U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended June 30, 2002 (Second quarter
of fiscal 2002)
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from_____________ to________________
Commission File No. 0-24073
DIGITAL FUSION, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3817344
(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
Incorporation or Organization)
400 North Ashley Drive
Suite 2600
Tampa, FL 33602
(Address of Principal Executive Offices)
(813) 221-0024
(Issuer's Telephone Number, Including Area Code)
______________________________________________________________
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
As of July 31, 2002, 7,163,936 shares of the issuer's common stock, par
value $.01 per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
DIGITAL FUSION, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December
31, 2001.......................................................................... 1
Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2002 and 2001 (unaudited)................................................ 2
Condensed Consolidated Statements of Cash Flows for the six months ended June 30,
2002 and 2001 (unaudited)......................................................... 3
Notes to Condensed Consolidated Financial Statements............................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 12
Item 2. Changes in Securities............................................................... 12
Item 3. Defaults Upon Senior Securities..................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders................................. 12
Item 5. Other Information................................................................... 12
Item 6. Exhibits and Reports on Form 8-K.................................................... 13
Certification by Chief Executive Officer.................................................... 14
Certification by Chief Financial Officer.................................................... 15
SIGNATURES.................................................................................. 16
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
DIGITAL FUSION, INC.
Condensed Consolidated Balance Sheets
(in thousands)
June 30, 2002 December 31,
ASSETS unaudited 2001
--------- -----------
Current assets:
Cash and cash equivalents $ 497 $ 1,350
Accounts receivable (net of allowance for doubtful
accounts of $340 in 2002 and 2001) 1,364 1,963
Other current assets 40 20
--------------- --------------
Total current assets 1,901 3,333
Property and equipment, net 354 495
Intangible assets, net 4,547 4,547
Other assets 49 74
--------------- --------------
Total assets $ 6,851 $ 8,449
=============== ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,280 $ 1,681
Accrued liabilities on sale of discontinued operations 167 437
Accrued severance and restructuring expenses 173 883
Current maturities of long-term debt 669 233
Deferred revenue 57 132
--------------- --------------
Total current liabilities 2,346 3,366
Accrued liabilities on sale of discontinued operations - long term - 1,103
Accrued severance and restructuring expenses - long term - 187
Long-term debt, less current maturities 77 709
Pension obligation 124 124
Acquisition liabilities 71 71
--------------- --------------
Total liabilities 2,618 5,560
--------------- --------------
Stockholders' equity:
Common stock, $.01 par value, authorized 16,000,000 shares,
7,163,936 shares issued and outstanding 72 72
Additional paid in capital 39,821 39,754
Accumulated deficit (35,660) (36,937)
--------------- --------------
Total stockholders' equity 4,233 2,889
--------------- --------------
Total liabilities and stockholders' equity $ 6,851 $ 8,449
=============== ==============
See Accompanying Notes to Condensed Consolidated Financial Statements.
1
DIGITAL FUSION, INC.
Condensed Consolidated Statements of Operations
For the three and six months ended June 30, 2002 and 2001
(unaudited, in thousands, except per share amounts)
Three months ended June 30, Six months ended June 30,
----------------------------------- ----------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Revenues $ 2,557 $ 5,418 $ 5,366 $ 10,633
Cost of services 1,894 4,098 4,075 8,262
------------------- -------------- ------------- ------------
Gross profit 663 1,320 1,291 2,371
------------------- -------------- ------------- ------------
Operating expenses:
Selling, general and administrative 884 1,324 1,714 3,403
Amortization of intangible assets - 1,164 - 2,036
Severance and restructuring (62) 518 (182) 518
Gain on forgiveness of debt - - (1,539) -
------------------- -------------- ------------- ------------
Total operating expenses 822 3,006 (7) 5,957
------------------- -------------- ------------- ------------
Operating income (loss) (159) (1,686) 1,298 (3,586)
Interest expense (income), net 11 17 21 33
Loss on disposal of assets, net - 212 - 212
------------------- -------------- ------------- ------------
Income (loss) before income taxes (170) (1,915) 1,277 (3,831)
Income tax benefit - - - -
------------------- -------------- ------------- ------------
Net income (loss) $ (170)$ (1,915) $ 1,277 $ (3,831)
=================== ============== ============= ============
Basic earnings (loss) per share $ (0.02) $ (0.28) $ 0.18 $ (0.56)
=================== ============== ============= ============
Basic weighted average common shares outstanding 7,164 6,803 7,164 6,795
=================== ============== ============= ============
Diluted earnings (loss) per share $ (0.02)$ (0.28) $ 0.17 $ (0.56)
=================== ============== ============= ============
Diluted weighted average common shares outstanding 7,164 6,803 7,727 6,795
=================== ============== ============= ============
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
DIGITAL FUSION, INC.
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2002 and 2001
(unaudited, in thousands)
2002 2001
Cash flows used in operating activities
Net income (loss) $ 1,277 $ (3,831)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 164 2,391
Gain on forgiveness of debt (1,539) -
Non-cash restructuring (136) 459
Loss on disposal of assets, net - 211
Changes in assets and liabilities (430) (561)
-------------- ------------
Net cash used in operating activities (664) (1,331)
Cash flows used in investing activities:
Capital expenditures - property and equipment (23) (25)
Proceeds from assets sold - 200
-------------- ------------
Net cash provided by (used in) (23) 175
investing activities
Cash flows provided by (used in) financing activities:
Repayments of notes payable (166) (95)
-------------- ------------
Net cash used in financing activities (166) (95)
-------------- ------------
Net decrease in cash and cash equivalents (853) (1,251)
Cash and cash equivalents, beginning of periods 1,350 1,557
-------------- ------------
Cash and cash equivalents, end of periods $ 497 $ 306
============== ============
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. Basis of Presentation
The condensed consolidated interim financial statements of
Digital Fusion, Inc. ("DFI," the "Company," "we," or "us") have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission with respect to
Form 10-QSB. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures made herein are adequate to make the information contained
herein not misleading. These condensed consolidated interim financial
statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 2001 and the notes
thereto included in the Company's Annual Report on Form 10-KSB. In the
Company's opinion, all adjustments (consisting only of normal recurring
adjustments reclasses) necessary for a fair presentation of the
information shown herein have been included.
The results of operations and cash flows for the three and six
months ended June 30, 2002 are not necessarily indicative of the
results of operations and cash flows expected for the year ending
December 31, 2002. The Company's current operations have been funded
through internally generated funds. On July 26, 2002, the Company
completed an $800,000 secured convertible debt financing. These funds
will be used to provide the Company with additional working capital,
pay down the remaining $130,000 owed on scheduled legacy debt payments
and to pursue certain growth opportunities. In order for the Company to
support substantial growth, the Company may need to fund this growth
through additional externally generated funds. The Company continues to
review its options, which includes additional debt, equity raise or a
combination of both. There can be no assurance as to the availability
or terms upon which such financing and capital might be available.
2. Loss Per Share Data
Common stock equivalents in the three-month period ended June
30, 2002 and the three- and six- month periods ended June 30, 2001,
were anti-dilutive due to the net losses sustained by the Company
during these periods, thus the diluted weighted average common shares
outstanding in these periods are the same as the basic weighted average
common shares outstanding.
3. Income Taxes
The Company has not recognized an income tax benefit for its
operating losses generated in the three- and six-month periods ended
June 30, 2002 and 2001 based on uncertainties concerning its ability to
generate taxable income in future periods. The tax
4
benefit for the three- and six-month periods ended June 30, 2002 and
2001 is offset by a valuation allowance established against deferred
tax assets arising from operating losses and other temporary
differences, the realization of which could not be considered more
likely than not. In future periods, tax benefits and related deferred
tax assets will be recognized when management considers realization of
such amounts to be more likely than not.
4. Related Party Transaction
The Company entered into a consulting services agreement with
PowerCerv Technologies, Inc. (PowerCerv) where the Company provides
consulting services to PowerCerv at $100 per hour for 275 hours. DFI
recorded deferred revenue of $27,500 during the first quarter of 2002
related to this agreement. The $27,500 was paid to PowerCerv by
reducing the note payable owed to PowerCerv. As of June 30, 2002, the
Company had $25,465 remaining in deferred revenue.
5. Goodwill
On January 1, 2002, the Company adopted the Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. SFAS 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. SFAS 142
requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually.
The Company tested goodwill for impairment as of February 2002
determining that no impairment loss was necessary. The Company will
continue to test goodwill for impairment at least annually. Goodwill
was $4.5 million as of June 30, 2002, and was unchanged for the three
and six months then ended. The Company recorded amortization of
$1,164,000 and $2,036,000 for the three and six months ended June 30,
2001, respectively. In accordance with SFAS 142, the Company
discontinued amortization of goodwill as of January 1, 2002.
The impact of the adoption of SFAS No. 142 for the three- and
six-month periods ended June 30, 2002 and 2001 are summarized as
follows:
Three months ended June 30, Six months ended June 30,
-------------------------------- ----------------------------
2002 2001 2002 2001
-------------------------------- ----------------------------
Reported net income (loss) $ (170) $ (1,915) $ 1,277 $ (3,831)
Add back: Goodwill amortization - 1,164 - 2,036
-------------------------------- ----------------------------
Adjusted net income (loss) (170) (751) 1,277 (1,795)
================================ ============================
Basic earnings (loss) per share
Reported earnings (loss) per share $ (0.02) $ (0.28) $ 0.18 $ (0.56)
Goodwill amortization - 0.17 - 0.30
-------------------------------- ----------------------------
Adjusted earnings (loss) per share $ (0.02) $ (0.11) $ 0.18 $ (0.26)
================================ ============================
Basic weighted average common shares outstanding 7,164 6,803 7,164 6,795
================================ ============================
Diluted earnings (loss) per share
Reported earnings (loss) per share $ (0.02) $ (0.28) $ 0.17 $ (0.56)
Goodwill amortization - 0.17 - 0.30
-------------------------------- ----------------------------
Adjusted earnings (loss) per share $ (0.02) $ (0.11) $ 0.17 $ (0.26)
================================ ============================
Diluted weighted average common shares outstanding 7,164 6,803 7,727 6,795
================================ ============================
5
6. Recently Issued Accounting Pronouncements
On January 1, 2002, the Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
144 addresses the financial accounting and reporting for the impairment
of long-lived assets, excluding goodwill and intangible assets, to be
held and used or disposed of. The adoption of SFAS 144 did not have an
impact on the Company's financial position or results of operations.
On April 1, 2002, the Company adopted SFAS No. 145, Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections. SFAS 145 rescinded the following
pronouncements: SFAS 4, Reporting Gains and Losses from Extinguishment
of Debt; SFAS 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements; and SFAS 44, Accounting for Intangible Assets of Motor
Carriers. In addition, SFAS 145 amends SFAS 13, Accounting for Leases
and makes technical corrections and amendments to various existing
pronouncements. The adoption of SFAS 145 resulted in the Company
classifying the gain on forgiveness of debt as part of income from
operations on the Company's Condensed Consolidated Statements of
Operations.
7. Forgiveness of Debt and Severance and Restructuring
During the first quarter of 2002, the Company reached
settlement agreements on some debts associated with offices that were
closed, business units that were sold and services not used, which
resulted in forgiveness of debt of $1,539,000. After the settlements of
these debts, the Company reduced its Severance and Restructuring
liability by $62,000 and $182,000 for the three- and six-month periods
ended June 30, 2002, respectively, based upon its current estimates of
its remaining liabilities associated with its 2001 restructurings.
The adoption of SFAS 145 resulted in the Company classifying
the gain on forgiveness of debt as income from operations instead of an
extraordinary gain on the Company's Condensed Consolidated Statements
of Operations. Prior periods have been reclassified to conform to the
adoption of SFAS 145. This reclassification had no effect on net income
for any period.
8. Reclass of Income Statement Accounts
To conform to the presentation in 2002, revenues and cost of
goods sold were increased for the three- and six-month periods ended
June 30, 2001 in the consolidated income statement to include travel
and entertainment expenses billed to customers. This reclassification
had no effect on net income for any period.
9. Subsequent Event
On July 26, 2002, the Company closed on an $800,000, 10%
convertible note collateralized by the Company's accounts receivable.
After ninety days, the Company
6
pays principal and interest on a monthly basis. This note matures on
January 26, 2004. At the noteholder's election, this note can be
converted into DFI common stock at $0.922 a share after the DFI
common stock price is at or above $1.15 a share for ten consecutive
days. Additionally, a five-year warrant to purchase 75,000 shares of
DFI common stock at $1.15 per share was issued. The Company paid a
management fee of $48,000 to the noteholder, which will be amortized
to interest expense over the 18-month life of the note.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This Quarterly Report on Form 10-QSB contains forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). In addition, from time to time,
we or our representatives have made or may make other forward-looking
statements orally or in writing. Such statements may include, without
being limited to, statements concerning anticipated financial
performance, future revenues or earnings, business prospects, projected
ventures, new products, anticipated market performance and similar
matters. The words "plan," "budget, "intend," "anticipate," "project,"
"estimate," "expect," "may," "might," "believe," "potential," "could,"
"should," "would" and similar statements are intended to be among the
statements that are forward-looking statements. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the
safe harbor, we caution our readers that, because such statements
reflect the reality of risk and uncertainty that is inherent in doing
business, actual results may differ materially from those expressed or
implied by such forward-looking statements. These risks and
uncertainties, many of which are beyond our control, include, but are
not limited to, those set forth in the Company's Form 10-KSB for 2001
in the Management's Discussion and Analysis of Financial Condition and
Results of Operations under the heading "Certain Factors Which May
Affect the Company's Future Performance" which are incorporated herein
by reference. Readers are cautioned not to place undue reliance on
these forward-looking statements, which are made as of the date of this
report. Except as otherwise required to be disclosed in periodic
reports required to be filed by companies registered under the Exchange
Act by the rules of the SEC, the Company has no duty and undertakes no
obligation to update such statements.
