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 March 31, 2004 (First
quarter of fiscal 2004)
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
(State or Other Jurisdiction of 13-3817344
Incorporation or Organization) (I.R.S. Employer I.D. No.)
4940-A Corporate Drive
Huntsville, AL 35805
(Address of Principal Executive Offices)
(256) 837-2620
(Issuer's Telephone Number, Including Area Code)
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 May 13, 2004, 7,975,779 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 March 31, 2004
(unaudited) and December 31, 2003.................................................. 1
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2004 and 2003 (unaudited)................................... 2
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 and 2003 (unaudited)................................... 3
Notes to Condensed Consolidated Financial Statements............................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 6
Item 3. Controls and Procedures............................................................. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 11
Item 2. Changes in Securities.............................................................. 11
Item 3. Defaults Upon Senior Securities.................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders................................ 11
Item 5. Other Information.................................................................. 11
Item 6. Exhibits and Reports on Form 8-K................................................... 13
SIGNATURES.................................................................................. 14
Section 302 Certification by Chief Executive Officer
Section 906 Certification by Chief Executive Officer
Exhibits
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
DIGITAL FUSION, INC.
Condensed Consolidated Balance Sheets
(in thousands)
March 31, December 31,
2004 2003
unaudited
ASSETS
Current assets:
Cash and cash equivalents $ 156 $ 419
Accounts receivable (net of allowance for doubtful
accounts of $90 in 2004 and 2003) 930 737
Other current assets 50 39
---------------- ----------------
Total current assets 1,136 1,195
Property and equipment, net 24 29
Intangible assets, net 3,347 3,347
Other assets 13 13
---------------- ----------------
Total assets $ 4,520 $ 4,584
================ ================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 673 $ 658
Current maturities of long-term debt 713 46
Deferred revenue 21 21
---------------- ----------------
Total current liabilities 1,407 725
Interest payable - long term 50 39
Long-term debt, less current maturities 602 1,269
Pension obligation 295 295
---------------- ----------------
Total liabilities 2,354 2,328
---------------- ----------------
Stockholders' equity:
Common stock, $.01 par value, authorized 16,000,000 shares,
7,167,671 issued and outstanding 72 72
Additional paid in capital 39,919 39,919
Accumulated deficit (37,825) (37,735)
---------------- ----------------
Total stockholders' equity 2,166 2,256
---------------- ----------------
Total liabilities and stockholders' equity $ 4,520 $ 4,584
================ ================
See Accompanying Notes to Condensed Consolidated Financial Statements.
1
DIGITAL FUSION, INC.
Condensed Consolidated Statements of Operations
For the three months ended March 31, 2004 and 2003
(unaudited, in thousands, except per share amounts)
2004 2003
---- ----
Revenues
Services $ 1 281 $ 1,612
Product 205 -
--------------- --------------
Total Revenues 1,486 1,612
--------------- --------------
Cost of services and goods sold
Services 943 1,334
Product 189 -
--------------- --------------
Total cost of services and goods sold 1,132 1,334
--------------- --------------
Gross Profit 354 278
--------------- --------------
Operating expenses:
Selling 97
109
General and administrative 313 483
--------------- --------------
Total operating expenses 410 592
--------------- --------------
Operating loss (56) (314)
--------------- --------------
Other expense:
Interest expense, net (34) (52)
--------------- --------------
Total other expense (34) (52)
-------------- ---------------
Loss before income taxes (90) (366)
Income tax provision - -
--------------- --------------
Net loss ( 90) (366)
=============== ==============
Loss per share:
Basic and diluted $ (0.01) $ (0.05)
=============== ==============
Weighted average common stock outstanding:
Basic and diluted
7,168,000 7,168,000
=============== ==============
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
DIGITAL FUSION, INC.
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2004 and 2003
(unaudited, in thousands)
2004 2003
Cash flows used in operating activities:
Net loss $ (90) $ (366)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 8 72
Non-cash restructuring 9 -
Loss on disposal of assets, net - -
Changes in assets and liabilities (186) (22)
-------------- ------------
Net cash used in operating activities (259) (316)
Cash flows provided (used) in investing activities:
Capital expenditures - property and equipment (3) -
-------------- ------------
Net cash used in investing activities (3) -
Cash flows used in financing activities:
Repayments of notes payable (1) (159)
-------------- ------------
Net cash used in financing activities (1) (159)
-------------- ------------
Net decrease in cash and cash equivalents (263) (475)
Cash and cash equivalents, beginning of periods 419 653
-------------- ------------
Cash and cash equivalents, end of periods $ 156 $ 178
============== ============
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," or the "Company") 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, 2003 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 and reclasses) necessary for a fair presentation of the
information shown herein have been included.
