U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUER
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
CLUSTER TECHNOLOGY CORP.
(Name of Small Business Issuer in its charter)
Delaware 87-0425009
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
5411 John's Road, Suite 601, Tampa, FL 33634
(Address of Principal Executive Offices and Zip Code)
Issuer's Telephone Number: (813) 249-7888
Securities to be registered under Section 12(b) of the Act:
Securities to be registered under Section 12(g) of the Act:
Common Stock, Par Value $0.01
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TABLE OF CONTENTS
ITEM NUMBER AND CAPTION Page
Part I
1. Description of Business 3
2. Management's Discussion and Analysis or Plan of 6
Operations
3. Description of Properties 9
4. Security Ownership of Certain Beneficial Owners and 10
Management
5. Directors, Executive Officers, Promoters and Control 11
Persons
6. Executive Compensation 12
7. Certain Relationships and Related Transactions 14
8. Description of Securities 16
Part II
1. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters 19
2. Legal Proceedings 20
3. Changes in and Disagreements with Accountants 22
4. Recent Sales of Unregistered Securities 22
5. Indemnification of Directors and Officers 25
Part F/S Financial Statements 25
Part III
1. Index to Exhibits 25
2. Description of Exhibits 25
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Cluster Technology Corp., a Delaware Corporation, and its
subsidiaries (the "Company" or "we") is engaged in the business
of manufacturing, marketing and selling the DRS System, a system
for the decompression of the lower back to relieve lower back
pain. We are currently selling the DRS system to qualified
doctors through hospitals, university teaching facilities, HMO
and PPO companies and independent practices.
The prevalence of chronic pain in the United States is large
and growing. Approximately $65 billion was spent in 1999
treating chronic pain patients. The pain industry is so large
that it rivals the common cold as the leading cause of physician
visits as it affects over 75 million Americans.
One of the major causes of chronic pain is low back pain.
Low back pain is the leading cause of disability for workers
under age 45 and represents 32% of all workers' compensation
claims. Physicians will encounter more than 8 million office
visits for low back pain and employers will lose almost 108
million work days. Low back pain claims are increasing at a rate
14 times faster than the US population growth. The average low
back pain patient incurs over 3 years of vocational impairment
and fails to respond to an average of 1.86 surgeries, takes 1.92
analgesic/narcotic medications, and has seen an average of 6.8
heath care providers.
Cluster's mission is the successful treatment of these
costly and perplexing medical problems surrounding pain
management and the restoration of the patient's quality of life.
Cluster's approach to this dilemma is through the development of
non-surgical alternatives for the treatment of low back pain.
Through years of research and development we have produced an
effective and non-invasive therapy that utilizes a machine called
the DRS (Decompression Reduction and Stabilization).
Successful treatment with the DRS System and the low back
pain protocol achieves benefits for the patient and the insurance
company. The average cost of surgery is $50,000 while the
average cost of the DRS System is $3,500 for 20 sessions. If the
DRS System achieves a 70% success rate, then only 30% will be
candidates for surgery. Studies have shown that while 30% may
not be healed they have determined that they have received enough
relief to forgo surgery. Therefore, only 1% actually follow-up
the DRS treatment with surgery making the average effective cost
of those same 100 patients at $18,500, a savings to the insurance
company of over $31,000.
We conduct substantially all of our operations through two
wholly owned subsidiaries: (1) Professional Distribution Systems,
Inc. ("PDS") and (2) Universal Pain Technology, Inc. ("UPT"). We
also have one subsidiary, Universal Pain Clinics, Inc. which is
inactive at this
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time. Unless the context indicates otherwise, all references to
Cluster shall include Cluster and each of its subsidiaries.
Marketing strategy
Our products are marketed through a network of national and
international independent dealers and distributors, direct
salespersons and commissioned sales representatives. We
currently hold contracts with companies in Hong Kong, Canada,
Greece, Italy, and the United States, and are completing
negotiations with companies in Australia and Kuwait. We believe
that our approach to sales and marketing is supported by the
desire of our customers to identity with individual account
managers, product specialists, and specialized trainers, which
enables us to provide better customer service and to maintain
specialized expertise in each product line. We believe that
medical products are increasingly being purchased on a national
account or centralized basis by healthcare networkers, which
creates the need for our salespersons to maintain relationships
with purchasing managers within these networks. We utilize
Internet and direct-mail programs and attend trade shows to
market the DRS system. We also place advertisements for the DRS
System in chiropractic and medical journals.
Services and Products
We manufacture, market and sell the DRS System for the
decompression, reduction and stabilization of the lumbar spine to
relieve lower back pain through our PDS subsidiary. Using a
specific combination of lumbar positioning and varying the degree
and intensity of force, the DRS System produces distraction and
decompression of the spine. The average selling price of a DRS
System is $95,000 per machine.
The DRS System has been designed with ultra-fine component
parts to achieve decompression, that is, unloading due to
distraction and positioning of the intervertebral discs and facet
joints. The system is specialized into its functions, offering
smoothness and precision of operation. The DRS System features
an aluminum and steel construction with a special omnitower.
This part is equipped with a precision multi-positional, vertical
travel controller to control distraction positions and forces
critical to the successful delivery of treatment indicated for
many conditions associated with low back pain.
The patient steps onto a loading platform and is
automatically reclined, making the treatment easy for the patient
in pain, as well as the technician operating the system. By
focusing the action of the DRS System directly on the underlying
lumbar spine, the apparatus produces decompression, that is,
unloading due to distraction and positioning of the
intervertebral discs and facet joints. Studies have shown
through MRI imaging that in some cases the size of the herniation
decreases dramatically alleviating the patients pain.
The DRS System consists of a program of treatments utilizing
distraction and relaxation cycles. Patients have reported
significant decreases in the amount of pain during the treatment.
In fact, clinical experience with the DRS System is that some
patients are returning to work in as
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little as two weeks of starting treatment. In our opinion, the
DRS System is among the advanced devices available to physicians
for non-surgical treatment of the lumbar spine.
Competition
The treatment of lower back pain and the process of pain
management is highly competitive. Orthopedists, chiropractors
and various physical therapists, in both office and hospital
settings, provide a variety of competing approaches the
objectives of which are same as those of the DRS System. We are a
relatively small participant in the large lower back pain
remediation market. There are numerous treatments for lower back
pain, including physical therapy, medication, traction and spinal
injections, which may be viewed as competition. The DRS system
is sometimes offered to a patient as an alternative.
Our ability to compete with other providers will depend on
patient acceptance of the DRS System, reimbursement of treatments
offered through the DRS System by third party payors, and
educational of the general public about the alternatives offered
through the DRS System. We also believe that the DRS System
affords Cluster a strategically favorable position through
product differentiation.
Governmental Regulations
All medical devices are subject to the Food and Drug
Administration Regulations under the Medical Device Amendments of
the Food, Drug and Cosmetic Act, as amended ("FDCA"). As such,
these devices require premarket clearance or approval by the FDA
prior to their marketing and sale. Such clearance or approval is
premised on the production of evidence sufficient for a company
to show reasonable assurance of safety and effectiveness
regarding its products. Noncompliance with applicable
requirements can result in fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of
production, denial of premarket clearance or approval for
devices, recommendations by the FDA that Cluster not be allowed
to enter into government contracts, and criminal prosecution.
One method by which FDA approval may be obtained is to seek
FDA approval through a premarket notification filing under
Section 510(k) of the FDC Act. The manufacturer or distributor
of a medical devise must establish that a proposed device is
substantially equivalent to another legally marketed device for
which the FDA has not called for a premarket approval. The
manufacturer or distributor may not place the device in
interstate commerce until an order is issued by the FDA granting
premarket clearance for the device. Cluster has obtained from
the FDA premarket approval for the DRS System.
Cluster must also comply with the FDA's Good Manufacturing
Practice requirements. The FDA conducts inspections periodically
to ensure compliance with these regulations. In addition to the
foregoing, other federal and local agencies within the U.S. may
impose additional regulatory requirements on us, and such actions
could have a material adverse effect on our ability to do
business.
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Although Cluster believes that it will comply and will
continue to comply with all applicable regulations regarding the
manufacture and sale of medical devices, such regulations are
always subject to change and depend heavily on administrative
interpretations. We cannot be sure that future changes in review
guidelines, regulations or administrative effect, will not
materially adversely affect us.
Furthermore, the export of medical devises may be subject to
foreign regulatory clearances. We believe that only a limited
number of foreign countries have extensive regulatory
requirements, including France, Germany, Korea and Japan. A
number of European and other economically advanced countries,
including Italy, Norway, Spain and Sweden, have not developed
regulatory agencies for intensive supervision of such devices.
Instead, they generally have been willing to accept the approval
of the FDA. Therefore, a premarket approval from the FDA is
tantamount to approval in those countries.
Employees
As of February 15, 2000, we had 11 full-time employees. Of
this number 9 are full time employees comprised of management,
accountants, engineers and technicians. The remaining 2 are
sales representatives. This number does not include
manufacturer's representatives who are independent contractors
rather than our employees. Our employees are not members of a
labor union and we have never experienced any business
interruption as a result of any labor disputes. In addition, we
are anticipating hiring additional sales people and clerical
staff.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
REVENUES
Fiscal Years 1998 and 1999 - Overall revenues increased a
marginal 8.0% to $3,392,000 for the year ended September 30, 1999
from $3,140,336 during the same period in 1998. This increase is
due primarily to the increase in actual months of selling
operations. During several weeks of the 1998 period the product
underwent review by the Federal Food and Drug Administration
(FDA) and was ultimately awarded a 510K approval for marketing in
June of 1998. Cluster incurred a net loss of $810,620 for the
year ended September 30, 1999 as compared to a net loss of
$4,421,844 for the same period in fiscal 1998. A large potion of
this reduction in net loss was attributable to management's
decision in the prior period to write down Cluster's intangible
assets.
Quarters Ended December 31, 1999 and 1998 - Overall revenues
increased 19.2% from to $950,000 for the three months ended
December 31st, 1999 from $797,120 during the same period in 1998.
This increase is due primarily to the development of marketing
programs beginning in the spring of 1999, which resulted in
higher sales during the quarter ended December 31, 1999. Cluster
incurred a net loss of $25,255 for the three months ended
December 31, 1999 as compared to a net loss of $324,748 for the
same period in fiscal year 1999.
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As future revenues are concerned, marginal contributions can
be attributed to increased product recognition and marketing
efforts and acceptance by doctors. A significant improvement in
operating performance is attributable to Cluster's efforts to
reduce selling, general and administrative expenses in the
current period. Current management is committed to finding
attributable means to revenue growth with a firm commitment
towards controlling SG&A expenses.
COST OF SALES
Fiscal Years 1999 and 1998 - Cost of sales decreased by over
20.6% to $1,030,978 for the year ended September 30, 1999 as
compared to $1,298,133 for the same period in fiscal 1998. Cost
of sales consists of material and the acquisition thereof, direct
labor and overhead costs. For the year ended September 30, 1999
gross margins decreased to nearly 30.0% from the 41.3% for the
same period in Fiscal 1998. A percentage of this decrease is
attributable to the layoffs Cluster exercised during the slow
selling cycles not previously encountered in the previous year.
Quarters Ended December 31, 1999 and 1998- Cost of sales
increased by 39.7% to $420,991 for the three months ended
December 31, 1999 as compared to $301,292 for the same period in
fiscal 1999. Cost of sales consists of material and the
acquisitions thereof, direct labor and overhead costs. For the
three months ended December 31, 1999 gross margins had a slight
overall increase of nearly 7% to 44.3% from the 37.7% for the
same period in Fiscal 1999. The slight increase in gross margins
and Cost of Sales is a function of increased sales in the latter
part of the calendar year and some of the raw materials carrying
a 10% plus premium for rush orders to fill the late year sales
demand Cluster experienced.
While Cluster continues to add more sale staff in the coming
months cost of goods sold is expected to increase proportionally
to Revenue growth. However, current management is working toward
more favorable terms with suppliers in order to decrease cost of
goods sold and stabilize the margins towards more favorable ones.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal Years 1999 and 1998 - Selling, general and
administrative expenses decreased 29.1% to $2,813,576 for the
year ended September 30, 1999 as compared to $3,969,915 for the
same period in fiscal year 1998. This decrease was primarily due
to a significant adjustment in staffing and management that
resulted in an improvement of matching costs associated with
personnel as compared to corporate operations. General and
administrative expenses consist primarily of personnel costs,
professional service fees and general corporate expenses. Within
selling, general and administrative expenses are sales and
marketing expenses. Sales and marketing expenses consist
primarily of costs for sales, marketing, sales commissions,
medical conference participation and physician training programs.
Sales and marketing expenses were approximately 30% of sales
during the fiscal year ended September 30, 1999 or $798,200 as
compared to 24% of sales or $753,621 in the same period in fiscal
year 1998.
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Quarters ended December 31, 1999 and 1998 - Selling, general
and administrative expenses decreased 35.8% to $469,951 for the
three months ended December 31, 1999 as compared to $731,530 for
the same period in fiscal year 1999. This decrease is primarily
due to the continued adjustments in staffing and management that
resulted in an improvement of matching costs associated with
personnel as compared to corporate operations. General and
administrative expenses consist primarily of personnel costs,
professional service fees and general corporate expenses. Within
selling, general and administrative expenses are sales and
marketing expenses. Sales and marketing expenses consist
primarily of costs for sales, marketing, sales commissions,
medical conference participation and physician training programs.
Sales and marketing expenses were approximately 28% of sales or
$266,800 during the three months ended December 31, 1999 as
compared to 27.0% or $215,190 for the same period in fiscal 1999.
We anticipate that sales and marketing expenses will
increase in absolute dollars as we continue to develop our sales
force and expand our physician training programs. The stability
of our selling and marketing costs is dependant upon Cluster
continuing to move to more corporate employed sales
representatives versus the higher paid, commission only,
manufacturers representatives. Current management is in favor of
this direction and is implementing changes throughout the sales
force. The greatest contributor to periodic volatility of
selling costs in the past has been costs associated with
incentives and increased commissions that is consistent with the
increased sales volume.
We expect general and administrative expenses to increase in
absolute dollars as we add personnel and incur additional
expenses related to our operation as a public company. However,
current management has been successful in the reclassification of
pervious higher paid management positions into general staffing
positions with direct results contributing to decreases in
expenses.
IMPAIRMENT LOSS EXPENSES
Fiscal Years 1999 and 1998 - During the year ended September
30, 1999, no amount of impairment loss was charged to our profit
and loss statement due to management's determination that Cluster
would likely not derive future economic benefit from the
remaining balance of this asset. This adjustment compares with
$777,000 allocable to the same period in fiscal 1998. We do not
expect this expense to increase materially in future periods
because we believe that Cluster will realize future economic
benefit from the prior investments in the aforementioned
companies, the cost of which investment should fairly be matched
with and charged against operating profits over the applicable
future accounting periods corresponding with the underlying
asset's remaining useful life.
Quarters Ended December 31, 1999 and 1998 - During the three
months ended December 31, 1999 and 1998, no amount of impairment
loss was charged to our profit and loss statement.
Cluster's policy is to amortize the excess of investments in
consolidated subsidiaries over the net asset value at acquisition
and intellectual property rights" over a five-year period. The
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underlying asset, "excess of investment in consolidated
subsidiaries over the net asset value at acquisition" represents
amounts paid by Cluster for subsidiaries in excess of the book
value of the assets of those companies at the time the various
acquisitions were made (which is similar to goodwill). We assess
this asset periodically to "revalue" or "reappraise" its future
economic benefit to Cluster in accordance with generally accepted
accounting principals to determine if its value as reported on
Cluster's balance sheet is fairly stated.
If because of such factors as a significant adverse event or
some change in the environment in which Cluster operates, or if
expected future cash flows discounted to the present were to be
determined to be less than the asset's net carrying value, we
would record an impairment loss charge to our operating
statement, which we have done in prior reporting periods, in the
accounting period in which such determination would be made,
which treatment would effectively reduce the net carrying amount
of the asset. If we deem that no such adjustment is necessary,
the asset is simply amortized in accordance with our stated
policy, on a straight line basis over five years.
AMORTIZATION COSTS
Fiscal Years 1999 and 1998 - Consistent with the treatment
discussed immediately above, the adjusted gross book value of the
asset "cost in excess of fair value of assets acquired and
intellectual property right," of $368,200 is to be amortized
over a five year period, its estimated useful life. For the year
ended September 30, 1999 $298,800 was charged against income
consistent with Cluster's amortization policy, as compared with
$1,115,900 for the comparable period in fiscal year 1998. In the
future, this charge to income should decrease as most of the
underlying asset has been written down.
Quarters Ended December 31, 1999 and 1998 - For the three
months ended December 31st, 1999 $74,700 was charged against
income consistent with Cluster's amortization policy, as compared
with $74,700 for the comparable three month period in fiscal
1999.
LIQUIDITY
As shown in the accompanying financial statements, Cluster
has incurred significant operating losses and has a negative net
working capital position. Cluster's continued existence is
presently dependent upon the generation of funds from future
profitable operations. Cluster's intentions are to continue to
reduce overhead and focus on its core competencies.
ITEM 3. DESCRIPTION OF PROPERTIES
Our executive offices and manufacturing facilities are
currently located at 5411 Johns Road, Suite 601, Tampa, Florida
33634. The facility consists of approximately 11,063 square feet
of leased office space under a 30 month lease that expires July
2002. The monthly rental payment is $5,071.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
At January 31, 2000, Cluster had 18,202,171 shares of its
Common Stock issued and outstanding. The following table sets
forth, as of January 31, 2000, the beneficial ownership of
Cluster's Common Stock (i) by each director of Cluster; (ii) by
all directors and officers as a group and (iii) by persons who
are known by Cluster to own beneficially more than 5% of
Cluster's Common Stock.. Cluster obtained the information for
this table from United Stock Transfer, Inc., its transfer agent.
Name of Beneficial Owner(1) Number of Shares Percent of Class
James Gibson 1,475,000(2) 8.1%
5411 John's Road, Suite 601
Tampa, FL 33634
Al Mirman 1,052,000(3) 5.8%
5411 John's Road, Suite 601
Tampa, FL 33634
Alvin Siegel 600,000(4) 3.3%
5411 John's Road, Suite 601
Tampa, FL 33634
David Yeager 392,858(4) 2.2%
5411 John's Road, Suite 601
Tampa, FL 33634
All Officers and Directors 3,092,858 17.0%
as a Group (5 persons)
Ira Smolev 1,250,000 6.9%
350 Camino Gardens Blvd.,
Suite 200
Boca Raton, Florida 33432
Carlos Becerra 1,375,000 7.6%
940 Edgewater Court
Atlanta, Georgia 30328
John Frankum 1,150,000 6.3%
315 Starbuck Run
Longwood, Florida 32799
Footnotes to table on following page.
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(1) Unless otherwise indicated and subject to applicable
community property laws, each stockholder has sole voting and
investment power with respect to all shares of Cluster's common
stock beneficially owned by such stockholder.
(2) Mr. Gibson's shares are held jointly with his wife, Lori
Gibson. Includes 350,000 options that are immediately
exercisable at exercise prices ranging from $0.10 to $3.38 per
share and 125,000 options that are immediately exercisable at an
exercise price of $0.50 per share.
(3) Includes 250,000 shares held by Ilene Mirman, Mr. Mirman's
wife and 250,000 shares held by NW Holdings, Inc., a Florida
corporation controlled by Mr. Mirman. Includes 125,000 options
that are immediately exercisable at an exercise price of $0.50
per share. Also includes 277,000 options that are held by First
Level Capital, Inc., a Florida corporation controlled by Mr.
Mirman, that are immediately exercisable at an exercise price of
$0.15 per share and 150,000 options held by JI Consulting, Inc.,
an affiliated company in which Mr. Mirman's wife is an executive
officer, that are immediately exerciseable at an exercise price
of $0.10 per share.
(4) Includes 125,000 options that are immediately exercisable at
an exercise price of $0.50 per share.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
Directors and Executive Officers
The directors and executive officers of Cluster are as
follows:
Name Age Position Since
James J. Gibson, Jr. 33 Chief Executive Officer, President, 1999
Director
Diane Levesque 34 Treasurer and Secretary 1999
Alvin Mirman 62 Chairman of the Board 1999
Alvin Siegel 66 Director 1999
David Yeager 56 Director 1999
James J. Gibson, Jr. has served as the President of Cluster
since November 28, 1999, as a Director since March 2, 1999 and as
a Chief Executive Officer since August 1, 1999. Mr. Gibson
served as Chief Operating Officer from September 1996 to November
1999 and Controller of Cluster from September 1996 to June 1998
and as Secretary and Treasurer from April 1999 to July 1999.
Before joining Cluster, Mr. Gibson served as a financial
operations consultant for the Florida Department of State in
Health Agency Services from June 1995 until September 1996. Mr.
Gibson passed the CPA exam in November 1996. Mr. Gibson has also
served as a non-commissioned officer in a special operations unit
of the United States Marine Corp.
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Diane Levesque has served as Treasurer and Secretary of
Cluster since July 1999. From June 1998 through the present date
, Ms. Levesque, has served as controller of Cluster. From
November 1993 through May 1998, Ms. Levesque served as a Chief
Operations Officer with the Florida Department of Health & Human
Services.
Alvin Mirman has served as a Director of Cluster since July
1999. From January 1998 to the present, Mr. Mirman has been a
principal at First Level Capital, Inc., an NASD registered broker-
dealer which provides investment banking services to early stage
companies. From June 1997 until September 1998, Mr. Mirman
served as the Director of Research at Grady & Hatch, an
investment banking firm with its headquarters in New York. From
July 1994 until June 1997, Mr. Mirman served as the Director of
Research at Commonwealth Associates, an investment banking firm.
Alvin Siegel has served as a Director of Cluster since
August 1999. From 1983 until the present date, Mr. Siegel has
served as the Chief Operating Officer of Perry H. Koplik & Sons,
Inc., a trading company in the pulp and paper business. From
1980 until 1983, Mr. Siegel served as the owner and president of
United Woodpulp Corp., a pulp and paper international broker.
David Yeager has served as a Director of Cluster since
August 1, 1999. Mr. Yeager retired in April 1994. However,
during his retirement, Mr. Yeager has worked as an independent
business consultant. From November 1991 until April 1994, Mr.
Yeager served as the Director of Acquisitions and Administration
at ANFK/Pillsbury in Clyman, Wisconsin. From November 1991 until
December 1996, Mr. Yeager served as the Chief Financial Officer
at Ehmann Olive Co.
Director's Compensation
Directors who are full-time employees of Cluster receive no
additional compensation for services rendered as directors of
Cluster or as members of any committees of the Board. Directors
who are not full-time employees of Cluster receive reimbursement
of out-of-pocket expenses for attendance at Cluster's Board
Meetings. All directors received non-qualified options to
purchase 125,000 shares of common stock at an exercise price of
$0.50 per share (the opening bid price of the common stock on the
date of grant) for their services on the Board in 1999 and as an
incentive for future services. Additionally, the Chairman
devotes a substantial portion of his time to Cluster and receives
a monthly stipend of $5,000 per month.
ITEM 6. EXECUTIVE COMPENSATION
The Summary Compensation Table sets forth compensation
earned by James J. Gibson, Jr., Cluster's Chief Executive Officer
and Chairman (the "Named Executive Officer"), for services
rendered in all capacities to Cluster during each of Cluster's
three fiscal years beginning September 30, 1997, and ending
September 30, 1999. No other principal executive officer
received a total annual salary and bonus from Cluster which
exceeded $100,000 during fiscal 1999.
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Annual Long Term
Compensation Compensation
Restricted Securities All
Name and Year Salary Bonus Stock Underlying Other
Position Awards Options/SAR's Compensation
James J. 1999 $170,000 $61,000 625,000(1) 0 $112,500(2)
Gibson 1998 $135,000 $27,000 0 0 0
Chief 1997 $ 87,500 $10,000 0 0 0
Executive
Officer
and President
________________________
(1) Represents 250,000 shares of restricted stock awarded to Mr.
Gibson on March 25, 1999, valued at $0.10 per share, the fair
market value on the date of the grant.
(2) Represents the net value of stock options exercised during
fiscal 1999. See footnote (1) to the table below under the
caption "Aggregated Option /SAR Exercises in the Last Fiscal Year
and FY-End Option/SAR Values."
Stock Options
The following table sets forth information concerning
options granted during the fiscal year ended September 30, 1999
to the Named Executive Officer.
Option Grants in Last Fiscal Year
Number of % Of Total
Securities Options
Underlying Granted Exercise Expiration
Name Options to Employee Price Date
Granted in ($ per
Fiscal year share)
James J. 750,000(1) 79% (2) $0.10 7-05-04
Gibson, Jr.
____________________________
(1) The options were exercisable immediately and Mr. Gibson
exercised these options on July 27, 1999. See "Aggregated
Option/SAR Exercises in Last Fiscal Year and FY-End Options/SAR
Values."
(2) Cluster granted 1,450,000 options to its employees last
year.
As of this date, Cluster has granted 125,000 stock options
to its directors and officers at an exercise price of $2.38 per
share and 125,000 additional stock options at an execise price of
$0.50.
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Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values
On July 27, 1999, Jim Gibson exercised his stock option to
acquire 750,000 shares of Cluster's common stock at an exercise
price of $0.10 per share. As a result of such exercise, Cluster
issued 750,0000 shares of its common stock to Mr. Gibson.
Name Shares Number of Value of
Acquired on Value Unexercised Unexercised In-the Money
Exercise(#) Realized Options/SARS Options/SARs At FY-End ($)
at FY-End (#) Exercisable/Unexerciseable
Exercisable/
Unexerciseable
James J. 750,000 112,500(1) 350,000/ 0 0/ 0
Gibson, Jr.
__________________________
(1) Value is based on the difference between the closing price
of Cluster's Common Stock on July 27, 1999, the date on which the
Option was exercised ($0.15) and the option exercise price
($0.10) times the number of options exercised (750,000).
Employment Agreements
James Gibson is employed by Cluster under a four-year
employment agreement, effective as of November 20, 1998. The
employment agreement expires on January 1, 2002. Under the terms
of the employment agreement, which includes confidentiality and
non-competition provisions, Mr. Gibson received a monthly salary
of $10,000 per month from the period beginning November 20, 1998
through December 31, 1998. From January 1, 1999 through
September 30, 1999, Mr. Gibson received a salary of $128,000. As
of November 1, 1999, the Board has set Mr. Gibson's annual salary
at $170,000. Mr. Gibson is entitled to receive a bonus equal to
the number of DRS units sold each month times $2,000. Cluster
also pays Mr. Gibson a $1,250 per month automobile allowance. If
Cluster sells its business or if it terminates Mr. Gibson's
employment without cause, Mr. Gibson is entitled to receive a
single sum payment of $200,000. Both Cluster and Mr. Gibson may
terminate the employment agreement at any time by providing
written notice to the other party.
Over the course of his employment with Cluster, Mr. Gibson
has deferred his salary at several times when Cluster has had
liquidity problems. At various times during the ten month period
from November 1998 until August 1999, Mr. Gibson did not receive
his paycheck. Mr. Gibson has also loaned money to Cluster and
taken certain other actions on behalf of Cluster, which are
described in greater detail in "Certain Relationship and Related
Transactions."
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last three fiscal years and through the date
hereof, there is no currently proposed transaction, or series of
similar transactions, to which Cluster was or is to be party in
which the amount involves exceeds $60,000 and in which any
current, director, executive officer or holder or more than 5% of
any class of Cluster's voting securities or members of such
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person's immediate family had or will have a direct or indirect
material interest other than the transactions described herein.
During one ten month period from November 1998 until August
1999, Mr. Gibson, Cluster's Chief Executive Officer and
President, personally loaned over an aggregate of $100,000 to
Cluster. Mr. Gibson did not receive any interest on these loans.
Cluster also uses Mr. Gibson's personal credit card for all
credit purchases and travel expenses. Although Mr. Gibson is
reimbursed for these expenditures, he will be responsible for
these expenses if Cluster is unable to reimburse him.
Furthermore, in April 1999 when Cluster had severe liquidity
problems, Mr. Gibson purchased two DRS Systems at a purchase
price of $95,000 per system in order to infuse additional capital
into Cluster. Mr. Gibson purchased these systems under a
standard five (5) year leasing agreement with AEL Leasing
Company, a company that customarily provide financing to end
users who purchase the DRS System. Mr. Gibson has a personal
liability in excess of $250,000 for these DRS Systems.
In November 1998, Cluster's former Board of Directors,
negotiated a severance package with John Frankum, the former
President and director of Cluster. Included in the severance
package were all of Cluster's intellectual property rights in the
form of a UCC-1 security agreement against monies owed. The
monies owed were representative of accrued salary during the
development stages of Cluster. The directors that negotiated
this package were removed by Cluster's shareholders on July 30,
1999 and are no longer involved in Company matters. This matter
is now being contested in ongoing litigation. See "Business -
Litigation."
In November 1998, Cluster entered into an exclusive world-
wide distribution, marketing and licensing agreement (excluding
the United States of America, Canada and Greece) with John
Frankum, who was Cluster's former President. Among other items,
the Marketing Agreement covered Cluster's proprietary rights,
interests, contract rights and license rights with regard to the
Shealy Pain Program, the Shealy DRS System and the Shealy PCU
Unit. This Marketing Agreement has since been canceled and is
now part of ongoing litigation. See "Business - Litigation."
During the summer of 1999, Cluster retained First Level
Capital, Inc., an NASD registered broker dealer ("First Level"),
to assist it in raising capital in a private offering. Mr.
Mirman is a principal of First Level and is Chairman of Cluster.
However, Mr. Mirman was not the Chairman, when Cluster entered
into its private placement agreement with First Level. A
condition of the placement agreement was that First Level
received one seat on Cluster's Board of Directors. In the 1999
private offering, First Level received a non-accountable expense
allowance of $32,572.50 and commissions equal to $86,860, eight
percent of the proceeds raising in the offering. First Level
Capital also received a warrant to acquire 250,000 shares of
Cluster's common stock at an exercise price of $.10 and 277,000
shares of Cluster's common stock an exercise price of $.15 per
share. JI Consulting, Inc., an affiliated company, received an
option to purchase 150,000 shares at an exercise price of $.10
per share.
In the fall of 1997, Grady & Hatch and Co. acted as the
sales agent in Cluster's unit offering. Mr. Mirman, Cluster's
Chairman, was a principal at Grady & Hatch and Co., Inc. in
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1997; however, he was not a director at the time that Cluster
retained Grady & Hatch. Grady & Hatch received commissions equal
to $200,000 and a non-accountable expense allowance of $60,000.
Grady & Hatch also received warrants to acquire 75,000 shares of
Cluster's common stock at an exercise price of $0.10 per share
and warrants to purchase 75,000 additional shares at an exercise
price of $2.00 per share.
ITEM 8. DESCRIPTION OF SECURITIES
We are authorized to issue up to 50,000,000 shares of
Common Stock, par value $0.01 per share ("Common Shares"), and
1,000,000 shares of preferred stock, par value $0.01 per share
("Preferred Shares"). As of the date hereof, there are
18,202,171 Common Shares outstanding and no shares of Preferred
Stock are outstanding.
Common Stock
The holders of the common stock are entitled to one vote for
each share held, and have the sole right and power to vote on all
matters on which a vote of stockholders is taken. Voting rights
are non-cumulative. The holders of shares of our common stock
are entitled to receive dividends when, as and if declared by the
Board of Directors, out of funds legally available therefore and
to share pro rata in any distribution to stockholders, subject
to, and qualified and limited by, the Series A Preferred Stock.
Upon liquidation, shares held by them after our payment of
liabilities and liquidation preference on any preferred stock
which may be outstanding. The holders of our common stock do not
have any preemptive right to subscribe for or purchase any shares
of any class of stock. The outstanding shares of our common
stock and the shares offered hereby will not be subject to
further call or redemption and will be fully paid and non-
assessable.
