As filed with the Securities and Exchange Commission on November 1, 2002
Registration No. 333-100052
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________________________________
FORM S-3
AMENDMENT NO. 1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
____________________________________________
DIGITAL FUSION, INC.
(Exact name of Registrant as Specified in Its Charter)
DELAWARE 13-3817344
- ---------------------------- ---------------------
(State or Other Jurisdiction (I.R.S. Employer)
of Incorporation or Identification Number)
Organization)
400 N. ASHLEY DRIVE, SUITE 2600
TAMPA, FLORIDA 33602
(813) 221-0024
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
_____________________________________________________
ROY E. CRIPPEN, III
President and Chief Executive Officer
DIGITAL FUSION, INC.
400 N. ASHLEY DRIVE, SUITE 2600
TAMPA, FLORIDA 33602
(813) 221-0024
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
Please send a copy of all communications to:
RICHARD B. HADLOW, ESQUIRE
Bush Ross Gardner Warren & Rudy, P.A.
220 South Franklin Street
Tampa, Florida 33602
(813) 224-9255
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 pursuant to the Securities
Act of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_] Calculation of Registration Fee
=============================================================================================================
Amount Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities To Be Aggregate Price Aggregate Registration
To Be Registered Registered(1) per Unit Offering Price(2) Fee(3)
- -------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value per share 75,000 $1.15(4) $86,250 $7.94
Common Stock, $0.01 Par value per share 951,153 $.922(5) $876,963 $80.68
- -------------------------------------------------------------------------------------------------------------
TOTAL $88.62
=============================================================================================================
(1) This registration statement also covers any additional shares of our common
stock which become issuable under the rights to purchase common stock by
reason of any stock dividend, stock split, recapitalization or other
similar transaction that results in an increase in the number of
outstanding shares of our common stock.
(2) Estimated solely for calculating the registration fee.
(3) Calculated pursuant to Rule 457(g) of the Securities Act of 1933, as
amended.
(4) The Maximum Aggregate Price per Unit is calculated based on the Warrant
exercise price of $1.15 per share.
(5) The Maximum Aggregate Price per Unit is calculated based on the Convertible
Note conversion price of $.922 per share.
1
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
2
Prospectus
Subject to Completion, November 1, 2002
DIGITAL FUSION, INC.
1,026,153 Shares of Common Stock
Underlying Interest Bearing Convertible Note
and Common Stock Purchase Warrant
This prospectus relates to the public offering, which is not being
underwritten, of 1,026,153 shares of our common stock, par value $.01 per share,
of which 951,153 shares are being registered for issuance upon conversion of a
Convertible Note and the remaining 75,000 shares are being registered for
issuance upon exercise of a Common Stock Purchase Warrant. The Convertible Note
and Warrant were issued to Laurus Master Fund, Ltd, a Cayman Islands company, on
July 26, 2002 pursuant to an exemption from the registration requirements of the
Securities Act of 1933, as amended, provided under its section 4(2). We are
registering the shares of common stock underlying the Convertible Note and
Warrant pursuant to certain registration rights granted to Laurus Master Fund,
Ltd.
Our common stock is traded under the symbol "DIGF" on the NASDAQ SmallCap
Market.
AN INVESTMENT IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. See "Risk
Factors" commencing on page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
- ---------------------------------------------------------
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
- ---------------------------------------------------------
Per Share $1.15(3) $0.00 $86,250.00
=========================================================
(1) We are not using underwriters to solicit the exercise of the Warrant or the
conversion of the Convertible Note.
(2) Before deducting expense of the offering, estimated at $15,088.62. Any
proceeds we receive through the exercise of the Warrant will be used for
general working capital purposes. We will not receive any proceeds from the
conversion of the Convertible Note into shares of our common stock.
(3) The Price to the Public is calculated based on the Warrant exercise price
of $1.15 per share.
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ITEM 2. TABLE OF CONTENTS
Page
The Company.....................................................................................................................5
The Offering....................................................................................................................5
Cautionary Note Regarding Forward-Looking Statements............................................................................5
Risk Factors....................................................................................................................6
Use of Proceeds................................................................................................................14
Determination of Offering Price................................................................................................15
Dilution.......................................................................................................................15
Selling Security Holders.......................................................................................................15
Plan of Distribution...........................................................................................................16
Description of Securities to be Registered.....................................................................................16
Interests of Named Experts and Counsel.........................................................................................16
Material Changes...............................................................................................................16
Where You Can Find Additional Information......................................................................................16
Incorporation of Certain Information by Reference..............................................................................17
Disclosure of Commission Position on Indemnification...........................................................................18
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THE COMPANY
We were incorporated in February 1995 under the laws of the state of
Delaware and are engaged in the business of providing information technology
("IT") consulting services. We provide the following services to our customers:
(i) IT support and integration; (ii) IT Consulting; and (iii) Business
application development. We market our services to mid-sized business (including
mid-sized departments of larger enterprises) and public sector institutions. Our
stock trades on the NASDAQ SmallCap market under the symbol DIGF. The mailing
address of our principal executive office is 400 N. Ashley Drive, Suite 2600,
Tampa, Florida 33602. Our telephone number is (813) 221-0024.
