-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IKMWwKtBkcECq/kdrO2hDCMavfo5Paa99pnnb9Yw0bmSIfApeSpJyJppLkmxnf8t j+wJ18JfCR/L9NOJ8nprSw== 0001157523-04-004854.txt : 20040514 0001157523-04-004854.hdr.sgml : 20040514 20040514144928 ACCESSION NUMBER: 0001157523-04-004854 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL FUSION INC/NJ/ CENTRAL INDEX KEY: 0001057257 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 133817344 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-24073 FILM NUMBER: 04806722 BUSINESS ADDRESS: STREET 1: 4940-A CORPORATE DRIVE CITY: HUNTSVILLE STATE: AL ZIP: 35805 BUSINESS PHONE: 2568372620 MAIL ADDRESS: STREET 1: 4940-A CORPORATE DRIVE CITY: HUNTSVILLE STATE: AL ZIP: 35805 FORMER COMPANY: FORMER CONFORMED NAME: IBS INTERACTIVE INC DATE OF NAME CHANGE: 19980306 10QSB 1 a4641002.txt DIGITAL FUSION 10-QSB 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. 12 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. 13 (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) 14 EX-10.1 2 a4641002ex101.txt EXHIBIT 10.1 EXHIBIT 10.1 EMPLOYMENT AGREEMENT THIS AGREEMENT, effective as of May 5, 2004 (the "Effective Date"), is made by and between Digital Fusion, Inc., a Delaware corporation (the "Company") with its corporate offices at 4940-A Corporate Drive, Huntsville, Alabama 35805, and Roy E. Crippen, III (the "Executive"), residing at 2317 Woodcliffe Road SE, Huntsville, Alabama 35801. BACKGROUND INFORMATION ---------------------- The Company and the Executive previously entered into that certain Employment Agreement, dated as of March 1, 2000 (the "2000 Agreement") and the Agreement terminated on March 1, 2003. The Company and Executive now wish to enter into a new agreement upon the terms and conditions set forth herein. Therefore, in consideration of the mutual promises and covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: OPERATIVE PROVISIONS -------------------- 1. Employment; Term. ----------------- (a) Employment. Subject to the terms and conditions set forth herein, the Company agrees to employ and Executive agrees to serve as the Company's Chief Executive Officer. During the term of employment, Executive shall have such responsibilities, duties and authorities as commensurate with presidents of similar size, and additionally, such responsibilities, duties and authorities as may be assigned to the Executive by the Company's Board of Directors, provided, that, the same is not inconsistent with such position. Executive agrees that he will use his full business time to promote the interests of the Company and its affiliates and to fulfill his duties hereunder. In addition, the Company will elect or cause the election of Executive to the Board of Directors of the Company. Nothing in this Agreement shall however preclude Executive from engaging, so long as, in the reasonable determination of the Company's Board of Directors, such activities do not interfere with the execution of his duties and responsibilities hereunder, in charitable and community affairs, from managing any passive investment made by Executive in publicly traded equity securities or other property (provided, that, no such investment may exceed 5% of the equity of any entity, without the prior approval of the Company's Board of Directors) or from serving, subject to the prior approval of the Company's Board of Directors, as a member of boards of directors or as a trustee of any other corporation, association or entity (provided, that, no such prior approval shall be required for any such boards on which Executive shall currently serve). For purposes of the preceding sentence, any approval of the Company's Board of Directors required herein shall not be unreasonably withheld. (b) Term. Unless sooner terminated pursuant to Section 3, the term of Executive's employment pursuant to this Agreement shall commence on the Effective Date and shall continue thereafter for a period of two years (the "Term"). Executive and the Company understand and acknowledge that Executive's employment with the Company constitutes "at-will" employment. Subject to the Company's obligation to provide severance benefits as specified herein, Executive and the Company acknowledge that this employment relationship may be terminated at any time, upon written notice to the other party, with or without Cause or Good Reason, as those terms are defined below, at the option of either the Company or Executive. 2. Compensation. During the employment term under this Agreement, the Company shall compensate Executive as follows: (a) Base Salary. Subject to adjustment as set forth below, the Company will pay Executive while he is employed hereunder, an annualized base compensation of not less than One Hundred Forty Thousand Two Hundred ($140,200.00) per year, payable in substantially equal bi-monthly installments, or more frequently in accordance with Company's usual payroll policy (the "Base Salary"). The Company will review annually Executive's performance and compensation. (b) Performance Bonus. Executive shall be entitled to such bonus compensation as the Compensation Committee deems appropriate. Such bonus compensation shall be based, in part, on the achievement of performance criteria established by the Compensation Committee, including criteria relating to the profitability of the Company. (c) Participation in Company Stock Ownership Plan. During the period of Executive's employment, Executive will be entitled to participate in the Company's Stock Option Plan (or such other successor plan), as the Board of Directors or Compensation Committee, in its sole discretion, may determine. (d) Benefits. Executive will be eligible to participate in all benefit programs of the Company which are in effect for its senior executive personnel and, to the extent available to executive personnel, its employees generally from time to time. (e) Vacation. Executive will be entitled each year to vacation for a period or periods not inconsistent with the normal policy of Company in effect from time to time, but in any event not less than fifteen vacation days each year and to such holidays as may be customarily afforded to its employees by the Company, during which periods Executive's compensation shall be paid in full. (f) Reimbursement of Expenses. (i) All reasonable travel and entertainment expenses incurred by Executive in the course of fulfilling this Agreement or otherwise promoting the Company and its business shall be reimbursed by the Company. Such reimbursement shall be made to Executive promptly following submission to the Company of receipts and other documentation of such expenses reasonably satisfactory to the Company. (ii) In addition to the expenses reimbursable pursuant to paragraph (i) above, the Company shall also pay to Executive a monthly allowance of $125.00 for telephone expenses. 3. Termination. ------------ (a) Death and Legal Incapacity. Executive's employment hereunder shall terminate upon Executive's death or legal incapacity. (b) Disability. Executive's employment hereunder may be terminated by the Company in the event of Executive's Disability. As used in this Agreement, the term "Disability" shall mean the inability or failure of the Executive to perform the essential functions of the position for which he has been employed by the Company, for more than 90 consecutive days or for shorter periods aggregating more than 150 days in any period of 12 consecutive months, all as determined in good faith by a majority vote of the disinterested members of the Company's Board of Directors. Until such termination occurs, Executive shall continue to receive his base salary Base Salary as then in effect, provided, however, that such salary shall be reduced to the extent of any short-term disability benefits provided to Executive under a short-term disability plan sponsored by the Company. (c) For Cause. Executive's employment hereunder may be terminated by the Company for cause ("Cause") upon the occurrence of any of the following events and in accordance with the time periods set forth below: (i) Executive's breach of any material duty or obligation hereunder, which breach continues or renews at any time after notice and a reasonable opportunity to desist or otherwise cure has been furnished. (ii) Executive is convicted or pleads guilty or nolo contendre to any felony (other than traffic violation) or any crime involving fraud, dishonesty or misappropriation; (iii) Executive willfully engages in misconduct that causes material harm to the Company (iv) The Executive willfully engages in an act that constitutes a conflict of interest with the Company or a usurpation of a business opportunity of the Company, in either case without the prior written approval of the Company's Board of Directors. The determination as to whether any of the foregoing Causes has occurred shall be made in good faith by the affirmative vote of at least 75% of the disinterested members of the Company's Board of Directors. No event shall be deemed a basis for Cause unless Executive is terminated therefore within 60 days after such event is known to the Chairman of the Company or if Executive is Chairman, known to the Chairman of any committee of the Board. (d) For Good Reason. Executive may terminate his employment hereunder for good reason ("Good Reason") if such termination occurs within six months 60 days after: (i) The Company assigns to Executive any duties or responsibilities inconsistent with Section 1, which assignment is not withdrawn within 20 business days after Executive's notice to the Company of his reasonable objection thereto; (ii) Executive is relocated more than 40 miles from Huntsville, Alabama without his prior written consent; or (iii) The Company breaches any material provision of this Agreement and such breach and the effects thereof are not remedied by the Company within 20 business days after Executive's notice to the Company of the existence of such breach. (e) Effect of Termination. --------------------- (i) If the Company terminates Executive's employment for reasons other than for Cause, or for Executive's death, legal incapacity or disability or Disability, or if Executive terminates this Agreement for Good Reason, the obligations of Executive under this Agreement will terminate except that the covenants contained in Section 4(a) shall continue indefinitely, and the obligations in this section shall continue pursuant to their terms. In such event, for a period of six (6) months after the date of Executive's termination, the Company shall pay Executive, in accordance with customary payroll procedures, Executive's base salary Base Salary as then in effect and, in addition, any Performance Bonus that Executive would have earned in the year he was terminated, prorated as of the date of termination. For such six-month period, the Company shall continue to provide medical coverage to Executive under substantially the same terms as were in effect on the date Executive's employment terminated under this provision. Additionally, any and all vested options, warrants or other securities awarded to Executive pursuant to the Company's Stock Option Plan or any other similar plan or other written option agreement shall, as of the date of Executive's termination, immediately vest and become exercisable and all such vested options, warrants or other securities shall remain exercisable by Executive for the duration of the period during which the options, warrants or other securities would have remained exercisable if Executive had remained employed by the Company. The amounts paid to Executive under this paragraph shall not be affected in any way by Executive's acceptance of other employment during the six-month period described above. (ii) Except as otherwise provided herein, if Executive terminates his employment for any reason other than Good Reason or Executive's employment is terminated for Cause, the obligations of Executive and the Company under this Agreement will terminate except that the covenants of Executive contained in Section 4(a) shall continue indefinitely and the covenants of Executive contained in Section 4(d) shall continue until the first anniversary of the date of Executive's termination. In such event, Executive shall be entitled to receive only the compensation hereunder accrued and unpaid as of the date of Executive's termination. (iii) If Executive's employment terminates due to a disability Disability, as defined in Section 3(b), the obligations of Executive under this Agreement will terminated except that the covenants in Section 4(a) shall continue indefinitely. In such event, for a period of one year after the date of Executive's termination, the Company shall pay Executive, in accordance with customary payroll procedures, Executive's base salary Base Salary as then in effect, provided, however, that the payment of such salary shall be reduced to the extent of any long-term disability benefits provided to Executive under a long-term disability plan sponsored by the Company. The vesting and exercise of any and all options, warrants or other securities awarded to Executive pursuant to the Company's Stock Option Plan or any other similar plan shall be governed by the terms of such plan, or if awarded pursuant to a written option agreement, then the terms of such agreement. (iv) No amount payable to Executive pursuant to this Agreement shall be subject to mitigation due to Executive's acceptance or availability of other employment. 4. Restrictive Covenants; Non-Competition. -------------------------------------- The parties hereto recognize that Executive's services are special and unique and that the level of compensation and the provisions herefor for compensation are partly in consideration of and conditioned upon Executive's not competing with the Company. (a) Except as otherwise permitted hereby, or by the Company's Board of Directors, Executive shall treat as confidential and not communicate or divulge to any other person or entity any information related to the Company or its affiliates or the business, affairs, prospects, financial condition or ownership of the Company or any of its affiliates (the "Information") acquired by Executive from the Company or the Company's other employees or agents, except (i) as may be required to comply with legal proceedings (provided, that, prior to such disclosure in legal proceedings Executive notifies the Company and reasonably cooperates with any efforts by the Company to limit the scope of such disclosure or to obtain confidential treatment thereof by the court or tribunal seeking such disclosure) or (ii) while employed by the Company, as Executive reasonably believes necessary in performing his duties. Executive shall use the Information only in connection with the performance of his duties hereunder, and not otherwise for his benefit or the benefit of any other person or entity. For the purposes of this Agreement, Information shall include, but not be limited to, any confidential information concerning clients, subscribers, marketing, business and operational methods of the Company or its affiliates and its and its affiliates' clients, subscribers, contracts, financial or other data, technical data or any other confidential or proprietary information possessed, owned or used by the Company. Excluded from Executive's obligations of confidentiality is any part of such Information that: (i) was in the public domain prior to the date of commencement of Executive's employment with the Company or (ii) enters the public domain other than as a result of Executive's breach of this covenant. This Section (4) (a) shall survive the expiration or termination of the other provisions of this Agreement. (b) Executive shall fully disclose to the Company all discoveries, concepts, and ideas, whether or not patentable, including, but not limited to, processes, methods, formulas, and techniques, as well as improvements thereof or know-how related thereto (collectively, "Inventions") concerning or relating to the business conducted by the Company and concerning any present or prospective activities of the Company which are published, made or conceived by Executive, in whole or in part, during Executive's employment with the Company. (c) Executive shall make applications in due form for United States letters patent and foreign letters patent on such Inventions at the request of the Company and at its expense, but without additional compensation to Executive. Executive further agrees that any and all such Inventions shall be the absolute property of Company or its designees. Executive shall assign to the Company all of Executive's right, title and interest in any and all Inventions, execute any and all instruments and do any and all acts necessary or desirable in connection with any such application for letters patent or to establish and perfect in the Company the entire right, title, and interest in such Inventions, patent applications, or patents, and shall execute any instrument necessary or desirable in connection with any continuations, renewals, or reissues thereof or in the conduct of any related proceedings or litigation. (d) During Executive's employment with the Company and for a period of one (1) year after the earlier of the expiration date of this Agreement or the termination Executive's employment hereunder by the Company for Cause or by Executive (other than for Good Reason) or subsequent to a Change in Control, as hereinafter defined: (i) Executive will not, directly or indirectly, engage in, own or control an interest in (except as a passive investor in publicly held companies and except for investments held at the date hereof) or act as an officer, director, or employee of, or consultant or adviser to, any entity located in any state in which the Company provides or has provided its services or products (the "Covered Area"), that competes, directly or indirectly, with any of the products or services being offered or actively under consideration for offer during the term of Executive's employment with the Company; (ii) Executive will not recruit or hire any employee, independent contractor or vendor of the Company, or otherwise induce such employee, independent contractor or vendor to leave the Company, to become an employee of or otherwise be associated with Executive or any company or business with which Executive is or may become associated. (iii) Executive will not solicit or accept from any customer or account of the Company existing at the time or within 12 months preceding the termination of Executive's employment with the Company, any business of the kind offered or conducted by the Company as of the termination of the Executive's employment with the Company. (e) If any portion of the restrictive covenants contained in this Section 4 are held to be unreasonable, arbitrary or against public policy, each covenant shall be considered divisible both as to time and geographic area, such that each month within the specified period shall be deemed a separate period of time and each county within the Covered Area shall be deemed a separate geographical area, resulting in an intended requirement that the longest lesser time and the largest lesser geographic area determined not to be unreasonable, arbitrary, or against public policy shall remain effective and be specifically enforceable against the Executive. (f) Each restrictive covenant on the part of the Executive set forth in this Agreement shall be construed as a covenant independent of any other covenant or provision of this Agreement or any other agreement which the Executive may have, whether fully performed or executory, and the existence of any claim or cause of action by the Executive against the Company whether predicated upon another covenant or provision of this Agreement or otherwise, shall not, unless otherwise allowed by applicable law, constitute a defense to the enforcement by the Company of any other covenant. (g) The period of time during which the Executive is prohibited from engaging in the practices identified in this Section 4 shall be extended by any length of time during which the Executive is in breach of such covenants. 