expansion, are low-cost, easy-to-use and
have numerous attributes that we believe separate them from the competition.
Some of these attributes include:
1. Knowledge-Based Data: A database feature within the product software
allows it to locate failed components faster.
2. Power-Off Testing: Testing of components is performed without applying
electrical power to the board. Power-off testing eliminates the risks
of damaging the components of the printed circuitboards.
3. Family of Adaptive Products: Our core testing product, the CircuiTest
2000S Base System, is designed to facilitate rapid adaptation to meet
the unique, complex testing requirements that our customers identify.
We believe the CircuiTest 2000S Base System and its family of
flexible, adaptive products can test and troubleshoot the majority of
problems that exist in a variety of products or can be readily adapted
to do so.
Our products have been sold to several well-known corporations and
major governmental agencies including the U.S. Air Force ($33,527.00), the
Harris Corporation ($33,756.00), the U.S. Immigration and Naturalization Service
($28,359.00), IBM, ($15,440.00) and Sony Microelectronics ($9,995.00). There are
however, no current contractual relationships with these companies or entities.
We are seeking a capital infusion from this offering (i) to further develop a
market and support our products, (ii) to develop and/or acquire new
technologies, and (iiiv) to seek and form strategic alliances in order to
strengthen our company and maximize our future value.
A more complete description of our two products follows:
The CircuiTest 2000S In-Circuit Component Test System (the "CircuiTest
2000S"), is a personal computer-based product which will troubleshoot, test and
allow for the repair of components on assembled printed circuit boards.
The CircuiTest 2100 Scanner Expansion, when connected to the 2000S,
increases the number of tests the software can automatically perform from 64 to
a range of between 256 and 1024.
The CircuiTest 2000S is an economical, easy-to-use solution to
comparative testing of components on printed circuit boards. The system
connects with any standard personal computer via a serial
communications port and contains its own external power supply. The
CircuiTest 2000S tests both analog and digital circuits. Electronic
printed circuit boards are now used throughout the electronics industry
and will continue to be used in the foreseeable future. Despite the
growth of digital technology, we believe the real world to be analog in
nature. Digital circuits can only operate on very specialized
(restricted) kinds of electrical signals. All other types of signals
are, and must be, translated by analog circuits if digital circuits are
to process them. Furthermore, digital circuits require highly stable
power sources, and these power supplies themselves must be created from
analog components.
Specific electronics components that might use our printed circuit
board testing equipment for manufacturing, repair and maintenance
include:
o Network switching cards;
o Computer and peripheral circuit boards (i.e. computers, mother boards,
monitors, laser printers, matrix printers, scanners, modems, optical
disk drives);
13
<PAGE>
o Avionics circuit boards (i.e. aircraft, navigational and
communications electronics);
o Medical circuit boards;
o Military and government electronics;
o Telecommunication circuit boards;
o Telephone equipment, answering machines and fax machines;
o Cash registers, scanners, credit card verification equipment;
o Electronic equipment power supplies; and
o TV and monitor circuit boards.
Proven Methods of Production Will Be Used.
We will outsource production to Pensar, the owner and manufacturer of
the 2000S/2100 Technology. Since 1994, Pensar and its predecessors have
continually outsourced all the manufacturing and production of products
to various companies around Texas and the Southwest. Pensar will
continue to subcontract the production and assembly of products to
local and regional sheet metal fabricators, manufacturers and
assemblers.
Numerous back-up outsourcing firms exist in the area, and we believe
that Pensar will not be reliant on any single provider. Most parts and
components are readily available off-the-shelf through wholesalers.
Less than 5% of the final product is composed of
long-lead-delivery-time components, and Pensar normally carries these
in inventory. In addition, to achieve certain discounts, Pensar may,
from time to time, warehouse bulk quantities of off-the-shelf
components.
The steps in our manufacturing process are as follows: (1) The sheet
metal enclosures are manufactured to our specifications and delivered
to Pensar; (2) blank printed circuit boards are manufactured and, when
completed, are delivered to a printed circuit board assembly house, a
subcontractor of Pensar; and (3) upon completion of the assembly of the
printed circuit board (installation of all off-the-shelf components),
the completed and loaded printed circuit boards are delivered to
Pensar.
We anticipate that final insertion on the printed circuit board of our
components, pre-testing, packaging and shipping of our finished
products will be executed by Pensar in San Antonio, Texas, allowing for
quality control inspections prior to delivery. This process has been in
place since 1994 and we expect it to continue. We expect that we would
experience a maximum two-week delay if Pensar had to change suppliers
or manufacturers. This delay should not have a material effect on
sales.
14
<PAGE>
Future Products.
We would like to introduce new products based on current technology.
We would like to introduce new variants to our existing core product
base as well as to continually seek to develop and/or acquire new and
different technology. Our newest model, theCircuiTest 1000S has been
completed. The CircuiTest 1000S is a system that uses voltage and
current analysis and attaches to oscilloscopes. We anticipate that the
1000S will be retail-priced under $1,500, will not require software and
will be marketed to a wide range of electronics repair customers.
We may develop future products, for which no prototypes are currently
available, as market needs demand. This may result from a merger or
acquisition of a new technology company. Our core testing product is
designed to facilitate rapid adaptation to meet the unique, complex
testing requirements that customers identify. We believe that as more
and more products are manufactured with printed circuit boards, the
demand for manufacturer's defect-testing and troubleshooting systems,
such as ours, increases. Our core product and its family of flexible,
adaptive products can test and troubleshoot the majority of problems
that exist in these products.
Our Industry and Our Competition
As of 1999, our research indicates that the estimated annual market for
Personal Computer-Based Testing Equipment was in excess of $400
Million. We have obtained this information from Frost & Sullivan, an
international marketing and consulting firm.
In general, the CircuiTest systems compete in circuit board repair and
troubleshooting for companies around the world, as evidenced by our
sales to companies in Brazil, Japan, Egypt, Turkey, Mexico, Canada and
Germany (to the US Army). Although these sales represented a small
percentage of overall sales, we believe the potential for future
business is strong overseas and in Mexico and Canada. As described
below, other competitors are substantially larger in size and market
share or market coverage. However, we anticipate that the CircuiTest
Systems will be priced lower than the competition, be easier to use and
include a wider range of features.
Existing Competition for the CircuiTest Systems
Voltage/Current (V/I) Tracers.
Competitive testers that are marketed by both Huntron and Polar rely on a
graphic voltage/current plot of the component tested on an oscilloscope or
personal computer. To use the V/I tracers, the user visually compares a
plot on the oscilloscope screen with a reference plot previously learned by
the tester.
15
<PAGE>
Because of the rudimentary visual display in most V/I tracers, the margin
for error is significant. The price for these units ranges from $4,500 to
$7,000. In addition, Huntron also carries a very low-end V/I tracer which
sells for about $1,995, but it is limited in its use and performance.
Advantage of the CircuiTest over V/I Tracers
Our CircuiTest system also tests by use of a PC and color monitor and
compares the performance values of components to a previously learned
reference value. In contrast to the V/I tracers, the CircuiTest displays
that value and difference on the computer monitor in numerical terms. This
method provides higher accuracy and more consistent results than those
provided by the competition's V/I tracers. The difference between these two
systems is analogous to looking at a conventional thermometer and
estimating the temperature (V/I tracer) versus simply examining a digital
display readout which shows, for example, "36.4 degrees" (CircuitTest).
Huntron
Our CircuiTest system is most often compared to the Huntron series of
testers. Huntron Corporation, a privately held company based in Mill Creek,
Washington, has several systems ranging in price from $1,995 for a
rudimentary system to approximately $40,000 and more for its advanced
auto-prober system. Huntron has offered a 1-year warranty on its equipment
with subsequent one-year extensions for $950, as well as fees for software
upgrades. We offer a free 3-year warranty and free 3-year software
upgrades.
Most often, the CircuiTest 2000S is compared to Huntron's Model 5100DS,
priced at approximately $7,495, and the more recent ProTrack Model 20,
priced at approximately $6,995. After using both the Huntron 5100DS and our
CircuiTest 2000S system, a focus group comprised of eight potential
customers reported that our CircuiTest system had numerous advantages over
its competitor.
Traditional Test Instruments
Other competitors' systems include a variety of manually operated meters,
function generators, oscilloscopes, frequency counters and so on. We
believe that the use of these instruments is laborious, slow, inefficient
and particularly subject to human errors. Furthermore, they require highly
skilled personnel, further increasing the cost of the testing process. The
largest drawback of these items, however, is that they cannot capture and
save results for analysis and comparison at a later date.
16
<PAGE>
Our Market Strategy
1. Sales
Our sales approach will be based on maximizing contact with potential
customers by demonstrating that our products have a wider range of
capabilities and a lower price point than our competitors' products.
As of November 1999, we do not have any distributors who are selling our
product. We have introduced our product to two sale representative firms,
TPD Associates in New Jersey (for the New York, New Jersey and Pennsylvania
tri-state area) and Rich Sales Company in Phoenix, AZ and Austin and
Dallas, TX (for the Southwest region). There are no existing contractual
relationships in force with these companies at this time.
Our current internal sales force consists of our President, Carey
Birmingham. Our approach includes establishing new, and as yet unattained,
worldwide distributor relationships and implementing direct marketing
campaigns to specific segments of the market. Our direct marketing and
sales efforts include increasing our internal direct sales force, trade
publication advertising, Internet web site promotion, public relations,
trade shows/conferences and database marketingculminating in
demonstrations.
This method is based upon our own internal experience of selling to this
market and does not rely on any specific outside sales study or model.
2. Distribution
Our research indicates that, increasingly, companies are creating sales
distribution channels composed of non-company employees, and that companies
are reducing their dependence on their own direct field sales force.
We are building our distribution channels to reflect this industry trend.
We may engage additional regional and international distributors as well as
VAR (value-added resellers)and we may engage independent sales
representatives, licensing partners and joint venture partners to market
and sell products to prospective customers.
3. GSA Marketing
We have marketed our products, which to date only include the 2000S & 2100,
to the General Services Administration (GSA) the chief procurement agency
for U.S. federal governmental operations. The GSA granted us a government
contract number under the federal supply schedule for FSC/6625 instruments
and laboratory equipment. The contract pre-approved us under a negotiated
price schedule to sell our products to any branch of the federal government
for the six-year period June 1, 1997 through May 31, 2003. In two
categories that apply to our products, FSC/6625 subcategory 627-11 and
FSC/627-1, the GSA purchased $4,829,000 of circuit board testers and $20
million of products in a recent 24-month period. As of the date of this
prospectus, we have not sold any of our products to the GSA and as a result
our contract may be subject to cancellation at the discretion of the GSA.
17
<PAGE>
4. Direct Mail
We are considering the use of direct mail as the first phase of our
database marketing campaign to generate more leads and inquiries that lead
to sales. In addition, we expect to continue generating prospect lists from
trade shows, trade publications, associations, and other sources.
We have produced marketing materials describing our products which we can
mail to potential customers who respond to our print ads, who attend the
trade shows and conferences and who are trade magazine subscribers.
We can receive these mailing lists as an advertiser.
In order to enhance the success of the direct mail campaign, a portion of
the marketing budget may be designated for follow-up phone calls to
potential customers and lead management.
5. Advertising and Trade Shows.
We plan to allocate a portion of our marketing budget to print
advertisements
In conjunction with paid advertisements, most trade publications offer
complimentary editorials and feature stories on new product releases. We
are developing an editorial calendar and will increase our public relations
efforts to write articles about the technology.
