-----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, WpaC1Qqlm+BUPxhsVXOTzTfqerdVIeSXWTdQLGMwpId+s40xIoz3iJcc20SsFWN4 73ejt7AfwLsnQixlgY248g== 0001157523-04-007853.txt : 20040816 0001157523-04-007853.hdr.sgml : 20040816 20040816172741 ACCESSION NUMBER: 0001157523-04-007853 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040816 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: 04980044 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 a4701907.txt DIGITAL FUSION ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2004. (Second 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 13-3817344 (State or Other Jurisdiction (I.R.S. Employer I.D. No.) of Incorporation or Organization) 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 July 27, 2004, 7,984,904 shares of the issuer's common stock, par value $.01 per share, were outstanding. Transitional Small Business Disclosure Format (check one): Yes |_| No |X| ================================================================================
DIGITAL FUSION, INC. INDEX PART I. FINANCIAL INFORMATION PAGE NO. -------- ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003.................................................. 1 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003 (unaudited)...................... 2 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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)
JUNE 30, DECEMBER 31, ASSETS 2004 2003 ----------- ------------ (UNAUDITED) Current assets: Cash and cash equivalents $ 444 $ 419 Accounts receivable (net of allowance for doubtful accounts of $90 in 2004 and 2003) 1026 737 Other current assets 83 39 -------- -------- Total current assets 1,553 1,195 Property and equipment, net 20 29 Intangible assets, net 3,347 3,347 Other assets 13 13 -------- -------- Total assets $ 4,933 $ 4,584 ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 834 $ 658 Current maturities of long-term debt 1,237 46 Deferred revenue 21 21 -------- -------- Total current liabilities 2,092 725 Interest payable - long term 62 39 Long-term debt, less current maturities 27 1,269 Pension obligation 295 295 -------- -------- Total liabilities 2,476 2,328 -------- -------- Stockholders' equity: Common stock, $.01 par value, authorized 16,000,000 shares, 7,984,904 issued and outstanding 80 72 Additional paid in capital 40,434 39,919 Accumulated deficit (38,057) (37,735) -------- -------- Total stockholders' equity 2,457 2,256 -------- -------- Total liabilities and stockholders' equity $ 4,933 $ 4,584 ======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements. 1 DIGITAL FUSION, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, -------------------------- ------------------------- 2004 2003 2004 2003 ------- ------- ------- ------- Revenues: Consulting $ 1,165 $ 1,576 $ 2,446 $ 3,188 Product 471 58 676 58 ------- ------- ------- ------- Total revenue 1,636 1,634 3,122 3,246 ------- ------- ------- ------- Cost of services and goods sold: Consulting 959 1,151 1,902 2,485 Product 444 55 633 55 ------- ------- ------- ------- Total cost of services and goods sold 1,403 1,206 2,535 2,540 ------- ------- ------- ------- Gross profit 233 428 587 706 ------- ------- ------- ------- Operating expenses: Selling 93 72 190 181 General & Administrative 334 467 647 950 ------- ------- ------- ------- Total operating expenses 427 539 837 1,131 ------- ------- ------- ------- Operating income (loss) (194) (111) (250) (425) Interest expense, net 39 53 73 105 ------- ------- ------- ------- Income (loss) before income taxes (233) (164) (323) (530) Income tax benefit -- -- -- -- ------- ------- ------- ------- Net income (loss) $ (233) $ (164) $ (323) $ (530) ======= ======= ======= ======= Basic earnings (loss) per share $ (0.03) $ (0.02) $ (0.04) $ (0.07) ======= ======= ======= ======= Basic weighted average common shares outstanding 7,985 7,168 7,985 7,168 ======= ======= ======= ======= Diluted earnings (loss) per share $ (0.03) $ (0.02) $ (0.04) $ (0.07) ======= ======= ======= ======= Diluted weighted average common shares outstanding 7,985 7,168 7,985 7,168 ======= ======= ======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements. 2 DIGITAL FUSION, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED, IN THOUSANDS)
2004 2003 ------ ------ Cash flows used in operating activities: Net loss $(323) $(530) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 36 121 Changes in assets and liabilities (131) 70 ----- ----- Net cash used in operating activities (418) (339) ----- ----- Cash flows used in investing activities: Capital expenditures - property and equipment (4) (2) Net cash used in investing activities (4) (2) ----- ----- Cash flows used in financing activities: Repayments of notes payable: (6) (160) Net proceeds from equity sale 453 256 ----- ----- Net cash used in financing activities 447 96 ----- ----- Net decrease in cash and cash equivalents 25 (245) Cash and cash equivalents, beginning of periods 419 653 ----- ----- Cash and cash equivalents, end of periods $ 444 $ 408 ===== =====
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 six months ended June 30, 2004 are not necessarily indicative of the results of operations and cash flows expected for the year ended December 31, 2004. The accompanying financial statements have been prepared on the assumption that the Company will continue as a going concern. The Company has incurred losses of $395,000 and $403,000 for the years ended 2003 and 2002 respectively and cash flow deficiencies of $107,000 and $1,026,000 during 2003 and 2002 respectively. These items raise substantial doubt about the Company's ability to continue as a going concern. However, because of the actions the Company has taken to restructure and streamline the Company, the completion of its equity sale, the payment in full of its outstanding debt to its primary lender, and the establishment of a line of credit with a local bank, management believes 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, the completion of its equity sale, and its line of credit. 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. 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 June 30, 2004, 572,000 stock options were granted to employees. 4
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2004 2003 2004 2003 ------------- ------------ ------------ ----------- Net (loss), as reported $ (233,392) $ (164,000) $ (323,117) $ (530,000) 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 $ (51,962) $ (79,000) $ (75,056) $ (158,000) ------------- ------------ ------------ ----------- Pro forma net (loss) (285,354) (243,000) (398,173) (688,000) ============= ============ ============ =========== Earnings per share Basic - as reported $ (0.03) $ (0.02) $ (0.04) $ (0.07) ============= ============ ============ =========== Basic - pro forma $ (0.04) $ (0.03) $ (0.05) $ (0.10) ============= ============ ============ =========== Diluted - as reported $ (0.03) $ (0.02) $ (0.04) $ (0.07) ============= ============ ============ =========== Diluted - pro forma $ (0.04) $ (0.03) $ (0.05) $ (0.10) ============= ============ ============ ===========
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 June 30, 2004 and 2003, respectively. 2004 2003 ----- ----- Risk-free interest rate 4.43% 3.52% Dividend yield 0% 0% Expected life - years 10 10 Volatility 59% 62% 2. LOSS PER SHARE DATA Common stock equivalents in the three and six month periods ended June 30, 2004 and June 30, 2003, were anti-dilutive due to the net losses sustained by the Company during these periods. Therefore, the diluted weighted average common shares outstanding in these periods are the same as the basic weighted average common shares outstanding. 5 3. INCOME TAXES The Company has not recognized an income tax benefit for its operating losses generated in the three and six-month periods ended June 30, 2004 and 2003 based on uncertainties concerning its ability to generate taxable income in future periods. The tax benefit for the three and six-month periods ended June 30, 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. 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 therefor, 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 was secured by a security interest in property 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 bore 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 paid an amendment fee of $25,000 to the note-holder that is being amortized to interest expense over the life of the loan. In relation to the first note, the note-holder was given 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 was given 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. 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 both the transactions, the primary lender converted $35,000 of the principal, 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 issued 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%) that was applied as a reduction in the monthly amount due. 6 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. 5. SUBSEQUENT EVENTS On July 1, 2004, Digital Fusion fully redeemed the approximately $560,000 secured convertible debt with its primary lender and entered into a secured revolving line of credit with a local bank. The line of credit has an interest rate of prime plus one percent, is secured by the Company's receivables and certain guarantees, and is not to exceed $800,000. 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 AND SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 REVENUES. Consulting revenues decreased by $411,000 to $1.2 million and 742,000 to $2.4 million for the three and six months ended June 30, 2004. Over 50% of the decrease in revenues was due to the reduction in sales to the Company's largest consulting customer with the remainder due to projects being completed without others available to replace them. Revenue from Digital Fusion's largest professional services customer was responsible for 19% of its revenue in 2004 as compared to 29% 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 and to certain identified new opportunities. During the second quarter of 2003, the Company began reselling the Intuit product Track-It! to governmental organizations. Revenues for the three and six months ended June 30, 2004, were $471,000 and $676,000 respectively, as compared to $58,000 for the three and six months ending June 30, 2003. 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 $193,000 to $958,000 and $583,000 to $1.9 million for the three and six months ended June 30, 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 $445,000 and $633,000 for the three and six months ended June 30, 2004 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 second quarter of 2004 is $206,000 or 18% of services revenues as compared to $425,000, or 27% of services revenues for the second quarter of 2003. Gross profit for services for the six-month period ended June 30, 2004 was $544,000 or 22% of services revenues as compared to $703,000 or 22% of services revenues for the same period in 2003. The decrease in services gross profit as a percent of services revenues is due to decreased sales without a corresponding decrease in direct labor costs. 8 The gross profit for product was $27,000 or 6% and 3,000 or 5% for the quarter ending June 30, 2004 and 2003 respectively. Gross profit for product for the six-month period ended June 30, 2004 and 2003 was $43,000 or 6% and 3,000 or 5% respectively. The consistent and low profit margin on product sales is attributable to the low mark-up required on sales to governmental entities. 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 $112,000, or 21%, for the three-month period ended June 30, 2004 compared to the same period during 2003, and $294,000 or 26% for the six-month period ended June 30, 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 facilities, communications, and insurance expense. In addition, depreciation expense decreased 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 and certain identified new opportunities that require additional accountability. INTEREST EXPENSE (INCOME), NET. Interest expense decreased from $53,000 in the second quarter of 2003 to $39,000 for the second 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 and six-month periods ended June 30, 2004 and 2003 based on uncertainties concerning its ability to generate taxable income in future periods. The tax benefit for the three and six-month periods ended June 30, 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 $233,000 and $323,000 for the three and six-month periods ended June 30, 2004, respectively, compared to a net loss of $164,000 and $530,000 for the three and six-month periods ended June 30, 2003, respectively. Although revenues remained fairly constant during the three and six-month period ended June 30, 2004 and 2003 and expenses in general decreased, the mix of sales and cost of sales between services and product caused the net loss to increase during the second quarter of 2004. LIQUIDITY AND CAPITAL RESOURCES The net cash used in operating activities was $418,000 in 2004 compared to $339,000 during 2003 due to the Company's expenses exceeding its revenues. Net cash used in investing activities was $4,000 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. 