____________________________________________________________________________________________________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005.
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ________
COMMISSION FILE NO. 333-125678
PROBE MANUFACTURING, INC.
(Exact name of issuer as specified in its charter)
NEVADA 20-2675800
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3050 Pullman Street, Costa Mesa, CA 92626
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 424-2960
Securities registered under Section 12(b) of the Exchange Act: NONE.
Securities registered under Section 12(g) of the Exchange Act:
C OMMON STOCK, PAR VALUE $0.001 PER SHARE .
(Title of class)
[ ] Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
[ ] Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
State issuer's revenues for its most recent fiscal year: $6,351,362
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
April 14, 2006: $0.80 . The company currently does not sell its common equity on a traded exchange and is awaiting approval from the NASD to obtain a listing on the OCTBB.
State the number of shares outstanding of each of the registrant's classes of
common stock as of April 14, 2006: 3,557,364
Transitional Small Business Disclosure Format (Check one): Yes [ ]; No [X]
Page 1 of 43
PROBE MANUFACTURING, INC.
10-KSB
TABLE OF CONTENTS
PART I PAGE
ITEM 1. DESCRIPTION OF BUSINESS.
4
ITEM 2. DESCRIPTION OF PROPERTY.
11
ITEM 3. LEGAL PROCEEDINGS.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS. 15
ITEM 7. FINANCIAL STATEMENTS.
F-1-F-28
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
29
ITEM 8A. CONTROLS AND PROCEDURES. 29
ITEM 8B. OTHER INFORMATION. 29
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. 30
ITEM 10. EXECUTIVE COMPENSATION. 32
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS. 33
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 35
ITEM 13. EXHIBITS. 38
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. 41
Page 2 of 43
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
We incorporated in the State of California on July 7, 1995 as Probe Manufacturing Industries, Inc. On April 21, 2005 we re-domiciled from California to Nevada whereby we changed our name to Probe Manufacturing, Inc. Our business focuses on manufacturing electronics and providing services to original equipment manufacturers (OEMs) of industrial, automotive, semiconductor, medical, communication, military, and high technology products. The services that we provide are commonly referred to as electronics manufacturing services (EMS). We offer our customers comprehensive and integrated design and manufacturing services, from initial product design to production and direct order fulfillment.
Our engineering services include product design, printed circuit board layout, prototyping, and test development. Our supply chain management solutions include purchasing, management of materials, and order fulfillment. Our manufacturing services include surface mount and through hole assembly, cable assembly, mechanical assembly, and fully integrated box build systems for high complexity electronics.
For example, Probe builds a Natural Gas Electronic Control Unit for Quantum Technologies which is used in GM’s alternative fuel engines. We have supported this customer from the inception of its product. Our services started with full design review for manufacturability and testability of the product. Once the design review and recommendations were completed we source the materials and procure the components. Then we take responsibility for assembling the components on to the boards, assembling the mechanical parts, installing the product inside the enclosure, and finally we perform a full functional test. Then the finished good product is shipped to the customer, who integrates it in to their final fuel delivery system and it’s delivered to GM.
The majority of our revenue is driven from manufacturing a mix of complex Printed Circuit Card assemblies. Some of the examples of our customers finished goods products include automated fluid dispensing equipments, high performance gas and liquid delivery process modules, which are used in semiconductor fabrication equipment, photonics instrumentation to measure fiber optics, electronic control unit for hydrogen, natural gas, and propane engines, electronic control unit for welding equipment, portable ultrasound and electro-simulation therapy equipment, and target scoring systems for military.
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. An article by Banc of America Securities stated “that the EMS & electronic supply chain segment is poised to benefit from the increased outsourcing by OEMs. The analysts mention that the EMS segment is likely to grow faster than the broader technical sector in the long run due to the increasing trend among OEM’s to outsource work.”
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:
Page 3 of 43
• 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 OEM’s 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 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,
Page 4 of 43
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 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 assemblies and modules in which they 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
Page 5 of 43
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
Our current list of customers by their industry and what we help them produce is a follows:
Page 6 of 43
|
Name/ Industry |
Services & products offered by our customers |
Services or products we provide to our customers |
||
|
Apogee/ Consumer |
Manufactures digital audio conversion systems for studio professionals and home recording enthusiasts. |
Materials Procurement, Printed Circuit card assembly, test, and full box build assembly |
||
|
Asymtek/ Industrial |
Provides automated fluid dispensing systems. |
Materials Procurement, Printed Circuit Card Assembly and Test |
||
|
BD Bioscience/ Medical |
Manufactures of Blood Analyzers and agents. |
Materials Procurement, Printed Circuit assembly and test. |
||
|
Meggitt/ Military |
Manufactures target scoring systems for the military. |
Printed Circuit card assembly |
||
|
Celerity Group/ Semiconductor |
Manufacturer of gas and liquid delivery process modules that are used in semiconductor fabrication equipment. |
Materials Procurement, Printed Circuit card Assembly, and Test. |
||
|
Jetline Engineering/ Industrial |
Manufactures a full range of mechanized welding equipment for all arc and other high energy processes. |
Materials Procurement, Printed Circuit Assembly, Test, Mechanical and Full Box Build Assembly. |
||
|
Trigtek/ Military |
Manufactures laboratory test, simulation and training applications. |
Materials Procurement, Printed Circuit Card Assembly, Test, and Box Build Assembly. |
||
|
Mettler Electronics/ Medical |
Provides portable ultrasound and electro-stimulation therapy equipment. |
Materials Procurement, Printed Circuit Card Assembly, Test, Mechanical, and Box Build Assembly. |
||
|
Motia/ Semiconductor |
Manufactures 802.11 wireless communication IC’s. |
Manufacture printed Circuit card assembly. |
||
|
Newport/ Industrial & Instrumentation |
Manufactures lasers and precision photonics instrumentation, motion control, wafer handling and assembly automation. |
Materials procurement, printed Circuit Card Assembly, Test, Mechanical, and Box Build Assembly. |
||
|
Omniprint/ Computers |
Full Range of printer solutions for Point of Sales applications. |
Materials Procurement, Printed Circuit Card Assembly, and test. |
||
|
Quantum/ Automotive |
Manufactures Electronics Control Units for Hydrogen, Natural Gas & Propane engines. |
Materials Procurement, Printed Circuit Card Assembly, test, mechanical assembly and full box build. |
||
|
Staco Switch/ Industrial |
Manufactures Lighted pushbutton switches and ruggedized keyboards and keypads for both military and commercial applications. |
Printed Circuit Card Assembly. |
||
Page 7 of 43
We do not have any long term agreements with our customers, and our principal customers may not continue to purchase services from us. The duration of a purchase order is usually from 30 to 90 days. These purchase orders could be cancelled or rescheduled at any time. The part number, quantity, price, workmanship standards, and scheduled delivery dates of the products to be manufactured are determined by written purchase orders given by our customers and accepted or confirmed by us in writing or via email. We agree to deliver theproducts manufactured pursuant to each purchase order in accordance with the terms and conditions set forth in the purchase order. Probe manufactures hundreds of different types of assemblies on an ongoing basis and each product has a purchase order associated with it.
We currently only focus on attracting and servicng customers in Southern California.
SALES AND MARKETING
Organization
Sales and marketing efforts are divided into segments as follows:
•
Industrial products
•
Military products
•
Automotive products
•
Communication products
•
Medical products
•
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 the company 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, are heavily involved in customer relations and devote significant attention to broadening existing, and developing new, customer relationships.
Sales Approach
Page 8 of 43
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 customer’s 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 customer’s 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.
Future Electronics is the world’s 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.
We currently do not have long-term agreements with our major suppliers, however, we enter into purchase order agreements. Purchase orders are placed with suppliers based on our material requirement planning (MRP) operating system. When we enter a sales order in our operating system Manex, it generates a list of materials for procurement to satisfy that order. We then issue purchase orders to our suppliers with scheduled deliveries which acts as the only contractual agreements between us and our suppliers.
COMPETITION
The electronic manufacturing services industry is large, competitive and diverse, and is serviced by many companies, including several that have achieved significant 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. Because of our market’s 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
Page 9 of 43
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
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 are 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 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. Material cost may rise due to additional manufacturing cost of raw or made parts with the application of new regulations. Our liabilities may also increase due to additional regulations imposed by foreign, federal, state and local regulatory requirements relating to environmental, waste management, and health and safety matters. 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.
ITEM 2. DESCRIPTION OF PROPERTY.
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 one of our founders and a director of ours. Reza Zarif is our chief executive 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 the managing partner of Ashford Transition Fund, L.P. Furthermore, Mr. Kavanaugh was a director of ours from July 2004 to December 2004.
In March of 2006 the owners of our building, Kambiz Mahdi, Reza Zarif and Pacific Sail Bay Trust, sold the building to an unrelated 3 rd party buyer, Mitchell Fitch, LLC. We have entered into a new agreement to lease the building from the new buyer for a period of six months at $ 30,580.00 per month or until such time we can locate a new building to lease.
ITEM 3. LEGAL PROCEDINGS.
As of December 31, 2005 we have the following legal proceedings and legal settlements:
1. Cadence has a judgment against us for $98,000 which was entered by the Superior Court Santa Clara County, California in September 2, 2003. 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 due to Cadence under the agreement was $43,554 as of December 31, 2005.
Page 10 of 43
2. IFC has a judgment against us for $144,403.00 which was entered by the Superior Court Orange County, California. Judgment filed July 15, 2004. 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 December 31, 2005 was $5,000.00.
3. Canon Financial has a judgment against us for $15,000.00which was entered by the Superior Court Burlington County, New Jersey on April 1, 2004 and also entered by the Superior Court , Orange County, California June 24, 2004. 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 December 31, 2005 was $1,000.00.
4. We currently owe the Internal Revenue Service $121,741.00 for past tax liabilities which we are not currently able to pay in full. We have negotiated a settlement with the IRS and have entered into a payment plan with them in which we pay the IRS $2,500 per month.
5. Genisis Technologies has filed a lawsuit against us, in the amount of $37,604.00 which was filed in the Superior Court Orange County, California on December 19, 2005. The suit was filed because Probe disputed the outstanding balance owed (by Probe, of $21,550), which probe agreed to pay. Genisis refused to supply backup documentation for the difference, therefore, no payments were made. As a result, Genisis filed suit and as of April 14, 2006, no settlement has been reached.
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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
TRADING MARKET
There is currently no public trading market for our securities. Selling stockholders will sell at a fixed price of $.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.
SHAREHOLDERS
As of February 3, 2006, there were approximately 176 holders of record of our
common stock.
DIVIDEND POLICY
Page 11 of 43
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.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
None.
RECENT SALES OF UNREGISTERED SECURITIES
LINES OF CREDIT:
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 the company 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. On August 15, 2005 we issued eFund 8,224 shares of common stock and on September 15, 2005 we issued 1,922 shares of common stock as interest on the line credit.
On January 1, 2005 we entered into a credit line agreement with Ashford Transition fund, LP 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 the company 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. On August 15, 2005 we issued Ashford 9,740 shares of common stock and on September 15, 2005 we issued 1,575 shares of common stock as interest on the line credit.
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, 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. On August 15, 2005 we issued Rufina 6,808 shares of common stock and on September 15, 2005 we issued 1,182 shares of common stock as interest on the line credit.
On March 8, 2005 we entered into a credit line agreement with Dennis Benner and the Benner Exemption Trust for $200,000. This is an interest only line of credit. There are no scheduled principal payments due
Page 12 of 43
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 the company 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. On August 15, 2005 we issued Dennis Benner and the Benner Exemption Trust 6,494 shares of common stock and on September 15, 2005 we issued 3,529shares of common stock as interest on the line credit.
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 the company 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. On August 15, 2005 we issued Edward 3,770 shares of common stock and on September 15, 2005 we issued 3,529 shares of common stock as interest on the line credit.
On March 22, 2005 we entered into a credit line agreement with William Duncan 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 the company 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. On August 15, 2005 we issued William 1,206 shares of common stock and on September 15, 2005 we issued 1,260 shares of common stock as interest on the line credit.
PRIVATE PLACEMENTS:
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:
•
the sales were made to 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;
Page 13 of 43
•
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).
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATION.
You should read this section together with our consolidated financial statements
and related notes thereto included elsewhere in this report.
Management's Discussion and Analysis of Plan of Operation
We intend that our forward-looking statements be subject to the safe harbors created by the Exchange Act. The forward-looking statements are generally accompanied by words such as “intend,” “anticipate,” “believe,” “estimate,” “expect” and other similar words and statements and variations or negatives of these words. Our forward-looking statements are based on current expectations, forecasts and assumptions and are subject to risks, uncertainties and changes in condition, significance, value and effect, including those discussed under the heading “Risk Factors” in this report filed with the Securities and Exchange Commission. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from our anticipated outcomes. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate. Therefore, we can give no assurance that the results implied by these forward-looking statements will be realized. The inclusion of forward-looking information should not be regarded as a representation by our company or any other person that the future events, plans or expectations contemplated by Probe Manufacturing, Inc. will be achieved. We disclaim any intention or obligation to update or revise any forward-looking statements contained in the documents incorporated by reference herein, whether as a result of new information, future events or otherwise.
Overview
We provide a range of manufacturing and integrated supply chain services to companies who design and market electronic products. Our revenue is generated from sales of our services primarily to customers in the industrial, automotive, semi-conductor and medical devise manufacturers. As a result of the services we perform for our customers, we are impacted by our customer’s ability to appropriately predict market demand for their products. While we work with our customers to understand their demand needs, we are removed from the actual end-market served by our customers. Consequently, determining future trends and estimates of activity can be very difficult.
Page 14 of 43
Summary of Results:
Key Performance Indicators:
|
Inventory turns |
3.33 |
2.87 |
3.32 |
6.33 |
|
Days sales in Backlog |
137 |
186 |
168 |
125 |
|
Days Receivables Outstanding |
32 |
43 |
39 |
29 |
|
Days payable outstanding |
61 |
88 |
75 |
57 |
Inventory turns are calculated as the ratio of cost of material compared to the average inventory for the quarter. In fiscal 2004 due to lack of capital and no relationship with major suppliers we were forced to buy material only for kit shortages which meant higher inventory turns. During the fiscal 2005, inventory turns decreased primarily due to three factors; a) introducing new customers which means we have to purchase minimum required inventory to meet their specific requirements, b) we re-established relationships with major suppliers with line of credit and terms, where they ship material in advance of kitting and, c) we
Page 15 of 43
reinstated our Material Requirement Planning system where we plan material for production based on customer schedules and not shortages for kits. Days sales in Backlog is calculated based on our back log divided by average daily sales during the quarter. Days Receivables Outstanding is calculated as the ratio of average accounts receivable during the quarter compared to average daily sales for quarter. Days Payable Outstanding is calculated as the ratio of average accounts payable during the quarter compared to daily cost of sales for the quarter.