5. Change of Control. ----------------- In the event of a Change of Control, the following provisions shall apply: (a) If, immediately upon a Change of Control or at any time within one (1) year thereafter, Executive is no longer employed by the Company (or any entity to which this Agreement may be assigned in connection with such Change of Control) for any reason other than Executive's death, legal incapacity or disability, Executive shall be entitled to receive, within 10 days after the termination date, a lump sum payment ("Change of Control Payment") equal to one half the amount of Executive's annual 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 business expenses, and any other amount due to Executive under employee benefit or fringe benefit plans of the Company). Notwithstanding the foregoing, if Executive shall so request, any Change of Control Payment may be paid to Executive in substantially equal monthly installments, or more frequently in accordance with the Company's usual payroll policy. Additionally, any and all options, warrants or other securities awarded to Executive pursuant to the Company's Stock Option Plan or any other similar plan shall, as of the date of Executive's termination, immediately vest and become exercisable by Executive for the duration of the period during which the options, warrants or other securities would have remained exercisable if Executive had remained employed by the Company. (b) For purposes of this Section 5, a "Change of Control" shall be deemed to occur upon any of the following events: (1) Any "person" or "group" within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act (i) becomes the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, of 50% or more of the combined voting power of the Company's then outstanding securities, otherwise than through a transaction or series of related transactions arranged by, or consummated with the prior approval of, the Board or (ii) acquires by proxy or otherwise the right to vote 50% or more of the then outstanding voting securities of the Company, otherwise than through an arrangement or arrangements consummated with the prior approval of the Board, for the election of directors, for any merger or consolidation of the Company or for any other matter or question. (2) During any period of 12 consecutive months (not including any period prior to the adoption of this Section), Present Directors and/or New Directors cease for any reason to constitute a majority of the Board. For purposes of the preceding sentence, "Present Directors" shall mean individuals who at the beginning of such consecutive 12-month period were members of the Board, and "New Directors" shall mean any director whose election by the Board or whose nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were Present Directors or New Directors. (3) Consummation of (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of Stock immediately prior to the merger have the same proportion and ownership of common stock of the surviving corporation immediately after the merger or (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; provided, that, the divestiture of less than substantially all of the assets of the Company in one transaction or a series of related transactions, whether effected by sale, lease, exchange, spin-off sale of the stock or merger of a subsidiary or otherwise, shall not constitute a Change in Control. For purposes of this Section 5(b), the rules of Section 318(a) of the Code and the regulations issued thereunder shall be used to determine stock ownership. (c) Excise Tax Gross-Up. If Executive becomes entitled to one or more payments (with a "payment" including the vesting of restricted stock, a stock option, or other non-cash benefit or property), whether pursuant to the terms of this Agreement or any other plan or agreement with the Company or any affiliated company (collectively, "Change of Control Payments"), which are or become subject to the tax ("Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Company shall pay to Executive at the time specified below such amount (the "Gross-up Payment") as may be necessary to place Executive in the same after-tax position as if no portion of the Change of Control Payments and any amounts paid to Executive pursuant to this paragraph 5(c) had been subject to the Excise Tax. The Gross-up Payment shall include, without limitation, reimbursement for any penalties and interest that may accrue in respect of such Excise Tax. For purposes of determining the amount of the Gross-up Payment, Executive shall be deemed: (A) to pay federal income taxes at the highest marginal rate of federal income taxation for the year in which the Gross-up Payment is to be made; and (B) to pay any applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year. If the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, Executive shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined (but, if previously paid to the taxing authorities, not prior to the time the amount of such reduction is refunded to Executive or otherwise realized as a benefit by Executive) the portion of the Gross-up Payment that would not have been paid if such Excise Tax had been used in initially calculating the Gross-up Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made, the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest and penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. The Gross-up Payment provided for above shall be paid on the 30th day (or such earlier date as the Excise Tax becomes due and payable to the taxing authorities) after it has been determined that the Change of Control Payments (or any portion thereof) are subject to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Executive on such day an estimate, as determined by counsel or auditors selected by the Company and reasonably acceptable to Executive, of the minimum amount of such payments. The Company shall pay to Executive the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). The Company shall have the right to control all proceedings with the Internal Revenue Service that may arise in connection with the determination and assessment of any Excise Tax and, at its sole option, the Company may pursue or forego any and all administrative appeals, proceedings, hearings, and conferences with any taxing authority in respect of such Excise Tax (including any interest or penalties thereon); provided, however, that the Company's control over any such proceedings shall be limited to issues with respect to which a Gross-up Payment would be payable hereunder, and Executive shall be entitled to settle or contest any other issue raised by the Internal Revenue Service or any other taxing authority. Executive shall cooperate with the Company in any proceedings relating to the determination and assessment of any Excise Tax and shall not take any position or action that would materially increase the amount of any Gross-up Payment hereunder. 6. No Violation. ------------ Executive warrants that the execution and delivery of this Agreement and the performance of his duties hereunder will not violate the terms of any other agreement to which he is a party or by which he is bound. Additionally, Executive warrants that Executive has not brought and will not bring to the Company or use in the performance of Executive's responsibilities at the Company any materials or documents of a former employer that are not generally available to the public, unless Executive has obtained express written authorization from the former employer for their possession and use. Executive represents that he is not and, since the commencement of Executive's employment with the Company has not been a party to any employment, proprietary information, confidentiality, or noncompetition non-competition agreement with any of Executive's former employers which remains in effect as the date hereof. The warranties set forth in this Section 6 shall survive the expiration or termination of the other provisions of this Agreement. 7. Breach by Executive. ------------------- Both parties recognize that the services to be rendered under this Agreement by Executive are special, unique and extraordinary in character, and that in the event of the breach by Executive of the terms and conditions of this Agreement to be performed by him or in the event Executive performs services for any person, firm or corporation engaged in a competing line of business with Company, the Company shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, whether in law or in equity, to, by way of illustration and not limitation, obtain damages for any breach of this Agreement, or to enforce the specific performance thereof by Executive, or to enjoin Executive from competing with the Company or, performing services for himself or any such other person, firm or corporation. The Company may obtain an injunction restraining any such breach by Executive and no bond or other security shall be required in connection therewith. The Company and Executive each consent to the jurisdiction of United States Federal District Court for the Northern District of Alabama. 8. Miscellaneous. ------------- (a) This Agreement shall be binding upon and inure to the benefit of the Company, its successors, and assigns and may not be assigned by Executive. (b) This Agreement contains the entire agreement of the parties hereto and supersedes all prior or concurrent agreements, whether oral or written, relating to the subject matter hereof. This Agreement may be amended only by a writing signed by the party against whom enforcement is sought. (c) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ALABAMA WITHOUT REGARD TO ITS CONFLICTS OF LAWS, RULES OR PRINCIPLES. (d) Any notices or other communications required or permitted hereunder shall be in writing and shall be deemed effective when delivered in person or, if mailed, on the date of deposit in the mails, postage prepaid, to the other party at the respective address of such party set forth herein or to such other address as shall have been specified in writing by either party to the other in accordance herewith. (e) The provisions of Sections 4(a), 4(d) and 6 and the other provisions of this Agreement which by their terms contemplate survival of the termination of this Agreement, shall survive termination of this Agreement and be deemed to be independent covenants. (f) If any term or provision of this Agreement or its application to any person or circumstance is to any extent invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision shall be valid and enforced to the fullest extent permitted by law. (g) No delay or omission to exercise any right, power or remedy accruing to any party hereto shall impair any such right, power or remedy or shall be construed to be a waiver of or an acquiescence to any breach hereof. No waiver of any breach of this Agreement shall be deemed to be a waiver of any other breach of this Agreement theretofore or thereafter occurring. Any waiver of any provision hereof shall be effective only to the extent specifically set forth in the applicable writing. All remedies afforded under this Agreement to any party hereto, by law or otherwise, shall be cumulative and not alternative and shall not preclude assertion by any party hereto of any other rights or the seeking of any other rights or remedies against any other party hereto. (h) It is the intent of the Company that Executive not be required to incur any legal fees or disbursements associated with (i) the interpretation of any provision in, or obtaining of any right or benefit under this Agreement, or (ii) the enforcement of his rights under this Agreement, including, without limitation by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits to be extended to Executive hereunder. Accordingly, the Company irrevocably authorizes Executive from time to time to retain counsel of his choice, at the expense of the Company as hereafter provided, to represent Executive in connection with the interpretation and/or enforcement of this Agreement, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company, or any Director, officer, stockholder, or any other person affiliated with the Company in any jurisdiction. The Company shall pay or cause to be paid and shall be solely responsible for any and all reasonable attorneys' and related fees and expenses incurred by Executive under this Section 8(h). (i) The Background section of this Agreement is hereby incorporated into the Operative Provisions of this Agreement. 9. Indemnification. --------------- The Company agrees to indemnify Executive to the fullest extent permitted by applicable law, as such law may be hereafter amended, modified or supplemented and to the fullest extent permitted by each of the Company's Restated Certificate of Incorporation and the Company's Restated By-Laws, as from time to time amended, modified or supplemented. The Company further agrees that Executive is entitled to the benefits of any directors and officers' liability insurance policy, in accordance with the terms and conditions of that policy, if such a policy is maintained by the Company. (Signature Page To Follow) IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first stated above. COMPANY ------- DIGITAL FUSION, INC. By: /s/ Nicholas R. Loglisci, Jr. ------------------------------------ Its: Chairman of the Board EXECUTIVE --------- /s/ Roy E. Crippen, III -------------------------- Roy E. Crippen, III EX-10.2 3 a4641002ex102.txt EXHIBIT 10.2 EXHIBIT 10.2 EMPLOYMENT AGREEMENT THIS AGREEMENT, effective as of May 5, 2004 (the "Effective Date"), is made by and between Digital Fusion, Inc., a Delaware corporation (the "Company") with its corporate offices at 4940-A Corporate Drive, Huntsville, Alabama 35805, and Gary Ryan (the "Executive"), residing at 17144 Forest Hills Drive, Athens, Alabama 35613. RECITALS --------- WHEREAS, Company desires to employ Executive and Executive desires to be employed by the Company; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: OPERATIVE PROVISIONS -------------------- 1. Employment; Term. ---------------- (a) Employment. Subject to the terms and conditions set forth herein, the Company agrees to employ and Executive agrees to serve as the Company's President. During the term of employment, Executive shall have such responsibilities, duties and authorities as commensurate with presidents of similar size, and additionally, such responsibilities, duties and authorities as may be assigned to the Executive by the Company's Chief Executive Officer, provided, that, the same is not inconsistent with such position. Executive agrees that he will use his full business time to promote the interests of the Company and its affiliates and to fulfill his duties hereunder. In addition, the Company will elect or cause the election of Executive to the Board of Directors of the Company. Nothing in this Agreement shall however preclude Executive from engaging, so long as, in the reasonable determination of the Company's Board of Directors, such activities do not interfere with the execution of his duties and responsibilities hereunder, in charitable and community affairs, from managing any passive investment made by Executive in publicly traded equity securities or other property (provided, that, no such investment may exceed 5% of the equity of any entity, without the prior approval of the Company's Board of Directors) or from serving, subject to the prior approval of the Company's Board of Directors, as a member of boards of directors or as a trustee of any other corporation, association or entity (provided, that, no such prior approval shall be required for any such boards on which Executive shall currently serve). For purposes of the preceding sentence, any approval of the Company's Board of Directors required herein shall not be unreasonably withheld. (b) Term. Unless sooner terminated pursuant to Section 3, the term of Executive's employment pursuant to this Agreement shall commence on the Effective Date and shall continue thereafter for a period of two years (the "Term"). Executive and the Company understand and acknowledge that Executive's employment with the Company constitutes "at-will" employment. Subject to the Company's obligation to provide severance benefits as specified herein, Executive and the Company acknowledge that this employment relationship may be terminated at any time, upon written notice to the other party, with or without Cause or Good Reason, as those terms are defined below, at the option of either the Company or Executive. 2. Compensation. During the employment term under this Agreement, the Company shall compensate Executive as follows: (a) Base Salary. Subject to adjustment as set forth below, the Company will pay Executive while he is employed hereunder, an annualized base compensation of not less than One Hundred Thirty Thousand Dollars ($130,000.00) per year, payable in substantially equal bi-monthly installments, or more frequently in accordance with Company's usual payroll policy (the "Base Salary"). The Company will review annually Executive's performance and compensation. (b) Performance Bonus. Executive shall be entitled to such bonus compensation as the Compensation Committee deems appropriate. Such bonus compensation shall be based, in part, on the achievement of performance criteria established by the Compensation Committee, including criteria relating to the profitability of the Company. (c) Participation in Company Stock Ownership Plan. During the period of Executive's employment, Executive will be entitled to participate in the Company's Stock Option Plan (or such other successor plan), as the Board of Directors or Compensation Committee, in its sole discretion, may determine. Executive shall receive an initial stock option grant in accordance with Exhibit A attached hererto. (d) Benefits. Executive will be eligible to participate in all benefit programs of the Company which are in effect for its senior executive personnel and, to the extent available to executive personnel, its employees generally from time to time. (e) Vacation. Executive will be entitled each year to vacation for a period or periods not inconsistent with the normal policy of Company in effect from time to time, but in any event not less than fifteen vacation days each year and to such holidays as may be customarily afforded to its employees by the Company, during which periods Executive's compensation shall be paid in full. (f) Reimbursement of Expenses. (i) All reasonable travel and entertainment expenses incurred by Executive in the course of fulfilling this Agreement or otherwise promoting the Company and its business shall be reimbursed by the Company. Such reimbursement shall be made to Executive promptly following submission to the Company of receipts and other documentation of such expenses reasonably satisfactory to the Company. (ii) In addition to the expenses reimbursable pursuant to paragraph (i) above, the Company shall also pay to Executive a monthly allowance of $125.00 for telephone expenses. 3. Termination. (a) Death and Legal Incapacity. Executive's employment hereunder shall terminate upon Executive's death or legal incapacity. (b) Disability. Executive's employment hereunder may be terminated by the Company in the event of Executive's Disability. As used in this Agreement, the term "Disability" shall mean the inability or failure of the Executive to perform the essential functions of the position for which he has been employed by the Company, for more than 90 consecutive days or for shorter periods aggregating more than 150 days in any period of 12 consecutive months, all as determined in good faith by a majority vote of the disinterested members of the Company's Board of Directors. Until such termination occurs, Executive shall continue to receive his base salary Base Salary as then in effect, provided, however, that such salary shall be reduced to the extent of any short-term disability benefits provided to Executive under a short-term disability plan sponsored by the Company. (c) For Cause. Executive's employment hereunder may be terminated by the Company for cause ("Cause") upon the occurrence of any of the following events and in accordance with the time periods set forth below: (i) Executive's breach of any material duty or obligation hereunder, which breach continues or renews at any time after notice and a reasonable opportunity to desist or otherwise cure has been furnished. (ii) Executive is convicted or pleads guilty or nolo contendre to any felony (other than traffic violation) or any crime involving fraud, dishonesty or misappropriation; (iii) Executive willfully engages in misconduct that causes material harm to the Company (iv) The Executive willfully engages in an act that constitutes a conflict of interest with the Company or a usurpation of a business opportunity of the Company, in either case without the prior written approval of the Company's Board of Directors. The determination as to whether any of the foregoing Causes has occurred shall be made in good faith by the affirmative vote of at least 75% of the disinterested members of the Company's Board of Directors. No event shall be deemed a basis for Cause unless Executive is terminated therefore within 60 days after such event is known to the Chairman of the Company or if Executive is Chairman, known to the Chairman of any committee of the Board. (d) For Good Reason. Executive may terminate his employment hereunder for good reason ("Good Reason") if such termination occurs within six months 60 days after: (i) The Company assigns to Executive any duties or responsibilities inconsistent with Section 1, which assignment is not withdrawn within 20 business days after Executive's notice to the Company of his reasonable objection thereto; (ii) Executive is relocated more than 40 miles from Huntsville, Alabama without his prior written consent; or (iii) The Company breaches any material provision of this Agreement and such breach and the effects thereof are not remedied by the Company within 20 business days after Executive's notice to the Company of the existence of such breach. (e) Effect of Termination. --------------------- (i) If the Company terminates Executive's employment for reasons other than for Cause, or for Executive's death, legal incapacity or disability or Disability, or if Executive terminates this Agreement for Good Reason, the obligations of Executive under this Agreement will terminate except that the covenants contained in Section 4(a) shall continue indefinitely, and the obligations in this section shall continue pursuant to their terms. In such event, for a period of six (6) months after the date of Executive's termination, the Company shall pay Executive, in accordance with customary payroll procedures, Executive's base salary Base Salary as then in effect and, in addition, any Performance Bonus that Executive would have earned in the year he was terminated, prorated as of the date of termination. For such six-month period, the Company shall continue to provide medical coverage to Executive under substantially the same terms as were in effect on the date Executive's employment terminated under this provision. Additionally, any and all vested options, warrants or other securities awarded to Executive pursuant to the Company's Stock Option Plan or any other similar plan or other written option agreement shall, as of the date of Executive's termination, immediately vest and become exercisable and all such vested options, warrants or other securities shall remain exercisable by Executive for the duration of the period during which the options, warrants or other securities would have remained exercisable if Executive had remained employed by the Company. The amounts paid to Executive under this paragraph shall not be affected in any way by Executive's acceptance of other employment during the six-month period described above. (ii) Except as otherwise provided herein, if Executive terminates his employment for any reason other than Good Reason or Executive's employment is terminated for Cause, the obligations of Executive and the Company under this Agreement will terminate except that the covenants of Executive contained in Section 4(a) shall continue indefinitely and the covenants of Executive contained in Section 4(d) shall continue until the first anniversary of the date of Executive's termination. In such event, Executive shall be entitled to receive only the compensation hereunder accrued and unpaid as of the date of Executive's termination. (iii) If Executive's employment terminates due to a disability Disability, as defined in Section 3(b), the obligations of Executive under this Agreement will terminated except that the covenants in Section 4(a) shall continue indefinitely. In such event, for a period of one year after the date of Executive's termination, the Company shall pay Executive, in accordance with customary payroll procedures, Executive's base salary Base Salary as then in effect, provided, however, that the payment of such salary shall be reduced to the extent of any long-term disability benefits provided to Executive under a long-term disability plan sponsored by the Company. The vesting and exercise of any and all options, warrants or other securities awarded to Executive pursuant to the Company's Stock Option Plan or any other similar plan shall be governed by the terms of such plan, or if awarded pursuant to a written option agreement, then the terms of such agreement. (iv) No amount payable to Executive pursuant to this Agreement shall be subject to mitigation due to Executive's acceptance or availability of other employment. 