The results of operations and cash flows for the three months
ended March 31, 2004 are not necessarily indicative of the results of
operations and cash flows expected for the year ended December 31,
2004.
The Company believes that, because of the actions it has taken
during the prior years to restructure and streamline the Company, the
restructuring of its outstanding debt to its primary lender to defer
payments until 2005, and the completion of its equity sale, it
currently has enough cash to meet its funding requirements over the
next year. The Company's current growth has been funded through
internally generated funds and through the convertible note issued by
its primary lender in July 2002 and restructured in April 2003 and
2004, and the completion of its equity sale. In order for the Company
to support substantial growth, it may need to obtain other externally
generated funds. There can be no assurance as to the availability of
such funding, and if available, whether the terms would be acceptable
to the Company.
2. Loss Per Share Data
Common stock equivalents in the three-month periods ended
March 31, 2004 and March 31, 2003, 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-month periods ended March 31,
2004 and 2003 based on uncertainties concerning its ability to generate
taxable income in future periods. The tax benefit for the three-month
periods ended March 31, 2004 and 2003 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
4. Debt restructuring
On January 15, 2004, the note to PowerCerv was paid by Digital
Fusion's President and CEO, Roy E. Crippen, III, tendering to PowerCerv
$110,000 in cash and 25,000 shares of PowerCerv preferred stock. In
consideration therefore, Digital Fusion issued a note to Mr. Crippen
for approximately $137,000 (representing the amount of principal and
interest on the PowerCerv note at the time of its retirement). The note
bears an interest rate of prime plus 6% and is payable at $600 per
month plus interest for the first twelve months, $4,400 per month plus
interest for the next eleven months, and a balloon payment of
approximately $81,000 plus interest on January 15, 2006. Subject to a
subordination agreement with Digital Fusion's primary lender, the note
is secured by a security interest in property currently owned or later
acquired by the Debtor (Digital Fusion) to secure the prompt payment
and performance of all liabilities, obligations, and indebtedness of
the Debtor under the note.
On April 7, 2004, the Company restructured its outstanding
note with its primary lender to suspend monthly payments until February
2005. The note bears an interest rate of 10% with monthly payments due
on the first day of each month of $50,000 plus interest commencing on
February 1, 2005 until the maturity date of January 1, 2006. In
addition, the Company will pay an amendment fee of $25,000 to the
note-holder that will be amortized to interest expense over the life of
the loan. In relation to the first note, the note-holder will have the
right to convert the principal portion of the note and/or interest due
and payable into fully paid and non-assessable shares of common stock
of the Company at the fixed conversion price of $0.922. In relation to
the second note, the note-holder will have the right to convert the
principal and/or interest due and payable into fully paid and
non-assessable shares of common stock of the Company at the fixed
conversion price of $0.35.
5. Stock-Based Compensation
The Company accounts for stock-based compensation under the
intrinsic value method of accounting for stock-based compensation and,
in the table below has disclosed pro forma net income and earnings per
share amounts using the fair value based method prescribed by Statement
of Financial Accounting Standards ("SFAS") No. 123 "Accounting for
Stock Based Compensation". The Company has implemented the disclosure
provisions of SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure. During the three-month period ended March
31, 2004, 310,500 stock options were granted to employees.
Results may vary depending on the assumptions applied within the model.
Compensation expense recognized in providing pro forma disclosures may
not be representative of the effects on net income for future years.
5
2004 2003
Net (loss), as reported $ (90,000) $ (366,000)
Total stock-based employee compensation expense included in
reported net income applicable to common stockholder, net of tax - -
Total stock-based employee compensation determined under fair value based
method, net of related tax effects (23,000) (79,000)
------------ -------------
Pro forma net (loss) (113,000) (445,000)
=========== =============
Earnings per share
Basic - as reported (0.01) (0.05)
=========== =============
Basic - pro forma (0.02) (0.06)
=========== =============
Diluted - as reported (0.01) (0.05)
=========== =============
Diluted - pro forma (0.02) (0.06)
=========== =============
The preceding pro forma results were calculated with the use of the
Black-Scholes option-pricing model. The following assumptions were used for the
periods ended March 31, 2004 and 2003, respectively.
