Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-130244
[ SpaceDev Logo ] [ Starsys Research Logo ]
Dear Shareholders of SpaceDev, Inc. and Starsys Research Corporation:
We are pleased to report that the boards of directors of SpaceDev, Inc.
("SpaceDev") and Starsys Research Corporation ("Starsys") have each approved the
Agreement and Plan of Merger and Reorganization, as amended, (referred to in
this joint proxy statement/prospectus as the merger agreement) providing for a
reorganization involving our two companies. Pursuant to the merger, SpaceDev
will acquire Starsys. Before we c an complete the reorganization, we are seeking
the approval of each of our company's shareholders to the merger and some
related matters. We are sending you this joint proxy statement/prospectus to ask
you to vote in favor of the merger agreement and these other matters.
Starsys shareholders will be entitled to receive the following
consideration at the effective time of the merger, subject to reduction as
provided in the merger agreement: (1) cash in the aggregate amount of up to
$1,500,000; and (2) an aggregate number of shares of SpaceDev common stock equal
to the quotient of (A) up to $7,500,000 divided by (B) the volume weighted
average price of SpaceDev common stock for the 20 trading days preceding the
merger, but not less than $1.40 or more than $1.90. The cash and shares to be
paid at the closing of the merger are subject to reduction for transaction
expenses and a working capital adjustment. Starsys management anticipates that,
after these reductions, only approx. $547,000 in cash and $6,152,000 in shares
of SpaceDev common stock, calculated as described above, will be paid to Starsys
shareholders at the closing of the merger. Approximately one half of the shares
issued pursuant to the merger at the closing or for the first performance period
will be placed in escrow to satisfy indemnification obligations of Starsys
shareholders under the merger agreement and to pay certain expenses of the
shareholder agent. Following the merger, Starsys shareholders may also be
entitled to receive, based on the achievement by the Starsys business of certain
performance criteria after the closing, additional performance consideration
consisting of up to an aggregate of $1,050,000 in cash and shares of SpaceDev
common stock valued at up to $18,000,000, subject to reduction for some merger
related expenses and to the aforesaid escrow arrangements. For more information,
see "The Merger - Merger Consideration" beginning on page 57.
SpaceDev has scheduled a special meeting of shareholders at which SpaceDev
will be submitting the merger-related proposals as well as several additional
proposals for the consideration and approval of its shareholders. Starsys has
also scheduled a special meeting for its shareholders to vote on the merger and
a related proposal. The dates and times of these meetings are set forth in this
joint proxy statement/prospectus.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend your
meeting, please take the time to vote by completing, signing, dating and
returning the enclosed proxy card to SpaceDev or Starsys, as applicable. WE
ENCOURAGE YOU TO READ THIS ENTIRE JOINT PROXY STATEMENT/PROSPECTUS CAREFULLY AND
WE ESPECIALLY ENCOURAGE YOU TO READ THE SECTION ENTITLED "RISK FACTORS"
BEGINNING ON PAGE 15. This document provides you with detailed information about
the merger and the other proposals of SpaceDev and the merger and related
proposal of Starsys. As described in the next few pages, you can also find more
information about SpaceDev from publicly available documents on file with the
Securities and Exchange Commission. SpaceDev's common stock trades on the OTC
Bulletin Board under the symbol "SPDV.OB," and the last reported sale price of
shares of SpaceDev's common stock on December 16, 2005 was $1.48.
We enthusiastically support this reorganization, and we join with the
members of our boards of directors in recommending that you vote FOR the merger
agreement, the merger and the other proposals.
JAMES W. BENSON SCOTT TIBBITTS
Chairman and Chief Executive Officer Chairman and Chief Executive Officer
SpaceDev, Inc. Starsys Research Corporation
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SPACEDEV COMMON STOCK ISSUED
PURSUANT TO THE MERGER OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This joint proxy statement/prospectus is dated December 29, 2005 and is
first being mailed to shareholders on or about December 30, 2005.
PAGE
IF YOU ARE A STARSYS SHAREHOLDER, PLEASE COMPLETE, SIGN AND RETURN THE FOLLOWING
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DOCUMENTS TO THE EXCHANGE AGENT, CONTINENTAL STOCK TRANSFER & TRUST CO., ATTN:
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REORGANIZATION DEPARTMENT, 17 BATTERY PLACE, NEW YORK, NY 10004:
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- The proxy card;
- The letter of transmittal and Form W-9; and
- Your original Starsys stock certificate(s) endorsed for transfer
(or affidavit in lieu of a lost, mutilated or destroyed certificate).
Please use the enclosed envelope to send your original signed documents to the
exchange agent, and also please fax a copy of such documents to the attention of
Hillary Hebert of Holland & Hart, LLP at (303) 295-8261. The exchange
agent must receive your original signed documents by close of business on
January 26, 2005. If you do not send your original signed documents to the
exchange agent by the due date, you may bring them to the Starsys shareholder
meeting. Payment for your shares will only be made upon receipt of a completed
and signed letter of transmittal and your original stock certificates (or
affidavit in lieu of a lost, mutilated or destroyed certificate). If the merger
is not consummated, your original stock certificate will be returned to you.
ADDITIONAL INFORMATION
This joint proxy statement/prospectus:
- Incorporates important business and financial information about SpaceDev
from documents filed with the Securities and Exchange Commission that is
not included in or delivered with this document but is available online at
http://www.sec.gov, as well as from other sources; and
- Does not include some information included in the registration statement on
Form S-4 filed with the Securities and Exchange Commission by SpaceDev, of
which this joint proxy statement/prospectus is a part, or information
included in the exhibits to the registration statement.
The information described above is available to you without charge upon
your written or oral request. You can obtain any of the information described
above by requesting it in writing or by telephone from SpaceDev at the following
address and telephone number:
SpaceDev, Inc.
13855 Stowe Drive
Poway, CA 92064
Attention: Investor Relations
(858) 375-2026
IN ORDER FOR YOU TO RECEIVE TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF
THE MEETINGS, SPACEDEV SHOULD RECEIVE YOUR REQUEST NO LATER THAN JANUARY 23,
2006, WHICH IS FIVE BUSINESS DAYS BEFORE THE DATE OF SPACEDEV'S SPECIAL MEETING.
Please also see "Where You Can Find More Information" beginning on page
157.
If you have any questions about the merger, the non merger-related
proposals of SpaceDev or the meetings of SpaceDev and Starsys, including the
procedures for voting your shares, or if you need additional copies of this
joint proxy statement/prospectus or the enclosed proxy, please contact:
FOR SPACEDEV SHAREHOLDERS:
SpaceDev, Inc.
13855 Stowe Drive
Poway, CA 92064
Attention: Investor Relations
(858) 375-2026
FOR STARSYS SHAREHOLDERS:
Starsys Research Corporation
4909 Nautilus Court North
Boulder, Colorado 80301
Attention: Chief Executive Officer
(303) 583-1400
PAGE
The "SpaceDev" family of related marks, images and symbols are the
properties, trademarks and service marks of SpaceDev. The "Starsys" family of
related marks, images and symbols are the properties, trademarks and service
marks of Starsys. Additional company and product names may be trademarks of
their respective owners.
PAGE
TABLE OF CONTENTS
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Page
SUMMARY 1
QUESTIONS AND ANSWERS ABOUT THIS PROXY SOLICITATION, THE SPACEDEV SPECIAL
MEETING, THE STARSYS SPECIAL MEETING, THE COMPANIES AND THE MERGER 1
The Companies 4
The Merger 5
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 14
COMPARATIVE PER SHARE MARKET VALUE 14
RISK FACTORS 15
Risks Related to the Merger 15
Risks Related to the Combined Company Following the Merger 18
SPECIAL MEETING OF SPACEDEV SHAREHOLDERS 30
SPECIAL MEETING OF STARSYS SHAREHOLDERS 35
SPACEDEV PROPOSAL NO. 1 AND STARSYS PROPOSAL NO. 1 - THE MERGER 38
Background of the Merger 38
SpaceDev's Reasons for the Merger 40
Interests of Certain SpaceDev Persons in the Merger 42
Starsys' Reasons for the Merger 42
Interests of Certain Starsys Persons in the Merger 44
Material United States Federal Income Tax Considerations 46
Anticipated Accounting Treatment 50
Appraisal and Dissenters' Rights 50
Governmental and Regulatory Matters 53
Listing of SpaceDev Common Stock to be Issued in the Merger 54
Restriction on Resales of SpaceDev Common Stock 54
Standstills and Lockups 54
THE MERGER AGREEMENT 56
The Merger 56
Completion and Effectiveness of the Merger 56
Merger Consideration 57
Starsys Options and Warrants 61
Exchange of Stock Certificates 62
Share Adjustments 62
Representations and Warranties 62
Indemnification 65
Shareholder Agent 66
Conduct of Business Before Completion of the Transaction 67
No Solicitation of Other Proposals 69
Shareholder Meetings and Recommendation of Boards of Directors 69
SpaceDev Private Placement 70
Conditions to Completion of the Merger 70
SpaceDev Post-Closing Covenants 73
Termination of the Merger Agreement 74
Fees and Expenses 76
Amendment, Extension and Waiver of the Merger Agreement 76
SPACEDEV PROPOSAL NO. 2 - AMENDMENT OF THE 2004 EQUITY INCENTIVE
PLAN 77
Summary of the 2004 Equity Incentive Plan 77
SPACEDEV PROPOSAL NO. 4 - AUTHORIZATION TO SELL MORE THAN 20% OF SPACEDEV'S
COMMON STOCK IN PRIVATE OFFERINGS 84
STARSYS PROPOSAL NO. 2 - APPOINTMENT AND AUTHORIZATION OF SCOTT TIBBITTS AS
SHAREHOLDER AGENT UNDER THE MERGER AGREEMENT 87
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS 89
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COMPARISON OF RIGHTS OF SHAREHOLDERS OF SPACEDEV AND SHAREHOLDERS OF
STARSYS 96
INFORMATION REGARDING BUSINESS OF SPACEDEV 104
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF SPACEDEV 116
OWNERSHIP OF SPACEDEV COMMON STOCK 129
DESCRIPTION OF SPACEDEV CAPITAL STOCK 131
MANAGEMENT OF SPACEDEV AFTER THE MERGER 132
INFORMATION REGARDING BUSINESS OF STARSYS 143
OWNERSHIP OF STARSYS COMMON STOCK 148
DESCRIPTION OF STARSYS CAPITAL STOCK 149
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF STARSYS 150
WHERE YOU CAN FIND MORE INFORMATION 157
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
Consolidated Financial Statements of SpaceDev, Inc., for the Nine Month Period
Ended September 30, 2005
Consolidated Balance Sheets (Unaudited) F-2
Consolidated Statements of Operations (Unaudited) F-4
Consolidated Statements of Cash Flows (Unaudited) F-5
Notes to Consolidated Financial Statements F-7
Consolidated Financial Statements of SpaceDev, Inc., for the Fiscal Year Ended
December 31, 2004
Report of Independent Registered Public Accounting Firm F-16
Consolidated Balance Sheets F-17
Consolidated Statements of Operations F-19
Consolidated Statements of Stockholders' Equity (Deficit) F-20
Consolidated Statements of Cash Flows F-23
Notes to Consolidated Financial Statements F-25
STARSYS RESEARCH CORPORATION
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PAGE
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Financial Statements for the Nine Month Period Ended September 30, 2005
Balance Sheet (Unaudited) F-40
Statement of Operations (Unaudited) F-41
Statement of Cash Flows (Unaudited) F-42
Notes to Condensed Consolidated Financial Statements F-43
Financial Statements for the Fiscal Year Ended December 31, 2004
Independent Auditor's Report F-53
Balance Sheets F-54
Statements of Liabilities and Stockholders' Equity (Deficit) F-55
Statements of Operations F-56
Statements of Stockholders' Equity (Deficit) F-57
Statements of Cash Flows F-58
Summary of Significant Accounting Policies F-60
Notes to Financial Statements F-63
ANNEX A: Agreement and Plan of Merger and Reorganization dated October 24, 2005
ANNEX B: Article 113 of the Colorado Business Corporation Act
ANNEX C: Chapter 13 of the California General Corporation Law
ANNEX D: Amendment No. 2 to the SpaceDev, Inc. 2004 Equity Incentive Plan
ANNEX E: Articles of Amendment of Articles of Incorporation of SpaceDev, Inc.
ANNEX F: Letter of Transmittal
-ii-
SUMMARY
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QUESTIONS AND ANSWERS
ABOUT THIS PROXY SOLICITATION, THE SPACEDEV SPECIAL MEETING, THE STARSYS SPECIAL
MEETING, THE COMPANIES AND THE MERGER
The following questions and answers are intended to address briefly some
commonly asked questions regarding this proxy solicitation, the SpaceDev special
meeting, the Starsys special meeting, the companies and the merger. These
questions and answers may not address all of the information that may be
important to you. Please refer to the more detailed information contained
elsewhere in this joint proxy statement/prospectus and in the documents referred
to or incorporated by reference in this joint proxy statement/prospectus.
Q: WHY AM I RECEIVING THIS JOINT PROXY STATEMENT/PROSPECTUS?
A: You are receiving this joint proxy statement/prospectus because you have
been identified as a shareholder of either SpaceDev or Starsys, and thus you may
be entitled to vote at the upcoming special meeting of shareholders of either
SpaceDev or Starsys, as applicable. This document serves as both a joint proxy
statement of SpaceDev and Starsys, used to solicit proxies for the meetings, and
as a prospectus of SpaceDev, used to offer shares of SpaceDev common stock to
the Starsys shareholders pursuant to the terms of the merger agreement. This
document contains important information about the merger, the shareholder
proposals of SpaceDev and Starsys and the meetings of SpaceDev and Starsys, and
you should read it carefully.
Q: HOW MANY VOTES DO SPACEDEV SHAREHOLDERS HAVE?
A: Each holder of record of SpaceDev common stock on December 9, 2005 will
be entitled to one vote for each share of common stock held of record on that
date.
Q: HOW MANY VOTES DO STARSYS SHAREHOLDERS HAVE?
A: Each holder of record of Starsys common stock as of December 1, 2005 and
participants in the separate plan holding Starsys common stock under the Starsys
401(k) and Stock Bonus Plan dated August 4, 1997, will be entitled to one vote
for each share of common stock held on that date.
Q: WHAT DO I NEED TO DO NOW?
A: We urge you to read this joint proxy statement/prospectus carefully and
then vote your proxy for the relevant proposals. If you are a SpaceDev
shareholder, you may vote in person at the SpaceDev special meeting or vote by
proxy using the enclosed SpaceDev proxy card.
- To vote in person, attend the special meeting, and you will be given a
ballot when you arrive.
- To vote by proxy, simply complete, sign and date the applicable enclosed
proxy card and return it promptly in the envelope provided. If you return
your signed proxy card before the meeting, your shares will be voted as you
direct.
- If your shares are held in "street name" by your broker, you should follow
the instructions provided by your broker regarding how to instruct your
broker to vote your shares.
If you are a Starsys shareholder, you may vote in person at the Starsys
special meeting or vote by proxy using the enclosed Starsys proxy card.
- To vote in person, attend the special meeting, and you will be given a
ballot when you arrive.
- To vote by proxy, simply complete, sign and date the applicable enclosed
proxy card and return it promptly in the envelope provided. If you return
your signed proxy card before the meeting, your shares will be voted as you
direct.
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Please also see the instructions included with the applicable enclosed
proxy card. Regardless of whether you return your proxy, you may attend the
applicable meeting and vote your shares in person. Please note, however, that
if your SpaceDev shares are held of record by a broker, bank or other nominee
and you wish to vote at the meeting, you must obtain from the record holder a
proxy issued in your name or you must bring an account statement or other
acceptable evidence of ownership of SpaceDev common stock as of the close of
business on December 9, 2005, the record date for voting.
Q: WHAT HAPPENS IF I DO NOT VOTE?
A: The failure of a SpaceDev shareholder to vote in person or by proxy may
have the effect of voting AGAINST SpaceDev Proposal No. 1 and will have the
effect of voting AGAINST Proposal No. 3. The failure of a SpaceDev shareholder
to vote in person or by proxy will not directly affect the outcome of any of the
other SpaceDev proposals but will reduce the number of votes required to approve
these proposals and could also contribute to a failure to meet a quorum for the
meeting.
The failure of a Starsys shareholder to vote in person or by proxy will
have the effect of voting AGAINST Starsys Proposal No. 1 and Proposal No. 2. In
addition, the merger agreement contains a closing condition requiring the
affirmative vote of 98% of the shares of outstanding Starsys common stock for
Proposal No. 1, which condition SpaceDev may waive.
Q: WHAT VOTES ARE REQUIRED TO APPROVE THE SPACEDEV PROPOSALS?
A: PROPOSAL NO. 1 - If the shares of SpaceDev common stock are not listed on the
American Stock Exchange or another applicable national securities exchange prior
to the closing of the merger, adoption and approval of the merger agreement and
approval of the merger and the proposal to issue and reserve for issuance shares
of SpaceDev common stock in connection with the merger will require the
affirmative vote of a majority of the outstanding shares of SpaceDev common
stock. In addition, the merger agreement contains a closing condition in favor
of SpaceDev and Starsys that not more than 1.5% of outstanding SpaceDev shares
will have exercised, or retained the right to exercise, dissenters' rights,
which condition SpaceDev and Starsys may waive. If the shares of SpaceDev common
stock are listed on the American Stock Exchange or another applicable national
securities exchange prior to the closing of the merger, adoption and approval of
the merger agreement and approval of the merger and the proposal to issue and
reserve for issuance shares of SpaceDev common stock in connection with the
merger will not be required under applicable law or the articles of
incorporation or bylaws of SpaceDev. Nevertheless, in that case, the board of
directors of SpaceDev would still seek shareholder approval of Proposal No. 1 as
a matter of good corporate governance; and, if the number of votes present in
person or represented by proxy cast in favor of Proposal No. 1 does not exceed
the number of votes cast in opposition to Proposal No. 1, the board of directors
would reconsider its decision to approve the merger agreement, the merger and
the proposal to issue and reserve for issuance shares of SpaceDev common stock
in connection with the merger.
If the shares of SpaceDev common stock are not listed on the American Stock
Exchange or another applicable national securities exchange prior to the closing
of the merger, abstentions and broker non-votes will have the same effect as
voting AGAINST Proposal No. 1. If the shares of SpaceDev common stock are
listed on the American Stock Exchange or another applicable national securities
exchange prior to the closing of the merger, abstentions will be counted towards
the tabulation of votes cast on this proposal, and broker non-votes will be
counted towards a quorum, but are not counted for any purpose in determining
whether this matter has been approved.
PROPOSAL NO. 2 - Approval of the amendments to the 2004 Equity Incentive
Plan requires the number of votes present in person or represented by proxy cast
in favor of the amendments to exceed the number of votes cast in opposition to
the amendments. Abstentions will be counted towards the tabulation of votes cast
on this proposal. Broker non-votes are counted towards a quorum, but are not
counted for any purpose in determining whether this matter has been approved.
PROPOSAL NO. 3 - Approval of the amendment to SpaceDev's articles of
incorporation to increase the number of authorized shares of common stock by
50,000,000 shares to a total of 100,000,000 shares requires the affirmative vote
of a majority of the outstanding shares of SpaceDev common stock. Abstentions
and broker non-votes will have the same effect as voting AGAINST Proposal No. 3.
-2-
PROPOSAL NO. 4 - Approval of the proposal to authorize SpaceDev's board of
directors to sell more than 20% of SpaceDev's common stock (or securities
convertible into or exercisable for common stock) in private offerings requires
the number of votes present in person or represented by proxy cast in favor of
the proposal to exceed the number of votes cast in opposition to the proposal.
Abstentions will be counted towards the tabulation of votes cast on this
proposal, and broker non-votes are counted towards a quorum, but are not counted
for any purpose in determining whether this matter has been approved.
In addition, for any of the proposals to pass, a quorum of no less than a
majority of outstanding shares of SpaceDev common stock must be present in
person or represented by proxy at the special meeting.
Q: WHAT VOTES ARE REQUIRED TO PASS THE STARSYS PROPOSALS?
A: PROPOSAL NO. 1 - Adoption and approval of the merger agreement and
approval of the merger requires the affirmative vote of a majority of the
outstanding shares of Starsys common stock.
PROPOSAL NO. 2 - Approval of the appointment and authorization of Scott
Tibbitts, the Chairman and Chief Executive Officer of Starsys, as the
shareholder agent under the merger agreement and related escrow agreement
requires the affirmative vote of a majority of the outstanding shares of Starsys
common stock.
In addition, the merger agreement contains a closing condition requiring
the affirmative vote in favor of the merger of 98% of the outstanding shares of
Starsys common stock, which condition may be waived by SpaceDev.
Q: MAY I CHANGE MY VOTE AFTER I HAVE SUBMITTED MY PROXY?
A: Yes. You may revoke your proxy at any time before your proxy is voted at
the applicable meeting. You can do this in any of three ways:
- delivering to the Corporate Secretary of SpaceDev or Starsys, as
applicable, a written notice, dated later than the proxy you wish to
revoke, stating that the proxy is revoked;
- submitting to the Corporate Secretary of SpaceDev or Starsys, as
applicable, a new, signed proxy card with a later date than the proxy you
wish to revoke; or
- attending the special meeting of shareholders of SpaceDev or Starsys, as
applicable, and voting in person (attendance in itself will not revoke your
proxy).
If your SpaceDev shares are held in "street name," please see the next
question and answer.
Q: IF MY SHARES OF SPACEDEV COMMON STOCK ARE HELD IN "STREET NAME" BY MY
BROKER, WILL MY BROKER VOTE MY SHARES FOR ME?
A: If your SpaceDev shares are held in "street name" (that is, through a
bank, broker or other nominee), your broker will vote your shares for you only
if you provide instructions to your broker on how to vote your shares. You
should follow the directions provided by your broker regarding how to instruct
your broker to vote your shares. Your broker cannot vote your shares on these
proposals without specific instructions from you. If you hold shares in street
name and would like to attend the special meeting and vote in person, you will
need to bring an account statement or other acceptable evidence of ownership of
SpaceDev common stock as of the close of business on December 9, 2005, the
record date for voting. Alternatively, in order to vote, you may contact the
person in whose name your shares are registered, obtain a proxy from that person
and bring it to the special meeting.
Q: WHO IS PAYING FOR THIS PROXY SOLICITATION?
A: SpaceDev and Starsys are conducting this proxy solicitation and will bear
the cost of soliciting proxies, including the assembly, printing and mailing of
this joint proxy statement/prospectus, the proxy cards and any additional
information furnished to shareholders.
-3-
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have any questions about the merger, the proposals of SpaceDev or
Starsys or the meetings of SpaceDev or Starsys, including the procedures for
voting your shares, or if you need additional copies of the joint proxy
statement/prospectus or an enclosed proxy, please contact:
If you are a SpaceDev shareholder: If you are a Starsys shareholder:
SpaceDev, Inc. Starsys Research Corporation
13855 Stowe Drive 4909 Nautilus Court North
Poway, California 92064 Boulder, CO 80301
Attention: Investor Relations Attention: Chief Executive Officer
(858) 375-2026 (303) 583-1400
You may also obtain additional information about SpaceDev from the
documents it files with the Securities and Exchange Commission or by following
the instructions in the section entitled "Where You Can Find More Information"
on page 157.
THE COMPANIES
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Q: WHAT IS THE GENERAL BUSINESS OF SPACEDEV?
A: SpaceDev is engaged in the conception, design, development, manufacture,
integration and operation of space technology systems, products and services.
SpaceDev is currently focused on the commercial and military development of
low-cost microsatellites, nanosatellites and related subsystems, hybrid rocket
propulsion for space, launch and human flight vehicles as well as associated
engineering and technical services, which are provided primarily to government
agencies, and specifically the Department of Defense. SpaceDev's products and
solutions are sold, mainly on a project-basis, directly to these customers and
include sophisticated micro- and nano-satellites, hybrid rocket-based launch
vehicles, maneuvering and orbital transfer vehicles and safe sub-orbital and
orbital hybrid rocket-based propulsion systems. Although SpaceDev believes
there will be a commercial market for its microsatellite and nanosatellite
products and services in the future, virtually all of its current work is for
branches of the United States military. SpaceDev is also developing commercial
hybrid rocket motors for use in small launch vehicles, targets and sounding
rockets, and small, high-performance space vehicles and subsystems for
commercial customers.
SpaceDev's website can be accessed at http://www.spacedev.com. The
information on SpaceDev's website is not a part of this joint proxy
statement/prospectus. SpaceDev's principal executive office is located at 13855
Stowe Drive, Poway, California 92064.
Q: WHAT IS THE MARKET FOR SPACEDEV'S COMMON STOCK?
A: The common stock of SpaceDev is traded on the OTC Bulletin Board
("OTCBB") under the symbol "SPDV.OB." On October 25, 2005, the last full trading
day prior to the public announcement of the proposed merger, the last reported
sale price of SpaceDev's common stock on the OTCBB was $1.49 per share. On
December 16, 2005, the last reported sale price of SpaceDev's common stock on
the OTCBB was $1.48 per share.
Q: DOES SPACEDEV ANTICIPATE ANY MANAGEMENT CHANGES BEFORE THE CLOSING OF THE
MERGER?
A: Yes. Effective December 30, 2005, Mark N. Sirangelo will succeed James W.
Benson as chief executive officer and will also become vice chairman and a
director of SpaceDev. Mr. Benson will remain chairman of the board and will
assume the role of chief technology officer.
For information about Mr. Sirangelo's background and employment arrangement
with SpaceDev, see "Management of SpaceDev After the Merger" beginning on page
132. For information about Mr. Sirangelo's interests in the merger, see
"Interests of Certain SpaceDev Persons in the Merger" beginning on page 42.
-4-
Q: WHAT IS THE GENERAL BUSINESS OF STARSYS?
A: Starsys Research Corporation is engaged in the development and
manufacturing of engineered electro-mechanical systems and components for the
aerospace industry. Starsys provides mechanical systems, structures and
mechanisms that open, close, release and move components on spacecraft. Starsys'
products include motion-control actuators, cover systems, deployment systems and
separation systems.
Starsys is a privately-held company and there is currently no established
market for its securities. Its website can be accessed at
http://www.starsys.com. The information on Starsys' website is not a part of
this joint proxy statement/prospectus. Starsys' principal executive office is
located at 4909 Nautilus Court North, Boulder, Colorado 80301.
THE MERGER
-----------
Q: WHAT IS THE MERGER?
A: SpaceDev, Monoceros Acquisition Corp. ("Monoceros"), a Colorado
corporation and wholly-owned subsidiary of SpaceDev, Starsys, Scott Tibbitts, as
shareholder agent for the Starsys shareholders, and Scott Tibbitts, as a key
shareholder, have entered into an Agreement and Plan of Merger and
Reorganization dated October 24, 2005 (referred to in this joint proxy
statement/prospectus as the merger agreement, as the same may be amended from
time to time), which contains the terms and conditions of the proposed business
combination of SpaceDev and Starsys. The merger agreement is attached to this
joint proxy statement/prospectus as Annex A. Under the merger agreement,
Starsys will merge with and into Monoceros (referred to in this joint proxy
statement/prospectus as the merger) and Monoceros will survive the merger as a
wholly-owned subsidiary of SpaceDev. For more information, see "The Merger -
The Merger Agreement" beginning on page 56.
Q: WHAT ARE THE REASONS FOR THE MERGER?
A: SpaceDev believes a business combination with Starsys will benefit
SpaceDev in various ways:
- SpaceDev's design expertise and manufacturing capability in the nano- and
micro-satellite markets will complement Starsys' expertise in design and
manufacturing of components and other products primarily in the mainframe
satellite market;
- The increased size and capabilities of a combined company will enable
SpaceDev to participate in more diverse projects with greater revenue
generation potential and potentially lead to a more diversified and
predictable revenue stream;
- The increased market capitalization of a combined company will place
SpaceDev in a better position to have its shares listed on a national
securities exchange and to attract institutional investors and analyst
coverage;
- A second location in a favorable aerospace labor market will enable more
rapid growth to meet future business needs; and,
- SpaceDev's reputation for high customer satisfaction places it in a unique
position to take advantage of the increased capabilities that will result
from the merger.
In addition to the potential benefits described above that would be applicable
to Starsys shareholders, Starsys' board of directors believes that the merger
has the following benefits and potential benefits for Starsys shareholders:
- The opportunity for Starsys shareholders to participate in the
microsatellite and hybrid rocket propulsion markets served by SpaceDev.
- The opportunity for Starsys shareholders to participate in the potential
growth of SpaceDev after the merger.
-5-
- The value of the consideration provided for in the merger agreement based
on the market price of SpaceDev common stock at the time of board approval
and over the past year.
- The ability to complete the merger as a reorganization for United States
federal income tax purposes.
- The potential receipt of performance consideration, as described under the
caption "The Merger - Merger Consideration" beginning on page 57.
- Access to SpaceDev's greater depth of technologies, marketing resources and
financial and operating resources which Starsys' board believes should
enhance Starsys' ability to win larger contracts with favorable terms.
- The public market for SpaceDev common stock will offer Starsys shareholders
liquidity, albeit subject to limitations described under "The Merger -
Restriction on Resales of SpaceDev Common Stock" beginning on page 54.
For more information, see "The Merger - SpaceDev's Reasons for the Merger"
beginning on page 40 and "The Merger - Starsys' Reasons for the Merger"
beginning on page 42.
Q: WHAT WERE THE FACTORS CONSIDERED BY THE SPACEDEV BOARD OF DIRECTORS IN
DECIDING TO MERGE?
A: SpaceDev's board of directors reviewed a number of factors in evaluating
the merger, including but not limited to the following:
- the judgment, advice and analysis of SpaceDev's management and its
financial advisors with respect to the potential strategic, financial and
operational benefits of the transaction, including management's favorable
recommendation of the transaction, based in part on the business,
technical, financial, accounting and legal due diligence investigations
performed with respect to Starsys;
- the importance of the merger for pursuing SpaceDev's strategic plan;
- the potential benefits to SpaceDev shareholders of growth opportunities
following the merger;
- the possibility, as an alternative to the merger, of opening facilities in
new, strategically desirable locations and expanding SpaceDev's
manufacturing capability through internal growth or other potential
acquisitions;
- the competitive and market environments in which SpaceDev and Starsys
operate;
- the results of operations and financial condition of SpaceDev and Starsys;
- the interests that certain executive officers and directors of SpaceDev may
have with respect to the merger in addition to their general interests as
shareholders of SpaceDev, as described in more detail under "Interests of
Certain SpaceDev Persons in the Merger" beginning on page 42;
- the terms of the merger agreement and the agreements related to the merger,
including the consideration to be paid by SpaceDev and the structure of the
merger which were deemed by both the board of directors and management of
SpaceDev to provide a fair and equitable basis for the transaction; and,
- the likelihood that the transaction will be completed in a timely manner.
For more information see, "The Merger - SpaceDev's Reasons for the Merger"
beginning on page 40
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Q: WHAT WERE OTHER FACTORS CONSIDERED BY THE STARSYS BOARD OF DIRECTORS IN
DECIDING TO MERGE?
A: Starsys' board of directors reviewed a number of factors in evaluating
the merger, including but not limited to the following:
- the repayment by SpaceDev of Starsys' long term debt, which is subject to a
forbearance agreement that requires Starsys to pursue a financing or sale
of the company to repay the debt;
- the interests that certain executive officers and directors of Starsys may
have with respect to the merger in addition to their general interests as
shareholders of Starsys, as described in more detail under "The Merger -
Interests of Certain Starsys Persons in the Merger" beginning on page 44
- information concerning the financial performance and condition, results of
operations, competitive position, management and business of SpaceDev and
Starsys before and after giving effect to the merger;
- current financial market conditions and historical market prices,
volatility and trading information with respect to SpaceDev common stock;
- the current financial condition of Starsys;
- the opportunity for Starsys to receive additional working capital
investment, as described under the caption "The Merger - SpaceDev
Post-Closing Covenants" beginning on page 73;
- the ability of Starsys to obtain additional financing as a stand-alone
entity; and,
- results of (1) the review of SpaceDev's filings with the Securities and
Exchange Commission regarding SpaceDev's business and financial condition,
and (2) the due diligence investigation conducted by Starsys' management
regarding the stability of SpaceDev's long term contracts and work backlog.
For more information see, "The Merger - Starsys' Reasons for the Merger"
beginning on page 42.
Q: WHAT WILL STARSYS SHAREHOLDERS RECEIVE IN THE MERGER?
A: Starsys shareholders will be entitled to receive the following
consideration at the effective time of the merger, subject to adjustment as
provided in the merger agreement:
- cash in the aggregate amount of up to $1,500,000, which is expected by
Starsys' management to be reduced by approximately $770,000 in transaction
costs and to be further reduced by approximately $183,000 working capital
adjustments, or approximately $547,000 after reductions; and,
- an aggregate number of shares of SpaceDev common stock equal to the
quotient of (A) $7,500,000, which is expected by Starsys' management to be
reduced by approximately $431,000 in transaction costs and to be further
reduced by approximately $917,000 in working capital adjustments, or
approximately $6,152,000 after reductions, divided by (B) the volume
weighted average price of SpaceDev common stock for the twenty trading days
preceding the merger, but not less than $1.40 or more than $1.90.
The amounts presented as transaction costs and working capital adjustments
are only estimates and may increase prior to closing. Based on the formula and
estimates described above, at the closing of the merger, Starsys shareholders
are expected to receive merger consideration of approximately $12.83 per share
of Starsys common stock, consisting of approximately $1.05 per share in cash and
approximately $11.78 per share in shares of SpaceDev common stock (based on
522,437.47 shares of Starsys common stock outstanding as of December 1, 2005,
the record date for the special meeting of Starsys shareholders, which may
increase if any outstanding Starsys stock options are exercised prior to the
merger).
-7-
Fifty percent (50%) of the number of shares of SpaceDev common stock issued
at closing (without taking into account any shares of SpaceDev common stock
deliverable to the shareholder agent at the closing for the satisfaction of
certain transaction expenses incurred by Starsys related to the sale of the
company) will be deposited in escrow as security for the payment of
indemnification claims under the merger agreement and to pay certain expenses of
the shareholder agent, which escrow will continue until ten (10) days following
the date of audited financial statements prepared for the surviving corporation
for the fiscal year ending 2006 (i.e., approximately April 2007), subject to
extension in the event claims are outstanding on that date.
Following the merger, Starsys shareholders may also be entitled to receive,
based on the achievement by the Starsys business of certain performance criteria
for each of the fiscal years ending December 31, 2005, December 31, 2006 and
December 31, 2007, additional performance-based consideration consisting of up
to:
- For the fiscal year ended December 31, 2005, $350,000 in cash and an
aggregate number of shares of SpaceDev common stock equal to the quotient
of (A) up to $3,000,000 divided by (B) the volume weighted average price of
SpaceDev common stock for the twenty trading days preceding the date of the
audit opinion for Starsys' fiscal year ended December 31, 2005, but not
less than $2.00;
- For the fiscal year ended December 31, 2006, $350,000 in cash and an
aggregate number of shares of SpaceDev common stock equal to the quotient
of (A) up to $7,500,000 divided by (B) the volume weighted average price of
SpaceDev common stock for the twenty trading days preceding the date of the
audit opinion for Starsys' fiscal year ended December 31, 2006, but not
less than $2.50; and
- For the fiscal year ended December 31, 2007, $350,000 in cash and an
aggregate number of shares of SpaceDev common stock equal to the quotient
of (A) up to $7,500,000 divided by (B) the volume weighted average price of
SpaceDev common stock for the twenty trading days preceding the date of the
audit opinion for Starsys' fiscal year ended December 31, 2007, but not
less than $3.00.
