UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
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CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
January 7, 2005
Date of report (date of earliest event reported)
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DIGITAL FUSION, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware 0-24073 13-3817344
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
4940-A Corporate Drive, Huntsville, AL 35805
(Address of Principal Executive Offices)
(256) 837-2620
(Registrant's telephone number, including area code)
-------------
Check the appropriate box below if the Form 8-K filing in intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14D-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
Section 1 - Registrant's Business and Operations
Item 1.01 Entry into a Material Definitive Agreement.
On March 10, 2005, Digital Fusion, Inc. ("Company") entered into an increase to
the Loan Agreement by and among the Company, each of the Guarantors and First
Commercial Bank of Huntsville.
Among other things, the Amendment (i) increases the line of credit, not to
exceed $2,500,000 (ii) extends the maturity date to April 15, 2006, (iii) has an
interest rate of prime and (iv) is secured by the Company's receivables
and certain guarantees.
Section 2 - Financial Information
Item 2.01 Completion of Acquisition or Disposition of Assets.
On January 7, 2005, the Company filed a Current Report on Form 8-K (the
"Original 8-K") to report that pursuant to a Stock Purchase Agreement dated
October 28, 2004 by and between Digital Fusion, Inc. ("Digital Fusion") and
Michael W. Wicks ("Wicks"), Digital Fusion acquired all of Wicks' outstanding
capital stock of Summit Research Corporation ("Summit"). The Original 8-K is
incorporated herein by this reference. This amendment is being filed to include
the financial statements required by Item 9.01 of Form 8-K.
Section 9 - Financial Statements Exhibits
Item 9.01 Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
The audited financial statements of Summit Research Corporation for the period
ended September 30, 2004; and for the year ended December 31, 2003 appear
beginning on page F-1 of this Current Report on Form 8-K/A and are hereby
incorporated by reference herein.
(b) Pro Forma Financial Information
The Unaudited Pro Forma Condensed Consolidated Statement of Operations of
Digital Fusion, Inc. ("DFI") and Summit Research Corporation ("Summit") for the
Year Ended December 31, 2003. The Unaudited Pro Forma Condensed Consolidated
Statement of Operations for the Nine-months Ended September 30, 2004 of DFI and
Summit. The Unaudited Pro Forma Condensed Consolidated Balance Sheet of DFI and
Summit at September 30, 2004.
(c) Exhibits
Exhibit No. Description
----------- -----------
10.1* Loan Agreement, note and security agreement and
commercial security agreement, each dated March 10, 2005,
among First Commercial Bank of Huntsville and the
Company, for a $2,500,000 revolving line of credit.
10.2* Security and Subordination Agreement, dated January 3,
2005, by and among First Commercial Bank of Huntsville,
the Company and Michael W. Wicks.
10.3* Stock Purchase Agreement, dated as of October 28, 2004,
by and between the Company and Michael W. Wicks.
10.4* Convertible Promissory Note, dated January 3, 2005, by
and between the Company and Michael W. Wicks.
10.5* Registration Rights Agreement, dated January 3, 2005, by
and between the Company and Michael W. Wicks.
10.6* Escrow Agreement, dated October 28, 2004, by and among
the Company, Michael W. Wicks and Synovus Trust Company.
10.7* Employment Agreement, dated January 3, 2005, by and
between the Company and Michael W. Wicks.
10.8* Employment Agreement, dated January 3, 2005, by and
between the Company and Steven L. Thornton.
* Filed herewith.
1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: March 21, 2005
DIGITAL FUSION, INC.