Preferred Stock
Within the limits and restrictions contained in our
Certificate of Incorporation, the Board of Directors has the
authority, without further action by the stockholders, to issued
up to 1,000,000 shares of preferred stock, $0.01 par value per
share (the "Preferred Stock"), in one or more series, and to fix,
as to any such series, the dividend rate, redemption prices,
preferences on liquidation or dissolution, sinking fund terms, if
any, conversion rights, voting rights and any other preference or
special rights and qualifications. There are presently no shares
of Preferred Stock outstanding.
Shares of Preferred Stock issued by Cluster could be
utilized, under certain circumstances, to make an attempt to gain
control of Cluster more difficult or time consuming. For
example, shares of Preferred Stock could be issued with certain
rights which might have the effect of diluting the percentage of
our common stock owned by a significant stockholder, or issued to
purchasers who might side with management in opposing a takeover
bid, which our Board of Directors determines is not in the best
interests of Cluster and its shareholders. A takeover
transaction frequently affords shareholders the opportunity to
sell their shares at a premium over current market prices.
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Warrants
Our Warrants were issued in connection with our 1997 private
offering. Warrants to purchase 183,500 shares of common stock
were issued in October and November 1997. Each of these Warrants
entitles the holder to purchase one share of Common Stock at an
exercise price of $1.50 per share. The Warrants are exercisable
until July 31, 2002, unless such period is extended by Cluster.
The exercise price and the number of shares of Common Stock
purchasable upon exercise of the Warrants is subject to increase
or decrease upon the happening of certain corporate events.
The Warrants may be called at the sole option of Cluster,
upon thirty days prior written notice to the registered holders
thereof, so long as the Common Stock trades above $6.00 per share
for 20 consecutive trading days ending not more than 30 days
prior to the date the notice of redemption is given. Any such
redemption shall be for all outstanding Warrants. If Cluster
elects to redeem the Warrants, the Warrant holders shall have the
right to exercise their Warrants until the redemption date, and
thereafter the holders shall only be entitled to receive the
redemption price thereof.
The Warrants do not confer upon their holders any voting,
dividend or other rights as shareholders of Cluster. The
Warrants have certain piggy-back and demand registration rights.
The demand registration rights are exerciseable by Grady & Hatch,
the sales agent in the 1997 offering, for a two year period,
which began on November 20, 1998 and expires on July 31, 2002.
The Sales Agent has the right to exercise the demand registration
rights on one occasion during this time period, provided that
Cluster's common stock is trading at a price at least equal to
the exercise price of the Warrants, which is $1.50 per share.
The piggy back registration rights are exerciseable
beginning on November 19, 1998 and expiring on July 31, 2002. We
may require resale of Warrant Shares to be registered in a piggy-
back registration to be restricted for a period of 90 days or
completion of the offering, whichever is longer, to the extent
that the underwriter of any proposed offering by Cluster
reasonably believes that registration of the Warrant Shares by
investors would jeopardize such proposed offering. If the
Warrant Shares are included in a Piggy-back Registration
registering common stock to be offered by Cluster, investors
wishing to register their Warrant Shares would be required to
agree to offer their securities to the public at the same price
and on the same terms as Cluster's securities. Cluster will
cover all expenses of registration in the forgoing circumstances,
other than underwriting discounts and commissions and the fees
and disbursements of counsel for the investors electing to
include their securities in such registration. Cluster and the
investors electing to register their Warrant Shares shall
indemnify each other against certain liabilities, including
liabilities arising under the Securities Act, resulting from any
registration statement filed by Cluster covering the Warrant
Shares of such investors.
In connection with these piggy-back registration rights, we
also agreed that we would file a registration statement
pertaining to the Warrant Shares in the states where the holders
of the Warrant Shares reside. However, we do not have to file
any applications in any state where we are required to consent to
general service of process, amend our articles of incorporation
or
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bylaws, or escrow Cluster's securities held by officers,
directors or principal shareholders. Further, if the holders of
Warrant Shares refuse to comply with a state requirement that
holders escrow or lock-up Warrant Shares, Cluster would have no
obligation to pursue registration of the holders of Warrant
Shares in that State.
Business Combination Provisions
We have opted out of the Delaware statute regulation
"business combinations," defined to include a broad range of
transactions between Delaware corporations and "interested
stockholders" defined as persons who have acquired at least 15%
of a corporation's stock.
Certain Limited Liability and Indemnification Provisions
Cluster's Certificate of Incorporation, as amended, limits
the personal liability of its officers and directors.
Specifically, the directors of Cluster will not be personally
liable to Cluster or its shareholders for breach of their
fiduciary duties as officers and directors, except to the extent
that the elimination or limitation of liability is in
contravention of the DBCA, as amended. This provision will
generally not limit liability under state or federal securities
laws.
Article 10 of Cluster's Certificate of Incorporation
provides that each director, officer and employee of Cluster
shall be indemnified by Cluster in accordance with and to the
fullest extent permissible by applicable law.
Section 8.01 of Cluster's Bylaws provides that Cluster shall
have the power to indemnify any officer, director, employee or
agent, who was or is a party or is threatened to be made a party
to any pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigation by reason of the
fact that he is or was an officer, director, employee or agent of
Cluster, if the person (a) acted in good faith and (b) in a
manner he reasonably believed to be in or not opposed to the best
interests of Cluster, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by
judgement, order, settlement, conviction or on a plea of nolo
contendre or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to
the best interests of Cluster, and with respect to any criminal
action or proceeding, he had reasonable cause to believe that his
conduct was unlawful.
Section 8.02 provides that Cluster shall have the power to
indemnify any director, officer, employee or agent for any claims
brought as a shareholders derivative action if such person acted
in a manner he reasonably believed to be in or not opposed to the
best interest of Cluster, except that no indemnification shall be
made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to Cluster unless
and only to the extent that the court in which such action or
suit was brought shall determine on application that, despite the
adjudication of liability but in view of all circumstances of the
case, such person is fairly and reasonably entitled to indemnity
for such expenses as the court deems proper.
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Section 8.03 of the Bylaws provides that to the extent that
an officer, director, employee or agent has been successful on
the merits of the case, Cluster will indemnify him for expenses
actually and reasonably incurred. Unless ordered by a court,
Cluster will only give other indemnification if the director has
met the applicable standard of conduct set forth in Section 8.01
or 8.02, which determination will be made by (1) a majority vote
of the Board of Directors who were not parties to such action,
(2) independent legal counsel or (3) by the stockholder by a
majority vote. Section 8.04 provides that Cluster may advance
expenses to an officer or director in defending a civil or
criminal action, if the director or officers undertakes to repay
such amount if it is ultimately determined that he is not
entitled to be indemnified by Cluster as authorized under the By-
laws.
Insofar, as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers or
controlling persons of Cluster pursuant to the foregoing
provisions, Cluster has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore unenforceable.
Transfer Agent
The Transfer Agent for our common stock is United Stock
Transfer, Inc., 3615 Huron Street, Suite 104, Englewood, Colorado
80110-3494.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Quotations for the Company's common stock appear on the
"Pink Sheets" published by the National Quotation Bureau. The
following table sets forth for the respective periods indicated
the prices of the Company's Common Stock in the over-the-counter
market, as reported and summarized by the National Quotation
Bureau. Such prices are based on inter-dealer bid and asked
prices, without markup, markdown, commissions, or adjustments and
may not represent actual transactions.
Calendar Quarter High Bid ($) Low Bid ($)
Ended
December 31, 1997 2.875 1.625
March 31, 1998 2.125 1.50
June 30, 1998 1.625 0.75
September 30, 1998 0.75 0.1875
December 31, 1998 0.4375 0.09375
March 31, 1999 0.4375 0.1875
June 30, 1999 0.375 0.1875
September 30, 1999 0.70 0.1875
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December 31, 1999 0.375 0.125
Of the 18,202,171 shares of Cluster's common stock issued
and outstanding prior to the exercise of any Warrants, 2,597,515
shares are currently freely tradeable. In addition, the 400,000
shares of common stock underlying the Warrants will also be
freely tradeable into the public market immediately upon
issuance. Sales of substantial amounts of this common stock in
the public market could adversely affect the market price of our
common stock. Furthermore, all of the remaining shares of common
stock presently outstanding are restricted and/or affiliates
securities, which are not presently, but may in the future be
sold, pursuant to Rule 144, into any public market that may exist
for the common stock. Future sales by current shareholders could
depress the market price of our common stock in any such market.
In general, under Rule 144 as currently in effect, a person
(or group of person whose shares are aggregated), including
affiliates of Cluster, can sell within any three-month period, an
amount of restricted securities that does not exceed the greater
of 1% of the total number of outstanding shares of the same class
or (if the stock becomes quoted on NASDAQ or a stock exchange),
the reported average weekly trading volume during the four
calendar weeks preceding the sale; provided that at least one
year has elapsed since the restricted securities being sold were
acquired from Cluster or any affiliate of Cluster, and provided
further that certain other conditions are also satisfied. If at
least two years have elapsed since the restricted securities were
acquired from Cluster or an affiliate of Cluster, a person who
has not been an affiliate of Cluster for at least three months
can sell restricted shares under Rule 144 without regard to any
limitations on the amount.
Cluster has never paid dividends, nor does it anticipate
doing so. Cluster expects that it will retain all available
earnings generated by our operations for the development and
growth of our business.
ITEM 2. LEGAL PROCEEDINGS
Except for certain matters described herein, Cluster is
involved in litigation matters, which are incident to its normal
operations. In five litigation matters Cluster has been named as
a defendant. In one litigation matter, Cluster is a plaintiff.
None of the actions involve a product liability claim.
Frankum v. Cluster Technology Corp., et. al., Case No. 99-
769, Circuit Court of Seminole County, Florida. This action was
filed on April 12, 1999, by John Frankum, a former officer and
director of Cluster. Mr. Frankum alleges in this suit that
Cluster breached a severance agreement between Mr. Frankum and
Cluster (the "Severance Agreement"). Included in this severance
package was a UCC-1 security agreement collateralizing the
severance package with all of Cluster's intellectual property.
We have filed a motion to dismiss this action, and the defendants
intent to vigorously defend the litigation. This case is in its
preliminary stages, and no discovery has been conducted. We are
unable to evaluate the likelihood that this litigation
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will be resolved favorably or unfavorably to us, or to estimate
the amount or range of any potential loss.
Frankum v. Cluster Technology Corp., et. al., Case No. 99-
1139, Circuit Court of Seminole County, Florida. This action was
filed on May 28, 1999 by John Frankum, a former officer and
director of Cluster. Mr. Frankum alleges in this suit that
Cluster breached a Distribution, Marketing and Licensing
Agreement between Frankum and Cluster. Mr. Frankum also alleges
that Cluster and certain of its subsidiaries (Universal Pain
Technology, Inc., Universal Pain Clinics, Inc. and Professional
Distribution Systems, Inc.) breached other ancillary obligations
relating to the agreement. We have filed a Motion to Dismiss
this action, and the defendants intend to vigorously defend the
litigation. The case is in its preliminary stages, and no
discovery has been conducted. We are unable to evaluate the
likelihood that this litigation will be resolved favorably or
unfavorably to Cluster or to estimate the amount or range of any
potential loss.
Williams, et. al. v. Gibson, et. al., 99-7045, Circuit Court
or Orange County, Florida. This action was filed on August 20,
1999 by David Williams and Carlos Becerra, former officers and
directors of Cluster. The Complaint alleges that Cluster
improperly conducted and calculated a vote of its shareholders
that resulted in the removal of Messrs. Williams and Becerra from
their positions as directors of Cluster. Cluster (and other
individual defendants) intend to vigorously defend the
litigation. A motion for a preliminary injunction brought by
Messrs. Williams and Becerra to enjoin current management from
managing Cluster was denied, and discovery in the matter has
commenced. We are unable to evaluate the likelihood that this
litigation will be resolved favorably or unfavorably to Cluster,
or to estimate the amount or range of any potential loss.
Becerra v. Cluster Technology Corp., 99-7619, Circuit Court
of Orange County, Florida. This action was filed on September
16, 1999 by Carlos Becerra, a former officer and director of
Cluster. The complaint alleges that Cluster breached a severance
agreement Becerra and Cluster. Cluster intends to vigorously
defend the litigation. The case is in its preliminary stages,
and no discovery has been conducted. We are unable to evaluate
the likelihood that this litigation will be resolved favorably or
unfavorably to Cluster, or to estimate the amount or range of any
potential loss.
Quaker State Leasing Company v. Cluster Technology Corp., 99-
621-CA-16-G, Circuit Court of Seminole County, Florida. This
action was filed on February 10, 1999, by Quaker State Leasing
Company, assignee to Lear Financial Corporation, a company, which
leased equipment to Cluster,. The action seeks to domesticate
and collect in Florida a judgment that was entered against
Cluster in Pennsylvania. The amount of the foreign judgement is
$615,508.64. Quaker State has agreed to settle the judgement by
accepting current payments from Cluster on the leases and future
payments from assignees of the leases from Cluster.
Ronald G. Sheppard v. Cluster Technology Corporation, et.
al. , Cause No. IP97-1005-C-Y/G, United States District Court,
Southern District of Indiana. This action was filed on June 20,
1997 by Ronald Sheppard, a former officer and employee of
Cluster. This litigation relates to
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Cluster's cancellation of certain stock owed to Mr. Sheppard.
Mr. Frankum was the President of Cluster when Mr. Sheppard's
stock was issued. The parties are presently involved in
settlement negotiations.
Cluster Technology Corporation v. Carlos Becerra, et. al.,
Case No. 99-CA-1648-15-E, 18th Judicial Circuit in and for
Seminole County, Florida. On August 17, 1999, Cluster filed an
action against the former shareholders of PDS, in the 18th
Judicial Circuit in Seminole County, Florida. In this action,
Cluster alleges that the defendants misrepresented the value of
the intellectual property in the PDS transaction. Cluster has
asked the court to rescind the PDS transaction, cancel Cluster's
common stock issued to the Defendants and return PDS to the
Defendants as well as the PDS capital stock which Cluster had
exchanged with the Defendants. The case is in its preliminary
stages, and some discovery has been conducted. We are unable to
evaluate the likelihood that this litigation will be resolved
favorably or unfavorably to Cluster, or to estimate the amount or
range of any potential loss.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not Applicable.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth Cluster's sale of securities during
the last three years, which securities were not registered under
the Securities Act of 1933, as amended (the "Securities Act").
Except for the sale of shares in August 1997 and July 1999, no
underwriters were employed with respect to the sale of any of the
securities listed below. All shares were issued in reliance on
Section 4(2) and/or Section 3(b) of the Securities Act.
1. On May 1, 1997, Cluster issued 30,000 shares to Douglas
A. Narlow and Raymond V. Narlow at a purchase price of $1.50 per
share. Inasmuch, as Douglas Narlow and Raymond V. Narlow, were
knowledgeable and had access to comprehensive information about
Cluster, the shares were issued in reliance upon Section 4(2) of
the Securities Act. A legend was placed on the certificates
stating that the securities were not registered under the
Securities Act and set forth the restrictions on their
transferability and sale.
2. On June 25, 1997, Ira Smolev exercised an option to
acquire 1,250,000 shares of Cluster's common stock at an exercise
price of $.10 per share. Mr. Smolev paid for the option with
cash. The exercise of the option by Mr. Smolev was made in
reliance on Section 4(2) of the Securities Act. Mr. Smolev
represented that he had no need for liquidity in his investment
and had adequate financial resources to withstand a total loss of
their investment. A legend was placed on the certificates
stating that the securities were not registered under the
Securities Act and set forth the restrictions on their
transferability and sale.
3. In August 1997, Cluster sold 40 units in a private
offering at an offering price of $50,000 per unit. Each unit
consisted of 28,571 shares of common stock and 10,000 warrants.
Cluster closed the offering on November 19, 1997. The offering
and sale of the units was made
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in reliance on Rule 506 of the Securities Act of 1933, as
amended. The units were only offered and sold to accredited
investors. Cluster used Grady & Hatch (the "Sales Agent") as its
underwriter in the offering. The Sales Agent received a
commission equal to 10% of the gross proceeds. As additional
compensation, the Sales Agent received unit warrants to purchase
75,000 shares of common stock at an exercise price of $0.10 per
share and warrants to purchase 75,000 additional shares at an
exercise price of $2.00 per share. Cluster agreed to grant the
Sales Agent the same registration rights with respect to the
shares underlying its warrants as the registration rights
attached to the warrants included in the units. Cluster and the
Sales Agent also entered into a consulting agreement for a term
of one year upon sale of the minimum number of Units offered.
For investment banking and advisory services provided to Cluster,
the Sales Agent received warrants to purchase 100,000 shares of
common stock exercisable at a price of $0.10 per share and
warrants to purchase an additional 100,000 shares at an exercise
price of $2.00 per share, with the same registration rights as
the other warrants granted the Sales Agent.
4. On March 12, 1998, Cluster acquired The Shealy
Institute, Inc.("TSI") and issued 500,000 shares of its common
stock to the Holos Institute, the sole shareholder of TSI.
Inasmuch as the Holos Institute was knowledgeable, sophisticated
and had access to comprehensive information about Cluster, the
shares were issued in reliance upon Section 4(2) of the
Securities Act. A legend was placed on the certificates stating
that the securities were not registered under the Securities Act
and set forth the restrictions on their transferability and sale.
5. On June 27, 1998, Cluster issued 25,000 shares to
Steven Victor and 15,000 shares to Bob Rose as compensation for
services that such persons rendered to Cluster. In as much as
Mr. Victor and Mr. Rose were knowledgeable, sophisticated and had
access to comprehensive information about Cluster, the shares
were issued in reliance upon Section 4(2) of the Securities Act.
A legend was placed on the certificates stating that the
securities were not registered under the Securities Act and set
forth the restrictions on their transferability and sale.
6. On March 25, 1999, Cluster granted Jim Gibson and David
Williams 250,000 and 700,000 shares of Cluster's common stock,
respectively, as compensation for services that they had
performed for Cluster. In as much as Mr. Gibson and Mr. Williams
were knowledgeable, sophisticated and had access to comprehensive
information about Cluster, the shares were issued in reliance
upon Section 4(2) of the Securities Act. A legend was placed on
the certificates stating that the securities were not registered
under the Securities Act and set forth the restrictions on their
transferability and sale.
7. On March 25, 1999, Cluster issued shares to persons for
services that they had performed on behalf of Cluster. Cluster
issued 40,000 shares to Charles Buchert, 20,000 shares to Richard
Buchert and 25,000 shares to Steven Roemer. In as much as these
individuals were knowledgeable, sophisticated and had access to
comprehensive information about Cluster, the shares were issued
in reliance upon Section 4(2) of the Securities Act. A legend
was placed on the certificates stating that the securities were
not registered under the Securities Act and set forth the
restrictions on their transferability and sale.
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8. Raymonde Narlow purchased 200,000 shares in a private
placement at a purchase price of $1.50 per share. In as much as
Mr. Narlow was knowledgeable, sophisticated and had access to
comprehensive information about Cluster, the shares were issued
in reliance upon Section 4(2) of the Securities Act. A legend
was placed on the certificates stating that the securities were
not registered under the Securities Act and set forth the
restrictions on their transferability and sale.
9. On April 30, 1999, Cluster issued an additional 858,254
shares of its common stock to the accredited investors that had
purchased shares of its common stock in its unit offering
(described in paragraph 6). The offering contained a provision
that provided that the shareholders would receive an issuance of
additional shares if Cluster failed to meet established EPS
target. Cluster fell short of its target and issued these
additional shares in reliance on Rule 506 of the Securities Act
of 1933, as amended. The shares had restrictive legends.
10. On July 12, 1999, Cluster conducted a private offering
under Rule 506 of the Securities Act. The offer and sale was
made only to accredited investors, as such term is defined in the
Securities Act and Cluster used First Level Capital, Inc. as its
placement agent ("Placement Agent"). The Offering was conducted
in two tranches. In the first tranche which began on July 4 and
ended on July 30, Cluster sold 4,200,0000 shares of its common
stock at a price of $0.10 per share. In the second tranche,
which began on August 4, 1999, Cluster sold 3,013,000 shares of
its common stock at a price of $0.15 per share. Cluster's Board
of Directors deemed it advisable to increase the offering price
in the second tranche to $0.15 per share, because an investment
in Cluster was less risky after the initial $420,000 in seed
capital had been raised. Legends were placed on the certificates
stating that the securities were not registered under the
Securities Act and set forth the restrictions on their
transferability and sale.
The Placement Agent received a commission equal to $69,800
or 8% of the gross proceeds of the offering and a non-accountable
expense allowance equal to $26,175 or 3% of the gross proceeds of
the offering. The Placement Agent also received warrants to
acquire 400,000 shares of common stock of Cluster at an exercise
price of $0.10 per share and the right to have one of its
designees appointed to Cluster's Board of Directors.
11. On July 19, 1999, Cluster issued 250,000 shares to N.W.
Holdings, Inc. In as much as N.W. Holdings was knowledgeable,
sophisticated and had access to comprehensive information about
Cluster, the shares were issued in reliance upon Section 4(2) of
the Securities Act. A legend was placed on the certificates
stating that the securities were not registered under the
Securities Act and set forth the restrictions on their
transferability and sale.
12. On July 28, 1999, James Gibson and Lori Gibson
exercised their options to purchase 750,000 shares of Cluster's
common stock at an exercise price of $0.10 per share. The
Gibsons paid for the warrants with cash. The exercise of the
warrants by the Gibsons was made in reliance on Section 4(2) of
the Securities Act. The Gibsons represented that they had no
need for liquidity in their investment and had adequate financial
resources to withstand a total loss of their investment.
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13. On July 28, 1999, Timothy Exarhos exercised his option
to acquire 500,000 shares of Cluster's common stock at an
exercise price of $0.10 per share. Mr. Exarhos paid for the
warrants with cash. The exercise of the warrants by Mr. Exarhos
was made in reliance on Section 4(2) of the Securities Act. Mr.
Exarhos represented that he had no need for liquidity in his
investment and had adequate financial resources to withstand a
total loss of their investment.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As authorized by Delaware law, directors and officers of
Cluster are indemnified against liability under certain
circumstances. Reference is made to Article XIV of Cluster's
Certificate of Incorporation, and "Description of Securities."
PART F/S
FINANCIAL STATEMENTS
The financial statements of Cluster Technology Corp. appear
at the end of this registration statement beginning with the
Index to Financial Statements on page F-1.
PART III
ITEM 1. INDEX TO EXHIBITS
ITEM 2. DESCRIPTION OF EXHIBITS
Copies of the following documents are included as exhibits
to this report.
Exhibit Form 1-A Title of Document
No. Ref.
No.
1 (2) Certificate of Incorporation, as Amended
2 (2) Bylaws
3 (6) Employment Agreement/ James Gibson, Jr.
4 (6) Form of Option Agreement issued to Directors
5 (6) Distribution Agreement with John Frankum
6 (6) Severance Agreement with John Frankum
7 (6) Lease Agreement for Tampa, Florida Facility
8 -- Financial Data Schedule
25
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act
of 1934, the registrant caused this registration statement to be
signed on its behalf by the undersigned thereunto duly
authorized.
CLUSTER TECHNOLOGY CORP.
Date: March 6, 2000 By: /s/ James J. Gibson, Jr., Chief
Executive
Officer, President
In accordance with the Exchange Act, this registration
statement has been signed by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Dated: March 6, 2000 /s/ James J. Gibson, Jr.,
Director
Dated: March 6, 2000 /s/ Diane Levesque, Chief
Financial Officer
Dated: March 6, 2000 /s/ Alvin Mirman, Chairman of
the Board
Dated: March 6, 2000 /s/ Alvin Siegel, Director
Dated: ___________, 2000 _______________________________
David Yeager, Director
26
<PAGE>
CLUSTER TECHNOLOGY CORP.
INDEX TO
FINANCIAL STATEMENTS
Page
Quarters Ended December 31, 1999 and 1998
Consolidated Balance Sheets - December 31, 1999 and F-2
1998, Unaudited
Consolidated Statements of Operations - Three Months
Ended December 31, 1999 and 1998, Unaudited F-3
Consolidated Statements of Cash Flows - Three Months
Ended December 31, 1999 and 1998, Unaudited F-4
Notes to Unaudited Consolidated Financial Statements F-5
Fiscal years Ended September 30, 1999 and 1998
Report of Independent Certified Public Accountants F-6
Consolidated Balance Sheets - September 30, 1999 and F-7
1998
Consolidated Statements of Operations - Fiscal Years
Ended September 30, 1999 and 1998 F-8
Consolidated Statements of Stockholders' Equity -
Fiscal Years F-9
Ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows - Fiscal Years
Ended September 30, 1999 and 1998 F-10
Notes to Consolidate Financial Statements F-11
F-1
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
December 31,
1999 1998
Current Assets
Cash $ 115,351 $ 18,865
Accounts receivable, net allowance of
doubtful accounts of $270,845 and $270,845
respectively 239,879 21,262
Inventories 337,656 48,978
Prepaid expenses and other 58,035 42,481
Total Current Assets 750,921 131,586
Furniture and Equipment 243,646 65,397
Other Assets
Cost in excess of fair value of assets 137,143 435,943
Deposits 35,060 20,565
Total Other Assets 172,203 456,508
Total Assets $ 1,166,770 $ 653,491
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Line of Credit $ 50,000 $ 50,000
Current portion of capital lease obligation 12,291 -
Notes and advances payable -related parties 273,433 177,810
Accounts payable 643,296 715,333
Accrued liabilites 1,538,560 1,807,593
Total Current Liabilities 2,517,580 2,750,736
Long-Term Debt
Capital lease obligations 161,385 -
Total Long-Term Debt 161,385
Total Liabilities 2,678,965 2,750,736
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $0.01 par value; 1,000,000
shares authorized, no shares issued and
outstanding
Common stock, $0.01 par value; 50,000,000
shares authorized; 20,562,191 and
10,384,232 shares issued and outstanding,
respectively 205,622 103,842
Additional paid-in capital 11,256,490 10,262,093
Accumulated deficit (12,974,307) (12,463,180)
Total Shareholder's Deficit (1,512,195 (2,097,245)
Total Liabilities and
Shareholders' Deficit $ 1,166,770 $ 653,491
F-2
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended
December 31,
1999 1998
Revenues, net $ 950,000 $ 797,120
Cost of Sales 420,991 301,292
Gross Profit 529,009 495,828
Expenses
Selling, general and administration 469,951 731,530
Amortization of cost in excess
of fair value of assets acquired and
intellectual property rights 74,700 74,700
Depreciation 8,796 6,978
Total Expenses 553,447 813,208
Operating Loss (24,438) (317,380)
Other Income (Expenses)
Other Income 5,494 5,826
Interest expense (6,311) (13,194)
Total Other Income(Expense) (817) (7,368)
Net Loss $ (25,255) $ (324,748)
F-3
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
December 31,
1999 1998
Cash Flows From Operating Activities
Net Loss $ (25,255) $ (324,748)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 8,796 6,978
Impairment loss and amortization of
cost in excess of fair value and
intellectual property rights 74,700 74,700
Imputed Interest 5,469 6,120
Decrease (increase) in:
Accounts receivable, net (238,727) 4,098
Inventories (102,111) 81,955
Prepaid and other expenses (38,405) (18,152)
Increase (decrease) in:
Accounts payable 187,307 13,035
Accrued expenses 152,382 134,202
Total Adjustments 48,411 302,936
Net Cash Used in Operating Activities 23,156 (21,812)
Cash Flows From Financing Activities
Repayments of notes and advances payable -
related party (52,835) 16,836
Repayment from capital lease obligation (14,370) -
Net Cash Provided by Financing Activities (67,205) 16,836
Net Increase (Decrease) in Cash (44,049) (4,976)
Cash, Beginning of period 159,400 23,841
Cash, End of period $ 115,351 $ 18,865
F-4
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
Notes to the Financial Statements
September 30, 1999 and 1998
(Unaudited)
NOTE 1 - CONDENSED FINANCIAL STATEMENTS
The accompanying financial statements have been prepared
by the Company without audit. In the opinion of
management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows
at September 30, 1999 and 1998 and for all periods
presented have been made.
Certain information and footnote disclosures normally
included in consolidated financial statements prepared in
accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that
these condensed consolidated financial statements be read
in conjunction with the financial statements and notes
thereto included in the Company's December 31, 1998
audited consolidated financial statements. The results
of operations for the periods ended September 30, 1999
and 1998 are not necessarily indicative of the operating
results for the full years.
F-5
<PAGE>
DiRocco & Dombrow, P.A.
Certified Public Accountants and Consultants
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Cluster Technology Corp.
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of
Cluster Technology Corp. and subsidiaries as of September 30,
1999 and 1998, and the related consolidated statements of
operations, changes in shareholders' 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
audit. The financial statements of Cluster Technology Corp. and
Subsidiaries as of September 30, 1998 were audited by other
auditors whose report is dated August 27, 1999. Those statements
included an explanatory paragraph describing conditions that
raised substantial doubt about the Company's ability to continue
as a going concern.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Cluster Technology Corp. and subsidiaries as of
September 30, 1999 and 1998, and the results of their operations
and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 16 to the consolidated financial
statements, the Company has incurred significant losses, has a
negative net working capital position, has numerous unresolved
legal matters, all of its intellectual property and assets are
offered as security on certain outstanding liabilities, and a
substantial portion of its assets are intangible; the ultimate
realization of which is uncertain. These matters raise
substantial doubt about the Company's ability to continue as a
going concern. Management's plans concerning these matters are
also described in Note 16. The consolidated financial statements
do not include any adjustments that might result from the outcome
of these uncertainties.
/s/ DiRocco & Dombrow, P.A.
January 14, 2000
F-6
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
1999 1998
Current Assets
Cash $ 159,400 $ 23,841
Accounts receivable, net allowance
for doubtful accounts of $270,845 and $270,845,
respectively 1,152 25,360
Inventories 234,545 130,933
Prepaid expenses and other 19,630 24,329
Total Current Assets 414,727 204,463
Furniture and Equipment 246,365 89,047
Other Assets
Cost in excess of fair value of assets 211,843 510,643
Deposits 35,060 20,565
246,903 531,208
Total Assets $ 907,995 $ 824,718
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Line of credit $ 50,000 $ 31,000
Current portion of long-term debt - 3,561
Current portion of capital lease obligation 26,661 -
Notes and advances payable - related parties 326,268 160,974
Accounts payable 455,989 702,298
Accrued liabilities 1,374,632 1,543,155
Total Current Liabilities 2,233,550 2,440,988
Long-Term Debt
Notes payable - 14,547
Capital Lease Obligations 161,385 -
Notes Payable - Related Parties - 141,680
Total Long-Term Debt 161,385 156,227
Total Liabilities 2,394,935 2,597,215
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $0.01 par value; 50,000,000 shares
authorized; 20,562,191 and 10,384,232 shares
issued and outstanding, respectively 205,622 103,842
Additional paid-in capital 11,256,490 10,262,093
Accumulated deficit (12,949,052) (12,138,432)
Total Shareholders' Deficit (1,486,940) (1,772,497)
Total Liabilities and Shareholders' Deficit $ 907,995 $ 824,718
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
September 30,
1999 1998
Revenues, net $ 3,392,000 $ 3,140,336
Cost of Sales 1,030,978 1,298,133
Gross Profit 2,361,022 1,842,203
Expenses
Selling, general and administrative 2,813,576 3,969,915
Impairment loss of cost in excess of
fair value assets acquired and intellectual
property rights - 770,000
Amortization of cost in excess of fair value of
assets acquired and intellectual property rights 298,800 1,115,900
Depreciation 27,911 33,622
Total Expenses 3,140,287 5,889,437
Operating Loss (779,265) (4,047,234)
Other Income (Expenses)
Other income 24,791 -
Loss on sale of fixed assets - (1,912)
Interest expense (56,146) (41,928)
Loss on settlement - (330,770)
Total Other Income (Expense) (31,355) (374,610)
Net Loss $ (810,620) $ (4,421,844)
Net Loss Per Common Share $ (0.06) $ (0.36)
Weighted Average Number of Common Shares
Outstanding 13,052,379 12,420,890
The accompanying notes are an integral part of the consolidated
financial statements.
