-----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, BImByfGiWCHHRcbYCfk1Yc0bOsE9jjbkDU4ecobTBDJjLLxVeGekxaq+GWCcES3d BHCvHxX1XS9gYs4uN/rS5A== 0001157523-05-004701.txt : 20050512 0001157523-05-004701.hdr.sgml : 20050512 20050512163555 ACCESSION NUMBER: 0001157523-05-004701 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050512 DATE AS OF CHANGE: 20050512 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: 05824914 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 a4887211.txt DIGITAL FUSION 10-QSB ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2005. (First quarter of fiscal 2005) 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 of (I.R.S. Employer I.D. No.) 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 April 20, 2005, 10,804,214 shares of the issuer's common stock, par value $.01 per share, were outstanding. Transitional Small Business Disclosure Format (check one): Yes |_| No |X| ================================================================================ DIGITAL FUSION, INC. INDEX -----
PART I. FINANCIAL INFORMATION Page No. ------- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004.................................................................. 1 Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004 (unaudited)...................................................... 2 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 (unaudited)...................................................... 3 Notes to Condensed Consolidated Financial Statements............................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................................................ 8 Item 3. Controls and Procedures............................................................. 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings.................................................................. 14 Item 2. Changes in Securities.............................................................. 14 Item 3. Defaults Upon Senior Securities.................................................... 14 Item 4. Submission of Matters to a Vote of Security Holders................................ 14 Item 5. Other Information.................................................................. 14 Item 6. Exhibits........................................................................... 14 SIGNATURES.................................................................................. 15 Section 302 Certification by Chief Executive Officer Section 906 Certification by Chief Executive Officer
PART I FINANCIAL INFORMATION Item 1. Financial Statements. DIGITAL FUSION, INC. Condensed Consolidated Balance Sheets (In thousands)
March 31, December 31, 2005 2004 (Unaudited) --------------- ---------------- ASSETS Current Assets: Cash and cash equivalents $ 1 $ 252 Accounts receivable and unbilled revenues (net of Allowance for doubtful accounts of $54 for 2005 and 2004) 4,719 1,050 Prepaid expenses and other current assets 39 27 --------------- ---------------- Total current assets 4,759 1,329 Property and equipment, net of accumulated depreciation of $999 for 2005 and $952 for 2004 507 417 Prepaid acquisition costs and acquisition deposit - 285 Intangible assets, net 7,869 3,347 Other assets 22 13 --------------- ---------------- Total assets $ 13,157 $ 5,391 =============== ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt $ 1,316 $ 647 Accounts payable 1,082 609 Deferred revenue 118 21 Accrued compensation and related expenses 536 97 Other current liabilities 275 266 --------------- ---------------- Total current liabilities 3,327 1,640 Long-term debt, less current maturities 4,365 81 Pension obligation 302 302 --------------- ---------------- Total liabilities 7,994 2,023 --------------- ---------------- Stockholders' Equity: Preferred Stock - $.01 par value; authorized 1,000 shares, no shares issued and outstanding - - Common Stock - $.01 par value; authorized 16,000 shares; 10,801 and 9,721 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively 108 97 Additional paid in capital 43,741 42,050 Accumulated deficit (38,686) (38,779) --------------- ---------------- Total stockholders' equity 5,163 3,368 --------------- ---------------- Total liabilities and stockholders' equity $ 13,157 $ 5,391 =============== ================ See Accompanying Notes to Condensed Consolidated Financial Statements.
1 DIGITAL FUSION, INC. Condensed Consolidated Statements of Operations For the three months ended March 31, 2005 and 2004 (Unaudited) (In thousands, except per share data)
2005 2004 -------------------- ------------------ Revenues: Services and fees $ 3,495 $ 1,268 Reimbursed costs 509 13 Product 437 205 -------------------- ------------------ Total revenue 4,441 1,486 -------------------- ------------------ Cost of services and goods sold: Services and fees 2,663 930 Reimbursed costs 476 13 Product 422 189 -------------------- ------------------ Total cost of services and goods sold 3,561 1,132 -------------------- ------------------ Gross profit 880 354 Selling General & Administrative 638 410 -------------------- ------------------ Operating income (loss) 242 (56) -------------------- ------------------ Other expenses: Interest expense, net 47 34 Amortization of discount on debt and intrinsic value of convertible debt 102 - -------------------- ------------------ Total other expenses 149 34 -------------------- ------------------ Net income (loss) before income taxes 93 (90) Income tax benefit - - -------------------- ------------------ Net income (loss) $ 93 $ ( 90) ==================== ================== Basic earnings (loss) per share $ 0.01 $ (0.01) ==================== ================== Basic weighted average common stock shares outstanding 10,446 7,168 ==================== ================== Diluted earnings (loss) per share $ 0.01 $ (0.01) ==================== ================== Diluted weighted average common stock shares outstanding 12,758 7,168 ==================== ================== See Accompanying Notes to Condensed Consolidated Financial Statements.
2 DIGITAL FUSION, INC. Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2005 and 2004 (Unaudited) (In thousands)
2005 2004 ----------------- -------------- Cash flows provided by (used in) operating activities: Net Income (loss) $ 93 $ (90) Adjustments to reconcile net loss to net cash used in operating activities, net of effect of acquisition: Depreciation and amortization 38 8 Amortization of beneficial interest 70 - Amortization of discount on debt 32 - Non-cash restructuring - 9 Changes in assets and liabilities (1,499) (186) ----------------- -------------- Net cash used in operating activities (1,266) (259) ----------------- -------------- Cash flows used in investing activities: Capital expenditures - property and equipment (71) (3) Acquisition of Summit (1,125) - ----------------- -------------- Net cash used in investing activities (1,196) (3) ----------------- -------------- Cash flows provided by (used in) financing activities: Proceeds from exercise of options and warrants 455 - Repayments of notes payable (166) (1) Net proceeds from line of credit 1,922 - ----------------- -------------- Net cash provided by (used in) financing activities 2,211 (1) ----------------- -------------- Net decrease in cash and cash equivalents (251) (263) Cash and cash equivalents, beginning of periods 252 419 ----------------- -------------- Cash and cash equivalents, end of periods $ 1 $ 156 ================= ============== See Accompanying Notes to Condensed Consolidated Financial Statements.
3 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The condensed consolidated interim financial statements of Digital Fusion, Inc. ("Digital Fusion", "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, 2004 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) necessary for a fair presentation of the information shown herein have been included. The results of operations and cash flows for the three-month period ended March 31, 2005 are not necessarily indicative of the results of operations and cash flows expected for the year ending December 31, 2005. The Company accounts for stock-based compensation issued to employees under the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under the intrinsic value based method, compensation cost is measured on the date of grant as the excess of the quoted market price of the underlying stock over the exercise price. Such compensation amounts are amortized over the vesting periods of the options. During the three-month period ended March 31, 2005, 749,000 stock options were granted to employees. The following table illustrates the effect on net loss and loss per share as if the fair value based method of accounting had been applied to stock-based employee compensation, as required by SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS 148 "Accounting for Stock-Based Compensation - transition and disclosure", an amendment of SFAS No. 123 for the three months ended March 31, 2005 and 2004 (in thousands, except per share data): 4
Three Months Ended March 31, --------------------------------- 2005 2004 --------------- ------------- Net income (loss), as reported $ 93 $ (90) Deduct: Fair value of stock-based employee compensation costs (32) (23) -------------- -------------- Pro forma net income (loss) $ 61 $ (113) ============== ============== Basic net income (loss) per share : As reported $ 0.01 $ (0.01) =============== ============= Pro forma $ 0.01 $ (0.02) =============== ============= Diluted net income (loss) per share: As reported $ 0.01 $ (0.01) =============== ============= Pro forma $ 0.00 $ (0.02) =============== =============
2. Loss Per Share Data Common stock equivalents in the three-month period ended March 31, 2004, were anti-dilutive due to the net losses sustained by the Company during this period. Therefore, the diluted weighted average common stock shares outstanding in this period are the same as the basic weighted average common stock shares outstanding. 3. Income Taxes The income tax expense for the Company's income from operations generated during the first quarter of 2005 was offset by a reduction in the valuation allowance established against deferred tax assets arising from prior periods. For the three-month period ended March 31, 2004, the Company did not recognize an income tax benefit for its operating losses generated in that period based on uncertainties concerning its ability to generate taxable income in future periods. The tax benefit for the three-month period ended March 31, 2004 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 During March 2005, the Company made payments of approximately $188,000 that was comprised of $157,000 of principal and the remaining amount was accrued interest on certain notes outstanding. During April 2005, the Company paid another note holder $216,996 that was comprised of $183,946 of principal and the remaining amount was accrued interest on his note. At March 31, 2005, the Company had two notes outstanding to the Chief Executive Officer and on April 29, 2005, the Company refinanced these two notes by executing a $374,304 convertible note. The convertible note bears an annual interest rate of prime and interest is payable monthly. The CEO can convert the note into the Company's common stock at a conversion price of $2.43 per share. The note matures on April 29, 2007. At April 29, 2005, approximately $49,000 of interest is owed to the CEO related to the two notes refinanced and this accrued interest will be payable during May 2005. 5 On March 10, 2005, Digital Fusion amended its secured revolving line of credit agreement with a local bank. The Amendment (i) extended the maturity date to April 10, 2006, (ii) stated the rate of interest at prime, payable monthly and (iii) secured the line of credit by the Company's receivables and certain guarantees. The line of credit is not to exceed the lower of 80% of eligible accounts receivable or $2.5 million. See Note 6 below for a discussion of the debt acquired during the first quarter of 2005 from the acquisition of Summit Research Corporation. 5. Commitments On February 25, 2005, the Company amended the Chief Executive Officer's employment agreement to increase his annual salary to $175,000 per year and the employment agreement expires on February 25, 2007. On February 25, 2005, the Company amended the Chief Operating Officer/President's employment agreement to increase his annual salary to $175,000 per year and the employment agreement expires on February 25, 2007. 