By: /s/ Roy E. Crippen, III
---------------------------------------------
Roy E. Crippen, III, Chief Executive Officer,
and Chairman of the Board
2
Summit Research Corporation
Financial Statements
For the Period Ended September 30, 2004
and the Year Ended December 31, 2003
Contents
Independent Auditors' Report on Financial Statements F-1
Financial Statements:
Balance Sheets F-2
Statements of Operations F-3
Statements of Changes in Stockholder's Equity F-4
Statement of Cash Flows F-5
Notes to the Financial Statements F-6 - F-10
Independent Auditors' Report
Board of Directors
Summit Research Corporation
Huntsville, Alabama
We have audited the accompanying balance sheets of Summit Research Corporation
as of September 30, 2004 and December 31, 2003, and the related statements of
operations, changes in stockholder's equity, and cash flows for the period and
year then ended. These financial statements are the responsibility of the
management of Summit Research Corporation. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. These standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Summit Research Corporation as
of September 30, 2004 and December 31, 2003 and the results of its operations
and its cash flows for the period and year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/
Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
January 28, 2005
F-1
Summit Research Corporation
Balance Sheets
September 30, December 31,
2004 2003
-----------------------------------------
Assets
Current assets:
Cash $ 421,206 $ 459,250
Accounts receivable 1,779,384 905,212
Unbilled accounts receivable 116,447 68,638
Stockholder receivable 400,000 -
Other current assets 37,288 26,200
-----------------------------------------
Total current assets 2,754,325 1,459,300
Equipment, net of accumulated depreciation of $67,718
and $32,661 at September 30, 2004 and December 31,
2003, respectively 127,387 137,245
-----------------------------------------
$ 2,881,712 $ 1,596,545
=========================================
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable $ 447,168 $ 25,365
Accrued salaries and wages 841,776 630,845
Deferred revenue 210,575 -
Billings in excess of cost and estimated earnings 223,459 235,052
-----------------------------------------
Total current liabilities 1,722,978 891,262
-----------------------------------------
Stockholder's equity:
Common stock; $.01 par value; 100,000 shares
authorized; 80,000 shares issued and
outstanding 800 800
Additional paid-in capital 495 495
Retained earnings 1,157,439 703,988
-----------------------------------------
Total stockholder's equity 1,158,734 705,283
-----------------------------------------
$ 2,881,712 $ 1,596,545
=========================================
The accompanying notes are an integral part of the financial statements.
F-2
Summit Research Corporation
Statements of Operations
Period Ended Year Ended
September 30, December 31,
2004 2003
----------------------------------------
Net sales $ 6,416,972 $ 4,970,191
Cost of goods sold 5,515,406 4,076,845
----------------------------------------
Gross profit 901,566 893,346
Selling, general and administrative expenses 350,497 370,999
----------------------------------------
Income from operations 551,069 522,347
Interest income 2,382 833
----------------------------------------
Net income $ 553,451 $ 523,180
========================================
The accompanying notes are an integral part of the financial statements.
F-3
Summit Research Corporation
Statements of Changes in Stockholder's Equity
For the Period Ended September 30, 2004
and the Year Ended December 31, 2004
Common Stock Additional
---------------------- Paid-In Retained
Shares Amount Capital Earnings Total
--------------------------------------------------------------------------
Balance, December 31, 2002 80,000 $ 800 $ 495 $ 300,808 $ 302,103
Dividends paid (120,000) (120,000)
Net income for the year 523,180 523,180
--------------------------------------------------------------------------
Balance, December 31, 2003 80,000 800 495 703,988 705,283
Dividends paid (100,000) (100,000)
Net income for the period 553,451 553,451
--------------------------------------------------------------------------
Balance, September 30, 2004 80,000 $ 800 $ 495 $ 1,157,439 $ 1,158,734
==========================================================================
The accompanying notes are an integral part of the financial statements.
F-4
Summit Research Corporation
Statements of Cash Flows
Period Ended Year Ended
September 30, December 31,
2004 2003
------------------------------------------------
Operating activities
Net income $ 553,451 $ 523,180
------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 35,057 27,141
(Increase) decrease in:
Accounts receivable (874,172) (470,247)
Unbilled accounts receivable (47,809) (53,464)
Prepaid and other current assets (11,088) (10,696)
Other assets 4,697
Stockholder receivable (400,000)
Increase (decrease) in:
Accounts payable 421,803 7,595
Accrued expenses 210,931 343,363
Deferred revenue 210,575
Billing in excess of cost (11,593) 193,121
----------------------------------------
Total adjustments (466,296) 41,510
----------------------------------------
Net cash provided by operating activities 87,155 564,690
Investing activities
Acquisition of equipment (25,199) (109,641)
Financing activities
Dividends paid (100,000) (100,000)
----------------------------------------
Net (decrease) increase in cash (38,044) 355,049
Cash, beginning of period/year 459,250 104,201
----------------------------------------
Cash, ending of period/year $ 421,206 $ 459,250
========================================
Supplemental disclosure of cash flow information:
During 2003, the Company distributed a $20,000 stockholder receivable in lieu of
a cash dividend.