In addition, numerous trade shows exist for electronics manufacturing and
testing . We plan to participate at both large, national trade shows and
smaller, regional trade shows.
Our significant employees.
We have one employee, Carey Birmingham, our president and a director. Our
other directors are Youval Krigel, and Scott Barter. We plan to maintain
lean operations in order to minimize operating expenses while seeking a
capital infusion. Depending upon the success of this offering, we intend to
hire staff and enter into consulting relationships as needed in order to
(i) develop and market our products, (ii) develop and exploit new
technologies and products and (iii) seek and exploit strategic alliances
with persons and/or businesses that we believe will strengthen our company
and maximize our future value.
We do not anticipate that any of the employees engaged by us will be
subject to any collective bargaining agreements nor do we anticipate the
possibility of any strike or work stoppage.
We anticipate that all employees will receive a base salary or hourly wage,
as necessary. The sales staff may receive a sales commission in addition to
the base salary.
As a general course of business, we offer, and will continue to offer,
partial premium-paid health insurance to employees. In addition, we believe
financial incentives should be offered to quality employees, and we
anticipate the payment of cash and stock bonuses, stock options and other
monetary incentives to maintain a loyal and productive employee base.
18
<PAGE>
Our Intellectual Property.
Our company does not own any copyrights or patents. However, Pensar owns
the copyright on the printed circuit board design within our products. In
addition, Pensar owns the copyright on the proprietary software, which is
an integral part of our product. Our existing software cannot be modified
by outsiders without access to Pensar's software source code. We have an
exclusive distribution agreement with Pensar. On June 16, 1999, we entered
into a ten (10) year distribution agreement with Pensar to market, sell,
promote and distribute existing and new printed circuit board test products
throughout the world. Terms of the distribution agreement include our right
to purchase products from Pensar at a 40% discount off the retail price for
resale into the electronics repair, manufacturing and related markets. In
addition, we have a first right of refusal to purchase the existing
technology and the option to renew the distribution agreement for an
additional five (5) year term by delivering written notice to Pensar 90
days prior to the expiration of the initial term and by guaranteeing an
additional $90,000 in payments to Pensar over the renewal period. We have
the option to terminate the distribution agreement on thirty days written
notice to Pensar.
Pensar completes the final assembly of our product in-house in order to
eliminate the opportunity for duplication by outside competitors. The
hardware is protected from outside duplication by a PAL (Programmable Array
Logic) chip on the main system motherboard. This chip is installed and
programmed in the final phase of quality control at our main office by
developers of the system. Immediately after programming, a small fuse is
"blown" in the PAL, making the hardware and its functions virtually
impossible to duplicate. In addition, we are considering upgrading our
hardware security by including a modified EPROM (Erasable Programmable
Read-Only Memory) chip which also has a fuse "blowing" feature. Including
this chip is expected to increase the cost of the base system by $10-$15.
Mr. Youval Krigel, a director of our company, was a key individual in our
software, firmware and hardware development. Mr. Krigel is no longer
employed by us, but remains a director, a shareholder and consultant to our
company. We have a verbal agreement with Mr. Krigel to be available to our
company in order to customize and install prototype systems as well as to
train customers for their use. We intend to compensate Mr. Krigel $75 per
hour for these consulting services. To the extent that we choose to develop
new software or new products we contemplate (i) contracting with Pensar for
such services; or (ii) seeking strategic acquisitions, partnerships or
ventures with entities with developing technologies.
We have not spent any funds on research and development of products during
the last fiscal year.
The development of our company.
In September 1993, UAT Development Partners (UAT), a Texas general
partnership, was formed to design, develop, and market a universal analog
tester for component level testing of printed circuit boards.
Simultaneously, Pensar Technologies, Inc. ("Pensar Inc."), a Texas
corporation, was formed. Pensar Inc. and UAT entered into a contract for
services for Pensar, Inc. to manufacture the universal analog tester for
UAT. This product was named the A-2000.
Pursuant to their manufacturing contract, Pensar, Inc. and UAT completed
ten prototypes of the A-2000 in September 1994, and commenced marketing
efforts to prospective customers. The first system was sold one month after
marketing efforts commenced at a price $6,000.
During the next six months, the company sold an aggregate of eight
prototype units. Between January 1995 and July 1995, the A-2000 was
redesigned into the new CircuiTest-2000S, incorporating new software
features and hardware upgrades. The Circui-Test 2000S, with its new
features, would be considered the "core" product for the company from that
point forward.
In April 1995, Pensar Technologies, LLC ("Pensar LLC"), a Texas limited
liability company, was formed. Simultaneously, UAT transferred all of its
assets, including the technology, to Pensar LLC in exchange for ownership
units and assumption of the manufacturing contract between Pensar, Inc and
UAT.
In July 1995, Pensar LLC received 25 completed CircuiTest 2000S systems
from Pensar, Inc. The first few systems went to select customers as
exchanges, upgrades or were sold as additional units to those customers who
had previously purchased systems. By December 1995, 13 systems had been
sold to customers in the U.S., Canada and Singapore. In December 1995,
Pensar, Inc. and Pensar LLC terminated their manufacturing agreement and
Pensar, Inc. ceased day to day operations.
International Test Systems, Inc. ("ITS Texas"), a Texas corporation, was
formed in September 1996. Simultaneously, Pensar LLC contributed all of its
assets and liabilities to ITS Texas in exchange for 730,000 shares of
stock.
19
<PAGE>
Subsequently, ITS Texas experienced difficulties in growing its operations,
became overburdened with debt and sought the assistance of outside
consultants. On June 16, 1999, ITS Texas entered into a Subscription
Agreement with Unifund America, Inc. Unifund America agreed to provide
business and marketing advice to ITS Texas in exchange for 770,000 shares
in a newly formed entity, which would become ITS Delaware. Scott Barter,
chief executive officer of Unifund joined the ITS Texas board of directors.
Unifund believed that a leaner operation devoted to marketing and
distributing a successful technology would be a more successful direction
for the company to take. Unifund America helped engineer a reorganization
whereby ITS Texas sold the technology to Pensar in exchange for relief of
its debt and an exclusive ten (10) year renewable distribution agreement to
distribute the technology. The president of Unifund America will continue
to aid in our growth by identifying and evaluating companies to complement
and expand our existing business. Unifund will seek to maximize our value
by seeking strategic marketing and financial opportunities and by forming
strategic alliances.
As part of the reorganization and subscription agreement, ITS Texas
transferred all of its technology to Pensar LLC in exchange for which
Pensar LLC assumed all of the liabilities of ITS Texas. Simolutaneously,
Pensar LLC and ITS Texas entered into a ten-year distribution agreement
granting ITS Texas the exclusive, worldwide right to market, sell and
distribute products based on Pensar technology. Pursuant to the
reorganization, our company (ITS Delaware) was organized on September 20,
1999. On that date, the shareholders of ITS Texas exchanged their shares
for shares in ITS Delaware and ITS Texas assigned us the Distribution
Agreement with Pensar LLC.
Terms of the Distribution Agreement include our right to purchase products
from Pensar at a 40% discount off the price for resale into the electronics
repair, manufacturing and related markets. In addition, we have a first
right of refusal to purchase the existing technology and the option to
renew the Distribution Agreement for an additional five (5) year term by
delivering written notice to Pensar Inc. 90 days prior to the expiration of
the initial term and by guaranteeing an additional $90,000 in payments to
Pensar Inc. over the renewal period. We have the option to terminate the
license agreement on thirty days written notice to Pensar Inc.
20
<PAGE>
As of December 31, 1999 a total of 116 units have been sold to a total of
44 customers in the U.S., Japan, China, Egypt, Singapore, Jamaica, Mexico,
Brazil and Canada. A partial list of end-use customer list includes:
================================================================================
Company Location No. of Systems
================================================================================
NCR Corporation Bethlehem, PA 1
IBM Corporation San Jose, CA 2
Sony Microelectronics San Antonio, TX 2
Solectron Corp. Austin, TX 4
Seagate technology San Jose, CA 2
Harris corporation San Antonio, TX 6
US Air Force San Antonio 10
US Army Mannheim, Germany 1
ICL/Fujitsu Dallas, TX 3
Immigration Naturalization Service Various Location in Texas 3
Radian Corporation Austin, TX 2
Paradigm Corp. San Antonio, TX 2
Finetest San Jose, CA 2
Vanco PTE Singapore 1
Fastar, Ltd. Dallas, TX 1
Primetech Electronics Quebec, Canada 1
Colin Medical Instruments San Antonio, TX 1
Matrix Components Austin, TX 2
Tanisys Corporation Austin, TX 2
EMSCO Cairo, Egypt 1
Electronic Resources, Int'l Des Moines, LA 2
Digital Repair Corp. San Antonio 1
===============================================================================
The Distribution Agreement between ITS and Pensar Technologies states that
in consideration for the assuming all the liabilities of ITS, Pensar would
receive all the assets of the company at closing, or June 24, 1999. Part of
those assets included completed inventory, comprised of approximately 14
2000S, 2100 and 1000S units. The Distribution Agreement allowed Pensar to
sell the existing units at or close to the scheduled retail price and
retain the proceeds until the inventory was depleted. As a result, 5 units
were sold by Pensar in the second half of 1999 and, while these sales are
reflected in the total sales described above, the revenues are not included
in ITS sales for 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE PERIOD FROM INCEPTION,
SEPTEMBER 30, 1999 TO SEPTEMBER 20, 1999
The following discussion relates to the results of our operations to date,
and our financial condition:
This prospectus contains forward looking statements relating to our
Company's future economic performance, plans and objectives of management
for future operations, projections of revenue mix and other financial items
that are based on the beliefs of, as well as assumptions made by and
information currently known to, our management. The words "expects,
intends, believes, anticipates, may, could, should" and similar expressions
and variations thereof are intended to identify forward-looking statements.
The cautionary statements set forth in this section are intended to
emphasize that actual results may differ materially from those contained in
any forward looking statement.
Development stage activities.
21
<PAGE>
The Company has been a development stage enterprise from its inception
September 20, 1999 to September 30, 1999. The Company is a development
stage company that was organized as a predecessor to International Test
Systems, Inc., a Texas corporation,and has obtained a license and marketing
agreements the rights to manufacturer a component-level printed circuit
board tester whose principal customers use the tester to analyze, repair,
and service printed circuit boards with components attached.
During this period, management devoted the majority of its efforts to
initiating the production scheduling, sourcing inventory and its marketing
program, acquire additional equipment, management talent, inventory and
working capital to engage in any profitable business activity. Since its
organization, the Company's activities have been limited to the preliminary
developent of its new products, obtaining the license and m,arketing
agreement, hiring personnel and acquiring equipment and office space, and
preparation of documentation and the sale of a public offering. These
activities were funded by the Company's management and investments from
stockholders. The Company has not yet generated sufficient revenues during
its limited operating history to fund its ongoing operating expenses, repay
outstanding indebtedness, or entirely fund its research and product
development activities. There can be no assurance that development of the
Company's products will be completed and fully tested in a timely manner
and within the budget constraints of management and that the Company's
marketing research will provide a profitable path to utilize the Company's
marketing plans. Further investments into the Company's technology,
marketing research as defined in the Company's operating plan will
significantly reduce the cost of development, preparation, and processing
of purchases and orders by enabling the Company to effectively compete in
the electronic market place.