Risk-free interest rate 4.06% 3.78%
Dividend yield 0% 0%
Expected life - years 10 10
Volatility 59% 61%
6. Subsequent Events
On April 22, 2004 and on May 11, 2004, the Company's primary
lender exercised its right to convert principal and/or interest into
fully paid and non-assessable shares of common stock of Digital Fusion,
Inc. at the fixed conversion price of $0.35. With each of the
transactions, the primary lender converted $35,000 of the note, of
which no interest is owed, to 100,000 shares of common stock. The
conversion was deemed to constitute a conversion of outstanding
principal amount to be applied against subsequent amounts to be paid.
In addition, the lender will issue a "rebate credit" for every dollar
in principal amount converted 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 times four percent (4%) to
be applied as a reduction in the monthly amount due.
6
On April 30, 2004, the Company announced the appointment of
Gary S. Ryan as President of Digital Fusion effective May 5, 2004.
Additionally Mr. Ryan was appointed to the Company's Board of Directors
on April 27, 2004. He will be responsible for the Company's operations,
in particular the federal services market, and will report to chief
executive officer, Roy L. Crippen, III.
On May 11, 2004, Digital Fusion and Madison Run, LLC completed
an equity sale whereby Madison Run bought 608,108 shares of Digital
Fusion common stock at $0.74 per share, was issued a five year warrant
to purchase 304,054 shares of Digital Fusion common stock at $0.89 per
share, and was issued a five year warrant to purchase 212,839 shares of
Digital Fusion common stock at $0.94 per share. Digital Fusion
President, Mr. Gary Ryan, is a member of the Madison Run investment
group and personally invested $100,000 in the offering.
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,
the Company or its 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, readers are cautioned 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 the
Company's control, include, but are not limited to, those set forth in
the Company's Form 10-KSB for 2003 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
Digital Fusion, Inc. is an information technology ("IT")
consulting firm that helps its customers maximize the use of modern
technology to access business information, enhance the performance of
their human resources, and meet various business needs. The Company's
success is based on a total approach that provides the people,
processes, and technology needed to translate business needs into sound
IT strategies. Services are provided to business organizations and
public sector institutions primarily in the Eastern United States. The
Company is incorporated in Delaware with its main administrative office
located in Huntsville, Alabama and regional offices in Florida, New
Jersey, and Virginia.
7
Revenues are derived primarily from fees earned in connection
with the performance of services provided to customers. The Company
typically invoices on a time and materials basis. The majority of costs
are associated with personnel. Attracting and retaining billable
employees is vital for the Company to move forward. 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 because of holidays
and vacations. During the second quarter of 2003, the Company began
reselling the Intuit product Track-It!. All 2003 and 2004 Track-It!
Product sales were to governmental entities where margins are lower.
Results of Operations
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2003
REVENUES. Consulting revenues decreased by $331,000 to $1.3
million for the three months ended March 31, 2004 as compared to the
same period for the first quarter of 2003. Approximately 50% of the
decrease in revenues was due to the reduction in sales to the Company's
largest consulting customer with the remaining decrease due to business
divisions and offices that were shut down before and during the 2003
headquarters move from Tampa, Florida to Huntsville, Alabama. Revenue
from Digital Fusion's largest professional services customer was
responsible for 20% of its revenue in 2004 as compared to 28% in 2003.
The Company expects its revenues to increase during the remainder of
2004 as compared to 2003 due to the expansion of its federal services
market.
During the second quarter of 2003, the Company began reselling
the Intuit product Track-It! to governmental organizations. Sales for
the first quarter 2004 were $205,000.
COST OF SERVICES AND GOODS SOLD. Cost of services consists
primarily of salaries and expenses of programming and technical
personnel, expenses related to applications sold to customers, and fees
paid to outside consultants engaged for customer projects. Cost of
services decreased by $391,000 to $943,000 for the three months ended
March 31, 2004. The decrease is due to a reduction in head count in
conjunction with the revenue decrease from 2003 to 2004. The Company
expects its cost of services in 2004 to increase proportionally to its
increase in revenues.