THE OFFERING
This prospectus relates to the public offering, which is not being
underwritten, of 1,026,153 shares of our common stock, par value $.01 per share,
of which 951, 153 shares are being registered for issuance upon conversion of a
Convertible Note and the remaining 75,000 shares are being registered for
issuance upon exercise of a Common Stock Purchase Warrant. The Convertible Note
and Warrant were issued on July 26, 2002 pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended, provided
under its section 4(2). We are registering the shares of common stock underlying
the Convertible Note and Warrant pursuant to certain registration rights granted
to the holder of the Convertible Note and Warrant. The Warrant may be exercised,
in whole or in part, at a price of $1.15 per share until its expiration on July
26, 2007. The Convertible Note is in the original principal amount of $800,000
and bears interest at the simple annual rate of 6%. An additional fee payable on
the Convertible Note accrues at the simple annual interest rate of 4%. The
Convertible Note is convertible into shares of our common stock at the fixed
conversion price of $.922 per share provided that the average closing price of
the common stock for the 10 trading days prior to conversion is equal to or
greater than $1.15.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Throughout this prospectus, and throughout the documents incorporated
herein by reference, we make forward-looking statements, as that term is defined
in Section 27A of the Securities Act of 1933, as amended. In some cases you can
identify these statements by forward-looking words such as "anticipate"
"believe" "could" "estimate" "expect" "intend" "may" "should" "will" "would" or
similar words. You should read statements that contain these words carefully
because they discuss our future expectations, contain projections of our future
results of operations or of our financial position or state other
forward-looking information. There may be events in our future that we cannot
accurately predict or control. The factors listed below in the section entitled
"Risk Factors," as well as other cautionary language, identify examples of
risks, uncertainties and events that may cause actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our securities, you should be aware that the occurrence of
the events described in the Risk Factors below and elsewhere in this prospectus
and in the documents that we incorporate by reference could have an adverse
effect on our business, results of operations and financial position. You should
also make special note of the following:
5
1. Competition within the technology services industry is intense and may get
stronger;
2. General economic or business conditions, including the loss of major
customers, may be worse than we expect;
3. We have experienced significant losses in our operations and may continue
to incur losses for the foreseeable future;
4. We may require additional capital that may not be available on terms
acceptable to us, or at all; and
5. We may be subject to delisting from the NASDAQ SmallCap Market if the bid
price per share of our common stock falls below $1.00 for 30 consecutive
trading days pursuant to Marketplace Rule 4310(c)(4) and we are unable to
cause the stock to be bid at a price of above $1.00 for the 180 calendar
day grace period set forth in Marketplace Rule 4310(c)(8)(D).
We undertake no obligation to release publicly the results of any future
revisions we make to forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
ITEM 3. RISK FACTORS.
Prospective purchasers should carefully consider the following information
in addition to the other information contained in this prospectus in evaluating
an investment in our common stock.
Because we have a limited operating history, you should consider the risks
and difficulties frequently encountered by early stage companies in our market
before making a decision to invest in our common stock:
We have only been in operation since 1995 and many of our services have
only been offered since 1997 or later. In addition, we have only been a publicly
reporting company since May 1998. Accordingly, we have a limited operating
history on which you may evaluate us. You should consider the risks and
difficulties frequently encountered by early stage companies in new, rapidly
evolving and technology-dependent markets. If we fail to adequately address
these risks, our business will be materially and adversely affected.
We have experienced significant prior operating losses. If we do not
generate sufficient cash flow from operations or if we are unable to raise
capital in sufficient amounts, we may be unable to continue to operate our
business:
6
We have recently experienced significant losses in our operations. We may
continue to incur losses for the foreseeable future. For the year ended December
31, 2001 our loss from continuing operations was $12.0 million. Our expenses may
increase as we seek to grow our business and as our business expands. Even if we
become profitable, we may be unable to sustain our profitability. We may not
generate sufficient cash flow from operations or be able to raise capital in
sufficient amounts to enable us to continue to operate our business. An
inability to sustain profitability may also result in an impairment loss in the
value of our long-lived assets, principally goodwill, property and equipment,
and other tangible and intangible assets. If we are unable to generate
sufficient cash flow from operations or raise capital in sufficient amounts, our
business will be materially and adversely affected.