Overview
DFI is an information technology ("IT") consulting company
helping our customers use technology to access business information and
enhance the performance of their human capital. We provide a broad
range of business and IT consulting services including IT Support and
integration; IT consulting and Enterprise Application Solutions. The
Company was incorporated in 1995 under the name Internet Broadcasting
System, Inc. and changed its name to IBS Interactive, Inc. when it went
public in May 1998. During the annual 2001 shareholders meeting, the
shareholders approved a name change to Digital Fusion, Inc. We are a
Delaware corporation and our main administrative office is located in
Tampa, Florida, along with regional offices in Alabama, Florida, New
7
Jersey, New York and Virginia. We provide our services to businesses,
organizations and public sector institutions primarily in the Eastern
United States. Our revenues are derived principally from fees earned in
connection with the performance of services provided to customers. We
typically bill on a time and materials basis. The majority of our costs
are associated with personnel. Attracting and retaining billable
personnel will be important for our Company going forward. Our
quarterly operating results are affected by the number of billable days
in the quarter, holiday seasons and vacations. Demand for the Company's
services has historically been lower during the fourth quarter as a
result of holidays and vacations.
Our success is based on a total approach, providing the
people, processes, and technology needed to translate business needs
into sound IT strategies. This total approach is driven by the vision
and diverse skills of our people, talented professionals who view
projects from a wider perspective. They understand that no successful
project is developed in isolation. This big-picture approach bucks
today's trend toward the narrower focus of specialization.
Vendor-specific certification programs churn out consultants focused on
only a small set of products, a one-tool-fits-all approach, producing
inefficient and expensive solutions to business problems. We transform
technology into complete solutions through our integrated
multi-disciplinary services, including Information Technology
Consulting, Business Application Development and IT Support and
Integration.
On January 1, 2002, the Company adopted the Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. SFAS 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. SFAS 142
requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually.
The Company tested goodwill for impairment as of February 2002
determining that no impairment loss was necessary. The Company will
continue to test goodwill for impairment at least annually. Goodwill
was $4.5 million as of March 30, 2002. The Company recorded
amortization of $1,164,000 and $2,036,000 for the three- and six-month
periods ended June 30, 2001, respectively. In accordance with SFAS 142,
the Company discontinued amortization as of January 1, 2002.
On January 1, 2002, the Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
144 addresses the financial accounting and reporting for the impairment
of long-lived assets, excluding goodwill and intangible assets, to be
held and used or disposed of. The adoption of SFAS 144 did not have an
impact on our financial position or results of operations.
On April 1, 2002, the Company adopted SFAS No. 145, Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections. SFAS 145 rescinded the following
pronouncements: SFAS 4, Reporting Gains and Losses from Extinguishment
of Debt; SFAS 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements; and SFAS 44, Accounting for Intangible Assets of Motor
Carriers. In addition, SFAS 145 amends SFAS 13, Accounting for Leases
and makes technical corrections and amendments to various existing
pronouncements. The
8
adoption of SFAS 145 resulted in the Company
classifying the gain on forgiveness of debt as part of income from
operations on the Company's Condensed Consolidated Statements of
Operations.
There are no new litigation issues.
Results of Operations
THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE AND
SIX MONTHS ENDED JUNE 30, 2001
REVENUES. Revenues decreased by $2,861,000 to $2,557,000 for
the three months ended June 30, 2002 and decreased $5,267,000 to
$5,366,000 for the six months ended June 30, 2002. The decrease in
revenues during the three and six months ended 2002 compared to the
same period in the prior year was primarily due to the business
divisions and offices that were shut down or sold during our 2001
restructuring. Approximately $400,000 and $1,300,000 of the decrease in
revenue during the three and six months ended June 30, 2002,
respectively, was due to the softening of the IT consulting market over
the last year. Revenue from our largest professional services customer
was responsible for 23% of our revenue in 2002 as compared to 17% in
2001. We expect our revenues to continue to be lower during the
remainder of 2002 as compared to 2001 due to the business divisions and
offices that were shut down or sold during 2001.
COST OF SERVICES. Cost of services consists primarily of
salaries and expenses of engineering, programming and technical
personnel, expenses relating to cost of equipment and applications sold
to customers and fees paid to outside consultants engaged for customer
projects. Cost of services decreased by $2,204,000 for the three months
ended June 30, 2002 compared to the prior year and decreased by
$4,187,000 for the six months ended June 30, 2002 compared to the prior
year. As our revenues decreased due to the business units and offices
that were shut down or sold during 2001 and the softening of the IT
consulting market over the last year, we reduced our services
headcount, which reduced our cost of services. We expect our cost of
services to continue to be lower during the remainder of 2002 as
compared to 2001 due to the reduced services headcount from business
units and offices that were shut down or sold and lower than expected
revenue due to the softening of the IT consulting market over the last
year.
GROSS PROFIT. Our gross profit for the second quarter during
2002 was $663,000, or 26% of revenues as compared to $1,320,000, or 24%
of revenues for the second quarter of 2001. This increase in gross
profit as a percent of revenues is due to the business units that were
sold and offices closed had lower profit margins for the three months
ending June 30, 2001 since they were being sold or the offices were
being closed and during the three months ended June 30, 2002, the
Company reduced some billable consultants positions that were not
currently billing. The Company's gross profit in actual dollars
decreased $657,000 due to the decrease in revenue discussed above.
9
The gross profit for the six-month period ended June 30, 2002
was $1,291,000, or 24% of revenues and $2,371,000, or 22% of revenues
for the six-month period ended June 30, 2001. This increase in gross
profit as a percent of revenues is due to the business units that were
sold and offices closed had lower profit margins for the six months
ending June 30, 2001 since they were being sold or the offices were
being closed and during the six months ended June 30, 2002, the Company
reduced some billable consultants positions that were not currently
billing. The Company's gross profit in actual dollars decreased
$1,080,000 due to the decrease in revenue discussed above.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative (SG&A) expenses consist primarily of salaries and costs
associated with marketing literature, advertising, direct mailings, and
accounting, finance, sales and administrative personnel, as well as
professional fees and other costs associated with being a public
company and the administration of DFI. Selling, general and
administrative expenses decreased by $440,000, or 33%, for the
three-month period ended June 30, 2002 compared to the same period
during 2001. SG&A decreased $1,689,000 or 50% for the six-month period
ended June 30, 2002 compared to the same period during 2001. The
decrease in SG&A is primarily due to the administrative headquarters
move from New Jersey to Florida during January 2001 and the reduction
of costs related to the business units that were sold and offices
closed during 2001 and the April 2001 restructuring. We expect our
selling, general and administrative costs to be lower during the
remainder of 2002 as compared to 2001.
AMORTIZATION OF INTANGIBLE ASSETS. We implemented SFAS 142 on
January 1, 2002 and in accordance with SFAS 142, we discontinued
amortization of goodwill as of January 1, 2002. The amortization
recorded for the three- and six month periods ended June 30, 2001 was
$1,164,000 and $2,036,000, respectively. In accordance with SFAS 142,
there will be no amortization of goodwill during the remainder of 2002.
SEVERANCE AND RESTRUCTURING. We reduced our Severance and
Restructuring liability by $62,000 and $182,000 for the three- and
six-month periods ending June 30, 2002 based upon our current estimates
of our remaining liabilities associated with our 2001 restructurings.
During April 2001, the Company took additional cost reduction
and restructuring steps to become profitable. We closed our Detroit
facility and reduced our sales and general and administrative
management headcount by 21 employees. As a result, we recognized a
severance and restructuring expense of $518,000 in April 2001. This is
comprised of $456,000 relating to the closing of the office, and
$62,000 relating to severance, benefits and entitlements.
GAIN ON FORGIVENESS OF DEBT. During the first quarter of
2002, the Company reached settlement agreements on some debts
associated with offices that were closed, business units that were sold
and services not used, which resulted in forgiveness of debt of
$1,539,000.
10
INTEREST EXPENSE (INCOME), NET. Interest expense in 2002 and
2001 consists of interest payments and accruals on indebtedness in
connection with the acquisition of digital fusion, inc (a Florida
corporation). Net interest expense was $11,000 and $17,000 for the
three months ended June 30, 2002 and 2001, respectively and $21,000 and
$33,000 for the six months ended June 30, 2002 and 2001, respectively.
LOSS ON DISPOSAL OF ASSETS, NET. During April 2001, the
Company sold its web hosting and non-dial-up internet access business
to Veraciti, Inc. for $200,000 cash and $60,000 worth of services to
complete certain customer projects. In addition, Veraciti assumed
certain lease obligations of the Company related to the web hosting and
non-dial-up internet access business and subleased 4,000 square feet of
the Cedar Knolls office space. The Company recorded a $212,000 loss
related to this sale. Veraciti is owned by Frank Altieri, a former
member of the DFI Board of Directors.
INCOME TAX BENEFIT. The Company has not recognized an income
tax benefit for its operating losses generated in the three- and
six-month periods ended June 30, 2002 and 2001 based on uncertainties
concerning its ability to generate taxable income in future periods.
The tax benefit for the three- and six-month periods ended June 30,
2002 and 2001 is offset by a valuation allowance established against
deferred tax assets arising from operating losses and other temporary
differences, the realization of which could not be considered more
likely than not. In future periods, tax benefits and related deferred
tax assets will be recognized when management considers realization of
such amounts to be more likely than not.
Liquidity and Capital Resources
The net cash used in operating activities decreased from
$1,331,000 in 2001 compared to $664,000 in 2002. This change is
primarily attributable to operating results that produced a net loss in
the amount of $3,831,000 for the six months ended June 30, 2001
compared to a net income of $1,277,000 for the corresponding six-month
period in 2002. Also, during the six months ended June 30, 2002, DFI
paid approximately $600,000 related to restructuring liabilities and
accrued liabilities on sale of discontinued operations.
Net cash used in investing activities was $25,000 in 2001
compared to $23,000 in 2002. The cash used in both periods was related
to investments in equipment. The Company does not expect to have
significant equipment purchases during the remainder of 2002. During
the six months ended June 30, 2001, we received $200,000 related to the
sale of our web hosting and non-dial-up internet access business.
Financing activities used cash and cash equivalents of $95,000
in 2001, and $166,000 in 2002, which were for principal payments on the
note payable owed to PowerCerv. DFI paid the September 30, 2002 debt
service payment early during the second quarter to receive a $6,300
discount.
11
Our working capital at June 30, 2002 is $(445,000). Our net
accounts receivable balance outstanding at June 30, 2002 is $1,364,000.
Our cash and cash equivalents is $497,000. DFI has $130,000 of
scheduled 2002 payments related to liability settlements. Currently the
Company is funding its cash needs through consistent collections of
accounts receivable and current operations. On July 26, 2002, the
Company completed an $800,000 secured convertible debt financing. These
funds will be used to provide the Company with additional working
capital, pay down the remaining $130,000 owed on scheduled legacy debt
payments and to pursue certain growth opportunities. The Company
received net proceeds of $731,000 after certain fees and costs were
deducted. In order for the Company to support substantial growth, the
Company may need to fund this growth through additional externally
generated funds. The Company continues to review its options, which
includes additional debt, equity raise or a combination of both. There
can be no assurance as to the availability or terms upon which such
financing and capital might be available.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
No legal proceedings against the Company are required to be
disclosed under this Item pursuant to the requirements of
Form 10-QSB.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
12
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.30 Securities Purchase Agreement dated as of
July 26, 2002 by and between the Company
and Laurus Master Fund, Ltd
10.31 Convertible Note dates as of July 26, 2002
by and between the Company and Laurus
Master Fund, Ltd.
(b) Reports on Form 8-K.
None.
13
CERTIFICATION OF PERIODIC REPORT
I, Roy E. Crippen, III of Digital Fusion, Inc. certify, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10-QSB of the Company for the second
quarter ended June 30, 2002 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 (15 U.S.C 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company
Dated: August 8, 2002
/s/ Roy E. Crippen, III
-----------------------
Chief Executive Officer
14
CERTIFICATION OF PERIODIC REPORT
I, Karen L. Surplus of Digital Fusion, Inc., certify, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10-QSB of the Company for the second
quarter ended June 30, 2002 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company
Dated: August 8, 2002
/s/ Karen L. Surplus
-----------------------
Chief Financial Officer
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIGITAL FUSION, INC.
Date: August 8, 2002 By: /s/ Roy E. Crippen, III
-----------------------------------------------
Name: Roy E. Crippen, III
Title: Chief Executive Officer and President
(Principal Executive Officer)
Date: August 8, 2002 By: /s/ Karen L. Surplus
------------------------------------------------
Name: Karen L. Surplus
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)
16
EXHIBIT 10.30
DIGITAL FUSION, INC.