The accompanying notes are an integral part of the financial statements.
F-5
Summit Research Corporation
Notes to Financial Statements
For the Period Ended September 30, 2004
and the Year Ended December 31, 2003
1. Background Information and Change in Ownership
Summit Research Corporation (the "Company") is an Alabama corporation
incorporated on October 19, 2001. The Company's principal line of business is
the research and development of government aerospace technologies. The principal
market in which the Company operates includes government contracts to provide
engineering and other technical support services to the U.S. Army Aviation &
Missile Command at Redstone Arsenal, Alabama. Engineering disciplines include
modeling and simulation, hardware test and evaluation, and mechanical design and
prototype fabrication. Other technical skills include information management
systems and program analysis. The corporate headquarters is located in
Huntsville, Alabama.
Effective as of the close of business on January 3, 2005, Digital Fusion, Inc.
acquired all of the outstanding capital stock of Summit Research Corporation.
Digital Fusion, Inc. paid $1,600,000 cash and 575,000 shares of its stock. In
addition to the initial payments, the stockholder will be able to receive
additional consideration of $600,000 on the six-month anniversary of the
closing, plus an additional amount equal to the excess of the Company's tangible
net worth at the closing date in excess of $900,000. In addition, the
stockholder will receive a convertible promissory note in the cumulative amount
of $2,700,000, which shall be reduced by the extent that the Company's tangible
net worth is less than $900,000.
2. Significant Accounting Policies
The significant accounting policies followed are:
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 affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Cash is maintained with a major financial institution in the United
States. Deposits with this bank may exceed the amount of insurance
provided on such deposits. Generally, these deposits may be redeemed
upon demand and, therefore, bear minimal risk.
F-6
Summit Research Corporation
Notes to Financial Statements
For the Period Ended September 30, 2004
and the Year Ended December 31, 2003
2. Significant Accounting Policies (continued)
Accounts receivable consist primarily of receivables for services, as
well as receivables that are a function of the Company's billing
process, which is determined by the contract terms. The Company records
an allowance for doubtful accounts for any amounts that may not be
recoverable based on an analysis of the Company's prior collection
experience, customer credit worthiness, current economic trends, and
subsequent cash collections. Based on management's review of accounts
receivable, no allowance for doubtful accounts is considered necessary
at September 30 2004 and December 31, 2003. The Company determines
receivables to be past due based on the payment terms of original
invoices. Interest is not typically charged on past due receivables.
The Company recognizes revenue under the following two methods. The
majority of the Company's revenue is recognized on a time and material
basis as services are provided and products and materials are sold to
customers. In the event that there are significant performance
obligations yet to be fulfilled on consulting and design projects,
revenue recognition is deferred until such conditions are removed. The
Company also recognizes revenue from contracts under the
percentage-of-completion method. The estimated revenue for each contract
represents the percentage of estimated total revenue that costs incurred
to date bear to estimated total costs based on the Company's current
estimates. With respect to contracts that extend over one more
accounting periods, revisions in the costs and revenue estimates during
the course of the work are reflected in the period the revisions become
known. When current estimates of total contract costs indicate a loss,
provision is made for the entire estimated loss. For projects that the
customer has prepaid but services have not been performed, deferred
revenue is recorded on the balance sheet.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. General and
administrative costs are charged to expense as incurred.
Equipment is recorded at cost. Depreciation is computed using an
accelerated depreciation method over the estimated useful lives of the
respective assets, ranging generally from five to seven years.
Maintenance and repairs are charged to operations when incurred. When
equipment is sold or otherwise disposed of, the asset account and
related accumulated depreciation account are relieved, and any gain or
loss is included in operations.
Advertising costs are charged to operations when the advertising first
takes place. Advertising expense totaled $1,625 and $240 for the period
ended September 30, 2004 and the year ended December 31, 2003,
respectively.
F-7
Summit Research Corporation
Notes to Financial Statements
For the Period Ended September 30, 2004
and the Year Ended December 31, 2003
2. Significant Accounting Policies (continued)
The Company, with the consent of the stockholder, has elected under
Sections 1361 through 1379 of the Internal Revenue Code to be treated
substantially as a partnership instead of as a corporation for income
tax purposes. As a result, the stockholder will report the entire
corporate taxable income on his/her individual tax return. Therefore, no
provision for income taxes has been made to these financial statements.