6 Summit Acquisition On January 3, 2005, the Company closed on its acquisition of Summit Research Corporation ("Summit"). To purchase all of the outstanding capital stock of Summit, the Company (a) paid $1.6 million in cash (b) issued 575,000 shares of its common stock (c) entered into a six-month note for $898,692 (6% annual interest) and (d) executed a convertible promissory note for $2.7 million. The note holder may convert the principal portion of the convertible note into the Company's common stock at a conversion price of $2.25 per share. In the event the entire convertible note is converted, the note holder will receive a total of 1.2 million shares of the Company's common stock. The annual interest rate is 5%; however, no interest shall accrue for the first six months and during any calendar month in which the average closing price of the publicly traded Company's common stock is greater than $2.80 per share. The Company recorded imputed interest of $131,000. The estimates used to determine the imputed interest will be reviewed each quarter and adjusted as needed. The imputed interest amount of $131,000 will be amortized to interest expense during 2005. The Company also estimated the intrinsic value of the embedded beneficial conversion options of the $2.7 million note at $671,000. The $671,000 will be amortized to interest expense over the life of the note. In conjunction with this acquisition, on January 3, 2005, the Company entered into employment agreements with two individuals with Summit. The annual salaries for these two individuals total $310,000 per year for two years or when the convertible note is paid off whichever is later. The Company included the results of Summit in its financial statements beginning January 1, 2005. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The Company is in the process of evaluating the intangibles purchased, thus the purchase price allocation has not been finalized and is subject to change. 6 (in thousands)
Accounts receivable $ 2,354 Fixed assets 57 Other assets 313 Goodwill and other intangibles 4,522 --------------------- Total assets acquired 7,246 --------------------- Notes payable (300) Accounts payable and accrued liabilities (1,225) --------------------- Total liabilities assumed (1,525) --------------------- Total purchase price $ 5,721 =====================
7. Unaudited Pro Forma Financial information for Acquisition The following unaudited pro forma financial information presents the combined results of operations of the Company as if the Summit acquisition had occurred on January 1, 2004. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations of the Company that would have been reported had the acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations of the Company. Summarized unaudited pro forma results were as follows for the three months ended March 31, 2004: (in thousands) Revenues $ 3,390 Net income $ 40 Basic earnings per share $ 0.01 Weighted average common stock shares outstanding 7,743 8. Other Equity Transactions Effective March 17, 2005, Madison Run, LLC exercised warrants to purchase 354,054 shares of the Company's common stock. The Company received $333,108 from the exercise of these warrants. During the first quarter of 2005, employees exercised options to purchase 150,000 shares of the Company's common stock. The company received $122,600 from the exercise of these options. 9. Reclassifications The Company has reclassed certain amounts for the three months ending 2004 to conform to the 2005 presentation on its Condensed Consolidated Statements of Operation. 7 10. Subsequent Events See note 4 above for a discussion of the convertible note payable issued to the Chief Executive Officer on April 29, 2005 for refinancing of two notes outstanding at March 31, 2005. During April 2005, the Company paid a note holder $216,996 that was comprised of $183,946 of principal and the remaining amount was accrued interest to pay off his note in full. 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 2004 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 is an information technology and engineering services company that helps its customers make the most of technology to meet their business needs. The Company's IT Services provides solutions to both government and commercial customers, focused in the following areas: Business process Automation, Application Development and Data Management, Application Security, Web Portals and Digital Dashboards, System Integration and IT Support. Digital Fusion's engineering services supports a variety of customers with state-of-the art solutions that include Computational Aerodynamics/CFD, Optical Systems Design, Development and Test, Thermo/structural Dynamics, Models and Simulations, and Ground/Flight Planning, Execution, and Data Analysis. Based in Huntsville, Alabama, Digital Fusion also has an office in New Jersey and satellite offices in Florida and Washington DC. 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. Currently, the majority of the Track-It! product sales are to governmental entities where margins are lower. 8 With the addition of engineering services during the third quarter of 2004 and the acquisition of Summit on January 3, 2005, Digital Fusion greatly expanded its services offerings and past performance with governmental customers and federal prime contracts. Engineering services include the design, development and integration of advanced sensing systems as well as aerodynamic analysis and thermal-structural analysis. The engineering services provided by the Summit acquisition include modeling & simulation, hardware-in-the-loop testing, mechanical design & prototype fabrication, information technology and information management systems, program analysis, and associated technology transfer into production automation processes. These new services give the Company the ability to capitalize on the increased spending by the governmental sector due to increased military and homeland security spending. With the addition of engineering services and the acquisition of Summit, the Company believes it has taken the necessary steps to attain positive cash flow from continuing operations during 2005. The Company will continue to focus on consistent collections of accounts receivable and continued improvements in its operational performance. Company management believes that, as a result of these actions and assuming it can grow its client base in the private and federal sectors, it currently has sufficient cash to meet its funding requirements over the next year, although the Company has experienced negative cash flows from operations and incurred large net losses in the past. Results of Operations THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2004 REVENUES. Services and fees revenues increased by approximately $2.2 million to $3.5 million for the three months ended March 31, 2005 and reimbursed costs revenue increased by approximately $496,000 to $509,000 for the same period. The combined increase from consulting revenue and reimbursed costs revenue was $2.7 million for the three months ending March 31, 2005 compared to the same period in the prior year. The Summit acquisition accounted for $2.2 million of increased revenue and the newly formed engineering services accounted for $750,000 of revenues during the first quarter of 2005. This was offset by the reduction of revenue from the Company's IT services of approximately $300,000 that was the result of the IT Support and Integration service being phased out during 2004. During the first quarter of 2005, the Company's largest customer contributed 31% of its revenue with two other customers contributing 13% and 10% of revenue each. The Company expects its services and fees and reimbursed costs revenues to increase during the remainder of 2005 as compared to 2004 due to the addition of engineering services and the Summit acquisition. Revenues for the Company's products for the three months ended March 31, 2005, increased to $437,000 as compared to $205,000 for the three months ended March 31, 2004. During the third quarter of 2004, Digital Fusion began selling the SPI Dynamics Information Assurance product line WebInspect, which was $101,000 of the increase. The remaining increase is due to Digital Fusion being the sole source through which Intuit can sell to governmental entities. As the relationship between DFI and Intuit has solidified, Intuit developed its own federal team that concentrates on governmental agencies exclusively. 9 COST OF SERVICES AND GOODS SOLD. Cost of services includes labor, or the salaries and wages of our employees, plus fringe benefit; and other direct costs. Cost of services increased by $1,733,000 to $2,663,000 for the three months ended March 31, 2005. The increase is due to the increase in revenues as a result of the Summit acquisition and the addition of engineering services. Reimbursed costs consist primarily of third-party materials, such as hardware and software that we purchase for customer solutions resold to customers and also include the costs of subcontracted labor and travel related expenses that are reimbursed. The increase in the reimbursed costs from $13,000 for the three months ended March 31, 2004 to $476,000 for the three months ended March 31, 2005 is primarily due to the materials that are resold to the Summit customers. Summit was acquired on January 3, 2005; therefore, there were no cost of materials during 2004. Product cost of goods sold increased by $233,000 to $422,000 for the three months ended March 31, 2005. The increase is due to the increased sales of the Intuit product Track-It! and the newly introduced SPI Dynamics Information Assurance product line WebInspect. GROSS PROFIT. Gross profit for services during the first quarter of 2005 is $832,000 or 24% of services revenues as compared to $338,000, or 27% of services revenues for the first quarter of 2004. The decrease in services gross profit as a percent of services revenues is primarily due to an increase in benefit costs incurred beginning January 1, 2005, which resulted in increased costs of $200,000 for the three months ending March 31, 2005. Gross profit for the reimbursed costs during the first quarter of 2005 is $33,000 or 6% of reimbursed costs revenue as compared to $-0- for the first quarter of 2004. The reimbursed costs will have a low margin as this is reimbursement for costs incurred with a small mark-up for handling costs, if any. Gross profit for product was $15,000 or 3.4% and $16,000 or 7.8% for the quarter ending March 31, 2005 and 2004 respectively. The consistent and low profit margin on product sales is attributable to the low mark-up permitted 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 related to the administration of the company. SG&A expenses increased $228,000 for the three-month period ended March 31, 2005 compared to the same period during 2004. The increase in SG&A for the first quarter of 2005 compared to the same period during 2004 is primarily due to the addition of engineering services and the acquisition of Summit. SG&A as a percent of revenue was 14% and 28% for the three months ending March 31, 2005 and 2004, respectively. The Company expects its SG&A will continue to decrease as a percent of revenue for the remainder of 2005; however, the Company expects its SG&A actual dollars to continue to increase for the remainder of 2005 compared to the same periods in 2004 due to the addition of engineering services and the acquisition of Summit. 