During this developmental period, the Company has been financed through the
sale of stock to the Company's shareholders aggregating $40,000 and an
additional sale of stock to the Company's sharteholders aggregating $75,000
subsequent to the date of the financial statements.
Results of Operations for the period from inception to September 30, 1999
For the period from inception to September 30, 1999, the Company has not
generated any sales.
The Company's general and administrative costs aggregated approximately
$205,200 for the period from inception to September 30, 1999. These expenditures
represent office and administrative expenses of $20,000 and the payment of legal
and consulting fees of $185,200.
Liquidity and Capital Resources.
Overview
As of September 30, 1999, the Company's cash balance was $-0-, and the
Company's working capital was $-0-. As of September 30, 1999, the Company had a
tax loss carry-forward of $205,200 to off-set future taxable income. There can
be no assurance, however, that the Company will be able to take advantage of any
or all of such tax loss carry-forward, if at all, in future fiscal years.
Financing Needs
To date, the Company has not generated any revenues. The Company has
not been profitable since inception, may incur additional operating losses
in the future, and may require additional financing to continue the
development and commercialization of its technology. While the Company does
expect to generate significant revenues from the sale of products in the
near future, the Company may enter into licensing or other agreements with
marketing and distribution partners that may result in license fees,
revenues from contract research, or other related revenue.
The Company expects its capital requirements to increase significantly
over the next several years as it commences new research and development
efforts, undertakes new product developments, increases sales and
administration infrastructure and embarks on developing in-house business
capabilities and facilities. The Company's future liquidity and capital
funding requirements will depend on numerous factors, including, but not
limited to, the levels and costs of the Company's research and development
initiatives and the cost and timing of the expansion of the Company's sales
and marketing efforts.
The Company anticipates that it will be able to fund operations over
the next twelve (12) months subsequent to the sale of its public offering
and sales of shares and capital contributions from its present
shareholders. To enable the Company to fund its research and development
and commercialization efforts, including the hiring of additional
employees, the Company in the process of offering additional shares of its
common stock.
Trends in the Company's historical operating results.
We are unable to discern any noticeable trends in historical operating results
since we have only been selling our core product since July 1995.
However, we foresee two significant issues which will favorably affect our
operations in the future:
22
<PAGE>
Low Cost/PC-Based Automated Test Equipment
The price point of the CircuiTest 2000S, our core product, is considerably lower
than our competitors' comparable automated test equipment. (See "Business and
Properties.")
Power-Off Testing
Our core product, the CircuiTest 2000S, tests and troubleshoots populated,
printed circuit boards without applying power to the board. Management believes,
and has had confirmation from the marketplace, that power-off testing will
increase dramatically in the future due to this feature.. As components get
smaller and smaller, the trend in the industry will be to test and repair
components at the board level with no power supplied to the populated, printed
circuit board. When power is supplied to the board to test components, there is
a risk of damaging the component or the entire board if the technician
incorrectly connects the test equipment. Our "power-free" circuit board testing
technology uses known and trusted methods of troubleshooting and virtually
elimiates the possibility of damaging the board or its components.
Approved for Sales to Federal Government
Effective June 1, 1997, the Company was awarded a US Government Contract Number
GS-24F-3059 under the General Services Administration (GSA), Federal Supply
Service schedule FSC-6625. Under this GSA Contract the Company is pre-approved
to sell to any branch of the Federal Government. In two categories that apply to
ITS' products, FSC/6625 subcategory 627-11 and FSC/627-1, GSA purchased
$4,829,000 of circuit board testers and $20 million of comparable products in a
recent 24-month period.
In connection with the GSA Contract Award, the Company received a mailing list
from the GSA of 900 purchasing agents which purchase products similar to the
Company's 2000S & 2100. These agents are currently being contacted through the
ITS database marketing campaign.
Sampling of Features Found in ITS CircuiTest 2000S & 2100:
SymSortTM - A copyrighted database feature which allows technicians to
automatically accumulate information on failed components on a PCB. This feature
directs the technician to the most likely component to causing a particular
problem.
Turbo Scanning - Accelerated software feature allows up to 10 tests/second, or
test-by-test discharge of individual points.
Digital Image Importing - Software feature allowing the user to view a digital
image of the printed circuit board under test, making locating components under
test fast and easy. The image can be in photographic format, schematics, or
user-designated format.
23
<PAGE>
Warranty & Software Upgrades - ITS offers a 3-year repair or replace warranty on
its products as well as 3-year free software upgrades for customers. This
compares to competitors that offer only 1-year warranties and 1-year free
upgrades.
Ease of Use - The Windows-based software is icon-driven, and training time
averages three hours per customer.
Quick Ramp-Up - One of the product's software features is "Scope Mode." Scope
Mode allows technicians to begin trouble-shooting boards immediately, without
using all the product features and with virtually no training.
Low Cost - Based on market comparisons of similar testing systems, the Company's
products are inexpensive. Payback typically averages four to six months, but in
the case of one customer, was as fast as one day.
Family of Adaptive Products - Our core testing product, the CircuiTest 2000S
Base System, is designed to facilitate rapid adaptation to meet the unique,
complex testing requirements that ITS' customers identify. As more and more
products are manufactured with PCBs, the demand for manufacturer's
defect-testing and troubleshooting systems, such as our Company's, increases.
The CircuiTest 2000S Base System and its family of flexible, adaptive products
can test and troubleshoot the majority of problems that exist in a variety of
products with PCBs.
Positioned for Future Growth
The next generation of power-off testers will be automated, with robotics
devices to reduce the amount of time spent in the testing process. Our Company
has already identified a robotics arm prober, and development of the next
generation of CircuiTest systems is underway.
Fiscal year-end1995 sales are not considered significant to test for
gross margins.
Fiscal year-end1996 sales gross margins were 46.2%
Fiscal year-end 1997 sales gross margins were 83.8%
Fiscal year-end 1998 sales gross margins were 69.9%
Due to stabilization of price at $5,995 for the CircuiTest 2000S and $2,995 for
the CircuiTest 2100, the Company believes future gross margins for the core
products should exceed 80%, excluding labor.
Past foreign sales represented units sent to companies in Japan, China, Egypt,
Singapore, Jamaica, Mexico and Canada. The Company intends to increase
international sales by signing international distribution agreements.
Past domestic government sales represented sales to the US Air Force, the INS
and the US Army. The Company will continue to market aggressively to US
government agencies.
EVENTS OR MILESTONES
Printed circuits boards are in found virtually every type of electronic
instrument and product manufactured today. Every new product and every existing
product that contains a printed circuit board represents an application or
product opportunity for ITS test systems. While no assurance can be given, we
believe that printed circuit boards will remain a mainstay in the electronics
industry. Our products test the individual components on a printed circuit board
based on voltage and current (V/I) signature analysis. This technology is
time-tested and is a recognized generic means of testing throughout the
electronics industry. While the CircuiTest 2000S and associated software uses
new and innovative interpretations of the V/I, we believe that this basic method
of testing will continue to be a standard far into the foreseeable future. We
believe do not believe that this industry is as time sensitive as other
high-technology industries, and, thus, we believe we have the time to plan, fund
and scale up our business without losing a place in the market. Of course, the
foothold that competitors have in the industry will be a barrier which we must
pass.
Assuming that we raise the maximum offering amount (absent warrant exercises)
and we successfully scale-up our operations, we believe that that ITS can
reasonably achieve a 1% product penetration of the total annual automated test
equipment market (estimated at $400,000,000 per year) resulting in profitability
within eighteen months from the successful completion of this offering.
<TABLE>
<CAPTION>
- -------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Event Method of Achievement Date or number of months after
receipt of proceeds when event
should be accomplished
- -------------------------------------- -------------------------------------- --------------------------------------
Fund minimal operations Conduct this offering and raise the Immediately after escrowed funds are
minimum offering amount released.
- -------------------------------------- -------------------------------------- --------------------------------------
Market products based upon existing Conduct this offering to obtain Ongoing process which should
technology. needed funds to pay for direct commence within one month after
mailings and other marketing receipt of funds in excess of
efforts. Hire marketing support and minimum offering amount. Direct
establish relationships with Mail can commence if the minimum
independent sales contractors to offering amount is received. Other
market products. forms of marketing and the
retainment of marketing support
staff can commence when amounts in
excess of the minimum offering
amount are received. In addition,
the president and the directors will
be compensated from the offering
proceeds to the extent they engage
in developing our business, which
may include marketing advice or
activities.
- -------------------------------------- -------------------------------------- --------------------------------------
25
<PAGE>
Seek product and technology Conduct this offering to obtain Ongoing process which can commence
opportunities which expand our needed funds to continue immediately after receipt of minimum
business in both the area of testing Distribution Agreement with Pensar offering amount. Upon receipt of
and trouble shooting as well as and to hire a product developer and minimum, payments can continue to
other areas that will maximize our establish relationships with Pensar for the Distribuiton
value. independent technology companies and Agreement rights . Upon receipt of
developers. the maximum offering amount, we can
hire a product developer. The
receipt of amounts between these
breakpoints will enable us to pay
our president and directors who
shall engage in the development of
relationships with individuals and
companies which can provide us with
improved and different technologies
and products.
- -------------------------------------- -------------------------------------- --------------------------------------
Seek to establish strategic Conduct this offering to obtain Ongoing process which can commence
alliances that will maximize our needed funds to pay for the services immediately after receipt of minimum
value. of the president, the directors and offering amount. Upon receipt of
consultants to conduct due diligence minimum, and upon the receipt of
on market needs and opportunities amounts between the minimum and the
for our company to increase its maximum, we can pay our president,
value. our directors who intend to engage
in the development of our business.
The ability to complete strategic
alliances cannot be definitively
timed and will depend on
opportunities which these
individuals will continue to
explore.
- -------------------------------------- -------------------------------------- --------------------------------------
Seek liquidity and growth in the Become listed on the Six months to one year initially
market place. over-the-counter bulletin board and and then a continuing effort
continue marketing efforts. thereafter.
- -------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
We cannot assure you that any, or all, of the events previously outlined can, or
will, occur within the expected time frame.
We have scaled back operating costs and will continue to do so until we receive
an infusion of cash. If this offering is successful we will be able to market
and sell our products, to develop and/or license new technology; and to
strengthen the company and maximize its value by exploiting strategic alliances.
In the past we were unable to generate enough capital from revenues to fully
develop and retain the proper staff to market and support our products as well
as to seek and exploit other market opportunities. While no assurances can be
given, we believe that with proper funding, we will have the support to achieve
our objectives. However, we believe that the achievement of these goals involves
a process cannot necessarily be defined by a list of separately identifiable
date-certain milestones.
Description of our Property.
We currently sublease approximately 2,000 square feet of office and warehouse
space at 4703 Shavano Oak, Suite 102, San Antonio, Texas, which we use for our
corporate offices. This lease is month to month, with prime lease expiring June
30, 2001. Our lease payment is $310 per month plus expenses.
We believe that the existing premises will satisfy our needs in the foreseeable
future with only moderate changes needed to be made to the premises to
accommodate additional staff. Ample small office space is available to us, and
we are not real estate dependent.
Directors, Officers and Key Personnel of the Company.
Listed below are our officers and directors and their previous experience. The
directors have been elected by the present shareholders and shall serve for
terms of one year, or until their successors are elected and have qualified.
Officers are appointed by, and serve at the pleasure of, the board of directors.