Starsys believes it is unlikely that it will achieve one of the performance
criteria for the fiscal year ending December 31, 2005. This performance criteria
is subject to adjustment following the year end pursuant to its audit of its
financial records. If Starsys does not meet this performance criteria, the
Starsys shareholders will not receive any performance consideration for 2005.
If any shares of SpaceDev common stock are payable as performance
consideration for the fiscal year ending December 31, 2005, fifty percent (50%)
of those shares will be deposited in the escrow described above. In addition,
1% of any shares of SpaceDev common stock payable as performance consideration
will be paid as transaction expenses to Robert Vacek, the president of Starsys.
In addition, Starsys shareholders will be entitled to receive the maximum
amount of performance consideration for a particular fiscal year if SpaceDev
materially breaches specific covenants of the merger agreement and is unable to
cure the breach within the cure period set forth in the merger agreement.
For more information, see "The Merger - The Merger Agreement - Merger
Consideration" beginning on page 56
Q: WHAT IS REQUIRED TO COMPLETE THE MERGER?
A. To complete the merger, a majority of the shares of SpaceDev common stock
outstanding on the record date for the SpaceDev special meeting of shareholders
must approve the merger proposal (unless the shares of SpaceDev common stock are
listed at the time of the closing of the merger on the American Stock Exchange
or another applicable national securities exchange, in which case approval by
the SpaceDev shareholders of the merger will not be required under applicable
law but may still be required by the SpaceDev board of directors) and the
proposal to amend SpaceDev's articles of incorporation to increase the
authorized number of shares of common stock. In addition, a majority of the
outstanding shares of Starsys common stock on the record date of the Starsys
special meeting of shareholders must also approve and adopt the merger agreement
and approve the merger proposal. SpaceDev and Starsys must also satisfy or
waive all other closing conditions set forth in the merger agreement, including
the following:
- The volume weighted average price of SpaceDev common stock as of the
trading day immediately preceding the closing will not be less than $1.00
per share.
- Vectra Bank Colorado will not have foreclosed or collected on any
collateral securing any loan made to Starsys.
- The aggregate debt and associated liabilities of Starsys at the closing
under loans from Vectra Bank Colorado, SpaceDev and Starsys shareholders
will not exceed $6,800,000.
- Shareholders of Starsys holding not less than 98% of the shares of each
class of capital stock of Starsys will have approved the merger agreement
and the merger.
- Not more than 1.5% of outstanding shares of SpaceDev common stock will have
exercised, or will retain the unexpired right to exercise, dissenters'
rights (or similar rights of dissent), if any, in respect of the merger.
- SpaceDev will have consummated a private financing of debt or equity
securities of at least $4.5 million in gross proceeds.
For more information, see "The Merger - The Merger Agreement - Conditions
to Completion of Merger" beginning on page 70.
Q: ARE THERE ANY SPACEDEV OR STARSYS OFFICERS, DIRECTORS OR SHAREHOLDERS
ALREADY COMMITTED TO VOTING IN FAVOR OF THE MERGER?
A: Yes. James W. Benson, SpaceDev's chairman of the board and chief
executive officer, Richard B. Slansky, SpaceDev's president, chief financial
officer, corporate secretary, and a SpaceDev director, and Susan C. Benson, a
SpaceDev director, are parties to voting agreements under which each is
obligated to vote his or her shares in favor of the merger, the merger agreement
and related proposals. As of November 1, 2005, Mr. Benson, Ms. Benson and Mr.
Slansky collectively held approximately 42% of the outstanding shares of
SpaceDev common stock. 'Mr. Benson's shift in officer duties from chief
executive officer to chief technology officer to occur on December 30, 2005 will
not affect Mr. Benson's obligations under the voting agreement. For more
information on SpaceDev's pending management changes, see the answer to the
question, "Does SpaceDev anticipate any management changes before the closing of
the merger?"
Scott Tibbitts, Starsys' chairman and chief executive officer, is also
party to a similar voting agreement under which he is obligated to vote his
shares of Starsys common stock in favor of the merger, the merger agreement and
the related proposal. As of November 1, 2005, Mr. Tibbitts held approximately
48% of the outstanding shares of Starsys common stock.
Q: WHAT ARE THE INTERESTS OF SPACEDEV OFFICERS AND DIRECTORS IN THE MERGER?
A: Certain of the directors and officers of SpaceDev have interests in the
merger that are different from, or in addition to, the general interests of the
other shareholders of SpaceDev. The SpaceDev board of directors was aware of
these interests to the extent they existed at the time and considered them,
among other matters, in approving the merger, the merger agreement and the
transactions contemplated by the merger agreement. These other interests include
the following:
- Mark N. Sirangelo, who will become chief executive officer, vice chairman
and a director of SpaceDev effective December 30, 2005, is a member of QS
Advisors, LLC and also a member of The QuanStar Group, business advisors to
SpaceDev. Upon the closing of the merger, QS Advisors will receive $200,000
cash and 250,000 shares of SpaceDev common stock.
- Upon the completion of the merger, Mr. Sirangelo will also receive (1) an
increase in base salary from $22,500 per month to $25,000 per month, and
(2) a bonus of $25,000, in each case pursuant to the terms of his executive
employment agreement with SpaceDev.
-9-
- Upon the completion of the merger, Richard B. Slansky, the president, chief
financial officer, a director and secretary of SpaceDev, will receive (1)
an increase in base salary from $14,500 per month to $16,500 per month, and
(2) a bonus of $25,000, in each case pursuant to the terms of his amended
and restated executive employment agreement with SpaceDev.
- Upon the completion of the merger, James W. Benson, the chairman and
current chief executive officer of SpaceDev, will receive (1) an increase
in base salary from $14,000 per month to $15,500 per month, and (2) a bonus
of $22,500, in each case pursuant to the terms of his executive employment
agreement with SpaceDev.
Q: WHAT ARE THE INTERESTS OF STARSYS OFFICERS AND DIRECTORS IN THE MERGER?
A: Certain of the directors and officers of Starsys have interests in the
merger that are different from, or in addition to, the general interests of the
other shareholders of Starsys. The Starsys board of directors was aware of
these interests to the extent they existed at the time and considered them,
among other matters, in approving the merger, the merger agreement and the
transactions contemplated by the merger agreement. These other interests
include the following, among others:
- Scott Tibbitts, the chairman and chief executive officer of Starsys, is the
guarantor of amounts owed to Vectra Bank Colorado under a credit facility
with Starsys. This credit facility will be paid in full at closing, and Mr.
Tibbitts will be removed as guarantor. As of November 30, 2005, the amount
owed to Vectra Bank Colorado under the credit facility was approximately
$3.9 million.
- Each of Jack Tibbitts, Steve Tibbitts, and Ted Tibbitts, relatives of Scott
Tibbitts, loaned $100,000 to Starsys, which loans will be paid at closing.
- Pursuant to his employment agreement with Starsys, Robert Vacek, the
president and general manager of Starsys, will receive a merger bonus of 1%
of the total consideration for the merger, or approximately $140,000,
consisting of both cash and stock.
- SpaceDev has agreed to enter into executive employment agreements with
Scott Tibbitts and Robert Vacek contingent and effective upon the closing
of the merger. The agreement for Mr. Tibbitts will have a three year term.
- SpaceDev has agreed to enter into a three-year non-compete agreement with
Scott Tibbitts under which Mr. Tibbitts will receive $100,000 annually for
each year he abides by the terms of the agreement.
- Scott Tibbitts beneficially owns approximately 48% of the outstanding
shares of Starsys common stock.
- Scott Tibbitts is expected to act as the shareholder agent under the merger
agreement and related agreements.
For more information, see "The Merger - Interests of Certain Starsys Persons in
the Merger" beginning on page 44 and "The Merger - Shareholder Agent" beginning
on page 66.
Q: ARE THERE RISKS INVOLVED IN UNDERTAKING THE MERGER?
A: Yes. The merger (including the possibility that the merger may not be
consummated) poses a number of substantial and material risks. In addition, both
SpaceDev and Starsys are subject to various risks associated with their
respective businesses and industries, certain of which may be heightened by the
merger. These risks are discussed in greater detail under the caption "Risk
Factors" beginning on page 15. We encourage you to read and consider all of
these risks carefully.
-10-
Q: WHAT ARE THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO
ME?
A: The merger is intended to qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
Assuming the merger qualifies as a reorganization, Starsys shareholders will not
recognize gain or loss for United States federal income tax purposes upon the
exchange of shares of Starsys common stock for shares of SpaceDev common stock,
except with respect to any cash consideration received. The treatment of the
transaction as a tax-free reorganization is based on certain factual
assumptions. If any of these assumptions is inaccurate, the transaction may not
qualify as a reorganization. In that case, holders of Starsys common stock would
recognize gain or loss in an amount equal to the difference between the fair
market value of the consideration they receive in the merger and their tax bases
in their Starsys common stock.
Tax matters are very complicated, and the tax consequences of the merger to
a particular shareholder will depend significantly upon certain factual issues,
including the nature of the consideration of the shareholders in the merger and
such shareholder's particular circumstances. We accordingly urge you to consult
your own tax advisor for a full understanding of the tax consequences of the
merger to you, including the applicability and effect of federal, state, local
and foreign income and other tax laws. For more information, see the section
entitled "The Merger - Material United States Federal Income Tax Considerations"
on page 46.
Q. WHY WAS THE MINIMUM SPACEDEV STOCK PRICE CLOSING CONDITION CHANGED IN
AMENDMENT NO. 1 TO THE MERGER AGREEMENT FROM $0.77 PER SHARE TO $1.00 PER SHARE?
A. The merger agreement included a closing condition applicable to both
SpaceDev and Starsys which required that the price of SpaceDev common stock at
the closing be at least $0.77 per share. This closing condition was included
because both Starsys and SpaceDev desire that the merger be treated as a
tax-free reorganization for federal income tax purposes. The minimum SpaceDev
stock price in the original merger agreement was the value calculated at the
time, based on a number of assumptions, to be the minimum price necessary so
that the merger would be treated as a tax-free reorganization. For more
information on these assumptions, see "The Merger - Material United States
Federal Income Tax Considerations" beginning on page 46.
At the time of the amendment to the merger agreement, the assumptions
underlying the necessary minimum per-share price had changed. Based on the
updated assumptions, including updated information on the anticipated closing
working capital adjustments and transaction expense payments, a new minimum
per-share price of $1.00 was calculated as being necessary to ensure the merger
would be treated as a tax-free reorganization for federal income tax purposes.
Neither value represents our estimate or projection of the future value of
SpaceDev common stock.
Q: WHAT IS THE LETTER OF TRANSMITTAL?
A: If you are a Starsys shareholder, you will need to return a completed
letter of transmittal, attached as Annex F to this joint proxy/prospectus, to
claim your merger consideration. You will need to provide, among other items of
information, your taxpayer identification number (in the case of individuals,
your social security number) in the letter and to complete the attached Form
W-9. You will also need to send your certificate(s) for your Starsys common
stock along with the letter; if you have lost your certificate(s), or they have
been stolen or destroyed, the letter contains an affidavit to this effect and
you need not deliver your certificate(s) along with the letter. The letter also
includes a general release of all claims you may have against Starsys as a
shareholder, including any dissenters' rights.
Q: SHOULD I SEND IN A LETTER OF TRANSMITTAL AND MY STARSYS STOCK
CERTIFICATES NOW?
A: If you are not attending the Starsys shareholders meeting, Starsys
encourages you to send in your completed letter of transmittal (including the
attached Form W-9) and all of your Starsys share certificates together with your
proxy card. The letter of transmittal includes a certification that, if any of
your share certificates are not attached, that those certificates have been
lost, stolen or are otherwise missing. If the merger does not close, Starsys
will return these share certificates to you. If you are attending the meeting,
Starsys encourages you to bring the completed letter of transmittal and all of
your Starsys share certificates to the meeting. In either case, if the merger
is approved, Starsys will deliver the completed letter of transmittal, Form W-9
and share certificates to the exchange agent for the merger on your behalf. One
of the conditions to the closing of the merger is that SpaceDev receive share
certificates from Starsys shareholders evidencing not less than 98% of all
outstanding Starsys shares, which condition SpaceDev may waive.
-11-
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: SpaceDev and Starsys are working toward consummating the merger as
quickly as possible. We hope to consummate the merger by January 31, 2006
promptly following the approval of the merger by the shareholders of SpaceDev
and Starsys. However, the merger is subject to numerous conditions that could
affect the timing of its consummation.
Q: ARE THERE ANY REGULATORY CONSENTS OR APPROVALS THAT ARE REQUIRED TO
COMPLETE THE MERGER?
A: Neither SpaceDev or Starsys is aware of the need to obtain any regulatory
approvals in order to complete the merger other than the declaration by the
Securities and Exchange Commission of the effectiveness of the registration
statement on Form S-4, of which this joint proxy statement/prospectus is a part,
and registration by coordination of the Form S-4 with the Colorado Secretary of
State pursuant to Colorado Revised Statutes Section 11-51-303.
Q: AM I ENTITLED TO APPRAISAL OR DISSENTERS' RIGHTS WITH RESPECT TO THE
MERGER?
A: If you are a holder or beneficial owner of Starsys common stock, you are
or may be entitled to dissenters' rights under Article 113 the Colorado Business
Corporation Act in connection with the merger. If a holder or beneficial owner
of Starsys common stock elects to exercise dissenters' rights, the holder or
beneficial owner, as applicable, must comply precisely with all the procedures
set forth in Article 113 of the Colorado Business Corporation Act, which is
reprinted in its entirety and attached to this joint proxy statement/prospectus
as Annex B. If you properly exercise dissenters' rights and the merger is
completed, you will be entitled to a judicial appraisal of the fair value of
your shares and you will not receive the consideration described in this joint
proxy statement/prospectus.
If you are a SpaceDev shareholder and a class of equity securities of
SpaceDev is not listed on the American Stock Exchange (or another applicable
national securities exchange) at the time of the merger, under California law
you may have the right to dissent from the merger by exercising dissenters'
rights. If a SpaceDev shareholder elects to exercise dissenters' rights, the
shareholder must precisely comply with all of the procedures set forth in
Chapter 13 of the California General Corporation Law. Chapter 13 of the
California General Corporation Law is reprinted in its entirety and attached to
this joint proxy statement/prospectus as Annex C.
SpaceDev shareholders are not entitled to dissenters' rights under Colorado
law.
For more information, see the section entitled "The Merger - Appraisal and
Dissenters' Rights" beginning on page 50.
Q: WHY DO CALIFORNIA CORPORATE LAWS APPLY TO SPACEDEV, A CORPORATION
ORGANIZED UNDER THE LAWS OF COLORADO?
A: SpaceDev is currently subject to Section 2115 of the California General
Corporation Law, which mandates that certain of California's corporate laws
apply to non-California corporations, because (1) a majority of the holders of
record of SpaceDev's common stock were residents of California on the record
date for the latest meeting of shareholders held during its latest full income
year and (2) SpaceDev met certain tests regarding property, payroll and sales in
California during its latest full income year. However, Section 2115 will not
apply to SpaceDev once SpaceDev has equity securities qualified for trading on
the American Stock Exchange or another applicable national securities exchange
(although SpaceDev could again become subject to Section 2115 if it no longer
has equity securities trading on the American Stock Exchange or another
qualified market).
Q: DOES SPACEDEV EXPECT TO HAVE A CLASS OF EQUITY SECURITIES LISTED ON THE
AMERICAN STOCK EXCHANGE?
A: Initial listing on the American Stock Exchange requires the satisfaction
by SpaceDev of certain quantitative listing standards relating to shareholders'
equity, market capitalization, number of public shareholders, market value
public float and other criteria. SpaceDev does not currently qualify for
listing under these criteria. After the filing of the Form S-4 registration
statement of which this joint proxy statement/prospectus is a part, SpaceDev
will work diligently to be listed on the American Stock Exchange immediately
prior to the consummation of the merger but can give no assurance that such
listing will occur during that time frame, or at all.
-12-
Q: WILL ANY CONTINGENT FEES BE PAID TO BROKERS OR CONSULTANTS IN CONNECTION
WITH THE MERGER?
A: Yes. Upon the consummation of the merger, QS Advisors, LLC, business
advisor to SpaceDev, will receive $200,000 cash and 250,000 shares of SpaceDev
common stock, St. Charles Capital, LLC, financial advisor to Starsys, will
receive $250,000 cash and shares of SpaceDev common stock valued at
approximately $386,000. Mark N. Sirangelo, who will succeed James W. Benson as
chief executive officer and who will also become vice chairman and a director of
SpaceDev effective December 30, 2005, is a member of QS Advisors, LLC and also a
member of The QuanStar Group LLC business advisors to SpaceDev.
Q: HOW WILL THE MERGER AFFECT MY STOCK OPTIONS AND WARRANTS TO ACQUIRE
STARSYS COMMON STOCK?
A: The holders of options, warrants and other rights to purchase Starsys
common stock must exercise such rights on or before the closing of the merger.
Any options, warrants or other rights to purchase Starsys common stock which are
not exercised prior to the closing of the merger will be cancelled and will
terminate and expire in accordance with their terms as of the closing of the
merger. Neither SpaceDev nor the surviving corporation will assume any options,
warrants or other rights to purchase Starsys common stock after the consummation
of the merger.
-13-
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information relating to SpaceDev, Starsys and the combined
company contained or incorporated by reference into this joint proxy
statement/prospectus is forward-looking in nature. All statements included or
incorporated by reference into this joint proxy statement/prospectus or made by
management of SpaceDev or Starsys, other than statements of historical fact
regarding SpaceDev or Starsys, are forward-looking statements. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions or variations of such words are intended to identify
forward-looking statements, but are not the exclusive means of identifying
forward-looking statements in this joint proxy statement/prospectus.
Additionally, statements concerning future matters such as the development of
new products, enhancements of technologies, sales levels, expense levels and
other statements regarding matters that are not historical are forward-looking
statements.
Although forward-looking statements in this joint proxy
statement/prospectus reflect the good faith judgment of the management of
SpaceDev and Starsys, such statements can only be based on facts and factors
currently known by management. Consequently, forward-looking statements are
inherently subject to risks and uncertainties and actual results and outcomes
may differ materially from the results and outcomes discussed in or anticipated
by the forward-looking statements. Factors that could cause or contribute to
such differences in results and outcomes include without limitation those
discussed in the section entitled "Risk Factors," as well as those discussed
elsewhere in this joint proxy statement/prospectus. Readers are urged not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this joint proxy statement/prospectus. SpaceDev undertakes no
obligation to revise or update any forward-looking statements in order to
reflect any event or circumstance that may arise after the date of this joint
proxy statement/prospectus. Readers are urged to review and consider carefully
the various disclosures made in this joint proxy statement/prospectus that
attempt to advise interested parties of the risks and factors that may affect
our business, financial condition, results of operations and prospects.
COMPARATIVE PER SHARE MARKET VALUE
The common stock of SpaceDev is traded on the OTC Bulletin Board, or OTCBB,
under the symbol "SPDV.OB". On October 25, 2005, the last full trading day
prior to the public announcement of the proposed merger, the last reported sale
price of SpaceDev's common stock on the OTCBB was $1.49 per share. Starsys is a
privately-held company and there is currently no established market for its
securities.
At the closing of the merger, Starsys shareholders are expected to receive
merger consideration of approximately $12.83 per share of Starsys common stock,
consisting of approximately $1.05 per share in cash and approximately $11.78 per
share in shares of SpaceDev common stock. The estimated merger consideration per
share is based on 522,437.47 shares of Starsys common stock outstanding as of
December 1, 2005, the record date for the special meeting of Starsys
shareholders, and assumes that an aggregate of approximately $547,000 in cash,
after estimated adjustments, and an aggregate of approximately $6,152,000 in
shares of SpaceDev common stock, after estimated adjustments, will be paid to
the Starsys shareholders at the closing of the merger. Starsys shareholders may
also be entitled to receive additional performance-based consideration following
the closing of the merger payable in cash and shares of SpaceDev common stock.
For more information on the merger consideration to be received by the Starsys
shareholders pursuant to the merger agreement, see "The Merger - Merger
Agreement - Merger Consideration" beginning on page 57.
-14-
RISK FACTORS
The merger involves a high degree of risk. By voting in favor of the
merger, Starsys shareholders will be choosing to invest in SpaceDev common
stock. In addition to the risks described in SpaceDev's reports filed with the
Securities and Exchange Commission, you should carefully consider the risks
described below relating to the merger and the risks to the combined company's
business after the merger. You should also consider the other information
contained in, or incorporated by reference into, this joint proxy
statement/prospectus. If any of these risks actually occur, the business,
financial condition or results of operations of SpaceDev and for Starsys may be
seriously harmed. In such case, the market price of SpaceDev common stock may
decline, and you may lose all or part of your investment.
RISKS RELATED TO THE MERGER
IF SPACEDEV AND STARSYS FAIL TO INTEGRATE THEIR OPERATIONS EFFECTIVELY, THE
COMBINED COMPANY WILL NOT REALIZE ALL THE POTENTIAL BENEFITS OF THE MERGER.
The integration of SpaceDev and Starsys may be time consuming and expensive
and may disrupt the combined company's operations if it is not completed in a
timely and efficient manner. If this integration effort is not successful, the
combined company's results of operations could be harmed, employee morale could
decline, key employees could leave, customers could cancel existing orders or
choose not to place new ones and the combined company could have difficulty
entering into new contracts with customers and complying with regulatory
requirements. In addition, the combined company may not achieve anticipated
synergies or other benefits of the merger. The combined company may encounter
difficulties, costs and delays involved in integrating their operations,
including the following:
- failure to successfully manage relationships with customers and other
important relationships;
- failure of customers to accept new services or to continue using the
products and services of the combined company;
- difficulties in successfully integrating the management teams and employees
of the two companies;
- challenges encountered in managing larger, more geographically dispersed
operations;
- the loss of key employees;
- diversion of the attention of management from other ongoing business
concerns;
- potential incompatibilities of technologies and systems;
- potential difficulties integrating and harmonizing financial reporting
systems; and
- potential incompatibility of business cultures.
If the combined company's operations after the merger do not meet the
expectations of existing customers of either company, these customers may reduce
the amount of business or cease doing business with the combined company
altogether, which would harm the results of operations and financial condition
of the combined company.
If the anticipated benefits of the merger are not realized or do not meet
the expectations of financial or industry analysts, the market price of SpaceDev
common stock may decline after the merger. The market price of SpaceDev common
stock may decline as a result of the merger if, among other reasons:
- the integration of the two companies is unsuccessful;
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- the combined company does not achieve the expected benefits of the merger
as quickly as anticipated or the costs of or operational difficulties
arising from the merger are greater than anticipated;
- the combined company's financial results after the merger are not
consistent with the expectations of management or financial or industry
analysts;
- the anticipated operating and product synergies of the merger are not
realized; or,
- the combined company experiences the loss of significant customers or
employees as a result of the merger.
FAILURE TO COMPLETE THE MERGER COULD ADVERSELY AFFECT THE FUTURE BUSINESS AND
OPERATIONS OF SPACEDEV AND STARSYS AS WELL AS THE MARKET PRICE OF SPACEDEV
COMMON STOCK.
The merger is subject to the satisfaction of closing conditions, including
the approval by both SpaceDev and Starsys shareholders, and may not be
successfully completed. In the event that the merger is not completed, SpaceDev
may be subject to a number of risks, including:
- The price of SpaceDev's common stock may decline to the extent that the
current market price of SpaceDev's common stock reflects a market
assumption that the merger will be completed.
- SpaceDev could suffer the loss of customers, revenues and employees due to
uncertainties resulting from an uncompleted merger.
- SpaceDev's costs related to the merger, such as legal and accounting fees,
must be paid even if the merger is not completed, and these costs would
reduce reported earnings or increase reported loss, for the period when it
was determined that the merger would not be consummated.
If the merger is not completed, Starsys may be subject to a number of risks
including:
- Vectra Bank Colorado may foreclose on Starsys' credit facility, which could
force Starsys into bankruptcy and could result in Vectra owning all of the
assets of Starsys.
- Starsys could suffer the loss of customers, revenues and employees due to
uncertainties resulting from the uncompleted merger.
- Starsys could have difficulty attracting new customers or maintaining
current customers because of its difficult financial situation.
- Starsysy's costs related to the merger, such as legal and accounting fees,
must be paid even if the merger is not completed.
COMPLETION OF THE MERGER MAY RESULT IN DILUTION OR REDUCTION OF SPACEDEV'S
FUTURE EARNINGS PER SHARE.
The completion of the merger may not result in improved earnings per share
or a financial condition superior to that which would have been achieved on a
stand-alone basis. The combined company will have substantially more shares
outstanding than SpaceDev alone, and earnings need to increase proportionately
in order to maintain the present earnings per share. The merger could therefore
result in a reduction of SpaceDev's earnings per share as compared to the
earnings per share that would have been achieved if the merger had not occurred.
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THE COSTS ASSOCIATED WITH THE MERGER ARE DIFFICULT TO ESTIMATE, MAY BE HIGHER
THAN EXPECTED AND MAY HARM THE FINANCIAL RESULTS OF THE COMBINED COMPANY.
SpaceDev and Starsys estimate that they will incur aggregate direct
transaction costs of approximately $2,000,000 associated with the merger, and
additional costs associated with consolidation and integration of operations,
which cannot be estimated accurately at this time. If the total costs of the
merger exceed estimates or the benefits of the merger do not exceed the total
costs of the merger, the financial results of the combined company could be
adversely affected.
SPACEDEV'S AND STARSYS' BUSINESS COULD SUFFER DUE TO THE ANNOUNCEMENT AND
CLOSING OF THE MERGER.
Further disclosures concerning the merger, and closing of the merger, may
have a negative impact on SpaceDev's and Starsys' respective ability to sell
products and services, attract and retain key management, technical, sales or
other personnel, maintain and attract new customers and maintain strategic
relationships with third parties. For example, SpaceDev and Starsys may
experience deferrals, cancellations or declines in the size or rate of orders
for their respective products or services or a deterioration in their respective
customer or business partner relationships. Any such events could harm the
operating results and financial condition of the combined company following the
merger.
SPACEDEV'S OPERATING RESULTS MAY SUFFER AS A RESULT OF PURCHASE ACCOUNTING
TREATMENT AND THE IMPACT OF AMORTIZATION OF INTANGIBLE ASSETS RELATED TO THE
MERGER.
In accordance with U.S. generally accepted accounting principles that apply
to SpaceDev, the merger will be accounted for using the purchase method of
accounting, which will result in incremental expenses that could have an adverse
impact on the market value of SpaceDev common stock following completion of the
merger. Under the purchase method of accounting, the total estimated purchase
price will be allocated to Starsys' net tangible assets and identifiable
intangible assets based on their fair values as of the date of completion of the
merger. The excess of the purchase price over those fair values will be
recorded as goodwill. Goodwill is not amortized but is tested for impairment at
least annually. The combined company will incur additional amortization expense
based on the identifiable amortizable intangible assets acquired pursuant to the
merger agreement and their relative useful lives. Additionally, to the extent
the value of goodwill or identifiable intangible assets or other long-lived
assets become impaired, the combined company may be required to record material
charges relating to the impairment. These amortization and potential impairment
charges could have a material impact on the combined company's results of
operations. Changes in earnings per share, including changes that result from
this amortization expense, could adversely affect the trading price of SpaceDev
common stock.
STARSYS AND SPACEDEV EXECUTIVE OFFICERS AND DIRECTORS HAVE INTERESTS THAT ARE
DIFFERENT FROM, OR IN ADDITION TO, THOSE OF STARSYS SHAREHOLDERS GENERALLY.
Certain executive officers and directors of Starsys and SpaceDev have
interests in the merger that are different from, or are in addition to, those of
Starsys or SpaceDev shareholders generally, as applicable. The receipt of
compensation or other benefits in the merger, including employment agreements,
and/or the provision of and continuation of indemnification and insurance
arrangements for these individuals following completion of the merger, may
influence these individuals in making their recommendation that you vote in
favor of the adoption of the merger agreement. You should be aware of these
interests when you consider the recommendation of the boards of Starsys and
SpaceDev that you vote in favor of the merger agreement, the merger and the
related proposal. See the sections entitled "The Merger --Interests of Certain
SpaceDev Persons in the Merger" beginning on page 42 and "The Merger-Interests
of Certain Starsys Persons in the Merger" beginning on page 44.
STARSYS CURRENTLY FACES A LIQUIDITY CHALLENGE AND ITS PRIMARY BANK LENDER HAS
PLACED STARSYS INTO FORBEARANCE. STARSYS WILL REQUIRE A FURTHER FORBEARANCE
AGREEMENT IN ORDER TO AVOID THE LENDER HAVING A RIGHT TO FORECLOSE AFTER JANUARY
31, 2006. ANY DELAY OF THE CONSUMMATION OF THE MERGER COULD HAVE SIGNIFICANT
ADVERSE CONSEQUENCES TO STARSYS.
In April 2005, Starsys was notified by Vectra Bank Colorado, its primary
bank lender, that Starsys' access to capital was severely diminished, and that
the lender had elected to place Starsys into forbearance, an option available to
the lender as a part of Starsys' secured credit facility. The forbearance
agreement expires on January 31, 2006, at which
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time Vectra may foreclose on its collateral for the loans to Starsys. While the
merger agreement provides that at closing, SpaceDev will pay off the remaining
amounts due from Starsys to Vectra and the Starsys shareholders (up to $4.6
million in the aggregate), subject to the limitations described elsewhere in
this joint proxy statement/prospectus, the merger may not close prior to January
31, 2006, and a further forbearance agreement from Vectra may be necessary to
avoid foreclosure. Vectra may not grant a further forbearance agreement on terms
acceptable to Starsys, or at all. The terms of any forebearance agreement could
result in the violation of one or more covenants by Starsys in the merger
agreement, or the failure of a closing condition in the merger agreement, either
of which could give SpaceDev the right to terminate the merger agreement. Any
failure to obtain a further forebearance agreement, or delay in the consummation
of the merger, could have a severe negative effect on Starsys' ability to
continue as a going concern.
THE MERGER MAY NOT QUALIFY AS A TAX-FREE REORGANIZATION, IN WHICH CASE THE
TRANSACTION WILL BE FULLY TAXABLE TO THE STARSYS SHAREHOLDERS.
The treatment of the transaction as a tax-free reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended, is based on
certain factual assumptions. If any of these assumptions is inaccurate, the
merger may not qualify as a reorganization. In that case, holders of Starsys
common stock would recognize gain or loss in an amount equal to the difference
between the fair market value of the consideration they receive in the merger
and their tax bases in their Starsys common stock. See "The Merger - Material
United States Federal Income Tax Considerations" on page 46.
STARSYS MAY NOT ACHIEVE THE PERFORMANCE CRITERIA IN THE MERGER AGREEMENT FOR THE
YEARS ENDING DECEMBER 31, 2005, 2006 AND 2007, WHICH WOULD RESULT IN STARSYS
SHAREHOLDERS NOT RECEIVING SOME OR ALL OF THE PERFORMANCE CONSIDERATION
DESCRIBED IN THE MERGER AGREEMENT.
The payment of the performance consideration to Starsys shareholders by
SpaceDev is subject to the achievement by Starsys of the performance criteria
listed in the merger agreement. This performance criteria consists of Net
Revenues Targets and EBITDA Targets for the fiscal years ending December 31,
2005, 2006, and 2007. If Starsys does not achieve 80% of either Target
during a particular year, the Starsys shareholders will not receive the
performance consideration for that year.
THE EXCHANGE RATIO AND NUMBER OF SHARES OF SPACEDEV COMMON STOCK THAT YOU WILL
BE ENTITLED TO RECEIVE IS BASED ON AN AVERAGE CLOSING PRICE OF SPACEDEV COMMON
STOCK OVER A PERIOD OF TIME, WITH A FLOOR PRICE, BOTH OF WHICH COULD BE LOWER
THAN THE MARKET VALUE OF THE SHARES.
The use of an exchange ratio that is tied to an average closing price over
an extended period of time is intended to provide Starsys stockholders with a
negotiated level of appropriate "value" of SpaceDev common stock for each share
of Starsys common stock exchanged for SpaceDev common stock, without permitting
one-day trading spikes, arbitrage or other unusual market activity to
artificially raise or lower the exchange rate. In addition, the average price of
SpaceDev common stock at the closing and upon payment of the performance
consideration, if any, may be below the applicable floor prices in the merger
agreement. If so, Starsys shareholders would receive SpaceDev common stock
based on the floor price, even though the average price is less than the floor
price. However, you may not be able to sell your shares at the average closing
price or the floor price, as applicable. If the SpaceDev average closing price
over the measurement period or the floor price, as applicable, is higher than
the market price of the SpaceDev common stock at the effective time of the
merger or the payment of performance consideration, the SpaceDev common stock
issued pursuant to the merger or the payment of performance consideration,
together with any cash consideration issued, would be worth less than the
nominal amount of initial merger consideration or performance consideration per
share of Starsys common stock, as applicable.
THE SHAREHOLDERS' AGENT MAY NOT ACT IN THE MANNER YOU DESIRE.
Scott Tibbitts, Chairman and Chief Executive Officer of Starsys, is being
appointed as the shareholders' agent to act as the shareholders' representative
in certain matters involving the indemnification by the shareholders of SpaceDev
and the performance consideration that Starsys may be entitled to receive upon
achievement of certain performance criteria by Starsys. As shareholders' agent,
Scott Tibbitts will have the right, among other things, to compromise and to
settle claims for damages made by SpaceDev against the escrow account. The
shareholders' agent
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may not act in the manner you desire and decisions made by the agent could have
the effect of reducing the aggregate consideration you ultimately receive
pursuant to the merger.
RISKS RELATED TO THE COMBINED COMPANY FOLLOWING THE MERGER
To facilitate a reading of the risks that we believe will apply to SpaceDev
and Starsys as a combined company following the completion of the merger, in
referring to "we," "us" and other first person declarations in these risk
factors, we are referred to the combined company as it would exist following the
merger.
EACH OF SPACEDEV AND STARSYS HAVE EXPERIENCED LOSSES FROM OPERATIONS IN PRIOR
PERIODS AND HAVE BEEN REQUIRED TO SEEK ADDITIONAL FINANCING TO SUPPORT THEIR
BUSINESSES.
In prior years, both SpaceDev and Starsys have experienced operating losses
and, in some periods, revenues from operations have not been sufficient to fund
their respective operations. On a pro forma basis, the combined company would
have had a net loss from operations of $4,962,858 for the year ended December
31, 2004 and $955,631 for the nine months ended September 30, 2005, assuming the
merger had occurred on January 1, 2004. See "Unaudited Pro Forma Consolidated
Financial Statements" beginning on page 89. The success of the combined
company's business depends upon our ability to generate revenue from existing
contracts, to execute programs cost-effectively, to attract and complete
successfully additional government and commercial contracts, and additional
financing. In the past, both SpaceDev and Starsys have relied upon cash from
financing activities to fund part of the cash requirements of their respective
businesses. If we are in need of further financing, we may be unable to obtain
such financing or contracts as needed or on terms favorable to us. The
likelihood of our success must be considered in light of the expenses,
difficulties and delays frequently encountered in connection with developing
businesses, those historically encountered by us, and the competitive
environment in which we operate.
IF WE ARE UNABLE TO RAISE CAPITAL, WE MAY BE UNABLE TO FUND OPERATING CASH
SHORTFALLS.