10 INTEREST EXPENSE, NET. Interest expense increased from $34,000 in the first quarter of 2004 to $47,000 for the first quarter of 2005. The increase is due to the additional debt issued to the former Summit shareholder for the acquisition of Summit. AMORTIZATION OF DISCOUNT ON DEBT AND INTRINSIC VALUE OF CONVERTIBLE DEBT. The $32,000 amortization of debt discount and $70,000 from the intrinsic value of the convertible debt are related to the convertible debt issued to the former Summit shareholder. The Company expects these expenses to continue throughout 2005. There were no such expenses during 2004. INCOME TAX BENEFIT. The income tax expense for the Company's income from operations generated during the first quarter of 2005 was offset by a reduction in the valuation allowance established against deferred tax assets arising from prior periods. The Company has not recognized an income tax benefit for its operating losses generated in the three-month period ended March 31, 2004 based on uncertainties concerning its ability to generate taxable income in future periods. The tax benefit for the three-month period ended March 31, 2004 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 recorded net income of $93,000 for the three-month period ended March 31, 2005, compared to a net loss of $90,000 for the three-month period ended March 31, 2004. The increase in net income for the first quarter of 2005 compared to the same period during 2004 is primarily the result of the addition of engineering services and the Summit acquisition. Liquidity and Capital Resources Net cash used in operating activities was $1.3 million during the first quarter of 2005. Net of unbilled revenue, the Company had an increase in accounts receivable of $1.3 million as a result of the acquisition of Summit and the addition of engineering services. The Company expects its accounts receivable will continue to grow during 2005 as its revenues grow. The Company will attempt to collect its accounts receivable as quickly as possible to minimize this increase in accounts receivable. The largest cost of sales is for personnel costs and this cost must be paid timely and cannot be delayed; thus as the Company's revenues grow this will cause a use of cash in the interim period until the revenue can be collected. The Company is able to borrow on its line of credit up to 80% of its eligible accounts receivable to a maximum borrowing of $2.5 million. This borrowing capability helps the Company's cash flow until the accounts receivable are collected. During the first quarter of 2005, the Company invested $71,000 in computer equipment for the Company's operations. The Company does not expect to have significant equipment purchases during the remainder of 2005. On January 3, 2005, the Company closed on its acquisition of Summit. Under the terms of the Summit acquisition agreement, the Company (a) paid $1.6 million in cash (of which $500,000 was in escrow at December 31, 2004) (b) issued 575,000 shares of the Company's common stock, (c) executed a $898,692 six-month note and (d) executed a $2.7 million convertible promissory note. The convertible note requires a $600,000 principal payment on December 31, 2005. 11 The principal portion of the convertible note may be converted at any time by the note holder into the Company's common stock at a conversion price of $2.25 per share. In the event the entire convertible note is converted, the Company would issue 1.2 million shares of the Company's common stock. No interest will accrue for the first six months and during any calendar month in which the average closing price of the Company's common stock is greater than $2.80 per share. Net cash provided by financing activities for the first quarter of 2005 was $2.2 million. The Company received $455,000 of proceeds from the exercise of warrants and options and $1.9 million from its line of credit. This was offset by the payment of $166,000 to certain note holders during the first quarter of 2005. During April 2005, the Company also paid principal and interest of $217,000 on another note. Also on April 29, 2005, the Company executed a $374,304 convertible note payable to its CEO to refinance two notes it had outstanding to the CEO at March 31, 2005. The Company owes the CEO $49,000 of interest related to the two notes that were refinanced and this accrued interest will be payable during May 2005. The interest on the convertible debt is payable monthly with the principal due on April 29, 2007. The CEO can convert the note into the Company's common stock at a conversion price of $2.43 per share. Working capital at March 31, 2005 is $1.4 million. The net accounts receivable balance outstanding at March 31, 2005 is $4.7 million. During 2005, the Company has funded its cash needs through consistent collections of accounts receivable, through the exercise of warrants and options and by borrowing on its line of credit, which is secured by the Company's receivables and certain guarantees, at an interest rate of prime. Management is currently building relationships in which Digital Fusion would be the service provider. During October 2002, DFI was awarded its five-year information technology schedule by the U.S. General Services Administration (GSA), which makes the Company's services readily available to federal agencies. Federal services revenues are expected to increase with the employment of Gary Ryan as the Company's president during mid-2004, the addition of the Company's engineering services during late 2004 and the acquisition of Summit Research Corporation during January of this year. During the third quarter 2004, Digital Fusion began selling the SPI Dynamics Information Assurance product line WebInspect. Digital Fusion is a Value Added Reseller (VAR) for SPI Dynamics. WebInspect audits web based applications and determines security vulnerabilities. Digital Fusion markets these products along with remediation services to commercial and government customers. Digital Fusion's ability to grow substantially may be dependent upon obtaining cash flow from its operations and other external sources. The Company has taken numerous actions to restructure and streamline its operations. Most recently, the Company added engineering services during late 2004 and acquired Summit during early 2005. The Company has also obtained a line of credit secured with its receivables and certain guarantees. Because of these actions, management believes it 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 exercise of warrants and options and its line of credit. Future growth will be supported with revenue from continuing operations, which includes the Company's new engineering services and the acquisition of Summit, a high technology engineering firm. If the Company fails to meet its goals, seeks to expand its operations at a level above its current cash flow from operations, or does not collect its accounts receivable in a timely manner, it may require an infusion of working capital the availability and terms of which cannot be predicted. 12 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 below, as are the estimates and judgments involved: Accounts Receivable Reserve. The Company's accounts receivable are reduced by $54,000 for an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based on a specific analysis of accounts in the receivable portfolio and a general reserve based on the aging of receivables and historical write-off experience. The Company's management believes the allowance to be reasonable. The Company does not accrue interest on past due accounts receivable. Valuation of Goodwill. Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. This annual impairment test is performed in the last quarter of each fiscal year. The goodwill impairment test requires a comparison of the fair value of the Company to the amount of goodwill recorded. If this comparison reflects impairment, then the loss would be measured as the excess of recorded goodwill over its implied fair value. Although the Company's management believes that the estimates and assumptions used are reasonable, actual results could differ. Item 3. Controls and procedures. a. Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures designed to ensure that material information related to us is recorded, processed, summarized and reported in accordance with SEC rules and forms. Our management, with the supervision of the Chairman and Chief Executive officer, Roy E. Crippen, III, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, Mr. Crippen has concluded that our disclosure controls and procedures are effective in causing material information to be recorded, processed, summarized and reported so as to ensure the quality and timeliness of our public disclosures in compliance with SEC rules and forms. b. Changes in internal controls. There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting. 13 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. Issuance of Unregistered Securities- - ------------------------------------ On January 3, 2005, the Company acquired all of the common stock shares of Summit in exchange for consideration paid totaling $5,721,000, which included issuing 575,000 shares of the Company's common which shares were valued at $575,000. These shares were issued to a sophisticated investor. The company relied on Section 4(2) of the Securities Act of 1933 as the basis for an exemption from registration for this issuance. On March 28, 2005, the Company issued 354,054 shares of its common stock for exercises of warrants. The Company received proceeds of $270,608 for 304,054 shares of common stock at an exercise price of $0.89 per share and $62,500 for 50,000 shares of common stock at an exercise price of $1.25 per share. These shares were issued to a sophisticated investor. The company relied on Section 4(2) of the Securities Act of 1933 and Regulation D thereunder as the basis for an exemption from registration for this issuance. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits. (a) Exhibits The following is a list of Exhibits filed as a part of this Report. Exhibit No. Description - ----------- ----------- * 10.1 Convertible Promissory Note dated April 29, 2005 for $374,303.52 between Roy E Crippen, III (CEO) and the Company is incorporated herein by reference to Exhibit 10.1 to the Form 8-K filed May 5, 2005. * 10.2 Registration Rights Agreement dated April 29, 2005 between Roy E. Crippen, III (CEO) and the Company in incorporated herein by reference to Exhibit 10.2 to the Form 8-K filed May 5, 2005. **10.3 Consultant agreement dated March 30, 2005 between Frank Libutti and the Company to provide business development. **10.4 Employment Agreement dated April 7, 2005 between Digital Fusion and Christopher Brunhoeber + **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. 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: May 12, 2005 By: /s/ Roy E. Crippen, III ----------------------------------- Name: Roy E. Crippen, III Title: Chief Executive Officer (Principal Executive Officer) 15 EX-31.1 2 a4887211ex311.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Roy E. Crippen, III certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Digital Fusion, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as the end of the period covered by this report based on such evaluation; and c) disclosed in this any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons fulfilling the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 12, 2005 By: /s/ Roy E. Crippen, III ---------------------------------- Roy E. Crippen, III Chief Executive Officer EX-32.1 3 a4887211ex321.txt EXHIBIT 32.1 EXHIBIT 32.1 WRITTEN STATEMENT OF THE CHIEF EXECUTIVE OFFICER Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the undersigned President and Chief Executive Officer of Digital Fusion, Inc. (the "Company"), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-QSB of the Company for the quarter ended March 31, 2005 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 12, 2005 By: /s/ Roy E. Crippen, III --------------------------------- Roy E. Crippen, III EX-10.3 4 a4887211ex103.txt EXHIBIT 10.3 Exhibit 10.3 CONSULTANT AGREEMENT This Agreement for consulting services is between Digital Fusion Solutions, Inc., a Florida corporation, whose principal place of business is located at 4940-A Corporate Drive, Huntsville, Alabama, 35805 (herein "DFS") and Frank Libutti of The Rhino Group (herein "Consultant"). I. ENGAGEMENT DFS hereby retains Consultant to provide the services described in Attachment A hereto. Consultant shall serve at DFS's call. Consultant's principal point of contact at DFS with respect to the specific nature and scope of the services to be provided hereunder shall be Gary S. Ryan, President & COO or designee. Consultant shall submit monthly written reports to DFS, in the format described in Attachment B hereto, setting forth the actions taken on behalf of DFS