SECURITIES PURCHASE AGREEMENT
July 26, 2002
17
TABLE OF CONTENTS
Page
1. AGREEMENT TO SELL AND PURCHASE...........................................................................1
2. FEES AND WARRANT.........................................................................................1
3. CLOSING, DELIVERY AND PAYMENT............................................................................2
3.1 Closing.........................................................................................2
3.2 Delivery........................................................................................2
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................................2
4.1 Organization, Good Standing and Qualification...................................................2
4.2 Subsidiaries....................................................................................3
4.3 Capitalization; Voting Rights...................................................................3
4.4 Authorization; Binding Obligations..............................................................4
4.5 Liabilities.....................................................................................4
4.6 Agreements; Action..............................................................................4
4.7 Obligations to Related Parties..................................................................5
4.8 Changes.........................................................................................5
4.9 Title to Properties and Assets; Liens, Etc......................................................6
4.10 Intellectual Property...........................................................................7
4.11 Compliance with Other Instruments...............................................................7
4.12 Litigation......................................................................................7
4.13 Tax Returns and Payments........................................................................8
4.14 Employees.......................................................................................8
4.15 Registration Rights and Voting Rights...........................................................8
4.16 Compliance with Laws; Permits...................................................................9
4.17 Environmental and Safety Laws...................................................................9
4.18 Valid Offering..................................................................................9
4.19 Full Disclosure.................................................................................9
4.20 Insurance......................................................................................10
4.21 SEC Reports....................................................................................10
4.22 No Market Manipulation.........................................................................10
4.23 Listing........................................................................................10
4.24 No Integrated Offering.........................................................................10
4.25 Stop Transfer..................................................................................10
4.26 Dilution.......................................................................................11
5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS........................................................11
5.1 Requisite Power and Authority..................................................................11
5.2 Investment Representations.....................................................................11
5.3 Purchaser Bears Economic Risk..................................................................11
5.4 Acquisition for Own Account....................................................................12
5.5 Purchaser Can Protect Its Interest.............................................................12
5.6 Accredited Investor............................................................................12
5.7 Legends........................................................................................12
5.8 No Shorting....................................................................................12
5.8 Volume Limitation..............................................................................12
6. COVENANTS OF THE COMPANY................................................................................13
6.1 Stop-Orders....................................................................................13
6.2 Listing........................................................................................13
6.3 Market Regulations.............................................................................14
6.4 Reporting Requirements........................................................................14
6.5 Use of Funds...................................................................................14
6.6 Access to Facilities...........................................................................14
6.7 Taxes..........................................................................................14
6.8 Insurance......................................................................................14
6.9 Intellectual Property..........................................................................15
6.10 Properties.....................................................................................15
6.11 Confidentiality................................................................................15
6.12 Required Approvals.............................................................................15
6.13 Reissuance of Securities.......................................................................15
6.14 Opinion........................................................................................16
7. COVENANTS OF THE PURCHASER..............................................................................17
7.1 Confidentiality................................................................................16
8. COVENANTS OF THE COMPANY AND PURCHASERS REGARDING INDEMNIFICATION.......................................16
8.1 Company Indemnification........................................................................16
8.2 Purchaser's Indemnification....................................................................16
8.2 Procedures.....................................................................................16
9. CONVERSION OF CONVERTIBLE NOTE..........................................................................17
9.1 Mechanics of Conversion........................................................................17
9.2 Maximum Conversion.............................................................................18
9.3 Optional Redemption..............................................................................
10. REGISTRATION RIGHTS.....................................................................................19
10.1 Registration Rights Granted....................................................................19
10.2 Registration Procedures........................................................................20
10.3 Provision of Documents.........................................................................21
10.4 Non-Registration Events........................................................................21
10.5 Expenses.......................................................................................21
10.6 Indemnification and Contribution...............................................................22
11. OFFERING RESTRICTIONS...................................................................................24
12. SECURITY INTEREST.......................................................................................24
13. MISCELLANEOUS...........................................................................................24
13.1 Governing Law..................................................................................24
13.2 Survival.......................................................................................24
13.3 Successors and Assigns.........................................................................25
13.4 Entire Agreement...............................................................................25
13.5 Severability...................................................................................25
13.6 Amendment and Waiver...........................................................................25
13.7 Delays or Omissions............................................................................25
13.8 Notices........................................................................................25
13.9 Attorneys' Fees................................................................................26
13.10 Titles and Subtitles...........................................................................26
13.11 Counterparts...................................................................................26
13.12 Broker's Fees..................................................................................26
13.13 Construction...................................................................................26
DIGITAL FUSION, INC.
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is made and entered
into as of July 26, 2002, by and among Digital Fusion, Inc., a Delaware
corporation (the "Company"), and Laurus Master Fund, Ltd., a Cayman Islands
company (the "Purchaser").
RECITALS
WHEREAS, the Company has authorized the sale of a 6% Convertible Note in an
aggregate principal amount of $800,000 (the "Note"), convertible into shares of
the Company's common stock, $0.01 par value per share (the "Common Stock") at a
fixed conversion price of $.922 per share of Common Stock ("Fixed Conversion
Price");
WHEREAS, the Company wishes to issue a warrant to the Purchaser to purchase
shares of the Company's Common Stock in connection with Purchaser's purchase of
the Note;
WHEREAS, Purchaser desires to purchase the Note and Warrant on the terms and
conditions set forth herein; and
WHEREAS, the Company desires to issue and sell the Note and Warrant to Purchaser
on the terms and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises, representations, warranties and covenants hereinafter set forth and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. AGREEMENT TO SELL AND PURCHASE. Pursuant to the terms and conditions
set forth in this Agreement, on the Closing Date (as defined in Section 3), the
Company agrees to sell to the Purchaser, and the Purchaser hereby agrees to
purchase from the Company a Note in the amount of $800,000 convertible in
accordance with the terms thereof into shares of the Company's Common Stock in
accordance with the terms of the Note and this Agreement. The Note purchased on
the Closing Date shall be known as the "Offering." A form of the Note is annexed
hereto as Exhibit A. The Note will have a Maturity Date (as defined in the Note)
eighteen months from the date of issuance. Collectively, the Note and Warrant
(as defined in Section 2) and Common Stock issuable in payment of the Note, upon
conversion of the Note and upon exercise of the Warrant are referred to as the
"Securities."
2. FEES AND WARRANT. On the Closing Date:
(a) The Company will issue and deliver to the Purchaser a Warrant to
purchase 75,000 shares of Common Stock in connection with the Offering (the
"Warrant") pursuant to Section 1 hereof. The Warrant must be delivered on the
Closing Date. A form of Warrant is annexed hereto as Exhibit B. All the
representations, covenants, warranties, undertakings, and indemnification, and
other rights made or granted to or for the benefit of the Purchaser by the
Company are hereby also made and granted in respect of the Warrant and
1
shares of the Company's Common Stock issuable upon exercise of the Warrant
(the "Warrant Shares").
(b) The Company shall reimburse the Purchaser for its reasonable legal fees
for services rendered to the Purchaser in preparation of this Agreement and the
Related Agreements, and expenses in connection with the Purchaser's due
diligence review of the Company and relevant matters. Amounts required to be
paid hereunder will be paid at the Closing and shall not exceed $20,000.
(c) The Company will pay a cash fee in the amount of six percent (6%) of
the amount of the Note issued on the Closing Date (as defined in 3.1) to be paid
to the Company from the sale of Note in the Offering (the "Fund Management Fee")
to Laurus Capital Management, L.L.C., a Delaware limited liability company. The
Fund Management Fee must be paid on the Closing Date. The aforementioned Fund
Management Fee and legal fees will be payable at the Closing out of funds held
pursuant to a Funds Escrow Agreement to be entered into by the Company,
Purchaser and an Escrow Agent (the "Funds Escrow Agreement").
3. CLOSING, DELIVERY AND PAYMENT.
3.1 Closing. Subject to the terms and conditions herein, the closing of the
transactions contemplated hereby (the "Closing"), shall take place on the date
hereof, at such time or place as the Company and Purchaser may mutually agree
(such date is hereinafter referred to as the "Closing Date").
3.2 Delivery. Pursuant to the Funds Escrow Agreement, in the form attached
as Exhibit C, at the Closing, subject to the terms and conditions hereof, the
Company will deliver to the Escrow Agent, among other things, a Note in the form
attached as Exhibit A representing the principal amount of $800,000 and a Common
Stock Purchase Warrant in the form attached as Exhibit B in the Purchaser's name
representing 75,000 Warrant Shares and the Purchaser will deliver to the Escrow
Agent, among other things, $800,000, by certified funds or wire transfer made
payable to the order of the Escrow Agent.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to the Purchaser as of the date
of this Agreement as set forth below which disclosures are supplemented by, and
subject to the Company's filings under the Securities Exchange Act of 1934
(collectively, the "Exchange Act Filings"), copies of which have been provided
to the Purchaser.
4.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has the corporate power and authority to
own and operate its properties and assets, to execute and deliver this
Agreement, the Warrant to be issued in connection with this Agreement (in the
case of the Company only), the Funds Escrow Agreement, the Security Agreement
and all other agreements referred to herein (collectively, the "Related
Agreements"), to issue and sell the Note and the shares of Common Stock issuable
upon conversion of the Note (the "Note Shares") (in the case of the Company
only), to issue and sell the Warrant and the Warrant Shares (in the case of the
Company only), and to carry out the provisions of this
2
Agreement and the Related Agreements and to carry on its business as presently
conducted. The Company is duly qualified and is authorized to do business
and is in good standing as a foreign corporation in all jurisdictions in
which the nature of its activities and of its properties (both owned and
leased) makes such qualification necessary, except for those jurisdictions
in which failure to do so would not have a material adverse effect on the
Company or its business.
4.2 Subsidiaries. Except as disclosed on Schedule 4.2, the Company does not
own or control any equity security or other interest of any other corporation,
limited partnership or other business entity.
4.3 Capitalization; Voting Rights.
(a) The authorized capital stock of the Company, as of April 15, 2002,
consists of 16,000,000 shares of Common Stock, par value $0.01 per share,
7,163,936 shares of which are issued and outstanding and 1,000,000 shares
preferred stock, par value $0.01 per share of which no shares are outstanding.
(b) Except as disclosed on Schedule 4.3, other than (i) the shares reserved
for issuance under the Company's stock option plans; and (ii) shares which may
be granted pursuant to this Agreement and the Related Agreements, there are no
outstanding options, warrants, rights (including conversion or preemptive rights
and rights of first refusal), proxy or stockholder agreements, or arrangements
or agreements of any kind for the purchase or acquisition from the Company of
any of its securities. Neither the offer, issuance or sale of any of the Note or
Warrant, or the issuance of any of the Note Shares or Warrant Shares, nor the
consummation of any transaction contemplated hereby will result in a change in
the price or number of any securities of the Company outstanding, under
anti-dilution or other similar provisions contained in or affecting any such
securities.
(c) All issued and outstanding shares of the Company's Common Stock (i)
have been duly authorized and validly issued and are fully paid and
nonassessable and (ii) were issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
(d) The rights, preferences, privileges and restrictions of the shares of
the Common Stock are as stated in the Certificate of Incorporation (the
"Charter"). The Note Shares and Warrant Shares have been duly and validly
reserved for issuance. When issued in compliance with the provisions of this
Agreement and the Company's Charter, the Securities will be validly issued,
fully paid and nonassessable, and will be free of any liens or encumbrances;
provided, however, that the Securities may be subject to restrictions on
transfer under state and/or federal securities laws as set forth herein or as
otherwise required by such laws at the time a transfer is proposed.
4.4 Authorization; Binding Obligations. All corporate action on the part of
the Company, its officers and directors necessary for the authorization of this
Agreement and the Related Agreements, the performance of all obligations of the
Company hereunder at the Closing and, the authorization, sale, issuance and
delivery of the Note and Warrant has been taken or will be taken prior to the
Closing. The Agreement and the Related Agreements, when executed and delivered
3
and to the extent it is a party thereto, will be valid and binding obligations
of the Company enforceable in accordance with their terms, except (a) as limited
by applicable bankruptcy, insolvency, reorganization, moratorium or other laws
of general application affecting enforcement of creditors' rights, and (b)
general principles of equity that restrict the availability of equitable or
legal remedies. The sale of the Note and the subsequent conversion of the Note
into Note Shares are not and will not be subject to any preemptive rights or
rights of first refusal that have not been properly waived or complied with. The
issuance of the Warrant and the subsequent exercise of the Warrant for Warrant
Shares are not and will not be subject to any preemptive rights or rights of
first refusal that have not been properly waived or complied with. The Note and
the Warrant, when executed and delivered in accordance with the terms of this
Agreement, will be valid and binding obligations of the Company, enforceable in
accordance with their respective terms.
4.5 Liabilities. The Company, to the best of its knowledge, knows of no
material contingent liabilities, except current liabilities incurred in the
ordinary course of business and liabilities disclosed in any Exchange Act
Filings.