For the year ended December 31, 2001, our largest customer, Aetna,
accounted for approximately 18% of our revenues. Non-renewal or termination of
our contract with Aetna, which expires December 31, 2002, would have a material
adverse effect on us. We are also subject to other risks associated with our
customers, generally, including delays in customer funding, lengthy customer
contract review processes and non-renewal of contracts, to name a few:
For the year ended December 31, 2001, our largest customer, Aetna,
accounted for approximately 18% of our revenues. In December 1998, we entered
into a contractual agreement with Aetna to provide certain IT services. This
contractual agreement expired in December 2001, and we entered into a new
contractual agreement to provide certain IT consulting services to Aetna until
December 31, 2002. Non-renewal or termination of our contract with Aetna would
have a material adverse effect on us. A large portion of our revenues derived
from our consulting is generally non-recurring in nature. There can be no
assurance that we will obtain additional contracts for projects similar in scope
to those previously obtained from Aetna or any other customer, that we will be
able to retain existing customers or attract new customers or that we will not
remain largely dependent on a limited customer base, which may continue to
account for a substantial portion of our revenues. In addition, we generally
will be subject to delays in customer funding; lengthy customer review processes
for awarding contracts; non-renewal; delay, termination, reduction or
modification of contracts in the event of changes in customer policies or as a
result of budgetary constraints; and increased or unexpected costs resulting in
losses in the event of "fixed-price" contracts.
Our revenues are difficult to forecast. We may increase our operating
expenses to increase the number of our sales, marketing and technical personnel
to sell, provide and support our products and services. We may not be able to
adjust our spending quickly enough to offset any unexpected revenue shortfall.
In addition, at any given point in time, we may have significant accounts
receivable balances with customers that expose us to credit risks if such
customers are unable to settle such obligations. If we have an unexpected
shortfall in revenues in relation to our expenses, or significant bad debt
experience, our business will be materially and adversely affected.
Because we operate in an emerging market, the ultimate level of demand for
some of our services is subject to a high degree of uncertainty. If the demand
for these services declines significantly, our business could be negatively
affected:
7
The markets for some of our services are changing rapidly and evolving, and
therefore the ultimate level of demand for our services is subject to a high
degree of uncertainty. Any significant decline in demand for programming and
applications development and IT support and integration consulting services
could materially adversely affect our business and prospects.
Our success is dependent on our ability to continually attract and retain
new customers as well as to replace customers who have not renewed their
contracts. Achieving significant market acceptance will require substantial
efforts and expenditures on our part to create awareness of our services.
Our limited marketing experience and service and support capabilities could
negatively affect our business in a market with increasingly sophisticated
customers:
To effectively market and sell our services, we will need to expand our
customer service and support capabilities to satisfy increasingly sophisticated
customer requirements. We currently have limited marketing experience and
limited marketing, service, customer support and other resources, which may not
be adequate to meet customer needs.
Many of our national competitors are large companies that have
substantially greater financial, technical, marketing and other resources than
we have. We face potential additional competition from new competitors,
including large computer software, professional services and other technology
and telecommunications companies. We may not have the resources to compete
effectively with any of these competitors:
Competition for the Internet and IT consulting services that we provide is
significant, and we expect that competition will continue to intensify due to
the low barriers to entry. We may not have the financial resources, technical
expertise, sales and marketing or support capabilities to successfully meet this
competition. If we are unable to compete successfully against such competitors,
our business will be adversely affected. We compete against numerous large
companies that have substantially greater market presence, longer operating
histories, more significant customer bases, and financial, technical,
facilities, marketing, capital and other resources than we have.
Our competitors include national, regional and local IT consulting service
providers, software development firms and major accounting and consulting firms
such as Accenture, Answerthink, Keane, Kforce, MPS Group, Razorfish, Sapient,
and Viant.
In addition, we also encounter competition from numerous other businesses
that provide one or more similar goods or services, including numerous resellers
of Internet-related hardware and software and Web-site development companies.
8
Our competitors may respond more quickly than we can to new or emerging
technologies and changes in customer requirements. Our competitors may also
devote greater resources than we can to the development, promotion and sale of
their products and services. They may develop Internet products and services
that are superior to or have greater market acceptance than ours. Competitors
may also engage in more extensive research and development, undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and make
more attractive offers to our existing and potential employees and strategic
partners. In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties.
New competitors, including large computer software, professional services
and other technology and telecommunications companies, may enter our markets and
rapidly acquire significant market share. As a result of increased competition
and vertical and horizontal integration in the industry, we could encounter
significant pricing pressures. These pricing pressures could result in
significantly lower average selling prices for our products and services. We may
not be able to offset the effects of any price reductions with an increase in
the number of customers, higher revenue from consulting services, cost
reductions or otherwise. In addition, professional services businesses are
likely to encounter consolidation in the near future, which could result in
decreased pricing and other competition.