Plan of Operation
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 $634,105 for the year ended December 31, 2005 and a working capital deficit of $501,461 and an accumulated deficit of $1,009,483 as of December 31, 2005. The ability of the Company to operate as 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 by: (i) re-negotiating direct material cost with all of our suppliers, (ii) reducing direct and indirect labor cost by streamlining production lines and other operations to create more efficiency and (iii) we are also evaluating the possibility of moving into a more feasible facility with lower rent and overhead, thus reducing the break even revenue level; (b) we are negotiating to replace our lines of credit with an agreement(s) that have more attractive terms and expand borrowing capacity, as well as increasing our lines of credit with suppliers; (c) To increase revenue we’re acquiring new customers, and growing our business with existing customers. We are also going to start charging our customers for all services rendered such as equipment programming, delivery and documentation, where in the past, we have often provided these services to our customers as part of the unit price. (d) Decrease inventory levels, carrying costs and better utilize our supplier lines of credit, by implementing bonded inventory levels with our major suppliers, whereby they maintain stock at there facilities and deliver “Just-in-Time”.
These result of some these activities are already evident in our 4th quarter ending December 31, 2005. Our revenues were up by more than 20%, our cost of goods were down by 7%, and our net income from operations was up by 16% from 3rd quarter ending September 2005.
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 continue to attain future profitable operations. There can be no assurance that the company will be successful in obtaining such financing, or that it will continue to 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
Page 16 of 43
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.
Critical Accounting Policies
Management is required to make judgments, assumptions and estimates that affect the amounts reported when we prepare financial statements and related disclosures in conformity with generally accepted accounting principles in the United States. Note 2, “Summary of Significant Accounting Policies,” to the financial statements for our for the fiscal year ended December 31, 2005 describes the significant accounting policies and methods used in the preparation of our financial statements. Estimates are used for, but not limited to, our accounting for contingencies, allowance for doubtful accounts, inventory valuation, goodwill and intangible asset impairments, restructuring costs, and income taxes. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of our consolidated financial statements.
Page 17 of 43
Inventory Valuation
Our inventories are stated at the lower of weighted average cost or market. Our industry is characterized by rapid technological change, short-term customer commitments and rapid changes in demand, as well as any other lower of cost or market considerations. We make provisions for estimated excess and / or obsolete inventory based on our regular reviews of inventory quantities on hand and the latest forecasts of product demand and production requirements from our customers. Our provisions for excess and obsolete inventory are also impacted by our contractual arrangements with our customers including our ability or inability to re-sell such inventory to them. If actual market conditions or our customers’ product demands are less favorable than those projected or if our customers are unwilling or unable to comply with any contractual arrangements related to excess and obsolete inventory, additional provisions may be required.
Allowance for Doubtful Accounts
We evaluate the collectability of our accounts receivable based on a combination of factors. Where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations to us, we record a specific allowance against amounts due to us and thereby reduce the net receivable to the amount we reasonably believe is likely to be collected. If the financial condition of our customers deteriorates or if economic conditions worsen, additional allowances may be required.
Goodwill and Intangibles
The company currently has no balance in any good will or intangible assets.
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. In connection with the termination of the S-Corp election, the accumulated deficit through that point in time ($4,364,654) was transferred to additional paid in capital.
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 and laws that are expected to be in effect when differences are expected to reverse.
Results of Operations
For the 3 months period ended December 31, 2005 we incurred a net loss of ($94,577) compared to ($283,990) for the same period in 2004. For the 12 months period ended December 31, 2005 we incurred a net loss of ($634,105) compared to ($918,590) for the same period in 2004, compared to net losses of ($1,244,761) in 2003 and ($1,513,846) 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. From 2002, our net sales stabilized and remained flat through 2004. Although, we have seen growth in our revenue in the 4 th quarter 2005, our overall sales for the fiscal year 2005 remained flat. 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 and 2005. The down sizing combined with other restructuring and cost containment initiatives resulted in a lower cost structure from 2002 through 2004, reducing our net losses year over year. In the 4 th quarter 2004 we realized one time inventory revaluation adjustment of ($155,000), this was an accrual made for excess or obsolete inventory adjustments and or write-offs completed in 2005. We also realized a one time warranty cost adjustment of ($50,000). In 2005 we realized a net gain from the forgiveness of debt in the amount of ($78,635). In 2005, we also had a one time impairment loss from lease improvements ($132,403).
Page 18 of 43
In 2004, we experienced a strong net sale in 1 st quarter due to increased sales from one of our major customer. In the 1 st quarter 2004, the major customer accounted for 60% of our net sales at $1.4 million. In the second quarter, net sales from that 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, net sales increased by 33% in 1 st quarter 2005 compared to 4 th quarter of 2004. Our sales grew by another 15% from the 1st qtr to the 2 nd qtr of 2005. We experienced a drop in net sales in the third quarter of 2005 due to reduction of business by one major customer due to down turn in the semiconductor – Chip industry. As we had anticipated, our net sales grew in the 4th quarter 2005 due to higher orders from existing customers and addition of new customers. In the 4th quarter 2005, our revenues were up by about 20%, our cost of goods were down by 7%, and our net income from operations was up by 16% from 3rd quarter ending September 2005. We anticipate maintaining the same level of performance in the 1st and 2nd quarter of 2006. We constantly adjust our operations to new sales forecast, and are anticipating profitability as our net sales grow and expenses are cut to match current revenue levels.
The following table summarizes certain items in the statements of operations as a percentage of net sales. The financial information and the discussion below should be read in conjunction with the accompanying financial statements and notes thereto.
|
Un-audited |
Audited |
|||
|
Three-month period ended |
Twelve-month period ended |
|||
|
December 31, |
December 30, |
|||
|
2005 |
2004 |
2005 |
2004 |
|
|
$1,950,713 |
$1,038,935 |
$6,351,362 |
$6,204,957 |
|
|
Sales |
100% |
100% |
100% |
100% |
|
Cost Of Goods Sold |
72% |
85% |
78% |
80% |
|
Gross Profit |
28% |
15% |
22% |
20% |
|
General And Administrative Expenses |
24% |
45% |
29% |
32% |
|
Net Income / (Loss) From Operations |
4% |
(30)% |
(7)% |
(12)% |
|
Other Income / (Expense) |
(8)% |
|
(1)% |
4 % |
|
Interest Expense |
(1)% |
(4)% |
(2)% |
(7)% |
|
Net Loss Before Income Taxes |
(5)% |
(27)% |
(10)% |
(15)% |
|
Income Taxes |
- |
- |
- |
- |
|
Net Loss |
(5)% |
(7)% |
(10)% |
(15)% |
Net Sales
Our net sales increased by 20% in three month period ending December 31, 2005 compared to the same period in 2004 due to increase in the number of customers and higher orders from existing customers. Due to higher revenue and operational improvements, in three month period ending December 31, 2005, our cost of goods were down by 7%, and our net income from operations was up by 16% from 3rd quarter ending September 2005.
Major Customers
Our top 5 customers accounted for approximately 85% of net sales for the twelve month ending December, 31 2005, compared to approximately 88% in the corresponding periods of fiscal 2004 due to introducing new customers. We believe that our ability to grow depends on increasing sales to existing customers and on successfully attracting new customers. Customer contracts can be canceled and volume levels can be changed or delayed. The timely replacement of delayed, canceled or reduced orders with new business
Page 19 of 43
cannot be ensured. In addition, we cannot assume that any of our current customers will continue to utilize our services. Consequently, our results of operations may be materially adversely affected.
Gross Profit
Gross profit varies from period to period and is affected by a number of factors, including product mix, production efficiencies, component costs, pricing, competition, customer construction and unanticipated restructuring or inventory charges. Our gross profit percentage was 28% in 3 month ending December 31, 2005 compare 15% in the same period in 2004 due to increased revenue and reducing our cost. However, our gross profit percentage improved only by 2 % for the twelve month ending December 31, 2005 compared to the 2004, due to lower revenue and higher cost in the first 3 quarters of 2005. We are anticipating gross profits of 25% for 1 st 2 nd quarters in 2006.
Selling, General and Administrative (SG&A) Expenses
SG&A expenses decreased by 20%, for the three months ended December 31, 2005 compared to the corresponding period in fiscal 2004. This decrease in percentage is mainly due to higher revenue levels and lower SG&A cost in the 4th quarter of 2005. SG&A expenses also decreased by 3% for the twelve months period ended December 31, 2005, compared to the corresponding period in fiscal 2004 due to the same reasons. We anticipate Our SG&A to remain around 25% in the 1 st and 2 nd quarter of 2006.
Liquidity and Capital Resources
Cash and cash equivalents remained relatively unchanged from $40402 at December 31, 2004 to $0 at December 31, 2005. The table below, for the periods indicated, provides selected condensed consolidated cash flow information.
|
Audited |
|||
|
Twelve-month period ended |
|||
|
December 31, |
|||
|
2005 |
2004 |
||
|
Net Cash Used In Operating Activities |
(969,076) |
(1,613,540) |
|
|
Cash Flows Used In Investing Activities |
(7,082) |
(13,945) |
|
|
Cash Flows Provided By Financing Activities |
935,756 1,088,561 |
1,667,887 1,820,692 |
|
|
Net (Decrease) Increase in Cash and Cash Equivalents |
(40,402) |
40,402 |
|
|
Cash and Cash Equivalents at Beginning of Period |
40,402 |
- |
|
|
Cash and Cash Equivalents at End of Period |
- |
$40402 |
|
Net cash used in operating activities was $969,076 during the twelve months ended December 31, 2005. This was primarily due to a net loss of $634,105 (net of depreciation expense in the amount of $215,020), an increase in inventory of $603,571, and an increase in accounts receivable of $190,779, and one time impairment loss of $132 thousand. These were offset by an increase in debt forgiveness of $78 thousand and an increase in accounts payable of $161,935. The increase in inventory levels was partly an intentional effort to improve on-time delivery and production efficiency by having appropriate stocking levels to meet customer orders and also due to increase in overall demand for product from our customers in the 4 th quarter of 2005. The increase in receivables was mainly due to increase in net sales.
Net cash used in investing activities of $7,082 was due to the purchase of manufacturing equipment.
Net cash provided by financing activities of $935,756 during the twelve month ended December 31, 2005 primarily consisted of the proceeds from issuance of common stock of $572,000 and borrowings under
Page 20 of 43
lines of credit of $517,000, and increase in the bank overdraft of $54,029. These were offset by payments on capital lease obligations of $98,916, and payments on long-term debt of 109,132.
As of December 31, 2005 the company had available a $100,000.00 under various revolving credit facilities that expire between January and April of 2007. Our revolving credit facility are secured by the assets of the company
The following is a summary of certain obligations and commitments as of September, 2005 for continuing operations:
|
Capital Requirements for long-term Obligations by period |
Total as of December 31, 2005 |
2006 |
2007 |
2008 |
2009 |
|
Long-term Debt |
265,573 |
112,682 |
81,849 |
33,600 |
37,441 |
|
Capital Lease Payments |
870,915 |
109,765 |
748,629 |
521 |
Off-balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
RISKS ABOUT OUR BUSINESS
OUR INDEPENDENT ACCOUNTANTS HAVE ISSUED A GOING CONCERN OPINION AND IF WE CANNOT OBTAIN ADDITIONAL FINANCING AND/OR REDUCE OUR OPERATING COSTS SUFFICIENTLY, WE MAY HAVE TO CURTAIL OPERATIONS AND MAY ULTIMATELY CEASE TO EXIST.
Our audited financial statements for the twelve months ended December 31, 2005 reflect a net loss of ($634,105) as compared to a net loss of (918,590) for the twelve months ended December 31, 2004. 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, William 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 December 31, 2005, we have drawn on $625,000 of our revolving credit lines and only have $100,000 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 and/or we cannot reduce our operating costs sufficiently 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, therefore, we may be forced to curtail operations or may ultimately cease to exist.
WE HAVE AN ACCUMULATED DEFICIT AND MAY INCUR ADDITIONAL LOSSES, THEREFORE WE MAY NOT BE ABLE TO OBTAIN THE ADDITIONAL FINANCING NEEDED FOR WORKING CAPITAL, CAPITAL EXPENDITURES AND TO MEET OUR DEBT SERVICE OBLIGATIONS.
As of December 31, 2005, we had current liabilities of ($2,540,079). 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.
Page 21 of 43
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 MAY BE ADVERSELY AFFECTED BY SHORTAGES OF REQUIRED ELECTRONIC COMPONENTS. IN ADDITION, WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS TO PROCURE OUR PARTS FOR PRODUCTION WHICH IF AVAILABILITY OF PRODUCTS BECOMES COMPROMISED IT COULD ADD TO OUR COST OF GOODS SOLD AND AFFECT OUR REVENUE GROWTH.
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. In addition, we depend upon a number of major suppliers for our products. We do not have long-term agreements with our major suppliers, except for our purchase orders. 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. Lack of long-term agreement with our major suppliers could also impact material availability and could delay shipments. Should the availability of products be compromised, it could also force us to develop alternative products, which could add to the cost of goods sold and compromise delivery commitments.
Page 22 of 43
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, 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”)
WE CURRENTLY ONLY SERVICE AND ATTEMPT TO OBTAIN CUSTOMERS IN THE LIMITED GEOGRAPHIC OF SOUTHERN CALIFORNIA WHICH IS A SMALL ADDRESSABLE MARKET AND COULD BE SUBJECT TO ECONOMIC HARDSHIP OR SLOWDOWN, AS A RESULT OUR GROWTH COULD BE LIMITED AND ADVERSELY AFFECT OUR PROJECTED SALES AND OPERATING INCOME.