and provide such other reports as DFS may reasonably require. II. PLACE OF ENGAGEMENT Consultant shall perform the services called for under this Agreement in such places and at such times as DFS may reasonably require. III. TERM OF ENGAGEMENT The term of this Agreement shall be for a period of one year commencing on April 1, 2005 and terminating on March 31, 2006. This Agreement may be renewed or extended for such time as DFS and the Consultant may agree upon in writing. IV. COMPENSATION A. Fee. --- DFS shall pay Consultant and Consultant shall accept from DFS in full payment for services hereunder, compensation at the rate of Two Hundred Dollars ($200.00) for each hour of service performed. Payment shall be made only upon submittal of a proper invoice and only to the extent that Consultant satisfactorily performs services pursuant to this Agreement and substantiates such performance in the monthly activity report required by Attachment B. In the event services are not required or performed in a given month, DFS shall be under no obligation to pay any compensation for that month except as otherwise provided herein. If Consultant fails to substantiate any invoice for services, DFS shall have no obligation to compensate Consultant for such claimed services. B. Expenses. --------- DFS shall reimburse Consultant for all reasonable and necessary business expenses greater than Two Hundred Fifty Dollars ($250.00) in a given month incurred by Consultant in connection with the rendering of services hereunder provided that all such expenses are approved in advance by Gary S. Ryan, President & COO or his designee. Claims for expenses must be in accordance with DFS's established policies and limitations pertaining to allowable expenses and documented pursuant to the procedures applicable to DFS's employees. C. Maximum Compensation. --------------------- Notwithstanding any other provisions of this Agreement to the contrary, DFS shall not be obligated to request or to pay Consultant for any minimum amount of services, and in no event shall DFS be obligated during the term of this Agreement for consulting fees and expenses of more than Fifty-Nine Thousand Nine Hundred Dollars ($59,900.00). D. Full Extent Of Compensation. ---------------------------- Unless otherwise specifically stated in writing, this Section IV describes the full extent of compensation Consultant shall receive under this Agreement and Consultant shall not be entitled by virtue of this Agreement to be paid a commission or to participate in any insurance, saving, retirement or other benefit programs, including, without limitation, stock ownership plans offered by DFS to its employees, nor shall this Agreement in any way modify any other Agreement that Consultant may have with DFS. E. Warranty. -------- Consultant certifies and warrants that in the course of performing services under this Agreement, no payments will be made to government officials or customer representatives, that no government official or customer representative has any direct or indirect investment interest or interest in the revenues or profits of Consultant, and that no expenditure for other than lawful purposes will be made. F. Exclusion Of Lobbying Costs From Overhead Rates. ------------------------------------------------ DFS is prohibited from charging directly or indirectly, costs associated with lobbying activities to its contracts with the United States Government. Unallowable costs associated with lobbying activities are defined at Federal Acquisition Regulations (FAR)31.205-22, effective as of the date of this Agreement. Consultant agrees that in the event that consultant performs lobbying activities under this Agreement, Consultant shall provide DFS with a detailed accounting of time expended, individual agency/congressional employees contacted, and DFS programs discussed in the required activity report. V. TRADE SECRETS AND PROPRIETARY INFORMATION A. Disclosure To Third Parties Prohibited. --------------------------------------- Consultant shall not divulge, disclose or communicate any information concerning any matters affecting or relating to the business of DFS without the express written consent of DFS. The terms of this section shall remain in full force and effect after the termination or expiration of this Agreement. 2 B. Ideas, Improvements and Inventions. ----------------------------------- Any and all ideas, improvements and inventions conceived of, developed, or first reduced to practice in the performance of work hereunder for DFS shall become the exclusive property of DFS and ideas and developments accruing there from shall all be fully disclosed to DFS and shall be the exclusive property of DFS and may be treated and dealt with by DFS as such without payment of further consideration than is hereinabove specified. Consultant shall preserve such ideas, improvements and inventions as confidential during the term of the contract and thereafter and will execute all papers and documents necessary to vest title to such ideas, developments, information, data, improvements and inventions in DFS and to enable DFS to apply for and obtain letters patent on such ideas, developments, information, data, improvements, and inventions in any and all countries and to assign to DFS the entire right, title and interest thereto. C. Notes, Memoranda, Reports and Data. ----------------------------------- Consultant agrees that the original and all copies of notes, memoranda, reports, findings, or other data prepared by Consultant in connection with the services performed hereunder shall become the sole and exclusive property of DFS. D. Disclosure of Confidential or Proprietary Information of Third Parties Prohibited. ---------------------------------------------------------------------- Consultant will not disclose to DFS or induce DFS to use any secret process, trade secret, or other confidential or proprietary knowledge or information belonging to others, including but not limited to the United States. Such information includes but is not limited to information relating to bids, offers, technical proposals, responses to requests for procurement, rankings of competitors and other similar procurement sensitive information. VI. COOPERATION WITH DFS During and after the expiration of this Agreement, Consultant shall cooperate with DFS in regard to any matter, dispute or controversy in which DFS is involved, or may become involved and of which Consultant may have knowledge. Such cooperation shall be subject to further agreement providing for legally appropriate compensation. VII. INDEMNIFICATION Consultant shall indemnify, defend and hold DFS harmless from any and all claims of third parties for loss or damage arising out of or relating to Consultant's activities or operations or omissions, including those of the Consultant's employees, pursuant to this Agreement. Such indemnification shall survive the expiration or termination of this Agreement. VIII. INDEPENDENT CONTRACTOR Consultant shall render all services hereunder as an independent contractor and shall not hold out himself or herself as an agent of DFS. Nothing herein shall be construed to create or confer upon Consultant the right to make contracts or commitments for or on behalf of DFS. 3 IX.TAXES Consultant shall pay all taxes due with respect to the compensation paid hereunder. X. OBSERVANCE OF APPLICABLE LAWS AND REGULATIONS A. United States Laws. ------------------- Consultant shall comply with and do all things necessary for DFS to comply with United States laws and regulations and express policies of the United States Government, including but not limited to the requirements of the Foreign Corrupt Practices Act, 15 U.S.C. Section 78 dd-1 et seq., the Federal Acquisition Regulations, 48 CFR section 1.101 et seq.,("FAR"), the International Traffic in Arms Regulations, 22 CFR Parts 120 through130 and applicable regulations; the Byrd Amendment (31 U.S.C. Section 1352) and applicable regulations; the Office of Federal Procurement Policy Act (41 U.S.C. Section 423) and applicable regulations; and the DoD Joint Ethics Regulation (DoD 5500.7-R). No part of any compensation or fee paid by DFS will be used directly or indirectly to make any kick backs to any person or entity, or to make payments, gratuities, emoluments or to confer any other benefit to an official of any government or any political party. Consultant shall not seek, nor relay to DFS, any classified, proprietary or source selection information not generally available to the public. Consultant shall also comply with and do all things necessary for DFS to comply with provisions of contracts between agencies of the United States Government or their contractors and DFS that relate either to patent rights or the safe guarding of information pertaining to the security of the United States. This entire Agreement and/or the contents thereof may be disclosed to the United States Government. B. No Selling Agency Employed. --------------------------- Consultant further represents and warrants that no person or selling agency has been or will be employed or retained to solicit or secure any contract, including but not limited to a United States Government contract, upon an agreement or understanding for a commission, percentage, brokerage, or contingent fee, excepting bona fide employees or bonafide established commercial or selling agencies maintained by the Consultant for the purpose of receiving business. In the event of a breach or violation of this warranty, DFS shall have the right to annul this Agreement without liability or in its discretion to deduct from the fee or consideration, or otherwise recover, the full amount of such commission, percentage, brokerage or contingent fee. C. State Law And Regulations. -------------------------- Consultant shall comply with and do all things necessary for Consultant and DFS each to comply with all laws and regulations of the State of Alabama and any other state, including but not limited to the District of Columbia, in which services hereunder are or may be rendered. 4 D. Maintenance Of Time And Expense Records. ---------------------------------------- Consultant shall maintain appropriate time and expense records pertaining to the services performed under this Agreement. Said records shall be subject to examination and audit by DFS and the United States Government until notified by DFS in writing, that the records no longer need to be maintained. E. Certification. -------------- This Agreement is made in material reliance upon the representations and warranties made by Consultant. The effectiveness of this Agreement is contingent upon and will not commence until receipt by DFS of the certifications set forth in Attachment C hereto. In the event that DFS has reason to believe that these certifications are incorrect, DFS may treat this Agreement as being null and void or may terminate this Agreement pursuant to Section XVI. XI. ASSIGNMENT OF RIGHTS This Agreement and the rights, benefits, duties and obligations contained herein may not be assigned or otherwise transferred in any manner to third parties without the express written approval of DFS. Any such assignment or transfer without prior approval of DFS will be null, void and without effect. XII. MODIFICATION No waiver or modification of this Agreement or of any covenant, condition, or limitation herein shall be valid and enforceable unless such waiver or modification is in writing. XIII. USE OR EMPLOYMENT OF THIRD PARTIES Consultant shall not utilize or employ any third party, individual or entity, in connection with Consultant's performance of services under this Agreement without the express written approval of DFS. XIV. CONFLICTS OF INTEREST No business or legal conflicts of interest shall exist between services performed or to be performed by Consultant on behalf of DFS and by Consultant on behalf of any other client. The identity of Consultant's directorships, other employment and clients shall be fully disclosed in the Certification, Attachment D. XV. COVENANT NOT TO COMPETE Consultant shall not directly or indirectly engage in any activities designed to deprive or which may have the effect of depriving DFS of the goodwill of customers or potential customers of its products and services. Further, Consultant shall not, during the term of this Agreement, and for a period of twelve (12) months after expiration or termination of this Agreement, represent, act as representative for, or market or sell, directly or indirectly, products competing with DFS products and services. 