Because the market for Internet and IT professional services is rapidly
evolving, to be successful, we must adapt to this rapidly changing market by
continually improving the responsiveness, functionality and features of our
products and services to meet customers' needs. Our business could be negatively
affected, if we fail to adapt to these changing demands:
The market for Internet and IT professional services has only recently
begun to develop and is rapidly evolving. Significant technological changes
could render our existing products and services obsolete. To be successful, we
must adapt to this rapidly changing market by continually improving the
responsiveness, functionality and features of our products and services to meet
customers' needs. If we are unable to respond to technological advances and
conform to emerging industry standards in a cost-effective and timely basis, our
business will be materially and adversely affected.
Because our business is dependent on the efficient and uninterrupted
operation or our computer and communications systems, any event that interrupts
or delays our network operations could negatively affect our business:
Our business depends on the efficient and uninterrupted operation of our
computer and communications hardware systems and infrastructure. We currently
maintain most of our computer systems in our facilities in Tampa, Florida. While
we have taken precautions against systems failure, interruptions could result
from natural disasters as well as power loss, telecommunications failure and
similar events. We also lease telecommunications lines from local and regional
carriers, whose service may be interrupted. Any damage or failure that
interrupts or delays our network operations could materially and adversely
affect our business.
The security services that we offer in connection with customers' use of
our networks cannot insure complete protection from computer viruses, break-ins
and other disruptive problems. Although we attempt to limit contractually our
liability in such instances, the occurrence of these problems may result in
claims against us or liability on our part:
9
We have taken measures to protect the integrity of our infrastructure and
the privacy of confidential information. Nonetheless, our infrastructure is
potentially vulnerable to physical or electronic break-ins, viruses or similar
problems. If a person circumvents our security measures, he or she could
jeopardize the security of confidential information stored on our systems,
misappropriate proprietary information or cause interruptions in our operations.
We may be required to make significant additional investments and efforts to
protect against or remedy security breaches. Security breaches that result in
access to confidential information could damage our reputation and expose us to
a risk of loss or liability.
The security services that we offer in connection with customers' use of
the networks cannot insure complete protection from computer viruses, break-ins
and other disruptive problems. Although we attempt to limit contractually our
liability in such instances, the occurrence of these problems may result in
claims against us or liability on our part. These claims, regardless of their
ultimate outcome, could result in costly litigation and could have a material
adverse effect on our business and reputation and on our ability to attract and
retain customers.
Although we hope to grow through the acquisition of similar businesses, we
may not be able to find suitable candidates or negotiate commercially acceptable
terms. Even if we are able to acquire similar businesses, we may not be able to
successfully integrating new businesses into our business:
A key element of our expansion strategy has been to grow through
acquisitions. If we do identify suitable candidates, we may not be able to make
investments or acquisitions on commercially acceptable terms. Acquisitions may
cause a disruption in our ongoing business, distract our management and other
resources and make it difficult to maintain our standards, controls and
procedures. We may not be able to successfully integrate the services, products
and personnel of any acquired business into our operations. We may not be able
to retain key employees of the acquired companies or maintain good relations
with their customers or suppliers. We may be required to incur additional debt,
and we may be required to issue equity securities, which may be dilutive to
existing stockholders, to fund acquisitions.
In addition to the risk that we may have difficulty integrating new
businesses into our business, to acquire new businesses we may have to expend a
substantial portion of our available cash, obtain loans or raise money through
the offering of our securities to finance such acquisitions. Any offering of our
securities could substantially dilute the interests of our stockholders:
We may acquire and integrate complementary businesses, products, services
or technologies, but we have limited experience in these activities. If we seek
to make investments or acquisitions, it will be subject to the following risks:
10
o The difficulty of assimilating the operations and personnel of acquired
companies.
o The potential disruption of our business.
o The inability of our management to maximize our financial and strategic
position by the incorporation of an acquired technology or business into
our service offerings.
o The difficulty of maintaining uniform standards, controls, procedures and
policies.
o The potential loss of key employees of acquired businesses, and the
impairment of relationships with employees and customers as a result of
changes in management.
We cannot assure you that any completed acquisition will enhance our
business. If we proceed with one or more significant acquisitions in which the
consideration consists of cash, a substantial portion of our available cash
could be used to consummate the acquisitions. If we were to consummate one or
more acquisitions in which the consideration consisted of stock, our
stockholders could suffer significant dilution of their interest in us. In
addition, we could incur or assume significant amounts of indebtedness in
connection with acquisitions. Acquisitions are required to be accounted for
under the purchase method, which could result in significant goodwill charges.
In addition, an inability to sustain profitability may also result in an
impairment loss in the value of our long-lived assets, principally goodwill,
property and equipment, and other tangible and intangible assets.