4.6 Agreements; Action. Except as set forth on Schedule 4.6 or as disclosed
in any Exchange Act Filings:
(a) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which the Company
is a party or to its knowledge by which it is bound which may involve (i)
obligations (contingent or otherwise) of, or payments to, the Company in excess
of $50,000 (other than obligations of, or payments to, the Company arising from
purchase or sale agreements entered into in the ordinary course of business), or
(ii) the transfer or license of any patent, copyright, trade secret or other
proprietary right to or from the Company (other than licenses arising from the
purchase of "off the shelf" or other standard products), or (iii) provisions
restricting the development, manufacture or distribution of the Company's
products or services, or (iv) indemnification by the Company with respect to
infringements of proprietary rights.
(b) The Company has not (i) declared or paid any dividends, or authorized
or made any distribution upon or with respect to any class or series of its
capital stock, (ii) incurred any indebtedness for money borrowed or any other
liabilities individually in excess of $50,000 or, in the case of indebtedness
and/or liabilities individually less than $50,000, in excess of $100,000 in the
aggregate, (iii) made any loans or advances to any person not in excess,
individually or in the aggregate, of $100,000, other than ordinary advances for
travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its
assets or rights, other than the sale of its inventory in the ordinary course of
business.
(c) For the purposes of subsections (a) and (b) above, all indebtedness,
liabilities, agreements, understandings, instruments, contracts and proposed
transactions involving the same person or entity (including persons or entities
the Company has reason to believe are affiliated therewith) shall be aggregated
for the purpose of meeting the individual minimum dollar amounts of such
subsections.
4
4.7 Obligations to Related Parties. Except as set forth on Schedule 4.7,
there are no obligations of the Company to officers, directors, stockholders or
employees of the Company other than (a) for payment of salary for services
rendered and for bonus payments, (b) reimbursement for reasonable expenses
incurred on behalf of the Company, (c) for other standard employee benefits made
generally available to all employees (including stock option agreements
outstanding under any stock option plan approved by the Board of Directors of
the Company) and (d) obligations listed in the Company's financial statements or
disclosed in any of its Exchange Act Filings. Except as described above or set
forth on Schedule 4.7, none of the officers, directors or, to the best of the
Company's knowledge, key employees or stockholders of the Company or any members
of their immediate families, are indebted to the Company, individually or in the
aggregate, in excess of $50,000 or have any direct or indirect ownership
interest in any firm or corporation with which the Company is affiliated or with
which the Company has a business relationship, or any firm or corporation which
competes with the Company, other than passive investments in publicly traded
companies (representing less than 1% of such company) which may compete with the
Company. Except as described above, no officer, director or stockholder, or any
member of their immediate families, is, directly or indirectly, interested in
any material contract with the Company and no agreements, understandings or
proposed transactions are contemplated between the Company and any such person.
Except as set forth on Schedule 4.7, the Company is not a guarantor or
indemnitor of any indebtedness of any other person, firm or corporation.
4.8 Changes. Since March 31, 2002, except as disclosed in any Exchange Act
Filing or in any Schedule to this Agreement or to any of the Related Agreements,
there has not been:
(a) Any change in the assets, liabilities, financial condition, prospects
or operations of the Company, other than changes in the ordinary course of
business, none of which individually or in the aggregate has had or is
reasonably expected to have a material adverse effect on such assets,
liabilities, financial condition, prospects or operations of the Company;
(b) Any resignation or termination of any officer, key employee or group of
employees of the Company;
(c) Any material change, except in the ordinary course of business, in the
contingent obligations of the Company by way of guaranty, endorsement,
indemnity, warranty or otherwise;
(d) Any damage, destruction or loss, whether or not covered by insurance,
materially and adversely affecting the properties, business or prospects or
financial condition of the Company;
(e) Any waiver by the Company of a valuable right or of a material debt
owed to it;
(f) Any direct or indirect material loans made by the Company to any
stockholder, employee, officer or director of the Company, other than advances
made in the ordinary course of business;
5
(g) Any material change in any compensation arrangement or agreement with
any employee, officer, director or stockholder;
(h) Any declaration or payment of any dividend or other distribution of the
assets of the Company;
(i) Any labor organization activity related to the Company;
(j) Any debt, obligation or liability incurred, assumed or guaranteed by
the Company, except those for immaterial amounts and for current liabilities
incurred in the ordinary course of business;
(k) Any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(l) Any change in any material agreement to which the Company is a party or
by which it is bound which may materially and adversely affect the business,
assets, liabilities, financial condition, operations or prospects of the
Company;
(m) Any other event or condition of any character that, either individually
or cumulatively, has or may materially and adversely affect the business,
assets, liabilities, financial condition, prospects or operations of the
Company; or
(n) Any arrangement or commitment by the Company to do any of the acts
described in subsection (a) through (m) above.
4.9 Title to Properties and Assets; Liens, Etc. Except as set forth on
Schedule 4.9, the Company has good and marketable title to its properties and
assets, and good title to its leasehold estates, in each case subject to no
mortgage, pledge, lien, lease, encumbrance or charge, other than (a) those
resulting from taxes which have not yet become delinquent, (b) minor liens and
encumbrances which do not materially detract from the value of the property
subject thereto or materially impair the operations of the Company, and (c)
those that have otherwise arisen in the ordinary course of business. All
facilities, machinery, equipment, fixtures, vehicles and other properties owned,
leased or used by the Company are in good operating condition and repair and are
reasonably fit and usable for the purposes for which they are being used. Except
as set forth on Schedule 4.9, the Company is in compliance with all material
terms of each lease to which it is a party or is otherwise bound.
4.10 Intellectual Property.
(a) The Company owns or possesses sufficient legal rights to all patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information and other proprietary rights and processes necessary for its
business as now conducted and to the Company's knowledge as presently proposed
to be conducted (the "Intellectual Property"), without any known infringement of
the rights of others. There are no outstanding options, licenses or agreements
of any kind relating to the foregoing proprietary rights, nor is the Company
bound by or a party to any options, licenses or agreements of any kind with
respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses,
6
information and other proprietary rights and processes of any other person or
entity other than such licenses or agreements arising from the purchase of
"off the shelf" or standard products.
(b) Except as set forth on Schedule 4.10(b), the Company has not received
any communications alleging that the Company has violated any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity, nor is the Company aware of
any basis therefor.
(c) The Company does not believe it is or will be necessary to utilize any
inventions, trade secrets or proprietary information of any of its employees
made prior to their employment by the Company, except for inventions, trade
secrets or proprietary information that have been rightfully assigned to the
Company.
4.11 Compliance with Other Instruments. Except as set forth on Schedule
4.11, the Company is not in violation or default of any term of its Charter or
Bylaws, or of any material provision of any mortgage, indenture, contract,
agreement, instrument or contract to which it is party or by which it is bound
or of any judgment, decree, order or writ. The execution, delivery and
performance of and compliance with this Agreement and the Related Agreements to
which it is a party, and the issuance and sale of the Note by the Company and
the other Securities by the Company each pursuant hereto, will not, with or
without the passage of time or giving of notice, result in any such material
violation, or be in conflict with or constitute a default under any such term or
provision, or result in the creation of any mortgage, pledge, lien, encumbrance
or charge upon any of the properties or assets of the Company or the suspension,
revocation, impairment, forfeiture or nonrenewal of any permit, license,
authorization or approval applicable to the Company, its business or operations
or any of its assets or properties.
4.12 Litigation. Except as set forth on Schedule 4.12, there is no action,
suit, proceeding or investigation pending or, to the Company's knowledge,
currently threatened against the Company that prevents the Company to enter into
this Agreement or the Related Agreements, or to consummate the transactions
contemplated hereby or thereby, or which might result, either individually or in
the aggregate, in any material adverse change in the assets, condition, affairs
or prospects of the Company, financially or otherwise, or any change in the
current equity ownership of the Company, nor is the Company aware that there is
any basis for any of the foregoing. The Company is not a party or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality. There is no action, suit, proceeding or
investigation by the Company currently pending or which the Company intends to
initiate.
4.13 Tax Returns and Payments. The Company has timely filed all tax returns
(federal, state and local) required to be filed by it. All taxes shown to be due
and payable on such returns, any assessments imposed, and to the Company's
knowledge all other taxes due and payable by the Company on or before the
Closing, have been paid or will be paid prior to the time they become
delinquent. Except as set forth on Schedule 4.13, the Company has not been
advised (a) that any of its returns, federal, state or other, have been or are
being audited as of the date hereof, or (b) of any deficiency in assessment or
proposed judgment to its federal, state or other taxes. The Company has no
knowledge of any liability of any tax to be imposed upon its properties or
assets as of the date of this Agreement that is not adequately provided for.
7
4.14 Employees. Except as set forth on Schedule 4.14, the Company has no
collective bargaining agreements with any of its employees. There is no labor
union organizing activity pending or, to the Company's knowledge, threatened
with respect to the Company. Except as disclosed in the Exchange Act Filings,
the Company is not a party to or bound by any currently effective employment
contract, deferred compensation arrangement, bonus plan, incentive plan, profit
sharing plan, retirement agreement or other employee compensation plan or
agreement. To the Company's knowledge, no employee of the Company, nor any
consultant with whom the Company has contracted, is in violation of any term of
any employment contract, proprietary information agreement or any other
agreement relating to the right of any such individual to be employed by, or to
contract with, the Company because of the nature of the business to be conducted
by the Company; and to the Company's knowledge the continued employment by the
Company of its present employees, and the performance of the Company's contracts
with its independent contractors, will not result in any such violation. The
Company is not aware that any of its employees is obligated under any contract
(including licenses, covenants or commitments of any nature) or other agreement,
or subject to any judgment, decree or order of any court or administrative
agency, that would interfere with their duties to the Company. The Company has
not received any notice alleging that any such violation has occurred. Except
for employees who have a current effective employment agreement with the
Company, no employee of the Company has been granted the right to continued
employment by the Company or to any material compensation following termination
of employment with the Company. The Company is not aware that any officer, key
employee or group of employees intends to terminate his, her or their employment
with the Company, nor does the Company have a present intention to terminate the
employment of any officer, key employee or group of employees.
4.15 Registration Rights and Voting Rights. Except as set forth on Schedule
4.15 and except as disclosed in Exchange Act Filings, the Company is presently
not under any obligation, and has not granted any rights, to register any of the
Company's presently outstanding securities or any of its securities that may
hereafter be issued. To the Company's knowledge, no stockholder of the Company
has entered into any agreement with respect to the voting of equity securities
of the Company.
4.16 Compliance with Laws; Permits. Except as set forth on Schedule 4.16,
to its knowledge, the Company is not in violation in any material respect of any
applicable statute, rule, regulation, order or restriction of any domestic or
foreign government or any instrumentality or agency thereof in respect of the
conduct of its business or the ownership of its properties which violation would
materially and adversely affect the business, assets, liabilities, financial
condition, operations or prospects of the Company. No governmental orders,
permissions, consents, approvals or authorizations are required to be obtained
and no registrations or declarations are required to be filed in connection with
the execution and delivery of this Agreement and the issuance of any of the
Securities, except such as has been duly and validly obtained or filed, or with
respect to any filings that must be made after the Closing, as will be filed in
a timely manner. The Company has all material franchises, permits, licenses and
any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which would materially and adversely affect the
business, properties, prospects or financial condition of the Company.
8
4.17 Environmental and Safety Laws. The Company is not in violation of any
applicable statute, law or regulation relating to the environment or
occupational health and safety, and to its knowledge, no material expenditures
are or will be required in order to comply with any such existing statute, law
or regulation. No Hazardous Materials (as defined below) are used or have been
used, stored, or disposed of by the Company or, to the Company's knowledge, by
any other person or entity on any property owned, leased or used by the Company.
For the purposes of the preceding sentence, "Hazardous Materials" shall mean (a)
materials which are listed or otherwise defined as "hazardous" or "toxic" under
any applicable local, state, federal and/or foreign laws and regulations that
govern the existence and/or remedy of contamination on property, the protection
of the environment from contamination, the control of hazardous wastes, or other
activities involving hazardous substances, including building materials, or (b)
any petroleum products or nuclear materials.
4.18 Valid Offering. Assuming the accuracy of the representations and
warranties of the Purchaser contained in this Agreement, the offer, sale and
issuance of the Securities will be exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act"), and will have
been registered or qualified (or are exempt from registration and qualification)
under the registration, permit or qualification requirements of all applicable
state securities laws.
4.19 Full Disclosure. The Company has provided the Purchaser with all
information requested by the Purchaser in connection with its decision to
purchase the Note and Warrant, including all information the Company believes is
reasonably necessary to make such investment decision. Neither this Agreement,
the exhibits and schedules hereto, the Related Agreements nor any other document
delivered by the Company to Purchaser or its attorneys or agents in connection
herewith or therewith or with the transactions contemplated hereby or thereby,
contain any untrue statement of a material fact nor omit to state a material
fact necessary in order to make the statements contained herein or therein, in
light of the circumstances in which they are made, not misleading. Any financial
projections and other estimates provided to the Purchaser by the Company were
based on the Company's experience in the industry and on assumptions of fact and
opinion as to future events which the Company, at the date of the issuance of
such projections or estimates, believed to be reasonable. As of the date hereof
the Company has seen no material improvement in Information Technology (IT)
spending by its clients and prospects that underlies and drives its revenue
projections. The Company is not likely to meet or exceed financial projections
provided to the Purchaser until IT spending and the general United States
economy improves. As of the date hereof and until IT spending improves the
operational plan of the Company is to retain core clients, tactically engage new
clients with small transactions and manage cash burn (primarily through
controlling costs). The Company anticipates that it will remain cash flow
negative to cash flow neutral for the foreseeable future.