9 Net cash provided by financing activities was $447,000. 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 CEO, and to suspend principal payments to its primary lender until February 2005. 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 for a total of $450,000, 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. Working capital at June 30, 2004 is negative $177,000. The net accounts receivable balance outstanding at June 30, 2004 is $1.0 million. The Company has funded 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. On July 1, 2004, Digital Fusion fully redeemed the approximately $560,000 secured convertible debt with its primary lender and entered into a secured revolving line of credit with a local bank. The line of credit has an interest rate of prime plus one percent, is secured by the Company's receivables and certain guarantees, and is not to exceed $800,000. 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 completion of its equity sale, the payment in full of its outstanding debt to its primary lender, and the establishment of a line of credit with a local bank, 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: 10 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. Under the supervision and with the participation of the Company's management, including the Company's principal executive officer, the Company conducted an evaluation of the effectiveness of the design and operations of its disclosure controls and procedures, as such term is defined in Rules 13a-1(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report. Based on their evaluation, the principal executive officer concluded that the disclosure controls and procedures were effective such that the material information required to be included in the Company's Securities and Exchange Commission ("SEC") reports is recorded, processed, summarized, and reported within the time-periods specified in SEC rules and forms relating to Digital Fusion, Inc., particularly during the period when this report was being prepared. b. CHANGES IN INTERNAL CONTROLS. There were no significant changes in the Company's internal controls or to management's knowledge, in other factors that could significantly affect the disclosure controls and procedures subsequent to the Evaluation Date. 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. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The following matters were submitted to a vote of security holders during the Company's annual meeting of shareholders held on July 28, 2004: Votes Authority Cast For Withheld -------- --------- 1. Election of Directors: Nicholas R. Loglisci, Jr. 5,643,485 367,621 Roy E. Crippen, III 5,645,585 365,521 O.G. Greene 5,640,385 370,721 Gary S. Ryan 5,645,725 365,381 Broker For Against Abstentions Non-Votes ----- ------- ------------ --------- 2. Ratification of Pender Newkirk & Company as independent accountants 5,645,405 364,151 1,550 0 ITEM 5. OTHER INFORMATION. EXECUTIVE AGREEMENTS CRIPPEN EMPLOYMENT AGREEMENT. On May 5, 2004, The Company entered into a subsequent agreement with Mr. Crippen 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. RYAN EMPLOYMENT AGREEMENT. On May 5, 2004, we entered into a two-year employment agreement with Mr. Ryan under which Mr. Ryan is employed to serve our president, which became 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. 12 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 Mr. 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. 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). 13 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 **10.6 Loan Agreement, security agreements and guarantees, each dated June 20, 2004, among First Commercial Bank of Huntsville and the Company, for a $800,000 revolving line of credit. **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. (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. 3. Form 8-K filed August 16, 2004 pursuant to Item 12 (Results of Operations and Financial Condition), announcing the Registrant's financial results for the second quarter ended June 30, 2004 and certain other information. 14 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIGITAL FUSION, INC. Date: August 16, 2004 By: /s/ Roy E. Crippen, Iii ----------------------------------------- Name: Roy E. Crippen, III Title: Chief Executive Officer (Principal Executive Officer) 15 EX-10.1 2 a4701907ex101.txt DIGITAL FUSION EXHIBIT 10.1 EXHIBIT 10.1 FIRST COMMERCIAL BANK OF HUNTSVILLE LOAN AGREEMENT Date: 6/30/04 --------- In consideration of the sum of ten dollars in hand paid to each of the undersigned, Digital Fusion, Inc., Roy E. Crippen, III, Gary S. Ryan (Crippen and Ryan cumulatively "Guarantor") (hereinafter cumulatively referred to as "Obligor", whether one or more) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Obligor, and in order to induce First Commercial Bank of Huntsville (hereinafter referred to as "Bank") to extend to Digital Fusion, Inc. (hereinafter referred to as the "Borrower") from time to time such extensions of credit, advances and forbearances as the Bank in its sole discretion may deem prudent and wise (all such indebtedness, obligations and liabilities of the Borrower to Bank of every kind, character and description and whatsoever, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, contracted or arising, joint or several, liquidated or un-liquidated, regardless of how they arise or by what agreement or instrument they may be evidenced or whether they are evidenced by any agreement or instrument, and whether incurred as maker, drawer, endorser, surety, guarantor or otherwise, including without limitation obligations of the Borrower purchased by the Bank, and obligations incurred in connection with the issuance of a letter of credit, and any and all extensions and renewals of all or any part of the same are herein collectively referred to as the "Liabilities"), the Obligor, the Borrower and the Bank agree as follows: DEFINITIONS ----------- For purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: "Accounts" shall have that meaning defined in the Alabama Uniform Commercial Code. "Collateral" shall mean any property or assets of Borrower or Obligor or other security pledged or granted to Bank as security for the Liabilities. "Debt" shall mean all of Obligor's total liabilities less Subordinated Debt. "Loan Documents" shall mean any note, loan agreement (other than this Agreement) or other instrument, document or paper evidencing, securing, guaranteeing, or executed in connection with all or any part of the Liabilities,. "Subordinated Debt" shall mean indebtedness of the Obligor described in and unconditionally subordinated to the Bank in any subordination agreement executed by a subordinate creditor and delivered to the Bank. "Tangible Net Worth" shall mean Obligor's net worth plus Subordinated Debt less (i) any and all loans and other advances to affiliates, subsidiaries, owners, parent, employees, officers, stockholders, directors or other related entities of Obligor; (ii) notes, notes receivable, accounts, accounts receivable, inter-company receivables, and other amounts owing from affiliates, subsidiaries, owners, parent, employees, officers, stockholders, directors or other related entities of Obligor; and (iii) any and all intangibles of Obligor. Accounting terms used in. this Agreement. such as "accounts receivable," "current maturities of long term debt," "inventory," "net income," "net worth" and "total liabilities" shall have the meanings normally given them by, and shall be calculated, both as to amounts and classification of items, in accordance with, generally accepted accounting principles in the United States. Singular terms shall include the plural as well as the singular and vice versa. REPRESENTATIONS AND WARRANTIES - ------------------------------ Obligor represents and warrants to bank, at all times while any Liabilities remain unsatisfied, as follows: (1) if Obligor is a corporation, partnership or limited liability company, Obligor is duly organized. validly existing, and in good standing under the laws of the jurisdiction in which Obligor was organized. and Obligor is duly qualified and in good standing (and will remain so qualified and in good standing) in every state in which it is or shall be doing business or in which the failure so to qualify and remain in good standing would or could have an adverse effect on its business or properties or Bank; (2) There are no actions, suits or proceedings pending or, to Obligor's best knowledge, threatened against or affecting Obligor or the Collateral that involve any of the transactions contemplated in this Agreement or the possibility of any judgment or liability that may result in a material adverse change in Obligor's operations or condition or the Collateral; (3) Obligor is not a party to any instrument, or subject to any restriction, that materially and adversely affects Obligor's operations or condition, and Obligor is not in default in any of the obligations contained in any instrument to which Obligor is a party that could have a material adverse effect upon Obligor's operations or condition; and (4) Obligor has full right, power and authority to enter into the Loan Documents to which it or (s)he is a party and to consummate the transactions contemplated thereby and has taken all necessary action to authorize the execution, delivery and performance of such Loan Documents and the documents contemplated to be executed and delivered thereby. COVENANTS - --------- Obligor and Borrower covenant and agree with Bank, at all times while any Liabilities remain unsatisfied, as follows: I. Obligor shall submit or cause to be submitted to Bank such financial and other information which Bank shall reasonably request regarding Borrower, the Collateral and Obligor when and as requested by Bank, including without limitation; (i) Obligor's and Borrower's monthly financial statements within forty-five (45) days after the close of each calendar month in each fiscal year including a balance sheet as of the close of such period and a fiscal year to date income statement in accordance with generally accepted accounting principles and attested to by an authorized officer of Obligor or Borrower, as the case may be; (ii) Obligor's and Borrower's audited fiscal year-end financial statements within one hundred twenty (120) days after the close of each fiscal year, including a balance sheet as of the close of such period, an income statement, and a reconciliation of stockholders' equity prepared by a certified public accountant acceptable to Bank in accordance with generally accepted accounting principles; (iii) annual personal financial statements of any guarantor of the Liabilities (as of December 31 of each year) within ninety (90) days of the close of each calendar year; and (iv) a borrowing base compliance certificate per the attached exhibit "A" along with an aging of accounts receivables within 15 days of month end (v) any other financial information as Bank may request from time to time, including but not limited to that information as may be required for Bank to determine Obligor's or Borrower's compliance with the terms of this Agreement. 2. Obligor shall (i) maintain insurance (written by insurance companies reasonably acceptable to Bank) in form, amount and substance reasonably acceptable to Bank, including, without limitation, worker's compensation, general liability insurance, property "all risk" insurance upon Obligor's property (in an amount at least equal to its full insurable value) and insurance on all facets of its businesses and all the Collateral; (ii) furnish to Bank, upon request, a statement of the insurance coverage. 3. Obligor does and shall comply with all laws, ordinances, rules and regulations of any governmental authority or entity governing or affecting Obligor, any of its property, the Collateral or any part thereof, and shall immediately notify Bank of any and all alleged or asserted violations of any such laws, ordinances or regulations. 4. Obligor shall not sell, transfer, lease, pledge, abandon, grant any lien on or security interest in, or otherwise encumber or dispose of any of its accounts receivable, including without limitation the Collateral or any interest therein, and Obligor shall not permit or suffer to exist any lien, security interest or other encumbrance on any of its accounts receivable. 5. Guarantors shall not guarantee, endorse, or assume, either directly or indirectly, any indebtedness greater than $200,000 in aggregate of any other corporation, person, or entity without prior written consent of the bank. 6. Obligor will not incur, create, assume or permit to exist any debt of Obligor other than (a) existing debt reflected in the most recent balance sheet of Obligor delivered to Bank on or prior to the date hereof, (b) debt to the Bank, (c) trade payables and other current liabilities incurred or accrued by the Obligor in the ordinary course of business, (d) the extension or receipt of normal trade terms with respect to customers and suppliers, (e) any specific debt in connection with a special transaction for which advance approval is sought and obtained from the Bank, (f) unsecured debt to the owners of the Obligor that is payable on terms as favorable to the Obligor as those that would be available to the Obligor in arms-length commercial transactions with commercial bank lenders, (g) leases of equipment and real estate incurred in the ordinary course of the Obligor's business, and (h) debt incurred solely for the purchase of fixed assets acquired or held by Obligor in the ordinary course of business. 