We are subject to delisting from the NASDAQ SmallCap Market if the bid
price per share of our common stock falls below $1.00 for 30 consecutive trading
days and we are unable to cause the stock to be bid at a price of above $1.00
during a 180-day grace period. If our common stock were delisted, an investor
could find it more difficult to dispose of, or to obtain accurate quotations, of
the market value of our common stock:
We may be subject to delisting from the NASDAQ SmallCap Market if the bid
price per share of our common stock falls below $1.00 for 30 consecutive trading
days pursuant to Marketplace Rule 4310(c)(4) and we are unable to cause the
stock to be bid at a price of above $1.00 for the 180 calendar day grace period
set forth in Marketplace Rule 4310(c)(8)(D). We currently meet all of the
listing requirements of the NASDAQ SmallCap Market, including the minimum bid
price requirement, and we have not received a notice of noncompliance with the
listing requirements from NASDAQ; however, in the event our common stock was
delisted, an investor could find it more difficult to dispose of, or to obtain
accurate quotations, of the market value of our common stock.
If we lose the services of key personnel or are unable to obtain the
services of additional qualified personnel when needed, our business will be
negatively affected:
There is intense competition for qualified personnel in the sectors in
which we operate. The loss of existing personnel or the failure to recruit
additional qualified technical, managerial and sales personnel, as well as
expenses in connection with hiring and retaining personnel, would adversely
affect our business. We also depend on the performance of our executive officers
and key employees, some of whom have not entered into employment agreements with
us.
11
As of August, 2002, we had 89 full-time employees. We will need to attract,
train and retain more employees for management, engineering, programming, sales
and marketing, and customer support technician positions. Competition for
qualified employees, particularly engineers, programmers and technicians, is
intense. Consequently, we may not be successful in attracting, training and
retaining the people we need to continue to offer solutions and services to
present and future customers in a cost effective manner or at all.
We may need to obtain additional capital to continue to increase sales and
marketing efforts, continue to expand and enhance the solutions and services we
are able to offer to present and future customers and fund potential
acquisitions. Our failure to obtain sufficient funds may require us to delay,
scale back or eliminate some or all of our expansion plans:
Our future capital uses and requirements will depend on numerous factors,
including:
o The extent to which our solutions and services gain market acceptance.
o The level of revenues from our present and future solutions and
services.
o The expansion of operations.
o The costs and timing of product and service developments and sales and
marketing activities.
o Costs related to acquisitions of technology or businesses.
o Competitive developments.
o Costs related to downsizing and discontinuation or sale of business
units.
o Timing of Accounts Receivable Collections.
o Timing of debt payments.
In order to continue to increase sales and marketing efforts, continue to
expand and enhance the solutions and services we are able to offer to present
and future customers and fund potential acquisitions, we may require additional
capital that may not be available on terms acceptable to us, or at all. In
addition, if unforeseen difficulties arise in the course of these or other
aspects of our business, we may be required to spend greater-than-anticipated
funds. As a consequence, we will be required to raise additional capital through
public or private equity or debt financings, collaborative relationships, bank
facilities or other arrangements. There can be no assurances that such
additional capital will be available on terms acceptable to us, or at all. Any
additional equity financing is expected to be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants and increased
interest costs. We have financed our operations to date primarily through
private sales of equity securities, proceeds from our initial public offering in
May 1998 and loan facilities.
We cannot assure you that additional funding will be available for us to
finance our ongoing operations when needed or that adequate funds for our
operations, whether from financial markets, collaborative or other arrangements
with corporate partners or from other sources, will be available when needed, if
at all, or on terms acceptable to us. Our inability to obtain sufficient funds
may require us to delay, scale back or eliminate some or all of our expansion
programs, to limit the marketing of our products, or to license to third parties
the rights to commercialize products or technologies that we would otherwise
seek to develop and market ourselves. This would have a material adverse effect
on our business.
Our stock prices could fall as a result of fluctuations in our quarterly
operating results. You should not rely on quarter-to-quarter comparisons of our
results of operations as an indication of our future performance:
Our revenues and operating results vary significantly from
quarter-to-quarter due to a number of factors, not all of which are in our
control. You should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our results of operations may be below the expectations of public
market analysts and investors. In that event, the market price of our common
stock may fall.
Factors that could cause quarterly results to fluctuate include:
o Change in customer demand for products and services.
o Timing of the expansion of operations.
o Seasonality in revenues, principally during the summer and year-end
holidays.
o The mix of products and services revenues from our operating
divisions.
o Changes in pricing by competitors or us.
o Introduction of new products or services by competitors or us.
o Costs related to acquisitions of technology or businesses.
o Recession or slow-down in economy.
o Termination of customer contracts.
An increasing number of laws and regulations pertain to the Internet. We
cannot predict the impact, if any, that future regulation or regulatory changes
may have on our business:
There are an increasing number of laws and regulations pertaining to the
Internet. These laws and regulations relate to liability for information
received from or transmitted over the Internet, online content regulation, user
privacy, taxation and quality of products and services. The government may also
seek to regulate some segments of our activities as basic telecommunications
services. Moreover, the applicability to the Internet of existing laws governing
intellectual property ownership and infringement, copyright, trademark, trade
secret, obscenity, libel, employment, personal privacy and other issues is
uncertain and developing. We cannot predict the impact, if any, that future
regulation or regulatory changes may have on our business.