3. Uncompleted Contracts
Information with respect to uncompleted contracts is summarized as follows:
2004 2003
---------------------------------
Costs incurred to date $ 346,709 $ 172,086
Estimated earnings thereon 51,163 51,431
---------------------------------
397,872 223,517
Less billings to date 621,331 458,569
---------------------------------
$ (223,459) $ (235,052)
=================================
Billings in excess of costs and estimated
earnings $ (223,459) $ (235,052)
=================================
4. Equipment
Equipment consists of:
2004 2003
------------------------------
Computer equipment $ 106,163 $ 94,897
Office equipment 6,693 300
Automobiles 73,782 73,782
Other 8,467 927
------------------------------
195,105 169,906
Less accumulated depreciation 67,718 32,661
------------------------------
$ 127,387 $ 137,245
==============================
F-8
Summit Research Corporation
Notes to Financial Statements
For the Period Ended September 30, 2004
and the Year Ended December 31, 2003
5. Credit Facility and Line of Credit
The Company has a credit facility with a major credit card company with an
interest rate of 18 percent on any past due balances. As of September 30, 2004,
the Company had an outstanding balance of $74,796 on this credit facility, which
has been included in accounts payable. The balance on this credit facility is
due monthly.
The Company has a bank line of credit with a maximum limit of $800,000. Interest
is at the bank's base lending rate of 4.75% at September 30, 2004 with interest
payable monthly and the balance maturing on February 13, 2005. The line is
collateralized by the Company's assets.
6. Pension and Profit-Sharing Plans
The Company has a 401(k) profit-sharing plan that covers substantially all
employees who meet certain eligibility requirements. Company contributions are
at the discretion of the Board of Directors. The Company may make a matching
contribution on a portion of the employee deferral amount, as well as an
employer contribution to the profit-sharing plan. The total amount contributed
for the period ended September 30, 2004 and the year ended December 31, 2003
amounted to $436,146 and $405,865, respectively, which included a safe harbor
match to satisfy certain federal tax regulations.
7. Lease Commitments
The following is a schedule by year of future minimum rental payments required
under operating leases that have an initial or remaining noncancelable lease
term in excess of one year as of September 30, 2004:
Year Ending
September 30,
-------------
2005 $ 39,951
2006 41,424
2007 42,955
------------
$ 124,330
============
Rent expense amounted to $29,963 and $3,329 for the period ended September 30,
2004 and the year ended December 31, 2004, respectively.
F-9
Summit Research Corporation
Notes to Financial Statements
For the Period Ended September 30, 2004
and the Year Ended December 31, 2003
8. Related Party Transaction
During 2004, the Company purchased $400,000 of certificates of deposit that were
titled either in the name of the stockholder or in the joint names of the
stockholder and the Company. The amount has been recorded as a stockholder
receivable as of September 30, 2004. Subsequent to September 30, 2004, these
certificates of deposit were surrendered and the cash was returned to the
Company.
9. Major Customers of the Company
Three customers accounted for 96 and 99 percent of the Company's revenues for
the period ended September 30, 2004 and the year ended December 31, 2003,
respectively. At September 30, 2004 and December 31, 2003, accounts receivable
include approximately 98 percent from these clients.
F-10
Item 9.01 (b) Pro Forma Financial Information
DIGITAL FUSION, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
AT SEPTEMBER 30, 2004 AND FOR THE NINE MONTHS THEN ENDED AND THE YEAR ENDED
DECEMBER 31, 2003
The accompanying unaudited pro forma condensed consolidated balance sheet as of
September 30, 2004 and the unaudited pro forma condensed consolidated statement
of operations for the nine months then ended and the year ended December 31,
2003 are based upon historical consolidated financial statements of Digital
Fusion, Inc. ("DFI") and Summit Research Corporation ("Summit") adjusted to give
effect to the January 3, 2005 acquisition of Summit by DFI. DFI acquired 100% of
the stock of Summit for $1.6 million cash, $2.7 million convertible note,
$898,692 note and 575,000 of DFI's common stock.