4. Restrictive Covenants; Non-Competition. -------------------------------------- The parties hereto recognize that Executive's services are special and unique and that the level of compensation and the provisions herefor for compensation are partly in consideration of and conditioned upon Executive's not competing with the Company. (a) Except as otherwise permitted hereby, or by the Company's Board of Directors, Executive shall treat as confidential and not communicate or divulge to any other person or entity any information related to the Company or its affiliates or the business, affairs, prospects, financial condition or ownership of the Company or any of its affiliates (the "Information") acquired by Executive from the Company or the Company's other employees or agents, except (i) as may be required to comply with legal proceedings (provided, that, prior to such disclosure in legal proceedings Executive notifies the Company and reasonably cooperates with any efforts by the Company to limit the scope of such disclosure or to obtain confidential treatment thereof by the court or tribunal seeking such disclosure) or (ii) while employed by the Company, as Executive reasonably believes necessary in performing his duties. Executive shall use the Information only in connection with the performance of his duties hereunder, and not otherwise for his benefit or the benefit of any other person or entity. For the purposes of this Agreement, Information shall include, but not be limited to, any confidential information concerning clients, subscribers, marketing, business and operational methods of the Company or its affiliates and its and its affiliates' clients, subscribers, contracts, financial or other data, technical data or any other confidential or proprietary information possessed, owned or used by the Company. Excluded from Executive's obligations of confidentiality is any part of such Information that: (i) was in the public domain prior to the date of commencement of Executive's employment with the Company or (ii) enters the public domain other than as a result of Executive's breach of this covenant. This Section (4) (a) shall survive the expiration or termination of the other provisions of this Agreement. (b) Executive shall fully disclose to the Company all discoveries, concepts, and ideas, whether or not patentable, including, but not limited to, processes, methods, formulas, and techniques, as well as improvements thereof or know-how related thereto (collectively, "Inventions") concerning or relating to the business conducted by the Company and concerning any present or prospective activities of the Company which are published, made or conceived by Executive, in whole or in part, during Executive's employment with the Company. (c) Executive shall make applications in due form for United States letters patent and foreign letters patent on such Inventions at the request of the Company and at its expense, but without additional compensation to Executive. Executive further agrees that any and all such Inventions shall be the absolute property of Company or its designees. Executive shall assign to the Company all of Executive's right, title and interest in any and all Inventions, execute any and all instruments and do any and all acts necessary or desirable in connection with any such application for letters patent or to establish and perfect in the Company the entire right, title, and interest in such Inventions, patent applications, or patents, and shall execute any instrument necessary or desirable in connection with any continuations, renewals, or reissues thereof or in the conduct of any related proceedings or litigation. (d) During Executive's employment with the Company and for a period of one (1) year after the earlier of the expiration date of this Agreement or the termination Executive's employment hereunder by the Company for Cause or by Executive (other than for Good Reason) or subsequent to a Change in Control, as hereinafter defined: (i) Executive will not, directly or indirectly, engage in, own or control an interest in (except as a passive investor in publicly held companies and except for investments held at the date hereof) or act as an officer, director, or employee of, or consultant or adviser to, any entity located in any state in which the Company provides or has provided its services or products (the "Covered Area"), that competes, directly or indirectly, with any of the products or services being offered or actively under consideration for offer during the term of Executive's employment with the Company; (ii) Executive will not recruit or hire any employee, independent contractor or vendor of the Company, or otherwise induce such employee, independent contractor or vendor to leave the Company, to become an employee of or otherwise be associated with Executive or any company or business with which Executive is or may become associated. (iii) Executive will not solicit or accept from any customer or account of the Company existing at the time or within 12 months preceding the termination of Executive's employment with the Company, any business of the kind offered or conducted by the Company as of the termination of the Executive's employment with the Company. (e) If any portion of the restrictive covenants contained in this Section 4 are held to be unreasonable, arbitrary or against public policy, each covenant shall be considered divisible both as to time and geographic area, such that each month within the specified period shall be deemed a separate period of time and each county within the Covered Area shall be deemed a separate geographical area, resulting in an intended requirement that the longest lesser time and the largest lesser geographic area determined not to be unreasonable, arbitrary, or against public policy shall remain effective and be specifically enforceable against the Executive. (f) Each restrictive covenant on the part of the Executive set forth in this Agreement shall be construed as a covenant independent of any other covenant or provision of this Agreement or any other agreement which the Executive may have, whether fully performed or executory, and the existence of any claim or cause of action by the Executive against the Company whether predicated upon another covenant or provision of this Agreement or otherwise, shall not, unless otherwise allowed by applicable law, constitute a defense to the enforcement by the Company of any other covenant. (g) The period of time during which the Executive is prohibited from engaging in the practices identified in this Section 4 shall be extended by any length of time during which the Executive is in breach of such covenants. 5. Change of Control. ----------------- In the event of a Change of Control, the following provisions shall apply: (a) If, immediately upon a Change of Control or at any time within one (1) year thereafter, Executive is no longer employed by the Company (or any entity to which this Agreement may be assigned in connection with such Change of Control) for any reason other than Executive's death, legal incapacity or disability, Executive shall be entitled to receive, within 10 days after the termination date, a lump sum payment ("Change of Control Payment") equal to one half the amount of Executive's annual 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 business expenses, and any other amount due to Executive under employee benefit or fringe benefit plans of the Company). Notwithstanding the foregoing, if Executive shall so request, any Change of Control Payment may be paid to Executive in substantially equal monthly installments, or more frequently in accordance with the Company's usual payroll policy. Additionally, any and all options, warrants or other securities awarded to Executive pursuant to the Company's Stock Option Plan or any other similar plan shall, as of the date of Executive's termination, immediately vest and become exercisable by Executive for the duration of the period during which the options, warrants or other securities would have remained exercisable if Executive had remained employed by the Company. (b) For purposes of this Section 5, a "Change of Control" shall be deemed to occur upon any of the following events: (1) Any "person" or "group" within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act (i) becomes the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, of 50% or more of the combined voting power of the Company's then outstanding securities, otherwise than through a transaction or series of related transactions arranged by, or consummated with the prior approval of, the Board or (ii) acquires by proxy or otherwise the right to vote 50% or more of the then outstanding voting securities of the Company, otherwise than through an arrangement or arrangements consummated with the prior approval of the Board, for the election of directors, for any merger or consolidation of the Company or for any other matter or question. (2) During any period of 12 consecutive months (not including any period prior to the adoption of this Section), Present Directors and/or New Directors cease for any reason to constitute a majority of the Board. For purposes of the preceding sentence, "Present Directors" shall mean individuals who at the beginning of such consecutive 12-month period were members of the Board, and "New Directors" shall mean any director whose election by the Board or whose nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were Present Directors or New Directors. (3) Consummation of (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of Stock immediately prior to the merger have the same proportion and ownership of common stock of the surviving corporation immediately after the merger or (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; provided, that, the divestiture of less than substantially all of the assets of the Company in one transaction or a series of related transactions, whether effected by sale, lease, exchange, spin-off sale of the stock or merger of a subsidiary or otherwise, shall not constitute a Change in Control. For purposes of this Section 5(b), the rules of Section 318(a) of the Code and the regulations issued thereunder shall be used to determine stock ownership. (c) Excise Tax Gross-Up. If Executive becomes entitled to one or more payments (with a "payment" including the vesting of restricted stock, a stock option, or other non-cash benefit or property), whether pursuant to the terms of this Agreement or any other plan or agreement with the Company or any affiliated company (collectively, "Change of Control Payments"), which are or become subject to the tax ("Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Company shall pay to Executive at the time specified below such amount (the "Gross-up Payment") as may be necessary to place Executive in the same after-tax position as if no portion of the Change of Control Payments and any amounts paid to Executive pursuant to this paragraph 5(c) had been subject to the Excise Tax. The Gross-up Payment shall include, without limitation, reimbursement for any penalties and interest that may accrue in respect of such Excise Tax. For purposes of determining the amount of the Gross-up Payment, Executive shall be deemed: (A) to pay federal income taxes at the highest marginal rate of federal income taxation for the year in which the Gross-up Payment is to be made; and (B) to pay any applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year. If the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, Executive shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined (but, if previously paid to the taxing authorities, not prior to the time the amount of such reduction is refunded to Executive or otherwise realized as a benefit by Executive) the portion of the Gross-up Payment that would not have been paid if such Excise Tax had been used in initially calculating the Gross-up Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made, the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest and penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. The Gross-up Payment provided for above shall be paid on the 30th day (or such earlier date as the Excise Tax becomes due and payable to the taxing authorities) after it has been determined that the Change of Control Payments (or any portion thereof) are subject to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Executive on such day an estimate, as determined by counsel or auditors selected by the Company and reasonably acceptable to Executive, of the minimum amount of such payments. The Company shall pay to Executive the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). The Company shall have the right to control all proceedings with the Internal Revenue Service that may arise in connection with the determination and assessment of any Excise Tax and, at its sole option, the Company may pursue or forego any and all administrative appeals, proceedings, hearings, and conferences with any taxing authority in respect of such Excise Tax (including any interest or penalties thereon); provided, however, that the Company's control over any such proceedings shall be limited to issues with respect to which a Gross-up Payment would be payable hereunder, and Executive shall be entitled to settle or contest any other issue raised by the Internal Revenue Service or any other taxing authority. Executive shall cooperate with the Company in any proceedings relating to the determination and assessment of any Excise Tax and shall not take any position or action that would materially increase the amount of any Gross-up Payment hereunder. 6. No Violation. ------------ Executive warrants that the execution and delivery of this Agreement and the performance of his duties hereunder will not violate the terms of any other agreement to which he is a party or by which he is bound. Additionally, Executive warrants that Executive has not brought and will not bring to the Company or use in the performance of Executive's responsibilities at the Company any materials or documents of a former employer that are not generally available to the public, unless Executive has obtained express written authorization from the former employer for their possession and use. Executive represents that he is not and, since the commencement of Executive's employment with the Company has not been a party to any employment, proprietary information, confidentiality, or noncompetition non-competition agreement with any of Executive's former employers which remains in effect as the date hereof.. Notwithstanding the foregoing, Executive currently has an agreement with Executive's previous employer which remains in effect, a copy of which is attached hereto and made a part hereof as Exhibit B. The warranties set forth in this Section 6 shall survive the expiration or termination of the other provisions of this Agreement. 7. Breach by Executive. ------------------- Both parties recognize that the services to be rendered under this Agreement by Executive are special, unique and extraordinary in character, and that in the event of the breach by Executive of the terms and conditions of this Agreement to be performed by him or in the event Executive performs services for any person, firm or corporation engaged in a competing line of business with Company, the Company shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, whether in law or in equity, to, by way of illustration and not limitation, obtain damages for any breach of this Agreement, or to enforce the specific performance thereof by Executive, or to enjoin Executive from competing with the Company or, performing services for himself or any such other person, firm or corporation. The Company may obtain an injunction restraining any such breach by Executive and no bond or other security shall be required in connection therewith. The Company and Executive each consent to the jurisdiction of United States Federal District Court for the Northern District of Alabama. 8. Miscellaneous. ------------- (a) This Agreement shall be binding upon and inure to the benefit of the Company, its successors, and assigns and may not be assigned by Executive. (b) This Agreement contains the entire agreement of the parties hereto and supersedes all prior or concurrent agreements, whether oral or written, relating to the subject matter hereof. This Agreement may be amended only by a writing signed by the party against whom enforcement is sought. (c) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ALABAMA WITHOUT REGARD TO ITS CONFLICTS OF LAWS, RULES OR PRINCIPLES. (d) Any notices or other communications required or permitted hereunder shall be in writing and shall be deemed effective when delivered in person or, if mailed, on the date of deposit in the mails, postage prepaid, to the other party at the respective address of such party set forth herein or to such other address as shall have been specified in writing by either party to the other in accordance herewith. (e) The provisions of Sections 4(a), 4(d) and 6 and the other provisions of this Agreement which by their terms contemplate survival of the termination of this Agreement, shall survive termination of this Agreement and be deemed to be independent covenants. (f) If any term or provision of this Agreement or its application to any person or circumstance is to any extent invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision shall be valid and enforced to the fullest extent permitted by law. (g) No delay or omission to exercise any right, power or remedy accruing to any party hereto shall impair any such right, power or remedy or shall be construed to be a waiver of or an acquiescence to any breach hereof. No waiver of any breach of this Agreement shall be deemed to be a waiver of any other breach of this Agreement theretofore or thereafter occurring. Any waiver of any provision hereof shall be effective only to the extent specifically set forth in the applicable writing. All remedies afforded under this Agreement to any party hereto, by law or otherwise, shall be cumulative and not alternative and shall not preclude assertion by any party hereto of any other rights or the seeking of any other rights or remedies against any other party hereto. (h) It is the intent of the Company that Executive not be required to incur any legal fees or disbursements associated with (i) the interpretation of any provision in, or obtaining of any right or benefit under this Agreement, or (ii) the enforcement of his rights under this Agreement, including, without limitation by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits to be extended to Executive hereunder. Accordingly, the Company irrevocably authorizes Executive from time to time to retain counsel of his choice, at the expense of the Company as hereafter provided, to represent Executive in connection with the interpretation and/or enforcement of this Agreement, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company, or any Director, officer, stockholder, or any other person affiliated with the Company in any jurisdiction. The Company shall pay or cause to be paid and shall be solely responsible for any and all reasonable attorneys' and related fees and expenses incurred by Executive under this Section 8 (h). (i) The Background section of this Agreement is hereby incorporated into the Operative Provisions of this Agreement. 