Carey Birmingham, president, chief executive officer and director, age 44
For the past five years Carey Birmingham has served as chairman and president of
ITS, as well as Pensar LLC, and has been responsible for long-term strategic
planning and all day-to-day administrative activities, including marketing,
finance, profit and loss responsibility, building strategic alliances and
developing sales. Mr. Birmingham is a full-time employee of our company. In
addition to acting as the chief executive officer and president, he acts as the
chief operating officer and chief financial officer of the company.
During the past 14 years, in addition to his work in venture capital and
individual investments, Mr. Birmingham had served in various capacities as Asset
Manager, Portfolio Director, Assistant Vice President, Vice President and
consultant for companies which include New York Life Insurance, United Services
Automobile Association (USAA), Fidelity Mutual Life Insurance and Mutual Benefit
Life. In these roles, Mr. Birmingham has been responsible for the asset and
property management of real estate portfolios valued in excess of $1 billion,
and generated proceeds of over $700 million from the sale of properties.
R. Scott Barter, chairman of the board and director, age 53.
Mr. Barter, age 53, is the Founder, Chairman, Chief Executive Officer and a
Director of Unifund Financial Group, Inc. since its inception in 1991 and
Unifund America, Inc. since its inception in 1995. Mr. Barter has been engaged
in the securities industry in the United States and abroad since August, 1975.
He has been licensed with the National Association of Securities Dealers and as
a member of the National Futures Association. He has been registered as a
representative with the United Kingdom National Association of Securities
Dealers and Investment Managers (now FSA) and in addition, has held a
Representative's license to deal in securities from the United Kingdom
Department of Trade and Industry. Mr. Barter has served as a senior
officer/director of various brokerage firms and has acted as advisor to and
consultant for both publicly and privately traded companies in the United States
and the United Kingdom. He has diverse investment experience combined with an
extensive background in the areas of corporate finance and the private
client/independent investor.
Henrik Youval Krigel, director and consultant, age 47.
H. Youval Krigel, a director, has spent over 25 years in electronics and 20
years in automated test equipment design, most recently as one of the founders
of Protech, Inc., a company formed for the design and manufacture of large-scale
functional testers, a technology Mr. Krigel developed.
As co-designer of the CircuiTest systems, Mr. Krigel served as Vice President of
Pensar LLC from its inception in 1994 until the formation of International Test
Systems in September 1996, at which time he resigned to become Vice President of
R&D for ITS until June 1999. As Vice President of ITS, Mr. Krigel was
responsible for creation, design and planning of new products for both Pensar
Inc. and International Test Systems.
Prior to the formation of Pensar Inc., he served from 1986-1992 as Vice
President and Director of Protech, Inc., a San Antonio-based company
specializing in the design, manufacture and marketing of large-scale digital
circuit board testing systems. As Vice President for Protech, Mr. Krigel was
responsible for the development and sale of various digital test systems for
international distribution.
Mr. Krigel is a shareholder, director and consultant to the company. He has
agreed to provide consultation services in connection with the customization and
installation of pro-type products as well as the training of customers to use
our systems. We intend to compensate Mr. Krigel at the rate of $75.00 per hour.
We do not have an employment or consulting agreement with Mr. Krigel.
Employment Agreements
We do not presently have any employment or consulting agreements, although we
may enter into employment agreements with certain officers, directors or other
key personnel.
Relationships Amongst Management
There are no family relationships amongst the management of the company
Security Ownership of Certain
Beneficial Owners and Management
The following tables set forth certain information regarding the beneficial
ownership of shares of common stock of the company by our officers, directors
and those holders of five percent (5%) or more of stock in our company both
prior to the offering as well as after completion of the offering. Based on
information furnished by these individuals and/or groups, we believe that they
are the beneficial owners of the common stock listed below, and unless otherwise
noted, have sole investment and voting power with respect to such shares, except
in those cases where community property laws may apply.
Prior to the offering and according to the records provided by the company
(which currently has 2,000,000 shares of Common Stock outstanding), the
officers, directors and holders of five percent (5%) or more of our common
stock, owned the following number of shares:
Number
Name of Shares Percentage
Unifund Financial Group, Inc.* 1,020,000 51.0%
Carey Birmingham 493,000 24.7%
R. Scott Barter 350,000 17.5%
H. Youval Krigel 10,800 0.5%
(All officers and directors
as a group - 4 persons) 1,873,800 93.7%
*This entity is controlled by Mr. Barter and its share ownership in
us is attributed to him.
Totals 1,873,800 93.7%
========= ====
Upon completion of the offering, officers, directors and holders of five
percent (5%) or more of our common stock will hold, the shares set forth below:
Percentage of Common Stock
Number
Name of Owners of Shares Minimum
Unifund Financial Group, Inc. 1,020,000 31.4%
Carey Birmingham 493,000 15.2%
R. Scott Barter 350,000 10.8%
H. Youval Krigel 10,800 0.3%
1,873,800 57.7%
--------- -----
(All officers and directors
as a group -4 persons)
TOTALS 1,873,800 57.75%
========= =====
Management Compensation as of the last fiscal year
Cash Other
President and Director - C. Birmingham $ 34,350 0
Vice President and Director - Y. Krigel $ 57,600 0
TOTAL $ 91,950 0
Directors as a group:
(number of persons 2) $ 91,950 0
It is anticipated that the President of ITS will receive an estimated base
salary of between $40,000 and $75,000 (depending upon the amount of funds we
raise) plus performance bonuses in future years. Performance bonuses for the
President, as well as other officers or employees of ITS, will be based upon
milestones in gross revenue increases and profitability of ITS. Based upon
successfully meeting the milestones, such bonuses may equal 100% of the
individual's annual salary, or more.
Director compensation and insurance benefits will commence after we raise at
least $300,000 . We have allocated $15,000 based upon interim financing levels
and $60,000 based on maximum financing levels. Thereafter, director compensation
will be allocated in accordance with a director's level of engagement with the
company and at the discretion of the board of directors.
Selling Shareholders
All securities held by existing shareholders will be subject to a one
year "lockup" period during which they will unable to offer and/or sell shares
currently held by them. After the expiration of such period, there will be no
limitations on any such shareholder's ability to sell shares assuming that a
registration statement with respect to such shares is then in effect. If a
registration statement is in effect, the shareholders may sell all, or any
portion, of their shares.
The shareholdings of our officers and directors is set forth under the
heading "Security Ownership of Certain Beneficial Owners and Management". There
are 176,200 shares held by individuals who are neither officers nor directors.
The names and shareholdings of such individuals and their percentage ownership
of the common stock of the company if the minimum and maximum number of shares
are sold are as follows:
------------------------------------------------ --------------------------
Name of Owner Number of % if Minimum Offering
Shares Amount Sold (Assuming
only Common Stock sold)
------------------------------------------------ --------------------------
Unifund Financial Group 1,020,000 31.4%
------------------------------------------------ --------------------------
Carey Birmingham 493,000 15.2%
------------------------------------------------ --------------------------
R. Scott Barter 350,000 10.8%
------------------------------------------------ --------------------------
Douglas Harrison-Mills 50,000 1.5%
------------------------------------------------ --------------------------
Sheila Corvino 50,000 1.5%
------------------------------------------------ --------------------------
Kaplan Gottbetter & Levenson, LLP 50,000 1.5%
------------------------------------------------ --------------------------
H. Youval Krigel 10,800 .5%
------------------------------------------------ --------------------------
Harris Schiff 10,000 .3%
------------------------------------------------ --------------------------
Alan Scott 5,000 .1%
------------------------------------------------ --------------------------
Elizabeth Acton 5,000 .1%
------------------------------------------------ --------------------------
Stephen G. Birmingham 5,000 .1%
------------------------------------------------ --------------------------
Dr. Ed Lahniers 500 .0%
------------------------------------------------ --------------------------
Andree Sonsino 400 .0%
------------------------------------------------ --------------------------
Raphael Sonsino 300 .0%
------------------------------------------------ --------------------------
None of the individuals listed above are officers and/or directors. They may be
considered to be "significant employees" and a description of their activities
during the prior three years is included in the section entitiled "Directors,
Executive Officers, Promoters and Control Persons".
Carey Birmingham, Scott Barter and Youval Krigel are directors of our company.
Carey Birmingham, Youval Krigel and Raphael Sonsino were founding shareholders
of ITS Texas. During the first quarter of 1997 in a private sale pursuant to
Section 4(2) of the Securities Act, Stephen G. Birmingham, Dr. Ed Lahniers, and
Andree Sonsino purchased shares in ITS Texas for a capital investment of
$50,000, $5,000 and $2,000, respectively. Upon formation of our company, all
holders exchanged all of their shares in ITS Texas for shares in our company.
Kaplan Gottbetter & Levenson LLP and Sheila Corvino, Esq. performed legal
services for our company. They received a portion of their remuneration in
shares of our Company. Douglas Harrison Mills, Harris Schiff, Alan Scott and
Elizabeth Acton was awarded shares in our company for consulting services.
Unifund Financial Group received its shares as remuneration for consulting
services pursuant to the Distribution Agreement. Scott Barter received 100,000
shares in remuneration for his directorial function . In January, 2000, Scott
Barter, Carey Birmingham and Unifund Financial Group, Inc. made an additional
capital contribution to the company to cover on-going expenses. The company
issued shares in consideration for this contibution. Each of Mr. Barter and
Unifund Financial Group, Inc. contributed $25,000 in consideration for 250,000
shares being awarded to each of them. Mr. Birmingham contributed $30,000 in
consideration for 300,000 shares being awarded to him.
Description of the Securities
The securities offered for sale consist of (i) 1,250,000 shares of
common stock, par value $0.001 per share, which can be purchased for $0.40 per
share, (ii) 1,250,000 class A redeemable warrants, which can be purchased for
$0.10 per warrant, and which may be exercised for one share of common stock at
an exercise price of $2.50 per share, and (iii) 1,250,000 class B redeemable
warrants, which can be purchased for $0.10 per warrant and which may be
exercised for one share of common stock at an exercise price of $4.50 per share.
Subject to applicable offering minimum amounts, an investor must purchase the
same number of class A redeemable warrants or class B redeemable warrants as
shares of common stock.
Common Stock
We are authorized to issue up to 20,000,000 shares of common stock, par
value $.001 per share, of which 2,000,000 shares are outstanding on the date
hereof. Holders of common stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There is no
cumulative voting for election of directors. Subject to the prior rights of any
series of preferred stock which may be outstanding, if and when the board of
directors declares dividends, holders of common stock are entitled to ratably
receive, such dividends. Upon the liquidation, dissolution, or winding up of the
company, holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities and payment of accrued dividends and
liquidation preferences on the preferred stock, if any. Common stock is not
convertible, nor does it have any preemptive rights. The outstanding common
stock is validly authorized and issued, fully paid, and nonassessable.
We will, at all times, reserve a sufficient number of authorized but
unissued shares to accommodate the exercise of warrants. There is no assurance
that any such exercise will take place and therefore no assurance that we will
have available to us proceeds from an exercise.
Warrants
The company will offer class A redeemable warrants and class B
redeemable warrants. The following discussion of certain terms and provisions of
the warrants is qualified in its entirety by reference to the detailed
provisions of each warrant and its related warrant agreement, the forms of which
have been filed as exhibits to the registration statement of which this
prospectus forms a part. Both the class A redeemable warrant and the class B
redeemable warrant and the class A redeemable warrant agreement and class B
redeemable warrant agreement can be inspected and copied by the public at the
offices of the SEC in Washington, D. C., New York, New York, and Chicago,
Illinois (see "Additional Information").