F-8
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Total
Preferred Stock Common Stock Additional Shareholders'
$0.01 Par Value $0.01 Par Value Paid-In Accumlated Equity
Shares Amount Shares Amount Capital Deficit (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 - - 11,784,232 $ 117,842 $ 9,783,008 $ (7,716,588) $ 2,184,262
Acquisition of subsidiary - - 500,000 5,000 1,370,000 - 1,375,000
Cancellation of common stock - - (2,450,000) (24,500) (1,786,500) - (1,811,000)
Issuance of common stock in
partail payment for services - - 40,000 400 54,600 - 55,000
Issuance of common stock in
private placement, net - - 510,000 5,100 801,065 - 806,165
Imputed interest on noninterest
bearing advances and notes - - - - 39,920 - 39,920
Net loss for the year ended
September 30, 1998 - - - - - (4,421,844) (4,421,844)
Balance at September 30, 1998 - - 10,384,232 103,842 10,262,093 (12,138,432) (1,772,497)
Exercise of stock option - - 1,700,000 17,000 153,000 - 170,000
Reset provision for private
placement in 1997 - - 868,959 8,690 (8,690) - -
Issuance of common stock
for services - - 999,000 9,990 193,034 - 203,024
Issuance of common stock
in private placement - - 6,610,000 66,100 632,572 - 698,672
Imputed interest on noninterest
bearing advances and notes - - - - 24,480 - -
Net loss for the year ended
September 30, 1999 - - - - - (810,620) (786,140)
Balance at September 30, 1999 - $ - 20,562,191 $ 205,622 $ 11,256,490 $ (12,949,052) $ (1,486,941)
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
September 30,
1999 1998
Cash Flows From Operating Activities
Net loss $ (810,620) $ (4,421,844)
Adjustments to reconcile net loss to net cash
used in operating activities
Common stock issued for services and expenses 203,024 55,000
Loss on sale of fixed assets - 1,912
Provision for bad debts - 286,488
Depreciation 27,911 33,622
Impairment loss and amortization of cost
in excess of fair value and intellectual
property rights 298,800 1,885,915
Imputed interest 24,480 39,920
Decrease (increase) in:
Accounts receivable, net 24,208 (287,504)
Inventories (103,612) (80,301)
Prepaid and other expenses 4,657 (12,329)
Deposits (14,452) (2,692)
Increase (decrease) in:
Accounts payable (246,309) 499,866
Accrued expenses 137,331 1,043,715
Total Adjustments 356,038 3,463,612
Net Cash Used in Operating Activities (454,582) (958,232)
Cash Flows From Investing Activities
Acquisitions of furniture and equipment, net (185,229) (30,743)
Net Cash Used in Investing Activities (185,229) (30,743)
Cash Flows From Financing Activities
Repayments of notes and advances payable-
related party (282,240) (392,692)
Proceeds from (repayments of) line of credit 19,000 (268,501)
Proceeds from notes payable - 8,747
Repayment of notes payable (18,108) (3,517)
Proceeds from capital lease obligation 190,000 -
Repayments from capital lease obligation (1,954) -
Proceeds from issuance of stock upon exercise
of stock options 170,000 -
Issuance of common stock 698,672 806,165
Net Cash Provided by Financing Activities 775,370 150,202
Net Increase (Decrease) in Cash 135,559 (838,773)
Cash, Beginning of Year 23,841 862,614
Cash, End of Year $ 159,400 $ 23,841
The accompanying notes are an integral part of the consolidated
financial statement.
F-10
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE I - ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT
RISKS
Organization and Basis of Presentation
Cluster Technology Corporation (CTC) was formed in 1985 to
develop and distribute a computer peripheral product. In 1986, to
fund its initial operations, CTC issued 120,000 shares of its
common stock through its initial public offering of its
securities. The Company received net proceeds from this offering
of approximately $971,000. CTC's product development and
distribution activities were unsuccessful, and it became inactive
in 1987. A Form 15 was filed with the Securities and Exchange
Commission (SEC) to terminate CTC's reporting obligation under
Federal Securities Laws. In addition, CTC discontinued its
operations by entering into an agreement with a third party;
wherein, the third party agreed to assume CTC's assets,
liabilities and operations. As a result, until March 1996, CTC
was a publicly held corporate shell seeking a business venture in
which to participate.
In March 1996, CTC acquired all of the issued and outstanding
stock of Professional Distribution Systems, Inc. (PDS), a
privately held company, in exchange for 5,240,000 shares (as
adjusted) of its previously unissued common stock. This
transaction was accounted for as a recapitalization of PDS, with
PDS as the acquirer (a reverse acquisition). PDS was incorporated
in February 1996.
Prior to the merger, PDS's activity primarily consisted of its
acquisition of intellectual property rights for the worldwide
marketing and manufacturing of certain hot and cold pack products
and technology. The rights were acquired by the original
shareholders of PDS for $1,100,000 and then assigned to PDS in
exchange for 262.5 shares of PDS common stock. The rights were
carried at their original cost less accumulated amortization,
which was calculated on a straight-line basis over the estimated
useful lives of the assets, approximately five years. The
recoverability of these rights were evaluated and estimated by
management of the Company with the primary indicator of
recoverability being management's opinion of the products
forecasted cash flows and profitability compared to the carrying
value of the rights. Management has determined that it could not
properly market and/or manufacture these products to a point were
it could realize its original investment in the intellectual
property rights. As a result, the Company no longer invests any
significant time or money in these products; accordingly, the
Company expensed its unamortized balance in the intellectual
property rights as of the beginning of fiscal 1998. Current
management is reviewing the original PDS merger transaction to
determine whether it was an arms-length transaction. No
adjustments that may result upon the ultimate resolution of this
matter have been recorded in the accompanying financial
statements.
In 1996, CTC acquired Universal Pain Technology, Inc. (UPT) (see
Note 11). UPT owns the rights to certain pain relief products and
programs, which includes the DRS SystemTM. CTC also acquired
Master Medical Marketing (MMM). The activity of MMM since its
inception has not been significant.
In May 1997, CTC created and incorporated Universal Pain Clinics,
Inc. (UPC). CTC intended to use UPC to develop and/or purchase
pain clinics that utilize the DRS SystemTM. Activity of UPC
through September 30, 1998 primarily consisted of organizational
and travel expenses.
F-11
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE I - ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT
RISKS, (C0NTINUED)
Organization and Basis of Presentation, (Continued)
In October 1998, UPT acquired all of the issued and outstanding
stock of PDS and UPC. This merger is accounted for under the
pooling of interest method, UPT currently manufactures,
distributes and markets the DRS SystemTM.
The consolidated financial statements include the accounts of
CTC, PDS, UPT, UPC and MMM (collectively, the Company). All
significant intercompany accounts have been eliminated in the
consolidated financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined principally on the average cost method. Provision for
potentially obsolete or slow-moving inventory is based on
management's analysis of inventory levels and future sales
forecasts.
Inventories consist of the following at September 30:
1999 1998
Materials $206,589 $130,933
Finished goods 27,956 -
------------ -----------
$234,545 $130,933
======= =======
Furniture and Equipment
Furniture and equipment is stated at cost. Depreciation is
provided for using the straight-line method over the estimated
useful lives of the equipment, which ranges from three to five
years. Maintenance and repairs are charged to expense as
incurred; major renewals and betterments are capitalized. When
items of property or equipment are sold or retired, the related
cost and accumulated depreciation is removed from the accounts
and any gain or loss is included in the results of operations.
Cost In Excess of Fair Value of Assets Acquired
The excess of investments in consolidated subsidiaries over the
net asset value at acquisition is amortized over a five-year
period. The Company's policy is to evaluate these intangible
assets based upon an evaluation of such factors as the occurrence
of a significant adverse event or change in the environment in
which the business operates, or if the expected future net cash
flows would become less than the carrying amount of the asset. An
impairment loss would be recorded in the period such
determination is made.
F-12
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
Income Taxes
The Company recognizes deferred tax assets and liabilities for
the expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred tax
assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse (see Note 10).
Revenue Recognition
Revenue from the sale of DRS SystemsTM to customers is recognized
at the time the products are shipped.
Basic and Diluted Loss Per Share
Basic loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding during each
period. Diluted in loss per share reflects the potential dilution
that could occur if securities or other contracts to issue common
stock were exercised, or converted into common stock and resulted
in the issuance of common stock. Common share equivalents are not
considered in calculations of per share data when their inclusion
would have an anti-dilutive effect on diluted net in loss per
share. Basic and diluted loss per common share were the same in
both 1999 and 1998, as all common stock equivalents were
anti-dilutive.
Fair Value of Financial Instruments
Financial instruments reflected in the Company's balance sheets
at September 30, 1999 and 1998 include cash, accounts receivable,
line of credit payable, other debt and notes and advances payable
- - related parties. The carrying amount of cash, accounts
receivable and line of credit payable approximate their fair
value due to the short maturity of those instruments. Because of
the circumstances and the nature of the Company's relationship
with its creditors, it was not practical to estimate the fair
value of the approximately $326,000 and $303,000 of notes and
advances payable-related parties, as well as other debt
outstanding as of September 30, 1999 and 1998, respectively (see
Note 3).
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-13
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash
deposited in financial institutions. The Company maintains its
cash in bank accounts which, at times, may exceed federally
insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant
credit risk with respect to cash.
In fiscal 1999 and 1998, $1,500,000 and $1,800,000, respectively
of the Company's revenues were from a leasing company, which
purchased the machines from the Company and then leased to a
third party. The loss of this financing option to potential
purchasers/users of the
DRS SystemTM could have a significant negative financial impact
on the Company.
Concentration
The Company currently generates 100% of its income from the sale
of the DRS SystemTM. Elimination of this product could have a
significant negative impact on the Company in the near-term.
NOTE 3 - RELATED-PARTY TRANSACTIONS
The Company is indebted to a shareholder and officer of the
Company in the amount of $241,000 as of October 1, 1997. The
notes are unsecured, non-interest bearing. Payments made on these
advances during the years ended September 30, 1999 and 1998,
approximated $58,000 and $279,000, respectively, which resulted
in an overpayment of approximately $96,000 and $38,000,
respectively. In fiscal 1999, the $96,000 was expensed as it is
not likely that these monies will be returned. The Company is
currently in litigation with this former officer.
In September 1997, the Company issued a note payable to a
consultant/shareholder for an
unpaid balance relating to consulting fees from prior years, of
approximately $284,000. The note is non-interest bearing and is
payable at the rate of $5,000 per month through September 1999,
with a balloon payment due October 1999. The balance due under
this note at September 30, 1999 and 1998, is approximately
$175,000 and $202,000, respectively. The Company is currently in
default of this note. In addition, the Company is presently in
litigation with the aforementioned shareholder.
Loan payable due to a stockholder and officer of the Company at
September 30, 1999 was approximately $20,000. The loan is
unsecured and non-interest bearing.
Also included in notes and advances - related parties is
approximately $131,000 of liabilities related to product returns.
These liabilities are being contested by the Company.
F-14
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 3 - RELATED-PARTY TRANSACTIONS, (CONTINUED)
Interest is imputed on these non-interest bearing notes and
advances at the rate of 8% per annum. Imputed interest
approximated $24,480 and $39,920 for the years ended September
30, 1999 and 1998, respectively.
During fiscal year ended September 30, 1999, the Company sold two
DRS SystemTM to a shareholder and officer of the Company in the
amount of $190,000. This transaction was accounted for at an
arms length transaction (see Note 9)
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following at September
30:
1999 1998
Furniture $ 11,419 $ 16,471
Equipment 131,291 131,010
Idle equipment, under capital
lease obligation 190,000 -
----------- -----------
332,710 147,481
Less accumulated depreciation (86,345) (58,434)
----------- -----------
$246,365 $ 89,047
======= =======
NOTE 5 - COST IN EXCESS OF FAIR VALUE OF ASSETS
The balance of cost in excess of fair value of assets consist of
the following at September 30:
1999 1998
Cost in excess of fair value of assets acquired $ 1,464,043 $ 1,464,043
Less accumulated amortization (1,252,200) (953,400)
----------------------------
$ 211,843 $ 510,643
======== ========
NOTE 6 - ACCRUED LIABILITIES
Accrued liabilities consist of the following at September 30:
1999 1998
Accrued former officer salary $ 543,822 $ 609,769
Accrued judgement payable 429,328 615,509
Payroll and related 32,801 127,877
Accrued expenses 189,675 10,000
Refunds payable 180,000 180,000
------------ -----------
$1,374,632 $1,543,155
======== ========
F-15
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 7 - LINE OF CREDIT
In April 1997, the Company obtained a $50,000 line of credit
with a bank. Borrowings under this line of credit accrue interest
at the lending institution's prime rate plus 3%, are
collateralized by the assets of the Company and are due upon
demand. The line of credit agreement expires in April 2000.
NOTE 8 - LONG-TERM DEBT
Long-term debt consists of the following at September 30, 1998:
Equipment note payable to financial institution,
with monthly principal payments of approximately $190,
maturing in April 2002, interest accrues at the rate of
17.0% per annum, collateralized by equipment $ 5,221
Equipment note payable to financial institution,
with monthly principal payments of approximately $150,
maturing in September 2002, interest accrues at the rate
of 16.9% per annum, collateralized by equipment 4,720
Equipment note payable to financial institution,
with monthly principal payments of approximately $220,
maturing in July 2003, interest accrues at the rate of
16.9% per annum, collateralized by equipment 8,167
---------
Total Long-term debt 18,108
Less current portion (3,561)
---------
Total long-term portion $ 14,547
======
Interest expense paid by the Company during the years ended
September 30, 1998 approximated $13,000.
F-16
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 9 - CAPITAL LEASE OBLIGATION
In 1999, the Company under a sale and lease-back arrangement sold
to a related party two DRS SystemTM for $95,000 each. The
machines were then leased back to the Company for five years with
monthly payments of $4,790 expiring in 2004 under a capital
lease. The machines are included in furniture and equipment. No
depreciation is being taken since the machines are not in use at
this time.
The future minimum lease payments due under the capital lease is
as follows:
Year Ending
September 30: Amount
2000 $ 26,661
2001 31,834
2002 37,937
2003 45,212
2004 46,402
----------
188,046
Less current portion (26,661)
---------
Total long-term portion $161,385
======
NOTE 10 - INCOME TAXES
As of September 30, 1999, the Company has a net operating loss
carryforward of approximately $10,750,000 available to offset
future taxable income. The net operating loss carryforward
expires during the years 2001 through the year 2014. Under U.S.
federal tax laws, certain changes in ownership of a company may
cause a limitation on future utilization of these loss
carryforwards.
The Company has established a valuation allowance to fully offset
potential deferred tax assets resulting from its income tax loss
carryforwards as their future realization is uncertain.
NOTE 11 - SHAREHOLDERS' EQUITY
Preferred Stock
The Board of Directors is authorized, without further shareholder
action, to divide any or all shares of the authorized preferred
stock into series and to fix and determine the designation,
preferences, privileges, options or other special rights, and
qualifications, limitations, or restrictions thereon, of any
series so established, including voting powers, dividend rights,
liquidation preferences, redemption rights, and conversion
privileges. No shares of preferred stock have been issued and
there are currently no plans, agreements or understandings for
the issuance of any shares of preferred stock.
F-17
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 11 - SHAREHOLDERS' EQUITY, (CONTINUED)
Private Placement
In October 1997 and November 1997, the Company completed its
private placement from 1997 and issued an aggregate of 510,000
shares of its common stock for $ 1.75 per share and 183,500
warrants exercisable at $3.00 per share. The Company received net
proceeds of approximately $806,000 from these issuances. Offering
costs associated with these issuances approximated $86,000. These
shares and warrants are subject to certain anti-dilutive
provisions, as defined in the offering memorandum.
During fiscal year 1999, the Company issued 868,959 additional
shares of its common stock and reduced the exercise price of
these private placement warrants to $1.50 per share as a result
of the Company's failure to meet the required minimum earnings
per share.
During fiscal year 1999, the Company sold through two private
placements 2,360,000 shares of its common stock at $.15 per share
and 4,250,000 shares of its common stock at $.10 per share. The
Company received net proceeds of $698,672 from these offerings.
Offering costs associated with these issuances approximated
$80,000.
The Company issued 999,000 and 40,000 shares of its common stock
in fiscal years 1999 and 1998, respectively, to individuals as
compensation for their services. These transactions were valued
at $203,024 and $55,000, respectively, which was the fair market
value based upon either the open market closing price or a board
of directors designation as of the date of each individual's
involvement with the Company.
Acquisitions
In September 1996, the Company acquired all of the issued and
outstanding shares of UPT in exchange for 1,500,000 shares of its
common stock. At the time of the acquisition, UPT did not have
any significant assets and its operations had not been
significant since its inception. As the fair market value of UPT
was not readily determinable the acquisition was recorded in the
accompanying financial statements using an estimated fair market
value of the CTC stock issued of $1.50 per share. The fair market
value of the issued stock was based upon the issuance price of
the recent private placements. Accordingly, the Company recorded
approximately $2,250,000 of cost in excess of fair value of
assets acquired as a result of this transaction. As part of the
related agreement, the previous UPT shareholder agreed to provide
product/program development, training, billing, marketing and
instructional services to the Company. In addition, the Company
agreed to pay the previous UPT shareholder a commission for each
Shealy Pain ProgramTM franchise sold. The Company currently has
no plans to offer such franchises for sale. The Company's former
management had various differences of opinions with the original
shareholder of UPT and in June 1998, an agreement was reached
whereby 1,200,000 shares of the Company's common stock was
returned to the Company. The Company determined the value of the
1,200,000 returned shares to be approximately $756,000, using the
average stock quote of the Company's common stock for the month
of June 1998. As a result, cost in excess of fair value of assets
acquired and common stock and additional paid-in-capital were
reduced by a corresponding amount.
F-18
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 11 - SHAREHOLDERS' EQUITY, (CONTINUED)
Acquisitions, (Continued)
In October 1996, the Company acquired all of the issued and
outstanding shares of MMM in exchange for 1,500,000 shares of its
common stock. MMM was a medical marketing company, which the
Company intended to use to help facilitate the sales of UPT. At
the time of the acquisition, MMM did not have any assets and its
operations had not been significant since its
inception. As the fair market value of MMM was not readily
determinable the acquisition was recorded using an estimated fair
market value of the CTC stock issued of $1.50 per share. The fair
market value of the issued stock was based upon the issuance
price of the recent private placements. Accordingly, the Company
recorded approximately $2,250,000 of post in excess of fair value
of assets acquired as a result of this transaction. The
recoverability of the cost in excess of fair value of assets
acquired was evaluated and estimated by management of the
Company, with the primary indicator of recoverability being
management's opinion of MMM's forecasted cash flows and profit
ability, compared to the carrying value of the cost in excess of
fair value of assets acquired. As a result of management's
evaluation, and its belief that adequate cash flows and
profitability would not be generated from MMM, the Company
expensed approximately $1,882,000 of the recorded cost in excess
of fair value of assets acquired in fiscal 1997. The Company had
a consulting and a employment agreement with the two former
shareholders of MMM whereby the former shareholders would provide
consulting, marketing and development services to MMM. As part of
these agreements, the Company agreed to compensate the former
shareholders at 10% of the sales price of each Shealy Pain
ProgramTM franchise sold by the Company. In September 1998, this
acquisition was rescinded and 750,000 of the Company's originally
issued shares were returned to the Company and the Company
returned all of the MMM shares to the original owners. The
Company determined the value of the 750,000 returned shares to be
approximately $367,000, using the average stock quote of the
Company's common stock for the month of September 1998. As a
result, cost in excess of fair value of assets acquired and
common stock and additional paid-in capital were reduced by a
corresponding amount.
In October 1997, the Company entered into an agreement to acquire
The Shealy Institute, Inc. (TSI), an organization owned by a
shareholder of the Company. The agreement required the Company to
issue 500,000 shares of its common stock and pay $80,000 in
consideration for all of the issued and outstanding shares of
TSI. The agreement also required the Company to enter into a
management agreement with Holos Institute of Health (HIH), a
company controlled by a related party, immediately following the
Company's purchase of TSI. Under the management agreement, HIH
would have managed the ongoing operations of TSI and received a
monthly management fee of $30,000 per month from the Company. In
July 1998, the purchase agreement was rescinded and 500,000
shares were returned to the Company. Organization costs incurred
to the date of rescission amounted to approximately $49,000 and
were expensed as of that date.
F-19
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 12 - STOCK OPTIONS
In January 1998, the Company's Board of Directors revised the
exercise price of certain of its outstanding options to purchase
common stock. In April 1998, the Company's Board of Directors
rescinded the January 1998 revision; accordingly, the
aforementioned stock options are exercisable at their original
exercise price.
In January 1998, the Company issued to two of its officers
options to purchase an aggregate of 500,000 shares of its common
stock at $2.38 per share. The options were fully vested as of the
date of their issuance and expire the earlier of 30 days
subsequent to employment termination or January 2008.
In 1998, the Company canceled options to purchase 800,000 shares
of its common stock upon the termination of employment of an
officer of the Company.
In fiscal year 1999, the Company issued options to purchase an
aggregate of 1,850,000 shares of its common stock at $.10 per
share and 277,000 shares of its common stock at $.15 per share.
Options issued to employees, one of which is an officer of the
Company were 1,450,000 shares. These options were fully vested
as of the date of their issuance and expire the earlier of 30
days subsequent to termination of employment. Options issued to
consultants were 677,000 shares. These options were fully
vested as of the date of their issuance and expire in August
2004.
Activity related to the Company's stock options during the years
ended September 30, 1999 and 1998, was as follows:
Outstanding Options
Weighted
Number of Average
Shares Exercise Price
September 30, 1997 1,662,000 $2.52
Grants 936,500 $2.14
Exercises - -
Cancellations (800,000) $1.64
-------------
September 30, 1998 1,798,500 $2.45
Grants 2,127,000 $ .10
Exercises (1,700,000) $ .10
Cancellations - -
--------------
September 30, 1999 2,225,500 $2.11
========
Options Exercisable at:
September 30, 1999 2,225,500 $2.11
========
F-20
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 12- STOCK OPTIONS, (CONTINUED)
The range of exercise prices for options outstanding at September
30, 1999 was $0.10 to $3.25. The following table summarizes
information about options outstanding at September 30, 1999:
Outstanding Options
Weighted Weighted
Average Average
Number Contractual Exercise
Range of Exercise Prices of Shares Life (in years) Price
$0.10 to $3.00 680,000 3.4 $ .83
$3.01 to $3.25 1,545,500 6.2 $ 2.68
--------------
2,225,500 5.33 $ 2.11
========
Exercisable Options
Weighted
Average
Number Exercise
Range of Exercise Prices of Shares Price
$0.10 to $3.00 680,000 $ .83
$3.01 to $3.25 1,545,500 $2.68
-------------
2,225,500 $2.11
========
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS
123) was issued during 1995 and is effective for fiscal years
ending after December 15, 1996. This pronouncement establishes
financial accounting and reporting standards for stock-based
employee compensation plans. It encourages, but does not require,
companies to recognize compensation expense for grants of stock,
stock options and other equity instruments to employees based on
new fair value accounting rules. Companies that choose not to
adopt the new fair value accounting rules are required to
disclose net income and earnings per share under the new method
on a pro forma basis. The Company accounts for its options and
warrants according to APB No. 25 and follows the disclosure
provisions of SFAS 123. Accordingly, if options or warrants are
granted to employees or others for services and other
consideration with an exercise price below the fair market value
on the date of the grant, the difference between the exercise
price and the fair market value is charged to operations. The
fair value of the options granted during the fiscal years ended
September 30, 1999 and 1998, reported below, has been estimated
at the dates of grant using the Black-Scholes option pricing
model with the following assumptions:
1999 1998
Expected life (in years) 5 7
Risk-free interest rate 6.0% 6.0%
Volatility 11.0% 162.0%
Dividend yield 0.0% 0.0%
F-21
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 12- STOCK OPTIONS, (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions, including the expected stock price volatility.
Because the Company's options have characteristics significantly
different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair
value estimate, in the opinion of management, the existing models
do not necessarily provide a reliable single measure of the fair
value of its options.
For the purpose of pro forma disclosures, the estimated fair
values of the options is amortized to expense over the options
vesting period. The Company's pro forma information is as
follows:
1999 1998
Pro forma net loss $(1,690,000) $(6,009,000)
Pro forma loss per share $ (.13) $ (.48)
The effects on pro forma disclosures of applying SFAS 123 are not
necessarily indicative of the effects on pro forma disclosures of
future years.
NOTE 13 - OTHER
Selling, general and administrative expenses consist of the
following at September 30:
1999 1998
Salaries and related $ 1,356,885 $ 1,554,432
Consulting 379,525 412,036
Professional expense 201,664 379,500
Bad debts - 286,488
Rent expense 256,909 247,820
Travel 126,815 220,262
Office expense 32,774 202,969
Advertising 39,837 135,311
Contract labor 46,131 94,992
Research and development 14,045 74,418
Insurance 141,815 68,375
Telephone 46,118 59,484
Repairs and maintenance 6,775 21,684
Patents and rights - 9,604
Utilities 5,838 4,559
Dues and subscription 4,575 3,648
Miscellaneous and other 153,870 194,333
-------------- --------------
$ 2,813,576 $ 3,969,915
======== ========
F-22
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under an operating lease that was
assigned to it by an officer of the Company. The lease expires
November 1998. In June 1996, the Company entered into an
agreement to lease warehouse space, commencing July 1, 1996. The
space was vacated in July 1999. This lease expires June 2001.
In July 1999, the Company entered into an agreement to lease
office/warehouse space located in South Florida, for
manufacturing and distribution of the DRS SystemTM and executive
offices. This lease expires June 2000. The lease contains one
three year option.
Future minimum rental payments under these leases are
approximately as follows:
Year Ending
September 30 Amount
2000 $281,154
2001 162,333
-----------
$443,487
======
For the years ended September 30, 1999 and 1998, rent expense
approximated $249,750 and $247,820, respectively.
Employment Agreements
As of September 30, 1999, the Company had an employment agreement
with one of its officers that required the payment of minimum
monthly salaries plus car allowances. Payment of certain
officer's salaries were deferred and classified as accrued
liabilities in the accompanying financial statements.
The agreements also provide for, among other things, bonus
compensation based upon the number of DRS SystemsTM sold and
severance pay.
Litigation and Contingent Liabilities
The Company had certain liabilities relating to its previous
peripheral computer product operations which it was unable to
extinguish (see Note 1). The Company's legal counsel has advised
the Company that the statutes of limitation related to collection
of these liabilities has expired; however, there is no assurance
that the creditors will not pursue collections. No provision or
liability has been made in the accompanying consolidated
financial statements for these costs, which relate to the
Company's previous operations.
F-23
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 14- COMMITMENTS AND CONTINGENCIES, (CONTINUED)
Litigation and Contingent Liabilities, (Continued)
In October 1996, the Company and UPT were named as co-defendants
in a lawsuit claiming damages of approximately $110,000 for the
alleged breach of contract with the plaintiff. The Company has
filed a motion to dismiss the claims, and UPT has answered the
petition filed
denying all of the allegations. Management believes that the
Company and UPT are not liable for the damages claimed and
intends to vigorously contest the lawsuit; accordingly, no
provision for any liability that may result upon the resolution
of this claim has been recorded in the accompanying financial
statements.
In June 1997, the Company was named as a co-defendant in a
lawsuit claiming unspecified damages for its alleged violation of
various federal and state securities laws. The complaint relates
to the cancellation of 250,000 and 1,000,000 of the Company's
shares of stock, which were being held in escrow for the
complainant as compensation for consulting and sales services to
be performed. The Company canceled the shares due to a
disagreement between
the original shareholders of PDS. The lawsuit also claims
unspecified damages for alleged violations of various federal and
state securities laws, including fraudulent misrepresentations by
certain directors of the Company. Management believes that the
Company is not liable for any damages claimed and intends to
vigorously contest the lawsuit; accordingly, no provision for any
liability that may result upon the resolution of this claim has
been recorded in the accompanying financial statements. The
accompanying financial statements have also been prepared
assuming the 1,000,000 shares of common stock were never issued.
In December 1997, the Company filed a lawsuit against two former
employees (the Defendants) of UPC asserting breach of contract,
among other claims, by the Defendants. Subsequent thereto, the
Defendants filed a counterclaim seeking damages for wrongful
termination of employment contracts, in the aggregate of $480,000
per year, for the period June 1, 1997 through May 29, 2000 less
amounts previously paid. The Defendants also sought other costs,
including the value of options which were made available to them,
attorneys fees and out-of-pocket expenses. In March 1998, a
nonprofit corporation related to the aforementioned Defendants
filed a lawsuit against the Company claiming damages for letters
sent by the Company that were allegedly false and misleading and
disparaged the nonprofit corporation. In 1998, the parties of
these lawsuits entered into a settlement agreement whereby the
Company received $10 as consideration for entering into the
agreement.
In April 1998, the Company terminated an officer of the Company.
The officer was also a director and subsequently resigned from
their Board of Directors. The former officer disputed the
termination and requested the matter be resolved through
arbitration, as allowed by the employment agreement. In February
1999, the Company reached a confidential settlement agreement
with the former officer. The settlement has been accrued in the
accompanying 1998 financial statements. The balance accrued as
of September 30, 1999 and 1998 is $42,500 and $120,000,
respectively.
F-24
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Litigation and Contingent Liabilities, (Continued)
In June 1998, the Company sold four DRS SystemTM to a leasing
company for an aggregate of $400,000, of which only $300,000 has
been received by the Company. The agreements called for the
Company to immediately lease the machines back from the leasing
company over a two-year period and then purchase the machines at
the end of the lease for the greater of the machines fair market
value or an aggregate of $252,000. The machines were originally
intended to be used in a Company-owned clinic. The loans are
collateralized by the machines. In addition, the loan agreements
prohibit the transfer of the Company's interest in the
collateral, including, but not limited to, its sale or disposal,
This transaction has been recorded as a financing activity in the
accompanying financial statements. The Company did not open the
intended clinic and, in 1998, it sold the collateral underlying
the loan in violation of the loan agreement. The Company is also
in default on these loans due to nonpayment of certain
installments due under the agreements. In January 1999, a
judgment in the amount of $615,509 was entered against the
Company as a result of its breach of its lease obligations
under the four equipment lease agreements. The accompanying
financial statements include the entire amount due under the
judgment, which resulted in a $330,770 loss on settlement. The
Company does not believe the judgment amount is reasonable and it
is currently reviewing its options, if any, regarding this
matter. The settlement payable has been classified as accrued
liabilities in the accompanying financial statements.
In November 1998, the Company's Board of Directors negotiated a
severance package with a former officer and director of the
Company. Included in the severance package was a UCC-1 security
agreement collateralizing the severance payments with all of the
Company's intellectual property rights and assets. The severance
package was consideration for accrued salary, loans made to the
Company by the former officer and severance. The directors who
negotiated the severance package have since been removed from the
Company's Board of Directors. Current management is contesting
the severance package and the UCC-1 provided to the former
officer. The former officer has filed a claim against the Company
for payment of the severance package. In addition to the
aforementioned agreement, the previous directors entered into an
exclusive agreement whereby the former officer received the
worldwide distribution rights, excluding the United States,
Canada and Greece, for the Company's primary product, the DRS
SystemTM. Current management believed this agreement to be
grossly unfair and cancelled the worldwide distribution
agreement. The former officer has contested the cancellation and
has filed suit against the Company. The Company intends to
vigorously defend its position on these
matters. The Company's legal counsel cannot reasonably evaluate
the likelihood of an unfavorable outcome to the Company or the
range of potential loss, if any; accordingly, no provision for
any other liability that may result upon the resolution of this
matter has been recorded in the accompanying financial
statements.
