AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 2005
REGISTRATION NO. ___________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PROBE MANUFACTURING, INC.
(Name of small business issuer in its charter)
Nevada 3672 20-2675800 ------- ---------- ---------- (State or jurisdiction (Primary Standard Industrial I.R.S. Employer of incorporation or Classification Code Number) Identification Organization No.
|
3050 PULLMAN, COSTA MESA, CA 92626
Telephone: (714) 424-2960
(Address and telephone number of principal executive offices)
3050 PULLMAN, COSTA MESA, CA 92626
Telephone: (714) 424-2960
(Address of principal place of business or intended principal place of business)
Kambiz Mahdi
Chief Executive Officer
3050 PULLMAN STREET
COSTA MESA, CA 92626
Telephone: (714) 424-2960
COPY TO:
Catherine Basinger, Esq.
301 East Ocean Blvd., Suite 640
Long Beach, CA 90802
(562)624 -6280
(Name, address and telephone number of agent for service)
Approximate date of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) 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, check the following box. [ ]
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]
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale is not permitted.
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PROSPECTUS
PROBE MANUFACTURING, INC.
This prospectus relates to the sale of up to 12,078,125 shares of our common stock, which represents 100% of our outstanding securities, by our current shareholders, the common stock shares we could issue upon conversion of the Series B Convertible Preferred Stock by our Series B stockholders and BTF, LLC who will become a stockholder pursuant to a "put right" under an Investment Agreement, also referred to as an Equity Line of Credit, that we have entered into with BTF, LLC.
Use of Proceeds
We are not selling any securities in this offering and therefore will not receive any proceeds from this offering. We will, however, receive proceeds from the sale of securities pursuant to our exercise of the put right and possible future exercise of the warrants held by The Hicks Family Trust, The Edward & Mildred Lassiter Restated Family Trust, The DW & JS Benner Family Trust, , Hirad Emadi, Patrick Connelly, Phillip Kavanaugh, Ronnie Novian, John White, Parvin Khalili, Albert Assil, Keith Barrett, Helene Mandell, Guy Grimsley, Francis F. Smith Descendants Trust, Edmondson Farms, Inc. Employees 401K Plan & Trust, Ikuo Ito, Global Capital Management, Inc., Masahiro Irie, James and Lisa Goodell, Peter Grias, Kamran Gharibian, Iraj Gharibian, Billy E. Malcolm, Robert Kofke and Cathy Kofke JT TEN WROS, Phillip Smith, Billy Barr, Charles Schwab FBO Andrew Kotowicz, Todd Jorgensen, Chritopher Reed and Patricia Schone JT WROS, Anthony and Angela Reed Family Trust, Cadioty/Werth Living Trust, Miller Family Trust, Finer Marital Trust, James Kimmel, Adam Carolla, George Geldin, Dennis Gerber, Noriaki Sasaki, B Derman & J Derman TTEE Bennett & Janice Derman Family U/A Dated January 16, 1998, Abraham Assil, James Blake, Anthony Reed, Bach Living Trust, Craig Benner, Carolina Trust, Duncan Revocable Trust, Hooman Emadi, Ronald Feldman, George D. Hill & Elieen C. Hill JT WROS, The Edward and Mildred Lassiter Restated Family Trust Dated April 14, 2000, Russell Miller, William W. Morse & Jill D. Morse JT WROS, and Research Drive Equities, LLC. All costs associated with this registration will be borne by us.
Investment Agreement
BTF, LLC will become a stockholder pursuant to a "put right" under an Investment Agreement, also referred to as an Equity Line of Credit, that we have entered into with BTF, LLC. a put right permits us to require BTF, LLC to buy shares pursuant to the terms of the Investment Agreement. That Investment Agreement permits us to "put" up to $4.5 million in shares of our common stock to BTF, LLC if and when we are successful in our attempt to have our common stock listed on the Over-the-Counter Bulletin Board.
BTF, LLC is an "underwriter" within the meaning of the Securities Act of 1933, as amended, in connection with the resale of our common stock under the Investment Agreement. BTF, LLC will pay us 93% of the average of the two lowest posted bid prices of the common stock during the five consecutive trading day period immediately following the date of our notice to them of our election to put shares pursuant to the Equity Line of Credit.
We are registering 5,625,000 shares of common stock pursuant to the Investment Agreement which assumes that price of our stock will be $0.80 at the time of the put notice.
Please read more information about the Investment Agreement in the Investment Agreement Section below.
Common Stock Shares
The common stock shares held by The Hicks Family Trust, The Edward & Mildred Lassiter Restated Family Trust, The DW & JS Benner Family Trust, , Hirad Emadi, Patrick Connelly, Phillip Kavanaugh, Ronnie Novian, John White, Parvin Khalili, Albert Assil, Keith Barrett, Helene Mandell, Guy Grimsley, Francis F. Smith Descendants Trust, Edmondson Farms, Inc. Employees 401K Plan & Trust, Ikuo Ito, Global Capital Management, Inc., Masahiro Irie, James and Lisa Goodell, Peter Grias, Kamran Gharibian, Iraj Gharibian, Billy E. Malcolm, Robert Kofke and Cathy Kofke JT TEN WROS, Phillip Smith, Billy Barr, Charles Schwab
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FBO Andrew Kotowicz, Todd Jorgensen, Chritopher Reed and Patricia Schone JT WROS, Anthony and Angela Reed Family Trust, Cadioty/Werth Living Trust, Miller Family Trust, Finer Marital Trust, James Kimmel, Adam Carolla, George Geldin, Dennis Gerber, Noriaki Sasaki, B Derman & J Derman TTEE Bennett & Janice Derman Family U/A Dated January 16, 1998, Abraham Assil, James Blake, Anthony Reed, Bach Living Trust, Craig Benner, Carolina Trust, Duncan Revocable Trust, Hooman Emadi, Ronald Feldman, George D. Hill & Elieen C. Hill JT WROS, The Edward and Mildred Lassiter Restated Family Trust Dated April 14, 2000, Russell Miller, William W. Morse & Jill D. Morse JT WROS, and Research Drive Equities, LLC were issued by us pursuant to our Private Placement Memorandum, as amended. The shares held by Reza Zarif and Kambiz Mahdi were Founders Shares. The shares held by eFund Capital Partners, LLC were issued pursuant to a stock purchase and strategic relationship agreement executed on May 20, 2004. The shares held by Ashford Capital, LLC were assigned by eFund Capital Partners, LLC.
We are registering 3,328,125 shares of common stock by the shareholders listed above which represents 100% of the common stock currently issued and outstanding.
Series B Convertible Preferred Stock
The 12,500 shares of Series B Convertible Preferred Stock held by Reza Zarif, Kambiz Mahdi and eFund Capital Partners, LLC were issued by us as consideration for an investment agreement totaling $1,250,000 dated December 31, 2004. As of June 10, 2005 there were 12,500 shares of Series B Convertible stock outstanding. Each share of Series B Stock shall be converted into a number of shares of Common Stock that is equal to each share of Series B being divided by the average of the 3 lowest intraday bids in the twenty (20) days prior to conversion
, or $0.10, which ever is greater,
multiplied by 100 (1 divided by x, multiplied by 100), or 125 shares per Series B, whichever is greater. The minimum conversion price
which Series B shareholders shall be to convert their Series B shares to common stock shall be $0.10.
We are, therefore, registering 3,125,000 shares of common stock to cover 200% common stock shares we could issue upon conversion of the Series B Convertible Preferred stock assuming that the conversion price will be $0.80.
Our common stock is not traded on any public market. Selling stockholders will sell at a fixed price of $0.80 per share until our common shares are quoted on the Over-the-Counter Bulletin Board and thereafter at prevailing market prices, or privately negotiated prices. The offering price of $0.80 per share was determined arbitrarily by us. The offering price is not based upon our net worth, total asset value, or any other objective measure of value based on accounting measurements. Should a market develop or occur for our securities, the market price may be far less than the offering price. If and when our common stock is listed on the Over-the-Counter Bulletin Board the price will be established according to the demand of our common stock and will fluctuate based on the demand for our shares.
______________________________________________
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.
YOU SHOULD PURCHASE SECURITIES ONLY IF YOU CAN AFFORD A COMPLETE LOSS.
SEE "RISK FACTORS" BEGINNING ON PAGE 12.
_________________________________________________
You should rely only on the information provided in this prospectus or any supplement to this prospectus and information incorporated by reference. We have not authorized anyone else to provide you with different information. Neither the delivery of this prospectus nor any distribution of the shares of common stock pursuant to this prospectus shall, under any circumstances, create any implication that there has been no change in our affairs since the date of this prospectus.
Neither the Securities and Exchange Commission nor any state securities regulator has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. It is a criminal offense to make any representation to the contrary.
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SUBJECT TO COMPLETION, THE DATE OF THIS PROSPECTUS IS JUNE 10, 2005.
TABLE OF CONTENTS
PROSPECTUS SUMMARY |
6 |
RISK FACTORS |
11 |
USE OF PROCEEDS |
21 |
DETERMINATION OF OFFERING PRICE |
22 |
DILUTION |
22 |
SELLING SECURITY HOLDERS |
22 |
PLAN OF DISTRIBUTION |
29 |
LEGAL PROCEEDINGS |
31 |
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS |
32 |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
33 |
DESCRIPTION OF SECURITIES |
35 |
INTEREST OF NAMED EXPERTS AND COUNSEL |
36 |
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES |
37 |
DESCRIPTION OF BUSINESS |
37 |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION |
44 |
DESCRIPTION OF PROPERTY |
58 |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
58 |
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
61 |
EXECUTIVE COMPENSATION |
62 |
FINANCIAL STATEMENTS |
F1-F19 |
INDEMNIFICATION OF DIRECTORS AND OFFICERS |
64 |
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION |
64 |
RECENT SALES OF UNREGISTERED SECURITIES |
64 |
EXHIBITS |
66 |
UNDERTAKINGS |
67 |
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PROSPECTUS SUMMARY
The Following summary is qualified in its entirety by the more detailed information and financial statements including the notes thereto, appearing elsewhere in this prospectus. Because it is a summary, it does not contain all of the information you should consider before making an investment decision.
PROBE MANUFACTURING, INC.
We incorporated in the State of California on July,7, 1995 as Probe Manufacturing Industries, Inc. On April 21, 2005 we reincorporated from California to Nevada whereby we changed our name to Probe Manufacturing, Inc. From our formation until present we have been a provider of advanced electronics manufacturing services, or EMS, to original equipment manufacturers, or OEMs, primarily in the industrial, automotive, semiconductor, medical, communication and military industries. Our strategy is to provide customers with a collaborative end-to-end service that involves engineering, supply chain management, and manufacturing services. Furthermore, we take responsibility for new product introduction and implementation, and logistics management, with the goal of delivering a complete packaged product. Once a complete packaged product is delivered, we also provide after-sale services such as repair and warranty services.
Substantially all of our manufacturing services are provided on a turnkey basis, whereby we purchase customer-specified components from our suppliers, assemble the components on printed circuit boards and perform post-production testing upon request by our customers. However, we can assume supply chain responsibility at any time during the product life cycle. We offer our customers flexible, "just-in-time" delivery programs allowing product shipments to be closely coordinated with our customers' inventory requirements. Additionally, we complete the assembly of our customers' products at our facilities by integrating printed circuit board assemblies into other elements of our customers' products upon request by our customers.
Our marketing strategy is to convince potential customers to engage us as an engineering and supply chain partner, rather than to simply change EMS suppliers whereby we collaborate with the customer through the entire process. To do this, we perform a full process audit on prospective customers operations to ensure our objectives are aligned and make recommendations for integration of our processes to their technology, quality, and delivery process to achieve the highest positive outcome and lowest total cost. This process has been an extremely effective way to demonstrate the ways we can improve the targeted customers business performance.
HOW TO CONTACT US
The address of our principal executive office is 3050 Pullman Street, Costa Mesa, California 92626. Our telephone number is (714) 424-2960. Our website address is www.probemi.com. Information contained on our website does not constitute part of this report and our address should not be used as a hyperlink to our website.
THE OFFERING
This prospectus relates to the sale of up to 12,078,125 shares of our common stock, which represents 100% of our outstanding common stock securities, by our current shareholders, the common stock shares we could issue upon conversion of the Series B Convertible Preferred Stock by our Series B stockholders and BTF, LLC who will become a stockholder pursuant to a "put right" under an Investment Agreement, also referred to as an Equity Line of Credit, that we have entered into with BTF, LLC.
Investment Agreement
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BTF, LLC will become a stockholder pursuant to a "put right" under an Investment Agreement, also referred to as an Equity Line of Credit, that we have entered into with BTF, LLC A "put right" permits us to require BTF, LLC to buy shares pursuant to the terms of the Investment Agreement. That Investment Agreement permits us to "put" up to $4.5 million in shares of our common stock to BTF, LLC if and when we are successful in our attempt to have our common stock listed on the Over-the-Counter Bulletin Board.
BTF, LLC is an "underwriter" within the meaning of the Securities Act of 1933, as amended, in connection with the resale of our common stock under the Investment Agreement. BTF, LLC will pay us 93% of the average of the two lowest posted bid prices of the common stock during the five consecutive trading day period immediately following the date of our notice to them of our election to put shares pursuant to the Equity Line of Credit.
We are registering 5,625,000 shares of common stock pursuant to the Investment Agreement which assumes that price of our stock will be $0.80 at the time of the put notice.
Please read more information about the Investment Agreement in the Investment Agreement Section below.
Common Stock Shares
The common stock shares held by The Hicks Family Trust, The Edward & Mildred Lassiter Restated Family Trust, The DW & JS Benner Family Trust, , Hirad Emadi, Patrick Connelly, Phillip Kavanaugh, Ronnie Novian, John White, Parvin Khalili, Albert Assil, Keith Barrett, Helene Mandell, Guy Grimsley, Francis F. Smith Descendants Trust, Edmondson Farms, Inc. Employees 401K Plan & Trust, Ikuo Ito, Global Capital Management, Inc., Masahiro Irie, James and Lisa Goodell, Peter Grias, Kamran Gharibian, Iraj Gharibian, Billy E. Malcolm, Robert Kofke and Cathy Kofke JT TEN WROS, Phillip Smith, Billy Barr, Charles Schwab FBO Andrew Kotowicz, Todd Jorgensen, Chritopher Reed and Patricia Schone JT WROS, Anthony and Angela Reed Family Trust, Cadioty/Werth Living Trust, Miller Family Trust, Finer Marital Trust, James Kimmel, Adam Carolla, George Geldin, Dennis Gerber, Noriaki Sasaki, B Derman & J Derman TTEE Bennett & Janice Derman Family U/A Dated January 16, 1998, Abraham Assil, James Blake, Anthony Reed, Bach Living Trust, Craig Benner, Carolina Trust, Duncan Revocable Trust, Hooman Emadi, Ronald Feldman, George D. Hill & Elieen C. Hill JT WROS, The Edward and Mildred Lassiter Restated Family Trust Dated April 14, 2000, Russell Miller, William W. Morse & Jill D. Morse JT WROS, and Research Drive Equities, LLC were issued by us pursuant to our Private Placement Memorandum, as amended. The shares held by Reza Zarif and Kambiz Mahdi were Founders Shares. The shares held by eFund Capital Partners, LLC were issued pursuant to a stock purchase and strategic relationship agreement executed in April 2004. The held by Ashford Capital, LLC were assigned by eFund Capital Partners, LLC.
We are registering 3,328,125 shares of common stock by the shareholders listed above which represents 100% of the common stock currently issued and outstanding.
Series B Convertible Preferred Stock
The 12,500 shares Series B Convertible Preferred Stock held by Reza Zarif, Kambiz Mahdi and eFund Capital Partners, LLC were issued by us as consideration for an investment agreement totaling $1,250,000 dated December 31, 2003. As of June 10, 2005 there were 12,500 shares of Series B Convertible stock outstanding. Each share of Series B Stock shall be converted into a number of shares of Common Stock that is equal to each share of Series B being divided by the average of the 3 lowest intraday bids in the twenty (20) days prior to conversion, multiplied by 100 (1 divided by x, multiplied by 100), or 125 shares per Series B, whichever is greater. The minimum conversion price which Series B shareholders shall be to convert their Series B shares to common stock shall be $0.10. For the purpose of determining the number of shares subject to registration with the Securities and Exchange Commission, we are assuming a stock price or sale price of $0.80 and are 200% of the shares of common stock that we would issue at $0.80.
We are, therefore, registering 3,125,000 shares of common stock to cover 200% common stock shares we could issue upon conversion of the Series B Convertible Preferred stock assuming that the conversion price will be $0.80.
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USE OF PROCEEDS
We are not selling any securities in this offering and therefore will not receive any proceeds from this offering. We will, however, receive proceeds from the sale of securities pursuant to our exercise of the put right and possible future exercise of the warrants held by The Hicks Family Trust, The Edward & Mildred Lassiter Restated Family Trust, The DW & JS Benner Family Trust, , Hirad Emadi, Patrick Connelly, Phillip Kavanaugh, Ronniw Novian, John White, Parvin Khalili, Albert Assil, Keith Barrett, Helene Mandell, Guy Grimsley, Francis F. Smith Decendants Trust, Edmondson Farms, Inc. Employees 401K Plan & Trust, Ikuo Ito, Global Capital Management, Inc., Masahiro Irie, James and Lisa Goodell, Peter Grias, Kamran Gharibian, Iraj Gharibian, Billy E. Malcolm, Robert Kofke and Cathy Kofke JT TEN WROS, Phillip Smith, Billy Barr, Charles Schwab FBO Andrew Kotowicz, Todd Jorgensen, Chritopher Reed and Patricia Schone JT WROS, Anthony and Angela Reed Family Trust, Cadioty/Werth Living Trust, Miller Family Trust, Finer Marital Trust, James Kimmel, Adam Carolla George Geldin, Dennis Gerber, Noriaki Sasaki, B Derman & J Derman TTEE Bennett & Janice Derman Family U/A Dated January 16, 1998, Abraham Assil James Blake, Anthony Reed, Bach Living Trust, Craig Benner, Carolina Trust, Duncan Revocable Trust, Hooman Emadi, Ronald Feldman, George D. Hill & Elieen C. Hill JT WROS, The Edward and Mildred Lassiter Restated Family Trust Dated April 14, 2000, Russell Miller, William W. Morse & Jill D. Morse JT WROS, and Research Drive Equities, LLC. All costs associated with this registration will be borne by us.
RISK FACTORS
The purchase of our common stock involves a high degree of risk. You should carefully review and consider the Risk Factors.
TRADING MARKET
There is currently no public trading market for our securities. Selling stockholders will sell at a fixed price of $.80 per share or privately negotiated prices until our common shares are quoted on the Over-the-Counter Bulletin Board and thereafter at prevailing market prices, or privately negotiated prices.
INVESTMENT AGREEMENT
The Investment Agreement we have with BTF, LLC will only become effective if and when we are successful in our attempt to have our common stock listed on the Over-the-Counter Bulletin Board. If and when we are successful the Investment Agreement allows us to "put" to BTF, LLC Partners, LLC up to $4,500,000. The purchase price for our common stock identified in the Put Notice shall be equal to 93% of the average of the two lowest posted bid prices of our common stock during the five days after we deliver the put notice to BTF, LLC. We can initiate a new put after we close on the prior put.
BTF, LLC will only purchase shares when we meet the following conditions:
•
a registration statement has been declared effective and remains effective for the resale of the common stock subject to the Equity Line;
•
we are successful in our attempt to have our common stock listed on the Over-the-Counter Bulletin Board;
•
our common stock has not been suspended from trading for a period of five consecutive trading days and we have not been notified of any pending or threatened proceeding or other action to delist or suspend our common stock if and when our common stock is listed on the Over-the-Counter Bulletin Board ;
•
we have complied with our obligations under the Investment Agreement and the Registration Rights Agreement;
•
no injunction has been issued and remains in force, or action commenced by a governmental authority which has not been stayed or abandoned, prohibiting the purchase or the issuance of our common stock;
•
the issuance of the Securities will not violate the shareholder approval requirements of the Principal Market.
The Investment Agreement will terminate when any of the following events occur:
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•
we are not successful in our attempt to have our common stock listed on the Over-the-Counter Bulletin Board;
•
BTF, LLC has purchased an aggregate of $4,500,000 of our common stock;
•
36 months after the SEC declares this registration statement effective;
•
we file or otherwise enter an order for relief in bankruptcy;
•
trading of our common stock is suspended for a period of 5 consecutive trading days;
•
we do not file the initial Registration Statement with the SEC within 120 calendar days or the Registration Statement has not been declared effective within 180 calendar days;
•
our common stock ceases to be registered under the 1934 Act; or
•
we require shareholder approval under Nasdaq rules to issue additional shares and such approval is not obtained within 60 days from the date when the Company has issued its 19.9% maximum allowable shares
OUR CAPITAL STRUCTURE AND SHARES ELIGIBLE FOR FUTURE SALE
The following tables outline our capital stock as of June 10, 2005:
Common Stock outstanding:
Before the offering:
3,328,125 shares (1) (2)
After the Offering:
12,078,125 shares (1)(2) (3) (4)
Shares of common stock potentially issuable upon
3,125,000 (3)
Conversion of Series B.
Shares of common stock potentially issuable upon
exercise of the put right to BTF, LLC
5,625,000 (4)
(1) Assumes no conversion of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock as of June 10, 2005:
Series A Convertible Preferred Stock: There are currently 440 shares of Series A Convertible Preferred Stock issued and outstanding. Each share is convertible into 0.1% percent of the shares of our common stock outstanding at the date of conversion. The shares shall convert at the earlier of the election of the holder, or March 26, 2006.
(2) Also assumes no exercise of:
•
No exercise of outstanding warrants to purchase an aggregate of 1,172,937 shares of our common stock at an exercise price of $2.00 per share.
•
No exercise of outstanding warrants to purchase an aggregate of 1,172,937 shares of our common stock at an exercise price of $3.00 per share
(3) Series B Convertible Preferred Stock: There are currently 12,500 shares of Series B Convertible Preferred Stock issued and outstanding. Each share of Series B Stock shall be converted into a number of shares of Common Stock that is equal to each share being divided by the average of the 3 lowest intraday bids in the twenty (20) days prior to conversion or $0.10, which ever is greater, multiplied by 100 (1 divided by x, multiplied by 100), or 125 shares per Series B, whichever is greater. For the purpose of determining the number of shares subject to registration with the Securities and Exchange Commission, we are assuming a stock price or sale price of $0.80 and are 200% of the shares of common stock that we would issue at $0.80.
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(4) For the purpose of determining the number of shares subject to registration with the Securities and Exchange Commission, we have assumed that we will issue not more than 5,625,000 shares pursuant to the exercise of our put right under the Investment Agreement, although the number of shares that we will actually issue pursuant to that put right may be more than or less than 5,625,000, depending on the trading price of our common stock. We currently have no intent to exercise the put right in a manner that would result in our issuance of more than 5,625,000 shares, but if we were to exercise the put right in that manner, we would be required to file a subsequent registration statement with the Securities and Exchange Commission and for that registration statement to be deemed effective prior to the issuance of any such additional shares. We are registering 5,625,000 shares of common stock pursuant to the Investment Agreement which assumes that price of our stock will be $0.80 at the time of the put notice.
You should be aware that there is an inverse relationship between our stock price if and when our common stock is quoted on the Over-the-Counter Bulletin Board or other Exchange and the number of shares to be issued pursuant to our Investment Agreement with BTF, LLC. If our stock price declines, we will be required to issue a greater number of shares under the Investment Agreement for a given advance.
SUMMARY FINANCIAL INFORMATION
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RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors, other information included in this prospectus and information in our periodic reports filed with the SEC. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected, and you may lose some or all of your investment.
RISKS ABOUT OUR BUSINESS
OUR INDEPENDENT ACCOUNTANTS HAVE ISSUED A GOING CONCERN OPINION AND IF WE CANNOT OBTAIN ADDITIONAL FINANCING, WE MAY HAVE TO CURTAIL OPERATIONS AND MAY ULTIMATELY CEASE TO EXIST.
Our audited financial statements for the twelve months ended December 31, 2004 reflect a net loss of ($918,590) and negative cash flows from operations of ($1,210,016). These conditions require sufficient additional funding or alternative sources of capital to meet our working capital needs. We currently receive capital under six different revolving lines of credit from eFund Capital Partners, LLC, Ashford Capital, LLC, Edward Lassiter, Bill Duncan, Rufina Paniego and the Benner Exemption Trust that allows us to draw up to $725,000 and anticipate we will continue to be able to have access to the money through the revolving lines of credit. As of June 10, 2005, we have drawn on $500,000 of our revolving credit lines and only have $225,000 left upon which to draw. These conditions raised substantial doubt about our ability to continue as a going concern if we do not acquire sufficient additional funding or alternative sources of capital to meet our working capital needs. Unless we obtain additional financing through operations, investment capital or otherwise, there is significant doubt we will be able to meet our obligations as they come due and will be unable to execute our business strategy. However, if we are not able to draw down on or use the funds available in the revolving lines of credit and cannot raise funds on acceptable terms, or achieve positive cash flow, we may be forced to curtail operations or may ultimately cease to exist.
As of December 31, 2004 our monthly operating costs and interest expenses averaged $616,497.91 per month. As income from operations is not sufficient to meet these expenses, we must depend on other sources of capital to fund our operations. We currently receive capital under six different revolving lines of credit from eFund Capital Partners, LLC, Ashford Capital, LLC, Edward Lassiter, Bill Duncan, Rufina Paniego and the Benner Exemption Trust that allows us to draw up $725,000 and anticipate we will continue to be able to have access to the money through the revolving lines of credit. As of March 25,2 005 we have drawn on $500,000 of our revolving credit lines and only have $225,000 left upon which to draw. Therefore, the funds available may not be sufficient to sustain our operations if we experience a slow down of customer orders, if one of our customers decides to terminate our agreement or other adverse economic effect. There can be no assurance that we will be successful in obtaining additional capital. If we issue additional shares in connection with debt or equity financing, this will serve to dilute the value of our common stock and existing shareholders positions. If we are unsuccessful in obtaining additional funding to finance our operations, there is a serious doubt that we will be able to continue as a going concern and we may be forced to seek the protection of bankruptcy laws.
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WE HAVE AN ACCUMULATED DEFICIT AND MAY INCUR ADDITIONAL LOSSES, THEREFORE WE MAY NOT BE ABLE TO MEET OUR DEBT SERVICE OBLIGATIONS.
As of December 31, 2004, we had liabilities of ($2,995,378). Our debt could limit our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, or other purposes in the future, as needed; to plan for, or react to, changes in technology and in our business and competition; and to react in the event of an economic downturn.
We may not be able to meet our debt service obligations. If we are unable to generate sufficient cash flow or obtain funds for required payments, or if we fail to comply with covenants in our revolving lines of credit, we will be in default.
WE FACE INTENSE COMPETITION, WHICH MAY REDUCE OUR SALES, OPERATING PROFITS, OR BOTH .
The market segments in which we compete are rapidly evolving and intensely competitive. The electronic manufacturing service or EMS industry is extremely competitive and includes hundreds of companies, several of which have achieved substantial market share. We compete with numerous domestic and foreign EMS firms, including Benchmark Electronics, Inc.; Celestica Inc; Flextronics International Ltd.; Jabil Circuit, Inc.; Pemstar, Inc.; Plexus Corp.; Sanmina-SCI Corporation; CTS Electronics; Solectron Corporation; SMS Technologies, Inc.; Express Manufacturing, Inc. and others. Current and prospective customers also evaluate our capabilities against the merits of internal production. Some of our competitors may have greater design, manufacturing, financial or other resources than us. Additionally, we face competition from Taiwanese ODM suppliers, who have a substantial share of the global market for information technology hardware production, primarily related to notebook and desktop computers and personal computer motherboards, as well as provide consumer products and other technology manufacturing services.
In recent years, many participants in the industry, including us, have substantially expanded their manufacturing capacity. The overall demand for electronics manufacturing services has decreased, resulting in increased capacity and substantial pricing pressures, which has harmed our operating results. Certain sectors of the EMS industry are currently experiencing increased price competition, and if this increased level of competition should continue, our revenues and gross margin may continue to be adversely affected.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS TO PROCURE OUR PARTS FOR PRODUCTION WHICH IF AVAILABILITY OF PRODUTS BECOMES COMPROMISED IT COULD ADD TO OUR COST OF GOODS SOLD AND AFFECT OUR REVENUE GROWTH.
We depend upon a number of suppliers for our products. There is an inherent risk that certain products will be unavailable for prompt delivery or, in some cases, discontinued. We will have only limited control over any third-party manufacturer as to quality controls, timeliness of production and deliveries and various other factors. Should the availability of products be compromised, it could force us to develop alternative products, which could add to the cost of goods sold and compromise delivery commitments.
OUR PRINCIPAL SHAREHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS WILL, IN THE AGGREGATE, BENEFICIALLY OWN MORE THAN 50% OF OUR OUTSTANDING COMMON STOCK AND THESE SHAREHOLDERS, IF ACTING TOGETHER, WILL BE ABLE TO EXERT SUBSTANTIAL INFLUENCE OVER ALL MATTERS REQUIRING APPROVAL OF OUR SHAREHOLDERS .
Our principal shareholders, Directors and Executive Officers will, in the aggregate, beneficially own more than 50% our outstanding Common Stock on a fully diluted basis which includes Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and any shares issued to them under various revolving credit facilities. These shareholders, if acting together, will be able to exert substantial influence over all matters requiring approval of our shareholders, including amendments to our Articles of Incorporation,
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fundamental corporate transactions such as mergers, acquisitions, the sale of the Company, and other matters involving the direction of our business and affairs and specifically the ability to determine the members of our board of directors. (See: Principal Shareholders)
IF WE DO NOT EFFECTIVELY MANAGE CHANGES IN OUR OPERATIONS, OUR BUSINESS MAY BE HARMED.
We plan to increase our manufacturing by expanding our facilities and adding new equipment. This expansion and transition involves significant risks, including, but not limited to, the following:
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we may not be able to attract and retain the management personnel and skilled employees necessary to support expanded operations;
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we may not efficiently and effectively integrate new operations and information systems, expand our existing operations and manage geographically dispersed operations;
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we may incur cost overruns;
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we may incur unusual charges related to our restructuring activities;
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we may encounter construction delays, equipment delays or shortages, labor shortages and disputes and production start-up problems that could harm our growth and our ability to meet customers delivery schedules; and
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we may not be able to obtain funds for this transition, and we may not be able to obtain loans or operating leases with attractive terms
In addition, we expect to incur new fixed operating expenses associated with our expansion efforts that will increase our cost of sales, including increases in depreciation expense and rental expense. If our revenues do not increase sufficiently to offset these expenses, our operating results could be seriously harmed. We cannot assure you as to the timing or amount of any future restructuring charges. If we are required to take additional restructuring charges in the future, this could have a material adverse impact on our financial position, results of operations and cash flows.
WE DEPEND ON LOW TO MEDIUM VOLUME HIGH MIX TECHNOLOGY PRODUCTS THAT ARE BUILT DOMESTICALLY. THESE APPLICATIONS INCLUDE INDUSTRIAL INSTRUMENTATION AND SCIENTIFIC COMMUNICATION, SEMICONDUCTOR AND AUTOMOTIVE PRODUCTS, WHICH CONTINUALLY PRODUCE TECHNOLOGICALLY ADVANCED PRODUCTS WITH SHORT LIFE CYCLES; OUR INABILITY TO CONTINUALLY MANUFACTURE SUCH PRODUCTS ON A COST-EFFECTIVE BASIS COULD HARM OUR BUSINESS.
During the twelve months ended December 31, 2004, we derived approximately 30% of our revenues from customers in the industrial product sector, whose products include adhesive dispensing equipment, motion controllers; approximately 40% of our revenues from customers in the semiconductor industry, whose products include mass flow controllers, and evaluation modules for integrated circuit manufactures; approximately 19% of our revenues from providers of communications infrastructure, whose products include equipment for optical networks, cellular base stations, radio frequency devices, telephone exchange and access switches and broadband devices; approximately 3% of our revenues from the automotive industry, whose products are electronic control units for alternative fuel systems. The remaining 8% of our revenues was derived from customers in a variety of other industries, including the medical, consumer and military industries.
Factors affecting these industries in general could seriously harm our customers and, as a result, us. These factors include:
•
rapid changes in technology, which result in short product life cycles;
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seasonality of demand for our customers products;
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the inability of our customers to successfully market their products, and the failure of these products to gain widespread commercial acceptance; and
•
recessionary periods in our customers markets
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OUR INCREASED ORIGINAL DESIGN MANUFACTURING, OR ODM, ACTIVITY MAY REDUCE OUR PROFITABILITY.
We have recently begun providing ODM services, where we design and develop products that we then manufacture for OEM customers. We are actively pursuing ODM projects, focusing primarily on consumer related devices, such as cell phones and related products, which requires that we make investments in research and development, technology licensing, test and tooling equipment, patent applications, facility expansion and recruitment.
Although we enter into contracts with our ODM customers, we may design and develop products for these customers prior to receiving a purchase order or other firm commitment from them. We are required to make substantial investments in the resources necessary to design and develop these products, and no revenue may be generated from these efforts if our customers do not approve the designs in a timely manner or at all, or if they do not then purchase anticipated levels of products. In addition, ODM activities often require that we purchase inventory for initial production runs before we have a purchase commitment from a customer. Even after we have a contract with a customer with respect to an ODM product, these contracts may allow the customer to delay or cancel deliveries and may not obligate the customer to any volume of purchases. These contracts can generally be terminated by either party on short notice. There is no assurance that we will be able to maintain our current level of ODM activity at all or for an extended period of time. We continue to make investments in our ODM services, which could adversely affect our profitability through fiscal 2005 and beyond. Further, the products we design must satisfy safety and regulatory standards and some products must also receive government certifications. If we fail to timely obtain these approvals or certifications, we would be unable to sell these products, which would harm our sales, profitability and reputation.
THE SUCCESS OF OUR ODM ACTIVITY DEPENDS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.
We retain certain intellectual property rights to our ODM products. As the level of our ODM activity is increasing, the extent to which we rely on rights to intellectual property incorporated into products is increasing. Despite our efforts, we cannot be certain that the measures we have taken to prevent unauthorized use of our technology will be successful. If we are unable to protect our intellectual property rights, this could reduce or eliminate the competitive advantages of our proprietary technology, which would harm our business.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST US OR OUR CUSTOMERS COULD HARM OUR ODM BUSINESS.
Our ODM products often face competition from the products of OEMs, many of whom may own the intellectual property rights underlying those products. As a result, we could become subject to claims of intellectual property infringement as the number of our competitors increases. In addition, customers for our ODM services typically require that we indemnify them against the risk of intellectual property infringement. If any claims are brought against us or our customers for such infringement, whether or not these have merit, we could be required to expend significant resources in defense of such claims. In the event of such an infringement claim, we may be required to spend a significant amount of money to develop non-infringing alternatives or obtain licenses. We may not be successful in developing such alternatives or obtaining such a license on reasonable terms or at all.
IF OUR ODM PRODUCTS ARE SUBJECT TO NON-COMPLIANCE, OUR BUSINESS MAY BE DAMAGED AND WE MAY INCUR SIGNIFICANT FEES .
In our contracts with our ODM customers, we generally provide them with a warranty against non-compliance in our designs. If an ODM product or component that we design is found to be non-compliant in its design, this may lead to increased warranty claims. Although we have product liability insurance coverage, this is expensive and may not be available on acceptable terms, in sufficient amounts, or at all. A successful product liability claim in excess of our insurance coverage or any material claim for which insurance
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coverage was denied or limited and for which indemnification was not available could have a material adverse effect on our business, results of operations and financial condition.
THE MAJORITY OF OUR SALES COME FROM A SMALL NUMBER OF CUSTOMERS; IF WE LOSE ANY OF THESE CUSTOMERS, OUR SALES COULD DECLINE SIGNIFICANTLY.
Sales to our five largest customers have represented a significant percentage of our net sales in recent periods. Our five largest customers accounted for approximately 86% and 79% of net sales during the twelve months ended December 31, 2004 and December 31, 2003 respectively.
Our principal customers have varied from year to year, and our principal customers may not continue to purchase services from us at current levels, if at all. Significant reductions in sales to any of these customers, or the loss of major customers, would seriously harm our business. If we are not able to timely replace expired, canceled or reduced contracts with new business, our revenues could be harmed.
IF WE LOSE KEY SENIOR MANAGEMENT PERSONNEL OUR BUSINESS COULD BE NEGATVIELY AFFECTED.
Our success depends to a large extent upon the continued services of our executive officers. Generally our employees are not bound by employment or non-competition agreements, and we cannot assure that we will retain our executive officers and other key employees. We could be seriously harmed by the loss of any of our executive officers. In order to manage our growth, we will need to recruit and retain additional skilled management personnel and if we are not able to do so, our business and our ability to continue to grow could be harmed. In addition, in connection with expanding our ODM activities, we must attract and retain experienced design engineers. Although a number of companies in our industry have implemented workforce reductions, there remains substantial competition for highly skilled employees. Our failure to recruit and retain experienced design engineers could limit the growth of our ODM activities, which could adversely affect our business.
WE ARE SUBJECT TO ENVIRONMENTAL COMPLIANCE RISKS AND UNEXPECTED COSTS THAT WE MAY INCUR WITH RESPECT TO ENVIRONMENTAL MATTERS MAY RESULT IN ADDITIONAL LOSS CONTINGENCIES, THE QUANTIFICATION OF WHICH CANNOT BE DETERMINED AT THIS TIME.
We are subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, discharge and disposal of hazardous substances in the ordinary course of our manufacturing process. If more stringent compliance or cleanup standards under environmental laws or regulations are imposed, or the results of future testing and analyses at our current or former operating facilities indicate that we are responsible for the release of hazardous substances, we may be subject to additional remediation liability. Further, additional environmental matters may arise in the future at sites where no problem is currently known or at sites that we may acquire in the future. Currently unexpected costs that we may incur with respect to environmental matters may result in additional loss contingencies, the quantification of which cannot be determined at this time.
WE ARE EXPOSED TO FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES BECAUSE WE PROCURE PRODUCTS FROM SUPPLIERS IN FOREIGN COUNTRIES AND AS A RESULT OF THE VOLATILITY IN THE EXCHANGE RATES BETWEEN THE FOREIGN CURRENCIES AND THE FUNCTIONAL CURRENCIES OF OUR ENTITIES COULD SERIOUSLY HARM OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION.
We transact business in various foreign countries because we procure products from suppliers in foreign countries. As a result, we are exposed to fluctuations in foreign currencies. We have currency exposure arising from both sales and purchases denominated in currencies other than the functional currencies of our entities. Volatility in the exchange rates between the foreign currencies and the functional currencies of our entities could seriously harm our business, operating results and financial condition. We try to manage our foreign currency exposure by entering into foreign exchange forward contracts. Mainly, we enter into foreign
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exchange forward contracts intended to reduce the short-term impact of foreign currency fluctuations on current assets and liabilities denominated in foreign currency. These exposures are primarily, but not limited to, cash, receivables, payables and inter-company balances, in currencies other than the functional currency unit of the operating entity. We will first evaluate and, to the extent possible, use non-financial techniques, such as currency of invoice, leading and lagging payments, receivable management or local borrowing to reduce transaction exposure before taking steps to minimize remaining exposure with financial instruments. Foreign exchange forward contracts are treated as cash flow hedges and such contracts generally expire within three months. The credit risk of these forward contracts is minimal since the contracts are with large financial institutions. The gains and losses on forward contracts generally offset the gains and losses on the assets, liabilities and transactions hedged.
LITIGATION COULD HARM OUR BUSINESS WHETHER OR NOT DETERMINED ADVERSELY TO US.
As of June 10, 2005 we have the following legal proceedings and legal settlements:
1. Cadence has a judgment against us for $98,000. The judgment was due to lack of payment by Probe to Cadence after Probe purchased the license to use its Alegro software program. Due to economic conditions after September 11 th the market for the use of this product disappeared and Probe was not able to resell the services. Consequently, Probe was not able to generate any revenues from reselling of the software and could not pay Cadence. On August 9 th 2004 we entered into a payment agreement with Cadence in which we pay them $2,500 a month until such time the debt is paid off. The balance currently due to Cadence under the agreement is $58,500 as of June 10, 2005.
2. IFC had a judgment against us for $144,403.00. The judgment resulted from our failure to pay IFC under the purchase agreement for a piece of X-Ray equipment. In September 2004 we entered into a settlement agreement whereby we agreed to pay IFC $15,000 as an initial payment and $5,000 per month until settlement amount of $70,000.00 is paid in full. The balance due as of June 10, 2005 is $15,000.00.
3. Canon Financial has a judgment against us for $15,000.00. The judgment was entered because Probe did not pay the lease payments due on a copy machine which was not properly maintained by Canon and was not functional most of the time. We have agreed to pay Canon $1000.00 per month until fully paid. Our balance as of June 10, 2005 is $8,000.00.
4. Pro-Source has filed a civil case against us for $35,000 for breach of contract. They claimed breach of contract as a result of our refusal to pay for their services they claimed rendered in 2003 and 2004. Were currently negotiating a settlement, however, if we are unable to negotiate a settlement we believe we will be successful on the merits of the case because of Pro-Sources failure to provide the agreed services.
5. We currently owe the Internal Revenue Service $140,000.00 for past tax liabilities which we are not currently able to pay in full. We have negotiated a settlement with IRS and have entered into a payment plan with them in which we pay the IRS $2,500 per month.
While we are currently able to service any and all payment obligations to the creditors, if we are unable in the future to service any payments, anyone of the creditors may instigate foreclosure proceedings against us. If we are unable to satisfy our obligations, we could be forced into bankruptcy.
We believe that there are no other claims or litigation pending, the outcome of which could have a material adverse effect on our financial condition or operating results. However, if litigation should arise and the Company was to receive an unfavorable ruling, there is a possibility that it would have a material adverse impact on our financial condition, results of operations, or liquidity of the period in which the ruling occurs, or future periods.
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RISKS TO OUR INDUSTRY
THE VARIABILITY OF CUSTOMER REQUIREMENTS IN THE ELECTRONICS INDUSTRY COULD ADVERSELY AFFECT OUR REULTS OF OPERATIONS.
As a provider of electronics manufacturing services, we must provide increasingly rapid product turnaround for our customers. We generally do not obtain firm, long-term purchase commitments from our customers, and we often experience reduced lead-times in customer orders. Customers cancel their orders, change production quantities and delay production for a number of reasons. The uncertain economic conditions and geopolitical situation has resulted, and may continue to result, in some of our customers delaying the delivery of some of the products we manufacture for them, and placing purchase orders for lower volumes of products than previously anticipated. Cancellations, reductions or delays by a significant customer or by a group of customers have harmed, and may continue to harm, our results of operations by reducing the volume of products manufactured by us for the customers and delivered in that period, as well as causing a delay in the repayment of our expenditures for inventory in preparation for customer orders and lower asset utilization resulting in lower gross margins.
In addition, we make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimates of customer requirements. The short-term nature of our customers commitments and the rapid changes in demand for their products reduce our ability to accurately estimate future customer requirements. This makes it difficult to schedule production and maximize utilization of our manufacturing capacity. We often increase staffing, increase capacity and incur other expenses to meet the anticipated demand of our customers, which cause reductions in our gross margins if customer orders are delayed or cancelled. Anticipated orders may not materialize, and delivery schedules may be deferred as a result of changes in demand for our customers products. On occasion, customers require rapid increases in production, which may stress our resources and reduce margins. Although we have increased our manufacturing capacity, and plan further increases, we may not have sufficient capacity at any given time to meet our customers demands. In addition, because many of our costs and operating expenses are relatively fixed, a reduction in customer demand harms our gross profit and operating income.
WE MAY BE ADVERSELY AFFECTED BY SHORTAGES OF REQUIRED ELECTRONIC COMPONENTS.
At various times, there have been shortages of some of the electronic components that we use, as a result of strong demand for those components or problems experienced by suppliers. These unanticipated component shortages have resulted in curtailed production or delays in production, which prevented us from making scheduled shipments to customers in the past and may do so in the future. Our inability to make scheduled shipments could cause us to experience a reduction in our sales and an increase in our costs and could adversely affect our relationship with existing customers as well as prospective customers. Component shortages may also increase our cost of goods sold because we may be required to pay higher prices for components in short supply and redesign or reconfigure products to accommodate substitute components. As a result, component shortages could adversely affect our operating results for a particular period due to the resulting revenue shortfall and increased manufacturing or component costs.
OUR CUSTOMERS MAY BE ADVERSELY AFFECTED BY RAPID TECHNOLOGICAL CHANGE; THEREFORE, IF OUR CUSTOMERS PRODUCTS BECOME OBSOLETE OR FAIL TO GAIN WIDESPREAD COMMERCIAL ACCEPTANCE, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
Our customers compete in markets that are characterized by rapidly changing technology, evolving industry standards and continuous improvement in products and services. These conditions frequently result in short product life cycles. Our success will depend largely on the success achieved by our customers in developing and marketing their products. If technologies or standards supported by our customers products become obsolete or fail to gain widespread commercial acceptance, our business could be adversely affected.
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WE DEPEND ON THE CONTINUING TREND OF OUTSOURCING BY OEMS, IF THIS TREND CHANGES OR DECLINES OUR BUISSESS COULD BE SIGNIFICANTLY HARMED.
Future growth in our revenue depends on new outsourcing opportunities in which we assume additional manufacturing and supply chain management responsibilities from OEMs. To the extent that these opportunities are not available, either because OEMs decide to perform these functions internally or because they use other providers of these services, our future growth would be limited.
RISKS ABOUT OUR STOCK AND THIS OFFERING
IF WE SELL SECURITIES PURSUANT TO OUR INVESTMENT AGREEMENT WITH BTF, LLC THEN EXISTING STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION.
The sale of shares pursuant to our Investment Agreement with BTF, LLC may have a dilutive impact on our stockholders. As a result, our net income per share could decrease in future periods, and the market price of our common stock could decline. In addition, the lower our stock price at the time we exercise our put option, the more shares we will have to issue to BTF, LLC to draw down on the full equity line with BTF , LLC. If our stock price decreases, then our existing stockholders would experience greater dilution.
BTF, LLC WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK, WHICH COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.
Our common stock to be issued under our agreement with BTF, LLC will be purchased at a 7% discount to the average of the two lowest posted bid prices for the five days immediately following our notice to BTF, LLC of our election to exercise our put right. BTF, LLC has a financial incentive to sell our common stock immediately upon receiving the shares to realize the profit between the discounted price and the market price. If BTF, LLC sells our shares, the price of our stock could decrease. If our stock price decreases, BTF, LLC may have a further incentive to sell the shares of our common stock that it holds. The discounted sales under our agreement with BTF, LLC could cause the price of our common stock to decline.
THERE IS CURRENTLY NO MARKET FOR OUR SECURITIES, AND THERE CAN BE NO ASSURANCES THAT ANY MARKET WILL EVER DEVELOP OR THAT OUR COMMON STOCK WILL BE QUOTED FOR TRADING AND IF QUOTED, IT IS LIKELY TO BE SUBJECT TO SIGNIFICANT PRICE FLUCTUATIONS.
Prior to the date of this prospectus, there has not been any established trading market for our common stock, and there is currently no market whatsoever for our securities. We will seek to have a market maker file an application with the NASD on our behalf to quote the shares of our common stock on the OTC Bulletin Board ("OTCBB") maintained by the NASD. There can be no assurance as to whether such market maker's application will be accepted or, if accepted, the prices at which our common stock will trade if a trading market develops, of which there can be no assurance. We are not permitted to file such application on our own behalf. If the application is accepted, we cannot predict the extent to which investor interest in Probe Manufacturing, Inc. will lead to the development of an active, liquid trading market. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders for investors.
In addition, our common stock is unlikely to be followed by any market analysts, and there may be few institutions acting as market makers for the common stock. Either of these factors could adversely affect the liquidity and trading price of our common stock. Until our common stock is fully distributed and an orderly market develops in our common stock, if ever, the price at which it trades is likely to fluctuate significantly. Prices for our common stock will be determined in the marketplace and may be influenced by many factors,
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including the depth and liquidity of the market for shares of our common stock, developments affecting our business, including the impact of the factors referred to elsewhere in these Risk Factors, investor perception of Probe Manufacturing, Inc. and general economic and market conditions. No assurances can be given that an orderly or liquid market will ever develop for the shares of our common stock.
Because of the anticipated low price of the securities, many brokerage firms may not be willing to effect transactions in these securities. See subheading to "Plan of Distribution" entitled "Selling Shareholders and any purchasers of our securities should be aware that any market that develops in our stock will be subject to the penny stock restrictions."
ALL 12,078,125 SHARES OF OUR COMMON STOCK CURRENTLY BEING REGISTERED MAY BE SOLD BY SELLING STOCKHOLDERS SUBSEQUENT TO THE EFFECTIVENESS OF THIS REGISTRATION STATEMENT. SIGNIFICANT SALES OF THESE SHARES OVER A SHORT OR CONCENTRATED PERIOD OF TIME IS LIKELY TO DEPRESS THE MARKET FOR AND PRICE OF SHARES IN ANY MARKET THAT MAY DEVELOP.
All 12,078,125 shares of our common stock being registered in this offering and being held by 57 shareholders may be sold subsequent to effectiveness of this registration statement either at once and/or over a period of time. These sales may take place because the 12,078,125 shares of common stock are being registered hereunder and, accordingly, reliance upon Rule 144 is not necessary. See also "Selling Stockholders" and "Plan of Distribution" hereinafter. The ability to sell these shares of common stock and/or the sale thereof reduces the likelihood of the establishment and/or maintenance of an orderly trading market for our shares at any time in the near future.
IF A MARKET DEVELOPS FOR OUR SHARES, RULE 144 SALES MAY DEPRESS PRICES IN THAT MARKET.
All of the outstanding shares of our common stock held by present stockholders are "restricted securities" within the meaning of Rule 144 under the Securities Act of 1933, as amended.
As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Act and as required under applicable state securities laws. Rule 144 provides in essence that a person who has held restricted securities for a prescribed period may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed 1.0% of a company's outstanding common stock. The alternative average weekly trading volume during the four calendar weeks prior to the sale is not available to our shareholders being that the OTCBB (if and when listed thereon) is not an "automated quotation system" and, accordingly, market based volume limitations are not available for securities quoted only over the OTCBB. As a result of revisions to Rule 144 which became effective on or about April 29, 1997, there is no limit on the amount of restricted securities that may be sold by a non-affiliate (i.e., a stockholder who is not an officer, director or control person) after the restricted securities have been held by the owner for a period of two years. A sale under Rule 144 or under any other exemption from the Act, if available, or pursuant to registration of shares of common stock of present stockholders, may have a depressive effect upon the price of the common stock in any market that may develop.
ANY MARKET THAT DEVELOPS IN SHARES OF OUR COMMON STOCK WILL BE SUBJECT TO THE PENNY STOCK RESTRICTIONS WHICH WILL CREATE A LACK OF LIQUIDITY AND MAKE TRADING DIFFICULT OR IMPOSSIBLE .
Until our shares of common stock qualify for inclusion in the NASDAQ system, if ever, the trading of our securities, if any, will be in the over-the-counter markets which are commonly referred to as the OTCBB as maintained by the NASD. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations as to the price of our securities.
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The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks (generally) are equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on NASDAQ, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. Prior to a transaction in a penny stock, a broker-dealer is required to:
•
Deliver a standardized risk disclosure document prepared by the SEC;
•
Provide the customer with current bid and offer quotations for the penny stock;
•
Explain the compensation of the broker-dealer and its salesperson in the transaction;
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Provide monthly account statements showing the market value of each penny stock held in the customer's account;
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Make a special written determination that the penny stock is a suitable investment for the purchaser and receives the purchaser's; and
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Provide a written agreement to the transaction.
•
These requirements may have the effect of reducing the level of trading activity in the secondary market for our stock. Because our shares are subject to the penny stock rules, you may find it more difficult to sell your shares.
IF AND WHEN OUR SECURITIES BECOME QUOTED ON THE OVER-THE-COUNTER BULLETIN BOARD OR OTHER EXCHANGE OUR SECURITIES MAY BE THINLY TRADED WHICH MAY NOT PROVIDE LIQUIDITY FOR OUR INVESTORS
If our securities are quoted on the Over-the-Counter Bulletin Board or other exchange our securities may be thinly traded which may not provide liquidity for our investors
The Over-the-Counter Bulletin Board is an inter-dealer, over-the-counter market that provides significantly less liquidity than the NASDAQ Stock Market or national or regional exchanges. Securities traded on the Over-the-Counter Bulletin Board are usually thinly traded, highly volatile, have fewer market makers and are not followed by analysts. The Securities and Exchange Commission's order handling rules, which apply to NASDAQ-listed securities, do not apply to securities quoted on the Over-the-Counter Bulletin Board. Quotes for stocks included on the Over-the-Counter Bulletin Board are not listed in newspapers. Therefore, prices for securities traded solely on the Over-the-Counter Bulletin Board may be difficult to obtain and holders of our securities may be unable to resell their securities at or near their original acquisition price, or at any price.
Investors must contact a broker-dealer to trade over-the-counter bulletin board securities. As a result, you may not be able to buy or sell our securities at the times that you may wish.
Even though our securities are quoted on the Over-the-Counter Bulletin Board, the Over-the-Counter Bulletin Board may not permit our investors to sell securities when and in the manner that they wish. Because there are no automated systems for negotiating trades on the Over-the-Counter Bulletin Board, they are conducted via telephone. In times of heavy market volume, the limitations of this process may result in a significant increase in the time it takes to execute investor orders. Therefore, when investors place market orders to buy or sell a specific number of shares at the current market price it is possible for the price of a stock to go up or down significantly during the lapse of time between placing a market order and its execution.
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE; THEREFORE, YOU MAY NEVER SEE A RETURN ON YOUR INVESTMENT
We do not anticipate the payment of cash dividends on our common stock in the foreseeable future. We anticipate that any profits from our operations will be devoted to our future operations. Any decision to pay dividends will depend upon our profitability at the time, cash available and other factors.
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USE OF PROCEEDS
This prospectus relates to shares of common stock that may be offered and sold from time to time by certain selling stockholders. We will not receive any proceeds from the sale of the shares. However, we will receive proceeds from the sale of our common shares pursuant to our Investment Agreement with BTF, LLC.
Additionally, we may receive proceeds from the sale of our common shares to The Hicks Family Trust, The Edward & Mildred Lassiter Restated Family Trust, The DW & JS Benner Family Trust, , Hirad Emadi, Patrick Connelly, Phillip Kavanaugh, Ronniw Novian, John White, Parvin Khalili, Albert Assil, Keith Barrett, Helene Mandell, Guy Grimsley, Francis F. Smith Decendants Trust, Edmondson Farms, Inc. Employees 401K Plan & Trust, Ikuo Ito, Global Capital Management, Inc., Masahiro Irie, James and Lisa Goodell, Peter Grias, Kamran Gharibian, Iraj Gharibian, Billy E. Malcolm, Robert Kofke and Cathy Kofke JT TEN WROS, Phillip Smith, Billy Barr, Charles Schwab FBO Andrew Kotowicz, Todd Jorgensen, Chritopher Reed and Patricia Schone JT WROS, Anthony and Angela Reed Family Trust, Cadioty/Werth Living Trust, Miller Family Trust, Finer Marital Trust, James Kimmel, Adam Carolla George Geldin, Dennis Gerber, Noriaki Sasaki, B Derman & J Derman TTEE Bennett & Janice Derman Family U/A Dated January 16, 1998, Abraham Assil, James Blake, Anthony Reed, Bach Living Trust, Craig Benner, Carolina Trust, Duncan Revocable Trust, Hooman Emadi, Ronald Feldman, George D. Hill & Elieen C. Hill JT WROS, The Edward and Mildred Lassiter Restated Family Trust Dated April 14, 2000, Russell Miller, William W. Morse & Jill D. Morse JT WROS, and Research Drive Equities, LLC if one or any of the above listed individuals exercise warrants that they currently hold. We cannot accurately predict when we will receive revenues pursuant to the warrants because we do not know when the holders will choose to exercise the warrants. However, it is possible that the warrants will expire without being exercised. If we receive revenues from exercise of the warrants, we currently intend to use the proceeds for working capital.
For illustrative purposes, we have set forth below our intended use of proceeds for the range of net proceeds indicated below to be received under the Investment Agreement. The Gross Proceeds represent the total dollar amount that BTF, LLC is obligated to purchase. The table assumes estimated offering expenses of $25,000.