We currently only service, attempt to solicit new, and direct our marketing efforts to customers in the Southern California region. This is a very small addressable market which ultimately limits the amount of growth we could experience. In addition, this region could experience an economic recession or other market contraction which would cause our current customers and any potential customers to also contract their businesses as well and cease outsourcing any current products that we currently service and would attempt to obtain. Both the size of the market and any potential economic hardship affecting this small regional market could adversely affect our project sales and operating incomer. If we are forced to expand our marketing efforts outside this region we could also incur significant costs in an attempt to penetrate other regional or national markets.
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, 2005 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, often reduce the volume and market share for our customers and ultimately us. It will lead to the loss of previous design
Page 23 of 43
•
wins and frequent new product introductions and substantial development costs. This could result in loss of revenue and it could adversely affect our operating income.
•
Seasonality of demand for our customers’ products would force our customers to manage their inventories for seasonal variations and inventory management and excess build ups. Customers could dramatically increase their request for production quantities, which could cause lead time problems with getting the components or we may not be able to build enough products which could have loss of revenue for our customers. As a result we could lose these customers and it would adversely affect our projected sales. If the projected sales will not materialize, we will have loss of revenue and reduced margins. Any cancellation or delay in production would also have the same adverse effect on our sales projections and profitability.
•
The inability of our customers to successfully market their products, and the failure of these products to gain widespread commercial acceptance; could effect their long term business plans and sales. Our success depends upon the ability of our customers to successfully market their products and if they fail, it could result in cancellations or rescheduling orders lower sales volume and operating income.
•
Recessionary periods in our customers’ markets will affect both our customers and our overall business output. It would require dramatic changes to the overall business model, layoffs and major adjustments to the business overhead. If we fail to adjust to new recessionary environment, our business would be adversely affected and we may not be able to compete successfully against other companies in our industry and achieve profitability.
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
Page 24 of 43
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.
OUR ODM PRODUCTS CURRENTLY COMPETE WITH CURRENT AND PROSPECTIVE PRODUCTS OF OUR OEM CUSTOMERS WHICH COULD PROVOKE OUR CUSTOMERS TO CEASE ITS BUSINESS RELATIONSHIP WITH US AND WE MAY INCUR SIGNIFICANT LOSES AS A RESULT.
Flexibility and time to market are now forcing our OEM customers to turn to us for Outside Design Manufacturing (ODM) services. As a result we could begin to compete with our OEMs products. Some of these customers could terminate their relationship with us and seek an injunction against us or future of their underlying technology in our ODM product, which could result in loss of these customers and loss of revenue for Probe.
Furthermore, if we continue to produce our ODM products we could also face allegations of patent infringement and trademark infringement by our customers. In the event of an infringement claim against us, we would absorb substantial costs in defending the claim and if we lose we have to pay the amount of any resulting adverse final judgment against us or settlement. This could have an adverse effect on our business both with our profitability and reputation in the market.
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 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 WITH WHOM WE DO NOT HAVE LONG TERM CONTRACTS; 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 79% of net sales during the twelve months ended December 31, 2005.
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
Page 25 of 43
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.
The part number, quantity, price, workmanship standards, and scheduled delivery dates of the products to be Manufactured are determined by written purchase orders given by our customers and accepted or confirmed by us in writing or via email. We agree to deliver the products manufactured pursuant to each purchase order in accordance with the terms and conditions set forth in the purchase order. Probe manufactures hundreds of different types of assemblies on an ongoing basis and each product has a purchase order associated with it. Please see attcahed filing of several samples of these purchase orders.
We do not have any long term agreements with our customers, and our principal customers may not continue to purchase services from us. The duration of a purchase order is usually from 30 to 90 days. These purchase orders could be cancelled or rescheduled at any time. Significant reductions in sales to any of these customers would reduce our projected sales, adversely affect our profits, and seriously harm our business.
Our top five customers include, Celerity Group, Newport Corporation, Asymtek Corporation, Jetline Engineering, and Apogee.
WE CURRENTLY DO NOT HAVE LONG TERM CONTRACTS WITH OUR EXECUTIVE OFFICERS AND IF WE LOSE KEY SENIOR MANAGEMENT PERSONNEL OUR BUSINESS COULD BE NEGATIVELY AFFECTED. FURTHER, 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.
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.
Page 26 of 43
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. 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. Foreign exchange forward contracts are treated as cash flow hedges and such contracts generally expire within three months.
Page 27 of 43
ITEM 7. FINANCIAL STATEMENTS.
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT
F-1
BALANCE SHEETS
F-3
STATEMENTS OF OPERATIONS
F-5
STATEMENTS OF CASH FLOWS
F-7
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
F-9
NOTES TO FINANCIAL STATEMENTS
F-10
Page 28 of 43
FINANCIAL STATEMENTS
JASPERS + HALL, PC
CERTIFIED PUBLIC ACCOUNTANTS
9175 Kenyon Avenue, Suite 100
Denver, CO 80237
303-796-0099
Board of Directors
Probe Manufacturing, Inc.
Costa Mesa, California
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying balance sheets of Probe Manufacturing, Inc. as of December 31, 2005 and 2004, and the related statements of operations, stockholders’ deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Probe Manufacturing, Inc., as of December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
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 Company’s 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. Management’s 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
March 16, 2006
F-1
|
PROBE MANUFACTURING, INC. |
|||
|
Balance Sheets |
|||
|
December 31, |
|||
|
ASSETS |
2005 |
2004 |
|
|
Current Assets: |
|
|
|
|
Cash |
$ - |
$ 40,402 |
|
|
Accounts receivable - trade – net |
692,212 |
501,433 |
|
|
Inventory |
1,296,386 |
692,815 |
|
|
Prepaid expenses |
50,020 |
60,060 |
|
|
Total Current Assets |
2,038,618 |
1,294,710 |
|
|
Property and equipment – net |
337,889 |
678,230 |
|
|
Deposits |
27,963 |
10,000 |
|
|
TOTAL ASSETS |
$ 2,404,470 |
$ 1,982,940 |
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT |
|||
|
Current Liabilities: |
|||
|
Bank overdraft |
$ 154,596 |
$ 100,567 |
|
|
Accounts payable – trade |
691,694 |
529,759 |
|
|
Accrued expenses |
282,503 |
270,981 |
|
|
Line of credit borrowings |
732,838 |
140,063 |
|
|
Notes payable |
456,000 |
531,000 |
|
|
Current Portion of LT Debt |
222,448 |
286,650 |
|
|
Total Current Liabilities |
2,540,079 |
1,859,020 |
|
|
Long-Term Debt: |
|||
|
Other long-term debt |
265,573 |
374,705 |
|
|
Capital lease obligations |
870,915 |
1,048,303 |
|
|
Less Current portion of Long Term Debt |
(222,448) |
(286,650) |
|
|
Total Long-Term Debt |
914,040 |
1,136,358 |
|
|
TOTAL LIABILITIES |
3,454,119 |
2,995,378 |
|
|
Stockholders' Deficit: |
|||
|
Preferred A stock, stated value $1,000 per share; 440 shares |
|||
|
authorized; 440 shares issued and outstanding |
440,000 |
440,000 |
|
|
Preferred B stock, stated value $100 per share; 20,000 shares |
|||
|
authorized; 12,500 shares issued and outstanding |
1,250,000 |
1,250,000 |
|
|
Common stock, $.001 par value; 200,000,000 shares |
|
|
|
|
authorized; 3,359243 and 2,613,125 shares issued and outstanding, respectively. |
3,359 |
2,613 |
|
|
Additional paid-in capital |
(1,733,525) |
(2,329,673) |
|
|
Accumulated deficit |
(1,009,483) |
(375,378) |
|
|
Total Stockholders' Deficit |
(1,049,649) |
(1,012,438) |
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT |
$ 2,404,470 |
$ 1,982,940 |
|
The accompanying footnotes are an integral part of these financial statements
F-2
|
PROBE MANUFACTURING, INC. |
||
|
Statements of Operations |
||
|
For the years ended December 31, |
||
|
2005 |
2004 |
|
|
|
||
|
SALES |
$ 6,351,362 |
$ 6,204,957 |
|
COST OF GOODS SOLD |
4,953,672 |
4,988,538 |
|
GROSS PROFIT |
1,397,690 |
1,216,419 |
|
|
||
|
GENERAL AND ADMINISTRATIVE |
1,822,824 |
1,964,325 |
|
NET LOSS FROM OPERATIONS |
(425,134) |
(747,906) |
|
OTHER INCOME/(EXPENSES): |
||
|
OTHER INCOME |
78,635 |
275,228 |
|
IMPAIRMENT LOSS |
(132,403) |
|
|
INTEREST EXPENSE |
(156,003) |
(445,112) |
|
NET LOSS BEFORE INCOME TAXES |
(634,905) |
(917,790) |
|
INCOME TAXES |
800 |
(800) |
|
NET LOSS |
$ (634,105) |
$ (918,590) |
|
|
|
|
|
|
|
|
|
Per Share Information: |
||
|
Weighted average number |
||
|
of common shares outstanding |
3,418,497 |
4,058,594 |
|
Net Loss per common share |
$ (0.19) |
$ (0.23) |
The accompanying footnotes are an integral part of these financial statements
F-3
|
PROBE MANUFACTURING, INC. |
|||
|
Statements of Cash Flows |
|||
|
for the years ended December 31, |
|||
|
2005 |
2004 |
||
|
Cash Flows from Operating Activities: |
|||
|
Net Loss |
$ (634,105) |
$ (918,590) |
|
|
Adjustments to reconcile net loss to net cash |
|||
|
used in operating activities: |
|||
|
Depreciation and amortization |
215,020 |
241,086 |
|
|
Impairment Loss |
132,403 |
||
|
Debt forgiveness |
(78,472) |
(275,228) |
|
|
Stock issued for services |
- |
85,500 |
|
|
Stock issued for Interest |
24,894 |
||
|
Changes in assets and liabilities: |
|||
|
(Increase) decrease in accounts receivable |
(190,779) |
632,121 |
|
|
(Increase) decrease in inventory |
(603,571) |
(329,221) |
|
|
(Increase) decrease in prepaid expenses |
10,040 |
(60,060) |
|
|
(Increase) decrease in deposits |
(17,963) |
4,997 |
|
|
(Decrease) increase in accounts payable |
161,935 |
(838,099) |
|
|
Other (Decrease) increase in accrued expenses |
11,522 |
(156,046) |
|
|
Net Cash Used In Operating Activities |
(969,076) |
(1,613,540) |
|
|
Cash Flows from Investing Activities |
|||
|
Purchase of property and equipment |
(7,082) |
(13,945) |
|
|
Cash Flows Used In Investing Activities |
(7,082) |
(13,945) |
|
|
Cash Flows from Financing Activities |
|||
|
Bank overdraft |
54,029 |
(51,235) |
|
|
Borrowings under line of credit, net |
517,775 |
(1,028,990) |
|
|
Stock issued for debt |
- |
564,183 |
|
|
Principal payments on capital lease obligations |
(98,916) |
(79,572) |
|
|
Proceeds from sale of stock |
572,000 |
1,885,306 |
|
|
Proceeds / (Payments) on notes payable |
(109,132) |
378,195 |
|
|
Cash Flows Provided By Financing Activities |
935,756 |
1,667,887 |
|
|
Net (Decrease) Increase in Cash and Cash Equivalents |
(40,402) |
40,402 |
|
|
Cash and Cash Equivalents at Beginning of Period |
40,402 |
- |
|
|
Cash and Cash Equivalents at End of Period |
$ - |
$ 40,402 |
|
|
Supplemental Information: |
|||
|
Interest Paid |
$ 156,003 |
$ 445,112 |
|
|
Income Taxes Paid |
$ 800 |
$ 800 |
|
The accompanying footnotes are an integral part of these financial statements
F-4
The accompanying footnotes are an integral part of these financial statements
F-5
PROBE MANUFACTURING, INC.
Notes to Financial Statements
December 31, 2005
Notes 1- GENERAL
The Company
Probe Manufacturing Industries, Inc. was incorporated on July 7, 1995 . On April 21, 2005, the Company was re-domiciled from California to Nevada and 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 includes 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 $634,105 for the Year ended December 31, 2005 and a working capital deficit of $501,461 and an accumulated deficit of $1,009,483 as of December 31, 2005, The ability of the Company to operate as 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 by: (i) re-negotiating direct material cost with all of our suppliers, (ii) reducing direct and indirect labor cost by streamlining production lines and other operations to create more efficiency and (iii) we are also evaluating the possibility of moving into a more feasible facility with lower rent and overhead, thus reducing the break even revenue level; (b) we are negotiating to replace our lines of credit with an agreement(s) that have more attractive terms and expand borrowing capacity, as well as increasing our lines of credit with suppliers; (c) To increase revenue we’re acquiring new customers, and growing our business with existing customers. We’re also going to start charging our customers for all services rendered such as equipment programming, delivery and documentation, where in the past, we have often provided these services to our customers as part of the unit price. (d) Decrease inventory levels, carrying costs and better utilize our supplier lines of credit, by implementing bonded inventory levels with our major suppliers, whereby they maintain stock at there facilities and deliver “Just-in-Time”.
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.
F-6
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company follows United States generally accepted accounting principles. Certain of the principles involve selection among alternatives and choices of methods, which are described in the footnotes to the Companies audited consolidated financial statements. Certain reclassifications have been made to the 2004 balance sheet and notes to be consistent with the 2005 presentation. The new balance sheet presentation is more consistent with other companies in similar lines of business.
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. For purposes of the statement of cash flows, the Company considers all cash and highly liquid investments with initial maturities of one year 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, the collectibility of accounts receivable and valuation if inventory and reserves.
Accounts Receivable
The Company grants credit to its customers within the United States of America and does not require collateral. The Company’s 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, 2005, the Company has a reserve of $33,133.
Five (5) customers accounted for approximately 92% of accounts receivable at December 31, 2005. The Company’s trade accounts primarily represent unsecured receivables. Historically, the Company’s bad debt write-offs related to these trade accounts have been insignificant.
Inventory
Inventories are valued at the lower of weighted average cost or market value. Our Industry experiences changes in technology, changes in market value and availability of the raw materials, as well as changing customer demand. The Company makes provisions for estimated excess and obsolete inventories based on regular audits and cycle counts of our on-hand inventory levels and forecasted customer demands and at times additional provisions are made. As of December 31, 2005, the Company had a reserve of $229,000.