The cost of goods sold of $189,000 is related to the reselling
of the Intuit product Track-It! that began in the second quarter of
2003.
GROSS PROFIT. Gross profit for services during the first
quarter of 2004 is $338,000 or 26% of revenues as compared to $278,000,
or 17% of revenues for the first quarter of 2003. This increase in
gross profit as a percent of revenues is due to a higher utilization
rate of the billable consultants for 2004 compared to the same period
in 2003.
The gross profit for product was $16,000 or 8% for the first
quarter of 2004. The low profit margin on product sales is attributable
to the low mark-up required on sales to governmental entities.
8
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative ("SG&A") expenses consist primarily of salaries and
expenses associated with marketing, accounting, finance, sales, and
administrative personnel, as well as professional fees and other
corporate costs associated with the administration of the company. SG&A
expenses decreased by $182,000, or 31%, for the three-month period
ended March 31, 2004 compared to the same period during 2003. The
decrease in SG&A is due to the corporate headquarters move from Tampa,
Florida to Huntsville, Alabama, which resulted in the decrease of
corporate personnel and related salaries and benefits and a decrease in
depreciation expense because of certain assets becoming fully
depreciated. SG&A costs are expected to increase during 2004 with the
expansion of the Company's federal services market, the addition of new
company president and the additional accountability required and
federal rules and regulations.
INTEREST EXPENSE (INCOME), NET. Interest expense decreased
from $52,000 in the first quarter of 2003 to $34,000 for the first
quarter of 2004. The decrease was due primarily to the reduction in
debt to the Company's primary lender.
INCOME TAX BENEFIT. The Company has not recognized an income
tax benefit for its operating losses generated in the three-month
periods ended March 31, 2004 and 2003 based on uncertainties concerning
its ability to generate taxable income in future periods. The tax
benefit for the three-month periods ended March 31, 2004 and 2003 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.
NET INCOME (LOSS). The Company incurred a net loss of $90,000
for the three-month period ended March 31, 2004 compared to a net loss
of $366,000 for the three-month period ended March 31, 2003. Although
revenues decreased from the first quarter of 2003 to 2004, the actions
taken by the Company to restructure and reduce costs resulted in the
reduction of its net loss for the first quarter 2004.
Liquidity and Capital Resources
The net cash used in operating activities was $259,000 during
the first quarter of 2004 compared to $316,000 during the first quarter
of 2003 due to the Company's expenses exceeding its revenues.
Net cash used in investing activities was $3,000 during 2004,
which was used to invest in computer equipment for the Company's
operations. The Company does not expect to have significant equipment
purchases during the remainder of 2004.
Net cash used in financing activities was $1,000. During the
first quarter of 2004, the Company restructured its short-term debt to
refinance its note to PowerCerv with Mr. Roy E. Crippen, III, Digital
Fusion's President and CEO, and to temporarily suspend principal
payments to its primary lender until February 2005.
Working capital at March 31, 2004 is negative $271,000. The
net accounts receivable balance outstanding at March 31, 2004 is
$930,000. Currently the Company is funding its cash needs through
consistent collections of accounts receivable and current operations
and through the convertible note issued by its primary lender in July
2002 and restructured in April 2003 and 2004 and with the completion of
its equity sale to Madison Run, LLC.
9
Management is currently building relationships where DFI would
be the service provider in the relationship. During October 2002, DFI
was awarded its five-year information technology schedule by the U.S.
General Services Administration (GSA), which makes DFI's services
readily available to federal agencies. In addition, the federal
services market is expected to increase with the employment of Gary
Ryan as the Company's president on May 5, 2004. The Company believes
that, because of these actions and the actions it has taken to
reorganize and streamline the Company, the restructuring of its
outstanding debt to its primary lender to defer payments until 2005,
the completion of its equity sale, and attaining positive working
capital, it currently has enough cash to meet its funding requirements
over the next year. In order for the Company to support substantial
growth, it may need to obtain other externally generated funds. There
can be no assurance as to the availability of such funding, and if
available, whether the terms would be acceptable to the Company.