F-25
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Litigation and Contingent Liabilities, (Continued)
In July 1999, the shareholders, by written shareholder consent,
resolved for the removal of two directors from the Company's
Board of Directors. The shareholders further resolved for the
addition of three newly elected members to the Board of
Directors. As a result of their removal, the two former directors
have initiated litigation against the Company, the Company's
current Board of Directors, as well as certain consultants to the
Company. The claim includes, among
other things, that the removal of the two directors is not valid,
in part, due to the issuance an aggregate of 250,000 shares of
the Company's common stock and options to purchase 1,250,000
shares of the Company's common stock to a director and to two
consultants to the Company in 1999. The claim contends these
issuances were not properly authorized by the Company, which
resulted in a dilution to the removed directors' ownership
interest and, in turn, effected the shareholder vote to remove
them as directors of the Company. The Company intends to
vigorously defend its position on these matters and to bring
counterclaims against the former directors. The Company's legal
counsel cannot reasonably evaluate the likelihood of an
unfavorable outcome to the Company or the range of potential
loss, if any; accordingly, no provision for any liability that
may result upon the resolution of this matter has been recorded
in the accompanying financial statements.
Current management has reviewed prior business transactions
between the Company and its former management. Based upon that
review, current management, along with outside legal counsel,
believes that some legal improprieties may have occurred in prior
years. Current management believes that there may have been
fraudulent misrepresentations regarding the Company's 1996
acquisition of PDS and has filed a complaint for rescission of
this transaction. The Company's legal counsel cannot reasonably
evaluate the likelihood of a favorable outcome to the Company, if
any; accordingly, no adjustment that may result upon the
resolution of this matter has been recorded in the accompanying
financial statements. The carrying value of the primary asset
included in the acquisition of PDS, the intellectual property
rights for hot and cold pack products, has been determined by
management to be unrecoverable and has been fully expensed as of
September 30, 1998.
The Company was named as a co-defendant in a lawsuit claiming
damages of approximately $625,000 for the alleged
misrepresentation and violation of the Tennessee Consumer
Protection Act in connection with the sale of the DRS SystemTM.
Management is contesting the case. No provision for any
liability that may result upon the resolution of this claim has
been recorded in the accompanying financial statements.
The Company is involved in certain other lawsuits for which it
does not believe the ultimate outcome will have a significant
adverse effect on the Company.
F-26
<PAGE>
CLUSTER TECHNOLOGY CORP. AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 15 - CASH FLOW INFORMATION
Supplemental cash flow information:
1999 1998
Cash paid during the year for:
Interest $31,666 $ 2,008
====== ======
NOTE 16 - GOING CONCERN
As shown in the accompanying consolidated financial statements,
the Company has incurred significant losses, has a negative net
working capital position, has numerous unresolved legal matters,
certain debt of the Company is secured by the Company's assets
and a substantial portion of its assets are intangible; the
ultimate realization of which is uncertain. The Company's
continued existence is dependent presently upon the generation of
funds from future profitable operations. The consolidated
financial statements do not include any adjustments that might
result from the outcome of these uncertainties. The Company's
intentions currently include reducing overhead and marketing the
DRS SystemTM to large health care and/or pain management
organizations.
NOTE I7 -SUBSEQUENT EVENTS
Stock Options
In October 1999, options to purchase an aggregate of 835,000
shares of the Company's common stock, at $.50 per share, were
issued to directors, officers and employees of the Company.
F-27
Exhibit No. 1
Form 10-SB
Cluster Technology Corp.
CERTIFICATE OF INCORPORATION
OF
CLUSTER TECHNOLOGY CORP.
ARTICLE I
Name
The name of the corporation hereby created shall be Cluster
Technology Corp. (the "Corporation").
ARTICLE II
Duration
The Corporation shall continue in existence perpetually
unless sooner dissolved according to law.
ARTICLE III
Purposes and Powers
The Corporation is organized for the following purposes:
(a) To develop, manufacture, distribute, purchase, and sell
computer software and hardware, computer equipment, and related
products; and
(b) To engage in any and all other lawful purposes,
activities and pursuits, whether similar or dissimilar to the
foregoing that are permissible for a corporation to engage in
under the General Corporation Law of the state of Delaware.
ARTICLE IV
Capitalization
The Corporation shall have authority to issue is 11,000,000
shares of which 10,000,000 shares shall be common stock having a
$0.01 par value each (the "Common Stock"), and 1,000,000 shares
shall be preferred stock having a $0.01 par value each (the
"Preferred Stock").
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ARTICLE V
Classes of Stock
A statement of the designations and the powers, preferences,
and rights, and the qualifications, limitations, or restrictions
thereof, of the shares of stock of each class which the
Corporation shall be authorized to issue, is as follows:
(a) Preferred Stock. Shares of preferred stock may be
issued from time to time in one or more series as may from time
to time be determined by the board of directors. Each series
shall be distinctly designated. All shares of any one series
shall be distinctly designated. All shares of any one series of
the preferred stock shall be alike in every particular, except
that there may be different dates from which dividends thereon,
if any, shall be cumulative, if made cumulative. The powers,
preferences, participating, optional and other rights of each
such series and qualifications, limitations or restrictions
thereof, if any, may differ from those of any and all other
series at any time outstanding. Subject to the provisions of
subparagraph (iv) of Paragraph (c) of this Article V, the board
of directors of this Corporation is hereby expressly granted
authority to fix by resolution or resolutions adopted prior to
the issuance of any shares of each particular series of preferred
stock, the designation, powers, preferences and relative,
participating, optional and other rights and the qualifications,
limitations and restrictions thereof, if any, of such series,
including, without limiting the generality of the foregoing the
following:
(i) The distinctive designation of, and the number of
shares of preferred stock which shall constitute, the series,
which number may be increased (except at otherwise fixed by the
board of directors) or decreased (but not below the number of
shares thereof outstanding ) from time to time by action of the
board of directors;
(ii) The rate and times at which, and the terms and
conditions upon which, dividends, if any, on shares of the series
shall be paid, the extent of preferences or relation, if any, of
such dividends to the dividends payable on any other class or
classes of stock of this Corporation, or on any series of
preferred stock, and whether such dividends shall be cumulative
or noncumulative;
(iii) The right, if any, of the holders of shares of the
series to convert the same into, or exchange the same for, any
other class or classes of stock of this Corporation, and the
terms and conditions of such conversion or exchange;
(iv) Whether shares of the series shall be subject to
redemption, and the redemption price or prices, including,
without limitation, a redemption price or prices payable in
shares of Common Stock, cash or other property and the time or
times at which, and the terms and conditions upon which, shares
of the series may be redeemed;
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(v) The rights, if any, of the holders of shares of the
series upon voluntary or involuntary liquidation merger,
consolidation, distribution or sale of assets, dissolution or
winding up this Corporation;
(vi) The terms of the sinking fund or redemption or purchase
account, if any, to be provided for shares of the series; and
(vii) The voting powers, if any, of the holders of
shares of the series which may, without limiting the generality
of the foregoing, include (A) the right to more or less than one
vote per share on any or all matters voted upon by the
shareholders and (B) the right to vote as a series by itself or
together with other series of preferred stock or together with
all series of preferred stock as a class, upon such matters,
under such circumstances and upon such conditions as the board of
directors may fix, including, without limitation, the right,
voting as a series by itself or together with other series of
preferred or together with all series of preferred stock as a
class, to elect one or more directors of this Corporation in the
event there shall have been a default in the payment of dividends
on any one or more series of preferred stock or under such other
circumstances and upon such conditions as the board may
determine.
(b) Common Stock. The Common Stock shall be
nonassessable and shall not have cumulative voting rights or pre-
emptive rights. In addition, the Common Stock shall have the
following powers, preferences, right, qualifications, limitations
and restrictions:
(i) After the requirements with respect to preferential
dividends of preferred stock (fixed in accordance with the
provisions of Paragraph (a) of this Article V), if any, shall
have been met and after this Corporation shall comply with all
the requirements, if any, with respect to the setting aside of
funds as sinking funds or redemption or purchase accounts (fixed
in accordance with provisions of Paragraph (a) of this Article V)
and subject further to any other conditions which may be fixed in
accordance with the provisions of Paragraph (a) of this Article
V, then, but not otherwise, the holders of Common Stock shall be
entitled to receive such dividends, if any, as may be declared
from time to time by the board of directors;
(ii) After distribution in full of the preferential amount
(fixed in accordance with the provisions of Paragraph (a) of this
Article V), if any, to be distributed to the holders of preferred
stock in the event of a voluntary or involuntary liquidation,
distribution or sale of assets, dissolution or winding up of this
Corporation, tangible and intangible, of whatever kind available
for distribution to stockholders, ratibly in proportion to the
number of shares of the Common Stock held by each;
(iii) Except as may otherwise be required by law, this
Certificate of Incorporation or the provisions of the resolution
or resolutions as may be adopted by the board of directors
pursuant to Paragraph (a) of this Article V, each holder of
Common Stock shall have one vote in respect of each share of
Common Stock held by such holder on each matter voted upon by the
stockholders.
(c) Other Provisions.
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(i) The relative powers, preferences and rights of each
series of preferred stock in relation to the powers, preferences
and rights of each other series of preferred stock shall, in each
case, be as fixed from time to time by the board of directors in
the resolution or resolutions adopted pursuant to authority
granted in Paragraph (a) of this Article V, and the consent by
class or series vote or otherwise, of the holders of the
preferred stock of such of the series of preferred stock as are
from time to time outstanding shall not be required for the
issuance by the board of directors of any other series of
preferred stock whether the powers, preferences and rights of
such other series shall be fixed by the board of directors as
senior to, or on a party with the powers, preferences and rights
of such outstanding series, or any of them; provided, however,
that the board of directors may provide in such resolution or
resolutions adopted with respect to any series of preferred stock
that the consent of the holders of a majority (or such greater
proportion as shall be therein fixed) of the outstanding shares
of such series voting thereon shall be required for the issuance
of any or all other series of preferred stock.
(ii) Subject to the provisions of subparagraph (i) of this
Paragraph, shares of any series of preferred stock may be issued
from time to time as the board of directors shall determine and
on such terms and for such consideration as shall be fixed by the
board of directors.
(iii) Shares of the Common Stock may be issued from time
to time as the board of directors shall determine and on such
terms and for such consideration as shall be fixed by the board
of directors.
(iv) No holder of any of the shares of any class or series
of stock or of options, warrants or other rights to purchase
shares of any class or series of stock or of other securities of
the Corporation shall have any preemptive right to purchase or
subscribe for any unissued stock of any class or series or any
additional shares of any class or series to be issued by reason
of any increase of the authorized capital stock of the
Corporation of any class or series, or bonds, certificates of
indebtedness, debentures or other securities convertible into or
exchangeable for stock of the Corporation of any class or series,
or carrying any rights to purchase stock of any class or series,
but any such unissued stock, additional authorized issue of
shares of any class or series of stock or securities convertible
into or exchangeable for stock, or carrying any right to purchase
stock, may be issued and disposed of pursuant to resolution of
the board of directors to such persons, firms, corporations or
associations, whether such holders or others, and upon such terms
as may be deemed advisable by the board of directors in the
exercise of its sole discretion.
ARTICLE VI
Bylaws
In furtherance and not in limitation of the powers conferred
by statute, the board of directors is expressly authorized to
make, alter or repeal the bylaws of the Corporation.
ARTICLE VII
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Meetings and Records
Meetings of stockholders may be held within or without the
state of Delaware, as the bylaws may provide. The books of the
Corporation may be kept (subject to any provision of Delaware
law) outside the state of Delaware at such place or places as may
be designated from time to time by the board of directors or in
the bylaws of the Corporation.
ARTICLE VIII
Registered Office and Agent
The address of its registered office is in the county of New
Castle at 1209 Orange Street, Wilmington, Delaware 19801. The
name of its registered agent at such address is The Corporation
Trust Company.
ARTICLE IX
Contracts With Officers and Directors
No contract or other transaction between this Corporation
and any other firm or corporation shall be affected by the fact
that a director or officer of this Corporation has an interest
in, or is a director or officer of such firm or other
corporation. Any officer or director, individually or with
others, may be a party to, or may have an interest in, any
transaction of this Corporation or any transaction in which this
Corporation is a party or has an interest. Each person who is
now or may become an officer or director of this Corporation is
hereby relieved from liability that he might otherwise obtain in
the event such officer or director contracts with this
Corporation individually or in behalf of another corporation or
entity in which he may have an interest; provided, that such
officer or director acts in good faith.
ARTICLE X
Indemnification of Officers and Directors
The Corporation may indemnify each director and each officer
and any employee or agent of the Corporation and their respective
heirs, administrators and executors, against all liabilities and
expenses reasonably incurred by him in connection with any
action, suit or proceeding to which he may be made a party by
reason of his being or having been a director, officer, employee
or agent of the Corporation, to the full extent permitted by the
laws of the state of Delaware now existing or as such laws may
hereafter be amended.
ARTICLE XI
Amendment
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The Corporation reserves the right to amend, alter, change
or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred upon stockholders herein are
granted subject to this reservation.
ARTICLE XII
Directors
The governing board of the Corporation shall be known as
directors, and the directors may from time to time be increased
or decreased in the manner as shall be provided in the bylaws of
the Corporation, provided that the number of directors shall not
be reduced to less than three, except that in cases where all the
shares of the Corporation are owned beneficially and of record by
either one or two stockholders, the number of directors may be
less than three, but not less than the number of stockholders.
ARTICLE XIII
Incorporator
The names and address of the incorporator for this
Corporation is as follows:
Name Address
Philip C. Gugel c/o Northwest Digital
Software, Inc.
Box 2-743 Spring Valley Road
Newport, Washington 99156
I, THE UNDERSIGNED, being the sole incorporator hereinbefore
named, for the purpose of forming a corporation pursuant to the
General Corporation Law of the state of Delaware, do make this
certificate, hereby declaring and certifying that this is my act
and deed and the facts herein stated are true, and accordingly
have hereunto set my hand this 28th day of July, 1985.
/s/ Philip C. Gugel
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CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
CLUSTER TECHNOLOGY CORP.
Cluster Technology Corp., a corporation organized and
existing under the General Corporation Law of the State of
Delaware (the "Corporation"), does hereby certify that:
The amendments to the Corporation's Certificate of
Incorporation set forth below were duly adopted by resolutions
approved by the Corporation's Board of Directors and stockholders
in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware:
Amendment 1. The Certificate of Incorporation of the corporation
is amended by striking Article III in its entirety and replacing
therefor:
Article III
Purposes and Powers
The Corporation is organized to engage in any and all
lawful purposes, businesses, activities, and pursuits for
which corporations may be organized under the General
Corporation Law of the state of Delaware
Amendment 2. The Certificate of Incorporation of the corporation
is amended by striking Article IV in its entirety and replacing
therefor:
Article IV
Capitalization
The Corporation shall have authority to issue
51,000,000 shares of which 50,000,000 shares shall be common
stock having a $0.01 par value each (the "Common Stock"),
and 1,000,000 shares shall be preferred stock having a $0.01
par value each (the "Preferred Stock").
Amendment 3. The Certificate of Incorporation of the corporation
is amended by the addition of Article XIV as follows:
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Article XIV
Limitation of Liability
To the fullest extent that the General Corporation Law
of the state of Delaware as it exists on the date hereof or
as it may hereafter be amended permits the limitation or
elimination of the liability of directors and officers, no
director or officer of the Corporation shall be liable to
the Corporation or its Stockholders for monetary damages for
breach of fiduciary duty as a director or officer. No
amendment to this Certificate of Incorporation, directly or
indirectly by merger, consolidation, or otherwise, having
the effect of amending or repealing any of the provisions of
this Article XIV shall apply to or have any effect on the
liability or alleged liability of any director or officer of
the Corporation for or with respect to any acts or omissions
of such director or officer occurring prior to such
amendment or repeal, unless such amendment shall have the
effect of further limiting or eliminating such liability.
Amendment 4. The Certificate of Incorporation of the corporation
is amended by the addition of Article XV as follows:
Article XV
Interested Stockholder Provision
The Corporation elects not to be governed by the terms
and provisions of Section 203 of the General Corporation Law
of the state of Delaware, as the same may be amended,
superseded, or replaced by any successor section, statute,
or provision. No amendment to this Certificate of
Incorporation, directly or indirectly, by merger or
consolidation or otherwise, having the effect of amending or
repealing any of the provisions of this Article XV shall
apply to or have any effect on any transaction with an
interested stockholder occurring prior to such amendment or
repeal.
IN WITNESS WHEREOF, Cluster Technology Corp. has caused this
Certificate to be signed and attested by its duly authorized
officers, this 5th day of June, 1996.
CLUSTER TECHNOLOGY CORP.
/s/ John Frankum, President
ATTEST:
/s/ Cynthia Lawhon, Secretary
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Exhibit No. 2
Form 10-SB
Cluster Technology Corp.
BYLAWS
OF
CLUSTER TECHNOLOGY CORP.
A DELAWARE CORPORATION
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<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I OFFICES 1
Section 1.01 Registered Office 1
Section 1.02 Locations of Offices 1
ARTICLE II SHAREHOLDERS 1
Section 2.01 Annual Meeting 1
Section 2.02 Special Meeting 1
Section 2.03 Place of Meetings 1
Section 2.04 Notice of Meetings 2
Section 2.05 Waiver of Notice 2
Section 2.06 Fixing Record Date 2
Section 2.07 Voting Lists 2
Section 2.08 Quorum 3
Section 2.09 Vote Required 3
Section 2.10 Voting on Stock 3
Section 2.11 Proxies 3
Section 2.12 Written Consent to Action by Stockholders 4
ARTICLE III DIRECTORS 4
Section 3.01 Number, Term, and Qualifications 4
Section 3.02 Vacancies and Newly Created Directorships 4
Section 3.03 General Powers 4
Section 3.04 Regular Meetings 5
Section 3.05 Special Meetings 5
Section 3.06 Meetings by Telephone Conference Call 5
Section 3.07 Notice 5
Section 3.08 Quorum 5
Section 3.09 Manner of Acting 5
Section 3.10 Compensation 5
Section 3.11 Presumption of Assent 5
Section 3.12 Resignations 5
Section 3.13 Written Consent to Action by Directors 6
Section 3.14 Removal 6
ARTICLE IV OFFICERS 6
Section 4.01 Number 6
Section 4.02 Election, Term of Office, and Qualification 6
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Section 4.03 Subordinate Officers, Etc. 6
Section 4.04 Resignation 7
Section 4.05 Removal 7
Section 4.06 Vacancies and Newly Created Offices 7
Section 4.07 The Chairman of the Board 7
Section 4.08 The President 7
Section 4.09 The Vice Presidents 8
Section 4.10 The Secretary 8
Section 4.11 The Treasurer 9
Section 4.12 General Manager 10
Section 4.13 Salaries 10
Section 4.14 Surety Bonds 10
ARTICLE V EXECUTION OF INSTRUMENTS, BORROWING OF MONEY,
AND DEPOSIT OF CORPORATE FUNDS 10
Section 5.01 Execution of Instruments 10
Section 5.02 Loans 10
Section 5.03 Deposits 10
Section 5.04 Checks, Drafts, Etc. 11
Section 5.05 Bonds and Debentures 11
Section 5.06 Sale, Transfer, Etc. of Securities 11
Section 5.07 Proxies 11
ARTICLE VI CAPITAL STOCK 11
Section 6.01 Stock Certificates 11
Section 6.02 Transfer of Stock 12
Section 6.03 Regulations 12
Section 6.04 Maintenance of Stock Ledger at Principal
Place of Business 12
Section 6.05 Transfer Agents and Registrars 12
Section 6.06 Closing of Transfer Books and Fixing of Record
Date 12
Section 6.07 Lost or Destroyed Certificates 13
ARTICLE VII EXECUTIVE COMMITTEE AND OTHER COMMITTEES 13
Section 7.01 How Constituted 13
Section 7.02 Powers 13
Section 7.03 Proceedings 14
Section 7.04 Quorum and Manner of Acting 14
Section 7.05 Resignations 14
Section 7.06 Removal 14
Section 7.07 Vacancies 14
Section 7.08 Compensation 14
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ARTICLE VIII INDEMNIFICATION, INSURANCE, AND OFFICER
AND DIRECTOR CONTRACTS 15
Section 8.01 Indemnification: Third Party Actions 15
Section 8.02 Indemnification: Corporate Actions 15
Section 8.03 Determination 15
Section 8.04 Advances 16
Section 8.05 Scope of Indemnification 16
Section 8.06 Insurance 16
Section 8.07 Officer and Director Contracts 16
ARTICLE IX FISCAL YEAR 17
ARTICLE X DIVIDENDS 17
ARTICLE XI AMENDMENTS 17
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BYLAWS
OF
CLUSTER TECHNOLOGY CORP.
ARTICLE I
OFFICES
Section 1.01 Registered Office. The registered office
shall be in the city of Wilmington, county of New Castle, state
of Delaware.
Section 1.02 Locations of Offices. The corporation may
also have offices at such other places both within and without
the state of Delaware as the board of directors may from time to
time determine or the business of the corporation may require.
ARTICLE II
STOCKHOLDERS
Section 2.01 Annual Meeting. The annual meeting of the
stockholders shall be held on the second Tuesday of the fourth
month following the end of the corporation's fiscal year or at
such other time designated by the board of directors and as is
provided for in the notice of the meeting; provided, that
whenever such date falls on a legal holiday, the meeting shall be
held on the next succeeding business day, beginning with the year
following the filing of the certificate of incorporation, for the
purpose of electing directors and for the transaction of such
other business as may come before the meeting. If the election
of directors shall not be held on the day designated herein for
the annual meeting of the stockholders, or at any adjournment
thereof, the board of directors shall cause the election to be
held at a special meeting of the stockholders as soon thereafter
as may be convenient.
Section 2.02 Special Meetings. Special meetings of the
stockholders may be called at any time by the chairman of the
board, the president, or by the board of directors, or in their
absence or disability, by a vice president, and shall be
immediately called by the president, or in his absence or
disability, by a vice president, or by the secretary, on the
written request of the holders of not less than one-tenth of all
the shares entitled to vote at the meeting, such written request
to state the purpose or purposes of the meeting and to be
delivered to the president, a vice president, or the secretary.
In case of failure to call such meeting within 90 days after such
request, such stockholder or stockholders may call the same.
Section 2.03 Place of Meetings. The board of directors
may designate any place, either within or without the state of
incorporation, as the place of meeting for any annual meeting or
for any special meeting called by the board of directors. A
waiver of notice signed by all stockholders entitled to vote at a
meeting may designate any place, either within or without the
state of incorporation, as the place for the holding of such
meeting. If no designation is made, or if a
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special meeting be
otherwise called, the place of meeting shall be at the principal
office of the corporation.
Section 2.04 Notice of Meetings. The secretary or
assistant secretary, if any, shall cause notice of the time,
place, and purpose or purposes of all meetings of the
stockholders (whether annual or special), to be mailed at least
ten days, but not more than sixty days, prior to the meeting, to
each stockholder of record entitled to vote.
Section 2.05 Waiver of Notice. Any stockholder may waive
notice of any meeting of stockholders (however called or noticed,
whether or not called or noticed and whether before, during, or
after the meeting), by signing a written waiver of notice or a
consent to the holding of such meeting, or an approval of the
minutes thereof. Attendance at a meeting, in person or by proxy,
shall constitute waiver of all defects of notice regardless of
whether waiver, consent, or approval is signed or any objections
are made, unless attendance is solely for the purpose of
objecting, at the beginning of the meeting, to the transaction of
any business because the meeting is not lawfully called or
convened. All such waivers, consents, or approvals shall be made
a part of the minutes of the meeting.
Section 2.06 Fixing Record Date. For the purpose of
determining stockholders entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof, or to express
consent to corporate action in writing without a meeting, or
stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or entitled to exercise
any rights in respect to any change, conversion, or exchange of
stock, or for the purpose of any other lawful action, the board
of directors may fix in advance a date as the record date for any
such determination of stockholders, such date in any case to be
not more than sixty days and, in case of a meeting of
stockholders, not less than ten days prior to the date on which
the particular action requiring such determination of
stockholders is to be taken. If no record date is fixed for the
determination of stockholders entitled to notice of or to vote at
a meeting, the day preceding the date on which notice of the
meeting is mailed shall be the record date. For any other
purpose, the record date shall be the close of business on the
date on which the resolution of the board of directors pertaining
thereto is adopted. When a determination of stockholders
entitled to vote at any meeting of stockholders has been made as
provided in this section, such determination shall apply to any
adjournment thereof. Failure to comply with this section shall
not affect the validity of any action taken at a meeting of
stockholders.
Section 2.07 Voting Lists. The officers of the
corporation shall cause to be prepared from the stock ledger at
least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at such meeting or any
adjournment thereof, arranged in alphabetical order, and showing
the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be
open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting at a place
within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, the principal
business office of the corporation, or, at the place where the
meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
The
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original stock ledger shall be the only evidence as to who
are the stockholders entitled to examine the stock ledger, the
list required by this section, or the books of the corporation,
or to vote in person or by proxy at any meeting of stockholders.
Section 2.08 Quorum. Stock representing one-third of the
voting power of all outstanding stock of the corporation entitled
to vote, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the
transaction of business, except as otherwise provided by statute
or by the certificate of incorporation. If, however, such quorum
shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present
in person or represented by proxy, shall have power to adjourn
the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall
be present or represented any business may be transacted which
might have been transacted at the meeting as originally notified.
If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting,
a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 2.09 Vote Required. When a quorum is present at
any meeting, the vote of the holders of stock having a majority
of the voting power present in person or represented by proxy
shall decide any question brought before such meeting (including
the election of each director at a meeting where directors are
elected), unless the question is one on which by express
provision of the statutes of the state of Delaware or of the
certificate of incorporation a different vote is required, in
which case such express provision shall govern and control the
decision of such question.
Section 2.10 Voting of Stock. Unless otherwise provided
in the certificate of incorporation, each stockholder shall at
every meeting of the stockholders be entitled to one vote in
person or by proxy for each share of the capital stock having
voting power held by such stockholder, subject to the
modification of such voting rights of any class or classes of the
corporation's capital stock by the certificate of incorporation.
Section 2.11 Proxies. At each meeting of the
stockholders, each stockholder entitled to vote shall be entitled
to vote in person or by proxy; provided, however, that the right
to vote by proxy shall exist only in case the instrument
authorizing such proxy to act shall have been executed in writing
by the registered holder or holders of such stock, as the case
may be, as shown on the stock ledger of the corporation or by his
attorney thereunto duly authorized in writing. Such instrument
authorizing a proxy to act shall be delivered prior to or at the
beginning of such meeting to the secretary of the corporation or
to such other officer or person who may, in the absence of the
secretary, be acting as secretary of the meeting. In the event
that any such instrument shall designate two or more persons to
act as proxy, a majority of such persons present at the meeting,
or, if only one be present, that one shall (unless the instrument
shall otherwise provide) have all of the powers conferred by the
instrument upon all persons so designated. Persons holding stock
in a fiduciary capacity shall be entitled to vote the stock so
held, and the persons whose shares are pledged shall be entitled
to vote, unless the transfer by the pledgor in the books and
records of the corporation shall have expressly empowered the
pledgee to vote thereon, in which case the pledgee,
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<PAGE>
or his proxy,
may represent such stock and vote thereon. No proxy shall be
voted or acted on after three years from its date, unless the
proxy provides for a longer period.
Section 2.12 Written Consent to Action by Stockholders.
Unless otherwise provided in the certificate of incorporation,
any action required to be taken at any annual or special meeting
of stockholders of the corporation, or any action which may be
taken at any annual or special meeting of such stockholders, may
be taken without a meeting, without prior notice, and without a
vote, if a consent in writing, setting forth the action so taken,
shall be signed by all of the holders of outstanding stock having
not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice
of the taking of corporate action without a meeting by less than
unanimous written consent shall be given to those stockholders
who have not consented in writing.
ARTICLE III
DIRECTORS
Section 3.01 Number, Term, and Qualifications. The number
of directors which shall constitute the whole board shall be not
less than one nor more than eleven. Within the limits above
specified, the number of directors shall be determined by
resolution of the board of directors or by the stockholders at
the annual meeting of the stockholders or a special meeting
called for such purpose, except as provided in section 3.02 of
this article, and each director elected shall hold office until
his successor is elected and qualified. Directors need not be
residents of the state of incorporation or stockholders of the
corporation.
Section 3.02 Vacancies and Newly Created Directorships.
Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a
quorum, or by a sole remaining director, and the directors so
chosen shall hold office until the next annual election and until
their successors are duly elected and shall qualify. If there
are no directors in office, then an election of directors may be
held in the manner provided by statute.
Section 3.03 General Powers. The business of the
corporation shall be managed under the direction of its board of
directors which may exercise all such powers of the corporation
and do all such lawful acts and things as are not by statute or
by the certificate of incorporation or by these bylaws directed
or required to be exercised or done by the stockholders.
Section 3.04 Regular Meetings. A regular meeting of the
board of directors shall be held without other notice than this
bylaw immediately following, and at the same place as, the annual
meeting of stockholders. The board of directors may provide by
resolution, the time and place either within or without the state
of incorporation, for the holding of additional regular meetings
without other notice than such resolution.
Section 3.05 Special Meetings. Special meetings of the
board of directors may be called by or at the request of the
president, vice president, or any two directors. The person or
persons authorized to call special meetings of the board of
directors may fix any place, either within or
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without the state
of incorporation, as the place for holding any special meeting of
the board of directors called by them.
Section 3.06 Meetings by Telephone Conference Call.
Members of the board of directors may participate in a meeting of
the board of directors or a committee of the board of directors
by means of conference telephone or similar communication
equipment in which all persons participating in the meeting can
hear each other, and participation in a meeting pursuant to this
section shall constitute presence in person at such meeting.
Section 3.07 Notice. Notice of any special meeting shall
be given at least five days prior thereto by written notice
delivered personally or mailed to each director at his regular
business address or residence, or by telegram. If mailed, such
notice shall be deemed to be delivered when deposited in United
States mail so addressed, with postage thereon prepaid. If
notice be given by telegram, such notice shall be deemed to be
delivered when the telegram is delivered to the telegraph
company. Any director may waive notice of any meeting.
Attendance of a director at a meeting shall constitute a waiver
of notice of such meeting, except where a director attends a
meeting solely for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully
called or convened.
Section 3.08 Quorum. A majority of the number of
directors shall constitute a quorum for the transaction of
business at any meeting of the board of directors, but if less
than a majority is present at a meeting, a majority of the
directors present may adjourn the meeting from time to time
without further notice.
Section 3.09 Manner of Acting. The act of a majority of
the directors present at a meeting at which a quorum is present
shall be the act of the board of directors, and individual
directors shall have no power as such.
Section 3.10 Compensation. By resolution of the board of
directors, the directors may be paid their expenses, if any, of
attendance at each meeting of the board of directors, and may be
paid a fixed sum for attendance at each meeting of the board of
directors or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
Section 3.11 Presumption of Assent. A director of the
corporation who is present at a meeting of the board of directors
at which action on any corporate matter is taken shall be
presumed to have assented to the action taken unless his dissent
shall be entered in the minutes of the meeting, unless he shall
file his written dissent to such action with the person acting as
the secretary of the meeting before the adjournment thereof, or
shall forward such dissent by registered or certified mail to the
secretary of the corporation immediately after the adjournment of
the meeting. Such right to dissent shall not apply to a director
who voted in favor of such action.
Section 3.12 Resignations. A director may resign at any
time by delivering a written resignation to either the president,
a vice president, the secretary, or assistant secretary, if any.
The resignation shall become effective on its acceptance by the
board of directors; provided, that if the
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board has not acted
thereon within ten days from the date presented, the resignation
shall be deemed accepted.
Section 3.13 Written Consent to Action by Directors. Any
action required to be taken at a meeting of the directors of the
corporation or any other action which may be taken at a meeting
of the directors or of a committee, may be taken without a
meeting, if a consent in writing, setting forth the action so
taken, shall be signed by all of the directors, or all of the
members of the committee, as the case may be. Such consent shall
have the same legal effect as a unanimous vote of all the
directors or members of the committee.