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
(estimated life of the lease)
F-7
PROBE MANUFACTURING, INC.
Notes to Financial Statements
December 31, 2005
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Long –Lived Assets
The Company’s 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, 2005, the Company wrote off as an impairment expense, the value of leasehold improvements to the estimated remaining useful life of nine months and believes there is no other impairment of its long-lived assets. There can be no assurance however, that market conditions will not change or demand for the Company’s 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. Terms are generally FOB Origination with the right of inspection and acceptance. The company has not experienced a material amount of rejected or damaged product.
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.
Net Loss Per Common Share
Basic loss per share is computed on the basis of the weighted average number of common shares outstanding. For the period ended December 31, 2005, all of the Company's common stock equivalents were excluded from the calculation of diluted loss per common share because they were anti-dilutive, due to the Company's net loss in that year. At December 31, 2005 there were warrants outstanding to purchase 2,321,250 common shares which may dilute future earnings per share. At December 31, 2005 there were 12,500 shares of Preferred B outstanding which would convert to 1,562,500 common shares which may dilute future earnings per share. At December 31, 2005 there were 440 shares of Preferred A outstanding which would convert to 5,690,923 common shares which may dilute future earnings per share.
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
December 31, 2005
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.
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. In connection with the termination of the S-Corp election, the accumulated deficit through that point in time ($4,364,654) was transferred to additional paid in capital.
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 and laws that are expected to be in effect when differences are expected to reverse.
NOTE 3 - INVENTORY
Inventories at December 31, 2005 by major classification were comprised of the following:
|
Raw Material |
1,133,127 |
|
Work in Process |
354,176 |
|
Finished Goods |
38,083 |
|
Total |
1,525,386 |
|
Less Reserve for excess or obsolete inventory |
(229,000) |
|
Net Inventory |
1,296,386 |
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment were comprised of the following at December 31, 2005:
|
Furniture and fixtures |
544,107 |
|
Equipment |
2,658,061 |
|
Vehicles |
44,708 |
|
Leasehold improvements |
163,153 |
|
Total |
3,410,029 |
|
Less accumulated depreciation and amortization |
(3,072,140) |
|
Net Fixed Assets |
337,889 |
F-9
PROBE MANUFACTURING, INC.
Notes to Financial Statements
December 31, 2005
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 Company’s 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 $100,000 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, 2005, the Company had borrowed $77,838.
The Company has an additional unsecured line of credit in the amount of $775,000. Borrowings under the Line of credit bear interest at the rate of 20% (12% paid in cash and 8% paid in common stock in the company) per annum. As of December 31, 2005 the Company had an outstanding balance against this line of credit in the amount of $655,000.
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 original leases 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). Subsequently, the remaining leases were negotiated to settled amounts and carry no provisions for interest. 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, 2005 are as follows:
|
Present value of Minimum lease payments |
||
|
2006 |
109,767 |
|
|
2007 |
748,626 |
|
|
2008 |
12,520 |
|
|
Total Minimum Lease payments |
870,913 |
|
|
Less amount representing interest |
0 |
|
|
Present value of net minimum lease payments |
870,913 |
|
|
Less Current Portion |
-109,765 |
|
|
Long-term portion |
$761,148 |
|
|
The following is an analysis of the equipment under capital leases as of December 31, 2005, |
||
|
which is included in property and equipment: |
||
|
Equipment |
1,797,958 |
|
|
less: Accumulated depreciation |
-1,577,729 |
|
|
Net Equipment under capital leases |
220,229 |
F-10
PROBE MANUFACTURING, INC.
Notes to Financial Statements
December 31, 2005
NOTE 7 – NOTE PAYABLE
Note payable – related party, secured by deed of trust, 12% interest, originally due on
September 2005 to Ashford Capital Transition Fund I, LP, and was subsequently extended to March 2006.
Total Note Payable
$456,000
Other Long-Term Debt
Other long-term debt consist of settlements reached with various vendors ranging from $1,400 to $120,000 with payment terms from two to five years in the total amount of $265,573. Monthly installment payments to these vendors range from $70 to $2,500.
NOTE 8 – COMMITMENTS AND CONTIGENCIES
Operating Rental Leases
The Company leased its office and warehouse facilities in Costa Mesa, California from stockholders under an operating lease that required minimum monthly payments of $19,790. Subsequently the building was sold. As of March 2006 the company is under a new rental agreement which is based on month to month for a maximum of six month at a monthly rate of $30,580, consisting of Base rent of $24,068 and additional operating expenses of $6,512.
Litigation
The Company may be involved from time to time in various claims, lawsuits, and 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
F-11
PROBE MANUFACTURING, INC.
Notes to Financial Statements
December 31, 2005
NOTE 9 – CAPITAL STOCK TRANSACTIONS
1)
On May 20th, 2004, the Company’s Board of Directors and shareholders approved the following capital stock transactions:
2)
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.
3)
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.
4)
On December 31, 2004, the Company’s Board of Directors and shareholders approved the following capital stock transactions:
5)
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.
6)
On April 21, 2005, the Company’s Board of Directors and shareholders approved the following capital stock transactions:
7)
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.
Common Stock transactions:
1)
In May of 2004 the company issued 4,000,000 shares to its founders.
2)
In May of 2004 the company entered into an agreement with eFund Capital Partners, LLC whereby eFund invested $200,000 and agreed to provide strategic assistance to the company. In exchange, the company gave eFund Capital Partners, 2,000,000 shares of common stock and 200 shares of Series A Convertible Preferred Stock.
3)
In December 2004 the company cancelled 3,500,000 previously issued to founders and 1,500,000 shares previously issued efund, for a total of 5,000,000 shares.
4)
From June 16, 2004 to April 1, 2005 the Company sold 2,221,250 shares of common stock Private Placement Memorandum at $.80 per Share to 49 individuals generating net proceeds of $1,777,000.
5)
In December of 2004 the Company issues 106,875 shares of common stock at $.80 per share, as compensation in the amount of $85,500.
6)
During 2005 the company issued 24,863 in lieu of interest payments a $.80 per share for a total of $24,894.
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 December 31, 2004 and 2005 there were 2,613,125 and 3,359,243 shares of common stock issued and outstanding, respectively. 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.
F-12
PROBE MANUFACTURING, INC.
Notes to Financial Statements
December 31, 2005
PREFERRED STOCK
Our Articles of Incorporation authorize to issue 10,000,000 shares of preferred stock. We authorized 440 as Series A Convertible Preferred Stock and have authorized 20,000 shares of Series B Convertible Preferred Stock.
As of December 31, 2005, there were 440 shares of Convertible A Preferred Stock outstanding, with a stated value of $1,000. 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.
As of December 31, 2005 there were 12,500 shares of Series B Convertible stock outstanding, with a stated value of $100. 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 Company’s 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 Company’s 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 Company’s 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.
F-13
PROBE MANUFACTURING, INC.
Notes to Financial Statements
December 31, 2005
WARRANTS
Series A - Common Stock Warrants:
We currently have 232,125 Series A Warrants issued and outstanding. Each warrant gives the holder the right to purchase 5 shares of common stock at $2.00 per share. The Series A Warrants will expire on November 15, 2006.
Series B - Common Stock Warrants
We currently have 232,125 Series B Warrants issued and outstanding. Each warrant gives the holder the right to purchase 5 shares of common stock at $3.00 per share. The Series A Warrants will expire on
on May 15, 2007.
Warrants Activity for the Period and Summary of Outstanding Warrants
From June 16, 2004 to April 1, 2005 the Company sold 222,125 common stock units pursuant to a Private Placement Memorandum at $8.00 per unit to 49 individuals generating net proceeds of $1,777,000. The Company also issued 10,000 units of common stock for compensation. Each Unit consists of ten (10) shares of common stock. In addition, each unit entitles the holder to purchase a total of 10 shares of Probe Common Stock through the exercise of Warrants as follows: Class A Warrants, for 5 shares at a price of $2.00 per share which would expire on November 16, 2005, which has been subsequently extended by 12 months to November 15, 2006; and, Class B Warrants, for 5 shares at a price of $3.00 per share which would expire on May 16, 2006, which was subsequently extended to May 15, 2007. As of December 31, 2005, no warrants were exercised.
A summary of warrant activity for the quarter ended December 31, 2005 is as follows:
|
No. of Warrants |
Weighted Average exercise price |
Warrants Exercisable |
Weighted Average exercise price |
|||
|
Outstanding December 31, 2003 |
0 |
0.00 |
0 |
0.00 |
||
|
Granted |
321,250 |
2.50 |
321,250 |
|||
|
Exercised |
0 |
0.00 |
0 |
|||
|
|
|
|||||
|
Outstanding December 31, 2004 |
321,250 |
321,250 |
2.50 |
|||
|
Granted |
143,000 |
2.50 |
143,000 |
|||
|
Exercised |
0 |
0.00 |
0 |
|||
|
|
|
|||||
|
Outstanding December 31, 2005 |
464,250 |
464,250 |
2.50 |
|||
|
Warrants Outstanding |
Warrants Exercisable |
|||||
|
Range of Warrant Exercise Price |
No. of Warrants |
Weighted Average exercise price |
Weighted Average Remaining Contractual Life |
No. of Warrants |
Weighted Average exercise price |
|
|
$ 2.00 |
232,125 |
$ 2.00 |
1.16 |
232,125 |
2.00 |
|
|
$ 3.00 |
232,125 |
$ 3.00 |
1.71 |
232,125 |
3.00 |
|
F-14
PROBE MANUFACTURING, INC.
Notes to Financial Statements
December 31, 2005
NOTE 10 – RELATED PARTY TRANSACTIONS
The Company leases its 35,000 sq/ft facility for $19,700 per month from Kambiz Mahdi, Reza Zarif and Pacific Sail Bay Trust. Kambiz Mahdi is the Chief Executive Officer and a Director of the company. Reza Zarif is the Chief Operating Officer and a Director of the company. Pacific Sail Bay Trust is managed by Frank Kavanaugh. Frank Kavanaugh is also the managing member of Ashford Capital, LLC, and the managing partner of Ashford Transition Fund, L.P. Furthermore, Mr. Kavanaugh was a director of the company from July 2004 to December 2004. Total payments made for the year ended December 31, 2005 was $236,400. Subsequently the building was sold. As of March 2006 the company is under a new rental agreement which is based on month to month for a maximum of six month at a monthly rate of $30,580, consisting of Base rent of $24,068 and additional operating expenses of $6,512.
Jeffrey Conrad provides legal services for the company and receives a monthly retainer of $2,500 and is one of the company 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. Total payments through December 31, 2005 were $30,000.
Catherine Basinger, Esq.,wife of Barrett Evans, a managing member of eFund Capital Partners, LLC., is on legal retainer. Total payments made during the Year ended December 31, 2005 were $10,000.
South Coast Marketing, LLC is associated with Jeffrey Conrad and administrates SB-2 filing fees. Total payments made for the year ended December 31, 2005 was $7,667.
In May of 2004 the company entered into an agreement with eFund Capital Partners, LLC whereby eFund invested $200,000 and agreed to provide strategic assistance to the company. In exchange, the company 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 disclaim any beneficial ownership of such shares of common stock. Mr. Evans and Mr. Conrad have both been directors of the company 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 the company from May 2004 until December 2004.
F-15
PROBE MANUFACTURING, INC.
Notes to Financial Statements
December 31, 2005
NOTE 10 – RELATED PARTY TRANSACTIONS - Continued
In September of 2004 the company issued to Ashford Transition Fund, L.P 40 shares of the companies 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. Total payments made during the year ended December 31, 2005 were $54,444.
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 the company and acquired shares in the company 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.
In December of 2004 the company 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 the company since May 2004.
In December of 2004 the company 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 a Director of the company . 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 the company 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 the Chief Executive Officer and a Director of the company. 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 Partners, 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. This was done to reduce the number of outstanding shares to be in line with the valuation of $.80/per share.
F-16
PROBE MANUFACTURING, INC.
Notes to Financial Statements
December 31, 2005
Related Party Debt
On January 1, 2005, the Company 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 the Company 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 $150,000 as of December 31, 2005. Total payments made during the 12 months ended December 31, 2005 consisted of $0 in principal and $10,281.02 in interest and $3,978.00 in common stock with accrued interest payable of $3,969.86 at December 31, 2005.
On January 1, 2005 the Company 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 the Company 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 December 31, 2005. Total payments made during the 12 months ended December 31, 2005 consisted of $0 in principal and $11,747.94 in interest and 6,724.58 in common stock with accrued interest payable of $1,910.96 at December 31, 2005.
On January 1, 2005 the Company 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, 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 the Company 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 December 31, 2005. Rufina Paniego is the wife of Reza Zarif who is the Company’s founder, CEO and director. Total payments made during the 12 months ended December 31, 2005 consisted of $0 in principal and $7,228.78 in interest and $3,668.49 in common stock with accrued interest payable of $3,472.72 at December 31, 2005.
On March 8, 2005 the Company entered into a credit line agreement with William Duncan for $50,000. 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 the Company 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 $50,000 as of December 31, 2005. Total payments made during the 12 months ended December 31, 2005 consisted of $0 in principal and $3,328.36 in interest and 2,158.90 in common stock with accrued interest payable of $849.32 at December 31, 2005.
F-17
PROBE MANUFACTURING, INC.
Notes to Financial Statements
December 31, 2005
NOTE 10 – RELATED PARTY TRANSACTIONS - Continued
On March 8, 2005 the Company 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 the Company 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 $140,000 as of December 31, 2005. Dennis Benner is a Director of the Company and controls the Benner Exemption Trust. Total payments made during the 12 months ended December 31, 2005 consisted of $0 in principal and $10.963.94 in interest and $7,292.71 in common stock with accrued interest payable of $2,378.08 at December 31, 2005.
On March 22, 2005 the Company entered into a credit line agreement with Edward Lassiter for $140,000. 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 the company 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 $140,000 as of June 30 2005. Edward Lassiter is a shareholder of the Company 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 the Company’s common stock, which is 9% of the outstanding shares of common stock. Total payments made during the 12 months ended December 31, 2005 consisted of $0 in principal and $5,144.11 in interest and $1,507.95 in common stock with accrued interest payable of $4,909.82 at December 31, 2005.