Proceeds if 100% Sold |
Proceeds if 50% Sold |
||
Gross Proceeds |
$4,500,000 |
$2,250,000 |
|
Estimated Expenses of Offering |
$25,000 |
$25,000 |
|
Net Proceeds |
$4,475,000 |
$2,225,000 |
|
Priority |
Use of Proceeds if 100% Sold |
Use of Proceeds if 50% Sold |
|
Working Capital and General corporate expenses |
1 st |
$1,000,000 |
$500,000 |
Repayment of Debt |
2 nd |
$1,000,000 |
$500,000 |
Expansion of Internal Operations |
3 rd |
737,500 |
$368,750 |
Potential Acquisition costs (1) |
4 th |
1,737,500 |
$868,750 |
(1) From time to time we evaluate opportunities to make acquisitions of assets or businesses that we believe would help us achieve our goal of profitability, but we are not currently negotiating or planning any material acquisitions.
Proceeds of the offering which are not immediately required for the purposes described above will be invested in United States government securities, short-term certificates of deposit, money market funds and other high-grade, short-term interest-bearing investments.
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DETERMINATION OF OFFERING PRICE
The offering price of $0.80 per share was determined arbitrarily by us. The offering price is not based upon our net worth, total asset value, or any other objective measure of value based on accounting measurements. Should a market develop or occur for our securities, the market price may be far less than the offering price. If and when our common stock is listed on the Over-the-Counter Bulletin Board the price will established according to demand of our common stock and will fluctuate based on the demand for our shares.
DILUTION
Our net tangible book value as of March 31, 2005 ($0.18) per share of common stock. Net tangible book value is determined by dividing our tangible book value (total tangible assets less total liabilities) by the number of outstanding shares of our common stock. Since this offering is being made solely by the selling stockholders and none of the proceeds will be paid to us, our net tangible book value will be unaffected by this offering. Our net tangible book value, however, will be impacted by the common stock to be issued to BTF, LLC. The amount of dilution will depend on the offering price and number of shares to be issued. The following example shows the dilution to new investors at an offering price of $0.80 per share.
If we assume that we were to issue 5,625,000 shares of common stock to BTF, LLC at an assumed offering price of $.80 per share less $25,000 of offering expenses, our net tangible book value as of March 31, 2005 would have been $0.18 per share. This represents an immediate increase in net tangible book value to existing shareholders of $0.62 per share and an immediate dilution to new shareholders of ($0.36) per share.
SELLING SECURITY HOLDERS
Based upon information available to us as of June 10, 2005 the following table sets forth the name of the selling stockholders, the number of shares owned, the number of shares registered by this prospectus and the number and percent of outstanding shares that the selling stockholders will own after the sale of the registered shares, assuming all of the shares are sold. The information provided in the table and discussions below has been obtained from the selling stockholders. The selling stockholders may have sold, transferred or otherwise disposed of, or may sell, transfer or otherwise dispose of, at any time or from time to time since the date on which they provided the information regarding the shares beneficially owned, all or a portion of the shares of common stock beneficially owned in transactions exempt from the registration requirements of the Securities Act of 1933. As used in this prospectus, "selling stockholder" includes donees, pledgees, transferees or other successors-in-interest selling shares received from the named selling stockholder as a gift, pledge, distribution or other non-sale related transfer.
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Beneficial ownership is determined in accordance with Rule 13d-3(d) promulgated by the Commission under the Securities Exchange Act of 1934. Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to the shares, subject to community property laws where applicable.
In some cases, the Shares Being Offered Column will reflect a higher number of shares than the Ownership Before the Offering column. This occurs when the selling shareholder has not received shares being registered on this registration statement because the selling shareholder holds shares of Series B Convertible Preferred Stock, warrant or other right to acquire shares of common stock but has not yet exercised that right.
(1) Assumes all shares are sold pursuant to this Prospectus.
(2) The Managing Member of Ashford Capital, LLC is Frank Kavanaugh. Mr. Kavanaugh has authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Kavanaugh may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Kavanaugh does not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and disclaims any beneficial ownership of such shares of common stock. Ashford Capital, LLC received the shares pursuant to an assignment agreement with eFund Capital Partners, LLC of which 750,000 were cancelled and redeemed by us. Ashford Capital, LLC and eFund Capital Partners, LLC have no affiliation. Mr. Kavanaugh was a director of ours from May 2004 until December 2004.
(3) The managing members of eFund Capital Partners, LLC are Barrett Evans and Jeffrey Conrad. Mr. Evans and Mr. Conrad jointly have authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Evans and Mr. Conrad may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Evans and Mr. Conrad do not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and they disclaim any beneficial ownership of such shares of common stock. eFund Capital Partners, LLC received 2,000,000 shares common stock pursuant to an investment agreement with us in May of 2004, a million of which were issued to Ashford Capital, LLC and 750,000 of which were cancelled and redeemed. An additional 875,000 shares are being registered in order to register 200% of the shares that we would issue upon conversion of the Series B Convertible Preferred Stock, which assumes that the shares will be converted at $0.80 per share. Mr. Evans and Mr. Conrad have both been directors of ours since May 2004.
(4) The managing member of BTF, LLC is Raquel Imbassahy. Ms. Imbassahy has had no relationship with us in the past three years. BTF, LLC will acquire their shares pursuant to the Equity Line of Credit. Ms. Imbassahy has authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Ms. Imbassahy may be deemed to have dispositive and voting power over the shares if and when they are issued pursuant to the Equity Line of Credit. Ms. Imbassahy does not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and disclaims any beneficial ownership of such shares of common stock if and when issued pursuant to the Equity Line of Credit.
(5) Reza Zarif is our Chief Operating Officer and a Director of ours. Mr. Zarif has dispositive and voting power over his shares and claims beneficial ownership of them. He has all the rights pursuant to such ownership. Mr. Zarif acquired 250,000 shares as a founder of Probe. An additional 1,125,000 shares are being registered in order to register 200% of the shares that we would issue upon conversion of the Series B Convertible Preferred Stock, which assumes that the shares will be converted at $0.80 per share.
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(6) Kambiz Mahdi is our Chief Executive Officer and a Director of ours. Mr. Mahdi has dispositive and voting power over his shares and claims beneficial ownership of them. He has all the rights pursuant to such ownership. Mr. Mahdi acquired his shares as a founder of Probe. An additional 1,125,000 shares are being registered in order to register 200% of the shares that we would issue upon conversion of the Series B Convertible Preferred Stock which assumes that the shares will be converted at $0.80 per share.
(7) The Hicks Family Trust, The Edward & Mildred Lassiter Restated Family Trust, The DW & JS Benner Family Trust, , Hirad Emadi, Patrick Connelly, Phillip Kavanaugh, Ronniw Novian, John White, Parvin Khalili, Albert Assil, Keith Barrett, Helene Mandell, Guy Grimsley, Francis F. Smith Decendants Trust, Edmondson Farms, Inc. Employees 401K Plan & Trust, Ikuo Ito, Global Capital Management, Inc., Masahiro Irie, James and Lisa Goodell, Peter Grias, Kamran Gharibian, Iraj Gharibian, Billy E. Malcolm, Robert Kofke and Cathy Kofke JT TEN WROS, Phillip Smith, Billy Barr, Charles Schwab FBO Andrew Kotowicz, Todd Jorgensen, Chritopher Reed and Patricia Schone JT WROS, Anthony and Angela Reed Family Trust, Cadioty/Werth Living Trust, Miller Family Trust, Finer Marital Trust, James Kimmel, Adam Carolla George Geldin, Dennis Gerber, Noriaki Sasaki, B Derman & J Derman TTEE Bennett & Janice Derman Family U/A Dated January 16, 1998 Abraham Assil, James Blake, and Anthony Reed all became shareholders pursuant to our private placement memorandum dated June 9, 2004 as restated and amended on November 16, 2004. All the above parties have dispositive and voting power over their shares and claim beneficial ownership of them.
(8) Dennis Benner is a Director of ours and acquired shares in our private placement memorandum dated June 9, 2004 as restated and amended on November 16, 2004 through The DW & JS Benner Family Trust. Mr. Benner has dispositive and voting power over the shares in The DW & JS Benner Family Trust and claims beneficial ownership of them.
PLAN OF DISTRIBUTION
Each selling stockholder of our common stock and any of their pledges, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the trading market if and when one develops, any other stock exchange if and when one develops, market or trading facility which the shares are traded if and when one develops or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders will act independently of us in making decisions with respect to the timing, manner and size of each sale. The selling stockholders may sell the shares from time to time:
•
If we are successful in our application to have our common stock list on the Over-the-Counter Bulletin Board in transactions on the Over-the-Counter Bulletin Board or on any national securities exchange or U.S. inter-dealer system of a registered national securities association on which our common stock may be listed or quoted at the time of sale; or
•
In private transactions and transactions otherwise than on these exchanges or systems or in the over-the-counter market; or
•
If we are successful in our application to have our common stock list on the Over-the-Counter Bulletin Board at prices related to such prevailing market prices, or
•
In privately negotiated transactions, or
•
If we are successful in our application to have our common stock listed on the Over-the-Counter Bulletin Board in block trades in which the broker-dealer will attempt to sell shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
•
Purchase by a broker-dealer as principal and resale by the broker-dealer for its account; or
•
An exchange distribution in accordance with the rules of the applicable exchange; or
Page 24 of 69
•
If we are successful in our application to have our common stock listed on the Over-the-Counter Bulletin Board in settlement of short sales entered into after the date of this prospectus; or
•
If we are successful in our application to have our common stock listed on the Over-the-Counter Bulletin Board in broker-dealer transaction in which broker-dealers may agree with the selling stock holders to sell a specified number of such shares at a stipulated price per share; or
•
Through the writing or settlement of option or other hedging transactions, whether through an options exchange or otherwise; or
•
In a combination of such methods of sale; or
•
Any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the Securities Act of 1933, as amended, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser, in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with NASDR Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with NASDR IM-2440.
In connection with the sale of the common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of the common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus, as supplemented or amended to reflect such transaction.
The selling stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each Selling Stockholder has informed us that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the common stock. In no event shall any broker-dealer receive fees, commissions and markups which, in the aggregate, would exceed eight percent.
We are required to pay certain fees and expenses incurred by us incident to the registration of the shares. We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
Because selling stockholders may be deemed to be "underwriters" within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. Each selling stockholder has advised us that they have not entered into any written or oral agreements, understandings or arrangements with any underwriter or broker-dealer regarding the sale of the resale shares. There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the selling stockholders.
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We agreed to keep this prospectus effective until the earlier of (i) the date on which the shares may be resold by the selling stockholders without registration and without regard to any volume limitations by reason of Rule 144(e) under the Securities Act or any other rule of similar effect or (ii) all of the shares have been sold pursuant to the prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the Common Stock for a period of two business days prior to the commencement of the distribution. In addition, the selling stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the Common Stock by the selling stockholders or any other person. We will make copies of this prospectus available to the selling stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale.
LEGAL PROCEEDINGS
As of June 10, 2005 we have the following legal proceedings and legal settlements:
1. Cadence has a judgment against us for $98,000. The judgment was due to lack of payment by Probe to Cadence after Probe purchased the license to use its Alegro software program. Due to economic conditions after September 11 th the market for the use of this product disappeared and Probe was not able to resale the services. Consequently, Probe was not able to generate any revenues from reselling of the software and could not pay Cadence. On August 9 th 2004 we have entered into a payment agreement with the Cadence in which we pay them $2,500 a month until such time the debt is paid off and the balance currently due to Cadence under the agreement is $80,000.
2. IFC had a judgment against us for $144,403.00. The judgment resulted from our failure to pay IFC under the purchase agreement for a piece of X-Ray equipment. In September 2004 we entered into a settlement agreement whereby we have agreed to pay IFC $15,000 as an initial payment and $5,000 per month until settlement amount of $70,000.00 is paid in full. The balance due as of March 31, 2005 is $35,000.00.
3. Canon Financial has a judgment against us for $15000.00. The judgment was entered because Probe did not pay the lease payments due on a copy machine which was not properly maintained by Canon and was not functional most of the time. We have agreed to pay Canon $1000.00 per month until fully paid. Our balance as of March 31 st 2004 is $9,000.00
4. Pro-Source has filed a civil case against us for $35,000 for breach of contract. The claimed breach of contract is a result of our refusal to pay for their services they claimed rendered in 2003 and 2004. Were currently negotiating a settlement, however, if we are unable to negotiate a settlement we believe we will be successful on the merits of the case because of Pro-Source failure to provide the agreed to services.
5. We currently owe the Internal Revenue Service $140,000.00 for past tax liabilities which we are not currently able to pay in full. We have negotiated a settlement with IRS and have entered into a payment plan with them in which we pay IRS $2,500 per month.
While we are currently able to service any and all payment obligation to the creditors, if we are unable in the future to service any payments, anyone of the creditors may instigate foreclosure proceedings against us. If we are unable to satisfy our obligations, we could b forced into bankruptcy.
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We believe that there are no other claims or litigation pending, the outcome of which could have a material adverse effect on our financial condition or operating results. However, if litigation should arise and the Company was to receive an unfavorable ruling, there is a possibility that it would have a material adverse impact on our financial condition, results of operations, or liquidity of the period in which the ruling occurs, or future periods
DIRECTORS, EXECUTIVE OFFICERS, SIGNFICANT EMPLOYEES AND CONTROL PERSONS
The following table sets forth the name, age, positions, and offices or employments for the past five years as of May 31, 2004, of our executive officers and directors. Members of the board are elected and serve for one year terms or until their successors are elected and qualify. All of the officers serve at the pleasure of the Board of Directors of the Company.
NAME
AGE
POSITION
Dennis Benner
63
Chairman
Kambiz Mahdi
41
Chief Executive Officer, Director
Reza Zarif
48
Chief Operating Officer, Director
Barrett Evans
33
Director
Jeffrey Conrad
32
Director
BIOGRAPHIES OF OFFICERS AND DIRECTORS
Set forth below is a brief description of the background of our officers and directors based on information provided by them to us.
DENNIS BENNER has over 35 years of business experience in leadership positions in the information technology industry. His experience includes sales, marketing and general management of information technology services companies. He has had line management responsibility for acquisitions, integrating acquisitions, restructuring organizations, creating and rebuilding management teams, developing and implementing sales and marketing systems, developing and implementing sales compensation systems, creating new products and services, creating and managing strategic alliances and relocating major facilities. He has held leadership positions in large Fortune 500 companies including corporate CIO at Fluor Corporation, Division General Manager at TRW, Division VP of Sales and Marketing at Computer Sciences and Automatic Data Processing, Manager of Federal Government Marketing for Control Data, Marketing Manager in IBM) and a smaller, emerging company (Corporate Development at Autobytel, Inc.). Dennis has a BS in Business from the University of Kansas
KAMBIZ MAHDI is a co-founder and Chief Executive Officer and has been with the Company since its inception in 1993. Mr. Mahdi has direct responsibilities for sales and marketing, overseeing financial activities, and developing and guiding the Companys vision and cultural values. Prior to Probe, Mr. Mahdi was the Technical Sales Manager for six years with Future Electronics, a billion dollar electronics distributor. While at Future Electronics, Mr. Mahdi developed technical management leadership and management tools for their highest technology customers and applications. Mr. Mahdi has a BS degree in Electrical Engineering.
REZA ZARIF is a co-founder and has been with the Company as Chief Operating Officer since its inception in 1993. Mr. Zarif is responsible for all operational activities as well as developing and guiding the Company's vision and cultural values. Prior to Probe, Mr. Zarif was at Graphtec Incorporated of Japan for 7 years where he was responsible for transferring manufacturing and associated technologies from Japan to the United States. Mr. Zarif has a BA and MA in Cultural Anthropology and earned the status of "Summa Cum Laude" at the University of California, Irvine.
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BARRETT EVANS has been our director since June 9, 2004. Mr. Evans is eFund Capital Partner's Managing Partner. In 1990, Mr. Evans started his career with Cruttenden Roth, a regional emerging growth focused investment bank. At Cruttenden, Mr. Evans developed significant relationships with institutional investors. Additionally, Mr. Evans was engaged in all facets of investment banking from private debt and equity financing to Initial Public Offerings, retail brokerage and institutional trading, Mezzanine financing and bridge capital. Mr. Evans founded BRE Investments & Consulting, LLC. in 1996. BRE Investments & Consulting evolved into what is now eFund Capital Partners in 1999. At eFund Capital Partners, Mr. Evans has utilized his institutional contacts to help fund numerous start-up companies and has advised these companies on a wide range of issues including raising capital, securing management and overall business strategy. Mr. Evans received his Bachelor's degree from the University of California, Santa Barbara. He also serves as a Director for NeWave, Inc. and Xtreme Companies, Inc.
JEFFREY CONRAD has been our director since June 9, 2004. Mr. Conrad is a Venture Partner with eFund Capital Partners, LLC. Jeff worked as a contract attorney for the law firm of Gibson, Dunn and Crutcher, LLP until December 1999 when he joined eFund Capital Partners. Prior to that time he worked with Diana Perez, Attorney at Law, Kushner-Locke International and Universal Pictures. Jeff's primary focus has been on entertainment and corporate transactions. Jeff has also worked as a junior publicist for the public relations firm Levine Communications where his focus was strategic advertising and marketing., Jeff received his Juris Doctorate from Loyola Law School and is a member of the State Bar of California. Jeff received his Bachelor's degree from the University of California, Los Angeles.
EMPLOYMENT AGREEMENTS
Currently we do not have any of our executives or officers under employments contracts. However, Kambiz Mahdi, our Chief Executive Officer and Reza Zarif, our Chief Operating Officer, have orally agreed to accept $167,000 per annum as compensation for their services. We anticipate that in fourth quarter of 2005 we will have employment agreements in place with several of our key executives and officers.
BOARD OF DIRECTORS
We currently have five members of our Board of Directors, who are elected to annual terms and until their successors are elected and qualified. Executive officers are appointed by the Board of Directors on an annual basis and serve until their successors have been duly elected and qualified. There are no family relationships among any of our directors, officers or key employees.
DIRECTOR COMPENSATION
We currently reimburse Directors for travel expenses associated with their work for the company and have agreed to establish a compensation plan to be submitted for approval by the shareholders at our annual meeting in 2005. Until a plan is established and approved by the shareholders, Directors will not be compensated.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, to our knowledge, certain information concerning the beneficial ownership of our common stock as of June 10, 2005 by each stockholder known by us to be (i) the beneficial owner of more than 5% of the outstanding shares of common stock, (ii) each current director, (iii) each of the executive officers named in the Summary Compensation Table who were serving as executive officers at the end of the 2004 fiscal year and (iv) all of our directors and current executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to shares beneficially owned. Shares of Common Stock subject to options or warrants currently exercisable are deemed outstanding for computing the percentage ownership of the person holding such options or warrants, but are not deemed outstanding for computing percentage ownership of any other person.
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Name of Beneficial Owner |
Number of Shares Beneficially Owned |
Percentage of Ownership (1) |
Kambiz Mahdi (2) |
250,000 |
7% |
Reza Zarif (3) |
250,000 |
7% |
Dennis Benner (4) |
62,500 |
1% |
Barrett Evans (5) |
250,000 |
7% |
Jeffrey Conrad (6) |
250,000 |
7% |
eFund Capital Partners, LLC (7) |
250,000 |
7% |
Ashford Capital, LLC (8) |
250,000 |
7% |
Edward Lassiter (9) |
312,500 |
9% |
Global Capital Management, Inc. (10) |
375,000 |
11% |
Total |
1,750,000 |
52% |
Total of All officers and directors |
1,062,500 |
24% |
(1)
The number of shares of common stock outstanding as of June 10, 2005 is 3,328,125. The percentage of ownership does not reflect other classes of stock held by the individuals, such as Series A Convertible Preferred Stock and Series B Convertible Preferred Stock even thought such class may be registered pursuant to this prospectus.
(2)
Kambiz Mahdi is our Chief Executive Officer and a Director of ours. Mr. Mahdi has dispositive and voting power over his shares and claims beneficial ownership of them. He is all the rights pursuant to such ownership. Mr. Mahdi acquired his shares as a founder of Probe.
(3)
Reza Zarif is our Chief Operating Officer and a Director of ours. Mr. Zarif has dispositive and voting power over his shares and claims beneficial ownership of them. He is all the rights pursuant to such ownership. Mr. Zarif acquired his shares as a founder of Probe.
(4)
Dennis Benner is a Director of ours and acquired shares in our private placement memorandum dated June 9, 2004 as restated and amended on November 16, 2004 through The DW & JS Benner Family Trust. Mr. Benner has dispositive and voting power over the shares in The DW & JS Benner Family Trust and claims beneficial ownership of them.
(5)
Please see number (7) below.
(6)
Please see number (7) below.
(7)
The managing members of eFund Capital Partners, LLC are Barrett Evans and Jeffrey Conrad. Mr. Evans and Mr. Conrad jointly have authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Evans and Mr. Conrad may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Evans and Mr. Conrad do not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and they disclaim any beneficial ownership of such shares of common stock. eFund Capital Partners, LLC received their shares pursuant to an investment agreement with us in April of 2004. Mr. Evans and Mr. Conrad have both been directors of ours since May 2004.
(8)
The Managing Member of Ashford Capital, LLC is Frank Kavanaugh. Mr. Kavanaugh has authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Kavanaugh may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Kavanaugh does not have the right to receive dividends from or the proceeds from the sale of such
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common stock by the selling shareholder and disclaims any beneficial ownership of such shares of common stock. Ashford Capital, LLC received these shares pursuant to an assignment agreement with eFund Capital Partners, LLC. Ashford Capital, LLC and eFund Capital Partners, LLC have no affiliation. Mr. Kavanaugh was a director of ours from May 2004 until December 2004.
(9)
Edward Lassiter is a shareholder of ours and holds his shares in The Edward & Mildred Lassiter Restated Family Trust and The Edward & Mildred Lassiter Restated Family Trust dated April 14, 2000. Mr. Lassiter purchased the shares through our private placement memorandum dated June 9, 2004. Mr. Lassiter has dispositive and voting power over the shares.
(10)
Global Capital Management, Inc. is a Japanese private equity firm. The companys president is Ikuo Ito. Mr. Ito has authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Ito may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Ito does not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and disclaims any beneficial ownership of such shares of common stock. The company bought its shares through our private placement memorandum dated June 9, 2004. Mr. Ito also owns 25,000 shares of common stock personally which were also purchased through our private placement memorandum dated June 9, 2004
DESCRIPTION OF SECURITIES
COMMON STOCK
Our Articles of Incorporation authorize us to issue 200,000,000 shares of common stock, par value $0.001 per share. As of June 10, 2005 there were 3,328,125 shares of common stock issued and outstanding. All outstanding shares of common stock are, and the common stock to be issued in this offering will be, fully paid and non-assessable. Each share of our common stock has identical rights and privileges in every respect. The holders of our common stock are entitled to vote upon all matters submitted to a vote of our shareholders and are entitled to one vote for each share of common stock held. There are no cumulative voting rights.
The holders of our common stock are entitled to share equally in dividends and other distributions that our board of directors may declare from time to time out of funds legally available for that purpose, if any, after the satisfaction of any prior rights and preferences of any outstanding preferred stock. If we liquidate, dissolve or wind up, the holders of shares of common stock will be entitled to share ratably in the distribution of all of our assets remaining available for distribution after satisfaction of all our liabilities and our obligations to holders of our outstanding preferred stock.
PREFERRED STOCK
Our Articles of Incorporation authorize to issue 10,000,000 shares of preferred stock, no par value. We authorized 440 as Series A Convertible Preferred Stock and have authorized 20,000 shares of Series B Convertible Preferred Stock.
As of June 10, 2005, there were 440 shares of Convertible A Preferred Stock outstanding. Each share is convertible into 0.1% percent of the shares of our common stock outstanding at the date of conversion. The shares shall convert at the earlier of the election of the holder, or March 26, 2006. The holder of the Convertible A Preferred Stock, has the right to vote, with the holders of common stock, on any matter to which the common stock holders are entitled to vote, the number of shares of common stock into which the Convertible A Preferred Stock is convertible. If we are liquidated, distribute our assets, dissolve or wind-up, the holders of Convertible A Preferred Stock shall receive the greater of (i) $2,500 per share of Convertible A Preferred Stock they hold at the time of such Liquidation, or (ii) their pro rata share of the total value of our assets and funds to be distributed, assuming the Convertible A preferred stock is converted to common stock.
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As of June 10, 2005 there were 12,500 shares of Series B Convertible stock outstanding. Each share of Series B Stock shall be converted into a number of shares of Common Stock that is equal to each share being divided by the average of the 3 lowest intraday bids in the twenty (20) days prior to conversion multiplied by 100 (1 divided by x, multiplied by 100), or 125 shares per Series B, whichever is greater. The minimum conversion price which Series B shareholders shall be to convert their Series B shares to common stock shall be $0.10. The Series B Stock shall have voting rights and voting will be on an as converted basis, with class votes for the election of directors, any transaction in which control of the Company is transferred in which the per share price consideration received by Purchaser is less than three (3) times the Purchase Price, the sale of the Company of all or substantially all of its assets, liquidation or winding up of the Company and any amendment to the Companys By-Laws or Articles of Incorporation in a manner adverse to Series B Stock. In the event of any voluntary or involuntary liquidation, distribution of assets (other than the payment of dividends), dissolution or winding-up of the Company, Series B Stock shall have preferential rights to the Companys common stock (the Common Stock) whereby Series B Stock shall get two times (2x) return on its capital. Once Series B Stock has recouped its two times (2x) return on capital then Series B Stock shall participate, on a pro rata basis, based on the number of shares of the Companys common stock (the Common Stock) into which the Series B Stock are convertible at the time of the liquidation, distribution of assets, dissolution or winding-up.
Our board of directors has the authority to issue additional shares of preferred stock in one or more series, and fix for each series, the designation of, and number of shares to be included in, each such series. Our board of directors is also authorized to set the powers, privileges, preferences, and relative participating, optional or other rights, if any, of the shares of each such series and the qualifications, limitations or restrictions of the shares of each such series.
Unless our board of directors provides otherwise, the shares of all series of preferred stock will rank on parity with respect to the payment of dividends and to the distribution of assets upon liquidation. Any issuance by us of shares of our preferred stock may have the effect of delaying, deferring or preventing a change of our control or an unsolicited acquisition proposal. The issuance of preferred stock also could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of common stock.
INTEREST OF NAMED EXPERTS AND COUNSEL
No expert or counsel within the meaning of those terms under Item 504 of Regulation S-B will receive a direct or indirect interest in the small business issuer or was a promoter, underwriter, voting trustee, director, officer, or employee of Probe Manufacturing, Inc. Nor does any such expert have any contingent based agreement with us or any other interest in or connection to us.
The legality of our shares of common stock being offered hereby is being passed upon by Catherine Basinger, Esq. Ms. Basinger will not receive a direct or indirect interest in the small business issuer and has never been a promoter, underwriter, voting trustee, director, officer or employee of our company. Nor does Ms. Basinger have any contingent based agreement with us or any other interest in or connection to us.
The financial statements included in this prospectus have been audited by our independent auditors Jaspers & Hall, P.C., and have been included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. Jaspers & Hall, P.C. has no direct or indirect interest in us, nor were they a promoter or underwriter.
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DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Indemnification of Directors and Officers
ARTICLE VI of our Bylaws states that to the extent and in the manner permitted by the laws of the State of Nevada, and specifically as is permitted under the Nevada Revised Statutes pertaining to Corporations, the corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of the corporation, by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement.
We have been advised that in the opinion of the Securities and Exchange Commission, insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. In the event a claim for indemnification against such liabilities (other than our payment of expenses incurred or paid by our director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
DESCRIPTION OF BUSINESS
We incorporated in the State of California on July 7, 1995 as Probe Manufacturing Industries, Inc. On April 21, 2005 we reincorporated from California to Nevada whereby we changed our name to Probe Manufacturing, Inc. From our formation until present we have been a provider of advanced electronics manufacturing services, or EMS, to original equipment manufacturers, or OEMs, primarily in the Industrial, Automotive, Semiconductor, Medical, Communication, and Military segments. Our strategy is to provide customers with Integrated, collaborative end-to-end Engineering, Supply-Chain management and Manufacturing services. We take responsibility for engineering, supply chain management, new product introduction, manufacturing, and logistics management, with the goal of delivering a complete packaged product. Once a complete packaged product is delivered, we also provide after-sale services such as repair and warranty services.
Substantially all of our manufacturing services are provided on a turnkey basis, whereby we purchase customer-specified components from our suppliers, assemble the components on printed circuit boards and perform post-production testing upon customers request. However, we can assume supply chain responsibility at any time during the product life cycle. We offer our customers flexible, "just-in-time" delivery programs allowing product shipments to be closely coordinated with our customers' inventory requirements. Additionally, we complete the assembly of our customers' products at our facilities by integrating printed circuit board assemblies into other elements of our customers' products upon customers request.
Our marketing strategy is to convince potential customers to engage us as an collaborative engineering, supply chain management, and manufacturing partner, rather than to simply change EMS Provider. To do this, we perform a full process audit on prospective customers operations to ensure our objectives are aligned and make recommendations for integration of our processes to their technology, quality and delivery process
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to achieve the highest positive outcome and the lowest total cost. This process has been an extremely effective way to demonstrate the ways we can improve the targeted customers business performance.
Our end-to-end services enable us to manage our customers products throughout their life cycles. These services include:
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Collaborative product design and engineering, including initial product design and development and new product introduction;
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Low to medium volume manufacturing of Printed Circuit Board Assembly;
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Box Build, final system assembly and test;
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Direct order fulfillment and logistics services; and
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After-sale product service and support.
INDUSTRY BACKGROUND
EMS companies are the principal beneficiaries of the increased use of outsourced manufacturing services by the electronics and other industries. Outsourced manufacturing refers to OEMs use of EMS companies, rather than internal manufacturing capabilities, to manufacture their products. Historically, EMS companies only manufactured components or sub assemblies. As the EMS industry has evolved, OEMs have increased their reliance on EMS companies for additional, more complex manufacturing services, including collaborative product design services, supply chain management and full box manufacturing. Some EMS companies now often participate in designing, manufacturing and testing of complete systems and manage the entire supply chains of their OEM customers. Industry leading EMS companies offer end-to-end services, including product design and engineering, volume manufacturing, final system assembly and testing, direct order fulfillment, after-sale product service and support and global supply chain management. Increased outsourced manufacturing by OEMs is expected to continue because it allows OEMs to:
Reduce Operating Costs and Capital Investment . In the current economic environment, OEMs are under significant pressure to reduce manufacturing costs and capital expenditures. EMS companies can provide OEMs with flexible, cost-efficient manufacturing services. In addition, as OEM products have become more technologically advanced, the manufacturing and system test processes have become increasingly automated and complex, requiring significant capital investments. EMS companies enable OEMs to access technologically advanced manufacturing and test equipment and facilities, without additional capital expenditures.
Focus on Core Competencies . The electronics industry is highly competitive and subject to rapid technological change. As a result, OEMs increasingly are focusing their resources on activities and technologies in which they expect to add the greatest value. By offering comprehensive manufacturing services and supply chain management, EMS companies enable OEMs to focus on their core competencies, including next generation product design and development as well as marketing and sales.
Access Leading Design and Engineering Capabilities. The design and engineering of electronics products has become more complex and sophisticated and in an effort to become more competitive, OEMs are increasingly relying on EMS companies to provide product design and engineering support services. EMS companies design and engineering services can provide OEMs with improvements in the performance, cost and time required to bring products to market. EMS companies are providing more sophisticated design and engineering services to OEMs, including the design and engineering of complete products following an OEMs development of a product concept.
Improve Supply Chain Management and Purchasing Power . OEMs face challenges in planning, procuring and managing their inventories efficiently due to fluctuations in customer demand, product design changes, short product life cycles and component price fluctuations. EMS companies employ sophisticated production management systems to manage their procurement and manufacturing processes in an efficient and cost-effective manner so that, where possible, components arrive on a just-in-time, as-and-when needed basis. EMS companies are significant purchasers of electronic components and other raw materials, and can
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capitalize on the economies of scale associated with their relationships with suppliers to negotiate price discounts, obtain components and other raw materials that are in short supply, and return excess components. EMS companies expertise in supply chain management and their relationships with suppliers across the supply chain enable them to help OEMs reduce their cost of goods sold and inventory exposure.
Access Global Manufacturing Services . OEMs seek to reduce their manufacturing costs by having EMS companies manufacture their products in the lowest cost locations that are appropriate for their products and end customers. OEMs also are increasingly requiring particular products to be manufactured simultaneously
in multiple locations, often near end users, to bring products to market more quickly, reduce shipping and logistics costs and meet local product content requirements. Global EMS companies are able to satisfy these requirements by capitalizing on their geographically dispersed manufacturing facilities, including those in lower cost regions.
Accelerate Time to Market . OEMs face increasingly short product life cycles due to increased competition and rapid technological changes. As a result, OEMs need to reduce the time required to bring their products to market. OEMs can bring a product to market faster by using EMS companies expertise in new product introduction, including manufacturing design, engineering support and prototype production. OEMs can more quickly achieve volume production of their products by capitalizing on EMS companies manufacturing expertise and global presence and infrastructure.
OUR PRODUCTS AND SERVICES
Services We Provide
Engineering . Our approach is to coordinate and integrate our design, prototype and other engineering capabilities. Through this approach, we provide a broad range of engineering services and, in some cases, dedicated production lines for prototypes. These services strengthen our relationships with manufacturing customers and attract new customers requiring specialized engineering services.
To assist customers with initial design, we offer computer assisted engineering, computer assisted design, engineering for manufacturability, circuit board layout and test development. We also coordinate industrial design and tooling for product manufacturing. After product design, we offer quick-turn prototyping, which means a rapid process of prototyping. During this process, we assist with the transition to production. By participating in product design and prototype development, we can reduce manufacturing costs and accelerate the cycle from product introduction to production.
Supply Chain Management . Supply chain management consists of the planning, purchasing, expediting and warehousing of components and materials. Our inventory management and volume procurement capabilities contribute to cost reductions and reduce total cycle time.
Assembly and Manufacturing . Our manufacturing operations include printed circuit board assembly, subsystem assembly, box build and systems integration, the process of integrating sub-systems and downloading software before producing a fully configured product. We purchase the printed circuit boards used in our assembly operations from third parties. We employ various inventory management techniques, such as just-in-time, ship-to-stock and auto-replenish, which are programs designed to ensure timely, convenient and efficient delivery of assembled products to our customers. As OEMs seek to provide greater functionality in smaller products, they increasingly require more sophisticated manufacturing technologies and processes. Our investment in advanced manufacturing equipment and our experience in innovative packaging and interconnect technologies enable us to offer a variety of advanced manufacturing solutions.
Testing. We offer computer-aided, in-circuit testing of assembled printed circuit boards, which contributes significantly to our ability to deliver high-quality products on a consistent basis. We work with our customers to develop product-specific test strategies. Our test capabilities include manufacturing defect analysis, in-circuit tests to test the circuitry of the board and functional tests to confirm that the board or assembly operates in accordance with its final design and manufacturing specifications. We either custom design test
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equipment and software ourselves or use test equipment and software provided by our customers. In addition, we provide environmental stress tests of assemblies of boards or systems.
Final System Assembly and Test . We provide final system assembly and test in which assemblies and modules are combined to form complete, finished products. We integrate printed circuit board assemblies manufactured by us with enclosures, electronic and mechanical sub-assemblies, cables and memory modules. We assemble systems to a specific customer order and we also build to standard configurations. The complex, finished products that we produce typically require extensive test protocols. Our test services include in-circuit testing, functional and environmental tests. We also test products for conformity to applicable industry, product integrity and regulatory standards. Our test engineering expertise enables us to design functional test processes that assess critical performance elements, including hardware, software and reliability. By incorporating rigorous test processes into the manufacturing process, we can help to assure customers that their products will function as designed. We provide direct order fulfillment services shipping completed systems directly to the end consumer.
Distribution. We offer our customers flexible, just-in-time delivery programs allowing product shipments to be closely coordinated with customers' inventory requirements. We have the ability to ship products directly into customers' distribution channels or directly to the end-user. We believe that this service can provide our customers with a more comprehensive solution and enable them to be more responsive to market demands.
Direct Order Fulfillment . We provide direct order fulfillment for certain of our OEM customers. Direct order fulfillment involves receiving customer orders, configuring products to quickly fill the orders and delivering the products either to the OEM, a distribution channel or directly to the end customer. We manage our direct order fulfillment processes using a core set of common systems and processes that receive order information from the customer and provide comprehensive supply chain management, including procurement and production planning. These systems and processes enable us to process orders for multiple system configurations, and varying production quantities, including single units. Our direct order fulfillment services include build-to-order (BTO) and configure-to-order (CTO) capabilities. BTO involves building a system having the particular configuration ordered by the OEM customer. CTO involves configuring systems to an end customer's order. The end customer typically places this order by choosing from a variety of possible system configurations and options. We are capable of meeting a 48 to 72 hour turn-around-time for BTO and CTO by using advanced manufacturing processes. We support our direct order fulfillment services with logistics that include delivery of parts and assemblies to the final assembly site, distribution and shipment of finished systems, and processing of customer returns.
STRATEGIC RELATIONSHIPS AND ALLIANCES
Customers
Probes customer partnership philosophy has resulted in a high quality list of loyal customers including some of the leading OEMs in Southern California.
Probes current list of customers by their industry and what we help them produce is a follows:
Aerospace |
Designs, manufactures and supports high-quality, innovative solutions for use in the commercial, military or general aviation aerospace markets. |
Consumer |
Leading manufacturer of digital audio conversion systems for studio professionals and home recording enthusiasts. |
Industrial |
Provides automated fluid dispensing systems. |
Medical |
Our customer provides integrated, high-value products and services for genomics, proteomics, drug discovery & development, oncology, and immune function. |
Military |
Specializes in the design, manufacture and installation of target scoring systems for the military and government services around the world. |
Semiconductor |
World leader in the design and production of high performance gas and liquid delivery process modules and critical instruments that are integral to semiconductor manufacturing. |
Semiconductor |
Evaluation Moules. |
Industrial |
Automated, Point-of-Use dispensing technology. |
Industrial |
Manufactures a full range of mechanized welding equipment for all arc and other high energy processes. |
Military |
Designs, manufactures and supports state-of-the-art military defense electronics products and systems serving a variety of operational mission and laboratory test, simulation and training applications. |
Medical |
Provides portable ultrasound and electro-stimulation therapy equipment. |
Semiconductor |
semiconductor company focused on enabling multi-element smart antennas (including MIMO) with RFICs. |
Industrial/ Instrumentation |
Technology leader in lasers and the technology leader in precision photonics instrumentation, motion control, wafer handling and assembly automation. |
Computers |
Full Range of printer solutions for OEM and POS applications. |
Automotive |
Products & Services for Hydrogen, Natural Gas & Propane Applications. |
Instrumentation |
Providing Flow Instrumentation. |
Industrial |
Lighted pushbutton switches and ruggedized keyboards and keypads for both military and commercial applications. |
Instrumentation |
Standard and custom instrumentation for dynamic measurements. |
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SALES AND MARKETING
Organization
Sales and marketing efforts are divided into segments as follows:
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Industrial products
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Military products
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Automotive products
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Communication products
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Medical products
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Semiconductor products
Our divisional and executive management teams are an integral part of our sales and marketing teams. We generally enter into supply arrangements with our customers. These arrangements, similar to purchase orders, generally govern the conduct of business between our customer and ourselves relating to, among other things, the manufacture of products which in many cases were previously produced by the customer itself. Such arrangements generally identify the specific products to be manufactured, quality and production requirements, product pricing and materials management. There can be no assurance that at any time these arrangements will remain in effect or be renewed.
Our key customer accounts are managed by a dedicated customer focused team, including a program manager directly responsible for account management. The program manager coordinates activities across divisions to effectively satisfy customer requirements and have direct access to our executive management to quickly address customer concerns. In addition, our executive management, including our chief executive officer and chief operating officer are heavily involved in customer relations and devote significant attention to broadening existing, and developing new, customer relationships.
Sales Approach
Our selling strategy is to convince potential customers to engage Probe as an engineering and supply chain partner, rather than to simply change EMS suppliers. To do this, we perform a full process audit on prospective customers operations and make recommendations for technology, quality, delivery and cost improvements. This process has been extremely effective way to demonstrate the ways we can improve the targeted customers performance.
In each business segment, there is a dedicated program manager responsible for the maintenance of existing accounts and for development of new accounts. The use of engineers for both sales and technical support tasks allows us to keep a technical advantage over its competition and to spot opportunities for improvement in the field.
SUPPLIERS
We currently procure our materials from a limited number of distributors, thus if a shortage of various components were to occur we would be forced to seek other distributors and our cost of goods could impact our revenues. Our main suppliers of materials include:
Arrow Electronics, Inc . is one of the world's largest distributors of electronic components and computer products and a leading provider of services to the electronics industry, with 2004 sales of $10.7 billion. Headquartered in Melville, New York, Arrow serves as a supply channel partner for more than 600 suppliers and 175,000 original equipment manufacturers, contract manufacturers, and value-added resellers through more than 200 sales facilities and 23 distribution centers in 40 countries and territories.
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Future Electronics is the worlds largest distributor specializing in passive, interconnect, and electromechanical components used in commercial and military applications, and they hold the top market share for most of our product lines. Headquartered in Fort Worth, Texas, TTI has 47 locations around the globe: 33 in North America, 11 in Europe and, most recently, 3 in Asia. From these facilities, they provide local service to customers around the world.
COMPETITION
The electronic manufacturing services industry is large and diverse, and is serviced by many companies, including several that have achieved significant market share. competitive and includes hundreds of companies, several of which have achieved substantial market share. We compete with numerous domestic and foreign EMS firms, including Benchmark Electronics, Inc.; Celestica Inc; Flextronics International Ltd.; Jabil Circuit, Inc.; Pemstar, Inc.; Plexus Corp.; Sanmina-SCI Corporation; CTS Electronics; Solectron Corporation; SMS Technologies, Inc.; Express Manufacturing, Inc. and othersBecause of our markets size and diversity, we do not typically compete for contracts with a discreet group of competitors. We compete with different companies depending on the type of service or geographic area. Certain of our competitors may have greater manufacturing, financial, research and development and marketing resources. We also face competition from current and prospective customers that evaluate our capabilities against the merits of manufacturing products internally.
COMPETITIVE POSITIONING
We believe our primary competitive advantages are our design, manufacturing, testing and supply chain management capabilities. We offer our customers flexible manufacturing solutions through out the life cycle of their products. These solutions provide accelerated time-to-market, time-to-volume production, and reduced production costs. As a result of working closely with our customers and responding promptly to their needs, we have become an integral part of their operations. In addition, our workforce is led by a management team that founded the Company and has an average of 22 years of industry experience.
PERSONNEL AND OPERATIONS SUMMARY
Facilities
Probe currently has one manufacturing facility that is located in Costa Mesa, California. The facility is 35,000 square feet and approximately 28,000 square feet are dedicated to the manufacturing operations and approximately 6,000 square feet are dedicated to the sales and marketing and manufacturing support, and administration operations. We lease our 35,000 sq/ft facility for $19,790.40 from Kambiz Mahdi, Reza Zarif and Pacific Sail Bay Trust. We believe the rental rate to be at or below market rate for similar properties in our area. Kambiz Mahdi is our Chief Executive Officer and a Director of ours. Reza Zarif is our Chief Operating Officer and a Director of ours. Pacific Sail Bay Trust is managed by Frank Kavanaugh. Frank Kavanaugh is also the managing member of Ashford Capital, LLC, and Apt Leadership, LLC and the managing partner of Ashford Transition Fund, L.P. Furthermore, Mr. Kavanaugh was a director of ours from July 2004 to December 2004.
Personnel
We presently employ approximately 75 employees, including production team, program management team, material management team, engineering, sales team and quality staff and administrative and management personnel. We have never experienced work stoppages, and is not a party to any collective bargaining agreement. See Management
REGULATORY RESTRICTIONS ON OUR BUSINESS
Our operations, and the operations of businesses that we may acquire, are subject to certain foreign, federal, state and local regulatory requirements relating to environmental, waste management, and health and safety
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matters. We believe we operate in substantial compliance with all applicable requirements. However, material costs and liabilities may arise from these requirements or from new, modified or more stringent requirements. In addition, our past, current and future operations, and those of businesses we acquire, may give rise to claims of exposure by employees or the public or to other claims or liabilities relating to environmental, waste management or health and safety concerns.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
Cautionary Statement Concerning Forward-Looking Statements
This Prospectus contains forward-looking statements, including, without limitation, statements concerning possible or assumed future results of operations and those preceded by, followed by or that include the words "believes," "could," "expects," "intends" "anticipates," or similar expressions. Our actual results could differ materially from these anticipated in the forward-looking statements for many reasons including the risks described in the Risk Factor section and elsewhere in this report. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made, and our future results, levels of activity, performance or achievements may not meet these expectations. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law.
Overview
For the year ended December 31, 2004, we incurred a net loss of ( $918,000.00) Thousand compared to net losses of ($1,200,000.00) in 2003 and ($1,500,000.00) in 2002. From 2001 to 2002, we experienced a severe contraction in our business where annual net sales declined from $17.9 million in 2001 to $6.8 million in 2002. Our net sales stabilized and stayed flat from 2002 through 2004. However, we responded to the economic downturn by streamlining our processes and down sizing our operations from 225 employees in 2001 to 65 employees in 2004. The down sizing combined with other restructuring and cost containment initiatives resulted in a lower cost structure from 2002 through 2004. In the 4 th quarter 2004 we realized one time inventory revaluation adjustment of ($155,000.00). We also realized one time warranty cost adjustment of ($50,000.00).
In 2004, we experienced a strong net sale in 1 st quarter due to increased sales from a major customer, one of our customers. In the 1 st quarter 2004, the major customer accounted for 60% of our net sales at $1,400,000.00. In the second quarter, net sales from a major customer dropped by about $800,000.00 which explains the decreased net sales for 2 nd quarter 2004. In the 3 rd and 4 th quarter 2004 net sales to the major customer dropped by another $500,000.00 which explains the additional reduction in our net sales for the third and the 4 th quarter of 2004. Since 3 rd and 4 th quarter 2004 we started a sales campaign to add new customers. Consequently, we have added some new customers and our net sales have grown by 33% in 1 st quarter of 2005 compared to 4 th quarter of 2004. We continue to evaluate sales forecasts in relation to our operations; we are anticipating additional growth in the 2 nd , 3 rd and 4 th quarters of 2005. The anticipated growth is due to existing customers forecast and new sales activity pipeline. While we are constantly adjusting our operations to new sales forecast, we are anticipating profitability as our net sales grow to meet our fixed expenses.
Information About Our Business
Probe delivers complete manufacturing services and solutions to support the entire life cycle of complex products in the industrial, automotive, semiconductor, medical, communication, and military segments of the electronic manufacturing Industry. Our manufacturing services include printed circuit board assembly, engineering services, Supply-chain management services, quick-turn manufacturing services and full systems integration, testing, and after-market repair and warranty services. We believe our success in the market place
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is a direct result of our ability to provide unique solutions tailored to match each of our customers specific requirements, while meeting the highest quality standards in the industry.
We are engaged in the Electronics Manufacturing Services or EMS industry. Accordingly, our largest single expenditure is for the purchase of electronic components. Our expertise in electronics manufacturing techniques is critical to our ability to provide competitive and quality services. However, in order to fully comprehend our business, it is also important to understand that our customers are engaged in semiconductor capital equipment, aerospace and defense, medical products, and many other industries. While our ability to compete with other companies in the EMS industry is important to our long-term success, short-term fluctuations in the demand for our manufacturing services are primarily affected by the economic conditions in the market sectors served by our customers. Since 2002, we have diversified our customer base to reduce the impact of fluctuation in demand in any given sector. However, 75% of our revenue comes from 3 major customers in 2 different industries. Our quarterly net sales can be extremely volatile when these sectors are experiencing either rapid growth or contraction.
As an EMS company, our customers are original equipment manufacturers, or OEMs, that have designed their own products. Our customers request proposals that include key terms such as quality, delivery, and material and labor cost which is the price to purchase the materials and perform the manufacturing services to make one or more components or assemblies. Generally, the component or assembly that we manufacture is delivered to the customer where it is then integrated into their final product. We price new business with our customers by obtaining raw material quotes from our suppliers and then estimating the amount of labor and overhead that will be required to make the products.
Before we begin a customer relationship, we typically enter into arrangements that are intended to protect us in case a customer cancels an order after we purchase the raw materials to fill that order. In these circumstances, the customer is generally required to purchase the materials or reimburse us if we incur a loss from liquidating the raw materials.
The electronics manufacturing services industry is extremely dynamic and our customers make frequent changes to their orders. The magnitude and frequency of these changes make it difficult to predict revenues beyond the next quarter, and even relatively short-term forecasts may prove inaccurate depending on changes in economic, political, and military factors, as well as unexpected customer requests to delay shipments near the end of our fiscal quarters. These changes in customer orders also cause substantial difficulties in managing inventories, which often leads to excess inventories and the need to recognize losses on inventories. However, from time to time, we may also have difficulties obtaining certain electronic components that are in short supply. In addition, our inventories consist of over 21,000 different parts and some of these parts have limited alternative uses or markets beyond the products that we manufacture for our customers. When we liquidate excess materials through an inventory broker or auction, we often realize less than the original cost of the materials, and in some cases we determine that there is no market for the excess materials.
The most common reasons we incur losses related to inventories are due to purchasing more materials than are necessary to meet a customers requirements or failing to act promptly to minimize losses once the customer communicates a cancellation. Occasionally it is not clear what action caused an inventory loss and there is a shared responsibility whereby our customers agree to negotiate a settlement with us. Accordingly, management continually evaluates inventory on-hand, forecasted demand, contractual protections, and net realizable values in order to determine whether an adjustment to the carrying amount of inventory is necessary. When the relationship with a customer terminates, we tend to be more vulnerable to inventory losses because the customer may be reluctant to accept responsibility for the remaining inventory if a product is at the end of its life cycle. We can also incur inventory losses if a customer becomes insolvent and the materials do not have alternative uses or markets into which we can sell them.
The Company
Probe Manufacturing Industries was incorporated on July 7, 1995. On April 21, 2005 we reincorporated from California to Nevada whereby we changed our name to Probe Manufacturing, Inc. We are a leading provider of advanced electronics manufacturing services, or EMS, to original equipment manufacturers, or OEMs,
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primarily in the industrial and instrumentation segments. This would include globally integrated end to end manufacturing solutions ranging from engineering designs, cable assembly, enclosures, complete system integration, printed circuit board assembly and test, as well as global order fulfillment.
Going Concern
The financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. The Company incurred a net loss of ($918,590.00) for the year ended December 31, 2004 and has a working capital deficit of approximately ($564,310.00) at December 31, 2004. The ability of the Company to operate a going concern is dependent upon its ability (1) to obtain sufficient debt and/or equity capital and/or (2) cut operating costs such that the Company can operate until such time that it resumes generating positive cash flow from operations.
Management is taking the following steps to address this situation: (a) reducing operating costs, thus reducing the break even revenue level; (b) negotiating to replace the line of credit with an agreement more attractive terms and expand borrowing capacity.
The future success of the Company is likely dependent on its ability to attain additional capital to develop its products and ultimately, upon its ability to attain future profitable operations. There can be no assurance that the Company will be successful in obtaining such financing, or that it will attain positive cash flow from operations. The successful outcome of these or any future activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute their business plans or generate positive operating results. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
Cash and Cash Equivalents
The Company maintains the majority of its cash accounts at a commercial bank. The total cash balance is insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000 per commercial bank. As of December 31, 2004, the Company had zero amounts in excess of the FDIC insured limits. For purposes of the statement of cash flows, the Company considers all cash and highly liquid investments with initial maturities of three months or less to be cash equivalents.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates may be materially different from actual financial results. Significant estimates include the recoverability of long-lived assets and the collectability of accounts receivable.
Accounts Receivable
The Company grants credit to customers within the United States of America and does not require collateral. The Companys ability to collect receivables is affected by economic fluctuations in the geographic areas and industries served by the Company.
Reserves for un-collectable amounts are provided, based on past experience and a specific analysis of the accounts, which management believes are sufficient. Although the Company expects to collect amounts due, actual collections may differ from the estimated amounts. As of December 31, 2004, the Company has a reserve of $97,569.
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Six (6) customers accounted for approximately 88% of accounts receivable at December 31, 2004 and 92% of the net sales for the year ended December 31, 2004. The Companys trade accounts primarily represent unsecured receivables. Historically, the Companys bad debt write-offs related to these trade accounts have been insignificant.
Property and Equipment
Property and equipment, including renewals and betterments, are stated at cost. Assets held under capital leases are recorded at lease inception at the lower of the present value of the minimum lease payments or the fair market value of the related assets. The Company follows the practice of capitalizing property and equipment purchased over $1,250. The cost of ordinary maintenance and repairs is charged to operations while renewals and replacements are capitalized. Depreciation and amortization are computed on the straight-line method over the following estimated useful lives of the related assets, which range from three to twenty years, and are as follows:
Furniture and Fixtures |
3 to 7 years |
Equipment |
7 to 10 years |
Vehicles |
5 years |
Leasehold improvements |
20 years |
Long Lived Assets
The Companys management assesses the recoverability of its long-lived assets by determining whether the depreciation and amortization of long lived assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of long lived asset impairment, if any, is measured based on fair value and is charged to operations in the period in which long lived assets impairment is determined by management. At December 31, 2004, the Companys management believes there is no impairment of its long-lived assets. There can be no assurance however, that market conditions will not change or demand for the Companys services will continue, which could result in impairment of long-lived assets in the future.
Revenue Recognition
Revenue from products and services are recognized at the time goods are shipped or services are provided to the customer, with an appropriate provision for returns and allowances.
Fair Value of Financial Instruments
The carrying amount of accounts payable and accrued expenses are considered to be representative of their respective fair values because of the short-term nature of these financial instruments.
Other Comprehensive Income
The Company has no material components of other comprehensive income (loss) and accordingly, net loss is equal to comprehensive loss in all periods.
Federal Income Taxes
The Company accounts for income taxes under SFAS No. 109, which requires the asset and liability approach to accounting for income taxes. Under this method, deferred tax assets and liabilities are measured based on differences between financial reporting and tax bases of assets and liabilities measured using enacted tax rates
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and laws that are expected to be in effect when the differences are expected to reverse. During the year ended December 31, 2004, the Company changed from a S corporation to a C corporation.
Segment Information
The Corporation operates primarily in a single operating segment, providing printed circuit board assemblies.
Stock Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) allows an entity to elect to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), but requires pro forma disclosures of net loss and loss per share as if the fair-valued-based method of accounting had been applied. In accordance with SFAS 123, the Company elected to continue to measure compensation cost under APB No. 25, and comply with the pro forma disclosure requirements.
The Company has adopted for footnote disclosure purposes SFAS No. 123, which requires that companies disclose the cost of stock-based employee compensation at the grant date based on the value of the award (the fair value method) and disclose this cost over the service period. The value of the stock-based award is determined using a pricing model whereby compensation cost is the excess of the fair value of the award as determined by the model at grant date or other measurement date over the amount an employee must pay to acquire the stock.
Transactions in which goods or services are received from non-employees for the issuance of equity securities or stock-based awards are accounted for based on the fair value of the consideration received. Stock amounts of $5,500 were valued for services during the year ended December 31, 2004.
Inventory
Inventories at December 31, 2004 by major classification were comprised of the following:
Parts |
$885,369 |
Work in progress |
143,662 |
Finished goods |
11,078 |
Total |
1,040,109 |
Less reserve for potentially excess or obsolete inventories |
(347,294) |
Inventory- net |
$629,815 |
Property And Equipment
Property and equipment were comprised of the following at December 31, 2004:
Furniture and Fixtures |
$ 253,512 |
Equipment |
2,944,742 |
Vehicles |
44,708 |
Leasehold improvements |
3,406,116 |
Total |
3,406,116 |
Less accumulated depreciation and amortization |
(2,272,886) |
Total |
$678,230 |
Line Of Credit
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The Company had a revolving line of credit (the Line) with a financial institution, which allowed them to borrow a maximum of $1,100,000 based on 80% of eligible accounts receivable, as defined. Borrowings under the Line, bared interest at prime (4.25% plus 10.5% per annum) are secured by substantially all of the Companys assets and are personally guaranteed by the two founders Kambiz Mahdi and Reza Zarif. In March 2004 the Line was restructured into a term loan in the amount of $500,000. Terms of the Note were 1) Monthly payments of $5,000 interest at the rate of 4% plus the prime rate by the agent, 2) Secured by Accounts Receivable, and 3)with a discount of $200,000 for timely payment of the first $300,000. In December 2004 the note was restructured and discounted by $200,000. An amortizing Line of Credit which allows them to borrow a maximum of $140,000 based on 80% of Accounts Receivables, with monthly payments of $5,000.00 plus interest at the rate of 4% plus the prime lending rate. As of December 31, 2004, the Company had borrowed $140,063.