The Class A Redeemable Warrants
The class A redeemable warrants will be issued in registered form
pursuant to an agreement dated the date of this prospectus between the company
and Continental Stock Transfer and Trust Company (the "Class A Redeemable
Warrant Agent"). One class A redeemable warrant represents the right of the
registered holder to purchase one share of common stock at an exercise price of
$2.50 per share, subject to adjustment (the "Class A Exercise Price"). The class
A redeemable warrants are subject to adjustment in the purchase price and in the
number of shares of common stock and/or other securities deliverable upon the
exercise of the class A redeemable warrants in the event of certain stock
dividends, stock splits, reclassifications, reorganizations, consolidations or
mergers.
The class A redeemable warrants may be exercised at any time after
issuance, until the close of business on the third anniversary of the effective
date of the offering (the "Class A Expiration Date"). After the expiration date,
the class A redeemable warrants become void and of no value. A holder of the
class A redeemable warrants may exercise them at the office of the class A
redeemable warrant agent (now located at 2 Broadway, NY, NY 10004) by
surrendering his or her warrant, and paying the Exercise Price for each warrant
being exercised.
No holder of the class A redeemable warrants will be entitled to vote
or to receive dividends or be deemed the holder of shares of Common Stock for
any purpose whatsoever until the class A redeemable warrants have been duly
exercised and the Exercise Price paid in full.
The class A redeemable warrants are subject to redemption by the
company anytime on 30 days written notice at a redemption price of $.01 per
warrant, provided that the trading price of the underlying Common Stock is at
least 150% of the then current per share exercise price for 20 or more
consecutive trading days. Upon notice of redemption, holders of the class A
redeemable warrants will forfeit all rights thereunder except the rights to
receive the $0.01 per share redemption price and to exercise them during the
relevant 30-day notice period.
If required, the company will file a post-effective amendment to the
registration statement with the Securities and Exchange Commission with respect
to the common stock underlying the class A redeemable warrants prior to the
exercise of the class A redeemable warrants and deliver a prospectus with
respect to such common stock to all class A redeemable warrant holders as
required by Section 10(a)(3) of the Securities Act of 1933.
The Class B Redeemable Warrants
The class B redeemable warrants will be issued in registered form
pursuant to an agreement dated the date of this Prospectus between the company
and Continental Stock Transfer and Trust Company (the "Class B Redeemable
Warrant Agent"). One cClass B redeemable wWarrant represents the right of the
registered holder to purchase one share of common stock at an exercise price of
$4.50 per share, subject to adjustment (the "Class B Exercise Price"). The class
B redeemable warrants are subject to adjustment in the Exercise Price and in the
number of shares of common stock and/or other securities deliverable upon the
exercise of the class B redeemable warrants in the event of certain stock
dividends, stock splits, reclassifications, reorganizations, consolidations or
mergers.
The Class B redeemable warrants may be exercised at any time after
issuance, until the close of business on the fifth anniversary of the effective
date of this offering (the "Expiration Date"). After the Expiration Date, the
class B redeemable warrants become void and of no value. A holder of the class B
redeemable warrants may exercise them at the office of the Class B Redeemable
Warrant Agent (now located at 2 Broadway, NY, NY 10004) by surrendering his or
her warrant, and paying the Class B Exercise Price for each class B redeemable
warrant being exercised.
No holder of the class B redeemable warrants will be entitled to vote
or to receive dividends or be deemed the holder of shares of common stock for
any purpose whatsoever until the class B redeemable warrants have been duly
exercised and the Exercise Price paid in full.
The class B redeemable warrants are subject to redemption by the
company anytime on 30 days written notice at a redemption price of $.01 per
warrant, provided that the trading price of the underlying common stock is at
least 150% of the then current per share exercise price for 20 or more
consecutive trading days. Upon notice of redemption, holders of the class B
redeemable warrants will forfeit all rights thereunder except the rights to
receive the $0.01 per share redemption price and to exercise them during the
relevant 30-day notice period.
If required, the company will file a post-effective amendment to the
registration statement with the Securities and Exchange Commission with respect
to the common stock underlying the class B redeemable warrants prior to the
exercise of the class B redeemable warrants and deliver a prospectus with
respect to such Common Stock to all class B redeemable warrant holders as
required by Section 10(a)(3) of the Securities Act of 1933. (See "Risk
Factors--We May Be Subject to Government Regulation.")
Dividend Policy
We have not paid any cash dividends to date, and we do not expect to
pay dividends in the foreseeable future. We intend, in the short term at least,
to use all available funds to develop our business.
Legal Proceedings
In June 1996, we received a formal cease and desist letter from Pensar
Corporation of Appleton, Wisconsin alleging trademark infringement and demanding
that we cease use of the name "Pensar" due to Pensar Corporation's prior
registered trademark of the name. ITS agreed to change its name to International
Test Systems, Inc. and no lawsuit was filed.
Certain Relationships and Related Transactions
Carey Birmingham, Scott Barter and Youval Krigel are directors of our company.
Carey Birmingham, Youval Krigel and Raphael Sonsino were founding shareholders
of ITS Texas. During the first quarter of 1997 in a private sale pursuant to
Section 4(2) of the Securities Act, Stephen G. Birmingham, Dr. Ed Lahniers, and
Andree Sonsino purchased shares in ITS Texas for a capital investment of
$50,000, $5,000 and $2,000, respectively. Upon formation of our company, all
holders exchanged all of their shares in ITS Texas for shares in our company.
Kaplan Gottbetter & Levenson LLP and Sheila Corvino, Esq. performed legal
services for our company. They received a portion of their remuneration in
shares of our Company. Douglas Harrison Mills, Harris Schiff, Alan Scott and
Elizabeth Acton was awarded shares in our company for consulting services.
Unifund Financial Group received its shares as remuneration for consulting
services pursuant to the Distribution Agreement. Scott Barter received 100,000
shares in remuneration for his directorial function .
In January, 2000, Scott Barter, Carey Birmingham and Unifund Financial
Group, Inc. made an additional capital contribution to the company to cover
on-going expenses. The company issued shares in consideration for this
contibution. Each of Mr. Barter and Unifund Financial Group, Inc. contributed
$25,000 in consideration for 250,000 shares being awarded to each of them. Mr.
Birmingham contributed $30,000 in consideration for 300,000 shares being awarded
to him.
Interests Of Named Experts And Counsel
The Company's Financial Statements as of December 31, 1999, December
31, 1998 and December 31, 1997 were passed upon by Darilek Butler & Co. P.C.,
independent certified public accountants. Certain legal matters in connection
with the registration of the securities were passed upon by Kaplan Gottbetter &
Levenson, LLP, counsel to the Company. Kaplan Gottbetter & Levenson, LLP was
awarded 50,000 shares of our common stock in partial consideration of services
rendered which shares they have agreed not to sell until the first anniversary
of the date of effectiveness of this offering.
Changes In And Disagreements With
Accountants On Accounting And Financial Disclosure
None.
Certain Provisions Of Our Articles And
By-Laws And Disclosure Of Commission Position
On Indemnification For Securities Act Liabilities
Our Certificate of Incorporation and By-laws contain provisions
eliminating the personal liability of a director to the company and its
stockholders for certain breaches of his or her fiduciary duty of care as a
director. This provision does not, however, eliminate or limit the personal
liability of a director (i) for any breach of such director's duty of loyalty to
the company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Delaware statutory provisions making directors personally liable, under a
negligence standard, for unlawful dividends or unlawful stock repurchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. This provision offers persons who serve on the board
of directors of the company protection against awards of monetary damages
resulting from breaches of their duty of care (except as indicated above),
including grossly negligent business decisions made in connection with takeover
proposals for the company. As a result of this provision, the ability of the
company or a stockholder thereof to successfully prosecute an action against a
director for a breach of his duty of care has been limited. However, the
provision does not affect the availability of equitable remedies such as an
injunction or rescission based upon a director's breach of his duty of care. The
SEC has taken the position that the provision will have no effect on claims
arising under the federal securities laws.
In addition, the Amended Certificate and By-Laws provide mandatory
indemnification rights, subject to limited exceptions, to any person who was or
is party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by reason of the fact that such person is
or was a director or officer of the Company, or is or was serving at the request
of the Company as a director or officer of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise. Such
indemnification rights include reimbursement for expenses incurred by such
person in advance of the final disposition of such proceeding in accordance with
the applicable provisions of the Delaware General Corporation Law.
Where Can Investors Find Additional Information
A Registration Statement on Form SB-1, including amendments thereto,
relating to the shares offered hereby has been filed with the Securities and
Exchange Commission. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. For further information with respect to us and
the securities offered hereby, reference is made to such Registration Statement,
exhibits and schedules. A copy of the Registration Statement may be inspected by
anyone without charge at the Securities and Exchange Commission's principal
office located at 450 Fifth Street, N.W., Washington, D.C. 20549, the Northeast
Regional Office located at 7 World Trade Center, 13th Floor, New York, New York,
10048, and the Midwest Regional Office located at Northwest Atrium Center, 500
Madison Street, Chicago, Illinois 60661-2511 and copies of all or any part
thereof may be obtained from the Public Reference Branch of the Securities and
Exchange Commission upon the payment of certain fees prescribed by the
Securities and Exchange Commission. The Commission also maintains a site on the
World Wide Web at http://www.sec.gov that contains information regarding
registrants that file electronically with the Securities and Exchange
Commission.
<PAGE>
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 3. Undertakings.
The registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Securities and Exchange Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) Insofar as indemnification for liabilities arising under the Securities 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 expressed in the Securities Act and is, therefore, unenforceable.
Item 4. Unregistered Securities Issued or Sold Within One Year
Carey Birmingham, Youval Krigel and Raphael Sonsino were founding
shareholders of ITS Texas. During the first quarter of 1997 in a
private sale pursuant to Section 4(2) of the Securities Act, Stephen G.
Birmingham, Dr. Ed Lahniers, and Andree Sonsino purchased shares in ITS
Texas for a capital investment of $50,000, $5,000 and $2,000,
respectively. Upon formation of our company, all holders exchanged all
of their shares in ITS Texas for shares in our company. The following
shares of common stock were issued to the persons identified below by
our company on September 20, 1999.
<TABLE>
<CAPTION>
---------------------------------------- ---------------------- ----------------------------
Name of Owner Number of Shares Consideration Paid
---------------------------------------- ---------------------- ----------------------------
<S> <C>
Unifund Financial Group 770,000(1) Services and funding of
our operation and an
additional $25,000 in
bridge financing
---------------------------------------- ---------------------- ----------------------------
R. Scott Barter 350,000(1) Services and an additional
$25,000 in bridge financing
---------------------------------------- ---------------------- ----------------------------
Carey Birmingham 493,000 Services and an additional
$25,000 in bridge financing
---------------------------------------- ---------------------- ----------------------------
Douglas Harrison-Mills 50,000(1) services
---------------------------------------- ---------------------- ----------------------------
Sheila Corvino 50,000(2) services
---------------------------------------- ---------------------- ----------------------------
Kaplan Gottbetter & Levenson, LLP 50,000(2) services
---------------------------------------- ---------------------- ----------------------------
Harris Schiff 10,000(1) services
---------------------------------------- ---------------------- ----------------------------
Alan Scott 5,000(1) services
---------------------------------------- ---------------------- ----------------------------
Elizabeth Acton 5,000(1) services
---------------------------------------- ---------------------- ----------------------------
</TABLE>
- ----------
(1) $40,000 and Services
(2) Legal Services
<PAGE>
Item 5. Index to Exhibits
Exhibit No. Description
1.1 *Certificate of Incorporation of Registrant
1.2 *By-laws of Registrant
3.1 **Lockup Agreement
6.1 *Letter of Intent dated June 4, 1999 with Unifund America, Inc.