Because we currently have no registered copyrights or patents or patent
applications pending, it may be possible for unauthorized third parties to copy
aspects of, or otherwise obtain and use, our proprietary information without
authorization. Even though it is our policy to execute confidentiality
agreements with our employees and consultants, if these agreements are breached,
we may not be able to successfully protect our proprietary information:
12
We rely on a combination of copyright and trademark laws, trade secrets
laws and license and nondisclosure agreements to protect our proprietary
information, particularly the computer software applications that we have
developed. We currently have no registered copyrights or patents or patent
applications pending. It may be possible for unauthorized third parties to copy
aspects of, or otherwise obtain and use, our proprietary information without
authorization. The majority of our current contracts with our customers contain
provisions granting to the customer intellectual property rights to certain of
our work product, including the customized programming that we create for such
customer. We anticipate that contracts with future customers will contain
similar provisions. Other existing agreements to which we are a party are, and
future agreements may be, silent as to the ownership of such rights. To the
extent that the ownership of such intellectual property rights is expressly
granted to a customer or is ambiguous, our ability to reuse or resell such
rights will or may be limited.
Our policy is to execute confidentiality agreements with our employees and
consultants upon the commencement of an employment or consulting relationship
with us. These agreements generally require that all confidential information
developed or made known to the individual by us during the course of the
individual's relationship with us be kept confidential and not disclosed to
third parties. These agreements also generally provide that inventions conceived
by the individual in the course of rendering services to us shall be our
exclusive property. There can be no assurance that such agreements will not be
breached, that we would have adequate remedies for any breach or that our trade
secrets will not otherwise become known to or be independently developed by
competitors.
Even though we attempt to limit contractually our damages arising from
errors in rendering our services and we maintain general liability insurance
coverage, if our insurance coverage does not continue to be available on
reasonable terms or is insufficient to cover one or more large claims, our
business would be negatively affected:
Our services involve development, implementation and maintenance of
computer systems and computer software that are critical to the operations of
our customers' businesses. Our failure or inability to meet a customer's
expectations in the performance of our services could harm our business
reputation or result in a claim for substantial damages against us, regardless
of our responsibility for such failure or inability. In addition, in the course
of performing services, our personnel often gain access to technologies and
content that includes confidential or proprietary customer information. Although
we have implemented policies to prevent such customer information from being
disclosed to unauthorized parties or used inappropriately, any such unauthorized
disclosure or use could result in a claim for substantial damages. We attempt to
limit contractually our damages arising from negligent acts, errors, mistakes or
omissions in rendering services and, although we maintain general liability
insurance coverage, including coverage for errors and omissions, there can be no
assurance that such coverage will continue to be available on reasonable terms
or will be available in sufficient amounts to cover one or more large claims.
The successful assertion of one or more large claims against us that are
uninsured, exceed available insurance coverage or result in changes to our
insurance policies, including premium increases or the imposition of a large
deductible or co-insurance requirements, would adversely affect us.
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The law relating to material distributed over the Internet is currently
unsettled. We may become subject to legal claims relating to the content in the
web sites we host or in email messages that we transmit:
The law relating to the liability of online service providers, private
network operators and Internet service providers for information carried on or
disseminated through their networks is currently unsettled. We may become
subject to legal claims relating to the content in the web sites we host or in
email messages that we transmit. For example, lawsuits may be brought against us
claiming that material inappropriate for viewing by young children can be
accessed from the web sites we host. Claims could also involve matters such as
defamation, invasion of privacy and copyright infringement. Providers of
Internet products and services have been sued in the past, sometimes
successfully, based on the content of material. If we have to take costly
measures to reduce our exposure to these risks, or are required to defend
ourselves against such claims, our business may be materially adversely
affected.
If our existing or future stockholders decide to sell a large number of
shares of our common stock, the market price of our common stock could decline:
The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of common stock in the
market or the perception that these sales may occur. These sales also might make
it more difficult for us to sell equity securities in the future at a time and
at a price that we deem appropriate.
We have granted options to purchase 874, 650 shares under our 1998, 1999
and 2000 Stock Option Plans. We have granted 980,000 of nonqualified stock
options. These were granted to certain management to retain key personnel during
our restructuring and refocusing of the Company's strategic vision to be focused
on being an IT consulting services firm and sell or shut down unprofitable
units. If the holders of these options were to exercise their rights and sell
the shares issued to them, it could have an adverse effect on the market price
of our common stock.
In addition, the Company has agreed to issue warrants to purchase up to
991,510 shares in connection with the consulting agreements, private placement
financings, the conversion of debentures issued in 1999 and other agreements. If
and when these shares are issued by the Company and sold by the various holders,
sale of these shares could have an adverse effect on the market price of our
common stock.