Capital Lease Obligations
The Company is a lessee of certain equipment under capital leases that expire on various dates through April 2008. Terms of the lease call for monthly payments ranging from $314 to $9,163, at implicit rates of interest ranging from 8.6% to 25.0% per annum (the incremental borrowing rate). The assets and liabilities under capital leases are recorded at lease inception at the lower of the present value of the minimum lease payments or the fair market value of the related assets. The assets are depreciated over their estimated useful lives.
Minimum future lease payments under current lease agreements at December 31, 2004 are as follows:
The following is an analysis of the equipment under capital leases as of December 31, 2004,
Which is included in property and equipment:
Equipment |
$1,797,958 |
Less accumulated depreciation |
(1,448,230) |
Net |
$349,728 |
Commitments And Contingencies
Operating Rental Leases
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The Company leases its office and warehouse facilities in Costa Mesa, California from stockholders under an operating lease that requires minimum monthly payments of $19,790.40. The lease requires the Company to pay property taxes and maintenance, and expires in May 2022. For the year ended December 31, 2004, building rent expense was $242,244.
Future minimum rental payments under the non-cancelable related party operating lease are as follows:
2005 |
$237,484.80 |
2006 |
$237,484.80 |
2007 |
$237,484.80 |
2008 |
$237,484.80 |
2009 |
$237,484.80 |
Remaining |
2,948,769.60 |
$4,136,193.60 |
Litigation
As of June 10, 2005 we have the following legal proceedings and legal settlements:
1. Cadence has a judgment against us for $98,000. The judgment was due to lack of payment by Probe to Cadence after Probe purchased the license to use their Alegro software program. Due to economic conditions after September 11 th the market for the use of this product disappeared and Probe was not able to resale the services. Consequently, Probe was not able to generate any revenues from reselling of the software and could not pay Cadence. On August 9 th 2004 we have entered into a payment agreement with Cadence in which we pay them $2,500 a month until such time the debt is paid off and the balance currently due to Cadence under the agreement is $58,500 as of June 10, 2005.
2. IFC had a judgment against us for $144,403.00. The judgment resulted from our failure to pay IFC under the purchase agreement for a piece of X-Ray equipment. In September 2004 we entered into a settlement agreement whereby we have agreed to pay IFC $15,000 as an initial payment and $5,000 per month until settlement amount of $70,000.00 is paid in full. The balance due as of June 10, 2005 is $15,000.00.
3. Canon Financial has a judgment against us for $15,000.00. The judgment was entered because Probe did not pay the lease payments due on a copy machine which was not properly maintained by Canon and was not functional most of the time. We have agreed to pay Canon $1000.00 per month until fully paid. Our balance as of June 10, 2005 is $8,000.00.
4. Pro-Source has filed a civil case against us for $35,000 for breach of contract. The claimed breach of contract is a result of our refusal to pay for their services they claimed rendered in 2003 and 2004. Were currently negotiating a settlement, however, if we are unable to negotiate a settlement we believe we will be successful on the merits of the case because of Pro-Source failure to provide the agreed to services.
5. We currently owe the Internal Revenue Service $140,000.00 for past tax liabilities which we are not currently able to pay in full. We have negotiated a settlement with IRS and have entered into a payment plan with them in which we pay the IRS $2,500 per month.
While we are currently able to service any and all payment obligations to the creditors, if we are unable in the future to service any payments, anyone of the creditors may instigate foreclosure proceedings against us. If we are unable to satisfy our obligations, we could be forced into bankruptcy.
We believe that there are no other claims or litigation pending, the outcome of which could have a material adverse effect on our financial condition or operating results. However, if litigation should arise and the Company was to receive an unfavorable ruling, there is a possibility that it would have a material adverse
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impact on our financial condition, results of operations, or liquidity of the period in which the ruling occurs, or future periods.
The Company may be involved from time to time in various claims, lawsuits, disputes with third parties, action involving allegations or discrimination or breach of contract actions incidental in the normal operations of the business. The Company is currently not involved in any such litigation which management believes could have a material adverse effect on its financial position
Notes Payable
Note payable, secured by deed of trust, 14%interest, due in January 2005 to wife of shareholder of the Company |
$50,000 |
Note payable, 12% interest, due in January 2005 to Efund Capital |
25,000 |
Note payable, secured by deed of trust, 12% interest, due on September 2005 to Ashford Capital Transition Fund |
456,000 |
Total notes payable |
$531,000 |
Accrued interest on related party notes payable, included in
accrued expenses as of December 31, 2004, was $5,000.
Retirement Plan
The Company has a 401(k) profit sharing plan (the Plan) in which all eligible employees, as defined, can elect to participate. Employees can contribute up to 15 percent of their earning, up to allowable IRS limits, each year. Employer contributions to the Plan are at the discretion of the Company and vest over a six-year period. During the year ended December 31, 2004, the Company did not make any contributions to the Plan.
Capital Stock Transactions
During the year ended December 31, 2004, the Companys Board of Directors and shareholders approved the following capital stock transactions:
1. An amendment to the Articles of Incorporation of the Company increasing the number of authorized common shares to 100,000,000 and designating no par value per share.
2. An amendment to the Articles of Incorporation of the Company authorizing 440 shares of Preferred A stock and designating no par value.
3. An amendment to the Articles of Incorporation of the Company authorizing 20,000 share of Preferred B stock and designating no par value per share.
From June 16, 2004 to March 31, 2005 the Company sold 234,587 common stock units pursuant to a Private Placement Memorandum at $8.00 per unit to 53 individuals generating net proceeds of $1,876,700.00. Each Unit entitled the holder to purchase ten (10) shares of common stock. In addition, each unit entitled the holder to purchase a total of 10 shares of Probe Common Stock through the exercise of Warrants as follows: Class A Warrants, 5 shares at a price of $2.00 per share for a period of 12 months from November 16, 2004, which shall be November 15, 2005; and, Class B Warrants, 5 shares at a price of $3.00 per share for a period of 18 months from November 16, 2004, which shall be May 15, 2006.
The sales set forth above were undertaken under Rule 506 of Regulation D under the Securities Act of 1933, as amended ("Act"), by the fact that:
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•
the sales were made to a sophisticated or accredited investors, as defined in Rule 502;
•
the Company gave each purchaser the opportunity to ask questions and receive answers concerning the terms and conditions of the offering and to obtain any additional information which the Company possessed or could acquire without unreasonable effort or expense that is necessary to verify the accuracy of information furnished;
•
at a reasonable time prior to the sale of securities, the Company advised each purchaser of the limitations on resale in the manner contained in Rule 502(d)2;
•
neither the Company nor any person acting on its behalf sold the securities by any form of general solicitation or general advertising; and
•
the Company exercised reasonable care to assure that each purchaser of the securities is not an underwriter within the meaning of Section 2(11) of the Securities Act of 1933 in compliance with Rule 502(d).
In May of 2004 we entered into an agreement with eFund Capital Partners, LLC whereby eFund invested $200,000 and agreed to provide strategic assistance to us. In exchange, we gave eFund Capital partners, 2,000,000 shares of common stock (of which 1,750,000 shares were cancelled and returned to the company) and 200 shares of Series A Convertible Preferred Stock. The managing members of eFund Capital Partners, LLC are Barrett Evans and Jeffrey Conrad. Mr. Evans and Mr. Conrad jointly have authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Evans and Mr. Conrad may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Evans and Mr. Conrad do not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and they disclaim any beneficial ownership of such shares of common stock. Mr. Evans and Mr. Conrad have both been directors of ours since May 2004.
In September of 2004 we issued the Ashford Transition Fund, L.P 40 shares of our Series A Convertible Preferred Stock as consideration for a loan they gave the Company in the amount of $456,000.00. Frank Kavanaugh is the managing partner of Ashford Transition Fund, L.P.
In December of 2004 we issued eFund Capital Partners, LLC 3,500 shares of Series B Convertible Preferred Stock pursuant to a Series B Convertible Preferred Stock Purchase Agreement. The company received $350,000 as consideration. The managing members of eFund Capital Partners, LLC are Barrett Evans and Jeffrey Conrad. Mr. Evans and Mr. Conrad jointly have authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Evans and Mr. Conrad may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Evans and Mr. Conrad do not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and they disclaim any beneficial ownership of such shares of common stock. Mr. Evans and Mr. Conrad have both been directors of ours since May 2004.
In December of 2004 we issued Kambiz Mahdi 450,000 shares of Series B Convertible Preferred Stock pursuant to a Series B Convertible Preferred Stock Purchase Agreement. The company received $450,000 as consideration. Kambiz Mahdi is our Chief Executive Officer and a Director of ours. Mr. Mahdi has dispositive and voting power over his shares and claims beneficial ownership of them. He is all the rights pursuant to such ownership.
In December of 2004 we issued Reza Zarif 450,000 shares of Series B Convertible Preferred Stock pursuant to a Series B Convertible Preferred Stock Purchase Agreement. The company received $450,000 as consideration. Reza Zarif is our Chief Operating Officer and a Director of ours. Mr. Zarif has dispositive and voting power over his shares and claims beneficial ownership of them. He is all the rights pursuant to such ownership.
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In December of 2004 we issued Anthony Reed 6,875 shares of common stock pursuant to a Consulting Agreement.
In December of 2004 we issued Russell Miller 100,000 shares of common stock pursuant to an employee stock grant.
In April 21, 2005 we re-domiciled in the State of Nevada whereby our authorized capital structure is as follows:
1.
200,000,000 shares of Common Stock par value $.001.
2.
440 shares of Series A Convertible Preferred Stock, no par value.
3.
20,000 shares of Series B Convertible Preferred Stock, no par value.
New Accounting Pronouncements
In February 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS No. 150). The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The Company has not issued any financial instruments with such characteristics.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN No. 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN No. 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities , which was issued in January 2003. Companies are required to apply FIN No. 46R to variable interests in variable interest entities (VIEs) created after December 31, 2003. For variable interest in VIEs created before January 1, 2004, the Interpretation is applied beginning January 1, 2005. For any Vies that must be consolidated under FIN No. 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interests of the VIE initially are measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN No. 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. The Company does not have any interest in any VIE.
In December 2004, the FASB issued SFAS No 123(R)(revised 2004), Share-Based Payment which amends FASB Statement No. 123 and will be effective for public companies for interim or annual periods after June 15, 2005. The new standard will require entities to expense employee stock options and other share-based payments. The new standard may be adopted in one of three ways the modified prospective transition method, a variation of the modified prospective transition method or the modified retrospective transition method. The Company is evaluation how it will adopt the standard and evaluating the effect that the adoption of SFAS 123(R) will have on our financial position and results of operations.
In November 2004, the FASB issued SFAS No 151,
Inventory Costs, an amendment of ARB No. 43, Chapter
. This statement amends the guidance in ARB No. 43, Chapter 4,
Inventory Pricing
, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling cost, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that
.
under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of so abnormal. In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the prospectively and are effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier application permitted for inventory costs incurred during fiscal years beginning after the date this Statement was issued. The adoption of SFGAS No. 151 is not expected to have a material impact on the Companys financial position and results of operations.
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In December 2004, the FASB issued SFAS No.153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Non-monetary Transactions , is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for non-monetary exchanges of similar productive assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for non-monetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the Companys financial position and results of operations.
Overview of Statement of Operations
Net sales are recognized when title is transferred to our customers, which generally occurs upon shipment from our facilities. Net sales from design, engineering and other services are generally recognized as the services are performed. Our sales are recorded net of customer discounts and credits taken or expected to be taken.
Cost of goods sold includes materials, labor, and overhead expenses incurred in the manufacture of our products. Cost of goods sold also includes charges and credits related to manufacturing operations for lease exit costs, impairment of long-lived assets, and obsolete and slow moving inventories. Many factors affect our gross profit, including capacity utilization, product mix, and production volume.
Selling, general, and administrative expenses primarily include the salaries for executive, finance, accounting, IT personnel, program management and human resources personnel; salaries and commissions paid to our internal sales force and external sales representatives and marketing costs; insurance expenses; depreciation expense related to assets not used in manufacturing activities; bad debt charges and recoveries; professional fees for auditing and legal assistance; and general corporate expenses.
Impairment of long-lived assets reflects charges related to property, equipment and intangible assets not used in manufacturing activities; impairment of manufacturing assets is included in cost of goods sold.
Interest expense relates to our credit facilities and other debt obligations. Interest expense also includes the amortization of debt issuance costs.
Results of Operations
Our results of operations are affected by several factors, primarily the level and timing of customer orders (especially orders from our major customers). The level and timing of orders placed by a customer vary due to the customers attempts to balance its inventory, changes in the customers manufacturing strategy, and variation in demand for its products due to, among other things, product life cycles, competitive conditions, and general economic conditions. In the past, changes in orders from customers have had a significant effect on our quarterly results of operations. Year Ended December 31, 2003 Compared to Year Ended December 31, 2004
Net Sales. Net sales decreased from $6,400,000.00 for the year ended 2003 to $6,200,000.00 for the year ended December 31, 2004. The decrease in 2004 net sales was primarily attributable to a decrease in sales for customers in the telecommunications industry which was $2,000,000 in 2003 and $562,000 2004. Although we experienced this significant decrease in net sales from our telecommunication customers we experienced in net from the semiconductor and industrial sectors which increased from 3,300,000 in 2003 to 5,175,000 in 2004..
Gross Profit (Loss). Our gross profit decreased by $154,000.00 from 1,370,000.00 for 2003 to 1,220,000 for 2004. Similarly, gross profit as a percentage of net sales decreased from 21.2% for 2003 19.7% for 2004. The decrease in gross profit for 2004 is primarily attributable to the decrease in net sales while fixed manufacturing costs remained relatively unchanged.
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In 2004, the company incurred a net loss of ($918,000) an improvement of $322,000 over the 2003 loss of ($1,240,000.00). This was primarily due to a gain on restructuring of certain notes payable and capital leases, totaling 275 thousand. Also certain pieces of manufacturing equipment are nearing the end there useful lives, resulting in a decrease in depreciation expense of $58,000.00 from 2003 of $299,000 to 2004 of $241,000
Selling, General, and Administrative Expenses . Selling, general, and administrative expenses (SG & A) decreased $112,000.00 or 5.4%, from $2,078,000.00 for 2003 to $1,965,000 for 2004. The decrease was a direct result of a decrease in net sales.
Interest Expense. Interest expense decreased by approximately $95,000.00 primarily due to the pay-down of outstanding debt.
Contractual Obligations . The following table summarizes our contractual obligations as of December 31, 2004:
1. Cadence has a judgment against us for $98,000. The judgment was due to lack of payment by Probe to Cadence after Probe purchased the license to use their Alegro software program. Due to economic conditions after September 11 th the market for the use of this product disappeared and Probe was not able to resale the services. Consequently, Probe was not able to generate any revenues from reselling of the software and could not pay Cadence. On August 9 th 2004 we have entered into a payment agreement with the Cadence in which we pay them $2,500 a month until such time the debt is paid off and the balance currently due as of 5-25-2005 $58,500.00.
2. IFC has a judgment against us for $144,403.00. The judgment resulted from our failure to pay IFC under the purchase agreement for a piece of X-Ray equipment. In September 2004 we entered into a settlement agreement whereby we have agreed to pay IFC $15,000 as an initial payment and $5,000 per month until settlement amount of $70,000.00 is paid in full. The balance due as of 5-25-2005 is $15,000.00.
3. Canon Financial has a judgment against us for $15,000.00. The judgment was entered because Probe did not pay the lease payments due on a copy machine which was not properly maintained by Canon and was not functional most of the time. We have agreed to pay Canon $1,000.00 per month until fully paid. Our balance as of 5-25-05 is $8,000.00.
4. Pro-Source has filed a civil case against us for $35,000 for breach of contract. The claimed breach of contract is a result of our refusal to pay for their services they claimed rendered in 2003 and 2004. We're currently negotiating a settlement, however, if we are unable to negotiate a settlement we believe we will be successful on the merits of the case because of Pro-Sources failure to provide the agreed to services.
5. We currently owe the Internal Revenue Service $140,000.00 for past tax liabilities which we are not currently able to pay in full. We have negotiated a settlement with IRS and have entered into a payment plan with them in which we pay IRS $2,500 per month.
6. The Company had a revolving line of credit (the Line) with a financial institution, which allowed them to borrow a maximum of $1,100,000 based on 80% of eligible accounts receivable, as defined. Borrowings under the Line, bared interest at prime (4.25% plus 10.5% per annum) are secured by substantially all of the Companys assets and are personally guaranteed by the two founders Kambiz Mahdi and Reza Zarif. In March 2004 the Line was restructured into a term loan in the amount of $500,000. Terms of the Note were 1) Monthly payments of $5,000 interest at the rate of 4% plus the prime rate by the agent, 2) Secured by Accounts Receivable, and 3)with a discount of $200,000 for timely payment of the first $300,000. In December 2004 the note was restructured and discounted by $200,000. An amortizing Line of Credit which allows them to borrow a maximum of $140,000 based on 80% of Accounts Receivables, with monthly payments of $5,000.00 plus interest at the rate of 4% plus the prime lending rate. As of December 31, 2004, the Company had borrowed $140,063.
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7. On January 1, 2005 we entered into a credit line agreement with eFund Capital Partners, LLC for $150,000.00. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $75,000.00.
8. On January 1, 2005 we entered into a credit line agreement with Ashford Capital, LLC for $150,000.00. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $100,000.
9. On March 8, 2005 we entered into a credit line agreement with Benner Exemption Trust for $200,000.00. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accursed and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $100,000. Dennis Benner is a Director of ours and controls the Benner Exemption Trust.
10. On March 22, 2005 we entered into a credit line agreement with Edward Lassiter for $100,000.00. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $100,000. Edward Lassiter is a shareholder of ours and holds his shares in The Edward & Mildred Lassiter Restated Family Trust and The Edward & Mildred Lassiter Restated Family Trust dated April 14, 2000. Mr. Lassiter currently holds 312,500 shares of our common stock which is 9% of the outstanding shares of common stock.
11. On January 1, 2005 we entered into a credit line agreement with Rufina V. Paniego for $75,000.00. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 3007, when the entire outstanding balance plus any accured and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the
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previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $75,000. Rufina Paniego is the wife of Reza Zarif who is our founder, COO and director.
12. We lease our 35,000 sq/ft facility for $19,790.40 per month from Kambiz Mahdi, Reza Zarif and Pacific Sail Bay Trust. Our lease obligation is until 2022. We believe the rental rate to be at or below market rate for similar properties in our area. Kambiz Mahdi is our Chief Executive Officer and a Director of ours. Reza Zarif is our Chief Operating Officer and a Director of ours. Pacific Sail Bay Trust is managed by Frank Kavanaugh. Frank Kavanaugh is also the managing member of Ashford Capital, LLC, and Apt Leadership, LLC and the managing partner of Ashford Transition Fund, L.P. Furthermore, Mr. Kavanaugh was a director of ours from July 2004 to December 2004.
13. On September 29, 2004 we entered into a forbearance agreement for a capital lease for $1,014,528.00 CIT Financial, Inc. with monthly obligations of $5,000.00 for the first five months an $7,500.00.
Capital Resources . Our working capital at December 31, 2004 totaled ($564,000) compared to ($2,892,000) at December 31, 2003. This increase in working capital is attributable pay down of accounts payable by $990,000, reduction in current notes payable by $1,000,000, and a reduction in current lease obligation of $338,000. This was accomplished through the infusion of capital.
We currently receive capital under six different revolving lines of credit from eFund Capital Partners, LLC, Ashford Capital, LLC, Edward Lassiter, Bill Duncan, Rufina Paniego and the Benner Exemption Trust that allows us to draw up $725,000 and anticipate we will continue to be able to have access to the money through the revolving lines of credit. As of March 25, 2005 we have drawn on $500,000 of our revolving credit lines and only $225,000 available to draw upon.
Impact of Recently Issued Accounting Standards
Share-Based Payment. In December 2004, the Financial Accounting Standards Board issued Statement No. 123R, Share-Based Payment. This statement is a revision to Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement No. 123R establishes standards of accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. This standard generally requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service (usually the vesting period) in exchange for the award. The grant-date fair value of employee stock options and similar instruments will be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Accordingly, we will adopt Statement No. 123R in the third quarter of 2005.
We intend to use the modified-prospective transition method when we adopt Statement No. 123R. Under the modified-prospective method, we will be required to recognize compensation cost for share-based awards to employees based on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied, as well as compensation cost for awards that were granted prior to, but not vested as of the date of adoption. Prior periods will not be restated and the pro forma disclosures will continue to be required for periods prior to the adoption date. Our board of directors is considering taking action to accelerate vesting of all options for which the current exercise price exceeds fair market value, which would eliminate any incremental future expense related to options that are currently outstanding. If the board of directors does not take this action, we believe the impact of adopting this new standard on our future results of operations would require approximately $1.1 million of incremental unvested compensation cost
Page 51 of 69
that will be recognized as an expense in our Consolidated Statements of Operations. Of this amount, we expect that approximately $0.5 million would be recognized in the second half of 2005 and $0.6 million after 2005. In addition to these amounts, we will also recognize additional compensation cost related to new stock options and other share-based payments that are granted in the future.
Inflation
We do not believe that inflation has had or is likely to have any significant impact on our revenues.
Subsidiaries
None.
DESCRIPTION OF PROPERTY
Probe currently has one manufacturing facility that is located in Costa Mesa, California. The facility is 35,000 square feet and approximately 28,000 square feet are dedicated to the manufacturing operations and approximately 6,000 square feet are dedicated to the sales and marketing and manufacturing support, and administration operations. We lease our 35,000 sq/ft facility for $19,790.40 per month from Kambiz Mahdi, Reza Zarif and Pacific Sail Bay Trust. Our lease obligation is until 2022. We believe the rental rate to be at or below market rate for similar properties in our area. Kambiz Mahdi is our Chief Executive Officer and a Director of ours. Reza Zarif is our Chief Operating Officer and a Director of ours. Pacific Sail Bay Trust is managed by Frank Kavanaugh. Frank Kavanaugh is also the managing member of Ashford Capital, LLC, and Apt Leadership, LLC and the managing partner of Ashford Transition Fund, L.P. Furthermore, Mr. Kavanaugh was a director of ours from July 2004 to December 2004.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We lease our 35,000 sq/ft facility for $19,790.40 from Kambiz Mahdi, Reza Zarif and Pacific Sail Bay Trust. We believe the rental rate to be at or below market rate for similar properties in our area. Kambiz Mahdi is our Chief Executive Officer and a Director of ours. Reza Zarif is our Chief Operating Officer and a Director of ours. Pacific Sail Bay Trust is managed by Frank Kavanaugh. Frank Kavanaugh is also the managing member of Ashford Capital, LLC, and Apt Leadership, LLC and the managing partner of Ashford Transition Fund, L.P. Furthermore, Mr. Kavanaugh was a director of ours from July 2004 to December 2004.
Jeffrey Conrad provides legal services for us and receives a monthly retainer of $2,500 and is one of our directors. Jeffrey Conrad is also a managing member of eFund Capital Partners, LLC. Mr. Conrad jointly has authority regarding the portfolio management decisions with respect to the shares of common stock owned by eFund Capital Partners, LLC. Mr. Conrad may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Conrad does not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and they disclaim any beneficial ownership of such shares of common stock. eFund Capital Partners, LLC received their shares pursuant to an investment agreement with us in April of 2004.
In May of 2004 we entered into an agreement with eFund Capital Partners, LLC whereby eFund invested $200,000 and agreed to provide strategic assistance to us. In exchange, we gave eFund Capital Partners, 2,000,000 shares of common stock and 200 shares of Series A Convertible Preferred Stock. The managing members of eFund Capital Partners, LLC are Barrett Evans and Jeffrey Conrad. Mr. Evans and Mr. Conrad jointly have authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Evans and Mr. Conrad may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Evans and Mr. Conrad do not have the right to receive dividends from or the proceeds from the sale of such
Page 52 of 69
common stock by the selling shareholder and they disclaim any beneficial ownership of such shares of common stock. Mr. Evans and Mr. Conrad have both been directors of ours since May 2004.
In May of 2004 the company issued 100 shares of Series A Preferred Stock to Kambiz Mahdi pursuant to a Series A Convertible Preferred Stock Agreement.
In May of 2004 the company issued 100 shares of Series A Preferred Stock to Reza Zarif pursuant to a Series A Convertible Preferred Stock Agreement.
In July 2004 eFund Capital Partners, LLC assigned 1,000,000, shares of common stock and 33 shares of Series A Convertible Preferred Stock to Ashford Capital, LLC. The Managing Member of Ashford Capital, LLC is Frank Kavanaugh. Mr. Kavanaugh has authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Kavanaugh may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Kavanaugh does not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and disclaims any beneficial ownership of such shares of common stock. Ashford Capital, LLC received there shares pursuant to an assignment agreement with eFund Capital Partners, LLC. Ashford Capital, LLC and eFund Capital Partners, LLC have no affiliation. Mr. Kavanaugh was a director of ours from May 2004 until December 2004.
On July 1, 2004, we entered into a promissory note with Rufina V. Paniego for $50,000.00. This is an interest only note. There are no scheduled principal payments due other than on January 8, 2005, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 14% per annum. The note is secured by deed of trust. Rufina Paniego is the wife of Reza Zarif who is our founder, COO and director.
In July of 2004 eFund Capital Partners, LLC assigned 67 shares of Series A Convertible Preferred Stock to Apt Leadership, LLC as consideration for Apt Leadership, LLCs assistance in helping restructuring our company. The Managing Member of Apt Leadership, LLC is Frank Kavanaugh. Mr. Kavanaugh has authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Kavanaugh may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Kavanaugh does not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and disclaims any beneficial ownership of such shares of common stock. Apt Leadership, LLC and eFund Capital Partners, LLC have no affiliation. Mr. Kavanaugh was a director of ours from May 2004 until December 2004.
In September of 2004 we issued the Ashford Transition Fund, L.P 40 shares of our Series A Convertible Preferred Stock as consideration for a loan they gave the Company in the amount of $456,000.00. Frank Kavanaugh is the managing partner of Ashford Transition Fund, L.P.
In September of 2004 eFund Capital Partners, LLC assigned 30 shares of Series A Convertible Preferred Stock to Dennis Benner. Dennis Benner is a Director of ours and acquired shares in our private placement memorandum dated June 9, 2004 as restated and amended on November 16, 2004 through The DW & JS Benner Family Trust. Mr. Benner has dispositive and voting power over the shares in The DW & JS Benner Family Trust and claims beneficial ownership of them. Mr. Benner and eFund Capital Partners, LLC have no affiliation.
On October 12, 2004, we entered into a promissory note with eFund Capital Partners, LLC for $25,000.00. This is an interest only note. There are no scheduled principal payments due other than on January 8, 2005, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 12% per annum.
Page 53 of 69
In December of 2004 we issued eFund Capital Partners, LLC 3,500 shares of Series B Convertible Preferred Stock pursuant to a Series B Convertible Preferred Stock Purchase Agreement. The company received $350,000 as consideration. The managing members of eFund Capital Partners, LLC are Barrett Evans and Jeffrey Conrad. Mr. Evans and Mr. Conrad jointly have authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Evans and Mr. Conrad may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Evans and Mr. Conrad do not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and they disclaim any beneficial ownership of such shares of common stock. Mr. Evans and Mr. Conrad have both been directors of ours since May 2004.
In December of 2004 we issued Kambiz Mahdi 4,500 shares of Series B Convertible Preferred Stock pursuant to a Series B Convertible Preferred Stock Purchase Agreement. The company received $450,000 as consideration. Kambiz Mahdi is our Chief Executive Officer and a Director of ours. Mr. Mahdi has dispositive and voting power over his shares and claims beneficial ownership of them. He is all the rights pursuant to such ownership.
On October 12, 2004, we entered into a promissory note with eFund Capital Partners, LLC for $25,000.00. This is an interest only note. There are no scheduled principal payments due other than on January 8, 2005, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 12% per annum.
In December of 2004 we issued Reza Zarif 4,500 shares of Series B Convertible Preferred Stock pursuant to a Series B Convertible Preferred Stock Purchase Agreement. The company received $450,000 as consideration. Reza Zarif is our Chief Operating Officer and a Director of ours. Mr. Zarif has dispositive and voting power over his shares and claims beneficial ownership of them. He is all the rights pursuant to such ownership.
On December 31, 2004, Ashford Capital, LLC, eFund Capital Parnters, LLC each returned 750,000 shares of common stock to the company for cancellation and Kambiz Mahdi and Reza Zarif each returned 1,750,000 shares to the company for cancellation.
On January 1, 2005, we entered into a credit line agreement with eFund Capital Partners, LLC for $150,000.00. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $75,000.00.
On January 1, 200 5
4
we entered into a credit line agreement with Ashford Capital, LLC for $150,000.00. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $100,000.
Page 54 of 69
On January 1, 200 5
4
we entered into a credit line agreement with Rufina V. Paniego for $75,000.00. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 3007, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $75,000. Rufina Paniego is the wife of Reza Zarif who is our founder, COO and director.
On March 8, 2005 we entered into a credit line agreement with Benner Exemption Trust for $200,000.00. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accursed and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $100,000. Dennis Benner is a Director of ours and controls the Benner Exemption Trust.
On March 22, 2005 we entered into a credit line agreement with Edward Lassiter for $100,000.00. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $100,000. Edward Lassiter is a shareholder of ours and holds his shares in The Edward & Mildred Lassiter Restated Family Trust and The Edward & Mildred Lassiter Restated Family Trust dated April 14, 2000. Mr. Lassiter currently holds 312,500 shares of our common stock which is 9% of the outstanding shares of common stock.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is currently no public market for our common stock, and a public market may never develop. While we will seed to obtain a market maker to apply for the inclusion of our common stock on the Over-the-Counter- Bulletin Board we may not be successful in our efforts, and owners of our common stock may not have a market in which to sell the shares. Even if the common stock were quoted in a market, there may never be substantial activity in such market and if there is substantial activity, such activity may not be maintained, and no prediction can be made as to what prices may prevail in market.
SHAREHOLDERS
As of June 10, 2005, there were approximately 57 holders of record of our common stock.
Page 55 of 69
DIVIDEND POLICY
We have never declared a cash dividend on our common stock and our Board of Directors does not anticipate that we will pay cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend upon our financial condition, operating results, capital requirements, restrictions contained in our agreements and other factors which our board of directors deems relevant.
EXECUTIVE COMPENSATION
Currently we do not have any of our executives or officers under employments contracts. However, Kambiz Mahdi, our Chief Executive Officer and Reza Zarif, our Chief Operating Officer, have orally agreed to accept $167,000 per annum as compensation for his services. We anticipate that in fourth quarter of 2005 we will have employment agreements in place with several of our key executives and officers.
Page 56 of 69
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration statement on Form SB-2 under the Securities Act of 1933 for the shares of common stock in the offering, of which this prospectus is a part. This prospectus does not contain all of the information in the registration statement and the exhibits and schedules that were filed with the registration statement. For further information we refer you to the registration statement and the exhibits and schedules that were filed with the registration statement.
Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and we refer you to the full text of the contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules that were filed with the registration statement may be inspected without charge at the Public Reference Room maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the Securities and Exchange Commission upon payment of the prescribed fee. Information regarding the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains a web site that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC. The address of the site is www.sec.gov.
Page 57 of 69
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Board of Directors
Probe Manufacturing Industries, Inc.
Costa Mesa, California
We have audited the accompanying balance sheet of Probe Manufacturing, Inc. as of December 31, 2004, and the related statements of operations, stockholders deficit and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Probe Manufacturing Industries, Inc., as of December 31, 2004, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The financial statements for the year ended December 31, 2003, were audited by other accountants, whose report dated September 30, 2004 on those statements included an explanatory paragraph describing conditions that raised substantial doubt about the Companys ability to continue as a going concern..
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Companys recurring losses from operations and its difficulties in generating sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern. Managements plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Jaspers + Hall, PC
Denver, Colorado
May 25, 2005
F-1
PROBE MANUFACTURING INC.
BALANCE SHEET
For Period ending December 31, 2004 and 2003
F-2
Total Stockholders' Deficit |
(1,012,438) |
(2,628,836) |
|||
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT |
$ 1,982,940 |
$ 2,417,516 |
The accompanying notes are an integral part of these financial statements.
F-3
PROBE MANUFACTURING INC.
INCOME STATEMENT
For Period ending December 31, 2004 and 2003
2004 |
2003 |
|||
|
||||
SALES |
$6,204,957 |
$ 6,455,728 |
||
COST OF GOODS SOLD |
4,988,538 |
5,085,672 |
||
GROSS PROFIT |
1,216,419 |
1,370,056 |
||
|
||||
GENERAL AND ADMINISTRATIVE |
1,964,325 |
2,078,109 |
||
NET LOSS FROM OPERATIONS |
(747,906) |
(708,053) |
||
OTHER INCOME/(EXPENSES): |
||||
Other income |
275,228 |
- |
||
Interest expense |
(445,112) |
(535,908) |
||
NET LOSS BEFORE INCOME TAXES |
(917,790) |
(1,243,961) |
||
INCOME TAXES |
(800) |
(800) |
||
NET LOSS |
$ (918,590) |
$(1,244,761) |
||
|
|
|||
|
|
|||
Per Share Information: |
||||
Weighted average number |
||||
of common shares outstanding |
226,785 |
10,000 |
||
Net Loss per common share |
$ (4.05) |
$ (124.48) |
The accompanying notes are an integral part of these financial statements.
F-4
PROBE MANUFACTURING INC.
STATEMENT OF SHAREHOLDERS EQUITY
For Period ending December 31, 2004 and 2003
Preferred Stock A |
Preferred Stock B |
Common Stock |
Paid-In |
to Related |
Accumulated |
Deficit |
||||||||||||||
|
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Capital |
Parties |
(Deficit) |
Totals |
||||||||||
Balance, December 31, 2002 |
- |
- |
- |
- |
10,000 |
10 |
1,308,528 |
(130,166) |
(2,576,681) |
(1,398,309) |
||||||||||
Advances to related parties |
- |
- |
- |
- |
- |
- |
- |
130,166 |
- |
130,166 |
||||||||||
Distributions |
- |
- |
- |
- |
- |
- |
(115,932) |
- |
- |
(115,932) |
||||||||||
Net loss |
- |
- |
- |
- |
- |
- |
- |
- |
(1,244,761) |
(1,244,761) |
||||||||||
Balance, December 31, 2003 |
- |
|
- |
- |
|
- |
10,000 |
|
10 |
|
1,192,596 |
- |
|
(3,821,442) |
|
(2,628,836) |
||||
|
||||||||||||||||||||
Stock issued in lieu of debt |
- |
- |
- |
- |
564,000 |
564 |
563,436 |
- |
- |
564,000 |
||||||||||
Stock issued for cash |
- |
- |
- |
- |
176,000 |
176 |
90,312 |
- |
- |
90,488 |
||||||||||
Common shares converted to preferred |
200 |
200,000 |
- |
- |
- |
- |
(200,000) |
- |
- |
- |
||||||||||
Shares issued for cash |
- |
- |
- |
- |
1,506,250 |
1,506 |
1,203,494 |
- |
- |
1,205,000 |
||||||||||
Shares issued for cash |
- |
- |
- |
- |
250,000 |
250 |
549,750 |
- |
- |
550,000 |
||||||||||
Note converted to preferred shares |
200 |
200,000 |
- |
- |
- |
- |
(200,000) |
- |
- |
- |
||||||||||
Shares issued for services |
- |
- |
- |
- |
106,875 |
107 |
85,393 |
- |
- |
85,500 |
||||||||||
Common shares converted to preferred |
- |
- |
900 |
900,000 |
- |
- |
(900,000) |
- |
- |
- |
||||||||||
Common shares converted to preferred |
- |
- |
350 |
350,000 |
- |
- |
(350,000) |
- |
- |
- |
||||||||||
Shares issued for cash |
40 |
40,000 |
- |
- |
- |
- |
- |
- |
- |
40,000 |
||||||||||
Net loss |
- |
- |
- |
- |
- |
- |
- |
- |
(918,590) |
(918,590) |
||||||||||
Balance, December 31, 2004 |
440 |
|
$ 440,000 |
1,250 |
|
$1,250,000 |
2,613,125 |
|
$ 2,613 |
|
$2,034,981 |
$ - |
|
$ (4,740,032) |
|
$ (1,012,438) |
The accompanying notes are an integral part of these financial statements.
F-5
PROBE MANUFACTURING INC.
STATEMENT OF CASH FLOWS
For Period ending December 31, 2004 and 2003
2004 |
2003 |
||||
Cash Flows from Operating Activities: |
|||||
Net Loss |
$ (918,590) |
$(1,244,761) |
|||
Adjustments to reconcile net loss to net cash |
|||||
used in operating activities: |
|||||
Depreciation and amortization |
241,086 |
299,691 |
|||
Net bad debt recoveries |
- |
182,690 |
|||
Debt forgiveness |
(275,228) |
- |
|||
Stock issued for services |
85,500 |
- |
|||
Stock issued for debt |
564,183 |
- |
|||
Changes in assets and liabilities: |
|||||
(Increase) decrease in accounts receivable |
632,121 |
27,455 |
|||
(Increase) decrease in inventory |
(329,221) |
(118,386) |
|||
(Increase) decrease in prepaid expenses |
(60,060) |
- |
|||
(Increase) decrease in deposits |
4,997 |
23,722 |
|||
(Decrease) increase in accounts payable |
(990,904) |
(78,931) |
|||
Other (Decrease) increase in accrued expenses |
(156,046) |
602,323 |
|||
Net Cash Used In Operating Activities |
(1,202,162) |
(306,197) |
|||
Cash Flows from Investing Activities |
|||||
Purchase of property and equipment |
(13,945) |
(63,637) |
|||
Advances from related parties |
- |
130,166 |
|||
Cash Flows Used In Investing Activities |
(13,945) |
66,529 |
|||
Cash Flows from Financing Activities |
|||||
Bank overdraft |
(51,235) |
151,802 |
|||
Borrowings under line of credit, net |
(1,028,990) |
169,083 |
|||
Distributions |
- |
(115,932) |
|||
Prinicipal payments on capital lease obligations |
(79,572) |
(91,344) |
|||
Proceeds from sale of stock |
1,885,306 |
- |
|||
Proceeds from notes payable |
531,000 |
- |
|||
Cash Flows Provided By Financing Activities |
1,256,509 |
113,609 |
|||
Net (Decrease) Increase in Cash and Cash Equivalents |
40,402 |
(126,059) |
|||
Cash and Cash Equivalents at Beginning of Period |
- |
126,059 |
|||
Cash and Cash Equivalents at End of Period |
$ 40,402 |
$ - |
|||
Supplemental Information: |
|||||
Interest Paid |
$ 120,975 |
$ 276,256 |
|||
Income Taxes Paid |
$ 800 |
$ 800 |
The accompanying notes are an integral part of these financial statements.
F-6
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
Notes 1- GENERAL
The Company
Probe Manufacturing Industries, Inc. was incorporated on July 7, 1995 . On April 21, 2005, the Company was redomiciled from California to Nevada whereby, it changed its name to Probe Manufacturing, Inc. Probe Manufacturing , Inc. (the Company or Probe) is a leading provider of advanced electronics manufacturing services, or EMS, to original equipment manufacturers, or OEMs, primarily in the industrial and instrumentation, communication, semiconductor, automotive, medical, and military segments. This would include globally integrated end to end manufacturing solutions ranging from engineering printed circuit card assembly, cable assembly, enclosures, complete system integration and test, as well as global order fulfillment.
Going Concern
The financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. The Company incurred a net loss of $918,590 for the year ended December 31, 2004 and has a working capital deficit of approximately $564,310 at December 31, 2004. The ability of the Company to operate a going concern is dependent upon its ability (1) to obtain sufficient debt and/or equity capital and/or (2) cut operating costs such that the Company can operate until such time that it resumes generating positive cash flow from operations.
Management is taking following steps to address this situation: (a) reducing operating costs, thus reducing the break even revenue level; (b) negotiating to replace the line of credits with an agreement more attractive terms and expand borrowing capacity.
The future success of the Company is likely dependent on its ability to attain additional capital to support growth and ultimately, upon its ability to attain future profitable operations. There can be no assurance that the Company will be successful in obtaining such financing, or that it will attain positive cash flow from operations. The successful outcome of these or any future activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute their business plans or generate positive operating results. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company maintains the majority of its cash accounts at a commercial bank. The total cash balance is insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000 per commercial bank. As of December 31, 2004, the Company had zero amounts in excess of the FDIC insured limits. For purposes of the statement of cash flows, the Company considers all cash and highly liquid investments with initial maturities of three months or less to be cash equivalents.
F-7
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates may be materially different from actual financial results. Significant estimates include the recoverability of long-lived assets and the collectibility of accounts receivable.
Accounts Receivable
The Company grants credit to customers within the United States of America and does not require collateral. The Companys ability to collect receivables is affected by economic fluctuations in the geographic areas and industries served by the Company.
Reserves for un-collectable amounts are provided, based on past experience and a specific analysis of the accounts, which management believes are sufficient. Although the Company expects to collect amounts due, actual collections may differ from the estimated amounts. As of December 31, 2004, the Company has a reserve of $97,569.
Six (6) customers accounted for approximately 88% of accounts receivable at December 31, 2004 and 92% of the net sales for the year ended December 31, 2004. The Companys trade accounts primarily represent unsecured receivables. Historically, the Companys bad debt write-offs related to these trade accounts have been insignificant.
Property and Equipment
Property and equipment, including renewals and betterments, are stated at cost. Assets held under capital leases are recorded at lease inception at the lower of the present value of the minimum lease payments or the fair market value of the related assets. The Company follows the practice of capitalizing property and equipment purchased over $1,250. The cost of ordinary maintenance and repairs is charged to operations while renewals and replacements are capitalized. Depreciation and amortization are computed on the straight-line method over the following estimated useful lives of the related assets, which range from three to ten years, and are as follows:
Furniture and Fixtures |
3 to 7 years |
Equipment |
7 to 10 years |
Vehicles |
5 years |
Leasehold improvements |
20 years |
F-8
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Long Lived Assets
The Companys management assesses the recoverability of its long-lived assets by determining whether the depreciation and amortization of long lived assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of long lived asset impairment, if any, is measured based on fair value and is charged to operations in the period in which long lived assets impairment is determined by management. At December 31, 2004, the Companys management believes there is no impairment of its long-lived assets. There can be no assurance however, that market conditions will not change or demand for the Companys services will continue, which could result in impairment of long-lived assets in the future.
Revenue Recognition
Revenue from product and services are recognized at the time goods are shipped or services are provided to the customer, with an appropriate provision for returns and allowances.
Fair Value of Financial Instruments
The carrying amount of accounts payable and accrued expenses are considered to be representative of their respective fair values because of the short-term nature of these financial instruments.
Other Comprehensive Income
The Company has no material components of other comprehensive income (loss) and accordingly, net loss is equal to comprehensive loss in all periods.
Federal Income Taxes
As of January 1, 2004, the company was considered an S Corporation For Federal and State income tax purposes, consequently there was no provision for income taxes as any income or loss was taxed to the shareholders. In May 2004, the Company issued a second class of stock which caused a termination of the S Corporation election by operation of law. Losses incurred in 2004 subsequent to the date of the termination will be carried forward to offset future taxable income, if any.
Segment Information
The Corporation operates primarily in a single operating segment, providing printed circuit boards and electronic assemblies.
F-9
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Stock Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) allows an entity to elect to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), but requires pro forma disclosures of net loss and loss per share as if the fair-valued-based method of accounting had been applied. In accordance with SFAS 123, the Company elected to continue to measure compensation cost under APB No. 25, and comply with the pro forma disclosure requirements.
The Company has adopted for footnote disclosure purposes SFAS No. 123, which requires that companies disclose the cost of stock-based employee compensation at the grant date based on the value of the award (the fair value method) and disclose this cost over the service period. The value of the stock-based award is determined using a pricing model whereby compensation cost is the excess of the fair value of the award as determined by the model at grant date or other measurement date over the amount an employee must pay to acquire the stock.
Transactions in which goods or services are received from non-employees for the issuance of equity securities or stock-based awards are accounted for based on the fair value of the consideration received. Stock amounts of $5,500 were valued for services during the year ended December 31, 2004.
NOTE 3 - INVENTORY
Inventories at December 31, 2004 by major classification, were comprised of the following:
Parts |
$885,369 |
Work in progress |
143,662 |
Finished goods |
11,078 |
Total |
1,040,109 |
Less reserve for potentially excess or obsolete inventories |
(347,294) |
Inventory- net |
$629,815 |
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment were comprised of the following at December 31, 2004:
Furniture and Fixtures |
$ 253,512 |
Equipment |
2,944,742 |
Vehicles |
44,708 |
Leasehold improvements |
3,406,116 |
Total |
3,406,116 |
Less accumulated depreciation and amortization |
(2,272,886) |
Total |
$678,230 |
F-10
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 5 LINE OF CREDIT
The Company had a revolving line of credit (the Line) with a financial institution, which allowed them to borrow a maximum of $1,100,000 based on 80% of eligible accounts receivable, as defined. Borrowings under the Line, bore interest at prime (4.25% plus 10.5% per annum) were secured by substantially all of the Companys assets and are personally guaranteed by the stockholders. In March 2004 the Line was restructured into a term loan in the amount of $500,000. Terms of the Note were: (1) monthly installment payments of $5,000, (2) interest at the rate of 4% plus the prime rate by the agent (3) secured by accounts receivable (4) with a discount provision of $200,000 after timely payments of the first $300,000. In December 2004, the note was restructured into a new line of credit and discounted by $200,000. This new line of credit allows the Company to borrow a maximum of $140,000 based on 80% of eligible accounts receivables, payable in monthly installments of $5,000 plus interest at the rate of 4% plus the prime lending rate. As of December 31, 2004, the Company had borrowed $140,063.
NOTE 6 - CAPITAL LEASE OBLIGATIONS
The Company is a lessee of certain equipment under capital leases that expire on various dates through April 2008. Terms of the lease call for monthly payments ranging from $314 to $9,163, at implicit rates of interest ranging from 8.6% to 25.0% per annum (the incremental borrowing rate). The assets and liabilities under capital leases are recorded at lease inception at the lower of the present value of the minimum lease payments or the fair market value of the related assets. The assets are depreciated over their estimated useful lives.
Minimum future lease payments under current lease agreements at December 31, 2004 are as follows:
The following is an analysis of the equipment under capital leases as of December 31, 2004,
Which is included in property and equipment:
Equipment |
$1,797,958 |
Less accumulated depreciation |
(1,448,230) |
Net |
$349,728 |
F-11
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 7 NOTES PAYABLE
Notes Payable consist of the following at December 31, 2004:
Note payable, secured by deed of trust, 14%interest, due in January 2005 to wife of shareholder of the Company |
$50,000 |
Note payable, 12% interest, due in January 2005 to Efund Capital |
25,000 |
Note payable, secured by deed of trust, 12% interest, due on September 2005 to Ashford Capital Transition Fund |
456,000 |
Total notes payable |
$531,000 |
Accrued interest on related party notes payable, included in
accrued expenses as of December 31, 2004, was $5,000.
Other Long-Term Debt
Other long-term debt consist of settlements reached with (6) various vendors ranging from $1,400 to $120,000 with payment terms from two to five years in the total amount of $221,990. Monthly installment payments to these vendors range from $70 to $2,500.
NOTE 8 COMMITMENTS AND CONTIGENCIES
Operating Rental Leases
The Company leases its office and warehouse facilities in Costa Mesa, California from stockholders under an operating lease that requires minimum monthly payments of $19,790.40. The lease requires the Company to pay property taxes and maintenance, and expires in May 2022. For the year ended December 31, 2004, building rent expense was $242,244.
Future minimum rental payments under the non-cancelable related party operating lease are as follows:
2005 |
$237,484.80 |
2006 |
$237,484.80 |
2007 |
$237,484.80 |
2008 |
$237,484.80 |
2009 |
$237,484.80 |
Remaining |
2,948,769.60 |
$4,136,193.60 |
F-12
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 8 COMMITMENTS AND CONTIGENCIES - (Continued)
Litigation
The Company may be involved from time to time in various claims, lawsuits, disputes with third parties, action involving allegations or discrimination or breach of contract actions incidental in the normal operations of the business. The Company is currently not involved in any such litigation which management believes could have a material adverse effect on its financial position
NOTE 9 CAPITAL STOCK TRANSACTIONS
On May 20th, 2004, the Companys Board of Directors and shareholders approved the following capital stock transactions:
(1)
an amendment to the Articles of Incorporation of the Company, increasing the number of authorized shares to 110,000,000, 100,000,000 shares of which will be common stock and 10,000,000 shares of which shall be preferred stock.
(2)
an amendment to the Articles of Incorporation of the Company authorizing a new series of Preferred stock, which shall be designated as Series A, and shall consist of 440 shares.
On December 31, 2004, the Companys Board of Directors and shareholders approved the following capital stock transactions:
(3)
an amendment to the Articles of Incorporation of the Company authorizing a new series of Preferred stock, which shall be designated as Series B, and shall consist of 20,000 shares.
On April 21, 2005, the Companys Board of Directors and shareholders approved the following capital stock transactions:
(4)
The Company re-domiciled in the state of Nevada, where by increasing the number of authorized common shares to 200,000,000 and designating a par value of $.001 per share.
All share and per share amounts in the accompanying financial statements of the Company and notes thereto have been retroactively adjusted to give effect to the stock splits.
NOTE 10 RETIREMENT PLAN
The Company has a 401(k) profit sharing plan (the Plan) in which all eligible employees, as defined, can elect to participate. Employees can contribute up to 15 percent of their earning, up to allowable IRS limits, each year. Employer contributions to the Plan are at the discretion of the Company and vest over a six-year period. During the year ended December 31, 2004, the Company did not make any contributions to the Plan.
F-13
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 11 RELATED PARTY TRANSACTIONS
The Company leases its 35,000 sq/ft facility for $19,790.40 per month from Kambiz Mahdi, Reza Zarif and Pacific Sail Bay Trust. Kambiz Mahdi is our Chief Executive Officer and a Director of ours. Reza Zarif is our Chief Operating Officer and a Director of ours. Pacific Sail Bay Trust is managed by Frank Kavanaugh. Frank Kavanaugh is also the managing member of Ashford Capital, LLC, and Apt Leadership, LLC and the managing partner of Ashford Transition Fund, L.P. Furthermore, Mr. Kavanaugh was a director of ours from July 2004 to December 2004.
Jeffrey Conrad provides legal services for us and receives a monthly retainer of $2,500 and is one of our directors. Jeffrey Conrad is also a managing member of eFund Capital Partners, LLC. Mr. Conrad jointly has authority regarding the portfolio management decisions with respect to the shares of common stock owned by eFund Capital Partners, LLC. Mr. Conrad may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Conrad does not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and they disclaim any beneficial ownership of such shares of common stock. eFund Capital Partners, LLC received their shares pursuant to an investment agreement with us in April of 2004.
In May of 2004 we entered into an agreement with eFund Capital Partners, LLC whereby eFund invested $200,000 and agreed to provide strategic assistance to us. In exchange, we gave eFund Capital Partners, 2,000,000 shares of common stock and 200 shares of Series A Convertible Preferred Stock. The managing members of eFund Capital Partners, LLC are Barrett Evans and Jeffrey Conrad. Mr. Evans and Mr. Conrad jointly have authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Evans and Mr. Conrad may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Evans and Mr. Conrad do not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and they disclaim any beneficial ownership of such shares of common stock. Mr. Evans and Mr. Conrad have both been directors of ours since May 2004.
In July 2004 eFund Capital Partners, LLC assigned 1,000,000, shares of common stock and 33 shares of Series A Convertible Preferred Stock to Ashford Capital, LLC. The Managing Member of Ashford Capital, LLC is Frank Kavanaugh. Mr. Kavanaugh has authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Kavanaugh may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Kavanaugh does not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and disclaims any beneficial ownership of such shares of common stock. Ashford Capital, LLC received three shares pursuant to an assignment agreement with eFund Capital Partners, LLC. Ashford Capital, LLC and eFund Capital Partners, LLC have no affiliation. Mr. Kavanaugh was a director of ours from May 2004 until December 2004.
On July 1, 2004, we entered into a promissory note with Rufina V. Paniego for $50,000. This is an interest only note. There are no scheduled principal payments due other than on January 8, 2005, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 14% per annum. The note is secured by deed of trust. Rufina Paniego is the wife of Reza Zarif who is our founder, COO and director.
F-14
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 11 RELATED PARTY TRANSACTIONS - Continued
In July of 2004 eFund Capital Partners, LLC assigned 67 shares of Series A Convertible Preferred Stock to Apt Leadership, LLC as consideration for Apt Leadership, LLCs assistance in helping restructuring our company. The Managing Member of Apt Leadership, LLC is Frank Kavanaugh. Mr. Kavanaugh has authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Kavanaugh may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Kavanaugh does not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and disclaims any beneficial ownership of such shares of common stock. Apt Leadership, LLC and eFund Capital Partners, LLC have no affiliation. Mr. Kavanaugh was a director of ours from May 2004 until December 2004.
In September of 2004 we issued the Ashford Transition Fund, L.P 40 shares of our Series A Convertible Preferred Stock as consideration for a loan they gave the Company in the amount of $456,000. Frank Kavanaugh is the managing partner of Ashford Transition Fund, L.P.
In September of 2004 eFund Capital Partners, LLC assigned 30 shares of Series A Convertible Preferred Stock to Dennis Benner. Dennis Benner is a Director of ours and acquired shares in our private placement memorandum dated June 9, 2004 as restated and amended on November 16, 2004 through The DW & JS Benner Family Trust. Mr. Benner has dispositive and voting power over the shares in The DW & JS Benner Family Trust and claims beneficial ownership of them. Mr. Benner and eFund Capital Partners, LLC have no affiliation.
On October 12, 2004, we entered into a promissory note with eFund Capital Partners, LLC for $25,000. This is an interest only note. There are no scheduled principal payments due other than on January 8, 2005, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 12% per annum.
In December of 2004 we issued eFund Capital Partners, LLC 3,500 shares of Series B Convertible Preferred Stock pursuant to a Series B Convertible Preferred Stock Purchase Agreement. The company received $350,000 as consideration. The managing members of eFund Capital Partners, LLC are Barrett Evans and Jeffrey Conrad. Mr. Evans and Mr. Conrad jointly have authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Evans and Mr. Conrad may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Evans and Mr. Conrad do not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and they disclaim any beneficial ownership of such shares of common stock. Mr. Evans and Mr. Conrad have both been directors of ours since May 2004.
In December of 2004 we issued Kambiz Mahdi 4,500 shares of Series B Convertible Preferred Stock pursuant to a Series B Convertible Preferred Stock Purchase Agreement. The company received $450,000 as consideration. Kambiz Mahdi is our Chief Executive Officer and a Director of ours. Mr. Mahdi has dispositive and voting power over his shares and claims beneficial ownership of them. He is all the rights pursuant to such ownership.
On October 12, 2004, we entered into a promissory note with eFund Capital Partners, LLC for $25,000. This is an interest only note. There are no scheduled principal payments due other than on January 8, 2005, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 12% per annum.
F-15
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 11 RELATED PARTY TRANSACTIONS - Continued
In December of 2004 we issued Reza Zarif 4,500 shares of Series B Convertible Preferred Stock pursuant to a Series B Convertible Preferred Stock Purchase Agreement. The company received $450,000 as consideration. Reza Zarif is our Chief Operating Officer and a Director of ours. Mr. Zarif has dispositive and voting power over his shares and claims beneficial ownership of them. He is all the rights pursuant to such ownership.
On December 31, 2004, Ashford Capital, LLC, eFund Capital Parnters, LLC each returned 750,000 shares of common stock to the company for cancellation and Kambiz Mahdi and Reza Zarif each returned 1,750,000 shares to the company for cancellation.
NOTE 12 NEW ACCOUNTING PRONOUNCEMENTS
In February 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS No. 150). The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The Company has not issued any financial instruments with such characteristics.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN No. 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN No. 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities , which was issued in January 2003. Companies are required to apply FIN No. 46R to variable interests in variable interest entities (VIEs) created after December 31, 2003. For variable interest in VIEs created before January 1, 2004, the Interpretation is applied beginning January 1, 2005.
For any Vies that must be consolidated under FIN No. 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interests of the VIE initially are measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN No. 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. The Company does not have any interest in any VIE.
In December 2004, the FASB issued SFAS No 123(R)(revised 2004), Share-Based Payment which amends FASB Statement No. 123 and will be effective for public companies for interim or annual periods after June 15, 2005. The new standard will require entities to expense employee stock options and other share-based payments. The new standard may be adopted in one of three ways the modified prospective transition method, a variation of the modified prospective transition method or the modified retrospective transition method. The Company is evaluation how it will adopt the standard and evaluating the effect that the adoption of SFAS 123(R) will have on our financial position and results of operations.