The unaudited pro forma condensed consolidated statements of operation have been
prepared assuming that the acquisition occurred on the first day of the periods
presented therein. These unaudited pro forma consolidated statements of
operation are not necessarily indicative of the operating results or financial
position of future operating results. The pro forma adjustments give effect to
available information and assumptions that DFI believes are reasonable. The pro
forma condensed financial information should be read in conjunction with DFI's
historical consolidated financial statements and notes thereto and the
historical consolidated financial statements of Summit and the notes thereto.
DIGITAL FUSION, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
(in thousands, except per share amounts and footnotes)
Condensed Historical Pro Forma
----------------------------- ----------------------------------
DFI Summit Adjustments Combined
-------------- ----------- -------------- -------------
Revenues $ 6,420 4,970 11,390
Cost of revenues 4,905 4,077 8,982
-------------- ----------- -------------- -------------
Gross profit 1,515 893 2,408
Selling, general and administrative expenses 1,715 371 2,086
-------------- ----------- -------------- -------------
Income (loss) from operations (200) 522 322
Interest expense, net 195 (1) 233 (1) 427
Intrinsic value of convertible debt - - 224 (4) 224
-------------- ----------- -------------- -------------
Net income (loss) before income taxes (395) 523 (457) (329)
Income taxes - - (2) - (2) -
-------------- ----------- -------------- -------------
Net income (loss) $ (395) 523 (457) (329)
============== =========== ============== =============
Basic and diluted net income (loss) per share $ ($0.06) ($0.04)
============== =============
Weighted average number of common shares
used in net income (loss) per share computation 7,168 575 (3) 7,743
============== ============== =============
(1) The $2.7 million loan accrues interest each month the DFI stock price
exceeds an average price of $2.80. The pro forma adjustments include
$131,000 of imputed interest for this loan. In addition, estimated interest
expense of $54,000 for the $899,000 loan at 6% interest rate, $36,000 for
the $700,000 line of credit at Prime plus 1% and $12,000 for the $300,000
line of credit at Prime is recorded as a pro forma adjustment.
(2) Prior to January 3, 2005, Summit was an S Corporation and did not record
any income tax expense. Summit would have recorded an estimated $200,000 of
income tax expense if this transaction had occurred at the beginning of
this period. This tax expense would have been offset by DFI's tax benefit.
(3) 575,000 shares of DFI's common stock were issued in conjunction with the
Summit acquisition
(4) Record $224,000 amortization for the intrinsic value of the embedded
convertible debt option.
3
DIGITAL FUSION, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(in thousands, except per share amounts and footnotes)
Condensed Historical Pro Forma
----------------------------- -----------------------------------
DFI Summit Adjustments Combined
------------- ------------ -------------- -------------
Revenues $ 5,165 6,417 11,582
Cost of revenues 4,375 5,516 9,891
------------- ------------ -------------- -------------
Gross profit 790 901 - 1,691
Selling, general and administrative expenses 1,309 350 - 1,659
------------- ------------ -------------- -------------
Income (loss) from operations (519) 551 - 32
Interest expense, net 131 (2) 174 (1) 303
Intrinsic value of convertible debt - - 168 (4) 168
------------- ------------ -------------- -------------
Net income (loss) before income taxes (650) 553 (342) (439)
Income taxes - - (2) - (2) -
------------- ------------ -------------- -------------
Net income (loss) $ (650) 553 (342) (439)
============= ============ ============== =============
Basic and diluted net income (loss) per share ($0.09) ($0.05)
============= =============
Weighted average number of common shares
used in net income (loss) per share computation 7,599 575 (3) 8,174
============= ============== =============
(1) The $2.7 million loan accrues interest each month the DFI stock price
exceeds an average price of $2.80. The pro forma adjustments include
$98,000 of imputed interest for this loan. In addition, Estimated interest
expense of $40,000 for the $899,000 loan at 6% interest rate, $27,000 for
the $700,000 line of credit at Prime plus 1% and $9,000 for the $300,000
line of credit at Prime is recorded as a pro forma adjustment. Prior to
January 3, 2005, Summit was an S Corporation and did not record any income
tax expense. Summit would have
(2) recorded an estimated $211,000 of income tax expense if this transaction
had occurred at the beginning of this period. This tax expense would have
been offset by DFI's tax benefit.