9. Indemnification. --------------- The Company agrees to indemnify Executive to the fullest extent permitted by applicable law, as such law may be hereafter amended, modified or supplemented and to the fullest extent permitted by each of the Company's Restated Certificate of Incorporation and the Company's Restated By-Laws, as from time to time amended, modified or supplemented. The Company further agrees that Executive is entitled to the benefits of any directors and officers' liability insurance policy, in accordance with the terms and conditions of that policy, if such a policy is maintained by the Company. (Signature Page To Follow) IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first stated above. COMPANY ------- DIGITAL FUSION, INC. By: /s/ Roy E. Crippen, III ---------------------------- Its: Chief Executive Officer EXECUTIVE --------- /s/ Gary S. Ryan ------------------------------ Gary Ryan EXHIBIT A --------- Stock Options* ------------- The Company hereby awards to Executive an option to purchase Four Hundred Fifty Thousand (450,000) shares of the Company's Common Stock. The price per share shall be determined on the effective date of the grant. One Hundred Fifty Thousand (150,000) shares shall vest one hundred percent (100%) immediately, pursuant to the terms and conditions, as set forth in the Company's Stock Option Plan and Agreement. The remaining Three Hundred Thousand (300,000) shares shall vest in accordance with the performance schedules below. Performance Vesting 1 --------------------- One Hundred Fifty Thousand (150,000) shares shall vest one hundred percent (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. Performance Vesting 2 --------------------- One Hundred Fifty Thousand (150,000) shares shall vest one hundred percent (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. * Grant shall be non-qualified stock options. In addition, during the period of the Executive's employment, Executive will be entitled to further participate in the Company's Stock Ownership Plan, as the Board of Directors, in its sole discretion, may determine. EX-10.3 4 a4641002ex103.txt EXHIBIT 10.3 EXHIBIT 10.3 EMPLOYMENT AGREEMENT THIS AGREEMENT, effective as of May 4, 2004 (the "Effective Date"), is made by and between Digital Fusion, Inc., a Delaware corporation (the "Company") with its corporate offices at 4940-A Corporate Drive, Huntsville, Alabama 35805, and Jeffrey L. Williams (the "Executive"), residing at 137 River Walk Trail, New Market, Alabama 35761. BACKGROUND INFORMATION ---------------------- The Company and Executive wish to enter into a new agreement upon the terms and conditions set forth herein. Therefore, in consideration of the mutual promises and covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: OPERATIVE PROVISIONS -------------------- 1. Employment; Term. ---------------- (a) Employment. Subject to the terms and conditions set forth herein, the Company agrees to employ and Executive agrees to serve as the Company's Vice President of Operations and Federal Services. During the term of employment, Executive shall have such responsibilities, duties and authorities as commensurate with companies of similar size, and additionally, such responsibilities, duties and authorities as may be assigned to the Executive by the Company's President, provided, that, the same is not inconsistent with such position. Executive agrees that he will use his full business time to promote the interests of the Company and its affiliates and to fulfill his duties hereunder. Nothing in this Agreement shall however preclude Executive from engaging, so long as, in the reasonable determination of the Company's Board of Directors, such activities do not interfere with the execution of his duties and responsibilities hereunder, in charitable and community affairs, from managing any passive investment made by Executive in publicly traded equity securities or other property (provided, that, no such investment may exceed 5% of the equity of any entity, without the prior approval of the Company's Board of Directors) or from serving, subject to the prior approval of the Company's Board of Directors, as a member of boards of directors or as a trustee of any other corporation, association or entity (provided, that, no such prior approval shall be required for any such boards on which Executive shall currently serve). For purposes of the preceding sentence, any approval of the Company's Board of Directors required herein shall not be unreasonably withheld. (b) Term. Unless sooner terminated pursuant to Section 3, the term of Executive's employment pursuant to this Agreement shall commence on the Effective Date and shall continue thereafter for a period of two years (the "Term"). Executive and the Company understand and acknowledge that Executive's employment with the Company constitutes "at-will" employment. Subject to the Company's obligation to provide severance benefits as specified herein, Executive and the Company acknowledge that this employment relationship may be terminated at any time, upon written notice to the other party, with or without Cause or Good Reason, as those terms are defined below, at the option of either the Company or Executive. 2. Compensation. During the employment term under this Agreement, the Company shall compensate Executive as follows: (a) Base Salary. Subject to adjustment as set forth below, the Company will pay Executive while he is employed hereunder, an annualized base compensation of not less than One Twenty-Seven Thousand Four Hundred ($127,400.00) per year, payable in substantially equal bi-monthly installments, or more frequently in accordance with Company's usual payroll policy (the "Base Salary"). The Company will review annually Executive's performance and compensation. (b) Performance Bonus. Executive shall be entitled to such bonus compensation as the Compensation Committee deems appropriate. Such bonus compensation shall be based, in part, on the achievement of performance criteria established by the Compensation Committee, including criteria relating to the profitability of the Company. (c) Participation in Company Stock Ownership Plan. During the period of Executive's employment, Executive will be entitled to participate in the Company's Stock Option Plan (or such other successor plan), as the Board of Directors or Compensation Committee, in its sole discretion, may determine. (d) Benefits. Executive will be eligible to participate in all benefit programs of the Company which are in effect for its senior executive personnel and, to the extent available to executive personnel, its employees generally from time to time. (e) Vacation. Executive will be entitled each year to vacation for a period or periods not inconsistent with the normal policy of Company in effect from time to time, but in any event not less than fifteen vacation days each year and to such holidays as may be customarily afforded to its employees by the Company, during which periods Executive's compensation shall be paid in full. (f) Reimbursement of Expenses. (i) All reasonable travel and entertainment expenses incurred by Executive in the course of fulfilling this Agreement or otherwise promoting the Company and its business shall be reimbursed by the Company. Such reimbursement shall be made to Executive promptly following submission to the Company of receipts and other documentation of such expenses reasonably satisfactory to the Company. (ii) In addition to the expenses reimbursable pursuant to paragraph (i) above, the Company shall also pay to Executive a monthly allowance of $100.00 for telephone expenses. 3. Termination. ----------- (a) Death and Legal Incapacity. Executive's employment hereunder shall terminate upon Executive's death or legal incapacity. (b) Disability. Executive's employment hereunder may be terminated by the Company in the event of Executive's Disability. As used in this Agreement, the term "Disability" shall mean the inability or failure of the Executive to perform the essential functions of the position for which he has been employed by the Company, for more than 90 consecutive days or for shorter periods aggregating more than 150 days in any period of 12 consecutive months, all as determined in good faith by a majority vote of the disinterested members of the Company's Board of Directors. Until such termination occurs, Executive shall continue to receive his base salary Base Salary as then in effect, provided, however, that such salary shall be reduced to the extent of any short-term disability benefits provided to Executive under a short-term disability plan sponsored by the Company. (c) For Cause. Executive's employment hereunder may be terminated by the Company for cause ("Cause") upon the occurrence of any of the following events and in accordance with the time periods set forth below: (i) Executive's breach of any material duty or obligation hereunder, which breach continues or renews at any time after notice and a reasonable opportunity to desist or otherwise cure has been furnished. (ii) Executive is convicted or pleads guilty or nolo contendre to any felony (other than traffic violation) or any crime involving fraud, dishonesty or misappropriation; (iii) Executive willfully engages in misconduct that causes material harm to the Company (iv) The Executive willfully engages in an act that constitutes a conflict of interest with the Company or a usurpation of a business opportunity of the Company, in either case without the prior written approval of the Company's Board of Directors. The determination as to whether any of the foregoing Causes has occurred shall be made in good faith by the affirmative vote of at least 75% of the disinterested members of the Company's Board of Directors. No event shall be deemed a basis for Cause unless Executive is terminated therefore within 60 days after such event is known to the Chairman of the Company or if Executive is Chairman, known to the Chairman of any committee of the Board. (d) For Good Reason. Executive may terminate his employment hereunder for good reason ("Good Reason") if such termination occurs within six months 60 days after: (i) The Company assigns to Executive any duties or responsibilities inconsistent with Section 1, which assignment is not withdrawn within 20 business days after Executive's notice to the Company of his reasonable objection thereto; (ii) Executive is relocated more than 40 miles from Huntsville, Alabama without his prior written consent; or (iii) The Company breaches any material provision of this Agreement and such breach and the effects thereof are not remedied by the Company within 20 business days after Executive's notice to the Company of the existence of such breach. (e) Effect of Termination. --------------------- (i) If the Company terminates Executive's employment for reasons other than for Cause, or for Executive's death, legal incapacity or disability or Disability, or if Executive terminates this Agreement for Good Reason, the obligations of Executive under this Agreement will terminate except that the covenants contained in Section 4(a) shall continue indefinitely, and the obligations in this section shall continue pursuant to their terms. In such event, for a period of six (6) months after the date of Executive's termination, the Company shall pay Executive, in accordance with customary payroll procedures, Executive's base salary Base Salary as then in effect and, in addition, any Performance Bonus that Executive would have earned in the year he was terminated, prorated as of the date of termination. For such six-month period, the Company shall continue to provide medical coverage to Executive under substantially the same terms as were in effect on the date Executive's employment terminated under this provision. Additionally, any and all vested options, warrants or other securities awarded to Executive pursuant to the Company's Stock Option Plan or any other similar plan or other written option agreement shall, as of the date of Executive's termination, immediately vest and become exercisable and all such vested options, warrants or other securities shall remain exercisable by Executive for the duration of the period during which the options, warrants or other securities would have remained exercisable if Executive had remained employed by the Company. The amounts paid to Executive under this paragraph shall not be affected in any way by Executive's acceptance of other employment during the six-month period described above. (ii) Except as otherwise provided herein, if Executive terminates his employment for any reason other than Good Reason or Executive's employment is terminated for Cause, the obligations of Executive and the Company under this Agreement will terminate except that the covenants of Executive contained in Section 4(a) shall continue indefinitely and the covenants of Executive contained in Section 4(d) shall continue until the first anniversary of the date of Executive's termination. In such event, Executive shall be entitled to receive only the compensation hereunder accrued and unpaid as of the date of Executive's termination. (iii) If Executive's employment terminates due to a Disability, as defined in Section 3(b), the obligations of Executive under this Agreement will terminated except that the covenants in Section 4(a) shall continue indefinitely. In such event, for a period of one year after the date of Executive's termination, the Company shall pay Executive, in accordance with customary payroll procedures, Executive's Base Salary as then in effect, provided, however, that the payment of such salary shall be reduced to the extent of any long-term disability benefits provided to Executive under a long-term disability plan sponsored by the Company. The vesting and exercise of any and all options, warrants or other securities awarded to Executive pursuant to the Company's Stock Option Plan or any other similar plan shall be governed by the terms of such plan, or if awarded pursuant to a written option agreement, then the terms of such agreement. (iv) No amount payable to Executive pursuant to this Agreement shall be subject to mitigation due to Executive's acceptance or availability of other employment. 4. Restrictive Covenants; Non-Competition. -------------------------------------- The parties hereto recognize that Executive's services are special and unique and that the level of compensation and the provisions herefor for compensation are partly in consideration of and conditioned upon Executive's not competing with the Company. (a) Except as otherwise permitted hereby, or by the Company's Board of Directors, Executive shall treat as confidential and not communicate or divulge to any other person or entity any information related to the Company or its affiliates or the business, affairs, prospects, financial condition or ownership of the Company or any of its affiliates (the "Information") acquired by Executive from the Company or the Company's other employees or agents, except (i) as may be required to comply with legal proceedings (provided, that, prior to such disclosure in legal proceedings Executive notifies the Company and reasonably cooperates with any efforts by the Company to limit the scope of such disclosure or to obtain confidential treatment thereof by the court or tribunal seeking such disclosure) or (ii) while employed by the Company, as Executive reasonably believes necessary in performing his duties. Executive shall use the Information only in connection with the performance of his duties hereunder, and not otherwise for his benefit or the benefit of any other person or entity. For the purposes of this Agreement, Information shall include, but not be limited to, any confidential information concerning clients, subscribers, marketing, business and operational methods of the Company or its affiliates and its and its affiliates' clients, subscribers, contracts, financial or other data, technical data or any other confidential or proprietary information possessed, owned or used by the Company. Excluded from Executive's obligations of confidentiality is any part of such Information that: (i) was in the public domain prior to the date of commencement of Executive's employment with the Company or (ii) enters the public domain other than as a result of Executive's breach of this covenant. This Section (4) (a) shall survive the expiration or termination of the other provisions of this Agreement. (b) Executive shall fully disclose to the Company all discoveries, concepts, and ideas, whether or not patentable, including, but not limited to, processes, methods, formulas, and techniques, as well as improvements thereof or know-how related thereto (collectively, "Inventions") concerning or relating to the business conducted by the Company and concerning any present or prospective activities of the Company which are published, made or conceived by Executive, in whole or in part, during Executive's employment with the Company. (c) Executive shall make applications in due form for United States letters patent and foreign letters patent on such Inventions at the request of the Company and at its expense, but without additional compensation to Executive. Executive further agrees that any and all such Inventions shall be the absolute property of Company or its designees. Executive shall assign to the Company all of Executive's right, title and interest in any and all Inventions, execute any and all instruments and do any and all acts necessary or desirable in connection with any such application for letters patent or to establish and perfect in the Company the entire right, title, and interest in such Inventions, patent applications, or patents, and shall execute any instrument necessary or desirable in connection with any continuations, renewals, or reissues thereof or in the conduct of any related proceedings or litigation. (d) During Executive's employment with the Company and for a period of one (1) year after the earlier of the expiration date of this Agreement or the termination Executive's employment hereunder by the Company for Cause or by Executive (other than for Good Reason) or subsequent to a Change in Control, as hereinafter defined: (i) Executive will not, directly or indirectly, engage in, own or control an interest in (except as a passive investor in publicly held companies and except for investments held at the date hereof) or act as an officer, director, or employee of, or consultant or adviser to, any entity located in any state in which the Company provides or has provided its services or products (the "Covered Area"), that competes, directly or indirectly, with any of the products or services being offered or actively under consideration for offer during the term of Executive's employment with the Company; (ii) Executive will not recruit or hire any employee, independent contractor or vendor of the Company, or otherwise induce such employee, independent contractor or vendor to leave the Company, to become an employee of or otherwise be associated with Executive or any company or business with which Executive is or may become associated. (iii) Executive will not solicit or accept from any customer or account of the Company existing at the time or within 12 months preceding the termination of Executive's employment with the Company, any business of the kind offered or conducted by the Company as of the termination of the Executive's employment with the Company. (e) If any portion of the restrictive covenants contained in this Section 4 are held to be unreasonable, arbitrary or against public policy, each covenant shall be considered divisible both as to time and geographic area, such that each month within the specified period shall be deemed a separate period of time and each county within the Covered Area shall be deemed a separate geographical area, resulting in an intended requirement that the longest lesser time and the largest lesser geographic area determined not to be unreasonable, arbitrary, or against public policy shall remain effective and be specifically enforceable against the Executive. (f) Each restrictive covenant on the part of the Executive set forth in this Agreement shall be construed as a covenant independent of any other covenant or provision of this Agreement or any other agreement which the Executive may have, whether fully performed or executory, and the existence of any claim or cause of action by the Executive against the Company whether predicated upon another covenant or provision of this Agreement or otherwise, shall not, unless otherwise allowed by applicable law, constitute a defense to the enforcement by the Company of any other covenant. (g) The period of time during which the Executive is prohibited from engaging in the practices identified in this Section 4 shall be extended by any length of time during which the Executive is in breach of such covenants. 