NOTE 11 – SUBSEQUENT EVENTS
Sale of Building
The Company leases its 35,000 sq/ft facility for $19,700 per month from Kambiz Mahdi, Reza Zarif and Pacific Sail Bay Trust. Kambiz Mahdi is a Director of the company. Reza Zarif is the Chief Executive Officer and a Director of the company. Pacific Sail Bay Trust is managed by Frank Kavanaugh. Frank Kavanaugh is also the managing member of Ashford Capital, LLC, and the managing partner of Ashford Transition Fund, L.P. Furthermore, Mr. Kavanaugh was a director of the company from July 2004 to December 2004. Total payments made for the year ended December 31, 2005 was $236,400. Subsequently the building was sold. As of March 2006 the company is under a new rental agreement which is based on month to month for a maximum of six month at a monthly rate of $30,580, consisting of Base rent of $24,068 and additional operating expenses of $6,512.
F-18
PROBE MANUFACTURING, INC.
Notes to Financial Statements
December 31, 2005
NOTE 12 - Recent Accounting Pronouncements Issued, Not Adopted
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 Company’s financial position and results of operations.
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 December 2004, the FASB issued SFAS No.153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary 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 nonmonetary exchanges of similar productive assets that do not have commercial substance. A nonmonetary 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 nonmonetary 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 Company’s financial position and results of operations.
In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”). FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The provision is effective no later than the end of fiscal years ending after December 15, 2005. The Company will adopt FIN 47 beginning the first quarter of fiscal year 2006 and does not believe the adoption will have a material impact on its consolidated financial position or results of operations or cash flows.
F-19
PROBE MANUFACTURING, INC.
Notes to Financial Statements
December 31, 2005
NOTE 12 - Recent Accounting Pronouncements Issued, Not Adopted – Continued
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinions No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and a correction of errors made in fiscal years beginning after December 15, 2005 and is required to be adopted by the Company in the first quarter of 2006. The Company is currently evaluating the effect that the adoption of SFAS 154 will have on its results of operations and financial condition but does not expect it to have a material impact.
In June 2005, the Emerging Issues Task Force, or EITF, reached a consensus on Issue 05-6, Determining the Amortization Period for Leasehold Improvements, which requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. EITF 05-6 is effective for periods beginning after July 1, 2005. We do not expect the provisions of this consensus to have a material impact on the financial position, results of operations or cash flows.
F-20
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES.
As of the end of the period covered by this Annual Report on Form 10-KSB, an
evaluation was performed under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act
of 1934). Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports that
we file or submit under the Securities Exchange Act of 1934 (i) is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and (ii) is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Our disclosure controls and procedures are designed to provide
reasonable assurance that such information is accumulated and communicated to
our management. Our disclosure controls and procedures include components of our
internal control over financial reporting. Management's assessment of the
effectiveness of our internal control over financial reporting is expressed at
the level of reasonable assurance that the control system, no matter how well
designed and operated, can provide only reasonable, but not absolute, assurance
that the control system's objectives will be met.
CHANGES IN INTERNAL CONTROLS
There was no change in our internal control over financial reporting that
occurred during the fourth quarter covered by this Annual Report on Form
10-KSB that materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 8B. OTHER INFORMATION.
None.
Page 29 of 43
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth the name, age, positions, and offices or
employments for the past five years as of March 15, 2006, of our executive
officers and directors. Members of the board are elected and serve for one year
NAME
AGE
POSITION
Kambiz Mahdi
41
Director
Reza Zarif
48
Chief Executive 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.
KAMBIZ MAHDI is a co-founder 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 company’s 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 executive 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.
BARRETT EVANS has been our director since July 15, 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 July 15, 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.
Page 30 of 43
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. On April 13, 2006, Mr. Dennis Benner our director and chairman of the board of directors resigned from the board of directors to pursue other interest.
AUDIT COMMITTEE
We do not have a separate Audit Committee. Our full Board of Directors performs
the functions usually designated to an Audit Committee. Mr. Evans, a Director ,
qualifies as an "audit committee financial expert" as defined in Item 401(e)(2)
of Regulation S-B.
CODE OF ETHICS
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We are filing our Code of Ethics to our Report on Form 10-KSB for the year ended December 31, 2005 as Exhibit 14.1. Our Code of Ethics is available upon request at no charge to any shareholder.
Page 31 of 43
ITEM 10. EXECUTIVE COMPENSATION.
The following table presents a summary of the compensation paid to our Chief Executive Officer and Chief Operating Officer. No other executive officer received compensation in excess of$100,000 during 2005 . Except as listed below, there are no bonuses, other annual compensation, restricted stock awards or stock options/SARs or any other compensation paid to the executive officers.
Currently we do not have any of our executives or officers under employments contracts. However, Kambiz Mahdi, our former chief executive officer and Reza Zarif, our former chief operations officer, and current chief executive officer have orally agreed to accept $167,000 per annum as compensation for his services for the ended December 31, 2005.
On September 15, 2005 our board of directors replaced our chief executive officer, Kambiz Mahdi, with Reza Zarif, our former chief operations officer. In November of 2005, Mr. Mahdi decided to leave the company to pursue other interests
Page 32 of 43
EMPLOYMENT AGREEMENTS
Currently we do not have any of our executives or officers under employments contracts. However, Reza Zarif, our chief executive officer, has orally agreed to accept $167,000 per annum as compensation for his services.
DIRECTOR COMPENSATION
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.
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 2006. Until a plan is established and approved by the shareholders, directors will not be compensated.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS.
The following table sets forth certain information concerning the beneficial ownership of our outstanding classes of stock as of December 31, 2005, by each person known by us to (i) own beneficially more than 5% of each class, (ii) by each of our Directors and Executive Officers and (iii) by all Directors and Executive Officers as a group. Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock except to the extent that authority is shared by spouses under applicable law.
The number of shares of common stock issued and outstanding on December 31, 2005 was 3,577,364 shares. The calculation of percentage ownership for each listed beneficial owner is based upon the number of shares of common stock issued and outstanding on December 31, 2005, plus shares of common stock subject to options held by such person on December 31, 2005 and exercisable within 60 days
thereafter.
|
Name of Beneficial Owner |
Number of Shares Beneficially Owned |
Percentage of Ownership (1) |
|
Kambiz Mahdi (2) |
1,390,646 |
14.3% |
|
Reza Zarif (3) |
1,390,646 |
14.3% |
|
Dennis Benner (4) |
335,396 |
3.4% |
|
Barrett Evans (5) |
1,086,224 |
11.2% |
|
Jeffrey Conrad (6) |
1,086,224 |
11.2% |
|
eFund Capital Partners, LLC (7) |
1,086,224 |
11.2% |
|
Ashford Capital, LLC (8) |
944,966 |
9.7% |
|
Edward Lassiter (9) |
627,102 |
6.4% |
|
Global Capital Management, Inc. (10) |
750,000 |
7.7% |
|
Total |
4,202,912
|
43.4% |
|
Total of All officers and directors |
6,524,980 |
67.4% |
Page 33 of 43
(1)
The number of shares of common stock outstanding as of January 20, 2006 is 3,346,246. The percentage of ownership includes shares underlying other classes of securities held by the individuals, such as Series A Convertible Preferred Stock and Series B Convertible Preferred Stock and Series A and Series B Warrants which can be converted into common stock within 60 days of this offering.
(2)
The percentage of ownership assumes the Series B Convertible Stock holders, Mr. Zarif, eFund Capital Partners, LLC and Mr. Mahdi convert at a price of $0.80. Furthermore, it assumes the Series A and Series B warrant holders exercise all their warrants. It also assumes that the Series A Convertible Stock holders convert there shares as well. The total outstanding shares on a fully-diluted basis used to calculate the number of shares outstanding is 9,674,355.
(3)
Kambiz Mahdi is one of our founders 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.
(4)
Reza Zarif is our chief executive 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.
(5)
Dennis Benner is a director of ours and acquired shares in our private placement memorandum dated July 15, 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.
(6)
Please see number (7) below.
(7)
Please see number (7) below.
(8)
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.
(9)
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 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.
(10)
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 July 15, 2004. Mr. Lassiter has dispositive and voting power over the shares.
Page 34 of 43
(11)
(12)
Global Capital Management, Inc. is a Japanese private equity firm. The company’s 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 July 15, 2004. Mr. Ito also owns 25,000 shares of common stock personally which were also purchased through our private placement memorandum dated July 15, 2004
The number of shares of common stock issued and outstanding on December 31, 2005
was 3,577,364 shares .
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company leases its 35,000 sq/ft facility for $19,700 per month from Kambiz Mahdi, Reza Zarif and Pacific Sail Bay Trust. Kambiz Mahdi is the Chief Executive Officer and a Director of the company. Reza Zarif is the Chief Operating Officer and a Director of the company. Pacific Sail Bay Trust is managed by Frank Kavanaugh. Frank Kavanaugh is also the managing member of Ashford Capital, LLC, and the managing partner of Ashford Transition Fund, L.P. Furthermore, Mr. Kavanaugh was a director of the company from July 2004 to December 2004. Total payments made for the year ended December 31, 2005 was $236,400. Subsequently the building was sold. As of March 2006 the company is under a new rental agreement which is based on month to month for a maximum of six month at a monthly rate of $30,580, consisting of Base rent of $24,068 and additional operating expenses of $6,512.
Jeffrey Conrad provides legal services for the company and receives a monthly retainer of $2,500 and is one of the company 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. Total payments made during the 6 months ended June 30, 2005 were $110,422, with an unpaid balance of $12,500 at June 30, 2005
In May of 2004 we issued 2,000,000of common stock to each of our two founders, Kambiz Mahdi and Reza Zarif, for no cash consideration when converted the corporation from an S to a C corporation in order for the two founders to maintain ownership in the corporation going forward.
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.
Page 35 of 43
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. eFund assigned its shares to Ashford as a result of eFund realizing they needed more assistance with restructuring the company’s business operations and they want Ashford to also be involved in assisting them with the Probe’s restructure.
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, 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 the company 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 June 30, 2005. Rufina Paniego is the wife of Reza Zarif who is the company’s founder, CEO and director. Total payments made during the 6 months ended June 30, 2005 consisted of $0 in principal and $3,345 of interest , with accrued interest payable of $3,287 at June 30, 2005.
In September of 2004 we issued the Ashford Transition Fund, L.P 40 shares of the company’s 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. Total payments made during the 6 months ended June 30, 2005 consisted of $0 in principal and $60,060 of interest , with accrued interest of $20,020 at June 30, 2005.
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 July 15, 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.
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
Page 36 of 43
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 one of our founders 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 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 executive 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.
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. This transaction took place because our board of directors and our large inside shareholders thought it was in the best interest of the company to reduce the number of outstanding shares of common stock.
On January 1, 2005, the Company 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 the Company 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 $150,000 as of December 31, 2005. Total payments made during the 12 months ended December 31, 2005 consisted of $0 in principal and $10,281.02 in interest and $3,978.00 in common stock with accrued interest payable of $3,969.86 at December 31, 2005.
On January 1, 2005 the Company 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 the Company 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 December 31, 2005. Total payments made during the 12 months ended December 31, 2005 consisted of $0 in principal and $11,747.94 in interest and 6,724.58 in common stock with accrued interest payable of $1,910.96 at December 31, 2005.
On January 1, 2005 the Company 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, 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%
Page 37 of 43
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 the Company 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 December 31, 2005. Rufina Paniego is the wife of Reza Zarif who is the Company’s founder, CEO and director. Total payments made during the 12 months ended December 31, 2005 consisted of $0 in principal and $7,228.78 in interest and $3,668.49 in common stock with accrued interest payable of $3,472.72 at December 31, 2005.
On March 8, 2005 the Company entered into a credit line agreement with William Duncan for $50,000. 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 the Company 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 $50,000 as of December 31, 2005. Total payments made during the 12 months ended December 31, 2005 consisted of $0 in principal and $3,328.36 in interest and 2,158.90 in common stock with accrued interest payable of $849.32 at December 31, 2005.
On March 8, 2005 the Company 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 the Company 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 $140,000 as of December 31, 2005. Dennis Benner is a Director of the Company and controls the Benner Exemption Trust. Total payments made during the 12 months ended December 31, 2005 consisted of $0 in principal and $10.963.94 in interest and $7,292.71 in common stock with accrued interest payable of $2,378.08 at December 31, 2005.
On March 22, 2005 the Company entered into a credit line agreement with Edward Lassiter for $140,000. 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 the company 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 $140,000 as of June 30 2005. Edward Lassiter is a shareholder of the Company 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 the Company’s common stock, which is 9% of the outstanding shares of common stock. Total payments made during the 12 months ended December 31, 2005 consisted of $0 in principal and $5,144.11 in interest and $1,507.95 in common stock with accrued interest payable of $4,909.82 at December 31, 2005.
Page 38 of 43
ITEM 13. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
-------------------
3.1 Articles of Incorporation (included as exhibit 3.1 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
3.2 Bylaws (included as exhibit 3.2 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
4.1 Certificate of Designation for Series A Convertible Preferred Stock, dated May 20, 2004 (included as exhibit 4.1 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
4.2 Certificate of Designation for Series B Convertible Preferred Stock dated December 31, 2004 (included as exhibit 4.2 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
4.3 Sample Series A Warrant Purchase Agreement (included as exhibit 4.3 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
4.4 Sample Series B Warrant Purchase Agreement (included as exhibit 4.4 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
4.5 Sample Amended Series A Warrant Purchase Agreement (included as exhibit 4.5 to the Form SB-2/A filed on November 25, 2005 and incorporated herein by reference
4.6 Sample Amended Series B Warrant Purchase Agreement (included as exhibit 4.6 to the Form SB-2/A filed on November 25, 2005 and incorporated herein by reference).