5 XVI. TERMINATION A. Thirty Days Notice. ------------------- Either party may terminate this Agreement upon thirty days written notice to the other. Except as otherwise provided herein, in the event of termination, Consultant shall be entitled to compensation until the expiration of the stated notice period. B. Violation Of Term Or Condition. ------------------------------- Notwithstanding the foregoing, in the event of a violation by Consultant of any term or condition, express or implied, of this Agreement or of any federal or state law or regulation pertaining to or arising from Consultant's performance of services under this Agreement, DFS may, in its discretion, terminate this Agreement immediately, without notice and in such event, Consultant shall only be entitled to compensation up to the time of such violation. C. Bankruptcy. ----------- Notwithstanding the foregoing, in the event that Consultant is adjudicated a bankrupt or petitions for relief under bankruptcy, reorganization, receivership, liquidation, compromise or other arrangement or attempts to make an assignment for the benefit of creditors, this Agreement shall be deemed terminated automatically, without requirement of notice, without further liability or obligation to DFS. XVII. SEVERABILITY OF PROVISIONS All provisions contained herein are severable and in the event any of them are held to be invalid by any competent court, this Agreement shall be interpreted as if such invalid provision was not contained herein. XVIII. AVAILABILITY OF EQUITABLE REMEDIES Consultant understands and agrees that any breach or evasion of any of the terms of this Agreement will result in immediate and irreparable injury to DFS and will entitle DFS to all legal and equitable remedies including, without limitation, injunction, or specific performance. XIX. GOVERNING LAW This Agreement and the performance hereunder shall be governed by and construed in accordance with the laws of the State of Alabama (excluding any conflicts of laws provisions) which shall be the exclusive applicable law. 6 XX. SETTLEMENT OF DISPUTES A. DFS and Consultant hereby consent to the resolution by arbitration of all disputes, issues, claims or controversies arising out of or in connection with this Agreement, that DFS may have against Consultant, or that Consultant may have against DFS, or against its officers, directors, employees or agents acting in their capacity as such. Each party's promise to resolve all such claims, issues, or disputes by arbitration in accordance with this Agreement rather than through the courts is consideration for the other party's like promise. It is further agreed that the decision of an arbitrator on any issue, dispute, claim or controversy submitted for arbitration, shall be final and binding upon the DFS and Consultant and that judgment may be entered on the award of the arbitrator in any court having proper jurisdiction. B. Except as otherwise provided herein or by mutual agreement of the parties, any arbitration shall be administered in accordance with the then-current Model Arbitration Procedures of the American Arbitration Association (AAA) before an arbitrator who is licensed to practice law in the state in which the arbitration is convened. The arbitration shall be held in Huntsville, Alabama or at any other location mutually agreed upon by the parties. C. The parties shall attempt to agree upon the arbitrator. If the parties cannot agree on the arbitrator, the AAA shall then provide the names of nine (9) arbitrators experienced in business employment matters along with their resumes and fee schedules. Each party may strike all names on the list it deems unacceptable. If more than one common name remains on the list of all parties, the parties shall strike names alternately until only one remains. The party who did not initiate the claim shall strike first. If no common name remains on the lists of the parties, the AAA shall furnish an additional list until an arbitrator is selected. D. The arbitrator shall interpret this Agreement, and any applicable DFS policy or rules and regulations, any applicable substantive law (and the law of remedies, if applicable) of the state of Alabama, or applicable federal law. In reaching his or her decision, the arbitrator shall have no authority to change or modify any lawful DFS policy, rule or regulation, or this Agreement. The arbitrator, and not any federal, state or local court or agency, shall have exclusive and broad authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including, but not limited to, any claim that all or any part of this Agreement is voidable. XXI. NOTICE Any notice to be given hereunder shall be in writing, mailed by certified or registered mail with return receipt requested addressed to DFS: Digital Fusion Solutions, Inc. 4940-A Corporate Drive Huntsville, Alabama, 35805 Attn: Roy E. Crippen, III, CEO 7 or to Consultant: The Rhino Group 4413 49th Street NW Washington, D.C. 20016 Attn: Frank Libutti or to such other address as may have been furnished at the date of mailing either by DFS or Consultant in writing. XXII. COMPLETE AGREEMENT This Agreement constitutes the entire agreement of the parties with respect to the engagement of Consultant by DFS and supersedes any and all other agreements between the parties. The parties stipulate and agree that neither of them has made any representation with respect to this Agreement except that such representations are specifically set forth herein. The parties acknowledge that any other payments or representations that may have been made are of no effect and that neither party has relied on such payments or representations in connection with this Agreement or the performance of services contemplated herein. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be entered into and executed as set forth below. DIGITIAL FUSION SOLUTIONS, INC. By: /s/ Roy E. Crippen, III -------------------------- Its: Chief Executive Officer --------------------------- Date: March 30, 2005 -------------------------- THE RHINO GROUP By: /s/ Frank Libutti --------------------------- Name: President, Rhino Group --------------------------- TIN: --------------------------- Date: 16 April 2005 --------------------------- 8 ATTACHMENT A ------------ STATEMENT OF WORK Frank Libutti When requested, Consultant shall advise DFS on issues relating to business development, new business proposals and business opportunity evaluations. Other areas of support may, when requested in writing, include: 1. 2. 9 ATTACHMENT B ------------ MONTHLY ACTIVITY REPORT FORMAT Frank Libutti As a Consultant, you are required to submit a written activity report each month directly to the DFS employee identified in Article I of the Agreement. Each activity report must include the following information: 1. A detailed accounting of the amount of time spent by you on behalf of DFS since your last Activity Report, itemized each hour or by fraction of an hour worked, reflecting the work performed during each periodic segment and the individual who performed it. 2. The identity of all persons with whom you met or discussed business on behalf of DFS, including a description of the business or government affiliation of the individual, as well as the specific position or rank of each person. 3. A statement of the subject matter of all meetings and discussions in which you participated on behalf of DFS, including all DFS programs discussed in connection with any activities performed. 4. An invoice, on a separate page, clearly identifying the Agreement, specifying the time period covered, summarizing the fees and expenses claimed for that time period, and enclosing the original receipts for all claimed expenses. Consultant must certify on each invoice that the charges for the period covered by it do not include any charges for assignments not authorized by the Agreement. A suggested certification is as follows: "The undersigned certifies that the payment requested herein is correct and just, and that payment has not been received. The undersigned certifies that this invoice does not include any charges for services not authorized by the Agreement and, specifically, that no services have been performed involving the influence or attempt to influence any Federal agency office or employee, any Member of Congress, officer or employee of Congress, or employee of a Member of Congress, in connection with any Federal action as defined in the Byrd Amendment (including the awarding, extension, continuation, renewal, amendment, or modification of any Federal contract); and that no services have been performed regarding advice, information, direction or assistance to DFS for a Federal contract." 10 Unless your services are fully described and accurately recorded in this fashion, your fees will not be paid by DFS. You are not authorized to engage in any activity covered by the Byrd Amendment (31 U.S.C. Section 1352), but if you do so you must clearly identify it as such in your activity report, and the activity you describe shall be treated as a material representation of fact upon which DFS shall rely in preparing any certifications and/or disclosures required by the Byrd Amendment, 31 USC Section 1352. Any and all liability arising from an erroneous representation shall be borne solely by you. Acknowledged and Understood: By: ------------------------ Name: ------------------------ Date: ------------------------ 11 ATTACHMENT C ------------ CERTIFICATION Frank Libutti The undersigned, Frank Libutti, ("Consultant"), hereby certifies, represents and warrants the following: 1. In past dealings with DFS or other clients, Consultant has complied with all applicable laws, rules, regulations, and express policies of the United States and the State or territory in which services were performed. 2. In performing the services under this Agreement, Consultant will comply with all applicable laws, rules, regulations and express policies of the United States and the State or territory in which services will be performed. 3. There have been no kick-backs or other payments made, either directly or indirectly, to any DFS director, employee or consultant or to the family of any DFS director, employee or consultant. 4. No kick-backs or other payments will be made, either directly or indirectly, to any DFS director, employee or consultant or to the family of any DFS director, employee or consultant. 5. Consultant has not used and will not use any part of the compensation paid by DFS to make payments, gratuities, emoluments or to confer any other benefit to an official of any government, or any political party, or official of any political party. 6. No person or selling agency has been or will be employed or retained to solicit or secure any contract, including but not limited to a United States government contract, upon an agreement or understanding for a commission, percentage, brokerage, or contingent fee, excepting bona fide employees or bonafide established commercial selling agencies maintained by the Consultant for the purpose of receiving business. 7. No classified, proprietary, source selection or procurement sensitive information has been or will be solicited on behalf of or conveyed to DFS. 8. Consultant has not influenced or attempted to influence and will not influence or attempt to influence any United States government official or employee in connection with the award, extension, continuation, renewal, amendment or modification of a federal contract or otherwise engage in "non-exempt services" within the meaning of the Byrd Amendment, 31 U.S.C. Section 1352. 12 9. Consultant has not utilized or employed and will not utilize or employ any third party, individual or entity, in connection with the performance of services on behalf of DFS, except as follows: (if none, state "None"). 