7. Obligor shall permit Bank or any persons duly designated by Bank to call at the places of business of Obligor at any reasonable time and without hindrance or delay to visit, inspect, audit and check any of Obligor's properties, books, records, journals, orders, receipts and any correspondence or other data relating to Obligor's business or any other transactions between or among the parties hereto, and to make copies thereof and take extracts tberefrom, and to discuss Obligor's financial affairs with Obligor's financial officers and accountants. 8. Obligor shall comply with all applicable present and future local, state, and federal laws, including, without limitation, environmental laws and regulations. 9. Obligor shall maintain its principal transaction account with Bank. 10. In the event Obligor has a revolving loan or line of credit with Bank, the sum of 80 percent (80%) of its accounts receivable (excluding any accounts receivable that are aged 120 days or greater) will at all times exceed the sum of the outstanding principal balance of said revolving loan or line of credit. In the event of default, Obligor agrees upon Bank request to cooperate in the filing and perfection of assignment of claims documents on all Federal Government contracts. 11. Funding and Payoff; Conditions to Advance. The parties acknowledge that the purpose of this loan is pay off the loan currently existing with Laurus Funds. Obligor agrees that no disbursement of funds pursuant to the liabilities will be advanced (other than closing costs) until Bank has received appropriate confirmation of the payoff and that Obligor shall use its best efforts and cooperation with Bank to obtain release of collateral held by Laurus Funds. It shall be the obligation of the Obligor to provide such information to the Bank. EVENTS OF DEFAULT; ACCELERATION ------------------------------- Any or all of the Liabilities shall be, at the option of Bank and notwithstanding any time or credit allowed by any instrument evidencing any of the Liabilities or under any of the Loan Documents, immediately due and payable without notice or demand, and the obligation of Bank to make advances under any revolving line of credit, or other loan shall immediately cease and terminate upon the occurrence of any of the following events of default (singularly an "Event of Default"): (1) default in the payment or performance, when due or payable, of any of the Liabilities, or of any liability or obligation (whether now or hereafter existing, arising or incurred, direct or indirect, conditional or unconditional) of any endorser, guarantor, or surety for any of the Liabilities (severally a "Guarantor"); (2) failure by Obligor, Borrower or any other person or entity, as applicable. to (a) pay or perform any act or obligation imposed hereby or by any of the other Loan Documents, or (b) comply with any of the terms, conditions, covenants or requirements described herein or contained or referenced in one or more of the Loan Documents; (3) failure of Obligor, Borrower or any other person or entity, as applicable, to pay when due (a) any tax (subject to the right of Obligor to contest same as provided in paragraph 17 hereof), or (b) any premium on (i) any insurance policy assigned to Bank, or (ii) any insurance covering any Collateral; (4) if any warranty or representation contained herein shall prove false or misleading with respect to a material fact or if Obligor or Borrower or any Promissory made or makes any other misrepresentation to Bank for the purpose of obtaining credit or any extension of credit; (5) failure of Obligor, Borrower or any Guarantor to furnish financial information or to permit the inspection of the books or records or Collateral of Obligor, Borrower or of any Guarantor; (6) the loss, theft, damage, sale, destruction or encumbrance of any uninsured material portion of the Collateral, or the sale or encumbrance or the issuance of any execution or the making of any levy, seizure or attachment thereof or thereon; (7) the insolvency, dissolution, liquidation, suspension of business or death of the Obligor or the Borrower or of any Guarantor, or of any of the Obligor's or the Borrower's or such Promissor's principal officers if a corporation, or of any of the Obligor's or the Borrower's general partners if a partnership; (8) the Obligor or the Borrower or any Guarantor shall (i) fail or admit in writing the inability of the Obligor or the Borrower or any Guarantor to pay the Obligor's or the Borrower's or such Guarantor's debts generally as they become due, (ii) make a general assignment for the benefit of creditors or have an order for relief entered against the Obligor or the Borrower or any Guarantor in any proceeding under the Federal bankruptcy code, or (iii) file a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with creditors or take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or an answer admitting the material allegations of a petition filed against the Obligor or the Borrower or such Guarantor in any proceeding under any such law, or if corporate or partnership action should be taken by the Obligor or the Borrower or any Guarantor for the purpose of effecting any of the foregoing; (9) the appointment of a receiver trustee, liquidator or custodian of the Obligor or the Borrower or any Guarantor or of any of their respective properties or assets; (10) the filing of a petition without the application, approval or consent of the Obligor or the Borrower or any Guarantor in any court of competent jurisdiction, seeking the bankruptcy or reorganization of the Obligor or the Borrower or of any Guarantor or of all or a substantial part of their respective properties or assets, or seeking an arrangement with the creditors of any of them, and such petition shall not be dismissed within 30 days after the filing thereof; (11) any change in the ownership nature, management or control of Borrower or Obligor without the prior written consent of Bank; (12) failure of Obligor or Borrower or any other person or entity to maintain any insurance required hereunder and/or assigned or pledged to Bank in connection with any of the Loan Documents; (13) fraud or misrepresentation by or on behalf of Obligor or Borrower in Obligor's or Borrower's transactions with Bank; (14) violation of or failure to abide by any covenant, term or provision of this Agreement or any of the Loan Documents; or the termination, cancellation or revocation of any Loan Document without Bank's consent or the Determination that any of the Loan Documents is void, voidable or unenforceable; (15) any default or event of default under any of the Loan Documents; or (16) any default or event of default of Obligor or Borrower under any other loan or indebtedness owing by Obligor or Borrower to Bank whether or not arising under the Loan Documents. Notwithstanding the foregoing, Obligor or Borrower shall have sixty (60) calendar days to cure any Event of Default (other than a payment default regarding the Liabilities) without penalty, termination, or payment demand of this Loan Agreement. Digital Fusion, Inc. Obligor Digital Fusion, Inc., Borrower By: /s/ Roy E. Crippen, III ----------------------- Its: CEO ----------------------- Roy E. Crippen, III, Guarantor: /s/ Roy E. Crippen, III ----------------------- Gary S. Ryan, Guarantor: /s/ Gary S. Ryan ----------------------- First Commercial Bank of Huntsville, Bank By: /s/ Andy Kattos ----------------------- Its: Senior Vice President -----------------------
Loan Number 69404189 / 50 DIGITAL FUSION, INC. FIRST COMMERCIAL BANK Date 06/30/2004 4940 CORPORATE DRIVE NW OF HUNTSVILLE Maturity Date 06/30/2005 SUITE A 301 WASHINGTON STREET Loan Amount $ 800,000.00 HUNTSVILLE, AL 35808 HUNTSVILLE, AL 35801 Fed. Tax ID 13-3817344 BORROWER'S NAME AND ADDRESS LENDER'S NAME AND ADDRESS "I" includes each borrower above, jointly and "You" means the lender, its successors and severally. assigns.
For value received, I promise to pay to you, or your order, at your address above the PRINCIPAL sum of **EIGHT HUNDRED THOUSAND DOLLARS AND ZERO CENTS** Dollars $ 800,000.00 |_| Single Advance: I will receive all of this principal sum on ___________. No additional advances are contemplated under this note. |X| Multiple Advances: The principal sum shown above is the maximum amount of principal I can borrow under this note. On June 30, 2004, I will receive the amount of $ 0.00 and future principal advances are contemplated. Conditions: The conditions for future advances are AS DESCRIBED IN LOAN AGREEMENT DATE 06/30/2004_________________________________________________________________ ___________________________________________________________________________ |X| Open End Credit: You and I agree that I may borrow under this Note, prepay this Note in whole or in part, and borrow again under this Note, so long as the aggregate unpaid principal amount owed under this Note at any time does not exceed the amount of the principal sum set forth above. My right to borrow is subject to all other conditions of this Note expires on June 20, 2005. |_| Closed End Credit: You and I agree that I may borrow in aggregate an amount not to exceed the principal sum shown above. Amounts I repay under this Note may not be re-borrowed later. My right to borrow is subject to all other conditions and expires on _________________. |X| INTEREST: I agree to pay interest on the outstanding principal balance from June 30, 2004 at the rate of 5. 000000% per year until the index rate changes. Variable Rate: This rate may then change as stated below. |X| Index rate: The future rate will be 1.000% ABOVE the following index rate:_________________ LENDER'S PRIME, WHICH IS THE BASE RATE USED BY LENDER TO SET INTEREST RATE AT WHICH LOANS ARE MADE TO VARIOUS CUSTOMERS. LOANS MAY NOT BE MADE AT, ABOVE OR BELOW SAID PRIME RATE. |_| No Index: The future rate will not be subject to any internal or external index. It will be entirely in your control. |X| Frequency and Timing: The rate on this note may change as often as DAILY . A change in the interest rate will take effect WHEN THE INDEX RATE CHANGES . |X| Limitations: During the term of this loan, the applicable .annual interest rate will not be more than ________ % or less than 5.00% The rate may not change more than __________________% each _________________. Effect of Variable Rate: A change in the Interest rate will have the following effect on the payments: |X| The amount of each scheduled payment will change. |_| The amount of the final payment will change. |_|________________________________________________________________________ ACCRUAL METHOD: Interest will be calculated on an ACTUAL # DAYS/360 - DAY YEAR basis. POST MATURITY RATE: I agree to pay Interest on the unpaid balance of this note owing after maturity, and until paid in full, as stated below: |X| on the same fixed or variable rate basis in effect before maturity (as indicated above). |_| at a rate equal to___________________________________________________. |X| LATE CHARGE: I agree to pay a late charge on the portion of any payment not made within 10 days after it is due equal to 5% OF THE UNPAID AMOUNT WITH A MINIMUM OF $25.00 . |X| ADDITIONAL CHARGES: In addition to interest, I agree to pay the following charges which |_| are |X| are not included in the principal amount above: $250.00 BANK PROCESSING FEE, $130.00 UCC-11 DE, $100.00 UCC-1 FILINGS ___________________________________________________________________________ PAYMENTS: I agree to pay this note as follows: |X| Interest: l agree to pay accrued Interest MONTHLY Beginning July 20. 