ITEM 4. USE OF PROCEEDS
We intend to use any net proceeds from the exercise of the Warrant for
general working capital purposes. We will not receive any proceeds from the
conversion of the Convertible Note into shares of our common stock.
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ITEM 5. DETERMINATION OF OFFERING PRICE.
Not applicable.
ITEM 6. DILUTION.
Not applicable.
ITEM 7. SELLING SECURITY HOLDERS.
On July 26, 2002, in connection with a Securities Purchase Agreement that
we entered into with Laurus Master Fund, Ltd., a Cayman Islands company, we
issued a Convertible Note and Warrant to Laurus Master Fund, Ltd. We are
registering the shares of common stock underlying the Convertible Note and
Warrant pursuant to certain registration rights we granted to Laurus Master
Fund, Ltd. at that time. Except for negotiating at arm's length and entering
into the Securities Purchase Agreement with Laurus Master Fund, Ltd., through
which we obtained financing for our business operations, we have not had, and we
currently do not have a material realtionship with Laurus Master Fund., Ltd. Our
relationship with Laurus Master Fund, Ltd. continues to be an arm's length
relationship.
In accordance with Rule 13d-3 under the Securities Exchange Act of 1934,
Laurus Capital Management, L.L.C., a Delaware limited liability company, may be
deemed a control person of the shares owned by Laurus Master Fund, Ltd. David
Grin and Eugene Grin are the principals of Laurus Capital Management, L.L.C.
Laurus Master Fund, Ltd. is neither a broker-dealer nor an affiliate of a
broker-dealer.
Laurus Master Fund, Ltd. currently does not own any shares of our common
stock. Assuming the maximum conversion under the Convertible Note and the full
exercise of the Warrant, Laurus Master Fund, Ltd. would own 1,026,153 shares of
our common stock, or approximately 12.53% of the issued and outstanding shares
of our common stock. Assuming no default has occurred under the terms of the
Convertible Note, however, Laurus Master Fund, Ltd. is only permitted to
exercise that number of shares of common stock underlying the Warrant and
convert into shares of our common stock a portion of the principal of the
Convertible Note, which, once converted or exercised, as the case may be, and
together with any shares of our common stock already owned by Laurus Master
Fund, Ltd. on the conversion or exercise date, would be equal to or less than
4.9% of our issued and outstanding shares of common stock.
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ITEM 8. PLAN OF DISTRIBUTION.
Our public offering of 1,026,153 shares of our common stock, of which
951,153 shares are being registered for issuance upon conversion of a
Convertible Note and the remaining 75,000 shares are being registered for
issuance upon exercise of a Common Stock Purchase Warrant, is not being
underwritten. The Convertible Note and Warrant were issued on July 26, 2002 in
connection with a Securities Purchase Agreement that we entered into with Laurus
Master Fund, Ltd. and pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended, provided under its
section 4(2). We are registering the shares of common stock underlying the
Convertible Note and Warrant pursuant to certain registration rights granted to
the holder of the Convertible Note and Warrant.
ITEM 9. DESCRIPTION OF SECURITIES TO BE REGISTERED.
Not applicable.
ITEM 10. INTERESTS OF NAMED EXPERTS AND COUNSEL.
The balance sheet of Digital Fusion as of December 31, 2000, and the
related statements of operations, stock holder's equity and cash flows for the
year then ended have been incorporated in this prospectus by reference to our
Annual Report on Form 10-KSB in reliance on the report of BDO Seidman, LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The balance sheet of Digital Fusion as of December 31, 2001, and the
related statements of operations, stock holder's equity and cash flows for the
year then ended have been incorporated in this prospectus by reference to our
Annual Report on Form 10-KSB in reliance on the report of Pender Newkirk &
Company, independent auditors, given upon the authority of said firm as experts
in accounting and auditing.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Bush, Ross, Gardner, Warren & Rudy, P.A., Tampa, Florida.
ITEM 11. MATERIAL CHANGES.
Not applicable.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file reports, proxy statements and other information with the SEC under
the Exchange Act. The public may read and copy any materials that we file with
the SEC at the SEC's Public Reference Room located at 450 Fifth Street, N.W.,
Washington, D.C., 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an internet site at that contains our reports, proxy and information
statements and other information regarding our business.
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ITEM 12. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.