10. No business or legal conflicts of interest exist between services performed or to be performed by Consultant on behalf of DFS and by Consultant on behalf of any other client, the identities of which Consultant has fully disclosed to DFS. The person whose signature appears below is authorized by Consultant to certify that the foregoing is true and correct. I declare under penalty of perjury that the foregoing certificate is true and correct. By: -------------------------- Name: -------------------------- Date: -------------------------- 13 ATTACHMENT D ------------ CERTIFICATION OF DIRECTORSHIPS, EMPLOYMENT AND CLIENTS Frank Libutti The following is a complete list of Consultant's directorships, employment and consulting clients (if none, state "None"): I. DIRECTORSHIPS AND EMPLOYMENT Name of Company Responsibilities/Duties --------------- ----------------------- II. CLIENTS Name of Company Responsibilities/Duties --------------- ----------------------- By: ----------------------- Name: ----------------------- Date: ----------------------- 14 EX-10.4 5 a4887211ex104.txt EXHIBIT 10.4 Exhibit 10.4 EMPLOYMENT AGREEMENT THIS AGREEMENT, effective as of, April 25, 2005 (the "Effective Date"), is made by and between Digital Fusion, Inc., a Delaware corporation (the "Company") with its corporate offices at 4940-A Corporate Drive, Huntsville, Alabama 35805, and Chris Brunhoeber (the "Executive"), residing at 104 Jones Valley Drive, SW, Huntsville, Alabama 35802. BACKGROUND INFORMATION ---------------------- The Company and Executive wish to enter into a new agreement upon the terms and conditions set forth herein. Therefore, in consideration of the mutual promises and covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: OPERATIVE PROVISIONS -------------------- 1. Employment; Term. ----------------- (a) Employment. Subject to the terms and conditions set forth herein, the Company agrees to employ and Executive agrees to serve as the Company's Vice President of Finance. During the term of employment, Executive shall have such responsibilities, duties and authorities as commensurate with companies of similar size, and additionally, such responsibilities, duties and authorities as may be assigned to the Executive by the Company's President, provided, that, the same is not inconsistent with such position. Executive agrees that he will use his full business time to promote the interests of the Company and its affiliates and to fulfill his duties hereunder. Nothing in this Agreement shall however preclude Executive from engaging, so long as, in the reasonable determination of the Company's Board of Directors, such activities do not interfere with the execution of his duties and responsibilities hereunder, in charitable and community affairs, from managing any passive investment made by Executive in publicly traded equity securities or other property (provided, that, no such investment may exceed 5% of the equity of any entity, without the prior approval of the Company's Board of Directors) or from serving, subject to the prior approval of the Company's Board of Directors, as a member of boards of directors or as a trustee of any other corporation, association or entity (provided, that, no such prior approval shall be required for any such boards on which Executive shall currently serve). For purposes of the preceding sentence, any approval of the Company's Board of Directors required herein shall not be unreasonably withheld. (b) Term. Unless sooner terminated pursuant to Section 3, the term of Executive's employment pursuant to this Agreement shall commence on the Effective Date and shall continue thereafter for a period of two years (the "Term"). Executive and the Company understand and acknowledge that Executive's employment with the Company constitutes "at-will" employment. Subject to the Company's obligation to provide severance benefits as specified herein, Executive and the Company acknowledge that this employment relationship may be terminated at any time, upon written notice to the other party, with or without Cause or Good Reason, as those terms are defined below, at the option of either the Company or Executive. 1 2. Compensation. During the employment term under this Agreement, the Company shall compensate Executive as follows: (a) Base Salary. Subject to adjustment as set forth below, the Company will pay Executive while he is employed hereunder, an annualized base compensation of not less than Ninety Five Thousand Dollars ($95,000.00) per year, payable in substantially equal semi-monthly installments, or more frequently in accordance with Company's usual payroll policy (the "Base Salary"). Executive shall have a performance and compensation review in January of 2006. (b) Performance Bonus. Executive shall be entitled to an interim metrics bonus based upon the Compensation Committee's approved performance objectives in accordance with Exhibit A attached hereto. In addition, Executive shall be entitled to an annual bonus based on the performance metrics outlined in Exhibit B, attached hereto. Such bonus compensation shall be based, in part, on the achievement of performance criteria established by the Compensation Committee, including criteria relating to the profitability of the Company. (c) Participation in Company Stock Ownership Plan. During the period of Executive's employment, Executive will be entitled to participate in the Company's Stock Option Plan (or such other successor plan), as the Board of Directors or Compensation Committee, in its sole discretion, may determine. Executive shall receive an initial stock option grant in accordance with Exhibit C attached hereto. (d) Benefits. Executive will be eligible to participate in all benefit programs of the Company which are in effect for its senior executive personnel and, to the extent available to executive personnel, its employees generally from time to time. (e) Vacation. Executive will be entitled each year to vacation for a period or periods not inconsistent with the normal policy of Company in effect from time to time, but in any event not less than fifteen vacation days each year and to such holidays as may be customarily afforded to its employees by the Company, during which periods Executive's compensation shall be paid in full. (f) Reimbursement of Expenses. 2 (i) All reasonable travel and entertainment expenses incurred by Executive in the course of fulfilling this Agreement or otherwise promoting the Company and its business shall be reimbursed by the Company. Such reimbursement shall be made to Executive promptly following submission to the Company of receipts and other documentation of such expenses reasonably satisfactory to the Company. (ii) In addition to the expenses reimbursable pursuant to paragraph (i) above, the Company shall also pay to Executive a monthly allowance of $75.00 for telephone expenses. 3. Termination. (a) Death and Legal Incapacity. Executive's employment hereunder shall terminate upon Executive's death or legal incapacity. (b) Disability. Executive's employment hereunder may be terminated by the Company in the event of Executive's Disability. As used in this Agreement, the term "Disability" shall mean the inability or failure of the Executive to perform the essential functions of the position for which he has been employed by the Company, for more than 90 consecutive days or for shorter periods aggregating more than 150 days in any period of 12 consecutive months, all as determined in good faith by a majority vote of the disinterested members of the Company's Board of Directors. Until such termination occurs, Executive shall continue to receive his base salary Base Salary as then in effect, provided, however, that such salary shall be reduced to the extent of any short-term disability benefits provided to Executive under a short-term disability plan sponsored by the Company. (c) For Cause. Executive's employment hereunder may be terminated by the Company for cause ("Cause") upon the occurrence of any of the following events and in accordance with the time periods set forth below: (i) Executive's breach of any material duty or obligation hereunder, which breach continues or renews at any time after notice and a reasonable opportunity to desist or otherwise cure has been furnished; (ii) Executive is convicted or pleads guilty or nolo contendre to any felony (other than traffic violation) or any crime involving fraud, dishonesty or misappropriation; (iii) Executive willfully engages in misconduct that causes material harm to the Company; 3 (iv) The Executive willfully engages in an act that constitutes a conflict of interest with the Company or a usurpation of a business opportunity of the Company, in either case without the prior written approval of the Company's Board of Directors. The determination as to whether any of the foregoing Causes has occurred shall be made in good faith by the affirmative vote of at least 75% of the disinterested members of the Company's Board of Directors. No event shall be deemed a basis for Cause unless Executive is terminated therefore within 60 days after such event is known to the Chairman of the Company or if Executive is Chairman, known to the Chairman of any committee of the Board. (d) For Good Reason. Executive may terminate his employment hereunder for good reason ("Good Reason") if such termination occurs within sixty (60) days after: (i) The Company assigns to Executive any duties or responsibilities inconsistent with Section 1, which assignment is not withdrawn within 20 business days after Executive's notice to the Company of his reasonable objection thereto; (ii) Executive is relocated more than 40 miles from Huntsville, Alabama without his prior written consent; or (iii) The Company breaches any material provision of this Agreement and such breach and the effects thereof are not remedied by the Company within 20 business days after Executive's notice to the Company of the existence of such breach. (e) Effect of Termination. (i) If the Company terminates Executive's employment for reasons other than for Cause, or for Executive's death, legal incapacity or disability, or if Executive terminates this Agreement for Good Reason, the obligations of Executive under this Agreement will terminate except that the covenants contained in Section 4(a) shall continue indefinitely, and the obligations in this section shall continue pursuant to their terms. In such event, for a period of three (3) months after the date of Executive's termination, the Company shall pay Executive, in accordance with customary payroll procedures, Executive's base salary as then in effect and, in addition, any Performance Bonus that Executive would have earned in the year he was terminated, prorated as of the date of termination. For such three-month period, the Company shall continue to provide medical coverage to Executive under substantially the same terms as were in effect on the date Executive's employment terminated under this provision. Additionally, any and all vested options, warrants or other securities awarded to Executive pursuant to the Company's Stock Option Plan or any other similar plan or other written option agreement shall, as of the date of Executive's termination, immediately vest and become exercisable and all such vested options, warrants or other securities shall remain exercisable by Executive for the duration of the period during which the options, warrants or other securities would have remained exercisable if Executive had remained employed by the Company. The amounts paid to Executive under this paragraph shall not be affected in any way by Executive's acceptance of other employment during the three-month period described above. 4 (ii) Except as otherwise provided herein, if Executive terminates his employment for any reason other than Good Reason or Executive's employment is terminated for Cause, the obligations of Executive and the Company under this Agreement will terminate except that the covenants of Executive contained in Section 4(a) shall continue indefinitely and the covenants of Executive contained in Section 4(d) shall continue until the first anniversary of the date of Executive's termination. In such event, Executive shall be entitled to receive only the compensation hereunder accrued and unpaid as of the date of Executive's termination. (iii) If Executive's employment terminates due to a Disability, as defined in Section 3(b), the obligations of Executive under this Agreement will terminated except that the covenants in Section 4(a) shall continue indefinitely. In such event, for a period of one year after the date of Executive's termination, the Company shall pay Executive, in accordance with customary payroll procedures, Executive's Base Salary as then in effect, provided, however, that the payment of such salary shall be reduced to the extent of any long-term disability benefits provided to Executive under a long-term disability plan sponsored by the Company. The vesting and exercise of any and all options, warrants or other securities awarded to Executive pursuant to the Company's Stock Option Plan or any other similar plan shall be governed by the terms of such plan, or if awarded pursuant to a written option agreement, then the terms of such agreement. (iv) No amount payable to Executive pursuant to this Agreement shall be subject to mitigation due to Executive's acceptance or availability of other employment. 