2004 _________________________________ |X| Principal: I agree to pay the principal June 20, 2005 __________________________________ |_| Installments: I agree to pay this note in ________ payments. The first payment of $_________ will be due ___________________ . A payment of $ _____________will be due _______ thereafter. The final payment of the entire unpaid balance of principal and interest will be due ______. PURPOSE: The purpose of this loan is WORKING CAPITAL ____________________________________________ ADDITIONAL TERMS: THIS LOAN IS ALSO SBCURED BY BUT NOT LIIMITED TO THE FOLLOWING: LOAN AGREEMENT DATED 06/30/2004; SUBORDINATION AGREEMENT DATED 06/30/2004. SECURITY AGREEMENT SECURITY INTEREST': I grant you a security interest in all of the Property described below that I now own and that I may own in the future including, but not limited to, all parts, accessories, repairs, improvements, and accessions to the Property, wherever the Property is or may be located, and all cash and non-cash proceeds and products from the Property, and all supporting obligations that relate to or arise out of any of the Property (including things In action) described below, all documents that now or hereafter evidence any of the Property described below or the right to receive, hold, or dispose of any of that Property. | | Inventory: All Inventory, whether now owned or hereafter acquired by Debtor, Including all goods, other than farm, which now or hereafter: (a) are leased by Debtor as lessor; (b) are held by Debtor for sale or lease or to be furnished under a contract of service; (c) are furnished by Debtor under a contract of service; or (d) consist of raw materials, work in process, or materials used or consumed in Debtor's business. | | Equipment: All equipment, whether now owned or hereafter acquired by Debtor, Including 811 goods now or hereafter owned by Debtor other than inventory, farm products, and consumer goods, and Including all machinery, motor vehicles, furniture, trade or business fixtures, manufacturing equipment, mobile equipment, farm machinery and equipment, shop equipment, office equipment, record-keeping equipment, parts and tools, computer and printing equipment, and all goods which are, or are to become, fixtures. All equipment described in any list or schedule which Debtor gives to Secured Party is also included in the Property, but delivery of such a list is not necessary for the attachment of Secured Party's security interest in Debtor's equipment as described above, and Secured Party's security interest is not limited to the Property described in any such list or schedule. | | Farm Products: All farm products, whether now owned or hereafter acquired by Debtor, including all goods, other than standing timber, with respect to which Debtor Is engaged in raising, cultivating, propagating, fattening, grazing or any other farming, livestock, or aqua cultural operation and which are: (a) crops grown, growing, or to be grown, including: (i) crops produced on trees, vines, and/or bushes; and (ii) aquatic goods produced in aquaculture operations; (b) livestock born or unborn, Including aquatic goods produced in acquacultural operations; (c) feed, seed, fertilizer, medicines, or other supplies used or produced in Debtor's farming operation: or (d) products of crops or livestock in their unmanufactured states. | | Accounts: All accounts of debtor, whether now owned or existing or hereafter acquired or arising, including all rights of Debtor to payment of a monetary obligation, whether or not earned by performance, and whether originally owed to Debtor or acquired by Debtor after the obligation came into existence: (a) for property that has been or is to be sold, leased, licensed, asslgned, or otherwise disposed of: (b) for services rendered or to be rendered; (c) for a policy of insurance issued or to be issued; (d) for a secondary obligation incurred or to be incurred: (e) for energy provided or to be provided; (f) for the use or hire of a vessel under a charter or other contract; (g) arising out of the use of a credit or charge card or information contained on or for use with the card; (h) as winnings in a lottery or other game of chance operated or sponsored by a State, governmental unit of a State, or person licensed or authorized to operate the game by a State or governmental unit of a State; and (i) arising out of an interest in or claim under a policy or policies of Insurance for healthcare goods or services provided. | | Instruments (Including Promissory Notes), Documents, Chattel Paper (including Electronic Chattel Paper), Letter-of-Credit Rights, and Other Rights to Payment: All of Debtor's right. title, and interest, whether now owned or existing or hereafter arising or acquired, in and to all instruments, documents, chattel paper, letter-of-credit rights, and other rights to payment. Including: (a) all negotiable instruments, including promissory notes and any other writings that evidence a right to payment of a monetary obligation and are not themselves a security agreement or lease, and that are of a type that in ordinary course of business are transferred by delivery with any necessary endorsement or assignment, but not including investment property, letters of credit, or writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card; (b) all documents of title and all receipts of the type described in Section 7-201(2) of the Uniform Commercial Code; (c) all chattel paper, including any record or records that evidence both a monetary obligation and a security interest In specific goods, a security interest in specific goods and software used in the goods, a lease of specific goods, or a lease of specific goods and license of software used in the goods (but not including charters or other contracts involving the use or hire of a vessel or records that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card), and including all chattel paper evidenced by a record or records consisting of information stored in an electronic medium; and (d) all letters of credit and letter-of-credit rights, including all rights of Debtor to payment or performance under a letter-of-credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance. | | General Intangibles: All general intangibles, whether now owned or hereafter acquired by Debtor, including any personal property, things in action, payment intangibles, tax refunds, applications for patents, patents, copyrights, trademarks, trade names, trade secrets, service marks. Goodwill, customer lists, permits and franchises, licenses, software, the right to use Debtor's name and likeness, and all property and rights described under the heading "Government Payments and Programs" below (which description is incorporated herein by this reference), but not Including accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money. or oil, gas, or other minerals before extraction (as those terms are defined or used in Article 9 of the Uniform Commercial Code). | | Deposit Accounts: All deposit accounts, whether now owned or hereafter acquired by Debtor, including all demand, time, savings, passbook., or similar accounts maintained with a bank, or other financial institution, but not including investment property or accounts evidenced by an instrument. | | Investment Property: All of Debtor's investment property, whether now owned or hereafter acquired, including all securities, whether certificated or uncertificated, securities entitlements, securities accounts, commodity contracts, and commodity accounts. | | Commercial Tort Claims: All rights of Debtor now existing or hereafter arising in that certain tort claim more particularly described as follows (provide description of tort claim): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- | | Government Payments and Programs: All payments, accounts, general intangibles, or other benefits (including, but not limited to, payments in and conservation reserve payments) in which Debtor now has and in the future may have any rights or interest and which arise under or as a result of any pre-existing, current or future federal or state governmental program (including, but not limited to, all programs administered by the Commodity Credit Corporation and ASCS). | | Specific Property: All of Debtor's right, title and interest, whether now owned or hereafter acquired, in the following property (all without limiting the generality of the applicable descriptions set forth above: ALL INVOICES, ACCOUNTS RECEIVABLE, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS THEREBY AND ALL PROCEEDS THEREOF OF THE DEBTOR'S BUSINESS WHETHER NOW OR HEREAFTER EXISTING OR ACQUIRED | | Standing Timber: All of Debtor's right, title and interest, whether now owned or hereafter acquired, in standing timber located on the real property described below, and all cutting rights with respect thereto: | | As Extracted Collateral: All of Debtor's rights, title, and interest, whether now owned or hereafter acquired, in all oil, gas, and other minerals extracted from the real property described below, and all accounts arising out of the safe at the wellhead, mine head, or mine of oil, gas, or other minerals from such real property. | | Where the property Includes goods that are or are to become fixtures, or standing timber, or as-extracted collateral: The legal description of the real property on which such Property is or will be located is (provide legal description of the or other sufficient description of real property: ________________________________________________________________________________ ________________________________________________________________________________ The record owner of the real property, (if other than Debtor) is (provide name of record owner of real property, (other than Debtor) If this agreement covers timber to be cut, minerals (including oil and gas), fixtures or crops growing or to be grown, the legal description is: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ | | If checked, the file this agreement on the real estate records. Record owner (if not me) ___________ ADDITIONAL TERMS OF THE SECURITY AGREEMENT GENERALLY - This agreement secures this note and any other debt I have with you, now or later. However, it will not secure other debts if you fail this security agreement or if you fail to give any required notice of the right of rescission. If property described in this agreement is located in another state, this agreement may also, in some circumstances, be governed by the law of the state in which the Property is located. All locations referenced to "this note" or "this agreement" or "this loan" shall mean this Universal Note and Security Agreement. OWNERSHIP AND DUTIES TOWARD PROPERTY: I represent that I own all of the Property, or to the extent, this is a purchase money security interest, I will acquire ownership of the Property with the proceeds of the loan. I will defend it against any other claim. Your claim to the Property is ahead of the claims of any other creditor. I agree to do whatever you require to protect the loan your security interest and to keep your claim in the Property ahead of the claims of other creditors. I will not do anything to harm your position. I will keep books, records, and accounts about the Property and my business in general. I will let you examine these records at any reasonable time. I will prepare any report or accounting you request, which deals with the Property. I will keep the Property in my possession and will keep it in good repair and use it only for the purpose(s) described on page 1 of this written permission. I represent that I am the original owner of the Property and, if I am not, that I have provided you with a list of prior owners of the Property. I will keep the Property at my address listed on page 1 of this agreement, unless we agree I may keep it at another location. If the Property is to be used in another state, I will give you a list of those states. I will not try to sell the Property unless it is inventory or I receive your written permission to do so. If I sell the Property I will have the payment made payable to the order of you and me. I will pay all taxes and charges on the Property as they become due. You have the right of reasonable access in order to inspect the Property. I will immediately inform you of any loss or damage to the Property. If I fail to perform any of my duties under this security agreement, or any mortgage, deed of trust, lien or other security interest, you may without notice to me perform the duties or cause them to be performed. Your right to perform for me shall not create an obligation to perform and your failure to perform will not preclude you from exercising any of your other rights under the law or this security agreement. PURCHASE MONEY SECURITY INTEREST - For the sole purpose of determining the extent of a purchase money security interest arising under this security agreement: (a) payments on any non-purchase money loan also secured by this agreement will not be deemed to apply to the Purchase Money Loan, and (b) payments on the Purchase Money Loan will be deemed to apply first to the non-purchase money portion of the loan, if any, and then to the purchase money obligations in the order in which the items of collateral were acquired or if acquired at the same time, in the order selected by you. No security interest will be terminated by application of this formula. "Purchase Money Loan" means any loan the proceeds of which, in whole or in part, are used to acquire any collateral securing the loan and all extensions, renewals, consolidations and refinancing of such loan. PAYMENTS BY LENDER - You are authorized to pay, on my behalf, charges I am or may become obligated to pay to preserve or protect the secured property (such as property insurance premiums). You may treat those payments as advances and add them to the unpaid principal under the note secured by this agreement or you may demand immediate payment of the amount advanced. INSURANCE - I agree to buy insurance on the Property against the risks and for the amounts you require and to furnish you continuing proof of coverage. I will have the insurance company name you as loss payee on any such policy. You may require added security if you agree that insurance proceeds may be used to repair or replace the Property. I will buy insurance