SpaceDev will need additional financing to fulfill its obligations under
the merger agreement and fund its projected operations for the next twelve
months. Additional financing may not be available to us on acceptable terms, or
at all. Any inability to obtain needed financing would hinder our ability to
close the merger while funding our projected operating needs and may result in a
default under the merger agreement, which in turn could have a material adverse
effect on our business. Any financing may cause additional dilution to existing
shareholders. Any debt financing or other issuance of securities senior to
common stock likely will include financial and other covenants that will
restrict our operating flexibility and our ability to pay dividends to
shareholders. SpaceDev has not paid dividends on its common stock in the past
and does not anticipate paying dividends on its common stock in the foreseeable
future.
SOME OF OUR GOVERNMENT CONTRACTS ARE STAGED AND WE CANNOT GUARANTEE THAT ALL
STAGES OF THE CONTRACTS WILL BE AWARDED TO US OR AT ALL.
Some of our government contracts are phased contracts in which the customer
may determine to terminate the contract between phases for any reason.
Accordingly, the entire contract amount may not be realized by us. For
example,recently, SpaceDev was informed by the Missile Defense Agency that it
would not be exercising its option for a second cluster of three microsats under
the March 31, 2004 Missile Defense Agency contract. SpaceDev estimates that the
second cluster represented approximately $10 million of the $43 million of total
potential payments under the contract. In the event that subsequent phases of
some of our government contracts, including but not limited to the Missile
Defense Agency contract, are not awarded to us, it could have a material adverse
effect on our financial position and results of operations.
SPACEDEV RELIES ON A SMALL NUMBER OF CUSTOMERS FOR SUBSTANTIALLY ALL OF OUR
REVENUES AND THE LOSS OF ONE OR MORE OF THESE CUSTOMERS WOULD SERIOUSLY HARM OUR
BUSINESS.
For the 2004 fiscal year and the nine months ended September 2005, two
customers accounted for approximately 77% and 79% of SpaceDev's net sales. We
expect that our dependence on a small number of government agency customers will
continue into the foreseeable future. Many of our contracts are staged, or
contain termination rights in favor of the customer. In the event we experience
terminations or are not awarded future stages of our contracts, our results of
operations could be materially adversely affected.
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A SUBSTANTIAL PORTION OF OUR NET SALES ARE GENERATED FROM GOVERNMENT CONTRACTS,
WHICH MAKES US SUSCEPTIBLE TO THE UNCERTAINTIES INHERENT IN THE GOVERNMENT
BUDGETING PROCESS. IN ADDITION, MANY OF OUR CONTRACTS CAN BE TERMINATED BY THE
CUSTOMER.
Our concentration of government work makes us susceptible to government
budget cuts and policy changes, which may impact the award of new contracts or
future phases of existing contracts. Government budgets are subject to the
prevailing political climate, which is subject to change at any time.
Additionally, awarded contracts could be altered or terminated prior to the time
we recognize our projected revenue. Many contracts are awarded in phases where
future phases are not guaranteed to us. In addition, obtaining contracts and
subcontracts from government agencies is challenging, and contracts often
include provisions that are not standard in private commercial transactions. For
example, government contracts may:
- include provisions that allow the government agency to terminate the
contract without penalty under some circumstances;
- be subject to purchasing decisions of agencies that are subject to
political influence;
- contain onerous procurement procedures; and,
- be subject to cancellation if government funding becomes unavailable.
Securing government contracts can be a protracted process involving
competitive bidding. In many cases, unsuccessful bidders may challenge contract
awards, which can lead to increased costs, delays and possible loss of the
contract for the winning bidder.
SPACEDEV'S LIMITED OPERATING HISTORY AND LACK OF EXPERIENCE IN OUR NEW OR
PROPOSED LINES OF BUSINESS MAKES IT DIFFICULT TO PREDICT OUR FUTURE PROSPECTS.
SpaceDev has limited operating history and, as a result, its historical
financial information is of limited value in projecting SpaceDev's future
success in these markets. SpaceDev launched its first microsatellite, CHIPSat,
in January 2003 and, in June, September and October, 2004, SpaceDev's hybrid
rocket technology was first utilized in connection with SpaceShipOne. SpaceDev
plans to sell an increasing percentage of its products and services in
commercial markets, but virtually all of its historical work has been from
government contracts and government-related work. SpaceDev recently announced
its intention to enter the launch services market by providing a microsat bus,
integration services, and a launch vehicle as a package. SpaceDev will be
dependent on the performance of Space Exploration Technologies, a small company
with limited operating history which has not yet had a successful launch, for
its first launch vehicle. SpaceDev's microsatellites, nanosatellites and launch
services may not achieve market acceptance, and our future prospects are
therefore difficult to evaluate.
WE MAY NOT SUCCESSFULLY OR TIMELY DEVELOP PRODUCTS.
Many of our products and technologies (including our hybrid rocket
technology) are currently under various stages of development. Further
development and testing of our products and technologies will be required to
prove additional performance capability beyond current levels and to confirm
commercial viability. Additionally, the final cost of development cannot be
determined until development is complete. Our ongoing and future product
development will depend, in part, on the ability to timely complete our projects
within estimated cost parameters and ultimately deploy the product in a
cost-effective manner. In addition, Starsys has contracted to execute
development programs under fixed price contracts. Under these contracts, even
if our costs begin to exceed the amount to be paid by the customer under the
contract, we are required to complete the contract without receiving any
additional payments from the customer. It is difficult to predict accurately
the total cost of executing these programs. If the costs to complete these
programs significantly exceeds the payments from the customers under the
contracts, our results of operations will be harmed.
-20-
WE PROVIDE OUR PRODUCTS AND SERVICES PRIMARILY THROUGH FIXED-PRICE AND COST PLUS
FIXED FEE CONTRACTS. STARSYS HAS EXPERIENCED SIGNIFICANT LOSSES ON FIXED-PRICE
CONTRACTS. COST OVERRUNS MAY RESULT IN FURTHER LOSSES AND, IF SIGNIFICANT, COULD
IMPAIR OUR LIQUIDITY POSITION.
Under fixed-price contracts, our customers pay us for work performed and
products shipped without adjustment for the costs we incur in the process.
Therefore, we generally bear all or a significant portion of the risk of losses
as a result of increased costs on these contracts. Starsys has experienced
significant cost overruns on development projects under its fixed-price
contracts, resulting in estimated losses on uncompleted contracts of $2 million
for Starsys' fiscal 2004, and an additional $4.3 million for the nine months
ended September 30, 2005. As of September 30, 2005, based on a formal
evaluation process, Starsys has reserved $1.6 million for potential risks on
these remaining development projects. Fixed-price contracts may provide for
sharing of unexpected costs incurred or savings realized within specified limits
and may provide for adjustments in price depending on actual contract
performance other than costs. We bear the entire risk of cost overruns in
excess of the negotiated maximum amount of unexpected costs to be shared. Any
significant overruns in the future could materially impair our liquidity and
operations.
Under cost plus fixed fee contracts, we are reimbursed for allowable
incurred costs plus a fee, which may be fixed or variable. There is no guarantee
as to the amount of fee we will be awarded under a cost plus fixed fee contract
with a variable fee. The price on a cost plus fixed fee reimbursable contract is
based on allowable costs incurred, but generally is subject to contract funding
limitations. Therefore, we could bear the amount of costs in excess of the
funding limitation specified in the contract, and we may not be able to recover
those cost overruns.
THE MARKETPLACE FOR OUR TECHNOLOGY AND PRODUCTS IS UNCERTAIN.
The demand for our technology, products and services is uncertain and we
may not obtain a sufficient market share to sustain our business or to increase
profitability. Our business plan assumes that near-term revenues will be
generated largely from government contracts for microsatellites and
electromechanical systems for spacecraft with a long-term commercial market
developing for private manned and unmanned space exploration. Microsatellites
and commercial space exploration are still relatively new concepts, and it is
difficult to predict accurately the ultimate size of the market. In addition, we
are developing new product areas such as large deployable structures, solar
array drives, slip rings and precision scanning assemblies for spacecraft. Many
of our products and services are new and unproven, and the true level of
customer demand is uncertain. Lack of significant market acceptance of our
products and services, delays in such acceptance, or failure of our markets to
develop or grow could negatively affect our business, financial condition, and
results of operations.
WE EXPECT OUR OPERATING RESULTS TO FLUCTUATE ON A QUARTERLY AND ANNUAL BASIS,
WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE OR DECLINE.
We believe that our operating results may fluctuate substantially from
quarter-to-quarter and year-to-year for a variety of reasons, many of which are
beyond our control. Factors that could affect our quarterly and annual operating
results include those listed below as well as others listed in this "Risk
Factors" section:
- we may not be awarded all stages of existing or future contracts;
- the timing of new technological advances and product announcements or
introductions by us and our competitors;
- changes in the terms of our arrangements with customers or suppliers;
- our current reliance on a few customers for a significant portion of our
net sales;
- the failure of our key suppliers to perform as expected;
- general political conditions that could affect spending for the products
that we offer;
- delays or failures to satisfy our obligations under our contracts on a
timely basis;
-21-
- the failure of our products to successfully launch or operate;
- the uncertain market for our technology and products;
- the availability and cost of raw materials and components for our products;
and,
- the potential loss of key personnel.
As a result of these factors, period-to-period comparisons of our operating
results may not be meaningful, and you should not rely on them as an indication
of our future performance. In addition, our operating results may fall below the
expectations of public market analysts or investors. In this event, our stock
price could decline significantly.
WE FACE SIGNIFICANT COMPETITION AND MANY OF OUR COMPETITORS HAVE GREATER
RESOURCES THAN WE DO.
We face significant competition for our government and commercial
contracts. Many of our competitors have greater resources than we do and may be
able to devote greater resources than us to research and development, and
marketing. Given the sophistication inherent in our operations, larger
competitors may have a significant advantage and may be able to more efficiently
adapt and implement technological advances. Furthermore, it is possible that
other domestic or foreign companies or governments, some with greater experience
in the space industry and many with greater financial resources than we possess,
could seek to produce products or services that compete with our products or
services, including new mechanisms and electromechanical subsystems using new
technology which could render our products less viable. Some of our foreign
competitors currently benefit from, and others may benefit in the future from,
subsidies from or other protective measures implemented by their home countries.
OUR PRODUCTS AND SERVICES ARE TECHNOLOGICALLY ADVANCED AND MAY NOT FUNCTION
UNDER CERTAIN CONDITIONS.
Most of our products are technologically advanced and sometimes novel
systems that must function under demanding operating conditions. Our products
may not be successfully launched or operated, or perform as intended. Like most
organizations that have launched satellite programs, we have and in the future
will likely experience some product and service failures, cost overruns,
schedule delays, and other problems in connection with our products. Our
products and services are and will continue to be subject to significant
technological change and innovation. Our success will generally depend on our
ability to continue to conceive, design, manufacture and market new products and
services on a cost-effective and timely basis. We anticipate that we will incur
significant expenses in the design and initial manufacture and marketing of new
products and services.
LAUNCH FAILURES COULD HAVE SERIOUS ADVERSE EFFECTS ON OUR BUSINESS.
A launch failure of one of our microsatellites could have serious adverse
effects on our business. Microsatellite launches are subject to significant
risks, the realization of which can cause disabling damage to or total loss of a
microsatellite. Delays in the launch could also adversely affect our net sales.
Delays could be caused by a number of factors, including:
- designing, constructing, integrating, or testing the microsatellite,
microsatellite components, or related ground systems;
- delays in receiving the license necessary to operate the microsatellite
systems;
- delays in obtaining the customer's payload;
- delays related to the launch vehicle;
- weather; and,
- other events beyond our control.
-22-
Delays and the perception of potential delay could negatively affect our
marketing efforts and limit our ability to obtain new contracts and projects.
OUR EXPANSION INTO OTHER NEW LINES OF BUSINESS MAY DIVERT MANAGEMENT'S ATTENTION
FROM OUR EXISTING OPERATIONS AND PROVE TO BE TOO COSTLY.
Our current business plan contemplates the migration of SpaceDev's
technology from projects into products for microsatellites and hybrid rocket
motors over the next several years. In the meantime, we are investigating other
applications of our technology and other markets for our technologies and
prospective products. Our expansion into new lines of business may be difficult
for us to manage because they may involve different disciplines and require
different expertise than our core business. Consequently, this expansion may
divert management's time and attention away from our core business, and we may
need to incur significant expenses in order to develop the expertise, and
reputation we desire. Any revenues generated by new lines of business may not
be significant enough to offset the expenditures required to enter such
business, or provide the anticipated return on investment.
OUR U.S. GOVERNMENT CONTRACTS ARE SUBJECT TO AUDITS THAT COULD RESULT IN A
MATERIAL ADVERSE AFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS IF
A MATERIAL ADJUSTMENT IS REQUIRED.
The accuracy and appropriateness of our direct and indirect costs and
expenses under our contracts with the U.S. government are subject to extensive
regulation and audit by the Defense Contract Audit Agency, by other agencies of
the U.S. government or prime contractors. These entities have the right to
audit our cost estimates and/or allowable cost allocations with respect to
certain contracts. From time to time we may in the future be required to make
adjustments and reimbursements as a result of these audits. Responding to
governmental audits, inquiries or investigations may involve significant expense
and divert management attention. Also, an adverse finding in any such audit,
inquiry or investigation could involve contract termination, suspension, fines,
injunctions or other sanctions.
OUR SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR KEY PERSONNEL.
Our success will be dependent upon the efforts of key members of our
management and engineering team, including our current chief executive officer,
James W. Benson, who will continue to be a key member of our management team
after December 30, 2005, in his capacity as chairman and chief technology
officer, our new chief executive officer effective December 30, 2005, Mark N.
Sirangelo, our president and chief financial officer, Richard B. Slansky, our
vice president of engineering, Frank Macklin, our vice president of programs and
new business development, Randall K. Simpson, the chief executive officer of
Starsys, Scott Tibbitts, the president of Starsys, Robert Vacek, and certain
other SpaceDev and Starsys personnel. The loss of any of these persons, or
other key employees, including personnel with security clearances required for
classified work and highly skilled technicians and engineers, could have a
material adverse effect on us. Our future success is likely to depend
substantially on our continued ability to attract and retain highly qualified
personnel. The competition for such personnel is intense, and our inability to
attract and retain such personnel could have a material adverse effect on us. At
this time we do not maintain key man life insurance on any of our key personnel.
OUR GROWTH MAY NOT BE MANAGEABLE AND OUR BUSINESS COULD SUFFER AS A RESULT.
Even if we are successful in obtaining new business, failure to manage the
growth could adversely affect our operations. We may experience extended periods
of very rapid growth, which could place a significant strain on our management,
operating, financial and other resources. Our future performance will depend in
part on our ability to manage growth effectively. We must develop management
information systems, including operating, financial, and accounting systems,
improve project management systems and expand, train, and manage employees to
keep pace with growth. Our inability to manage growth effectively could
negatively affect results of operations and the ability to meet obligations as
they come due.
WE MAY NOT ADDRESS SUCCESSFULLY THE PROBLEMS ENCOUNTERED IN CONNECTION WITH ANY
POTENTIAL FUTURE ACQUISITIONS.
We expect to consider opportunities to acquire or make investments in other
technologies, products and businesses that could enhance our capabilities,
complement our current products or expand the breadth of our markets
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or customer base. We have limited experience in acquiring other businesses and
technologies. Potential and completed acquisitions and strategic investments
involve numerous risks, including:
- problems assimilating the purchased technologies, products or business
operations;
- problems maintaining uniform standards, procedures, controls and policies;
- unanticipated costs associated with the acquisition;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with suppliers and
customers;
- risks associated with entering new markets in which we have no or limited
prior experience;
- potential loss of key employees of acquired businesses; and,
- increased legal and accounting costs as a result of the newly adopted rules
and regulations related to the Sarbanes-Oxley Act of 2002.
IF OUR KEY SUPPLIERS FAIL TO PERFORM AS EXPECTED, OUR REPUTATION MAY BE DAMAGED.
WE MAY EXPERIENCE DELAYS, LOSE CUSTOMERS AND EXPERIENCE DECLINES IN REVENUES,
PROFITABILITY, AND CASH FLOW.
We purchase a significant percentage of our product components and
subassemblies from third parties, many of which are sole source suppliers in the
industry. If our subcontractors fail to perform as expected or encounter
financial difficulties, we may have difficulty replacing them or identifying
qualified replacements in a timely or cost effective manner. As a result, we
may experience performance delays that could result in additional program costs,
contract termination for default or damage to our customer relationships which
may cause our revenues, profitability and cash flow to decline. In addition,
negative publicity from any failure of one of our products or sub-systems as a
result of a supplier failure could damage our reputation and prevent us from
winning new contracts.
OUR LIMITED INSURANCE MAY NOT COVER ALL RISKS INHERENT IN OUR OPERATIONS.
We may find it difficult to insure certain risks involved in our
operations, including our launch vehicle and satellite operations, accidental
damage to high value customer hardware during the manufacturing process and
damages to customer spacecraft caused by our products not working to
specification. Insurance market conditions or factors outside of our control at
the time insurance is purchased could cause premiums to be significantly higher
than current estimates. Additionally, the U.S. Department of State has published
regulations which could significantly affect the ability of brokers and
underwriters to place insurance for certain launches. These factors could cause
other terms to be significantly less favorable than those currently available,
may result in limits on amounts of coverage that we can obtain, or may prevent
us from obtaining insurance at all. Furthermore, proceeds from insurance may not
be sufficient to cover losses.
SEVERAL YEARS OF LOW DEMAND AND OVERCAPACITY IN THE COMMERCIAL SATELLITE MARKET
HAVE RESULTED IN SLOW GROWTH IN DEMAND FOR SPACE PRODUCTS.
The commercial satellite market has experienced pricing pressures due to
excess capacity in the telecommunications industry and weakened demand over the
past several years. Satellite demand, and thus subsystem and component orders,
have also been impacted by the business difficulties encountered by the
commercial satellite services industry. This has resulted in a reduction in the
total market size in the near term. While the market appears to be making a
recovery, growth in the demand for our products may be limited.
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OUR COMPETITIVE POSITION WILL BE SERIOUSLY DAMAGED IF WE CANNOT PROTECT
INTELLECTUAL PROPERTY RIGHTS IN OUR TECHNOLOGY.
Our success, in part, depends on our ability to obtain and enforce
intellectual property protection for our technology. We rely on a
combination of patents, trade secrets and contracts to establish and protect our
proprietary rights in our technology. However, we may not be able to prevent
misappropriation of our intellectual property, and the agreements we enter into
may not be enforceable. In addition, effective trademark and trade secret
protection may be unavailable or limited in some foreign countries.
There is no guarantee any patent will issue on any patent application that
we have filed or may file. Further, any patent that we may obtain will expire,
and it is possible that it may be challenged, invalidated or circumvented. If we
do not secure and maintain patent protection for our technology and products,
our competitive position will be significantly harmed because it will be much
easier for competitors to sell products similar to ours. Alternatively, a
competitor may independently develop or patent technologies that are
substantially equivalent to or superior to our technology. If this happens, any
patent that we may obtain may not provide protection and our competitive
position could be significantly harmed.
As we expand our product line or develop new uses for our products, these
products or uses may be outside the protection provided by our current patent
applications and other intellectual property rights. In addition, if we develop
new products or enhancements to existing products, there is no guarantee that we
will be able to obtain patents to protect them. Even if we do receive patents
for our existing or new products, these patents may not provide meaningful
protection. In some countries outside of the United States, patent protection is
not available. Moreover, some countries that do allow registration of patents do
not provide meaningful redress for violations of patents. As a result,
protecting intellectual property in these countries is difficult and our
competitors may successfully sell products in those countries that have
functions and features that infringe on our intellectual property.
We may initiate claims or litigation against third parties in the future
for infringement of our proprietary rights or to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and divert the efforts of our
technical and management personnel. As a result, our operating results could
suffer and our financial condition could be harmed.
CLAIMS BY OTHER COMPANIES THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY OR THAT
PATENTS ON WHICH WE RELY ARE INVALID COULD ADVERSELY AFFECT OUR BUSINESS.
From time to time, companies may assert patent, copyright and other
intellectual proprietary rights against our products or products using our
technologies or other technologies used in our industry. These claims may result
in our involvement in litigation. We may not prevail in such litigation given
the complex technical issues and inherent uncertainties in intellectual property
litigation. If any of our products were found to infringe on another company's
intellectual property rights, we could be required to redesign our products or
license such rights and/or pay damages or other compensation to such other
company. If we were unable to redesign our products or license such intellectual
property rights used in our products, we could be prohibited from making and
selling such products.
Other companies or entities also may commence actions seeking to establish
the invalidity of our patents. In the event that one or more of our patents are
challenged, a court may invalidate the patent or determine that the patent is
not enforceable, which could harm our competitive position. If any of our key
patents are invalidated, or if the scope of the claims in any of these patents
is limited by court decision, we could be prevented from licensing the
invalidated or limited portion of such patents. Even if such a patent challenge
is not successful, it could be expensive and time consuming to address, divert
management attention from our business and harm our reputation.
WE ARE SUBJECT TO SUBSTANTIAL REGULATION. ANY FAILURE TO COMPLY WITH EXISTING
REGULATIONS, OR INCREASED LEVELS OF REGULATION, COULD HAVE A MATERIAL ADVERSE
EFFECT ON US.
Our business activities are subject to substantial regulation by various
agencies and departments of the United States government and, in certain
circumstances, the governments of other countries. Several government agencies,
including NASA and the U.S. Air Force, maintain Export Control Offices to ensure
that any disclosure of scientific and technical information complies with the
Export Administration Regulations and the International Traffic in Arms
-25-
Regulations or, "ITAR." Exports of our products, services and technical
information require either Technical Assistance Agreements, manufacturing
license agreements or licenses from the U.S. Department of State depending on
the level of technology being transferred. This includes recently published
regulations restricting the ability of U.S.-based companies to complete offshore
launches, or to export certain satellite components and technical data to any
country outside the United States. The export of information with respect to
ground-based sensors, detectors, high-speed computers, and national security and
missile technology items are controlled by the Department of Commerce. The
government has indicated that failure to comply with the ITAR and/or the
Commerce Department regulations may subject guilty parties to fines of up to $1
million and/or up to 10 years imprisonment per violation. Failure to comply with
any of the above mentioned regulations could have serious adverse effects as
dictated by the rules associated with compliance to the ITAR regulations.
In addition, the space industry has specific regulations with which we must
comply. Command and telemetry frequency assignments for space missions are
regulated internationally by the International Telecommunications Union, which
we refer to as the ITU. In the United States, the Federal Communications
Commission, which we refer to as the FCC, and the National Telecommunications
Information Agency, which we refer to as NTIA, regulate command and telemetry
frequency assignments. All launch vehicles that are launched from a launch site
in the United States must pass certain launch range safety regulations that are
administered by the U.S. Air Force. In addition, all commercial space launches
that we would perform require a license from the Department of Transportation.
Satellites that are launched must obtain approvals for command and frequency
assignments. For international approvals, the FCC and NTIA obtain these
approvals from the ITU. These regulations have been in place for a number of
years to cover the large number of non-government commercial space missions that
have been launched and put into orbit in the last 15 to 20 years. Any commercial
deep space mission that we would perform would be subject to these regulations.
We are also subject to laws and regulations regulating the formation,
administration and performance of, and accounting for, U.S. government
contracts. With respect to such contracts, any failure to comply with applicable
laws could result in contract termination, price or fee reductions, penalties,
suspension or debarment from contracting with the U.S. government.
We are also required to obtain permits, licenses, and other authorizations
under federal, state, local and foreign laws and regulations relating to the
environment. Our failure to comply with applicable law or government
regulations, including any of the above-mentioned regulations, could have
serious adverse effects on our business.
SPACEDEV'S STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE, WHICH COULD
RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES OF SPACEDEV COMMON
STOCK.
The market prices of securities of technology-based companies like ours are
often highly volatile. The market price of SpaceDev common stock has fluctuated
significantly in the past. During the 52-week period ended November 1, 2005, the
high and low closing price of a share of SpaceDev common stock was $2.31 and
$1.43, respectively. Our market price may continue to exhibit significant
fluctuations in response to a variety of factors, many of which are beyond our
control, including:
- deviations in our results of operations from estimates;
- changes in estimates of our financial performance;
- changes in our markets, including decreased government spending or the
entry of new competitors;
- our inability to obtain financing necessary to operate our business and
consummate the merger;
- changes in technology;
- potential loss of key personnel;
- changes in market valuations of similar companies and stock market price;
- the merger; and,
-26-
- volume fluctuations generally.
OUR NET OPERATING LOSS CARRYFORWARDS MAY BE SUBJECT TO AN ANNUAL LIMITATION ON
THEIR UTILIZATION, WHICH MAY INCREASE OUR TAXES AND DECREASE NET INCOME AND CASH
FLOWS.
At December 31, 2004 and September 30, 2005, we had federal tax net
operating loss carryforwards of approximately $4,826,000 and $4,325,000, state
tax net operating loss carryforwards of approximately $2,146,000 and $1,629,000
respectively. The federal tax loss carryforwards will expire in 2023 and the
state tax carryforwards will expire in 2013, respectively, unless previously
utilized. The State of California suspended the utilization of net operating
loss for 2002 and 2003 and limited them for 2004. If our net operating loss
carryforwards are subject to an annual limitation on their utilization, our
taxes may increase and our cash flows and net income may decrease.
Our use of Starsys' net operating loss carryforwards may be limited as a
result of cumulative changes in ownership of more than 50% over a three year
period. At December 31, 2004 and September 30, 2005, Starsys had federal tax net
operating loss carryforwards of approximately $1,500,000 and $3,546,000, state
tax net operating loss carryforwards of approximately $3,270,000 and $5,315,000.
The federal and state tax loss carryforwards will expire in 2024 unless
previously utilized.
THE CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK GIVES A FEW INDIVIDUALS
SIGNIFICANT CONTROL OVER IMPORTANT POLICY DECISIONS AND COULD DELAY OR PREVENT
CHANGES IN CONTROL.
As of November 1, 2005, SpaceDev executive officers and directors together
beneficially owned approximately 45% of the issued and outstanding shares of
SpaceDev common stock, and Starsys executive officers and directors together
beneficially owned approximately 59% of the issued and outstanding shares of
Starsys common stock. As a result, following the merger these persons could have
the ability to exert significant influence over matters concerning us, including
the election of directors, changes in the size and composition of the board of
directors, and mergers and other business combinations involving us. In
addition, through control of the board of directors and voting power, our
officers and directors may be able to control certain decisions, including
decisions regarding the qualification and appointment of officers, dividend
policy, access to capital (including borrowing from third-party lenders and the
issuance of additional equity securities), and the acquisition or disposition of
our assets. In addition, the concentration of voting power in the hands of those
individuals could have the effect of delaying or preventing a change in control
of our company, even if the change in control would benefit our shareholders. A
perception in the investment community of an anti-takeover environment at our
company could cause investors to value our stock lower than in the absence of
such a perception.
SPACEDEV HAS NOT PAID DIVIDENDS ON ITS COMMON STOCK IN THE PAST AND DOES NOT
ANTICIPATE PAYING DIVIDENDS ON ITS COMMON STOCK IN THE FORESEEABLE FUTURE.
SpaceDev has not paid common stock dividends since its inception and does
not anticipate paying dividends in the foreseeable future. Our current business
plan provides for the reinvestment of earnings in an effort to complete
development of our technologies and products, with the goal of increasing sales
and long-term profitability and value. In addition, the revolving credit
facility with Laurus Master Fund Ltd. and the terms of our preferred stock
currently restrict, and any other credit or borrowing arrangements that we may
enter into may in the future restrict or limit, our ability to pay common stock
dividends to our shareholders.
SPACEDEV COMMON SHAREHOLDERS WILL EXPERIENCE DILUTION IF OUR PREFERRED STOCK IS
CONVERTED OR OUR OUTSTANDING WARRANTS AND OPTIONS ARE EXERCISED.
As of December 20, 2005, SpaceDev is obligated to issue 3,369,127 shares of
SpaceDev common stock if all of SpaceDev's outstanding warrants are exercised
and shares of preferred stock converted. In addition, as of December 20, 2005,
SpaceDev has outstanding stock options to purchase an aggregate of 9,572,266
shares of SpaceDev common stock. The total number of shares, issuable upon the
exercise of currently vested warrants, options and preferred stock (12.941,393
shares) represents approximately 52% of SpaceDev's issued and outstanding shares
of common stock as of December 20, 2005. In addition, SpaceDev has agreed in the
merger agreement to issue up to 5,357,143 shares at the closing of the merger,
up to 7,000,000 shares as performance consideration and up to 1,843,571 shares
as options under SpaceDev's equity incentive plan to executives, managers,
employees and consultants of Starsys. In addition, to
-27-
complete the financing necessary to repay the Starsys bank and shareholder loans
and to pay other costs and expenses associated with the merger, SpaceDev
currently anticipates it needs to issue another approximately 4,500,000 shares
in connection with the merger. The total number of shares which SpaceDev may
thus issue in connection with the merger (18,700,714 shares) represents
approximately 75% of SpaceDev's outstanding shares of common stock as of
December 20, 2005.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS THE PRICE OF THE COMMON STOCK.
Sales by SpaceDev's current and future stockholders of a substantial number
of shares, including sales by the Starsys shareholders following the merger, or
the expectation that such sales may occur, could significantly reduce the market
price of our common stock. As described in the immediately preceding risk
factor, SpaceDev has a significant number of shares that are issuable upon
exercise of options and warrants or upon conversion of shares of preferred
stock. All of these shares are either registered with the SEC and may be sold
without restriction (except for volume limitations applicable to our officers,
directors and significant shareholders with respect to their option shares, and
contractual lockup restrictions obtained from some of the Starsys shareholders)
or have registration rights requiring us to register these shares with the SEC.
In the future, we may issue additional shares of common stock, convertible
securities, options and warrants.
CHANGES IN STOCK OPTION ACCOUNTING RULES MAY ADVERSELY AFFECT OUR REPORTED
OPERATING RESULTS PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES, OUR STOCK PRICE AND OUR EFFORTS IN RECRUITING ADDITIONAL EMPLOYEES.
Technology companies in general, and our company in particular, depend upon
and use broad based employee stock option programs to hire, incentivize and
retain employees in a competitive marketplace. Currently, we do not recognize
compensation expense for stock options issued to employees or directors, except
in limited cases involving modifications of stock options, and we instead
disclose in the notes to our financial statements information about what such
charges would be if they were expensed. An accounting standard setting body has
recently adopted a new accounting standard that will require us to record
equity-based compensation expense for stock options and employee stock purchase
plan rights granted to employees based on the fair value of the equity
instrument at the time of grant. We will be required to record these expenses
beginning with the first quarter of the year ending December 31, 2006. The
change in accounting rules will lead to a decrease in reported earnings, if we
have earnings, or an increased loss, if we do not have earnings. This may
negatively impact our future stock price. In addition, this change in accounting
rules could impact our ability to utilize broad based employee stock plans to
reward employees and could result in a competitive disadvantage to us in the
employee marketplace.
WE ARE SUBJECT TO NEW CORPORATE GOVERNANCE AND INTERNAL CONTROL REPORTING
REQUIREMENTS, AND OUR COSTS RELATED TO COMPLIANCE WITH, OR OUR FAILURE TO COMPLY
WITH EXISTING AND FUTURE REQUIREMENTS COULD ADVERSELY AFFECT OUR BUSINESS.
We face new corporate governance requirements under the Sarbanes-Oxley Act
of 2002, as well as new rules and regulations subsequently adopted by the SEC,
the Public Company Accounting Oversight Board and the American Stock Exchange
(if our common stock is approved for listing on the American Stock Exchange).
These laws, rules and regulations continue to evolve and may become increasingly
stringent in the future. In particular, we will be required to include
management and independent registered public accounting firm reports on internal
controls as part of our annual report for the year ending December 31, 2007
pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of
evaluating our control structure to help ensure that we will be able to comply
with Section 404 of the Sarbanes-Oxley Act. We cannot assure you that we will be
able to fully comply with these laws, rules and regulations that address
corporate governance, internal control reporting and similar matters. Failure
to comply with these laws, rules and regulations could materially adversely
affect our reputation, financial condition and the value of our securities.
THE TERMS OF SPACEDEV'S OUTSTANDING SHARES OF PREFERRED STOCK, AND ANY SHARES OF
PREFERRED STOCK ISSUED IN THE FUTURE, MAY REDUCE THE VALUE OF YOUR COMMON STOCK.
SpaceDev is authorized to issue up to 10,000,000 shares of preferred stock
in one or more series. SpaceDev currently has outstanding 250,000 shares of its
Series C Convertible Preferred Stock. Our board of directors may determine the
terms of future preferred stock offerings without further action by our
shareholders. If we issue additional
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preferred stock, it could affect your rights or reduce the value of your common
stock. In particular, specific rights granted to future holders of preferred
stock could be used to restrict our ability to merge with or sell our assets to
a third party. These terms may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights, and sinking fund
provisions. SpaceDev's Series C Preferred Stock ranks senior to the common stock
with respect to dividends and liquidation.
BECAUSE SPACEDEV COMMON STOCK IS SUBJECT TO THE SEC'S PENNY STOCK RULES,
BROKER-DEALERS MAY EXPERIENCE DIFFICULTY IN COMPLETING CUSTOMER TRANSACTIONS AND
TRADING ACTIVITY IN SPACEDEV SECURITIES MAY BE ADVERSELY AFFECTED.
Transactions in SpaceDev common stock are currently subject to the "penny
stock" rules promulgated under the Securities Exchange Act of 1934. Under these
rules, broker-dealers who recommend SpaceDev securities to persons other than
institutional accredited investors must:
- make a special written suitability determination for the purchaser;
- receive the purchaser's written agreement to a transaction prior to sale;
- provide the purchaser with risk disclosure documents which identify certain
risks associated with investing in "penny stocks" and which describe the
market for these "penny stocks" as well as a purchaser's legal remedies;
and,
- obtain a signed and dated acknowledgment from the purchaser demonstrating
that the purchaser has actually received the required risk disclosure
document before a transaction in a "penny stock" can be completed.
As a result of these rules, broker-dealers may find it difficult to
effectuate customer transactions and trading activity in SpaceDev securities may
be adversely affected. As a result, the market price of SpaceDev securities may
be depressed, and you may find it more difficult to sell our securities.
THE REVOLVING CREDIT FACILITY WITH LAURUS MASTER FUND, LTD. IS COLLATERALIZED BY
A GENERAL SECURITY INTEREST IN OUR ASSETS. IF WE WERE TO BORROW AND THEN DEFAULT
UNDER THE TERMS OF THE REVOLVING CREDIT FACILITY, THEN LAURUS WOULD HAVE THE
RIGHT TO FORECLOSE ON OUR ASSETS.
In June 2003, SpaceDev entered into a revolving credit facility with Laurus
Master Fund, Ltd., which currently permits borrowings up to a maximum principal
amount of $1.5 million. Borrowings under the revolving credit facility are
collateralized by a general security interest in SpaceDev's assets. As of
September 30, 2005, there was no balance outstanding under the revolving credit
facility, however, subject to the amount of our eligible accounts receivable, we
may be able to borrow funds in the future under the revolving credit facility.
Although, we have no intention of borrowing under the revolving credit facility,
if we were to borrow and then default under the terms and conditions of the
revolving credit facility, Laurus would have the right to accelerate any
indebtedness outstanding and foreclose on our assets in order to satisfy our
indebtedness. Such a foreclosure could have a material adverse effect on our
business, liquidity, results of operations and financial position.