Section 3.14 Removal. At a meeting expressly called for
that purpose, one or more directors may be removed by a vote of a
majority of the shares of outstanding stock of the corporation
entitled to vote at an election of directors.
ARTICLE IV
OFFICERS
Section 4.01 Number. The officers of the corporation
shall be a president, one or more vice presidents, as shall be
determined by resolution of the board of directors, a secretary,
a treasurer, and such other officers as may be appointed by the
board of directors. The board of directors may elect, but shall
not be required to elect, a chairman of the board, and the board
of directors may appoint a general manager.
Section 4.02 Election, Term of Office and Qualifications.
The officers shall be chosen by the board of directors annually
at its annual meeting. In the event of failure to choose
officers at an annual meeting of the board of directors, officers
may be chosen at any regular or special meeting of the board of
directors. Each such officer (whether chosen at an annual
meeting of the board of directors to fill a vacancy or otherwise)
shall hold his office until the next ensuing annual meeting of
the board of directors and until his successor shall have been
chosen and qualified, or until his death or until his resignation
or removal in the manner provided in these bylaws. Any one
person may hold any two or more of such offices, except that the
president shall not also be the secretary. No person holding two
or more offices shall act in or execute any instrument in the
capacity of more than one office. The chairman of the board, if
any, shall be and remain director of the corporation during the
term of his office. No other officer need be a director.
Section 4.03 Subordinate Officers, Etc. The board of
directors from time to time may appoint such other officers or
agents as it may deem advisable, each of whom shall have such
title, hold office for such period, have such authority, and
perform such duties as the board of directors from time to time
may determine. The board of directors from time to time may
delegate to any officer or agent the power to appoint any such
subordinate officer or agents and to prescribe their respective
titles, terms of office, authorities, and duties. Subordinate
officers need not be stockholders or directors.
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Section 4.04 Resignations. Any officer may resign at any
time by delivering a written resignation to the board of
directors, the president, or the secretary. Unless otherwise
specified therein, such resignation shall take effect upon
delivery.
Section 4.05 Removal. Any officer may be removed from
office at any special meeting of the board of directors called
for that purpose or at a regular meeting, by the vote of a
majority of the directors present at such meeting, with or
without cause. Any officer or agent appointed in accordance with
the provisions of section 4.03 hereof may also be removed, either
with or without cause, by any officer upon whom such power of
removal shall have been conferred by the board of directors.
Section 4.06 Vacancies and Newly Created Offices. If any
vacancy shall occur in any office by reason of death,
resignation, removal, disqualification or any other cause, or if
a new office shall be created, then such vacancies or newly
created offices may be filled by the board of directors at any
regular or special meeting.
Section 4.07 The Chairman of the Board. The chairman of
the board, if there by such an officer, shall have the following
powers and duties:
(a) He shall preside at all stockholders' meetings;
(b) He shall preside at all meetings of the board of
directors; and
(c) He shall be a member of the executive committee,
if any.
Section 4.08 The President. The president shall have the
following powers and duties:
(a) If no general manager has been appointed, he shall
be the chief executive officer of the corporation, and,
subject to the direction of the board of directors, shall
have general charge of the business, affairs and property of
the corporation and general supervision over its officers,
employees and agents;
(b) If no chairman of the board has been chosen, or if
such officer is absent or disabled, he shall preside at
meetings of the stockholders and board of directors;
(c) He shall be a member of the executive committee,
if any;
(d) He shall be empowered to sign certificates
representing stock of the corporation, the issuance of which
shall have been authorized by the board of directors; and
(e) He shall have all power and perform all duties
normally incident to the office of a president of a
corporation and shall exercise such other powers and perform
such other duties as from time to time may be assigned to
him by the board of directors.
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Section 4.09 The Vice Presidents. The board of directors
may, from time to time, designate and elect one or more vice
presidents, one of whom may be designated to serve as executive
vice president. Each vice president shall have such powers and
perform such duties as from time to time may be assigned to him
by the board of directors or the president. At the request or in
the absence or disability of the president, the executive vice
president or, in the absence or disability of the executive vice
president, the vice president designated by the board of
directors (or in the absence of such designation by the board of
directors, by the president), as senior vice president, shall
perform all the duties of the president, and when so acting,
shall have all the powers of, and be subject to all the
restrictions on, the president.
Section 4.10 The Secretary. The secretary shall have the
following powers and duties:
(a) He shall keep or cause to be kept a record of all
of the proceedings of the meetings of the stockholders and
of the board of directors in books provided for that
purpose;
(b) He shall cause all notices to be duly given in
accordance with the provisions of these bylaws and as
required by statute;
(c) He shall be the custodian of the records and of
the seal of the corporation, and shall cause such seal (or a
facsimile thereof) to be affixed to all certificates
representing stock of the corporation prior to the issuance
thereof and to all instruments, the execution of which on
behalf of the corporation under its seal shall have been
duly authorized in accordance with these bylaws, and when so
affixed he may attest the same;
(d) He shall see that the books, reports, statements,
certificates, and other documents and records required by
statute are properly kept and filed;
(e) He shall have charge of the stock ledger and books
of the corporation and cause the such books to be kept in
such manner as to show at any time the amount of the stock
of the corporation of each class issued and outstanding, the
manner in which and the time when such stock was paid for,
the names alphabetically arranged and the addresses of the
holders of record thereof, the amount of stock held by each
holder and time when each became such holder of record; and
he shall exhibit at all reasonable times to any director, on
application, the original or duplicate stock ledger. He
shall cause the stock ledger referred to in section 6.04
hereof to be kept and exhibited at the principal office of
the corporation, or at such other place as the board of
directors shall determine, in the manner and for the purpose
provided in such section;
(f) He shall be empowered to sign certificates
representing stock of the corporation, the issuance of which
shall have been authorized by the board of directors; and
(g) He shall perform in general all duties incident to
the office of secretary and such other duties as are given
to him by these bylaws or as from time to time may be
assigned to him by the board of directors or the president.
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Section 4.11 The Treasurer. The Treasurer shall have the
following powers and duties:
(a) He shall have charge and supervision over and be
responsible for the monies, securities, receipts, and
disbursements of the corporation;
(b) He shall cause the monies and other valuable
effects of the corporation to be deposited in the name and
to the credit of the corporation in such banks or trust
companies or with such banks or other depositories as shall
be selected in accordance with section 5.03 hereof;
(c) He shall cause the monies of the corporation to be
disbursed by checks or drafts (signed as provided in section
5.04 hereof) drawn upon the authorized depositories of the
corporation, and cause to be taken and preserved property
vouchers for all monies disbursed;
(d) He shall render to the board of directors or the
president, whenever requested, a statement of the financial
condition of the corporation and of all of his transactions
as treasurer, and render a full financial report at the
annual meeting of the stockholders, if called on to do so;
(e) He shall cause to be kept correct books of account
of all the business and transactions of the corporation and
exhibit such books to any director on request during
business hours;
(f) He shall be empowered from time to time to require
from all officers or agents of the corporation reports or
statements giving such information as he may desire with
respect to any and all financial transactions of the
corporation; and
(g) He shall perform in general all duties incident to
the office of treasurer and such other duties as are given
to him by these bylaws or as from time to time may be
assigned to him by the board of directors or the president.
Section 4.12 General Manager. The board of directors may
employ and appoint a general manager who may, or may not, be one
of the officers or directors of the corporation. The general
manager, if any, shall have the following powers and duties:
(a) He shall be the chief executive officer of the
corporation and, subject to the directions of the board of
directors, shall have general charge of the business affairs
and property of the corporation and general supervision over
its officers, employees and agents;
(b) He shall have the exclusive management of the
business of the corporation and of all of its dealings, but
at all times subject to the control of the board of
directors;
(c) Subject to the approval of the board of directors
or the executive committee, if any, he shall employ all
employees of the corporation, or delegate such employment to
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subordinate officers, or such division chiefs, and shall
have authority to discharge any person so employed; and
(d) He shall make a report to the president and
directors quarterly, or more often if required to do so,
setting forth the result of the operations under his charge,
together with suggestions looking to the improvement and
betterment of the condition of the corporation, and shall
perform such other duties as the board of directors shall
require.
Section 4.13 Salaries. The salaries or other compensation
of the officers of the corporation shall be fixed from time to
time by the board of directors except that the board of directors
may delegate to any person or group of persons the power to fix
the salaries or other compensation of any subordinate officers or
the agents appointed in accordance with the provision of section
4.03 hereof. No officer shall be prevented from receiving any
such salary or compensation by reason of the fact that he is also
a director of the corporation.
Section 4.14 Surety Bonds. In case the board of directors
shall so require, any officer or agent of the corporation shall
execute to the corporation a bond in such sums and with such
surety or sureties as the board of directors may direct,
conditioned upon the faithful performance of his duties to the
corporation, including responsibility for negligence and for the
accounting of all property, monies, or securities of the
corporation which may come into his hands.
ARTICLE V
EXECUTION OF INSTRUMENTS, BORROWING OF MONEY
AND DEPOSIT OF CORPORATE FUNDS
Section 5.01 Execution of Instruments. Subject to any
limitation contained in the certificate of incorporation or these
bylaws, the president or any vice president or the general
manager, if any, may, in the name and on behalf of the
corporation, execute and deliver any contract or other instrument
authorized by the board of directors. The board of directors
may, subject to any limitation contained in the certificate of
incorporation or in these bylaws, authorize any officer or agent
to execute and deliver any contract or other instrument in the
name and on behalf of the corporation; any such authorization may
be general or confined to specific instances.
Section 5.02 Loans. No loan or advance shall be
contracted on behalf of the corporation, no negotiable paper or
other evidence of its obligation under any loan or advance shall
be issued in its name, and no property of the corporation shall
be mortgaged, pledged, hypothecated, transferred or conveyed as
security for the payment of any loan, advance, indebtedness, or
liability of the corporation, unless and except as authorized by
the board of directors. Any such authorization may be general or
confined to specific instances.
Section 5.03 Deposits. All monies of the corporation not
otherwise employed shall be deposited from time to time to its
credit in such banks or trust companies or with such bankers or
other depositories as the board of directors may select, or as
from time to time may be selected by any officer or agent
authorized to do so by the board of directors.
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Section 5.04 Checks, Drafts, Etc. All notes, drafts,
acceptances, checks, endorsements, and, subject to the provisions
of these bylaws, evidences of indebtedness of the corporation
shall be signed by such officer or officers or such agent or
agents of the corporation and in such manner as the board of
directors from time to time may determine. Endorsements for
deposits to the credit of the corporation in any of its duly
authorized depositories shall be in such manner as the board of
directors from time to time may determine.
Section 5.05 Bonds and Debentures. Every bond and
debenture issued by the corporation shall be evidenced by an
appropriate instrument which shall be signed by the president or
a vice president and by the secretary and sealed with the seal of
the corporation. The seal may be a facsimile, engraved or
printed. Where such bond or debenture is authenticated with the
manual signature of an authorized officer of the corporation or
other trustee designated by the indenture of trust or other
agreement under which such security is issued, the signature of
any of the corporation's officers named thereon may be a
facsimile. In case any officer who signed, or whose facsimile
signature has been used on any such bond or debenture, shall
cease to be an officer of the corporation for any reason before
the same has been delivered by the corporation, such bond or
debenture may nevertheless be adopted by the corporation and
issued and delivered as though the person who signed it or whose
facsimile signature has been used thereon had not ceased to be
such officer.
Section 5.06 Sale, Transfer, Etc. of Securities. Sales,
transfers, endorsements, and assignments of stocks, bonds and
other securities owned by or standing in the name of the
corporation, and the execution and delivery on behalf of the
corporation of any and all instruments in writing incident to any
such sale, transfer, endorsement, or assignment, shall be
effected by the president, or by any vice president, together
with the secretary, or by any officer or agent thereunto
authorized by the board of directors.
Section 5.07 Proxies. Proxies to vote with respect to
stock of other corporations owned by or standing in the name of
the corporation shall be executed and delivered on behalf of the
corporation by the president or any vice president and the
secretary or assistant secretary of the corporation, or by any
officer or agent thereunto authorized by the board of directors.
ARTICLE VI
CAPITAL SHARES
Section 6.01 Stock Certificates. Every holder of stock in
the corporation shall be entitled to have a certificate, signed
by the president or any vice president and the secretary or
assistant secretary, and sealed with the seal (which may be a
facsimile, engraved or printed) of the corporation, certifying
the number and kind, class or series of stock owned by him in the
corporation; provided, however, that where such a certificate is
countersigned by (a) a transfer agent or any assistant transfer
agent, or (b) registered by a registrar, the signature of any
such president, vice president, secretary, or assistant secretary
may be a facsimile. In case any officer who shall have signed,
or whose facsimile signature or signatures shall have been used
on any such certificate, shall cease to be such officer of the
corporation, for any reason, before the delivery of such
certificate by the corporation, such certificate may nevertheless
be adopted by the corporation
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and be issued and delivered as
though the person who signed it, or whose facsimile signature or
signatures shall have been used thereon, has not ceased to be
such officer. Certificates representing stock of the corporation
shall be in such form as provided by the statutes of the state of
incorporation. There shall be entered upon the stock books of
the corporation at the time of issuance of each share, the number
of the certificate issued, the name and address of the person
owning the stock represented thereby, the number and kind, class
or series of such stock and the date of issuance thereof. Every
certificate exchanged or returned to the corporation shall be
marked "cancelled" with the date of cancellation.
Section 6.02 Transfer of Stock. Transfers of stock of the
corporation shall be made on the books of the corporation by the
holder of record thereof, or by his attorney thereunto duly
authorized by a power of attorney duly executed in writing and
filed with the secretary of the corporation or any of its
transfer agents, and on surrender of the certificate or
certificates, properly endorsed or accompanied by proper
instruments of transfer, representing such stock. Except as
provided by law, the corporation and transfer agents and
registrars, if any, shall be entitled to treat the holder of
record of any stock as the absolute owner thereof for all
purposes, and accordingly shall not be bound to recognize any
legal, equitable, or other claim to or interest in such stock on
the part of any other person whether or not it or they shall have
express or other notice thereof.
Section 6.03 Regulations. Subject to the provisions of
articles IV and V of the certificate of incorporation, the board
of directors may make such rules and regulations as they may deem
expedient concerning the issuance, transfer, redemption and
registration of certificates for stock of the corporation.
Section 6.04 Maintenance of Stock Ledger at Principal
Place of Business. A stock ledger (or ledgers where more than
one kind, class or series of stock is outstanding) shall be kept
at the principal place of business of the corporation, or at such
other place as the board of directors shall determine, containing
the names alphabetically arranged of original stockholders of the
corporation, their addresses, their interest, the amount paid on
their shares, and all transfers thereof and the number and class
of stock held by each. Such stock ledgers shall at all
reasonable hours be subject to inspection by persons entitled by
law to inspect the same.
Section 6.05 Transfer Agents and Registrars. The board of
directors may appoint one or more transfer agents and one or more
registrars with respect to the certificates representing stock of
the corporation, and may require all such certificates to bear
the signature of either or both. The board of directors may from
time to time define the respective duties of such transfer agents
and registrars. No certificate for stock shall be valid until
countersigned by a transfer agent, if at the date appearing
thereon the corporation had a transfer agent for such stock, and
until registered by a registrar, if at such date the corporation
had a registrar for such stock.
Section 6.06 Closing of Transfer Books and Fixing of
Record Date.
(a) The board of directors shall have power to close
the stock ledgers of the corporation for a period of not to
exceed sixty days preceding the date of any meeting of the
stockholders, or the date for payment of any dividend, or
the date for the allotment of rights
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or capital stock shall
go into effect, or a date in connection with obtaining the
consent of stockholders for any purpose.
(b) In lieu of closing the stock ledgers as aforesaid,
the board of directors may fix in advance a date, not
exceeding sixty days preceding the date of any meeting of
stockholders, or the date for the payment of any dividend,
or the date for the allotment of rights, or the date when
any change or conversion or exchange of capital stock shall
go into effect, or a date in connection with obtaining any
such consent, as a record date for the determination of the
stockholders entitled to notice of, and to vote at, any such
meeting and any adjournment thereof, or entitled to receive
payment of any such dividend, or to any such allotment of
rights, or to exercise the rights in respect of any such
change, conversion or exchange of capital stock or to give
such consent.
(c) If the stock ledgers shall be closed or a record
date set for the purpose of determining stockholders
entitled to notice of or to vote at a meeting of
stockholders, such books shall be closed for or such
record date shall be at least ten days immediately preceding
such meeting.
Section 6.07 Lost or Destroyed Certificates. The
corporation may issue a new certificate for stock of the
corporation in place of any certificate theretofore issued by it,
alleged to have been lost or destroyed, and the board of
directors may, in their discretion, require the owner of the lost
or destroyed certificate or his legal representatives, to give
the corporation a bond in such form and amount as the board of
directors may direct, and with such surety or sureties as may be
satisfactory to the board, to indemnify the corporation and its
transfer agents and registrars, if any, against any claims that
may be made against it or any such transfer agent or registrar on
account of the issuance of such new certificate. A new
certificate may be issued without requiring any bond when, in the
judgment of the board of directors, it is proper to do so.
ARTICLE VII
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
Section 7.01 How Constituted. The board of directors may
designate an executive committee and such other committees as the
board of directors may deem appropriate, each of which committees
shall consist of one or more directors. Members of the executive
committee and of any such other committee shall be designated
annually at the annual meeting of the board of directors;
provided, however, that at any time the board of directors may
abolish or reconstitute the executive committee or any such other
committee. Each member of the executive committee and of any
such other committee shall hold office until his successor shall
have been designated or until his resignation or removal in the
manner provided in these bylaws.
Section 7.02 Powers. During the intervals between
meetings of the board of directors, the executive committee shall
have and may exercise all powers of the board of directors in the
management of the business and affairs of the corporation, except
for the power to fill vacancies in the board of directors or to
amend these bylaws, and except for such powers as by law may not
be delegated by the board of directors to an executive committee.
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Section 7.03 Proceedings. The executive committee, and
such other committees as may be designated hereunder by the board
of directors, may fix its own presiding and recording officer or
officers, and may meet at such place or places, at such time or
times, and upon such notice (or without notice) as it shall
determine from time to time. It will keep a record of its
proceedings and shall report such proceedings to the board of
directors at the meeting of the board of directors next
following.
Section 7.04 Quorum and Manner of Acting. At all meetings
of the executive committee, and of such other committees as may
be designated hereunder by the board of directors, the presence
of members constituting a majority of the total authorized
membership of the committee shall be necessary and sufficient to
constitute a quorum for the transaction of business, and the act
of a majority of the members present at any meeting at which a
quorum is present shall be the act of such committee. The
members of the executive committee, and of such other committees
as may be designated hereunder by the board of directors, shall
act only as a committee and the individual members thereof shall
have no powers as such.
Section 7.05 Resignations. Any member of the executive
committee, and of such other committees as may be designated
hereunder by the board of directors, may resign at any time by
delivering a written resignation to either the president, the
secretary, or assistant secretary, or to the presiding officer of
the committee of which he is a member, if any shall have been
appointed and shall be in office. Unless otherwise specified
therein, such resignation shall take effect upon delivery.
Section 7.06 Removal. The board of directors may at any
time remove any member of the executive committee or of any other
committee designated by it hereunder either for or without cause.
Section 7.07 Vacancies. If any vacancy shall occur in the
executive committee or of any other committee designated by the
board of directors hereunder, by reason of disqualification,
death, resignation, removal, or otherwise, the remaining members
shall, until the filling of such vacancy, constitute the then
total authorized membership of the committee and continued to
act, unless such committee consisted of more than one member
prior to the vacancy or vacancies and is left with only one
member as a result thereof. Such vacancy may be filled at any
meeting of the board or directors.
Section 7.08 Compensation. The board of directors may
allow a fixed sum and expenses of attendance to any member of the
executive committee, or of any other committee designated by it
hereunder, who is not an active salaried employee of the
corporation for attendance at each meeting of the said committee.
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ARTICLE VIII
INDEMNIFICATION, INSURANCE, AND
OFFICER AND DIRECTOR CONTRACTS
Section 8.01 Indemnification: Third Party Actions. The
corporation shall have the power to indemnify any person who was
or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceedings,
whether civil, criminal, administrative, or investigative (other
than an action by or in the right of the corporation), by reason
of the fact that he is or was a director, officer, employee, or
agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other
enterprise, against expenses, (including attorney's fees),
judgments, fines, and amounts paid in settlement actually and
reasonably incurred by him in connection with the action, suit,
or proceeding, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit, or proceeding by
judgment, order, settlement, conviction, or on a plea of nolo
contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any
criminal action or proceeding, he had reasonable cause to believe
that his conduct was unlawful.
Section 8.02 Indemnification: Corporate Actions. The
corporation shall have the power to indemnify any person who was
or is a party or is threatened to be made a party to any
threatened, pending, or completed action or suit by or in the
right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee,
or agent of another corporation, partnership, joint venture,
trust, or other enterprise, against expenses, (including
attorney's fees), actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit,
if he acted in good faith and in a manner he reasonably believed
to be or not opposed to the best interests of the corporation
except that no indemnification shall be made in respect of any
claim, issue, or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the
extent that the court in which such action or suit was brought
shall determine on application that, despite the adjudication of
liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.
Section 8.03 Determination. To the extent that a
director, officer, employee, or agent of the corporation has been
successful on the merits or otherwise in defense of any action,
suit, or proceeding referred to in sections 8.01 and 8.02 hereof,
or in defense of any claim, issue, or matter therein, he shall be
indemnified against expenses (including attorneys' fees),
actually and reasonably incurred by him in connection therewith.
Any other indemni-fication under sections 8.01 and 8.02 hereof,
unless ordered by a court, shall be made by the corporation only
in the specific case on a determination that indemnification of
the director, officer, employee, or agent is proper in the
circumstances because he has met the applicable standard or
conduct set forth in sections 8.01 or 8.02 hereof. Such
determination shall be made either (i) by the board of directors
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by a majority vote of a quorum consisting of directors who were
not parties to such action, suit, or proceeding, (ii) if such a
quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel
in a written opinion, or (iii) by the stockholders by a majority
vote of a quorum of stockholders at any meeting duly called for
such purpose.
Section 8.04 Advances. Expenses incurred by an officer or
director in defending a civil or criminal action, suit, or
proceeding may be paid by the corporation in advance of the final
disposition of such action, suit, or proceeding on receipt of an
undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized by
this section. Such expenses incurred by other employees and
agents may be so paid on such terms and conditions, if any, as
the board of directors deems appropriate.
Section 8.05 Scope of Indemnification. The
indemnification and advancement of expenses provided by, or
granted pursuant to, sections 8.01, 8.02, and 8.04:
(a) shall not be deemed exclusive of any other rights
to which those seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors, or otherwise, both
as to action in his official capacity and as to action in
another capacity while holding such office; and
(b) shall, unless otherwise provided when authorized
or ratified, continue as to a person who ceased to be a
director, officer, employee, or agent of the corporation,
and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
Section 8.06 Insurance. The corporation may purchase and
maintain insurance on behalf of any person who is or was a
director, officer, employee, or agent of the corporation, or is
or was serving at the request of the corporation as a director,
officer, employee, or agent of another corporation partnership,
joint venture, trust, or other enterprise against any liability
asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not the corporation
would have the power to indemnify him against any such liability.
Section 8.07 Officer and Director Contracts. No contract
or other transaction between the corporation and one or more of
its directors or officers, or between the corporation and any
corporation, partnership, association, or other organization in
which one or more of the corporation's directors or officers are
directors, officers, or have a financial interest, is either void
or voidable solely on the basis of such relationship or solely
because any such director or officer is present at or
participates in the meeting of the board of directors or a
committee thereof which authorizes the contract or transaction,
or solely because the vote or votes of each director or officer
are counted for such purpose, if:
(a) the material facts of the relationship or interest
are disclosed or known to the board of directors or
committee and the board or committee in good faith
authorizes the contract or transaction by the affirmative
votes of a majority of the disinterested directors even
though the disinterested directors be less than a quorum;
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(b) the material facts of the relationship or interest
is disclosed or known to the stockholders and they approve
or ratify the contract or transaction in good faith by a
majority vote of the shares voted at a meeting of
stockholders called for such purpose or written consent of
stockholders holding a majority of the shares entitled to
vote (the vote of the common or interested directors or
officers shall be counted in any such vote of stockholders);
or
(c) the contract or transaction is fair as to the
corporation at the time it is authorized, approved, or
ratified by the board of directors, a committee thereof, or
the stockholders.
ARTICLES IX
FISCAL YEAR
The fiscal year of the corporation shall be fixed by
resolution of the board of directors.
ARTICLE X
DIVIDENDS
The board of directors may from time to time declare, and
the corporation may pay, dividends on its outstanding stock in
the manner and on the terms and conditions provided by the
certificate of incorporation and by law.
ARTICLE XI
AMENDMENTS
All bylaws of the corporation, whether adopted by the board
of directors or the stockholders, shall be subject to amendment,
alteration, or repeal, and new bylaws may be made, except that:
(a) no bylaw adopted or amended by the stockholders
shall be altered or repealed by the board of directors; and
(b) no bylaw shall be adopted by the board of
directors which shall require more than the stock
representing a majority of the voting power for a quorum at
a meeting of stockholders, or more than a majority of the
votes cast to constitute action by the stockholders, except
where higher percentages are required by law; provided,
however, that:
(i) if any bylaw regulating an impending
election of directors is adopted or amended or repealed
by the board of directors, there shall be set forth in
the notice of the next meeting of the stockholders for
the election of directors, the bylaws so adopted or
amended or repealed, together with a concise statement
of the changes made; and
(ii) no amendment, alteration, or repeal of
this Article XI shall be made except by the
stockholders.
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Exhibit No. 3
Form 10-SB
Cluster Technology Corp.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") effective as of
the 2nd day of November, 1998, is mad and entered into by and
between CLUSTER TECHNOLOGY CORP., a Delaware corporation ( the
"Company" or "Employer") and JIM GIBSON ("Employee") who is
appointed to the position of President & CEO.
Recitals
A. Employer is a company, which directly or through its
subsidiaries develops, manufactures, and/or markets health and
related consumer products and services;
B. Employee has been engaged in and has experience in the
above-designated business and the necessary experience with
management of a public company;
C. The Company desires to provide for the employment of
Employee, to clearly set forth the relationship between the
parties, and to restrict Employee from using certain confidential
information and from competing with the Employer in the future.
Agreement
NOW THEREFORE, in consideration of the foregoing recitals
which are incorporated as a part of this Agreement, and of the
mutual covenants contained herein and the mutual benefits to be
derived hereunder, the parties agree as follows:
1. Employment. Employer hereby employs Employee to
perform those duties generally described in this Agreement, and
Employee hereby accepts and agrees to such employment on the
terms and conditions hereinafter set forth.
2. Duties: Employer hereby employer Employee to serve in
such offices and perform those duties as shall, from time to
time, be determined by Employer's board of directors. Employee
agrees to serve as an executive officer of the Employer or any of
its subsidiary corporations without compensation except as set
forth herein. Employee shall devote substantially all of his
working time and efforts to the business of Employer and any
other of Employer's parent and subsidiary corporations, if any,
and shall not during the term of this Agreement be engaged in any
other substantial business activities which will significantly
interfere or conflict with the performance of his duties
hereunder. Employee agrees that he will at all times faithfully,
industriously, and to the best of his ability, experience, and
talents, perform all of the duties that may be required of and
from him pursuant to the express and explicit terms hereof.
3. Term. The term of this Agreement shall
commence on the date hereof and continue through January 1st,
2002.
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<PAGE>
4. Compensation For all services rendered by the
Employee during the Initial Term, Employer shall pay to Employee
a salary of $10,000 per month for the period ending December
31,1998 and then $14,167 per month for the six-month period
ending June 1st ,1999. On or before June 1st, 1999, the Employee
and the Board of Directors shall convene to evaluate the current
salary compensation of the Employee. Any review of salary and
subsequent increases shall be at the best interest of the Company
and mutually agreed between the Employee and the Board of
Directors. Salary for any year during the term of this Agreement
shall be payable monthly in accordance with the payroll
procedures established by Employer for all its employees. The
salary to Employee shall be subject to withholding and other
applicable taxes.
5. Bonus Compensation. The Company proposes to engage in
the business of manufacturing and selling of equipment consisting
of the DRS System for decompression of the lower back, which
typically sells for $90,000. For each sale of the DRS System,
within North America and Greece beginning with and including the
month of November 1998, the Company shall pay to the Employee a
bonus. The bonuses shall be paid on the first payroll following
the month end, or within 15 days following the end of each such
month during the term of this Agreement. The bonus compensation
is equal to the product, which is obtained by multiplying the
number of DRS Systems sold during the calendar month then ended
by $2,000. For purposes of this Agreement, a DRS System sale is
defined as those Systems that have been fully funded. Should any
DRS System be sold at either a discount, the same percentage
discount shall be applied to the bonus compensation payable in
respect of the DRS System. All such payments shall be subject to
withholding and other applicable taxes.
6. Automobile Allowance. The Company shall pay $1250
per month payable on the first pay-period of every month for use
in leasing or purchasing a car for the Employee's use. This
number has been grossed up from $1,000 and all such payments
shall be subject to withholding and other applicable taxes.
7. Employment Benefits. Employer shall provide, life,
short-term disability, health and medical insurance for Employee
in a form and program to be chosen by Employer for its fulltime
employees. Employee shall be entitled to participate in all of
Employer's benefit plans including but not limited to, long-term
disability insurance, any stock option, medical, dental, life
insurance, retirement, pension, profit sharing, or other plan as
in effect from time to time on the same basis as other employees.
8. Working Facilities Employer will provide to Employee
at Employer's principal offices suitable offices and facilities
appropriate for his position and suitable for the performance of
his responsibilities.
9. Expenses. Employer shall bear the cost of all expenses
reasonably incurred by the Employee in performing his duties
under this Agreement. The payment of such expenses shall, at the
option of Employer, be by direct payment to the provider of
services or goods in question, or by the reimbursement of
Employee for the same. Employer will reimburse Employee for
expenses incurred in connection with Employer's business,
including, but not limited to, expenses for travel, lodging
meals, beverages, entertainment, and other items on
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<PAGE>
Employee's
periodic presentation of an account of such expenses. Employee
agrees to submit such documentation as may be necessary to
substantiate the deductibility of the foregoing expenses for
income tax purposes which are permitted under the Internal
Revenue Code. Employee agrees to keep such records as are
required under the Internal Revenue Code and the Regulations
thereunder to enable substantiation of each of the said
expenditures and reimbursements. In the event a dispute should
arise regarding any matter set forth in this paragraph 9, the
determination shall be final and binding on all parties hereto.
10. Covenant Not to Compete. During the period of this
Agreement, and for a period of one year after termination of this
Agreement, except in the event of breach of this Agreement by
Employer, Employee agrees that he will not directly or indirectly
engage in, assist perform services for, establish or open, or
have any equity interest (other than ownership of 10% or less of
the outstanding stock of any corporation listed on the New York
or American Stock Exchange or included in the National
Association of Securities Dealers Automated Quotation system), in
any person, firm corporation, or business entity (whether as an
employee, officer director, agent security holder, creditor
consultant, or otherwise), that engages in the business in which
Employer or any of its subsidiaries is engaged, or any other
activity or business in which Employer or any of its subsidiaries
is engaged or in which it expressly proposes to become engaged at
the termination of this Agreement, within any territory or area
in which Employer or any of its subsidiaries is at present
conducting business and also any territories and areas in which
Employer or any of its subsidiaries where Employee knows that
Employer or any of its subsidiaries intends to extend and carry
on business by expansion of its or their activities. This
covenant not to compete shall not be construed as restricting
Employee's right to own shares in any company or limited
partnership or business entity, provided they do not perform
services for, or participate in any way in the management of, a
business entity which competes in the manner outlined above. The
parties intend that the covenant contained in this paragraph
shall be construed as a series of separate covenants, one for
each market area in which Employer or any of its subsidiaries
provides goods and/or services. Except for geographic coverage,
each such separate covenant shall be deemed identical in terms to
the covenants contained in this paragraph. If in any judicial
proceeding, a court shall refuse to enforce any of the separate
covenants deemed included in this paragraph, then the
unenforceable covenants shall be deemed eliminated from these
provisions for the purpose of those proceedings to the extent
necessary to permit the remaining separate covenants (meaning the
remaining market areas) to be enforced. This covenant shall
survive the termination of this Agreement.