5. Change of Control. ----------------- In the event of a Change of Control, the following provisions shall apply: (a) If, immediately upon a Change of Control or at any time within one (1) year thereafter, Executive is no longer employed by the Company (or any entity to which this Agreement may be assigned in connection with such Change of Control) for any reason other than Executive's death, legal incapacity or disability, Executive shall be entitled to receive, within 10 days after the termination date, a lump sum payment ("Change of Control Payment") equal to one half the amount of Executive's annual 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 business expenses, and any other amount due to Executive under employee benefit or fringe benefit plans of the Company). Notwithstanding the foregoing, if Executive shall so request, any Change of Control Payment may be paid to Executive in substantially equal monthly installments, or more frequently in accordance with the Company's usual payroll policy. Additionally, any and all options, warrants or other securities awarded to Executive pursuant to the Company's Stock Option Plan or any other similar plan shall, as of the date of Executive's termination, immediately vest and become exercisable by Executive for the duration of the period during which the options, warrants or other securities would have remained exercisable if Executive had remained employed by the Company. (b) For purposes of this Section 5, a "Change of Control" shall be deemed to occur upon any of the following events: (1) Any "person" or "group" within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act (i) becomes the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, of 50% or more of the combined voting power of the Company's then outstanding securities, otherwise than through a transaction or series of related transactions arranged by, or consummated with the prior approval of, the Board or (ii) acquires by proxy or otherwise the right to vote 50% or more of the then outstanding voting securities of the Company, otherwise than through an arrangement or arrangements consummated with the prior approval of the Board, for the election of directors, for any merger or consolidation of the Company or for any other matter or question. (2) During any period of 12 consecutive months (not including any period prior to the adoption of this Section), Present Directors and/or New Directors cease for any reason to constitute a majority of the Board. For purposes of the preceding sentence, "Present Directors" shall mean individuals who at the beginning of such consecutive 12-month period were members of the Board, and "New Directors" shall mean any director whose election by the Board or whose nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were Present Directors or New Directors. (3) Consummation of (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of Stock immediately prior to the merger have the same proportion and ownership of common stock of the surviving corporation immediately after the merger or (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; provided, that, the divestiture of less than substantially all of the assets of the Company in one transaction or a series of related transactions, whether effected by sale, lease, exchange, spin-off sale of the stock or merger of a subsidiary or otherwise, shall not constitute a Change in Control. For purposes of this Section 5(b), the rules of Section 318(a) of the Code and the regulations issued thereunder shall be used to determine stock ownership. (c) Excise Tax Gross-Up. If Executive becomes entitled to one or more payments (with a "payment" including the vesting of restricted stock, a stock option, or other non-cash benefit or property), whether pursuant to the terms of this Agreement or any other plan or agreement with the Company or any affiliated company (collectively, "Change of Control Payments"), which are or become subject to the tax ("Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Company shall pay to Executive at the time specified below such amount (the "Gross-up Payment") as may be necessary to place Executive in the same after-tax position as if no portion of the Change of Control Payments and any amounts paid to Executive pursuant to this paragraph 5(c) had been subject to the Excise Tax. The Gross-up Payment shall include, without limitation, reimbursement for any penalties and interest that may accrue in respect of such Excise Tax. For purposes of determining the amount of the Gross-up Payment, Executive shall be deemed: (A) to pay federal income taxes at the highest marginal rate of federal income taxation for the year in which the Gross-up Payment is to be made; and (B) to pay any applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year. If the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, Executive shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined (but, if previously paid to the taxing authorities, not prior to the time the amount of such reduction is refunded to Executive or otherwise realized as a benefit by Executive) the portion of the Gross-up Payment that would not have been paid if such Excise Tax had been used in initially calculating the Gross-up Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made, the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest and penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. The Gross-up Payment provided for above shall be paid on the 30th day (or such earlier date as the Excise Tax becomes due and payable to the taxing authorities) after it has been determined that the Change of Control Payments (or any portion thereof) are subject to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Executive on such day an estimate, as determined by counsel or auditors selected by the Company and reasonably acceptable to Executive, of the minimum amount of such payments. The Company shall pay to Executive the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). The Company shall have the right to control all proceedings with the Internal Revenue Service that may arise in connection with the determination and assessment of any Excise Tax and, at its sole option, the Company may pursue or forego any and all administrative appeals, proceedings, hearings, and conferences with any taxing authority in respect of such Excise Tax (including any interest or penalties thereon); provided, however, that the Company's control over any such proceedings shall be limited to issues with respect to which a Gross-up Payment would be payable hereunder, and Executive shall be entitled to settle or contest any other issue raised by the Internal Revenue Service or any other taxing authority. Executive shall cooperate with the Company in any proceedings relating to the determination and assessment of any Excise Tax and shall not take any position or action that would materially increase the amount of any Gross-up Payment hereunder. 6. No Violation. ------------ Executive warrants that the execution and delivery of this Agreement and the performance of his duties hereunder will not violate the terms of any other agreement to which he is a party or by which he is bound. Additionally, Executive warrants that Executive has not brought and will not bring to the Company or use in the performance of Executive's responsibilities at the Company any materials or documents of a former employer that are not generally available to the public, unless Executive has obtained express written authorization from the former employer for their possession and use. Executive represents that he is not and, since the commencement of Executive's employment with the Company has not been a party to any employment, proprietary information, confidentiality, or noncompetition non-competition agreement with any of Executive's former employers which remains in effect as the date hereof. The warranties set forth in this Section 6 shall survive the expiration or termination of the other provisions of this Agreement. 7. Breach by Executive. ------------------- Both parties recognize that the services to be rendered under this Agreement by Executive are special, unique and extraordinary in character, and that in the event of the breach by Executive of the terms and conditions of this Agreement to be performed by him or in the event Executive performs services for any person, firm or corporation engaged in a competing line of business with Company, the Company shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, whether in law or in equity, to, by way of illustration and not limitation, obtain damages for any breach of this Agreement, or to enforce the specific performance thereof by Executive, or to enjoin Executive from competing with the Company or, performing services for himself or any such other person, firm or corporation. The Company may obtain an injunction restraining any such breach by Executive and no bond or other security shall be required in connection therewith. The Company and Executive each consent to the jurisdiction of United States Federal District Court for the Northern District of Alabama. 8. Miscellaneous. ------------- (a) This Agreement shall be binding upon and inure to the benefit of the Company, its successors, and assigns and may not be assigned by Executive. (b) This Agreement contains the entire agreement of the parties hereto and supersedes all prior or concurrent agreements, whether oral or written, relating to the subject matter hereof. This Agreement may be amended only by a writing signed by the party against whom enforcement is sought. (c) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ALABAMA WITHOUT REGARD TO ITS CONFLICTS OF LAWS, RULES OR PRINCIPLES. (d) Any notices or other communications required or permitted hereunder shall be in writing and shall be deemed effective when delivered in person or, if mailed, on the date of deposit in the mails, postage prepaid, to the other party at the respective address of such party set forth herein or to such other address as shall have been specified in writing by either party to the other in accordance herewith. (e) The provisions of Sections 4(a), 4(d) and 6 and the other provisions of this Agreement which by their terms contemplate survival of the termination of this Agreement, shall survive termination of this Agreement and be deemed to be independent covenants. (f) If any term or provision of this Agreement or its application to any person or circumstance is to any extent invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision shall be valid and enforced to the fullest extent permitted by law. (g) No delay or omission to exercise any right, power or remedy accruing to any party hereto shall impair any such right, power or remedy or shall be construed to be a waiver of or an acquiescence to any breach hereof. No waiver of any breach of this Agreement shall be deemed to be a waiver of any other breach of this Agreement theretofore or thereafter occurring. Any waiver of any provision hereof shall be effective only to the extent specifically set forth in the applicable writing. All remedies afforded under this Agreement to any party hereto, by law or otherwise, shall be cumulative and not alternative and shall not preclude assertion by any party hereto of any other rights or the seeking of any other rights or remedies against any other party hereto. (h) It is the intent of the Company that Executive not be required to incur any legal fees or disbursements associated with (i) the interpretation of any provision in, or obtaining of any right or benefit under this Agreement, or (ii) the enforcement of his rights under this Agreement, including, without limitation by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits to be extended to Executive hereunder. Accordingly, the Company irrevocably authorizes Executive from time to time to retain counsel of his choice, at the expense of the Company as hereafter provided, to represent Executive in connection with the interpretation and/or enforcement of this Agreement, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company, or any Director, officer, stockholder, or any other person affiliated with the Company in any jurisdiction. The Company shall pay or cause to be paid and shall be solely responsible for any and all reasonable attorneys' and related fees and expenses incurred by Executive under this Section 8(h). (i) The Background section of this Agreement is hereby incorporated into the Operative Provisions of this Agreement. 9. Indemnification. --------------- The Company agrees to indemnify Executive to the fullest extent permitted by applicable law, as such law may be hereafter amended, modified or supplemented and to the fullest extent permitted by each of the Company's Restated Certificate of Incorporation and the Company's Restated By-Laws, as from time to time amended, modified or supplemented. The Company further agrees that Executive is entitled to the benefits of any directors and officers' liability insurance policy, in accordance with the terms and conditions of that policy, if such a policy is maintained by the Company. (Signature Page To Follow) IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first stated above. COMPANY ------- DIGITAL FUSION, INC. By: Roy E. Crippen, III ----------------------------------- Its: Chief Executive Officer EXECUTIVE --------- Jeffrey L. Williams --------------------- Jeffrey L. Williams EX-10.4 5 a4641002ex104.txt EXHIBIT 10.4 EXHIBIT 10.4 SUBSCRIPTION AGREEMENT ---------------------- COMMON STOCK AND WARRANT DIGITAL FUSION, INC. This Subscription Agreement is made and entered into by and between DIGITAL FUSION, INC., a Delaware corporation (the "Company"), and Madison Run LLC (the "Investor") with respect to the purchase by the Investor of common stock, par value $.001 per share (the "Common Stock") of the Company and a warrant to purchase such Common Stock (the "Warrant") pursuant hereto. In consideration of the Company's agreement to accept the Investor's subscription of shares of the Common Stock and the Warrant upon the terms and conditions set forth in this Subscription Agreement, the Company and the Investor agree and represent as follows: A. SUBSCRIPTION 1. The Investor is subscribing for 608,108 shares of Common Stock (the "Shares") at a purchase price of $0.74 per share and the Warrant, which grants the Investor the right to purchase 304,054 shares of Common Stock at a price of $0.89 per share and 212,839 shares of Common Stock at a price of $0.94 per share (together, the "Underlying Shares") for a total consideration of $450,000 (the "Purchase Price"). Simultaneously with the execution of this Subscription Agreement, the Investor shall pay and deliver to the Company the Purchase Price in the form of a check or wire transfer payable to "Digital Fusion, Inc." Upon acceptance of this subscription, the Company will issue to the Purchaser the Shares and the Warrant. B. REPRESENTATIONS AND WARRANTIES OF THE COMPANY 1. The Shares and the Underlying Shares are duly authorized for issuance and, upon payment of the Purchase Price (or the Warrant exercise price with respect to the Underlying Shares) as contemplated by this Subscription Agreement (or the Warrant with respect to the Underlying Shares), will be validly issued and fully paid and non-assessable. The Underlying Shares have been duly reserved for issuance by the Company. The rights, preferences, privileges and restrictions granted to or imposed upon the Common Stock and the holders thereof are as set forth in the certificate of incorporation of the Company, as amended to the date of this Subscription Agreement, a true and complete copy of which has been delivered to the Investor. 2. The Company is duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all required power and authority to own and operate its properties and assets and to carry on its business as now conducted and as proposed to be conducted. The Company is in good standing wherever necessary to carry on its present business and operations, except in jurisdictions in which the failure to be in good standing has not had and reasonably could not be expected to have a material adverse effect. 3. The Company has all requisite corporate power and authority to enter into and perform its obligations under this Subscription Agreement and Warrant. The execution, delivery and performance by the Company of this Subscription Agreement and Warrant have been duly authorized by all necessary action. This Subscription Agreement and Warrant have been duly and validly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company, enforceable against it in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, and (b) general principles of equity that restrict the availability of equitable or legal remedies. 4. The authorized capital stock of the Company consists of 16,000,000 shares of Common Stock of which 7,267,671 shares are currently issued and outstanding and 1,000,000 shares of preferred stock, par value $.01 per share, (the Preferred Stock") of which no shares are currently issued and outstanding. All of the issued and outstanding shares of the Common Stock are duly authorized, validly issued, fully paid and non-assessable. Except for Digital Fusion Solutions, Inc., a Florida corporation, (the "Subsidiary") the Company has no subsidiaries. The Company owns all of the issued and outstanding capital stock of the Subsidiary. None of the issued and outstanding capital stock of the Company or the Subsidiary was issued in violation of any preemptive or preferential rights or similar claims. Except with respect to the transaction between the Company and Laurus Master Fund, Ltd., as disclosed in the Company's Form 10-KSB for the fiscal year ended December 31, 2003 (the "Laurus Transaction") and except for currently outstanding warrants to purchase 601,680 shares of Common Stock at an average purchase price of $4.74 expiring on or before April 29, 2010, there are no outstanding or authorized subscriptions, options, calls, contracts, commitments, understandings, restrictions, arrangements, rights or warrants, including any right of conversion or exchange under any outstanding security, instrument or other agreement and also including any rights plan or other anti-takeover agreement, obligating the Company or the Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of the capital stock of the Company or the Subsidiary or obligating the Company or the Subsidiary to grant, extend or enter into any such agreement or commitment, and no voting trusts, proxies or other agreements or understandings to which the Company or the Subsidiary is a party or is bound with respect to the voting of any shares of capital stock of the Company or the Subsidiary and, to the knowledge of the Company, there are no such trusts, proxies, agreements or understandings by, between or among any of the Company's stockholders with respect to any shares of the Common Stock. The Company is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its Common Stock or any security convertible into or exchangeable for any of its Common Stock. 5. The Company and its Board of Directors has taken all necessary steps to render any "business combination," "moratorium," "control share" or other state anti-takeover statute or regulation applicable to the Company inapplicable to the Investor, the Shares, the holder of the Warrant, the Underlying Shares and the transactions contemplated by this Subscription Agreement and the Warrant. 6. The execution, delivery and performance of this Subscription Agreement and the Warrant do not and will not and the issuance of the Underlying Shares upon exercise of the Warrant in accordance with its terms will not (with or without the passage of time or the giving of notice): (a) violate or conflict with the articles of incorporation or bylaws of the Company; (b) violate or conflict with any law, regulation, judgment or order applicable to the Company; (c) violate any rule of any self-regulatory organization applicable to the Company; (d) violate or conflict with, result in a breach of, constitute a default or otherwise cause any loss of benefit under any material agreement or other material obligation to which the Company is a party, or by which it or any of its assets are otherwise bound; (e) result in the creation of any encumbrance pursuant to, or give rise to any penalty, acceleration of remedies, right of termination or otherwise cause any alteration of any rights or obligations of any party under any material contract to which the Company is a party or by which its assets are otherwise bound; or (f) require any consent, notice, authorization, waiver by or filing with any governmental agency, administrative body or other third party, other than the filing of a Form D with the Securities and Exchange Commission and any state securities commission. 7. There are no actions, suits, audits, investigations or proceedings pending or, to the knowledge of the Company, threatened against the Company in any court or before any governmental commission, board or authority which, if adversely determined, will have a material adverse effect on the Company, its financial condition or its prospects, or its ability to perform its obligations under this Subscription Agreement or the Warrant. 8. The Company's common stock is traded on the Bulletin Board, and the Company has taken all steps to make the Shares and the Underlying Shares eligible for trading on the Bulletin Board (assuming that such Shares and Underlying Shares are subject to resale under the Securities Act of 1933). 