6.2 **Reorganization and Stock Subscription Agreement Dated June 24, 1999.
6.3 **Stock Exchange Agreement dated September 20, 1999 among certain
shareholders of International Test Systems, Inc., a Texas
corporation and International Test Systems, Inc., a Delaware
corporation.
6.4 *Distributorship Agreement dated June 24, 1999.
9 **Escrow Agreement
10.1 *Consent of Darilek, Butler & Co., P.C., Certified Public Accountants.
10.3 **The consent of Kaplan Gottbetter & Levenson, LLP, counsel to
registrant, is included in Exhibit 11.
11 **Opinion of Kaplan Gottbetter & Levenson, LLP dated ___________
- ----------
*Previously Filed
**To be filed by amendment
<PAGE>
DARILEK BUTLER P.C.
INTERNATIONAL TEST SYSTEMS, INC.
Financial Statements
December 31, 1998 and 1997
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC.
Financial Statements
December 31, 1998 and 1997
Table of Contents
Audited Financial Statements
Independent Auditors' Report 1
Balance Sheet 2
Statement of Income (Loss) 3
Statement of Changes in Stockholders' Equity 4
Statement of Cash Flows 5
Notes to the Financial Statements 6
<PAGE>
INDEPENDENT AUDITORS' REPORT
International Test Systems, Inc.
San Antonio, Texas
We have audited the accompanying balance sheets of International Test Systems,
Inc., a Texas corporation, (the Company) as of December 31, 1998 and 1997 and
the related statements of income (loss), changes in stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note J, the Company has received a commitment from a related
party for continued funding of future operations. The Company's continued
operations are dependent upon this funding.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Test Systems,
Inc. as of December 31, 1998 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
San Antonio, Texas
March 10, 1999
(except for Note K dated June 24, 1999)
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC. Page 2
INTERNATIONAL TEST SYSTEMS, INC.
Balance Sheet - December 31, 1998 and 1997
ASSETS:
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
Current Assets
<S> <C> <C>
Cash $ 4,219 $ 22,286
Accounts Receivable - Trade 9,134 23,727
Prepaid Expense 1,640 1,404
Inventory 53,131 22,525
--------------- --------------
Total Current Assets 68,124 69,942
--------------- --------------
Fixed Assets
Equipment 22,871 18,492
Furniture and Leasehold Improvements 1,789 1,789
Accumulated Depreciation (16,170) (11,560)
--------------- --------------
8,490 8,721
--------------- --------------
Other Assets
Accounts Receivable - Related Party 7,243 5,985
Note Receivable - Related Party 5,700 5,700
Accrued Interest - Related Party 800 766
Software Development Costs, net of amortization 22,526 24,829
Patent Costs, net of amortization 1,453 1,567
Deposits -0- 461
--------------- --------------
37,722 39,308
--------------- --------------
$ 114,336 $ 117,971
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities
Current Liabilities
Bank Overdraft -0- 0
Accounts Payable - Trade $ 19,718 $ 10,013
Accounts Payable - Related Parties 15,413 14,086
Accrued liabilities 6,337 7,045
Accrued Interest - Related Parties 22,611 4,628
Line of Credit - Related Party 244,314 89,313
Note Payable, Current Portion 27,390 23,160
--------------- --------------
Total Current Liabilities 335,783 148,245
--------------- --------------
Long-Term Debt
Note Payable, Net of Current Portion -0- 24,287
--------------- --------------
335,783 172,532
--------------- --------------
Stockholders' Equity
Common Stock, No Par, 20,000,000 Shares Authorized,
1,600,000 Shares Issued and Outstanding in 1998 and 1997 309,249 309,249
Retained Deficit (530,696) (363,810)
--------------- --------------
(221,447) (54,561)
=============== ==============
$ 114,336 $ 117,971
=============== ==============
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC. Page 3
INTERNATIONAL TEST SYSTEMS, INC.
Statement of Income (Loss)
For the Year Ended December 31,1998 and 1997
1998 1997
-------------- -----------
Sales $ 91,508 $ 207,912
Cost of Sales 30,241 33,717
-------------- -----------
Gross Profit 61,267 174,195
-------------- -----------
Operating Expenses
Advertising 8,565 24,731
Amortization 2,416 12,699
Commissions -0- 0
Contract Labor 5,036 3,485
Consulting 0
Depreciation 4,610 3,974
Directors Fees 500 2,000
Dues and Subscriptions 2,667 2,693
Insurance 16,105 10,931
Other 3,890 3,950
Postage 2,137 1,989
Professional Fees 22,266 39,829
Rental - Building 7,741 7,985
Rental - Equipment 2,425 3,596
Repair and Maintenance 2,127 1,539
Salaries Officers 88,465 73,934
Supplies - Office 4,810 4,599
Taxes - Other
Taxes - Payroll 6,162 5,139
Telephone 8,374 7,214
Travel and Entertainment 18,202 6,138
-------------- -----------
Total Operating Expenses 206,498 216,425
-------------- -----------
Net Operating Loss Before Other (145,231) (42,230)
Income (Expense) and Federal Income
Taxes
Other Income (Expense)
Interest Income 92 1,093
Interest Expense (21,747) (14,272)
-------------- -----------
Total Other Income (Expense) (21,655) (13,179)
-------------- -----------
Net Loss Before Federal Income Taxes (166,886) (55,409)
Provision For Federal Income Taxes -0- -0-
-------------- -----------
Net Loss $ (166,886) (55,409)
============== ===========
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC. Page 4
INTERNATIONAL TEST SYSTEMS, INC.
Statement of Changes in Stockholders' Equity
For the Year Ended December 31,1998 and 1997
Common Stock
Retained Total
---------------------------- Members' Earnings Stockholders'
Shares Amount Equity (Deficit) Equity
------------- ----------- ------------- ----------- ---------------
Balance - January 1, 1996 -0- $ -0- $ (174,604) $ -0- $ (174,604)
Debt Payable to a Member
Contributed as Capital -0- -0- 281,113 -0- 281,113
------------- ----------- ------------- ----------- ---------------
Equity Prior to Pooling of Interest -0- -0- 106,509 -0- 106,509
Issuance of Stock for Assets of
Pensar Technologies, L.L.C. in a
Pooling of Interest Combination
(Note A) 730,000 281,749 (106,509) (175,240) -0-
------------- ----------- ------------- ----------- ---------------
Equity After Pooling of Interest 730,000 281,749 -0- (175,240) 106,509
Issuance of Stock
H. Youval Krigel 368,400 -0- -0- -0- -0-
David G. Slimpin 296,000 -0- -0- -0- -0-
B. Raphael Sonsino 205,600 -0- -0- -0- -0-
Net Loss -0- -0- -0- (133,161) (133,161)
Balance - December 31, 1996 1,600,000 $ 281,749 $ -0- $ (308,401) $ (26,652)
Purchase of Treasury Stock -0- -0- -0- (27,500) (27,500)
Sale of Treasury Stock -0- 27,500 -0- 27,500 55,000
Net Loss -0- -0- -0- (55,409) (55,409)
------------- ----------- ------------- ----------- ---------------
Balance - December 31,1997 1,600,000 309,249 -0- (363,810) (54,561)
------------- ----------- ------------- ----------- ---------------
Net Loss -0- -0- -0- (166,886) (166,886)
============= =========== ============= =========== ===============
Balance - December 31,1998 1,600,000 $ 309,249 $ -0- $ (530,696) $ (221,447)
============= =========== ============= =========== ===============
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC. Page 5
INTERNATIONAL TEST SYSTEMS, INC.
Statement of Cash Flows
For the Year Ended December 31,1998 and 1997
1998 1997
--------------- --------------
Cash Flows From Operating Activities
Net Loss $ (166,886) $ (55,409)
Adjustment to Reconcile Net Loss to Net Cash
Provided by Operating Activities:
Depreciation 4,610 3,974
Amortization 2,417 12,699
(Increase) Decrease In:
Accounts Receivable 13,335 (10,642)
Accrued Interest Receivable (34) (766)
Prepaid Expense (236) (1,404)
Deposits 461 0
Inventories (30,606) (5,726)
Increase (Decrease) In:
Accounts Payable 11,032 (6,840)
Accrued Liabilities (708) 4,891
Accrued Interest 17,983 4,628
--------------- --------------
Net Cash Provided (Used) by Operating Activities (148,632) (54,595)
--------------- --------------
Cash Flows From Investing Activities
Purchase of Assets (4,379) (5,097)
--------------- --------------
Net Cash Provided (Used) by Investing Activities (4,379) (5,097)
--------------- --------------
Cash Flows From Financing Activities
Advance on Note Receivable -0- (5,700)
Purchase of Treasury Stock -0- (27,500)
Sale of Treasury Stock -0- 55,000
Advances on Lines of Credit and Notes Payable 155,001 89,313
Payments on Lines of Credit and Notes Payable (20,057) (27,889)
--------------- --------------
Net Cash Provided (Used) by Financing Activities 134,944 83,224
--------------- --------------
Net Increase (Decrease) in Cash (18,067) 23,532
Cash at Beginning of Year 22,286 (1,246)
=============== ==============
Cash at End of Year $ 4,219 $ 22,286
=============== ==============
Supplemental Information:
Interest Paid $ 3,763 $ 9,644
=============== ==============
</TABLE>
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC. Page 6
Notes to the Financial Statements
December 31, 1998 and 1997
Note A - Summary of Significant Accounting Policies
Corporate History and Operations
International Test Systems, Inc. (the Company) was incorporated as a Texas
corporation on September 23, 1996. The Company was formed for the purpose of
acquiring the assets of Pensar Technologies, LLC (Pensar). This transaction was
completed on December 1, 1996 through a business combination accounted for as a
pooling of interests transaction.
The Company is the manufacturer of a component-level printed circuit board
tester whose principal customers use the tester to analyze, repair, and service
printed circuit boards with components attached.
The Company's financial statements have been prepared in conformity with
principles of accounting applicable to a going concern. These principles
contemplate the realization of assets and liquidation of liabilities in the
normal course of business. During 1998, the Company has sustained a substantial
net loss. At the present time, the Company has been financing these losses
through a related party line of credit. Management has indicated it has received
a commitment of continued financing of these losses through this line of credit
and has indicated that additional capital may be available through the SCOR
offering (see Note F). These financial statements have been prepared under the
assumption that the funding will continue. (Also see Note J.)
Basis of Accounting
Assets, liabilities, revenues and expenses are recognized on the accrual method
of accounting for financial statement presentation. Product revenue is
recognized when the product is shipped to the customer. Maintenance and extended
support revenue is recognized when billed. Expenses are recognized when
incurred.
Use of Estimates
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts.
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC.
Notes to the Financial Statements
December 31, 1998 and 1997
Note A - Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
For the purpose of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents. There were no cash equivalents as of December 31, 1998 and
1997.