4.20 Insurance. The Company has general commercial, product liability, fire
and casualty insurance policies with coverage customary for companies similarly
situated to the Company in the same or similar business.
4.21 SEC Reports. The Company has filed all proxy statements, reports and
other documents required to be filed by it under the Exchange Act. The Company
has furnished the Purchaser with copies of (i) its Annual Report on Form 10-KSB
for the fiscal year ended
9
December 31, 2001, (ii) its Quarterly Report on Form 10-QSB for the fiscal
quarter ended March 31, 2002 and (iii) its Proxy Statement dated April 16,
2002 (collectively, the "SEC Reports"). Each SEC Report was, at the time of
its filing, in substantial compliance with the requirements of its respective
form and none of the SEC Reports, nor the financial statements (and the notes
thereto) included in the SEC Reports, as of their respective filing dates,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
4.22 Listing. The Company's Common Stock is listed for trading on the
Nasdaq SmallCap Market and satisfies all requirements for the continuation of
such listing. The Company has not received any notice that its Common Stock will
be delisted from the Nasdaq SmallCap Market or that the Common Stock does not
meet all requirements for the continuation of such listing.
4.23 No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offering of the
Securities pursuant to this Agreement to be integrated with prior offerings by
the Company for purposes of the Securities Act which would prevent the Company
from selling the Securities pursuant to Rule 506 under the Securities Act, or
any applicable exchange-related stockholder approval provisions. Nor will the
Company or any of its affiliates or subsidiaries take any action or steps that
would cause the offering of the Securities to be integrated with other
offerings.
4.24 Stop Transfer. The Securities are restricted securities as of the date
of this Agreement. The Company will not issue any stop transfer order or other
order impeding the sale and delivery of any of the Securities at such time as
the Securities are registered for public sale or an exemption from registration
is available, except as required by federal securities laws.
4.26 Dilution. The Company specifically acknowledges that its obligation to
issue the shares of Common Stock upon conversion of the Note and exercise of the
Warrant is binding upon the Company and enforceable regardless of the dilution
such issuance may have on the ownership interests of other shareholders of the
Company.
5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.
The Purchaser hereby represents and warrants to the Company as follows
(such representations and warranties do not lessen or obviate the
representations and warranties of the Company set forth in this Agreement):
5.1 Requisite Power and Authority. Purchaser has all necessary power and
authority under all applicable provisions of law to execute and deliver this
Agreement and the Related Agreements and to carry out their provisions. All
corporate action on Purchaser's part required for the lawful execution and
delivery of this Agreement and the Related Agreements have been or will be
effectively taken prior to the Closing. Upon their execution and delivery, this
Agreement and the Related Agreements will be valid and binding obligations of
Purchaser,
10
enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors' rights, and (b) as
limited by general principles of equity that restrict the availability of
equitable and legal remedies.
5.2 Investment Representations. Purchaser understands that the Securities
are being offered and sold pursuant to an exemption from registration contained
in the Securities Act based in part upon Purchaser's representations contained
in the Agreement, including, without limitation, that the Purchaser is an
"accredited investor" within the meaning of Regulation D under the Securities
Act. The Purchaser has received or has had full access to all the information it
considers necessary or appropriate to make an informed investment decision with
respect to the Note and the Warrant to be purchased by it under this Agreement
and the Note Shares and the Warrant Shares acquired by it upon the conversion of
the Note and the exercise of the Warrant, respectively. The Purchaser further
has had an opportunity to ask questions and receive answers from the Company
regarding the Company's business, management and financial affairs and the terms
and conditions of the Offering, the Note, the Warrant and the Securities and to
obtain additional information (to the extent the Company possessed such
information or could acquire it without unreasonable effort or expense)
necessary to verify any information furnished to the Purchaser or to which the
Purchaser had access.
5.3 Purchaser Bears Economic Risk. Purchaser has substantial experience in
evaluating and investing in private placement transactions of securities in
companies similar to the Company so that it is capable of evaluating the merits
and risks of its investment in the Company and has the capacity to protect its
own interests. Purchaser must bear the economic risk of this investment until
the Securities are sold pursuant to (i) an effective registration statement
under the Securities Act, or (ii) an exemption from registration is available.
5.4 Acquisition for Own Account. Purchaser is acquiring the Note and
Warrant and the Note Shares and the Warrant Shares for Purchaser's own account
for investment only, and not as a nominee or agent and not with a view towards
or for resale in connection with their distribution.
5.5 Purchaser Can Protect Its Interest. Purchaser represents that by reason
of its, or of its management's, business and financial experience, Purchaser has
the capacity to evaluate the merits and risks of its investment in the Note, the
Warrant and the Securities and to protect its own interests in connection with
the transactions contemplated in this Agreement, and the Related Agreements.
Further, Purchaser is aware of no publication of any advertisement in connection
with the transactions contemplated in the Agreement or the Related Agreements.
5.6 Accredited Investor. Purchaser represents that it is an accredited
investor within the meaning of Regulation D under the Securities Act.
5.7 Legends.
(a) The Note shall bear substantially the following legend:
"THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR, IF
11
APPLICABLE, STATE SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE
UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO
THIS NOTE OR SUCH SHARES UNDER SAID ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO DIGITAL FUSION,
INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
(b) The Note Shares and the Warrant Shares, if not issued by DWAC system
(as hereinafter defined), shall bear a legend which shall be in substantially
the following form until such shares are covered by an effective registration
statement filed with the SEC:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR IF APPLICABLE, STATE SECURITIES
LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH SECURITIES ACT AND APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO DIGITAL FUSION, INC. THAT SUCH REGISTRATION IS
NOT REQUIRED."
(c) The Warrant shall bear substantially the following legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK
UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO DIGITAL FUSION, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED."
5.8 No Shorting. The Purchaser or any of its affiliates and investment
partners will not and will not cause any person or entity, directly or
indirectly, to engage in "short sales" of the Company's Common Stock or any
other hedging strategies.
5.9 Volume Limitation. The Purchaser agrees not to sell on any given
trading day more than two thirds of the average daily volume for the thirty
trading days prior to a sale of the shares of Common Stock on the Principal
Market on which the shares of Common Stock are listed for trading.
6. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
Purchaser as follows:
6.1 Stop-Orders. The Company will advise the Purchaser, promptly after it
receives notice of issuance by the Securities and Exchange Commission (the
"SEC"), any state securities commission or any other regulatory authority of any
stop order or of any order preventing or suspending any offering of any
securities of the Company, or of the suspension of
12
the qualification of the Common Stock of the Company for offering or sale
in any jurisdiction, or the initiation of any proceeding for any such
purpose.
6.2 Listing. The Company shall promptly secure the listing of the shares of
Common Stock issuable upon conversion of the Note and upon the exercise of the
Warrant on the Pink Sheets, the NASD OTC Bulletin Board, NASDAQ SmallCap Market,
NASDAQ National Market, American Stock Exchange or New York Stock Exchange (the
"Principal Market") upon which shares of Common Stock are then listed (subject
to official notice of issuance) and shall maintain such listing so long as any
other shares of Common Stock shall be so listed. The Company will maintain the
listing of its Common Stock on a Principal Market, and will comply in all
material respects with the Company's reporting, filing and other obligations
under the bylaws or rules of the National Association of Securities Dealers
("NASD") and such exchanges, as applicable.
6.3 Market Regulations. The Company shall notify the SEC, NASD and
applicable state authorities, in accordance with their requirements, of the
transactions contemplated by this Agreement, and shall take all other necessary
action and proceedings as may be required and permitted by applicable law, rule
and regulation, for the legal and valid issuance of the Securities to Purchaser
and promptly provide copies thereof to Purchaser.
6.4 Reporting Requirements. The Company will timely file with the SEC all
reports required to be filed pursuant to the Exchange Act and refrain from
terminating its status as an issuer required by the Exchange Act to file reports
thereunder even if the Exchange Act or the rules or regulations thereunder would
permit such termination.
6.5 Use of Funds. The Company agrees that it will use the proceeds of the
sale of the Note and Warrant for general corporate purposes only.
6.6 Access to Facilities. The Company will permit any representatives
designated by the Purchaser (or any successor of the Purchaser), upon reasonable
notice and during normal business hours, at such person's expense and
accompanied by a representative of the Company, to (a) visit and inspect any of
the properties of the Company, (b) examine the corporate and financial records
of the Company (unless such examination is not permitted by federal, state or
local law or by contract) and make copies thereof or extracts therefrom and (c)
discuss the affairs, finances and accounts of any such corporations with the
directors, officers and independent accountants of the Company. Notwithstanding
the foregoing, the Company will not provide any material, non-public information
to the Purchaser unless the Purchaser signs a confidentiality agreement and
otherwise complies with Regulation FD, under the federal securities laws.
6.7 Taxes. The Company will promptly pay and discharge, or cause to be paid
and discharged, when due and payable, all lawful taxes, assessments and
governmental charges or levies imposed upon the income, profits, property or
business of the Company; provided, however, that any such tax, assessment,
charge or levy need not be paid if the validity thereof shall currently be
contested in good faith by appropriate proceedings and if the Company shall have
set aside on its books adequate reserves with respect thereto, and provided,
further, that the Company will pay all such taxes, assessments, charges or
levies forthwith upon the
13
commencement of proceedings to foreclose any lien which may have attached
as security therefor.
6.8 Insurance. The Company will keep its assets which are of an insurable
character insured by financially sound and reputable insurers against loss or
damage by fire, explosion and other risks customarily insured against by
companies in similar business similarly situated as the Company; and the Company
will maintain, with financially sound and reputable insurers, insurance against
other hazards and risks and liability to persons and property to the extent and
in the manner customary for companies in similar business similarly situated as
the Company and to the extent available on commercially reasonable terms.
6.9 Intellectual Property. The Company shall maintain in full force and
effect its corporate existence, rights and franchises and all licenses and other
rights to use Intellectual Property owned or possessed by it and reasonably
deemed to be necessary to the conduct of its business.
6.10 Properties. The Company will keep its properties in good repair,
working order and condition, reasonable wear and tear excepted, and from time to
time make all needful and proper repairs, renewals, replacements, additions and
improvements thereto; and the Company will at all times comply with each
provision of all leases to which it is a party or under which it occupies
property if the breach of such provision could reasonably be expected to have a
material adverse effect.
6.11 Confidentiality. The Company agrees that it will not disclose, and
will not include in any public announcement, the name of the Purchaser, unless
expressly agreed to by the Purchaser or unless and until such disclosure is
required by law or applicable regulation, and then only to the extent of such
requirement.
6.12 Required Approvals. For so long as 50% of the principal amount of the
Note is outstanding, the Company, without the prior written consent of the
Purchaser, shall not:
(a) directly or indirectly declare or pay any dividends;
(b) liquidate, dissolve or effect a material reorganization;
(c) become subject to (including, without limitation, by way of amendment
to or modification of) any agreement or instrument which by its terms would
(under any circumstances) restrict the Company's right to perform the provisions
of this Agreement or any of the agreements contemplated thereby; or
(d) materially alter or change the scope of the business of the Company.
6.13 Reissuance of Securities. The Company agrees to reissue certificates
representing the Securities without the legends set forth in Section 5.7 above
at such time as (a) the holder thereof is permitted to dispose of such
Securities pursuant to Rule 144(k) under the Securities Act, or (b) upon resale
subject to an effective registration statement after such Securities are
registered under the Securities Act. The Company agrees to cooperate with the
Purchaser in connection with all resales pursuant to Rule 144(d) and Rule 144(k)
and provide
14
legal opinions necessary to allow such resales provided the Company
and its counsel receive reasonably requested representations from the selling
Purchaser and broker, if any.
6.14 Opinion. On the Closing Date, the Company will deliver to the
Purchaser an opinion acceptable to the Purchaser from the Company's legal
counsel. The Company will provide, at the Company's expense, such other legal
opinions in the future as are reasonably necessary for the conversion of the
Note and exercise of the Warrant.
7. COVENANTS OF THE PURCHASER. The Purchaser covenants and agrees with the
Company as follows:
7.1 Confidentiality. The Purchaser agrees that it will not disclose, and
will not include in any public announcement, the name of the Company, unless
expressly agreed to by the Company or unless and until such disclosure is
required by law or applicable regulation, and then only to the extent of such
requirement.
7.2 Non-Public Information. The Purchaser agrees not to effect any sales in
the shares of the Company's Common Stock while in possession of material,
non-public information regarding the Company.