Critical Accounting Policies
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that have
a significant impact on the results reported in the financial
statements. Some of the accounting policies require management to make
difficult and subjective judgments, often because of the need to make
estimates of matters that are inherently uncertain. Digital Fusion's
most critical accounting policies include accounts receivable reserves
and the valuation of goodwill. Actual results may differ from the
estimates under different assumptions or conditions. These policies are
discussed further, as well as the estimates and judgments involved:
Accounts Receivable Reserve. The Company's accounts receivable
is reduced by $90,000 for an allowance for amounts that may become
uncollectible in the future. The estimated allowance for uncollectible
amounts is based on a specific analysis of accounts in the receivable
portfolio and a general reserve based on the aging of receivables and
historical write-off experience. The Company's management believes the
allowance to be reasonable. The Company does not accrue interest on
past due accounts receivable.
Valuation of Goodwill. Goodwill is reviewed annually for
impairment or more frequently if impairment indicators arise. This
annual impairment test is performed in the last quarter of each fiscal
year. The goodwill impairment test requires a comparison of the fair
value of the Company to the amount of goodwill recorded. If this
comparison reflects impairment, then the loss would be measured as the
excess of recorded goodwill over its implied fair value. Although the
Company's management believes that the estimates and assumptions used
are reasonable, actual results could differ.
Item 3. Controls and procedures.
a. Evaluation of disclosure controls and procedures. We maintain
disclosure controls and procedures designed to ensure that material
information related to us is recorded, processed, summarized and
reported in accordance with SEC rules and forms. Our management, with
the supervision of the Chief Executive officer, Roy E. Crippen, III,
has evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based
upon that evaluation, Mr. Crippen has concluded that our disclosure
controls and procedures are effective in causing material information
to be recorded, processed, summarized and reported so as to ensure the
quality and timeliness of our public disclosures in compliance with SEC
rules and forms.
10
b. Changes in internal controls. There was no change in our internal
control over financial reporting that occurred during our most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect our internal control over financial reporting.
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.
Executive Agreements
Crippen Employment Agreement. On May 5, 2004, The Company
entered into a subsequent agreement with Roy E. Crippen, III for a
period of two-years under which Mr. Crippen continues to be employed to
serve as our chief executive officer. Mr. Crippen relinquished the
title of president upon the commencement of Mr. Ryan's employment with
the Company to serve as our president. Under his employment agreement,
Mr. Crippen is eligible to receive an annual salary of $140,200 and a
monthly allowance of $125 to cover the cost of telephone expense.
Under his employment agreement, Mr. Crippen will be eligible
for performance bonuses under the executive compensation plan. Mr.
Crippen is also eligible to participate in our employee benefit plans,
and receive three weeks vacation. Under his employment agreement, Mr.
Crippen is required to keep all confidential information of DFI
confidential, and for the period of his employment, plus an additional
one-year period following termination of his employment, Mr. Crippen is
not allowed to compete with DFI.
We are allowed to terminate Mr. Crippen's employment agreement
at any time, provided that, if his employment is terminated due to his
death, disability, or by us other than for cause (as defined in the
agreement) he is entitled to six months base salary and continuation of
employee benefits for a period of six months.
11
Ryan Employment Agreement. On May 5, 2004, we entered into a
two-year employment agreement with Gary S. Ryan under which Mr. Ryan is
employed to serve as a director and our president, which became
effective April 27, 2004 and May 5, 2004, respectively. Under his
employment agreement, Mr. Ryan is eligible to receive an annual salary
of $130,000; a monthly allowance of $125 to cover the cost of telephone
expense; an option to purchase a total of 450,000 shares of our common
stock at an exercise price per share of $0.81. A portion of the vesting
shall be performance based. The vesting will occur as follows: 1)
150,000 shares shall vest 100% immediately upon grant of the option; 2)
150,000 shares shall vest 100% immediately upon the following
occurrence: If the Company's trailing four (4) quarters revenue is more
than $15 million with minimum net income of $1 million OR if the
Company's trailing four (4) quarters' earnings is more than $1.5
million. Revenue and earnings shall be based on GAAP; however, they
shall be adjusted to eliminate extraordinary one-time events such as
expensing acquisition costs or revenue associated with an acquisition;
and 3) 150,000 shares shall vest 100% immediately upon the following
occurrence: If the Company's trailing four (4) quarters revenue is more
than $25 million with minimum net income of $1.75 million OR if the
Company's trailing four (4) quarters' earnings is more than $2.5
million. Revenue and earnings shall be based on GAAP; however, they
shall be adjusted to eliminate extraordinary one-time events such as
expensing acquisition costs or revenue associated with an acquisition.