As of December 31, 1998 and 1997, the Company held cash in demand accounts at
federally insured banks. No amounts were held in excess of the federally insured
limits.
Reclassifications
Certain changes have been made to the presentation of the December 31, 1997
financial statements to conform to the current period presentation.
Software Development Costs
Software development costs for each product are carried on the balance sheet at
the lower of unamortized capitalized costs or its net realizable value.
Direct labor costs of producing product masters including coding and testing,
which were incurred subsequent to establishing technological feasibility are
capitalized. Software production costs for computer software that is to be used
as an integral part of a product or process is charged to expense until both
technological feasibility has been established for the software and all research
and development activities for other components of the product or process have
been completed. Capitalization of computer software costs is discontinued when
the product is available for general release to customers. The sale price of a
product includes customer support and costs are expensed as incurred.
The Company amortizes capitalized software costs based on the ratio of current
gross revenues to the total of the current and anticipated future gross revenue.
Due to the inherent technological changes in the software development industry,
the period in which capitalized software costs (carried at $22,526 for 1998 and
$24,829 for 1997) are being amortized may have to be accelerated. Amortization
on capitalized software during 1998 and 1997 is $2,303 and $12,584.
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC.
Notes to the Financial Statements
December 31, 1998 and 1997
Note A - Summary of Significant Accounting Policies (Continued)
Fixed Assets
Equipment and leasehold improvements are stated at cost and depreciated over the
estimated "useful lives" of the related assets. The cost of leasehold
improvements is depreciated over the lesser of the length of the related leases
or the estimated useful lives of the assets. Depreciation is computed on the
MACRS (Modified Accelerated Cost Recovery System) method which does not
materially differ from generally accepted accounting principles. Expenditures
for maintenance and repairs are charged to operations as incurred.
Inventories
Inventories consist of component parts and completed tester units. Inventories
are stated at the lower of cost, determined by the specific identification
method, or market.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $8,565 and
$24,731 for the years ended December 31, 1998 and 1997.
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences
between the financial statements and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.
Amortization
The cost of patents, trademarks and copyrights acquired are being amortized on
the straight-line basis over their remaining lives. Amortization expense charged
to operations is $114 for 1998 and $114 for 1997.
Concentration of Credit Risk
Substantially all of the Company's revenues are from the sale of the Company's
circuit board tester.
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC.
Notes to the Financial Statements
December 31, 1998 and 1997
Note B - Related Party Transactions
Accounts Receivable
At December 31, 1998 and 1997, the Company has $7,243 and $5,985 receivable from
stockholders for various personal purchases made by the Company.
Note Receivable
At December 31, 1998 and 1997, the Company has a $5,700 note receivable from
another company related to the Company through ownership of a major stockholder.
Accrued interest on the note at December 31, 1998 and 1997 is $800 and $766.
Long-Term Debt
The Company has a note payable and a line of credit to another company related
to International Test Systems, Inc. through ownership by a major stockholder
(see Notes C and D).
Interest
During 1998 and 1997, the Company incurred $17,984 and $11,975 of interest
expense relating to various notes from a related party. The party is related to
the company through ownership by a major stockholder.
Legal Fees
During 1998 and 1997, the Company incurred $3,097 and $8,143 in legal fees
related to services performed by an individual stockholder.
Credit Card Purchases
During 1998 and 1997, the Company used the credit card of a stockholder for the
purchase of various expenditures including inventory, office supplies, and
travel. At December 31, 1998 and 1997, $15,413 and $14,086 for these credit card
purchases is included in accounts payable - related parties.
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC.
Notes to the Financial Statements
December 31, 1998 and 1997
Note C - Long-Term Debt - Related Party
Following is a summary of long-term debt at December 31, 1998 and 1997 which is
due to another company related to International Test Systems, Inc. through
ownership by a major stockholder:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Unsecured note payable bearing interest at 12% $ 27,390 $ 47,447
maturing in 1999
Less: Current maturities (27,390) (23,160)
------------------ ------------------
$ -0-$ 24,287
================== ==================
</TABLE>
Following are maturities of long-term debt to maturity :
1999 $ 27,390
------------------
$ 27,390
==================
Note D - Line of Credit - Related Party
In January of 1997, the Company entered into a line of credit agreement with
another company related to International Test Systems, Inc. through common
ownership and management by a major stockholder. The line provided for maximum
borrowings of $100,000. Interest accrues on outstanding balances at 8% and is
payable annually at the expiration date. At December 31, 1997, the Company had
received advances of $89,313 and accrued interest on the outstanding balance
totaled $4,628. The line expired on December 31, 1997 and was renewed at that
time in an amount of $350,000 due December 31, 2000. At December 31, 1998, the
Company had a balance outstanding on the line of credit of $244,314 and accrued
interest on the outstanding balance totaled $13,543. The unused portion of the
line of credit was $92,143 at December 31, 1998.
Note E - Note Receivable - Related Party
The note receivable from a related party consists of the following at December
31, 1998:
10% Unsecured Note Payable, principal and interest are due
at January 30, 1999 $ 5,700
============
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC.
Notes to the Financial Statements
December 31, 1998 and 1997
Note F - Small Company Offering Registration
The Company has been approved by the Texas State Securities Board to offer stock
under a Small Company Offering Registration (SCOR). As a condition to
registering the Company's equity securities for sale to public investors in the
state of Texas, security holders of the Issuer and other security holders who
are deemed to be promoters of the Issuer have deposited equity securities in
accordance with a Promotional Shares Escrow Agreement. The Depositor's
promotional shares have been deposited into an escrow account and shall remain
there until they are released in accordance with Paragraph 4 of the Promotional
Shares Agreement. The actual amount of shares deposited was determine by the
State Securities Board. Following is a list of anticipated depositors and equity
securities.
Depositors Equity Securities
- --------------------------------------- --------------------------
Pensar Technologies, Inc. 717,229
H. Youval Krigel 540,770
B. Raphael Sonsino 202,001
==========================
1,460,000
==========================
Note G - Income Taxes
The Company's effective tax rate on tax benefits differs from the expected
federal income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Income tax benefit at statutory rate $ 24,520 $ 8,056
Increase in valuation allowance (24,520) (8,056)
---------------- ----------------
Actual Income Taxes -0- 0
================ ================
The components of the deferred tax assets and liabilities are as follows:
Deferred tax assets:
Prior Net Operating Loss Carryforward $ 11,264 3,208
Net operating loss carryforwards 24,520 8,056
---------------- ----------------
Total deferred tax assets 35,784 11,264
---------------- ----------------
Less valuation allowance (35,784) (11,264)
---------------- ----------------
Deferred tax assets, net of valuation allowance $ -0-$ 0
================ ================
</TABLE>
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC.
Notes to the Financial Statements
December 31, 1998 and 1997
Note G - Income Taxes (Continued)
The Company has net operating loss carryforwards available to offset future
taxable income. If not used, these carryforwards will expire as follows:
Year Ending December 31, Net Operating Loss
- --------------------------------------- --------------------
2011 $ 21,386
2012 $ 55,409
2013 $ 166,886
Note H - Stock Subscriptions
During 1998, the Company received funds from potential investors. Pursuant to
Section 26 (a) and (b), page 47, of the Form U-7 Prospectus, the Company is
required to open a cash escrow account in which subscriber funds are to be
deposited until the Company raises the minimum offering. The Company also
submitted a completed Form D to the U.S. Securities and Exchange Commission
(SEC) for approval. Counsel to the Company has advised the Company not to
deposit any checks from prospective investors prior to filing and receiving
confirmation on the Form D from the SEC. This confirmation has not yet been
received; thus, no escrow account has been opened. The Company did not raise the
minimum offering in accordance with the prospectus and parties who remitted
payments for shares which were not deposited in escrow received interest
pursuant to Section 26 (b) from the date received by the Company. At December
31, 1998, the Company held no stock subscription funds.
Note I - Stock Options
The Company adopted a stock option plan which provides for the granting of
options to personnel and key advisors. The Company intends to grant options that
are "incentive stock options" within the meaning of the Internal Revenue Code of
1986, as amended, but also has the latitude of granting "non-qualified" options.
The exercise price of any stock option granted cannot be less than 85% of fair
market value of the shares underlying the option on the date of the grant. The
term of any options will be determined by the compensation committee of the
Board of Directors, pursuant to the provisions and limitations of the plan. The
options are not transferable and cannot have a term exceeding ten (10) years.
They terminate on the earliest expiration date, 30 days after severance of
employment or advisory relationship, one year in the event of death, 90 days
upon disability, unless waived by the compensation committee. The plan provides
that options to purchase up to 10% of any public offering of common stock can be
granted to directors of, employees of, and advisors or consultants to the
Company. The plan also contains provisions for making adjustments in the number
of shares in events such as stock splits and dividends, in an effort to preserve
the optioner's proportionate rights in such events. Stock received upon exercise
of the options will be subject to certain terms, conditions, and restrictions.
No options have been granted at December 31, 1998 or 1997.
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC.
Notes to the Financial Statements
December 31, 1998 and 1997
Note J - Sustained Losses
The Company has experienced sustained losses for the past two years including a
substantial loss in 1998. As of December 31, 1998, the Company's current
liabilities exceed its current assets by $267,259, of which $244,314 is a line
of credit due to a related party. The Company also has negative equity at
December 31, 1998. The Company's continued operations is dependent upon it
receiving continued funding from the related party line of credit. Management
has received a letter of commitment from the related party that future
operations will continue to be funded as needed, at least through December 31,
1999, and for added years if necessary. The related party is a limited
partnership with common ownership to the company and whose general partner is
also the president of the Company.
These financial statements have been prepared assuming the Company is a going
concern and funding will continue which contemplates the realization of assets
and liquidation of liabilities in the normal course of business.
Note K - Subsequent Events
On June 19, 1999, the Company (for the purposes of this note, "the Company"
represents International Test Systems, Inc., a Texas Corporation) entered into a
distribution agreement with Pensar Technologies, LLC, a Texas Limited Liability
Company, (Pensar) to acquire the exclusive right to market, sell, and distribute
the technology produced by Pensar. As consideration, the Company transferred all
of its assets (including the rights to technology) and liabilities to Pensar
plus a one time fee of $5,000 and $1,500 per month over the ten year term of the
agreement. The Company (subsequently ITS Delaware) has the right to terminate
this distribution agreement with thirty days written notice.
On June 24, 1999, the Company entered into a reorganization and stock
subscription agreement with Pensar; Unifund America, Inc., a New York
corporation; and Unifund Financial Group, Inc., a New York corporation. Under
the terms of this reorganization agreement, all shareholders of the Company
(except Pensar) exchanged their stock, representing 54.4% of the outstanding
shares of the Company, for a 17.5% ownership interest in International Test
Systems, Inc. (ITS Delaware). International Test Systems, Inc., a Texas
corporation reorganized in the state of Delaware and became ITS Delaware. The
reorganization agreement includes stock compensation to a prior officer and
shareholder of the Company for services to be rendered to ITS Delaware.
International Test Systems, Inc. (the Texas corporation) will cease to exist and
ITS Delaware will have the exclusive worldwide right to market, sell, and
distribute products based on the technology of Pensar. Pensar will manufacture
the products to be marketed, sold, and distributed by ITS Delaware.
The line of credit referred to in Note D ceased with the signing of the
agreement and funding under this line of credit is no longer available to the
Company or ITS Delaware.