11. Non-Disclosure of Information. In further
consideration of employment and the continuation of employment by
Employer, Employee agrees as follows:
(a) Employee will not, directly or indirectly, during or after
the term:
(i) use for his own benefit or give to any
person not authorized by Employer to receive or use
such information, except for the sole benefit of
Employer, any of Employer's proprietary data,
information, marketing or installation plans,
procedures, results, methods, ideas, processes, or
research and development;
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<PAGE>
(ii) use for his own benefit or give to any
person not authorized by Employer to receive it, any
plans or specifications, customer lists, data, study,
table, report, written technical information, or the
like owned by Employer, or any copy thereof, or
(iii) use for his own benefit or give to any
persons not authorized by Employer to receive
it any information that is not generally
known to anyone other than Employer, or that
is designated by Employer as "Limited",
"Private", or "Confidential", or similarly
designated.
(b) Employee will keep himself informed of Employer's
policies and procedures for safeguarding Employer's
property, including proprietary data and information, and
will strictly comply with those policies and procedures at
all time. He will not, except when authorized by Employer,
remove any of Employer's property from Employer's premises.
He will return to Employer, immediately upon termination of
employment, all of Employer's property in his possession or
control.
12. Disability If Employee is unable to perform his
services by reason of illness or incapacity for a period of more
than six consecutive months, the compensation thereafter payable
to him during the second consecutive six-month period, one-fourth
of the salary Employee would have received for a six-month period
provided for in paragraphs 4 and 5; provided, however, that no
such compensation shall be payable after the termination of this
Agreement. Notwithstanding the foregoing, if such illness or
incapacity does not cease to exist within such 18-consecutive-
month period, as determined by a physician selected by the
Employer and Employer may thereupon terminate this Agreement. If
Employee desires to return to work, but there is a dispute as to
whether he is able to perform his duties hereunder, the issue
shall be submitted to arbitration as provided in paragraph 26
hereof.
13. Termination for Cause. Except as set forth in the
foregoing paragraph or due to the death of Employee, Employer may
not terminate this Agreement during its term without a showing
the Employee has materially breached its terms, Employee has been
grossly negligent in the performance of his duties, Employee has
failed to meet standards established by Employer for the
performance of his duties, or Employee has engaged in material
willful or gross misconduct in the performance of his duties
hereunder.
14. Termination Upon Transfer of Business. Notwithstanding
any provision of this Agreement to the contrary, Employee may
terminate this Agreement, including the covenant not to compete,
upon the happening of any of the following events:
(a) The sale by Employer of substantially all of its assets
to a single purchaser or to a group of associated purchasers;
(b) or The sale, exchange, or other disposition to a single
entity or group of entities under common control in one
transaction or series of related transactions of greater than 50%
of the outstanding shares of Employer's common stock;
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<PAGE>
(c) or The decision by Employer to terminate its business and
liquidate its assets;
(d) or The merger or consolidation of Employer in a
transaction in which the shareholders of the Employer immediately
prior to such merger or consolidation receive less than 50
percent of the outstanding voting shares of the new or continuing
corporation. In the event Employee elects to terminate this
Agreement, as a condition precedent to the happened in of any of
the events noted above, Employer shall make as single sum payment
to Employee as provided in paragraph 15 of this Agreement.
In the event Employee does not elect to terminate this
Agreement upon the happening of any of the events noted above,
and as a result of such event, Employer is not the surviving
entity, then the provisions of this Agreement shall inure to the
benefit of and be binding upon the surviving or resulting entity.
If as a result of the merger, consolidation, transfer of assets,
or other event listed above, the duties of Employee are
increased, then the compensation of Employee provided for in
paragraph 4 of this Agreement shall be reasonably adjusted upward
to compensate for the additional duties and responsibilities
assumed.
15. Termination Payment. In the event that the Employee's
employment is terminated by the Employer during the term hereof
for reasons other than cause as defined paragraph 13, or is
terminated by Employer as provided in paragraph 14, the Employee
shall be compensated by the Employer through a single sum payment
of $200,000.
16. Death During Employment. If the Employee dies during
the term of the employment, Employer shall pay to the estate of
Employee the compensation which would otherwise be payable to
Employee up to the end of the month in which his death occurs.
17. Nontransferability. Neither Employee, his spouse, his
designated contingent beneficiary, nor their estates shall have
any right to anticipate, encumber, or dispose of any payment due
under this Agreement. Such payments and other rights are
expressly declared nonassignable and nontransferable except as
specifically provided herein.
18. Indemnification. Employer shall indemnify Employee and
hold him harmless from liability for acts or decisions made by
him while performing services for Employer to the greatest extent
permitted by applicable law. Employer shall also use its best
efforts to obtain coverage for Employee under any insurance
policy now in force or hereafter obtained during the term of this
Agreement insuring officers and directors of Employer, in amounts
acceptable to employee, against such liability.
19. Assignment. This Agreement may not be assigned by
either party without the prior written consent of the other
party.
20. Entire Agreement. This Agreement is and shall be
considered to be the only agreement or understanding between the
parties hereto with respect to the employment of Employee by
Employer. All negotiations, commitments, and understandings
acceptable to both parties have been incorporated herein. No
letter, telegram, or communication passing between the parties
hereto shall be deemed a part of this Agreement; nor shall it
have the effect of
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<PAGE>
modifying or adding to this agreement unless
it is distinctly stated in such letter, telegram, or
communication that it is to constitute a part of this Agreement
and is to be attached as a rider to this Agreement and is signed
by the parties to this Agreement.
21. Modification of Contract. This Agreement cannot be
modified by tender, acceptance or endorsement of any instrument
of payment, including check. Any words contained in an
instrument of payment modifying this contract, including a waiver
or release of any claims, or a statement referring to paying in
full is void. This Agreement can only be modified in a separate
writing, other than an instrument of payment, signed by the
parties.
22. Counterparts and Headings. This Agreement may be
executed in two or more counterparts, each of which shall be
deemed an original and all of which together shall constitute one
and the same instrument. All headings in this Agreement are
inserted for convenience of reference and shall not affect its
meaning or interpretation.
23. Cooperation. The parties shall deal with each other in
good faith, good faith meaning honesty in fact and the observance
of all commercial standards of fair dealing and usage's of trade
which are regularly observed within the industry.
24. No Strict Construction. The language used in this
Agreement shall be deemed to be the language chosen by the
parties hereto to express their mutual intent, and no rule of
strict construction shall be applied against any party.
25. Notices. Any notice, request, instruction, report or
other document to be given to the parties shall be in writing and
delivered personally or sent by certified mail, postage prepaid,
if to Jim Gibson: 9826 Quail Cove Court
Windermere, Florida 34786
if to Cluster Technology Corp: 250 International
Parkway, Suite 200
Heathrow, Florida 32746
or at such other address as any party shall specify to the other
party in writing.
26. Arbitration. In the event of dispute or controversy
between the parties as to the performance hereof, this Agreement
shall be and remain in full force and effect and all terms hereof
shall continue to be complied with by both parties, it shall be
submitted to two arbitrators, one to be appointed by each, and if
those arbitrators do not agree, they select a third interested
and competent person to act with them, and the decision of the
three, or a majority of them, shall be final and conclusive. If
either party does not appoint an arbitrator as aforesaid within
90 days after receipt of notice to the other that it desires
arbitration, which notice shall state the name and address of the
arbitrator appointed by such other, and does not within such
period furnish to such other party the name and address of the
second arbitrator, then the arbitrator first named shall appoint
a disinterested and competent arbitrator for the party thus
defaulting, and the two arbitrators so appointed shall select a
third to act with them as aforesaid and with like effect.
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<PAGE>
Cost
or arbitration shall be borne by the parties equally. Judgment
upon the reward rendered may be entered in any court having
jurisdiction thereof.
27. Enforcement. Employee acknowledges that any remedy at
law for breach of paragraph 10 and 11 would be inadequate,
acknowledges that Employer would be irreparably damaged by an
actual or threatened breach thereof, and agrees that Employer
shall be entitled to an injunction restraining Employee from any
actual or threatened breach of paragraphs 10 and 11 as well as
any further appropriate equitable relief without any bond or
other security being required. In addition to the foregoing,
each of the parties hereto shall be entitled to any remedies
available in equity or by statute with respect to the breach of
the terms of this Agreement by the other party.
28. Governing Law. This Agreement shall be governed by
and interpreted in accordance with the laws of the state of
Florida.
29. Severability. If and to the extent that any court of
competent jurisdiction holds any provision or any part thereof of
this Agreement to be invalid or unenforceable, such holding shall
in no way affect the validity of the remainder of this Agreement.
30. Waiver. No failure by an party to insist upon the
strict performance of any covenant, duty, agreement, or condition
of this Agreement or to exercise any right or remedy consequent
upon a breach hereof shall constitute a waiver of any such
breach or of any other covenant, agreement, term, or condition.
IN WITNESS WHEREOF, the parties have executed this
Agreement at Heathrow, Florida, the day and year first above
written.
CLUSTER TECHNOLOGY CORP.: EMPLOYEE:
/s/ Duly Authorized Director, Carlos Becera /s/ Jim Gibson
/s/ Duly Authorized Director, David Williams
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<PAGE>
Exhibit No. 4
Form 10-SB
Cluster Technology Corp.
CLUSTER TECHNOLOGY CORP.
STOCK OPTION AGREEMENT
Option for the Purchase of 125,000
Shares of Common Stock
Par Value $0.01
THE HOLDER OF THIS OPTION, BY ACCEPTANCE HEREOF, BOTH WITH
RESPECT TO THE OPTION AND COMMON STOCK ISSUABLE UPON CONVERSION
OF THE OPTION, AGREES AND ACKNOWLEDGES THAT THE SECURITIES
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR
UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES HAVE
BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE TRANSFERRED OR SOLD
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR OTHER
COMPLIANCE UNDER THE SECURITIES ACT OR THE LAWS OF THE APPLICABLE
STATE OR A "NO ACTION" OR INTERPRETIVE LETTER FROM THE SECURITIES
AND EXCHANGE COMMISSION OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE ISSUER, AND ITS COUNSEL, TO THE EFFECT THAT
THE SALE OR TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE
SECURITIES ACT AND SUCH STATE STATUTES.
This is to certify that, for value received,
___________________ (the "Optionee") is entitled to purchase from
CLUSTER TECHNOLOGY CORP. (the "Company"), on the terms and
conditions hereinafter set forth, all or any part of 125,000
shares ("Option Shares") of the Company's common stock, par value
$0.01 (the "Common Stock"), at the purchase price of $0.50 per
share ("Option Price"). Upon exercise of this option in whole or
in part, a certificate for the Option Shares so purchased shall
be issued and delivered to the Optionee, upon presentation and
surrender to the Company of the duly executed form of purchase
attached hereto accompanied by payment of the purchase price of
each share purchased either in cash or by certified or bank
cashier's check payable to the order of the Company. If less than
the total option is exercised, a new option of similar tenor
shall be issued for the unexercised portion of the options
represented by this Agreement. Upon such exercise, the Company
shall issue and cause to be delivered with all reasonable
dispatch (and 'in any event within 10 business days of such
exercise) to or upon the written order of the Optionee at its
address, and in the name of the Optionee, a certificate or
certificates for the number of full Option Shares issuable upon
the exercise together with such other property (including cash)
and securities as may then be deliverable upon such exercise.
Such certificate or certificates shall be deemed to have been
issued and the Optionee shall be deemed to have become a holder
of record of such Option Shares as of the date of the surrender
of the purchase form. This Agreement constitutes an "Award
Agreement" as defined in the 1996 Long Term Equity Incentive Plan
of the Company ("Plan"), and is intended to qualify as an
incentive option under section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), to the fullest extent permitted
under section 422 of the Code. A copy of the Plan will be made
available to the Optionee on request. Except as otherwise
provided herein, the Options shall be governed by the terms and
conditions set forth in the Plan.
Page 1 of 4
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<PAGE>
This option is granted subject to the following further terms and
conditions:
1 . These options shall vest immediately upon issuance and
delivery of this Agreement to the Optionee, and may be exercised
at any time, in whole or in part, during the five-year period
following the date of this Agreement, subject to continued
engagement as a consultant or employment by the Company or any of
its subsidiaries. In the event such engagement or employment of
the Optionee by the Company or any of its subsidiaries terminates
for any reason, the purchase rights represented by this Agreement
shall expire 30 days following the date employment of the
Optionee terminates; provided, that in the event such
2. The Optionee acknowledges that the shares subject to this
option have not and will not be registered as of the date of
exercise of this option under the Securities Act or the
securities laws of any state. The Optionee acknowledges that this
option and the shares issuable on exercise of the option, when
and if issued, are and will be "restricted securities" as defined
in Rule 144 promulgated by the Securities and Exchange Commission
and must be held indefinitely unless subsequently registered
under the Securities Act and any other applicable state
registration requirements. The Company is under no obligation to
register the securities under the Securities Act or under
applicable state statutes. In the absence of such a registration
or an available exemption from registration, sale of the Option
Shares may be practicably impossible. The Optionee shall confirm
to the Company the representations set forth above in connection
with the exercise of all or any portion of this option.
3. The Company, during the term of this Agreement, will use
its best efforts to seek to obtain from the appropriate
regulatory agencies any requisite authorization in order to issue
and sell such number of shares of its Common Stock as shall be
sufficient to satisfy the requirements of the Agreement. The
inability of the Company to obtain from any such regulatory
agency having jurisdiction thereof the authorization deemed by
the Company's counsel to be necessary to the lawful issuance and
sale of any share of its stock hereunder shall relieve the
Company of any liability in respect of the non-issuance or sale
of such stock as to which such requisite authorization shall not
have been obtained. In the event that such stock cannot be
issued, the Company will renegotiate this Agreement with the
Optionee.
4. The number of Option Shares purchasable upon the exercise
of this option and the Option Price per share shall be subject to
adjustment from time to time subject to the following terms. If
the outstanding shares of Common Stock of the Company are
increased, decreased, changed into or exchanged for a different
number or kind of shares of the Company through reorganization,
recapitalization, reclassification, stock dividend, stock split
or reverse stock split, the Company or its successors and assigns
shall make an appropriate and proportionate adjustment in the
number or kind of shares, and the per-share Option Price thereof,
which may be issued to the Optionee under this Agreement upon
exercise of the options granted under this Agreement. The
purchase rights represented by this option shall not be
exercisable with respect to a fraction of a share of Common
Stock. Any fractional shares of Common Stock arising from the
dilution or other adjustment in the number of shares subject to
this option shall rounded up to the nearest whole share.
5. The Company covenants and agrees that all Option Shares
which may be delivered upon the exercise of this option will,
upon delivery, be free from all taxes, liens, and charges with
respect to the purchase thereof, provided, that the Company shall
have no obligation with respect to any income tax liability of
the Optionee and the Company may, in its discretion, withhold
such amount or require the Optionee to make such provision of
funds or other consideration as the Company deems necessary to
satisfy any income tax withholding obligation under federal or
state law.
Page 2 of 4
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<PAGE>
6. The Company agrees at all times to reserve or hold
available a sufficient number of shares of Common Stock to cover
the number of Option Shares issuable upon the exercise of this
and all other options of like tenor then outstanding.
7. This option shall not entitle the holder hereof to any
voting rights or other rights as a shareholder of the Company, or
to any other rights whatsoever, except the rights herein
expressed, and no dividends shall be payable or accrue in respect
of this option or the interest represented hereby or the Option
Shares purchasable hereunder until or unless, and except to the
extent that, this option shall be exercised..
8. The holder of this option, by acceptance hereof,
acknowledges and agrees that this option is not transferable by
the Optionee except by will or the laws of descent or
distribution. The Company may deem and treat the registered owner
of this option as the absolute owner hereof for all purposes and
shall not be affected by any notice to the contrary.
9. In the event that any provision of this Agreement is
found to be invalid or otherwise unenforceable under any
applicable law, such invalidity or unenforceability shall not be
construed as rendering any other provisions contained herein
invalid or unenforceable, and all such other provisions shall be
given full force and effect to the same extent as though the
invalid or unenforceable provision were not contained herein.
10. This Agreement shall be governed by and construed in
accordance with the internal laws of the state of Delaware,
without regard to the principles of conflicts of law thereof.
11. Except as otherwise provided herein, this Agreement
shall be binding on and inure to the benefit of the Company and
the person to whom an option is granted hereunder, and such
person's heirs, executors, administrators, legatees, personal
representatives, assignees, and transferees.
IN WITNESS WHEREOF, the Company has caused this option to be
executed by the signature of its duly authorized officer,
effective this 1 st day of October, 1999.
CLUSTER TECHNOLOGY CORP.
BY
Duly Authorized Officer
The undersigned Optionee hereby acknowledges receipt of a
copy of the foregoing option and acknowledges and agrees to the
terms and conditions set forth in the option.
By: OPTIONEE
Page 3 of 4
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<PAGE>
FORM OF PURCHASE
(to be signed only upon exercise of Option)
TO: CLUSTER TECHNOLOGY CORP.
The Optionee, holder of the attached option, hereby
irrevocable elects to exercise the purchase rights represented by
the option for, and to purchase thereunder,
_______________________________
shares of common stock of Cluster Technology Corp., and herewith
makes payment therefor, and requests that the certificate(s) for
such shares be delivered to the Optionee at:
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
The Optionee represents that the Common Stock is being
acquired without a view to, or for, resale in connection with any
distribution thereof without registration or other compliance
under the Securities Act of 1933, as amended (the "Securities
Act"), and applicable state statutes, and that the Optionee has
no direct or indirect participation in any such undertaking or in
the underwriting of such an undertaking. The Optionee understands
that the Common Stock has not been registered, but is being
acquired by reason of a specific exemption under the Securities
Act as well as under certain state statutes for transactions by
an issuer not involving any public offering and that any
disposition of the Common Stock may, under certain circumstances,
be inconsistent with these exemptions. The Optionee acknowledges
that the Common Stock must be held and may not be sold,
transferred, or otherwise disposed of for value unless
subsequently registered under the Securities Act or an exemption
from such registration is available. The Company is under no
obligation to register the Common Stock under the Securities Act.
The certificates representing the Common Stock will bear a legend
restricting transfer, except in compliance with applicable
federal and state securities statutes.
The Optionee agrees and acknowledges that this purported
exercise of the option is conditioned on, and subject to, any
compliance with requirements of applicable federal and state
securities laws deemed necessary by the Company.
DATED this ______ day of _____________________, ______.
Signature
Page 4 of 4
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<PAGE>
Exhibit No. 5
Form 10-SB
Cluster Technology Corp.
DISTRIBUTION, MARKETING AND LICENSING AGREEMENT
THIS AGREEMENT made effective the 11th day of November,
1998, by and between CLUSTER TECHNOLOGY CORP., a Delaware
corporation (hereinafter referred to as the "Company", and JOHN
FRANKUM (hereinafter referred to as the "Company", and JOHN
FRANKUM (hereinafter referred to as "Frankum").
WITNESSETH:
WHEREAS, the Company and/or its subsidiaries is the owner
and/or has certain proprietary rights, interests, contract
rights, and license rights with regard to the Shealy Pain
Program, the Shealy DRS System and the Shealy PCU Unit,
including, but not limited to, franchise rights, advertising,
technology, manufacturing and/or distribution rights of related
products (including the DRS machine), licensing rights, working
drawings and specifications, research, testing results and
materials, design patents, patents, trademarks and service marks,
(collectively, the "concepts and/or products"), and
WHEREAS, the Company has the exclusive right to manufacture,
market, distribute, franchise and license the Shealy concepts
and/or products described above, worldwide, and
WHEREAS, the Company may from time to time develop,
manufacture and/or distribute concepts and/or products which are
related, derived or evolved from the existing above described
concepts and/or products, and
WHEREAS, the Company and/or its subsidiaries may from time
to time manufacture and/or distribute other products, and
WHEREAS, Frankum is knowledgeable and experienced with
regard to international licensing, franchising, manufacturing,
marketing and distribution, and
WHEREAS, the Company is desirous of granting to Frankum the
right and license Worldwide (excluding the United States of
America, Canada and Greece) to market, distribute, franchise and
license the above described concepts and/or products, and other
products manufactured and/or distributed by the Company and/or
its subsidiaries, and
WHEREAS, Frankum is desirous of accepting said grant, and
WHEREAS, the parties anticipate a long term relationship due
to the nature of the concepts and/or products to be marketed, and
due to anticipated continued revenues derived from individual
sales, and
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<PAGE>
WHEREAS, the parties have reached certain agreements with
regard to said sole and exclusive right to market, distribute,
franchise and license said concepts and/or products, and
WHEREAS, the parties are desirous of setting forth said
agreements in writing hereinbelow, it is, therefore,
IN CONSIDERATION of the mutual covenants set forth below,
and other valuable consideration acknowledged,
MUTUALLY AGREED as follows:
1. Recitals. The recitals set forth above are true and
correct as applicable to the respective parties, and are
incorporated by reference herein as a material part hereof.
2. Grant of Rights. The Company hereby grants to Frankum the
sole and exclusive right worldwide (excluding the United States
of America, Canada and Greece) to market, distribute, franchise
and license all of the above described concepts and/or products,
and other products, now existing or hereafter developed,
improved, substituted, derived or evolved. Frankum may market,
distribute, franchise and license said concepts and products, and
other products, approved by the Company, which approval shall not
be unreasonable withheld, by any method permissible under the
laws and customs of any country or territory in which said
marketing efforts are made.
3. Acceptance. Frankum hereby accepts said grant of rights
by the Company, and shall perform pursuant to the terms of this
Agreement.
4. Term of Agreement and Termination. Subject to the quotas
set forth below, this Agreement shall be for a term of Ten (10)
years from the effective date of this Agreement. Either party, at
its discretion, may terminate this Agreement if Frankum fails to
produce minimum sales, which are defined as delivered and paid
for, of the Company's DRS machine as follows:
a. Fifty (50) DRS machines shall be purchased by Frankum by
the end of the first year from the effective date of this
Agreement.
b. One Hundred (100) DRS machines shall be purchased by
Frankum. During the second full year of this Agreement.
c. One Hundred and Fifty (150) DRS machines shall be
purchased by Frankum during the third full year of this
Agreement.
d. Thereafter, no quotas shall apply, as the parties
anticipate continuing usage revenues
from each individual DRS machine sold shall be paid to the
Company by Frankum.
At the conclusion of the initial ten (10) year term of this
Agreement, either party may renew this Agreement for an additional
term of five (5) years.
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<PAGE>
5. Supply of Product. During the term of this Agreement, the
Company shall supply the DRS machine, and any other product which
is the subject of this Agreement, to Frankum as requested by
Frankum, and Frankum shall pay to Company the purchase price set
forth below, as follows:
a. The price for the DRS machine shall be Sixty-Thousand
Dollars ($60,000.00) F.O.B for each complete unit, based on
present design. On each yearly anniversary date of this
Agreement, subject to the agreement of the parties, the purchase
price per unit may be increased by a percentage equal to the
lesser of the then current rate of inflation in the United
States of America, or five percent (5 %) over the price per unit
for the immediately preceding year, which said price shall
remain in effect until the next said anniversary date.
Otherwise, the parties may mutually agree upon any adjustments in
the purchase price.
b. Beginning the sixth (6th) month after the installation of
each DRS machine, Frankum shall pay to the Company the sum of
Two Hundred and Fifty Dollars ($250.00) per month for each
such machine on a continuing monthly basis.
c. The price for any other product shall be established by
the parties on a per product basis, and shall be evidenced by
a written document executed by each party confirming said
product price.
d. Frankum shall insure the products so purchased for their
full insurable value during all segments of shipment.
6. Payments for Product. Frankum shall pay in full all
balance owing the Company for all products delivered within forty-
eight business hours of the arrival of any such product in the
Country where the same are to be installed or delivered to a
customer.
7. Responsibilities of Company. The Company shall be
responsible under this Agreement as follows:
a. To perform in accordance with all of the terms and
provisions of this Agreement.
b. To process orders made by Frankum in a timely manner for
dispatch from works no later than forty-five (45) days of
receipt of an accepted purchase order from Frankum, to be
processed within five (5) days, or for such other delivery
date as may be set forth in any such purchase, order as
agreed by the parties.
c. To manufacture and produce the DRS machine within the
standards of quality and workmanship established as of the
effective date of this Agreement, and any future
improvements and/or modifications, and to manufacture and
produce any other product consistent with high standards of
quality and workmanship.
d. To immediately, as far as reasonable, repair or replace
any defective DRS machine or other product at the expense of
the Company, including the shipping costs of any such
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<PAGE>
returned product and any such replaced product, providing
damage has not been caused by unpacking: erection or misuse.
e. To warranty the quality, workmanship and operation of
each DRS machine and/or other product, and to indemnify and
hold Frankum harmless from any claim, damage, liability,
suit or other expense resulting from any breach of any such
warranty.
f. To provide to Frankum on a continuing basis an y
advertising materials, product videos,
brochures, leaflets, etc. for any such product, whether
existing or later developed, (which
Frankum shall reproduce at his own expense), for use by
Frankum in marketing any of the
said concepts and/or products.
g. To provide to Frankum, on a continuing basis any product
test results, product research, customer testimonials.
h. To continue with ongoing trials of products, and the
development of protocols, and to supply all information with
regard to the same to Frankum., as felt appropriate by the
Company.
i. To provide adequate and appropriate training to selected
personnel and/or engineers selected by Frankum from time to
time. Travel and accommodations shall be paid by Frankum.
j. To keep all ownership and/or proprietary rights in and to
the Shealy concepts set forth above, any later acquired
Shealy concept, any and all DRS machines and/or other
related products, all related intellectual property,
trademarks, service marks, patents, design patents, working
drawings and specifications, technology, contracts, licenses
and other related items, free and clear from all liens,
claims, pledges or encumbrances of any nature, except for
any security interest granted to Frankum pursuant to this
Agreement or otherwise.
k. To make its best efforts to make Dr. Shealy available for
lectures, presentations, appearances and promotions in
connection with Frankum's marketing efforts, with travel and
expenses to be paid by Frankum.
1. To allow Frankum. To utilize signage or other designs of
the Company related to said concepts and/or products, and to
utilize Dr. Shealy's likeness, in connection with Frankum's
marketing efforts.
8. Responsibilities of Frankum. Frankum shall be responsible
under this Agreement as follows:
a. To perform in accordance with all of the terms and
provisions of this Agreement.
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<PAGE>
b. To make best efforts to evaluate and give to the Company
a continuing forecast of purchase order quantities and
schedules of deliveries as distribution is developed.
c. To register all appropriate trademarks and/or service
marks regarding said concepts and/or products in any and all
Countries where Frankum is engaged in active marketing
efforts, and any other Country in which, in Frankum's sole
discretion, such registration prior to marketing efforts
being made would be beneficial, all at Frankum's own
expense.
d. To provide to the Company any product test results,
product research or customer testimonials on a continuing
basis.
e. To conduct trials of products as deemed appropriate, and
to develop protocols as deemed appropriate, and to supply
all information with regard to the same to the Company. Any
proposed trial or protocol development shall require the
Company's prior written approval.
9. Frankum as Independent Contractor. It is specifically
understood and agreed that Frankum is acting as an independent
contractor, and that Frankum is not an agent, partner or
coventurer of the Company.
10. Delays. The Company shall not be deemed to be in default
under this Agreement where the Company's delays or inability to
perform is occasioned by strikes, boycotts, lockouts, shortages,
Acts of God, Governmental regulations, or other occurrences
beyond the control of the Company with respect to agreed
manufacturing and delivery schedules, providing the Company is
acting in good faith.
11. Non-Competition/Non-Interference. During the term of
this Agreement, and during any renewal or extension thereof, the
Company shall not, directly or indirectly, through any
subsidiary, joint venturer, partner, or as a Shareholder, through
any agent, nor in any other* manner, or method, engage in the
business of the marketing, distribution, franchising or licensing
of the above described concepts and/or products, or any other
product which Frankum has the sole and exclusive right to so
market, nor shall it engage in the sale of evolutions,
derivations, or imitations of the same, nor in the sale of like
or similar concepts and/or products in any geographical area for*
which Frankum has the sole and exclusive rights pursuant to this
Agreement. In addition to any other remedies available to
Frankum. As a result of a breach or violation of this Paragraph
11, Frankum shall have the right to seek and receive injunctive
relief.
12. All of the Company's obligations under this Agreement
shall be secured by an appropriate security interest executed by
the Company and each of its subsidiaries, granting to Frankum a
security interest in any and all proprietary interest, contracts,
licenses and/or rights in and to the Shealy Pain Program, the
Shealy DRS System, the Shealy PCU Unit, or and additions,
replacements, accessions, improvements, extension, or
substitutions thereto, including, without limitation,
intellectual property related to the same, copyright, trademarks,
patents, design patents, technology, working drawings and
specifications, test reports, research, advertising materials,
franchise rights, and all related assets, whether now existing,
later developed or later acquired. The Company shall execute, and
cause all of its subsidiaries to executed, and deliver to
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<PAGE>
Frankum
any documents or instruments necessary to enable Frankum to
perfect and otherwise establish and protect the security interest
granted herein, including, but not limited to documents for
filing with the United States Trademark and Patent Office, UCC-1
Financing Forms, and the Security Agreement attached to this
Agreement as Exhibit "A". Should the Company, or any of its
subsidiaries, fail or refuse to execute any such document, the
Company hereby irrevocably grants Frankum its power of attorney
to execute any such document on behalf of the Company, and to
bind the Company, and/or its subsidiaries, as fully thereby as if
the Company had so executed any such document.
13. Default. Upon any default by the Company of the terms
and provisions of this Agreement which has not been cured by the
Company within one hundred and eighty (180) days of receipt of
written notice thereof by Frankum, in additions to any remedy
available to Frankum in law or equity, Frankum shall have the
right to manufacture the DRS machine and/or other related
products, and continue to market the above described concepts
and/or products worldwide (exclusive of the United States of
America, Canada and Greece), and to continue to utilize all
trademarks, service marks and other intellectual property,
designs, patents, advertising, and other materials in connection
with Frankum's marketing efforts for a period of time equal to
the balance of the original term hereof, and any extension. The
Company shall continue to receive continuing usage revenues for
DRS machines installed prior to the date of 180 days subsequent
to written notice of such default, but shall receive no such
revenues for DRS machines installed after said date. The Company
shall promptly deliver all working drawings and specifications,
technology, and all other materials and/or information necessary
to enable Frankum to manufacture said products.
14. Amendments. This Agreement may be amended, altered or
modified only by a written instrument executed by the parties
hereto.
15. Sale of Assets, Merger or Reorganization by Company. The
Company and Frankum agree that the long term nature of this
Agreement is a major consideration received by Frankum for entry
by Frankum into this Agreement, consequently, the Company shall
not sell, transfer, assign or otherwise dispose of its ownership
and proprietary interests in the concepts and/or products, all as
described above, including merger and/or reorganization, without
disclosing the existence, terms and provisions of this Agreement
to any such proposed transferee, and requiring that the
continuation of this Agreement, by way of assignment to and
acceptance by any such transferee, pursuant to all its terms, be
a condition of any such assignment, sale or other transfer, and,
further, that this said requirement be binding upon any such
transferee and any and all subsequent transferee, surviving
corporation or entity, or successor entity, and/or successors in
interest.