8. COVENANTS OF THE COMPANY AND PURCHASER REGARDING INDEMNIFICATION.
8.1 Company Indemnification. The Company agrees to indemnify, hold
harmless, reimburse and defend Purchaser, each of Purchaser's officers,
directors, agents, affiliates, control persons, and principal shareholders,
against any claim, cost, expense, liability, obligation, loss or damage
(including reasonable legal fees) of any nature, incurred by or imposed upon the
Purchaser which results, arises out of or is based upon (i) any
misrepresentation by Company or breach of any warranty by Company in this
Agreement or in any exhibits or schedules attached hereto or any Related
Agreement, or (ii) any breach or default in performance by Company of any
covenant or undertaking to be performed by Company hereunder, or any other
agreement entered into by the Company and Purchaser relating hereto.
8.2 Purchaser's Indemnification. Purchaser agrees to indemnify, hold
harmless, reimburse and defend the Company and each of the Company's officers,
directors, agents, affiliates, control persons and principal shareholders, at
all times against any claim, cost, expense, liability, obligation, loss or
damage (including reasonable legal fees) of any nature, incurred by or imposed
upon the Company which results, arises out of or is based upon (i) any
misrepresentation by Purchaser or breach of any warranty by Purchaser in this
Agreement or in any exhibits or schedules attached hereto or any Related
Agreement; or (ii) any breach or default in performance by Purchaser of any
covenant or undertaking to be performed by Purchaser hereunder, or any other
agreement entered into by the Company and Purchaser relating hereto.
8.3 Procedures. The procedures and limitations set forth in Section 10.6
shall apply to the indemnifications set forth in Sections 8.1 and 8.2 above.
15
9. CONVERSION OF CONVERTIBLE NOTE.
9.1 Mechanics of Conversion.
(a) Provided the Purchaser has notified the Company of the Purchaser's
intention to sell the Note Shares and the Note Shares are included in an
effective registration statement or are otherwise exempt from registration when
sold: (i) Upon the conversion of the Note or part thereof, the Company shall, at
its own cost and expense, take all necessary action (including the issuance of
an opinion of counsel) to assure that the Company's transfer agent shall issue
shares of the Company's Common Stock in the name of the Purchaser (or its
nominee) or such other persons as designated by the Purchaser in accordance with
Section 9.1(b) hereof and in such denominations to be specified representing the
number of Note Shares issuable upon such conversion; and (ii) The Company
warrants that no instructions other than these instructions have been or will be
given to the transfer agent of the Company's Common Stock and that after the
Effective Date (as hereinafter defined) the Note Shares issued will be freely
transferable subject to the prospectus delivery requirements of the Securities
Act and the provisions of this Agreement, and will not contain a legend
restricting the resale or transferability of the Note Shares.
(b) Purchaser will give notice of its decision to exercise its right to
convert the Note or part thereof by telecopying or otherwise delivering an
executed and completed notice of the number of shares to be converted to the
Company (the "Notice of Conversion"). The Purchaser will not be required to
surrender the Note until the Purchaser receives a credit to the account of the
Purchaser's prime broker through the DWAC system (as defined below),
representing the Note Shares or until the Note has been fully satisfied. Each
date on which a Notice of Conversion is telecopied or delivered to the Company
in accordance with the provisions hereof shall be deemed a "Conversion Date."
The Company will cause the transfer agent to transmit the shares of the
Company's Common Stock issuable upon conversion of the Note (and a certificate
representing the balance of the Note not so converted, if requested by
Purchaser) to the Purchaser by crediting the account of the Purchaser's prime
broker with the Depository Trust Company ("DTC") through its Deposit Withdrawal
Agent Commission ("DWAC") system within five (5) business days after receipt by
the Company of the Notice of Conversion (the "Delivery Date").
The Company understands that a delay in the delivery of the Note Shares in
the form required pursuant to Section 9 hereof beyond the Delivery Date could
result in economic loss to the Purchaser. In the event that the Company fails to
direct its transfer agent to deliver the Note Shares to the Purchaser via the
DWAC system within the time frame set forth in Section 9.1(b) above and the Note
Shares are not delivered to the Purchaser by the Delivery Date, as compensation
to the Purchaser for such loss, the Company agrees to pay late payments to the
Purchaser for late issuance of the Note Shares in the form required pursuant to
Section 9 hereof upon conversion of the Note in the amount equal to the greater
of (i) $500 per business day after the Delivery Date or (ii) the Purchaser's
actual damages from such delayed delivery. Notwithstanding the foregoing, the
Company will not owe the Purchaser any late payments if the delay in the
delivery of the Note Shares beyond the Delivery Date is solely out of the
control of the Company and the Company is actively trying to cure the cause of
the delay. The Company shall pay any payments incurred under this Section in
immediately available funds upon demand
16
and, in the case of actual damages, accompanied by reasonable documentation
of the amount of such damages. Such documentation shall show the number of
shares of Common Stock the Purchaser is forced to purchase (in an open
market transaction) which the Purchaser anticipated receiving upon such
conversion, and shall be calculated as the amount by which (A) the
Purchaser's total purchase price (including customary brokerage
commissions, if any) for the shares of Common Stock so purchased exceeds
(B) the aggregate principal and/or interest amount of the Note, for which
such Conversion Notice was not timely honored.
Nothing contained herein or in any document referred to herein or delivered
in connection herewith shall be deemed to establish or require the payment of a
rate of interest or other charges in excess of the maximum permitted by
applicable law. In the event that the rate of interest or dividends required to
be paid or other charges hereunder exceed the maximum amount permitted by such
law, any payments in excess of such maximum shall be credited against amounts
owed by the Company to a Purchaser and thus refunded to the Company.
9.2 Maximum Conversion. The Purchaser shall not be entitled to convert on a
Conversion Date that amount of a Note in connection with that number of shares
of Common Stock which would be in excess of the sum of (i) the number of shares
of Common Stock beneficially owned by the Purchaser on a Conversion Date, and
(ii) the number of shares of Common Stock issuable upon the conversion of the
Note with respect to which the determination of this proviso is being made on a
Conversion Date, which would result in beneficial ownership by the Purchaser of
more than 4.9% of the outstanding shares of Common Stock of the Company on such
Conversion Date. For the purposes of the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Exchange Act and Regulation 13d-3 thereunder. Upon an Event of Default under the
Note, the conversion limitation in this Section 9.2 shall become null and void.
9.3 Optional Redemption. The Company will have the option of redeeming any
outstanding principal of the Note ("Optional Redemption") by paying to the
Purchaser a sum of money equal to 110% of such principal amount being redeemed
(this number shall be 100% after 210 days from the date hereof), together with
accrued but unpaid interest thereon and any and all other sums due, accrued or
payable to the Purchaser arising under this Agreement, Note or any other
document delivered herewith ("Redemption Amount") outstanding on the day notice
of redemption ("Notice of Redemption") is delivered to a Purchaser ("Redemption
Date"). A Notice of Redemption may not be given in connection with any portion
of Note for which a Notice of Conversion has been given by the Purchaser at any
time before receipt of a Notice of Redemption or given pursuant to the following
sentence. A Notice of Redemption must be accompanied by a certificate signed by
the chief executive officer or chief financial officer of the Company stating
that the Company has on deposit and segregated ready funds equal to the
Redemption Amount. The Redemption Amount must be paid in good funds to the
Purchaser no later than the seventh (7th) business day after the Redemption Date
("Optional Redemption Payment Date"). In the event the Company fails to pay the
Redemption Amount by the Optional Redemption Payment Date, then the Redemption
Notice will be null and void. A Notice of Redemption may be given by the
Company, provided (i) no Event of Default as described in the Note shall have
occurred or be continuing; and (ii) the Note Shares issuable upon conversion of
the full outstanding Note principal are included for unrestricted resale in a
registration statement effective as of the Redemption Date
17
10. REGISTRATION RIGHTS.
10.1 Registration Rights Granted. The Company hereby grants the following
registration rights to the Purchaser:
(a) If the Company at any time proposes to register any of its securities
under the Act for sale to the public, whether for its own account or for the
account of other security holders or both, except with respect to registration
statements on Forms S-4, S-8 or another form not available for registering the
Registrable Securities for sale to the public, provided the Registrable
Securities are not otherwise subject to an effective registration statement, the
Company will give the Purchaser written notice ("Notice of Registration") to
cause such Registrable Securities to be included with the securities to be
covered by the registration statement proposed to be filed by the Company. In
the event that any registration pursuant to this Section 10.1(a) shall be, in
whole or in part, an underwritten public offering of Common Stock of the
Company, the number of shares of Registrable Securities to be included in such
an underwriting may be reduced by the managing underwriter if and to the extent
that the Company and the underwriter shall reasonably be of the opinion that
such inclusion would adversely affect the marketing of the securities to be sold
by the Company therein; provided, however, that the Company shall notify the
Purchaser in writing of any such reduction.
(b) The Company shall use its reasonable commercial efforts to file a Form
S-3 registration statement (or such other form that it is eligible to use) in
order to register the issuance of the Registrable Securities to the Purchaser
under the Securities Act with the SEC within 60 days of the Closing Date (the
"Filing Date"), and use its reasonable commercial efforts to cause such
registration statement to be declared effective within 90 days of the Filing
Date (the "Effective Date"). The Company will register a number of shares of
Common Stock in the aforedescribed registration statement that is equal to the
Warrant Shares and 100% of the Note Shares issuable at the Fixed Conversion
Price set forth in the Note, that would be in effect on the Closing Date,
assuming the conversion of 100% of the principal amount of the Note which is
then outstanding, and at least one share of Common Stock for each common share
issuable upon exercise of the Warrant, plus interest payable under the Note
("Registrable Securities").
10.2 Registration Procedures. If and whenever the Company is required by
the provisions hereof to effect the registration of the Registrable Securities
under the Act, the Company will:
(a) prepare and file with the SEC a registration statement with respect to
such securities and use its best efforts to cause such registration statement to
become and remain effective for the period of the distribution contemplated
thereby (determined as herein provided), and promptly provide to the Purchaser
copies of all filings and SEC letters of comment;
(b) prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective until the earlier of:
(i) six months after the latest exercise period of the Warrant; (ii) four years
after the Closing Date, or (iii) the date on which the Purchaser has disposed of
all of the Registrable Securities covered by such registration
18
statement in accordance with the Purchaser's intended method of disposition
set forth in such registration statement for such period;
(c) furnish to the Purchaser such number of copies of the registration
statement and the prospectus included therein (including each preliminary
prospectus) as the Purchaser reasonably may request to facilitate the public
sale or disposition of the securities covered by such registration statement;
(d) use its commercially reasonable efforts to register or qualify the
Purchaser's Registrable Securities covered by such registration statement under
the securities or "blue sky" laws of such jurisdictions as the Purchaser,
provided, however, that the Company shall not for any such purpose be required
to qualify generally to transact business as a foreign corporation in any
jurisdiction where it is not so qualified or to consent to general service of
process in any such jurisdiction;
(e) list the Registrable Securities covered by such registration statement
with any securities exchange on which the Common Stock of the Company is then
listed;
(f) immediately notify the Purchaser at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, of the happening
of any event of which the Company has knowledge as a result of which the
prospectus contained in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing; and
(g) make available for inspection by the Purchaser and any attorney,
accountant or other agent retained by the Purchaser, all publicly available,
non-confidential financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all publicly available, non-confidential information
reasonably requested by the attorney, accountant or agent of the Purchaser.
10.3 Provision of Documents. In connection with the registration hereunder,
the Purchaser will furnish to the Company in writing such information and
representation letters with respect to itself and the proposed distribution by
it as reasonably shall be necessary in order to assure compliance with federal
and applicable state securities laws.
10.4 Non-Registration Events.
If (i) the Registration Statement described in Section 10.1(b) is not filed
on or before the Filing Date or not declared effective on or before the sooner
of the Effective Date, or within four business days of receipt by the Company of
a communication from the SEC that the registration statement described in
Section 10.1(b) will not be reviewed, or (ii) any registration statement
described in Section 10.1(b) is filed and declared effective but shall
thereafter cease to be effective (without being succeeded immediately by an
additional registration statement filed and declared effective) for a period of
time which shall exceed 30 days in the aggregate per year but not more than 20
consecutive calendar days (defined as a period of 365 days commencing on the
date the Registration Statement is declared effective) (each such event referred
to in this
19
Section 10.4 is referred to herein as a "Non-Registration Event"),
the Purchaser, at its sole option, may declare in a written notice to the
Company that the Non-Registration Event has triggered an Event of Default (as
defined in Article IV of the Note.) Declaring an Event of Default under the Note
is the Purchaser's sole remedy for a Non-Registration Event.
10.5 Expenses. All expenses incurred by the Company in complying with
Section 10, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel and independent public
accountants for the Company, fees and expenses (including reasonable counsel
fees) incurred in connection with complying with state securities or "blue sky"
laws, fees of the NASD, transfer taxes, fees of transfer agents and registrars,
fees of, and disbursements incurred by, and costs of insurance are called
"Registration Expenses". All underwriting discounts and selling commissions
applicable to the sale of Registrable Securities, including any fees and
disbursements of any special counsel to the Purchaser beyond those included in
Registration Expenses, are called "Selling Expenses."
The Company will pay all Registration Expenses. All Selling Expenses in
connection with each registration statement under Section 10 shall be borne by
the Purchaser.