9. The Company's periodic reports filed pursuant to the Securities Exchange Act of 1934, as amended, (the "Periodic Reports") comply in all material respects with the provisions of the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder and do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein (in light of the circumstances under which they were made) not misleading. The Periodic Reports include all certifications and statements required, if any, by (A) the Commission's Order dated June 27, 2002 pursuant to Section 21(a)(1) of the Exchange Act (File No. 4-460), (B) Rule 13a-14 or 15d-14 under the Exchange Act, and (C) 18 U.S.C. ss. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), and each of such certifications and statements contain no qualifications or exceptions to the matters certified therein other than a knowledge qualification, permitted under such provision, and have not been modified or withdrawn and neither the Company nor any of its officers has received any notice from the Commission or any other governmental body questioning or challenging the accuracy, completeness, form or manner of filing or submission of such certifications or statements. The Company is in material compliance with all of the provisions of the Sarbanes-Oxley Act of 2002, and the provisions of the Exchange Act and the Securities Act relating thereto, applicable to the Company. The financial statements (including related notes, if any) contained in the Periodic Reports: (i) complied as to form in all material respects with the published rules and regulations of the Commission applicable thereto; (ii) were prepared in accordance with United States generally accepted accounting principles applied on a consistent basis throughout the periods covered; and (iii) fairly presented in all material respects the consolidated financial position of the Company and its consolidated subsidiary as of the respective dates thereof and the consolidated results of operations and cash flows of the Company and its consolidated subsidiaries for the periods covered thereby. 10. Since December 31, 2003, there have been no material adverse changes to the financial condition or operations of the business of the Company. Since December 31, 2003, the Company has not (other than in the Laurus Transaction) (i) declared or paid any dividend or other distribution in respect of its Common Stock, (ii) incurred any indebtedness except accounts payable incurred in the ordinary course of its business, (iii) incurred any capital expenditure in excess of Five Thousand Dollars ($5,000), (iv) sold any assets of the Company other than in the ordinary course of business, (v) issued any capital stock of the Company or any options, warrants, or similar rights, to acquire any such capital stock, (vi) redeemed, purchased or otherwise acquired, directly or indirectly, any of its capital stock, (vii) engaged in any material change in the method of conducting the business of the Company, (viii) effected any material change in compensation, incentive or bonus plans or the terms of employment of any employee of the Company, (ix) authorized or executed any amendment to the Certificate of Incorporation or Bylaws of the Company, (x) invested in or made a loan to any other person, company or enterprise, or (xi) entered into any commitment or agreement to do any of the above. On April 22, 2004, Laurus converted $35,000 of its promissory note into 100,000 shares of common stock of the Company. 11. No representation or warranty by the Company contained in this Subscription Agreement or any information in any schedule, instrument, or document furnished or to be furnished pursuant hereto, contains any untrue statement of a material fact or omits or fails to state any material fact necessary in order to make the statements contained therein, in light of the circumstances in which made, not misleading. 12. The foregoing representations and warranties are true and accurate as of the date of this Subscription Agreement, shall be true and accurate as of the date of the acceptance of this Subscription Agreement by the Investor and shall survive thereafter. If such representations or warranties shall not be true and accurate in any respect, the Company will, prior to such acceptance, give written notice of such fact to the Investor specifying which representations and warranties are not true and accurate and the reasons therefore. 13. The Company shall indemnify and hold harmless the Investor and any of its respective officers, employees, registered representatives, directors or control persons who were or are a party to, or are threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of, or arising from any actual or alleged misrepresentation or misstatement of facts, or omission to represent or state facts, made by the Company to the Investor in connection with this Subscription Agreement, the Warrant and the transactions set forth herein and therein, against losses, liabilities, and expenses actually and reasonably incurred by the undersigned prospective purchaser or any of its respective officers, employees, registered representatives, directors or control persons (including attorney's fees, judgments, fines and amounts paid in settlement) in connection with such action, suit or proceeding. The Company has delivered to the Investor a certificate of an officer of the Company in form satisfactory to the Investor certifying and attaching the Certificate of Incorporation of the Company, the Bylaws of the Company and the minutes of the Board of Directors and any committee of the Board of Directors organizing the Company and authorizing the execution and delivery of this Subscription Agreement and the Warrant, and authorizing the issuance of the Shares and the Underlying Shares. C. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR 1. The offer and sale of the Shares and Warrant is intended to be exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, (the "Act") and/or Regulation D promulgated under the Act. In furtherance thereof, the Investor represents and warrants to the Company as follows: (a) The Shares and Warrant are being purchased for the account of the Investor for investment purposes only and not for the account of any other person, and not with a view to distribution, assignment or resale to others or to fractionalization in whole or in part. (b) No other person has or will have a direct or indirect beneficial interest in the Shares or Warrant and the Investor will not sell, hypothecate or otherwise transfer the Shares or Warrant except in accordance with the registration provisions of the Act and applicable state securities laws, unless an opinion of counsel acceptable to the Company and its counsel is provided which states that an exemption from the registration requirements of the Act and applicable state securities laws is available. (c) In evaluating the suitability of an investment in the Company, the Investor has not relied upon any representations or other information (whether oral or written) from the Company or any of its agents other than as set forth in the Company's Periodic Reports, in this Subscription Agreement, in the Warrant and in documents provided pursuant to Section C.1.(d) of this Subscription Agreement. No oral or written representations have been made, or oral or written information furnished to, the Investor or its advisors, if any, in connection with the offering of the Shares which were in any way inconsistent with the Periodic Reports. (d) The Company has made available to the Investor all documents and information that the Investor has requested relating to an investment in the Company. (e) The Investor recognizes that an investment in the Company involves substantial risks and represents that the Investor has taken full cognizance of and understands all of the risks related to the purchase of the Shares and Warrant. The Investor can bear the economic risk of losing the entire investment in the Shares and Warrant. (f) The Investor has carefully considered and has, to the extent he, she or it believes such discussion to be necessary, discussed with his, her or its professional legal, tax and financial advisers the suitability of an investment in the Company, and the Investor has determined that the Shares and Warrant are a suitable investment for the Investor. (g) The statements and information set forth in the Entities Investor Qualification Questionnaire (the "Questionnaire") and attached to this Subscription Agreement as Exhibit A, are true, accurate and complete. All information which the Investor has provided to the Company concerning the Investor and the Investor's financial position is correct and complete as of the date set forth below, and if there should be any change in such information prior to the Company's acceptance of the Investor's subscription for the Shares and Warrant, the Investor will immediately provide such information to the Company and will promptly send confirmation of such information to the Company. (h) The Investor's overall commitment to investments which are not readily marketable is not disproportionate to the Investor's net worth, and the Investor's investment in the Shares and Warrant will not cause such overall commitment to become excessive. (i) The Investor has adequate means of providing for its current needs and personal contingencies and has no need for liquidity in its investment in the Shares and Warrant. (j) If this Subscription Agreement is executed and delivered on behalf of an entity, the person executing and delivering this Subscription Agreement has been duly authorized and is duly qualified to (i) execute and deliver this Subscription Agreement and all other instruments executed and delivered on behalf of the Investor in connection with the purchase of the Shares and Warrant, and (ii) purchase and hold the Shares and Warrant. The signature of the person executing and delivering this Subscription Agreement is binding upon such entity and such entity has not been formed for the specific purpose of acquiring the Shares and Warrant. 2. The foregoing representations and warranties are true and accurate as of the date of this Subscription Agreement, shall be true and accurate as of the date of the acceptance of this Subscription Agreement by the Company and shall survive thereafter. If such representations or warranties shall not be true and accurate in any respect, the Investor will, prior to such acceptance, give written notice of such fact to the Company specifying which representations and warranties are not true and accurate and the reasons therefor. 3. The Investor shall indemnify and hold harmless the Company and any of its respective officers, employees, registered representatives, directors or control persons who were or are a party to, or are threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of, or arising from any actual or alleged misrepresentation or misstatement of facts, or omission to represent or state facts, made by the Investor to the Company, concerning the Investor or its financial position, in connection with the offering and sale of the Shares and Warrant, against losses, liabilities and expenses actually and reasonably incurred by the Company or any of its respective officers, employees, registered representatives, directors or control persons (including attorneys' fees, judgments, fines and amounts paid in settlement) in connection with such action, suit or proceeding. D. INVESTOR INFORMATION The Investor and each of its members is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D promulgated under the Act ("Accredited Investor"). In furnishing the information set forth in the Questionnaire, the Investor acknowledges that the Company will be relying thereon in determining, among other things, whether there are reasonable grounds to believe that the Investor and its members qualify as an Accredited Investor under the Act. E. INVESTOR UNDERSTANDINGS 1. The Investor understands, acknowledges and agrees with the Company as follows: (a) The Investor through each of its members has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of investment in the Company and of making an informed investment decision. (b) The Investor through each of its members has by reason of its business or financial experience, the capacity to protect its own interest in connection with this transaction. (c) Except as set forth herein, the Company is under no obligation to register the Shares, the Warrant or the Underlying Shares on behalf of the Investor or to assist the Investor in complying with any exemption from registration. The certificate representing the Shares and the Underlying Shares shall be marked with the following legend: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS 2. The foregoing understandings, acknowledgments and agreements in this Subscription Agreement are true and accurate as of the date of this Subscription Agreement, shall be true and accurate as of the date of the acceptance of this Subscription Agreement by the Company and shall survive thereafter. F. REGISTRATION RIGHTS 1. Company Registration A. Notice of Registration. If at any time or from time to time the Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders, other than (i) a registration relating solely to employee benefit plans on Form S-8 (or any successor form) or (ii) a registration relating solely to a Commission Rule 145 transaction on Form S-4 (or any successor form), the Company will: (1) promptly give to the Investor written notice thereof, and (2) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Shares specified in a written request or requests, made within 15 days after delivery of such written notice from the Company described in Section F.1.A.(1), by the Investor. For purposes of this Section F, the term "Shares" shall also refer to the "Underlying Shares." B. Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Investor as a part of the written notice described above. In such event, the right of the Investor to registration pursuant to this Section F.1 shall be conditioned upon the Investor's participation in such underwriting and the inclusion of the Shares in the underwriting to the extent provided herein. The Investor shall (together with the Company) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. (1) If the managing underwriter determines in good faith that marketing factors (including pricing) require a limitation of the number of shares to be underwritten, the underwriter may exclude some or all of the Shares from such registration and underwriting. The Company shall so advise Investor, and the number of shares of Common Stock to be included in such registration shall be allocated as follows: first, for the account of the Company, all shares of Common Stock proposed to be sold by the Company; second, for the account of the Investor, the number of the Shares requested to be included in the registration up to the amount of the limitation imposed by the managing underwriter; and third, for the account of any other investor that has been granted registration rights with respect to shares of Common Stock on the terms and conditions of any agreement pertaining to such registration rights. (2) If the Investor disapproves of the terms of any such underwriting, the Investor may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. (3) The Company shall have the right to terminate or withdraw any registration initiated by it under this Section F.1 prior to the effectiveness of such registration, whether or not the Investor has elected to include any or all of the Shares in such registration. C. Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to this Section F.1 shall be borne by the Company. All Selling Expenses relating to the Shares shall be borne by the Investor. 2. Demand Registration A. Request for Registration. (1) In addition to the rights set forth in above, if, on one occasion, the Investor requests that the Company file a registration statement for a public offering of the Shares having an aggregate offering price of at least $2,000,000 (based on the then current market price), the Company shall use its best efforts to cause such shares to be registered for the offering as soon as practicable. (2) The Company shall file a registration statement covering the Shares so requested to be registered within 90 days after receipt of the request of the Investor; provided, however, that if the Company shall furnish to the Investor a certificate signed by the Chairman or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be detrimental to the Company and its stockholders for such registration statement to be filed on or before the date filing would be required, and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a period of not more than 90 days, but in no event for a period longer than 180 days after receipt of the request of the Investor; provided, further, that the Company shall not be permitted to exercise such deferral right more than once in any 360-day period. B. Underwriting. (1) The distribution of the Shares covered by the registration statement shall be effected by means of the method of distribution selected by the Investor. (2) If the distribution of the Shares pursuant to this Section F.2 is effected by means of an underwriting, the Company and the Investor shall enter into an underwriting agreement in customary form with a managing underwriter selected for such underwriting by the Investor. C. Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to this Section F.2 shall be borne by the Investor. All Selling Expenses relating to the Shares shall be borne by the Investor. 3. Registration Procedures A. In the case of each registration effected by the Company pursuant to this Subscription Agreement, the Company will keep the Investor advised in writing as to the initiation of each registration and as to the completion thereof. The Company agrees to use its best efforts to effect or cause such registration to permit the sale of the Shares covered thereby by the Investor in accordance with the intended method or methods of distribution thereof described in such registration statement and to keep such registration statement in effect and comply with such laws so as to permit the continuance of offers, sales and dealings therein for so long as may be necessary to enable the Investor, agent or underwriter to complete its distribution of the Shares pursuant to such registration statement. In connection with any registration of any of the Shares, the Company shall, as soon as reasonably possible: (1) use its best efforts to cause the registration statement filed for purposes of such registration to become effective as soon as reasonably possible thereafter; (2) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus included therein as may be necessary to effect and maintain the effectiveness of such registration statement as may be required by the applicable rules and regulations of the Commission and the instructions applicable to the form of such registration statement, and furnish to the Investor copies of any such supplement or amendment prior to this being used and/or filed with the Commission; and comply with the provisions of the Securities Act with respect to the disposition of all the Shares to be included in such registration statement; (3) provide (A) the Investor, (B) the underwriters (which term, for purposes of this Agreement, shall include a person deemed to be an underwriter within the meaning of Section 2(11) of the Securities Act), if any, thereof, (C) the sales or placement agent, if any, therefor, (D) one counsel for such underwriters or agent, and (E) one counsel for the Investor, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment or supplement thereto; (4) for a reasonable period prior to the filing of such registration statement, and throughout the period of effectiveness of the registration statement, make available for inspection by the parties referred to above such financial and other information and books and records of the Company, and cause the officers, directors, employees, counsel and independent certified public accountants of the Company to respond to such inquiries, as shall be reasonably necessary, in the judgment of the respective counsel referred to above, to conduct a reasonable investigation within the meaning of the Securities Act; provided, however, that each such party shall be required to maintain in confidence and not disclose to any other person or entity any information or records reasonably designated by the Company in writing as being confidential, until such time as (a) such information becomes a matter of public record (whether by virtue of its inclusion in such registration statement or otherwise), or (b) such party shall be required so to disclose such information pursuant to the subpoena or order of any court or other governmental agency or body having jurisdiction over the matter, or (c) such information is required to be set forth in such registration statement or the prospectus included therein or in an amendment to such registration statement or an amendment or supplement to such prospectus in order that such registration statement, prospectus, amendment or supplement, as the case may be, does not include an untrue statement of a material fact or omit to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading. (5) promptly advise the Investor, the sales or placement agent, if any, therefor and the managing underwriter of the securities being sold and confirm such advice in writing, (A) when