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SPECIAL MEETING OF SPACEDEV SHAREHOLDERS
SpaceDev is furnishing this joint proxy statement/prospectus to you in
order to provide you with important information regarding the matters to be
considered at the special meeting of SpaceDev shareholders and at any
adjournment or postponement of the special meeting. SpaceDev first mailed this
joint proxy statement/prospectus and the accompanying form of proxy to its
shareholders on or about December 29, 2005.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
SpaceDev will hold its special meeting of shareholders at SpaceDev's
offices at 13855 Stowe Drive, Poway, California 92064, on Monday, January 30,
2006, at 9:00 a.m. Pacific Standard Time.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the special meeting, shareholders of SpaceDev will be asked to consider
and vote upon the following proposals:
PROPOSAL NO. 1 - To adopt and approve the Agreement and Plan of Merger and
Reorganization (referred to in this joint proxy statement/prospectus as the
merger agreement) dated as of October 24, 2005 among Starsys Research
Corporation ("Starsys"), SpaceDev, Monoceros Acquisition Corp., a Colorado
corporation and wholly owned subsidiary of SpaceDev, and certain other
parties, and to approve the merger contemplated thereby and the issuance
and reservation for issuance of shares of SpaceDev common stock to Starsys
shareholders pursuant to the merger agreement.
PROPOSAL NO. 2 - To approve amendments to the SpaceDev 2004 Equity
Incentive Plan: (1) to increase by 3,000,000 shares the number of
authorized shares under the plan; (2) to add per person annual share award
limits; and (3) to clarify the limitation on the number of shares which may
be issued as incentive stock options.
PROPOSAL NO. 3 - To approve an amendment to SpaceDev's Articles of
Incorporation to increase the number of authorized shares of common stock
by 50,000,000 shares to a total of 100,000,000 shares. PROPOSAL NO. 4 - To
give to SpaceDev's board of directors discretionary authority to sell more
than 20% of SpaceDev's common stock (or securities convertible into or
exercisable for common stock) in one or more private financings.
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE
The record date for determining the SpaceDev shareholders entitled to vote
at the special meeting is December 9, 2005. Only holders of record of SpaceDev
common stock at the close of business on that date are entitled to vote at the
special meeting. On the record date, there were issued and outstanding
24,410,176 shares of SpaceDev common stock. Shares of SpaceDev preferred stock
are not entitled to vote on any of the proposals.
As of the record date, the directors and executive officers of SpaceDev and
their affiliates held shares of common stock representing approximately 45% of
the outstanding shares of SpaceDev common stock.
A list of shareholders eligible to vote at the meeting will be available
for your review during SpaceDev's regular business hours at its headquarters in
Poway, California for at least ten days prior to the special meeting for any
purpose related to the special meeting.
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VOTING AGREEMENTS
James W. Benson, the chairman and current chief executive officer of
SpaceDev, Susan C. Benson, a director of SpaceDev, and Richard B. Slansky, the
president, chief financial officer, corporate secretary, and a director of
SpaceDev, who in the aggregate hold approximately 42% of the voting power of
SpaceDev as of the record date, have entered into voting agreements pursuant to
which each has agreed to vote in favor of the merger agreement, the merger and
the other proposals described in this joint proxy statement/prospectus.
VOTING AND REVOCATION OF PROXIES
The proxy accompanying this joint proxy statement/prospectus is solicited
on behalf of the board of directors of SpaceDev for use at the special meeting.
General. Shares represented by a properly signed and dated proxy will be
voted at the special meeting in accordance with the instructions indicated on
the proxy. Proxies that are properly signed and dated but that do not contain
voting instructions will be voted FOR each of the proposals described in this
joint proxy statement/prospectus.
Abstentions. SpaceDev will count a properly executed proxy marked ABSTAIN
with respect to a particular proposal as present for purposes of determining
whether a quorum is present, but the shares represented by that proxy will not
be voted at the special meeting with respect to such proposal. Because approval
of Proposal No. 1 may, and Proposal No. 3 will, require the affirmative vote of
a majority of the voting power of the SpaceDev shares outstanding, abstentions
on these proposals may have the same effect as a vote AGAINST Proposal No. 1 and
will have the same effect as a vote AGAINST Proposal No. 3. However, abstentions
will have no direct effect on the outcome of any other proposal, assuming that a
quorum is present at the special meeting, but will reduce the number of votes
required to approve those proposals.
Broker Non-Votes. If your shares are held by your broker, your broker will
vote your shares for you if you provide instructions to your broker on how to
vote. You should follow the directions provided by your broker regarding how to
instruct your broker to vote your shares. "Broker non-votes" are shares held by
a broker or other nominee that are represented at the special meeting, but with
respect to which the broker or nominee is not instructed by the beneficial owner
of the shares to vote on the particular proposal and the broker does not have
discretionary voting power on the proposal. Broker non-votes will be counted for
purposes of determining the presence or absence of a quorum but will not be
counted for purposes of determining the number of shares represented and voting
with respect to a proposal. Failure to instruct your broker on how to vote your
shares on Proposal No. 1 may, and on Proposal No. 3 will, have the effect of
voting AGAINST Proposal No. 1 or Proposal No. 3, as the case may be.
Voting Shares in Person that are Held Through Brokers. If your SpaceDev
shares are held in "street name" (that is, through a bank, broker or other
nominee) and you would like to attend the special meeting and vote in person,
you will need to bring an account statement or other acceptable evidence of
ownership of SpaceDev common stock as of the close of business on December 9,
2005, the record date for voting. Alternatively, in order to vote, you may
contact the person in whose name your shares are registered, obtain a properly
executed legal proxy from that person, identifying you as a SpaceDev
shareholder, authorizing you to act on behalf of the nominee at the SpaceDev
special meeting and identifying the number of shares with respect to which the
authorization is granted, and bring that proxy to the special meeting.
Revocation of Proxies. If you submit a proxy, you may revoke it at any time
before it is voted by:
- delivering to the corporate secretary of SpaceDev a written notice, dated
later than the proxy you wish to revoke, stating that the proxy is revoked;
- submitting to the corporate secretary of SpaceDev a new, signed proxy card
with a later date than the proxy you wish to revoke; or,
- attending the special meeting and voting in person (attendance by itself
will not revoke your proxy).
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Notices to the corporate secretary of SpaceDev should be sent to 13855
Stowe Drive, Poway, California 92064.
If you have instructed your broker to vote your shares, you must follow
directions received from your broker to change those instructions.
REQUIRED SHAREHOLDER VOTE
In order to conduct business at the SpaceDev special meeting, a quorum must
be present. The holders of a majority of the votes entitled to be cast by
holders of common stock at the special meeting, present in person or represented
by proxy, constitute a quorum under SpaceDev's articles of incorporation.
SpaceDev will treat shares of SpaceDev common stock represented by a properly
signed and returned proxy, including abstentions and broker non-votes, as
present at the SpaceDev special meeting for the purposes of determining the
existence of a quorum. If a quorum is not present, it is expected that the
shareholder meeting will be adjourned to solicit additional proxies.
With respect to any matter submitted to a vote of the SpaceDev
shareholders, each holder of SpaceDev common stock will be entitled to one vote,
in person or by proxy, for each share of SpaceDev common stock held in his, her
or its name on the books of SpaceDev on the record date.
PROPOSAL NO. 1 - If the shares of SpaceDev common stock are not listed on
the American Stock Exchange or another applicable national securities exchange
prior to the closing of the merger, adoption and approval of the merger
agreement and approval of the merger and the proposal to issue and reserve for
issuance shares of SpaceDev common stock in connection with the merger requires
the affirmative vote of a majority of the outstanding shares of SpaceDev common
stock. If the shares of SpaceDev common stock are listed on the American Stock
Exchange or another applicable national securities exchange prior to the closing
of the merger, adoption and approval of the merger agreement and approval of the
merger and the proposal to issue and reserve for issuance shares of SpaceDev
common stock in connection with the merger will not be required under applicable
law or the articles of incorporation or bylaws of SpaceDev. Nevertheless, in
that case, the board of directors of SpaceDev would still seek shareholder
approval of Proposal No. 1 as a matter of good corporate governance; and, if the
number of votes present in person or represented by proxy cast in favor of
Proposal No. 1 does not exceed the number of votes cast in opposition to
Proposal No. 1, the board of directors would reconsider its decision to approve
the merger agreement, the merger and the proposal to issue and reserve for
issuance shares of SpaceDev common stock in connection with the merger.
If the shares of SpaceDev common stock are not listed on the American Stock
Exchange or another applicable national securities exchange prior to the closing
of the merger, abstentions and broker non-votes will have the same effect as
voting AGAINST Proposal No. 1. In addition, the merger agreement contains a
closing condition in favor of SpaceDev and Starsys that not more than 1.5% of
outstanding SpaceDev shares will have exercised, or retained the right to
exercise, dissenters' rights, which condition SpaceDev and Starsys may waive. If
the shares of SpaceDev common stock are listed on the American Stock Exchange or
another applicable national securities exchange prior to the closing of the
merger, abstentions will be counted towards the tabulation of votes cast on this
proposal; and broker non-votes will be counted towards a quorum, but are not
counted for any purpose in determining whether this matter has been approved.
PROPOSAL NO. 2 - Approval of the amendments to the 2004 Equity Incentive
Plan requires the number of votes present in person or represented by proxy cast
in favor of the amendments to exceed the number of votes cast in opposition to
the amendments. Abstentions will be counted towards the tabulation of votes cast
on this proposal. Broker non-votes are counted towards a quorum, but are not
counted for any purpose in determining whether this matter has been approved.
PROPOSAL NO. 3 - Approval of the amendment to SpaceDev's articles of
incorporation to increase the number of authorized shares of common stock by
50,000,000 shares to a total of 100,000,000 shares requires the affirmative vote
of a majority of the outstanding shares of SpaceDev common stock. Abstentions
and broker non-votes will have the same effect as voting AGAINST Proposal No. 3.
PROPOSAL NO. 4 - Approval of the proposal to authorize SpaceDev's board of
directors to sell more than 20% of SpaceDev's common stock (or securities
convertible into or exercisable for common stock) in private offerings
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requires the number of votes present in person or represented by proxy cast in
favor of the proposal to exceed the number of votes cast in opposition to the
proposal. Abstentions will be counted towards the tabulation of votes cast on
this proposal. Broker non-votes are counted towards a quorum, but are not
counted for any purpose in determining whether this matter has been approved.
The inspector of elections for the SpaceDev special meeting will tabulate
the votes.
RECOMMENDATION BY THE BOARD OF DIRECTORS
After careful consideration, the board of directors of SpaceDev has
determined that each proposal is advisable and in the best interests of SpaceDev
and its shareholders and recommends that SpaceDev shareholders vote FOR each of
the proposals.
SOLICITATION OF PROXIES
SpaceDev and Starsys are conducting this proxy solicitation and will bear
the cost of soliciting proxies, including the assembly, printing and mailing of
this joint proxy statement/prospectus, the respective proxy cards and any
additional information furnished to shareholders. SpaceDev will also make
arrangements with brokerage houses and other custodians, nominees and
fiduciaries to send the proxy materials to their principals and will reimburse
them for their reasonable expenses in so doing. To the extent necessary in order
to assure sufficient representation at the SpaceDev special meeting, officers
and regular employees of SpaceDev may solicit the return of proxies from
SpaceDev shareholders by mail, telephone, telegram and personal interview. No
compensation in addition to regular salary and benefits will be paid to any such
officer or regular employee for such solicitation. The total estimated cost of
the solicitation of SpaceDev proxies is approximately $35,000.
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS
For information regarding the security ownership of SpaceDev common stock
by principal shareholders, directors and executive officers of SpaceDev, see the
disclosure below under the caption "Ownership of SpaceDev Common Stock"
beginning on page 129.
APPRAISAL AND DISSENTERS' RIGHTS
Holders of SpaceDev common stock may have dissenters' rights under
California law with respect to the merger transaction. For information
regarding such dissenters' rights, see "The Merger - Appraisal and Dissenters'
Rights" beginning on page 50.
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
With respect to Proposal No. 1 and two other merger related proposals,
certain officers and directors of SpaceDev have interests in the merger that are
different from, or are in addition to, those of SpaceDev shareholders generally.
For information regarding the interests of SpaceDev's officers and directors in
the merger, see "The Merger - Interests of Certain SpaceDev Persons in the
Merger" beginning on page 42.
In addition, the officers and directors of SpaceDev have an interest in the
passing of Proposal No. 2 to the extent they may in the future receive awards
under the 2004 Equity Incentive Plan, the total authorized shares of which are
proposed to be increased by 3,000,000 shares.
Other than as provided above, the officers and directors of SpaceDev do not
have interests in the proposals that are materially different from those of
SpaceDev shareholders generally.
SHAREHOLDER PROPOSALS AND NOMINATIONS
Requirements for Shareholder Proposals to be Brought Before an Annual
Meeting. For shareholder nominations to the board of directors or other
proposals to be considered at an annual meeting, the shareholder must have given
timely notice of the proposal or nomination in writing to the company's
Corporate Secretary pursuant to
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Rule 14a-4 under the Securities Exchange Act of 1934. To be timely for the 2006
annual meeting, a shareholder's notice must be delivered to or mailed and
received by SpaceDev's Corporate Secretary at SpaceDev's principal executive
offices not later than June 3, 2006. A shareholder's notice to the Corporate
Secretary must set forth, as to each matter the shareholder proposes to bring
before the annual meeting, the information required by SpaceDev's bylaws.
Requirements for Shareholder Proposals to be Considered for Inclusion in
SpaceDev's Proxy Materials. Shareholder proposals submitted pursuant to Rule
14a-8 under the Securities Exchange Act of 1934 and intended to be presented at
SpaceDev's 2006 annual meeting must be received by SpaceDev not later than March
20, 2006 to be considered for inclusion in SpaceDev's proxy materials for that
meeting.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE SHAREHOLDERS OF SPACEDEV. YOU ARE ACCORDINGLY URGED TO READ AND CAREFULLY
CONSIDER THE INFORMATION PRESENTED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, AND
TO SUBMIT YOUR PROXY BY MAIL IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
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SPECIAL MEETING OF STARSYS SHAREHOLDERS
Starsys is furnishing this joint proxy statement/prospectus to you in order
to provide you with important information regarding the matters to be considered
at the special meeting of the Starsys shareholders and at any adjournment or
postponement of the special meeting. Starsys first mailed this joint proxy
statement/prospectus and the accompanying form of proxy to its shareholders on
or about December 29, 2005.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
Starsys will hold its special meeting of shareholders at Starsys' offices
at 4909 Nautilus Court North, Boulder, Colorado 80301 on Monday, January 30,
2006, at 10:00 a.m. Mountain Standard Time.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the special meeting, shareholders of Starsys will be asked to consider
and vote upon the following proposals:
PROPOSAL NO. 1 - To adopt and approve the Agreement and Plan of Merger and
Reorganization (referred to in this joint proxy statement/prospectus as the
merger agreement) dated as of October 24, 2005, among Starsys, SpaceDev, Inc.
("SpaceDev"), Monoceros Acquisition Corp., a Colorado corporation and wholly
owned subsidiary of SpaceDev, and certain other parties, and to approve the
merger contemplated thereby.
PROPOSAL NO. 2 - To approve the appointment and authorization of Scott Tibbitts,
the Chairman and Chief Executive Officer of Starsys, as the shareholder agent
under the merger agreement and related escrow agreement.
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE
The record date for determining the Starsys shareholders entitled to vote
at the special meeting is December 1, 2005. Only holders of record of Starsys
common stock at the close of business and participants in the separate plan
holding Starsys common stock under the Starsys 401(k) and Stock Bonus Plan dated
August 4, 1997, on that date are entitled to vote at the special meeting. On
the record date, there were issued and outstanding 522,437.47 shares of Starsys
common stock (including the shares held in the separate plan holding Starsys
common stock under the Starsys 401(k) and Stock Bonus Plan dated August 4,
1997).
As of the record date, the directors and executive officers of Starsys and their
affiliates held 300,102.17 shares of Starsys common stock, representing
approximately 57% of the outstanding shares of Starsys common stock.
A list of shareholders eligible to vote at the meeting will be available for
your review during Starsys' regular business hours at its headquarters in
Boulder, Colorado for at least ten days prior to the special meeting for any
purpose related to the special meeting.
VOTING AGREEMENTS
Scott Tibbitts, the chairman and chief executive officer of Starsys, who
holds approximately 48% of the voting power of Starsys as of the record date,
has entered into a voting agreement pursuant to which he is obligated to vote in
favor of both proposals.
VOTING AND REVOCATION OF PROXIES
The proxy accompanying this joint proxy statement/prospectus is solicited
on behalf of the board of directors of Starsys for use at the special meeting.
General. Shares represented by a properly signed and dated proxy will be voted
at the special meeting in accordance with the instructions indicated on the
proxy. Proxies that are properly signed and dated but that do not contain voting
instructions will be voted FOR each of the proposals described above.
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Abstentions. Starsys will count a properly executed proxy marked ABSTAIN with
respect to a particular proposal as present for purposes of determining whether
a quorum is present, but the shares represented by that proxy will not be voted
at the special meeting with respect to such proposal. Because approval of
Proposal No. 1 and Proposal No. 2 each requires the affirmative vote of a
majority of the voting power of shares of Starsys' common stock outstanding,
abstentions on either proposal will have the same effect as a vote AGAINST the
proposal.
Revocation of Proxies. If you submit a proxy, you may revoke it at any time
before it is voted by:
- delivering to the secretary of Starsys a written notice, dated later than
the proxy you wish to revoke, stating that the proxy is revoked;
- submitting to the secretary of Starsys a new, signed proxy card with a
later date than the proxy you wish to revoke; or
- attending the special meeting and voting in person for attendance by
itself will not revoke your proxy.
Notices to the secretary of Starsys should be sent to 4909 Nautilus Court
North, Boulder, Colorado 80301.
REQUIRED SHAREHOLDER VOTE
In order to conduct business at the Starsys special meeting, a quorum must
be present. The holders of a majority of the votes entitled to be cast by
holders of common stock at the special meeting, present in person or represented
by proxy, constitutes a quorum under Starsys' bylaws. Starsys will treat shares
of common stock represented by a properly signed and returned proxy, including
abstentions, as present at the Starsys special meeting for the purposes of
determining the existence of a quorum. If a quorum is not present, it is
expected that the special meeting will be adjourned to solicit additional
proxies.
With respect to any matter submitted to a vote of the Starsys shareholders, each
holder of Starsys common stock will be entitled to one vote, in person or by
proxy, for each share of Starsys common stock held in his, her or its name on
the books of Starsys on the record date.
PROPOSAL NO. 1 - Adoption and approval of the merger agreement and approval of
the merger requires the affirmative vote of a majority of the voting power of
Starsys' common stock outstanding.
PROPOSAL NO. 2 - Approval of the appointment and authorization of Scott
Tibbitts, the chairman and chief executive officer of Starsys, as the
shareholder agent under the merger agreement and related escrow agreement,
requires the affirmative vote of a majority of the voting power of Starsys'
common stock outstanding.
In addition, the merger agreement contains a closing condition requiring the
affirmative vote in favor of the merger of holders of 98% of the voting power of
Starsys' common stock outstanding. This closing condition may be waived by
SpaceDev.
The inspector of elections for the Starsys special meeting will tabulate the
votes.
UNANIMOUS RECOMMENDATION BY THE BOARD OF DIRECTORS
After careful consideration, the board of directors of Starsys has
determined that the merger and the merger agreement, and the the appointment and
authorization of Scott Tibbitts as shareholder agent, is advisable and in the
best interests of Starsys and its shareholders and unanimously recommends that
Starsys shareholders vote FOR each of the proposals described above.
SOLICITATION OF PROXIES
SpaceDev and Starsys are conducting this proxy solicitation and will bear
the cost of soliciting proxies, including the assembly, printing and mailing of
this joint proxy statement/prospectus, the respective proxy cards and
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any additional information furnished to shareholders. To the extent necessary in
order to assure sufficient representation at the Starsys special meeting,
officers and regular employees of Starsys may solicit the return of proxies from
Starsys shareholders by mail, telephone, telegram and personal interview. No
compensation in addition to regular salary and benefits will be paid to any such
officer or regular employee for such solicitation. The total estimated cost of
the solicitation of Starsys proxies is approximately $15,000.
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS
For information regarding the security ownership of Starsys common stock by
principal shareholders, directors and executive officers of Starsys, see
"Ownership of Starsys Common Stock" beginning on page 148.
APPRAISAL AND DISSENTERS' RIGHTS
Holders of Starsys common stock may be entitled to dissenters' rights under
Colorado law with respect to the merger transaction. For more information
regarding dissenters' rights, see the disclosure under "The Merger - Appraisal
and Dissenters' Rights" beginning on page 50. In addition, the merger agreement
includes a closing condition that at least 98% of the outstanding shares of
Starsys common stock vote to approve the merger and the merger agreement, which
closing condition SpaceDev may waive.
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Certain officers and directors of Starsys have interests in the merger that
are different from, or are in addition to, those of Starsys shareholders
generally. For information regarding the interests of Starsys' officers and
directors in the merger, see "The Merger - Interests of Certain Starsys Persons
in the Merger" beginning on page 44.
LETTER OF TRANSMITTAL AND STARSYS SHARE CERTIFICATES
If you are attending the Starsys shareholders meeting, Starsys encourages
you to bring the completed letter of transmittal, attached to this joint proxy
statement/prospectus as Annex F, including the attached Form W-9, and all of
your Starsys share certificates to the meeting. If the merger does not close,
Starsys will return these share certificates to you.
If you are not attending the meeting, Starsys encourages you to send in
your completed letter of transmittal (including the attached Form W-9) and all
of your Starsys share certificates together with your proxy card to the exchange
agent. If you deliver the completed letter of transmittal, Form W-9 and share
certificates to Starsys, Starsys will deliver them to the exchange agent for the
merger on your behalf. A closing condition to the merger requires Starsys
shareholders holding 98% of the outstanding shares of Starsys common stock to
deliver their share certificates prior to the closing, which condition may be
waived by SpaceDev.
The letter of transmittal includes a certification that, if any of your
share certificates are not attached, that those certificates have been lost,
stolen or are otherwise missing. The letter also includes a general release of
all claims you may have against Starsys as a shareholder, including any
dissenters' rights.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE TO
THE SHAREHOLDERS OF STARSYS. YOU ARE ACCORDINGLY URGED TO READ AND CAREFULLY
CONSIDER THE INFORMATION PRESENTED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, AND
TO PROPERLY COMPLETE AND SUBMIT YOUR PROXY.
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SPACEDEV PROPOSAL NO. 1 AND STARSYS PROPOSAL NO. 1 -
THE MERGER
This section of this joint proxy statement/prospectus describes the
principal aspects of SpaceDev Proposal No. 1 and Starsys Proposal No. 1,
including the merger and the merger agreement. While SpaceDev and Starsys
believe that this description covers the material terms of the merger and the
related transactions, this summary may not contain all of the information that
is important to SpaceDev and Starsys shareholders. You can obtain a more
complete understanding of the merger by reading the merger agreement, a copy of
which is attached to this joint proxy statement/prospectus as Annex A. You are
encouraged to read the merger agreement and the other annexes to this joint
proxy statement/prospectus carefully and in their entirety.
BACKGROUND OF THE MERGER
The management and boards of directors of both SpaceDev and Starsys
continually review their companies' respective market positions in light of the
changing competitive environment of the aerospace industry with the objective of
determining which strategic alternatives are available to enhance shareholder
value. From time to time, the management of each of SpaceDev and Starsys have
had conversations with other companies to explore opportunities to improve their
companies' respective market positions, including through potential acquisitions
or dispositions of assets, joint ventures and other strategic transactions.
The provisions of the merger agreement are the result of arms-length
negotiations conducted among representatives of SpaceDev and Starsys and their
respective legal and financial advisors. The following is a summary of the
meetings, negotiations, and discussions between the parties that preceded the
execution of the merger agreement.
Beginning in 2001, Starsys entered into some fixed-price development programs
which resulted in cost overruns and financial challenges to meet program needs.
These overruns have been funded through Starsys credit facilities, term loans,
and other loans. As these cost overruns continued to increase, Starsys faced
additional financial duress and required additional capital resources.
In May 2005, Starsys was notified by its primary bank lender, Vectra Bank
Colorado, which we refer to as Vectra, that Starsys was out of compliance with
various loan covenants, and that Vectra had elected to place Starsys into
forbearance, an option available to Vectra under the credit facility. On May
24, 2005, Starsys signed a forbearance agreement with Vectra, which included an
incremental schedule for Starsys to obtain additional investments to repay
Vectra and to provide additional working capital to Starsys.
In June 2005, Starsys promoted Robert Vacek to the position of president and
general manager, with the founder of Starsys, Scott Tibbitts retaining the role
of chief executive officer. In his role as president, Mr. Vacek was responsible
for stabilizing Starsys' finances, completing the programs with cost overruns
and establishing processes and systems to support the growing company. It was
anticipated that Mr. Vacek's efforts could lead to a sale of Starsys.
On June 22, 2005, Starsys engaged St. Charles Capital, LLC, which we refer to as
St. Charles, to provide investment banking services in connection with Starsys'
review of its strategic alternatives, including the possible sale of Starsys or
the raising of private equity financing. St. Charles, as part of its investment
banking business, regularly values businesses and their securities in connection
with capital market transactions, merger and acquisitions, private placements
and valuations for estate, corporate and other purposes.
In July and August 2005, St. Charles produced marketing documents and financial
models for use in the solicitation of interested parties. During these months,
St. Charles contacted approximately 21 potential interested parties, and
distributed offering memorandums to 10 parties. Also during this time, St.
Charles and Starsys met with interested parties to describe more fully the
opportunity of acquiring Starsys, including a meeting with Mark N. Sirangelo of
QS Advisors, LLC and The QuanStar Group LLC, which we refer to as QS Advisors or
QuanStar, business advisors to SpaceDev, on July 20, 2005. Mr. Sirangelo will
succeed James W. Benson as chief executive officer of SpaceDev and will also
become vice chairman and a director of SpaceDev effective December 30, 2005.
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On July 28, 2005, Starsys met with management of SpaceDev at the Starsys
facility. SpaceDev management toured the facility and began to conduct due
diligence.
By August 2, 2005, three parties, including SpaceDev, had submitted proposals to
Starsys to enter into a strategic transaction. All three proposals provided for
the repayment of the Starsys bank debt. Two of the proposals were for
acquisition of Starsys, and one was for strategic investment. Each proposal
placed a different enterprise value on Starsys.
On August 8, 9 and 10, 2005, Starsys provided counterproposals to two of the
parties, including SpaceDev. Starsys and St. Charles believed that those
parties were motivated and capable of meeting Starsys' time schedule.
On August 10 and 11, 2005, representatives of the management of Starsys and
SpaceDev met in San Diego, California, together with St. Charles, to discuss the
valuation of Starsys and the potential terms of a merger transaction. The
parties also conducted due diligence. Starsys management toured the SpaceDev
facility.
On August 21, 2005, Starsys and St. Charles updated SpaceDev and QS Advisors on
Starsys' working capital needs and operational results. The parties also
discussed potential transaction terms.
On August 22, 2005, Starsys terminated negotiations with the second party after
the second party could not meet Starsys' time and enterprise valuation
requirements. Starsys further discussed potential transaction terms with
SpaceDev.
On August 23, 2005, Starsys and SpaceDev entered into a letter of intent. Under
the letter of intent, SpaceDev and Starsys agreed to negotiate a definitive
agreement for SpaceDev to acquire all of the outstanding capital stock of
Starsys and repay Starsys' indebtedness to Vectra. This letter of intent
included binding provisions regarding exclusivity and non-binding provisions
regarding a bridge loan for $1.2 million, cash and equity at closing and in
future periods, employment agreements and option reserves and a target closing
date.
On September 7, 2005, SpaceDev management met with various Starsys
representatives to conduct further due diligence. Starsys financial and
personnel records were collected, and Starsys engineering, operational, and
support capabilities were assessed.
On September 8, 2005, Starsys and SpaceDev entered into a bridge loan agreement
under which SpaceDev agreed to loan to Starsys $1.2 million for the purpose of
paying down Starsys' credit facility with Vectra. The loan accrues interest at
8% per annum and matures on December 31, 2005 or earlier in certain
circumstances. No principal or interest payments are due before maturity. The
maturity date may be accelerated upon the occurrence of certain events of
default. The loan is secured by a security interest in all of the assets of
Starsys, subject to an intercreditor agreement with Vectra. This intercreditor
agreement precludes SpaceDev from foreclosing on its loan, absent Vectra's
consent, until May 31, 2006. Starsys was required to use the proceeds of the
loan to make a progress payment to Vectra on the outstanding principal balance
of loans under the credit facility, which payment was due under the forbearance
agreement.
On September 22, 2005, on behalf of SpaceDev, Sheppard, Mullin, Richter &
Hampton, LLP, which we refer to as Sheppard Mullin, legal representative of
SpaceDev, delivered an initial draft of the merger agreement to Starsys and its
advisors. From this point until the signing of the merger agreement, Starsys
and SpaceDev performed legal, financial and technical due diligence on each
other.
From September 22 through October 19, 2005, Starsys and SpaceDev and their
respective legal and other advisors exchanged drafts of the merger agreement and
agreements ancillary to the merger agreement and negotiated various provisions
and deal terms.
On October 19, 2005, at a meeting of the Starsys board of directors, the Starsys
board of directors reviewed and discussed the proposed acquisition. The Starsys
board of directors reviewed the status of the negotiations and key deal terms,
the status and findings of due diligence on SpaceDev, the strategic rationale
for the proposed acquisition, the potential risks and potential benefits of the
proposed acquisition, regulatory and shareholder approval requirements in
connection with the proposed transaction, and the key business and financial
terms of the proposed transaction.
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Representatives of St. Charles and Holland & Hart LLP, legal advisor to Starsys,
reviewed the deal terms and relevant issues for the Starsys board of directors,
and St. Charles reviewed its updated financial analysis of the proposed merger
with the board members. Following this review and discussion, the Starsys board
of directors unanimously approved the merger agreement and the merger.
On October 20, the board of directors of SpaceDev approved the merger and the
merger agreement (with such changes as management deemed appropriate) and the
transactions contemplated thereby, and recommended that the merger and the
merger agreement be presented to the shareholders of SpaceDev for their
approval.
On October 20, and through October 24, 2005, management of Starsys and SpaceDev,
as well as their respective legal advisors, participated in various meetings and
discussions regarding the merger agreement and exchanged additional drafts of
the merger agreement and ancillary agreements.
On October 24, 2005, the parties executed and delivered the merger agreement,
which is attached to this joint proxy statement/prospectus as Annex A.
On December 7, 2005, the parties amended the merger agreement, which amendment
is included as part of Annex A attached to this joint proxy
statemtent/prospectus.
On December 20, 2005, Starsys and SpaceDev agreed to extend to January 31, 2006
the maturity date of the $1.2 million loan from SpaceDev to Starsys, which loan
was originally extended to Starsys in September 2005 pursuant to the terms of a
bridge loan agreement described above.
SPACEDEV'S REASONS FOR THE MERGER
SpaceDev believes a business combination with Starsys will benefit SpaceDev
in several ways:
- SpaceDev's design expertise and manufacturing capability in the nano- and
micro-satellite markets will complement Starsys' expertise in design and
manufacturing of components and other products primarily in the mainframe
satellite market;
- the increased size and capabilities of a combined company will enable
SpaceDev to participate in more diverse projects with greater revenue generation
potential and potentially lead to more predictable revenue streams;
- the increased market capitalization of a combined company will place
SpaceDev in a better position to have its shares listed on a national securities
exchange and to attract institutional investors and analyst coverage;
- a second location in a favorable aerospace labor market will enable more
rapid growth to meet future business needs; and,
- SpaceDev's reputation for high customer satisfaction places it in a unique
position to take advantage of the increased capabilities that will result from
the merger.
SpaceDev's board of directors has determined that the merger is in the best
interests of SpaceDev and its shareholders and has approved the merger
agreement, the merger, the issuance of shares of SpaceDev common stock pursuant
to the merger agreement and the other transactions contemplated by the merger
agreement. In reaching its determination, SpaceDev's board of directors
considered a number of factors, including the factors discussed above and listed
below. The conclusions reached by SpaceDev's board of directors with respect to
the following factors supported its determination that the merger and the
issuance of shares of SpaceDev common stock pursuant to the merger are fair to,
and in the best interests of, SpaceDev and its shareholders:
- the judgment, advice and analysis of SpaceDev's management and its
financial advisors with respect to the potential strategic, financial and
operational benefits of the transaction, including
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management's favorable recommendation of the transaction, based in part on the
business, technical, financial, accounting and legal due diligence
investigations performed with respect to Starsys;
- the importance of the merger for pursuing SpaceDev's strategic plan;
- the potential benefits to SpaceDev shareholders of growth opportunities
following the merger;
- the possibility, as an alternative to the merger, of opening facilities in
new, strategically desirable locations and expanding SpaceDev's manufacturing
capability through internal growth or other potential acquisitions;
- the competitive and market environments in which SpaceDev and Starsys
operate;
- the expected qualification of the transactions contemplated by the merger
agreement as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code;
- the likelihood that SpaceDev will be able to retain key management and
other personnel of Starsys who may be critical to the ongoing success of each
company's business and to the successful integration of the businesses;
- the interests that certain executive officers and directors of SpaceDev may
have with respect to the merger in addition to their general interests as
shareholders of SpaceDev, as described in more detail under "The Merger -
Interests of Certain SpaceDev Persons in the Merger" beginning on page 42;
- the results of operations and financial condition of SpaceDev and Starsys;
- the terms of the merger agreement and the agreements related to the
merger, including the consideration to be paid by SpaceDev and the structure of
the merger which were deemed by both the board of directors and management of
SpaceDev to provide a fair and equitable basis for the transaction; and,
- the likelihood that the transaction will be completed in a timely manner.
SpaceDev's board of directors also considered a number of risks and
potentially negative factors in its deliberation concerning the merger,
including in particular:
- the risk that the benefits sought to be achieved by the transaction,
including those outlined above, will not be achieved;
- the general challenges and costs of combining the operations of two
companies and the substantial expenses to be incurred in connection with the
merger;
- the effect of public announcement of the transaction on SpaceDev's common
stock;
- the risks of unexpected expenses or liabilities associated with the
merger, including the potential for cost overruns of the type that motivated
Starsys to consider entering into a transaction such as the merger;
- the need to raise additional financing to meet SpaceDev's obligations
under the merger agreement;
- the other risks and uncertainties discussed above in the section entitled
"Risk Factors", beginning on page 15; and,
- the diversion of management resources from other strategic opportunities
and operational matters.
-41-
The above discussion of information and factors considered by SpaceDev's
board of directors is not intended to be exhaustive but is believed to include
the material factors considered by SpaceDev's board of directors. In view of
the wide variety of factors considered by SpaceDev's board of directors, the
board did not find it practical to quantify or otherwise assign relative weight
to the specific factors considered. In addition, SpaceDev's board of directors
did not reach any specific conclusion on each factor considered, or any aspect
of any particular factor, but conducted an overall analysis of these factors.
Individual members of SpaceDev's board of directors may have given different
weight to different factors. However, after taking into account all of the
factors described above, SpaceDev's board of directors determined that the
merger, the merger agreement, the issuance of shares of SpaceDev's common stock
pursuant to the merger agreement and the other agreements related to the merger
were fair to, and in the best interests of, SpaceDev and SpaceDev's
shareholders, and that SpaceDev should proceed with the merger.