from a firm licensed to do business in the state where the property is located. The firm will be reasonably acceptable to you. The insurance will remain in force until the Property is released from this agreement. If I fail to buy or maintain the insurance (or fail to name you as loss payee) you may purchase it yourself. WARRANTIES AND REPRESENTATIONS - If this agreement includes accounts, I will not settle any account for less than its full value without your written permission. I will collect all accounts until you tell me otherwise. I will keep in trust for you the proceeds from all the accounts and any goods which are returned to me or which I take back. I will not mix them with any other property of mine. I will deliver them to you at your request. If you ask me to pay you the full price on any returned items or items retaken by myself, I will do so. If this agreement covers inventory, I will not dispose of it except in my ordinary course of business at the fair market value for the Property, or at a minimum price established between you and me. If this agreement covers farm products I will provide you, at your request, a written list of the buyers, commission merchants, or selling agents to or through whom I may sell my farm products. In addition to those parties named on this written list, I authorize you to notify at your sole discretion any additional parties regarding your security interest in my farm products. I remain subject to all applicable penalties for selling my farm products in violation of my agreement with you and the Food Security Act. In this paragraph the terms farm products, buyers, commission merchants and selling agents have the meanings given to the in the Federal Food Security Act of 1985. REMEDIES - I will be in default on this security agreement if I am in default on any note this agreement secures or if I fail to keep any promise contained in the terms of this agreement. If I default, you have all of the rights and remedies provided in the note and under the Uniform Commercial Code. You may required me to make the secured property available to you at a place which is reasonably convenient. You may take possession of the secured property and sell it as provided by law. The proceeds will be applied first to your expenses and then to the debt. I agree that 10 days written notice sent to my last known address by first class mail will be reasonable notice under the Uniform Commercial Code. My current address is on page 1. I agree to inform you in writing of any change of my address. You may demand immediate payment of the debt(s) if the debtor is not a natural person and without your prior written consent; (1) a beneficial interest in the debtor is sold or transferred, or (2) there is a change in either the identity or number of members of a partnership, or (3) there is a change in ownership of more than 25 percent of the voting stock of a corporation. FILING - A carbon, photographic or other reproduction of this security agreement or the financing statement covering the Property described in this agreement may be used as a financing statement where allowed by law. Where permitted by laws, you may file a financing statement which does not contain my signature, covering the Property secured by this agreement. ADDITIONAL TERMS OF THE NOTE DEFINITIONS - As used on pages 1, 2, and 3, "terms" means the terms that apply to this load. "I", "me", or "my" means each Borrower who signs this note and each other person or legal entity (including guarantors, endorsers, and sureties) who agrees to pay this note (together referred to as "us"). "You" or "your" means the Lender and its successors and assigns. APPLICABLE LAW - The laws of the United States and, to the extent not inconsistent therewith, the laws of the state of Alabama. Any term of this agreement, which is contrary to applicable laws, will not be effective, unless the law permits you and me to agree to such a variation. If any provision of this agreement cannot be enforced according to its terms, this fact will not affect the enforceability of the remainder of this agreement. No modification of this note or any agreement securing this note is effective unless the modification is in writing and signed by you and me. Time is of the essence in this agreement. PAYMENTS - Each payment of principal and interest I make on this note will first reduce the amount I owe you for charges, which are neither interest nor principal. The remainder of each payment will then reduce accrued unpaid interest, and then unpaid principal. If you and I agree to a different application of payments, we will describe our agreement on this note. I may prepay a part of, or the entire balance of this loan without penalty, unless we specify to the contrary on this note. Any partial prepayment will not excuse or reduce any later scheduled payment until this note is paid in full (unless, when I make the prepayment, you and I agree in writing to the contrary). INTEREST - Interest accrues on the principal remaining unpaid from time to time, until paid in full. If I receive the principal in more than one advance, each advance will start to earn interest only when I receive the advance. The interest rate in effect on this note at any given time will apply to the entire principal sum outstanding at that time. Notwithstanding anything to the contrary, I don not agree to pay and you do not intend to charge any rate of interest that is higher than the maximum rate of interest you could charge under applicable law for the extension of credit that is agreed to in this note (either before or after maturity). If any notice of interest accrual is sent and is in error, we mutually agree to correct it, and if you actually collect more interest than allowed by law and this agreement, you agree to refund it to me. INDEX RATE - The index will serve only as a device for setting the interest rate on this note. You do not guarantee by selecting this index or the margin, that the interest rate on this note will be the same rate you charge on any other loans or class of loans you make to me or other borrowers. POST MATURITY DATE - For purposes of deciding when the "Post Maturity Rate" (shown on page 1) applies, the term "maturity" means the date of the last scheduled payment indicated on page 1 of this note or the date you accelerate payment on the note, whichever is earlier. SINGLE ADVANCE LOAND - If this is a single advance loan, you and I expect that you will make only one advance of principal. However, you may add other amounts to the principal if you make any payments described in the "PAYMENTS BY LENDER" paragraph herein. MULTIPLE ADVANCE LOANS - If this is a multiple advance loan, you and I expect that you will make more than one advance of principal. If this is closed end credit, repaying a part of the principal will not entitle me to additional credit. SET-OFF - I agree that you may set off any amount due and payable under this note against any right I have to receive money from you. "Right to receive money from you" means: (1) any deposit account balance I have with you; (2) any money owed to me on an item presented to you or in your possession for collection or exchange; and (3) any repurchase agreement or other nondeposit obligation. "Any amount due and payable under this note" means the total amount of which you are entitled to demand payment under the terms of this note at the time you set off. This total includes any balance the due date for which you properly accelerate under this note. If my right to receive money from you is also owned by someone who has not agreed to pay this note, your right of set-off will apply to my interest in the obligation and to any other amounts I could withdraw on my sole request or endorsement. Your right of set-off does not apply to an account or other obligation where my rights are only as a representative. It also does not apply to any Individual Retirement Account or other tax-deferred retirement account. You will not be liable for the dishonor of any check when the dishonor occurs because you set off this debt against any of my accounts. I agree to hold you harmless from any such claims arising as a result of your exercise of your right to set-off. DEFAULT - I will be in default if any one or more of the following occur: (1) I fail to make a payment on time or in the amount due; (2) I fail to keep the Property insured, if required; (3) I fail to pay, r keep any promise, on any debt or agreement I have with you; (4) any other creditor of mine attempts to collect any debt I owe him through court proceedings; (5) I die, am declared incompetent, make an assignment for the benefit of creditors, or become insolvent (either because my liabilities exceed my assets or I am unable to pay my debts as they become due); (6) I make any written statement or provide any financial information that is untrue or inaccurate at the time it was provided; (7) I do or fail to do something which causes you to believe you will have difficulty collecting the amount I owe you; (8) any collateral securing this note is used in a manner or for a purpose which threatens confiscation by a legal authority; (9) I change my name or assume an additional name without first notifying you before making such a change; (10) I fail to plant, cultivate and harvest crops in due season; (11) any loan proceeds are used for a purpose that will contribute to excessive erosion of highly erodible land or the conversion of wetlands to produce and agricultural commodity, as further explained 7 C.F.R. Part 1940, Subpart G, Exhibit M. REMEDIES - If I am in default on this note you have, but are not limited to, the following the following remedies: (1) You may demand immediate payment of all I owe you under this note (principal, accrued unpaid interest and other accrued unpaid charges). (2) You may set off this debt against any right I have to the payment of money from you, subject to the terms of the "SET-OFF" paragraph herein. (3) You may demand security, additional security, or additional parties to be obligated to pay this note as a condition for not using any other remedy. (4) You may refuse to make advances to me or allow purchases on credit by me. (5) You may use any remedy you have under state or federal law. (6) You may make use of any remedy given to you in any agreement securing this note. By selecting any one or more of these remedies you do not give up your right to use later any other remedy. By waiving your right to declare an event to be a default, you do not waive your right to consider later the event a default if it continues or happens again. COLLECTION COSTS AND ATTORNEYS' FEES - I agree to pay you all reasonable costs you incur to collect this debt or realize on any security. This includes, if the amount financed is more than $300.00 your reasonable attorneys' fees of up to 15% of the unpaid debt if you refer collection of the note to an attorney who is not your salaried employee. This provision also shall apply if I file a petition or any other claim for relief under any bankruptcy rule or laws of the United States, or if such petition or other claim for relief is filed against me by another. WAIVER - I give up my rights to required you to do certain things. I will not require you to: (1) demand payment of amounts due (presentment) (2) obtain official certification of nonpayment (protest); or (3) give notice that amounts due have not been paid (notice of dishonor). I waive any defenses I have based on surety ship or impairment of collateral to the extent permitted by law, I also waive all personal property exemptions in the property securing this loan. OBLIGATIONS INDEPENDENT - I understand that I must pay this note even if someone else has also agreed to pay it (by, for example, signing this form or a separate guarantee or endorsement). You may sue me alone, or anyone else who is obligated on this note, or any number of us together, to collect this note. You may without notice release any party to this agreement without releasing any other party. If you give up any of your rights, with or without notice, it will not affect my duty to pay this note. Any extension of new credit to any of us, or renewal of this note by all or less than all of us will not release me from my duty to pay it. (Of course, you are entitled to only one payment in full.) I agree that you may at your option extend this note or the debt represented by this note, or any portion of the note or debt, from time to time without limit or notice and for any term without affecting my liability for payment of the note. I will not assign my obligation under this agreement without your prior written approval. CREDIT INFORMATION - I agree and authorize you to obtain credit information about me from time to time (for example, by requesting a credit report) and to report to others your credit experience with me (such as a credit reporting agency). I agree to provide you, upon request, any financial statement or information you may deem necessary. I warrant that the financial statements and information I provide to you are or will be accurate, correct and complete. SIGNATURES: I AGREE TO THE TERMS OF THIS NOTE (INCLUDING THOSE ON PAGES 1, 2, AND 3). I have received