4. Restrictive Covenants; Non-Competition. The parties hereto recognize that Executive's services are special and unique and that the level of compensation and the provisions herefor for compensation are partly in consideration of and conditioned upon Executive's not competing with the Company. 5 (a) Except as otherwise permitted hereby, or by the Company's Board of Directors, Executive shall treat as confidential and not communicate or divulge to any other person or entity any information related to the Company or its affiliates or the business, affairs, prospects, financial condition or ownership of the Company or any of its affiliates (the "Information") acquired by Executive from the Company or the Company's other employees or agents, except (i) as may be required to comply with legal proceedings (provided, that, prior to such disclosure in legal proceedings Executive notifies the Company and reasonably cooperates with any efforts by the Company to limit the scope of such disclosure or to obtain confidential treatment thereof by the court or tribunal seeking such disclosure) or (ii) while employed by the Company, as Executive reasonably believes necessary in performing his duties. Executive shall use the Information only in connection with the performance of his duties hereunder, and not otherwise for his benefit or the benefit of any other person or entity. For the purposes of this Agreement, Information shall include, but not be limited to, any confidential information concerning clients, subscribers, marketing, business and operational methods of the Company or its affiliates and its affiliates' clients, subscribers, contracts, financial or other data, technical data or any other confidential or proprietary information possessed, owned or used by the Company. Excluded from Executive's obligations of confidentiality is any part of such Information that: (i) was in the public domain prior to the date of commencement of Executive's employment with the Company or (ii) enters the public domain other than as a result of Executive's breach of this covenant. This Section (4) (a) shall survive the expiration or termination of the other provisions of this Agreement. (b) Executive shall fully disclose to the Company all discoveries, concepts, and ideas, whether or not patentable, including, but not limited to, processes, methods, formulas, and techniques, as well as improvements thereof or know-how related thereto (collectively, "Inventions") concerning or relating to the business conducted by the Company and concerning any present or prospective activities of the Company which are published, made or conceived by Executive, in whole or in part, during Executive's employment with the Company. (c) Executive shall make applications in due form for United States letters patent and foreign letters patent on such Inventions at the request of the Company and at its expense, but without additional compensation to Executive. Executive further agrees that any and all such Inventions shall be the absolute property of Company or its designees. Executive shall assign to the Company all of Executive's right, title and interest in any and all Inventions, execute any and all instruments and do any and all acts necessary or desirable in connection with any such application for letters patent or to establish and perfect in the Company the entire right, title, and interest in such Inventions, patent applications, or patents, and shall execute any instrument necessary or desirable in connection with any continuations, renewals, or reissues thereof or in the conduct of any related proceedings or litigation. 6 (d) During Executive's employment with the Company and for a period of one (1) year after the earlier of the expiration date of this Agreement or the termination Executive's employment hereunder by the Company for Cause or by Executive (other than for Good Reason) or subsequent to a Change in Control, as hereinafter defined: (i) Executive will not, directly or indirectly, engage in, own or control an interest in (except as a passive investor in publicly held companies and except for investments held at the date hereof) or act as an officer, director, or employee of, or consultant or adviser to, any entity located in any state in which the Company provides or has provided its services or products (the "Covered Area"), that competes, directly or indirectly, with any of the products or services being offered or actively under consideration for offer during the term of Executive's employment with the Company; (ii) Executive will not recruit or hire any employee, independent contractor or vendor of the Company, or otherwise induce such employee, independent contractor or vendor to leave the Company, to become an employee of or otherwise be associated with Executive or any company or business with which Executive is or may become associated; (iii) Executive will not solicit or accept from any customer or account of the Company existing at the time or within 12 months preceding the termination of Executive's employment with the Company, any business of the kind offered or conducted by the Company as of the termination of the Executive's employment with the Company; (e) If any portion of the restrictive covenants contained in this Section 4 are held to be unreasonable, arbitrary or against public policy, each covenant shall be considered divisible both as to time and geographic area, such that each month within the specified period shall be deemed a separate period of time and each county within the Covered Area shall be deemed a separate geographical area, resulting in an intended requirement that the longest lesser time and the largest lesser geographic area determined not to be unreasonable, arbitrary, or against public policy shall remain effective and be specifically enforceable against the Executive; (f) Each restrictive covenant on the part of the Executive set forth in this Agreement shall be construed as a covenant independent of any other covenant or provision of this Agreement or any other agreement which the Executive may have, whether fully performed or executory, and the existence of any claim or cause of action by the Executive against the Company whether predicated upon another covenant or provision of this Agreement or otherwise, shall not, unless otherwise allowed by applicable law, constitute a defense to the enforcement by the Company of any other covenant; 7 (g) The period of time during which the Executive is prohibited from engaging in the practices identified in this Section 4 shall be extended by any length of time during which the Executive is in breach of such covenants. 5. Change of Control. In the event of a Change of Control, the following provisions shall apply: (a) If, immediately upon a Change of Control or at any time within one (1) year thereafter, Executive is no longer employed by the Company (or any entity to which this Agreement may be assigned in connection with such Change of Control) for any reason other than Executive's death, legal incapacity or disability, Executive shall be entitled to receive, within 10 days after the termination date, a lump sum payment ("Change of Control Payment") equal to one half the amount of Executive's annual Base Salary then in effect plus any other amounts accrued and unpaid as of the date of termination (i.e., earned bonuses, car allowance, unreimbursed business expenses, and any other amount due to Executive under employee benefit or fringe benefit plans of the Company). Notwithstanding the foregoing, if Executive shall so request, any Change of Control Payment may be paid to Executive in substantially equal monthly installments, or more frequently in accordance with the Company's usual payroll policy. Additionally, any and all options, warrants or other securities awarded to Executive pursuant to the Company's Stock Option Plan or any other similar plan shall, as of the date of Executive's termination, immediately vest and become exercisable by Executive for the duration of the period during which the options, warrants or other securities would have remained exercisable if Executive had remained employed by the Company. (b) For purposes of this Section 5, a "Change of Control" shall be deemed to occur upon any of the following events: (1) Any "person" or "group" within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act (i) becomes the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, of 50% or more of the combined voting power of the Company's then outstanding securities, otherwise than through a transaction or series of related transactions arranged by, or consummated with the prior approval of, the Board or (ii) acquires by proxy or otherwise the right to vote 50% or more of the then outstanding voting securities of the Company, otherwise than through an arrangement or arrangements consummated with the prior approval of the Board, for the election of directors, for any merger or consolidation of the Company or for any other matter or question. (2) During any period of 12 consecutive months (not including any period prior to the adoption of this Section), Present Directors and/or New Directors cease for any reason to constitute a majority of the Board. For purposes of the preceding sentence, "Present Directors" shall mean individuals who at the beginning of such consecutive 12-month period were members of the Board, and "New Directors" shall mean any director whose election by the Board or whose nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were Present Directors or New Directors. 8 (3) Consummation of (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of Stock immediately prior to the merger have the same proportion and ownership of common stock of the surviving corporation immediately after the merger or (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; provided, that, the divestiture of less than substantially all of the assets of the Company in one transaction or a series of related transactions, whether effected by sale, lease, exchange, spin-off sale of the stock or merger of a subsidiary or otherwise, shall not constitute a Change in Control. For purposes of this Section 5(b), the rules of Section 318(a) of the Code and the regulations issued thereunder shall be used to determine stock ownership. (c) Excise Tax Gross-Up. If Executive becomes entitled to one or more payments (with a "payment" including the vesting of restricted stock, a stock option, or other non-cash benefit or property), whether pursuant to the terms of this Agreement or any other plan or agreement with the Company or any affiliated company (collectively, "Change of Control Payments"), which are or become subject to the tax ("Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Company shall pay to Executive at the time specified below such amount (the "Gross-up Payment") as may be necessary to place Executive in the same after-tax position as if no portion of the Change of Control Payments and any amounts paid to Executive pursuant to this paragraph 5(c) had been subject to the Excise Tax. The Gross-up Payment shall include, without limitation, reimbursement for any penalties and interest that may accrue in respect of such Excise Tax. For purposes of determining the amount of the Gross-up Payment, Executive shall be deemed: (A) to pay federal income taxes at the highest marginal rate of federal income taxation for the year in which the Gross-up Payment is to be made; and (B) to pay any applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year. If the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, Executive shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined (but, if previously paid to the taxing authorities, not prior to the time the amount of such reduction is refunded to Executive or otherwise realized as a benefit by Executive) the portion of the Gross-up Payment that would not have been paid if such Excise Tax had been used in initially calculating the Gross-up Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made, the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest and penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. 