INTERESTS OF CERTAIN SPACEDEV PERSONS IN THE MERGER
You should be aware that, as described below, certain of the directors and
officers of SpaceDev have interests in the merger that are different from, or in
addition to, the general interests of the other shareholders of SpaceDev. The
SpaceDev board of directors was aware of these interests to the extent they
existed at the time and considered them, among other matters, in approving the
merger, the merger agreement and the transactions contemplated by the merger
agreement. These other interests include the following:
Contingent Fee Payable to QS Advisors, LLC
Mark N. Sirangelo, who will become chief executive officer, vice chairman and a
director of SpaceDev effective December 30, 2005, is a member of QS Advisors,
LLC, and also a member of The QuanStar Group LLC which served as business
advisors to SpaceDev in connection with the merger. Upon the closing of the
merger, QS Advisors will receive $200,000 cash and 250,000 shares of SpaceDev
common stock.
Employment Agreements
Upon the completion of the merger, Mr. Sirangelo will receive (1) an increase in
base salary from $22,500 per month to $25,000 per month, and (2) a bonus of
$25,000, in each case pursuant to the terms of his executive employment
agreement with SpaceDev.
Upon the completion of the merger, Richard B. Slansky, the president, chief
financial officer, a director and secretary of SpaceDev, will receive (1) an
increase in base salary from $14,500 per month to $16,500 per month, and (2) a
bonus of $25,000, in each case pursuant to the terms of his amended and restated
executive employment agreement with SpaceDev.
Upon the completion of the merger, James W. Benson, the chairman and current
chief executive officer of SpaceDev, will receive (1) an increase in base salary
from $14,000 per month to $15,500 per month, and (2) a bonus of $22,500, in each
case pursuant to the terms of his executive employment agreement with SpaceDev.
THE INTERESTS DESCRIBED ABOVE MAY INFLUENCE SPACEDEV'S DIRECTORS AND EXECUTIVE
OFFICERS IN MAKING THEIR RECOMMENDATION THAT YOU VOTE IN FAVOR OF THE ADOPTION
OF THE MERGER AGREEMENT AND THE MERGER. YOU SHOULD BE AWARE OF THESE INTERESTS
WHEN YOU CONSIDER THE SPACEDEV'S BOARD'S RECOMMENDATION THAT YOU VOTE IN FAVOR
OF THE SPACEDEV PROPOSALS.
STARSYS' REASONS FOR THE MERGER
Starsys' board of directors has determined that the terms of the merger and
the merger agreement are advisable and fair to, and in the best interests of,
Starsys and its shareholders, and determined to recommend that the shareholders
of Starsys adopt the merger agreement. In its evaluation of the merger and the
merger agreement, Starsys' board of directors consulted with Starsys' senior
management, as well as its legal and financial advisors. The decision of
Starsys' board of directors to approve the merger and the merger agreement was
based upon, among other things, several
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potential benefits of the merger to Starsys and its shareholders compared to
Starsys continuing to operate as an independent business.
Prior to approving the merger and the merger agreement, Starsys' board of
directors considered a number of alternatives for enhancing Starsys' business,
including raising new capital to facilitate remaining an independent entity.
Based on such information, Starsys' board of directors concluded that remaining
an independent entity was not in its shareholders' best interests. In addition,
the board of directors was concerned about Starsys' liquidity position and
believed that Starsys would not be able to continue as a going concern.
Starsys' board of directors believed Starsys' prospects for raising new capital
were not sufficient to permit Starsys to remain a viable independent company in
light of its weakened liquidity position.
In addition to the potential benefits described under "SpaceDev's Reasons for
the Merger" that would be applicable to Starsys shareholders, Starsys' board of
directors believes that the merger could be beneficial to Starsys and its
shareholders for the following reasons:
- The opportunity for Starsys shareholders to participate in the
microsatellite and hybrid rocket propulsion markets served by SpaceDev.
- The opportunity for Starsys shareholders to participate in the potential
growth of SpaceDev after the merger.
- The value of the consideration provided for in the merger agreement based
on the market price of SpaceDev common stock at the time of board approval and
over the past year.
- The ability to complete the merger as a reorganization for United States
federal income tax purposes.
- The potential receipt of performance consideration, as described in the
merger agreement.
- Access to SpaceDev's greater depth of technologies, marketing resources
and financial and operating resources which Starsys' board believes will should
enhance Starsys' ability to win larger contracts with favorable terms.
- The public market for SpaceDev common stock will offer Starsys
shareholders liquidity, albeit subject to limitations described under "The
Merger - Restriction on Resales of SpaceDev Common Stock" beginning on page 54.
Starsys' board of directors reviewed a number of factors in evaluating the
merger, including but not limited to the following:
- The repayment by SpaceDev of Starsys long term debt, which is subject to a
forbearance agreement that requires Starsys to pursue a financing or sale of the
company to repay the debt.
- Information concerning the financial performance and condition, results of
operations, competitive position, management and business of SpaceDev and
Starsys before and after giving effect to the merger.
- Current financial market conditions and historical market prices,
volatility and trading information with respect to SpaceDev common stock.
- The interests that certain executive officers and directors of Starsys may
have with respect to the merger in addition to their general interests as
shareholders of Starsys, as described in more detail under "The Merger -
Interests of certain Starsys' Persons in the Merger" beginning on page 44.
- The current financial condition of Starsys.
-43-
- The opportunity for Starsys to receive additional working capital
investment, as described under the caption "The Merger - SpaceDev Post-Closing
Covenants" beginning on page 73.
- The ability of Starsys to obtain additional financing as a stand-alone
entity.
- Results of (i) the review of SpaceDev's Securities and Exchange Commission
filings regarding SpaceDev's business and financial condition, and (ii) the due
diligence investigation conducted by Starsys' management regarding the stability
of SpaceDev's long term contracts and work backlog.
Starsys' board of directors also considered the terms of the merger
agreement regarding Starsys' rights and limits on its ability to consider and
negotiate other acquisition proposals, as well as the possible effects of the
provisions regarding termination and termination fees.
In view of the wide variety of factors considered in connection with its
evaluation of the merger and the complexity of these matters, the Starsys board
of directors did not find it useful to and did not attempt to quantify, rank or
otherwise assign relative weights to these factors. In addition, the Starsys
board of directors did not undertake to make any specific determination as to
whether any particular factor, or any aspect of any particular factor, was
favorable or unfavorable to the ultimate determination of the Starsys board of
directors, but rather the Starsys board of directors conducted an overall
analysis of the factors described above, including discussions with and
questioning of Starsys' management and legal, accounting and other advisors.
In considering the recommendation of Starsys' board of directors with respect to
the merger agreement, Starsys shareholders should be aware that certain
directors and officers of Starsys have interests in the merger that are
different from, or are in addition to, the interests of other Starsys
shareholders. Please see "The Merger--Interests of Starsys' Officers and
Directors in the Merger" below.
INTERESTS OF CERTAIN STARSYS PERSONS IN THE MERGER
You should be aware that, as described below, the directors and officers of
Starsys may have interests in the merger that may be different from, or in
addition to, the general interests of the other shareholders of Starsys. The
Starsys board of directors was aware of these interests to the extent they
existed at the time and considered them, among other matters, in approving the
merger, the merger agreement and the transactions contemplated by the merger
agreement. These other interests, to the extent material, include the
following:
Bank Guarantee
Scott Tibbitts is guarantor of Starsys' obligations under the forbearance
agreement between Starsys and Vectra dated June 24, 2005. The merger agreement
provides that Vectra will be paid at closing and Mr. Tibbitts will be removed as
guarantor. As of November 30, 2005, the amount due under the credit facility to
Vectra was approximately $3.9 million.
Shareholder Loans
Jack Tibbitts, Steve Tibbitts, and Ted Tibbitts, relatives of Scott
Tibbitts, each loaned $100,000 to Starsys pursuant to subordinated notes. Each
of these loans has a loan premium of $10,000 and bears interest at 15% per
annum. These loans will be repaid at closing.
Stock Ownership of Executive Officers and Directors
As of November 1, 2005, Scott Tibbitts beneficially owned approximately 48%
of the outstanding shares of Starsys capital stock and the Starsys executive
officers and directors in total beneficially owned approximately 59% of the
outstanding shares of Starsys' capital stock.
-44-
SpaceDev Employment Agreements
SpaceDev has agreed to enter into a three year executive employment
agreement with Scott Tibbitts, contingent and effective upon the closing of the
merger, pursuant to which Mr. Tibbitts will be employed as managing director of
SpaceDev. Under the agreement, Mr. Tibbitts will earn an annual base salary of
$150,000 and will be eligible for quarterly performance bonuses, as determined
by SpaceDev's board of directors or compensation committee, up to an annual
aggregate amount of 50% of his base salary. Bonus milestones will be mutually
agreed upon in good faith by Mr. Tibbitts and by SpaceDev's board of directors
or compensation committee. SpaceDev will pay severance to Mr. Tibbitts if his
employment is terminated by SpaceDev without cause or by Mr. Tibbitts for good
reason. The severance payment is equal to: (1) if Mr. Tibbitts' employment is
terminated by SpaceDev without cause, his then-current base salary per month
multiplied by the number of months remaining in the term of the agreement
(prorated with respect to any partial month); and, (2) if Mr. Tibbitts'
employment is terminated by Mr. Tibbitts for good reason, his then-current base
salary per month multiplied by the lesser of twelve months and the number of
months remaining in the term of the agreement. Under the agreement, SpaceDev
will indemnify Mr. Tibbitts to the extent provided in SpaceDev's articles of
incorporation, as may be amended from time to time, and pursuant to SpaceDev's
standard indemnification agreement with its officers and directors, provided
that SpaceDev will have no obligation to indemnify or defend Mr. Tibbitts for
any action, suit or other proceeding to the extent based on acts, omissions,
events or circumstances occurring prior to the merger. We anticipate that the
employment agreement with Mr. Tibbitts will be modified to provide him with the
more comprehensive indemnification terms included in the SpaceDev employment
agreements with Messrs. Sirangelo, Slansky and Benson.
SpaceDev has also agreed to enter into an employment agreement with Mr.
Vacek, contingent and effective upon the closing of the merger, pursuant to
which Mr. Vacek will be employed as president of the surviving corporation. The
other terms of this agreement remain to be negotiated, though the parties
anticipate the severence and indemnity terms and conditions will be similar to
the terms included in the SpaceDev employment agreements with Messrs. Sirangelo,
Slansky and Benson.
Starsys Employment Agreements
Starsys entered into an employment agreement dated June 10, 2005 with
Robert Vacek for the position of president and general manager, which agreement
provides for a bonus to be paid to Mr. Vacek in connection with a merger,
acquisition, or equity event and for third and fourth quarter performance.
Pursuant to the employment agreement, Mr. Vacek will receive a merger bonus of
1% of the total consideration for the merger divided between cash and stock. Mr.
Vacek will receive approximately $140,000 in cash and stock for the initial
closing consideration plus 1% of performance consideration, if any.
Starsys entered into a verbal agreement with Bob Harr in November 2004,
pursuant to which Starsys agreed to provide to Mr. Harr a monthly automobile
allowance in the amount of approximately $825. Starsys has not paid to Mr. Harr
any amounts in connection with this agreement. Starsys anticipates paying the
accrued amounts owed to Mr. Harr at the closing.
Dave Edwards, Starsys' director of business management, is to receive a
$10,000 bonus to be paid upon the closing of the merger.
Non-Competition Agreement
SpaceDev has agreed to enter into a non-competition agreement with Scott
Tibbitts, contingent and effective upon the closing of the merger, pursuant to
which Mr. Tibbitts will agree not to be employed by or have any interest in an
entity that engages in a similar business to Starsys related to the aerospace
industry for three years, shall not solicit any business from any past or
present customer of SpaceDev, not solicit or encourage any SpaceDev employee to
leave or reduce his or her employment, not to encourage a consultant under
contract with SpaceDev to cease or diminish his or her work with SpaceDev, not
to use SpaceDev's intellectual property other than for the benefit of SpaceDev
and not to make any negative or disparaging statements regarding SpaceDev to any
third party. Mr. Tibbitts will receive $100,000 annually each year he abides by
the covenant not to compete.
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THE INTERESTS DESCRIBED ABOVE MAY INFLUENCE STARSYS' DIRECTORS AND EXECUTIVE
OFFICERS IN MAKING THEIR RECOMMENDATION THAT YOU VOTE IN FAVOR OF THE ADOPTION
OF THE MERGER AGREEMENT AND THE MERGER AND FOR THE APPOINTMENT AN AUTHORIZATION
OF MR. TIBBITTS AS SHAREHOLDER AGENT. YOU SHOULD BE AWARE OF THESE INTERESTS
WHEN YOU CONSIDER THE STARSYS BOARD'S RECOMMENDATION THAT YOU VOTE IN FAVOR OF
THE TWO STARSYS PROPOSALS.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal
income tax consequences of the merger that are generally applicable to U.S.
holders of Starsys common stock. This discussion is based on the Internal
Revenue Code of 1986, as amended, which we refer to as the Code, United States
Treasury Regulations, administrative rulings and court decisions in effect as of
the date of this joint proxy statement/prospectus, all of which may change at
any time, possibly with retroactive effect.
For purposes of this discussion, we use the term "U.S. holder" to mean:
- an individual who is a citizen or resident of the United States;
- a corporation created or organized under the laws of the United States or
any of its political subdivisions;
- a trust that (i) is subject to the supervision of a court within the
United States and the control of one or more United States persons or (ii) has a
valid election in effect under applicable United States Treasury Regulations to
be treated as a United States person; or
- an estate that is subject to United States federal income tax on its
income regardless of its source.
This discussion assumes that holders of Starsys common stock hold their
stock as capital assets within the meaning of Section 1221 of the Code and do
not hold any shares or rights to acquire shares of SpaceDev common stock either
actually or constructively under Section 318 of the Code. This discussion does
not address all aspects of United States federal income taxation that may be
important to a Starsys shareholder in light of his or her particular
circumstances or particular tax status, including the following:
- shareholders who are not U.S. holders;
- shareholders who are subject to the alternative minimum tax provisions of
the Code;
- banks and other financial institutions;
- tax-exempt organizations and governmental entities;
- insurance companies;
- S corporations, entities taxable as partnerships, and other pass-through
entities;
- shareholders who have a functional currency other than the U.S. dollar;
- brokers or dealers in securities or foreign currency;
- traders in securities who elect the mark-to-market method of accounting
for their securities holdings;
- shareholders who acquired their shares in connection with stock option or
stock purchase plans or in other compensatory transactions; and,
- persons holding shares as part of a hedge, straddle, conversion
transaction or risk reduction transaction.
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In addition, the following discussion does not address the tax consequences
of other transactions effectuated prior to, concurrently with, or after the
merger (including exercise of options or warrants to purchase Starsys common
stock), whether or not such transactions are in connection with the merger.
Furthermore, no foreign, state or local tax considerations are addressed.
THEREFORE, WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR AS TO THE SPECIFIC
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO YOU OF THE MERGER AND
RELATED REPORTING OBLIGATIONS.
Federal Income Tax Consequences of the Merger
Subject to the assumptions set forth herein, the material United States
federal income tax consequences of the merger should be as follows:
- No gain or loss should be recognized by Starsys, Monoceros or SpaceDev
solely as a result of the merger.
- No gain or loss should be recognized by holders of Starsys common stock
solely upon their receipt of SpaceDev common stock in the merger; provided,
however, that a portion of the shares deposited and held in escrow and a portion
of any performance consideration (both stock and cash) may be treated as imputed
interest and taxable to the Starsys shareholders as ordinary income when such
stock or cash is transferred to the Starsys shareholders. Any SpaceDev common
stock so treated as imputed interest (a) will have a basis equal to its fair
market value and a holding period beginning the day after its receipt by a
Starsys shareholder; and, (b) is excluded from the discussion of gain, basis and
holding period below.
- Holders of Starsys common stock receiving only SpaceDev common stock and
cash will recognize gain, but not loss, to the extent of the cash received in
the merger. Provided that a Starsys shareholder does not choose to accelerate
any gain caused by the receipt of contingent cash, gain caused by the receipt of
cash should be recognizable by the Starsys shareholders on an "installment"
basis as contingent cash is paid. The amount of gain realized by a Starsys
shareholder will be equal to the difference, if any, between: (i) the fair
market value of the SpaceDev common stock and cash received; and, (ii) the
Starsys shareholder's adjusted tax basis in the Starsys common stock surrendered
in the merger. If the exchange has the "effect of a distribution of a
dividend," some or all of the gain recognized will be treated as a dividend and
installment sale treatment will not be available. If the exchange does not have
the "effect of a distribution of a dividend," all of the gain recognized will be
capital gain. The determination of whether the exchange of stock for cash
pursuant to the merger has the "effect of a distribution of a dividend" will be
made, on a shareholder-by-shareholder basis, by applying the rules of Section
302 of the Code, under which exchange treatment generally applies to a
shareholder: (i) whose post-merger percentage interest in SpaceDev is less than
50% and also less than 80% of the what the shareholder's interest in SpaceDev
would have been if all of such Starsys shareholder's shares of Starsys common
stock had been exchanged for shares of SpaceDev common stock (such percentage
ownership being determined pursuant to the ownership attribution rules of
Section 318 of the Code); or, (ii) whose receipt of the cash is "not essentially
equivalent to a dividend." Whether the exchange will be "not essentially
equivalent to a dividend" with respect to a Starsys shareholder depends upon the
particular circumstances applicable to such shareholder - there being no precise
mathematical formula or clearly applicable rules developed by the Internal
Revenue Service or the courts whereby it is possible to assure that this test
has been met. It is anticipated, however, that under such rules the Starsys
shareholders will not be subject to dividend-type treatment but will qualify for
capital gain treatment on any cash received. Holders of Starsys common stock
who have held their stock for one year or less at the closing of the merger will
be taxed on cash received at ordinary income tax rates, rather than the lower
income tax rates applicable to long-term capital gain or qualified dividends.
- The aggregate tax basis of the SpaceDev common stock received in the
merger by a holder of Starsys common stock should be the same as the aggregate
tax basis of the Starsys common stock surrendered in exchange therefor,
decreased by the amount of cash received by such shareholder, and increased by
the amount of capital gain recognized by such shareholder and the amount, if
any, treated as a dividend to such shareholder.
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- If: (i) a Starsys shareholder elects to accelerate any gain caused by the
receipt of contingent cash; (ii) the receipt of cash by a Starsys shareholder in
the merger is treated as a dividend under the rules referred to above; or, (iii)
shares of SpaceDev common stock held in escrow are forfeited, there could be
adjustments to the gain recognized and the basis of stock received in the
merger.
- The holding period of SpaceDev common stock received in the merger by a
holder of Starsys common stock should include the holding period of the Starsys
common stock surrendered in exchange therefor.
The federal income tax consequences described above are subject to certain
assumptions. One significant assumption is that the fair market value of the
SpaceDev common stock issued in the merger, as such value is determined on the
closing of the merger, is at least 40% of the fair market value of all of the
consideration transferred to the Starsys shareholders in the merger (including
SpaceDev common stock and cash). If the fair market value of the SpaceDev
common stock issued in the merger is less than 40% of the fair market value of
all of the consideration transferred to the Starsys shareholders in the merger,
then the merger may not qualify as a reorganization under Section 368(a) of the
Code.
If the merger does not qualify as a reorganization, the transaction will be
taxable to Starsys and the holders of Starsys common stock as if Starsys sold
all of its assets in a fully taxable transaction and then liquidated. In that
case, (i) Starsys will recognize gain or loss in an amount equal to the
difference between the fair market value of the consideration it is deemed to
receive and the tax basis in its assets and (ii) holders of Starsys common stock
will recognize gain or loss in an amount equal to the difference between the
fair market value of the consideration they receive and the tax bases in their
Starsys common stock exchanged.
In this regard, we rely on the following additional, related assumptions:
- The value of the SpaceDev stock upon consummation of the merger will not
be lower than $1.00 per share. If the value of the SpaceDev stock is lower than
$1.00 per share at the closing of the merger, and if one of the other
assumptions set forth below is inaccurate, then the fair market value of the
SpaceDev common stock issued in the merger, as such value is determined on the
closing of the merger, may be less than 40% of the fair market value of all the
consideration transferred to the Starsys shareholders in the merger.
- No shares of SpaceDev stock received by Starsys shareholders (which do not
include the shares deposited in the escrow account) will be redeemed or
otherwise acquired by SpaceDev or any person related (as defined in Treasury
Regulations Sec. 1.368-1(e)) to SpaceDev or Starsys in connection with the
merger. Shares that are so redeemed or otherwise acquired will not be treated
as SpaceDev common stock issued in the merger, thereby reducing the percentage
of SpaceDev common stock treated as issued at the closing of the merger.
- All loans made to Starsys that will be outstanding on the closing of the
merger (including those loans made by Starsys shareholders and Vectra Bank
Colorado, but excluding the secured loan of $1.2 million made by SpaceDev) will
be respected as indebtedness for federal income tax purposes (see the discussion
under the caption "The Merger Agreement - Merger Consideration - Loan
Repayments" below). If these loans are characterized as equity of Starsys for
tax purposes instead of indebtedness, then the cash paid to retire these loans
at closing of the merger could be treated as additional cash consideration paid
to Starsys shareholders in the merger, thereby reducing the percentage of
SpaceDev common stock issued at the closing of the merger.
- The amount of the working capital deficit of Starsys on the date two
business days prior to the closing of the merger, after payment of the Starsys
transaction expenses and repayment of the Starsys loans, will not exceed $2.43
million so as to (alone or in combination with other factors) reduce the stock
portion of the merger consideration to less than 40% (see the discussion under
the caption "The Merger Agreement - Merger Consideration - Working Capital
Adjustment" below). To the extent the working capital deficit of Starsys
exceeds $1.68 million, 1/6 of the excess will reduce the amount of cash paid to
the Starsys shareholders at closing of the merger and 5/6 of such excess will
reduce
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the amount of SpaceDev common stock issued at the closing of the merger. Starsys
anticipates that the working capital deficit will exceed $1.68 million by
approximately $750,000, which (together with any further increase in the working
capital deficit) will reduce the percentage of SpaceDev common stock issued at
the closing of the merger.
These assumptions are purely factual in nature. We believe that the
assumptions set forth above are reasonable, and that the merger should qualify
as a reorganization under Section 368(a) of the Code. However, neither SpaceDev
nor Starsys will request a ruling from the Internal Revenue Service regarding
the tax consequences of the merger to SpaceDev, Starsys or the Starsys
shareholders.
Federal Income Tax Consequences to Dissenting Starsys Stockholders
If all of the shares of Starsys common stock actually or constructively
owned by a Starsys shareholder are exchanged solely for cash as a result of the
exercise of dissenter rights, the transaction will be treated as a sale by the
Starsys shareholder of his or her shares of Starsys common stock exchanged, and
such shareholder will recognize capital gain or loss measured by the difference
between such shareholder's tax basis in the shares of Starsys common stock
actually owned by him or her and the amount of cash received by him or her in
exchange for such shares.
If a Starsys shareholder exchanges all the shares of Starsys common stock
actually owned by him or her solely for cash as a results of the exercise of
dissenter rights, but shares of Starsys common stock treated as constructively
owned by him or her are exchanged in whole or in part for SpaceDev common stock,
then the tax consequences to such shareholder will be determined under the
"effect of a distribution of a dividend" rules discussed above, which will
determine whether the cash received is taxed as dividend income or capital gain.
However, in certain limited circumstances, and pursuant to certain procedures
set forth in the Code, the application of the constructive ownership rules as
they apply to family members of the Starsys shareholder can be waived, in which
case the transaction will be treated as a sale and the shareholder will
recognize capital gain or loss on the exchange as described in the preceding
paragraph.
Backup Withholding
If you are a non-corporate holder of Starsys common stock, you may be
subject to information reporting and backup withholding on any cash payments
received in respect of SpaceDev common stock. A non-corporate holder will not
be subject to backup withholding, however, if such holder:
- furnishes a correct taxpayer identification number and certifies that such
holder is not subject to backup withholding on the substitute Form W-9 or
successor form included in the letter of transmittal to be delivered to it
following the completion of the merger; or,
- is otherwise exempt from backup withholding.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or credit against United States federal income tax liability, provided
the required information is furnished to the Internal Revenue Service.
Reporting
Starsys shareholders will be required to attach a statement to their United
States federal income tax returns for the year of the merger that contains the
information listed in Treasury Regulation Section 1.368-3(b). Such statement
must include the shareholder's tax basis in shares of Starsys common stock and a
description of the SpaceDev common stock received.
THE PRECEDING DISCUSSION OF MATERIAL UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT PURPORT
TO BE A COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT
THERETO. THE FOREGOING DISCUSSION NEITHER BINDS THE IRS NOR PRECLUDES IT FROM
ADOPTING A CONTRARY POSITION. STARSYS SHAREHOLDERS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER,
INCLUDING REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER APPLICABLE TAX LAWS AND THE EFFECT OF ANY
CHANGES IN TAX LAWS.
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ANTICIPATED ACCOUNTING TREATMENT
SpaceDev intends to account for the merger as a purchase transaction for
financial reporting and accounting purposes under accounting principles
generally accepted in the United States. After the merger, the results of
operations of Starsys will be included in the consolidated financial statements
of SpaceDev. The purchase price, which is equal to the aggregate merger
consideration, will be allocated based on the fair values of the Starsys assets
acquired and the Starsys liabilities assumed. These allocations will be based
upon valuations and other studies that have not yet been finalized.
APPRAISAL AND DISSENTERS' RIGHTS
In connection with the merger, holders of Starsys common stock may be
entitled to dissenters' rights under Colorado law, and holders of SpaceDev
common stock may be entitled to dissenters' rights under California law if (i)
SpaceDev's common stock is not listed on the American Stock Exchange (or another
applicable national securities exchange) at the effective time of the merger,
and (ii) SpaceDev is subject to Section 2115 of the California General
Corporation Law, which is discussed below, at the effective time of the merger.
Holders of SpaceDev common stock are not entitled to dissenters' rights under
Colorado law with respect to the merger.
Although SpaceDev is incorporated in Colorado, SpaceDev may be subject to
certain provisions of California law pursuant to Section 2115 of the California
General Corporation Law. Therefore, despite what SpaceDev's articles of
incorporation and bylaws may provide, SpaceDev may be subject to California law
with respect to Chapter 13 (Dissenters' Rights) of the California General
Corporation Law, as referenced below.
If SpaceDev is listed on the American Stock Exchange (or another applicable
national securities exchange) at the effective time of the merger, Section 2115
will not be applicable to SpaceDev, holders of SpaceDev common stock will not be
entitled to dissenters' rights under California law, and SpaceDev will not honor
any demands by SpaceDev shareholders under Chapter 13 of the California General
Corporation Law.
Under both California and Colorado law, a shareholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal/dissenters' rights pursuant to which
such shareholder may receive cash in the amount of the fair value of such
shareholder's shares in lieu of the consideration such shareholder would
otherwise receive in the transaction.
California General Corporation Law
If the merger is completed, and SpaceDev is subject to Section 2115 of the
California General Corporation Law when the merger becomes effective, holders of
SpaceDev common stock who do not vote in favor of the merger and merger
agreement and who comply with the procedures prescribed in Chapter 13 of the
California General Corporation Law (including making written appraisal demand to
SpaceDev prior to the occurrence of the special meeting) may be entitled to a
judicial appraisal of the fair market value of their shares which, for purposes
of the exercise of appraisal rights under the California General Corporation
Law, is determined as of the day before the first announcement of the terms of
the merger, excluding any appreciation or depreciation in consequence of the
merger, and to require SpaceDev to purchase the shareholder's shares for cash at
such fair market value. To the extent required by California law, a further
notice of dissenters' rights will be sent to any shareholder eligible to
exercise or exercising such rights within ten days after the special meeting.
The following is a brief summary of the statutory procedures that must be
followed by a shareholder of SpaceDev in order to dissent from the merger and
perfect appraisal rights under the California General Corporation Law. This
summary is not intended to be a complete statement of the law of dissenters'
rights and is qualified in its entirety by reference to Chapter 13 of the
California General Corporation Law, the full text of which is attached to this
proxy statement as Annex C and is incorporated herein by reference. We advise
any shareholders of SpaceDev considering exercising appraisal rights to consult
legal counsel.
Under Sections 181 and 1201 of the California General Corporation Law, the
merger constitutes a "reorganization" of Space Dev. Chapter 13 of the California
General Corporation Law provides appraisal rights for shareholders dissenting
from reorganization under certain circumstances.
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Even though a shareholder who wishes to exercise dissenters' rights may be
required to take certain actions before the special meeting, if the merger
agreement is later terminated and the merger is abandoned, no shareholder of the
company will have the right to any payment from us by reason of having taken
that action. The following discussion is subject to these qualifications.
For a holder of common stock to exercise dissenters' rights as to any shares of
the common stock in connection with the merger, the shareholder must not vote in
favor of the merger and merger agreement and must make a written demand to have
the company purchase the shares at their fair market value.
The written demand must:
- be received not later than the date of the special meeting;
- specify the shareholder's name and mailing address and the number and
class of the company's shares held of record which the shareholder demands the
company purchase;
- state that the shareholder is demanding purchase of the shares and payment
of their fair market value; and,
- state the price which the shareholder claims to be the relevant (see
below) fair market value of the shares, which statement will constitute an offer
by the shareholder to sell the shares to the company at that price.
Written demands should be addressed to:
SpaceDev, Inc.
13855 Stowe Drive
Poway, CA 92064
Attention: Corporate Secretary
Fax No.: 858-375-1000
Simply failing to vote for, or voting against, the merger and merger
agreement will not be sufficient to constitute the demand described above.
In addition, within thirty (30) days after notice of the approval of the merger
is mailed to shareholders, the shareholder must also submit to the company or a
transfer agent of the company, for endorsement as dissenting shares, the stock
certificates representing SpaceDev's shares as to which the shareholder is
exercising dissenters' rights.
Shares of SpaceDev's stock held by shareholders who have perfected their
dissenters' rights in accordance with Chapter 13 of the California General
Corporation Law and have not withdrawn their demands or otherwise lost their
rights are referred to in this summary as "dissenting shares." Under the
California General Corporation Law, a dissenting shareholder may not withdraw
his, her or its demand for payment of the fair market value of the shareholder's
dissenting shares in cash unless we consent.
Within ten (10) days after the approval of the merger by SpaceDev's
shareholders, SpaceDev must mail a notice of the approval to each holder of
common stock who did not vote in favor of the merger. This notice must state the
price determined by SpaceDev to represent the relevant fair market value of the
dissenting shares, which statement will constitute an offer by the company to
purchase the dissenting shares at the stated amount if the merger closes.
Chapter 13 of the California General Corporation Law states that the fair market
value, for this purpose, is determined "as of the day before the first
announcement" of the terms of the proposed merger, excluding appreciation or
depreciation as a consequence of the proposed merger. The company's notice must
also include a brief description of the procedures to be followed by those
holders if the holders desire to exercise their dissenters' rights and a copy of
Section 1300 through 1304 of Chapter 13 of the California General Corporation
Law.
Irrespective of the percentage of SpaceDev's common stock with respect to which
demands for appraisal have been properly filed, we must mail the notice referred
to above to any shareholder who has filed a demand with respect
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to our shares and that are subject to transfer restrictions imposed by us or by
any law or regulation. We are not aware of any transfer restrictions on our
shares of common stock, except for those restrictions which apply to our common
stock held by shareholders who are deemed to be affiliated of the company as
that term is defined in Rule 144 adopted by the Securities and Exchange
Commission under the Securities Act. Any shareholder who believes there is
another type of restriction on its shares should consult with its advisor as to
the nature of the restriction and its relationship to the availability of
dissenters' rights in connection with the merger. If the shareholder and
SpaceDev agree that the shares of SpaceDev's common stock as to which the
shareholder is seeking dissenters' rights are dissenting shares, and also agree
upon the price to be paid to purchase the shares, then the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments under California General Corporation Law from the date of the
merger agreement. Any agreements fixing the fair market value of any dissenting
shares as between SpaceDev and any dissenting shareholder must be filed with the
Secretary of SpaceDev.
However, if SpaceDev denies that the shareholder's shares qualify as dissenting
shares eligible for purchase under Chapter 13 of the California General
Corporation Law, or if SpaceDev and the shareholder fail to agree upon the fair
market value of the shares, then the shareholder may, within six months after
the date on which SpaceDev mailed to the shareholder the notice of approval of
the merger by the shareholders of SpaceDev, but not thereafter, file a complaint
in the California Superior Court of the proper county requesting the court to
determine whether the shareholder's shares qualify as dissenting shares that are
eligible to be repurchased pursuant to the exercise of dissenters' rights, the
fair market value of such shares, or both, or may intervene in any action
pending on such a complaint. If the court is requested to determine the fair
market value of the shares, it shall appoint one or more impartial appraisers to
determine the fair market value of the shares. Within ten (10) days of their
appointment, the appraisers, or a majority of them, will make and file a report
with the court. If the court finds the report reasonable, the court may confirm
it.
However, if the appraisers cannot determine the fair market value within ten
(10) days of their appointment, or within a longer time determined by the court
or the report is not confirmed by the court, then the court will determine the
fair market value. If the court determines that the shareholder's shares
qualify as dissenting shares, then, following determination of their fair market
value, SpaceDev will be obligated to pay the dissenting shareholder the fair
market value of the shares, as so determined, together with interest thereon at
the legal rate from the date on which judgment is entered. Payment on this
judgment will be due upon the endorsement and delivery to SpaceDev of the
certificates for the shares as to which the appraisal rights are being
exercised. The costs of the appraisal action, including reasonable compensation
to the appraisers appointed by the court, will be allocated among SpaceDev and
dissenting shareholders as the court deems equitable. However, if the appraisal
of the fair market value of the shares exceeds the price offered by SpaceDev,
then SpaceDev shall pay an additional amount equal to the difference. If the
fair market value of the shares awarded by the court exceeds 125% of the price
offered by SpaceDev for the shares in the notice of approval of the merger by
the shareholders of SpaceDev, then the court may in its discretion include
attorneys' fees, fees of expert witnesses and interest at the legal rate on
judgments in the amounts payable by SpaceDev.
Shareholders of SpaceDev considering whether to seek appraisal should bear in
mind that the fair value of their SpaceDev common stock determined under Chapter
13 of the California General Corporation Law could be more than, the same as or
less than the value of consideration to be paid in the merger as set forth in
the merger agreement. Also, SpaceDev reserves the right to assert in any
appraisal proceeding that, for purposes thereof, the "fair value" of the capital
stock of SpaceDev is less than the value of the consideration to be issued and
paid in the merger as set forth in the merger agreement. The process of
dissenting requires strict compliance with technical prerequisites. Shareholders
wishing to dissent should consult with their own legal counsel in connection
with compliance with Chapter 13 of the California General Corporation Law. Any
shareholder who fails to comply with the requirements of Chapter 13 of the
California General Corporation Law, attached as Annex C to this joint proxy
statement/prospectus, will forfeit such shareholder's rights to dissent from the
merger and exercise appraisal rights and will receive the consideration to be
issued and paid in the merger as set forth in the merger agreement.