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 (included as exhibit 10.1 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.2 Consulting Agreement between Probe Manufacturing Industries and Anthony Reed dated December 31, 2004 (included as exhibit 10.2 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.3 Legal retainer agreement between Probe Manufacturing, Inc. and Jeffrey Conrad dated (included as exhibit 10.3 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.4 Line of Credit agreement between Probe Manufacturing, Inc. and eFund Capital Partners, LLC dated January 1, 2005 (included as exhibit 10.4 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.5 Line of Credit agreement between Probe Manufacturing, Inc. and Ashford Capital, LLC dated January 1, 2005 (included as exhibit 10.5 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.6 Line of Credit agreement between Probe Manufacturing, Inc. and Benner Exemption Trust dated March 8, 2005 (included as exhibit 10.6 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
Page 39 of 43
10.7 Line of Credit agreement between Probe Manufacturing, Inc. and Edward Lassiter dated March 22, 2005 (included as exhibit 10.7 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.8 Line of Credit agreement between Probe Manufacturing, Inc. and Rufina V. Paniego dated January 1, 2004 (included as exhibit 10.8 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.9 Promissory Note between Probe Manufacturing, Inc and Ashford Transitional Fund, L.P. dated September 20, 2004 (included as exhibit 10.9 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.10 Engagement Letter between Probe Manufacturing, Inc. and eFund Capital Partners, LLC dated May 20, 2004 (included as exhibit 10.10 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.11 Series A Convertible Preferred Stock Purchase Agreement with eFund Capital Partners, LLC dated May 20, 2004 (included as exhibit 10.11 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.12 Series A Convertible Preferred Stock Purchase Agreement with Reza Zarif dated May 20, 2004 (included as exhibit 10.12 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.13 Series A Convertible Preferred Stock Purchase Agreement with Kambiz Mahdi dated May 20, 2004. (included as exhibit 10.13 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.14 Series B Convertible Preferred Stock Purchase Agreement with eFund Capital Partners, LLC dated December 31, 2004 (included as exhibit 10.14 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10. 15 Series B Convertible Preferred Stock Purchase Agreement with Reza Zarif dated December 31, 2004 (included as exhibit 10.15 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.16 Series B Convertible Preferred Stock Purchase Agreement with Kambiz Mahdi dated December 31, 2004 (included as exhibit 10.16 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.17 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 (included as exhibit 10.17 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.18 Promissory note with eFund Capital Partners, LLC dated October 12, 2004 (included as exhibit 10.18 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.19 Promissory note with Rufina V. Paniego dated July 1, 2004 (included as exhibit 10.19 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.20 Sample purchase order agreement with Celerity, Inc (included as exhibit 10.20 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
10.21 Sample purchase order agreement with Newport Corporation (included as exhibit 10.21 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
Page 40 of 43
10.22 Sample purchase order agreement with Asymtek Corporation (included as exhibit 10.22 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
10.23 Sample purchase order agreement with Jetline Engineering Corporation (included as exhibit 10.23 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
10.24 Sample purchase order agreement with our supplier Future Active, Inc (included as exhibit 10.24 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
10.25 Sample purchase order agreement with our supplier Arrow Electronics, Inc. (included as exhibit 10.25 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
10.26 Lease Agreement between Probe Manufacturing, Inc. and Mitchell Fitch, LLC, dated November 15, 2005 filed herewith.
16.1 Letter from Michael Johnson & Company, LLC dated January 04, 2006 (included as exhibit 10.20to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
14.1 Code of Ethics filed herewith.
16.1 Letter from Michael Johnson & Company, LLC dated January 04, 2006 (included as exhibit 10.20to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
21.1 List of Subsidiaries (included as Exhibit 21.1 to the Form 10-KSB
filed herewith
23.1 Consent of Jaspers + Hall, PC - Independent Auditors to the Form 10-K filed
March 21, 2006, and filed herewith.
23.2 Report of Independent Registered Public Accounting Firm regarding the audit
of Probe Manufacturing, Inc. for the year ended December 31, 2004, and filed herewith.
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Page 41 of 43
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
Jaspers + Hall, PC were our auditors for the fiscal year ended December 31, 2004 and December 31, 2005 and for the three quarters ended September 30, 2005.
For their review of our Quarterly Reports on Form 10-Q for the fiscal year 2005, Jaspers + Hall, PC billed us $9,000. For their 2004 year end audit Jaspers + Hall, PC billed us $12,500. We have contracted Jaspers + Hall, PC to complete the 2005 year end audit for $15,000.
AUDIT RELATED FEES
None.
TAX FEES
None.
ALL OTHER FEES
None.
THE BOARD OF DIRECTORS PRE-APPROVAL POLICY AND PROCEDURES
We do not have a separate Audit Committee. Our full Board of Directors performs the functions of an Audit Committee. During fiscal year 2005, the Board of Directors adopted policies and procedures for the pre-approval of audit and non-audit services for the purpose of maintaining the independence of our independent auditors. We may not engage our independent auditors to render any audit or non-audit service unless either the service is approved in advance by the Board of Directors or the engagement to render the service is entered into pursuant to the Board of Director's pre-approval policies and procedures. On an annual basis, the Board of Directors may pre-approve services that are expected to be provided to us by the independent auditors during the following 12 months. At the time such pre-approval is granted, the Board of Directors must (1) identify the particular pre-approved services in a sufficient level of detail so that management will not be called upon to make judgment as to whether a proposed service fits within the pre-approved services and (2) establish a monetary limit with respect to each particular pre-approved service, which limit may not be exceeded without obtaining further pre-approval under the policy.
The Board has considered whether the provision of the services described above under the caption "All Other Fees" is compatible with maintaining the auditor's independence.
Page 42 of 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Costa Mesa, State of California on the 14th day of April 2006.
PROBE MANUFACTURING, INC.
______________________________
REGISTRANT
/s/ Reza Zarif
___________________
By: Reza Zarif
Director and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature
Title
Date
/s/ Reza Zarif
Chief Executive Officer and Director
April 14, 2006
_______________________
Reza Zarif
/s/ Barrett Evans
_______________________Interim Chief Financial Officer, and Director
April 14, 2006
Barrett Evans
/s/ Kambiz Mahdi
Director
April 14, 2006
_______________________
Kambiz Mahdi
/s/ Jeffrey Conrad
Director
April 14, 2006
_______________________
Jeffrey Conrad
Page 43 of 43
Probe Manufacturing, Inc. Code of Business Conduct and Ethics – January 2006
PROBE MANUFACTURING, INC.INTERNATIONAL LTD.
CODE OF BUSINESS CONDUCT AND ETHICS
Adopted January 12, 2006
Probe Manufacturing, Inc., a provider of advanced electronics manufacturing services (EMS) to OEMs, strives to ensure that the ethics and integrity of its employees, officers and Board members is beyond reproach. Although business practices and laws vary from region to region, and each individual who works for Probe Manufacturing, Inc. is unique, we share certain standards and responsibilities wherever we do business.
To this end, we have outlined the following Code of Business Conduct and Ethics to educate all of our employees, officers and Board members worldwide about our standards, and to assist them in resolving ethical questions that may arise in the course of their work for the Company. This Code of Business Conduct and Ethics is implemented in accordance with the laws of the country in which we operate. If an employee, officer or Board member fails to comply with these responsibilities, or fails to take action when he or she is aware of criminal or unethical acts, then the Company may take corrective action, up to and including termination of employment or other relationship with the Company and the Company may pursue any legal or equitable remedies it may have, as further provided under “Corrective Actions” below. From time to time we will use the term “associate(s)” which means for purposes of this document every full and part-time employee of the company, all members of the company’s senior management, including the company Chief Executive Officer and every member of the company’s Board of Directors, even if such member is not employed by the company.
1
Probe Manufacturing, Inc. Code of Business Conduct and Ethics – January 2006
Table of Contents
I. Implementation of the Code
4
II. General Requirements
4
III. Business Standards To Avoid Conflicts Of Interest
5
A.
General Policy
5
B.
Outside Boards
5
C.
Outside Employment
5
D.
Gifts, Entertainment and Kickbacks
6
E.
Outside Commercial Interests and Investments
6
F.
Related Parties
7
G.
Corporate Opportunities
7
H.
Other Situations
7
IV. Conducting Probe’s Business in Compliance with Laws
7
A.
Antitrust Laws
7
B.
Industrial Espionage
8
C.
Advertising
8
D.
Employment and Labor Laws
8
E.
Environmental Laws
9
F.
Intellectual Property Rights
9
G.
Confidential Information
10
H.
Obligations Under U.S. Securities Laws
11
I.
Foreign Corrupt Practices Act / Political Contributions
12
V. Accurate Books and Records
13
A. Accounting Practices
13
B. Payments
13
VI. Use of Company’s Assets
14
A.
General
14
B.
Company Funds
14
C.
Facility Security
14
D.
Computers and Other Equipment
14
E.
Software
15
F.
Prohibition Against Use of Company Assets to Aid Terrorists
15
VII. Additional Standards
15
A.
Selecting Suppliers
15
B.
Government Contracts
15
VIII. Amendments and Waivers
16
IX. Prompt Reporting; Non-Retaliation
16
X. Corrective Actions
16
XI. Frequently Asked Questions and Answers
17
2
Probe Manufacturing, Inc. Code of Business Conduct and Ethics – January 2006
I.
IMPLEMENTATION OF THE CODE
The following questions and answers address the company's implementation of the Code. The company has attempted to design procedures that ensure maximum confidentiality, anonymity, and, most importantly, freedom from the fear of retaliation for complying with and reporting violations under the Code.
Q: Who is responsible for administering, updating and enforcing the Code?
A: The Company's Board of Directors and our Corporate Compliance Officer will administer, update and enforce the Code. Ultimately, the Board of Directors of the company must ensure that the Corporate
Compliance Officer fulfills his or her responsibilities. The Corporate Compliance Officer has overall responsibility for overseeing the implementation of the Code. The Compliance Committee is comprised of the Corporate Compliance Officer (who is the General Counsel), and the Chairman of the Board of Directors.
Q: How can I contact the Corporate Compliance Officer and the Compliance Committee?
A: The names and phone numbers of the Corporate Compliance Officer our Chairman of the Board are listed below. Any one of these individuals can assist you in answering questions or reporting violations or suspected violations under the Code.
______________________________________________________________________________________John Bennett
(714) 424-2960 ext 133
Controller and
Corporate Compliance Officer
jbennett@PROBEMI.com
______________________________________________________________________________________
Jeffrey Conrad
(562) 983-0660 ext 203.
Board Member, General Counsel
Compliance Committee Member
dwbener@cox.net
______________________________________________________________________________________
Barrett Evans
(562)983-0660 ext 204
Board Member
Compliance Committee Member
bevans@efundcapital.net
II.
GENERAL
This Code of Business Conduct and Ethics does not and cannot cover every situation.
The Company encourages you to seek guidance on any ethical or legal question. If you have any doubt about the best course of action or response to a situation, you should contact the Chief Compliance Officer, Jeffrey Conrad, the Company’s legal counsel and board member.
The Company’s reputation for integrity and business ethics should never be taken for granted. To maintain that reputation, you must exercise good judgment in your decisions and any conduct that affects your work performance, other employees, or the Company’s legitimate business interests.
III. BUSINESS STANDARDS TO AVOID CONFLICTS OF INTEREST
A. G ENERAL P OLICY
You may not engage in any conduct that poses a conflict of interest with the Company’s business. A prohibited conflict of interest exists where your interests conflict with, or may appear to conflict with, the interests of the Company. Although this duty does not prevent you from engaging in personal transactions that are not Company-related, it does demand that you avoid situations where a conflict of interest might occur or appear to occur.
In addition, you are expected to devote your full attention to the business of the
Company, and you are prohibited from engaging in any activity that interferes with your performance or responsibilities to the Company, or is otherwise in conflict with, or prejudicial to, the Company.
You may generally engage in outside activities that are not related to the Company, if they:
•
do not involve a conflict of interest;
•
do not interfere with the performance of your Company responsibilities;
•
do not call for the use of the Company’s influence, resources or facilities; and
•
do not discredit the name or reputation of the Company.
You are encouraged to seek guidance from the Chief Compliance Officer if you are unsure about whether your interests conflict with or appear to conflict with those of the Company.
B. O UTSIDE B OARDS
You may not serve on the board of a supplier, customer or competitor of the Company unless you obtain prior and express written approval from the Chief Compliance Officer (or in the case of the Chief Compliance Officer, the Board of Directors). In particular, it is a conflict of interest to serve as a board member of any company that competes (or is likely to compete in the future) with the Company.
This policy is not intended to prevent service on such boards, but is intended to help you
avoid conflicts of interest.
C. O UTSIDE E MPLOYMENT
You may not accept simultaneous employment with a supplier, customer or competitor of the Company unless you obtain prior and express written approval of the Chief Compliance Officer (or in the case of the Chief Compliance Office or other Board of Director, unanimous written consent the Board of Directors).
You may not engage in any self-employment that is in competition with the Company or
contract with the Company as a supplier, distributor, or consultant.
Furthermore, you may not you many serve as an employee (full or part-time) or as a consultant or independent contractor of competitor, distributor or supplier of the company if it will cause or is likely to cause an unfair advantage financial or otherwise to one of our competitors to the detriment of the Company.
D. G IFTS , E NTERTAINMENT AND K ICKBACKS
You may not give or receive kickbacks in any form under any circumstances. “Kickbacks” are defined as any payment, services or gift that is or might be intended (or perceived as intended), directly or indirectly, to be in exchange for business or to influence any business decision or action. A kickback would include not just a payment of cash, but any offer, payment, promise to pay, or authorization to pay any money, gift, products or services – anything of value sufficient to influence a decision. In addition, neither you nor any of your immediate family members may accept any discount from the Company’s suppliers or customers unless the same discount is available to all Company employees in your region.
This policy does not apply to gifts, meals and entertainment consistent with customary local business practices, that do not have substantial value relative to the income of the recipient, and that do not violate any policies of the recipient’s company or applicable law. A gift of cash or its equivalent is always considered improper, regardless of the value.
If you receive any gift that you believe may violate this policy, please consult with your
supervisor or the Chief Compliance Officer.
E. O UTSIDE C OMMERCIAL I NTERESTS AND I NVESTMENTS
You may not hold any financial interest, including stock or bond ownership or any other direct financial relationship, in any outside concern that creates a conflict of interest with your responsibilities to the Company unless you obtain the prior and express written approval of the Chief Compliance Officer (or in the case of the Chief Compliance Officer, the Board of Directors). Examples of potentially inappropriate financial interests or transactions are:
•
material stock holdings or other investments in a competitor, supplier or a customer
of the Company; and
•
any material interest in property or assets which are sold or leased to the Company.