F-16
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 12 NEW ACCOUNTING PRONOUNCEMENTS - Continued
In November 2004, the FASB issued SFAS No 151, Inventory Costs, an amendment of ARB No. 43, Chapter . This statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing , to clarify the accounting for abnormal amounts of idle facility expense, freight, handling cost, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs may be so abnormal as to require treatment as current period charges. SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of so abnormal. In addition, this statement requires that allocation of
fixed production overheads to the costs of conversion be based on the prospectively and are effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier application permitted for inventory costs incurred during fiscal years beginning after the date this Statement was issued. The adoption of SFGAS No. 151 is not expected to have a material impact on the Companys financial position and results of operations.
In December 2004, the FASB issued SFAS No.153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Non-monetary Transactions , is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for non-monetary exchanges of similar productive assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for non-monetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the Companys financial position and results of operations.
NOTE 13 SUBSEQUENT EVENTS
Proposed Sale Of Securities
The Company has proposed to file a Form SB-2 relating to the sale of certain of its securities in 2005. The terms of the prospectus relate to the sale of up to 12,078,125 shares of common stock, which represents 100% of the outstanding securities, by current shareholders, the common stock shares we could issue upon conversion of the Series B Convertible Preferred Stock by Series B stockholders and BTF, LLC who will become a stockholder pursuant to a "put right" under an Investment Agreement, also referred to as an Equity Line of Credit, that we have entered into with BTF, LLC. BTF, LLC would become a stockholder pursuant to a "put right" under an Investment Agreement, also referred to as an Equity Line of Credit, that we have entered into with BTF, LLC. a put right permits us to require BTF, LLC to buy shares pursuant to the terms of the Investment Agreement. That Investment Agreement permits us to "put" up to $4.5 million in shares of our common stock to BTF, LLC if and when we are successful in our attempt to have our common stock listed on the Over-the-Counter Bulletin Board. The Company would also register 5,625,000 shares of common stock pursuant to the Investment Agreement which assumes that price of our stock will be $0.80 at the time of the put notice.
F-17
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 13 SUBSEQUENT EVENTS - Continued
Redomicile Of Corporation
In April 2005, the Corporation was redomiciled to the State of Nevada from the State of California. This process required that a new Nevada Corporation be incorporated, the assets of the old corporation were merged into the new corporation, and the old corporation was terminated.
Related Party Debt
On January 1, 2005, we entered into a credit line agreement with eFund Capital Partners, LLC for $150,000. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $75,000 as of May 2005.
On January 1, 2005 we entered into a credit line agreement with Ashford Capital, LLC for $150,000. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $100,000 as of May 2005.
On January 1, 2005 we entered into a credit line agreement with Rufina V. Paniego for $75,000. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 3007, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $75,000 as of May 2005. Rufina Paniego is the wife of Reza Zarif who is our founder, COO and director.
F-18
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 13 SUBSEQUENT EVENTS - Continued
On March 8, 2005 we entered into a credit line agreement with Benner Exemption Trust for $200,000. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accursed and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $100,000 as of May 2005. Dennis Benner is a Director of ours and controls the Benner Exemption Trust.
On March 22, 2005 we entered into a credit line agreement with Edward Lassiter for $100,000. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $100,000 as of May 2005. Edward Lassiter is a shareholder of ours and holds his shares in The Edward & Mildred Lassiter Restated Family Trust and The Edward & Mildred Lassiter Restated Family Trust dated April 14, 2000. Mr. Lassiter currently holds 312,500 shares of our common stock which is 9% of the outstanding shares of common stock.
F-19
PART II- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
ARTICLE VI of our Bylaws states that to the extent and in the manner permitted by the laws of the State of Nevada, and specifically as is permitted under the Nevada Revised Statutes pertaining to Corporations, the corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of the corporation, by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement.
We have been advised that in the opinion of the Securities and Exchange Commission, insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. In the event a claim for indemnification against such liabilities (other than our payment of expenses incurred or paid by our director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
ITEM 25. EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth our expenses in connection with this registration statement. All of these expenses are estimates, other than the fees and expenses of legal counsel and filing fees payable to the Securities and Exchange Commission.
Expense or Fee |
Amount to Be Paid |
SEC Registration Fee |
$1,137.28 |
Printing and Edgarizing Expenses |
$4,000 |
Legal Fees and Expenses |
$10,000 |
Accounting Fees and Expenses |
$8,000 |
Transfer Agent |
$500 |
Miscellaneous |
$1,362.72 |
TOTAL |
$25,000 |
RECENT SALES OF UNREGISTERED SECURITIES
From June 16, 2004 to March 31, 2005 the Company sold 234,587 common stock units pursuant to a Private Placement Memorandum at $8.00 per unit to 53 individuals generating net proceeds of $1,876,700.00. Each Unit entitled the holder to purchase ten (10) shares of common stock. In addition, each unit entitled the holder to purchase a total of 10 shares of Probe Common Stock through the exercise of Warrants as follows: Class A Warrants, 5 shares at a price of $2.00 per share for a period of 12 months from November 16, 2004, which shall be November 15, 2005; and, Class B Warrants, 5 shares at a price of $3.00 per share for a period of 18 months from November 16, 2004, which shall be May 15, 2006.
Page 64 of 69
The sales set forth above were undertaken under Rule 506 of Regulation D under the Securities Act of 1933, as amended ("Act"), by the fact that:
•
the sales were made to a sophisticated or accredited investors, as defined in Rule 502;
•
the Company gave each purchaser the opportunity to ask questions and receive answers concerning the terms and conditions of the offering and to obtain any additional information which the Company possessed or could acquire without unreasonable effort or expense that is necessary to verify the accuracy of information furnished;
•
at a reasonable time prior to the sale of securities, the Company advised each purchaser of the limitations on resale in the manner contained in Rule 502(d)2;
•
neither the Company nor any person acting on its behalf sold the securities by any form of general solicitation or general advertising; and
•
the Company exercised reasonable care to assure that each purchaser of the securities is not an underwriter within the meaning of Section 2(11) of the Securities Act of 1933 in compliance with Rule 502(d).
In May of 2004 we entered into an agreement with eFund Capital Partners, LLC whereby eFund invested $200,000 and agreed to provide strategic assistance to us. In exchange, we gave eFund Capital partners, 2,000,000 shares of common stock (of which 1,750,000 shares were cancelled and returned to the company) and 200 shares of Series A Convertible Preferred Stock. The managing members of eFund Capital Partners, LLC are Barrett Evans and Jeffrey Conrad. Mr. Evans and Mr. Conrad jointly have authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Evans and Mr. Conrad may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Evans and Mr. Conrad do not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and they disclaim any beneficial ownership of such shares of common stock. Mr. Evans and Mr. Conrad have both been directors of ours since May 2004.
In May of 2004 the company issued 200 shares of Series A Preferred Stock to Kambiz Mahdi pursuant to a Series A Convertible Preferred Stock Agreement.
In May of 2004 the company issued 200 shares of Series A Preferred Stock to Reza Zarif pursuant to a Series A Convertible Preferred Stock Agreement.
In September of 2004 we issued the Ashford Transition Fund, L.P 40 shares of our Series A Convertible Preferred Stock as consideration for a loan they gave the Company in the amount of $456,000.00. Frank Kavanaugh is the managing partner of Ashford Transition Fund, L.P.
In December of 2004 we issued eFund Capital Partners, LLC 3,500 shares of Series B Convertible Preferred Stock pursuant to a Series B Convertible Preferred Stock Purchase Agreement. The company received $350,000 as consideration. The managing members of eFund Capital Partners, LLC are Barrett Evans and Jeffrey Conrad. Mr. Evans and Mr. Conrad jointly have authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Evans and Mr. Conrad may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Evans and Mr. Conrad do not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and they disclaim any beneficial ownership of such shares of common stock. Mr. Evans and Mr. Conrad have both been directors of ours since May 2004.
In December of 2004 we issued Kambiz Mahdi 450,000 shares of Series B Convertible Preferred Stock pursuant to a Series B Convertible Preferred Stock Purchase Agreement. The company received $450,000 as consideration. Kambiz Mahdi is our Chief Executive Officer and a Director of ours. Mr. Mahdi has
Page 65 of 69
dispositive and voting power over his shares and claims beneficial ownership of them. He is all the rights pursuant to such ownership.
In December of 2004 we issued Reza Zarif 450,000 shares of Series B Convertible Preferred Stock pursuant to a Series B Convertible Preferred Stock Purchase Agreement. The company received $450,000 as consideration. Reza Zarif is our Chief Operating Officer and a Director of ours. Mr. Zarif has dispositive and voting power over his shares and claims beneficial ownership of them. He is all the rights pursuant to such ownership.
In December of 2004 we issued Anthony Reed 6,875 shares of common stock pursuant to a Consulting Agreement.
In December of 2004 we issued Russell Miller 100,000 shares of common stock pursuant to an employee stock grant.
ITEM 27. EXHIBITS
(a) EXHIBITS.
EXHIBIT NUMBER
DESCRIPTION
3.1 Articles of Incorporation (filed herewith).
3.2 Bylaws (filed herewith).
4.1 Certificate of Designation for Series A Convertible Preferred Stock, dated May 20, 2004 (filed herewith).
4.2 Certificate of Designation for Series B Convertible Preferred Stock dated December 31, 2004 (filed herewith).
5.1 Opinion of Counsel.
10.1 Lease Agreement between Probe Manufacturing, Inc. (F.K.A. Probe Manufacturing Industries, Inc. and Reza Zarif and Kambiz Mahdi, dated May 2, 1997 (filed herewith).
10.2 Consulting Agreement between Probe Manufacturing Industries and Anthony Reed dated December 31, 2004 (filed herewith).
10.3 Legal retainer agreement between Probe Manufacturing, Inc. and Jeffrey Conrad dated (filed herewith).
10.4 Line of Credit agreement between Probe Manufacturing, Inc. and eFund Capital Partners, LLC dated January 1, 2005 (filed herewith).
10. 5 Line of Credit agreement between Probe Manufacturing, Inc. and Ashford Capital, LLC dated January 1, 2005 (filed herewith).
10.6 Line of Credit agreement between Probe Manufacturing, Inc. and Benner Exemption Trust dated March 8, 2005 (filed herewith).
10.7 Line of Credit agreement between Probe Manufacturing, Inc. and Edward Lassiter dated March 22, 2005 (filed herewith).
10.8 Line of Credit agreement between Probe Manufacturing, Inc. and Rufina V. Paniego dated January 1, 2004 (filed herewith).
Page 66 of 69
10.09 Investment agreement between Probe Manufacturing, Inc. and BTF, LLC dated April 1, 2005 (filed herewith).
10.10 Promissory Note between Probe Manufacturing, Inc and Ashford Transitional Fund, L.P. dated September 20, 2004 (filed herewith).
10.11 Engagement Letter between Probe Manufacturing, Inc. and eFund Capital Partners, LLC dated May 20, 2004 (filed herewith).
10.12 Series A Convertible Preferred Stock Purchase Agreement with eFund Capital Partners, LLC dated May 20, 2004 (filed herewith).
10.13 Series A Convertible Preferred Stock Purchase Agreement with Reza Zarif dated May 20, 2004 (filed herewith).
10.14 Series A Convertible Preferred Stock Purchase Agreement with Kambiz Mahdi dated May 20, 2004. (filed herewith).
10.15 Series B Convertible Preferred Stock Purchase Agreement with eFund Capital Partners, LLC dated December 31, 2004 (filed herewith).
10. 16 Series B Convertible Preferred Stock Purchase Agreement with Reza Zarif dated December 31, 2004 (filed herewith).
10.17 Series B Convertible Preferred Stock Purchase Agreement with Kambiz Mahdi dated December 31, 2004 (filed herewith).
10.18 Agreement to Cancel and Return shares of Common Stock between Probe and eFund Capital Partners, LLC, Ashford Capital, LLC, Reza Zarif, Kambiz Mahdi, dated December 31, 2004 (filed herewith).
10.19 Promissory note with eFund Capital Partners, LLC dated October 12, 2004 (filed herewith).
10.20 Promissory note with Rufina V. Paniego dated July 1, 2004 (filed herewith).
21.1 List of Subsidiaries (filed herewith).
23.1 Consent of Independent Auditors, Jaspers & Hall, P.C..
23.2 Consent of Counsel (contained in Exhibit 5.1).
ITEM 28. 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
Page 67 of 69
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum 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 any 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.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers, and controlling persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(1) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant under Rule 424(b)(1), or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities.
Page 68 of 69
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 on Form SB-2 and authorized this Registration Statement to be signed on its behalf by the undersigned, in the City of Long Beach, in the State of California, on June 10, 2005.
PROBE MANUFACTURING, INCORPORATED
By: /s/ Kambiz Mahdi
________________________________________
Kabmiz, Mahdi, Chief Executive Officer, and Director
By: /s/ Barrett Evans
____________________________________________
Barrett Evans, Interim Chief Financial Officer 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 in the dates stated:
Signature
Title
Date
/s/ Kambiz Mahdi
Chief Executive Officer and Director
June 10, 2005
_______________________
Kambiz Mahdi
/s/ Barrett Evans
_______________________
Interim Chief Financial Officer and Director
June 10, 2005
Barrett Evans
/s/ Dennis Benner
Director and Chairman
June 10, 2005
_______________________
Dennis Benner
/s/ Reza Zarif
Chief Operating Officer and Director
June 10, 2005
_______________________
Reza Zarif
/s/ Jeffrey Conrad
Director
June 10, 2005
_______________________
Jeffrey Conrad
Page 69 of 69
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Board of Directors
Probe Manufacturing Industries, Inc.
Costa Mesa, California
We have audited the accompanying balance sheet of Probe Manufacturing, Inc. as of December 31, 2004, and the related statements of operations, stockholders deficit and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Probe Manufacturing Industries, Inc., as of December 31, 2004, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The financial statements for the year ended December 31, 2003, were audited by other accountants, whose report dated September 30, 2004 on those statements included an explanatory paragraph describing conditions that raised substantial doubt about the Companys ability to continue as a going concern..
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Companys recurring losses from operations and its difficulties in generating sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern. Managements plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Jaspers + Hall, PC
Denver, Colorado
May 25, 2005
F-1
PROBE MANUFACTURING INC.
BALANCE SHEET
For Period ending December 31, 2004 and 2003
F-2
The accompanying notes are an integral part of these financial statements.
PROBE MANUFACTURING INC.
INCOME STATEMENT
For Period ending December 31, 2004 and 2003
2004 |
2003 |
|||
|
||||
SALES |
$6,204,957 |
$ 6,455,728 |
||
COST OF GOODS SOLD |
4,988,538 |
5,085,672 |
||
GROSS PROFIT |
1,216,419 |
1,370,056 |
||
|
||||
GENERAL AND ADMINISTRATIVE |
1,964,325 |
2,078,109 |
||
NET LOSS FROM OPERATIONS |
(747,906) |
(708,053) |
||
OTHER INCOME/(EXPENSES): |
||||
Other income |
275,228 |
- |
||
Interest expense |
(445,112) |
(535,908) |
||
NET LOSS BEFORE INCOME TAXES |
(917,790) |
(1,243,961) |
||
INCOME TAXES |
(800) |
(800) |
||
NET LOSS |
$ (918,590) |
$(1,244,761) |
||
|
|
|||
|
|
|||
Per Share Information: |
||||
Weighted average number |
||||
of common shares outstanding |
226,785 |
10,000 |
||
Net Loss per common share |
$ (4.05) |
$ (124.48) |
The accompanying notes are an integral part of these financial statements.
F-3
PROBE MANUFACTURING INC.
STATEMENT OF SHAREHOLDERS EQUITY
For Period ending December 31, 2004 and 2003
Preferred Stock A |
Preferred Stock B |
Common Stock |
Paid-In |
to Related |
Accumulated |
Deficit |
||||||||||||||
|
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Capital |
Parties |
(Deficit) |
Totals |
||||||||||
Balance, December 31, 2002 |
- |
- |
- |
- |
10,000 |
10 |
1,308,528 |
(130,166) |
(2,576,681) |
(1,398,309) |
||||||||||
Advances to related parties |
- |
- |
- |
- |
- |
- |
- |
130,166 |
- |
130,166 |
||||||||||
Distributions |
- |
- |
- |
- |
- |
- |
(115,932) |
- |
- |
(115,932) |
||||||||||
Net loss |
- |
- |
- |
- |
- |
- |
- |
- |
(1,244,761) |
(1,244,761) |
||||||||||
Balance, December 31, 2003 |
- |
|
- |
- |
|
- |
10,000 |
|
10 |
|
1,192,596 |
- |
|
(3,821,442) |
|
(2,628,836) |
||||
|
||||||||||||||||||||
Stock issued in lieu of debt |
- |
- |
- |
- |
564,000 |
564 |
563,436 |
- |
- |
564,000 |
||||||||||
Stock issued for cash |
- |
- |
- |
- |
176,000 |
176 |
90,312 |
- |
- |
90,488 |
||||||||||
Common shares converted to preferred |
200 |
200,000 |
- |
- |
- |
- |
(200,000) |
- |
- |
- |
||||||||||
Shares issued for cash |
- |
- |
- |
- |
1,506,250 |
1,506 |
1,203,494 |
- |
- |
1,205,000 |
||||||||||
Shares issued for cash |
- |
- |
- |
- |
250,000 |
250 |
549,750 |
- |
- |
550,000 |
||||||||||
Note converted to preferred shares |
200 |
200,000 |
- |
- |
- |
- |
(200,000) |
- |
- |
- |
||||||||||
Shares issued for services |
- |
- |
- |
- |
106,875 |
107 |
85,393 |
- |
- |
85,500 |
||||||||||
Common shares converted to preferred |
- |
- |
900 |
900,000 |
- |
- |
(900,000) |
- |
- |
- |
||||||||||
Common shares converted to preferred |
- |
- |
350 |
350,000 |
- |
- |
(350,000) |
- |
- |
- |
||||||||||
Shares issued for cash |
40 |
40,000 |
- |
- |
- |
- |
- |
- |
- |
40,000 |
||||||||||
Net loss |
- |
- |
- |
- |
- |
- |
- |
- |
(918,590) |
(918,590) |
||||||||||
Balance, December 31, 2004 |
440 |
|
$ 440,000 |
1,250 |
|
$1,250,000 |
2,613,125 |
|
$ 2,613 |
|
$2,034,981 |
$ - |
|
$ (4,740,032) |
|
$ (1,012,438) |
The accompanying notes are an integral part of these financial statements.
F-4
PROBE MANUFACTURING INC.
STATEMENT OF CASH FLOWS
For Period ending December 31, 2004 and 2003
2004 |
2003 |
||||
Cash Flows from Operating Activities: |
|||||
Net Loss |
$ (918,590) |
$(1,244,761) |
|||
Adjustments to reconcile net loss to net cash |
|||||
used in operating activities: |
|||||
Depreciation and amortization |
241,086 |
299,691 |
|||
Net bad debt recoveries |
- |
182,690 |
|||
Debt forgiveness |
(275,228) |
- |
|||
Stock issued for services |
85,500 |
- |
|||
Stock issued for debt |
564,183 |
- |
|||
Changes in assets and liabilities: |
|||||
(Increase) decrease in accounts receivable |
632,121 |
27,455 |
|||
(Increase) decrease in inventory |
(329,221) |
(118,386) |
|||
(Increase) decrease in prepaid expenses |
(60,060) |
- |
|||
(Increase) decrease in deposits |
4,997 |
23,722 |
|||
(Decrease) increase in accounts payable |
(990,904) |
(78,931) |
|||
Other (Decrease) increase in accrued expenses |
(156,046) |
602,323 |
|||
Net Cash Used In Operating Activities |
(1,202,162) |
(306,197) |
|||
Cash Flows from Investing Activities |
|||||
Purchase of property and equipment |
(13,945) |
(63,637) |
|||
Advances from related parties |
- |
130,166 |
|||
Cash Flows Used In Investing Activities |
(13,945) |
66,529 |
|||
Cash Flows from Financing Activities |
|||||
Bank overdraft |
(51,235) |
151,802 |
|||
Borrowings under line of credit, net |
(1,028,990) |
169,083 |
|||
Distributions |
- |
(115,932) |
|||
Prinicipal payments on capital lease obligations |
(79,572) |
(91,344) |
|||
Proceeds from sale of stock |
1,885,306 |
- |
|||
Proceeds from notes payable |
531,000 |
- |
|||
Cash Flows Provided By Financing Activities |
1,256,509 |
113,609 |
|||
Net (Decrease) Increase in Cash and Cash Equivalents |
40,402 |
(126,059) |
|||
Cash and Cash Equivalents at Beginning of Period |
- |
126,059 |
|||
Cash and Cash Equivalents at End of Period |
$ 40,402 |
$ - |
|||
Supplemental Information: |
|||||
Interest Paid |
$ 120,975 |
$ 276,256 |
|||
Income Taxes Paid |
$ 800 |
$ 800 |
The accompanying notes are an integral part of these financial statements.
F-5
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
Notes 1- GENERAL
The Company
Probe Manufacturing Industries, Inc. was incorporated on July 7, 1995 . On April 21, 2005, the Company was redomiciled from California to Nevada whereby, it changed its name to Probe Manufacturing, Inc. Probe Manufacturing , Inc. (the Company or Probe) is a leading provider of advanced electronics manufacturing services, or EMS, to original equipment manufacturers, or OEMs, primarily in the industrial and instrumentation, communication, semiconductor, automotive, medical, and military segments. This would include globally integrated end to end manufacturing solutions ranging from engineering printed circuit card assembly, cable assembly, enclosures, complete system integration and test, as well as global order fulfillment.
Going Concern
The financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. The Company incurred a net loss of $918,590 for the year ended December 31, 2004 and has a working capital deficit of approximately $564,310 at December 31, 2004. The ability of the Company to operate a going concern is dependent upon its ability (1) to obtain sufficient debt and/or equity capital and/or (2) cut operating costs such that the Company can operate until such time that it resumes generating positive cash flow from operations.
Management is taking following steps to address this situation: (a) reducing operating costs, thus reducing the break even revenue level; (b) negotiating to replace the line of credits with an agreement more attractive terms and expand borrowing capacity.
The future success of the Company is likely dependent on its ability to attain additional capital to support growth and ultimately, upon its ability to attain future profitable operations. There can be no assurance that the Company will be successful in obtaining such financing, or that it will attain positive cash flow from operations. The successful outcome of these or any future activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute their business plans or generate positive operating results. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company maintains the majority of its cash accounts at a commercial bank. The total cash balance is insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000 per commercial bank. As of December 31, 2004, the Company had zero amounts in excess of the FDIC insured limits. For purposes of the statement of cash flows, the Company considers all cash and highly liquid investments with initial maturities of three months or less to be cash equivalents.
F-6
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates may be materially different from actual financial results. Significant estimates include the recoverability of long-lived assets and the collectibility of accounts receivable.
Accounts Receivable
The Company grants credit to customers within the United States of America and does not require collateral. The Companys ability to collect receivables is affected by economic fluctuations in the geographic areas and industries served by the Company.
Reserves for un-collectable amounts are provided, based on past experience and a specific analysis of the accounts, which management believes are sufficient. Although the Company expects to collect amounts due, actual collections may differ from the estimated amounts. As of December 31, 2004, the Company has a reserve of $97,569.
Six (6) customers accounted for approximately 88% of accounts receivable at December 31, 2004 and 92% of the net sales for the year ended December 31, 2004. The Companys trade accounts primarily represent unsecured receivables. Historically, the Companys bad debt write-offs related to these trade accounts have been insignificant.
Property and Equipment
Property and equipment, including renewals and betterments, are stated at cost. Assets held under capital leases are recorded at lease inception at the lower of the present value of the minimum lease payments or the fair market value of the related assets. The Company follows the practice of capitalizing property and equipment purchased over $1,250. The cost of ordinary maintenance and repairs is charged to operations while renewals and replacements are capitalized. Depreciation and amortization are computed on the straight-line method over the following estimated useful lives of the related assets, which range from three to ten years, and are as follows:
Furniture and Fixtures |
3 to 7 years |
Equipment |
7 to 10 years |
Vehicles |
5 years |
Leasehold improvements |
20 years |
F-7
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Long Lived Assets
The Companys management assesses the recoverability of its long-lived assets by determining whether the depreciation and amortization of long lived assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of long lived asset impairment, if any, is measured based on fair value and is charged to operations in the period in which long lived assets impairment is determined by management. At December 31, 2004, the Companys management believes there is no impairment of its long-lived assets. There can be no assurance however, that market conditions will not change or demand for the Companys services will continue, which could result in impairment of long-lived assets in the future.
Revenue Recognition
Revenue from product and services are recognized at the time goods are shipped or services are provided to the customer, with an appropriate provision for returns and allowances.
Fair Value of Financial Instruments
The carrying amount of accounts payable and accrued expenses are considered to be representative of their respective fair values because of the short-term nature of these financial instruments.
Other Comprehensive Income
The Company has no material components of other comprehensive income (loss) and accordingly, net loss is equal to comprehensive loss in all periods.
Federal Income Taxes
As of January 1, 2004, the company was considered an S Corporation For Federal and State income tax purposes, consequently there was no provision for income taxes as any income or loss was taxed to the shareholders. In May 2004, the Company issued a second class of stock which caused a termination of the S Corporation election by operation of law. Losses incurred in 2004 subsequent to the date of the termination will be carried forward to offset future taxable income, if any.
Segment Information
The Corporation operates primarily in a single operating segment, providing printed circuit boards and electronic assemblies.
F-8
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Stock Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) allows an entity to elect to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), but requires pro forma disclosures of net loss and loss per share as if the fair-valued-based method of accounting had been applied. In accordance with SFAS 123, the Company elected to continue to measure compensation cost under APB No. 25, and comply with the pro forma disclosure requirements.
The Company has adopted for footnote disclosure purposes SFAS No. 123, which requires that companies disclose the cost of stock-based employee compensation at the grant date based on the value of the award (the fair value method) and disclose this cost over the service period. The value of the stock-based award is determined using a pricing model whereby compensation cost is the excess of the fair value of the award as determined by the model at grant date or other measurement date over the amount an employee must pay to acquire the stock.
Transactions in which goods or services are received from non-employees for the issuance of equity securities or stock-based awards are accounted for based on the fair value of the consideration received. Stock amounts of $5,500 were valued for services during the year ended December 31, 2004.
NOTE 3 - INVENTORY
Inventories at December 31, 2004 by major classification, were comprised of the following:
Parts |
$885,369 |
Work in progress |
143,662 |
Finished goods |
11,078 |
Total |
1,040,109 |
Less reserve for potentially excess or obsolete inventories |
(347,294) |
Inventory- net |
$629,815 |
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment were comprised of the following at December 31, 2004:
Furniture and Fixtures |
$ 253,512 |
Equipment |
2,944,742 |
Vehicles |
44,708 |
Leasehold improvements |
3,406,116 |
Total |
3,406,116 |
Less accumulated depreciation and amortization |
(2,272,886) |
Total |
$678,230 |
F-9
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 5 LINE OF CREDIT
The Company had a revolving line of credit (the Line) with a financial institution, which allowed them to borrow a maximum of $1,100,000 based on 80% of eligible accounts receivable, as defined. Borrowings under the Line, bore interest at prime (4.25% plus 10.5% per annum) were secured by substantially all of the Companys assets and are personally guaranteed by the stockholders. In March 2004 the Line was restructured into a term loan in the amount of $500,000. Terms of the Note were: (1) monthly installment payments of $5,000, (2) interest at the rate of 4% plus the prime rate by the agent (3) secured by accounts receivable (4) with a discount provision of $200,000 after timely payments of the first $300,000. In December 2004, the note was restructured into a new line of credit and discounted by $200,000. This new line of credit allows the Company to borrow a maximum of $140,000 based on 80% of eligible accounts receivables, payable in monthly installments of $5,000 plus interest at the rate of 4% plus the prime lending rate. As of December 31, 2004, the Company had borrowed $140,063.
NOTE 6 - CAPITAL LEASE OBLIGATIONS
The Company is a lessee of certain equipment under capital leases that expire on various dates through April 2008. Terms of the lease call for monthly payments ranging from $314 to $9,163, at implicit rates of interest ranging from 8.6% to 25.0% per annum (the incremental borrowing rate). The assets and liabilities under capital leases are recorded at lease inception at the lower of the present value of the minimum lease payments or the fair market value of the related assets. The assets are depreciated over their estimated useful lives.
Minimum future lease payments under current lease agreements at December 31, 2004 are as follows:
The following is an analysis of the equipment under capital leases as of December 31, 2004,
Which is included in property and equipment:
Equipment |
$1,797,958 |
Less accumulated depreciation |
(1,448,230) |
Net |
$349,728 |
F-10
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 7 NOTES PAYABLE
Notes Payable consist of the following at December 31, 2004:
Note payable, secured by deed of trust, 14%interest, due in January 2005 to wife of shareholder of the Company |
$50,000 |
Note payable, 12% interest, due in January 2005 to Efund Capital |
25,000 |
Note payable, secured by deed of trust, 12% interest, due on September 2005 to Ashford Capital Transition Fund |
456,000 |
Total notes payable |
$531,000 |
Accrued interest on related party notes payable, included in
accrued expenses as of December 31, 2004, was $5,000.
Other Long-Term Debt
Other long-term debt consist of settlements reached with (6) various vendors ranging from $1,400 to $120,000 with payment terms from two to five years in the total amount of $221,990. Monthly installment payments to these vendors range from $70 to $2,500.
NOTE 8 COMMITMENTS AND CONTIGENCIES
Operating Rental Leases
The Company leases its office and warehouse facilities in Costa Mesa, California from stockholders under an operating lease that requires minimum monthly payments of $19,790.40. The lease requires the Company to pay property taxes and maintenance, and expires in May 2022. For the year ended December 31, 2004, building rent expense was $242,244.
Future minimum rental payments under the non-cancelable related party operating lease are as follows:
2005 |
$237,484.80 |
2006 |
$237,484.80 |
2007 |
$237,484.80 |
2008 |
$237,484.80 |
2009 |
$237,484.80 |
Remaining |
2,948,769.60 |
$4,136,193.60 |
F-11
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 8 COMMITMENTS AND CONTIGENCIES - (Continued)
Litigation
The Company may be involved from time to time in various claims, lawsuits, disputes with third parties, action involving allegations or discrimination or breach of contract actions incidental in the normal operations of the business. The Company is currently not involved in any such litigation which management believes could have a material adverse effect on its financial position
NOTE 9 CAPITAL STOCK TRANSACTIONS
On May 20th, 2004, the Companys Board of Directors and shareholders approved the following capital stock transactions:
(1)
an amendment to the Articles of Incorporation of the Company, increasing the number of authorized shares to 110,000,000, 100,000,000 shares of which will be common stock and 10,000,000 shares of which shall be preferred stock.
(2)
an amendment to the Articles of Incorporation of the Company authorizing a new series of Preferred stock, which shall be designated as Series A, and shall consist of 440 shares.
On December 31, 2004, the Companys Board of Directors and shareholders approved the following capital stock transactions:
(3)
an amendment to the Articles of Incorporation of the Company authorizing a new series of Preferred stock, which shall be designated as Series B, and shall consist of 20,000 shares.
On April 21, 2005, the Companys Board of Directors and shareholders approved the following capital stock transactions:
(4)
The Company re-domiciled in the state of Nevada, where by increasing the number of authorized common shares to 200,000,000 and designating a par value of $.001 per share.
All share and per share amounts in the accompanying financial statements of the Company and notes thereto have been retroactively adjusted to give effect to the stock splits.
NOTE 10 RETIREMENT PLAN
The Company has a 401(k) profit sharing plan (the Plan) in which all eligible employees, as defined, can elect to participate. Employees can contribute up to 15 percent of their earning, up to allowable IRS limits, each year. Employer contributions to the Plan are at the discretion of the Company and vest over a six-year period. During the year ended December 31, 2004, the Company did not make any contributions to the Plan.
F-12
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 11 RELATED PARTY TRANSACTIONS
The Company leases its 35,000 sq/ft facility for $19,790.40 per month from Kambiz Mahdi, Reza Zarif and Pacific Sail Bay Trust. Kambiz Mahdi is our Chief Executive Officer and a Director of ours. Reza Zarif is our Chief Operating Officer and a Director of ours. Pacific Sail Bay Trust is managed by Frank Kavanaugh. Frank Kavanaugh is also the managing member of Ashford Capital, LLC, and Apt Leadership, LLC and the managing partner of Ashford Transition Fund, L.P. Furthermore, Mr. Kavanaugh was a director of ours from July 2004 to December 2004.
Jeffrey Conrad provides legal services for us and receives a monthly retainer of $2,500 and is one of our directors. Jeffrey Conrad is also a managing member of eFund Capital Partners, LLC. Mr. Conrad jointly has authority regarding the portfolio management decisions with respect to the shares of common stock owned by eFund Capital Partners, LLC. Mr. Conrad may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Conrad does not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and they disclaim any beneficial ownership of such shares of common stock. eFund Capital Partners, LLC received their shares pursuant to an investment agreement with us in April of 2004.
In May of 2004 we entered into an agreement with eFund Capital Partners, LLC whereby eFund invested $200,000 and agreed to provide strategic assistance to us. In exchange, we gave eFund Capital Partners, 2,000,000 shares of common stock and 200 shares of Series A Convertible Preferred Stock. The managing members of eFund Capital Partners, LLC are Barrett Evans and Jeffrey Conrad. Mr. Evans and Mr. Conrad jointly have authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Evans and Mr. Conrad may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Evans and Mr. Conrad do not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and they disclaim any beneficial ownership of such shares of common stock. Mr. Evans and Mr. Conrad have both been directors of ours since May 2004.
In July 2004 eFund Capital Partners, LLC assigned 1,000,000, shares of common stock and 33 shares of Series A Convertible Preferred Stock to Ashford Capital, LLC. The Managing Member of Ashford Capital, LLC is Frank Kavanaugh. Mr. Kavanaugh has authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Kavanaugh may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Kavanaugh does not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and disclaims any beneficial ownership of such shares of common stock. Ashford Capital, LLC received three shares pursuant to an assignment agreement with eFund Capital Partners, LLC. Ashford Capital, LLC and eFund Capital Partners, LLC have no affiliation. Mr. Kavanaugh was a director of ours from May 2004 until December 2004.
On July 1, 2004, we entered into a promissory note with Rufina V. Paniego for $50,000. This is an interest only note. There are no scheduled principal payments due other than on January 8, 2005, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 14% per annum. The note is secured by deed of trust. Rufina Paniego is the wife of Reza Zarif who is our founder, COO and director.
F-13
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 11 RELATED PARTY TRANSACTIONS - Continued
In July of 2004 eFund Capital Partners, LLC assigned 67 shares of Series A Convertible Preferred Stock to Apt Leadership, LLC as consideration for Apt Leadership, LLCs assistance in helping restructuring our company. The Managing Member of Apt Leadership, LLC is Frank Kavanaugh. Mr. Kavanaugh has authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Kavanaugh may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Kavanaugh does not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and disclaims any beneficial ownership of such shares of common stock. Apt Leadership, LLC and eFund Capital Partners, LLC have no affiliation. Mr. Kavanaugh was a director of ours from May 2004 until December 2004.
In September of 2004 we issued the Ashford Transition Fund, L.P 40 shares of our Series A Convertible Preferred Stock as consideration for a loan they gave the Company in the amount of $456,000. Frank Kavanaugh is the managing partner of Ashford Transition Fund, L.P.
In September of 2004 eFund Capital Partners, LLC assigned 30 shares of Series A Convertible Preferred Stock to Dennis Benner. Dennis Benner is a Director of ours and acquired shares in our private placement memorandum dated June 9, 2004 as restated and amended on November 16, 2004 through The DW & JS Benner Family Trust. Mr. Benner has dispositive and voting power over the shares in The DW & JS Benner Family Trust and claims beneficial ownership of them. Mr. Benner and eFund Capital Partners, LLC have no affiliation.
On October 12, 2004, we entered into a promissory note with eFund Capital Partners, LLC for $25,000. This is an interest only note. There are no scheduled principal payments due other than on January 8, 2005, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 12% per annum.
In December of 2004 we issued eFund Capital Partners, LLC 3,500 shares of Series B Convertible Preferred Stock pursuant to a Series B Convertible Preferred Stock Purchase Agreement. The company received $350,000 as consideration. The managing members of eFund Capital Partners, LLC are Barrett Evans and Jeffrey Conrad. Mr. Evans and Mr. Conrad jointly have authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Evans and Mr. Conrad may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Evans and Mr. Conrad do not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and they disclaim any beneficial ownership of such shares of common stock. Mr. Evans and Mr. Conrad have both been directors of ours since May 2004.
In December of 2004 we issued Kambiz Mahdi 4,500 shares of Series B Convertible Preferred Stock pursuant to a Series B Convertible Preferred Stock Purchase Agreement. The company received $450,000 as consideration. Kambiz Mahdi is our Chief Executive Officer and a Director of ours. Mr. Mahdi has dispositive and voting power over his shares and claims beneficial ownership of them. He is all the rights pursuant to such ownership.
On October 12, 2004, we entered into a promissory note with eFund Capital Partners, LLC for $25,000. This is an interest only note. There are no scheduled principal payments due other than on January 8, 2005, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 12% per annum.
F-14
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 11 RELATED PARTY TRANSACTIONS - Continued
In December of 2004 we issued Reza Zarif 4,500 shares of Series B Convertible Preferred Stock pursuant to a Series B Convertible Preferred Stock Purchase Agreement. The company received $450,000 as consideration. Reza Zarif is our Chief Operating Officer and a Director of ours. Mr. Zarif has dispositive and voting power over his shares and claims beneficial ownership of them. He is all the rights pursuant to such ownership.
On December 31, 2004, Ashford Capital, LLC, eFund Capital Parnters, LLC each returned 750,000 shares of common stock to the company for cancellation and Kambiz Mahdi and Reza Zarif each returned 1,750,000 shares to the company for cancellation.
NOTE 12 NEW ACCOUNTING PRONOUNCEMENTS
In February 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS No. 150). The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The Company has not issued any financial instruments with such characteristics.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN No. 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN No. 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities , which was issued in January 2003. Companies are required to apply FIN No. 46R to variable interests in variable interest entities (VIEs) created after December 31, 2003. For variable interest in VIEs created before January 1, 2004, the Interpretation is applied beginning January 1, 2005.
For any Vies that must be consolidated under FIN No. 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interests of the VIE initially are measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN No. 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. The Company does not have any interest in any VIE.
In December 2004, the FASB issued SFAS No 123(R)(revised 2004), Share-Based Payment which amends FASB Statement No. 123 and will be effective for public companies for interim or annual periods after June 15, 2005. The new standard will require entities to expense employee stock options and other share-based payments. The new standard may be adopted in one of three ways the modified prospective transition method, a variation of the modified prospective transition method or the modified retrospective transition method. The Company is evaluation how it will adopt the standard and evaluating the effect that the adoption of SFAS 123(R) will have on our financial position and results of operations.
F-15
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 12 NEW ACCOUNTING PRONOUNCEMENTS - Continued
In November 2004, the FASB issued SFAS No 151, Inventory Costs, an amendment of ARB No. 43, Chapter . This statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing , to clarify the accounting for abnormal amounts of idle facility expense, freight, handling cost, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs may be so abnormal as to require treatment as current period charges. SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of so abnormal. In addition, this statement requires that allocation of
fixed production overheads to the costs of conversion be based on the prospectively and are effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier application permitted for inventory costs incurred during fiscal years beginning after the date this Statement was issued. The adoption of SFGAS No. 151 is not expected to have a material impact on the Companys financial position and results of operations.
In December 2004, the FASB issued SFAS No.153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Non-monetary Transactions , is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for non-monetary exchanges of similar productive assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for non-monetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the Companys financial position and results of operations.
NOTE 13 SUBSEQUENT EVENTS
Proposed Sale Of Securities
The Company has proposed to file a Form SB-2 relating to the sale of certain of its securities in 2005. The terms of the prospectus relate to the sale of up to 12,078,125 shares of common stock, which represents 100% of the outstanding securities, by current shareholders, the common stock shares we could issue upon conversion of the Series B Convertible Preferred Stock by Series B stockholders and BTF, LLC who will become a stockholder pursuant to a "put right" under an Investment Agreement, also referred to as an Equity Line of Credit, that we have entered into with BTF, LLC. BTF, LLC would become a stockholder pursuant to a "put right" under an Investment Agreement, also referred to as an Equity Line of Credit, that we have entered into with BTF, LLC. a put right permits us to require BTF, LLC to buy shares pursuant to the terms of the Investment Agreement. That Investment Agreement permits us to "put" up to $4.5 million in shares of our common stock to BTF, LLC if and when we are successful in our attempt to have our common stock listed on the Over-the-Counter Bulletin Board. The Company would also register 5,625,000 shares of common stock pursuant to the Investment Agreement which assumes that price of our stock will be $0.80 at the time of the put notice.
F-16
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 13 SUBSEQUENT EVENTS - Continued
Redomicile Of Corporation
In April 2005, the Corporation was redomiciled to the State of Nevada from the State of California. This process required that a new Nevada Corporation be incorporated, the assets of the old corporation were merged into the new corporation, and the old corporation was terminated.
Related Party Debt
On January 1, 2005, we entered into a credit line agreement with eFund Capital Partners, LLC for $150,000. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $75,000 as of May 2005.
On January 1, 2005 we entered into a credit line agreement with Ashford Capital, LLC for $150,000. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $100,000 as of May 2005.
On January 1, 2005 we entered into a credit line agreement with Rufina V. Paniego for $75,000. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 3007, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $75,000 as of May 2005. Rufina Paniego is the wife of Reza Zarif who is our founder, COO and director.
F-17
PROBE MANUFACTURING, INC.
Notes to Financial Statements
Year Ended December 31, 2004
NOTE 13 SUBSEQUENT EVENTS - Continued
On March 8, 2005 we entered into a credit line agreement with Benner Exemption Trust for $200,000. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accursed and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $100,000 as of May 2005. Dennis Benner is a Director of ours and controls the Benner Exemption Trust.
On March 22, 2005 we entered into a credit line agreement with Edward Lassiter for $100,000. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The Interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if we had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other creditors willing to provide a loan for 20% or less interest. There is currently an outstanding balance of $100,000 as of May 2005. Edward Lassiter is a shareholder of ours and holds his shares in The Edward & Mildred Lassiter Restated Family Trust and The Edward & Mildred Lassiter Restated Family Trust dated April 14, 2000. Mr. Lassiter currently holds 312,500 shares of our common stock which is 9% of the outstanding shares of common stock.
F-18
BYLAWS
OF
PROBE MANUFACTURING, INC.
ARTICLE I
OFFICES
Section 1.1 PRINCIPAL OFFICES. The board of directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of Nevada. If the principal executive office is located outside this state, and the corporation has one or more business offices in this state, the board of directors shall likewise fix and designate a principal business office in the State of Nevada.
Section 1.2 OTHER OFFICES. The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 2.1 PLACE OF MEETINGS. Meetings of shareholders shall be held at any place within or outside the State of Nevada designated by the board of directors. In the absence of any such designation, shareholders meetings shall be held at the principal executive office of the corporation.
Section 2.2 ANNUAL MEETINGS OF SHAREHOLDERS. The annual meeting of shareholders shall be held each year at a time designated by the board of directors. At each annual meeting, directors shall be elected and any other proper business may be transacted.
Section 2.3 SPECIAL MEETINGS. A special meeting of shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than 10% of the votes at any such meeting.
If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation. The officer receiving such request forthwith shall cause notice to be given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held.
Section 2.4 NOTICE OF SHAREHOLDERS MEETINGS. All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of this Article II not less than ten (10) nor more than sixty (60) days before the date of the meeting being noticed. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees, which, at the time of the notice, the board of directors intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to the Corporations Code of Nevada, (ii) an amendment of the Articles of Incorporation, pursuant to such Code, (iii) a reorganization of the corporation, pursuant to such Code, (iv) a voluntary dissolution of the corporation, pursuant to such Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to such Code, the notice shall also state the general nature of such proposal.
Section 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any meeting of shareholders shall be given either personally or by first class mail or telegraphic or other written communication, charges prepaid, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporations books or is given, notice shall be deemed to have been given if sent by mail or telegram to the corporations principal executive office, or if published at least once in a newspaper of general circulation in the county where this office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of such notice.
An affidavit of the mailing or other means of giving any notice of any shareholders meeting shall be executed by the secretary, assistant secretary or any transfer agent of the corporation giving such notice, and shall be filed and maintained in the minute book of the corporation.
Section 2.6 QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at a meeting of shareholders shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.
Section 2.7 ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at such meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at such meeting, except as provided in Section 2.6 of this Article II.
When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case the board of directors shall set a new record date. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of this Article II. At any adjourned meeting, the corporation may transact any business that might have been transacted at the original meeting.
Section 2.8 VOTING. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 of this Article II, subject to the provisions of the Corporations Code of Nevada (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership). Such vote may be by voice vote or by ballot; provided, however, that all elections for directors must be by ballot upon demand by a shareholder at any election and before the voting begins. Any shareholder entitled to vote on any matter (other than elections of directors) may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholders approving vote is with respect to all shares such shareholder is entitled to vote. Except as provided in Section 2.6 of this Article II, the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number of voting by classes is required by the Corporations Code of Nevada or the Articles of Incorporation.
At a shareholders meeting involving the election of directors, no shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) unless such candidate or candidates names have been placed in nomination prior to the voting and a shareholder has given notice at the meeting prior to the voting of the shareholders intention to cumulate votes. If any shareholder has given such notice, then every shareholder entitled to vote may cumulate such shareholders votes for candidates in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which such shareholders shares are normally entitled, or distribute the shareholders votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of affirmative vote up to the number of directors to be elected, shall be elected. Votes against a director and votes withheld shall have no legal effect.
Section 2.9 WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The transactions at any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes thereof. The waiver of notice, consent to the holding of the meeting or approval of the minutes thereof need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.4 of this Article II, the waiver of notice, consent to the holding of the meeting or approval of the meeting or approval of the minutes thereof shall state the general nature of such proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting.
Attendance of a person at a meeting shall also constitute a waiver of notice of and presence at such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a wavier of any right to object to the consideration of matters required by the Corporations Code of Nevada to be included in the notice by which were not included in the notice, if such objection is expressly made at the meeting.
Section 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. In the case of election of directors, such consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, however, that a director may be elected at any time to fill a vacancy not filled by the directors by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be filed with the secretary of the corporation and shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholders proxy holders, or a transferee of the shares or a personal representative of the shareholder or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders shall not have been received, the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. Such notice shall be given in the manner specified in Section 2.5 of this Article II. In the case of approval of (i) contracts or transactions in which a director has a direct or indirect financial interest, pursuant to the Corporations Code of Nevada, (ii) indemnification of agents of the corporation, pursuant to such Code, (iii) a reorganization of the corporation, pursuant to such Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to the Code, such notice shall be given at least ten (10) days before the consummation of any such action authorized by any such approval.
Section 2.11 RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING CONSENTS. For purposes of determining the shareholders entitled to notice of any meeting or to vote or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days prior to the date of any such meeting nor more than sixty (60) days prior to such action without a meeting, and in such case only shareholders at the close of business on the record date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date fixed as aforesaid, except as otherwise provided in the Corporations Code of Nevada.
If the board of directors does not so fix a record date:
(a)
The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived at the close of business on the business day next preceding the day on which the meeting is held.
(b)
The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action of the board has been taken, shall be the close of business on the day on which the board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later.
v Section 2.12 PROXIES. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholders name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholders attorney in fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, prior to the vote pursuant thereto, by a writing stating that the proxy is revoked or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or as to any meeting by attendance at such meeting and voting in person by the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of such proxy is received by the corporation before the vote pursuant thereto is counted; provided, however, that no such proxy shall be valid after the expiration of eleven (11) months from the date of such proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of the Corporations Code of Nevada.
Section 2.13 INSPECTORS OF ELECTION. Before any meeting of shareholders, the board of directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholders proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholders proxy shall, appoint a person to fill such vacancy.
The duties of these inspectors shall be as follows:
(a)
Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies;
(b)
Receive votes, ballots or consents;
(c)
Hear and determine all challenges and questions in any way arising in connection with the right to vote;
(d)
Count and tabulate all votes or consents;
(e)
Determine when the polls shall close;
(f)
Determine the result; and
(g)
Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
Section 3.1 POWERS. Subject to the provisions of the Corporations Code of Nevada Law and any limitations in the Articles of Incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors.
Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the directors shall have the power and authority to:
(a)
Select and remove all officers, agents, and employees of the corporation, prescribe such powers and duties for them as may not be inconsistent with law, with the Articles of Incorporation or these bylaws, fix their compensation, and require from them security for faithful service.
(b)
Change the principal executive office or the principal business office in the State of Nevada from one location to another; cause the corporation to be qualified to do business in any other state, territory, dependency or foreign country and conduct business within or outside the State of Nevada; designate any place within or without the State of Nevada for the holding of any shareholders meeting, or meetings, including annual meetings; adopt, make and use a corporate seal, and prescribe the forms of certificates of stock, and alter the form of such seal and of such certificates from time to time as in their judgment they may deem best, provided that such forms shall at all times comply with the provisions of law.
(c)
Authorize the issuance of shares of stock of the corporation from time to time, upon such terms as may be lawful, in consideration of money paid, labor done or services actually rendered, debts or securities cancelled or tangible or intangible property actually received.
(d)
Borrow money and incur indebtedness for the purposes of the corporation, and cause to be executed and delivered therefore, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, or other evidences of debt and securities therefore.
vii Section 3.2 NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of directors shall be seven until changed by a duly adopted amendment to the Articles of Incorporation or by an amendment to this bylaw adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of action by written consent, are equal to more than 16-2/3% of the outstanding shares entitled to vote.
Section 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at each annual meeting of the shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified.
Section 3.4 VACANCIES. Vacancies on the board of directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) or by the written consent of holders of a majority of the outstanding shares entitled to vote. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to exist in the case of the death, resignation or removal of any director, or if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of directors be increased, or if the shareholders fail at any meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting.
The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote.
Any director may resign effective upon giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective.
No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his term of office.
viii Section 3.5 PLACE OF MEETINGS AND TELEPHONIC MEETINGS. Regular meetings of the board of directors may be held at any place within or without the State of Nevada that has been designated from time to time by resolution of the board. In the absence of such designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board shall be held at any place within or without the State of Nevada that has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in such meeting can hear one another, and all such directors shall be deemed to be present in person at such meeting.
Section 3.6 ANNUAL MEETING. Immediately following each annual meeting of shareholders, the board of directors shall hold a regular meeting for the purpose of organization, any desired election of officers and the transaction of other business. Notice of this meeting shall not be required.
Section 3.7
OTHER REGULAR MEETINGS. Other regular meetings of the board of directors shall be held without call at such time as shall from time to time be fixed by the board of directors. Such regular meetings may be held without notice.
Section 3.8 SPECIAL MEETINGS. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board or the president or any vice president or the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first class mail or telegram, charges pre-paid, addressed to each director at his or her address as it is shown upon the records of the corporation. In case such notice is mailed, it shall be deposited in the United States mail at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered personally, or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours prior to the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated to either the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the corporation.
Section 3.9 QUORUM. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as hereinafter provided. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of the Corporations Code of Nevada (Approval of Contracts or Transactions in which a Director has a Direct or Indirect Material Financial Interest), (Appointment of Committees), and (Indemnification of Directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting.
Section 3.10 WAIVER OF NOTICE. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting.
Section 3.11 ADJOURNMENT. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place.
Section 3.12 NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of such time and place shall be given prior to the time of the adjourned meeting, in the manner specified in Section 3.8 of this Article III, to the directors who were not present at the time of the adjournment.
Section 3.13 ACTION WITHOUT MEETING. Any action required or permitted to be taken by the board of directors may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to such action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent or consents shall be filed with the minutes of the proceedings of the board.
Section 3.14 FEES AND COMPENSATION OF DIRECTORS. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the board of directors. Nothing contained herein shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for such services.
ARTICLE IV
COMMITTEES
Section 4.1 COMMITTEES OF DIRECTORS. The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any such committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to:
(a)
The approval of any action which, under the Corporations Code of Nevada, also requires shareholders approval or approval of the outstanding shares;
(b)
The filing of vacancies on the board of directors or in any committee;
(c)
The fixing of compensation of the directors for serving on the board or on any committee;
(d)
The amendment or repeal of bylaws or the adoption of new bylaws;
(e)
The amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable;
(f)
A distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or
(g)
The appointment of any other committees of the board of directors or the members thereof.
Section 4.2 MEETINGS AND ACTION OF COMMITTEES. Meetings and action of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Sections 3.5 (Place of Meetings), 3.7 (Regular Meetings), 3.8 (Special Meetings and Notice), 3.9 (Quorum), 3.10 (Waiver of Notice), 3.11 (Adjournment), 3.12 (Notice of Adjournment) and 3.13 (Action without Meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members,, except that the time of regular meetings of committees may be determined by resolution of the board of directors as well as by resolution of the committee; special meetings of committees may also be called by resolution of the board of directors; and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
Section 5.1 OFFICERS. The officers of the corporation shall be a president, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice-presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of this Article V. Any number of officers may be held by the same person.
Section 5.2 ELECTION OF OFFICERS. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of this Article V, shall be chosen by the board of directors, and each shall serve at the pleasure of the board, subject to the rights, if any, of an officer under any contract of employment.
Section 5.3 SUBORDINATE OFFICERS, ETC. The board of directors may appoint, and may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the bylaws or as the board of directors may from time to time determine.
Section 5.4 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors, at any regular or special meeting thereof, or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors
Any officer may resign at any time by giving written notice to the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation is without prejudice to the rights, if any, of the corporation, under any contract to which the officer is a party.
Section 5.5 VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to such office.
Section 5.6 CHAIRMAN OF THE BOARD. The chairman of the board, if such an officer be elected, shall, if present, preside at all meetings of the board of directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the board of directors or prescribed by the bylaws. If there is no president, the chairman of the board shall be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of this Article V.
Section 5.7 PRESIDENT. Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the chairman of the board, or if there be none, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or the bylaws.
Section 5.8 VICE PRESIDENTS. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president, and when so acting shall have all the powers of, and be subject to all restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors or the bylaws, the president or the chairman of the board.
Section 5.9 SECRETARY. The secretary shall keep or cause to be kept, at the principal executive office or such other place as the board of directors may order, a book of minutes of all meetings and actions of directors, committees of directors and shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors and committee meetings, the number of shares present or represented at shareholders meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporations transfer agent or registrar, as is determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of share held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required by the bylaws or by law to be given, and he shall keep the seal of the corporation, if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by the bylaws.
Section 5.10 CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or the bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS
Section 6.1 INDEMNIFICATION THIRD PARTY PROCEEDINGS. The corporation shall indemnify any person (the Indemnitee) who is or was a party or is threatened to be made a party to any proceedings (other than an action by or in the right of the corporation to procure a judgment in its favor) by reason of the fact that Indemnitee is or was a director or officer of the corporation, or any subsidiary of the corporation, and the corporation may indemnify a person who is or was a party or is threatened to be made a party to any proceedings (other than an action by or in the right of the corporation to procure a judgment in its favor) by reason of the fact that such person is or was an employee or other agent of the corporation (the Indemnitee Agent) by reason of any action or inaction on the part of the Indemnitee or Indemnitee Agent while an officer, director or agent or by reason of the fact that Indemnitee or Indemnitee Agent is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including subject to Section 6.19, attorneys fees and any expenses of establishing a right to indemnification pursuant to this Article VI or under Nevada law), judgments, fines, settlements (if such settlement is approved in advance by the corporation, which approval shall not be unreasonably withheld) and other amounts actually and reasonably incurred by Indemnitee or Indemnitee Agent in connection with such proceeding if Indemnitee or Indemnitee Agent acted in good faith and in a manner Indemnitee or Indemnitee Agent reasonably believed to be in or not opposed to the best interests of the corporation and, in the case of a criminal proceedings, if Indemnitee or Indemnitee Agent had no reasonable cause to believe Indemnitees or Indemnitee Agents conduct was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that Indemnitee or Indemnitee Agent did not act in good faith and in a manner which Indemnitee or Indemnitee Agent reasonably believed to be in or not opposed to the best interests of the corporation, or with respect to any criminal proceedings, would not create a presumption that Indemnitee or Indemnitee Agent had reasonable cause to believe that Indemnitees or Indemnitee Agents conduct was unlawful.