16. Assignability.
a. It is anticipated that John Frankum will assign this
Agreement to an entity wholly owned by him, and said
assignment is approved, and all references to "Frankum"
herein shall apply to John Frankum or his wholly owned
successor in interest, as the case may be.
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<PAGE>
b. Otherwise, this Agreement is fully assignable by Frankum,
with the prior approval of the Company, which shall not be
unreasonably withheld.
c. Except as set forth in Paragraph 15, above, the Company
may not assign this Agreement without the prior written
consent of Frankum.
17. Notices. All notices herein provided shall be deemed to
be duly given when sent by registered or certified mail, return
receipt requested, or by overnight courier, return receipt
requested, or by hand delivery, at such address as may be
designated by the parties, or at an actual or operative address
of any such party.
18. Interpretation. To the extend possible, this Agreement
shall be governed by the Laws of the State of Florida.
19. Venue. Venue for any litigation, arbitration or other
proceeding arising out of this Agreement shall be in the United
States of America, or an international arbitration court as
agreed by the parties.
20. Attorneys Fees and Costs. In the event any action or
proceeding is instituted to enforce the terms and provisions of
this Agreement, or in the event of breach hereof, the prevailing
party shall recover reasonable fees and costs incurred as a
result thereof, including all appeals, from the non-prevailing
party.
21. Facsimile and/or Counterpart Execution. The parties
agree that this Agreement may
be executed in multiple counterparts, and such counterparts when
executed by all parties shall be
considered to constitute a valid binding agreement. The parties
further agree that this Agreement,
or any such counterparts, may be executed by an original
signature of a party, or by a facsimile
(telefax) signature, which shall be considered to be an original
signature, and shall be valid and
binding.
22. Entire Agreement. This Agreement contains the entire
agreement between the parties regarding the subject matter
herein, and supercedes all previous agreements, whether written,
oral or otherwise, with regard to said subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement
below, effective the
date and year first set forth above.
WITNESSES:
/s/ /s/ John Frankum
Cluster Technology Corp. and its
subsidiaries, Universal Pain
Technology, Inc., Universal Pain
Clinics, Inc., and Professional
Distribution Systems, Inc.
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<PAGE>
/s/ /s/ Carlos Becerra, Director
/s/ David Williams, Director
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<PAGE>
ADDENDUM TO DISTRIBUTION, MARKETING AND LICENSING AGREEMENT,
AND SECURITY AGREEMENT
THIS ADDENDUM to Agreement made by and between CLUSTER
TECHNOLOGY CORP., a Delaware corporation (hereinafter "Company"),
and JOHN FRANKUM (hereinafter "Frankum").
WITNESSETH:
WHEREAS, the parties entered into that certain DISTRIBUTION,
MARKETING AND LICENSING Agreement dated effective November 11,
1998, which provided, among other things, for the grant to
Frankum of the right and license worldwide (excluding the United
States of America, Canada and Greece) to market, distribute,
franchise and license certain defined concepts and/or products
manufactured and/or distributed by Cluster, the grant of a
security interest in favor of Frankum in certain defined assets
of Cluster, and other matters and obligations of the parties, and
WHEREAS, said Security Agreement was executed by the parties
to be effective November 11, 1998, and
WHEREAS, certain events have occurred which cause the
parties to desire to amend the effective date of said Agreement
and said Security Agreement, and
WHEREAS, the parties have reached certain agreements with
regard to the effective date of said Agreement, and with regard
to a certain force majeure provision, and are desirous of setting
forth the same in writing below, it is, therefore,
IN CONSIDERATION of the Distribution, Marketing and
Licensing Agreement, the
covenants set forth herein, and other valuable consideration
acknowledged,
MUTUALLY AGREED as follows:
1. Recitals. The foregoing recitals are true and correct as
applicable to the respective parties, and the same are
incorporated herein as a material part hereof.
2. Merger. This Addendum and said Distribution, Marketing
and Licensing Agreement are hereby merged and shall be deemed to
be one document; in the event of conflict between the provisions
of said Agreement and those of this Addendum, this Addendum shall
be controlling.
3. Effective Date. The effective date of said Distribution,
Marketing and Licensing Agreement shall for all purposes be
considered to be November 17, 1998.
4. Security Agreement. The effective date of said Security
Agreement, executed as provided in said Agreement, shall for all
purposes be deemed to be November 17, 1998, rather than November
11, 1998.
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<PAGE>
5. Delays. Paragraph 10 of said Distribution, Marketing and
Licensing Agreement is hereby amended by adding to the end of
said Paragraph 10 the following provision:
"Frankum shall not be deemed to be in default under this
Agreement where Frankum's delays or inability to perform is
occasioned by strikes, boycotts, lockouts, shortages, Acts
of God, Governmental regulations, or other occurrences
beyond the control of Frankum, except in regard to all
matter of payment pursuant to this Agreement".
6. Agreement Effective. Except as modified by this Addendum,
said Distribution, Marketing and Licensing Agreement, and
Security Agreement shall remain in full force and effect in all
respects, and the parties remain fully bound thereby.
IN WITNESS WHEREOF, the parties have executed this Addendum
effective the 24th day of November, 1998.
WITNESSES:
/s/ /s/John Frankum
Cluster Technology Corp. and its
subsidiaries, Universal Pain
Technology, Inc., Universal Pain
Clinics, Inc., and Professional
Distribution Systems, Inc.
/s/ /s/ Carlos Becerra, Director
/s/ /s/ David Williams, Director
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<PAGE>
SECURITY AGREEMENT
CLUSTER TECHNOLOGY CORP., a Delaware corporation, and its
wholly owned subsidiaries, UNIVERSAL PAIN TECHNOLOGY, Inc., a
Florida corporation; UNIVERSAL PAIN CLINICS, INC., a Florida
corporation; and PROFESSIONAL DISTRIBUTION SYSTEMS, INC., jointly
and severally, whose addresses are 250 International Parkway,
Suite 200, Heathrow, Florida 32746, referred to herein jointly
and severally as the "Obligor" and JOHN FRANKUM whose address is
1287 Glencrest Drive, Heathrow, Florida 32746, referred to herein
as the "Secured Party", do hereby agree effective the 11th day of
November, 1998, as follows:
1. Security Interest. Obligor, and each of them, hereby
grants to Secured Party a continuing and unconditional security
interest (the "Security Interest") in the following (all of which
is collectively referred herein as the "Collateral"):
Any and all proprietary interest, contracts creating
proprietary interests, licenses and/or rights in and to
the Shealy Pain Program, the Shealy DRS System, the
Shealy PCU Unit, or any additions, replacements,
accessions, improvements, extensions, or substitutions
thereto, including, without limitation, intellectual
property related to the same, copyrights, trademarks,
patents, technology, working drawings and
specifications, test reports, research, advertising
materials, franchise rights, and all related assets,
whether now existing, later developed or later
acquired.
2. Indebtedness Secured. This Agreement and the Security
Interest shall secure the performance of all obligations, of
Obligor pursuant to that certain Distribution, Marketing and
Licensing Agreement (hereinafter the "DML Agreement") by and
between Obligor and Secured Party, dated effective November 11,
1998.
3. Warranties of Obligor. The Obligor and each of them,
wan-ants, and so long as this Agreement remains in force, shall
be deemed continuously to warrant as follows:
(a) Obligor has no knowledge of any liens or encumbrances
which could attach the collateral, except for the security
interest created hereby;
(b) Obligor has full power and authority to enter into this
agreement and any person signing it on behalf of Obligor does so
with obligor's full authority;
(c) Information which the obligor has supplied or hereafter
supplies to the Secured Party is true and correct.
(d) Cluster Technology Corp. is a lawfully established
Delaware corporation in good standing, and all of its wholly
owned subsidiaries are corporations in good standing in the State
of their respective incorporation.
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4. Covenants of Obligor. For so long as this Agreement is
in force, and the Obligor's obligations pursuant to the DML
Agreement remain in force, Obligor and each of them, does
covenant with the Secured Party as follows:
(a) Obligor will defend the Collateral against the claims
of all other persons;
(b) Obligor will keep the Collateral free from all other
liens and encumbrances which are superior in priority to that of
the Secured Party.
(c) Obligor will not sell, transfer, lease or otherwise
dispose of the Collateral or any interest therein, unless said
sale, transfer, lease or other transfer is subject to the terms
and provisions of this Security Agreement and the DML Agreement.
(d) Obligor will keep the Collateral in force and in good
standing with all governing authorities;
(e) Obligor will not use the Collateral in violation of any
provision of this Agreement any insurance policy affecting the
Collateral, or any applicable law or regulation;
(f) Obligor will permit the Secured Party or its agents to
inspect the Collateral and the premises in which it is used, at
all reasonable times and in any reasonable manner;
(g) Obligor will execute and deliver the Secured Party any
financing statements or other documents reasonably requested by
Secured Party if Obligor defaults on payments when due;
(h) Obligor will pay all taxes, and other charges of every
nature which may be levied or assessed against the Collateral,
before any interest or penalties accrue;
(i) Obligor will do all things necessary to keep the
Collateral operational and to maintain this Security Agreement;
(j) Obligor will maintain adequate broad-form casualty
insurance on the insurable Collateral and shall deliver certified
copies of required insurance policies to the Secured Party;
(k) Obligor will pay its obligations to secured party
promptly when due. Obligor will also repay to secured party
immediately and without demand, all of the expenses incurred by
secured party, including reasonable attorney's fees and legal
expenses, which the secured party incurs under this agreement,
together with interest at the highest legal rate from the date of
expenditure, including all appellate proceedings.
5. Default. Any of the following shall constitute an event
of default ("Default"):
(a) the failure to perform any obligation of Obligor under
the DML Agreement referenced above, or this Security Agreement;
(b) the filing by or against the Obligor or any of them, of
a petition in bankruptcy;
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(c) any attachment or levy against the Collateral or
any other occurrence which inhibits the Secured Party's free
access to the Collateral or jeopardizes the Secured Party's
interest in the Collateral;
6. Rights of Secured RM. The nature of the Collateral is
such that delays in asserting the rights of the Secured Party in
the event of Default may seriously impair the value of the
Collateral. Therefore, to the maximum extent permitted by law, as
may be liberally construed, Obligor does hereby grant to Secured
Party the following rights:
(a) Secured Party may file any financing statement or other
document relating to the Collateral which the Secured Party deems
appropriate, without Obligor's signature thereon;
(b) Obligor hereby appoints the Secured Party as Obligor's
attorney-in-fact to execute such documents and to perform all
other acts which the Secured Party deems appropriate to perfect
and to continue perfection of the Security Interest and to do any
act which the obligor is obligated to do under this agreement and
to exercise rights under this agreement which the obligor is
entitled to exercise;
(c) Upon any Default the Secured Party may (but shall not
be obligated to) perform any duty of Obligor hereunder, and
Obligor shall immediately reimburse the Secured Party upon demand
for any expenses incurred by the Secured Party thereby;
(d) Secured Party may declare any part of the Indebtedness
to be due immediately, without notice, upon the happening of any
Default;
(e) Upon the happening of any Default, the Secured Party's
rights with respect to the Collateral shall be those of a Secured
Party under the Uniform Commercial Code and/or any other
applicable law of the United States or the State of Florida; and,
(f) The Secured Party may assign any or all of its rights
or interests under the DML Agreement or this Security Agreement
with the approval of the Obligor, which shall not bv unreasonably
withheld..
7. Notice. Any notice hereunder shall be sufficient if
mailed by or certified mail (return receipt requested) or hand-
delivered to Obligor or Creditor at either of the addresses set
forth above.
8. Costs. Obligor shall pay all costs and expenses
incurred by Secured Party in enforcing this Agreement, including
(but not limited to) reasonable attorney fees, whether suit is
brought or not and whether incurred in connection with
collection, trial, appeal or otherwise.
9. Repossession. Obligor hereby expressly grants to
Secured Party the right to physically repossess the Collateral,
by any reasonable means.
10. Waiver of Notice and Hearing. If any default by Obligor
hereunder is not cured within One Hundred and Eighty (180) days
after receipt of written notice thereof, Obligor hereby
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<PAGE>
waives
any other or further rights Obligor may have to notice and a
hearing before possession of Collateral, or any part thereof, is
sought by the Secured Party whether by self-help replevin,
attachment, foreclosure, or otherwise.
11. Miscellaneous Provisions:
(a) No delay or omission by the Secured Party in exercising
any right hereunder shall operate as a waiver of that or any
other right.
(b) The terms "Secured Party" and "Obligor" as used in this
Agreement shall include the heirs, personal representatives, and
successors or assigns (if permitted) of those parties.
(c) This Agreement may not be modified or amended except in
writing signed by the Obligor and by the Secured Party.
(d) This Agreement shall be construed under the laws of the
State of Florida. Venue shall be in Seminole County, Florida.
(e) This Security Agreement is a continuing Agreement which
shall remain in force until all obligations of Obligors pursuant
to the DML Agreement referenced above have been performed.
(f) No party to this agreement shall be discharged by any
extension of time, additional advances and notes, renewals and
extensions of the taking of further security, releasing security,
extinguishment of the security interest as to all or any party of
the Collateral, or any other act except a release or discharge of
the secured interest upon the full payment of the obligations
secured by this agreement including charges, expenses, fees,
costs and interest.
(g) Any failure by the Secured Party to exercise any right
set forth in this agreement shall not constitute a waiver
thereof. Nothing in this agreement or in the obligations secured
by it shall preclude any other remedy by action or otherwise for
the enforcement of this agreement or the payment in full of the
obligations secured by it.
OBLIGORS: WITNESSES:
CLUSTER TECHNOLOGY CORP.
and its subsidiaries, Universal Pain Technology,
Universal Pain Clinics, Inc., and Professional
Distribution Systems, Inc.
/s/ Carlos Becerra, Director /s/ Ramsey W. Dulin
/s/ David Williams, Director
"SECURED PARTY" WITNESSES:
/s/ John Frankum /s/ Ramsey W. Dulin
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Exhibit No. 6
Form 10-SB
Cluster Technology Corp.
AGREEMENT
THIS AGREEMENT made effective the 11th day of November,
1998, by and between CLUSTER TECHNOLOGY CORP., a Delaware
corporation (hereinafter referred to as the "Company"), and JOHN
FRANKUM (hereinafter referred to as "Frankum").
WITNESSETH:
WHEREAS, the Company and Frankum are the parties to an
Employment Agreement consisting of that certain Employment
Agreement dated effective December 1, 1996, and that certain
Addendum to Employment Agreement dated effective July 1, 1997,
pursuant to which the Company employed Frankum pursuant to the
terms, provisions and conditions set forth therein, and
WHEREAS, pursuant to said Employment Agreement, Frankum has
served, and continues to serve, as a member of the Board of
Directors and as President of the Company, and
WHEREAS, the term of Frankum's employment by the Company
pursuant to said Employment Agreement began on December 1, 1996,
and continues through December 31, 2001, and
WHEREAS, said Employment Agreement specifies and sets forth
the salary to be paid to Frankum during the term of his
employment, including $317,400 for the one-year period ending
December 31, 1998; $365,010 for the one-year period ending
December 31, 1999; $419,761.50 for the one-year period ending
December 31, 2000; and $500,000 for the one-year period ending
December 31, 2001, and
WHEREAS, said Employment Agreement specifies and sets forth
bonus compensation to be paid by the Company to Frankum during
the term of his employment, and
WHEREAS, said Employment Agreement specifies and sets forth
certain expenses to be paid by the Company for the benefit of
Frankum and/or to be reimbursed to Frankum by the Company, and
further set forth benefits to be provided to Frankum by the
Company and/or to which Frankum may be entitled, and
WHEREAS, the sum of $512,000.00 is due and owing to Frankum
by the Company as, and for accrued and unpaid salary, and
WHEREAS, Frankum has over the years loaned substantial sums
of money to the Company, by way of direct loans, deferred
compensation, and other credit facilities, which have
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<PAGE>
been
evidenced from time to time by certain promissory notes payable
to Frankum by the Company upon demand, and
WHEREAS, Frankum has caused a line of credit for the Company
at the Barnett Bank, with a limit of $50,000.00, and has
personally guaranteed payment of the same, and
WHEREAS, during the term of his employment, Frankum has
taken actions with regard to the operation of the Company and its
business, and the business of the Company's subsidiaries, and has
taken other actions on behalf of the Company and/or the Company's
subsidiaries, with the approval and at the direction of the
Company, and
WHEREAS, the Company has granted to Frankum certain options
to purchase shares of the Company's stock, and
WHEREAS, said Employment Agreement specifies and sets forth
provisions restricting Frankum's ability to compete with the
Company and/or to disclose certain information with regard to the
Company, and
WHEREAS, said Employment Agreement provides that the Company
shall indemnify and hold Frankum harmless from and against
liability for acts or decisions made by Frankum while providing
services for the Company, and
WHEREAS, said Employment Agreement provides that should said
Employment Agreement be terminated by the Company for any reason
other than cause, as cause is defined therein, that the Company
shall pay to Frankum a single sum payment of an amount equal to
two (2) years salary plus the sum of the four (4) bonus payments
made or due Frankum immediately preceding the date of
termination, and
WHEREAS, the Board of Directors consists of three (3)
members, to-wit: David Williams, Carlos Becerra and John Frankum,
and
WHEREAS, David Williams and Carlos Becerra, as members of
the Board of Directors, have indicated their desire to terminate
said Employment Agreement without cause, and
WHEREAS, Frankum is a shareholder of the Company, currently
holding and owning 1,150,00 shares, and
WHEREAS, the Company and Frankum each desire to act in the
best interests of the Company, and, consequently have reached
certain agreements with regard to said Employment Agreement and
other issues between Frankum and the Company, and
WHEREAS, the Company and Frankum are desirous of setting
forth said agreements in writing hereinbelow, it is, therefore,
IN CONSIDERATION of the covenants set forth below, and other
valuable consideration acknowledged,
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<PAGE>
MUTUALLY AGREED as follows:
1. Recitals. The recitals set forth above are true and
correct as applicable to the parties, and are incorporated into
this Agreement as a material part hereof.
2. Termination of Employment Agreement. Subject to the
terms, provisions, conditions, obligations and rights contained
in this Agreement, the Employment Agreement described in the
above recitals shall be terminated immediately upon execution of
this Agreement by all parties hereto, except as certain
provisions thereof may be referenced and incorporated into this
Agreement as a material part hereof, and the parties shall
hereafter be governed by the terms, provisions, conditions,
obligations and rights set forth herein. Notwithstanding the
mutual agreement of the parties hereto to so terminate said
Employment Agreement, the parties acknowledge and agree that no
cause exists for said termination, as cause is defined in said
Employment Agreement, or for any other cause.
3. Corporate Resignations. Upon the execution of this
Agreement by all parties, Frankum shall execute and deliver to
the Company his resignation as a member of the Board of Directors
and as President of the Company. Said resignation shall be of a
form as attached hereto as Exhibit "A".
4. Severance Compensation. The Company shall pay to
Frankum severance compensation as follows:
a. The Company shall pay to Frankum the sum of Two Hundred
Thousand Dollars ($200,000.00), which said sum represents an
amount of salary compensation. The entire sum is owed to
Frankum by the Company upon the execution of this Agreement
by the parties, and shall become subject of a Promissory
Note which shall be executed and delivered to Frankum by the
Company in a principal amount equal to said $200,000.00 plus
the amount of Loans and/or accrued salary to be paid to
Frankum pursuant to Paragraph 5, below (hereinafter the
"Note"). The Note shall provide for interest at the rate of
ten percent (10%) per annum, and shall provide for twelve
consecutive monthly payments of principal and interest in
the amount of Forty Thousand Dollars ($40,000.00) each,
beginning the I 11th day of December, 1998, and continuing
on the 11th day of each subsequent consecutive month
thereafter until the 11th day of November, 1999; thereafter,
one-sixth of the remaining unpaid principal shall be paid on
the 11th day of each consecutive month, beginning December
11, 1999, plus all accrued interest due based upon the
entire remaining unpaid principal at the time of each said
payment, all payments being first applied to interest and
then to principal. Said payments shall be the full gross
amounts set forth above, and there shall be no deductions
therefrom, whether for payroll taxes, payroll related
deductions, or otherwise. Upon failure by the Company to
make any such payment when due, or upon any other default by
the Company of any of its obligations pursuant to this
Agreement, Frankum, at his option, may declare all remaining
payments to be due and payable in full. Any waiver by
Frankum of any late payment or other default shall not
constitute a waiver or release by Frankum of any
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<PAGE>
subsequent
failure to make such a payment or other default by the
Company. A copy of said Note is attached hereto as Exhibit
"B".
b. In addition to payment to Frankum of other amount set
forth in this Agreement, the Company shall also pay to
Frankum the sum of $26,400.00, which represents an amount
equal to the sum of the last four (4) bonuses paid to
Frankum immediately preceding the date of this Agreement.
The entire sum is owed to Frankum by the Company upon the
execution of this Agreement by the parties, and shall be
paid in full within fourteen (14) days of the effective date
of this Agreement. Frankum, may declare the entire amount
remaining unpaid to be due and payable in full upon any
default by the Company pursuant to this Agreement. No
waiver, forgiveness or release of any failure to make a
timely payment by the Company, or any other default, shall
constitute a waiver, forgiveness or release of any
subsequent failure to pay, or other default, by the Company.
5. Payment of Loans and/or Accrued Salary. The parties
agree that over the past three years Frankum, has made
substantial loans to the Company and has deferred payment of
salary, the total of which is the amount of $512,000.00. The
parties agree that the Company, as Maker, shall execute and
deliver the Note described in Paragraph 4(a) of this Agreement,
above, the principal amount of which includes the amounts due
pursuant to this Paragraph 5, and the amounts due pursuant to
said Paragraph 4(a), in favor of Frankum, as Payee, which said
note shall supercede and replace any and all existing promissory
notes executed by the Company in favor of Frankum. The terms of
said Note shall be as set forth in the Note attached hereto as
Exhibit "B", and as described in Paragraph 4(a), above.
6. Payment of Credit Line. Frankum has caused a line of
credit to be established for the benefit of the Company at
Barnett Bank. The limit of said line of credit is $50,000.00, and
Frankum has personally guaranteed payment of the same. The
Company shall, within fourteen (14) days of the effective date of
this. Agreement, pay any and all amounts due under said line of
credit, and shall close said account, thereby releasing Frankum
as a guarantor.
7. Payment of Credit Card Expenses. The parties agree that
Frankum has permitted the company to utilize his credit cards for
travel expenses and other business expenses; specifically, the
American Express Corporate (Greystone International, Inc.) Card
No. 3783 400623 31008, and the American Express Platinum Card No.
3713 877219 41005. The Company shall immediately cease all use of
said credit cards as of the effective date of this Agreement, and
shall immediately pay when due all charges against said cards
incurred for the benefit of the Company.
8. Removal From Personal Obligations. Within fourteen (14)
days of the effective date of this Agreement, the Company shall
cause Frankum to be removed and released from any and all debts
or obligations for which he has personally guaranteed performance
or payment by the Company, including, but not limited to,
equipment leases, real property leases, vehicle leases, purchase
contracts, loans, notes, contracts of any nature, office
furniture and/or equipment leases or contracts, and any and all
other obligations of the Company for which Frankum has any
personal liability or potential liability.
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<PAGE>
9. Stock Options. Frankum is hereby granted options to
purchase shares of the Company's Stock as follows:
a. Frankum has previously been granted an option to purchase
250,000 shares of the common stock of the Company at an
exercise purchase price of $2.38 per share. Said option
shall remain valid, and the date by which Frankum must
exercise said option is hereby extended to two years from
the effective date of this Agreement.
b. Additionally, as long as there is any outstanding
obligation to Frankum by the Company pursuant to this
Agreement, whether payments of amounts due or otherwise,
Frankum shall be granted an option to purchase 125,000
shares of the Company's common stock at an exercise purchase
price of $2.38 per share should any obligation of the
Company to Frankum be outstanding at the conclusion of the
first year from the effective date of this Agreement. Said
option shall be exercisable within two (2) years of the date
said option is so granted.
10. Stock Share Dilution. As long as there is any
outstanding obligation to Frankum by the Company pursuant to this
Agreement, no officer or Director of the Company may hold or own,
or be the beneficial owner, any shares of the Company's stock,
including the acquisition of any such shares by the exercise of
any stock options or warrants (other than, pursuant to an option
based upon a performance package for the President), except as
the same may be held and owned by any such officer or Director as
of the effective date of this Agreement, or except as the same
may be purchased at full market value. Additionally, prior to any
stock offering, public, private or otherwise, or prior to any
financing arrangement or credit facility which includes stock
options or conversion provisions which may result in a dilution
of the Company's stock, each shareholder shall be offered the
option to purchase shares or provide said financing in a
percentage equal to the percentage of ownership by any such
shareholder of the Company's stock at the time of said
offer, or in a greater percentage should other shareholders
decline to so purchase shares or otherwise provide such
financing.
11. Covenant Not to Compete. During the period of this
Agreement, and for a period of one (1) year following the
termination of this Agreement, except in the event of breach of
this Agreement by the Company, Frankum agrees that he will not
directly or indirectly engage in, assist, perform services for,
establish or open, or have any equity interest (other than
ownership of 10% or less of the outstanding stock of any
corporation listed on the New York or American Exchange, or
included in the National Association of Securities Dealers
automated quotation system), in any person, firm, corporation, or
business entity (whether as an employee, officer, director,
agent, security holder, creditor, consultant, or otherwise), that
engages in any business in which the Company or any of its
subsidiaries is engaged, within any territory or area in which
the Company or any of its subsidiaries is at present conducting
business, or in any territories in which Frankum knows at the
time of this Agreement that the Company or any of its
subsidiaries currently intend to establish a business by
expansion of their activities, unless such activity by Frankum
also serves to benefit the Company or is pursuant to a
distribution an/or licensing agreement with the Company. The
parties intend that the covenant contained in this Paragraph
shall be construed as a series of separate covenants, one for
each market area in which the
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<PAGE>
Company or any of its subsidiaries
provides goods and/or services. Except for geographic coverage,
each such separate covenant shall be deemed identical in terms to
the covenants contained above. If in any judicial proceeding, a
court shall refuse to enforce any of the separate covenants
described above, than the unenforceable covenants shall be deemed
eliminated from these provisions to the extent necessary to
permit the remaining covenants (meaning the remaining market
areas) to be enforced. This covenant shall survive the
termination of this Agreement.
12. Non-Disclosure of Information. In further consideration
of this Agreement, Frankum agrees that he will not, either during
the term of this Agreement or thereafter:
a. use for his own benefit or give to any person not
authorized by the Company to receive or use the same, except
for the sole benefit of the Company, any of the Company's
proprietary data, information, marketing or installation
plans, procedures, results, methods, ideas, processes or
research and development, or
b. use for his own benefit or give to any person not
authorized to receive it, any plans or specifications,
customer lists, data, study, table, report, written
technical information, or the like, owned by the Company, or
any copy thereof, or
c. Use for his own benefit or give to any persons not
authorized by the Company
to receive it, any information that is generally not known
to anyone other than the
Company, or that is designated by the Company as "Limited",
"Private", or
"Confidential", or is similarly designated.
13. Indemnification and Hold Harmless. The Company
shall indemnify and hold
Frankum harmless from and against any liability, claim, action,
proceeding, enforcement action, causes of action, suits, damages,
executions, securities claims or actions or enforcement (both
public and private) and demands of any nature whatsoever, whether
pending, accrued, known or unknown at the time of this Agreement
, whether the same are made by a person, business entity or other
entity, a governmental agency or entity, or a quasi-governmental
agency or entity, resulting from any action, lack of action,
decision, negligence or alleged negligence, or act of any nature
whatsoever, done while he served as president and/or Director of
the Company, or resulting from or drawing out of his service as
president and/or Director of the Company, or as a result of any
personal guaranty. Said indemnification and hold harmless shall,
include a vigorous defense by the Company at the Company's
expense, and, further, the Company shall pay all expenses
incurred or to be incurred by Frankum as a result of any matter
against which he is to be indemnified and held harmless,
including, but not limited to, attorney's fees paid to an
attorney of Frankum's choosing, related legal expenses,
investigative expenses, discovery costs, and related office
expenses.
14. Security. All of the Company's obligations under this
Agreement and the Promissory Note shall be secured by an
appropriate -security interest executed by the Company and each
of its subsidiaries, granting to Frankum a security interest in
any and all proprietary interest, contracts, licenses and/or
rights in and to the Shealy Pain Program, the Shealy DRS System,
the Shealy PCU Unit, or and additions, replacements, accessions,
improvements,
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extension, or substitutions thereto, including,
without limitation, intellectual property related to the same,
copyright, trademarks, patents, technology, working drawings and
specifications, test reports, research, advertising materials,
franchise rights, and all related assets, whether now existing,
later developed or later acquired. The Company shall execute, and
cause all of its subsidiaries to executed, and deliver to Frankum
any documents or instruments necessary to enable Frankum to
perfect and otherwise establish and protect the security interest
granted herein, including, but not limited to documents for
filing with the United States Trademark and Patent Office, UCC-1
Financing Forms, and the Security Agreement attached to this
Agreement as Exhibit "C". Should the Company, or any of its
subsidiaries, fail or refuse to execute any such document, the
Company hereby irrevocably grants Frankum its power of attorney
to execute any such document on behalf of the Company, and to
bind the Company, and/or its subsidiaries, as fully thereby as if
the Company had so executed any such document.
15. Sale of Assets, Merger or Reorganization by Company.
The Company and Frankum agree that the security interest granted
herein in the concepts and/or products is a major consideration
received by Frankum for entry by Frankum into this Agreement,
consequently, the Company shall not sell, transfer, assign or
otherwise dispose of its ownership and proprietary interests in
the concepts and/or products, all as described above, including
merger and/or reorganization, without disclosing the existence,
terms and provisions of this Agreement to any such proposed
transferee, and requiring that the continuation of this
Agreement, by way of assignment to and acceptance by any such
transferee, pursuant to all its terms, be a condition of any such
assignment, sale or other transfer, and, further, that this said
requirement be binding upon any such transferee and any and all
subsequent transferee, surviving corporation or entity, or
successor entity, and/or successors in interest.
16. Waivers and Releases. Except for the obligations and
covenants created by this Agreement, each party hereby releases
and discharges the other of and from all manner of action and
actions, causes of action, suits, debts, sums of money, accounts,
damages, judgments, executions, claims and demands whatsoever, in
law or in equity, which each party may have ever had, or may have
against the other, upon or for any reason whatsoever, whether
pending, accrued, known or unknown, from the beginning of time
trough the effective date of this Agreement.
17. Corporate Resolution. The Directors of the Company, as
a precondition to the execution of this Agreement by Frankum,
shall deliver to Frankum a true copy of a corporate resolution of
the Directors approving the entry of the Company into this
Agreement, and authorizing Carlos Becerra and David Williams, as
Directors, to execute this Agreement and all related documents on
behalf of the Company, and to bind the Company thereby.
18. Stock Offerings. Beginning April 1, 1999, as long as
Frankum is owed any amounts pursuant to this Agreement, in the
event the Company should make any stock offerings, whether
public, private or otherwise, ten percent (10%) of all monies
raised pursuant to any such stock offering shall be paid to
Frankum to retire indebtedness owed to him pursuant to this
Agreement.
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19. Governing Law and Venue. This Agreement shall be
governed and interpreted pursuant to the Laws of Florida. The
venue for any proceeding pursuant this Agreement shall be in
Seminole County, Florida.
20. Entire Agreement. This Agreement constitutes the entire
agreement between the parties regarding the subject matter
herein, superceding all prior agreements, oral, written or
otherwise, with regard to said subject matter.
21. Amendments. This Agreement may not be modified or
amended except by a written instrument or document executed by
all parties.
22. Attorneys Fees and Costs. In the event of any action or
proceeding to enforce this Agreement, or in the event of breach
thereof, the prevailing party in any such action shall recover
reasonable attorneys fee and cost incurred as a result of any
such action or proceeding, including appeals, from the non-
prevailing party.