a copy on today's date. CAUTION - IT IS IMPORTANT THAT YOU THOROUGHLY READ THE CONTRACT BEFORE YOU SIGN IT. DIGITAL FUSION, INC. BY: /s/ Gary S. Ryan BY: /s/ Roy E. Crippen, III ---------------- --------------------------- GARY S. RYAN PRESIDENT ROY E. CRIPPEN, III CEO SIGNATURE FOR LENDER ____________________ GUARANTY HUNTSVILLE, ALABAMA GARY S RYAN ----------- For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to in- duce FIRST COMMERCIAL BANK OF HUNTSVILE 301 WASHINGTON STREET HUNTSVILLE, AL 35801 (herein, with its participants, successors and assigns, called "Lender"), at its option, at any time or from time to time to make loans or extend other accommodations to or for the account of DIGITAL FUSION, INC (herein called the "Borrower") or to engage in any other transactions with Borrower, the Undersigned hereby absolutely and unconditionally guarantees to Lender the full and prompt payment when due, whether at maturity or earlier by reason of acceleration or otherwise, of the debts, liabilities and obligations described as follows: A. lf this | | is checked, the Undersigned guarantees to Lender the payment and performance of the debt, liability or obligation of Borrower to Lender evidenced by or arising out of the following: ___________________________________________________________________and any extensions, renewals or replacements thereof (hereinafter referred to as the "lndebtedness"). B. lf this |XX| is checked, the Undersigned guarantees to Lender the payment and performance of each and every debt, liability and obligation of every type and description which Borrower may now or at any time hereafter owe to Lender (whether such debt, liability or obligation now exists or is hereafter created or incurred, and whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, Iiquidated or unliquidated, or joint, several, or joint and several; all such debts, liabilities and obligations being hereinafter collectively referred to as the "Indebtedness"). The Undersigned further acknowledges and agrees with Lender that: 1. No act or thing need occur to establish the liability of the Undersigned hereunder, and no act or thing, except full payment and discharge of all indebtedness, shall in any way exonerate the Undersigned or modify, reduce, limit or release the liability of the Undersigned hereunder. 2. This is an absolute, unconditional and continuing guaranty of payment of the Indebtedness and shall continue to be in force and be binding upon the Undersigned, whether or not all Indebtedness is paid in full, until this guaranty is revoked by written notice actually received by the Lender, and such revocation shall not be effective as to Indebtedness existing or committed for at the time of actual receipt of such notice by the Lender, or as to any renewals, extensions end refinancings thereof. If there be more than one Undersigned, such revocation shall be effective only as to the one so revoking. The death or Incompetence of the Undersigned shall not revoke this guaranty, except upon actual receipt of written notice thereof by Lender and then only as to the decedent or the incompetent and only prospectively, as to future transactions, as herein set forth. 3. If the Undersigned shall be dissolved, shall die, or shall be or become insolvent (however defined) or revoke this guaranty, then the Lender shall have the right to declare immediately due and payable, and the Undersigned will forthwith pay to the Lender, the full amount of Indebtedness, whether due and payable or unmatured. If the Undersigned voluntarily commences or there is commenced involuntarily against the Undersigned a case under the United States Bankruptcy Code, the full amount of all Indebtedness, whether due and payable or unmatured, shall be immediately due and payable without demand or notice thereof. 4. The liability of the Undersigned hereunder shall be limited to (check only one box) | |_________ % of Indebtedness or ? a principal amount of $ ______________________ (If unlimited or if no amount or percentage is stated, the Undersigned shall be liable for all Indebtedness, without any limitation to amount or percentage}, plus accrued interest thereon and all attorneys' fees, collection costs and enforcement expenses referable thereto. Indebtedness may be created and continued in any amount, whether or not in excess of such principal amount, without affecting or impairing the liability of the Undersigned hereunder. The Lender may apply any sums received by or available to Lender on account of the Indebtedness from Borrower or any other person (except the Undersigned), from their properties, out of any collateral security or from any other source to payment of the excess. Such application of receipts shall not reduce, affect, or impair the liability of the Undersigned hereunder. If the liability of the Undersigned is limited to a stated amount pursuant to this paragraph 4, any payment made by the Undersigned under this guaranty shall be effective to reduce or discharge such liability only if accompanied by a written transmittal document, received by the Lender, advising the Lender that such payment is made under this guaranty for such purpose. If the liability of the Undersigned is limited to a stated percentage of the Indebtedness pursuant to this paragraph 4, the amount of the Indebtedness for which the Undersigned shall be liable hereunder shall be the aggregate amount of all said Indebtedness, reduced only by principal payments made by the Borrower and principal payments made as a result of the sale or liquidation of any collateral securing the Indebtedness (but not reduced by any payment made to Lender by any other guarantor of the Indebtedness), multiplied by the stated percentage. 5. The Undersigned will pay or reimburse lender for all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by Lender In connection with the protection, defense, or enforcement of this guaranty in any litigation or bankruptcy or insolvency proceedings. This guaranty includes the additional provisions on page 2, all of which are made a part hereof. IN WITNESS WHEREOF, this guaranty has been duly executed by the Undersigned on this 30TH day of JUNE , 2004 . /s/ Gary S. Ryan ---------------- GARY S. RYAN "Undersigned" shall refer to all persons who sign this guaranty, severally and jointly ADDITIONAL PROVISIONS 6. Whether or not any existing relationship between the Undersigned and Borrower has been changed or ended and whether or not this guaranty has been revoked, Lender may, but shall not be obligated to, enter into transactions resulting in the creation or continuance of Indebtedness, without any consent or approval by the Undersigned and without any notice to the Undersigned. The liability of the Undersigned shall not be affected or impaired by any of the following acts or things (which Lender is expressly authorized to do, omit or suffer from time to time, both before and after revocation of this guaranty, without notice to or approval by the Undersigned): (i) any acceptance of collateral security, guarantors, accommodation parties, or sureties for any or all Indebtedness; (ii) any one or more extensions or renewals of Indebtedness (whether or not for longer than the original period) or any modification of the interest rates, maturities or other contractual terms applicable to any Indebtedness; (iii) any waiver, adjustment, forbearance, compromise, or indulgence granted to Borrower, any delay or lack of diligence in the enforcement of Indebtedness, or any failure to institute proceedings, file a claim, give any required notices or otherwise protect any Indebtedness whether or not the Undersigned has made demand on Lender to do or not to do any of the foregoing, the benefit of any statute or rule of law to the contrary being hereby expressly waived by the Undersigned; (iv) any full or partial release of, settlement with, or agreement not to sue, Borrower or any other guarantor or other person liable in respect of any Indebtedness; (v) any discharge of any evidence of Indebtedness or the acceptance of any instrument in renewal thereof or substitution therefore; (vi) any failure to obtain collateral security (including rights of setoff) for Indebtedness, or to see to the proper or sufficient creation and perfection thereof, or to establish the priority thereof, or to protect, insure, or enforce any collateral security; or any release, modification, substitution, discharge, impairment, deterioration, waste, or loss of any collateral security; (vii) Any foreclosure or enforcement of any collateral security; (viii) any transfer of any Indebtedness or any evidence thereof; (ix) any order of application of any payments or credits upon Indebtedness; (x) any election by the Lender under ss. 1111(b)(2) of the United States Bankruptcy Code. 7. The Undersigned waives any and all defenses, claims and discharges of Borrower, or any other obligor, pertaining to Indebtedness, except the defense of discharge by payment in full. Without limiting the generality of the foregoing, the Undersigned will not assert, plead or enforce against Lender any defense of waiver, release, statute of limitations, res judicata, statute of frauds, fraud, incapacity, minority, usury, illegality or unenforceability which may be available to Borrower or any other person liable In respect of any Indebtedness, or any setoff available against Lender to Borrower or any such other person, whether or not on account of a related transaction. The Undersigned expressly agrees that the Undersigned shall be and remain liable, to the fullest extent permitted by applicable law, for any deficiency remaining after foreclosure of any mortgage or security interest securing Indebtedness, whether or not the liability of Borrower or any other obligor for such deficiency is discharged pursuant to statute or judicial decision. The undersigned shall remain obligated, to the fullest extent permitted by law to pay such amounts as though the Borrower's obligations had not been discharged. 8. The Undersigned further agrees that the Undersigned shall be and remain obligated to pay Indebtedness even though any other person obligated to pay Indebtedness including Borrower, has such obligation discharged in bankruptcy or otherwise discharged by law. "Indebtedness" shall include post-bankruptcy petition interest and attorneys' fees and any other amounts which Borrower Is discharged from paying or which do not otherwise accrue to Indebtedness due to Borrower's discharge, and the Undersigned shall remain obligated to pay such amounts as though Borrower's obligations had not been discharged. 9. If any payment applied by Lender to Indebtedness is thereafter set aside, recovered, rescinded or required to be returned for any reason (including, without Iimitation, the bankruptcy, insolvency or reorganization of Borrower or any other obligor), the Indebtedness to which such payment was applied shall for the purposes of this guaranty be deemed to have continued in existence, notwithstandIng such application, and this guaranty shall be enforceable as to such Indebtedness as fully as if such application had never been made. 10. The Undersigned waives any claim. remedy or other right which the Undersigned may now have or hereafter acquire against Borrower or any other person obligated to pay Indebtedness arising out of the creation or performance of the Undersigned's obligation under this guaranty, including, without limitation, any right of subrogation, contribution, reimbursement. indemnification, exoneration, and any right to participate in any claim or remedy the Undersigned may have against the Borrower, collateral, or other party obligated for Borrower's debts, whether or not such claim. remedy or right arises in equity, or under contract, statute or common law. 11. The Undersigned waives presentment, demand for payment, notice of dishonor or nonpayment, and protest of any instrument evidencing Indebtedness. Lender shall not be required first to resort for payment of the Indebtedness to Borrower or other persons or their properties, or first to enforce, realize upon or exhaust any collateral security for Indebtedness, before enforcing this guaranty. 12. The liability of the Undersigned under this guaranty is in addition to and shall be cumulative with all other liabilities of the Undersigned to Lender as guarantor or otherwise, without any limitation as to amount or percentage, unless the instrument or agreement evidencing or creating such other liability specifically provides to the contrary. 