Section 6.2 INDEMNIFICATION PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The corporation shall indemnify Indemnitee and may indemnify Indemnitee Agent if Indemnitee, or Indemnitee Agent, as the case may be, was or is a party or is threatened to be made a party to any threatened, pending or completed action by or in the right of the corporation or any subsidiary of the corporation to procure a judgment in its favor by reason of the fact that Indemnitee or Indemnitee Agent is or was a director, officer, employee or other agent of the corporation, or any subsidiary of the corporation, by reason of any action or inaction on the part of Indemnitee or Indemnitee Agent while an officer, director or agent or by reason of the fact that Indemnitee or Indemnitee Agent is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including subject to Section 6.19, attorneys fees and any expenses of establishing a right to indemnification pursuant to this Article VI or under Nevada law) and, to the fullest extent permitted by law, amounts paid in settlement, in each case to the extent actually and reasonably incurred by Indemnitee or Indemnitee Agent acted in good faith and in a manner Indemnitee or Indemnitee Agent believed to be in or not opposed to the best interests of the corporation and its shareholders, except that no indemnification shall be made with respect to any claim, issue or matter to which Indemnitee (or Indemnitee Agent) shall have been adjudged to have been liable to the corporation in the performance of Indemnitees or Indemnitee Agents duty to the corporation and its shareholders, unless and only to the extent that the court in which such proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee (or Indemnitee Agent) is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine.
Section 6.3 SUCCESSFUL DEFENSE ON MERITS. To the extent that Indemnitee (or Indemnitee Agent) without limitation has been successful on the merits in defense of any proceedings referred to in Sections 6.1 or 6.2 above, or in defense of any claim, issue or matter therein, the corporation shall indemnify Indemnitee (or Indemnitee Agent) against expenses (including attorneys fees) actually and reasonably incurred by Indemnitee (or Indemnitee Agent) in connection therewith.
Section 6.4 CERTAIN TERMS DEFINED. For purposes of this Article VI, references to other enterprises shall include employee benefit plans, references to fines shall include any excise taxes assessed on Indemnitee or Indemnitee Agent with respect to an employee benefit plan, and references to proceeding shall include any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative. References to corporation include all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation, so that any person who is or was a director, officer, employee, or other agent of such a constituent corporation or who, being or having been such a director, officer, employee or other agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Article VI with respect to the resulting or surviving corporation as such person would if he or she had served the resulting or surviving corporation in the same capacity.
Section 6.5 ADVANCEMENT OF EXPENSES. The corporation shall advance all expenses incurred by Indemnitee and may advance all or any expenses incurred by Indemnitee Agent in connection with the investigation, defense, settlement (excluding amounts actually paid in settlement of any action, suit or proceeding) or appeal of any civil or criminal action, suit or proceeding referenced in Sections 6.1 or 6.2 hereof. Indemnitee or Indemnitee Agent hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall be determined ultimately that Indemnitee or Indemnitee Agent is not entitled to be indemnified by the corporation as authorized hereby. The advances to be made hereunder shall be paid by the corporation (i) to Indemnitee within twenty (20) days following delivery of a written request therefore by Indemnitee to the corporation; and (ii) to Indemnitee Agent within twenty (20) days following the later of a written request therefore by Indemnitee Agent to the corporation and determination by the corporation to advance expenses to Indemnitee Agent pursuant to the corporations discretionary authority hereunder.
Section 6.6 NOTICE OF CLAIM. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Article VI, and Indemnitee Agent shall, as a condition precedent to his or her ability to be indemnified under this Article VI, give the corporation notice in writing as soon as practicable of any claim made against Indemnitee or Indemnitee Agent, as the case may be, for which indemnification will or could be sought under this Article VI. Notice to the corporation shall be directed to the secretary of the corporation at the principal business office of the corporation (or such other address as the corporation shall designate in writing to Indemnitee). In addition, Indemnitee or Indemnitee Agent shall give the corporation such information and cooperation as it may reasonably require and as shall be within Indemnitees or Indemnitee Agents power.
Section 6.7 ENFORCEMENT RIGHTS. Any indemnification provided for in Sections 6.1 or 6.2 or 6.3 shall be made no later than sixty (60) days after receipt of the written request of Indemnitee. If a claim or request under this Article VI, under any statute, or under any provision of the corporations Articles of Incorporation providing for indemnification is not paid by the corporation, or on its behalf, within sixty (60) days after written request for payment thereof has been received by the corporation, Indemnitee may, but need not, at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim or requests, and subject to Section 6.19, Indemnitee shall also be entitled to be paid for the expenses (including attorneys fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the corporation to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the corporation, and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Section 6.5 unless and until such defense may be finally adjudicated by court order or judgment for which no further right of appeal exists. The parties hereto intend that if the corporation contests Indemnitees right to indemnification, the question of Indemnitees right to indemnification shall be a decision for the court, and no presumption regarding whether the applicable standard has been met will arise based on any determination or lack of determination of such by the corporation (including its board or any subgroup thereof, independent legal counsel or its shareholders). The board of directors may, in its discretion, provide by resolution for similar or identical enforcement rights for any Indemnitee Agent.
Section 6.8 ASSUMPTION OF DEFENSE. In the event the corporation shall be obligated to pay the expenses of any proceeding against the Indemnitee (or Indemnitee Agent), the corporation, if appropriate, shall be entitled to assume the defense of such proceeding with counsel approved by Indemnitee (or Indemnitee Agent), which approval shall not be unreasonably withheld, upon the delivery to Indemnitee (or Indemnitee Agent) of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee (or Indemnitee Agent) and the retention of such counsel by the corporation, the corporation will not be liable to Indemnitee (or Indemnitee Agent) under this Article VI for any fees of counsel subsequently incurred by Indemnitee (or Indemnitee Agent) with respect to the same proceeding, in any of which events then the fees and expenses of Indemnitees (or Indemnitee Agents) counsel shall be at the expense of the corporation. At all times, Indemnitee (or Indemnitee Agent) shall have the right to employ other counsel in any such proceeding at Indemnitees (or Indemnitee Agents) expense.
Section 6.9 APPROVAL OF EXPENSES. No expenses for which indemnity shall be sought under this Article VI, other than those in respect of judgments and verdicts actually rendered, shall be incurred without the prior consent of the corporation, which consent shall not be unreasonably withheld.
Section 6.10 SUBROGATION. In the event of payment under this Article VI, the corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee (or Indemnitee Agent), who shall do all things that may be necessary to secure such rights, including the execution of such documents necessary to enable the corporation effectively to bring suit to enforce such rights.
Section 6.11 EXCEPTIONS. Notwithstanding any other provision herein to the contrary, the corporation shall not be obligated pursuant to this Article VI:
(a)
Excluded Acts . To indemnify Indemnitee (i) as to circumstances in which indemnity is expressly prohibited pursuant to Nevada law, or (ii) for any acts or omissions or transactions from which a director may not be relieved of liability pursuant to Nevada law; or
(b)
Claims Initiated by Indemnitee . To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Article VI or any other statute or law or as otherwise required under the Corporations Code of Nevada, but such indemnification or advancement of expenses may be provided by the corporation in specific cases if the board of directors has approved the initiation of bringing of such suit; or
(c)
Lack of Good Faith . To indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Article VI, if a court of competent jurisdiction determines that such proceeding was not made in good faith or was frivolous; or
(d)
Insured Claims . To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee by an insurance carrier under a policy of officers and directors liability insurance maintained by the corporation; or
(e)
Claims Under Section 16(b) . To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.
Section 6.12 PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Article VI to indemnification by the corporation for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred by the Indemnitee in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the corporation shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled.
Section 6.13 COVERAGE. This Article VI shall, to the extent permitted by law, apply to acts or omissions of (i) Indemnitee which occurred prior to the adoption of this Article VI if Indemnitee was a director or officer of the corporation, partnership, joint venture, trust or other enterprise, at the time such act or omission occurred; and (ii) Indemnitee Agent which occurred prior to the adoption of this Article VI if Indemnitee Agent was an employee or other agent of the corporation or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise at the time such act or omission occurred. All rights to indemnification under this Article VI shall be deemed to be provided by a contract between the corporation and the Indemnitee in which the corporation hereby agrees to indemnify Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the corporations Articles of Incorporation, these Bylaws or by statute. Any repeal of modification of these Bylaws, the Corporations Code of Nevada or any other applicable law shall not affect any rights or obligations then existing under this Article VI. The provisions of this Article VI shall continue as to Indemnitee and Indemnitee Agent for any action taken or not taken while serving in an indemnified capacity even though the Indemnitee or Indemnitee Agent may have ceased to serve in such capacity at the time of any action, suit or other covered proceeding. This Article VI shall be binding upon the corporation and its successors and assigns and shall inure to the benefit of Indemnitee and Indemnitee Agent and Indemnitees and Indemnitee Agents estate, heirs, legal representatives and assigns.
Section 6.14 NON-EXCLUSIVITY. Nothing herein shall be deemed to diminish or otherwise restrict any rights to which Indemnitee or Indemnitee Agent may be entitled under the corporations Articles of Incorporation, these Bylaws, any agreement, any vote of shareholders or disinterested directors, or under the laws of the State of Nevada.
Section 6.15 SEVERABILITY. Nothing in this Article VI is intended to require or shall be construed as requiring the corporation to do or fail to do any act in violation of applicable law. If this Article VI or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify Indemnitee or Indemnitee Agent to the fullest extent permitted by any applicable portion of this Article VI that shall not have been invalidated.
Section 6.16 MUTUAL ACKNOWLEDGMENT. Both the corporation and Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the corporation from indemnifying its directors and officers under this Article VI or otherwise. Indemnitee understands and acknowledges that the corporation has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the corporations right under public policy to indemnify Indemnitee.
Section 6.17 OFFICER AND DIRECTOR LIABILITY INSURANCE. The corporation shall, from time to time, make the good faith determination whether or not it is practicable for the corporation to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the corporation with coverage for losses from wrongful acts, or to ensure the corporations performance of its indemnification obligations under this Article VI. Among other considerations, the corporation will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. Notwithstanding the foregoing, the corporation shall have no obligation to obtain or maintain such insurance if the corporation determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the corporation.
Section 6.18 NOTICE TO INSURERS. If, at the time of the receipt of a notice of a claim pursuant to Section 6.6 hereof, the corporation has director and officer liability insurance in effect, the corporation shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The corporation shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.
Section 6.19 ATTORNEYS FEES. In the event that any action is instituted by Indemnitee under this Article VI to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that the action was not instituted in good faith or was frivolous. In the event of an action instituted by or in the name of the corporation under this Article VI, or to enforce or interpret any of the terms of this Article VI, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitees counterclaims and cross-claims made in such action), unless as a part of such action the court determines that Indemnitees defenses to such action were not made in good faith or were frivolous. The board of directors may, in its discretion, provide by resolution for payment of such attorneys fees to any Indemnitee Agent.
Section 6.20 NOTICE. All notices, requests, demands and other communications under this Article VI shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the addressee, on the date of such receipt, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked.
ARTICLE VII
RECORDS AND REPORTS
Section 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the board of directors, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder.
A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation may (i) inspect and copy the records of shareholders names and addresses and shareholdings during usual business hours upon five (5) days prior written demand upon the corporation, and/or (ii) obtain from the transfer agent of the corporation, upon written demand and upon the tender of such transfer agents usual charges for such list, a list of the shareholders names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which such list has been compiled or as of a date specified by the shareholder subsequent to the date of demand. Such list shall be made available by the transfer agent on or before the later of five (5) days after the demand is received or the date specified therein as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to such holders interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making such demand.
Section 7.2 MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall keep at its principal executive office, or if its principal executive office is not in the State of Nevada at its principal business office in this state, the original or a copy of the bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside this State and the corporation has no principal business office in this State, the secretary shall, upon the written request of any shareholder, furnish to such shareholder a copy of the bylaws as amended to date.
Section 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The accounting books and records and minutes of proceedings of the shareholders and the board of directors and any committee or committees of the board of directors shall be kept at such place or places designated by the board of directors, or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. Such minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to such holders interests as a shareholder or as the holder of a voting trust certificate. Such inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. The foregoing rights of inspection shall extend to the records of each subsidiary of the corporation.
Section 7.4 INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. This inspection by a director may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents.
Section 7.5 ANNUAL REPORT TO SHAREHOLDERS. The annual report to shareholders referred to in the Corporations Code of Nevada is expressly dispensed with, but nothing herein shall be interpreted as prohibiting the board of directors from issuing annual or other periodic reports to the shareholders of the corporation as they deem appropriate.
Section 7.6 FINANCIAL STATEMENTS. A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period, that has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months and each such statement shall be exhibited at all reasonable times to any shareholder demanding an examination of any such statement or a copy shall be mailed to any such shareholder.
If no annual report for the last fiscal year has been sent to shareholders, the corporation shall, upon the written request of any shareholder made more than 120 days after the close of such fiscal year, deliver or mail to such shareholder, within thirty (30) days after such request a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year.
If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation make a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days prior to the date of the request and a balance sheet of the corporation as of the end of such period and, in addition, if no annual report for the last fiscal year has been sent to shareholders, a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, then, the chief financial officer shall cause such statements to be prepared, if not already prepared, and shall deliver personally or mail such statement or statements to the person making the request within thirty (30) days after the receipt of such request.
Section 7.7 ANNUAL STATEMENT OF GENERAL INFORMATION. The corporation shall file annually with the Secretary of State of the State of Nevada, on the prescribed form, a statement setting forth the names and complete business or residence address of all incumbent directors, the number of vacancies on the board of directors, if any, the names and complete business or residence addresses of the chief executive officer, secretary and chief financial officer, the street address of its principal executive office or principal business office in this State and the general type of business constituting the principal business activity of the corporation for the purpose of service of process, all in compliance with the Corporations Code of Nevada.
ARTICLE VIII
GENERAL CORPORATE MATTERS
Section 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days prior to any such action, an in such case only shareholders of record on the date so fixed are entitled to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date fixed as aforesaid, except as otherwise provided in the Corporations Code of Nevada.
If the board of directors does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the resolution relating thereto, or the sixtieth (60 th ) day prior to the date of such action, whichever is later.
Section 8.2 CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution by the board of directors.
Section 8.3 CORPORATION CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances; and, unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.
Section 8.4 CERTIFICATES FOR SHARES. A certificate or certificates for shares of the capital stock of the corporation shall be issued to each shareholder when any such shares are fully paid, and the board of directors may authorize the issuance of certificates for shares as partly paid provided that such certificates shall state the amount of the consideration to be paid therefore and the amount paid thereon. All certificates shall be signed in the name of the corporation by the chairman of the board or vice chairman of the board or the president or a vice president and by the chief financial officer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue.
Section 8.5 LOST CERTIFICATES. Except as hereinafter in this Section provided, no new certificates for shares shall be issued in lieu of an old certificate unless the latter is surrendered to the corporation and cancelled at the same time. The board of directors may in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of a new certificate in lieu thereof, upon such terms and conditions as the board may require including provision for indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate.
Section 8.6 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman of the board, the president, or any vice president, or any other person authorized by resolution of the board of directors by any of the foregoing designated officers, is authorized to vote on behalf of the corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the corporation. The authority herein granted to said officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised by any such officer in person or by any person authorized to do so by proxy duly executed by said officer.
Section 8.7 CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Corporations Code of Nevada shall govern the construction of these bylaws. Without limiting the generality of the foregoing, the singular number includes the plural, the plural number includes the singular, and the term person includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
Section 9.1 AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the Articles of Incorporation of the corporation set forth the number of authorized directors of the corporation, the authorized number of directors may be changed only by an amendment of the Articles of Incorporation.
Section 9.2 AMENDMENT BY DIRECTORS. Subject to the rights of the shareholders as provided in Section 9.1 of this Article IX, bylaws, other than a bylaw or an amendment thereof changing the authorized number of directors, may be adopted, amended or repealed by the board of directors.
1
ADOPTION OF BYLAWS AND
ELECTION OF DIRECTORS
BY INCORPORATOR OF
PROBE MANUFACTURING, INC.
a Nevada corporation
The undersigned, sole incorporator named in the Articles of Incorporation of Auction Liquidator, Inc., a Nevada corporation, hereby takes the following action to perfect the organization of the corporation:
1.
Adoption of Bylaws . The bylaws of the Corporation as presented to the incorporator are hereby adopted. The incorporator has affixed his name thereto and placed the bylaws in the minute book of the corporation.
2.
Election of Sole Directors . The Directors of Probe Manufacturing Industries, Inc. are hereby elected as directors of the corporation, to hold office until the next annual meeting of the Shareholders or until their successors are elected and qualified in accordance with the bylaws of the Corporation.
3.
Resignation of Incorporator . The undersigned resigns as incorporator of the Corporation.
Executed on March 11, 2005
Incorporate Express, Incorporator
i Corporate Bylaws (Page 1 of 24)
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2
CERTIFICATE OF DESIGNATION
of
SERIES A CONVERTIBLE PREFERRED STOCK
for
PROBE MANUFACTURING INDUSTRIES, INC.
PROBE MANUFACTURING INDUSTRIES, INC., a California corporation (the Company), pursuant to the appropriate provisions of California Corporations Code, does hereby make this Certificate of Designation and does hereby state and certify that pursuant to the authority expressly vested in the Board of Directors of the Company by the Articles of Incorporation of the Company, the Board of Directors, without any shareholder action, which action was not required to be taken, duly adopted the following resolutions, which resolutions remain in full force and effect as of the date hereof:
RESOLVED, that, pursuant to Article Three, Section 2 of the Articles of Incorporation of the Company, the Board of Directors hereby authorizes the issuance of, and fixes the designation and preferences and relative, participating, optional, and other special rights, and qualifications, limitations and restrictions, of a series of Preferred Stock consisting of Four Hundred Forty (440) shares, no par value, to be designated Series A Convertible Preferred Stock (the Series A Stock).
RESOLVED, that each share of the Series A Stock shall rank equally in all aspects and shall be subject to the following terms and provisions:
1.
Preference on Liquidation . In the event of any voluntary or involuntary liquidation, distribution of assets (other than the payment of dividends), dissolution or winding-up of the Company, Series A Stock shall have preferential rights to the Companys common stock (the Common Stock) whereby Series A Stock shall get two times (2x) return on its capital. Once Series A Stock has recouped its two times (2x) return on capital then Series A Stock shall participate, on a pro rata basis, based on the number of shares of the Companys common stock (the Common Stock) into which the Series A Stock are convertible at the time of the liquidation, distribution of assets, dissolution or winding-up.
2.
Voting Rights . The Series A Stock shall have voting rights and voting will be on an as converted basis, with class votes for the election of directors, any transaction in which control of the Company is transferred in which the per share price consideration received by Purchaser is less than three (3) times the Purchase Price, the sale of the Company of all or substantially all of its assets, liquidation or winding up of the Company and any amendment to the Companys by-laws or articles of incorporation in a manner adverse to Series A Stock.
3.
Conversion . The holders of the Series A Stock shall have the following rights with respect to the conversion of the Series A Stock into shares of Common Stock (the Conversion Rights):
(a)
Conversion. Subject to and in compliance with the provisions of this Section 3, any shares of Series A Stock may, at any time, at the option of the holder, be converted into fully paid and non-assessable shares of Common Stock (a Conversion). Each share of Series A Stock shall be converted into a number of shares of Common Stock that equals one-tenth of a percent (0.1%) of the Companys outstanding common stock immediately following the Conversion Date.
(b) Mechanics of the Conversion. Upon a Conversion, the holder of Series A Stock shall surrender the applicable certificate or certificates therefore, duly endorsed, at the office of the Company or any transfer agent for the Series A Stock, and shall give written notice to the Company, of the Conversion and the number of shares of Series A Stock being converted. Thereupon, the Company shall promptly issue and deliver to such holder a certificate or certificates for the number of shares of Common Stock to which such holder is entitled. A Conversion shall be deemed to have been made at the close of the first business day after the date both notice has been given and the applicable share certificate or certificates have been delivered to the Company, provided, however, if the foregoing occurs on a business day, before the close of business, the Conversion shall be deemed to have occurred at the close of business on that day (the Conversion Date). The person entitled to receive the shares of Common Stock issuable upon a Conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date.
(c)
Adjustment for Reclassification, Exchange and Substitution . If at any time or from time to time after the Common Stock issuable upon the conversion of the Series A Stock is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a transaction provided for elsewhere in this Section 2), in any such event each holder of Series A Stock shall have the right thereafter to convert such stock into the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change by holders of the maximum number of shares of Common Stock into which such shares of Series A Stock could have been converted immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof.
(d)
Reorganizations, Mergers, Consolidations or Sales of Assets . If at any time or from time to time after the date of issuance of the Series A Stock, there is a capital reorganization of the Common Stock (other than a transaction provided for elsewhere in this Section 2), as a part of such capital reorganization, provision shall be made so that the holders of the Series A Stock shall thereafter be entitled to receive upon conversion of the Series A Stock the number of shares of stock or other securities or property of the Company to which a holder of the number of shares of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, subject to adjustment in respect of such stock or securities by the terms thereof.
(e)
Notices of Record Date . Upon (i) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or (ii) any sale of the Company, capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company, or any voluntary or involuntary dissolution, liquidation or winding up of the Company, the Company shall mail to each holder of Series A Stock at least twenty (20) days prior to the record date specified therein a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (A) the date on which any such sale of the Company, reorganization, reclassification, recapitalization, dissolution, liquidation or winding up is expected to become effective, and (C) the date, if any, that is to be fixed as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such sale of the Company, reorganization, reclassification, recapitalization, dissolution, liquidation or winding up.
(f)
Fractional Shares . Any fractional share of Common Stock resulting from the conversion of the Series A Stock shall be rounded up to the nearest whole share.
(g)
Reservation of Stock Issuable Upon Conversion . The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Stock. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Stock, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.
(h)
Notices . Any notice required by the provisions of this Section 2 shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) three (3) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All notices shall be addressed to each holder of record at the address of such holder appearing on the books of the Company.
(i)
No Impairment. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company but will at all times in good faith assist in the carrying out of all the provisions of this Section 2 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holder of the Series A Stock against impairment.
4.
Redemption .
(a)
At any time, the Company may, in its sole discretion, redeem some or all of the outstanding shares of Series A Stock at a Redemption Price equal to the greater of (i) $12,500 per share or (ii) the current market value of the common stock on an as converted basis.
(b)
To redeem Series A Stock, the Company, at least five (5) days prior to the date on which it desires to redeem such stock (the Redemption Date), shall send the applicable holder of Series A Stock a notice of the redemption, provided, however, that failure to give such notice or any defect therein or in the mailing thereof shall not affect the validity of the proceedings for the redemption of any shares of Series A Stock. Such notice shall state: (i) the Redemption Date; (ii) the Redemption Price; and (iii) the number of shares of Series A Stock to be redeemed.
(c)
Upon surrender, in accordance with said notice, of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Company shall so require), such shares shall be redeemed by the Company at the Redemption Price. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed shares without cost to the holder thereof.
(d)
All shares of Series A Stock redeemed pursuant to this Section 4 shall be restored to the status of authorized and unissued shares of Series A Stock, without designation as to Series and may thereafter be reissued as shares of any series of preferred stock other than shares of Series A Stock.
[Signatures on following page]
1 of 5
PROBECertificate of Designation for Series A Preferred Stock, v. 1
This Certificate of Designation has been executed and adopted on behalf of the Company as of May 20, 2004.
PROBE MANUFACTURING INDUSTRIES, INC.
By:
Kam Mahdi, Chief Executive Officer
2 of 5
PROBE Certificate of Designation for Series A Preferred Stock, v. 1
CERTIFICATE OF DESIGNATION
of
SERIES B CONVERTIBLE PREFERRED STOCK
for
PROBE MANUFACTURING INDUSTRIES, INC.
PROBE MANUFACTURING INDUSTRIES, INC., a California corporation (the Company), pursuant to the appropriate provisions of California Corporations Code, does hereby make this Certificate of Designation and does hereby state and certify that pursuant to the authority expressly vested in the Board of Directors of the Company by the Articles of Incorporation of the Company, the Board of Directors, without any shareholder action, which action was not required to be taken, duly adopted the following resolutions, which resolutions remain in full force and effect as of the date hereof:
RESOLVED, that, pursuant to Article Three, Section 2 of the Articles of Incorporation of the Company, the Board of Directors hereby authorizes the issuance of, and fixes the designation and preferences and relative, participating, optional, and other special rights, and qualifications, limitations and restrictions, of a series of Preferred Stock consisting of Twenty Thousand (20,000) shares, no par value, to be designated Series B Convertible Preferred Stock (the Series B Stock).
RESOLVED, that each share of the Series B Stock shall rank equally in all aspects and shall be subject to the following terms and provisions:
1.
Preference on Liquidation . In the event of any voluntary or involuntary liquidation, distribution of assets (other than the payment of dividends), dissolution or winding-up of the Company, Series B Stock shall have preferential rights to the Companys common stock (the Common Stock) whereby Series B Stock shall get two times (2x) return on its capital. Once Series B Stock has recouped its two times (2x) return on capital then Series B Stock shall participate, on a pro rata basis, based on the number of shares of the Companys common stock (the Common Stock) into which the Series B Stock are convertible at the time of the liquidation, distribution of assets, dissolution or winding-up.
2.
Voting Rights . The Series B Stock shall have voting rights and voting will be on an as converted basis, with class votes for the election of directors, any transaction in which control of the Company is transferred in which the per share price consideration received by Purchaser is less than three (3) times the Purchase Price, the sale of the Company of all or substantially all of its assets, liquidation or winding up of the Company and any amendment to the Companys by-laws or Articles of Incorporation in a manner adverse to Series B Stock.
3.
Conversion . The holders of the Series B Stock shall have the following rights with respect to the conversion of the Series B Stock into shares of Common Stock (the Conversion Rights):
(a)
Conversion. Subject to and in compliance with the provisions of this Section 3, any shares of Series B Stock may, at any time, at the option of the holder, be converted into fully paid and non-assessable shares of Common Stock (a Conversion). Each share of Series B Stock shall be converted into a number of shares of Common Stock that is equal to each share being divided by the average of the 3 lowest intraday bids in the twenty (20) days prior to conversion or $0.10, which ever is greater, multiplied by 100 (1 divided by x, multiplied by 100), or 125 shares per Series B, whichever is greater.
(b) Mechanics of the Conversion. Upon a Conversion, the holder of Series B Stock shall surrender the applicable certificate or certificates therefore, duly endorsed, at the office of the Company or any transfer agent for the Series B Stock, and shall give written notice to the Company, of the Conversion and the number of shares of Series B Stock being converted. Thereupon, the Company shall promptly issue and deliver to such holder a certificate or certificates for the number of shares of Common Stock to which such holder is entitled. A Conversion shall be deemed to have been made at the close of the first business day after the date both notice has been given and the applicable share certificate or certificates have been delivered to the Company, provided, however, if the foregoing occurs on a business day, before the close of business, the Conversion shall be deemed to have occurred at the close of business on that day (the Conversion Date). The person entitled to receive the shares of Common Stock issuable upon a Conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date.
(c)
Adjustment for Reclassification, Exchange and Substitution . If at any time or from time to time after the Common Stock issuable upon the conversion of the Series B Stock is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a transaction provided for elsewhere in this Section 2), in any such event each holder of Series B Stock shall have the right thereafter to convert such stock into the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change by holders of the maximum number of shares of Common Stock into which such shares of Series B Stock could have been converted immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof.
(d)
Reorganizations, Mergers, Consolidations or Sales of Assets . If at any time or from time to time after the date of issuance of the Series B Stock, there is a capital reorganization of the Common Stock (other than a transaction provided for elsewhere in this Section 2), as a part of such capital reorganization, provision shall be made so that the holders of the Series B Stock shall thereafter be entitled to receive upon conversion of the Series B Stock the number of shares of stock or other securities or property of the Company to which a holder of the number of shares of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, subject to adjustment in respect of such stock or securities by the terms thereof.
(e)
Notices of Record Date . Upon (i) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or (ii) any sale of the Company, capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company, or any voluntary or involuntary dissolution, liquidation or winding up of the Company, the Company shall mail to each holder of Series B Stock at least twenty (20) days prior to the record date specified therein a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (A) the date on which any such sale of the Company, reorganization, reclassification, recapitalization, dissolution, liquidation or winding up is expected to become effective, and (C) the date, if any, that is to be fixed as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such sale of the Company, reorganization, reclassification, recapitalization, dissolution, liquidation or winding up.
(f)
Fractional Shares . Any fractional share of Common Stock resulting from the conversion of the Series B Stock shall be rounded up to the nearest whole share.
(g)
Reservation of Stock Issuable Upon Conversion . The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series B Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series B Stock. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series B Stock, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.
(h)
Notices . Any notice required by the provisions of this Section 2 shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) three (3) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All notices shall be addressed to each holder of record at the address of such holder appearing on the books of the Company.
(i)
No Impairment. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company but will at all times in good faith assist in the carrying out of all the provisions of this Section 2 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holder of the Series B Stock against impairment.
4.
Redemption .
(a)
At any time, the Company may, in its sole discretion, redeem some or all of the outstanding shares of Series B Stock at a Redemption Price equal to the greater of (i) $200.00 per share or (ii) the current market value of the common stock on an as converted basis.
(b)
To redeem Series B Stock, the Company, at least five (5) days prior to the date on which it desires to redeem such stock (the Redemption Date), shall send the applicable holder of Series B Stock a notice of the redemption, provided, however, that failure to give such notice or any defect therein or in the mailing thereof shall not affect the validity of the proceedings for the redemption of any shares of Series B Stock. Such notice shall state: (i) the Redemption Date; (ii) the Redemption Price; and (iii) the number of shares of Series B Stock to be redeemed.
(c)
Upon surrender, in accordance with said notice, of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Company shall so require), such shares shall be redeemed by the Company at the Redemption Price. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed shares without cost to the holder thereof.
(d)
All shares of Series B Stock redeemed pursuant to this Section 4 shall be restored to the status of authorized and unissued shares of Series B Stock, without designation as to Series and may thereafter be reissued as shares of any series of preferred stock other than shares of Series B Stock.
[Signatures on following page]
1 of 5
PROBECertificate of Designation for Series B Preferred Stock, v. 1
This Certificate of Designation has been executed and adopted on behalf of the Company as of December 31, 2004.
PROBE MANUFACTURING INDUSTRIES, INC.
By:
Kam Mahdi, Chief Executive Officer
2 of 5
PROBE Certificate of Designation for Series B Preferred Stock, v. 1
CATHERINE BASINGER, ESQ.
144 W. San Antonio Drive
Long Beach, CA 90807
(562)547-0364
June 3, 2005
Probe Manufacturing, Inc.
3050 Pullman Street
Costa Mesa, CA 92626
Gentlemen:
I have acted as counsel to Probe Manufacturing, Inc., a Nevada corporation (the "Company"), in connection with the preparation and filing with the Securities and Exchange Commission (the "Commission") of a Registration Statement on Form SB-2, (the "Registration Statement"), as amended, pursuant to which the Company is registering under the Securities Act of 1933, as amended (the "Securities Act"), up to 12,078,125 shares of its common stock, $0.001 par value per share (the "Shares") which may be issued from time to time on a delayed or continuous basis pursuant to Rule 415 under the Securities Act. This opinion is being rendered in connection with the filing of the Registration Statement. All capitalized terms used herein and not otherwise defined shall have the respective meanings given to them in the Registration Statement.
In connection with this opinion, I have examined the Company's Articles of Incorporation and By-laws; and such other records of the corporate proceedings of the Company and certificates of the Company's officers as I deemed relevant; and the Registration Statement and the exhibits filed with the Commission.
In my examination, I have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as certified or photostatic copies and the authenticity of the originals of such copies.
Based upon the foregoing, and subject to the limitations set forth below, I am of the opinion that, once (i) the Registration Statement, as amended, has become effective under the Securities Act, (ii) the Shares have been issued as contemplated in the Registration Statement, and (iii) the Company has received the consideration in the manner described in the Registration Statement, the Shares will be duly and validly issued, fully paid and non-assessable shares of the Common Stock.
My opinion is based on the General Corporation Law of the State of Nevada and U.S. federal securities law. No opinion is expressed herein with respect to the qualification of the Shares under the securities or blue sky laws of any state or any foreign jurisdiction. It is understood that this opinion is to be used only in connection with the offer and sale of the Shares while the Registration Statement is in effect. This opinion is based upon currently existing statutes, rules, regulations and judicial decisions, and even though the Securities may be issued from time to time on a delayed or continuous basis, I disclaim any obligation to advise you of any change in any of these sources of law or subsequent legal or factual developments which might affect any matters or opinions set forth herein.
I understand that you wish to file this opinion as an exhibit to the Registration Statement, and I hereby consent thereto.
Sincerely,
/s/ Catherine Basinger, Esq.
_______________________
Catherine Basinger
CONSULTING AGREEMENT
THIS AGREEMENT made effective this 31 st day of December 2004, by and between Anthony Reed (Consultant) and Probe Manufacturing, Inc. (Client) (collectively, the Parties and separately, the Party).
WITNESSETH:
WHEREAS, Client is a provider of advanced electronics manufacturing services, or EMS, to original equipment manufacturers, or OEMs, primarily in the Industrial, Automotive, Semiconductor, Medical, Communication, and Military segments; and
WHEREAS, Consultant has experience providing certain advisory services to companies; and
WHEREAS, Client and Consultant wish to enter into a relationship whereby Consultant will provide certain services to Client on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of, and for the mutual promises and covenants contained herein, and for good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows:
1.
Statement of Services-Scope of Work
Client agrees to engage Consultant to perform the services and undertake the duties and responsibilities as set forth below and incorporated herein (the Services) and Consultant agrees to render the Services under the terms and conditions set forth in this Agreement. Consultant shall perform the Services without a fixed schedule or a commitment of a minimum number of hours provided; however, Consultant will provide a reasonable number of hours to perform the Services.
2.
No Employment
Consultant will be engaged solely as a consultant and not as an employee. The relationship between Consultant and Client shall at all times be a contractor/principal relationship, and Consultant shall not be deemed to be an employee of Client.
3.
Compensation and Payment
Client shall issue Consultant 6,875 shares of common stock upon execution of this Agreement. Consultant shall be responsible for all out of pocket expenses unless Consultant has received prior written approval from Client, and shall be responsible for supplying his own PC, office, telephone and related business items.
4.
Term of Agreement
The term of this Agreement (the Term) shall commence as of the date of this Agreement and shall remain in full force and effect for twelve months unless terminated pursuant to Section 5.
5.
Termination of Agreement
Either Party may terminate this Agreement due to a material breach by the other party and failure by that party to cure within 30 days of written notice of said breach (the Notice of Termination). Upon receiving Notice of Termination from Client, Consultant shall discontinue performance of the Services on the date specified in the Notice of Termination (the Termination Date).
6 .
Confidentiality of Information
Consultant acknowledges that he has executed the Confidentiality Agreement attached hereto. The Parties further agree that Client retains sole and exclusive right, title and ownership of any and all proprietary technology and any new products, improvements, enhancements or the like that result from Consultants services (the Developments) and that Consultant shall not have any right to or claim for any interest in the technology and/or the Developments.
7.
Responsibility of the Client
Client shall:
(a)
Provide reasonable assistance to Consultant by making available to Consultant pertinent information relating to the Services.
(b)
Provide prompt written notice to Consultant whenever Client becomes aware of any development that affects the scope or timing of the Services.
(c)
Pay Consultant for the Services in a timely manner.
8.
Responsibilities of the Consultant
Consultant shall:
(a)
Use best efforts to perform the Services in a professional and workman like manner consistent with the professional standards of the industry.
(b)
Inform and update Client regarding matters pertinent to the performance of the Services.
(c)
Although Consultant may perform services for other customers/clients, Consultant has agreed that shall devote such time as is reasonable and necessary to complete the Services in a timely manner consistent with the time frame established by Client.
9.
Compliance with Law
Consultant agrees to comply with all applicable local, state and federal laws, regulations and orders relating to the Services, including but not limited to, fair and equal opportunity practices and policies.
10.
Notices
Any notice to be given under and pursuant to the terms of this Agreement shall be in writing and shall be made by personal delivery, by a nationally recognized overnight carrier or by registered or certified mail, postage prepaid, return receipt requested and such notice shall be deemed given upon receipt if delivered personally or by overnight carrier, or forty-eight (48) hours after deposit in the United States mails as set forth herein. Any notice to the parties shall be sent to the following addresses or to such other address, as either party to this Agreement shall specify by notice to the other:
If to Client:
EFund Capital Partners, LLC
301 East Ocean Blvd.
Suite 640
Long Beach, CA 90802
If to Consultant:
Probe Manufacturing, Inc.
3050 Pullman Street
Costa Mesa, CA 90024
11.
Governing Law
The laws of the State of California shall govern this Agreement.
12.
Binding Arbitration
Any controversy or claim arising out of or relating to this Agreement, or any alleged breach thereof, will be settled by binding arbitration in accordance with the Commercial Rules of the American Arbitration Association. Such action shall be brought in Orange County, California and judgment upon the award rendered by the Arbitrator(s) may be entered in any court having jurisdiction thereof. The prevailing party in such action shall be entitled to recover reasonable attorneys fees.
13.
Entire Agreement
This Agreement constitutes the entire agreement between the Parties and the terms and conditions may be waived, modified or amended only by written agreement signed by both Parties.
14.
Waiver
No covenant, term or condition of this Agreement or breach thereof shall be deemed waived unless the waiver is in writing and signed by the party against whom enforcement is sought. Any waiver shall not be deemed to be a waiver of any proceeding or succeeding breach of the same or any other covenant, term or condition.
15.
Mutual Representation and Warranties
Each Party represents to the other that:
(a)
They are not restricted or prohibited, contractually or otherwise, from entering into and performing each of the terms and conditions of this Agreement.
(b)
The person executing this Agreement on behalf of the respective party has the requisite power and authority to execute this Agreement and to cause the respective party to be legally bound.
(c)
No suits, actions or proceedings are threatened or pending that will adversely affect its ability to perform its obligations under this Agreement.
16.
Assignment
This Agreement and the rights hereunder may not be assigned by either Party without the prior written consent of the other and shall be binding upon and enure to the benefit of the Parties, their respective successors and assigns.
17.
Severability
The provisions of this Agreement are meant to be enforced severally so that the determination that one or more provisions are enforceable or invalid shall not affect or render invalid any other provisions of this Agreement and such provisions shall continue to be in full force in accordance with their terms.
18.
Counterparts
This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed to be an original and such counterparts shall constitute but one and the same instrument.
IN WITNESS WHEREOF , the Parties have caused this Agreement to be executed effective as of the date set forth above.
Consultant:
Client:
Anthony Reed
Probe Manufacturing, Inc.
By: ____________________
By: __________________
Anthony Reed
Kambiz Mahdi
Chief Executive Officer
Page 1 of 4
LAW OFFICES OF JEFFREY CONRAD
Jeffrey Conrad
|
301 East Ocean Blvd., Suite 640
|
|
May 20, 2004
Probe Manufacturing Industries, Inc.
Mr. Kambiz Mahdi, CEO
3050 Pullman Street
Costa Mesa, CA 92626
Dear Mr. Mahdi:
This letter states the understanding between you and me for the services you want me to perform as your attorney.
1. Scope
I shall provide those legal services reasonably required to represent you and shall take reasonable steps to keep you informed of progress and to respond to your inquiries. My services may include review and preparation of corporate agreements, preparation of a private placement and creditor negotiations and SEC filings. My services will not, however, include litigation of any kind, whether in court, in administrative hearings, or before government agencies or arbitration tribunals. This agreement will take effect on the date as set forth above. Please return a signed copy of this agreement to me.
2. Client's Duties
In order to adequately represent you, it is important that you be truthful with me, cooperate with me, keep me informed of developments, abide by this agreement, pay my bills on time and keep me advised of your current address, telephone number and whereabouts.
3. Legal Fees
You agree to pay for legal services at a flat monthly fee of $2,500.00 that is nonrefundable to you in the event that the hours spent providing legal services is less than the flat monthly fee based upon my standard legal billing rate of $300.00/hour.
4. Costs and Expenses
In addition to the above fee(s), you agree to reimburse me for costs and expenses incurred in connection with my representation of you, including fees fixed by law or assessed by public agencies, long distance telephone calls, messenger or delivery fees, postage expenses, in-office photocopying at $0.15 per page, parking, investigation expenses, expenses of materials or books particularly related to
my representation of you, expenses of consultation with other attorneys, accountants or other professionals. You authorize me to hire any investigators, attorneys, consultants, or other professionals reasonably necessary in my judgment, and to direct such persons or entities to render statements for services rendered and expenses advanced either directly to you or to me (in my discretion), in which later event you agree to promptly reimburse me for the full amount of such statements.
5. Statements and Payments
You agree to pay my statements within seven (7) days after each statement's date. I shall send you periodic statements for fees and/or costs incurred; I anticipate that these statements will be sent monthly.
6. Termination
You are free to consult with another attorney at any time, and you may discharge me as your attorney at any time. I may withdraw from representing you with your consent or for good cause. Good cause includes your breach of
this agreement, your refusal to cooperate with me or to follow my advice on a material matter or any other fact or circumstance that would render my continuing representation unlawful or unethical. When my services conclude, all unpaid charges shall become immediately due and payable. After my services conclude, I will upon your request deliver your files to you along with any of your funds or property that are in my possession. You agree to pay for the cost of copying and transferring your files upon termination of my services.
7. Disclaimer of Guarantee
You understand that nothing in this agreement and nothing in my statements to you are to be construed as a promise or guarantee about the outcome of any of your matters. I make no such promises or guarantees. My comments about the outcome of your matters are expressions of opinion only.
8. Failure To Pay Fees and Expenses
In the event that any fee is not paid as provided above, I reserve the right to charge you interest at the rate of 1.5% per month, until payment is received. You agree that if fees are not paid promptly, I shall be able to recover from you attorney's fees and costs in connection with negotiation,
settlement, or an action to enforce payment of fees pursuant to this agreement.
Very truly yours,
Jeffrey S. Conrad, Esq.
Agreed and accepted:
______________________
Kambiz Mahdi, CEO
Date: May 20, 2004
Probe Manufacturing Industries, Inc.
Note Payable, Line of Credit
Secured by Assets of the company
Line of credit $150,000 Costa Mesa, California January 1, 2005
At the times hereinafter stated, for value received, I promise to pay to _Efund Capital Partners, LLC or order, at place designated by the holder hereof, the sum of ______________________________________ with interest on the amounts of principal remaining from time to time unpaid, until said principal sum is paid, at the rate of 20%, per annum. All principal together with interest due thereon, shall immediately be due and payable March 22, 2007
Advances and Payments This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any unpaid interest with be due and payable in full. The borrower may draw advances from and make payments to this line of credit at any time.
Interest Payments Interest will accrue at the rate of 20% per annum, payable as follows:
1)
12 % will be paid (in US dollars) on the 22nd of the following month, based on the average outstanding balance of the previous month.
2)
8 % will be paid (converted to common stock) at the end of each quarter, based on the average outstanding balance for the previous quarter. The Interest due will be converted to Common Stock at the price .80 cents per share.
Balloon Payment Provision: This note is subject to section 2966 of the Civil Code, which provides that the holder of this note shall give written notice to the trustor, or his successor in interest, of prescribed information at least 90 and not more than 150 days before any balloon payment is due.
Pre-Payment Privilege: Payor shall have the privilege to prepay this note in full, or in part, at anytime without penalty. Payment (s) shall first apply to interest then due and the balance to principle. Interest shall cease to accrue on any principle paid as of date of payment thereof. Interest only payment, if applicable, shall thereafter adjust accordingly.
Should default be made in payment of any installment when due the whole sum of principle and interest shall become immediately due at the option of the holder of this note. All principle and interest are payable in lawful money of the United States of America. If action were instituted on this note or any portion thereof, I promise to pay such sum as the Court may fix as attorneys fees.
__________________________________ _______________________________
Kambiz Mahdi, - Pres./CEO Date Holder Date
__________________________________
Reza Zarif, COO Date
Probe Manufacturing Industries, Inc.
Note Payable, Line of Credit
Secured by Assets of the company
Line of credit $150,000.00 Costa Mesa, California January 1, 2005
At the times hereinafter stated, for value received, I promise to pay to Ashford Capital or order, at place designated by the holder hereof, the sum of -- One Hundred Fifty Thousand and no/00 -- with interest on the amounts of principal remaining from time to time unpaid, until said principal sum is paid, at the rate of 20%, per annum. All principal together with interest due thereon, shall immediately be due and payable March 22, 2007
Advances and Payments This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any unpaid interest with be due and payable in full. The borrower may draw advances from and make payments to this line of credit at any time.
Interest Payments Interest will accrue at the rate of 20% per annum, payable as follows:
1)
12 % will be paid (in US dollars) on the 22nd of the following month, based on the average outstanding balance of the previous month.
2)
8 % will be paid (converted to common stock) at the end of each quarter, based on the average outstanding balance for the previous quarter. The Interest due will be converted to Common Stock at the price .80 cents per share.
Balloon Payment Provision: This note is subject to section 2966 of the Civil Code, which provides that the holder of this note shall give written notice to the trustor, or his successor in interest, of prescribed information at least 90 and not more than 150 days before any balloon payment is due.
Pre-Payment Privilege: Payor shall have the privilege to prepay this note in full, or in part, at anytime without penalty. Payment (s) shall first apply to interest then due and the balance to principle. Interest shall cease to accrue on any principle paid as of date of payment thereof. Interest only payment, if applicable, shall thereafter adjust accordingly.
Should default be made in payment of any installment when due the whole sum of principle and interest shall become immediately due at the option of the holder of this note. All principle and interest are payable in lawful money of the United States of America. If action were instituted on this note or any portion thereof, I promise to pay such sum as the Court may fix as attorneys fees.
__________________________________ _______________________________
Kambiz Mahdi, - Pres./CEO Date Ashford Capital Date
__________________________________
Reza Zarif, COO Date
Probe Manufacturing Industries, Inc.
Note Payable, Line of Credit
Secured by Assets of the company
Line of credit $200,000 Costa Mesa, California Tuesday, March 8, 2005
At the times hereinafter stated, for value received, I promise to pay to Benner exemption trust or order, at place designated by the holder hereof, the sum of ______________________________________ with interest on the amounts of principal remaining from time to time unpaid, until said principal sum is paid, at the rate of 20%, per annum. All principal together with interest due thereon, shall immediately be due and payable March 22, 2007
Advances and Payments This is an interest only line of credit. There are no scheduled principal payments due other than on March 22 th , 2007, when the entire outstanding balance plus any unpaid interest with be due and payable in full. The borrower may draw advances from and make payments to this line of credit at any time.
Interest Payments Interest will accrue at the rate of 20% per annum, payable as follows:
1)
12 % will be paid (in US dollars) on the 22nd of the following month, based on the average outstanding balance of the previous month.
2)
8 % will be paid (converted to common stock) at the end of each quarter, based on the average outstanding balance for the previous quarter. The Interest due will be converted to Common Stock at the price .80 cents per share.
Balloon Payment Provision: This note is subject to section 2966 of the Civil Code, which provides that the holder of this note shall give written notice to the trustor, or his successor in interest, of prescribed information at least 90 and not more than 150 days before any balloon payment is due.
Pre-Payment Privilege: Payor shall have the privilege to prepay this note in full, or in part, at anytime without penalty. Payment (s) shall first apply to interest then due and the balance to principle. Interest shall cease to accrue on any principle paid as of date of payment thereof. Interest only payment, if applicable, shall thereafter adjust accordingly.
Should default be made in payment of any installment when due the whole sum of principle and interest shall become immediately due at the option of the holder of this note. All principle and interest are payable in lawful money of the United States of America. If action were instituted on this note or any portion thereof, I promise to pay such sum as the Court may fix as attorneys fees.
__________________________________ _______________________________
Kambiz Mahdi, - Pres./CEO Date Benner Exemption Trust Date
__________________________________
Reza Zarif, COO Date
Probe Manufacturing Industries, Inc.
Note Payable, Line of Credit
Secured by Assets of the company
Line of credit $100,000 Costa Mesa, California Tuesday, March 22, 2005
At the times hereinafter stated, for value received, I promise to pay to Ed Lassiter or order, at place designated by the holder hereof, the sum of ______________________________________ with interest on the amounts of principal remaining from time to time unpaid, until said principal sum is paid, at the rate of 20%, per annum. All principal together with interest due thereon, shall immediately be due and payable March 22, 2007
Advances and Payments This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any unpaid interest with be due and payable in full. The borrower may draw advances from and make payments to this line of credit at any time.
Interest Payments Interest will accrue at the rate of 20% per annum, payable as follows:
1)
12 % will be paid (in US dollars) on the 22nd of the following month, based on the average outstanding balance of the previous month.
2)
8 % will be paid (converted to common stock) at the end of each quarter, based on the average outstanding balance for the previous quarter. The Interest due will be converted to Common Stock at the price .80 cents per share.
Balloon Payment Provision: This note is subject to section 2966 of the Civil Code, which provides that the holder of this note shall give written notice to the trustor, or his successor in interest, of prescribed information at least 90 and not more than 150 days before any balloon payment is due.
Pre-Payment Privilege: Payor shall have the privilege to prepay this note in full, or in part, at anytime without penalty. Payment (s) shall first apply to interest then due and the balance to principle. Interest shall cease to accrue on any principle paid as of date of payment thereof. Interest only payment, if applicable, shall thereafter adjust accordingly.
Should default be made in payment of any installment when due the whole sum of principle and interest shall become immediately due at the option of the holder of this note. All principle and interest are payable in lawful money of the United States of America. If action were instituted on this note or any portion thereof, I promise to pay such sum as the Court may fix as attorneys fees.
__________________________________ _______________________________
Kambiz Mahdi, - Pres./CEO Date Edward Lassiter Date
__________________________________
Reza Zarif, COO Date
Probe Manufacturing Industries, Inc.
Note Payable, Line of Credit
Secured by Assets of the company
Line of credit $ 75,000.00 Costa Mesa, California January 1, 2005
At the times hereinafter stated, for value received, I promise to pay to _Rufina V. Paniego or order, at place designated by the holder hereof, the sum of -- Seventy Five and no/00 -- with interest on the amounts of principal remaining from time to time unpaid, until said principal sum is paid, at the rate of 20%, per annum. All principal together with interest due thereon, shall immediately be due and payable March 22, 2007
Advances and Payments This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any unpaid interest with be due and payable in full. The borrower may draw advances from and make payments to this line of credit at any time.
Interest Payments Interest will accrue at the rate of 20% per annum, payable as follows:
1)
12 % will be paid (in US dollars) on the 22nd of the following month, based on the average outstanding balance of the previous month.
2)
8 % will be paid (converted to common stock) at the end of each quarter, based on the average outstanding balance for the previous quarter. The Interest due will be converted to Common Stock at the price .80 cents per share.
Balloon Payment Provision: This note is subject to section 2966 of the Civil Code, which provides that the holder of this note shall give written notice to the trustor, or his successor in interest, of prescribed information at least 90 and not more than 150 days before any balloon payment is due.
Pre-Payment Privilege: Payor shall have the privilege to prepay this note in full, or in part, at anytime without penalty. Payment (s) shall first apply to interest then due and the balance to principle. Interest shall cease to accrue on any principle paid as of date of payment thereof. Interest only payment, if applicable, shall thereafter adjust accordingly.
Should default be made in payment of any installment when due the whole sum of principle and interest shall become immediately due at the option of the holder of this note. All principle and interest are payable in lawful money of the United States of America. If action were instituted on this note or any portion thereof, I promise to pay such sum as the Court may fix as attorneys fees.
__________________________________ _______________________________
Kambiz Mahdi, - Pres./CEO Date Holder Date
__________________________________
Reza Zarif, COO Date
INVESTMENT AGREEMENT
INVESTMENT AGREEMENT (this AGREEMENT), dated as of April 1, 2005 by and between Probe Manufacturing, Inc., a Nevada corporation (the Company ), and BTF, LLC., a Nevada limited liability company (the Purchaser ).
Whereas , the parties desire that, upon the terms and subject to the conditions contained herein, the Purchaser shall invest up to $4,500,000 to purchase the Companys Common Stock, $0.001 par value per share (the Common Stock );
Whereas , such investments will be made in reliance upon the provisions of Section 4(2) under the Securities Act of 1933, as amended (the 1933 Act ), Rule 506 of Regulation D, and the rules and regulations promulgated thereunder, and/or upon such other exemption from the registration requirements of the 1933 Act as may be available with respect to any or all of the investments in Common Stock to be made hereunder; and
Whereas , contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement substantially in the form attached hereto as Exhibit A (as amended from time to time, the Registration Rights Agreement ) pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act, and the rules and regulations promulgated thereunder, and applicable state securities laws.
NOW THEREFORE, in consideration of the foregoing recitals, which shall be considered an integral part of this Agreement, the covenants and agreements set forth hereafter, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Purchaser hereby agree as follows:
Section 1 . DEFINITIONS .
As used in this Agreement, the following terms shall have the following meanings specified or indicated, and such meanings shall be equally applicable to the singular and plural forms of the defined terms.
1933 Act shall have the meaning set forth in the preamble, above.
1934 Act shall mean the Securities Exchange Act of 1934, as it may be amended.
Affiliate shall have the meaning specified in Section 5(h), below.
Agreed Upon Procedures Report shall have the meaning specified in Section 2(o), below.
Agreement shall mean this Investment Agreement.
Best Bid shall mean the highest posted bid price of the Common Stock.
Bring Down Cold Comfort Letter shall have the meaning specified in Section 2(n), below.
Buy In shall have the meaning specified in Section 6, below.
Buy In Adjustment Amount shall have the meaning specified in Section 6.
Closing shall have the meaning specified in Section 2(h).
Closing Date shall mean seven (7) Trading Days following the Put Notice Date.
Common Stock shall have the meaning set forth in the preamble to this Agreement.
Control or Controls shall have the meaning specified in Section 5(h).
Covering Shares shall have the meaning specified in Section 6.
Effective Date shall mean the date the SEC declares effective under the 1933 Act the Registration Statement covering the Securities.
Environmental Laws shall have the meaning specified in Section 4(m), below.
Execution Date shall mean the date first indicated above.
Indemnitiees shall have the meaning specified in Section 10, below.
Indemnified Liabilities shall have the meaning specified in Section 10, below.
Ineffective Period shall mean any period of time that the Registration Statement or any Supplemental Registration Statement (as defined in the Registration Rights Agreement) becomes ineffective or unavailable for use for the sale or resale, as applicable, of any or all of the Registrable Securities (as defined in the Registration Rights Agreement) for any reason (or in the event the prospectus under either of the above is not current and deliverable) during any time period required under the Registration Rights Agreement.
Purchaser shall have the meaning indicated above.
Major Transaction shall have the meaning specified in Section 2(g), above.
Material Adverse Effect shall have the meaning specified in Section 4(a).
Material Facts shall have the meaning specified in Section 2(m).
Maximum Common Stock Issuance shall have the meaning specified in Section 2(j).
Minimum Acceptable Price with respect to any Put Notice Date shall mean 75% of the average of the closing bid prices for the fifteen Trading Day period immediately preceding such Put Notice Date.
Open Period shall mean the period beginning on and including the Trading Day immediately following the Effective Date and ending on the earlier to occur of (i) the date which is 36 months from the Effective Date; and (ii) termination of the Agreement in accordance with Section 9, below.
Payment Amount shall have the meaning specified in Section 2(p), below.
Partial Release Form shall have the meaning specified in Section 2(i), below.
Pricing Period shall mean the period beginning on the Put Notice Date and ending on and including the date that is five Trading Days after such Put Notice Date.
Principal Market shall mean the American Stock Exchange, Inc., the National Association of Securities Dealers, Inc. Over-the-Counter Bulletin Board, the Nasdaq National Market System or the Nasdaq SmallCap Market, whichever is the principal market on which the Common Stock is listed.
Prospectus shall mean the prospectus, preliminary prospectus and supplemental prospectus used in connection with the Registration Statement.
Purchase Amount shall mean the total amount being paid by the Purchaser on a particular Closing Date to purchase the Securities.
Purchase Price shall mean 93% of the average of the two lowest closing Best Bid price of the Common Stock during the Pricing Period.
Put Amount shall have the meaning set forth in Section 2(b) hereof.
Put Notice shall mean a written notice sent to the Purchaser by the Company stating the Put Amount of Shares the Company intends to sell to the Purchaser pursuant to the terms of the Agreement and stating the current number of Shares issued and outstanding on such date.
Put Notice Date shall mean the Trading Day immediately following the day on which the Purchaser receives a Put Notice, however a Put Notice shall be deemed delivered on (x) the Trading Day it is received by facsimile or otherwise by the Purchaser if such notice is received prior to 9:00 am Eastern Time, or (y) the immediately succeeding Trading Day if it is received by facsimile or otherwise after 9:00 am Eastern Time on a Trading Day. No Put Notice may be deemed delivered on a day that is not a Trading Day.
Put Restriction shall mean the days between the end of the Pricing Period and the date on which the Purchaser deems the Put closed. During this time, the Company shall not be entitled to deliver another Put Notice.
Registration Period shall have the meaning specified in Section 5(c), below.