You may own less than 1% of the stock of a public corporation, or 5% of the stock of a private corporation, because a conflict of interest rarely exists in those situations. Additionally, you may borrow from a financial institution that does business with the Company so long as the financial institution applies its normal underwriting standards and the terms of the loans are substantially similar to those the terms offered by the financial institutions to other third parties.
3
Probe Manufacturing, Inc. Code of Business Conduct and Ethics – January 2006
If you are in doubt as to whether something is an inappropriate financial interest or transaction, please consult the Chief Compliance Officer.
F. R ELATED P ARTIES
You may not conduct Company business with a relative or with a business in which a relative holds a senior management role. This type of activity is referred to as a “related party transaction”.
If a related party transaction is unavoidable, you must fully disclose the nature of the related party transaction to the Chief Compliance Officer (or in the case of the Chief Compliance Office or other Board Member, the Company’s Audit Committee). If the Chief Compliance Officer that the related party transaction is material to the Company, then the Company’s Audit Committee must give prior and express written approval. In addition, the related party transaction must be conducted in a manner that does not provide the related party with preferential treatment.
G. C ORPORATE O PPORTUNITIES
You may not exploit for your own personal gain opportunities that are discovered through the use of corporate property, information or your position with the Company unless you disclose the opportunity fully in writing to the Chief Compliance Officer (or in the case of the Chief Compliance Officer, to the Board of Directors) and the Chief Compliance Officer or Board of Directors declines in writing to pursue such opportunity.
H. O THER S ITUATIONS
It would be impractical to attempt to list all possible situations where a conflict of interest may arise. If a proposed transaction or situation raises any questions or doubts in your mind, you should consult the Chief Compliance Officer.
IV. CONDUCTING PROBE MANUFACTURING, INC.’S BUSINESS IN COMPLIANCE WITH LAWS
The Company’s business ethics and standards include compliance with the laws of the countries in which we operate. Due to the nature and scope of the Company’s business, it would be impractical to cover all of the requirements that may apply to your respective function or location. However, you are expected to have a basic working knowledge of the applicable laws and prohibited activities related to your work for the Company. You are also required to participate in training when the Company offers it on these subjects.
A. A NTITRUST L AWS
Most countries have antitrust or competition laws that are designed to encourage and protect free and fair competition. Competition laws generally address a wide range of practices, including: arrangements with competitors such as participating in a trade association or in a standards-creation
body, as well as joint ventures or other collaborations; pricing practices such as price fixing, price discrimination, predatory pricing and secret rebates; terms of sale; restrictions on resellers; promotional allowances; vertical restrictions with suppliers or purchasers of Company products; mergers or acquisitions of competitors; and many other practices. Certain activities may be prohibited by the Company, whether or not local law prohibits them. These activities include price-fixing in any form, bid rigging and arrangements with competitors to divide or allocate markets or customers (including arrangements not to compete in certain geographic or product areas) or arrangements to exclude others from a market.
Price fixing covers behavior that may at first not seem to fit the definition. For example, it would be a violation of competition laws for competitors to share information about pricing or pricing methodology for goods or services as well as any commercial terms that impact price (such as payment, price reductions and warranty terms); disclosing the identity of bidders responding to requests for quotes or participating in auction processes. Finally, cooperating with competitors in an attempt to maintain prices or market shares is also unacceptable, even if there is not a formal agreement as to a particular price.
Competition laws may also prohibit false or misleading statements regarding the
Company’s competitors or their services. Competition laws in the U.S. (and in some other countries) apply not only to products manufactured there but also to products sold there.
Since the applications of the competition laws to particular situations is complex you should engage the Company’s Legal Department as soon as a question arises in this area or whenever you are aware that the Company is proposing to enter into an agreement or arrangement with a competitor, or if you believe that an exceptional circumstance may require discussion of pricing or markets with any competitor.
B. I NDUSTRIAL E SPIONAGE
You may not steal or unlawfully use the information, material, products, intellectual property, or proprietary or confidential information of anyone, including the Company’s suppliers, customers, business partners or competitors.
C. A DVERTISING
The Company’s reputation for integrity is an important asset. We have developed our reputation through the conduct of our business, including our commitment to always be truthful in our promotional efforts. In that regard, you must refrain from misrepresenting the Company at any time when you may be advertising or promoting the Company or its products or services.
D. E MPLOYMENT AND L ABOR L AWS
The Company is committed to providing a safe and quality work environment for its employees. It is the Company’s policy to act in accordance with all applicable employment and labor laws and regulations, including:
•
compliance with all non-discrimination requirements;
•
maintaining an environment where individuals are free from any physical, sexual, psychological, verbal or visual harassment or abuse;
•
observing all applicable restrictions on the maximum hours employees are legally permitted to work;
•
paying employees at least the minimum wage required by local law and providing all legally mandated benefits;
•
ensuring that no forced labor, indentured labor, or bonded labor is used;
•
requiring a minimum age requirement for employment of 15 years old (or 14 if permitted by local law); and
•
offering a safety and health program that conforms to the best practices of organizations of our type, to reduce the number of occupational injuries and illnesses to a minimum.
E. E NVIRONMENTAL L AWS
The Company is committed to complying with all applicable environmental laws and regulations and to providing a safe and healthy workplace, protecting the environment, conserving energy and natural resources, and preventing pollution by applying appropriate management practices and technology.
The Company’s operations are subject to a number of regulatory requirements relating to the use, storage, discharge, and disposal of hazardous chemicals used during the manufacturing processes. The Company is also required to comply with certain hazardous substance content regulations. We monitor our compliance with these laws to maintain our status as a responsible corporate citizen in all locations in which we operate. In addition, we review our practices and procedures regularly to address changing circumstances, and to continually improve our performance.
F. I NTELLECTUAL P ROPERTY R IGHTS
General. Intellectual property includes patents, trademarks, copyrights, trade secrets and any other intangible personal property that is created through the intellectual efforts of its creator. Intellectual
property owners generally expend considerable time and money to create, perfect and enforce intellectual property rights and as a result, generally consider those rights to be valuable assets. Intellectual property may take many forms. For example, intellectual property may include: an oral presentation about a company’s product development plans; a customer or employee list; a proprietary design; or information disclosed during a new product demonstration. Software source code may be protected by copyright or patents.
The Company and its customers, suppliers and other third parties with whom we do business have made substantial investments in intellectual property rights. It is our policy to respect the intellectual property rights of third parties and to enforce our rights when we believe it is necessary to do so. You are expected to have a basic working knowledge of the applicable intellectual property laws and prohibited
activities related to your work for the Company. In addition, you must comply with the restrictions on the use of intellectual property rights that may be included in the Company’s contracts with third parties.
Your improper use or disclosure of intellectual property of others can subject the
Company to significant liability and can seriously harm our reputation and relationships with third parties.
Former Employees . If you are a former employee of another company that is engaged in a similar line of business, you may be in possession of trade secrets of your former employer. You may not reveal any information to the Company that would be considered a trade secret of your former employer. Please consult the Chief Compliance Officer if you have any questions or concerns about whether you have disclosed any trade secrets of your former employer to the Company.
Other Hardcopy Copyrighted Material . You may not scan or copy any hardcopy copyrighted material owned by any third party for use in your services for the Company unless you first obtain written permission from the copyright holder prior to the proposed use.
G. C ONFIDENTIAL I NFORMATION
General. Confidential information is information that is furnished by Probe Manufacturing, Inc. or its customers, suppliers or other third parties and that is disclosed with the expectation that it may only be used for a specific business purpose by individuals who have a “need to know” the information to achieve the purpose. Confidential information may include ideas, designs, engineering and manufacturing processes, drawings, formulas, and procedures. It also may include business and strategic plans, capital spending plans, pricing data, procurement plans, financial information, employee records, lists of customers, manufacturing processes, customer or supplier lists and pricing, new ideas, trade secrets, inventions, and patent applications. Confidential information may be in the form of hard copy or soft copy or electronic communication such as emails and it may or may not be marked as confidential.
Confidential information is a valuable asset. This information is the property of the party that discloses it and may also be considered intellectual property protected by patent, trademark, copyright and trade secret laws.
This Code of Business Conduct and Ethics serves as notice that the Company considers you to be bound by these obligations.
Improper disclosure of confidential information includes without limitation, disclosure on
Internet sites, including chat rooms and message boards.
Disclosure of Company Confidential Information. To further the Company’s business, from time to time our confidential information may be disclosed to potential business partners. However, such disclosure should never be done without carefully considering its potential benefits and risks. If you determine, in consultation with your manager and other appropriate Company management, that disclosure of confidential information is necessary, you must then ensure that an appropriate written nondisclosure agreement is signed prior to the disclosure. Significant deviations from the provisions of the Company’s standard nondisclosure agreement should be discussed with a member of the Company’s Legal Department.
Need for Nondisclosure Agreement . You should never accept information offered by a third party that they indicate is confidential, or which you should reasonably assume is confidential based on the content, context or circumstances under which it is disclosed to you, unless an appropriate nondisclosure agreement has been signed with the party offering the information. Even after a nondisclosure agreement is in place, you should accept only the information necessary to accomplish the purpose of receiving it, such as a decision on whether to proceed to negotiate a deal.
Competitive Information . You should never attempt to obtain a competitor’s confidential information by improper means, and you should especially never contact a competitor regarding their confidential information.
Requests by Regulatory Authorities . All government requests for information, documents or investigative interviews must be referred to the Chief Compliance Officer. No Company confidential information may be disclosed in response to any government inquiries or investigations without the prior and express written approval of the Chief Compliance Officer (or in the case of the Chief Compliance Officer, the Board of Directors).
Document Retention Policy. You must adhere to the Document Retention Policy adopted by the Company, which is available on the Company’s intranet.
H. O BLIGATIONS UNDER U.S. S ECURITIES L AWS
The Company is committed to providing timely, transparent, consistent and credible information to the investing public, consistent with legal and regulatory requirements. In that regard, you are prohibited from the selective disclosure of material, nonpublic information to any person outside the Company other than to the Company’s advisors and representatives who owe a duty of trust to the Company (e.g., our independent accountants, attorneys and investment bankers), to persons who are covered by confidentiality agreements (so long as you limit the scope of the disclosure to the activity covered by the confidentiality agreement), or as otherwise permitted under this policy and Regulation FD, as promulgated by the U.S. Securities Exchange Commission.
External Communications and Company Spokespersons . Specific policies have been established regarding who may communicate information to the press or to broker-dealers and persons associated with them, including investment analysts; investment advisers and certain institutional investment managers and persons associated with them; and investment companies, hedge funds, and affiliated persons of such entities (collectively, the “financial analyst community”). All inquiries or calls from the press or any member of the financial analyst community should be referred to the Chief Financial Officer or the Company’s Investor Relations or Corporate Marketing Departments. The Company has designated its Chief Executive Officer, Chief Financial Officer and its Investor Relations department as the official Company spokespeople for financial matters. The Company has designated its regional public relations departments as official Company spokespeople for marketing, technical and other such information.
Unless you are designated as an official spokesperson, you should not talk to reporters or any member of the financial analyst community identified above about the Company. In addition, reporters and members of the financial analyst community may not visit any company facilities without prior and
express written approval of the Chief Financial Officer or Director of Investor Relations. You should refer any inquiries that you receive either directly or indirectly from any news media or any member of the financial analyst community to official Company spokesperson (identified above).
Compliance with Regulation FD . The Company is committed to maintaining a disclosure policy consistent with Regulation FD. Regulation FD prohibits the selective disclosure of material, nonpublic information to any security holder or to any member of the financial analyst community. Regulation FD requires that whenever the Company or any person acting on its behalf discloses any material, nonpublic information to a member of the financial analyst community the Company must make public disclosure of the information, simultaneously, in the case of an intentional disclosure, and promptly, in the case of a non- intentional disclosure.
Violations of Regulation FD are subject to enforcement action by the U.S. Securities
Exchange Commission, which may include an administrative action seeking a cease-and-desist order, or a civil action against the Company or an individual seeking an injunction and/or civil money penalties. If you are aware of any disclosure of information that you believe may violate this policy, please consult with your supervisor or the Chief Compliance Officer.
Prohibition on “Insider” Trading. The U.S. securities laws prohibitions against insider trading apply to you. The Company has outlined your obligations under the U.S. securities laws in its Insider Trading Policy, which is available upon request.
I. F OREIGN C ORRUPT P RACTICES A CT / P OLITICAL C ONTRIBUTIONS
Payments to Government Officials and Agencies. The U.S. Foreign Corrupt Practices
Act (or “FCPA”) places a strict prohibition on payments (or promises or offers to pay) of anything of value to any foreign official, political party or official. Such payments are prohibited whether they involve Company funds or involve the use of private funds in furtherance of the Company business. Laws in most countries outside of the U.S. also prohibit or restrict government officials or employees of government agencies from receiving payments, entertainment, or gifts for the purpose of winning or keeping business. Whether or not you are legally subject to the FCPA, you are required to adhere to this law as a matter of Company policy.
The FCPA contains limited exceptions permitting “facilitating” or “expediting” payments to foreign officials, for the purpose of securing the performance of routine governmental action by such persons, such as:
•
obtaining permits, licenses or other official documentation to conduct business in a foreign country;
•
processing governmental papers (such as work permits and visas);
•
providing police protection, mail service and utilities and scheduling certain inspections; and
•
loading and unloading product shipments.
You are expected to have a basic working knowledge of the FCPA and prohibited activities related to your work for the Company. You are also required to participate in training when the Company offers it on this subject. Violations of the FCPA subject both the Company and you to criminal and civil liability. In light of the restrictive nature of the FCPA, you may not make any payments of any kind to government officials or party officials without the prior and express written approval of the Chief Compliance Officer (or in the case of the Chief Compliance Officer, the Board of Directors). In addition, no contract or agreement may be made with any business in which a government official or employee holds a significant interest, without the prior and express written approval of the Chief Compliance Officer (or in the case of the Chief Compliance Officer, the Board of Directors).
Political Contributions. You may not use any Company funds for political
contributions of any kind to any political candidate or holder of any government office without the prior and express written approval of the Chief Compliance Officer (or in the case of the Chief Compliance Officer, the prior and express written approval of the Company’s Audit Committee). The term “political contribution” includes direct and indirect payments, loans, advances, deposits or gifts of money or any service. It also includes subscriptions, memberships, tickets, purchasing of advertising space, and payment of expenses and compensation of employees for a political organization, candidate or public official.