13. This guaranty shall be enforceable against each person signing this guaranty, even if only one person signs and regardless of any failure of other persons to sign this guaranty. If there be more than one signer, all agreements and promises herein shall be construed to be, and are hereby declared to be, joint and several in each of every particular and shall be fully binding upon and enforceable against either, any or all the Undersigned, This guaranty shall be effective upon delivery to Lender, without further act, condition or acceptance by Lender, shall be binding upon the Undersigned and the heirs, representatives, successors and assigns of the Undersigned and shall inure to the benefit of Lender and its participants, successors and assigns. Any invalidity of unenforceability of any provision or application of this guaranty shall not affect other lawful provisions and application hereof, and to this end the provisions of this guaranty are declared to be severable. Except as authorized by the terms herein, this guaranty may not be waived, modified, amended, terminated, released or otherwise changed except by a writing signed by the Undersigned and Lender. This guaranty shall be governed by the laws of the State where the lender is located. The Undersigned waives notice of Lender's acceptance hereof. GUARANTY HUNTSVILLE, ALABAMA ROY E. CRIPPEN, III ------------------- For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to in- duce FIRST COMMERCIAL BANK OF HUNTSVILE 301 WASHINGTON STREET HUNTSVILLE, AL 35801 (herein, with its participants, successors and assigns, called "Lender"), at its option, at any time or from time to time to make loans or extend other accommodations to or for the account of DIGITAL FUSION, INC (herein called the "Borrower") or to engage in any other transactions with Borrower, the Undersigned hereby absolutely and unconditionally guarantees to Lender the full and prompt payment when due, whether at maturity or earlier by reason of acceleration or otherwise, of the debts, liabilities and obligations described as follows: B. lf this | | is checked, the Undersigned guarantees to Lender the payment and performance of the debt, liability or obligation of Borrower to Lender evidenced by or arising out of the following: ___________________________________________________________________and any extensions, renewals or replacements thereof (hereinafter referred to as the "lndebtedness"). B. lf this |XX| is checked, the Undersigned guarantees to Lender the payment and performance of each and every debt, liability and obligation of every type and description which Borrower may now or at any time hereafter owe to Lender (whether such debt, liability or obligation now exists or is hereafter created or incurred, and whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, Iiquidated or unliquidated, or joint, several, or joint and several; all such debts, liabilities and obligations being hereinafter collectively referred to as the "Indebtedness"). The Undersigned further acknowledges and agrees with Lender that: 1. No act or thing need occur to establish the liability of the Undersigned hereunder, and no act or thing, except full payment and discharge of all indebtedness, shall in any way exonerate the Undersigned or modify, reduce, limit or release the liability of the Undersigned hereunder. 2. This is an absolute, unconditional and continuing guaranty of payment of the Indebtedness and shall continue to be in force and be binding upon the Undersigned, whether or not all Indebtedness is paid in full, until this guaranty is revoked by written notice actually received by the Lender, and such revocation shall not be effective as to Indebtedness existing or committed for at the time of actual receipt of such notice by the Lender, or as to any renewals, extensions end refinancings thereof. If there be more than one Undersigned, such revocation shall be effective only as to the one so revoking. The death or Incompetence of the Undersigned shall not revoke this guaranty, except upon actual receipt of written notice thereof by Lender and then only as to the decedent or the incompetent and only prospectively, as to future transactions, as herein set forth. 3. If the Undersigned shall be dissolved, shall die, or shall be or become insolvent (however defined) or revoke this guaranty, then the Lender shall have the right to declare immediately due and payable, and the Undersigned will forthwith pay to the Lender, the full amount of Indebtedness, whether due and payable or unmatured. If the Undersigned voluntarily commences or there is commenced involuntarily against the Undersigned a case under the United States Bankruptcy Code, the full amount of all Indebtedness, whether due and payable or unmatured, shall be immediately due and payable without demand or notice thereof. 4. The liability of the Undersigned hereunder shall be limited to (check only one box)| |_________ % of Indebtedness or | | a principal amount of $ ______________________ (If unlimited or if no amount or percentage is stated, the Undersigned shall be liable for all Indebtedness, without any limitation to amount or percentage}, plus accrued interest thereon and all attorneys' fees, collection costs and enforcement expenses referable thereto. Indebtedness may be created and continued in any amount, whether or not in excess of such principal amount, without affecting or impairing the liability of the Undersigned hereunder. The Lender may apply any sums received by or available to Lender on account of the Indebtedness from Borrower or any other person (except the Undersigned), from their properties, out of any collateral security or from any other source to payment of the excess. Such application of receipts shall not reduce, affect, or impair the liability of the Undersigned hereunder. If the liability of the Undersigned is limited to a stated amount pursuant to this paragraph 4, any payment made by the Undersigned under this guaranty shall be effective to reduce or discharge such liability only if accompanied by a written transmittal document, received by the Lender, advising the Lender that such payment is made under this guaranty for such purpose. If the liability of the Undersigned is limited to a stated percentage of the Indebtedness pursuant to this paragraph 4, the amount of the Indebtedness for which the Undersigned shall be liable hereunder shall be the aggregate amount of all said Indebtedness, reduced only by principal payments made by the Borrower and principal payments made as a result of the sale or liquidation of any collateral securing the Indebtedness (but not reduced by any payment made to Lender by any other guarantor of the Indebtedness), multiplied by the stated percentage. 5. The Undersigned will pay or reimburse lender for all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by Lender In connection with the protection, defense, or enforcement of this guaranty in any litigation or bankruptcy or insolvency proceedings. This guaranty includes the additional provisions on page 2, all of which are made a part hereof. IN WITNESS WHEREOF, this guaranty has been duly executed by the Undersigned on this 30TH day of JUNE , 2004 . /s/ Roy E. Crippen, III ----------------------- ROY E. CRIPPEN, III "Undersigned" shall refer to all persons who sign this guaranty, severally and jointly ADDITIONAL PROVISIONS 6. Whether or not any existing relationship between the Undersigned and Borrower has been changed or ended and whether or not this guaranty has been revoked, Lender may, but shall not be obligated to, enter into transactions resulting in the creation or continuance of Indebtedness, without any consent or approval by the Undersigned and without any notice to the Undersigned. The liability of the Undersigned shall not be affected or impaired by any of the following acts or things (which Lender is expressly authorized to do, omit or suffer from time to time, both before and after revocation of this guaranty, without notice to or approval by the Undersigned): (i) any acceptance of collateral security, guarantors, accommodation parties, or sureties for any or all Indebtedness; (ii) any one or more extensions or renewals of Indebtedness (whether or not for longer than the original period) or any modification of the interest rates, maturities or other contractual terms applicable to any Indebtedness; (iii) any waiver, adjustment, forbearance, compromise, or indulgence granted to Borrower, any delay or lack of diligence in the enforcement of Indebtedness, or any failure to institute proceedings, file a claim, give any required notices or otherwise protect any Indebtedness whether or not the Undersigned has made demand on Lender to do or not to do any of the foregoing, the benefit of any statute or rule of law to the contrary being hereby expressly waived by the Undersigned; (iv) any full or partial release of, settlement with, or agreement not to sue, Borrower or any other guarantor or other person liable in respect of any Indebtedness; (v) any discharge of any evidence of Indebtedness or the acceptance of any instrument in renewal thereof or substitution therefore; (vi) any failure to obtain collateral security (including rights of setoff) for Indebtedness, or to see to the proper or sufficient creation and perfection thereof, or to establish the priority thereof, or to protect, insure, or enforce any collateral security; or any release, modification, substitution, discharge, impairment, deterioration, waste, or loss of any collateral security; (vii) Any foreclosure or enforcement of any collateral security; (viii) any transfer of any Indebtedness or any evidence thereof; (ix) any order of application of any payments or credits upon Indebtedness; (x) any election by the Lender under ss. 1111(b)(2) of the United States Bankruptcy Code. 7. The Undersigned waives any and all defenses, claims and discharges of Borrower, or any other obligor, pertaining to Indebtedness, except the defense of discharge by payment in full. Without limiting the generality of the foregoing, the Undersigned will not assert, plead or enforce against Lender any defense of waiver, release, statute of limitations, res judicata, statute of frauds, fraud, incapacity, minority, usury, illegality or unenforceability which may be available to Borrower or any other person liable In respect of any Indebtedness, or any setoff available against Lender to Borrower or any such other person, whether or not on account of a related transaction. The Undersigned expressly agrees that the Undersigned shall be and remain liable, to the fullest extent permitted by applicable law, for any deficiency remaining after foreclosure of any mortgage or security interest securing Indebtedness, whether or not the liability of Borrower or any other obligor for such deficiency is discharged pursuant to statute or judicial decision. The undersigned shall remain obligated, to the fullest extent permitted by law to pay such amounts as though the Borrower's obligations had not been discharged. 8. The Undersigned further agrees that the Undersigned shall be and remain obligated to pay Indebtedness even though any other person obligated to pay Indebtedness including Borrower, has such obligation discharged in bankruptcy or otherwise discharged by law. "Indebtedness" shall include post-bankruptcy petition interest and attorneys' fees and any other amounts which Borrower Is discharged from paying or which do not otherwise accrue to Indebtedness due to Borrower's discharge, and the Undersigned shall remain obligated to pay such amounts as though Borrower's obligations had not been discharged. 9. If any payment applied by Lender to Indebtedness is thereafter set aside, recovered, rescinded or required to be returned for any reason (including, without Iimitation, the bankruptcy, insolvency or reorganization of Borrower or any other obligor), the Indebtedness to which such payment was applied shall for the purposes of this guaranty be deemed to have continued in existence, notwithstandIng such application, and this guaranty shall be enforceable as to such Indebtedness as fully as if such application had never been made. 10. The Undersigned waives any claim. remedy or other right which the Undersigned may now have or hereafter acquire against Borrower or any other person obligated to pay Indebtedness arising out of the creation or performance of the Undersigned's obligation under this guaranty, including, without limitation, any right of subrogation, contribution, reimbursement. indemnification, exoneration, and any right to participate in any claim or remedy the Undersigned may have against the Borrower, collateral, or other party obligated for Borrower's debts, whether or not such claim. remedy or right arises in equity, or under contract, statute or common law. 11. The Undersigned waives presentment, demand for payment, notice of dishonor or nonpayment, and protest of any instrument evidencing Indebtedness. Lender shall not be required first to resort for payment of the Indebtedness to Borrower or other persons or their properties, or first to enforce, realize upon or exhaust any collateral security for Indebtedness, before enforcing this guaranty. 12. The liability of the Undersigned under this guaranty is in addition to and shall be cumulative with all other liabilities of the Undersigned to Lender as guarantor or otherwise, without any limitation as to amount or percentage, unless the instrument or agreement evidencing or creating such other liability specifically provides to the contrary. 