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
Unaudited
Assets
<TABLE>
<CAPTION>
Current assets
<S> <C>
Cash and cash equivalents $ -0-
---------
Total current assets -0-
Property and equipment-net
Other assets
License rights 26,800
--------
Total other assets 26,800
--------
Total assets $26,800
=========
Liabilities and Stockholders' Equity
Current liabilities
Commitments and contingencies (Note 5)
Stockholders' equity
Preferred Stock authorized 5,000,000 shares, $.001 par value each. At $ -0-
September 30, 1999 there were -0- shares outstanding
Common Stock authorized 20,000,000 shares, $.001 par value each. 1,250
At September 30, 1999, there are 1,250,000 shares outstanding
Additional paid in capital 230,750
Deficit accumulated during development stage (205,200)
---------
Total stockholders' equity 26,800
---------
Total liabilities and stockholders' equity $ 26,800
=========
See accompanying notes to financial statements.
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM REOGANIZATION, JUNE 26, 1999 TO SEPTEMBER 30, 1999
Unaudited
Revenue $ -0-
-----------
Costs of goods sold -0-
Gross profit -0-
Operations:
General and administrative 205,200
Depreciation and amortization -0-
-----------
Total expense 205,200
Loss from operations (205,200)
Net income (loss) $ (205,200)
===========
Net income (loss) per share -basic $ -0-
===========
Number of shares outstanding-basic 1,250,000
===========
See accompanying notes to financial statements.
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM REORGANIZATION, JUNE 26, 1999 TO SEPTEMBER 30, 1999
Unaudited
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(205,200)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation -0-
Issuance of stock for payment of consulting and legal fees 185,200
---------
TOTAL CASH FLOWS FROM OPERATIONS (20,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of shares 40,000
---------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 40,000
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of license rights (20,000)
---------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (20,000)
NET INCREASE (DECREASE) IN CASH -0-
CASH BALANCE BEGINNING OF PERIOD -0-
CASH BALANCE END OF PERIOD $ -0-
Supplemental disclosure of cash flow information
Cash paid for interest $ -0-
Cash paid for income taxes $ -0-
See accompanying notes to financial statements.
<PAGE>
INTERNATIONAL TEST SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Unaudited
Additional Deficit
Paid In Accumulated During
Date Common Stock Common Stock Capital Development Stage Total
- ---- ------------ ------------ --------- ----------------- -----
<S> <C> <C> <C> <C>
Initial issuance of shares 770,000 $ 770 $ 39,230 $ 40,000
Issuance of shares for license 17,000 $ 17 $ 6,783 $ 6,800
rights
Issuance of shares for 463,000 463 184,737 185,200
consulting fees
Net loss (205,200) (205,200)
------------ --------- ---------
1,250,000 $ 1,250 $230,750 $(205,200) $ 26,800
========== ============ ======== ========== =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Note 1. Organization of Company and Issuance of Common Stock
a. Creation of the Company
International Test Systems, Inc., (the "Company") was formed under the laws of
Delaware on September 20, 1999 and is authorized to issue 20,000,000 shares of
common stock, $0.001 par value each and 5,000,000 shares of preferred stock,
$.001 par value each.
b. Description of the Company
The Company is a development stage company that was formed to reorganize the
business of International Test System, Inc. a corporation formed under the laws
of the State of Texas ("ITS Texas") to change the domicile of ITS Texas to the
State of Delaware and has acquired through a related party agreement with Pensar
Technology LLC ("Pensar") a license and marketing agreements the rights to
manufacturer a component-level printed circuit board tester whose principal
customers use the tester to analyze, repair, and service printed circuit boards
with components attached.
c. Issuance of Shares of Common Stock
On September 20, 1999, the Company issued an aggregate of 17,000 shares of
common stock to ITS Texas and paid $40,000 in consideration for all of the
issued and outstanding shares of common stock of ITS Texas and the rights to a
10 year license agreement.
On September 20, 1999, the company issued 770,000 shares of common stock to
Unifund Financial Group, Inc. in consideration in consideration for $40,000 that
was paid to ITS Texas as part consideration for the license rights and the
purchase of all the issued and outstanding shares of common stock of ITS Texas
or $.05 per share.
On September 30, 1999, the Company issued an aggregate of 463,000 shares of
common stock valued at $185,200 or $.40 per shares in consideration for
consulting and legal services.
Note 2-Summary of Significant Accounting Policies
a. Basis of Financial Statement Presentation
The accompanying unaudited financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company incurred net losses
of $205,200 for the period from inception, September 20, 1999, September 30,
1999. These factors indicate that the Company's continuation as a going concern
is dependent upon its ability to obtain adequate financing. The Company is
anticipating that with the completion of a public offering and with the increase
in working capital, the Company will be able to complete the research and
development and bring into production its technology and experience an increase
in sales. The Company will require substantial additional funds to finance its
business activities on an ongoing basis and will have a continuing long-term
need to obtain additional financing. The Company's future capital requirements
will depend on numerous factors including, but not limited to, continued
progress developing its customer base, hiring and training competent sales
people and other organization staff, and initiating marketing penetration. The
Company plans to engage in such ongoing financing efforts on a continuing basis.
The unaudited financial statements presented consist of the balance sheet of the
Company as at September 30, 1999 and the related statements of operations and
cash flows for the period from reorganization of ITS Texas, June 16, 1999 to
September 30, 1999.
b. Cash and cash equivalents
The Company treats cash equivalents which includes temporary investments with a
maturity of less than three months as cash.
c. Revenue recognition
Revenue is recognized when products are shipped or services are rendered.
d. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
e. Recent Accounting Standards
Accounting for Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June
1998. It is effective for all fiscal years beginning after June 15, 1999. The
new standard requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivatives and whether they qualify for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
The Company does not currently engage in derivative trading or hedging activity.
The Company will adopt SFAS 133 in the fiscal year ending December 31, 2000,
although no impact on operating results or financial position is expected.
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use
In March of 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning January 1, 1999. The Company is currently assessing the impact that
adoption of this statement will have on consolidated financial position and
results of operations.
Note 3 - Reorganization of Company
On September 20, 1999, the Company exchanged on a one for one basis shares of
its common stock for all the issued and outstanding shares of common stock of
ITS Texas. The transaction has been accounted for as a transfer and is accounted
for as if a pooling of interests had occurred using historic costs with the
recording of the net assets acquired at their historical book value with
restatement of periods prior to the reorganization on a combined basis.
On June 16, 1999, ITS Texas entered into an agreement with Pensar whereby ITS
Texas transferred all of its assets to Pensar in exchange for which Pensar
assumed all of the liabilities of ITS Texas and entered into a distribution
agreement with Pensar as described as follows: On June 16, 1999, ITS Texas
entered into a distribution agreement with Pensar (the "Distribution Agreement")
for a ten year term pursuant to which ITS Texas was appointed as the exclusive
distributor to market and distribute new printed circuit board test products
throughout the world based upon the technology granted through this distribution
agreement. ITS Texas is required to pay an initial fee of $5,000, a monthly fee
of $1,500, and a $5,000 bonus upon the Company's registration on the "over the
counter bulletin board" and has the option to renew this distribution agreement
for an additional five year term with similar terms and conditions. The Company
has the right to purchase products from Pensar at a 40% discount from the resale
price.
As part of this reorganization, certain shareholders of ITS Texas agreed to
transfer all of the issued shares of common stock in exchange for 17,000 shares
of the Company's common stock.
The transaction has been accounted for as a transfer and is accounted for at
historical cost as if a pooling of interests had occurred with the recording of
the net assets acquired at their historical book value. The financial statements
of the Company have been retroactively restated to include the combined
statements of operations and cash flows for the period from ITS Texas
reorganization, June 16, 1999, to September 30, 1999.
Note 4 - Related Party transactions
a. Issuance of Shares of Common Stock
On September 20, 1999, the Company issued an aggregate of 17,000 shares of
common stock to ITS Texas and paid $40,000 in consideration for all of the
issued and outstanding shares of common stock of ITS Texas and the rights to a
10 year license agreement.
On September 20, 1999, the company issued 770,000 shares of common stock to
Unifund Financial Group, Inc. in consideration in consideration for $40,000 that
was paid to ITS Texas as part consideration for the license rights and the
purchase of all the issued and outstanding shares of common stock of ITS Texas
or $.05 per share.
b. Office Location
The Company occupies 2,000 square feet of office and warehousing space at 4703
Shavano Oak, Suite 102, San Antonio, Texas 78249. ITS Texas is obligated to pay
$285 a rent on a month to month basis with prime lease expiring June 30, 2001.
c. Corporate Relationships
Carey Birmingham is the President of the Company and is the President of
International Tests Systems, Inc., a Texas Corporation
Mr. Scott Barter through his ownership of an aggregate of 50,000 shares of
common stock acquired through a Reorganization and Subscription Agreement and
his position as President of Unifund directly controls the Company.
Note 5 - Income Taxes
The Company provides for the tax effects of transactions reported in the
financial statements. The provision if any, consists of taxes currently due plus
deferred taxes related primarily to differences between the basis of assets and
liabilities for financial and income tax reporting. The deferred tax assets and
liabilities, if any represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. As of September 30, 1999, the Company had
no material current tax liability, deferred tax assets, or liabilities to impact
on the Company's financial position because the deferred tax asset related to
the Company's net operating loss carryforward and was fully offset by a
valuation allowance.
At September 30, 1999, the Company has net operating loss carry forwards for
income tax purposes of $205,200. This carryforward is available to offset future
taxable income, if any, and expires in the year 2010. The Company's utilization
of this carryforward against future taxable income may become subject to an
annual limitation due to a cumulative change in ownership of the Company of more
than 50 percent.
The components of the net deferred tax asset as of September 30, 1999 are as
follows:
Deferred tax asset:
Net operating loss carry forward $ 82,080
Valuation allowance $ (82,080)
----------
Net deferred tax asset $ -0-
The Company recognized no income tax benefit for the loss generated in the
period from inception, September 20, 1999 to September 30, 1999.
SFAS No. 109 requires that a valuation allowance be provided if it is more
likely than not that some portion or all of a deferred tax asset will not be
realized. The Company's ability to realize benefit of its deferred tax asset
will depend on the generation of future taxable income. Because the Company has
yet to recognize significant revenue from the sale of its products, the Company
believes that a full valuation allowance should be provided.
Note 6 - Issuance of Shares of Common Stock for Non Cash Payments
Issuance of 463,000 shares for Consulting services $185,200
Issuance of 17,000 to ITS Texas 6,800
Common Stock (192,000)
-------
$ -0-
Note 7 - Business and Credit Concentrations
The amount reported in the financial statements for cash approximates fair
market value. Because the difference between cost and the lower of cost or
market is immaterial, no adjustment has been recognized and investments are
recorded at cost.
Financial instruments that potentially subject the company to credit risk
consist principally of trade receivables. Collateral is generally not required.
<PAGE>
Signatures
In accordance with 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 of filing and authorizes this amendment number one to its
registration statement on Form SB-1 to be signed on its behalf by the
undersigned, on February 14, 2000.
International Test Systems, Inc.
/s/ Carey Birmingham
Carey Birmingham,
President and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
/s/ H. Youval Krigel
H. Youval Krigel, Director
Dated: February 14, 2000
/s/ R. Scott Barter
R. Scott Barter, Director
Dated: Feburary 14, 2000