You may make any political contributions of your choice on an individual basis, with
your own money and on your own time if you make it clear that you are not representing Probe or giving money on behalf of Probe..
V. ACCURATE BOOKS AND RECORDS
A. A CCOUNTING P RACTICES
The Company’s responsibilities to its stockholders and the investing public require that all transactions be accurately recorded in the Company’s books and records in compliance with U.S. generally accepted accounting principles (US GAAP). In that regard, the Company’s books and records may not contain any false, incomplete or misleading entries or records. In addition, the Company may not have any undisclosed or unrecorded corporate funds established for any purpose.
B. P AYMENTS
All Company payments and other transactions must be properly authorized by management and be accurately and completely recorded on the Company books and records in accordance with US GAAP and established corporate accounting policies. Payments without appropriate supporting documentation and approval are strictly prohibited and violate Company policy and the law. Additionally, all documentation supporting a transaction should fully and accurately describe the nature of the transaction and be processed in a timely fashion.
VI. USE OF COMPANY’S ASSETS
A. G ENERAL
Protecting the Company’s assets is a key responsibility of every employee. You may not take, misappropriate, loan, sell or donate any Company assets without appropriate authorization. In addition, you are to use Company assets for Company business purposes only. In addition, you may use a Company-owned laptop computer or mobile phone for personal purposes only to the extent permitted by local policies.
B. C OMPANY F UNDS
You are personally responsible for all Company funds over which you exercise control.
Company agents and contractors should not be allowed to exercise control over Company funds.
You may only use Company funds for Company business purposes, and you may not use
Company funds for any personal purpose or place such funds in a personal or non-corporate account.
C. F ACILITY S ECURITY
The Company has and will continue to develop policies and procedures covering the security of the Company’s facilities to ensure employee safety, privacy of communications, security of the Company’s communications equipment, and to safeguard the Company’s assets
from theft, misuse and destruction. You are personally responsible for complying with any security procedures or physical access restrictions that are implemented in any Company facility at which you are present.
D. C OMPUTERS AND O THER E QUIPMENT
The Company endeavors to furnish employees with the equipment necessary to efficiently and effectively do their jobs. You must care for that equipment and use it responsibly and primarily in the conduct of your job responsibilities. If you use Company equipment at your home or off site, you must take precautions to protect it from theft or damage as if it were your own. If the Company no longer employs you, you must immediately return all Company equipment. All equipment provided to you must remain fully accessible to the Company and, to the maximum extent permitted by law, will remain the sole and exclusive property of the Company.
You should not maintain any expectation of privacy with respect to information transmitted over, received by, or stored in any electronic communications device owned, leased, or operated in whole or in part by or on behalf of the Company. To the extent permitted by applicable law, the Company retains the right to gain access to any information received by, transmitted by, or stored in any such electronic communications device, by and through you at any time, either with or without your or a third party’s knowledge, consent or approval.
E. S OFTWARE
Some of the software used at the Company was created and copyrighted by other
companies and may be subject to nondisclosure restrictions. This software is usually governed by a license agreement. You should seek guidance from the Company’s Legal Department when entering into and interpreting license agreements. You should not make copies, resell or transfer software created by another company, whether in the office, at home, or on the road, unless you are authorized to do so under the applicable software license agreement. Unauthorized copying may constitute breach of the license agreement as well as copyright infringement and may expose you and the Company to potential civil and criminal liability. The Company’s IT Department may inspect your Company computer periodically to verify that only approved and licensed software has been installed. If you have installed any unlicensed or unsupported software, the Company may remove it or require that you pay for it. You may not install any software on your computer that is not expressly authorized by the company. The company’s computers are for company use only and you are not permitted for personal use.
F. Emails
The purpose of this policy is to ensure the proper use of Company’s email system. All messages distributed via the company’s email system, even personal emails, are Company’s property. You must have no expectation of privacy in anything that you create, store, send or receive on the company’s email system. Your emails can be monitored without prior notification if Company deems this necessary. If there is evidence that you are not adhering to the guidelines set out in this policy, the company reserves the right to take disciplinary action, including termination and/or legal action.
It is strictly prohibited to:
•
Send or forward emails containing libelous, defamatory, offensive, racist or obscene remarks. If you receive an email of this nature, you must promptly notify your supervisor.
•
Forward a message or copy a message or attachment belonging to another user without acquiring permission from the originator first.
•
Send unsolicited email messages or chain mail.
•
Forge or attempt to forge email messages, or disguise or attempt to disguise your identity when sending mail.
Duty of care
Users must take the same care in drafting an email as they would for any other communication. Confidential information should not be sent via email.
Personal usage
Although the company’s email system is meant for business use, [Company] allows personal usage if it is reasonable and does not interfere with work.
F. P ROHIBITION AGAINST USE OF C OMPANY A SSETS TO A ID T ERRORISTS
You are expressly prohibited from using any Company assets to aid any alleged terrorists.
VII.
ADDITIONAL STANDARDS
A. S ELECTING S UPPLIERS
The Company’s suppliers make significant contributions to our success. To create an environment where our suppliers have an incentive to work with the Company, they must be confident that they will be treated lawfully and in an ethical manner. The Company’s policy is to purchase supplies based on need, quality, service, price and terms and conditions. Agreements with suppliers may contain restrictions on sales if those restrictions have been specifically reviewed and approved by the Chief Compliance Officer (or in the case of the Chief Compliance Officer, the Board of Directors) for compliance with applicable antitrust laws.
B. G OVERNMENT C ONTRACTS
It is the Company’s policy to comply fully with all applicable laws and regulations that apply to government contracting and to strictly adhere to all terms and conditions of any contract with government bodies. The Company’s Legal Department must review and approve all contracts with any government entity.
VIII. AMENDMENTSAND WAIVERS
Any amendment of this Code of Business Conduct and Ethics and any waiver (including an implied waiver) of the application of any provision of this Code of Business Conduct and Ethics for a member of the Company’s Board of Directors or the Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, Chief Compliance Officer or any other executive officer requires the prior and express written approval of the Company’s Board of Directors. Any such amendment or waiver must be disclosed promptly in accordance with the rules of the U.S. Securities and Exchange Commission.
Any waiver of any provision of this Code of Business Conduct and Ethics with respect to any other employee requires the prior and express written approval of the Chief Compliance Officer.
IX. PROMPT REPORTING; NON-RETALIATION
If you are aware of any conduct that you believe is a violation of this Code of Business
Conduct and Ethics, or of any law, you are obligated to report it promptly to the Chief
Compliance Officer. You may also make reports to:
•
your immediate supervisor;
•
the Chief Executive Officer;
•
the Chief Compliance Officer;
•
the General Counsel;
• anonymously via confidential letter or email to: the Chief Compliance Officer at 301 East Ocean Blvd., Suite 640, Long Beach, CA 90802 or jconrad@efundcapital.net .
The Company will handle all reports discreetly and will make every effort to maintain, within the limits allowed by the law, the confidentiality of anyone requesting guidance or reporting a possible violation. If you report a suspected violation of this Code of Business Conduct and Ethics, or you report any concerns regarding accounting, internal accounting controls or audit matters, you will be protected from retaliation by the Company as a result of your reports. You may not make a knowingly false report of a possible violation for the purpose of harming the Company or another individual.
X. CORRECTIVE ACTIONS
The matters covered in this Code of Business Conduct and Ethics are of the utmost importance to the Company, its stockholders and its business partners, and are essential to the Company’s ability to conduct its business in accordance with its stated values. We expect all of our employees, officers and Board members to adhere to these rules in carrying out their duties for the Company. The Company will take appropriate action against any person whose actions are found to violate these policies or any other applicable policies of the Company. Corrective actions with respect to any of the matters covered in this Code of Business Conduct and Ethics may include termination of employment at the Company’s sole discretion. In addition, where the Company has suffered a loss, it may pursue its remedies against the individuals or entities responsible. Where laws have been violated, the Company will cooperate fully with the appropriate authorities.
XI. FREQUENTLY ASKED QUESTIONS ANS ANSWERS
The following questions and answers address each associate's obligation to comply with the Code. The company has attempted to design procedures that ensure maximum confidentiality and, most importantly, freedom from the fear of retaliation for complying with and reporting violations under the Code.
Q: Do I have a duty to report violations under the Code?
A: Yes, participation in the Code and its compliance program is mandatory. You must immediately report any suspected or actual violation of the Code to the Corporate Compliance Officer or a member of
the Compliance Committee. The company will keep reports confidential to the fullest extent required by applicable law. Failure to report suspected or actual violations is itself a violation of the Code and may subject you to disciplinary action, up to and including termination of employment or legal action.
Q: I'm afraid of being fired for raising questions or reporting violations under the Code. Will I be risking my job if I do?
A: The Code contains a clear non-retaliation policy, meaning that if you in good faith report a violation of the Code by the company, or its agents acting on behalf of the company, to the Corporate Compliance Officer or another member of the Compliance Committee, the company will undertake to protect you from being fired, demoted, reprimanded or otherwise harmed for reporting the violation, even if the violation involves you, your supervisor, or senior management of the company. You are entitled to make the report on a confidential and anonymous basis. To the extent an investigation must be initiated, the company will keep confidential any report you make to the Corporate Compliance Officer or another member of the Compliance Committee to the extent required by applicable law.
In addition, if you report a suspected violation under the Code which you reasonably believe constitutes a violation of a federal statute by the company, or its agents acting on behalf of the company, to a federal regulatory or law enforcement agency, you may not be reprimanded, discharged, demoted, suspended, threatened, harassed or in any manner discriminated against in the terms and conditions of your employment for reporting the suspected violation, regardless of whether the suspected violation involves you, your supervisor or senior management of the company.
Q: How are suspected violations investigated under the Code?
A: When a suspected violation is reported to the Corporate Compliance Officer or a member of the Compliance Committee, the Compliance Committee will gather information about the allegation by interviewing the associate reporting the suspected violation (if permissible, in the case of a non-anonymous report), the associate who is accused of the violation and/or any co- workers or associates of the accused associates to determine if a factual basis for the allegation exists. The reporting associate's immediate supervisor will
not be involved in the investigation if the reported violation involved that supervisor. The company will keep the identity of the reporting associate confidential to the fullest extent required by applicable law.
If the report is not substantiated, the reporting associate will be informed and at that time will be asked for any additional information not previously communicated. If there is no additional information, the Corporate Compliance Officer will close the matter as unsubstantiated.
If the allegation is substantiated, the Compliance Committee will make a judgment as to the degree of severity of the violation and the appropriate disciplinary response. In more severe cases, the Compliance Committee will make a recommendation to the Board of Directors of the company for its approval. The
Board's decision as to disciplinary and corrective action will be final. In the case of less severe violations, the Corporate Compliance Officer may refer the violation to the Human Resources Department for appropriate disciplinary action.
The Compliance Committee shall provide a summary of all matters considered under the Code to the Board of Directors or a committee thereof at each regular meeting thereof, or sooner if warranted by the severity of the matter.
Q: Do I have to participate in any investigation under the Code?
A: Your full cooperation with any pending investigation under the Code is a condition of your
continued relationship with the company. The refusal to cooperate fully with any investigation is a violation of the Code and grounds for discipline, up to and including termination.
Q: What are the consequences of violating the Code?
A: As explained above, associates who violate the Code may be subject to discipline, up to and including termination of employment. Associates who violate the Code may simultaneously violate federal, state, local or foreign laws, regulations or policies. Such associates may be subject to prosecution,
imprisonment and fines, and may be required to make reimbursement to the company, the government or any other person for losses resulting from the violation. They may be subject to punitive or treble damages depending on the severity of the violation and applicable law.
Q: What if I have questions under the Code or want to obtain a waiver under any provision of the Code?
A: The Corporate Compliance Officer a can help answer questions you may have under the Code. Particularly difficult questions will be answered with input from the Compliance Officer. In addition, Section IX of the Code provides information on how you may obtain a waiver from the Code; waivers will be granted only in very limited circumstances. You should never pursue a course of action that is unclear under the Code without first consulting the Corporate Compliance Officer, and if necessary, obtaining a waiver from the Code.
Nothing in this Code of Business Conduct and Ethics, in any company policies and procedures, or in other related communications (verbal or written) modifies any at-will employment relationship Probe Manufacturing, Inc. has with its employees, nor creates or implies a third-party contract, an employment contract or term of employment.
4
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
April 13, 2006
U.S. Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington, DC 20549
RE: Probe Manufacturing, Inc. – 10-KSB
Dear Sir/Madame:
We hereby consent to the incorporation by reference in this report on Form 10-KSB of our report dated March 17, 2006 on our audits of the financial statements of Probe Manufacturing, Inc.’s for the years ended December 31, 2005 and 2004, and to all references to our firm included in this report on Form 10-KSB.
Sincerely,
/s/ Jaspers + Hall, PC
Jaspers + Hall, PC
Denver, Colorado
Exhibit 23.2
Report of Independent Registered Public Accounting Firm
Board of Directors
Probe Manufacturing, 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 Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (Unites States) in accordance with auditing standard No. 1 of the PCAOB. 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 provides 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, 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 Company’s 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 Company’s 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. Management’s 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.
/s/ Jaspers + Hall, PC
Jaspers + Hall, PC
Denver, Colorado
May 25, 2005
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Reza Zarif, certify that:
1. I have reviewed this annual report of Probe Manufacturing, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
DATED this 14th day of April 2006.
/s/ Reza Zarif
__________________________
Reza Zarif
Chief Executive Officer and
Director
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Barrett Evans, certify that:
1. I have reviewed this annual report of Probe Manufacturing, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
DATED this 14th day of April 2006.
/s/ Barrett Evans
-------------------------------
Barrett Evans
Interim Chief Financial Officer
Exhibit 32.1
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code), each of the
undersigned officers of Probe Manufacturing, Inc., a Nevada corporation (the "Company"), does hereby certify, to such officer's knowledge, that:
The Annual Report for the year ended December 31, 2005 (the "Form 10-KSB") of
the Company fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, and the information contained in the Form
10-KSB fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: April 14, 2006
/s/ Reza Zarif
----------------------
Reza Zarif
Chief Executive Officer
Director
Date: April 14, 2006
/s/ Barrett Evans
------------------------
Barrett Evans
Interim Chief Financial Officer