9 The Gross-up Payment provided for above shall be paid on the 30th day (or such earlier date as the Excise Tax becomes due and payable to the taxing authorities) after it has been determined that the Change of Control Payments (or any portion thereof) are subject to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Executive on such day an estimate, as determined by counsel or auditors selected by the Company and reasonably acceptable to Executive, of the minimum amount of such payments. The Company shall pay to Executive the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). The Company shall have the right to control all proceedings with the Internal Revenue Service that may arise in connection with the determination and assessment of any Excise Tax and, at its sole option, the Company may pursue or forego any and all administrative appeals, proceedings, hearings, and conferences with any taxing authority in respect of such Excise Tax (including any interest or penalties thereon); provided, however, that the Company's control over any such proceedings shall be limited to issues with respect to which a Gross-up Payment would be payable hereunder, and Executive shall be entitled to settle or contest any other issue raised by the Internal Revenue Service or any other taxing authority. Executive shall cooperate with the Company in any proceedings relating to the determination and assessment of any Excise Tax and shall not take any position or action that would materially increase the amount of any Gross-up Payment hereunder. 10 6. No Violation. Executive warrants that the execution and delivery of this Agreement and the performance of his duties hereunder will not violate the terms of any other agreement to which he is a party or by which he is bound. Additionally, Executive warrants that Executive has not brought and will not bring to the Company or use in the performance of Executive's responsibilities at the Company any materials or documents of a former employer that are not generally available to the public, unless Executive has obtained express written authorization from the former employer for their possession and use. Executive represents that he is not and, since the commencement of Executive's employment with the Company has not been a party to any employment, proprietary information, confidentiality, or noncompetition non-competition agreement with any of Executive's former employers which remains in effect as the date hereof. The warranties set forth in this Section 6 shall survive the expiration or termination of the other provisions of this Agreement. 7. Breach by Executive. Both parties recognize that the services to be rendered under this Agreement by Executive are special, unique and extraordinary in character, and that in the event of the breach by Executive of the terms and conditions of this Agreement to be performed by him or in the event Executive performs services for any person, firm or corporation engaged in a competing line of business with Company, the Company shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, whether in law or in equity, to, by way of illustration and not limitation, obtain damages for any breach of this Agreement, or to enforce the specific performance thereof by Executive, or to enjoin Executive from competing with the Company or, performing services for himself or any such other person, firm or corporation. The Company may obtain an injunction restraining any such breach by Executive and no bond or other security shall be required in connection therewith. The Company and Executive each consent to the jurisdiction of United States Federal District Court for the Northern District of Alabama. 8. Miscellaneous. (a) This Agreement shall be binding upon and inure to the benefit of the Company, its successors, and assigns and may not be assigned by Executive. (b) This Agreement contains the entire agreement of the parties hereto and supersedes all prior or concurrent agreements, whether oral or written, relating to the subject matter hereof. This Agreement may be amended only by a writing signed by the party against whom enforcement is sought. 11 (c) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ALABAMA WITHOUT REGARD TO ITS CONFLICTS OF LAWS, RULES OR PRINCIPLES. (d) Any notices or other communications required or permitted hereunder shall be in writing and shall be deemed effective when delivered in person or, if mailed, on the date of deposit in the mails, postage prepaid, to the other party at the respective address of such party set forth herein or to such other address as shall have been specified in writing by either party to the other in accordance herewith. (e) The provisions of Sections 4(a), 4(d) and 6 and the other provisions of this Agreement which by their terms contemplate survival of the termination of this Agreement, shall survive termination of this Agreement and be deemed to be independent covenants. (f) If any term or provision of this Agreement or its application to any person or circumstance is to any extent invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision shall be valid and enforced to the fullest extent permitted by law. (g) No delay or omission to exercise any right, power or remedy accruing to any party hereto shall impair any such right, power or remedy or shall be construed to be a waiver of or an acquiescence to any breach hereof. No waiver of any breach of this Agreement shall be deemed to be a waiver of any other breach of this Agreement theretofore or thereafter occurring. Any waiver of any provision hereof shall be effective only to the extent specifically set forth in the applicable writing. All remedies afforded under this Agreement to any party hereto, by law or otherwise, shall be cumulative and not alternative and shall not preclude assertion by any party hereto of any other rights or the seeking of any other rights or remedies against any other party hereto. (h) It is the intent of the Company that Executive not be required to incur any legal fees or disbursements associated with (i) the interpretation of any provision in, or obtaining of any right or benefit under this Agreement, or (ii) the enforcement of his rights under this Agreement, including, without limitation by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits to be extended to Executive hereunder. Accordingly, the Company irrevocably authorizes Executive from time to time to retain counsel of his choice, at the expense of the Company as hereafter provided, to represent Executive in connection with the interpretation and/or enforcement of this Agreement, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company, or any Director, officer, stockholder, or any other person affiliated with the Company in any jurisdiction. The Company shall pay or cause to be paid and shall be solely responsible for any and all reasonable attorneys' and related fees and expenses incurred by Executive under this Section 8(h). 12 (i) The Background section of this Agreement is hereby incorporated into the Operative Provisions of this Agreement. 9. Indemnification. The Company agrees to indemnify Executive to the fullest extent permitted by applicable law, as such law may be hereafter amended, modified or supplemented and to the fullest extent permitted by each of the Company's Restated Certificate of Incorporation and the Company's Restated By-Laws, as from time to time amended, modified or supplemented. The Company further agrees that Executive is entitled to the benefits of any directors and officers' liability insurance policy, in accordance with the terms and conditions of that policy, if such a policy is maintained by the Company. (Signature Page To Follow) 13 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first stated above. COMPANY ------- DIGITAL FUSION, INC. By: /s/ Gary S. Ryan ------------------------ Its: President EXECUTIVE --------- /s/ Chris Brunhoeber --------------------------- Chris Brunhoeber 14 EXHIBIT A --------- Interim Metrics Bonus o Financial close of each month within 10 business days beginning with the May 2005 accounting month o File quarterly SEC reports within 30 days beginning with the Q2 2005 accounting period ended 6/30/05 o Implement Work Authorization System and Job Costs Reporting beginning with the May 2005 accounting month These metrics will be evaluated by the President and the CEO in July 2005 and if met, the V.P. Finance will be eligible for a $15,000 bonus. 15 EXHIBIT B --------- Metrics for Vice-President Finance o Manage to the Indirect Budget provided for your organization o Obtain Approved Government Purchasing System o Obtain Approved Government Property System o Financial close of each month within 10 days o File quarterly SEC reports within 30 days o File annual SEC report within 60 days o Implement Work Authorization System o Achieve 95% compliance with reporting on Limitation of Funds/Cost Clause in Cost Type Contracts o Implement company-wide bid rates o Unqualified external Audit Opinion on Financial Statements o Maintain Interest Expense below .2% of revenue o Manage and prepare budget preparation o Maintain internal controls and internal audit functions o Responsible for risk management functions o The revenue and profit metrics for all senior-level managers are the same. We are dependent on each other to meet these metrics. Two-thirds of the $20,000 potential bonus is strictly financial - based solely on the Company achieving its revenue, profit and G&A base metrics goals for FY205 as approved by the board of directors. The remaining one-third is based on performance - achieving the objectives listed above. 16 EXHIBIT C --------- Stock Options* - -------------- The Company hereby awards to Executive an option to purchase Sixty Thousand (60,000) shares of the Company's Common Stock. The price per share shall be determined on the effective date of the grant. Twenty Thousand (20,000) shares shall vest one hundred percent (100%) immediately upon the first anniversary of employment or business worth 1 million, whichever takes place sooner; pursuant to the terms and conditions, as set forth in the Company's Stock Option Plan and Agreement. The remaining Forty Thousand (40,000) shares shall vest in accordance with the performance schedules below. Performance Vesting 1 - --------------------- Twenty Thousand (20,000) shares shall vest one hundred percent (100%) immediately upon the following occurrence: If the Company's trailing four (4) quarters' revenue is more than $25 million with minimum net income of $1.75 million OR if the Company's trailing four (4) quarters' earnings is more than $2.5 million. Revenue and earnings shall be based on GAAP; however, they shall be adjusted to eliminate extraordinary one-time events such as expensing acquisition costs or revenue associated with an acquisition. Performance Vesting 2 - --------------------- Twenty Thousand (20,000) shares shall vest one hundred percent (100%) immediately upon the following occurrence: If the Company's trailing four (4) quarters' revenue is more than $35 million with minimum net income of $2.50 million OR if the Company's trailing four (4) quarters' earnings is more than $3.5 million. Revenue and earnings shall be based on GAAP; however, they shall be adjusted to eliminate extraordinary one-time events such as expensing acquisition costs or revenue associated with an acquisition. * Grant shall be non-qualified stock options. In addition, during the period of the Executive's employment, Executive will be entitled to further participate in the Company's Stock Ownership Plan, as the Board of Directors, in its sole discretion, may determine. 17 -----END PRIVACY-ENHANCED MESSAGE-----