Registration Rights Agreement shall have the meaning set forth in the recitals, above.
Registration Statement means the registration statement of the Company filed under the 1933 Act covering the Common Stock issuable hereunder.
Related Party shall have the meaning specified in Section 5(h).
Repurchase Event shall have the meaning specified in Section 2(p).
Resolution shall have the meaning specified in Section 8(f).
SEC shall mean the U.S. Securities & Exchange Commission.
SEC Documents shall have the meaning specified in Section 4(f).
Securities shall mean the shares of Common Stock issued pursuant to the terms of the Agreement.
Shares shall mean the shares of the Companys Common Stock.
Sold Shares shall have the meaning specified in Section 6.
Subsidiaries shall have the meaning specified in Section 4(a).
Trading Day shall mean any day on which the Principal Market for the Common Stock is open for trading, from the hours of 9:30 am until 4:00 pm.
Transaction Documents shall mean this Agreement, the Registration Rights Agreement, and each of the other agreements entered into by the parties hereto in connection with this Agreement.
Valuation Event shall have the meaning specified in Section 2(k).
Section 2. PURCHASE AND SALE OF COMMON STOCK.
(a) Purchase and Sale of Common Stock . Subject to the terms and conditions set forth herein, the Company shall issue and sell to the Purchaser, and the Purchaser shall purchase from the Company, up to that number of Shares having an aggregate Purchase Price of $4,500,000.
(b) Delivery of Put Notices.
(i) Subject to the terms and conditions of the Transaction Documents, and from time to time during the Open Period, the Company may, in its sole discretion, deliver a Put Notice to the Purchaser which states the Put Amount (designated in shares of Common Stock) which the Company intends to sell to the Purchaser on a Closing Date. The Put Notice shall be in the form attached hereto as Exhibit B and incorporated herein by reference. The amount that the Company shall be entitled to Put to the Purchaser (the Put Amount ) shall be equal to, at the Companys election, either: (a) 200% of the average daily volume (U.S. market only) of the Common Stock for the 10 Trading Days prior to the applicable Put Notice Date, multiplied by the average of the two daily closing Best Bid prices immediately preceding the Put Date, or (b) a minimum of $10,000; provided that in no event will the Put Amount be more than $1,000,000 with respect to any single Put. During the Open Period, the Company shall not be entitled to submit a Put Notice until after the previous Closing has been completed. The Purchase Price for the Common Stock identified in the Put Notice shall be equal to 93% of the average of the two lowest closing Best Bid price of the Common Stock during the Pricing Period.
(ii) If any closing bid price during the applicable Pricing Period with respect to that Put Notice is less than 75% of the any closing Best Bid prices of the Common Stock for the fifteen Trading Days prior to the Put Notice Date (the Minimum Acceptable Price ), the Put Notice will terminate at the Companys request sent in accordance with Section 9 of this Agreement. In the event that the closing bid price for the applicable Pricing Period is less than the Minimum Acceptable Price, the Company may elect, by sending written notice to the Purchaser to cancel the Put Notice.
(iii) Within seven calendar days after the commencement of each calendar quarter occurring subsequent to the commencement of the Open Period, the Company undertakes to notify Purchaser as to its reasonable expectations as to the Put Amount it intends to raise during such calendar quarter, if any, through the issuance of Put Notices. Such notification shall constitute only the Companys good faith estimate with respect to such calendar quarter and shall in no way obligate the Company to raise such amount during such calendar quarter or otherwise limit its ability to deliver Put Notices during such calendar quarter. The failure by the Company to comply with this provision may be cured by the Companys notification Purchaser at any time as to its reasonable expectations with respect to the current calendar quarter.
(c) Interest . It is the intention of the parties that any interest that may be deemed to be payable under this Agreement shall not exceed the maximum amount permitted under applicable law. If any applicable law sets the maximum interest amount, and any payment required under this Agreement exceeds such limit, then: (i) any such interest shall be reduced by the amount necessary to reduce the interest to the legally permitted limit; and (ii) any sums already collected (if any) from a party which exceed the legally permitted limits will be refunded to such party.
(d) Purchasers Obligation to Purchase Shares . Subject to the conditions set forth in this Agreement, following the Purchaser's receipt of a validly delivered Put Notice, the Purchaser shall be required to purchase from the Company during the related Pricing Period that number of Shares having an aggregate Purchase Price equal to the lesser of (i) the Put Amount set forth in the Put Notice, and (ii) 200% of the aggregate trading volume of the Common Stock during the applicable Pricing Period times (x) 93% of the average of the two (2) lowest closing bid prices of the Company's Common Stock during the specified Pricing Period, but only if said Shares bear no restrictive legend, are not subject to stop transfer instructions and are being held in escrow, pursuant to Section 2(h), prior to the applicable Closing Date.
(e) Limitation on Purchasers Obligation to Purchase Shares . In no event shall the Purchaser purchase Shares (whether from the Company or in public or private secondary transactions) other than pursuant to this Agreement until such date as this Agreement is terminated.
(f) Conditions to Purchasers Obligation to Purchase Shares . Notwithstanding anything to the contrary in this Agreement, the Company shall not be entitled to deliver a Put Notice and the Purchaser shall not be obligated to purchase any Shares at a Closing (as defined in Section 2(h)) unless each of the following conditions are satisfied:
(i) a Registration Statement shall have been declared effective and shall remain effective and available for the resale of all the Registrable Securities (as defined in the Registration Rights Agreement) at all times until the Closing with respect to the subject Put Notice;
(ii) at all times during the period beginning on the related Put Notice Date and ending on and including the related Closing Date, the Common Stock shall have been listed on the Principal Market and shall not have been suspended from trading thereon for a period of five consecutive Trading Days during the Open Period and the Company shall not have been notified of any pending or threatened proceeding or other action to delist or suspend the Common Stock;
(iii) the Company has complied with its obligations and is otherwise not in breach of a material provision of, or in default under, this Agreement, the Registration Rights Agreement or any other agreement executed in connection herewith which has not been corrected prior to delivery of the Put Notice Date;
(iv) no injunction shall have been issued and remain in force, or action commenced by a governmental authority which has not been stayed or abandoned, prohibiting the purchase or the issuance of the Securities; and
(v) the issuance of the Securities will not violate any share Purchaser approval requirements of the Principal Market.
If any of the events described in clauses (i) through (v) above occurs during a Pricing Period, then the Purchaser shall have no obligation to purchase the Put Amount of Common Stock set forth in the applicable Put Notice.
(g) Major Transaction . For purposes of this Agreement, a Major Transaction shall be deemed to have occurred upon the closing of any of the following events: (i) the consolidation, merger or other business combination of the Company with or into another person (other than pursuant to a migratory merger effected solely for the purposes of changing the jurisdiction of incorporation of the Company or other than a transaction in which the Company is the surviving corporation); (ii) the sale or transfer of all or substantially all of the Companys assets; or (iii) the consummation of a purchase, tender or exchange offer made to, and accepted by, the Purchasers of more than 50% of the economic interest in, or the combined voting power of all classes of voting stock of, the Company.
(h) Mechanics of Purchase of Shares by Purchaser . Subject to the satisfaction of the conditions set forth in Sections 2(f), 7 and 8, the closing of the purchase by the Purchaser of Shares or the Purchaser deeming a Put closed (a Closing ) shall occur on the date which is no later than seven Trading Days following the applicable Put Notice Date or when the Purchaser deems a Put closed (each a Closing Date ). Prior to each Closing Date, (i) the Company shall deliver to the Purchaser pursuant to the this Agreement, certificates representing the Shares to be issued to the Purchaser on such date and registered in the name of the Purchaser; and (ii) the Purchaser shall deliver to the Company the Purchase Price to be paid for such Shares, determined as set forth in Sections 2(b) and 2(d). In lieu of delivering physical certificates representing the Securities and provided that the Companys transfer agent then is participating in The Depository Trust Company ( DTC ) Fast Automated Securities Transfer ( FAST ) program, upon request of the Purchaser, the Company shall use its commercially reasonable efforts to cause its transfer agent to electronically transmit the Securities by crediting the account of the Purchasers prime broker (which shall be specified by the Purchaser a reasonably sufficient time in advance) with DTC through its Deposit Withdrawal Agent Commission ( DWAC ) system.
The Company understands that a delay in the issuance of Securities beyond the Closing Date could result in economic loss to the Purchaser. After the Effective Date, as compensation to the Purchaser for such loss, the Company agrees to pay late payments to the Purchaser for late issuance of Securities (delivery of Securities after the applicable Closing Date) in accordance with the following schedule (where No. of Days La te is defined as the number of days beyond the Closing Date):
Late Payment For Each
No. of Days Late
$10,000 of Common Stock
1
$100
2
$200
3
$300
4
$400
5
$500
6
$600
7
$700
8
$800
9
$900
10
$1,000
Over 10
$1,000 + $200 for each
Business Day late beyond 10 days
The Company shall pay any payments incurred under this Section in immediately available funds upon demand. Nothing herein shall limit the Purchasers right to pursue actual damages for the Companys failure to issue and deliver the Securities to the Purchaser, except to the extent that such late payments shall constitute payment for and offset any such actual damages alleged by the Purchaser, and any Buy In Adjustment Amount.
(i) reserved.
(j) Overall Limit on Common Stock Issuable . Notwithstanding anything contained herein to the contrary, if during the Open Period the Company becomes listed on an exchange that limits the number of shares of Common Stock that may be issued without share Purchaser approval, then the number of Shares issuable by the Company and purchasable by the Purchaser, including the shares of Common Stock issuable to the Purchasers pursuant to Section 11(b), shall not exceed that number of the shares of Common Stock that may be issuable without share Purchaser approval, subject to appropriate adjustment for stock splits, stock dividends, combinations or other similar recapitalization affecting the Common Stock (the Maximum Common Stock Issuance ), unless the issuance of Shares, including any Common Stock to be issued to the Purchasers pursuant to Section 11(b), in excess of the Maximum Common Stock Issuance shall first be approved by the Companys share Purchasers in accordance with applicable law and the By-laws and Amended and Restated Certificate of Incorporation of the Company, if such issuance of shares of Common Stock could cause a delisting on the Principal Market. The parties understand and agree that the Companys failure to seek or obtain such share Purchaser approval shall in no way adversely affect the validity and due authorization of the issuance and sale of Securities or the Purchasers obligation in accordance with the terms and conditions hereof to purchase a number of Shares in the aggregate up to the Maximum Common Stock Issuance limitation, and that such approval pertains only to the applicability of the Maximum Common Stock Issuance limitation provided in this Section 2(j).
(k) For the purpose of this Agreement, the term Valuation Event means the Company taking any of the following actions at any time during a Pricing Period:
(i) the subdivision or combinations of the Companys Common Stock;
(ii) the payment of a dividend or any other distribution with respect to shares of the Companys Common Stock;
(iii) the issuance of any options or other rights to subscribe for or purchase Common Stock ( Options ) or any securities convertible into or exchangeable for Common Stock ( Convertible Securities ), except for Incentive Stock Option Plans, the price per share for which Common Stock is shall be less than the bid price in effect immediately prior to such issuance of such Options or Convertible Securities;
(iv) the issuance of shares of Common Stock other than as provided in the foregoing subsections (i) through (iii), at a price per share less, or for other consideration lower, than the bid price in effect immediately prior to such issuance, or without consideration, except for Incentive Stock Option Plans; or
(v) the distribution of its assets or evidences of indebtedness to the Purchasers of Common Stock as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such Purchasers made in respect of the sale of all or substantially all of the Companys assets (other than under the circumstances provided for in the foregoing subsections (i) through (iv)).
(l) The Company agrees that it shall not take any action that would result in a Valuation Event occurring during a Pricing Period.
(m) reserved .
(n) Audit.
(i) Whenever reasonably requested by Purchaser, the Company shall engage its independent auditors to prepare in accordance with the provisions of Statement on Auditing Standards No. 71, as amended, such written report (the Bring Down Cold Comfort Letters ) with respect to the financial information contained in the Registration Statement and shall have delivered to the Purchaser such a report addressed to the Purchaser, on or prior to each Registration Opinion Deadline;
(ii) in the event that the Purchaser shall have requested delivery of an Agreed Upon Procedures Report pursuant to Section 2(o), the Company shall engage its independent auditors to perform certain agreed upon procedures and report thereon as shall have been reasonably requested by the Purchaser with respect to certain financial information of the Company and the Company shall deliver to the Purchaser a copy of such report addressed to the Purchaser. In the event that the report required by this Section 2(n) cannot be delivered by the Companys independent auditors, the Company shall, if necessary, promptly revise the Registration Statement and the Company shall not deliver a Put Notice to Purchaser until such report is delivered.
(o) Procedure if Material Facts are Reasonably Believed to be Untrue or are Omitted. In the event after such consultation the Purchaser or the Purchasers counsel reasonably believes that the Registration Statement contains an untrue statement or a material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading, (i) the Company shall file with the SEC an amendment to the Registration Statement responsive to such alleged untrue statement or omission and provide the Purchaser, as promptly as practicable, with copies of the Registration Statement and related Prospectus, as so amended, or (ii) if the Company disputes the existence of any such material misstatement or omission, and in the event the dispute relates to the adequacy of financial disclosure and the Purchaser shall reasonably request, the Companys independent auditors shall provide to the Company a letter ( Agreed Upon Procedures Report ) outlining the performance of such agreed upon procedures, which shall not require any more than the SAS 71 review described above as shall be reasonably requested by the Purchaser and the Company shall provide the Purchaser with a copy of such letter.
(p) Delisting; Suspension . If at any time during the Open Period or within 30 calendar days after the end of the Open Period; (i) the Registration Statement, after it has been declared effective, shall not remain effective and available for sale of all the Registrable Securities for a period exceeding 10 calendar days; (ii) the Common Stock shall not be listed on the Principal Market or shall have been suspended from trading thereon (excluding suspensions of not more than one trading day resulting from business announcements by the Company) or the Company shall have been notified of any pending or threatened proceeding or other action to delist or suspend the Common Stock; (iii) there shall have occurred a Major Transaction (as defined in Section 2(g)) or the public announcement of a pending Major Transaction which has not been abandoned or terminated; or (iv) the Registration Statement is no longer effective or stale for a period of more than five Trading Days as a result of the Companys failure to timely file its financial statements or for any other reason, the Company shall repurchase, within 30 calendar days of the occurrence of one of the events listed in clauses (i), (ii), (iii) or (iv) above (each a Repurchase Event ) and subject to the limitations imposed by applicable federal and state law, all or any part of the Securities issued to the Purchaser within the 60 Trading Days preceding the occurrence of the Repurchase Event and then held by the Purchaser at a price per Share equal to the highest closing bid price during the period beginning on the date of the Repurchase Event and ending on and including the date on which the Purchaser is paid by the Company for the repurchase of the Shares (the Payment Amount ). If the Company fails to pay to the Purchaser the full aggregate Payment Amount within ten calendar days of the occurrence of a Repurchase Event, the Company shall pay to the Purchaser, on the first Trading Day following such tenth calendar day, in addition to and not in lieu of the Payment Amount payable by the Company to the Purchaser, an amount equal to 2% of the aggregate Payment Amount then due and payable to the Purchaser, in cash by wire transfer, plus compounded annual interest of 18% on such Payment Amount during the period, beginning on the day following such tenth calendar day, during which such Payment Amount, or any portion thereof, is outstanding.
Section 3. PURCHASERS REPRESENTATIONS, WARRANTIES AND COVENANTS .
The Purchaser represents and warrants to the Company, and covenants, that:
(a) Sophisticated Purchaser . The Purchaser has, by reason of its business and financial experience, such knowledge, sophistication and experience in financial and business matters and in making investment decisions of this type that it is capable of (i) evaluating the merits and risks of an investment in the Securities and making an informed investment decision; (ii) protecting its own interest; and (iii) bearing the economic risk of such investment for an indefinite period of time.
(b) Authorization; Enforcement . This Agreement has been duly and validly authorized, executed and delivered on behalf of the Purchaser and is a valid and binding agreement of the Purchaser enforceable against the Purchaser in accordance with its terms, subject as to enforceability to general principles of equity and to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors rights and remedies.
(c) Section 9 of the 1934 Act . During the term of this Agreement, the Purchaser will comply with the provisions of Section 9 of the 1934 Act, and the rules promulgated thereunder, with respect to transactions involving the Common Stock. The Purchaser agrees not to short, either directly or indirectly through its affiliates, principals or advisors, the Companys common stock during the term of this Agreement.
(d) Accredited Purchaser . Purchaser is an Accredited Purchaser as that term is defined in Rule 501(a)(3) of Regulation D of the 1933 Act.
(e) No Conflicts . The execution, delivery and performance of the Transaction Documents by the Purchaser and the consummation by the Purchaser of the transactions contemplated hereby and thereby will not result in a violation of Partnership Agreement or other organizational documents of the Purchaser.
(f) Opportunity to Discuss . The Purchaser has had an opportunity to discuss the business, management and financial affairs of the Company with the Companys management.
(g) Investment Purposes . The Purchaser is purchasing the Securities for its own account for investment purposes and not with a view towards distribution and agrees to resell or otherwise dispose of the Securities solely in accordance with the registration provisions of the 1933 Act (or pursuant to an exemption from such registration provisions).
(h) No Registration as a Dealer . The Purchaser is not and will not be required to be registered as a dealer under the 1934 Act, either as a result of its execution and performance of its obligations under this Agreement or otherwise.
(i) The Purchaser is a Limited Liability Company , duly organized, validly existing and in good standing in the State of Nevada.
(j)
The Purchaser understands that it is liable for its own tax liabilities.
(k) The Purchaser will comply with Regulation M under the 1934 Act, if applicable
Section 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY .
Except as set forth in the Schedules attached hereto, or as disclosed on the Companys SEC Documents, the Company represents and warrants to the Purchaser that:
(a) Organization and Qualification . The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Nevada, and has the requisite corporate power and authorization to own its properties and to carry on its business as now being conducted. Each of the Company and its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect. As used in this Agreement, Material Adverse Effect means any material adverse effect on the business, properties, assets, operations, results of operations, financial condition or prospects of the Company and its Subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby or by the agreements and instruments to be entered into in connection herewith, or on the authority or ability of the Company to perform its obligations under the Transaction Documents (as defined in Section 1 and 4(b), below).
(b) Authorization; Enforcement; Compliance with Other Instruments .
(i) The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement, and each of the other agreements entered into by the parties hereto in connection with the transactions contemplated by this Agreement (collectively, the Transaction Documents ), and to issue the Securities in accordance with the terms hereof and thereof.
(ii) The execution and delivery of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby, including without limitation the reservation for issuance and the issuance of the Securities pursuant to this Agreement, have been duly and validly authorized by the Companys Board of Directors and no further consent or authorization is required by the Company, its Board of Directors, or its share Purchasers.
(iii) The Transaction Documents have been duly and validly executed and delivered by the Company.
(iv) The Transaction Documents constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors rights and remedies.
(c) Capitalization . As of the date hereof, the authorized capital stock of the Company consists of (i) 200,000,000 shares of Common Stock, .001 par value per share, of which as of the date hereof, 3,345,875 shares are issued and outstanding; shares of reserved for issuance pursuant to options, warrants and other convertible securities. All of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and nonassessable. Except as disclosed in the Companys publicly available filings with Periodic Filings, (i) no shares of the Companys capital stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company; (ii) there are no outstanding debt securities; (iii) there are no outstanding shares of capital stock, options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its Subsidiaries, except as stated in the SB-2; (iv) there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of their securities under the 1933 Act (except the Registration Rights Agreement); (v) there are no outstanding securities of the Company or any of its Subsidiaries which contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to redeem a security of the Company or any of its Subsidiaries; (vi) there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Securities as described in this Agreement; (vii) the Company does not have any stock appreciation rights or phantom stock plans or agreements or any similar plan or agreement, except Series A Convertible Preferred Stock; and (viii) there is no dispute as to the classification of any shares of the Companys capital stock. The Company has furnished to the Purchaser, or the Purchaser has had access through EDGAR to, true and correct copies of the Companys Amended and Restated Certificate of Incorporation, as in effect on the date hereof (the Certificate of Incorporation ), and the Companys By-laws, as in effect on the date hereof (the By-laws ), and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the Purchasers thereof in respect thereto.
(d) Issuance of Shares . The Company has reserved 10,000,000 Shares for issuance pursuant to this Agreement has been duly authorized and reserved for issuance (subject to adjustment pursuant to the Companys covenant set forth in Section 5(f) below) pursuant to this Agreement. Upon issuance in accordance with this Agreement, the Securities will be validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof. In the event the Company cannot register a sufficient number of Shares for issuance pursuant to this Agreement, the Company will use its best efforts to authorize and reserve for issuance the number of Shares required for the Company to perform its obligations hereunder as soon as reasonably practicable.
(e) No Conflicts . The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby will not (i) result in a violation of the Certificate of Incorporation, any Certificate of Designations, Preferences and Rights of any outstanding series of preferred stock of the Company or the By-laws; or (ii) conflict with, or constitute a material default (or an event which with notice or lapse of time or both would become a material default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, contract, indenture mortgage, indebtedness or instrument to which the Company or any of its Subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including United States federal and state securities laws and regulations and the rules and regulations of the Principal Market or principal securities exchange or trading market on which the Common Stock is traded or listed) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected. Except as disclosed in Schedule 4(e), neither the Company nor its Subsidiaries is in violation of any term of, or in default under, the Certificate of Incorporation, any Certificate of Designations, Preferences and Rights of any outstanding series of preferred stock of the Company or the By-laws or their organizational charter or by-laws, respectively, or any contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its Subsidiaries, except for possible conflicts, defaults, terminations, amendments, accelerations, cancellations and violations that would not individually or in the aggregate have a Material Adverse Effect. The business of the Company and its Subsidiaries is not being conducted, and shall not be conducted, in violation of any law, statute, ordinance, rule, order or regulation of any governmental authority or agency, regulatory or self-regulatory agency, or court, except for possible violations the sanctions for which either individually or in the aggregate would not have a Material Adverse Effect. Except as specifically contemplated by this Agreement and as required under the 1933 Act, the Company is not required to obtain any consent, authorization, permit or order of, or make any filing or registration (except the filing of a registration statement) with, any court, governmental authority or agency, regulatory or self-regulatory agency or other third party in order for it to execute, deliver or perform any of its obligations under, or contemplated by, the Transaction Documents in accordance with the terms hereof or thereof. All consents, authorizations, permits, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof and are in full force and effect as of the date hereof. Except as disclosed in Schedule 4(e), the Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. The Company is not, and will not be, in violation of the listing requirements of the Principal Market as in effect on the date hereof and on each of the Closing Dates and is not aware of any facts which would reasonably lead to delisting of the Common Stock by the Principal Market in the foreseeable future.
(f) INTENTIONALLY DELETED.
(g) Absence of Certain Changes . Except as set forth in the SEC Documents, the Company does not intend to change the business operations of the Company. The Company has not taken any steps, and does not currently expect to take any steps, to seek protection pursuant to any bankruptcy law nor does the Company or its Subsidiaries have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings.
(h) Absence of Litigation . Except as set forth in Schedule 4(h) and the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of Company or any of its Subsidiaries, threatened against or affecting the Company, the Common Stock or any of the Companys Subsidiaries or any of the Companys or the Companys Subsidiaries officers or directors in their capacities as such, in which an adverse decision could have a Material Adverse Effect.
(i) Acknowledgment Regarding Purchasers Purchase of Shares . The Company acknowledges and agrees that the Purchaser is acting solely in the capacity of arms length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby. The Company further acknowledges that the Purchaser is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby and any advice given by the Purchaser or any of its respective representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to the Purchasers purchase of the Securities. The Company further represents to the Purchaser that the Companys decision to enter into the Transaction Documents has been based solely on the independent evaluation by the Company and its representatives.
(j) No Undisclosed Events, Liabilities, Developments or Circumstances . Since March 31, 2005, no event, liability, development or circumstance has occurred or exists, or to the Companys knowledge is contemplated to occur, with respect to the Company or its Subsidiaries or their respective business, properties, assets, prospects, operations or financial condition, that would be required to be disclosed by the Company under applicable securities laws on a registration statement filed with the SEC relating to an issuance and sale by the Company of its Common Stock and which has not been publicly announced.
(k) Employee Relations . Neither the Company nor any of its Subsidiaries is involved in any union labor dispute nor, to the knowledge of the Company or any of its Subsidiaries, is any such dispute threatened. Neither the Company nor any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and its Subsidiaries believe that relations with their employees are good. No executive officer (as defined in Rule 501(f) of the 1933 Act) has notified the Company that such officer intends to leave the Companys employ or otherwise terminate such officers employment with the Company.
(l) Intellectual Property Rights . Except as set forth in Schedule 4(l) the Company and its Subsidiaries own or possess adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. Except as set forth the SEC Documents, none of the Companys trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, government authorizations, trade secrets or other intellectual property rights necessary to conduct its business as now or as proposed to be conducted have expired or terminated, or are expected to expire or terminate within two years from the date of this Agreement. The Company and its Subsidiaries do not have any knowledge of any infringement by the Company or its Subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, or of any such development of similar or identical trade secrets or technical information by others and, except as set forth on the SEC Documents, there is no claim, action or proceeding being made or brought against, or to the Companys knowledge, being threatened against, the Company or its Subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. The Company and its Subsidiaries have taken commercially reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties.
(m) Environmental Laws . The Company and its Subsidiaries (i) are, to the knowledge of management of the Company, in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ( Environmental Laws ); (ii) have, to the knowledge of management of the Company, received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses; and (iii) are in compliance, to the knowledge of the Company, with all terms and conditions of any such permit, license or approval where, in each of the three foregoing cases, the failure to so comply would have, individually or in the aggregate, a Material Adverse Effect.
(n) Title . The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as those that do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its Subsidiaries. Any real property and facilities held under lease by the Company or any of its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries.
(o) Insurance . The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company reasonably believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect.
(p) Regulatory Permits . The Company and its Subsidiaries have in full force and effect all certificates, approvals, authorizations and permits from the appropriate federal, state, local or foreign regulatory authorities and comparable foreign regulatory agencies, necessary to own, lease or operate their respective properties and assets and conduct their respective businesses, and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, approval, authorization or permit, except for such certificates, approvals, authorizations or permits which if not obtained, or such revocations or modifications which, would not have a Material Adverse Effect.
(q) Internal Accounting Controls. The Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with managements general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with managements general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
(r) No Materially Adverse Contracts, Etc. Neither the Company nor any of its Subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Companys officers are or is expected in the future to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement which in the judgment of the Companys officers has or is expected to have a Material Adverse Effect.
(s) Tax Status. The Company and each of its Subsidiaries have made or filed all United States federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and have paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim except $140,000 to the Internal Revenue Service.
(t) Certain Transactions . Except for arms length transactions pursuant to which the Company makes payments in the ordinary course of business upon terms no less favorable than the Company could obtain from third parties and other than the grant of stock options disclosed to the purchaser, none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company or any of its Subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner.
(u) Dilutive Effect . The Company understands and acknowledges that the number of shares of Common Stock issuable upon purchases pursuant to this Agreement will increase in certain circumstances including, but not necessarily limited to, the circumstance wherein the trading price of the Common Stock declines during the period between the Effective Date and the end of the Open Period. The Companys executive officers and directors have studied and fully understand the nature of the transactions contemplated by this Agreement and recognize that they have a potential dilutive effect. The Board of Directors of the Company has concluded, in its good faith business judgment, that such issuance is in the best interests of the Company. The Company specifically acknowledges that, subject to such limitations as are expressly set forth in the Transaction Documents, its obligation to issue shares of Common Stock upon purchases pursuant to this Agreement is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other share Purchasers of the Company.
(v) Right of First Refusal . The Company shall not, directly or indirectly, without the prior written consent of Purchaser offer, sell, grant any option to purchase, or otherwise dispose of (or announce any offer, sale, grant or any option to purchase or other disposition) any of its Common Stock or securities convertible into Common Stock at a price that is less than the market price of the Common Stock at the time of issuance of such security or investment (a Subsequent Financing ) for a period of one year after the Effective Date, except (i) the granting of options or warrants to employees, officers, directors and consultants, and the issuance of shares upon exercise of options granted, under any stock option plan heretofore or hereafter duly adopted by the Company or for services rendered or to be rendered; (ii) shares issued upon exercise of any currently outstanding warrants or options and upon conversion of any currently outstanding convertible debenture or convertible preferred stock, in each case disclosed pursuant to Section 4(c); (iii) securities issued in connection with the capitalization or creation of a joint venture with a strategic partner; (iv) shares issued to pay part or all of the purchase price for the acquisition by the Company of another entity (which, for purposes of this clause (iv), shall not include an individual or group of individuals); and (v) shares issued in a bona fide public offering by the Company of its securities, unless (A) the Company delivers to Purchaser a written notice (the Subsequent Financing Notice ) of its intention to effect such Subsequent Financing, which Subsequent Financing Notice shall describe in reasonable detail the proposed terms of such Subsequent Financing, the amount of proceeds intended to be raised thereunder, the person with whom such Subsequent Financing shall be effected, and attached to which shall be a term sheet or similar document relating thereto; and (B) Purchaser shall not have notified the Company by 5:00 p.m. (New York time) on the fifth Trading Day after its receipt of the Subsequent Financing Notice of its willingness to provide, subject to completion of mutually acceptable documentation, financing to the Company on substantially the terms set forth in the Subsequent Financing Notice. If Purchaser shall fail to notify the Company of its intention to enter into such negotiations within such time period, then the Company may effect the Subsequent Financing substantially upon the terms set forth in the Subsequent Financing Notice; provided that the Company shall provide Purchaser with a second Subsequent Financing Notice, and Purchaser shall again have the right of first refusal set forth above in this Section, if the Subsequent Financing subject to the initial Subsequent Financing Notice shall not have been consummated for any reason on the terms set forth in such Subsequent Financing Notice within thirty Trading Days after the date of the initial Subsequent Financing Notice. The rights granted to Purchaser in this Section are not subject to any prior right of first refusal given to any other person disclosed on Schedule 4(c).
(w) Lock-up. The Company shall cause its officers, insiders, directors, affiliates or other related parties to refrain from selling Common Stock during each Pricing Period, except for shares issued under S-8.
(x) No General Solicitation . Neither the Company, nor any of its affiliates, nor any person acting on its behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Common Stock offered hereby.
(y) No brokers, finders or financial advisory fees or commissions will be payable by the Company with respect to the transaction contemplated by this Agreement.
Section 5. COVENANTS OF THE COMPANY
(a) Best Efforts . The Company shall use commercially reasonable efforts timely to satisfy each of the conditions to be satisfied by it as provided in Section 7 of this Agreement.
(b) Blue Sky . The Company shall, at its sole cost and expense, on or before each of the Closing Dates, take such action as the Company shall reasonably determine is necessary to qualify the Securities for, or obtain exemption for the Securities for, sale to the Purchaser at each of the Closings pursuant to this Agreement under applicable securities or Blue Sky laws of such states of the United States, as reasonably specified by Purchaser, and shall provide evidence of any such action so taken to the Purchaser on or prior to the Closing Date.
(c) Reporting Status . Until the earlier to occur of (i) the first date which is after the date this Agreement is terminated pursuant to Section 9 and on which the Purchasers (as that term is defined in the Registration Rights Agreement) may sell all of the Securities without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto); and (ii) the date on which (A) the Purchasers shall have sold all the Securities; and (B) this Agreement has been terminated pursuant to Section 9 (the Registration Period ), the Company shall file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate its status as a reporting company under the 1934 Act.
(d) Use of Proceeds . The Company will use the proceeds from the sale of the Shares (excluding amounts paid by the Company for fees as set forth in the Transaction Documents) for general corporate and working capital purposes or for other disclosed purposes.
(e) INTENTIONALLY DELETED.
(f) Reservation of Shares . Subject to the following sentence, the Company shall take all action necessary to at all times have authorized, and reserved for the purpose of issuance, a sufficient number of shares of Common Stock to provide for the issuance of the Securities hereunder. In the event that the Company determines that it does not have a sufficient number of authorized shares of Common Stock to reserve and keep available for issuance as described in this Section 5(f), the Company shall use its best efforts to increase the number of authorized shares of Common Stock by seeking share Purchaser approval for the authorization of such additional shares.
(g) Listing . The Company shall promptly secure and maintain the listing of all of the Registrable Securities (as defined in the Registration Rights Agreement) upon the Principal Market and each other national securities exchange and automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and shall maintain, such listing of all Registrable Securities from time to time issuable under the terms of the Transaction Documents. The Company shall maintain the Common Stocks authorization for quotation on the Principal Market. Neither the Company nor any of its Subsidiaries shall take any action which would be reasonably expected to result in the delisting or suspension of the Common Stock on the Principal Market (excluding suspensions of not more than one trading day resulting from business announcements by the Company). The Company shall promptly provide to the Purchaser copies of any notices it receives from the Principal Market regarding the continued eligibility of the Common Stock for listing on such automated quotation system or securities exchange. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 5(g).
(h) Transactions With Affiliates . The Company shall not, and shall cause each of its Subsidiaries not to, enter into, amend, modify or supplement, or permit any Subsidiary to enter into, amend, modify or supplement, any agreement, transaction, commitment or arrangement with any of its or any Subsidiarys officers, directors, persons who were officers or directors at any time during the previous two years, share Purchasers who beneficially own 5% or more of the Common Stock, or affiliates or with any individual related by blood, marriage or adoption to any such individual or with any entity in which any such entity or individual owns a 5% or more beneficial interest (each a Related Party ), except for (i) customary employment arrangements and benefit programs on reasonable terms, (ii) any agreement, transaction, commitment or arrangement on an arms-length basis on terms no less favorable than terms which would have been obtainable from a person other than such Related Party, or (iii) any agreement, transaction, commitment or arrangement which is approved by a majority of the disinterested directors of the Company. For purposes hereof, any director who is also an officer of the Company or any Subsidiary of the Company shall not be a disinterested director with respect to any such agreement, transaction, commitment or arrangement. Affiliate for purposes hereof means, with respect to any person or entity, another person or entity that, directly or indirectly, (i) has a 5% or more equity interest in that person or entity, (ii) has 5% or more common ownership with that person or entity, (iii) controls that person or entity, or (iv) is under common control with that person or entity. Control or Controls for purposes hereof means that a person or entity has the power, direct or indirect, to conduct or govern the policies of another person or entity.
(i) Filing of Form 8-K . On or before the date which is three Trading Days after the Execution Date, the Company shall file a Current Report on Form 8-K with the SEC describing the terms of the transaction contemplated by the Transaction Documents in the form required by the 1934 Act, if such filing is required.
(j) Corporate Existence . The Company shall use its best efforts to preserve and continue the corporate existence of the Company.
(k) Notice of Certain Events Affecting Registration; Suspension of Right to Make a Put. The Company shall promptly notify Purchaser upon the occurrence of any of the following events in respect of a Registration Statement or related prospectus in respect of an offering of the Securities: (i) receipt of any request for additional information by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the Registration Statement or related prospectus; (ii) the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of any Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in such Registration Statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of a Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Companys reasonable determination that a post-effective amendment to the Registration Statement would be appropriate, and the Company shall promptly make available to Purchaser any such supplement or amendment to the related prospectus. The Company shall not deliver to Purchaser any Put Notice during the continuation of any of the foregoing events.
(l) Reserved
Section 6. COVER . If the number of Shares represented by any Put Notices become restricted or are no longer freely trading for any reason, and after the applicable Closing Date, the Purchaser purchases, in an open market transaction or otherwise, the Companys Common Stock (the Covering Shares ) in order to make delivery in satisfaction of a sale of Common Stock by the Purchaser (the Sold Shares ), which delivery such Purchaser anticipated to make using the Shares represented by the Put Notice (a Buy-In ), the Company shall pay to the Purchaser the Buy-In Adjustment Amount (as defined below). The Buy-In Adjustment Amount is the amount equal to the excess, if any, of (a) the Purchasers total purchase price (including brokerage commissions, if any) for the Covering Shares over (b) the net proceeds (after brokerage commissions, if any) received by the Purchaser from the sale of the Sold Shares. The Company shall pay the Buy-In Adjustment Amount to the Purchaser in immediately available funds immediately upon demand by the Purchaser. By way of illustration and not in limitation of the foregoing, if the Purchaser purchases Common Stock having a total purchase price (including brokerage commissions) of $11,000 to cover a Buy-In with respect to the Common Stock it sold for net proceeds of $10,000, the Buy-In Adjustment Amount which the Company will be required to pay to the Purchaser will be $1,000.
Section 7. CONDITIONS OF THE COMPANYS OBLIGATION TO SELL .
The obligation hereunder of the Company to issue and sell the Securities to the Purchaser is further subject to the satisfaction, at or before each Closing Date, of each of the following conditions set forth below. These conditions are for the Companys sole benefit and may be waived by the Company at any time in its sole discretion.
(a) The Purchaser shall have executed each of this Agreement and the Registration Rights Agreement and delivered the same to the Company.
(b) The Purchaser shall have delivered to the Company the Purchase Price for the Securities being purchased by the Purchaser at the Closing (after receipt of confirmation of delivery of such Securities) by wire transfer of immediately available funds pursuant to the wire instructions provided by the Company.
(c) The representations and warranties of the Purchaser shall be true and correct as of the date when made and as of the applicable Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and the Purchaser shall have performed, satisfied and complied with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Purchaser at or prior to such Closing Date.
(d) No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.
(e) No Valuation Event shall have occurred since the applicable Put Notice Date.
Section 8. FURTHER CONDITIONS OF THE PURCHASERS OBLIGATION TO PURCHASE .
The obligation of the Purchaser hereunder to purchase Shares is subject to the satisfaction, on or before each Closing Date, of each of the following conditions set forth below.
(a) The Company shall have executed each of the Transaction Documents and delivered the same to the Purchaser.
(b) The Common Stock shall be authorized for quotation on the Principal Market and trading in the Common Stock shall not have been suspended by the Principal Market or the SEC, at any time beginning on the date hereof and through and including the respective Closing Date (excluding suspensions of not more than one Trading Day resulting from business announcements by the Company, provided that such suspensions occur prior to the Companys delivery of the Put Notice related to such Closing).
(c) The representations and warranties of the Company shall be true and correct as of the date when made and as of the applicable Closing Date as though made at that time (except for (i) representations and warranties that speak as of a specific date and (ii) with respect to the representations made in Sections 4(g), (h) and (j) and the third sentence of Section 4(k) hereof, events which occur on or after the date of this Agreement and are disclosed in SEC filings made by the Company at least ten Trading Days prior to the applicable Put Notice Date) and the Company shall have performed, satisfied and complied with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company on or before such Closing Date. The Purchaser may request an update as of such Closing Date regarding the representation contained in Section 4(c) above.
(d) reserved
(e) The Company shall have executed and delivered to the Purchaser the certificates representing, or have executed electronic book-entry transfer of, the Securities (in such denominations as such Purchaser shall request) being purchased by the Purchaser at such Closing.
(f) The Board of Directors of the Company shall have adopted resolutions consistent with Section 4(b)(ii) above (the Resolutions ) and such Resolutions shall not have been amended or rescinded prior to such Closing Date.
(g) reserved.
(h) No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.
(i) The Registration Statement shall be effective on each Closing Date and no stop order suspending the effectiveness of the Registration statement shall be in effect or shall be pending or threatened. Furthermore, on each Closing Date (i) neither the Company nor Purchaser shall have received notice that the SEC has issued or intends to issue a stop order with respect to such Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of such Registration Statement, either temporarily or permanently, or intends or has threatened to do so (unless the SECs concerns have been addressed and Purchaser is reasonably satisfied that the SEC no longer is considering or intends to take such action), and (ii) no other suspension of the use or withdrawal of the effectiveness of such Registration Statement or related prospectus shall exist.
(j) At the time of each Closing, the Registration Statement (including information or documents incorporated by reference therein) and any amendments or supplements thereto shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading or which would require public disclosure or an update supplement to the prospectus.
(k) There shall have been no filing of a petition in bankruptcy, either voluntarily or involuntarily, with respect to the Company and there shall not have been commenced any proceedings under any bankruptcy or insolvency laws, or any laws relating to the relief of debtors, readjustment of indebtedness or reorganization of debtors, and there shall have been no calling of a meeting of creditors of the Company or appointment of a committee of creditors or liquidating agents or offering of a composition or extension to creditors by, for, with or without the consent or acquiescence of the Company.
(l) If applicable, the share Purchasers of the Company shall have approved the issuance of any Shares in excess of the Maximum Common Stock Issuance in accordance with Section 2(j).
(m) The conditions to such Closing set forth in Section 2(f) shall have been satisfied on or before such Closing Date.
(n) The Company shall have certified to the Purchaser the number of shares of Common Stock outstanding as of a date within ten Trading Days prior to such Closing Date.
Section 9. TERMINATION . This Agreement shall terminate upon any of the following events:
(i) when the Purchaser has purchased an aggregate of $4,500,000 in the Common Stock of the Company pursuant to this Agreement; provided that the Companys representations, warranties and covenants contained in this Agreement insofar as applicable to the transactions consummated hereunder prior to such termination, shall survive the termination of this Agreement for the period of any applicable statute of limitations;
(ii) on the date which is 36 months after the Effective Date;
(iii) if the Company shall file or consent by answer or otherwise to the entry of an order for relief or approving a petition for relief, reorganization or arrangement or any other petition in bankruptcy for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or shall make an assignment for the benefit of its creditors, or shall consent to the appointment of a custodian, receiver, trustee or other officer with similar powers of itself or of any substantial part of its property, or shall be adjudicated a bankrupt or insolvent, or shall take corporate action for the purpose of any of the foregoing, or if a court or governmental authority of competent jurisdiction shall enter an order appointing a custodian, receiver, trustee or other officer with similar powers with respect to the Company or any substantial part of its property or an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law, or an order for the dissolution, winding up or liquidation of the Company, or if any such petition shall be filed against the Company;
(iv) if the Company shall issue or sell any equity securities or securities convertible into, or exchangeable for, equity securities or enter into any other equity financing facility during the Open Period, other than in compliance with Section 4(v);
(v) the trading of the Common Stock is suspended by the SEC, the Principal Market or the NASD for a period of five consecutive Trading Days during the Open Period;
(vi)
the Company shall not have filed with the SEC the initial Registration Statement with respect to the resale of the Registrable Securities in accordance with the terms of the initial Registration Rights Agreement within 60 calendar days of the date hereof or the Registration Statement has not been declared effective within 180 calendar days of the date hereof; or
(vii) The Common Stock ceases to be registered under the 1934 Act or listed or traded on the Principal Market. Upon the occurrence of one of the above-described events, the Company shall send written notice of such event to the Purchaser.
Section 10. INDEMNIFICATION . In consideration of the parties mutual obligations set forth in the Transaction Documents, each of the parties (in such capacity, an Indemnitor ) shall defend, protect, indemnify and hold harmless the the other and all of the other partys share Purchasers, officers, directors, employees, counsel, and direct or indirect Purchasers and any of the foregoing persons agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the Indemnitees ) from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys fees and disbursements (the Indemnified Liabilities ), incurred by any Indemnitee as a result of, or arising out of, or relating to (i) any misrepresentation or breach of any representation or warranty made by the Indemnitor or any other certificate, instrument or document contemplated hereby or thereby; (ii) any breach of any covenant, agreement or obligation of the Indemnitor contained in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby; or (iii) any cause of action, suit or claim brought or made against such Indemnitee by a third party and arising out of or resulting from the execution, delivery, performance or enforcement of the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, except insofar as any such misrepresentation, breach or any untrue statement, alleged untrue statement, omission or alleged omission is made in reliance upon and in conformity with written information furnished to Indemnitor which is specifically intended for use in the preparation of any such Registration Statement, preliminary prospectus, prospectus or amendments to the prospectus. To the extent that the foregoing undertaking by the Indenitor may be unenforceable for any reason, the Indemnitor shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The indemnity provisions contained herein shall be in addition to any cause of action or similar rights Indemnitor may have, and any liabilities the Indemnitor or the Indemnitees may be subject to.
Section 11. GOVERNING LAW; MISCELLANEOUS .
(a) Governing Law . This Agreement shall be governed by and interpreted in accordance with the laws of the State of California without regard to the principles of conflict of laws. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the County of Los Angeles, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.
(b) Legal Fees; and Miscellaneous Fees . Except as otherwise set forth in the Transaction Documents, each party shall pay the fees and expenses of its advisers, counsel, the accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. Any attorneys fees and expenses incurred by either the Company or by the Purchaser in connection with the preparation, negotiation, execution and delivery of any amendments to this Agreement or relating to the enforcement of the rights of any party, after the occurrence of any breach of the terms of this Agreement by another party or any default by another party in respect of the transactions contemplated hereunder, shall be paid on demand by the party which breached the Agreement and/or defaulted, as the case may be. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of any Securities.
(c) Counterparts . This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party; provided that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature.
(d) Headings; Singular/Plural . The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. Whenever required by the context of this Agreement, the singular shall include the plural and masculine shall include the feminine.
(e) Severability . If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.
(f) Entire Agreement ; Amendments . This Agreement supersedes all other prior oral or written agreements between the Purchaser, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein (including the other Transaction Documents) contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Purchaser makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the Purchaser, and no provision hereof may be waived other than by an instrument in writing signed by the party against whom enforcement is sought.
(g) Notices . Any notices or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:
If to the Company:
Probe Manufacturing, Inc.
3050 Pullman Street
Costa Mesa, CA 92626
Facsimile: 714-424-2960
With Copy to:
If to the Purchaser:
BTF, LLC
10600 Wilshire Blvd., Suite 461
Los Angeles, CA 90024
Facsimile: 310-861-5896
Each party shall provide five days prior written notice to the other party of any change in address or facsimile number.
(h) No Assignment . This Agreement may not be assigned.
(i) No Third Party Beneficiaries . This Agreement is intended for the benefit of the parties hereto and is not for the benefit of, nor may any provision hereof be enforced by, any other person.
(j) Survival . The representations and warranties of the Company and the Purchaser contained in Sections 2 and 3, the agreements and covenants set forth in Sections 4 and 5, and the indemnification provisions set forth in Section 10, shall survive each of the Closings and the termination of this Agreement.
(k) Publicity . The Company and Purchaser shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and no party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other parties, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, in which such case the disclosing party shall provide the other parties with prior notice of such public statement. Notwithstanding the foregoing, the Company shall not publicly disclose the name of Purchaser without the prior written consent of such Purchaser, except to the extent required by law. Purchaser acknowledges that this Agreement and all or part of the Transaction Documents may be deemed to be material contracts as that term is defined by Item 601(b)(10) of Regulation S-B, and that the Company may therefore be required to file such documents as exhibits to reports or registration statements filed under the 1933 Act or the 1934 Act. Purchaser further agrees that the status of such documents and materials as material contracts shall be determined solely by the Company, in consultation with its counsel.
(l) Further Assurances . Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.
(m) Placement Agent . There were no brokers involved in this Agreement.
(n) No Strict Construction . The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.
(o) Remedies . The Purchaser and each Purchaser of the Shares shall have all rights and remedies set forth in this Agreement and the Registration Rights Agreement and all rights and remedies which such Purchasers have been granted at any time under any other agreement or contract and all of the rights which such Purchasers have under any law. Any person having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any default or breach of any provision of this Agreement, including the recovery of reasonable attorneys fees and costs, and to exercise all other rights granted by law.
(p) Payment Set Aside . To the extent that the Company makes a payment or payments to the Purchaser hereunder or the Registration Rights Agreement or the Purchaser enforces or exercises its rights hereunder or thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.
(q) Pricing of Common Stock . For purposes of this Agreement, the bid price of the Common Stock in this Agreement shall be as reported on Bloomberg.com.
* * *
Investment Agreement - 1
SIGNATURE PAGE OF INVESTMENT AGREEMENT
Your signature on this Signature Page evidences your agreement to be bound by the terms and conditions of the Investment Agreement and the Registration Rights Agreement as of the date first written above.
The undersigned signatory hereby certifies that he has read and understands the Investment Agreement, and the representations made by the undersigned in this Investment Agreement are true and accurate, and agrees to be bound by its terms.
BTF, LLC
By:____________________________
Raquel Imbassahy, Managing Member
PROBE MANUFACTURING, INC.
By:__________________________________
Kambiz Mahdi, CEO
LIST OF EXHIBITS
-----------------
EXHIBIT A
Registration Rights Agreement
EXHIBIT B
Opinion of Company's Counsel
EXHIBIT C
[reserved]
EXHIBIT D
Broker Representation Letter
EXHIBIT E
Board Resolution
EXHIBIT F
Put Notice
EXHIBIT G
Put Settlement Sheet
LIST OF SCHEDULES
-----------------
Schedule 4(a) Subsidiaries
Schedule 4(c) Capitalization
Schedule 4(e) Conflicts
Schedule 4(g) Material Changes
Schedule 4(h) Litigation
Schedule 4(l) Intellectual Property
Schedule 4(n) Liens
Schedule 4(t) Certain Transactions
Investment Agreement - 2
EXHIBIT A
Investment Agreement - 3
EXHIBIT B
Investment Agreement - 4
EXHIBIT C
Investment Agreement - 5
EXHIBIT D
[BROKERS LETTERHEAD]
Date
Via Facsimile
Attention:
______________________
______________________
______________________
Re: Probe Manufacturing, Inc.
Dear __________________:
It is our understanding that the Form______ Registration Statement bearing SEC File Number ( ___-______) filed by Probe Manufacturing, Inc.on Form _____ on __________, 2003 was declared effective on _________, 2003.
This letter shall confirm that ______________ shares of the common stock of Probe Manufacturing, Inc.are being sold on behalf of __________________ and that we shall comply with the prospectus delivery requirements set forth in that Registration Statement by filing the same with the purchaser.
If you have any questions please do not hesitate to call.
Sincerely,
______________________
cc: .
Investment Agreement - 6
EXHIBIT E
Investment Agreement - 7
EXHIBIT F
Date:
RE: Put Notice Number __
Dear Mr. Evans,
This is to inform you that as of today, Probe Manufacturing, Inc., Inc., a Nevada corporation (the "Company"), hereby elects to exercise its right pursuant to the Investment Agreement to require BTF, LLC. to purchase shares of its common stock. The Company hereby certifies that:
The amount of this put is $__________.
The Pricing Period runs from ________ until _______.
The current number of shares issued and outstanding as of the Company are:
____________________
Regards,
________________________
Kambiz Mahdi, CEO
Probe Manufacturing, Inc.
EXHIBIT G
PUT SETTLEMENT SHEET
Date:
Kambiz Mahdi,
Pursuant to the Put given by Probe Manufacturing, Inc., to BTF, LLC. on _________________ 200x, we are now submitting the amount of common shares for you to issue to BTF, LLC.
Please have a certificate baring no restrictive legend totaling __________ shares issued to BTF, LLC immediately and send via DWAC to the following account:
XXXXXX
If not DWAC eligible, please send Fedex Priority Overnight to:
XXXXXX
Once these shares are received by us, we will break have the funds wired to the Company.
Regards,
Raquel Imbassahy
The undersigned has completed this Put as of this ___ th day of _________, 20xx.
Probe Manufacturing, Inc.
________________________________
Kambiz Mahdi, CEO
SCHEDULE 4(c) CAPITALIZATION
SCHEDULE 4(e) CONFLICTS
SCHEDULE 4(g) MATERIAL CHANGES
SCHEDULE 4(h) LITIGATION
1. Cadence has a judgment against us for $98,000. The judgment was due to lack of payment by Probe to Cadence after Probe purchased the license to use their Alegro software program. Due to economic conditions after September 11 th the market for the use of this product disappeared and Probe was not able to resell the services. Consequently, Probe was not able to generate any revenues from reselling of the software and could not pay Cadence. On August 9 th 2004 we entered into a payment agreement with Cadence in which we pay them $2,500 a month until such time the debt is paid off. The balance currently due to Cadence under the agreement is $58,500 as of May 25, 2005.
2. IFC had a judgment against us for $144,403.00. The judgment resulted from our failure to pay IFC under the purchase agreement for a piece of X-Ray equipment. In September 2004 we entered into a settlement agreement whereby we agreed to pay IFC $15,000 as an initial payment and $5,000 per month until settlement amount of $70,000.00 is paid in full. The balance due as of May 25, 2005 is $15,000.00.
3. Canon Financial has a judgment against us for $15,000.00. The judgment was entered because Probe did not pay the lease payments due on a copy machine which was not properly maintained by Canon and was not functional most of the time. We have agreed to pay Canon $1000.00 per month until fully paid. Our balance as of May 25, 2005 is $8,000.00.
4. Pro-Source has filed a civil case against us for $35,000 for breach of contract. They claimed breach of contract as a result of our refusal to pay for their services they claimed rendered in 2003 and 2004. Were currently negotiating a settlement, however, if we are unable to negotiate a settlement we believe we will be successful on the merits of the case because of Pro-Sources failure to provide the agreed services.
5. We currently owe the Internal Revenue Service $140,000.00 for past tax liabilities which we are not currently able to pay in full. We have negotiated a settlement with IRS and have entered into a payment plan with them in which we pay the IRS $2,500 per month.
SCHEDULE 4(l) INTELLECTUAL PROPERTY
SCHEDULE 4(n) LIENS
SCHEDULE 4(t) CERTAIN TRANSACTIONS
Investment Agreement - 8
CONFIDENTIAL
PROBE MANUFACTURING INDUSTRIES, INC.
ENGAGEMENT AGREEMENT
May 20
18
, 2004
Probe Manufacturing Industries, Inc.
Attn. Kam Mahdi, President
Attn. Reza Zarif, COO
3050 Pullman
Costa Mesa, CA 92660
Dear Mr. Mahdi & Mr. Zarif:
Thank you for taking the time to speak with us about your plans for Probe Manufacturing Industries, Inc. ("Probe" or the "Company"). You have already accomplished a great deal, and your core business model promises exciting growth potential for the Company and its owners. We would be very pleased to assist you in achieving your goals. We believe that we can provide the right mix of access to capital, strategic planning advice and assistance, and the basis of long-term relationships that will greatly assist the Company in the accomplishment of its strategic objectives. We will work closely with you and your management team to plan and accomplish your objectives.
This letter agreement (the Agreement) confirms our understanding that eFund Capital Partners, LLC (EFUND) has been engaged as a Strategic Partner with Probe with respect to a proposed financing more particularly described below (the Financing), and in connection therewith reviewing the Companys business growth needs, its capital structure, its principal business organization and other matters pertinent to the restructuring of Probe.
1.
The Financing .
The Financing is currently contemplated to be structured as follows:
a.
Initial Funding - EFUND and/or its affiliates has already infused and will infuse additional amounts into Probe as a capital contribution in the following manner :
•
EFUND has already infused $50,000.00 on May 7, 2004 and $50,000 on May 12, 2004 pursuant to a Loan Agreement dated May 7, 2004 (the Initial Loan).
•
An additional $100,000 (the Additional Initial Funding), of which $50,000 will be funded within 14 days of the date of this Agreement and the remaining $50,000 will be funded within 14 days thereafter.
•
EFUND agrees to convert the aggregate amount of the above referenced Initial Loan and the Additional Initial Funding into 40% equity of Probe.
b.
Private Placement
At least $1,000,000 and up to $2,000,000 will be raised in a private placement of the Companys common stock to accredited investors, with the price per share to be determined after consultation between the Company and EFUND. The parties agree that the pre-money valuation of the Company with respect to the contemplated Private Placement will be set at $10,000,000; however, EFUND can give no assurance that the $10,000,000 is an appropriate valuation and that both Probe and EFUND have determined this number and agree that it will be re-evaluated from time to time in the future. The Private Placement will commence no later than May 2 6
1
, 2004 and will be consummated no later than the date 60 days after commencement date.
c.
Public Listing The parties mutual objective is that after completion of the private placement, the Company will use its reasonable commercial efforts to list its shares of common stock for public trading on the OTC Bulletin Board or on such other public market as the Company may determine in its sole discretion after consultation with EFUND. The parties acknowledge and agree that the Company will undertake a listing of its shares only if its Board of Directors, after thorough consideration of the costs and benefits of a listing, determines that such a listing is in the best interests of the Company and its shareholders. The filing of a registration statement and/or application for listing of the Companys shares shall occur no later than 30 days after closing of Private Placement, and the public listing of such shares shall occur no later than 180 days thereafter.
d.
Equity Line of Credit - Additionally, EFUND agrees to enter into an equity line of credit for a minimum amount of $2 million, to be entered into upon consummation of the public listing referred to above, the terms of which will be negotiated by the parties under separate agreements.
e.