such registration statement or the prospectus included therein or any prospectus amendment or supplement or post-effective amendment has been filed, and, with respect to such registration statement or any post-effective amendment, when the same has become effective, (B) of any comments by the Commission and by the blue sky or securities commissioner or regulator of any state with respect thereto or any request by the Commission for amendments or supplements to such registration statement or the prospectus or for additional information, (C) of the issuance by the Commission of any stop order suspending the effectiveness of such registration statement or the initiation of any proceedings for that purpose, (D) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, or (E) if it shall be the case, at any time when a prospectus is required to be delivered under the Securities Act, that such registration statement, prospectus, or any document incorporated by reference, in any of the foregoing contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (6) use its best efforts to obtain the withdrawal of any order suspending the effectiveness of such registration statement or any post-effective amendment thereto at the earliest practicable date; (7) if requested by any managing underwriter or underwriter, any placement or sales agent or the Investor, promptly incorporate in a prospectus, prospectus supplement or post-effective amendment such information as is required by the applicable rules and regulations of the Commission and as such managing underwriter or underwriters, such agent or the Investor may reasonably specify should be included therein relating to the terms of the sale of the Shares included thereunder, including, without limitation, information with respect to the number of the Shares being sold by the Investor or agent or to such underwriters, the name and description of Investor, the offering price of the Shares and any discount, commission or other compensation payable in respect thereof, the purchase price being paid therefor by such underwriters and with respect to any other terms of the offering of the Shares to be sold in such offering; and make all required filings of such prospectus; prospectus supplement or post-effective amendment promptly after notification of the matters to be incorporated in such prospectus, prospectus supplement or post-effective amendment; (8) furnish to the Investor, each placement or sales agent, if any, therefor, each underwriter, if any, thereof and the counsel referred to referred to above an executed copy of such registration statement, each such amendment and supplement thereto (in each case excluding all exhibits and documents incorporated by reference) and such number of copies of the registration statement (excluding exhibits thereto and documents incorporated by reference therein unless specifically so requested by such holder, agent or underwriter, as the case may be) of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, as the Investor, agent, if any, and underwriter, if any, may reasonably request in order to facilitate the disposition of the Shares sold by such agent or underwritten by such underwriter and to permit the Investor and such agent and underwriter to satisfy the prospectus delivery requirements of the Securities Act; and the Company hereby consents to the use of such prospectus and any amendment or supplement thereto by the Investor and by any such agent and underwriter, in each case in the form most recently provided to such party by the Company, in connection with the offering and sale of the Shares covered by the prospectus (including such preliminary and summary prospectus) or any supplement or amendment thereto; (9) use its best efforts to (A) register or qualify the Shares to be included in such registration statement under such other securities laws or blue sky laws of such jurisdictions to be designated by the Investor and each placement or sales agent, if any, therefor and underwriter, if any, thereof, as the Investor and each underwriter, if any, of the securities being sold shall reasonably request, (B) keep such registrations or qualifications in effect and comply with such laws so as to permit the continuance of offers, sales and dealings therein in such jurisdictions for so long as may be necessary to enable the Investor, agent or underwriter to complete its distribution of the Shares pursuant to such registration statement and (C) take any and all such actions as may be reasonably necessary or advisable to enable the Investor, agent, if any, and underwriter to consummate the disposition in such jurisdictions of the Shares; provided, however, that the Company shall not be required for any such purpose to (1) qualify generally to do business as a foreign company or a broker-dealer in any jurisdiction wherein it would not otherwise be required to qualify but for the requirements of this Section F.2 or subject itself to taxation in any such jurisdiction; (10) cooperate with the Investor and the managing underwriters to facilitate the timely preparation and delivery of certificates representing the Shares to be sold, which certificates shall be printed, lithographed or engraved, or produced by any combination of such methods, on steel engraved borders and which shall not bear any restrictive legends; and enable the Shares to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of the Shares; (11) provide a CUSIP number for all the Shares, not later than the effective date of the registration statement; (12) enter into one or more underwriting agreements, engagement letters, agency agreements, "best efforts" underwriting agreements or similar agreements, as appropriate, and take such other actions in connection therewith as the Investor reasonably requests in order to expedite or facilitate the disposition of the Shares; and (13) whether or not an agreement of the type referred to in the preceding subsection is entered into and whether or not any portion of the offering contemplated by such registration statement is an underwritten offering or is made though a placement or sales agent or any other entity, (A) make such representations and warranties to the Investor and the placement or sales agent, if any, therefor and the underwriters, if any, thereof in form, substance and scope as are customarily made in connection with any offering of equity securities pursuant to any appropriate agreement and/or to a registration statement filed on the form applicable to such registration statement; (B) obtain an opinion of counsel to the Company in customary form and covering such matters, of the type customarily covered by such an opinion, as the managing underwriters, if any, and as the Investor may reasonably request, addressed to the Investor and the placement or sales agent, if any, therefor and the underwriters, if any, thereof and dated the effective date of such registration statement (and if such registration statement contemplates an underwritten offering of a part or of all of the Shares, dated the date of the closing under the underwriting agreement relating thereto); (C) obtain a "cold" comfort letter or letters from the independent certified public accountants of the Company addressed to the Investor and the placement or sales agent, if any, therefor and the underwriters, if any, thereof, dated (I) the effective date of such registration statement and (II) the effective date of any prospectus supplement to the prospectus included in such registration statement or post-effective amendment to such registration statement which includes unaudited or audited financial statements as of a date or for a period subsequent to that of the latest such statements included in such prospectus (and, if such registration statement contemplates an underwritten offering pursuant to any prospectus supplement to the prospectus included in such registration statement or post-effective amendment to such registration statement which includes unaudited or audited financial statements as of a date or for a period subsequent to that of the latest such statements included in such prospectus, dated the date of the closing under the underwriting agreement relating thereto), such letter or letters to be in customary form and covering such matters of the type customarily covered by letters of such type; (D) deliver such documents and certificates, including officers' certificates, as may be customary and reasonably requested by the Investor and the placement or sales agent, if any, therefor and the managing underwriters, if any, thereof to evidence the accuracy of the representations and warranties made pursuant to clause (A) above and the compliance with or satisfaction of any agreements or conditions contained in the underwriting agreement or other agreement entered into by the Company; and (E) undertake such obligations relating to expense reimbursement, indemnification and contribution as are provided in this Subscription Agreement. B. In the event that the Company would be required, pursuant to Section F.3.A.(5) above, to notify the Investor, the sales or placement agent, if any, and the managing underwriters, if any, of the securities being sold, the Company shall prepare and furnish to the Investor, to each such agent, if any, and to each underwriter, if any, a reasonable number of copies of a prospectus supplement or amendment so that, as thereafter delivered to the purchasers of the Shares, such prospectus shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. 5. Indemnification A. The Company will indemnify the Investor, each of its officers and directors and members, and the Investor's legal counsel and independent accountants, if any, and each person controlling any such persons within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Subscription Agreement, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened ("Damages"), arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereof, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein, a material fact required to be stated therein or necessary to make the statements therein, not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act or any state securities laws applicable to the Company and relating to action or inaction by the Company in connection with any such registration, qualification or compliance, and will reimburse the Investor, each of its officers and directors and members and the Investor's legal counsel and independent accountants, and each person controlling any such persons, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by the Investor (or its members, legal counsel, independent accountants, control persons or other representatives) or underwriter and expressly intended for use in such registration statement, prospectus, offering circular or other document, or any amendment or supplement thereof, and the Investor, or the holder of the Warrant, as the case may be, will, if Shares are included in the securities as to which such registration, qualification, or compliance is being effected, indemnify the Company, its officers, directors, legal counsel, independent accountants, if any, and each person controlling any such persons within the meaning of Section 15 of the Securities Act for Damages arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular, other document or amendment or supplement in reliance upon and in conformity with written information furnished to the Company by the Investor or holder of the Warrant, as the case may be, and expressly intended for use in such registration statement, prospectus, offering circular or other document, or any amendment or supplement thereof; provided, however, that the obligations of the Investor and the holder of the Warrant hereunder shall be limited to an amount equal to the proceeds to the Investor or the holder of the Warrant sold as contemplated herein. B. Each party entitled to indemnification under this Section F.5 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld). The Indemnified Party may participate in such defense at such party's expense; provided, however, that the Indemnifying Party shall bear the expense of such defense of the Indemnified Party if representation of both parties by the same counsel would be inappropriate due to actual or potential conflicts of interest. The failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party its obligations under this Agreement, unless such failure is prejudicial to the ability of the Indemnifying Party to defend the action. The Indemnifying Party shall not, in the defense of any such claim or litigation, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation. 6. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of securities of the Company to the public without registration, the Company agrees to: A. Make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act; and B. Use its best efforts to then file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act ; and C. So long as the Investor owns any of the Shares, furnish to the Investor forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 and of the Securities Act and the Exchange Act , a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company as the Investor may reasonably request in availing itself of any rule or regulation of the Commission allowing the Investor to sell any such securities without registration. 7. Transfer of Registration Rights. The rights to cause the Company to register the Shares granted the Investor under this Subscription Agreement may be assigned in connection with any transfer or assignment of the Shares or the Warrant. All transferees and assignees of the rights to cause the Company to register the Shares under this Agreement, as a condition to the transfer of such rights, shall agree in writing to be bound by the agreements set forth herein. 8. Limitations on Registration Rights Granted to other Securities. The parties hereto agree that from and after the date of this Agreement, the Company shall not without the prior written consent of the Investor enter into any agreement with any holder or prospective holder of any securities of the Company providing for the grant to such holder of registration rights superior to, or pari passu with, those granted herein. 9. Definitions A. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. B "Investor" shall mean the Investor and any transferee who holds the Shares. C. The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing with the Commission a registration statement in compliance with the Securities Act, and the declaration or ordering by the Commission of the effectiveness of such registration statement. D. "Registration Expenses" shall mean expenses incurred by the Company that are directly and solely related to compliance with Sections F.1. and F.2. hereof, including, registration, qualification and filing fees, printing expenses, and disbursements of legal counsel for the Company, fees and disbursements of legal counsel for the Investor, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of employees of the Company, which shall be paid in any event by the Company). E. "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. F. "Selling Expenses" shall mean all underwriting fees, discounts, selling commissions and stock transfer taxes applicable to the Shares. G. MISCELLANEOUS 1. Neither this Subscription Agreement nor any provisions of this Subscription Agreement shall be waived, modified, changed, discharged, terminated, revoked or cancelled except by an instrument in writing signed by the party against whom any change, discharge or termination is sought. 2. The failure of the Company or the Investor to exercise any right or remedy under this Subscription Agreement or any other agreement between the Company and the Investor, or otherwise, or delay by the Company or the Investor in exercising such right or remedy, will not operate as a waiver of any such right or remedy. No waiver by the Company or the Investor will be effective unless and until it is in writing and signed by the Company or the Investor as the case may be. 3. Notices required or permitted to be given under this Subscription Agreement shall be in writing and shall be deemed to be sufficiently given when personally delivered or sent by Federal Express or other nationally recognized overnight delivery service, postage pre-paid, and addressed to the Investor at the address set forth in the Questionnaire and to the Company at 4940-A Corporate Drive, Huntsville, Alabama 35805. 4. This Subscription Agreement shall be enforced, governed and construed in all respects in accordance with the laws of the State of Delaware (without giving effect to principles of conflicts of laws). This Subscription Agreement shall be binding upon and inure to the benefit of the Investor and its successors and assigns and shall be binding upon and inure to the benefit of the Company and its successors and assigns. 5. In the event that any provision of this Subscription Agreement is held to be invalid, illegal, or unenforceable, in whole or in part, such invalidity shall not affect any otherwise valid provision, and all other valid provisions shall remain in full force and effect. 6. This Subscription Agreement supersedes all previous agreements, negotiations, or communications between the parties to this Subscription Agreement with respect to the subject matter of this Subscription Agreement, and contains the complete and exclusive expression of the understanding between the parties. This Subscription Agreement cannot be amended, modified, or supplemented in any respect except by a subsequent written agreement entered into by both parties. 7. Time is of the essence of this Subscription Agreement. 8. All representations and warranties of the Company and the Investor contained herein shall survive the date of this Subscription Agreement, the transfer of the Shares and the termination or expiration of the rights hereunder and shall terminate on the applicable statute of limitations. All agreements of the Company and the Investor contained herein shall survive indefinitely until, by their respective terms, they are no longer operative. IN WITNESS WHEREOF, the Investor has executed this Subscription Agreement to be effective as of the 11th day of May, 2004. MADISON RUN, LLC By: /s/ Stewart Hall ------------------------------------- Stewart Hall, Managing Member ACCEPTED: DIGITAL FUSION, INC. By: Roy E. Crippen, III ----------------------------------------- Roy E. Crippen III, President EXHIBIT A ================================================================================ DIGITAL FUSION, INC. (THE "COMPANY") INVESTOR QUALIFICATION QUESTIONNAIRE Entities EACH INVESTOR MUST COMPLETE PART A AND PART B BELOW. The purpose of this section is to aid in determining whether an investor is an accredited investor pursuant to Rule 501(a) under Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended. ================================================================================ PART A: General Information ================================================================================ Name of Subscriber State of Domicile - -------------------------------------- ----------------------------------------- Address of Principal Place of Business Nature of Business - -------------------------------------- ----------------------------------------- Was the Investor created for the specific purpose of investing in the Company? |_| Yes |_| No If the Investor is a partnership or a trust, do its individual partners or beneficiaries have the right to make a decision whether or not to participate in the proposed investment? |_| Yes |_| No |_| Not Applicable If the answer to either of the two preceding questions is "Yes," Item (m) of Part B of this Questionnaire must be checked, if true. If Item (m) of Part B is not applicable, the information required by Part A and Part B must be furnished with respect to each owner of an equity interest in the entity (or each beneficiary of a trust, if applicable) on separate pages that are validly signed and dated on behalf of each such owner or beneficiary. Alternatively, each such owner or beneficiary may complete and execute a separate copy of this Subscription Agreement. - -------------------------------------------------------------------------------- Has the investor ever been charged with, convicted of, or pleaded guilty, nolo contendere or no contest to, any crime or civil offense (excluding only minor traffic offenses). |_| Yes |_| No If yes, please give the details, including relevant dates and locations: - -------------------------------------------------------------------------------- To the investor's knowledge, has the investor ever been the subject of an investigation by any law enforcement or other governmental agency (other than routine background checks). |_| Yes |_| No If yes, please give the details, including relevant dates and locations. ================================================================================ ================================================================================ PART B: Accredited Investor Qualification Standards ================================================================================ The financial information and representations in this section are intended to permit the Company to determine whether the Investor qualifies as an accredited investor under Regulation D of the Securities and Exchange Commission. The Investor represents and warrants that it is (check one or more): |_| (a) A bank, as defined