10.6 Indemnification.
(a) In the event of a registration of any Registrable Securities under the
Securities Act pursuant to Section 10, the Company will indemnify and hold
harmless the Purchaser, and its officers, directors and each other person, if
any, who controls the Purchaser within the meaning of the Securities Act,
against any losses, claims, damages or liabilities, joint or several, to which
the Purchaser, or such persons may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such Registrable Securities were registered under the Securities Act
pursuant to Section 10, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse the Purchaser, and each such person for any reasonable legal
or other expenses incurred by them in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case if and to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so made in
conformity with information furnished by the Purchaser or any such person in
writing specifically for use in any such document.
(b) In the event of a registration of the Registrable Securities under the
Securities Act pursuant to Section 10, the Purchaser will indemnify and hold
harmless the Company, and its officers, directors and each other person, if any,
who controls the Company within the meaning of the Securities Act, against all
losses, claims, damages or liabilities, joint or several, to which the Company
or such persons may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material
20
fact contained in the registration statement under which such Registrable
Securities were registered under the Securities Act pursuant to Section
10, any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
and will reimburse the Company and each such person for any reasonable legal or
other expenses incurred by them in connection with investigating or defending
any such loss, claim, damage, liability or action, provided, however, that the
Purchaser will be liable in any such case if and only to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so made in
conformity with information furnished in writing to the Company by the Purchaser
specifically for use in any such document.
(c) Promptly after receipt by an indemnified party hereunder of notice of
the commencement of any action, such indemnified party shall, if a claim in
respect thereof is to be made against the indemnifying party hereunder, notify
the indemnifying party in writing thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
such indemnified party other than under this Section 10.6(c) and shall only
relieve it from any liability which it may have to such indemnified party under
this Section 10.6(c) if and to the extent the indemnifying party is prejudiced
by such omission. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate in and, to the
extent it shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 10.6(c) for any legal expenses subsequently incurred by
such indemnified party in connection with the defense thereof; if the
indemnified party retains its own counsel, then the indemnified party shall pay
all fees, costs and expenses of such counsel, provided, however, that, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be reasonable defenses available to it which are different from
or additional to those available to the indemnifying party or if the interests
of the indemnified party reasonably may be deemed to conflict with the interests
of the indemnifying party, the indemnified parties shall have the right to
select one separate counsel and to assume such legal defenses and otherwise to
participate in the defense of such action, with the reasonable expenses and fees
of such separate counsel and other expenses related to such participation to be
reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution in the event of
joint liability under the Securities Act in any case in which either (i) the
Purchaser, or any controlling person of the Purchaser, makes a claim for
indemnification pursuant to this Section 10.6 but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that this Section 10.6 provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of the
Purchaser or controlling person of the Purchaser in circumstances for which
indemnification is provided under this Section 10.6; then,
21
and in each such case, the Company and the Purchaser will contribute to the
aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportion so that the
Purchaser is responsible only for the portion represented by the percentage
that the public offering price of its securities offered by the registration
statement bears to the public offering price of all securities offered by
such registration statement, provided, however, that, in any such case,
(A) the Purchaser will not be required to contribute any amount in
excess of the public offering price of all such securities offered by it
pursuant to such registration statement; and (B) no person or entity guilty
of fraudulent misrepresentation (within the meaning of Section 10(f) of the
Act) will be entitled to contribution from any person or entity who was not
guilty of such fraudulent misrepresentation.
11. OFFERING RESTRICTIONS. Except as previously disclosed in the SEC
Reports or in the Exchange Act Filings, or stock or stock options granted to
employees or directors of the Company; or equity or debt issued in connection
with an acquisition of a business or assets by the Company; or the issuance by
the Company of stock in connection with the establishment of a joint venture
partnership or licensing arrangement (these exceptions hereinafter referred to
as the "Excepted Issuances"), the Company will not issue any securities with a
variable/floating conversion feature which are or could be (by conversion or
registration) free-trading securities (i.e. common stock subject to a
registration statement) prior to the full repayment or conversion of the Note
(the "Exclusion Period"). This restriction shall not prohibit the Company from
issuing any equity, convertible debt or other securities prior to the expiration
of the Exclusion Period, provided that such equity, convertible debt or other
securities are restricted securities when issued and remain restricted until the
expiration of the Exclusion Period, which shall include, but not limited to, any
bank debt with warrants, fixed rate convertible debt transactions and/or
discounted equity transactions in each case with registration rights that
provide for registration of the Common Stock issuable therein after the
Exclusion Period.
12. SECURITY INTEREST. As a condition of Closing, the Company will grant to
the Purchaser a security interest in its assets pursuant to a Security
Agreement. The Company will also execute all such documents reasonably necessary
to memorialize and further protect the security interest described above. The
Purchaser shall release such security interest when the principal amount of the
Note is reduced to $100,000 or less and all fee payments are current.
13. MISCELLANEOUS.
13.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of laws. Any action brought by either party against the other
concerning the transactions contemplated by this Agreement shall be brought only
in the state courts of New York or in the federal courts located in the state of
New York. Both parties and the individuals executing this Agreement and other
agreements on behalf of the Company agree to submit to the jurisdiction of such
courts and waive trial by jury. In the event that any provision of this
Agreement or any other agreement delivered in connection herewith is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of any agreement.
22
13.2 Survival. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by the Purchaser and the
closing of the transactions contemplated hereby to the extent provided therein.
All statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Company pursuant hereto in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder solely as of the date of
such certificate or instrument.
13.3 Successors. Except as otherwise expressly provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, heirs, executors and administrators of the parties hereto and shall
inure to the benefit of and be enforceable by each person who shall be a holder
of the Securities from time to time.
13.4 Entire Agreement. This Agreement, the exhibits and schedules hereto,
the Related Agreements and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and no party shall be liable or bound to any
other in any manner by any representations, warranties, covenants and agreements
except as specifically set forth herein and therein.
13.5 Severability. In case any provision of the Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
13.6 Amendment and Waiver.
(a) This Agreement may be amended or modified only upon the written consent
of the Company and the Purchaser.
(b) The obligations of the Company and the rights of the Purchaser under
this Agreement may be waived only with the written consent of the Purchaser.
(c) The obligations of the Purchaser and the rights of the Company under
this Agreement may be waived only with the written consent of the Company.
13.7 Delays or Omissions. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement or the Related
Agreements, shall impair any such right, power or remedy, nor shall it be
construed to be a waiver of any such breach, default or noncompliance, or any
acquiescence therein, or of or in any similar breach, default or noncompliance
thereafter occurring. All remedies, either under this Agreement, the Note or the
Related Agreements, by law or otherwise afforded to any party, shall be
cumulative and not alternative.
13.8 Notices. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to the
party to be notified, (b) when sent by confirmed facsimile if sent during normal
business hours of the recipient, if not, then on the next business day, (c) five
days after having been sent by registered or certified mail, return receipt
requested, postage prepaid, or (d) one day after deposit with a nationally
23
recognized overnight courier, specifying next day delivery, with written
verification of receipt. All communications shall be sent to the Company at the
address as set forth on the signature page hereof, with a copy to Richard
Hadlow, Esq., Bush Ross Gardner Warren & Rudy, P.A., 220 South Franklin Street,
Tampa, Florida 33602, facsimile number (813) 223-9620, and to the Purchaser at
the address set forth on the signature page hereto for such Purchaser, with a
copy in the case of the Purchaser to Daniel M. Laifer, Esq., 152 West 57th
Street, 4th Floor, New York, NY 10019, facsimile number (212) 541-4434, or at
such other address as the Company or the Purchaser may designate by ten days
advance written notice to the other parties hereto.
13.9 Attorneys' Fees. In the event that any suit or action is instituted to
enforce any provision in this Agreement, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including, without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
13.10 Titles and Subtitles. The titles of the sections and subsections of
the Agreement are for convenience of reference only and are not to be considered
in construing this Agreement.
13.11 Facsimile Signatures; Counterparts. This Agreement may be executed by
facsimile signatures and in any number of counterparts, each of which shall be
an original, but all of which together shall constitute one instrument.
13.12 Broker's Fees. Each party hereto represents and warrants that, no
agent, broker, investment banker, person or firm acting on behalf of or under
the authority of such party hereto is or will be entitled to any broker's or
finder's fee or any other commission directly or indirectly in connection with
the transactions contemplated herein. Each party hereto further agrees to
indemnify each other party for any claims, losses or expenses incurred by such
other party as a result of the representation in this Section 13.12 being
untrue.
13.13 Construction. Each party acknowledges that its legal counsel
participated in the preparation of this Agreement and, therefore, stipulates
that the rule of construction that ambiguities are to be resolved against the
drafting party shall not be applied in the interpretation of this Agreement to
favor any party against the other.
24
IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES PURCHASE
AGREEMENT as of the date set forth in the first paragraph hereof.
COMPANY: PURCHASER:
DIGITAL FUSION, INC. LAURUS MASTER FUND, LTD.
By:
By: /s/ Nicholas R. Loglisci, Jr ---------------------------------------
---------------------------- Name:
Name: Nicholas R. Loglisci, Jr. Address:c/o Ironshore Corporate Services Ltd.
Title: Chairman of the BOD P.O. Box 1234 G.T., Queensgate House, South
Address: Church Street
400 North Ashley Drive, Suite 2600 Grand Cayman, Cayman Islands
Tampa, Florida 33602
25
LIST OF EXHIBITS
Form of Offering Convertible Note Exhibit A
Form of Warrant Exhibit B
Form of Escrow Agreement Exhibit C
EXHIBIT A
FORM OF CONVERTIBLE NOTE
A-1
EXHIBIT B
FORM OF WARRANT
B-1
EXHIBIT C
FORM OF OPINIoN
1. The Company is a corporation validly existing and in good standing under
the laws of the State of Delaware and has all requisite corporate power and
authority to own, operate and lease its properties and to carry on its business
as it is now being conducted.
2. The Company has the requisite corporate power and authority to execute,
deliver and perform its obligations under the Agreement and Related Agreements.
All corporate action on the part of the Company and its officers, directors and
stockholders necessary for (i) the authorization of the Agreement and Related
Agreements to which each is a party, and the performance of all obligations of
the Company thereunder at the Closing, and (ii) the authorization, sale,
issuance and delivery of the Securities pursuant to the Agreement and the
Related Agreements has been taken. The Note Shares and the Warrant Shares, when
issued pursuant to and in accordance with the terms of the Agreement and upon
delivery, shall be validly issued and outstanding, fully paid and non
assessable.
3. The execution, delivery and performance of the Agreement, the Note or
the Related Agreements by the Company and the consummation of the transactions
contemplated by any thereof, will not, with or without the giving of notice or
the passage of time or both:
(a) Violate the provisions of the Charter or bylaws of the; or
(b) To the best of such counsel's knowledge, violate any judgment, decree,
order or award of any court binding upon the Company.
4. The Agreement and Related Agreements to which each is a party constitute
and the Note, upon their issuance will constitute, valid and legally binding
obligations of the Company, and are enforceable against the Company in
accordance with their respective terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors' rights, and (b) general
principles of equity that restrict the availability of equitable or legal
remedies.
5. The sale of the Note and the subsequent conversion of the Note into Note
Shares are not subject to any preemptive rights or, to such counsel's knowledge,
rights of first refusal that have not been properly waived or complied with. The
sale of the Warrant and the subsequent exercise of the Warrant for Warrant
Shares are not subject to any preemptive rights or, to such counsel's knowledge,
rights of first refusal that have not been properly waived or complied with.
6. Assuming the accuracy of the representations and warranties of the
Purchaser contained in the Agreement, the offer, sale and issuance of the
Securities will be exempt from the registration requirements of the Securities
Act. To the best of such counsel's knowledge, neither the Company, nor any of
its affiliates, nor any person acting on its or their
C-1
behalf, has directly or indirectly made any offers or sales of any security
or solicited any offers to buy and security under circumstances that would
cause the offering of the Securities pursuant to this Agreement to be
integrated with prior offerings by the Company for purposes of the Securities
Act which would prevent the Company from selling the Securities pursuant to
Rule 506 under the Securities Act, or any applicable exchange-related
stockholder approval provisions.
7. There is no action, suit, proceeding or investigation pending or, to the
best of such counsel's knowledge, currently threatened against the Company that
prevents the right of the Company to enter into this Agreement or any of the
Related Agreements, or to consummate the transactions contemplated thereby. To
the best of such counsel's knowledge, the Company is not a party or subject to
the provisions of any order, writ, injunction, judgment or decree of any court
or government agency or instrumentality; nor is there any action, suit,
proceeding or investigation by the Company currently pending or which the
Company intends to initiate.
C-2
EXHIBIT 10.31
THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER
SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO DIGITAL
FUSION, INC., THAT SUCH REGISTRATION IS NOT REQUIRED.
CONVERTIBLE NOTE
----------------
FOR VALUE RECEIVED, DIGITAL FUSION, INC., a Delaware corporation
(hereinafter called the "Borrower"), hereby promises to pay to LAURUS MASTER
FUND, LTD., c/o Ironshore Corporate Services Ltd., P.O. Box 1234 G.T.,
Queensgate House, South Church Street, Grand Cayman, Cayman Islands, Fax:
345-949-9877 (the "Holder") or its registered assigns or successors in interest,
on order, without demand, the sum of Eight Hundred Thousand Dollars ($800,000),
with any accrued and unpaid interest on January 26, 2004 (the "Maturity Date").