Employment Agreements - As a condition to funding the private placement and entering into the equity line of credit, each of Kam Mahdi and Reza Zarif shall enter into an employment agreement with the Company, on terms substantially similar to a form of employment agreement previously provided by the Company to EFUND and otherwise mutually acceptable to each of the respective parties. The parties acknowledge that each of Mr. Mahdi and Mr. Zarif are investors and officers in a company known as Netconexi, Inc. and that any employment agreement between the Company and each of Mr. Mahdi and Mr. Zarif will need to permit these individuals to continue their involvement in Netconexi in a manner and to the extent acceptable to each of the respective parties.
f.
Employee Stock Options Up to 2% of the Companys common stock outstanding at any time will be reserved for use as employee stock options.
2.
EFUND Services .
In connection with the Financing, EFUND will perform the following services:
(a)
EFUND will assist the Company regarding all financial aspects of the company, including but not limited to implementing cost reduction measures, instituting financial control mechanisms, and introducing general monetary management systems;
(b)
EFUND will familiarize itself to the extent it deems appropriate and feasible with the business, operations, properties, condition (financial and otherwise) and prospects of the Company;
(c)
EFUND will manage the Private Placement and as part of its responsibilities, will immediately put together a private placement memorandum. EFUND agrees that no private placement memorandum will be distributed to any prospective investor until the Company has approved the form and the substance of the memorandum;
(d)
EFUND shall assist the company in obtaining the public listing of its shares, whether through a reverse merger with a public company, through a public offering of the Companys shares, or through some other method deemed appropriate by the Companys Board of Directors after consultation with EFUND;
(e)
Certain members of EFUND are lawyers and are active members of the California State Bar. These members shall from time to time help the Company in a legal capacity when requested by the Company, as long as the interests of the Company and EFUND are not otherwise in conflict either generally or in the particular matter in which legal assistance is required. It is projected that such members will assist with employment problems, potential legal actions against current partners of the Company and general negotiations going forward. The fee for such services will be a retainer of $2,500 per month; however, if after review, the attorney or attornies are billing less than $2,500, the Company may elect to pay an hourly rate of $200;
(f)
EFUND will provide the Company with advice and counsel concerning the continued development and implementation of its business and financial plans and business strategies;
(g)
In assisting the Companys execution of its strategic plan, EFUND may identify and introduce to the Company a strategic partner or partners;
(h)
EFUND will provide such further reasonable and appropriate services to the Company as may be necessary to fulfill this engagement as the Company and its management may request from time to time.
In order to facilitate EFUNDs provision of the foregoing services, each of PROBE and, as appropriate, Kam Mahdi and Reza Zarif, agrees to do the following:
(aa)
PROBE agrees to provide a copy of any and all documents, software, proprietary information and access to all corporate records including trade secrets, etc to EFUND, all of which information will be subject to the confidentiality obligations set forth in Section 5;
(bb) Kam Mahdi and Reza Zarif agree to provide any and all services required to fulfill the Companys current obligations and any other future obligations that may arise in the course of the Companys business to ensure that the Company is operated in substantially the same manner in which it has been presented to EFUND, it being understood that: (i) the Company shall pay Mr. Mahdi and Mr. Zarif all uncashed payroll checks for 2004 if and when the Companys cash flow permits, at which time 50% of which will be paid at the discretion of Mr. Mahdi and Mr. Zarif as President and Chief Operating Officers of the Company, and 50% of which will be paid only with the additional approval of the Board of Directors, (ii) the Company will use its best commercial efforts to pay off amounts owed to Camel Financial, and (iii) the Company will use its best commercial efforts to pay off all indebtedness that is supported by personal guaranties of Mr. Mahdi and Mr. Zarif.
(cc)
PROBE shall pay all costs associated in obtaining the public listing of its shares. However, consulting services provided by EFUND in connection with such listing will be for EFUNDs own account and will not be part of the costs to be paid by PROBE.
(dd) PROBE agrees to submit a budget to EFUND prior to the funding of the private placement which shall be ratified by the Board of Directors, and which budget will be substantially similar to the budget presented in the private placement memorandum.
(ee) Kam Mahdi and Reza Zarif agree to convert any outstanding balances owed to them by the Company into equity as soon as possible after the signing of this Agreement, exclusive of: (i) the uncashed payroll checks referred to above in Section 2(bb) and (ii) debt that is personally guaranteed by Mr. Mahdi and Mr. Zarif, which debt will be paid off (and guaranties released) as described above in Section 2(bb).
3.
Ownership and Board Seats .
(a)
As soon as possible after the execution of this Agreement, Company will be re-organized and/or re-capitalized, and EFUND and its affiliates shall receive a forty percent (40%) ownership stake in the Company as consideration for entering into this Agreement. The Company will authorize a Series A Convertible Preferred with anti-dilution provisions representing 40% of the Company on terms to be agreed upon by EFUND and PROBE. Of the Series A Convertible Preferred, 50% shall be issued to EFUND and/or its affiliates, and 50% to the principles of Probe. EFUND shall receive its additional 20% interest in Probe as common stock. The principles of Probe will receive the remainder of their ownership in common stock.
(b)
The parties also contemplate that as soon as possible after the execution of this Agreement, the Board of Directors of the Company will consist of five (5) directors, and that EFUND will have the right to elect three (3) of those five directors, through its ownership of Series A Convertible Preferred and/or some other mechanism mutually acceptable to the parties.
(c)
The parties agree that in the event that EFUND is unable to effect the public listing of the Companys shares by the deadline described in Section 1(c) above, the Company shall have the right, but not the obligation, to repurchase from EFUND all shares of the Companys stock held by EFUND, at a purchase price of $200,000 plus 10% interest per annum
(the aggregate amount of the Initial Loan ,
and
the Additional Initial Funding and ten percent interest per annum thereon
).
4.
Representations and Warranties . The Company represents and warrants to EFUND that all information and documents (including any Memorandum) furnished by the Company in connection with the Financing will not, at the time so furnished and at the time of the closing of the Financing, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein.
5.
Confidentiality . In executing this Agreement, EFUND and PROBE each agrees that all information and documents received from or discovered by any party about the other party hereto whether before, on or after the date hereof with respect to such party (the Confidential Information) shall be held in confidence, shall not be disclosed to any third party (other than representatives and advisors of the parties hereto) and shall be used solely for the purpose of discussions and negotiations related to the proposed transaction. In the event the proposed transactions are not consummated and this Agreement is terminated, or upon any earlier request, all Confidential Information of any disclosing party hereto shall be returned to such party and no copies thereof shall be made or kept by the receiving party. EFUND agrees that (i) any private placement memorandum that is circulated to proposed investors shall contain a confidentiality notice to the effect of this Section 5 and (ii) prior to delivering any such memorandum, EFUND shall obtain an undertaking from such prospective investor to abide by the requirements of this Section.
6.
Governing Law . This Agreement shall be governed by, and construed in accordance with, the laws of the State of California applicably to contracts made and wholly to be performed within such state.
7.
Nature of Agreement and Legal Effect . EFUND and PROBE understand and agree that, with the exception of EFUNDs obligations under the Initial Funding, the ownership and repurchase provisions in Section 3, the representation and warranties of the Company in Section 4, and the confidentiality obligations of EFUND in Section 5, which provisions shall be legally binding on the parties and survive any termination of this Letter of Intent, this Letter of Intent does not create any legally binding rights or obligations on the part of any party hereto, but is only for the purpose of setting forth the present view of the parties hereto with respect to the proposed transaction and providing a basis on which to proceed with discussions and negotiations. Except as provided in the aforementioned provisions and this Section 7, legally binding rights and obligations with respect to the proposed Financing and related transactions would arise only upon the execution and delivery of a definitive agreements relating thereto (e.g., a stock purchase agreement) by the parties on mutually acceptable terms and conditions. The binding provisions of this Agreement referred to in this Section 7, shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, trustees, shareholders and receivers.
8.
Counterparts .
This agreement may be executed in counterparts, each of which together shall be considered a single document. This agreement may be executed via facsimile, which shall be deemed to be an original and shall be valid and binding upon each of the Company and EFUND.
9.
Termination . The obligations of either party under this Agreement may only be terminated (a) by mutual agreement of the parties or (b) by the Company if the public listing of the Companys shares has not been effected by the deadline described in Section 1(c) above.
[Signature page follows.]
1
PROBE Engagement Agreement
CONFIDENTIAL
______________________________________________________________________________
We are pleased that you wish to enter into a strategic partnership with EFUND and look forward to working with the Company and its management team. Please confirm that the foregoing is in accordance with your understanding by signing and returning to us the enclosed duplicate of this agreement, the binding provisions of which shall thereupon constitute a binding agreement between the Company and EFUND.
Very truly yours,
EFUND CAPITAL PARTNERS, LLC (EFUND)
By:
Barrett Evans
Managing Partner
Accepted and agreed to:
Accepted and agreed to:
Probe Manufacturing Technologies, Inc.
Probe Manufacturing Technologies, Inc.
By:
By:
Kam Mahdi
Reza Zarif
President
COO
Date:
Date:
2
PROBE MANUFACTURING INDUSTRIES, INC.
SERIES A CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
This Agreement is made as of May 20, 2004, by and between Probe Manufacturing Industries, Inc., a California corporation (the Company), and eFund Capital Partners, LLC (the Purchaser).
RECITALS
On the terms and conditions set forth herein, the Company desires to sell to the Purchaser, and the Purchaser desires to purchase from the Company, shares of the Companys Series A Convertible Preferred Stock (the Series A Preferred Stock) which are convertible into shares of the Companys common stock (the Common Stock), on the terms and conditions set forth in the Certificate of Designation of Series A Convertible Preferred Stock in the form attached hereto as Exhibit A (the Designation);
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual promises hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS
SECTION 1
AUTHORIZATION AND SALE OF THE SHARES
1.1
Authorization of the Shares .
(a)
The Company has authorized, or before the Closing (as defined in Section 2.1 below) will have authorized, a new series of preferred stock, designated as Series A Convertible Preferred Stock, which shall have the rights, preferences and privileges provided for in the Designation.
(b)
In addition, prior to the Closing, the Company shall have authorized the issuance and sale to the Purchaser(s) of Fifty (50) shares (the Shares) of the Series A Preferred Stock at a price of $10,000.00 per share, which shall have the rights, preferences and privileges provided for in the Designation.
1.2
Sale of the Shares . Subject to the terms and conditions hereof, at the Closing, the Company will issue and sell the Shares to the Purchaser and the Purchaser will purchase such Shares from the Company
(
) shares for an aggregate purchase price of
($
). The Common Stock issued or issuable upon conversion of the Shares is referred to as the Conversion Stock. The Shares, the Conversion Stock and any other securities issued or issuable in respect of the Shares are sometimes collectively referred to herein as the Securities.
SECTION 2
CLOSING DATE; DELIVERY
2.1
Closing Date . The closing date shall be the date upon which this Agreement is executed by the parties to this Agreement (the Closing Date ).
2.2
Delivery . On the Closing Date, the Company shall deliver to the Purchaser a certificate registered in the Purchasers name and representing the Shares, against delivery to the Company of a check or wire transfer payable to the order of the Company in the amount of the Purchase Price. The Shares shall be delivered free of any claims, liens or encumbrances.
SECTION 3
COMPANY REPRESENTATIONS AND WARRANTIES
Except as disclosed in the Schedules attached hereto, the Company makes the following representations and warranties to the Purchaser:
3.1
Organization and Standing . Each of the Company and its subsidiaries (i) is a corporation duly organized and validly existing under the laws of its respective jurisdiction of incorporation and is in good standing as a domestic corporation under the laws of said state or country, (ii) has all requisite corporate power and authority to own and lease its properties and to conduct its business as presently conducted, and (iii) is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified does not and is not reasonably expected to (x) individually or in the aggregate, have a material adverse effect on the properties, business, results of operations, condition (financial or otherwise), affairs or prospects of the Company and its subsidiaries, taken as a whole, (y) interfere with or impair the Companys ability to perform its obligations under this Agreement, or (z) interfere with or prevent the consummation of any of the transactions contemplated by said instruments (any of the events set forth in clauses (x), (y) or (z), a Material Adverse Effect).
3.2
Corporate Power . The Company has all requisite legal and corporate power to execute and deliver this Agreement, to sell and issue the Shares, to issue the Conversion Stock issuable upon conversion of the Shares, and to carry out and perform its obligations under the terms of this Agreement and under the terms of all other agreements and other documents executed in connection herewith.
3.3
Capitalization . The authorized capital stock of the Company upon the filing of the Designation with the Secretary of State of the State of California will consist of (a) 100,000,000 shares of Common Stock of which 6,000,000 shares are issued and outstanding, and (b) 10,000,000 shares of Preferred Stock of which (i) 300 shares Series A Convertible Preferred Stock of which are issued and outstanding and (ii) Fifty (50) shares shall be designated as Series A Convertible Preferred Stock, 50 of which shall be issued and transferred to the Purchaser(s) at the Closing. All of the outstanding shares of Common Stock and all of the shares of Series A Preferred Stock when issued and sold, will be, validly issued, fully paid and non-assessable, and free of any liens or encumbrances. The Series A Preferred Stock shall have the rights, preferences, privileges and restrictions set forth in the Designation. Except as set forth in Schedule 3.3 , no subscription, warrant, option or other right to purchase or acquire any shares of any class of capital stock of the Company or securities convertible into or exchangeable for such capital stock are outstanding. Except as set forth in Schedule 3.3 , no securities of the Company have any anti-dilution rights, preemptive rights or rights of first refusal.
3.4
Authorization . The execution, delivery and performance of this Agreement, and any other agreements related to this Agreement, by the Company have been properly and duly authorized by all requisite corporate action. In addition, all other actions taken by the Company in connection with the transactions contemplated by this Agreement were properly and duly authorized by all requisite corporate action. This Agreement and all documents and agreements executed in connection herewith, constitute valid and binding obligations of the Company. The issuance and sale of the Shares will not give rise to any preemptive rights or rights of first refusal on behalf of any person in existence on the date hereof.
3.5
Conversion Stock . The Conversion Stock has been duly and validly reserved for issuance.
3.6
Accuracy of Reports . All reports, if any, (the SEC Reports) required to be filed by the Company during the period from June 30, 2004 to the date of this Agreement under the Securities Exchange Act of 1934, as amended (the Exchange Act), have been duly filed, complied in all material respects with the Exchange Act and the requirements of their respective forms (as of their respective filing dates), were complete and correct in all material respects as of the dates at which the information was furnished, and none contains (as of their respective dates of filing) any untrue statement of a material fact nor omitted to state a material fact necessary in order to make the statements made therein, in light of the circumstances in which made, not misleading.
3.7
Financial Statements and Changes . All financial reports and materials provided by the Company are true and accurate reflection of the Companys current financial situation and nothing has been omitted which could have a material adverse effect.
3.8
No Conflict . The provisions of each of this Agreement and the Designation do not constitute any violation, or conflict with or constitute a default under, any indenture, mortgage, deed of trust or other agreement, instrument, court order, judgment, decree, statute, rule or regulation (each a Term and collectively the Terms) to which the Company or any of its subsidiaries is a party or by which it is bound. The execution, delivery and performance of and compliance with this Agreement, the issuance of the Securities pursuant to the terms hereof and the performance of the Companys obligations hereunder and thereunder (i) will not result in any violation or be in conflict with or constitute a default under any Term, (ii) will not result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or its subsidiaries pursuant to any such Term, and (iii) will not conflict with or violate any applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court having jurisdiction over the Company, any of its subsidiaries, or any of the Companys or subsidiaries assets or properties, subject to such exceptions as would not have a Material Adverse Effect.
3.9
Governmental Consents . No consent, approval or authorization of, or designation, declaration or filing with, any federal, state or foreign governmental authority is required on the part of the Company in connection with the valid execution and delivery of this Agreement, the offer, sale or the issuance of the Securities or the consummation of any other transaction contemplated hereby, except (i) the filing of the Designation in the office of the State of California, and (ii) if required, qualifications or filings in connection with exemptions under any applicable state blue sky laws and Federal securities laws, which qualifications or exemptions, if required, will have been obtained and will be effective on the Closing Date, or will be obtained or filed after the Closing Date within the prescribed time in order to secure such exemptions or qualifications.
3.10
Patents, Trademarks, Etc . The Company and its subsidiaries own or have the right, or prior to the Closing will own or have the right, to use all patents, trademarks, service marks, trade names, copyrights, licenses and rights necessary to their business as now conducted, as conducted at the time of the Closing and as contemplated being conducted thereafter, and, are not infringing upon any persons or companys rights under or with respect to any of the foregoing. Neither the Company nor any of its subsidiaries has received any written communications alleging that the Company or a subsidiary has violated any patent, trademark, service mark, trade name, copyright or trade secret or other proprietary right of any other person or entity.
3.11
Litigation . Except as set forth on Schedule 3.11 , there is no suit, action or proceeding pending or affecting the Company or any of its subsidiaries, nor is there any judgment, decree, injunction, rule or order of any governmental entity or arbitrator outstanding against the Company or any of its subsidiaries.
3.12
Compliance with Laws . The Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties, which could reasonably be expected to have a Material Adverse Effect.
3.13
Offering of the Shares . Neither the Company nor any person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require, under the Securities Act of 1933, as amended (the Securities Act), the integration of such offering with the offering and sale of the Securities) which might subject the offering, issuance or sale of the Securities to the registration requirements of the Securities Act.
3.14
Finders Fee. The Company represents and warrants that no finders or brokers have been retained or used in connection with the transactions contemplated by this Agreement.
1.15
Tax Matters. Except as set forth on Schedule 3.15 , the Company and each of its subsidiaries has timely filed with the appropriate taxing authority all tax returns required to be filed by it or has timely requested extensions and any such request has been granted and has not expired. Each such tax return is complete and accurate in all respects. All taxes shown as owed by the Company or any of its subsidiaries on any tax return or claimed or asserted to be due, from or with respect to any of them, have been paid, except for taxes being contested in good faith and for which adequate reserves have been taken. The Company and each of its subsidiaries have properly made due and sufficient accruals for all taxes for such periods subsequent to the periods covered by such tax returns as required by GAAP. None of the Company or any of its subsidiaries are being audited or examined by any taxing authority with respect to any tax or is a party to any pending action or proceedings by any taxing authority for assessment or collection of any tax, and no claim for assessment or collection of any tax has been asserted against it or any of its subsidiaries. No claim has been made by any authority in a jurisdiction where the Company or any of its subsidiaries does not file tax returns that it is or may be subject to taxation by that jurisdiction. There is no dispute or claim concerning any tax liability.
3.16
Environmental Matters . Each of the Company and its subsidiaries has obtained, and now maintains as currently valid and effective, all permits, certificates of financial responsibility, and other governmental authorizations (collectively, Environmental Permits) that are required to be obtained by the Company or any of its subsidiaries under any state, federal, municipal, foreign or other environmental laws, rules or regulations applicable to any aspect of the Company or such subsidiary, including, but not limited to, in connection with the operation of its businesses and properties (Environmental Laws). Each of the Company and its subsidiaries has been in compliance with all terms and conditions of the Environmental Permits and all Environmental Laws and no liability exists under any Environmental Laws or otherwise with respect to prior operations or activities.
SECTION 4
PURCHASER REPRESENTATIONS AND WARRANTIES
The Purchaser represents and warrants to the Company, as follows:
4.1
Investment Intent .
(a)
Purchaser has substantial experience in business and financial matters and is capable of evaluating the merits and risks of its investment in the Company and is able to bear the economic risks of its investment.
(b)
Purchaser is an accredited investor as defined in Rule 501(a)(3) of Regulation D of the Securities Act.
(c)
Purchaser is acquiring the Securities for investment for its own account and not with a view to, or for resale in connection with, any distribution thereof. Purchaser understands that the Securities have not been registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, which depends upon, among other things, the bona fide nature of the investment intent as expressed herein.
(d)
Purchaser acknowledges that the Securities must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser is aware of the provisions of Rule 144 promulgated under the Securities Act (Rule 144) which permit limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being through a brokers transaction or in a transaction directly with a market maker (as provided by Rule 144(f)) and the number of shares being sold during any three-month period not exceeding specified limitations.
4.2
Corporate Power . Purchaser has all requisite legal and corporate power to execute and deliver this Agreement and to carry out and perform its obligations under the terms of this Agreement.
4.3
Authorization . The execution, delivery and performance of this Agreement by the Purchaser has been duly authorized by all requisite corporate action, and this Agreement constitutes a valid and binding obligation of Purchaser enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors, and rules of law governing specific performance, injunctive relief or other equitable remedies.
4.4
Finders Fee. Purchaser represents and warrants that no finders or brokers have been retained or used in connection with the transactions contemplated by this Agreement.
SECTION 5
CONDITIONS TO CLOSING
5.1
Conditions to Purchasers Obligations . The obligation of the Purchaser to purchase the Shares at the Closing is subject to the fulfillment to the reasonable satisfaction of the Purchaser, on or prior to the Closing Date, of the following conditions any of which may be waived in writing, in whole or in part, by the Purchaser:
(a)
The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date;
(b)
All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date shall have been performed or complied with in all material respects; and
(c)
The Designation shall have been filed with and accepted by the California Secretary of State.
5.2
Conditions to Companys Obligations . The Companys obligation to sell and issue the Shares to the Purchaser at the Closing is subject to the fulfillment to the Companys reasonable satisfaction, on or prior to the Closing Date, of the following conditions, any of which may be waived in writing, in whole or in part, by the Company:
(a)
The representations and warranties made by the Purchaser in Section 4 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date;
(b)
All covenants, agreements and conditions contained in this Agreement to be performed by the Purchaser on or prior to the Closing Date shall have been performed or complied with in all material respects; and
SECTION 6
COVENANTS
6.1
Additional Documents and Further Assurances . Each party hereto, at the request of the other party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby.
SECTION 7
INDEMNIFICATION
7 . 1
Indemnification . The parties hereby agree to indemnify, defend and hold each other and their affiliates harmless from and against any and all costs, losses, liabilities, damages, lawsuits, deficiencies, claims and expenses, including without limitation, interest, penalties, reasonable attorneys fees and all amounts paid in investigation, defense or settlement of any of the foregoing (, incurred in connection with, arising out of, resulting from, or incident to, any breach of any representation or warranty made by such party in this Agreement.
SECTION 8
MISCELLANEOUS
8.1
Delays or Omissions . No delay or omission to exercise any right, power or remedy accruing to the Company or the Purchaser, upon any breach or default under this Agreement, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character by the Company or the Purchaser of any breach or default under this Agreement, or any waiver by the Company or the Purchaser of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in writing, and all remedies, either under this Agreement, or by law or otherwise afforded to the Company or the Purchaser, shall be cumulative.
8.2
Waivers and Amendments . This Agreement and the provisions hereof may not be waived or amended except pursuant to a written instrument signed by the required party or parties as aforesaid.
8.3
Severability . In the event that any provision of this Agreement shall be deemed to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby.
8.4
Successors and Assigns . Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto.
8.5
Notices, Etc . All notices and other communications required or permitted hereunder shall be in writing and shall be delivered either (i) personally, (ii) by facsimile transmission, or (iii) by a nationally recognized overnight courier, in each case with all delivery or postal charges pre-paid, and in each case, addressed attention: President. All notices and communications shall be sent or delivered to the address or fax number, as applicable, for the applicable party as set forth on the signature page of this Agreement, or at such other address or fax number as the applicable party shall have furnished in writing to the other party (or its transferees). Each such notice or communication, addressed and posted as aforesaid, shall for all purposes of this Agreement be treated as effective or having been given (i) when delivered, if delivered personally, (ii) the business day on which the notice or communication is sent, if delivered by facsimile transmission, or (iii) upon the earlier of its receipt or two (2) business days after the business day of deposit with a nationally recognized overnight courier, if delivered by such means.
8.6
Entire Agreement . This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subject matters hereof and thereof, and supersede any and all prior agreements and understandings among the parties.
8.7
Governing Law . This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California as they apply to contracts entered into and wholly to be performed within such state, and without reference to its principles of conflicts of law or choice of law.
8.8
Attorneys Fees . In the event of any litigation in a court of competent jurisdiction arising in connection with this Agreement and the transactions contemplated hereby, the prevailing party in judgment shall be entitled to recover reasonable legal fees and costs in connection with such action including any appeals.
8.9
Independent Advice of Counsel . The parties represent and declare that, in executing this agreement, they relied solely upon their own judgment, belief and knowledge, and had the ability to seek the advice of their own independently selected counsel concerning the nature, extent and duration of their duties and rights contained in this agreement. The parties further represent and agree that they have not been influenced by any representations or statements concerning any matters made by any other party or by any person or attorney representing any other party.
8.10
Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be an original and all of which together shall constitute one instrument.
[Signatures on following page]
Series A Convertible Preferred Stock Purchaser Agreement PROBE
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first written above.
COMPANY
PROBE MANUFACTURING INDUSTRIES, INC., a California corporation
By:
Kam Mahdi,
Chief Executive Officer
Address:
3050 Pullman Street
Costa Mesa, CA 92626
Fax: (714) 424-2972
PURCHASER
eFund Capital Partners, LLC
By: /s/ Barrett Evans
Print Name: Barrett Evans
Print Title: Managing Partner
Address:
_______________________
_______________________
Fax: (___) __-___
2 of 9
Series A Convertible Preferred Stock Purchaser Agreement PROBE
Schedules to Series A Convertible Preferred Stock Purchase Agreement
Schedule 3.3
Outstanding Rights
None.
Schedule 3.11
Litigation
None.
Schedule 3.15
Tax Matters
None.
Exhibit A
Certificate of Designation for Series A Convertible Preferred Stock
PROBE MANUFACTURING INDUSTRIES, INC.
____________________________
Series A Convertible Preferred Stock
Purchase Agreement
May 20, 2004
PROBE MANUFACTURING INDUSTRIES, INC.
SERIES A CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
This Agreement is made as of May 20, 2004, by and between Probe Manufacturing Industries, Inc., a California corporation (the Company), and Reza Zarif (the Purchaser).
RECITALS
On the terms and conditions set forth herein, the Company desires to sell to the Purchaser, and the Purchaser desires to purchase from the Company, shares of the Companys Series A Convertible Preferred Stock (the Series A Preferred Stock) which are convertible into shares of the Companys common stock (the Common Stock), on the terms and conditions set forth in the Certificate of Designation of Series A Convertible Preferred Stock in the form attached hereto as Exhibit A (the Designation);
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual promises hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS
SECTION 1
AUTHORIZATION AND SALE OF THE SHARES
1.1
Authorization of the Shares .
(a)
The Company has authorized, or before the Closing (as defined in Section 2.1 below) will have authorized, a new series of preferred stock, designated as Series A Convertible Preferred Stock, which shall have the rights, preferences and privileges provided for in the Designation.
(b)
In addition, prior to the Closing, the Company shall have authorized the issuance and sale to the Purchaser(s) of Fifty (50) shares (the Shares) of the Series A Preferred Stock at a price of $10,000.00 per share, which shall have the rights, preferences and privileges provided for in the Designation.
1.2
Sale of the Shares . Subject to the terms and conditions hereof, at the Closing, the Company will issue and sell the Shares to the Purchaser and the Purchaser will purchase such Shares from the Company
(
) shares for an aggregate purchase price of
($
). The Common Stock issued or issuable upon conversion of the Shares is referred to as the Conversion Stock. The Shares, the Conversion Stock and any other securities issued or issuable in respect of the Shares are sometimes collectively referred to herein as the Securities.
SECTION 2
CLOSING DATE; DELIVERY
2.1
Closing Date . The closing date shall be the date upon which this Agreement is executed by the parties to this Agreement (the Closing Date ).
2.2
Delivery . On the Closing Date, the Company shall deliver to the Purchaser a certificate registered in the Purchasers name and representing the Shares, against delivery to the Company of a check or wire transfer payable to the order of the Company in the amount of the Purchase Price. The Shares shall be delivered free of any claims, liens or encumbrances.
SECTION 3
COMPANY REPRESENTATIONS AND WARRANTIES
Except as disclosed in the Schedules attached hereto, the Company makes the following representations and warranties to the Purchaser:
3.1
Organization and Standing . Each of the Company and its subsidiaries (i) is a corporation duly organized and validly existing under the laws of its respective jurisdiction of incorporation and is in good standing as a domestic corporation under the laws of said state or country, (ii) has all requisite corporate power and authority to own and lease its properties and to conduct its business as presently conducted, and (iii) is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified does not and is not reasonably expected to (x) individually or in the aggregate, have a material adverse effect on the properties, business, results of operations, condition (financial or otherwise), affairs or prospects of the Company and its subsidiaries, taken as a whole, (y) interfere with or impair the Companys ability to perform its obligations under this Agreement, or (z) interfere with or prevent the consummation of any of the transactions contemplated by said instruments (any of the events set forth in clauses (x), (y) or (z), a Material Adverse Effect).
3.2
Corporate Power . The Company has all requisite legal and corporate power to execute and deliver this Agreement, to sell and issue the Shares, to issue the Conversion Stock issuable upon conversion of the Shares, and to carry out and perform its obligations under the terms of this Agreement and under the terms of all other agreements and other documents executed in connection herewith.
3.3
Capitalization . The authorized capital stock of the Company upon the filing of the Designation with the Secretary of State of the State of California will consist of (a) 100,000,000 shares of Common Stock of which 6,000,000 shares are issued and outstanding, and (b) 10,000,000 shares of Preferred Stock of which (i) 300 shares Series A Convertible Preferred Stock of which are issued and outstanding and (ii) Fifty (50) shares shall be designated as Series A Convertible Preferred Stock, 50 of which shall be issued and transferred to the Purchaser(s) at the Closing. All of the outstanding shares of Common Stock and all of the shares of Series A Preferred Stock when issued and sold, will be, validly issued, fully paid and non-assessable, and free of any liens or encumbrances. The Series A Preferred Stock shall have the rights, preferences, privileges and restrictions set forth in the Designation. Except as set forth in Schedule 3.3 , no subscription, warrant, option or other right to purchase or acquire any shares of any class of capital stock of the Company or securities convertible into or exchangeable for such capital stock are outstanding. Except as set forth in Schedule 3.3 , no securities of the Company have any anti-dilution rights, preemptive rights or rights of first refusal.
3.4
Authorization . The execution, delivery and performance of this Agreement, and any other agreements related to this Agreement, by the Company have been properly and duly authorized by all requisite corporate action. In addition, all other actions taken by the Company in connection with the transactions contemplated by this Agreement were properly and duly authorized by all requisite corporate action. This Agreement and all documents and agreements executed in connection herewith, constitute valid and binding obligations of the Company. The issuance and sale of the Shares will not give rise to any preemptive rights or rights of first refusal on behalf of any person in existence on the date hereof.
3.5
Conversion Stock . The Conversion Stock has been duly and validly reserved for issuance.
3.6
Accuracy of Reports . All reports, if any, (the SEC Reports) required to be filed by the Company during the period from June 30, 2004 to the date of this Agreement under the Securities Exchange Act of 1934, as amended (the Exchange Act), have been duly filed, complied in all material respects with the Exchange Act and the requirements of their respective forms (as of their respective filing dates), were complete and correct in all material respects as of the dates at which the information was furnished, and none contains (as of their respective dates of filing) any untrue statement of a material fact nor omitted to state a material fact necessary in order to make the statements made therein, in light of the circumstances in which made, not misleading.
3.7
Financial Statements and Changes . All financial reports and materials provided by the Company are true and accurate reflection of the Companys current financial situation and nothing has been omitted which could have a material adverse effect.
3.8
No Conflict . The provisions of each of this Agreement and the Designation do not constitute any violation, or conflict with or constitute a default under, any indenture, mortgage, deed of trust or other agreement, instrument, court order, judgment, decree, statute, rule or regulation (each a Term and collectively the Terms) to which the Company or any of its subsidiaries is a party or by which it is bound. The execution, delivery and performance of and compliance with this Agreement, the issuance of the Securities pursuant to the terms hereof and the performance of the Companys obligations hereunder and thereunder (i) will not result in any violation or be in conflict with or constitute a default under any Term, (ii) will not result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or its subsidiaries pursuant to any such Term, and (iii) will not conflict with or violate any applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court having jurisdiction over the Company, any of its subsidiaries, or any of the Companys or subsidiaries assets or properties, subject to such exceptions as would not have a Material Adverse Effect.
3.9
Governmental Consents . No consent, approval or authorization of, or designation, declaration or filing with, any federal, state or foreign governmental authority is required on the part of the Company in connection with the valid execution and delivery of this Agreement, the offer, sale or the issuance of the Securities or the consummation of any other transaction contemplated hereby, except (i) the filing of the Designation in the office of the State of California, and (ii) if required, qualifications or filings in connection with exemptions under any applicable state blue sky laws and Federal securities laws, which qualifications or exemptions, if required, will have been obtained and will be effective on the Closing Date, or will be obtained or filed after the Closing Date within the prescribed time in order to secure such exemptions or qualifications.
3.10
Patents, Trademarks, Etc . The Company and its subsidiaries own or have the right, or prior to the Closing will own or have the right, to use all patents, trademarks, service marks, trade names, copyrights, licenses and rights necessary to their business as now conducted, as conducted at the time of the Closing and as contemplated being conducted thereafter, and, are not infringing upon any persons or companys rights under or with respect to any of the foregoing. Neither the Company nor any of its subsidiaries has received any written communications alleging that the Company or a subsidiary has violated any patent, trademark, service mark, trade name, copyright or trade secret or other proprietary right of any other person or entity.
3.11
Litigation . Except as set forth on Schedule 3.11 , there is no suit, action or proceeding pending or affecting the Company or any of its subsidiaries, nor is there any judgment, decree, injunction, rule or order of any governmental entity or arbitrator outstanding against the Company or any of its subsidiaries.
3.12
Compliance with Laws . The Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties, which could reasonably be expected to have a Material Adverse Effect.
3.13
Offering of the Shares . Neither the Company nor any person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require, under the Securities Act of 1933, as amended (the Securities Act), the integration of such offering with the offering and sale of the Securities) which might subject the offering, issuance or sale of the Securities to the registration requirements of the Securities Act.
3.14
Finders Fee. The Company represents and warrants that no finders or brokers have been retained or used in connection with the transactions contemplated by this Agreement.
1.15
Tax Matters. Except as set forth on Schedule 3.15 , the Company and each of its subsidiaries has timely filed with the appropriate taxing authority all tax returns required to be filed by it or has timely requested extensions and any such request has been granted and has not expired. Each such tax return is complete and accurate in all respects. All taxes shown as owed by the Company or any of its subsidiaries on any tax return or claimed or asserted to be due, from or with respect to any of them, have been paid, except for taxes being contested in good faith and for which adequate reserves have been taken. The Company and each of its subsidiaries have properly made due and sufficient accruals for all taxes for such periods subsequent to the periods covered by such tax returns as required by GAAP. None of the Company or any of its subsidiaries are being audited or examined by any taxing authority with respect to any tax or is a party to any pending action or proceedings by any taxing authority for assessment or collection of any tax, and no claim for assessment or collection of any tax has been asserted against it or any of its subsidiaries. No claim has been made by any authority in a jurisdiction where the Company or any of its subsidiaries does not file tax returns that it is or may be subject to taxation by that jurisdiction. There is no dispute or claim concerning any tax liability.
3.16
Environmental Matters . Each of the Company and its subsidiaries has obtained, and now maintains as currently valid and effective, all permits, certificates of financial responsibility, and other governmental authorizations (collectively, Environmental Permits) that are required to be obtained by the Company or any of its subsidiaries under any state, federal, municipal, foreign or other environmental laws, rules or regulations applicable to any aspect of the Company or such subsidiary, including, but not limited to, in connection with the operation of its businesses and properties (Environmental Laws). Each of the Company and its subsidiaries has been in compliance with all terms and conditions of the Environmental Permits and all Environmental Laws and no liability exists under any Environmental Laws or otherwise with respect to prior operations or activities.
SECTION 4
PURCHASER REPRESENTATIONS AND WARRANTIES
The Purchaser represents and warrants to the Company, as follows:
4.1
Investment Intent .
(a)
Purchaser has substantial experience in business and financial matters and is capable of evaluating the merits and risks of its investment in the Company and is able to bear the economic risks of its investment.
(b)
Purchaser is an accredited investor as defined in Rule 501(a)(3) of Regulation D of the Securities Act.
(c)
Purchaser is acquiring the Securities for investment for its own account and not with a view to, or for resale in connection with, any distribution thereof. Purchaser understands that the Securities have not been registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, which depends upon, among other things, the bona fide nature of the investment intent as expressed herein.
(d)
Purchaser acknowledges that the Securities must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser is aware of the provisions of Rule 144 promulgated under the Securities Act (Rule 144) which permit limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being through a brokers transaction or in a transaction directly with a market maker (as provided by Rule 144(f)) and the number of shares being sold during any three-month period not exceeding specified limitations.
4.2
Corporate Power . Purchaser has all requisite legal and corporate power to execute and deliver this Agreement and to carry out and perform its obligations under the terms of this Agreement.
4.3
Authorization . The execution, delivery and performance of this Agreement by the Purchaser has been duly authorized by all requisite corporate action, and this Agreement constitutes a valid and binding obligation of Purchaser enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors, and rules of law governing specific performance, injunctive relief or other equitable remedies.
4.4
Finders Fee. Purchaser represents and warrants that no finders or brokers have been retained or used in connection with the transactions contemplated by this Agreement.
SECTION 5
CONDITIONS TO CLOSING
5.1
Conditions to Purchasers Obligations . The obligation of the Purchaser to purchase the Shares at the Closing is subject to the fulfillment to the reasonable satisfaction of the Purchaser, on or prior to the Closing Date, of the following conditions any of which may be waived in writing, in whole or in part, by the Purchaser:
(a)
The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date;
(b)
All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date shall have been performed or complied with in all material respects; and
(c)
The Designation shall have been filed with and accepted by the California Secretary of State.
5.2
Conditions to Companys Obligations . The Companys obligation to sell and issue the Shares to the Purchaser at the Closing is subject to the fulfillment to the Companys reasonable satisfaction, on or prior to the Closing Date, of the following conditions, any of which may be waived in writing, in whole or in part, by the Company:
(a)
The representations and warranties made by the Purchaser in Section 4 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date;
(b)
All covenants, agreements and conditions contained in this Agreement to be performed by the Purchaser on or prior to the Closing Date shall have been performed or complied with in all material respects; and
SECTION 6
COVENANTS
6.1
Additional Documents and Further Assurances . Each party hereto, at the request of the other party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby.
SECTION 7
INDEMNIFICATION
7 . 1
Indemnification . The parties hereby agree to indemnify, defend and hold each other and their affiliates harmless from and against any and all costs, losses, liabilities, damages, lawsuits, deficiencies, claims and expenses, including without limitation, interest, penalties, reasonable attorneys fees and all amounts paid in investigation, defense or settlement of any of the foregoing (, incurred in connection with, arising out of, resulting from, or incident to, any breach of any representation or warranty made by such party in this Agreement.
SECTION 8
MISCELLANEOUS
8.1
Delays or Omissions . No delay or omission to exercise any right, power or remedy accruing to the Company or the Purchaser, upon any breach or default under this Agreement, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character by the Company or the Purchaser of any breach or default under this Agreement, or any waiver by the Company or the Purchaser of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in writing, and all remedies, either under this Agreement, or by law or otherwise afforded to the Company or the Purchaser, shall be cumulative.
8.2
Waivers and Amendments . This Agreement and the provisions hereof may not be waived or amended except pursuant to a written instrument signed by the required party or parties as aforesaid.
8.3
Severability . In the event that any provision of this Agreement shall be deemed to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby.
8.4
Successors and Assigns . Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto.
8.5
Notices, Etc . All notices and other communications required or permitted hereunder shall be in writing and shall be delivered either (i) personally, (ii) by facsimile transmission, or (iii) by a nationally recognized overnight courier, in each case with all delivery or postal charges pre-paid, and in each case, addressed attention: President. All notices and communications shall be sent or delivered to the address or fax number, as applicable, for the applicable party as set forth on the signature page of this Agreement, or at such other address or fax number as the applicable party shall have furnished in writing to the other party (or its transferees). Each such notice or communication, addressed and posted as aforesaid, shall for all purposes of this Agreement be treated as effective or having been given (i) when delivered, if delivered personally, (ii) the business day on which the notice or communication is sent, if delivered by facsimile transmission, or (iii) upon the earlier of its receipt or two (2) business days after the business day of deposit with a nationally recognized overnight courier, if delivered by such means.
8.6
Entire Agreement . This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subject matters hereof and thereof, and supersede any and all prior agreements and understandings among the parties.
8.7
Governing Law . This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California as they apply to contracts entered into and wholly to be performed within such state, and without reference to its principles of conflicts of law or choice of law.
8.8
Attorneys Fees . In the event of any litigation in a court of competent jurisdiction arising in connection with this Agreement and the transactions contemplated hereby, the prevailing party in judgment shall be entitled to recover reasonable legal fees and costs in connection with such action including any appeals.
8.9
Independent Advice of Counsel . The parties represent and declare that, in executing this agreement, they relied solely upon their own judgment, belief and knowledge, and had the ability to seek the advice of their own independently selected counsel concerning the nature, extent and duration of their duties and rights contained in this agreement. The parties further represent and agree that they have not been influenced by any representations or statements concerning any matters made by any other party or by any person or attorney representing any other party.
8.10
Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be an original and all of which together shall constitute one instrument.
[Signatures on following page]
Series A Convertible Preferred Stock Purchaser Agreement PROBE
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first written above.
COMPANY
PROBE MANUFACTURING INDUSTRIES, INC., a California corporation
By:
Kam Mahdi,
Chief Executive Officer
Address:
3050 Pullman Street
Costa Mesa, CA 92626
Fax: (714) 424-2972
PURCHASER
Reza Zarif
By: __________________________
Print Name: Reza Zarif
Print Title:
Address:
_______________________
_______________________
Fax: (___) __-___
2 of 9
Series A Convertible Preferred Stock Purchaser Agreement PROBE
Schedules to Series A Convertible Preferred Stock Purchase Agreement
Schedule 3.3
Outstanding Rights
None.
Schedule 3.11
Litigation
None.
Schedule 3.15
Tax Matters
None.
Exhibit A
Certificate of Designation for Series A Convertible Preferred Stock
PROBE MANUFACTURING INDUSTRIES, INC.
____________________________
Series A Convertible Preferred Stock
Purchase Agreement
May 20, 2004
PROBE MANUFACTURING INDUSTRIES, INC.
SERIES A CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
This Agreement is made as of May 20, 2004, by and between Probe Manufacturing Industries, Inc., a California corporation (the Company), and Kambiz Mahdi (the Purchaser).
RECITALS
On the terms and conditions set forth herein, the Company desires to sell to the Purchaser, and the Purchaser desires to purchase from the Company, shares of the Companys Series A Convertible Preferred Stock (the Series A Preferred Stock) which are convertible into shares of the Companys common stock (the Common Stock), on the terms and conditions set forth in the Certificate of Designation of Series A Convertible Preferred Stock in the form attached hereto as Exhibit A (the Designation);
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual promises hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS
SECTION 1
AUTHORIZATION AND SALE OF THE SHARES
1.1
Authorization of the Shares .
(a)
The Company has authorized, or before the Closing (as defined in Section 2.1 below) will have authorized, a new series of preferred stock, designated as Series A Convertible Preferred Stock, which shall have the rights, preferences and privileges provided for in the Designation.
(b)
In addition, prior to the Closing, the Company shall have authorized the issuance and sale to the Purchaser(s) of Fifty (50) shares (the Shares) of the Series A Preferred Stock at a price of $10,000.00 per share, which shall have the rights, preferences and privileges provided for in the Designation.
1.2
Sale of the Shares . Subject to the terms and conditions hereof, at the Closing, the Company will issue and sell the Shares to the Purchaser and the Purchaser will purchase such Shares from the Company
(
) shares for an aggregate purchase price of
($
). The Common Stock issued or issuable upon conversion of the Shares is referred to as the Conversion Stock. The Shares, the Conversion Stock and any other securities issued or issuable in respect of the Shares are sometimes collectively referred to herein as the Securities.
SECTION 2
CLOSING DATE; DELIVERY
2.1
Closing Date . The closing date shall be the date upon which this Agreement is executed by the parties to this Agreement (the Closing Date ).
2.2
Delivery . On the Closing Date, the Company shall deliver to the Purchaser a certificate registered in the Purchasers name and representing the Shares, against delivery to the Company of a check or wire transfer payable to the order of the Company in the amount of the Purchase Price. The Shares shall be delivered free of any claims, liens or encumbrances.
SECTION 3
COMPANY REPRESENTATIONS AND WARRANTIES
Except as disclosed in the Schedules attached hereto, the Company makes the following representations and warranties to the Purchaser:
3.1
Organization and Standing . Each of the Company and its subsidiaries (i) is a corporation duly organized and validly existing under the laws of its respective jurisdiction of incorporation and is in good standing as a domestic corporation under the laws of said state or country, (ii) has all requisite corporate power and authority to own and lease its properties and to conduct its business as presently conducted, and (iii) is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified does not and is not reasonably expected to (x) individually or in the aggregate, have a material adverse effect on the properties, business, results of operations, condition (financial or otherwise), affairs or prospects of the Company and its subsidiaries, taken as a whole, (y) interfere with or impair the Companys ability to perform its obligations under this Agreement, or (z) interfere with or prevent the consummation of any of the transactions contemplated by said instruments (any of the events set forth in clauses (x), (y) or (z), a Material Adverse Effect).
3.2
Corporate Power . The Company has all requisite legal and corporate power to execute and deliver this Agreement, to sell and issue the Shares, to issue the Conversion Stock issuable upon conversion of the Shares, and to carry out and perform its obligations under the terms of this Agreement and under the terms of all other agreements and other documents executed in connection herewith.
3.3
Capitalization . The authorized capital stock of the Company upon the filing of the Designation with the Secretary of State of the State of California will consist of (a) 100,000,000 shares of Common Stock of which 6,000,000 shares are issued and outstanding, and (b) 10,000,000 shares of Preferred Stock of which (i) 300 shares Series A Convertible Preferred Stock of which are issued and outstanding and (ii) Fifty (50) shares shall be designated as Series A Convertible Preferred Stock, 50 of which shall be issued and transferred to the Purchaser(s) at the Closing. All of the outstanding shares of Common Stock and all of the shares of Series A Preferred Stock when issued and sold, will be, validly issued, fully paid and non-assessable, and free of any liens or encumbrances. The Series A Preferred Stock shall have the rights, preferences, privileges and restrictions set forth in the Designation. Except as set forth in Schedule 3.3 , no subscription, warrant, option or other right to purchase or acquire any shares of any class of capital stock of the Company or securities convertible into or exchangeable for such capital stock are outstanding. Except as set forth in Schedule 3.3 , no securities of the Company have any anti-dilution rights, preemptive rights or rights of first refusal.
3.4
Authorization . The execution, delivery and performance of this Agreement, and any other agreements related to this Agreement, by the Company have been properly and duly authorized by all requisite corporate action. In addition, all other actions taken by the Company in connection with the transactions contemplated by this Agreement were properly and duly authorized by all requisite corporate action. This Agreement and all documents and agreements executed in connection herewith, constitute valid and binding obligations of the Company. The issuance and sale of the Shares will not give rise to any preemptive rights or rights of first refusal on behalf of any person in existence on the date hereof.
3.5
Conversion Stock . The Conversion Stock has been duly and validly reserved for issuance.
3.6
Accuracy of Reports . All reports, if any, (the SEC Reports) required to be filed by the Company during the period from June 30, 2004 to the date of this Agreement under the Securities Exchange Act of 1934, as amended (the Exchange Act), have been duly filed, complied in all material respects with the Exchange Act and the requirements of their respective forms (as of their respective filing dates), were complete and correct in all material respects as of the dates at which the information was furnished, and none contains (as of their respective dates of filing) any untrue statement of a material fact nor omitted to state a material fact necessary in order to make the statements made therein, in light of the circumstances in which made, not misleading.
3.7
Financial Statements and Changes . All financial reports and materials provided by the Company are true and accurate reflection of the Companys current financial situation and nothing has been omitted which could have a material adverse effect.
3.8
No Conflict . The provisions of each of this Agreement and the Designation do not constitute any violation, or conflict with or constitute a default under, any indenture, mortgage, deed of trust or other agreement, instrument, court order, judgment, decree, statute, rule or regulation (each a Term and collectively the Terms) to which the Company or any of its subsidiaries is a party or by which it is bound. The execution, delivery and performance of and compliance with this Agreement, the issuance of the Securities pursuant to the terms hereof and the performance of the Companys obligations hereunder and thereunder (i) will not result in any violation or be in conflict with or constitute a default under any Term, (ii) will not result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or its subsidiaries pursuant to any such Term, and (iii) will not conflict with or violate any applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court having jurisdiction over the Company, any of its subsidiaries, or any of the Companys or subsidiaries assets or properties, subject to such exceptions as would not have a Material Adverse Effect.
3.9
Governmental Consents . No consent, approval or authorization of, or designation, declaration or filing with, any federal, state or foreign governmental authority is required on the part of the Company in connection with the valid execution and delivery of this Agreement, the offer, sale or the issuance of the Securities or the consummation of any other transaction contemplated hereby, except (i) the filing of the Designation in the office of the State of California, and (ii) if required, qualifications or filings in connection with exemptions under any applicable state blue sky laws and Federal securities laws, which qualifications or exemptions, if required, will have been obtained and will be effective on the Closing Date, or will be obtained or filed after the Closing Date within the prescribed time in order to secure such exemptions or qualifications.
3.10
Patents, Trademarks, Etc . The Company and its subsidiaries own or have the right, or prior to the Closing will own or have the right, to use all patents, trademarks, service marks, trade names, copyrights, licenses and rights necessary to their business as now conducted, as conducted at the time of the Closing and as contemplated being conducted thereafter, and, are not infringing upon any persons or companys rights under or with respect to any of the foregoing. Neither the Company nor any of its subsidiaries has received any written communications alleging that the Company or a subsidiary has violated any patent, trademark, service mark, trade name, copyright or trade secret or other proprietary right of any other person or entity.
3.11
Litigation . Except as set forth on Schedule 3.11 , there is no suit, action or proceeding pending or affecting the Company or any of its subsidiaries, nor is there any judgment, decree, injunction, rule or order of any governmental entity or arbitrator outstanding against the Company or any of its subsidiaries.
3.12
Compliance with Laws . The Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties, which could reasonably be expected to have a Material Adverse Effect.
3.13
Offering of the Shares . Neither the Company nor any person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require, under the Securities Act of 1933, as amended (the Securities Act), the integration of such offering with the offering and sale of the Securities) which might subject the offering, issuance or sale of the Securities to the registration requirements of the Securities Act.
3.14
Finders Fee. The Company represents and warrants that no finders or brokers have been retained or used in connection with the transactions contemplated by this Agreement.
1.15
Tax Matters. Except as set forth on Schedule 3.15 , the Company and each of its subsidiaries has timely filed with the appropriate taxing authority all tax returns required to be filed by it or has timely requested extensions and any such request has been granted and has not expired. Each such tax return is complete and accurate in all respects. All taxes shown as owed by the Company or any of its subsidiaries on any tax return or claimed or asserted to be due, from or with respect to any of them, have been paid, except for taxes being contested in good faith and for which adequate reserves have been taken. The Company and each of its subsidiaries have properly made due and sufficient accruals for all taxes for such periods subsequent to the periods covered by such tax returns as required by GAAP. None of the Company or any of its subsidiaries are being audited or examined by any taxing authority with respect to any tax or is a party to any pending action or proceedings by any taxing authority for assessment or collection of any tax, and no claim for assessment or collection of any tax has been asserted against it or any of its subsidiaries. No claim has been made by any authority in a jurisdiction where the Company or any of its subsidiaries does not file tax returns that it is or may be subject to taxation by that jurisdiction. There is no dispute or claim concerning any tax liability.
3.16
Environmental Matters . Each of the Company and its subsidiaries has obtained, and now maintains as currently valid and effective, all permits, certificates of financial responsibility, and other governmental authorizations (collectively, Environmental Permits) that are required to be obtained by the Company or any of its subsidiaries under any state, federal, municipal, foreign or other environmental laws, rules or regulations applicable to any aspect of the Company or such subsidiary, including, but not limited to, in connection with the operation of its businesses and properties (Environmental Laws). Each of the Company and its subsidiaries has been in compliance with all terms and conditions of the Environmental Permits and all Environmental Laws and no liability exists under any Environmental Laws or otherwise with respect to prior operations or activities.
SECTION 4
PURCHASER REPRESENTATIONS AND WARRANTIES
The Purchaser represents and warrants to the Company, as follows:
4.1
Investment Intent .
(a)
Purchaser has substantial experience in business and financial matters and is capable of evaluating the merits and risks of its investment in the Company and is able to bear the economic risks of its investment.
(b)
Purchaser is an accredited investor as defined in Rule 501(a)(3) of Regulation D of the Securities Act.
(c)
Purchaser is acquiring the Securities for investment for its own account and not with a view to, or for resale in connection with, any distribution thereof. Purchaser understands that the Securities have not been registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, which depends upon, among other things, the bona fide nature of the investment intent as expressed herein.
(d)
Purchaser acknowledges that the Securities must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser is aware of the provisions of Rule 144 promulgated under the Securities Act (Rule 144) which permit limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being through a brokers transaction or in a transaction directly with a market maker (as provided by Rule 144(f)) and the number of shares being sold during any three-month period not exceeding specified limitations.
4.2
Corporate Power . Purchaser has all requisite legal and corporate power to execute and deliver this Agreement and to carry out and perform its obligations under the terms of this Agreement.
4.3
Authorization . The execution, delivery and performance of this Agreement by the Purchaser has been duly authorized by all requisite corporate action, and this Agreement constitutes a valid and binding obligation of Purchaser enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors, and rules of law governing specific performance, injunctive relief or other equitable remedies.
4.4
Finders Fee. Purchaser represents and warrants that no finders or brokers have been retained or used in connection with the transactions contemplated by this Agreement.
SECTION 5
CONDITIONS TO CLOSING
5.1
Conditions to Purchasers Obligations . The obligation of the Purchaser to purchase the Shares at the Closing is subject to the fulfillment to the reasonable satisfaction of the Purchaser, on or prior to the Closing Date, of the following conditions any of which may be waived in writing, in whole or in part, by the Purchaser:
(a)
The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date;
(b)
All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date shall have been performed or complied with in all material respects; and
(c)
The Designation shall have been filed with and accepted by the California Secretary of State.
5.2
Conditions to Companys Obligations . The Companys obligation to sell and issue the Shares to the Purchaser at the Closing is subject to the fulfillment to the Companys reasonable satisfaction, on or prior to the Closing Date, of the following conditions, any of which may be waived in writing, in whole or in part, by the Company:
(a)
The representations and warranties made by the Purchaser in Section 4 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date;
(b)
All covenants, agreements and conditions contained in this Agreement to be performed by the Purchaser on or prior to the Closing Date shall have been performed or complied with in all material respects; and
SECTION 6
COVENANTS
6.1
Additional Documents and Further Assurances . Each party hereto, at the request of the other party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby.
SECTION 7
INDEMNIFICATION
7 . 1
Indemnification . The parties hereby agree to indemnify, defend and hold each other and their affiliates harmless from and against any and all costs, losses, liabilities, damages, lawsuits, deficiencies, claims and expenses, including without limitation, interest, penalties, reasonable attorneys fees and all amounts paid in investigation, defense or settlement of any of the foregoing (, incurred in connection with, arising out of, resulting from, or incident to, any breach of any representation or warranty made by such party in this Agreement.
SECTION 8
MISCELLANEOUS
8.1
Delays or Omissions . No delay or omission to exercise any right, power or remedy accruing to the Company or the Purchaser, upon any breach or default under this Agreement, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character by the Company or the Purchaser of any breach or default under this Agreement, or any waiver by the Company or the Purchaser of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in writing, and all remedies, either under this Agreement, or by law or otherwise afforded to the Company or the Purchaser, shall be cumulative.
8.2
Waivers and Amendments . This Agreement and the provisions hereof may not be waived or amended except pursuant to a written instrument signed by the required party or parties as aforesaid.
8.3
Severability . In the event that any provision of this Agreement shall be deemed to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby.
8.4
Successors and Assigns . Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto.
8.5
Notices, Etc . All notices and other communications required or permitted hereunder shall be in writing and shall be delivered either (i) personally, (ii) by facsimile transmission, or (iii) by a nationally recognized overnight courier, in each case with all delivery or postal charges pre-paid, and in each case, addressed attention: President. All notices and communications shall be sent or delivered to the address or fax number, as applicable, for the applicable party as set forth on the signature page of this Agreement, or at such other address or fax number as the applicable party shall have furnished in writing to the other party (or its transferees). Each such notice or communication, addressed and posted as aforesaid, shall for all purposes of this Agreement be treated as effective or having been given (i) when delivered, if delivered personally, (ii) the business day on which the notice or communication is sent, if delivered by facsimile transmission, or (iii) upon the earlier of its receipt or two (2) business days after the business day of deposit with a nationally recognized overnight courier, if delivered by such means.