13. This guaranty shall be enforceable against each person signing this guaranty, even if only one person signs and regardless of any failure of other persons to sign this guaranty. If there be more than one signer, all agreements and promises herein shall be construed to be, and are hereby declared to be, joint and several in each of every particular and shall be fully binding upon and enforceable against either, any or all the Undersigned, This guaranty shall be effective upon delivery to Lender, without further act, condition or acceptance by Lender, shall be binding upon the Undersigned and the heirs, representatives, successors and assigns of the Undersigned and shall inure to the benefit of Lender and its participants, successors and assigns. Any invalidity of unenforceability of any provision or application of this guaranty shall not affect other lawful provisions and application hereof, and to this end the provisions of this guaranty are declared to be severable. Except as authorized by the terms herein, this guaranty may not be waived, modified, amended, terminated, released or otherwise changed except by a writing signed by the Undersigned and Lender. This guaranty shall be governed by the laws of the State where the lender is located. The Undersigned waives notice of Lender's acceptance hereof. SUBORDINATION AGREEMENT This Subordination Agreement (the "Agreement") is entered into as of the 30TH day of June, 2004, by and among Digital Fusion, Inc., a Delaware corporation (the "Company") and Roy E. Crippen, III (the "Subordinate Lender"). BACKGROUND The Company is currently indebted to First Commercial Bank of Huntsville (the "Senior Lender") pursuant to (a) a promissory note issued on June 30TH, 2004. The Company is currently indebted to the Subordinate Lender in connection with a loan to the Company by the Subordinated Lender that was applied by the Company in retirement of a note that the Company was indebted to PowerCerv Corporation ("PowerCerv") pursuant to a promissory note in the original amount of $827,500 as a result of the Borrower's acquisition of digital fusion, inc., a Florida corporation, in March 2000. The parties intend for such loan to be subordinate to the Company's indebtedness to the Senior Lender. NOW, THEREFORE, the parties agree as follows: TERMS 1. All obligations of Company, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent or now or hereafter existing, or due or to become due, other than obligations to the Subordinate Lender as an employee of Company, are referred to as "Liabilities". All Liabilities to the Senior Lender are referred to as "Senior Liabilities" and the Note dated January 15, 2004 in the amount of $136,580.32 (a copy of which is attached as Exhibit A to this Agreement) to the Subordinate Lender is referred to as the "Junior Liability". It is expressly understood and agreed that the term "Senior Liabilities", as used in this Agreement, shall include, without limitation, any and all interest accruing on any of the Senior Liabilities after the commencement of any proceedings referred to in paragraph 4 of this Agreement, notwithstanding any provision or rule of law which might restrict the rights of the Senior Lender, as against Company or anyone else, to collect such interest. 2. Except as expressly otherwise provided in this Agreement or as the Senior Lender may otherwise expressly consent in writing, the payment of the Junior Liability shall be postponed and subordinated to the payment in full of all Senior Liabilities, and no payments or other distributions whatsoever in respect of the Junior Liability shall be made, nor shall any property or assets of the Company be applied to the purchase or other acquisition or retirement of the Junior Liability; provided, however, that, until such time as the Senior Lender shall have notified the Subordinate Lender that the Company shall have defaulted in the payment when due, whether by acceleration or otherwise, of any amount payable in respect of the Senior Liabilities (and after the default in payment is cured), there are excepted from the terms of the foregoing provisions of this paragraph 2 those payments to the Subordinate Lender by the Company in respect of the Junior Liability. 3. The Subordinate Lender hereby subordinates all security interests created pursuant to the Security Agreement by and between the Subordinate Lender and the Company dated as of January 15, 2004 (the "Security Agreement"), to the security interests of the Senior Lender (to the extent perfected and enforceable) in all of the property of the Company, now owned or hereafter acquired. Except as provided in the previous sentence, priority of such security interests shall be in accordance with the provisions of the Uniform Commercial Code. 4. In the event of any dissolution, winding up, liquidation, readjustment, reorganization or other similar proceedings relating to the Company or to its creditors, as such, or to its property (whether voluntary or involuntary, partial or complete, and whether in bankruptcy, insolvency or receivership, or upon an assignment for the benefit of creditors, or any other marshalling of the assets and liabilities of the Company, or any sale of all or substantially all of the assets of the Company, or otherwise), the Senior Liabilities shall first be paid in full before the Subordinate Lender shall be entitled to receive and to retain any payment or distribution in respect of the Junior Liability. 5. The Subordinate Lender will mark his books and records so as to clearly indicate that the Junior Liability is subordinated in accordance with the terms of this Agreement. The Subordinate Lender will execute such further documents or instruments and take such further action as the Company or the Senior Lender may reasonably request from time to time request to carry out the intent of this Agreement. 6. The Subordinate Lender hereby waives all diligence in collection or protection of or realization upon the Senior Liabilities or any security for the Senior Liabilities. 7. The Subordinate Lender will not without the prior written consent of the Senior Lender: (a) attempt to enforce or collect the Junior Liability or any rights in respect of the Junior Liability; (b) take any collateral security for the Junior Liability other than pursuant to the Security Agreement; or (c) commence, or join with any other creditor in commencing, any bankruptcy, reorganization or insolvency proceedings with respect to the Company. 8. This Agreement shall in all respects be a continuing agreement and shall remain in full force and effect (notwithstanding, without limitation, the death or incompetence of the Subordinate Lender or that at any time or from time to time all Senior Liabilities may have been paid in full), subject to discontinuance only upon receipt by the Senior Lender of written notice from the Subordinate Lender, or any person duly authorized and acting on behalf of the Subordinate Lender, of the discontinuance of this Subordinate Agreement; provided, however, that no such notice of discontinuance shall affect or impair any of the agreements and obligations of the Subordinate Lender under this Agreement with respect to any and all Senior Liabilities existing prior to the time of receipt of such notice by the Senior Lender, any and all Senior Liabilities created or acquired thereafter pursuant to any previous commitments made by the Senior Lender, any and all extensions or renewals of any of the foregoing, any and all interest accruing on any of the foregoing, and any and all expenses paid or incurred by the Senior Lender in endeavoring to collect or realize upon any of the foregoing or any security for the Senior Liabilities; and all of the agreements and obligations of the Subordinate Lender under this Agreement shall, notwithstanding any such notice of discontinuance, remain fully in effect until all such Senior Liabilities (including any extensions or renewals of any thereof and all such interest and expenses) shall have been indefeasibly paid in full. 9. The Senior Lender may, from time to time, whether before or after any discontinuance of this Agreement, at its sole discretion and without notice to the Subordinate Lender, take any or all of the following actions: (a) retain or obtain a security interest in any property to secure any of the Senior Liabilities; (b) retain or obtain the primary or secondary obligation of any other obligor or obligors with respect to any of the Senior Liabilities; (c) extend or renew for one or more periods (whether or not longer than the original period), alter or exchange any of the Senior Liabilities, or release or compromise any obligation of any nature of any obligor with respect to any of the Senior Liabilities; and (d) release their security interest in, or surrender, release or permit any substitution or exchange for, all or any part of any property securing any of the Senior Liabilities, or extend or renew for one or more periods (whether or not longer than the original period) or release, compromise, alter or exchange any obligations of any nature of any obligor with respect to any such property. 10. The Senior Lender may, from time to time, whether before or after any discontinuance of this Agreement, without notice to the Subordinate Lender, assign or transfer any or all of the Senior Liabilities or any interest in the Senior Liabilities; and, notwithstanding any such assignment or transfer or any subsequent assignment or transfer of the Senior Liabilities, such Senior Liabilities shall be and remain Senior Liabilities for the purposes of this Agreement, and every immediate and successive assignee or transferee of any of the Senior Liabilities or of any interest in the Senior Liabilities shall, to the extent of the interest of such assignee or transferee in the Senior Liabilities, be entitled to the benefits of this Agreement to the same extent as if such assignee or transferee were the Senior Lender, as applicable; provided, however, that, unless the Senior Lender shall otherwise consent in writing, the Senior Lender shall have an unimpaired right, prior and superior to that of any such assignee or transferee, to enforce this Agreement, for the benefit of the Senior Lender, as to those of the Senior Liabilities which the Senior Lender has not assigned or transferred. 11. The Senior Lender shall not be prejudiced in its rights under this Agreement by any act or failure to act of the Company or the Subordinate Lender, or any noncompliance of the Company or the Subordinate Lender with any agreement or obligation, regardless of any knowledge thereof which the Senior Lender may have or with which the Senior Lender may be charged; and no action of the Senior Lender permitted under this Agreement shall in any way affect or impair the rights of the Senior Lender and the obligations of the Subordinate Lender under this Agreement. 12. No delay on the part of the Senior Lender in the exercise of any right or remedy shall operate as a waiver of such right or remedy, and no single or partial exercise by the Senior Lender of any right or remedy shall preclude other or further exercise of such right or remedy or the exercise of any other right or remedy; nor shall any modification or waiver of any of the provisions of this Agreement be binding upon the Senior Lender except as expressly set forth in a writing duly signed and delivered on behalf of the Senior Lender. For the purposes of this Agreement, Senior Liabilities shall include all obligations of the Company to the Senior Lender, notwithstanding any right or power of the Company or anyone else to assert any claim or defense as to the invalidity or unenforceability of any such obligation, and no such claim or defense shall affect or impair the agreements and obligations of the Subordinate Lender under this Agreement. 13. This Agreement shall be binding upon the Subordinate Lender and upon the heirs, legal representatives, successors and assigns of the Subordinate Lender and the successors and assigns of the Company. 14. This Agreement shall be construed in accordance with and governed by the laws of Alabama without regard to conflict of laws provisions. Wherever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. [signature page follows] IN WITNESS WHEREOF, this Subordination Agreement has been made and delivered at Huntsville, Alabama this 30TH day of June, 2004. /s/ Roy E. Crippen, III --------------------------- Roy E. Crippen, III The Company hereby acknowledges receipt of a copy of the foregoing Subordination Agreement, waives notice of acceptance of the Subordination Agreement by the Senior Lenders, and agrees to be bound by the terms and provisions of the Subordination Agreement, to make no payments or distributions contrary to the terms and provisions of the Subordination Agreement, and to do every other act and thing necessary or appropriate to carry out such terms and provisions. Dated: June 30TH , 2004 DIGITAL FUSION, INC. By: /s/ Gary S. Ryan ----------------------- Name: Gary S. Ryan ----------------------- Title: President ----------------------- EX-31.1 3 a4701907ex311.txt DIGITAL FUSION 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: August 16, 2004 By: /s/ Roy E. Crippen, III ----------------------- Roy E. Crippen, III Chief Executive Officer EX-32.1 4 a4701907ex321.txt DIGITAL FUSION 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 June 30, 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: August 16, 2004 By: /s/ Roy E. Crippen, III ----------------------- Roy E. Crippen, III -----END PRIVACY-ENHANCED MESSAGE-----