Colorado Business Corporation Act
In connection with the proposed merger, holders of Starsys common stock are
or may be entitled to exercise dissenters' rights as provided in Article 113 of
the Colorado Business Corporation Act, which we refer to as the CBCA. If a
Starsys shareholder meets all the requirements of this law, and follows all of
its required procedures, a shareholder
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may receive cash in an amount equal to the fair value of its Starsys common
stock in lieu of the merger consideration described in this joint proxy
statement/prospectus.
The following is a brief summary of the statutory procedures that must be
followed by a shareholder of Starsys in order to dissent from the merger and
perfect appraisal rights under the CBCA. This summary is not intended to be
complete and is qualified in its entirety by reference to Article 113 of the
CBCA, the full text of which is attached to this joint proxy\
statement/prospectus as Annex B.
Under Colorado law, a holder of common stock may have the right to dissent from
the merger and obtain payment of the fair market value in cash of its shares of
common stock. The shareholder will have the right to seek appraisal of the
value of its common shares and be paid the appraisal value if the shareholder:
(1) notifies Starsys in writing, before the vote is taken, of the shareholder's
intention to demand payment for the shares if the proposed merger is
effectuated; (2) does not vote the shares in favor of the merger; and, (3)
otherwise complies with the provisions governing dissenters' rights under
Colorado law. The written notice must be received by Starsys, before the vote
is taken, and the certificates must be deposited as set forth by Starsys in its
dissenters' notice. If the holder possesses uncertificated shares of Starsys,
the holder's ability to freely transfer the uncertificated shares will be
restricted after the holder's payment demand is received. The shareholder may
not withdraw such demand unless as provided by Section 7-113-207 or
7-113-209(1)(b) of the CBCA.
If a holder of common stock dissents from the merger and the conditions outlined
above are met, the shareholder's only right will be to receive the fair value of
its shares in cash. The appraised value may be more or less than the
consideration the shareholder would receive under the terms of the merger
agreement. The shareholder should be aware that submission of a signed proxy
card without indicating a vote with respect to the merger will be deemed a vote
for the merger and a waiver of your dissenters' rights. Additionally, voting in
favor of such merger, or failure to send the required dissenters' notice or to
follow such other procedures will result in a waiver of your dissenters' rights.
A vote against the merger does not dispense with the other requirements to
request an appraisal under Colorado law.
Any demands, notices, certificates or other documents delivered to Starsys prior
to the merger may be sent to Starsys Research Corporation, 4909 Nautilus Court
North, Boulder, CO 80301, Attention: Corporate Secretary. Thereafter, they may
be sent to SpaceDev, Inc., 13855 Stowe Drive, Poway, CA 92064, Attention:
Corporate Secretary.
If you hold dissenting shares, Starsys will pay you the amount Starsys estimates
to be the fair value of your dissenting shares, plus accrued interest,
immediately before the effective date of the merger. The payment will be sent
to the address stated in your payment demand, or if no such address was stated,
at the address shown on SpaceDev's current record of shareholders, accompanied
by: (a) a copy of the Starsys' corporate balance sheet as of the end of its most
recent fiscal year; (b) a statement of Starsys' estimate of the fair value of
the shares; (c) an explanation of how interest was calculate; (d) a statement of
the procedure to follow if you are dissatisfied with the payment you are given
under Section 7-113-209 of CBCA; and, (e) a copy of Article 113 of CBCA.
If the shareholder fails to accept the fair value of the Starsys common stock
offered by Starsys, Starsys may commence proceedings in the district court of
the proper county in Colorado requesting that the court determine such issue.
The court may appoint one of more persons as appraisers to receive evidence and
recommend a decision on the question of fair value. If Starsys fails to
commence proceedings within sixty days of receiving the payment demand, Starsys
shall pay to each dissenter whose demand remains unresolved the amount demanded
by each such dissenter.
Failure to take any necessary step will result in a termination or waiver of the
shareholder's rights under Article 113 of CBCA. A person having beneficial
interest in the common stock that is held of record in the name of another
person, such as trustee or nominee, must act promptly to cause the record holder
to follow the requirements of Article 113 of CBCA in a timely manner if such
person elects to demand payment of the fair value of such shares.
GOVERNMENTAL AND REGULATORY MATTERS
Neither SpaceDev or Starsys is aware of the need to obtain any regulatory
approvals in order to complete the merger other than the declaration by the SEC
of the effectiveness of the Form S-4 registration statement of which this
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joint proxy statement / prospectus is a part, and registration by coordination
of the Form S-4 with the Colorado Secretary of State pursuant to Colorado
Revised Statutes Section 11-51-303.
LISTING OF SPACEDEV COMMON STOCK TO BE ISSUED IN THE MERGER
If SpaceDev's common stock is traded on the American Stock Exchange at the
time of the merger, the shares of SpaceDev common stock to be issued pursuant to
the merger agreement will be required to be approved for listing on the American
Stock Exchange.
RESTRICTION ON RESALES OF SPACEDEV COMMON STOCK
The SpaceDev common stock to be issued in the merger will be registered
under the Securities Act, thereby allowing such shares to be freely transferable
without restriction by all former holders of Starsys common stock who are not
deemed under the Securities Act to be "affiliates" of Starsys at the time of the
Starsys special meeting and who do not become "affiliates" of SpaceDev after the
merger. Persons who may be deemed to be "affiliates" of SpaceDev or Starsys
generally include individuals or entities that control, are controlled by or are
under common control with SpaceDev or Starsys, and may include some of their
respective executive officers and directors, as well as their respective
significant shareholders.
Shares of SpaceDev common stock received by those shareholders of Starsys who
are deemed to be "affiliates" of Starsys or SpaceDev under the Securities Act
may not be sold except pursuant to an effective registration statement under the
Securities Act covering the resale of those shares, or pursuant to Rule 145
under the Securities Act or any other applicable exemption under the Securities
Act. Starsys has agreed to provide a list of those shareholders considered to be
"affiliates" to SpaceDev prior to the closing of the merger.
This joint proxy statement/prospectus does not cover the resale of any SpaceDev
common stock received by any person who may be deemed to be an "affiliate" of
SpaceDev or Starsys.
STANDSTILLS AND LOCKUPS
After the effectiveness of the merger agreement and pursuant to its terms,
SpaceDev requested that the exectuvie officers, directors and significant
shareholders of Starsys enter into a standstill and lock-up agreement with
SpaceDev. In addition, upon the effectiveness of this joint proxy
statement/prospectus and pursuant to the terms of the merger agreement, SpaceDev
will request other shareholders of Starsys, as well as recipients of Starsys
transaction expenses, who will or may receive more than 50,000 shares of
SpaceDev common stock at the closing of the merger and for the first performance
period to enter into such a standstill and lock-up agreement. The completion
and delivery of these agreements is a condition to the closing of the merger,
which condition SpaceDev may waive.
The agreements provide for a lock-up period of 270 days beginning upon the
consummation of the merger. During that period, the signatory may not directly
or indirectly sell, offer, pledge, transfer the economic risk of ownership,
enter into any commitment or contract for, or make any short sale, pledge or
otherwise transfer: (1) any shares of SpaceDev common stock, whenever acquired;
or, (2) any commitments or securities convertible into or exchangeable or
exercisable for any other rights to purchase or acquire shares of SpaceDev
common stock. The only exceptions are for specified involuntary transfers by
operation of law and with the prior written consent of SpaceDev.
The agreement also provides for a standstill period of three (3) years from the
consummation of the merger. During this period, the signatory may not directly
or indirectly:
- other than pursuant to the merger agreement, acquire any shares of
SpaceDev common stock, or any other class of SpaceDev voting securities, or
transfer any shares of SpaceDev common stock or such other class of voting
securities, if after the acquisition or transfer the signatory or transferee (or
any group to which the transferee may belong) would beneficially own or have the
right to acquire more than 5% of the outstanding shares of SpaceDev common stock
or other class of SpaceDev voting securities;
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- make or participate in any solicitation of proxies to vote any shares of
SpaceDev common stock or other class of SpaceDev voting securities, or seek to
influence the vote of any other holder of such stock or securities, or initiate,
propose or solicit any such holder for the approval of any shareholder proposal,
or initiate or propose any shareholder proposal;
- make any statement or proposal to any director or officer of SpaceDev or
otherwise announce an intent or make any proposal to enter into any merger,
business combination or similar transaction, or material transfer of assets,
liquidation or other extraordinary corporate transaction, with or involving
SpaceDev or any of its affiliates;
- form, join or in any way participate in a group, or otherwise act in
concert with any person, with respect to any securities of SpaceDev for the
purpose of either circumventing the standstill restrictions, or holding,
acquiring, voting or transferring any shares of SpaceDev common stock or other
class of SpaceDev voting securities;
- enter into any arrangement or contract for the voting of shares of
SpaceDev common stock or other class of SpaceDev voting securities, except as
contemplated in the merger agreement and related agreements;
- otherwise act, alone or in concert with others (including by providing
financing, advice or other assistance to another person), to seek or offer to
exercise any control or influence, in any manner, over the management, board of
directors or policies of SpaceDev or its affiliates, other than by voting shares
of SpaceDev common stock consistent with the standstill provisions;
- make a public request to SpaceDev to amend or waive any provisions of the
agreement;
- participate in any action by written consent of the shareholders of
SpaceDev; or,
- take any action, or request SpaceDev to take any action, which might
require SpaceDev or any of its affiliates to make a public announcement
concerning the acquisition of shares of SpaceDev common stock or other class of
voting securities, or certain reorganizations or asset transfers involving
SpaceDev or its affiliates and the signatory or its affiliates.
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THE MERGER AGREEMENT
The following summary describes the material provisions of the merger
agreement. This summary may not contain all of the information about the merger
agreement that is important to you. The following summary is qualified in its
entirety by reference to the complete text of the merger agreement, which is
attached to this joint proxy statement/prospectus as Annex A and is incorporated
by reference into this joint proxy statement/prospectus. We encourage you to
read it carefully in its entirety for a more complete understanding of the
merger agreement.
The merger agreement has been included to provide you with information regarding
its terms. It is not intended to provide any other factual information about us.
Such information can be found elsewhere in this joint proxy statement/prospectus
and in the other public filings SpaceDev makes with the Securities and Exchange
Commission, which we refer to as the SEC, which are available without charge at
www.sec.gov.
The merger agreement contains a number of representations and warranties which
SpaceDev and Starsys have made to each other. The assertions embodied in those
representations and warranties are qualified by information in confidential
disclosure schedules that SpaceDev and Starsys have exchanged in connection with
signing the merger agreement. These disclosure schedules contain information
that has been included in the general prior public disclosures of SpaceDev, as
well as additional non-public information. While we do not believe that this
non-public information is required to be publicly disclosed by SpaceDev or
Starsys under the applicable securities laws, that information does modify,
qualify and create exceptions to the representations and warranties set forth in
the merger agreement. In addition, these representations and warranties were
made as of the date of the merger agreement. Information concerning the subject
matter of the representations and warranties may have changed since the date of
the merger agreement, which subsequent information may or may not be fully
reflected in the public disclosures of SpaceDev. Moreover, representations and
warranties are frequently utilized in merger agreements as a means of allocating
risks, both known and unknown, rather than to make affirmative factual claims or
statements. Accordingly, YOU SHOULD NOT RELY ON THE REPRESENTATIONS AND
WARRANTIES AS CURRENT CHARACTERIZATIONS OF FACTUAL INFORMATION ABOUT SPACEDEV
AND STARSYS.
THE MERGER
The merger agreement provides that, upon the closing, Starsys will merge
with and into Monoceros Acquisition Corp., a wholly-owned subsidiary of SpaceDev
which we refer to as Monoceros. Monoceros will survive the merger as a
wholly-owned subsidiary of SpaceDev. We refer to this transaction as the merger,
we refer to Monoceros as the surviving corporation following the effectiveness
of the merger and we refer to the business of Starsys prior to the merger as the
Starsys business.
COMPLETION AND EFFECTIVENESS OF THE MERGER
The parties will close the merger when all of the conditions to completion
of the merger contained in the merger agreement are satisfied or waived,
including adoption of the merger and the merger agreement by the shareholders of
Starsys and SpaceDev. As soon as practicable after the satisfaction or waiver
of the closing conditions, the parties will cause the merger to be effected by
filing a statement of merger with the Colorado Secretary of State, which we
refer to as the effective time.
Pursuant to the merger agreement, at the effective time, Monoceros will succeed
to all of the properties, rights, privileges and powers, and all liabilities,
obligations and debts, of Starsys. In particular, the merger agreement provides
that outstanding warrants, options or other commitments or rights to purchase
shares of Starsys capital stock, including under the Starsys stock option plan,
will not be assumed by the surviving corporation and no consideration will be
delivered at closing for any holder of any such warrants, options, commitments
or rights.
SpaceDev and Starsys plan to complete the merger soon after the special meetings
occur and anticipate that they will be in a position to complete the merger on
or prior to January 31, 2006.
The articles of incorporation, bylaws, directors and officers of Monoceros prior
to the effective time will remain the officers and directors of Monoceros
thereafter, except that the name of Monoceros will be changed to "Starsys
Research Corporation" or a similar name, immediately after the effective time.
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MERGER CONSIDERATION
Shareholder Consideration
Upon the effectiveness of the merger, each outstanding share of common
stock of Starsys will be cancelled and retired, and the holders of Starsys
shares will be entitled to receive the following shareholder closing and
performance consideration.
Closing Consideration. SpaceDev will pay and issue up to the following total
maximum consideration to the Starsys shareholders at the effective time of the
merger on a pro rata basis:
- cash in the aggregate amount of $1,500,000; and,
- a number of shares of SpaceDev common stock equal to $7,500,000 divided by
the volume-weighted average price of SpaceDev common stock for the preceding 20
trading days, subject to a minimum price of $1.40 per share and a maximum price
of $1.90 per share.
These amounts are subject to reduction for the payment of some Starsys
transaction expenses and for any excess working capital deficit about the time
of the merger, as described under the subcaptions "- Starsys Transaction
Expenses" and "- Working Capital Adjustment" below. Starsys management
anticipates that, after the payment of these expenses and the application of
these adjustments, $547,000 in cash and up to $6,152,000 in shares of SpaceDev
common stock will be available for distribution to Starsys shareholders. In
addition, 50% of the shares issued at the time of the merger will be placed in
an escrow account and in an expense fund, as described under the caption
"Escrow" below.
Performance Consideration. Following the merger, Starsys shareholders may also
be entitled to receive additional performance-based consideration, based on the
achievement by the Starsys business of certain performance criteria for the
fiscal years ending December 31, 2005, December 31, 2006 and December 31, 2007.
The performance consideration will be based on the achievement by the Starsys
business of net revenue and earnings targets, up to the following maximum
amounts:
- For the fiscal year ending December 31, 2005, $350,000 in cash and a
number of shares of SpaceDev common stock equal to $3,000,000 divided by the
volume-weighted average price of SpaceDev common stock for the 20 trading days
preceding the date of the Starsys audit opinion for the fiscal year ended
December 31, 2005, subject to a minimum price of $2.00 per share.
- For the fiscal year ending December 31, 2006, $350,000 in cash and a
number of shares of SpaceDev common stock equal to $7,500,000 divided by the
volume-weighted average price of SpaceDev common stock for the 20 trading days
preceding the date of the Starsys audit opinion for the fiscal year ended
December 31, 2006, subject to a minimum price of $2.50 per share.
- For the fiscal year ending December 31, 2007, $350,000 in cash and a
number of shares of SpaceDev common stock equal to $7,500,000 divided by the
volume-weighted average price of SpaceDev common stock for the 20 trading days
preceding the date of the Starsys audit opinion for the fiscal year ended
December 31, 2007, subject to a minimum price of $3.00 per share.
The actual performance consideration earned for each of the three fiscal
years will depend on the ability of the Starsys business to meet the specified
net revenues and EBITDA targets. Net revenues is calculated based on gross
sales less certain sales adjustments, and EBITDA is net income before interest,
taxes, depreciation and amortization. Both non-GAAP financial measures are
subject to certain protective restrictions and limitations set forth in the
merger agreement.
No performance consideration will be paid in any of the fiscal years unless at
least 80% of both performance targets are met for that year; the full amount
will be paid for a fiscal year only if both targets are met or exceeded for that
year. Between the 80% and 100% thresholds, the performance consideration will
be paid on a straight-line basis (e.g., if 85% of the target is met, 25%
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of the performance consideration will be paid, or if 90% of the target is met,
50% of the performance consideration will be paid), with 60% of the weight
placed on the EBITDA target and 40% on the net revenues target.
For example, if for the fiscal year 2006 the Starsys business achieves 120% of
the EBITDA target and 90% of the net revenues target, the performance
consideration would be 80% of the maximum amount. This is calculated as
follows: 60% due to meeting 100% or more of the EBITDA target (which carries
60% of the weight), and 20% due to reaching 90%, or 50% on the straight-line
scale between 80% and 100%, of the net revenues target (which carries 40% of the
weight).
The targets for the three fiscal years are:
FISCAL YEAR NET REVENUES TARGET EBITDA TARGET
2005 $ 21,500,000 $ 250,000
2006 $ 22,500,000 $ 2,000,000
2007 $ 24,000,000 $ 2,500,000
Starsys believes that it will achieve Net Revenues equal to at least 80% of
the Net Revenues Target of $21,500,000. However, Starsys believes that it is
unlikely that it will achieve at least 80% of the EBITDA Target for the fiscal
year ending December 31, 2005. Starsys' EBITDA is not final on December 31,
2005, and is subject to adjustment following the year end pursuant to its audit
of its financial records during the first quarter of 2006. If Starsys does not
achieve 80% of both the Net Revenues Target and the EBITDA Target, Starsys
shareholders will not receive any performance consideration for 2005.
In addition, Starsys shareholders will be entitled to receive the full
amount of performance consideration for a particular fiscal year if SpaceDev
materially breaches the following covenants contained in the merger agreement
and, after notice, is unable to cure any breach within the cure periods set
forth in the merger agreement:
- SpaceDev does not maintain separate books and records for the Starsys
business;
- SpaceDev sells all or substantially all of the surviving corporation or
the Starsys business before the expiration of the final performance period;
- SpaceDev does not make a minimum number of stock options available to
Starsys executives, managers, employees and consultants; or
- SpaceDev does not make the minimum capital investments in Starsys required
under the merger agreement for the fiscal years ended December 31, 2005 and
2006.
These covenants are described in more detail under the caption "SpaceDev
Post-Closing Covenants" below. Under the merger agreement, the selection of this
remedy would be exclusive of any other remedy, including the indemnity
provisions discussed under the caption "Indemnification" below.
The amount of performance consideration distributed to Starsys shareholders is
subject to reduction for the payment of some Starsys transaction expenses, as
described under the captions "Merger Consideration - Starsys Transaction
Expenses" below. In addition, 50% of the shares, if any, which are issued as
performance consideration for fiscal year 2005 will be placed in an escrow
account, as described under the caption "Escrow Account" below.
The shareholder agent will have the exclusive right to object to the calculation
of the performance consideration by SpaceDev. In the event the shareholder
agent decides to dispute SpaceDev's calculations, the merger agreement sets
forth specific non-judicial dispute resolution procedures. The outcome of these
procedures will be binding on all interested parties, including all
non-dissenting Starsys shareholders.
Withholding Rights. The surviving corporation, SpaceDev and the exchange agent
each is entitled to deduct and withhold from the consideration otherwise payable
to Starsys shareholders in connection with the merger any amounts required to be
deducted or withheld under federal, state or other tax laws.
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Dissenting Shareholders. The shares of dissenting Starsys shareholders will not
be exchanged for the foregoing shareholder consideration. SpaceDev will retain
the consideration payable to any dissenting shareholders of Starsys. The
dissenting Starsys shareholders will receive the consideration outlined in
"SpaceDev Proposal No. 1 and Starsys Proposal No. 1 - The Merger - Appraisal and
Dissenters' Rights" beginning on page 50.
Working Capital Adjustment
The amount of cash and shares of SpaceDev common stock to be delivered by
SpaceDev at the closing of the merger may be adjusted based on the Starsys
adjusted working capital deficit on the date two business days prior to the
closing of the merger. The adjustment is based on the amount by which the
Starsys business working capital deficit, after payment of the Starsys
transaction expenses and repayment of the Starsys loans (as described under the
subcaptions "- Loan Repayments" and "- Starsys Transaction Expenses" below),
exceeds $1.68 million. If this amount is a positive value, the cash to be paid
by SpaceDev at the closing will be reduced by one-sixth of that amount, and the
$7.5 million amount used to calculate the number of shares of SpaceDev common
stock to be delivered at the closing will be reduced by five-sixths of that
amount.
Loan Repayments
At the closing of the merger, SpaceDev will: (i) subject to a $4.6 million
limit on loan repayments, repay the remaining principal and interest of all
loans to Starsys from Vectra Bank Colorado, which we refer to as Vectra,
together with any other costs, expenses and liabilities incurred in connection
with those loans, which we refer to as the Vectra loans; (ii) cancel and
terminate the secured loan of $1.2 million and all accrued interest and fees,
from SpaceDev to Starsys, which we refer to as the SpaceDev loan; and, (iii)
repay subordinated loans in the aggregate principal amount of approximately
$800,000 owed by Starsys to certain Starsys shareholders plus interest.
SpaceDev will not be obligated to pay off more than $4,600,000 in the aggregate
(excluding the amount of the SpaceDev loan) for all of these loans and related
costs.
Starsys Transaction Expenses
Prior to the closing of the merger, Starsys will deliver to SpaceDev an
itemized schedule of the expenses it has occurred in connection with the sale of
Starsys, including any costs associated with the merger agreement, the
preparation and filing of this joint proxy statement/prospectus and the holding
of the Starsys shareholder meeting, which we refer to as the payment schedule.
The payment schedule may involve payments of up to $2 million to be made at
closing and payments of up to $250,000 to be made at the end of some or all of
the performance periods. These payments will be made out of the cash and shares
of SpaceDev which SpaceDev will deliver at the closing of the merger and, if
applicable, the cash and shares, if any, which SpaceDev may deliver as
performance consideration for any performance period.
Starsys currently anticipates these payments will total approximately $1,201,000
at the closing and 1% of any performance based payments, consisting of the
following payments:
----------------------------------------------------------------------------------------------------------
CASH STOCK
--------------------------------------- -----------------------------------------
EXPENSE CLOSING PAYMENTS PERFORMANCE PAYMENTS CLOSING PAYMENTS PERFORMANCE PAYMENTS
---------------------- ----------------- --------------------- ----------------- ---------------------
Financial Advisor Fees $ 250,000 - $ 365,000 -
Legal Fees . . . . . . $ 380,000 - - -
Accounting Fees. . . . $ 45,000 - - -
Merger Bonuses . . . . $ 80,000 1% $ 66,000 1%
Misc.. . . . . . . . . $ 15,000 - - -
---------------------- ----------------- --------------------- ----------------- ---------------------
TOTAL. . . . . . . . . $ 770,000 1% $ 431,000 1%
----------------------------------------------------------------------------------------------------------
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Transfer of Contingent Rights.
No person may transfer any interest in, or any right to obtain proceeds
from, performance consideration, the escrow account or the expense fund, except
for involuntary transfers required by law or transfers to the key shareholder.
Estimated Merger Consideration Per Share at Closing
At the closing of the merger, Starsys shareholders are expected to receive
merger consideration of approximately $12.83 per share of Starsys common stock,
consisting of approximately $1.05 per share in cash and approximately $11.78 per
share in shares of SpaceDev common stock. The estimated merger consideration per
share is based on 522,437.47 shares of Starsys common stock outstanding as of
December 1, 2005, the record date for the special meeting of Starsys
shareholders, and assumes that no outstanding Starsys options will be exercised
prior to the closing of the merger, and that an aggregate of approximately
$547,000 in cash, after estimated adjustments, and an aggregate of approximately
$6,152,000 in shares of SpaceDev common stock, after estimated adjustments, will
be paid to the Starsys shareholders at the closing of the merger.
ESCROW
Escrow Account
At the closing of the merger, SpaceDev will, on behalf of the Starsys
shareholders, and for the benefit of SpaceDev and related indemnified parties
under the merger agreement, deposit into an escrow account, which we will refer
to as the escrow account, 50% of the SpaceDev common stock to be distributed to
the Starsys shareholders at the closing of the merger (without taking into
account any shares of SpaceDev common stock deliverable to the shareholder agent
at the closing for the satisfaction of certain transaction expenses incurred by
Starsys related to the sale of the company, as described under the caption
"Merger Consideration - Starsys Transaction Expenses" above). Moreover, if any
performance consideration is to be distributed to the Starsys shareholders for
fiscal year 2005, SpaceDev will on behalf of the Starsys shareholders, and for
the benefit of SpaceDev and related indemnified parties under the merger
agreement, deposit into the same escrow account 50% of the SpaceDev common stock
issuable as the performance consideration (without taking into account any
shares of SpaceDev common stock deliverable to the shareholder agent,
contemporaneously with the payment of the performance consideration, for the
satisfaction of the above-referenced Starsys transaction expenses).
The escrow account will serve as security for the payment of indemnification
claims made by SpaceDev and certain related parties under the merger agreement.
If an eligible person has a claim for indemnification against the escrow
account, the shares of SpaceDev common stock will be valued, for purposes of
satisfying the claim, at the per-share value used in calculating the number of
shares to be issued by SpaceDev at the closing or for the first performance
period, as applicable, with recourse first being had against the closing shares.
The escrow account will be opened at the closing and is scheduled to be closed
ten (10) days following the date of audited financial statements prepared for
the Starsys business for the fiscal year 2006 (i.e., approximately April 2007),
which period we refer to as the escrow period. All shares of SpaceDev common
stock, if any, which are in the escrow account at the end of the escrow period
will be distributed by the escrow agent to the Starsys shareholders, except that
if any party entitled to indemnification under the merger agreement will have
made a claim against the Starsys shareholders during the escrow period, the
escrow period will be extended and a sufficient number of shares and other
assets will remain in the escrow account as security for that claim and will not
be released to the Starsys shareholders until that claim (and any other pending
claims) have been resolved and satisfied.
In addition, if at the time any shares or cash in the escrow account would be
distributed to the key shareholder, those shares or cash will be used to satisfy
any claims against the key shareholder by an eligible indemnified person under
the merger agreement. The escrow account will be administered pursuant to the
terms of an escrow agreement among SpaceDev, the escrow agent and the
shareholder agent.
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Expense Fund
At the closing of the merger, on behalf of the Starsys shareholders,
SpaceDev will transfer shares of SpaceDev common stock having a value of
$100,000 from the escrow account to a separate escrow account, which escrow
account we refer to as the expense fund. The escrow agent will maintain the
expense fund solely for the purpose of paying the out-of-pocket fees and
expenses, including independent accounting firm fees and attorneys' fees,
reasonably incurred by the shareholder agent in connection with performing and
exercising his duties under the merger agreement and escrow agreement. See the
discussion under the "Shareholder Agent" caption below for more information
concerning the shareholder agent.
The shares held in the expense fund may not be sold, pledged or otherwise
transferred for a period of 270 days after the closing of the merger.
Accordingly, the expense fund will not be available to pay the above-referenced
fees and expenses for 270 days after the closing and the shareholder agent will
need to find alternate means to fund out-of-pocket fees and expenses in the
interim.
The expense fund will be terminated after the escrow period has lapsed and the
final determination of the performance consideration (if any) for the final
performance period. Upon termination any remaining assets will be transferred
to the escrow account for release and distribution in accordance with its terms.
Shareholder Agent
The shareholder agent under the merger agreement will serve as the
shareholder agent under the escrow agreement. See the discussion under the
caption "- Shareholder Agent" below. The shareholder agent will serve as the
exclusive representative and agent for the pre-merger Starsys shareholders in
relation to the merger agreement, the escrow agreement and the transactions
contemplated thereby, including the merger.
Escrow Agent
The escrow agent will be responsible for establishing, maintaining and
administrating the escrow account and expense fund. SpaceDev and the
shareholder agent have agreed to appoint Zions First National Bank, which is
affiliated with Vectra Bank Colorado, as the initial escrow agent under the
escrow agreement.
SpaceDev will pay the escrow agent customary fees for its services and will
reimburse the escrow agent's out-of-pocket expenses. In performing any duties
under the escrow agreement, the escrow agent will not be liable to any party for
damages, losses or expenses, except for gross negligence or willful misconduct
on the part of the escrow agent. The escrow agent will not incur any liability
for any action taken or omitted in reliance upon an instrument, including any
written statement or affidavit, that the escrow agent in good faith believes to
be genuine. SpaceDev and, to the extent of the assets on deposit in the escrow
account, the pre-merger Starsys shareholders are obligated jointly and severally
to indemnify and hold the escrow agent harmless against any and all losses,
including reasonable costs of investigation, attorneys fees and disbursements,
that may be imposed on or incurred by the escrow agent in connection with the
performance of its duties under the escrow agreement.
The escrow agent may resign at any time by written notice to SpaceDev and the
shareholder agent, and the escrow agent may be removed at any time by SpaceDev.
SpaceDev will be responsible for appointing a successor escrow agent.
STARSYS OPTIONS AND WARRANTS
The holders of options, warrants and other rights to purchase Starsys
common stock must exercise such rights on or before the closing of the merger.
The merger agreement provides that any options, warrants or other rights to
purchase Starsys common stock which are not exercised prior to the closing of
the merger will be cancelled and will terminate and expire in accordance with
their terms as of the closing of the merger. Starsys has agreed to terminate
the separate plan holding Starsys stock under the Starsys 401(k) and stock bonus
plan dated August 4, 1997 and to distribute the shares to the participants prior
to the merger.
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EXCHANGE OF STOCK CERTIFICATES
Exchange Procedures. A letter of transmittal to be used for exchanging
shares of Starsys common stock for the merger consideration to be paid to the
shareholders of Starsys is attached to this joint proxy statement/prospectus as
Annex F. Upon surrender of a Starsys certificate to the exchange agent for
exchange, together with a duly executed letter of transmittal and such other
documents as may be reasonably required by the exchange agent, the exchange
agent will: (1) deliver to the holder of such certificate a certificate
representing the number of shares of SpaceDev common stock that such holder has
the right to receive at the closing pursuant to the merger agreement; and, (2)
deliver to the escrow agent under the escrow agreement on behalf of such holder
a certificate in the name of the escrow agent with respect to the portion of the
escrow shares that such holder has placed in escrow pursuant to the merger
agreement. See the discussion under the caption "Escrow Account" for more
information about the escrow. Starsys shareholders may, and are encouraged to,
deliver the letter of transmittal together with the shareholder's certificates
evidencing shares of Starsys common stock to SpaceDev at any time prior to the
closing.
Distributions With Respect to Unexchanged Shares. No dividends or other
distributions declared or made with respect to SpaceDev common stock with a
record date after the closing of the merger but prior to the surrender of a
certificate (or the delivery of an affidavit and any required bond in lieu of a
lost, stolen or mutilated certificate) for Starsys common stock will be paid to
the holder of that certificate on account of the shares of SpaceDev common stock
for which that stock certificate may be exchanged.
Transfers of Ownership. If any certificate for shares of SpaceDev common stock
is to be issued in a name other than that of the registered holder of the
certificates surrendered, it will be a condition of its issuance that the
certificates so surrendered will be properly endorsed and otherwise in proper
form for transfer and that the person requesting the exchange will have paid to
SpaceDev (or any agent designated by it) any transfer or other taxes required by
reason of the issuance of a certificate for shares of SpaceDev common stock in
any name other than that of the registered holder of the certificates
surrendered, or established to the satisfaction of SpaceDev (or any agent
designated by it) that the tax has been paid or is not payable.
Lost Stock Certificates. If any certificate evidencing shares of Starsys common
stock was lost, stolen or destroyed, SpaceDev will deliver the shareholder
consideration exchangeable for those shares only upon: (i) the making of an
affidavit of that fact by the applicable holder of record claiming the
certificate to be lost, stolen, or destroyed (which affidavit may be in the form
included in the letter of transmittal); and, (ii) if SpaceDev reasonably
requires, the posting by the holder of a bond in a reasonable amount directed by
SpaceDev, to serve as indemnity against any claim that may be made against it
with respect to such certificate. A form of affidavit is included in the letter
of transmittal attached to this joint proxy statement/prospectus as Annex F.
SHARE ADJUSTMENTS
Fractional Shares. SpaceDev will not issue any fractional shares of
SpaceDev common stock in connection with the merger or any transactions
contemplated by the merger agreement. Instead, any fractional share will be
rounded up to the nearest whole share of SpaceDev common stock.
Capitalization Adjustments. The number of shares of SpaceDev common stock which
are payable are subject to appropriate adjustment to reflect fully the effect of
any capitalization adjustment of SpaceDev common stock, such as a stock split,
reverse stock split, stock dividend, combination, reclassification or similar
event.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties of
SpaceDev, Monoceros, Scott Tibbitts, a key shareholder of Starsys identified as
a "Key Shareholder" in the merger agreement, whom we refer to as the key
shareholder, and Starsys that are subject, in some cases, to specified
exceptions and qualifications contained in the merger agreement or in the
disclosure schedules delivered in connection with the merger agreement. YOU
SHOULD NOT RELY ON THE REPRESENTATIONS AND WARRANTIES AS CURRENT
CHARACTERIZATIONS OF FACTUAL INFORMATION ABOUT SPACEDEV AND STARSYS.
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Representations and Warranties of Starsys
The representations and warranties of Starsys and, with respect to those
items marked with an asterisk (*), the key shareholder, relate to, among other
things:
- corporate organization and qualification;
- absence of subsidiaries;
- Starsys capital structure (*);
- the absence of a need to obtain governmental consents, authorizations or
filings in order to complete the merger;
- authority to enter into and carry out the obligations under the merger
agreement and the enforceability of the merger agreement (*);
- the absence of any conflict with or violation of corporate charter
documents, applicable law or contracts as a result of entering into and carrying
out the obligations under the merger agreement;
- consents required of any governmental body or other third party in
connection with the merger;
- corporate books and records;
- the accuracy of financial statements;
- the absence of undisclosed liabilities;
- the absence of off-balance sheet arrangements;
- the absence of a material adverse effect and certain other payments,
actions, transactions or changes since December 31, 2004;
- compliance with tax laws and other tax matters;
- the absence of restrictions on business activities;
- title of properties, absence of liens and encumbrances and condition of
equipment;
- ownership, use and protection of intellectual property;
- material agreements, contracts and commitments, including government
contracts;
- related party transactions;
- the receipt of all necessary governmental authorizations and permits;
- the absence of litigation;
- accounts receivable, customers and inventory;
- compliance with environmental laws;
- the absence of broker's or finder's fees related to the merger;
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- employee compensation, benefit plan, labor and other matters;
- insurance;
- the absence of improper relationships or transactions with governmental
authorities;
- product warranties and disclaimers;
- delivery of complete copies of documents during the merger negotiations;
- customer relations;
- equity ownership (*);
- expenses incurred in the sale of Starsys (*); and,
- the accuracy and completeness of the information and materials provided to
SpaceDev, including information supplied by Starsys for inclusion in this joint
proxy statement/prospectus (*).
Representations and Warranties of SpaceDev and Monoceros
The representations and warranties of SpaceDev and Monoceros relate to,
among other things:
- corporate organization and qualification;
- subsidiaries;
- capital structure;
- the absence of a need to obtain governmental consents, authorizations or
filings in order to complete the merger;
- corporate authority to enter into and carry out the obligations under the
merger agreement and the enforceability of the merger agreement;
- the absence of any conflict with or violation of corporate charter
documents, applicable law or contracts as a result of entering into and carrying
out the obligations under the merger agreement;
- the accuracy and completeness of the SpaceDev SEC filings and the
financial statements contained in those filings;
- the absence of undisclosed liabilities;
- the absence of broker's and finder's fees related to the merger;
- the trading of SpaceDev common stock;
- material agreements, contracts and commitments, including government
contracts;
- the validity of shares to be issued in the merger; and,
- the completeness and accuracy of information provided to Starsys and in
this joint proxy statement/prospectus.