The Securities and Exchange Commission allows us to incorporate by
reference the information we file with them, which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference below is considered to be part of this
prospectus. All future filings made with the Securities and Exchange Commission
under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of
this prospectus and prior to the termination of this offering shall be deemed to
be incorporated by reference into this prospectus and shall be deemed to be a
part hereof from the respective dates of the filing of such reports and other
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for all purposes to the extent that a statement contained in this prospectus or
in any other subsequently filed document that is also incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus. We incorporate by reference the documents
listed below:
(1) Our Annual Report on Form 10-KSB for the fiscal year ended December
31, 2001, filed on February 28, 2002;
(2) Our Quarterly Report on Form 10-QSB for the fiscal quarter ended March
31, 2002, filed on June 7, 2002;
(3) Our Quarterly Report on Form 10-QSB for the fiscal quarter ended June
30, 2002, filed on August 8, 2002;
(4) The description of our common stock set forth in our Registration
Statement on Form 8-A/A, filed on April 30, 1998, including any
amendment thereto or report filed for the purpose of updating such
description.
We will furnish without charge to each person to whom this prospectus is
delivered, upon written or oral request, a copy of any and all documents
incorporated by reference in this prospectus, (other than exhibits to such
documents unless such exhibits are incorporated by reference therein). Requests
for such copies should be directed to Digital Fusion, Inc. 400 N. Ashley Drive,
Suite 2600, Tampa, Florida 33602, Attention: Karen Surplus, Chief Financial
Officer, Telephone (813) 221-0024.
ITEM 13. DISCLOSURE ON COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Included as part of Item 15.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses payable by us in
connection with the issuance and distribution of the securities being registered
hereunder. Except for the SEC registration fee, all amounts are estimates.
Registration Fee $88.62
Legal Fees and Expenses $7,000.00
Accounting Fees and Expenses $7,000.00
Miscellaneous $1,000.00
---------
Total $15,088.62
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted under Section 145 of the General Corporation Law of the State
of Delaware, our Restated Certificate of Incorporation (the "Certificate")
provides that to the extent permitted by Delaware law, no director shall be
personally liable to any stockholder for monetary damages for breach of
fiduciary duty as a director, except for liability (1) arising from payment of
dividends or approval of a stock purchase in violation of Section 174 of the
General Corporation Law of the State of Delaware, (2) for any breach of their
duty of loyalty to Digital Fusion or Digital Fusion stockholders, (3) for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law or (4) for any action from which the director derived
an improper personal benefit. While the Certificate provides protection from
awards for monetary damages for breaches of the duty of care, it does not
eliminate a director's duty of care. The provisions of the Certificate described
above apply to officers of Digital Fusion only if they are directors of Digital
Fusion and are acting in their capacity as directors, and does not apply to
officers of Digital Fusion who are not directors.
In addition, Digital Fusion's By-Laws provide that Digital Fusion will
indemnify its officers, directors, employees and agents to the fullest extent
permitted by Delaware law. Under Section 145(a) of the General Corporation Law
of the State of Delaware, directors and officers, as well as employees and
individuals, may be indemnified against expenses (including attorneys' fees),
judgements, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation as a
derivative action) if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to Digital Fusion's best interests, and with
respect to any criminal action or proceeding, had no reasonable cause to believe
their conduct was unlawful. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of Digital Fusion pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act, and
is therefore unenforceable.
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ITEM 16. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
2.1 Securities Purchase Agreement, dated July 26, 2002, between
the Company and Laurus Master Fund, Ltd., filed as exhibit
10.30 to the Company's Form 10-QSB for the period ended
June 30, 2002, and incorporated herein by reference
2.2 Convertible Note, dated July 26, 2002, between the Company
and Laurus Master Fund, Ltd., filed as exhibit 10.31 to the
Company's Form 10-QSB for the period ended June, 30, 2002,
and incorporated herein by reference
*5.1 Opinion of Bush, Ross, Gardner, Warren & Rudy, P.A.
*23.1 Consent of BDO Seidman, LLP
*23.2 Consent of Pender Newkirk & Company
*24.1 Power of Attorney (see signature page)
* Previously filed with the registration statement filed on September 24, 2002.
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ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to include any
additional or changed material information relative to the plan of distribution.
(2) That, for the purposes of determining liability under the Securities
Act, each post-effective amendment shall be deemed to be a new registration
statement of the securities offered, and the offering of the securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered hereunder that remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding), is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tampa, State of Florida, on November 1, 2002.
DIGITAL FUSION, INC.
By: /s/ Roy E. Crippen, III
Roy E. Crippen, III,
President and Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Date: November 1, 2002 By: /s/ Roy E. Crippen, III
Name: Roy E. Crippen, III
Title: President and Chief Executive Officer
and Director
(Principal Executive Officer)
Date: November 1, 2002 By: /s/ Karen L. Surplus
Name: Karen L. Surplus
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)
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Date: November 1, 2002 By: /s/ **
Name: Nicholas R. Loglisci, Jr.
Title: Chairman of the Board of Directors
Date: November 1, 2002 By: /s/ **
Name: Bruce E. Fike
Title: Director
Date: November 1, 2002 By: /s/ **
Name: O.G. Greene
Title: Director
**Executed by Roy E. Crippen, III under previously granted power of attorney.
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