23. Facsimile and/or Counterpart Execution. The parties
agree that this Agreement may be executed in multiple
counterparts, and such counterparts when executed by all parties
shall be considered to constitute a valid binding agreement. The
parties further agree that this Agreement, or any such
counterparts, may be executed by an original signature of a
party, or by a facsimile (telefax) signature, which shall be
considered to be an original signature, and shall be valid and
binding.
24. Default. Upon default by the Company of any obligation
under this Agreement, the Security Agreement, and/or the
Promissory Note, Frankum may declare all sums due to him pursuant
to this Agreement to be due and payable in full immediately.
IN WITNESS WHEREOF, The parties have executed this Agreement
below, effective
the date and year first set forth above.
WITNESSES:
/s/ As to Frankum /s/ John Frankum
Cluster Technology Corp. and its
subsidiaries, Universal Pain
Technology, Inc., Universal Pain
Clinics, Inc., and Professional
Distribution Systems, Inc.
/s/ As to the Company /s/ Carlos Becerra,
Director
/s/ David Williams, Director
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RESIGNATION
In accordance with that certain Agreement, dated effective
November 11, 1998, by and between the undersigned and Cluster
Technology Corp., pursuant to which an agreement was made to
terminate without cause the Employment Agreement of the
undersigned with Cluster Technology Corp., the undersigned hereby
submits his resignation as President and as a member of the Board
of Directors of Cluster Technology Corp., and also as any officer
or Director of any and all subsidiaries of Cluster Technology
Corp., all said resignations being effective November 11, 1998.
/s/ John Frankum.
EXHIBIT NO. A
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PROMISSORY NOTE
$712,000.00 Orlando,
Florida
November 11,
1998
FOR VALUE RECEIVED, the undersigned maker, CLUSTER
TECHNOLOGY CORP., a Delaware corporation, 250 International
Parkway, Suite 200, Heathrow, Florida 32746 ("Maker"), does
hereby promise to pay to the order of JOHN FRANKUM ("Payee"), the
principal sum of Seven Hundred and Twelve Thousand and No/100
Dollars ($712,000.00), together with simple interest thereon from
date hereof at the rate of ten percent (10%) per annum, both
principal and interest being payable in lawful money of the
United States of America; said principal and interest to be
payable as follows:
Twelve consecutive monthly payments of principal and
interest in the amount of Forty Thousand Dollars
($40,000.00) each, beginning on the 11th day of
December, 199 8, and continuing on the 11th day of each
subsequent consecutive month thereafter until November
11, 1999; thereafter, one-sixth of the remaining unpaid
principal shall be paid on the 11th day of each
subsequent consecutive month, beginning December 11,
1999, plus all accrued interest due based upon the
entire remaining unpaid principal at the time of each
such payment. All payments shall first be applied to
interest and then to principal.
Maker hereby waives demand, protest and notice of maturity,
non-payment or protest and all requirements necessary to hold
Maker liable as Maker hereof. Failure to make any payment of
interest when due, or principal when due, shall constitute a
default, and upon such default Payee may declare the entire
unpaid principal and unpaid accrued interest due and payable
immediately.
Maker further agrees to pay all costs of collection,
including reasonable attorney's fees, in the event the principal
of this note, or any portion of the principal, or any interest
thereon, is not paid when due. This note is pre-payable, in full
or in part, without penalty. All payments due hereunder shall be
payable at the address directed by Payee.
MAKER:
CLUSTER TECHNOLOGY CORP.
WITNESSES:
/s/ /s/ Carlos Becerra, Director
/s/ /s/ David William, Director
EXHIBIT NO. B
E-64
<PAGE>
SECURITY AGREEMENT
CLUSTER TECHNOLOGY CORP., a Delaware corporation, and its
wholly owned subsidiaries, UNIVERSAL PAIN TECHNOLOGY, Inc., a
Florida corporation; UNIVERSAL PAIN CLINICS, INC., a Florida
corporation; and PROFESSIONAL DISTRIBUTION SYSTEMS, INC., jointly
and severally, whose addresses are 250 International Parkway,
Suite 200, Heathrow, Florida 32746, referred to herein jointly
and severally as the "Debtor" and JOHN FRANKUM whose address is
1287 Glencrest Drive, Heathrow, Florida 32746, referred to herein
as the "Secured Party", do hereby agree effective the 111 day of
November, 1998, as follows:
1. Security Interest. Debtor, and each of them, hereby
grants to Secured Party a continuing and unconditional security
interest (the "Security Interest") in the following (all of which
is collectively referred herein as the "Collateral"):
Any and all proprietary interest, contracts creating
proprietary interests, licenses and/or rights in and to
the Shealy Pain Program, the Shealy DRS System, the
Shealy PCU Unit, or any additions, replacements,
accessions, improvements, extensions, or substitutions
thereto, including, without limitation, intellectual
property related to the same, copyrights, trademarks,
patents, technology, working drawings and
specifications, test reports, research, advertising
materials, franchise rights, and all related assets,
whether now existing, later developed or later
acquired.
2. Indebtedness Secured. This Agreement and the Security
Interest shall secure the performance of all obligations, of
Debtor pursuant to that certain Agreement by and between the
Debtor and Secured Party, dated effective November 11, 1998, and
that certain promissory note of even date, in the principal
amount of $712,000.00, executed by Debtor in favor of Secured
Party.
3. Warranties of Debtor. The Debtor and each of them,
warrants, and so long as this Agreement remains in force, shall
be deemed continuously to warrant as follows:
(a) Debtor has no knowledge of any liens or encumbrances
which could attach the collateral, except for the security
interest created hereby;
(b) Debtor has full power and authority to enter into this
agreement and any person signing it on behalf of Debtor does so
with Debtor's full authority;
(c) Information which the Debtor has supplied or hereafter
supplies to the Secured Party is true and correct.
(d) Cluster Technology Corp. is a lawfully established
Delaware corporation in good standing, and all of its wholly
owned subsidiaries are corporations in good standing in
State of their respective incorporation.
EXHIBIT NO. C
E-65
<PAGE>
4. Covenants of Debtor. For so long as this Agreement is
in force, and the Debtor's obligations pursuant to the DML
Agreement remain in force, Debtor and each of them, does covenant
with the Secured Party as follows:
(a) Debtor will defend the Collateral against the claims of
all other persons;
(b) Debtor will keep the Collateral free from all other
liens and encumbrances which are superior in priority to that of
the Secured Party.
(c) Debtor will not sell, transfer, lease or otherwise
dispose of the Collateral or any interest therein, unless said
sale, transfer, lease or other transfer is subject to the terms
and provisions of this Security Agreement and the November 11,
1998, Agreement and Promissory Note.
(d) Debtor will keep the Collateral in force and in good
standing with all governing authorities;
(e) Debtor will not use the Collateral in violation of any
provision of this Agreement any insurance policy affecting the
Collateral, or any applicable law or regulation;
(f) Debtor will permit the Secured Party or its agents to
inspect the Collateral and the premises in which it is used, at
all reasonable times and in any reasonable manner;
(g) Debtor will execute and deliver the Secured Party any
financing statements or other documents reasonably requested by
Secured Party if Debtor defaults on payments when due;
(h) Debtor will pay all taxes, and other charges of every
nature which may be levied or assessed against the Collateral,
before any interest or penalties accrue;
(i) Debtor will do all things necessary to keep the
Collateral operational and to maintain this Security Agreement;
(j) Debtor will maintain adequate broad-form casualty
insurance on the insurable Collateral and shall deliver certified
copies of required insurance policies to the Secured Party;
(k) Debtor will pay its obligations to secured party
promptly when due. Debtor will also repay to secured party
immediately and without demand, all of the expenses incurred by
secured party, including reasonable attorney's fees and legal
expenses, which the secured party incurs under this agreement,
together with interest at the highest legal rate from the date of
expenditure, including all appellate proceedings.
5. Default. Any of the following shall constitute an event
of default ("Default").
(a) the failure to perform any obligation of Debtor under
the November 11, 1998, Agreement or the promissory note
referenced above, or this Security Agreement;
E-66
<PAGE>
(b) the filing by or against the Debtor or any of them, of
a petition in bankruptcy;
(c) any attachment or levy against the Collateral or any
other occurrence which inhibits the Secured Party's free access
to the Collateral or jeopardizes the Secured Party's interest in
the Collateral;
6. Rights of Secured Party. The nature of the Collateral
is such that delays in asserting the rights of the Secured Party
in the event of Default may seriously impair the value of the
Collateral. Therefore, to the maximum extent permitted by law, as
may be liberally construed, Debtor does hereby grant to Secured
Party the following rights:
(a) Secured Party may file any financing statement or other
document relating to the Collateral which the Secured Party deems
appropriate, without Debtor's signature thereon;
(b) Debtor hereby appoints the Secured Party as Debtor's
attorney-in-fact to execute such documents and to perform all
other acts which the Secured Party deems appropriate to perfect
and to continue perfection of the Security Interest and to do any
act which the Debtor is obligated to do under this agreement and
to exercise rights under this agreement which the debtor is
entitled to exercise;
(c) Upon any Default the Secured Party may (but shall not
be obligated to) perform any duty of Debtor hereunder, and Debtor
shall immediately reimburse the Secured Party upon demand for any
expenses incurred by the Secured Party thereby;
(d) Secured Party may declare any part of the Indebtedness
to be due immediately, without notice, upon the happening of any
Default;
(e) Upon the happening of any Default, the Secured Party's
rights with respect to the Collateral shall be those of a Secured
Party under the Uniform Commercial Code and/or any other
applicable law of the United States or the State of Florida; and,
(f) The Secured Party may assign any or all of its rights
or interests under the November 11, 1998, Agreement and
promissory note referenced above, or this Security Agreement,
with the approval of the Debtor, which shall not be unreasonably
withheld.
7. Notice. Any notice hereunder shall be sufficient if
mailed by or certified mail (return receipt requested) or hand-
delivered to Debtor or Creditor at either of the addresses set
forth above.
8. Costs. Debtor shall pay all costs and expenses incurred
by Secured Party in enforcing this Agreement, including (but not
limited to) reasonable attorney fees, whether suit is brought or
not and whether incurred in connection with collection, trial,
appeal or otherwise.
9. Repossession. Debtor hereby expressly grants to Secured
Party the right to physically repossess the Collateral, by any
reasonable means.
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<PAGE>
10. Waiver of Notice and Hearing. If any default by Debtor
hereunder is not cured within Twenty-One (21) days after receipt
of written notice thereof, Debtor hereby waives any other or
further rights Debtor may have to notice and a hearing before
possession of Collateral, or any part thereof, is sought by the
Secured Party whether by self-help replevin, attachment,
foreclosure, or otherwise.
11. Miscellaneous Provisions:
(a) No delay or omission by the Secured Party in exercising
any right hereunder shall operate as a waiver of that or any
other right.
(b) The terms "Secured Party" and "Debtor" as used in this
Agreement shall include the heirs, personal representatives, and
successors or assigns (if permitted) of those parties.
(c) This Agreement may not be modified or amended except in
writing signed by the Debtor and by the Secured Party.
(d) This Agreement shall be construed under the laws of the
State of Florida. Venue shall be in Seminole County, Florida.
(e) This Security Agreement is a continuing Agreement which
shall remain in force until all obligations of Debtors pursuant
to the November 11, 1998, Agreement and the Promissory Note
referenced above have been performed.
(f) No party to this agreement shall be discharged by any
extension of time, additional advances and notes, renewals and
extensions of the taking of further security, releasing security,
extinguishment of the security interest as to all or any party of
the Collateral, or any other act except a release or discharge of
the secured interest upon the full payment of the obligations
secured by this agreement including charges, expenses, fees,
costs and interest.
(g) Any failure by the Secured Party to exercise any right
set forth in this agreement shall not constitute a waiver
thereof. Nothing in this agreement or in the obligations secured
by it shall preclude any other remedy by action or otherwise for
the enforcement of this agreement or the payment in fall of the
obligations secured by it.
DEBTORS: WITNESSES:
CLUSTER TECHNOLOGY CORP.
and its subsidiaries, Universal Pain Technology,
Inc., Universal Pain Clinics, Inc., and
Professional Distribution Systems, Inc.
/s/ Carlos Becerra, Director /s/
/s/ David Williams, Director
E-68
<PAGE>
"SECURED PARTY": WITNESS:
/s/ John Frankum /s/
E-69
<PAGE>
ADDENDUM TO AGREEMENT, SECURITY AGREEMENT
AND PROMISSORY NOTE
THIS ADDENDUM to Agreement made by and between CLUSTER
TECHNOLOGY CORP., a Delaware corporation (hereinafter "Company"),
and JOHN FRANKUM (hereinafter "Frankum").
WITNESSETH:
WHEREAS, the parties entered into that certain Agreement
dated effective November 11, 1998, which provided, among other
things, for the termination of Frankum's Employment Agreement
with Cluster, the payment of certain sums of money to Frankum (or
for Frankum's benefit) by Cluster, the execution of a Promissory
Note by Cluster in favor of Frankum, the grant of a security
interest in favor of Frankum in certain defined assets of
Cluster, and other matters and obligations of the parties, and
WHEREAS, said Security Agreement was executed by the parties
to be effective November 11, 1998, and
WHEREAS, said Promissory Note was executed bearing the
effective date of November 11, 1998, and providing for certain
monthly payment on the 11th day of each month, and
WHEREAS, certain obligations of Cluster are to be performed
with defined time periods from the effective date of said
Agreement, and
WHEREAS, certain events have occurred which cause the
parties to desire to amend the effective date of said Agreement,
the Security Agreement and the Promissory Note, and
WHEREAS, the parties have reached certain agreements with
regard to the effective date of said Agreement, and are desirous
of setting forth the same in writing below, it is, therefore,
IN CONSIDERATION of the Agreement, the covenants set forth
herein, and other valuable consideration acknowledged,
MUTUALLY AGREED as follows:
1. Recitals. The foregoing recitals are true and correct
as applicable to the respective parties, and the same are
incorporated herein as a material part hereof.
2. Merger. This Addendum and said Agreement are hereby
merged and shall be deemed to be one document; in the event of
conflict between the provisions of said Agreement and those of
this Addendum, this Addendum shall be controlling.
3. Effective Date. The effective date of said Agreement
shall for all purposes be considered to be November 17, 1998.
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<PAGE>
4. Promissory Note. The effective date of said Promissory
Note, executed as provided in said Agreement, shall be considered
for all purposes to be November 17, 1998, and the payments due
thereunder shall be on the 17th day each month described therein,
rather than the 11th day of each month. The parties, at the
parties' option, may execute a substitute note bearing dates as
provided above, however, failure to do so shall not invalidate
the existing Promissory Note, which shall remain in full force
and effect until any such substitute note is executed.
5. Security Agreement. The effective date of said Security
Agreement, executed as provided in said Agreement, shall for all
purposes be deemed to be November 17, 1998, rather than November
11, 1998.
6. Agreement Effective. Except as modified by this
Addendum, said Agreement, Promissory Note and Security Agreement
shall remain in full force and effect in all respects, and the
parties remain fully bound thereby.
IN WITNESS WHEREOF, the parties have executed this Addendum
effective the 24th day of November, 1998.
WITNESSES:
/s/ /s/ John Frankum
Cluster Technology Corp. and
its subsidiaries, Universal
Pain Technology, Inc.,
Universal Pain Clinics, Inc.,
and Professional Distribution
Systems, Inc.
/s/ /s/ Carlos Becerra, Director
/s/ /s/ David Williams, Director
EF-72
<PAGE>
7
Exhibit No. 7
Form 10-SB
Cluster Technology Corp.
Sublease Agreement
This SUBLEASE AGREEMENT (this "Sublease Agreement") is made
and entered into as of the ______ day of January, 2000, by and
between QUICK DELIVERY SERVICE, INC., a Tennessee corporation
("Sublessor"), and UNIVERSAL PAIN TECHNOLOGY, INC., a Florida
corporation ("Sublessee").
WITNESSETH:
WHEREAS, Sublessor is lessee from FIRST INDUSTRIAL, L.P.
("Landlord") under a lease dated July 6, 1999, a copy of which
lease is attached hereto as Exhibit A (the "Main Lease"); and
WHEREAS, the real property leased by the Main Lease to
Sublessor is located at 5411 Johns Road, Suite 60 1, Tampa,
Florida 33634, and is more specifically described in the Main
Lease (the "Main Premises"); and
WHEREAS, Sublessor is desirous of subleasing all 11,063
square feet of the Main Premises set forth in Exhibit A hereto
(the "Premises") to Sublessee upon the terms and conditions
contained herein.
NOW, THEREFORE, in consideration of the premises, the
covenants and conditions hereinafter contained, and other good
and valuable consideration, it is mutually agreed by and between
the parties hereto as follows:
1. Sublessor hereby leases the Premises to Sublessee and
Sublessee leases the
Premises from Sublessor.
2. The Term of this Sublease shall commence on January 15,
2000 and shall end on July 31, 2002.
3. Sublessee shall pay directly to Sublessor the monthly
Base Rent of $5,070.54 plus Additional Rent and sales tax from
March 1, 2000 to July 31, 2000, of S5,248.00 plus Additional Rent
and sales tax from August 1, 2000 to July 31, 2001 and of
$5,431.69 plus Additional Rent and sales tax from August 1, 200 1
to July 31, 2002, which shall be paid in advance and which shall
be due on the first of each month as specified in the Main Lease.
The monthly rent is subject to adjustment in accordance with the
terms of the Main Lease. If the Term commences on any day other
than the first or ends on any day other than the last day of a
month, the rent shall be adjusted pro rata on a per diem basis.
Included in said monthly rent are other rental amounts, taxes and
assessments, maintenance fees and utilities specified in the Main
Lease. In no event shall Sublessor's rental obligations to
Landlord specified in the Main Lease be reduced or diminished.
Notwithstanding the foregoing, throughout the Term, Sublessee
shall pay, directly to
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<PAGE>
the utility company furnishing same, all
charges for electric, gas, telephone and refuse collection to the
Premises.
4. Sublessee shall deliver to Sublessor at the time of
execution of this Sublease Agreement $10,141.08 to be held by
Sublessor as security for the full and faithful performance by
Sublessee of all the agreements, terms, covenants and conditions
set forth herein and applied against expenses or other costs or
damages incurred by Sublessor and to be payable as damages and
not as penalty, upon forfeiture, default or early termination
without prejudice to any further claims by Sublessor for damages
and any remedy for recovery thereof In the event Sublessee
observes and performs the terms and conditions of this Sublease
Agreement, such money shall be returned to Sublessee following
expiration of the Term or any renewals or extensions, as
applicable. Sublessor agrees to pay and restore to Landlord the
previous security deposit used by Sublessor to cover previous
unpaid rent.
5. Sublessee shall pay Sublessor interest on all Overdue
rent, all such interest to be calculated from the date upon which
the amount is first due hereunder until actual payment thereof
and at a rate being the lesser of five percent (5%) per annum in
excess of the minimum lending rate charged to prime commercial
borrowers by Sublessor's bank from time to time or the rate
permitted by law. All rent payable by Sublessee to Sublessor
shall be paid without deduction, set-off or abatement except as
herein expressly provided.
6. Sublessee shall use the Premises exclusively for the
purposes allowed by the Main Lease, and shall conduct its
business on the Premises within the same hours of operation as
Sublessor.
7. Sublessee hereby acknowledges that Sublessor is now
leasing the Premises from Landlord under the Main Lease, and the
parties hereto expressly agree that the Main Lease is
incorporated herein by reference as fully as if its terms and
provisions were herewith set forth in full. Capitalized terms
used herein and not otherwise defined shall have the meanings set
forth in the Main Lease. Except as modified herein, Sublessee
agrees to assume and be bound by all responsibilities and duties
as Sublessor has under the Main Lease. Except as modified herein,
Sublessee shall have the same rights and privileges as Sublessor
has under the Main Lease and Sublessor shall further have the
same rights and privileges as Landlord has under the Main Lease,
where applicable. Except as modified herein, Sublessee agrees to
fully indemnify and hold harmless Sublessor from any
responsibility or liability which Sublessor may incur under the
Main Lease by virtue of this Sublease Agreement or Sublessee's
occupancy of the Premises.
8. If Sublessee shall default in the payment when due of
the monthly rent, or in the payment of any other payment required
under the Main Lease or hereunder, or shall default in the
payment of any other obligations from Sublessee to Sublessor,
Sublessor or other agents and employees of Sublessor may, without
notice if said default is in the payment of rent or other
monetary obligations, or, if said default is any non-monetary
default, upon five (5) days written notice to Sublessee, during
which five (5) days such default is not corrected, terminate this
Sublease and/or immediately or at any time thereafter, reenter
the Premises and remove all persons and all or any property
therefrom. Removal may be either by summary dispossession
E-73
<PAGE>
proceedings or by any suitable action or proceeding at law, or by
force or otherwise, without Sublessor being
liable to indictment, prosecution or damages therefor, and
Sublessor may repossess, hold and enjoy the Premises, as the
former estate of Sublessor, together with all additions,
alterations and improvements thereto. Notwithstanding the above,
such recourse shall not be contrary to Florida law.
9. Sublessee shall name Sublessor and Landlord as
additional insureds under all of Sublessee's insurance policies
required to be obtained and maintained during the term of the
Sublease, including but not limited to liability, fire, workers'
compensation and such other forms of insurance as are required
under the terms of the Main Lease. Sublessee shall deliver copies
of all such policies or certificates of insurance to Sublessor
prior to execution of this Sublease Agreement in accordance with
the terms of the Main Lease.
10. Sublessee understands and agrees that this is a lease
of space only, and Sublessor assumes no liability for any of
Sublessee's property, including without limitation, any
destruction, damage or theft of the property while being stored
in the leased space. Sublessee represents and warrants that it
has adequate insurance to cover loss or destruction of its
property and that its insurance policy contains a waiver of
subrogation rights such that its 'insurance company (and any
other third party) shall not have any right of recovery for any
amount paid by such insurance company for damages for loss or
destruction to its property at the Main Premises. Sublessee
agrees to have its property damage insurance company waive any
right -to subrogation that it may have
against Sublessor. Sublessee agrees to indemnify and hold
Sublessor harmless from any damage, loss or injury resulting from
Sublessee's occupancy of the Premises, including without
limitation, any attorney's fees or other costs associated with
any claim or action involving the property or breach of the terms
of this Sublease. Notwithstanding the above, Sublessor must
maintain insurance in accordance with the Main Lease.
11. Sublessee shall indemnify and hold harmless Sublessor
from and against any and all claims arising from Sublessee's use
of the Premises, or from any activity, work, or thing done,
permitted or suffered by Sublessee in or about the Premises or
elsewhere and shall further indemnify and hold harmless Sublessor
from and against any and all claims arising from any breach or
default in the performance of any obligation on Sublessee's part
to be performed under the terms of this Sublease, or arising from
any negligence of the Sublessee, or any of Sublessee's agents,
contractors, or employees, and from and against all costs,
attorney's fees, expenses and liabilities incurred in the defense
of any such claim or any action or proceeding brought thereon;
and in case any action or proceeding be brought against Sublessor
by reason of any such claim, Sublessee upon notice from Sublessor
shall defend the same at Sublessee's expense by counsel
satisfactory to Sublessor. Sublessee, as a material part of the
consideration to Sublessor, hereby assumes all risk of damage to
property or injury to persons, in, upon or about the Premises
arising from any cause and Sublessee hereby waives all claims in
respect thereof against Sublessor.
12. This Sublease Agreement shall be binding upon and shall
inure to the benefit of the successors, assigns, executors and
administrators of the parties hereto.
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<PAGE>
13. Any and all notices, designations, consents, offers,
acceptances or any other communication provided for herein shall
be given in writing by registered or certified mail which shall
be addressed to the parties as follows, or to such other address
as may be designated by said parties:
If to Sublessor, to: Quick Delivery Service,
Inc.
P. 0. Box 7361
Mobile, Alabama 36670
Attn: Richard Young
If to Sublessee, to: Universal Pain
Technology, Inc.
5411 Johns Road, Suite 601
Tampa, FL 33634
Attn: Jim Gibson
14. The invalidity or unenforceability of any particular
provision of this Sublease Agreement shall not affect the other
provisions hereof, and this Sublease Agreement shall be construed
in all respects as if such invalid or unenforceable provisions
are omitted.
15. No change or modification of the Sublease Agreement
shall be valid unless the same be in writing and signed by all of
the parties hereto.
16. This Sublease Agreement shall be interpreted under the
laws of the State of Florida.
IN WITNESS WHEREOF, the parties hereto have executed this
Sublease Agreement as of the day, month and year first written
above.
QUICK DELIVERY SERVICE, INC.
By:
Title:
UNIVERSAL PAIN TECHNOLOGY, INC.
By:
Title:
E-75
<PAGE>
CONSENT TO SUBLEASE AGREEMENT
THIS CONSENT TO SUBLEASE AGREEMENT ("Consent Agreement") is
made
as of this _______ day of __________ 2000 by and among FIRST
INDUSTRIAL L.P., a Delaware limited partnership (the "Landlord",
"Lessor" in attached Sublease), QUICK DELIVERY SERVICE, INC. (the
"Tenant", "Sublessor" in attached Sublease), and UNIVERSAL PAIN
TECHNOLOGY, INC. ("Subtenant", "Sublessee" in attached Sublease).
RECITALS:
WHEREAS, Landlord, as landlord, and Tenant, as tenant,
entered into that certain lease dated as of the 6th day of July,
1999, (the "Lease"), pursuant to which Landlord leased to Tenant
the leased premises described in the Lease ("Premises") and
commonly known as 5411 Johns Road, Suite 601, Tampa, Florida
33634;
WHEREAS, pursuant to that certain SUBLEASE AGREEMENT dated
_________________ attached hereto as Exhibit "A" and made a part
hereof (the "Sublease"), Tenant desires to sublease a certain
portion of the Premises to Subtenant (the "Sublease Premises"),
which Sublease Premises are more specifically described in the
Sublease; and Landlord agrees to permit such subletting under the
following terms and conditions;
NOW, THEREFORE, in consideration of the foregoing and other
good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Recitals. The foregoing recitals are hereby incorporated
into the body of this Consent Agreement as if fully rewritten and
restated herein. Capitalized terms used, but not defined herein,
shall have the same meanings as are respectively ascribed to
those terms in the Lease.
2. Representations, Warranties and Covenants. Tenant and
Subtenant represent and warrant to Landlord that they have
delivered to Landlord a true and complete copy of the Sublease,
inclusive of schedules and exhibits, and that there are no other
agreements, written or oral, between Tenant and Subtenant with
respect to all or any portion of the Premises and Tenant' s
interest therein. Tenant and Subtenant hereby covenant and agree
that they shall not modify or amend the Sublease without
Landlord's prior written consent, which consent may be given or
withheld in Landlord's sole discretion. Tenant and Subtenant
represent, warrant and covenant to and with Landlord that the
term of the Sublease shall expire prior to the expiration date of
the Lease, and they shall not extend the term of the Sublease.
Subtenant further covenants and agrees that in the event that the
Lease is terminated prior to its stated expiration date due to a
default or breach by Tenant, then at Landlord's sole and
unilateral option, the Sublease shall be deemed to have
terminated simultaneously with the Lease.
3. Consent. Landlord hereby consents to Tenant's sublease
of the Sublease Premises to Subtenant, provided that Subtenant
agrees to be bound by, and comply with, all terms and conditions
of the Lease as if Subtenant was Tenant, except the obligation to
pay Rent due under the Lease. It is understood and agreed that
Tenant shall continue to pay Rent to Landlord,
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<PAGE>
pursuant to the
requirements of the Lease, and Subtenant shall pay to Tenant
those payments due, from time to time, under the terms of the
Sublease; provided, however, that Tenant and Subtenant
acknowledge and agree that at any time and from time to time
after Tenant defaults under the Lease (subject to the applicable
notice and cure period, if any), Landlord may (but shall not be
obligated to) direct Subtenant to make all payments due under the
Sublease to Landlord, rather than Tenant. No such election by
Landlord shall constitute a waiver of any or all of its rights
and remedies against Tenant. In such event, payments timely
delivered to Landlord by Subtenant shall be deemed to satisfy
Subtenant's monetary obligations under the Sublease.
4. Waiver of Options. As a specific condition to the consent
herein granted by Landlord, Tenant shall agree to waive any and
all options contained within the Lease to expand the Premises, or
to extend the term of the Lease therefor.
5. Limitation on Consent. Landlord's above consent to the
Sublease does not and shall not diminish, or release Tenant from,
any or all of Tenant's obligations and liabilities under the
Lease; and Tenant shall continue to remain primarily liable for
the timely performance of all obligations required to be
performed by the Tenant under the Lease.
6. One-Time Consent. This consent does not and shall not
be deemed to constitute, or be construed as, consent to any
future sublease or assignment.
7. Acceptance of Premises. Subtenant accepts the Sublease
Premises in an "as-is," "where-is" condition, and acknowledges
and agrees that Landlord does not currently have, nor shall it
have, at any future date, any obligation, of any nature
whatsoever, to perform any improvements or alterations to or for
the benefit of the Sublease Premises and the Subtenant.
8. Compliance With Lease. Subtenant hereby agrees to be
bound by, and comply with, all of the obligations and
responsibilities imposed on Tenant, as tenant, under the Lease,
except the obligation to pay Rent.
9. Entire Agreement. This Consent Agreement, together with
the Lease and the Sublease, is intended by the parties to be a
complete and exclusive statement of the agreement and
understanding of the parties in respect of the subject matter
contained herein and therein. In the event of a conflict between
the terms and provisions of the Lease, on the one hand, and
either or both of the Sublease and this Consent Agreement, on the
other hand, the Lease shall control in all events.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
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<PAGE>
IN WITNESS WHEREOF, this Consent Agreement has been fully
executed and delivered as of the date set forth above.
LANDLORD:
FR Industrial, L.P.,
a Delaware limited partnership
By: First Industrial Realty Trust,
Inc.
a Maryland corporation, its
general partner
By:
____________________________________
RONALD M. SMITH
Its: Regional Director
TENANT:
QUICK DELIVERY SERVICE, INC.
By:
______________________________
Signature
______________________________
Print
____________________________________
Title
SUBTENANT:
UNIVERSAL PAIN TECHNOLOGY,
INC.
By:
___________________________________
Signature
___________________________________
Print
____________________________________
Title
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-2000 SEP-30-1999 SEP-30-1999 SEP-30-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998 SEP-30-1999 SEP-30-1998
<CASH> 115,351 18,865 159,400 23,841
<SECURITIES> 0 0 0 0
<RECEIVABLES> 510,724 292,107 271,997 296,205
<ALLOWANCES> 270,845 270,845 270,845 270,845
<INVENTORY> 337,656 48,978 234,545 130,933
<CURRENT-ASSETS> 750,921 131,586 414,727 204,463
<PP&E> 243,646 65,397 246,365 89,047
<DEPRECIATION> 0 0 0 0
<TOTAL-ASSETS> 1,166,770 653,491 907,995 824,718
<CURRENT-LIABILITIES> 2,517,580 2,750,736 2,233,550 2,440,988
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 205,622 103,842 205,622 103,842
<OTHER-SE> 11,256,490 10,262,093 11,256,490 10,262,093
<TOTAL-LIABILITY-AND-EQUITY> 1,166,770 653,491 907,995 824,718
<SALES> 950,000 797,120 3,392,000 3,140,336
<TOTAL-REVENUES> 950,000 797,120 3,392,000 3,140,336
<CGS> 420,991 301,292 1,030,978 1,298,133
<TOTAL-COSTS> 553,447 813,208 3,140,287 5,889,437
<OTHER-EXPENSES> 0 0 0 332,682
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 6,311 13,194 56,146 41,928
<INCOME-PRETAX> (25,255) (324,748) (810,620) (4,421,844)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (25,255) (324,748) (810,620) (4,421,844)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (25,255) (324,748) (810,620) (4,421,844)
<EPS-BASIC> 0 0 (0.06) (0.36)
<EPS-DILUTED> 0 0 (0.06) (0.36)
</TABLE>