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INDEMNIFICATION
By Starsys Shareholders. Pursuant to the merger agreement, the Starsys
shareholders will indemnify, defend and hold harmless SpaceDev, its affiliates
(including the surviving corporation) and its representatives (including its
officers, directors, employees, managers, consultants, contractors, agents and
financial, banking or legal advisors), which we refer to collectively as the
SpaceDev indemnified parties, against losses, liabilities and damages, which we
refer to collectively as losses, arising out of or resulting from, directly or
indirectly, any material inaccuracy or breach of a representation, warranty or
certification of Starsys contained in the merger agreement (without giving
effect either to the update of Starsys disclosure schedules after the signing of
the merger agreement or to sections or portions of the original Starsys
disclosure schedules identified by SpaceDev in its original disclosure
schedules), or in certain other documents contemplated by the merger agreement.
The indemnity does not apply to losses which were reflected on the balance sheet
of Starsys used for calculating the working capital deficit at the closing of
the merger (see the description under the heading "Merger Consideration -
Working Capital Adjustment" above), or to losses arising out of specially
approved transactions (see the discussion under the heading "Conduct of Business
Before Completion of the Transaction - Approved Transactions" below).
The SpaceDev indemnified parties may recover the losses described above: (i)
first, from the escrow account described under the caption "Escrow - Escrow
Account" above, until no additional amounts remain in the escrow account; and
(ii) next, to the extent such losses have not been fully recovered, from the key
shareholder, subject to limitations described below. The Starsys shareholders,
other than the key shareholder, will have no liability for losses in excess of
the amounts deposited on their behalf in the escrow account.
By Starsys Key Shareholder. In addition, pursuant to the merger agreement, the
key shareholder will indemnify, defend and hold harmless the SpaceDev
indemnified parties against losses arising out of or resulting from, directly or
indirectly:
- any material inaccuracy or breach of a representation, warranty or
certification of the key shareholder contained in the merger agreement (without
giving effect either to the update of Starsys disclosure schedules after the
signing of the merger agreement or to sections or portions of the original
Starsys disclosure schedules identified by SpaceDev in its original disclosure
schedules), or in certain other documents contemplated by the merger agreement;
or,
- any breach by the key shareholder of any covenants applicable to him
contained in the merger agreement or the non-competition agreement between
SpaceDev and the key shareholder.
Absent fraud or willful misrepresentation, the key shareholder will have no
liability for losses in excess of the total merger consideration actually
received by the key shareholder, as reduced by the amount of certain taxes
actually paid by the key shareholder on the merger consideration.
By SpaceDev. Pursuant to the merger agreement, SpaceDev will indemnify, defend
and hold harmless the Starsys shareholders against losses arising out of or
resulting from, directly or indirectly, any material inaccuracy or breach of a
representation, warranty or certification of SpaceDev or (prior to the closing
of the merger) Monoceros contained in the merger agreement (without giving
effect to the update of SpaceDev disclosure schedules after the signing of the
merger agreement) or in certain other documents contemplated by the merger
agreement.
SpaceDev will have no liability for losses in excess of 50% of the total cash
consideration and shares of SpaceDev common stock actually paid by SpaceDev to
the Starsys shareholders, except in the event of a breach of SpaceDev's
representations concerning its capitalization and accuracy of SEC filings and
financial statements, in which case SpaceDev will have no liability to the
Starsys shareholders in excess of 75% of the total cash consideration and shares
of SpaceDev common stock actually paid by SpaceDev to the Starsys shareholders.
SpaceDev will make all payments for its liabilities for indemnification claims
to the shareholder agent (as described under the caption "Shareholder Agent"
below) for the benefit of the Starsys shareholders, but will have no obligation
to allocate those payments among Starsys shareholders.
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Survival. The representations and warranties made in the merger agreement will
generally survive for a period of eighteen (18) months following the closing of
the merger. The representations and warranties in the merger agreement relating
to tax matters and government contracts will survive for three (3) years
following the close of the merger. The representations and warranties in the
merger agreement relating to capital structure, corporate authority, stock
records, capitalization and equity ownership will survive until the termination
of the applicable statute of limitations applicable to the subject matter of the
representation and warranty. No contractual time limitation will apply to
claims based on fraud or willful misrepresentation.
Basket Amount. Neither the SpaceDev indemnified parties nor the Starsys
shareholders will be entitled to indemnification until the total of all losses
to the SpaceDev indemnified parties or Starsys shareholders, as applicable,
exceeds $100,000 (except in the event of fraud or a willful or intentional
breach of the merger agreement), in which case the SpaceDev indemnified parties
or Starsys shareholders, as applicable, will be able to recover all losses,
including the $100,000.
Arbitration of Conflicts. The merger agreement provides that any disputes
relating to indemnification for losses will be resolved by binding arbitration,
and that the arbitrator's written decision will be binding on all parties.
SHAREHOLDER AGENT
By virtue of the approval of the merger and the approval and adoption of
the merger agreement, and the appointment and authorization of Scott Tibbitts as
shareholder agent under the merger agreement and the escrow agreement, at the
Starsys shareholders meeting described under the caption "Shareholder Meetings
and Recommendation of Boards of Directors" below, each of the Starsys
shareholders, including the key shareholder, will have irrevocably appointed and
constituted Scott Tibbitts as the shareholders' exclusive agent and
representative, whom we refer to in that capacity as the shareholder agent,
under the merger agreement and related agreements, including the escrow
agreement. Under the merger agreement and escrow agreement, the shareholder
agent serves as the exclusive agent and representative of all Starsys
shareholders to do, among other things, the following:
- with respect to claims made or potentially made against, or any other
action to be taken or omitted by or on behalf of, any Starsys shareholders
pursuant to the merger agreement or the escrow agreement or otherwise in
connection with the merger, including with respect to any indemnification
claims, performance consideration calculations, breaches of representations,
warranties or covenants and any other matters;
- give, fail to give and receive notices and communications from and to
SpaceDev, the escrow agent, pre-merger Starsys shareholders or other persons;
- agree to, negotiate, prosecute, defend, enter into settlements and
compromises of, make and demand arbitration or other alternative dispute
resolution;
- comply with orders of courts and awards of arbitrators and referees;
- satisfy indemnity claims from the shares, cash and other assets held in
the escrow account;
- take all actions necessary or appropriate in the judgment of the
shareholder agent for accomplishing any of the foregoing;
- use the shares of SpaceDev common stock in the escrow account (as
described under the caption "- Escrow - Escrow Account" above) as collateral to
secure the rights of the SpaceDev indemnified parties;
- deposit and withdraw funds into and from the expense fund (as described
under the caption "- Escrow - Expense Fund" above) for the payment of the
shareholder agent's reasonable out-of-pocket expenses; and,
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- agree to amendments and waivers of the merger agreement and escrow
agreement, and time extensions under the merger agreement, on behalf of the
per-merger Starsys shareholders, as described under the "- Amendment, Extension
and Waiver of the Merger Agreement" caption below.
The shareholder agent will not receive compensation for its services. The
shareholder agent will not be liable for any act done or omitted under the
merger agreement as shareholder agent while acting in good faith, or pursuant to
the advice of counsel. The shareholder agent may also recover its reasonable
out-of-pocket costs and expenses incurred in connection with the performance of
its duties, rights and responsibilities hereunder on behalf of the Starsys
shareholders from the expense fund, as described under the caption "Escrow -
Expense Fund" above. No bond will be required of the shareholder agent.
The shareholder agent may resign at any time by written notice to SpaceDev and
the escrow agent, and the shareholder agent may be removed at any time by
written notice signed by pre-merger Starsys shareholders holding not less than a
majority of the shares of Starsys outstanding immediately preceding the merger.
The pre-merger Starsys shareholders will be responsible for appointing a
successor shareholder agent by act of such shareholders holding not less than a
majority of the shares of Starsys outstanding immediately preceding the merger.
The successor shareholder agent must be the key shareholder, a director or
officer of Starsys or the surviving corporation, or reasonably acceptable to
SpaceDev. If the shareholders fail to appoint a successor shareholder agent
within ten (10) days of the resignation or removal of the shareholder agent,
SpaceDev may petition a proper court to appoint a successor.
Any successor shareholder agent under the merger agreement will automatically,
without any further act or notice, become the successor shareholder agent for
all purposes of the escrow agreement.
CONDUCT OF BUSINESS BEFORE COMPLETION OF THE TRANSACTION
Starsys has agreed in the merger agreement that, until the earlier of the
completion of the merger or termination of the merger agreement, except as
contemplated by the merger agreement or as SpaceDev consents in writing, it
will:
- carry on its businesses only in the ordinary course of business,
consistent with past practice;
- use its best efforts to preserve intact its business organization and
assets, maintain its rights and franchises, retain the services of its officers
and employees and maintain its relationships with customers, suppliers,
consultants, licensors, licensees and others having business dealings with it;
and,
- use its best efforts to keep in full force and effect liability insurance
and bonds comparable in amount and scope of coverage to those currently
maintained.
Negative Covenants.
In addition to the above general agreements regarding the conduct of the
Starsys business prior to the merger, Starsys has agreed to various additional
specific restrictions on the conduct of its business, including not to do, or to
agree to do, any of the following without the prior written consent of SpaceDev:
- take any of various employment-related actions, including modifying salary
or other compensation or benefits of current Starsys directors, officers or
employees, or hiring or terminating employees;
- reorganize or otherwise alter its capital structure, increase or decrease
the number of its outstanding shares, pay any dividend or make any other
distribution on its outstanding shares;
- acquire any other business, in whole or in part;
- enter into, amend or otherwise modify certain contracts, including leases;
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- change its organizational documents;
- change its tax elections or filings or settle any tax claims;
- make or agree to make new capital expenditures in excess of $10,000;
- transfer, encumber or license any of its property, except in the ordinary
course of business consistent with past practice;
- incur or guarantee any debt or capital lease obligation, except in the
ordinary course of business consistent with past practice pursuant to certain
contracts specified in the Starsys disclosure schedules,
- pay, discharge, settle or satisfy any liabilities, other than: (i)
payments, discharges or satisfactions of obligations in the ordinary course of
business consistent with past practice and in accordance with their terms or
liabilities reflected or reserved against in the financial statements of
Starsys; (ii) payments on debt after providing notice to SpaceDev; or, (iii)
legal, accounting or other fees and expenses related to the merger;
- amend, terminate or waive any material benefits of any contract;
- enter into or make any contract or commitment with, or amend any existing
contract or commitment with, any related party;
- change any method of accounting or accounting practice or policy other
than those required by GAAP or a governmental body;
- take any action or fail to take any action that could reasonably be
expected to have an adverse effect on Starsys prior to the closing of the merger
or an adverse effect on the surviving corporation or SpaceDev after the closing
of the merger, or that would adversely affect the ability of Starsys prior to
the closing of the merger, or SpaceDev or the surviving corporation after the
closing of the merger, to obtain consents of third parties or governmental
permits;
- collect accounts receivable or pay accounts payable other than in the
ordinary course of business consistent with past practice; or,
- take, propose to take, or commit or agree in writing or otherwise to take,
any of the actions described above, or any actions which would, individually or
taken together, make any of the representations or warranties made in the merger
agreement (or other agreement contemplated thereby) untrue, misleading,
incomplete or incorrect.
Covenants
Further Assurances. Starsys and SpaceDev have agreed to cooperate to
obtain any governmental and third-party consents and permits required to be
obtained, and to make any necessary filings, in connection with the proposed
merger.
Notifications. Starsys will notify SpaceDev promptly if, among other things:
(i) any events or circumstances occur, or fail to occur, which are likely to
cause any of the Starsys representations and warranties to be untrue as of the
closing of the proposed merger in a material respect; (ii) Starsys breaches any
of its agreements under the merger agreement in a material respect; or, (iii)
any events or circumstances occur which are likely to have a material adverse
effect on Starsys.
Tax Matters. Starsys has agreed to file timely and accurate tax returns, to
submit its tax returns to SpaceDev for review at least ten (10) days before
filing and not to file any tax return without SpaceDev''s approval.
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Access to Information. Starsys will give SpaceDev and its representatives
reasonable access to Starsys officers, employees, consultants, properties and
facilities and its books and records for inspection and investigation. Starsys
will cause its representatives to provide SpaceDev with financial, accounting,
tax, business and operating data upon reasonable request. SpaceDev will keep
the confidential and proprietary information it receives confidential.
Consents to Merger; Export Licenses; Settlements. Starsys will use its best
efforts to obtain the written consents to the consummation of the merger from
certain material contracting parties identified by Starsys in certain disclosure
schedules to the merger agreement. Starsys will also use its best efforts to
amend the permanent export licenses and manufacturing license agreement
identified by SpaceDev in certain disclosure schedules to the merger agreement,
as required by the International Traffic in Arms Regulations promulgated under
the Arms Export Control Act. Starsys will also use its commercially reasonable
efforts to reach a fixed settlement regarding certain pending royalty claims.
Retention of Employees. Starsys will also use its best efforts to retain its
employees and consultants in their employment or consulting relationship until
and following the closing of the merger.
Approved Transactions
The merger agreement provides for a special procedure under which Starsys
may obtain the prior consent of SpaceDev to engage in a transaction. At
SpaceDev's request, Starsys must provide a written description of the
transaction and any agreements proposed to be executed in connection with the
transaction. If SpaceDev provides the requested special approval, Starsys will
have no obligation to indemnify SpaceDev or its representatives under the merger
agreement for any losses which Starsys suffers arising from that transaction.
NO SOLICITATION OF OTHER PROPOSALS
Until the earlier of the closing of the merger or the termination of the
merger agreement pursuant to its terms, Starsys and the key shareholder will
not, and will cause their respective representatives, directly or indirectly,
not to:
- initiate, solicit or encourage (including by way of furnishing information
regarding Starsys) any inquiries, concerning the sale of Starsys, its businesses
or its property whether by way of merger, purchase of capital shares, purchase
of assets or otherwise, each of which we refer to as a competing transaction;
or,
- subject to the fiduciary duties of the board of directors of Starsys under
applicable law, hold any discussions or enter into any agreements with or
cooperate with, or provide any information to or respond to, any third party
concerning a proposed competing transaction.
If during this period Starsys or its representatives are approached in any
manner by a third party concerning a competing transaction, Starsys must
promptly inform SpaceDev about any inquiry or proposal and keep SpaceDev
informed of the status and details of any future developments.
If Starsys or the key shareholder breaches any of the obligations described
above, in addition to any other remedies available to SpaceDev, Starsys will be
liable to SpaceDev for the greater of: (i) all of the expenses incurred in
connection with the preparation, negotiation and drafting of the merger
agreement and certain agreements contemplated thereby; and, (ii) $250,000.
These obligations generally will survive the termination of the merger
agreement. See the discussion under the "Termination of the Merger Agreement"
caption below.
SHAREHOLDER MEETINGS AND RECOMMENDATION OF BOARDS OF DIRECTORS
SpaceDev and Starsys have each agreed to mail this joint proxy
statement/prospectus to their respective shareholders promptly after the date on
which the Form S-4 registration statement, of which this joint proxy
statement/prospectus forms a part, is declared effective by the SEC, and to take
all action necessary in accordance with the Colorado Business Corporation Act
and their respective articles of incorporation and bylaws to call, hold and
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promptly convene a special meeting of their respective shareholders to approve
the merger proposal and (with respect to SpaceDev) the other shareholder
proposals described in this joint proxy statement/prospectus. As neither board
of directors of SpaceDev or Starsys has concluded that a recommendation to its
shareholders to vote in favor of the merger proposal and (with respect to
SpaceDev) the other shareholder proposals described in this joint proxy
statement/prospectus would be a violation of any of its fiduciary obligations
under applicable law, each board of directors has included in this joint proxy
statement/prospectus its recommendation that its shareholders vote in favor of
the merger proposal and the merger agreement.
SpaceDev or Starsys may adjourn or postpone the SpaceDev or Starsys shareholders
meeting, as applicable, to the extent necessary to ensure that any required
supplement or amendment to this joint proxy statement/prospectus is provided to
the respective shareholders or, if as of the time for which either shareholder
meeting is originally scheduled (as set forth in this joint proxy
statement/prospectus) there are insufficient shares of the common stock
represented (either in person or by proxy) to constitute a quorum necessary to
conduct the business of the applicable shareholder meeting.
SPACEDEV PRIVATE PLACEMENT
SpaceDev will use its best efforts to execute definitive agreements for a
private financing of debt or equity securities of SpaceDev of at least $4.5
million in gross proceeds no later than December 15, 2005 and to close that
financing prior to the date the SEC declares effective the Form S-4 registration
statement of which this joint proxy statement/prospectus forms a part. The
parties anticipate these funds will be used to pay off various Starsys loans or
make the other payments described under the "Merger Consideration - Loan
Repayments" caption above and the "SpaceDev Post-Closing Covenants" caption
below.
CONDITIONS TO COMPLETION OF THE MERGER
Conditions to the Obligation of Each Party
The obligation of each party to complete the merger is subject to the
satisfaction or waiver of each of the following conditions:
- No governmental body will have acted to prevent or prohibit the merger or
other transactions contemplated by the merger agreement.
- The SpaceDev shareholders will have approved the merger agreement, the
merger and an increase in the authorized shares of SpaceDev common stock at the
SpaceDev shareholder meeting, which approval will have satisfied all shareholder
approval requirements under applicable law.
- Not more than 1.5% of outstanding shares of SpaceDev common stock will
have exercised, or will retain the unexpired right to exercise, dissenters'
rights (or similar rights of dissent), if any, in respect of the merger.
- The SEC will not have issued or threatened to issue a stop order
suspending the effectiveness of the Form S-4 registration statement, of which
this joint proxy statement/prospectus is a part, and any the requirements of
material state securities laws applicable to the issuance of the shares of
SpaceDev common stock in connection with the merger will have been satisfied.
- There will be no pending or threatened action: (i) challenging or seeking
to restrain or prohibit the consummation of the merger or other transactions
contemplated by the merger agreement; (ii) relating to the merger or other
transactions contemplated by the merger agreement and seeking to obtain from
SpaceDev, Monoceros or Starsys any damages that may be material to SpaceDev,
Monoceros or Starsys; (iii) seeking to prohibit or limit in any respect
SpaceDev's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of Starsys or the surviving
corporation; or, (iv) which would have a material adverse effect on Starsys or a
material adverse effect on SpaceDev's ability to operate the Starsys business or
to own, use and
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enjoy the property of the surviving corporation after consummation of the merger
and other transactions contemplated by the merger agreement.
- The volume-weighted average price of SpaceDev common stock as of the
trading day immediately preceding the closing of the merger will not be less
than $1.00 per share.
Conditions to the Obligations of SpaceDev or Monoceros
The obligations of SpaceDev and Monoceros to complete the merger are
subject to the satisfaction or waiver of each of the following additional
conditions, among others:
- Each of the representations and warranties of or in respect of Starsys and
the key shareholder contained in the merger agreement was true and correct as of
the date of the merger agreement and will be true and correct as of the closing
of the merger as though made as of the closing of the merger, except for
representations and warranties which address matters only as of a particular
date, which representations and warranties were true and correct as of such
date, and, with respect to most of the representations and warranties, except
for failures of the representations and warranties to be true and correct as
described above which are not "material." For purposes of determining the truth
and correctness of the representations and warranties, updates to the original
Starsys disclosure schedules will be disregarded. For purposes of the SpaceDev
closing conditions, "material" means that SpaceDev reasonably calculates the
resulting losses to exceed 10% of the consideration which would be paid to
Starsys shareholders at the closing of the merger.
- Starsys and the key shareholder will have performed or complied with, in
all material respects, all agreements and conditions contained in the merger
agreement required to be performed or complied with by them prior to or on the
closing of the merger.
- Starsys will have obtained and delivered to SpaceDev the requisite number
of third party consents from its material counterparties, and not more than a
specified percentage of the material counterparties will have indicated that
they will not consent to the merger.
- Vectra will not have foreclosed or collected on any collateral for any
Vectra loan or otherwise.
- The aggregate debt and associated liabilities of Starsys at the closing
under the Vectra loan, the SpaceDev loan and the Starsys shareholder loans will
not exceed $6,800,000.
- Starsys will have delivered to SpaceDev a certificate dated as of the
closing of the merger, signed by the chief executive officer, the president and
the director of business management of Starsys, certifying the fulfillment of
certain of the foregoing conditions and certain other factual matters. The key
shareholder will have delivered a similar certificate.
- No events, effects, violations or breaches will have occurred since the
date of the merger agreement which have had, or are likely to have, a "material"
adverse effect on Starsys (using the meaning "material" described above).
- The escrow agent and the shareholder agent will have entered into the
escrow agreement, which will be in full force and effect as of the closing of
the merger.
- Shareholders of Starsys holding not less than 98% of the shares of each
class of capital stock of Starsys will have approved the merger agreement and
the merger.
- Starsys and its shareholders will have delivered to SpaceDev certificates
representing not less than 98% of the shares of Starsys capital stock, including
shares issued upon the exercise of any options on or prior to the closing of the
merger, or, in lieu of a certificate, an affidavit and (if reasonably requested)
a bond.
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- Starsys will have delivered or arranged to be delivered the following
additional documents to SpaceDev:
- a pay off letter or similar paid-in-full receipt from Vectra and the
Starsys shareholder lenders, and other documents reasonably requested by
SpaceDev to evidence the repayment in full of the Vectra loans and the
termination of the security interests and liens on Starsys properties;
- an executed non-competition agreement from the key shareholder;
- an employment agreement with: (i) Scott Tibbitts (for the position of
managing director of SpaceDev); and, (ii) Robert Vacek (for the position of
president of the surviving corporation);
- a release of all claims (except for some wage and benefit-related claims)
against Starsys and its officers and directors signed by Scott Tibbitts, Robert
Vacek and other executive officers of Starsys;
- a legal opinion from special counsel to Starsys;
- an executed standstill and lockup agreement from each Starsys shareholder
or other person expected to be entitled to receive an aggregate of 50,000 or
more shares of SpaceDev common stock at the closing of the merger and as
performance consideration for fiscal year 2005, under which such shareholder or
other person would agree not to sell, pledge or otherwise transfer shares of
SpaceDev common stock for a period of 270 days after the merger (most of which
must have been delivered promptly after the signing of the merger agreement);
- updated disclosure schedules, including an updated shareholder table;
- an updated payment schedule, indicating how much cash and stock to pay
from the closing and performance consideration to various third parties in
connection with the costs and expenses of Starsys incurred in connection with
its sale;
- a duly executed letter of transmittal from each shareholder of Starsys who
voted in favor of the merger, each Starsys option holder who net exercised
options in contemplation of the merger and each person receiving shares of
SpaceDev common stock under the transaction expense payment schedule; and,
- various other certificates and documents set forth in the merger
agreement.
Conditions to the Obligations of Starsys
The obligations of Starsys to complete the merger are subject to the
satisfaction or waiver of each of the following additional conditions, among
others:
- Each of the representations and warranties of or in respect of SpaceDev
and Monoceros contained in the merger agreement was true and correct as of the
date of the merger agreement and will be true and correct as of the closing of
the merger as though made as of the closing of the merger, except for
representations and warranties which address matters only as of a particular
date, which representations and warranties were true and correct as of such
date, and, with respect to most of the representations and warranties, except
for failures of the representations and warranties to be true and correct as
described above which are not "material." For purposes of determining the truth
and correctness of the representations and warranties, updates to the original
SpaceDev disclosure schedules will be disregarded. For purposes of the Starsys
closing conditions, "material" means that
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Starsys reasonably calculates the resulting losses to exceed 10% of the
consideration which would be paid to Starsys shareholders at the closing of the
merger.
- SpaceDev and Monoceros will have performed, in all material respects
(considered collectively and individually), all covenants and obligations in the
merger agreement required to be performed by SpaceDev or Monoceros as of the
closing of the merger.
- SpaceDev will have consummated a private financing of debt or equity
securities of at least $4.5 million in gross proceeds, as described under the
caption "SpaceDev Private Placement" above.
- SpaceDev's quantity contract awarded by the Missile Defense Agency on
March 31, 2004 will not have terminated without a successor contract being in
effect.
- SpaceDev will have delivered to Starsys a certificate signed by the
president and chief financial officer of SpaceDev certifying the fulfillment of
certain of the foregoing conditions.
- SpaceDev will have tendered or delivered the cash consideration and the
shares of SpaceDev common stock required to be delivered at the closing of the
merger.
- SpaceDev will have delivered a duly executed counterpart of the
non-competition agreement with the key shareholder.
- SpaceDev will have delivered a duly executed counterpart of the employment
agreements with Scott Tibbitts and Robert Vacek.
- SpaceDev will have delivered a duly executed counterpart of the escrow
agreement.
- Sufficient funds to pay the Vectra loan and Starsys shareholder loans in
full will have been wired or delivered to the respective lenders of such loans
contemporaneously with the closing of the merger.
- Starsys will have received a legal opinion from special counsel to
SpaceDev.
SPACEDEV POST-CLOSING COVENANTS
SpaceDev is subject to various post-merger covenants in the merger
agreement. A number of these covenants are intended to protect the interests of
the Starsys shareholders in earning the potential performance consideration, as
discussed under the "Merger Consideration - Shareholder Consideration -
Performance Consideration" caption above. The most important of these
protective covenants are as follows:
- From the closing of the merger until the end of the fiscal year 2007,
which period we refer to as the performance period, SpaceDev will operate the
Starsys business separately and will maintain separate books and records for the
Starsys business, so that the financial results of the Starsys business can be
audited and reported as a separate business unit.
- SpaceDev will not sell all or substantially all of the surviving
corporation or the Starsys business during the performance period, except in
connection with the sale of all or substantially all of the shares or assets of
SpaceDev, in which case SpaceDev must provide the Starsys shareholders with
substantially similar protective covenants.
- Following the closing of the merger, SpaceDev will cause the compensation
committee of its board of directors to reserve for issuance to the executives,
managers, employees and consultants from time to time of the Starsys business,
whom we refer to as option eligible employees, options to purchase a number of
shares of SpaceDev common stock equal to at least 15% of the number of shares of
SpaceDev common stock issued at the closing of the merger. Following a
distribution of stock performance consideration for any performance period,
SpaceDev will, subject to the fiduciary duties
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of the compensation committee, cause the compensation committee to grant to
option eligible employees under SpaceDev's stock or equity plan in effect at the
time of grant options for a number of shares of SpaceDev common stock equal to
15% of the number of shares of SpaceDev common stock in the aggregate in the
applicable stock performance consideration (with due regard to the joint
recommendations of the chief executive officers of SpaceDev and the surviving
corporation).
- SpaceDev will make working capital investments in the Starsys business of
not less than $1,250,000 during the 30-day period following the closing of the
merger, and of not less than an additional $1,250,000 by the end of fiscal year
2006, which investments will be used by the surviving corporation to implement
the surviving corporation's strategic plan, ongoing programs and internal
initiatives.
If SpaceDev materially breaches any of the first three of these protective
covenants (separate books and records; sale of surviving corporation; stock
options), or if SpaceDev fails to reserve or grant the required number of
options or to make the required working capital investments set forth in the
last two of these protective covenants (stock options; capital investments), and
SpaceDev does not cure the breach within 30 days of notice from the shareholder
agent, the shareholder agent will be entitled to demand for the Starsys
shareholders the maximum performance consideration available under the merger
agreement for the affected performance periods (that is, the amount that would
be paid if both the net revenues and EBITDA targets had been fully met). For
more information on the performance consideration, please see the discussion
under the "Merger Consideration - Shareholder Consideration - Performance
Consideration" caption above.
In addition, SpaceDev has agreed to the following post-merger covenants, among
others:
- During the performance periods, SpaceDev will use its best efforts to
operate the surviving corporation in accordance with sound business practices
and will make all business decisions which affect the financial or operating
results of the Starsys business in good faith, and not with the purpose of
distorting results in a manner adverse to the pre-merger Starsys shareholders.
- SpaceDev will cause its board of directors to appoint Scott Tibbitts to
its board of directors, unless doing so would violate their fiduciary duties to
SpaceDev's shareholders.
- Pursuant to the merger agreement, SpaceDev is seeking the approval of its
shareholders in this joint proxy/prospectus to increase the amount of shares
available under the SpaceDev 2004 Equity Incentive Plan to provide sufficient
reserves for the issuance to option eligible employees of the options described
above.
TERMINATION OF THE MERGER AGREEMENT
At any time prior to the closing of the merger, the merger agreement may be
terminated by written notice explaining the reason for such termination as
follows:
- By the mutual written consent of SpaceDev and Starsys.
- By SpaceDev, if:
- SpaceDev has not received, as promptly as practicable after October
24, 2005, a standstill and lockup agreement from each Starsys
shareholder or other person expected to receive in excess of 50,000
shares of SpaceDev common stock at the closing and as performance
consideration for fiscal year 2005, except that Starsys will not
solicit a standstill and lockup agreement, and is not required to
deliver to SpaceDev a standstill and lockup agreement, from any of
those shareholders or other persons who is not a director or executive
officer of Starsys and who does not own 5% of more of the outstanding
shares of Starsys common stock, until after the date the Form S-4
registration statement of which this joint proxy statement/prospectus
forms a part has been declared effective by the Securities and
Exchange Commission;
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- Starsys or the key shareholder is in material breach of the merger
agreement, subject to the expiration of any cure period; or,
- Vectra forecloses or collects on any collateral for any Vectra loan.
- By Starsys, if:
- SpaceDev or Monoceros is in material breach of the merger agreement,
subject to the expiration of any cure period; or,
- SpaceDev has not held the SpaceDev shareholder meeting within 45 days
of the effective date of the Form S-4 registration statement of which
this joint proxy statement/prospectus forms a part.
- By either SpaceDev or Starsys, if:
- (i) SpaceDev has not received notice from the SEC that the SEC will
review the Form S-4 registration statement or any other report filed
by SpaceDev with the SEC; (ii) shares of SpaceDev common stock have
been listed on the American Stock Exchange; (iii) the closing has not
occurred on or prior to January 31, 2006 for any reason; (iv) the
terminating party is not, on the date of termination, in material
breach of the merger agreement; and, (v) the terminating party has not
breached the merger agreement in a manner which is responsible for
delaying the closing of the merger;
- (i) the closing of the merger has not occurred on or prior to March
31, 2006 for any reason; (ii) the terminating party is not, on the
date of termination, in material breach of the merger agreement; and,
(iii) the terminating party has not breached the merger agreement in a
manner which is responsible for delaying the closing of the merger;
or,
- (i) the satisfaction of a closing condition of the terminating party
is impossible; (ii) the terminating party is not, on the date of
termination, in material breach of the merger agreement; and, (iii)
the terminating party has not breached the merger agreement in a
manner causing the impossibility of satisfying the applicable closing
condition.
If the merger agreement is terminated as described above, all obligations
of the parties under the merger agreement will terminate, except for:
- the no-solicitation obligations described under the caption "No
Solicitation of Other Proposals" above, unless SpaceDev terminated the merger
agreement and neither Starsys nor the key shareholder was in material breach of
the merger agreement or responsible for the failure of a condition to the merger
to be satisfied (in which case those obligations will terminate as well);
- miscellaneous provisions generally pertaining to the interpretation of the
merger agreement, jurisdiction, governing law, notices, expenses (described
under the "Fees and Expenses" caption below) and similar matters; and,
- the confidentiality and non-disclosure provisions (and associated
remedies) contained in the merger agreement.
The termination of the merger agreement for any reason will not affect any
of SpaceDev's rights with respect to the loan made to Starsys or any
documentation related to that loan, including the secured note.
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FEES AND EXPENSES
Starsys and the shareholder agent will be solely responsible for their
respective legal, accounting and other fees and expenses incurred or reasonably
expected to be incurred by Starsys or the shareholder agent in connection with
the preparation, execution and delivery of the merger agreement and the
consummation of the transactions contemplated thereby, including the preparation
of the Form S-4 registration statement, of which this joint proxy
statement/prospectus forms a part, and the holding of the Starsys shareholders
meeting.
SpaceDev and Monoceros will be solely responsible for their respective legal,
accounting and other fees and expenses incurred by SpaceDev or Monoceros in
connection with the preparation, execution and delivery of the merger agreement
and the consummation of the transactions contemplated thereby, including the
preparation of the Form S-4 registration statement, of which this joint proxy
statement/prospectus forms a part, and the holding of the SpaceDev shareholders
meeting.
AMENDMENT, EXTENSION AND WAIVER OF THE MERGER AGREEMENT
Amendment. The merger agreement may not be amended except upon the
execution and delivery of a written agreement executed by SpaceDev, Starsys
(prior to the closing of the merger), the key shareholder and the shareholder
agent.
Extension and Waiver. At any time following the closing of the merger, SpaceDev
and the surviving corporation, on the one hand, and the shareholder agent, on
the other hand, to the extent legally allowed, may: (i) extend the time for the
performance of any of the obligations of the other of them; (ii) waive any
inaccuracies in the representations and warranties contained in the merger
agreement or in any certificate, instrument or other document delivered pursuant
to the merger agreement; or, (iii) waive compliance with any of the agreements
contained in the merger agreement. Any agreement to any extension or waiver
will be valid only if set forth in an instrument in writing signed on behalf of
the party against which enforcement of the extension or waiver is sought.
THE SPACEDEV BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" PROPOSAL NO.
1 TO APPROVE THE MERGER, THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY, AND THE ISSUANCE AND RESERVATION OF SHARES FOR ISSUANCE PURSUANT TO THE
MERGER AGREEMENT.
THE STARSYS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" PROPOSAL NO.
1 TO ADOPT THE MERGER AND THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
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SPACEDEV PROPOSAL NO. 2 -
AMENDMENT OF THE 2004 EQUITY INCENTIVE PLAN
In November 2005, SpaceDev's Board of Directors approved an amendment to
SpaceDev's 2004 Equity Incentive Plan, referred to as the 2004 Plan, subject to
shareholder approval: (1) to increase by 3,000,000 shares the number of
authorized shares under the plan; (2) to add per person annual share limits; and
(3) to clarify the limitation on the number of shares which may be issued as
incentive stock options. The board also changed the method for determining the
fair market value of shares, which amendment did not require shareholder
approval. A copy of the Amendment No. 2 to the SpaceDev, Inc. 2004 Equity
Incentive Plan is attached to this joint proxy statement/prospectus as Annex D.
As of November 1, 2005, no shares had been issued under the 2004 Plan, and
options to purchase 1,273,500 shares at exercise prices ranging from $1.49 to
$4.80 per share were outstanding under the 2004 Plan. Excluding the increase of
3,000,000 shares for which shareholder approval is being sought pursuant to this
Proposal No. 2, as of November 1, 2005 there were 2,726,500 shares (plus any
shares that might in the future be returned to the 2004 Plan as a result of
cancellations or expiration of options) remaining for future grant under the
2004 Plan.
Shareholders are requested in this Proposal 2 to approve the amendments to
the 2004 Plan approved by the Board of Directors in November 2005 and subject to
shareholder approval. Approval of this proposal requires the number of votes
present or represented by proxy cast in favor of the proposal to exceed the
number of votes cast in opposition to the proposal. Abstentions will be counted
towards the tabulation of votes cast on this proposal. Broker non-votes are
counted towards a quorum, but are not counted for any purpose in determining
whether this matter has been approved.