(3) 575,000 shares of DFI's common stock were issued in conjunction with the
Summit acquisition
(4) Record $168,000 amortization for the intrinsic value of the embedded
convertible debt option.
4
DIGITAL FUSION, INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
AT SEPTEMBER 30, 2004
(in thousands, except footnotes)
Condensed Historical Pro Forma
--------------------- ----------------------------------
DFI Summit Adjustments Combined
--------- -------- -------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 58 421 (1,600) (1) (121) (5)
1,000 (3)
Accounts receivable and unbilled accounts receivable, net 1,208 1,896 3,104
Other current assets 20 437 457
--------- -------- -------------- -------------
Total current assets 1,286 2,754 (600) 3,440
Property and equipment, net 185 128 313
Other Assets:
Intangible assets 3,347 4,538 (2) 7,885
Other assets 13 13
--------- -------- -------------- -------------
Total other assets 3,360 - 4,538 7,898
--------- -------- -------------- -------------
Total Assets $ 4,831 2,882 3,938 11,651
========= ======== ============== =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,544 447 54 (1) 2,045
Accrued salaries and wages 842 842
Current maturities of long-term debt, short-term notes
payable and LOC 801 899 (1) 2,700
1,000 (3)
Billings in excess of cost and estimated earnings 223 223
Deferred revenue 21 211 232
--------- -------- -------------- -------------
Total current liabilities 2,366 1,723 1,953 6,042
Long-term note, less current maturities 40 40
2,700 (1)
(131) (1)
Long-term convertible note (671) (4) 1,898
Pension obligation 295 295
--------- -------- -------------- -------------
Total liabilities 2,701 1,723 3,851 8,275
--------- -------- -------------- -------------
Stockholders' equity 2,130 1,159 (1,159) (2) 3,376
575 (1)
671 (4)
--------- -------- -------------- -------------
Total stockholders' equity and liabilities $ 4,831 2,882 3,938 11,651
========= ======== ============== =============
(1) Purchase price of the acquisition of Summit
Value of common stock issued as consideration $ 575,000
Cash 1,600,000
Short-term note 899,000
Long-term convertible note 2,700,000
Discount on long-term convertible note for imputed interest (131,000)
Acquisition costs 54,000
------------
Total purchase price $ 5,697,000
============
5
The purchase agreement required the Company to issue 575,000 shares of DFI's
common stock which was issued during January 2005. The 575,000 shares of common
stock are valued based upon contemporaneous cash sales.
(2) Allocation of acquisition costs:
Net book value of Summit $ 1,159,000
Allocation to goodwill 4,538,000
------------
$ 5,697,000
============
The Company is in the process of evaluating the intangibles purchased, thus the
purchase price allocation has not been finalized and is subject to change.
(3) DFI borrowed $700,000 at Prime plus 1% and Summit borrowed $300,000 at
Prime on lines of credit. These borrowings were used to fund part of this
Summit acquisition.
(4) The intrinsic value of the embedded beneficial conversion option of the
$2.7 million convertible note is estimated at $671,000.
(5) Subsequent to September 30, 2004, DFI received proceeds from the sale of
its common stock which funded the remaining portion of this acquisition.
6
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1* Loan Agreement, note and security agreement and commercial
security agreement, each dated March 10, 2005, among First
Commercial Bank of Huntsville and the Company, for a $2,500,000
revolving line of credit.
10.2* Security and Subordination Agreement, dated January 3, 2005,
by and among First Commercial Bank of Huntsville, the Company
and Michael W. Wicks.
10.3* Stock Purchase Agreement, dated as of October 28, 2004, by and
between the Company and Michael W. Wicks.
10.4* Convertible Promissory Note, dated January 3, 2005, by and
between the Company and Michael W. Wicks.
10.5* Registration Rights Agreement, dated January 3, 2005, by and
between the Company and Michael W. Wicks.
10.6* Escrow Agreement, dated October 28, 2004, by and among the
Company, Michael W. Wicks and Synovus Trust Company.
10.7* Employment Agreement, dated January 3, 2005, by and between the
Company and Michael W. Wicks.
10.8* Employment Agreement, dated January 3, 2005, by and between
the Company and Steven L. Thornton.
* Filed herewith.
7