Capitalized terms used herein without definition shall have the meanings
ascribed to such terms in the Purchase Agreement (as defined in Section 3.1(a)
below). This Note shall be convertible into shares of the Borrower's common
stock at the Fixed Conversion Price, as defined below.
The following terms shall apply to this Note:
ARTICLE I
DEFAULT RELATED PROVISIONS
1.1 Payment Grace Period. The Borrower shall have a ten (10) day grace
period to pay any monetary amounts due under this Note, after which grace period
a default interest rate of five percent (5%) per annum above the then applicable
interest rate hereunder shall apply to the monetary amounts due.
1.2 Conversion Privileges. The Conversion Privileges set forth in Article
III shall remain in full force and effect immediately from the date hereof and
until the Note is paid in full.
3
1.3 Interest Rate. (a) Interest payable on this Note shall accrue at the
simple annual rate of six percent (6%) and be payable in arrears commencing on
August 5, 2002 and on the fifth business day of each consecutive calendar month
thereafter, and on the Maturity Date, accelerated or otherwise, due and payable
as described below.
(b) In addition to the interest rate set forth above in Section 1.3(a), an
additional fee on this Note shall accrue at the simple annual rate of four
percent (4%) and be payable in arrears commencing on August 5, 2002 and on the
fifth business day of each consecutive calendar month thereafter, and on the
Maturity Date, accelerated or otherwise, when the principal and accrued but
unpaid interest shall be due and payable, or sooner as described below.
Notwithstanding the foregoing, for every dollar in principal amount of the Note
that Holder converts into Common Stock, the Holder will issue a credit to the
Borrower (each occurrence a "Rebate Credit") equal to the amount of time in
years and fractions thereof from the Closing Date (as defined in the Securities
Purchase Agreement) to the Conversion Date (as defined in section 3.1 (a)) times
four percent (4%). On the next Repayment Date (as defined in section 2.1), the
Rebate Credit will be paid by the Holder to the Borrower by a reduction in the
Monthly Amount due equal to the unpaid Rebate Credit.
ARTICLE II
AMORTIZATION
2.1 Monthly Payments. The Borrower shall repay one-fifteenth of the
original principal amount of this Note (to the extent such amount has not been
converted pursuant to Article III below), together with interest accrued to date
on such portion of the original principal amount plus any and all default
payments owing under the Purchase Agreement but not previously paid
(collectively the "Monthly Amount") on November 5, 2002 and on the fifth
business day of each consecutive calendar month thereafter (each, a "Repayment
Date"). Notwithstanding the foregoing, the Holder will have the option to delay
the start of the amortization for up to 120 days from the date hereof and the
Monthly Amount will then become one-fourteenth of the original principal amount
of the Note. On each such Repayment Date, the Borrower shall pay to the Holder
an amount equal to the Monthly Amount in satisfaction of such obligation.
ARTICLE III
CONVERSION RIGHTS
3.1. Conversion into the Borrower's Common Stock.
(a) For so long as the average closing price of the Common Stock for the 10
trading days prior to conversion is greater than 125% of the Fixed Conversion
Price (as defined below), the
4
Holder shall have the right, but not the obligation to convert the
principal portion of this Note and/or interest due and payable into fully
paid and nonassessable shares of common stock of the Borrower as such stock
exists on the date of issuance of this Note, or any shares of capital
stock of the Borrower into which such stock shall hereafter be changed or
reclassified (the "Common Stock") at the fixed conversion price of $.922
subject to adjustment as provided in Section 3.1(b) hereof (the
"Fixed Conversion Price").
The Borrower shall deliver a Notice of Conversion (as set forth on Exhibit
A attached hereto) as described in Section 9 of the Securities Purchase
Agreement entered into between the Borrower and the Holder relating to this Note
(the "Purchase Agreement") of the Holder's written request for conversion (the
date of giving such notice of conversion being a "Conversion Date"). The number
of shares of Common Stock to be issued upon each conversion of this Note shall
be determined by dividing that portion of the principal of the Note to be
converted and interest, if any, by the Fixed Conversion Price as of the
Conversion Date. In the event of any conversions of outstanding principal amount
under this Note in part pursuant to this Article III, such conversions shall be
deemed to constitute conversions of outstanding principal amount applying to
Monthly Amounts for the Repayment Dates in chronological order. By way of
example, if the original principal amount of this Note is $800,000 and the
Holder converted $106,666 of such original principal amount prior to the first
Repayment Date, then (1) the principal amount of the Monthly Amount due on the
first Repayment Date would equal $0, (2) the principal amount of the Monthly
Amount due on the second Repayment Date would equal $0 and (3) the principal
amount of the Monthly Amount due on each of the remaining Repayment Dates would
be $53,333.
(b) The Fixed Conversion Price and number and kind of shares or other
securities to be issued upon conversion determined pursuant to Section 3.1(a),
shall be subject to adjustment from time to time upon the happening of certain
events while this conversion right remains outstanding, as follows:
A. Stock Splits, Combinations and Dividends. If the shares of Common Stock
are subdivided or combined into a greater or smaller number of shares of Common
Stock, or if a dividend is paid on the Common Stock in shares of Common Stock,
the Fixed Conversion Price or the Conversion Price, as the case may be, shall be
proportionately reduced in case of subdivision of shares or stock dividend or
proportionately increased in the case of combination of shares, in each such
case by the ratio which the total number of shares of Common Stock outstanding
immediately after such event bears to the total number of shares of Common Stock
outstanding immediately prior to such event.
(c) During the period the conversion right exists, the Borrower will
reserve from its authorized and unissued Common Stock a sufficient number of
shares to provide for the issuance of Common Stock upon the full conversion of
this Note. The Borrower represents that upon issuance, such shares will be duly
and validly issued, fully paid and non-assessable. The Borrower agrees that its
issuance of this Note shall constitute full authority to its officers, agents,
and transfer agents who are
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charged with the duty of executing and issuing stock certificates to execute
and issue the necessary certificates for shares of Common Stock upon the
conversion of this Note.
3.2 Method of Conversion. This Note may be converted by the Holder in whole
or in part as described in Section 3.1(a) hereof and the Purchase Agreement.
Upon partial conversion of this Note, a new Note containing the same date and
provisions of this Note shall, at the request of the Holder, be issued by the
Borrower to the Holder for the principal balance of this Note and interest which
shall not have been converted or paid. The Borrower will pay no costs, fees or
any other consideration to the Holder for the production and issuance of a new
Note.
ARTICLE IV
EVENT OF DEFAULT
If an Event of Default occurs and is continuing, the Holder may make all
sums of principal, interest and other fees then remaining unpaid hereon and all
other amounts payable hereunder due and payable within 30 days of written notice
from Holder to Borrower (each occurrence being a "Default Notice Period") of an
Event of Default (as defined below). In the event of such an acceleration, the
amount due and owing to the Holder shall be 115% of the outstanding principal
amount of the Note (plus accrued and unpaid interest and fees, if any) (the
"Acceleration Rate"). If during the Default Notice Period, Borrower cures the
Event of Default (other than a payment default described in section 4.1 below),
the Event of Default will no longer exist and any rights Holder had pertaining
to the Event of Default will no longer exist.
If after the Default Notice Period the Borrower has not repaid in full
amount then due hereunder, then, and only then, the conversion price hereunder
shall be reduced and shall be equal to the lower of (i) the Fixed Conversion
Price; or (ii) seventy percent (70%) of the average of the three lowest closing
prices for the Common Stock on the Principal Market, for the thirty (30) trading
days prior to but not including the Conversion Date. The "Principal Market"
shall include the NASD OTC Bulletin Board, NASDAQ SmallCap Market, NASDAQ
National Market System, American Stock Exchange, or New York Stock Exchange
(whichever of the foregoing is at the time the principal trading exchange or
market for the Common Stock, or any securities exchange or other securities
market on which the Common Stock is then being listed or traded.
The occurrence of any of the following events is an Event of Default
("Event of Default"):
4.1 Failure to Pay Principal, Interest or other Fees. The Borrower fails to
pay any installment of principal, interest or other fees hereon or on any other
promissory note issued pursuant to the Purchase Agreement and this Note, when
due and such failure continues for a period of ten (10) days after the due date.
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4.2 Breach of Covenant. The Borrower breaches any material covenant or
other term or condition of this Note or the Purchase Agreement in any material
respect and such breach, if subject to cure, continues for a period of ten (10)
days after written notice to the Borrower from the Holder.
4.3 Breach of Representations and Warranties. Any material representation
or warranty of the Borrower made herein, in the Purchase Agreement, or in any
agreement, statement or certificate given in writing pursuant hereto or in
connection therewith shall be false or misleading and shall not be cured for a
period of twenty (20) days after written notice thereof is received by the
Borrower from the Holder.
4.4 Receiver or Trustee. The Borrower shall make an assignment for the
benefit of creditors, or apply for or consent to the appointment of a receiver
or trustee for it or for a substantial part of its property or business; or such
a receiver or trustee shall otherwise be appointed.
4.5 Judgments. Any money judgment, writ or similar final process shall be
entered or filed against the Borrower or any of its property or other assets for
more than $250,000, and shall remain unvacated, unbonded or unstayed for a
period of ninety (90) days.
4.6 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Borrower.
4.7 Stop Trade. An SEC stop trade order or Principal Market trading
suspension of the Common Stock for 5 consecutive days or 5 days during a period
of 10 consecutive days, excluding in all cases a suspension of all trading on a
Principal Market, provided that the Borrower shall not have been able to cure
such trading suspension within 30 days of the notice thereof or list the Common
Stock on another Principal Market within 60 days of such notice.
4.8 Failure to Deliver Common Stock or Replacement Note. The Borrower's
failure to timely deliver Common Stock to the Holder pursuant to and in the form
required by this Note and Section 9 of the Purchase Agreement, or if required a
replacement Note.
ARTICLE V
MISCELLANEOUS
5.1 Failure or Indulgence Not Waiver. No failure or delay on the part of
the Holder hereof in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privilege. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
5.2 Notices. Any notice herein required or permitted to be given shall be
in writing and shall be deemed effectively given: (a) upon personal delivery to
the party notified, (b) when sent by confirmed telex or facsimile if sent during
normal business hours of the recipient, if not, then on the next business day,
(c) five days after having been sent by registered or certified mail, return
receipt requested, postage prepaid, or (d) one day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the
Borrower at the address as set forth on the signature page to the Purchase
Agreement executed in connection herewith, and to the Holder at the address set
forth on the signature page to the Purchase Agreement for such Holder, with a
copy to Daniel M. Laifer, Esq., 152 West 57th Street, 4th Floor, New York, New
York 10019, facsimile number (212) 541-4434, or at such other address as the
Borrower or the Holder may designate by ten days advance written notice to the
other parties hereto. A Notice of Conversion shall be deemed given when made to
the Borrower pursuant to the Purchase Agreement.
5.3 Amendment Provision. The term "Note" and all reference thereto, as used
throughout this instrument, shall mean this instrument as originally executed,
or if later amended or supplemented, then as so amended or supplemented.
5.4 Assignability. This Note shall be binding upon the Borrower and its
successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder if approved in writing
by Borrower, which shall not be unreasonably withheld.
5.5 Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of laws. Any action brought by either party against the other
concerning the transactions contemplated by this Agreement shall be brought only
in the state courts of New York or in the federal courts located in the state of
New York. Both parties and the individual signing this Note on behalf of the
Borrower agree to submit to the jurisdiction of such courts. The prevailing
party shall be entitled to recover from the other party its reasonable
attorney's fees and costs. In the event that any provision of this Note is
invalid or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any such provision which may prove invalid or unenforceable under any law
shall not affect the validity or unenforceability of any other provision of this
Note.
5.6 Maximum Payments. Nothing contained herein shall be deemed to establish
or require the payment of a rate of interest or other charges in excess of the
maximum permitted by
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applicable law. In the event that the rate of interest required to be paid
or other charges hereunder exceed the maximum permitted by such law, any
payments in excess of such maximum shall be credited against amounts owed
by the Borrower to the Holder and thus refunded to the Borrower.
5.7 Security Interest. The holder of this Note has been granted a security
interest in certain assets of the Borrower more fully described in a Security
Agreement.
5.8 Construction. Each party acknowledges that its legal counsel
participated in the preparation of this Note and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting
party shall not be applied in the interpretation of this Note to favor any party
against the other.
IN WITNESS WHEREOF, each Borrower has caused this Note to be signed in its
name effective as of this 26th day of July, 2002.
DIGITAL FUSION, INC.
By: /s/ Nicholas R.Loglisci
-----------------------
Nicholas R. Loglisci
Chairman of the BOD
WITNESS:
- -------------------------------
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EXHIBIT A
NOTICE OF CONVERSION
(To be executed by the Holder in order to convert the Note)
The undersigned hereby elects to convert $_________ of the principal due on
the Note issued by DIGITAL FUSION, INC. on July ___, 2002 into Shares of Common
Stock of DIGITAL FUSION, INC. (the "Company") according to the conditions set
forth in such Note, as of the date written below.
Date of Conversion:____________________________________________________________
Shares To Be Delivered:________________________________________________________
Signature:_____________________________________________________________________
Print Name:____________________________________________________________________
Address:_______________________________________________________________________
_______________________________________________________________________
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