in Section 3(a)(2) of the Securities Act of 1933, as amended (the "1933 Act"); |_| (b) A savings and loan association or other institution, as defined in Section 3(a)(5)A) of the 1933 Act; |_| (c) A broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, as amended (the "1934 Act"); |_| (d) An insurance company, as defined in Section 2(13) of the 1933 Act; |_| (e) An investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"), or a business development company as defined in Section 2(a)(48) of the 1940 Act; |_| (f) A Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; |_| (g) A plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, that has total assets in excess of $5,000,000; |_| (h) An employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 ("ERISA"), and either (i) investment decisions are made by a plan fiduciary, as defined in Section 3(21) of ERISA, which is either a bank, savings and loan association, insurance company, or registered investment adviser, (ii) the employee benefit plan has total assets in excess of $5,000,000, or (iii) if a self-directed plan, investment decisions are made solely by persons that qualify as accredited investors either under this paragraph (1) or paragraph (2); |_| (i) A private business development company, as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; |_| (j) An organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, with total assets in excess of $5,000,000, that was not formed for the specific purpose of acquiring the Shares; |_| (k) A corporation, Massachusetts or similar business trust, or partnership with total assets in excess of $5,000,000, that was not formed for the specific purpose of acquiring the interests; |_| (l) A trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Shares, and whose purchase is directed by a person who has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of purchasing the Shares; |_| (m) An entity in which all of the equity owners qualify as accredited investors, as defined in Rule 501(a) of Regulation D; or |_| (n) None of the above. ================================================================================ ================================================================================ PART B: Accredited Investor Qualification Standards (con't) ================================================================================ I certify that I have answered the foregoing questions to the best of my knowledge and that my answers thereto are complete and accurate. I understand that the Company will be relying on the accuracy and completeness of my responses to the foregoing questions. I will notify the Company immediately of any material change in any statement made herein occurring prior to the effective date (after today) of any acquisition or exchange by me of stock of the Company. ================================================================================ SUBSCRIBER Date By: - --------------------------------- --------------------- Print or Type Name Signature ================================================================================ EX-10.5 6 a4641002ex105.txt EXHIBIT 10.5 EXHIBIT 10.5 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER(S) FROM THE APPROPRIATE GOVERNMENTAL AUTHORITY(IES), OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 8 OF THIS WARRANT. DIGITAL FUSION, INC. -------------------- WARRANT TO PURCHASE UP TO 516,893 SHARES OF COMMON STOCK (this "Warrant") Warrant No.: 001 Digital Fusion, Inc., a Delaware corporation (the "Company"), hereby certifies that, for value received, Madison Run LLC (Madison Run LLC or its assignees are referred to herein as the "Holder") is the registered Holder of a warrant (the "Warrant") to subscribe for and purchase 304,054 shares of the fully paid and nonassessable Common Stock of the Company, at a purchase price of $0.89 per share and 212,839 shares of Common Stock of the Company (each such number of shares, as adjusted from time to time, pursuant to Section 4 hereof, is, with respect to any specific exercise of the Warrant, referred to herein as the "Warrant Shares") at a price of $0.94 per share (each such price, as adjusted from time to time, pursuant to Section 4 hereof, is, with respect to any specific exercise of the Warrant, referred to herein as the "Warrant Price"), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, (a) the term "Common Stock" shall mean the Company's presently authorized Common Stock, par value $.001 per share, and any stock into or for which such Common Stock may hereafter be converted or exchanged, (b) the term "Date of Grant" shall mean May ___, 2004, and (c) the term "Other Warrants" shall mean any warrant issued upon transfer or partial exercise of this Warrant. The term "Warrant" as used herein shall be deemed to include Other Warrants unless the context hereof or thereof clearly requires otherwise. 1. Term. The purchase right represented by this Warrant is exercisable, in whole or in part, at any time after the Date of Grant (the "Initial Exercise Date"). This Warrant shall expire on May __, 2009. 2. Exercise. Subject to Section 1 hereof, the purchase right represented by this Warrant may be exercised by the Holder hereof, in whole or in part and from time to time after the Initial Exercise Date, by the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A duly executed) at the principal office of the Company and by the payment to the Company of an amount equal to the then applicable Warrant Price multiplied by the number of Warrant Shares then being purchased. The person or persons in whose name(s) any certificate(s) representing shares of Common Stock shall be issuable upon exercise of this Warrant shall be deemed to have become the Holder(s) of record of, and shall be treated for all purposes as the record Holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of stock so purchased shall be delivered to the Holder hereof as soon as possible and in any event within 30 days after such exercise and, unless this Warrant has been fully exercised, a new Warrant representing the portion of the Warrant Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the Holder hereof as soon as possible and in any event within such 30-day period. 3. Stock Fully Paid; Reservation of Shares. All Warrant Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance pursuant to the terms and conditions herein, be fully paid and nonassessable, and free from all taxes (other than any taxes determined with respect to, or based upon, the income of the person to whom such shares are issued), liens and charges (other than liens or charges created by actions of the Holder of this Warrant or the person to whom such shares are issued), and pre-emptive rights with respect to the issue thereof. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. 4. Adjustment of Warrant Price and Number of Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: a. Reclassification or Merger. In case of any reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any merger of the Company with or into another corporation (other than a merger with another corporation in which the Company is the acquiring and the surviving corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), or in case of any sale of all or substantially all of the assets of the Company, the Company, or such successor or purchasing corporation, as the case may be, shall duly execute and deliver to the Holder of this Warrant a new Warrant (in form and substance satisfactory to the Holder of this Warrant), so that the Holder of this Warrant shall have the right to receive, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of Common Stock theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or merger by a Holder of the number of shares of Common Stock (or similar security) then purchasable under this Warrant. Such new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The provisions of this Section 4(a) shall similarly apply to successive reclassifications, changes, mergers and transfers. b. Subdivision or Combination of Shares. If at any time while this Warrant remains outstanding and unexpired the Company shall subdivide or combine its outstanding shares of common stock, the Warrant Price shall be proportionately decreased and the number of Warrant Shares issuable hereunder shall be proportionately increased in the case of a subdivision and the Warrant Price shall be proportionately increased in the case of a combination and the number of Warrant Shares issuable hereunder shall be proportionately decreased, effective at the close of business on the date the subdivision or combination becomes effective. c. Stock Dividends. If at any time while this Warrant is outstanding and unexpired the Company shall (i) pay a dividend with respect to Common Stock payable in Common Stock, then the Warrant Price shall be adjusted, from and after the date of determination of stockholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (A) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend, and (B) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or (ii) make any other dividend or distribution with respect to Common Stock (except any distribution specifically provided for in Sections 4.a. and 4.b.), then, the Company will provide notice to the Investor of such dividend or distribution with respect to the Common Stock and, if the Warrant is exercised in whole or in part within five days of actual receipt by the Investor of the notice of such dividend or distribution, the Holder of the shares of Common Stock acquired pursuant to such exercise shall be entitled to receive the dividend or distribution with respect to the Warrant Shares acquired by the Investor upon such exercise of the Warrant. 5. Notice of Adjustments. Whenever the Warrant Price or the number of Warrant Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the Company shall deliver to the Holder of this Warrant a certificate signed by a duly designated officer of the Company setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Warrant Shares purchasable hereunder after giving effect to such adjustment. 6. Dividends. In the event that the Company shall fix a record date for the making of any stock dividend to Holders of shares of its common stock, the Company shall notify the Holder of the Warrants, in writing, at least 30 days in advance of the record date for the proposed dividend or distribution. 7. Fractional Shares. No fractional shares of Common Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall round up the shares to which the recipient is entitled to the nearest whole share. 8. Disposition of Warrant or Warrant Shares. a. Exchange. This Warrant may be exchanged, without payment of any service charge, for one (1) or more new Warrants of like tenor exercisable for the same aggregate number of shares of Common Stock upon surrender to the Company by the registered Holder hereof in person or by legal representative or by attorney duly authorized in writing and, upon issuance of the new Warrant or Warrants, the surrendered Warrant shall be cancelled and disposed of by the Company. b. Applicability of Restrictions. Neither any restrictions of any legend applicable to the Warrant or the Warrant Shares nor any restrictions on transfer set forth herein or in the Subscription Agreement between Holder and the Company dated as of the date of this Warrant shall apply to any transfer of, or grant of a security interest in, this Warrant (or the Common Stock obtainable upon exercise thereof) or any part hereof (i) to a partner of the Holder if the Holder is a partnership or to a member of the Holder if the Holder is a limited liability company, (ii) to a partnership of which the Holder is a partner or to a limited liability company of which the Holder is a member, or (iii) to any affiliate of the Holder if the Holder is a corporation; provided, however, in any such transfer, if applicable, the transferee shall agree in writing to be bound by the terms of this Warrant as if an original Holder hereof. 9. Rights as Stockholders; Information. Except as otherwise set forth in this Agreement, no Holder of this Warrant, as such, shall be entitled to vote or be deemed the Holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Holder of this Warrant, as such, any of the rights of a stockholder of the Company or any right to vote for the election of the directors or upon any matter submitted to stockholders at any meeting thereof, or to receive notice of meetings, until this Warrant shall have been exercised and the Warrant Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. The foregoing notwithstanding, the Company will transmit to the Holder of this Warrant such information, documents and reports as are generally distributed to the holders of any class or series of the securities of the Company concurrently with the distribution thereof to the stockholders. 10. Additional Rights on Transfer of Business. a. Transfer of Business. In the event that the Company undertakes to (i) sell, lease, exchange, convey or otherwise dispose of all or substantially all of its property or business, or (ii) merge into or consolidate with any other corporation (other than a wholly-owned Subsidiary), or effect any transaction (including a merger or other reorganization) or series of related transactions, in which more than 50% of the voting power of the Company is disposed of, the Company will provide at least 30 days notice prior to closing of the terms and conditions of the proposed transaction. The Company shall cooperate with the Holder in consummating the sale of this Warrant in connection with any such transaction. 11. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 12. Notices. Unless otherwise specifically provided herein, all communications under this Warrant shall be in writing and shall be deemed to have been duly given (i) on the date of service if served personally on the party to whom notice is to be given, (ii) on the day of transmission if sent by facsimile transmission to the number shown on the books of the Company, and telephonic confirmation of receipt is obtained promptly after completion of transmission, (iii) on the day after delivery to Federal Express or similar overnight courier, or (iv) on the fifth day after mailing, if mailed to the party to whom notice is to be given, by first class mail, registered or certified, postage prepaid, and properly addressed, return receipt requested, to each such Holder at its address as shown on the books of the Company or to the Company at the address indicated therefor on the signature page of this Warrant. Any party hereto may change its address for purposes of this Section 12 by giving the other party written notice of the new address in the manner set forth herein. 13. Assignment; Binding Effect on Successors. This Warrant may be assigned, transferred, or pledged by Holder only in accordance with the terms of this Warrant. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets, and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the Holder hereof. 14. Lost Warrants or Stock Certificates. The Company covenants to the Holder hereof that, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant or any stock certificate and, in the case of any loss, theft or destruction, upon receipt of an executed lost securities bond or indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 15. Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 16. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Delaware (without giving effect to principles of conflicts of laws). 17. Survival of Representations, Warranties and Agreements. All representations and warranties of the Company and the Holder hereof contained herein shall survive the Date of Grant, the exercise or conversion of this Warrant (or any part hereof) and the termination or expiration of rights hereunder and shall terminate three years after the date of this Agreement. All agreements of the Company and the Holder hereof contained herein shall survive indefinitely until, by their respective terms, they are no longer operative. 18. Remedies. In case any one or more of the covenants and agreements contained in this Warrant shall have been breached, the Holders hereof (in the case of a breach by the Company), or the Company (in the case of a breach by a Holder), may proceed to protect and enforce their or its rights either by suit in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and/or an action for specific performance of any such covenant or agreement contained in this Warrant. 19. Acceptance. Receipt of this Warrant by the Holder hereof shall constitute acceptance of and agreement to the foregoing terms and conditions. 20. No Impairment of Rights. The Company will not, by amendment of its Certificate of Incorporation or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant against impairment. 21. Severability. The invalidity or unenforceability of any provision of this Warrant in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction, or affect any other provision of this Warrant, which shall remain in full force and effect. [Signature page follows.] IN WITNESS WHEREOF, the Company has caused this Warrant to be executed on its behalf by one of its officers thereunto duly authorized. DIGITAL FUSION, INC., a Delaware corporation By: /s/ Roy E. Crippen, III ---------------------------------------- Name: Roy E. Crippen, III ------------------------------------ Its: President ------------------------------------- Address: 4940-A Corporate Drive Huntsville, AL 35805 Dated: May 11, 2004. EXHIBIT A NOTICE OF EXERCISE To: DIGITAL FUSION, INC. 1. The undersigned hereby elects to purchase shares of Common Stock of DIGITAL FUSION, INC. at a purchase price of $_________ pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are specified below: ------------------------------- (Name) ------------------------------- ------------------------------- (Address) 3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. In support thereof, the undersigned has executed an Investment Representation Statement attached hereto as Schedule 1. ---------------------------------- (Signature) - --------------------- (Date) SCHEDULE 1 ---------- INVESTMENT REPRESENTATION STATEMENT Purchaser: Company: DIGITAL FUSION, INC. Security: Common Stock Amount: Date: In connection with the purchase of the above-listed securities (the "Securities"), the undersigned (the "Purchaser") represents to the Company as follows: (a) The Purchaser is aware of the Company's business affairs and financial condition, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. The Purchaser is purchasing the Securities for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "Act"). (b) The Purchaser understands that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein. In this connection, the Purchaser understands that, in the view of the Securities and Exchange Commission ("SEC"), the statutory basis for such exemption may be unavailable if the Purchaser's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under applicable tax laws, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (c) The Purchaser further understands that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. In addition, the Purchaser understands that the certificate evidencing the Securities will be imprinted with the legend referred to in the Warrant under which the Securities are being purchased. (d) The Purchaser is aware of the provisions of Rule 144 and 144A, promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, including, among other things: The availability of certain public information about the Company, the resale occurring not less than one (1) year after the party has purchased and paid for the securities to be sold; the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934, as amended) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein. (e) The Purchaser further understands that at the time it wishes to sell the Securities there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144 and 144A, and that, in such event, the Purchaser may be precluded from selling the Securities under Rule 144 and 144A even if the one-year minimum holding period had been satisfied. (f) The Purchaser further understands that in the event all of the requirements of Rule 144 and 144A are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Purchaser: -------------------------------- Date: ------------------------------------ EX-31.1 7 a4641002ex311.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Roy E. Crippen, III certify that: 1. I have reviewed this annual report on Form 10-QSB of Digital Fusion, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as the end of the period covered by this report based on such evaluation; and c) disclosed in this any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons fulfilling the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 14, 2004 By: /s/ Roy E. Crippen, III ------------------------------ Roy E. Crippen, III Chief Executive Officer and President EX-32.1 8 a4641002ex321.txt EXHIBIT 32.1 EXHIBIT 32.1 WRITTEN STATEMENT OF THE CHIEF EXECUTIVE OFFICER Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the undersigned President and Chief Executive Officer of Digital Fusion, Inc. (the "Company"), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-QSB of the Company for the quarter ended March 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 14, 2004 By: /s/ Roy E. Crippen, III ----------------------- Roy E. Crippen, III -----END PRIVACY-ENHANCED MESSAGE-----