8.6
Entire Agreement . This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subject matters hereof and thereof, and supersede any and all prior agreements and understandings among the parties.
8.7
Governing Law . This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California as they apply to contracts entered into and wholly to be performed within such state, and without reference to its principles of conflicts of law or choice of law.
8.8
Attorneys Fees . In the event of any litigation in a court of competent jurisdiction arising in connection with this Agreement and the transactions contemplated hereby, the prevailing party in judgment shall be entitled to recover reasonable legal fees and costs in connection with such action including any appeals.
8.9
Independent Advice of Counsel . The parties represent and declare that, in executing this agreement, they relied solely upon their own judgment, belief and knowledge, and had the ability to seek the advice of their own independently selected counsel concerning the nature, extent and duration of their duties and rights contained in this agreement. The parties further represent and agree that they have not been influenced by any representations or statements concerning any matters made by any other party or by any person or attorney representing any other party.
8.10
Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be an original and all of which together shall constitute one instrument.
[Signatures on following page]
Series A Convertible Preferred Stock Purchaser Agreement PROBE
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first written above.
COMPANY
PROBE MANUFACTURING INDUSTRIES, INC., a California corporation
By:
Kam Mahdi,
Chief Executive Officer
Address:
3050 Pullman Street
Costa Mesa, CA 92626
Fax: (714) 424-2972
PURCHASER
Kambiz Mahdi
By: __________________________
Print Name: Kambiz Mahdi
Print Title:
Address:
_______________________
_______________________
Fax: (___) __-___
2 of 9
Series A Convertible Preferred Stock Purchaser Agreement PROBE
Schedules to Series A Convertible Preferred Stock Purchase Agreement
Schedule 3.3
Outstanding Rights
None.
Schedule 3.11
Litigation
None.
Schedule 3.15
Tax Matters
None.
Exhibit A
Certificate of Designation for Series A Convertible Preferred Stock
PROBE MANUFACTURING INDUSTRIES, INC.
____________________________
Series A Convertible Preferred Stock
Purchase Agreement
May 20, 2004
PROBE MANUFACTURING INDUSTRIES, INC.
SERIES B CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
This Agreement is made as of December 31, 2004, by and between Probe Manufacturing Industries, Inc., a California corporation (the Company), and eFund Capital Partners, LLC (the Purchaser).
RECITALS
On the terms and conditions set forth herein, the Company desires to sell to the Purchaser, and the Purchaser desires to purchase from the Company, shares of the Companys Series B Convertible Preferred Stock (the Series B Preferred Stock) which are convertible into shares of the Companys common stock (the Common Stock), on the terms and conditions set forth in the Certificate of Designation of Series B Convertible Preferred Stock in the form attached hereto as Exhibit A (the Designation);
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual promises hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS
SECTION 1
AUTHORIZATION AND SALE OF THE SHARES
1.1
Authorization of the Shares .
(a)
The Company has authorized, or before the Closing (as defined in Section 2.1 below) will have authorized, a new series of preferred stock, designated as Series B Convertible Preferred Stock, which shall have the rights, preferences and privileges provided for in the Designation.
(b)
In addition, prior to the Closing, the Company shall have authorized the issuance and sale to the Purchaser(s) of up to Twenty Thousand (20,000) shares (the Shares) of the Series B Preferred Stock at a price of $100.00 per share, which shall have the rights, preferences and privileges provided for in the Designation.
1.2
Sale of the Shares . Subject to the terms and conditions hereof, at the Closing, the Company will issue and sell the Shares to the Purchaser and the Purchaser will purchase such Shares from the Company three thousand and five hundred ( 3,500 ) shares for an aggregate purchase price of three hundred and fifty thousand ($ 350,000 ). The Common Stock issued or issuable upon conversion of the Shares is referred to as the Conversion Stock. The Shares, the Conversion Stock and any other securities issued or issuable in respect of the Shares are sometimes collectively referred to herein as the Securities.
SECTION 2
CLOSING DATE; DELIVERY
2.1
Closing Date . The closing date shall be the date upon which this Agreement is executed by the parties to this Agreement (the Closing Date ).
2.2
Delivery . On the Closing Date, the Company shall deliver to the Purchaser a certificate registered in the Purchasers name and representing the Shares, against delivery to the Company of a check or wire transfer payable to the order of the Company in the amount of the Purchase Price. The Shares shall be delivered free of any claims, liens or encumbrances.
SECTION 3
COMPANY REPRESENTATIONS AND WARRANTIES
Except as disclosed in the Schedules attached hereto, the Company makes the following representations and warranties to the Purchaser:
3.1
Organization and Standing . Each of the Company and its subsidiaries (i) is a corporation duly organized and validly existing under the laws of its respective jurisdiction of incorporation and is in good standing as a domestic corporation under the laws of said state or country, (ii) has all requisite corporate power and authority to own and lease its properties and to conduct its business as presently conducted, and (iii) is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified does not and is not reasonably expected to (x) individually or in the aggregate, have a material adverse effect on the properties, business, results of operations, condition (financial or otherwise), affairs or prospects of the Company and its subsidiaries, taken as a whole, (y) interfere with or impair the Companys ability to perform its obligations under this Agreement, or (z) interfere with or prevent the consummation of any of the transactions contemplated by said instruments (any of the events set forth in clauses (x), (y) or (z), a Material Adverse Effect).
3.2
Corporate Power . The Company has all requisite legal and corporate power to execute and deliver this Agreement, to sell and issue the Shares, to issue the Conversion Stock issuable upon conversion of the Shares, and to carry out and perform its obligations under the terms of this Agreement and under the terms of all other agreements and other documents executed in connection herewith.
3.3
Capitalization . The authorized capital stock of the Company upon the filing of the Designation with the Secretary of State of the State of California will consist of (a) 100,000,000 shares of Common Stock of which 6,000,000 shares are issued and outstanding, and (b) 10,000,000 shares of Preferred Stock of which (i) 4400 shares Series A Convertible Preferred Stock of which are issued and outstanding and (ii) Twenty Thousand (20,000) shares shall be designated as Series B Convertible Preferred Stock. All of the outstanding shares of Common Stock and all of the shares of Series A and B Preferred Stock when issued and sold, will be, validly issued, fully paid and non-assessable, and free of any liens or encumbrances. The Series B Preferred Stock shall have the rights, preferences, privileges and restrictions set forth in the Designation. Except as set forth in Schedule 3.3 , no subscription, warrant, option or other right to purchase or acquire any shares of any class of capital stock of the Company or securities convertible into or exchangeable for such capital stock are outstanding. Except as set forth in Schedule 3.3 , no securities of the Company have any anti-dilution rights, preemptive rights or rights of first refusal.
3.4
Authorization . The execution, delivery and performance of this Agreement, and any other agreements related to this Agreement, by the Company have been properly and duly authorized by all requisite corporate action. In addition, all other actions taken by the Company in connection with the transactions contemplated by this Agreement were properly and duly authorized by all requisite corporate action. This Agreement and all documents and agreements executed in connection herewith, constitute valid and binding obligations of the Company. The issuance and sale of the Shares will not give rise to any preemptive rights or rights of first refusal on behalf of any person in existence on the date hereof.
3.5
Conversion Stock . The Conversion Stock has been duly and validly reserved for issuance.
3.6
Accuracy of Reports . All reports, if any, delivered by the Company under this Agreement, have been duly filed, and the requirements of their respective forms (as of their respective filing dates), were complete and correct in all material respects as of the dates at which the information was furnished, and none contains (as of their respective dates of filing) any untrue statement of a material fact nor omitted to state a material fact necessary in order to make the statements made therein, in light of the circumstances in which made, not misleading.
3.7
Financial Statements and Changes . All financial reports and materials provided by the Company are true and accurate reflection of the Companys current financial situation and nothing has been omitted which could have a material adverse effect.
3.8
No Conflict . The provisions of each of this Agreement and the Designation do not constitute any violation, or conflict with or constitute a default under, any indenture, mortgage, deed of trust or other agreement, instrument, court order, judgment, decree, statute, rule or regulation (each a Term and collectively the Terms) to which the Company or any of its subsidiaries is a party or by which it is bound. The execution, delivery and performance of and compliance with this Agreement, the issuance of the Securities pursuant to the terms hereof and the performance of the Companys obligations hereunder and thereunder (i) will not result in any violation or be in conflict with or constitute a default under any Term, (ii) will not result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or its subsidiaries pursuant to any such Term, and (iii) will not conflict with or violate any applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court having jurisdiction over the Company, any of its subsidiaries, or any of the Companys or subsidiaries assets or properties, subject to such exceptions as would not have a Material Adverse Effect.
3.9
Governmental Consents . No consent, approval or authorization of, or designation, declaration or filing with, any federal, state or foreign governmental authority is required on the part of the Company in connection with the valid execution and delivery of this Agreement, the offer, sale or the issuance of the Securities or the consummation of any other transaction contemplated hereby, except (i) the filing of the Designation in the office of the State of California, and (ii) if required, qualifications or filings in connection with exemptions under any applicable state blue sky laws and Federal securities laws, which qualifications or exemptions, if required, will have been obtained and will be effective on the Closing Date, or will be obtained or filed after the Closing Date within the prescribed time in order to secure such exemptions or qualifications.
3.10
Patents, Trademarks, Etc . The Company and its subsidiaries own or have the right, or prior to the Closing will own or have the right, to use all patents, trademarks, service marks, trade names, copyrights, licenses and rights necessary to their business as now conducted, as conducted at the time of the Closing and as contemplated being conducted thereafter, and, are not infringing upon any persons or companys rights under or with respect to any of the foregoing. Neither the Company nor any of its subsidiaries has received any written communications alleging that the Company or a subsidiary has violated any patent, trademark, service mark, trade name, copyright or trade secret or other proprietary right of any other person or entity.
3.11
Litigation . Except as set forth on Schedule 3.11 , there is no suit, action or proceeding pending or affecting the Company or any of its subsidiaries, nor is there any judgment, decree, injunction, rule or order of any governmental entity or arbitrator outstanding against the Company or any of its subsidiaries.
3.12
Compliance with Laws . The Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties, which could reasonably be expected to have a Material Adverse Effect.
3.13
Offering of the Shares . Neither the Company nor any person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require, under the Securities Act of 1933, as amended (the Securities Act), the integration of such offering with the offering and sale of the Securities) which might subject the offering, issuance or sale of the Securities to the registration requirements of the Securities Act.
3.14
Finders Fee. The Company represents and warrants that no finders or brokers have been retained or used in connection with the transactions contemplated by this Agreement.
1.15
Tax Matters. Except as set forth on Schedule 3.15 , the Company and each of its subsidiaries has timely filed with the appropriate taxing authority all tax returns required to be filed by it or has timely requested extensions and any such request has been granted and has not expired. Each such tax return is complete and accurate in all respects. All taxes shown as owed by the Company or any of its subsidiaries on any tax return or claimed or asserted to be due, from or with respect to any of them, have been paid, except for taxes being contested in good faith and for which adequate reserves have been taken. The Company and each of its subsidiaries have properly made due and sufficient accruals for all taxes for such periods subsequent to the periods covered by such tax returns as required by GAAP. None of the Company or any of its subsidiaries are being audited or examined by any taxing authority with respect to any tax or is a party to any pending action or proceedings by any taxing authority for assessment or collection of any tax, and no claim for assessment or collection of any tax has been asserted against it or any of its subsidiaries. No claim has been made by any authority in a jurisdiction where the Company or any of its subsidiaries does not file tax returns that it is or may be subject to taxation by that jurisdiction. There is no dispute or claim concerning any tax liability.
3.16
Environmental Matters . Each of the Company and its subsidiaries has obtained, and now maintains as currently valid and effective, all permits, certificates of financial responsibility, and other governmental authorizations (collectively, Environmental Permits) that are required to be obtained by the Company or any of its subsidiaries under any state, federal, municipal, foreign or other environmental laws, rules or regulations applicable to any aspect of the Company or such subsidiary, including, but not limited to, in connection with the operation of its businesses and properties (Environmental Laws). Each of the Company and its subsidiaries has been in compliance with all terms and conditions of the Environmental Permits and all Environmental Laws and no liability exists under any Environmental Laws or otherwise with respect to prior operations or activities.
SECTION 4
PURCHASER REPRESENTATIONS AND WARRANTIES
The Purchaser represents and warrants to the Company, as follows:
4.1
Investment Intent .
(a)
Purchaser has substantial experience in business and financial matters and is capable of evaluating the merits and risks of its investment in the Company and is able to bear the economic risks of its investment.
(b)
Purchaser is an accredited investor as defined in Rule 501(a)(3) of Regulation D of the Securities Act.
(c)
Purchaser is acquiring the Securities for investment for its own account and not with a view to, or for resale in connection with, any distribution thereof. Purchaser understands that the Securities have not been registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, which depends upon, among other things, the bona fide nature of the investment intent as expressed herein.
(d)
Purchaser acknowledges that the Securities must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser is aware of the provisions of Rule 144 promulgated under the Securities Act (Rule 144) which permit limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being through a brokers transaction or in a transaction directly with a market maker (as provided by Rule 144(f)) and the number of shares being sold during any three-month period not exceeding specified limitations.
4.2
Corporate Power . Purchaser has all requisite legal and corporate power to execute and deliver this Agreement and to carry out and perform its obligations under the terms of this Agreement.
4.3
Authorization . The execution, delivery and performance of this Agreement by the Purchaser has been duly authorized by all requisite corporate action, and this Agreement constitutes a valid and binding obligation of Purchaser enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors, and rules of law governing specific performance, injunctive relief or other equitable remedies.
4.4
Finders Fee. Purchaser represents and warrants that no finders or brokers have been retained or used in connection with the transactions contemplated by this Agreement.
SECTION 5
CONDITIONS TO CLOSING
5.1
Conditions to Purchasers Obligations . The obligation of the Purchaser to purchase the Shares at the Closing is subject to the fulfillment to the reasonable satisfaction of the Purchaser, on or prior to the Closing Date, of the following conditions any of which may be waived in writing, in whole or in part, by the Purchaser:
(a)
The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date;
(b)
All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date shall have been performed or complied with in all material respects; and
(c)
The Designation shall have been filed with and accepted by the California Secretary of State.
5.2
Conditions to Companys Obligations . The Companys obligation to sell and issue the Shares to the Purchaser at the Closing is subject to the fulfillment to the Companys reasonable satisfaction, on or prior to the Closing Date, of the following conditions, any of which may be waived in writing, in whole or in part, by the Company:
(a)
The representations and warranties made by the Purchaser in Section 4 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date;
(b)
All covenants, agreements and conditions contained in this Agreement to be performed by the Purchaser on or prior to the Closing Date shall have been performed or complied with in all material respects; and
SECTION 6
COVENANTS
6.1
Additional Documents and Further Assurances . Each party hereto, at the request of the other party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby.
SECTION 7
INDEMNIFICATION
7 . 1
Indemnification . The parties hereby agree to indemnify, defend and hold each other and their affiliates harmless from and against any and all costs, losses, liabilities, damages, lawsuits, deficiencies, claims and expenses, including without limitation, interest, penalties, reasonable attorneys fees and all amounts paid in investigation, defense or settlement of any of the foregoing (, incurred in connection with, arising out of, resulting from, or incident to, any breach of any representation or warranty made by such party in this Agreement.
SECTION 8
MISCELLANEOUS
8.1
Delays or Omissions . No delay or omission to exercise any right, power or remedy accruing to the Company or the Purchaser, upon any breach or default under this Agreement, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character by the Company or the Purchaser of any breach or default under this Agreement, or any waiver by the Company or the Purchaser of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in writing, and all remedies, either under this Agreement, or by law or otherwise afforded to the Company or the Purchaser, shall be cumulative.
8.2
Waivers and Amendments . This Agreement and the provisions hereof may not be waived or amended except pursuant to a written instrument signed by the required party or parties as aforesaid.
8.3
Severability . In the event that any provision of this Agreement shall be deemed to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby.
8.4
Successors and Assigns . Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto.
8.5
Notices, Etc . All notices and other communications required or permitted hereunder shall be in writing and shall be delivered either (i) personally, (ii) by facsimile transmission, or (iii) by a nationally recognized overnight courier, in each case with all delivery or postal charges pre-paid, and in each case, addressed attention: President. All notices and communications shall be sent or delivered to the address or fax number, as applicable, for the applicable party as set forth on the signature page of this Agreement, or at such other address or fax number as the applicable party shall have furnished in writing to the other party (or its transferees). Each such notice or communication, addressed and posted as aforesaid, shall for all purposes of this Agreement be treated as effective or having been given (i) when delivered, if delivered personally, (ii) the business day on which the notice or communication is sent, if delivered by facsimile transmission, or (iii) upon the earlier of its receipt or two (2) business days after the business day of deposit with a nationally recognized overnight courier, if delivered by such means.
8.6
Entire Agreement . This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subject matters hereof and thereof, and supersede any and all prior agreements and understandings among the parties.
8.7
Governing Law . This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California as they apply to contracts entered into and wholly to be performed within such state, and without reference to its principles of conflicts of law or choice of law.
8.8
Attorneys Fees . In the event of any litigation in a court of competent jurisdiction arising in connection with this Agreement and the transactions contemplated hereby, the prevailing party in judgment shall be entitled to recover reasonable legal fees and costs in connection with such action including any appeals.
8.9
Independent Advice of Counsel . The parties represent and declare that, in executing this agreement, they relied solely upon their own judgment, belief and knowledge, and had the ability to seek the advice of their own independently selected counsel concerning the nature, extent and duration of their duties and rights contained in this agreement. The parties further represent and agree that they have not been influenced by any representations or statements concerning any matters made by any other party or by any person or attorney representing any other party.
8.10
Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be an original and all of which together shall constitute one instrument.
[Signatures on following page]
Series B Convertible Preferred Stock Purchaser Agreement PROBE
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first written above.
COMPANY
PROBE MANUFACTURING INDUSTRIES, INC., a California corporation
By:
Kam Mahdi,
Chief Executive Officer
Address:
3050 Pullman Street
Costa Mesa, CA 92626
Fax: (714) 424-2972
PURCHASER
eFund Capital Partners, LLC
By:
Print Name: Barrett Evans
Print Title: Managing Partner
Address:
_______________________
_______________________
Fax: (___) __-___
2 of 9
Series B Convertible Preferred Stock Purchaser Agreement PROBE
Schedules to Series B Convertible Preferred Stock Purchase Agreement
Schedule 3.3
Outstanding Rights
None.
Schedule 3.11
Litigation
None.
Schedule 3.15
Tax Matters
None.
Exhibit A
Certificate of Designation for Series B Convertible Preferred Stock
PROBE MANUFACTURING INDUSTRIES, INC.
____________________________
Series B Convertible Preferred Stock
Purchase Agreement
December 31, 2004
PROBE MANUFACTURING INDUSTRIES, INC.
SERIES B CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
This Agreement is made as of December 31, 2004, by and between Probe Manufacturing Industries, Inc., a California corporation (the Company), and Reza Zarif (the Purchaser).
RECITALS
On the terms and conditions set forth herein, the Company desires to sell to the Purchaser, and the Purchaser desires to purchase from the Company, shares of the Companys Series B Convertible Preferred Stock (the Series B Preferred Stock) which are convertible into shares of the Companys common stock (the Common Stock), on the terms and conditions set forth in the Certificate of Designation of Series B Convertible Preferred Stock in the form attached hereto as Exhibit A (the Designation);
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual promises hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS
SECTION 1
AUTHORIZATION AND SALE OF THE SHARES
1.1
Authorization of the Shares .
(a)
The Company has authorized, or before the Closing (as defined in Section 2.1 below) will have authorized, a new series of preferred stock, designated as Series B Convertible Preferred Stock, which shall have the rights, preferences and privileges provided for in the Designation.
(b)
In addition, prior to the Closing, the Company shall have authorized the issuance and sale to the Purchaser(s) of up to Twenty Thousand (20,000) shares (the Shares) of the Series B Preferred Stock at a price of $100.00 per share, which shall have the rights, preferences and privileges provided for in the Designation.
1.2
Sale of the Shares . Subject to the terms and conditions hereof, at the Closing, the Company will issue and sell the Shares to the Purchaser and the Purchaser will purchase such Shares from the Company four thousand and five hundred ( 4,500 ) shares for an aggregate purchase price of four hundred and fifty thousand ($ 450,000 ). The Common Stock issued or issuable upon conversion of the Shares is referred to as the Conversion Stock. The Shares, the Conversion Stock and any other securities issued or issuable in respect of the Shares are sometimes collectively referred to herein as the Securities.
SECTION 2
CLOSING DATE; DELIVERY
2.1
Closing Date . The closing date shall be the date upon which this Agreement is executed by the parties to this Agreement (the Closing Date ).
2.2
Delivery . On the Closing Date, the Company shall deliver to the Purchaser a certificate registered in the Purchasers name and representing the Shares, against delivery to the Company of a check or wire transfer payable to the order of the Company in the amount of the Purchase Price. The Shares shall be delivered free of any claims, liens or encumbrances.
SECTION 3
COMPANY REPRESENTATIONS AND WARRANTIES
Except as disclosed in the Schedules attached hereto, the Company makes the following representations and warranties to the Purchaser:
3.1
Organization and Standing . Each of the Company and its subsidiaries (i) is a corporation duly organized and validly existing under the laws of its respective jurisdiction of incorporation and is in good standing as a domestic corporation under the laws of said state or country, (ii) has all requisite corporate power and authority to own and lease its properties and to conduct its business as presently conducted, and (iii) is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified does not and is not reasonably expected to (x) individually or in the aggregate, have a material adverse effect on the properties, business, results of operations, condition (financial or otherwise), affairs or prospects of the Company and its subsidiaries, taken as a whole, (y) interfere with or impair the Companys ability to perform its obligations under this Agreement, or (z) interfere with or prevent the consummation of any of the transactions contemplated by said instruments (any of the events set forth in clauses (x), (y) or (z), a Material Adverse Effect).
3.2
Corporate Power . The Company has all requisite legal and corporate power to execute and deliver this Agreement, to sell and issue the Shares, to issue the Conversion Stock issuable upon conversion of the Shares, and to carry out and perform its obligations under the terms of this Agreement and under the terms of all other agreements and other documents executed in connection herewith.
3.3
Capitalization . The authorized capital stock of the Company upon the filing of the Designation with the Secretary of State of the State of California will consist of (a) 100,000,000 shares of Common Stock of which 6,000,000 shares are issued and outstanding, and (b) 10,000,000 shares of Preferred Stock of which (i) 4400 shares Series A Convertible Preferred Stock of which are issued and outstanding and (ii) Twenty Thousand (20,000) shares shall be designated as Series B Convertible Preferred Stock. All of the outstanding shares of Common Stock and all of the shares of Series A and B Preferred Stock when issued and sold, will be, validly issued, fully paid and non-assessable, and free of any liens or encumbrances. The Series B Preferred Stock shall have the rights, preferences, privileges and restrictions set forth in the Designation. Except as set forth in Schedule 3.3 , no subscription, warrant, option or other right to purchase or acquire any shares of any class of capital stock of the Company or securities convertible into or exchangeable for such capital stock are outstanding. Except as set forth in Schedule 3.3 , no securities of the Company have any anti-dilution rights, preemptive rights or rights of first refusal.
3.4
Authorization . The execution, delivery and performance of this Agreement, and any other agreements related to this Agreement, by the Company have been properly and duly authorized by all requisite corporate action. In addition, all other actions taken by the Company in connection with the transactions contemplated by this Agreement were properly and duly authorized by all requisite corporate action. This Agreement and all documents and agreements executed in connection herewith, constitute valid and binding obligations of the Company. The issuance and sale of the Shares will not give rise to any preemptive rights or rights of first refusal on behalf of any person in existence on the date hereof.
3.5
Conversion Stock . The Conversion Stock has been duly and validly reserved for issuance.
3.6
Accuracy of Reports . All reports, if any, delivered by the Company under this Agreement, have been duly filed, and the requirements of their respective forms (as of their respective filing dates), were complete and correct in all material respects as of the dates at which the information was furnished, and none contains (as of their respective dates of filing) any untrue statement of a material fact nor omitted to state a material fact necessary in order to make the statements made therein, in light of the circumstances in which made, not misleading.
3.7
Financial Statements and Changes . All financial reports and materials provided by the Company are true and accurate reflection of the Companys current financial situation and nothing has been omitted which could have a material adverse effect.
3.8
No Conflict . The provisions of each of this Agreement and the Designation do not constitute any violation, or conflict with or constitute a default under, any indenture, mortgage, deed of trust or other agreement, instrument, court order, judgment, decree, statute, rule or regulation (each a Term and collectively the Terms) to which the Company or any of its subsidiaries is a party or by which it is bound. The execution, delivery and performance of and compliance with this Agreement, the issuance of the Securities pursuant to the terms hereof and the performance of the Companys obligations hereunder and thereunder (i) will not result in any violation or be in conflict with or constitute a default under any Term, (ii) will not result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or its subsidiaries pursuant to any such Term, and (iii) will not conflict with or violate any applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court having jurisdiction over the Company, any of its subsidiaries, or any of the Companys or subsidiaries assets or properties, subject to such exceptions as would not have a Material Adverse Effect.
3.9
Governmental Consents . No consent, approval or authorization of, or designation, declaration or filing with, any federal, state or foreign governmental authority is required on the part of the Company in connection with the valid execution and delivery of this Agreement, the offer, sale or the issuance of the Securities or the consummation of any other transaction contemplated hereby, except (i) the filing of the Designation in the office of the State of California, and (ii) if required, qualifications or filings in connection with exemptions under any applicable state blue sky laws and Federal securities laws, which qualifications or exemptions, if required, will have been obtained and will be effective on the Closing Date, or will be obtained or filed after the Closing Date within the prescribed time in order to secure such exemptions or qualifications.
3.10
Patents, Trademarks, Etc . The Company and its subsidiaries own or have the right, or prior to the Closing will own or have the right, to use all patents, trademarks, service marks, trade names, copyrights, licenses and rights necessary to their business as now conducted, as conducted at the time of the Closing and as contemplated being conducted thereafter, and, are not infringing upon any persons or companys rights under or with respect to any of the foregoing. Neither the Company nor any of its subsidiaries has received any written communications alleging that the Company or a subsidiary has violated any patent, trademark, service mark, trade name, copyright or trade secret or other proprietary right of any other person or entity.
3.11
Litigation . Except as set forth on Schedule 3.11 , there is no suit, action or proceeding pending or affecting the Company or any of its subsidiaries, nor is there any judgment, decree, injunction, rule or order of any governmental entity or arbitrator outstanding against the Company or any of its subsidiaries.
3.12
Compliance with Laws . The Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties, which could reasonably be expected to have a Material Adverse Effect.
3.13
Offering of the Shares . Neither the Company nor any person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require, under the Securities Act of 1933, as amended (the Securities Act), the integration of such offering with the offering and sale of the Securities) which might subject the offering, issuance or sale of the Securities to the registration requirements of the Securities Act.
3.14
Finders Fee. The Company represents and warrants that no finders or brokers have been retained or used in connection with the transactions contemplated by this Agreement.
1.15
Tax Matters. Except as set forth on Schedule 3.15 , the Company and each of its subsidiaries has timely filed with the appropriate taxing authority all tax returns required to be filed by it or has timely requested extensions and any such request has been granted and has not expired. Each such tax return is complete and accurate in all respects. All taxes shown as owed by the Company or any of its subsidiaries on any tax return or claimed or asserted to be due, from or with respect to any of them, have been paid, except for taxes being contested in good faith and for which adequate reserves have been taken. The Company and each of its subsidiaries have properly made due and sufficient accruals for all taxes for such periods subsequent to the periods covered by such tax returns as required by GAAP. None of the Company or any of its subsidiaries are being audited or examined by any taxing authority with respect to any tax or is a party to any pending action or proceedings by any taxing authority for assessment or collection of any tax, and no claim for assessment or collection of any tax has been asserted against it or any of its subsidiaries. No claim has been made by any authority in a jurisdiction where the Company or any of its subsidiaries does not file tax returns that it is or may be subject to taxation by that jurisdiction. There is no dispute or claim concerning any tax liability.
3.16
Environmental Matters . Each of the Company and its subsidiaries has obtained, and now maintains as currently valid and effective, all permits, certificates of financial responsibility, and other governmental authorizations (collectively, Environmental Permits) that are required to be obtained by the Company or any of its subsidiaries under any state, federal, municipal, foreign or other environmental laws, rules or regulations applicable to any aspect of the Company or such subsidiary, including, but not limited to, in connection with the operation of its businesses and properties (Environmental Laws). Each of the Company and its subsidiaries has been in compliance with all terms and conditions of the Environmental Permits and all Environmental Laws and no liability exists under any Environmental Laws or otherwise with respect to prior operations or activities.
SECTION 4
PURCHASER REPRESENTATIONS AND WARRANTIES
The Purchaser represents and warrants to the Company, as follows:
4.1
Investment Intent .
(a)
Purchaser has substantial experience in business and financial matters and is capable of evaluating the merits and risks of its investment in the Company and is able to bear the economic risks of its investment.
(b)
Purchaser is an accredited investor as defined in Rule 501(a)(3) of Regulation D of the Securities Act.
(c)
Purchaser is acquiring the Securities for investment for its own account and not with a view to, or for resale in connection with, any distribution thereof. Purchaser understands that the Securities have not been registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, which depends upon, among other things, the bona fide nature of the investment intent as expressed herein.
(d)
Purchaser acknowledges that the Securities must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser is aware of the provisions of Rule 144 promulgated under the Securities Act (Rule 144) which permit limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being through a brokers transaction or in a transaction directly with a market maker (as provided by Rule 144(f)) and the number of shares being sold during any three-month period not exceeding specified limitations.
4.2
Corporate Power . Purchaser has all requisite legal and corporate power to execute and deliver this Agreement and to carry out and perform its obligations under the terms of this Agreement.
4.3
Authorization . The execution, delivery and performance of this Agreement by the Purchaser has been duly authorized by all requisite corporate action, and this Agreement constitutes a valid and binding obligation of Purchaser enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors, and rules of law governing specific performance, injunctive relief or other equitable remedies.
4.4
Finders Fee. Purchaser represents and warrants that no finders or brokers have been retained or used in connection with the transactions contemplated by this Agreement.
SECTION 5
CONDITIONS TO CLOSING
5.1
Conditions to Purchasers Obligations . The obligation of the Purchaser to purchase the Shares at the Closing is subject to the fulfillment to the reasonable satisfaction of the Purchaser, on or prior to the Closing Date, of the following conditions any of which may be waived in writing, in whole or in part, by the Purchaser:
(a)
The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date;
(b)
All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date shall have been performed or complied with in all material respects; and
(c)
The Designation shall have been filed with and accepted by the California Secretary of State.
5.2
Conditions to Companys Obligations . The Companys obligation to sell and issue the Shares to the Purchaser at the Closing is subject to the fulfillment to the Companys reasonable satisfaction, on or prior to the Closing Date, of the following conditions, any of which may be waived in writing, in whole or in part, by the Company:
(a)
The representations and warranties made by the Purchaser in Section 4 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date;
(b)
All covenants, agreements and conditions contained in this Agreement to be performed by the Purchaser on or prior to the Closing Date shall have been performed or complied with in all material respects; and
SECTION 6
COVENANTS
6.1
Additional Documents and Further Assurances . Each party hereto, at the request of the other party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby.
SECTION 7
INDEMNIFICATION
7 . 1
Indemnification . The parties hereby agree to indemnify, defend and hold each other and their affiliates harmless from and against any and all costs, losses, liabilities, damages, lawsuits, deficiencies, claims and expenses, including without limitation, interest, penalties, reasonable attorneys fees and all amounts paid in investigation, defense or settlement of any of the foregoing (, incurred in connection with, arising out of, resulting from, or incident to, any breach of any representation or warranty made by such party in this Agreement.
SECTION 8
MISCELLANEOUS
8.1
Delays or Omissions . No delay or omission to exercise any right, power or remedy accruing to the Company or the Purchaser, upon any breach or default under this Agreement, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character by the Company or the Purchaser of any breach or default under this Agreement, or any waiver by the Company or the Purchaser of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in writing, and all remedies, either under this Agreement, or by law or otherwise afforded to the Company or the Purchaser, shall be cumulative.
8.2
Waivers and Amendments . This Agreement and the provisions hereof may not be waived or amended except pursuant to a written instrument signed by the required party or parties as aforesaid.
8.3
Severability . In the event that any provision of this Agreement shall be deemed to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby.
8.4
Successors and Assigns . Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto.
8.5
Notices, Etc . All notices and other communications required or permitted hereunder shall be in writing and shall be delivered either (i) personally, (ii) by facsimile transmission, or (iii) by a nationally recognized overnight courier, in each case with all delivery or postal charges pre-paid, and in each case, addressed attention: President. All notices and communications shall be sent or delivered to the address or fax number, as applicable, for the applicable party as set forth on the signature page of this Agreement, or at such other address or fax number as the applicable party shall have furnished in writing to the other party (or its transferees). Each such notice or communication, addressed and posted as aforesaid, shall for all purposes of this Agreement be treated as effective or having been given (i) when delivered, if delivered personally, (ii) the business day on which the notice or communication is sent, if delivered by facsimile transmission, or (iii) upon the earlier of its receipt or two (2) business days after the business day of deposit with a nationally recognized overnight courier, if delivered by such means.
8.6
Entire Agreement . This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subject matters hereof and thereof, and supersede any and all prior agreements and understandings among the parties.
8.7
Governing Law . This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California as they apply to contracts entered into and wholly to be performed within such state, and without reference to its principles of conflicts of law or choice of law.
8.8
Attorneys Fees . In the event of any litigation in a court of competent jurisdiction arising in connection with this Agreement and the transactions contemplated hereby, the prevailing party in judgment shall be entitled to recover reasonable legal fees and costs in connection with such action including any appeals.
8.9
Independent Advice of Counsel . The parties represent and declare that, in executing this agreement, they relied solely upon their own judgment, belief and knowledge, and had the ability to seek the advice of their own independently selected counsel concerning the nature, extent and duration of their duties and rights contained in this agreement. The parties further represent and agree that they have not been influenced by any representations or statements concerning any matters made by any other party or by any person or attorney representing any other party.
8.10
Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be an original and all of which together shall constitute one instrument.
[Signatures on following page]
Series B Convertible Preferred Stock Purchaser Agreement PROBE
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first written above.
COMPANY
PROBE MANUFACTURING INDUSTRIES, INC., a California corporation
By:
Kam Mahdi,
Chief Executive Officer
Address:
3050 Pullman Street
Costa Mesa, CA 92626
Fax: (714) 424-2972
PURCHASER
Reza Zarif
By:
Print Name: Reza Zarif
Print Title:
Address:
_______________________
_______________________
Fax: (___) __-___
2 of 9
Series B Convertible Preferred Stock Purchaser Agreement PROBE
Schedules to Series B Convertible Preferred Stock Purchase Agreement
Schedule 3.3
Outstanding Rights
None.
Schedule 3.11
Litigation
None.
Schedule 3.15
Tax Matters
None.
Exhibit A
Certificate of Designation for Series B Convertible Preferred Stock
PROBE MANUFACTURING INDUSTRIES, INC.
____________________________
Series B Convertible Preferred Stock
Purchase Agreement
December 31, 2004
PROBE MANUFACTURING INDUSTRIES, INC.
SERIES B CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
This Agreement is made as of December 31, 2004, by and between Probe Manufacturing Industries, Inc., a California corporation (the Company), and Kambiz Mahdi (the Purchaser).
RECITALS
On the terms and conditions set forth herein, the Company desires to sell to the Purchaser, and the Purchaser desires to purchase from the Company, shares of the Companys Series B Convertible Preferred Stock (the Series B Preferred Stock) which are convertible into shares of the Companys common stock (the Common Stock), on the terms and conditions set forth in the Certificate of Designation of Series B Convertible Preferred Stock in the form attached hereto as Exhibit A (the Designation);
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual promises hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS
SECTION 1
AUTHORIZATION AND SALE OF THE SHARES
1.1
Authorization of the Shares .
(a)
The Company has authorized, or before the Closing (as defined in Section 2.1 below) will have authorized, a new series of preferred stock, designated as Series B Convertible Preferred Stock, which shall have the rights, preferences and privileges provided for in the Designation.
(b)
In addition, prior to the Closing, the Company shall have authorized the issuance and sale to the Purchaser(s) of up to Twenty Thousand (20,000) shares (the Shares) of the Series B Preferred Stock at a price of $100.00 per share, which shall have the rights, preferences and privileges provided for in the Designation.
1.2
Sale of the Shares . Subject to the terms and conditions hereof, at the Closing, the Company will issue and sell the Shares to the Purchaser and the Purchaser will purchase such Shares from the Company four thousand and five hundred ( 4,500 ) shares for an aggregate purchase price of four hundred and fifty thousand ($ 450,000 ). The Common Stock issued or issuable upon conversion of the Shares is referred to as the Conversion Stock. The Shares, the Conversion Stock and any other securities issued or issuable in respect of the Shares are sometimes collectively referred to herein as the Securities.
SECTION 2
CLOSING DATE; DELIVERY
2.1
Closing Date . The closing date shall be the date upon which this Agreement is executed by the parties to this Agreement (the Closing Date ).
2.2
Delivery . On the Closing Date, the Company shall deliver to the Purchaser a certificate registered in the Purchasers name and representing the Shares, against delivery to the Company of a check or wire transfer payable to the order of the Company in the amount of the Purchase Price. The Shares shall be delivered free of any claims, liens or encumbrances.
SECTION 3
COMPANY REPRESENTATIONS AND WARRANTIES
Except as disclosed in the Schedules attached hereto, the Company makes the following representations and warranties to the Purchaser:
3.1
Organization and Standing . Each of the Company and its subsidiaries (i) is a corporation duly organized and validly existing under the laws of its respective jurisdiction of incorporation and is in good standing as a domestic corporation under the laws of said state or country, (ii) has all requisite corporate power and authority to own and lease its properties and to conduct its business as presently conducted, and (iii) is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified does not and is not reasonably expected to (x) individually or in the aggregate, have a material adverse effect on the properties, business, results of operations, condition (financial or otherwise), affairs or prospects of the Company and its subsidiaries, taken as a whole, (y) interfere with or impair the Companys ability to perform its obligations under this Agreement, or (z) interfere with or prevent the consummation of any of the transactions contemplated by said instruments (any of the events set forth in clauses (x), (y) or (z), a Material Adverse Effect).
3.2
Corporate Power . The Company has all requisite legal and corporate power to execute and deliver this Agreement, to sell and issue the Shares, to issue the Conversion Stock issuable upon conversion of the Shares, and to carry out and perform its obligations under the terms of this Agreement and under the terms of all other agreements and other documents executed in connection herewith.
3.3
Capitalization . The authorized capital stock of the Company upon the filing of the Designation with the Secretary of State of the State of California will consist of (a) 100,000,000 shares of Common Stock of which 6,000,000 shares are issued and outstanding, and (b) 10,000,000 shares of Preferred Stock of which (i) 4400 shares Series A Convertible Preferred Stock of which are issued and outstanding and (ii) Twenty Thousand (20,000) shares shall be designated as Series B Convertible Preferred Stock. All of the outstanding shares of Common Stock and all of the shares of Series A and B Preferred Stock when issued and sold, will be, validly issued, fully paid and non-assessable, and free of any liens or encumbrances. The Series B Preferred Stock shall have the rights, preferences, privileges and restrictions set forth in the Designation. Except as set forth in Schedule 3.3 , no subscription, warrant, option or other right to purchase or acquire any shares of any class of capital stock of the Company or securities convertible into or exchangeable for such capital stock are outstanding. Except as set forth in Schedule 3.3 , no securities of the Company have any anti-dilution rights, preemptive rights or rights of first refusal.
3.4
Authorization . The execution, delivery and performance of this Agreement, and any other agreements related to this Agreement, by the Company have been properly and duly authorized by all requisite corporate action. In addition, all other actions taken by the Company in connection with the transactions contemplated by this Agreement were properly and duly authorized by all requisite corporate action. This Agreement and all documents and agreements executed in connection herewith, constitute valid and binding obligations of the Company. The issuance and sale of the Shares will not give rise to any preemptive rights or rights of first refusal on behalf of any person in existence on the date hereof.
3.5
Conversion Stock . The Conversion Stock has been duly and validly reserved for issuance.
3.6
Accuracy of Reports . All reports, if any, delivered by the Company under this Agreement, have been duly filed, and the requirements of their respective forms (as of their respective filing dates), were complete and correct in all material respects as of the dates at which the information was furnished, and none contains (as of their respective dates of filing) any untrue statement of a material fact nor omitted to state a material fact necessary in order to make the statements made therein, in light of the circumstances in which made, not misleading.
3.7
Financial Statements and Changes . All financial reports and materials provided by the Company are true and accurate reflection of the Companys current financial situation and nothing has been omitted which could have a material adverse effect.
3.8
No Conflict . The provisions of each of this Agreement and the Designation do not constitute any violation, or conflict with or constitute a default under, any indenture, mortgage, deed of trust or other agreement, instrument, court order, judgment, decree, statute, rule or regulation (each a Term and collectively the Terms) to which the Company or any of its subsidiaries is a party or by which it is bound. The execution, delivery and performance of and compliance with this Agreement, the issuance of the Securities pursuant to the terms hereof and the performance of the Companys obligations hereunder and thereunder (i) will not result in any violation or be in conflict with or constitute a default under any Term, (ii) will not result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or its subsidiaries pursuant to any such Term, and (iii) will not conflict with or violate any applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court having jurisdiction over the Company, any of its subsidiaries, or any of the Companys or subsidiaries assets or properties, subject to such exceptions as would not have a Material Adverse Effect.
3.9
Governmental Consents . No consent, approval or authorization of, or designation, declaration or filing with, any federal, state or foreign governmental authority is required on the part of the Company in connection with the valid execution and delivery of this Agreement, the offer, sale or the issuance of the Securities or the consummation of any other transaction contemplated hereby, except (i) the filing of the Designation in the office of the State of California, and (ii) if required, qualifications or filings in connection with exemptions under any applicable state blue sky laws and Federal securities laws, which qualifications or exemptions, if required, will have been obtained and will be effective on the Closing Date, or will be obtained or filed after the Closing Date within the prescribed time in order to secure such exemptions or qualifications.
3.10
Patents, Trademarks, Etc . The Company and its subsidiaries own or have the right, or prior to the Closing will own or have the right, to use all patents, trademarks, service marks, trade names, copyrights, licenses and rights necessary to their business as now conducted, as conducted at the time of the Closing and as contemplated being conducted thereafter, and, are not infringing upon any persons or companys rights under or with respect to any of the foregoing. Neither the Company nor any of its subsidiaries has received any written communications alleging that the Company or a subsidiary has violated any patent, trademark, service mark, trade name, copyright or trade secret or other proprietary right of any other person or entity.
3.11
Litigation . Except as set forth on Schedule 3.11 , there is no suit, action or proceeding pending or affecting the Company or any of its subsidiaries, nor is there any judgment, decree, injunction, rule or order of any governmental entity or arbitrator outstanding against the Company or any of its subsidiaries.
3.12
Compliance with Laws . The Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties, which could reasonably be expected to have a Material Adverse Effect.
3.13
Offering of the Shares . Neither the Company nor any person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require, under the Securities Act of 1933, as amended (the Securities Act), the integration of such offering with the offering and sale of the Securities) which might subject the offering, issuance or sale of the Securities to the registration requirements of the Securities Act.
3.14
Finders Fee. The Company represents and warrants that no finders or brokers have been retained or used in connection with the transactions contemplated by this Agreement.
1.15
Tax Matters. Except as set forth on Schedule 3.15 , the Company and each of its subsidiaries has timely filed with the appropriate taxing authority all tax returns required to be filed by it or has timely requested extensions and any such request has been granted and has not expired. Each such tax return is complete and accurate in all respects. All taxes shown as owed by the Company or any of its subsidiaries on any tax return or claimed or asserted to be due, from or with respect to any of them, have been paid, except for taxes being contested in good faith and for which adequate reserves have been taken. The Company and each of its subsidiaries have properly made due and sufficient accruals for all taxes for such periods subsequent to the periods covered by such tax returns as required by GAAP. None of the Company or any of its subsidiaries are being audited or examined by any taxing authority with respect to any tax or is a party to any pending action or proceedings by any taxing authority for assessment or collection of any tax, and no claim for assessment or collection of any tax has been asserted against it or any of its subsidiaries. No claim has been made by any authority in a jurisdiction where the Company or any of its subsidiaries does not file tax returns that it is or may be subject to taxation by that jurisdiction. There is no dispute or claim concerning any tax liability.
3.16
Environmental Matters . Each of the Company and its subsidiaries has obtained, and now maintains as currently valid and effective, all permits, certificates of financial responsibility, and other governmental authorizations (collectively, Environmental Permits) that are required to be obtained by the Company or any of its subsidiaries under any state, federal, municipal, foreign or other environmental laws, rules or regulations applicable to any aspect of the Company or such subsidiary, including, but not limited to, in connection with the operation of its businesses and properties (Environmental Laws). Each of the Company and its subsidiaries has been in compliance with all terms and conditions of the Environmental Permits and all Environmental Laws and no liability exists under any Environmental Laws or otherwise with respect to prior operations or activities.
SECTION 4
PURCHASER REPRESENTATIONS AND WARRANTIES
The Purchaser represents and warrants to the Company, as follows:
4.1
Investment Intent .
(a)
Purchaser has substantial experience in business and financial matters and is capable of evaluating the merits and risks of its investment in the Company and is able to bear the economic risks of its investment.
(b)
Purchaser is an accredited investor as defined in Rule 501(a)(3) of Regulation D of the Securities Act.
(c)
Purchaser is acquiring the Securities for investment for its own account and not with a view to, or for resale in connection with, any distribution thereof. Purchaser understands that the Securities have not been registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, which depends upon, among other things, the bona fide nature of the investment intent as expressed herein.
(d)
Purchaser acknowledges that the Securities must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser is aware of the provisions of Rule 144 promulgated under the Securities Act (Rule 144) which permit limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being through a brokers transaction or in a transaction directly with a market maker (as provided by Rule 144(f)) and the number of shares being sold during any three-month period not exceeding specified limitations.
4.2
Corporate Power . Purchaser has all requisite legal and corporate power to execute and deliver this Agreement and to carry out and perform its obligations under the terms of this Agreement.
4.3
Authorization . The execution, delivery and performance of this Agreement by the Purchaser has been duly authorized by all requisite corporate action, and this Agreement constitutes a valid and binding obligation of Purchaser enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors, and rules of law governing specific performance, injunctive relief or other equitable remedies.
4.4
Finders Fee. Purchaser represents and warrants that no finders or brokers have been retained or used in connection with the transactions contemplated by this Agreement.
SECTION 5
CONDITIONS TO CLOSING
5.1
Conditions to Purchasers Obligations . The obligation of the Purchaser to purchase the Shares at the Closing is subject to the fulfillment to the reasonable satisfaction of the Purchaser, on or prior to the Closing Date, of the following conditions any of which may be waived in writing, in whole or in part, by the Purchaser:
(a)
The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date;
(b)
All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date shall have been performed or complied with in all material respects; and
(c)
The Designation shall have been filed with and accepted by the California Secretary of State.
5.2
Conditions to Companys Obligations . The Companys obligation to sell and issue the Shares to the Purchaser at the Closing is subject to the fulfillment to the Companys reasonable satisfaction, on or prior to the Closing Date, of the following conditions, any of which may be waived in writing, in whole or in part, by the Company:
(a)
The representations and warranties made by the Purchaser in Section 4 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date;
(b)
All covenants, agreements and conditions contained in this Agreement to be performed by the Purchaser on or prior to the Closing Date shall have been performed or complied with in all material respects; and
SECTION 6
COVENANTS
6.1
Additional Documents and Further Assurances . Each party hereto, at the request of the other party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby.
SECTION 7
INDEMNIFICATION
7 . 1
Indemnification . The parties hereby agree to indemnify, defend and hold each other and their affiliates harmless from and against any and all costs, losses, liabilities, damages, lawsuits, deficiencies, claims and expenses, including without limitation, interest, penalties, reasonable attorneys fees and all amounts paid in investigation, defense or settlement of any of the foregoing (, incurred in connection with, arising out of, resulting from, or incident to, any breach of any representation or warranty made by such party in this Agreement.
SECTION 8
MISCELLANEOUS
8.1
Delays or Omissions . No delay or omission to exercise any right, power or remedy accruing to the Company or the Purchaser, upon any breach or default under this Agreement, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character by the Company or the Purchaser of any breach or default under this Agreement, or any waiver by the Company or the Purchaser of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in writing, and all remedies, either under this Agreement, or by law or otherwise afforded to the Company or the Purchaser, shall be cumulative.
8.2
Waivers and Amendments . This Agreement and the provisions hereof may not be waived or amended except pursuant to a written instrument signed by the required party or parties as aforesaid.
8.3
Severability . In the event that any provision of this Agreement shall be deemed to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby.
8.4
Successors and Assigns . Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto.
8.5
Notices, Etc . All notices and other communications required or permitted hereunder shall be in writing and shall be delivered either (i) personally, (ii) by facsimile transmission, or (iii) by a nationally recognized overnight courier, in each case with all delivery or postal charges pre-paid, and in each case, addressed attention: President. All notices and communications shall be sent or delivered to the address or fax number, as applicable, for the applicable party as set forth on the signature page of this Agreement, or at such other address or fax number as the applicable party shall have furnished in writing to the other party (or its transferees). Each such notice or communication, addressed and posted as aforesaid, shall for all purposes of this Agreement be treated as effective or having been given (i) when delivered, if delivered personally, (ii) the business day on which the notice or communication is sent, if delivered by facsimile transmission, or (iii) upon the earlier of its receipt or two (2) business days after the business day of deposit with a nationally recognized overnight courier, if delivered by such means.
8.6
Entire Agreement . This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subject matters hereof and thereof, and supersede any and all prior agreements and understandings among the parties.
8.7
Governing Law . This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California as they apply to contracts entered into and wholly to be performed within such state, and without reference to its principles of conflicts of law or choice of law.
8.8
Attorneys Fees . In the event of any litigation in a court of competent jurisdiction arising in connection with this Agreement and the transactions contemplated hereby, the prevailing party in judgment shall be entitled to recover reasonable legal fees and costs in connection with such action including any appeals.
8.9
Independent Advice of Counsel . The parties represent and declare that, in executing this agreement, they relied solely upon their own judgment, belief and knowledge, and had the ability to seek the advice of their own independently selected counsel concerning the nature, extent and duration of their duties and rights contained in this agreement. The parties further represent and agree that they have not been influenced by any representations or statements concerning any matters made by any other party or by any person or attorney representing any other party.
8.10
Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be an original and all of which together shall constitute one instrument.
[Signatures on following page]
Series B Convertible Preferred Stock Purchaser Agreement PROBE
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first written above.
COMPANY
PROBE MANUFACTURING INDUSTRIES, INC., a California corporation
By:
Kam Mahdi,
Chief Executive Officer
Address:
3050 Pullman Street
Costa Mesa, CA 92626
Fax: (714) 424-2972
PURCHASER
Kambiz Mahdi
By:
Print Name: Kambiz Mahdi
Print Title:
Address:
_______________________
_______________________
Fax: (___) __-___
2 of 9
Series B Convertible Preferred Stock Purchaser Agreement PROBE
Schedules to Series B Convertible Preferred Stock Purchase Agreement
Schedule 3.3
Outstanding Rights
None.
Schedule 3.11
Litigation
None.
Schedule 3.15
Tax Matters
None.
Exhibit A
Certificate of Designation for Series B Convertible Preferred Stock
PROBE MANUFACTURING INDUSTRIES, INC.
____________________________
Series B Convertible Preferred Stock
Purchase Agreement
December 31, 2004
December 31, 2004
Probe Manufacturing Industries, Inc.
3050 Pullman St.
Costa Mesa, CA 92626
RE:
Common Stock Cancellation and Return
Dear Probe:
The undersigned hereby agree to return to Probe Manufacturing Industries, Inc. the shares of common stock listed below for cancellation and return to the Companys treasury.
Shareholder |
Number of Shares of Common Stock Returned |
eFund Capital Partners, LLC |
750,000 |
Ashford Capital, LLC |
750,000 |
Reza Zarif |
1,750,000 |
Kambiz Mahdi |
1,750,000 |
TOTAL |
5,000,000 |
Sincerely,
____________________________
eFund Capital Partners, LLC
____________________________
Ashford Capital, LLC
____________________________
Reza Zarif
____________________________
Kambiz Mahdi
Agreed to and Accepted:
______________________________
Probe Manufacturing Industries, Inc.
PROMISSORY NOTE
$25, 000.00
Long Beach, California
October 12, 2004
1.
FOR VALUE RECEIVED, Probe Manufacturing Industries, Inc. (the "Borrower"), hereby promises to pay to the order of eFund Capital Partners, LLC (the "Holder"), at such location as the Holder may direct, the principal sum of Twenty Five Thousand and 0/100 Dollars ($25, 000.00) together with interest on the unpaid principal balance accruing as of the date hereof at a rate equal to the announced prime lending rate of U.S. Bank National Association as the same may change from time to time and be adjusted in the manner and at the times hereinafter provided for.
2.
The rate of interest due hereunder shall be twelve percent (12%) or such maximum rate as allowed under California and Federal lending laws.
3.
This Note shall be due and payable on January 8, 2005 together with all accrued interest.
4.
The Borrower promises to pay all costs of collection, including but not limited to, attorneys' fees, paid or incurred by the Holder on account of such collection, whether or not suit is filed with respect thereto and whether or not such costs are paid or incurred, or to be paid or incurred, prior to or after the entry of judgment.
5.
This Note may be prepaid at any time, either in whole or in part, without premium or penalty.
6.
As used herein, the term "Event of Default" shall mean and include any one or more of the following events:
a.
The Borrower shall fail to pay, when due, any amounts required to be paid by the Borrower under this Note;
b.
The Borrower shall file a petition in bankruptcy or for an arrangement pursuant to any present or future state or federal bankruptcy act or under a similar federal or state law, or shall be adjudicated a bankrupt or insolvent, or shall make a general assignment for the benefit of creditors, or shall be unable to pay its debts generally as they become due; or if an order for relief under any present or future federal bankruptcy act or similar state or federal law shall be entered against the Borrower; or if a petition or answer requesting or proposing the entry of such order for relief or the adjudication of the Borrower as a debtor or a bankrupt under a present or future state or federal bankruptcy act or a similar federal or state law shall be filed in any court and such petition and answer shall not be discharged or denied within sixty (60) days after the filing thereof; or if a receiver, trustee or liquidator of all or substantially all of the assets of the Borrower shall be appointed in any proceeding brought against the Borrower and shall not be discharged within sixty (60) days of such appointment; or if the Borrower shall consent to or acquiesce in such appointment; or
c.
Pinnacle Materials Development, LLC shall sell all or substantially all of its assets other than in the ordinary course of business or shall merge with another entity and not be the survivor thereof.
1.
Upon the occurrence of an Event of Default under Sections 7(a) or 7(b) above, the Holder shall give written notice to the Borrower of such Default, specifying the terms thereof, and the Borrower shall be accorded ten (10) days from the date of the receipt of such notice within which to cure such default. Such written notice shall be delivered in writing to Borrower or sent by certified or registered mail to the following address:
EFund Capital Parnter, LLC
301 East Ocean Blvd., Ste. 640
Long Beach, California 90802
2.
Upon the occurrence of any Event of Default (and, if applicable, which is not cured by the Borrower), and at any time and from time to time thereafter: (i) the Holder shall have the right to set off any and all amounts due hereunder by the Borrower to the Holder against any indebtedness or obligation of the Holder to the Borrower; and (ii) the unpaid principal balance hereof plus accrued interest hereon plus all other amounts due hereunder shall, at the option of the Holder, be immediately due and payable without notice or demand.
3.
Demand, presentment, protest and notice of nonpayment and dishonor of this Note are hereby waived.
4.
This Note shall be governed by and construed in accordance with the laws of the State of California.
5.
This Note is secured by that certain Pledge Agreement of even date herewith between the Borrower and the Holder.
BORROWER :
By:
Kambiz Mahdi, CEO
Exhibit 21.1
List of Subsidiaries
NONE.
Exhibit 23.1
Jaspers + Hall, PC
9175 East Kenyon Avenue, Suite 100
Denver, Colorado 80237
(303) 796-0099
June 7, 2005
U.S. Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, DC 20549
RE: Probe Manufacturing, Inc. SB-2
Dear Sir/Madame:
We hereby consent to the incorporation by reference in this Registration Statement on Form SB-2 of our report dated May 25, 2005 on our audit of the financial statements of Probe Manufacturing, Inc.s for the year ended December 31, 2004, and to all references to our firm included in this Registration Statement.
Sincerely,
Jaspers + Hall, PC
Denver, Colorado