Under his employment agreement, Mr. Ryan will be eligible for
performance bonuses under the executive compensation plan. Mr. Ryan is
also eligible to participate in our employee benefit plans, and receive
three weeks vacation. Under his employment agreement, Mr. Ryan is
required to keep all confidential information of DFI confidential, and
for the period of his employment, plus an additional one-year period
following termination of his employment, Mr. Ryan is not allowed to
compete with DFI.
We are allowed to terminate Mr. Ryan's employment agreement at
any time, provided that, if his employment is terminated due to his
death, disability, or by us other than for cause (as defined in the
agreement) he is entitled to six months base salary and continuation of
employee benefits for a period of six months.
Williams Employment Agreement. On May 4, 2004, we entered into
a two-year employment agreement with Jeffrey L. Williams under which
Mr. Williams is employed to serve as our vice president of federal
services and operations. Under his employment agreement, Mr. Williams
is eligible to receive an annual salary of $127,400 and a monthly
allowance of $100 to cover the cost of telephone expense
Under his employment agreement, Mr. Williams will be eligible
for performance bonuses under the executive compensation plan. Mr.
Williams is also eligible to participate in our employee benefit plans,
and receive three weeks vacation. Under his employment agreement, Mr.
Williams is required to keep all confidential information of DFI
confidential, and for the period of his employment, plus an additional
one-year period following termination of his employment, Mr. Williams
is not allowed to compete with DFI.
We are allowed to terminate Mr. Williams's employment
agreement at any time, provided that, if his employment is terminated
due to his death, disability, or by us other than for cause (as defined
in the agreement) he is entitled to six months base salary and
continuation of employee benefits for a period of six months.
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Under the employment agreements, each is entitled to
compensation if he is employed by us at the time of a change in control
and his or her employment is terminated within one year after that
change in control by us for a reason other than for cause, death, legal
incapacity of disability (as defined in the employment agreement) or by
the executive for good reason (as defined in the employment agreement).
In such event, he would receive a lump-sum payment equal to one half
the amount of his or her base salary then in effect plus any other
amounts accrued and unpaid as of the date of termination (i.e., earned
bonuses, car allowance, unreimbursed expenses, and any other amount due
to him under employee benefit or fringe benefit plans of the Company).
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following is a list of Exhibits filed as a part of this Report.
Exhibit No. Description
---------- -----------
**10.1 Employment Agreement, dated as of May 5, 2004, by and
between Digital Fusion and Roy E. Crippen, III.
**10.2 Employment Agreement, dated as of May 5, 2004, by and
between Digital Fusion and Gary S. Ryan.
**10.3 Employment Agreement, dated as of May 4, 2004, by and
between Digital Fusion and Jeffrey L. Williams.
**10.4 Subscription Agreement, dated as of May 11, 2004, by
and between Digital Fusion and Madison Run LLC.
**10.5 Form of Warrant to Purchase Shares of Common Stock,
dated as of May 11, 2004
**31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
**32.1 Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (This
exhibit shall not be deemed "filed" for purposes of
Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liability of
that section. Further, this exhibit shall not be
deemed to be incorporated by reference into any
filing under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended.)
---------------
* Incorporated by reference.
** Filed herewith.
+ Management contract or compensatory plan or arrangement.
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(b) Reports on Form 8-K.
1. Form 8-K filed March 16, 2004 pursuant to Item 12 (Results of
Operations and Financial Condition), announcing Registrant's
financial results for the fourth quarter and fiscal year ended
December 31, 2003 and certain other information.
2. Report on Form 8-K filed April 30, 2004 pursuant to Item 5
(Other Events and Regulation FD Disclosure), announcing the
appointment by the Board of Directors of Gary S. Ryan as a
director and incoming President and the letter of intent to
make an equity investment in the Company by Madison Run, LLC.
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: May 14, 2004
By: /s/ Roy E. Crippen, III
-----------------------------------------
Name: Roy E. Crippen, III
Title: Chief Executive Officer and President
(Principal Executive Officer)
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