THE SPACEDEV BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR"
THE PROPOSAL TO APPROVE THE AMENDMENT TO THE 2004 EQUITY INCENTIVE PLAN.
SUMMARY OF THE 2004 EQUITY INCENTIVE PLAN
The purpose of the 2004 Plan is to provide selected eligible employees,
directors and certain types of consultants of and to SpaceDev, its subsidiaries,
and affiliates an opportunity to participate in SpaceDev's future by offering
them an opportunity to acquire stock in SpaceDev so as to retain, attract and
motivate them. Options granted under the 2004 Plan may be incentive stock
options or nonstatutory stock options, as determined by the Board of Directors
or a committee appointed by the Board of Directors at the time of grant. Limited
rights and stock awards may also be granted under the 2004 Plan. The options,
limited rights and awards are collectively referred to in this discussion as
"awards."
Administration
The 2004 Plan is administered by the Compensation Committee. Subject to
the provisions of the 2004 Plan and the Compensation Committee Charter, and
subject to the approval of any relevant authorities, the Compensation Committee
shall have the authority in its discretion:
- to determine the fair market value;
- to select the employees, directors and consultants to whom awards may from
time to time be granted;
- to approve forms of agreement for use under the 2004 Plan;
- to determine the terms and conditions of any award granted under the 2004
Plan, including, but not limited to, the exercise price, the time or times when
awards may be exercised (which may be based on performance criteria), any
vesting and any restriction or limitation regarding any award or the common
stock relating thereto;
- to reduce the exercise price of any option to the then current fair market
value if the fair market value of the common stock covered by the option has
declined since the grant date;
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- to prescribe, amend and rescind rules and regulations relating to the 2004
Plan, including rules and regulations relating to sub-plans established for
the purpose of qualifying for preferred tax treatment under foreign tax laws;
- to allow participants in the 2004 Plan to satisfy withholding tax
obligations on options by electing to have SpaceDev withhold from the common
stock to be issued upon exercise of an option that number of shares having a
fair market value equal to the amount required to be withheld. The fair market
value to be withheld will be determined on the date that the amount of tax to be
withheld is to be determined; and,
- to construe and interpret the terms of the 2004 Plan and awards granted
pursuant to the 2004 Plan.
Awards
A stock option is the right to purchase a specified number of shares of
stock, at a specified exercise price for a specified period of time. The
exercise price of incentive stock options may not be less than 100% of the fair
market value of the common stock as of the date of grant (or 110% of the fair
market value if the grant is to an employee who beneficially owns more than 10%
of the total combined voting power of all classes of SpaceDev's capital stock).
The U.S. Internal Revenue Code of 1986, as amended, referred to as the Code,
currently limits to $100,000 the aggregate value of common stock for which
incentive stock options may first become exercisable in any calendar year under
the 2004 Plan or any other option plan adopted by SpaceDev. The 2004 Plan
permits nonstatutory stock options to be granted at an exercise price of not
less than 85% of the fair market value of the common stock on the date of grant;
however, the Compensation Committee does not intend to make grants with exercise
prices below 100% of the fair market value so long as such grants would result
in the imposition of additional taxes under Section 409A of the Internal Revenue
Code. See "American Jobs Creation Act of 2004" below. Nonstatutory stock
options may be granted without regard to any restriction on the amount of common
stock to which the option may first become exercisable in any calendar year. We
currently issue options at 100% of the fair market value, as determined by the
Board of Directors. Regardless of which type of option is granted to an
employee of SpaceDev, unless otherwise determined by the Board of Directors, the
option will expire 90 days after termination of employment for any reason other
than death, disability or retirement (but in no event later than the expiration
of the term of such option); provided, however, that all rights under any
options expire immediately upon termination of an employee for cause.
The Compensation Committee may grant a "limited right" in connection with grants
of stock options. A limited right is the right to receive the net of the market
price of a share of stock and the exercise price of the right, either in cash or
in stock, in the future. In no event may a limited right issued under the 2004
Plan be exercisable in whole or in part before the expiration of six months from
the date of grant, and the right may only be exercised in the event of a change
in control of SpaceDev. In addition, limited rights issued under the 2004 Plan
may be exercised only when the underlying option is exercisable and the fair
market value of the shares on the date of exercise is greater than the exercise
price of the underlying option. The limited right and the option terminate
simultaneously upon exercise of one or the other. Limited rights issued under
the plan may be for no more than 100% of the difference between the purchase
price and the fair market value of the stock subject to the underlying option.
The Compensation Committee may issue restricted stock awards under the 2004 Plan
to employees and independent directors. The Compensation Committee has
discretion to determine the dates on which stock awards will vest and any
specific conditions or performance goals which must be satisfied prior to
vesting of any portion of the award. Stock awards which are not fully vested at
the time of termination of the employee for any reason other than death,
disability or retirement or as a result of termination for cause, the unvested
portion of the award will be forfeited as of the date of termination.
The Compensation Committee has discretion to accelerate the vesting of any award
issued under the 2004 Plan.
The Compensation Committee may award incentive stock options only to
full-time employees (including officers) of SpaceDev and its affiliates under
the 2004 Plan. A non-employee director, as well as part-time employees and
certain consultants, of SpaceDev are not eligible to receive incentive stock
options, but may receive nonstatutory stock options under the 2004 Plan.
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Shares Subject to the 2004 Plan
Subject to adjustment, the maximum number of shares of common stock
reserved for awards under the 2004 Plan is 4,000,000 shares, currently, and
would be 7,000,000 shares if this proposal is approved by shareholders. These
shares of common stock may be either authorized but unissued shares or
authorized shares previously issued and reacquired by SpaceDev. To the extent
that options and stock awards are granted under the 2004 Plan, the shares
underlying such awards will be unavailable for any other use including future
grants under the 2004 Plan except that, to the extent that stock awards or
options terminate, expire, or are forfeited without having been exercised (or in
cases where a limited right has been granted in connection with an option, the
amount of such limited right received in lieu of the exercise of such option),
new awards may be made with respect to those shares underlying such terminated,
expired or forfeited options or stock awards. Notwithstanding the foregoing,
the maximum number of shares that may be issued under incentive stock options
will be 7,000,000 if this proposal is approved, and shares that are reacquired
by us will not be available for grants of incentive stock options.
Adjustments
The Compensation Committee will make adjustments to the number of shares
subject to any award based on any change in the outstanding shares of common
stock of SpaceDev resulting from any stock dividend or split, recapitalization,
merger, consolidation, spin-off, reorganization, combination or exchange of
shares, or any similar corporate change, or other increase or decrease in such
shares without receipt or payment of consideration by SpaceDev. The number of
shares reserved and the per person annual share limits will also adjust in such
circumstances.
Amendment or Termination
The Board of Directors may amend or modify the 2004 Plan in any or all
respects. However, certain amendments may require shareholder approval pursuant
to applicable laws and regulations. The 2004 Plan will terminate on August 5,
2014.
Certain Federal Income Tax Consequences
THE FOLLOWING IS A GENERAL SUMMARY AS OF THIS DATE OF THE FEDERAL INCOME
TAX CONSEQUENCES TO US AND TO U.S. PARTICIPANTS FOR AWARDS GRANTED UNDER THE
2004 PLAN. IT DOES NOT REFLECT PROVISIONS OF THE INCOME TAX LAWS OF ANY
MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH A RECIPIENT MAY RESIDE, NOR DOES
IT REFLECT THE TAX CONSEQUENCES OF A RECIPIENT'S DEATH. THE FEDERAL TAX LAWS
MAY CHANGE AND THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES FOR ANY PARTICIPANT
WILL DEPEND UPON HIS OR HER INDIVIDUAL CIRCUMSTANCES. TAX CONSEQUENCES FOR ANY
PARTICULAR INDIVIDUAL MAY BE DIFFERENT.
Incentive stock options granted under the 2004 Plan will be afforded favorable
federal income tax treatment under the U.S. Internal Revenue Code of 1986, as
amended, which we refer to as the Code. If an option is treated as an incentive
stock option, the recipient will recognize no income upon grant or exercise of
the option unless the alternative minimum tax rules apply. Upon a recipient's
sale of the shares (assuming that the sale occurs more than two years after
grant of the option and more than one year after exercise of the option), any
gain will be taxed to the recipient as long-term capital gain. If the recipient
disposes of the shares prior to the expiration of either of the above holding
periods, then the recipient will recognize ordinary income in an amount
generally measured as the difference between the exercise price and the lower of
the fair market value of the shares at the exercise date or the sale price of
the shares. Any gain recognized on such a disqualifying disposition of the
shares in excess of the amount treated as ordinary income will be characterized
as capital gain.
All other options granted under the 2004 Plan will be nonstatutory stock options
and will not qualify for any special tax benefits to the recipient. A recipient
generally will not recognize any taxable income at the time he or she is granted
a nonstatutory stock option with an exercise price equal to or greater than the
fair market value of the stock on the grant date. However, upon exercise of the
Non-Statutory Stock Option, the recipient will recognize ordinary income for
federal income tax purposes in an amount generally measured as the excess of the
then fair market value of each share over its exercise price. Upon a recipient's
resale of such shares, any difference between the sale price and the fair market
value of such shares on the date of exercise will be treated as capital gain or
loss and will generally
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qualify for long term capital gain or loss treatment if the shares have been
held for more than one year. The Code provides for reduced tax rates for
long-term capital gains based on the taxpayer's income and the length of the
taxpayer's holding period.
The recipient of a restricted stock award will generally recognize ordinary
income when such shares are no longer subject to a substantial risk of
forfeiture within the meaning of Code Section 83, or become transferable, based
on the excess of the value of the shares at that time over the price, if any,
paid for such shares. However, if the recipient makes a timely election under
the Code to be subject to tax upon the receipt of the shares, the recipient will
recognize ordinary income at that time equal to the fair market value of the
shares over the price paid, if any, and no further income will be recognized
when the shares vest.
No taxable income is recognized upon the receipt of a limited right with an
exercise price equal to or greater than the fair market value of the underlying
shares of common stock on the date of grant. The recipient will recognize
ordinary income, in the year in which the right is exercised only, equal to the
excess of the fair market value of the underlying shares of common stock on the
exercise date over the exercise price in effect for the exercised right, and the
recipient will be required to satisfy the tax withholding requirements
applicable to such income. SpaceDev will be entitled to an income tax deduction
equal to the amount of ordinary income recognized by the recipient in connection
with the exercise of the limited right. The deduction will be allowed for the
taxable year of SpaceDev in which such ordinary income is recognized.
Unless limited by Code Section 162(m), we are generally entitled to a deduction
for federal income tax purposes equal to the amount of ordinary income
recognized by the recipient of an award at the time such income is recognized.
Section 162(m) limits
Section 162(m) of the Code places a limit of $1,000,000 on the amount of
compensation that we may deduct in any one year with respect to each of our five
most highly paid executive officers. Certain performance-based compensation
approved by shareholders is not subject to the deduction limit. The 2004 Plan
as proposed to be amended is qualified such that awards under the 2004 Plan may
constitute performance-based compensation not subject to Section 162(m) of the
Code. One of the requirements for equity compensation plans is that there must
be a limit to the number of shares granted to any one individual under the plan.
Accordingly, the 2004 Plan as proposed to be amended provides that the aggregate
number of shares subject to awards granted under the 2004 Plan during any
calendar year to any one participant may not exceed 1,000,000, except that in
connection with his or her initial service, a participant may be granted awards
covering up to an additional 1,000,000 shares of common stock.
American Jobs Creation Act of 2004
The American Jobs Creation Act of 2004 contains deferred compensation
provisions added as Section 409A of the Code. These provisions make compensation
deferred under a nonqualified deferred compensation plan taxable on a current
basis (or, if later, when vested), unless certain requirements are met. The
Internal Revenue Service has recently issued proposed regulations on the
provisions of Section 409A, and further guidance is expected to follow. It is
the intent of our company that all awards granted under the 2004 Plan will not
cause an imposition of additional taxes provided by Section 409A of the Code,
and the Compensation Committee intends to administer the 2004 Plan so that such
taxes are not imposed.
New Plan Benefits
Except for our obligation to reserve stock options for eligible employees
of Starsys following the closing of the merger described above under "The Merger
Agreement -- SpaceDev Post-Closing Covenants," we have no other plans,
proposals, or arrangements to grant any awards out of the additional share
reserve under the 2004 Plan that is proposed to be approved in this Proposal No.
2. The benefits or amounts of awards that may be granted to our CEO, our
executive officers named in the summary compensation table included in our proxy
statement for our 2005 annual meeting, our executive officers as a group, our
non-executive directors as a group, and our non-executive employees as a group,
and the benefits or amounts that would have been granted to such persons or
classes of persons for our last completed fiscal year if these amendments had
been in effect during such year, are not presently determinable.
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EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about SpaceDev's equity
compensation plans as of December 31, 2004:
Number of securities
remaining available for
Number of securities Weighted-average future issuance under
to be issued upon the exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
----------------- ------------------------------- --------------------- ---------------------------
EQUITY COMPENSATION 3,878,766 $1.05 1,263,897
PLANS APPROVED BY
SECURITY HOLDERS
EQUITY COMPENSATION 2,500,000 $2.00 -
PLANS NOT APPROVED BY
SECURITY HOLDERS (1)
----------------- ------------------------------- --------------------- ---------------------------
TOTAL 6,378,766 $1.50 1,263,897
----------------- ------------------------------- --------------------- ---------------------------
----------------- ------------------------------- --------------------- ---------------------------
(1) Consists of options to purchase up to an aggregate of 2,500,000 shares
of common stock granted to Mr. James W. Benson, SpaceDev's chairman and current
chief executive officer. On July 21, 2005, options on 2,000,000 shares of common
stock granted to Mr. Benson expired unvested and unexercised.
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SPACEDEV PROPOSAL NO. 3 -
AMENDMENT TO ARTICLES OF INCORPORATION
TO INCREASE AUTHORIZED NUMBER OF SHARES
In October 2005, SpaceDev's Board of Directors approved an amendment to
SpaceDev's articles of incorporation to increase the authorized number of shares
of common stock from 50,000,000 to 100,000,000. The form of articles of
amendment is attached to this joint proxy statement/prospectus as Annex E.
The additional shares of common stock to be authorized by adoption of the
amendment would have rights identical to the currently outstanding shares of
common stock. Adoption of the amendment would not affect the rights of the
holders of currently outstanding common stock, except to the extent additional
shares are actually issued, which may have certain effects, including dilution
of the earnings per share and voting rights of current holders of common stock.
If the amendment is adopted, it will become effective upon filing of the
articles of amendment with the Secretary of State of the State of Colorado. If
the amendment is adopted, the articles of amendment giving effect to the
amendment will be filed as soon as practicable. On December 20, 2005, there were
24,606,255 shares of SpaceDev common stock outstanding, and 16,493,865 were
reserved for options, employee equity plans and other purposes (not including
shares issuable in the merger described in Proposal No. 1, the increased shares
authorized under the 2004 Equity Incentive Plan described in Proposal No. 2, or
shares that may be sold or issuable in one or more private placements described
in Proposal No. 4). Upon the approval of this Proposal No. 3, there would be
approximately 62,750,000 authorized and unreserved shares available for
issuance, excluding for the purposes described in Proposals No. 1, No. 2 and No.
4. We estimate that up to approximately 15,600,000 of these shares could be used
if Proposal No. 1 and Proposal No. 2 are approved.
The affirmative vote of the holders of a majority of the voting power of the
outstanding shares of SpaceDev's common stock is required to approve this
proposal. As a result, abstentions and broker non-votes will have the same
effect as negative votes.
PURPOSE AND EFFECT OF THE AMENDMENT
The principal purpose of this amendment is to provide SpaceDev with the
flexibility to issue shares of common stock for proper corporate purposes, which
may be identified in the future, such as to raise equity capital, make
acquisitions through the use of stock or reserve additional shares for issuance
under equity incentive plans. SpaceDev intends to use a portion of the newly
authorized shares of common stock to perform its obligations under the merger
agreement described in Proposal No. 1, as reserve for the additional shares
proposed to be authorized under the 2004 Equity Incentive Plan described in
Proposal No. 2, and for one or more private placements as described in Proposal
No. 4. Except as discussed above, SpaceDev has at this time no plans, proposals
or arrangements, written or otherwise, to issue any of the additional authorized
shares of common stock.
The increased reserve of shares available for issuance may be used to facilitate
public or private financings. If required operating funds cannot be generated by
operations, SpaceDev may need to, among other things, issue and sell
unregistered common stock, or securities convertible into common stock, in
private transactions. Such transactions might not be available on terms
favorable to SpaceDev, or at all. SpaceDev may sell common stock at prices less
than the public trading price of the common stock at the time, and may grant
additional contractual rights to purchase not available to other holders of
common stock, such as warrants to purchase additional shares of common stock or
anti-dilution protections.
The increased reserve of shares available for issuance also may be used in
connection with potential acquisitions. The ability to use its stock as
consideration provides SpaceDev with negotiation benefits and increases its
ability to execute its growth strategy which may include the acquisition of
other businesses or technologies.
In addition, the increased reserve of shares available for issuance may be used
for SpaceDev's future equity incentive plans for grants to its employees,
consultants and directors. Such equity incentive plans could also be used to
attract and retain employees of acquired companies in connection with potential
acquisitions.
The flexibility of the board of directors to issue additional shares of common
stock could also enhance the ability of SpaceDev's board of directors to
negotiate on behalf of the shareholders in a takeover situation. The
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authorized, but unissued shares of common stock could be used by the board of
directors to discourage, delay or make more difficult a change in the control of
SpaceDev. For example, such shares could be privately placed with purchasers who
might align themselves with the board of directors in opposing a hostile
takeover bid. The issuance of additional shares could dilute the stock ownership
of persons seeking to obtain control and increase the cost of acquiring a given
percentage of the outstanding stock. Shareholders should therefore be aware that
approval of the amendment could facilitate future efforts by SpaceDev to deter
or prevent changes in control of SpaceDev, including transactions in which the
shareholders might otherwise receive a premium for their shares over then
current market prices.
The availability of additional shares of common stock is particularly important
in the event that the board of directors needs to undertake any of the foregoing
actions on an expedited basis and therefore needs to avoid the time (and
expense) of seeking shareholder approval in connection with the contemplated
action. If the amendment is approved by the shareholders, the board of directors
does not intend to solicit further shareholder approval prior to the issuance of
any additional shares of common stock, except as may be required by applicable
law or rules. For example, if our common stock trades on the American Stock
Exchange, under the rules and policies of such exchange, shareholder approval is
required for any issuance of 20% or more of our outstanding shares in connection
with acquisitions or discounted private placements. Additionally, under
California law, to the extent it may apply to SpaceDev under Section 2115 of the
California General Corporation Law, shareholder approval is required for the
issuance of securities in connection with certain acquisitions where
shareholders, immediately before such issuance, do not continue to hold at least
five-sixths of SpaceDev's combined voting power after such issuance. SpaceDev
reserves the right to seek a further increase in the authorized number of shares
from time to time as considered appropriate by the board of directors.
EXISTING ANTI-TAKEOVER MECHANISMS
SpaceDev's articles of incorporation and bylaws contain provisions that may
make it less likely that our management would be changed, or someone would
acquire voting control of us, without the consent of our board of directors.
These provisions include:
- Shares of our authorized but unissued "blank check" preferred stock (as
well as shares of our authorized but unissued common stock) could be issued in
an effort to dilute the stock ownership and voting power of persons seeking to
obtain control of our company, or could be issued to purchasers who would
support our board of directors in opposing an unsolicited takeover proposal;
- Our shareholders are only allowed to take actions by unanimous written
consent, other than actions taken at a duly noticed meeting of shareholders;
and,
- Our board of directors increase the number of directors and may fill the
vacancies created by such action.
Other than as described above, there are no anti-takeover mechanisms
present in SpaceDev's governing documents or otherwise, and SpaceDev has no
present plans or proposals to adopt other provisions or enter into other
arrangements that may have material anti-takeover consequences.
THE SPACEDEV BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSAL
TO AMEND THE ARTICLES OF INCORPORATION TO INCREASE AUTHORIZED COMMON STOCK.
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SPACEDEV PROPOSAL NO. 4 - AUTHORIZATION TO SELL MORE THAN 20% OF SPACEDEV'S
COMMON STOCK IN PRIVATE OFFERINGS
Shareholders are being asked to authorize SpaceDev to sell shares of its
common stock (or securities convertible into or exercisable for common stock) in
one or more related private offerings pursuant to the following terms:
- The private offerings for which SpaceDev seeks shareholder approval will
be for gross proceeds up to an aggregate of $10 million, exclusive of any
amounts which may be received by SpaceDev upon the exercise of warrants, options
or other rights to purchase SpaceDev common stock which may be granted to
investors in connection with the private offerings;
- SpaceDev will not sell in such private offerings: (1) its common stock at
a price less than 35% of the then current market value of SpaceDev's common
stock; or, (2) other securities exercisable for or convertible into SpaceDev
common stock for an exercise price or conversion price, as applicable, less than
35% of the then current market value of SpaceDev's common stock, and in each
case, current market value to be determined by the board in good faith; and,
- SpaceDev will not sell to investors in any such private offerings,
warrants, options or other rights to purchase in excess of 40% of the total
amount of SpaceDev common stock (including any common stock issuable upon the
conversion of preferred stock or convertible debt) sold in such private
offerings.
SpaceDev intends to use the proceeds of these transactions to fund its
continued operations, and management believes that failure to approve this
proposal could have a material adverse effect on SpaceDev. If approved at the
special meeting, this authorization will expire three months following the date
of the special meeting of shareholders, (i.e. April 30, 2006).
Why is SpaceDev requesting this authorization?
SpaceDev is requesting this authorization to ensure compliance with the
listing requirements of the American Stock Exchange, on which SpaceDev intends
to apply for listing of its common stock. The rules of the American Stock
Exchange require each listed company to seek the approval of its shareholders
prior to the issuance of securities under certain circumstances, including in
connection with a transaction (other than a public offering) involving the sale
or issuance by a listed company of common stock (or securities convertible into
or exercisable for common stock) equal to 20% or more of the common stock or 20%
or more of the voting power outstanding for less than the greater of book value
or market value of the stock before such issuance, which listing requirement we
refer to as the 20% Financing Rule. For purposes of applying the 20% Financing
Rule, we must treat all sales of common stock that are part of a single plan of
financing as a single sale of common stock. If SpaceDev common stock is listed
on the American Stock Exchange and SpaceDev does not comply with the 20%
Financing Rule, then we expect we would be delisted from the American Stock
Exchange.
SpaceDev must raise additional capital in order to fulfill its obligations under
the merger agreement described in Proposal No. 1 (including the second
$1,250,000 working capital contribution required by the end of 2006) and to fund
its planned operations for the next twelve months, and expects to raise this
capital primarily through the sale of common stock or securities that can be
converted into or exercised for common stock. During the thirty (30) days
preceding December 2, 2005, the market price of SpaceDev's common stock
fluctuated between $1.50 and $1.63 per share, and SpaceDev's book value was
approximately $0.24 per share at September 30, 2005.
In October 2005, SpaceDev raised $2.5 million through the sale of 2,032,520
shares of common stock and warrants exercisable for 450,000 shares of common
stock. If these sales are counted towards the 20% Financing Rule, SpaceDev can
sell approximately only two million additional shares without shareholder
approval under the 20% Financing Rule.
Over the next several months, SpaceDev intends to raise an additional $5 to $7
million through the sale of equity securities. The specific amount we will
raise, and the amount of common stock we will sell to raise this amount,
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will depend upon SpaceDev's stock price, short term capital needs, expectation
of revenues from operations, the state of the capital markets generally,
SpaceDev's ability to obtain debt-based financing as opposed to equity-based
financing, and the specific financing terms that may be offered to SpaceDev. If
revenues do not increase in the near term, or if the merger is completed and
Starsys requires working capital in addition to the amounts SpaceDev is required
to contribute under the merger agreement, then SpaceDev may need to raise more
than $5 to $7 million (but not to exceed $10 million under the shareholder
authorization for this Proposal No. 4) from the sale of equity securities in
order to fund its operations.
SpaceDev believes it will be difficult to structure a financing transaction and
then seek shareholder approval of the specific transaction due to the time
necessary to organize, call and hold a meeting of shareholders. SpaceDev is
accordingly requesting the shareholders to approve this proposal, which allows
management broad discretion (within the parameters set forth above) to structure
and close a private financing transaction without obtaining shareholder approval
of the particular transaction.
Also, SpaceDev would not be obligated to sell any shares of common stock, and if
we did sell shares SpaceDev would not have to sell them in transactions that
would count against the 20% Financing Rule. However, we expect that we will sell
shares of common stock and that the financing transactions will count against
the 20% Financing Rule. At this time, SpaceDev does not have commitments for any
specific transaction obligating us to issue common stock up to or in excess of
the amount permitted under the 20% Financing Rule, although we expect that we
will have commitments for such transactions on or before the closing of the
merger.
Any sales of common stock we make will be on terms negotiated by us, and these
terms may not be beneficial to SpaceDev's current shareholders. For example,
most of the financing proposals that have been presented to us recently either
involve a purchase price for common stock that is discounted from the market
price of SpaceDev's common stock at the time of sale or the sale, of convertible
preferred stock with rights and preferences, including dividends and liquidation
preferences, senior to the common stock. These features are intended to protect
the new investor against a decline in SpaceDev's share price, but generally this
benefit to the new investor is to the detriment of the existing shareholders.
If we enter into a transaction that provides for the sale of shares at a price
below the market value per share, the ownership interests of SpaceDev's current
shareholders will be diluted.
Preferred Stock
SpaceDev is authorized to issue up to 10,000,000 shares of preferred stock
in one or more series and may issue preferred stock in the private offerings. As
of November 1, 2005, SpaceDev has outstanding 248,460 shares of its Series C
Convertible Preferred Stock. SpaceDev's board of directors may determine the
terms of future preferred stock offerings without further action by SpaceDev's
shareholders. If SpaceDev issues additional preferred stock, it could affect
your rights or reduce the value of your common stock. In particular, specific
rights granted to future holders of preferred stock could be used to restrict
SpaceDev's ability to merge with or sell our assets to a third party. These
terms may include voting rights, preferences as to dividends and liquidation,
conversion and redemption rights, and sinking fund provisions.
Price Reset Features and Floating Price Provisions
Although we do not intend to enter into a financing transaction with price
reset features, we may be required to do so under certain conditions in one or
more transaction. These types of transactions fix a price at the time of issue,
which may be at a discount to market price, and then reduce the price at a
future specified date if the market price is lower on that future date than it
was on the issue date. We may also agree to one or more transactions with
floating price provisions. These transactions are convertible securities that
permit the holder to convert into common stock at a price equal to the lesser of
a price fixed on the date the convertible security is issued, which may be below
the market price on that date, or a price related to the market price of the
common stock on the date of conversion, which also may be below the market price
on that date. If we enter into a transaction with a price reset feature or a
floating price, then generally the reset or pricing feature will have the effect
of requiring us to issue more shares of SpaceDev's common stock to the new
investors if SpaceDev's stock price falls but without SpaceDev receiving any
additional compensation for the additional shares we issue. An issuance under
these circumstances would dilute the economic interests of SpaceDev's current
shareholders, in the same manner as a below market sale. However, reset and
floating price transactions also involve the risk that the number of shares that
we will have to issue is not fixed. For example, if the
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price of SpaceDev's stock declines then the number of shares issuable to the new
investors would increase, which could, in turn, put additional downward pressure
on SpaceDev's stock price and result in a downward spiral ultimately resulting
in a dramatic drop in SpaceDev's stock price, very large dilution to SpaceDev's
current shareholders and a large ownership interest for the new investors. We
will use our best efforts to avoid any financing transaction that provides for a
price reset or floating price provision, and if we do agree to such a provision,
we will make every effort to include a reasonable limit on the number of shares
issuable as a result of the provision.
What happens if shareholders do not approve the authorization contemplated by
this proposal?
If shareholders do not authorize us to sell additional common stock in
excess of the number that may be sold without shareholder approval under the 20%
Financing Rule, then SpaceDev would have to:
- violate the 20% Financing Rule;
- raise the capital necessary for SpaceDev's operations in transactions that
do not require shareholder approval under the 20% Financing Rule; or,
- seek shareholder approval in the future for a particular transaction which
requires such approval under the 20% Financing Rule.
Unless SpaceDev's stock price increases significantly, we believe it is
unlikely that we will be able to raise the necessary capital in transactions
that do not fall within the 20% Financing Rule. We accordingly expect that if
this proposal is not adopted, SpaceDev would still raise the necessary funds,
and if SpaceDev common stock is then listed on the American Stock Exchange, seek
shareholder approval for the particular transaction or face the possibility of
delisting from the American Stock Exchange. Delisting from the American Stock
Exchange could have a material adverse effect on the trading market for
SpaceDev's common stock, and would increase regulatory burdens applicable to us,
such as Section 2115 of the California General Corporation Law (see "The Merger
- Approval and Dissenters' Rights") and certain state and federal securities
laws and rules which grant exemptions from state qualification requirements for
securities traded on the American Stock Exchange or other qualifying exchanges.
We would also likely become subject again to the penny stock rules which apply
to certain companies whose shares are not traded on a qualifying exchange and
trade below $5 per share. See "Risk Factors" beginning on page 15.
THE SPACEDEV BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SPACEDEV'S
SHAREHOLDERS VOTE "FOR" APPROVAL OF THE AUTHORIZATION TO SELL MORE THAN 20% OF
SPACEDEV'S COMMON STOCK IN PRIVATE OFFERINGS.
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STARSYS PROPOSAL NO. 2 -
APPOINTMENT AND AUTHORIZATION OF SCOTT TIBBITTS
AS SHAREHOLDER AGENT UNDER THE MERGER AGREEMENT
Shareholders are being asked to appoint and constitute Scott Tibbitts as
the shareholder's exclusive agent and representative under the merger agreement
and related escrow agreement. Mr. Tibbitts is the Chairman and Chief Executive
Officer of Starsys and beneficially owns approximately 48% of the common stock
of Starsys. It is expected that Mr. Tibbitts will be appointed to the board of
directors of SpaceDev following the merger. For more information, see "The
Merger - Interests of Certain Starsys Persons in the Merger" beginning on page
44.
The role of the shareholder agent and representative is to be the exclusive
agent of the shareholders and to perform, among other things, the following:
- with respect to claims made or potentially made against, or any other
action to be taken or omitted by or on behalf of, any shareholders pursuant to
the merger agreement or the escrow agreement or otherwise in connection with the
merger, including with respect to any indemnification claims, performance
consideration calculations, breaches of representations, warranties or covenants
and any other matters;
- give, fail to give and receive notices and communications from and to
SpaceDev, the escrow agent, Starsys shareholders or other persons;
- agree to, negotiate, prosecute, defend, enter into settlements and
compromises of, make and demand arbitration or other alternative dispute
resolution;
- comply with orders of courts and awards of arbitrators and referees;
- satisfy indemnity claims from the shares, cash and other assets held in
the escrow account;
- to take all actions necessary or appropriate in the judgment of the
shareholder agent for accomplishing any of the foregoing; and,
- use the shares of SpaceDev common stock in the escrow account (as
described under the caption "The Merger Agreement - Escrow - Escrow Account"
above) as collateral to secure the rights of the SpaceDev indemnified parties;
- deposit and withdraw funds into and from the expense fund (as described
under the caption "The Merger Agreement - Escrow - Expense Fund" above) for the
payment of the shareholder agent's reasonable out-of-pocket expenses; and
- agree to amendments and waivers of the merger agreement and escrow
agreement, and time extensions under the merger agreement, on behalf of the
shareholders, as described under the "The Merger Agreement - Amendment,
Extension and Waiver of the Merger Agreement" caption above.
Mr. Tibbitts will not be liable for any act done or omitted as shareholder
agent while acting in good faith and in the exercise of reasonable judgment.
Mr. Tibbitts shall not receive any compensation for his services as shareholder
agent.
The shareholder agent may resign at any time by written notice to SpaceDev and
the escrow agent, and the shareholder agent may be removed at any time by
written notice signed by pre-merger Starsys shareholders holding not less than a
majority of the shares of Starsys outstanding immediately preceding the merger.
The pre-merger Starsys shareholders will be responsible for appointing a
successor shareholder agent by act of such shareholders holding not less than a
majority of the shares of Starsys outstanding immediately preceding the merger.
The successor shareholder agent must be the key shareholder, a director or
officer of Starsys or the surviving corporation, or reasonably acceptable
-87-
to SpaceDev. If the shareholders fail to appoint a successor shareholder agent
within ten (10) days of the resignation or removal of the shareholder agent,
SpaceDev may petition a proper court to appoint a successor.
Approval of Proposal No. 2 requires the affirmative vote of a majority of the
outstanding shares of Starsys common stock. Approval of this Proposal No. 2
constitutes, without any further action on the part of any shareholders, the
appointment by each of the shareholders of Mr. Tibbitts to act as shareholder
agent under the merger agreement and related escrow agreement, for and on each
of their behalf.
THE STARSYS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STARSYS' SHAREHOLDERS
VOTE "FOR" THE
---
APPOINTMENT AND AUTHORIZATION OF SCOTT TIBBITTS AS SHAREHOLDER AGENT UNDER THE
MERGER AGREEMENT.
-88-
UNAUDITED PRO FORMA
COMBINED CONSOLIDATED FINANCIAL STATEMENTS
HOW THE PRO FORMA FINANCIAL STATEMENTS WERE PREPARED
The following unaudited pro forma combined financial statements give effect
to the proposed merger of SpaceDev and Starsys using the purchase method of
accounting, as required by Statement of Financial Accounting Standard No. 141,
"Business Combinations." SpaceDev will legally be acquiring Starsys and will be
viewed for accounting purposes as the "accounting acquirer." Under this method
of accounting, the combined company will allocate the purchase price to the fair
value of assets of Starsys deemed to be acquired, including identifiable
intangible assets and goodwill. The purchase price allocation is subject to
revision when the combined company obtains additional information regarding
asset valuation. The unaudited pro forma combined financial statements are based
on respective historical consolidated financial statements and the accompanying
notes of SpaceDev, and those of Starsys included herein.
The unaudited pro forma combined statements of operations for the year ended
December 31, 2004 and the nine months ended September 30, 2005 assume the merger
took place on January 1, 2004. The unaudited pro forma combined balance sheet
assumes the merger took place on September 30, 2005. The unaudited pro forma
combined statement of operations for the year ended December 31, 2004 combines
SpaceDev's historical statement of operations for the year ended December 31,
2004 with Starsys' historical statement of operations for the year ended
December 31, 2004. The pro forma combined statement of operations for the nine
months ended September 30, 2005 combines SpaceDev's historical statement of
operations for the nine months ended September 30, 2005 with Starsys' historical
statement of operations for the nine months ended September 30, 2005. The
unaudited pro forma combined balance sheet combines SpaceDev's historical
balance sheet as of September 30, 2005 with Starsys' historical balance sheet as
of September 30, 2005.
THESE PRO FORMA FINANCIAL STATEMENTS HAVE BEEN BASED ON ASSUMPTIONS
The unaudited pro forma combined financial statements data is based on
estimates and assumptions described in the notes to them. This data is presented
for information purposes only and is not intended to represent or be indicative
of the consolidated results of operations or financial condition of SpaceDev
that would have been reported had the merger been completed as of the dates
presented, and should not be taken as representative of future consolidated
results of operations or financial condition of SpaceDev.
YOU SHOULD READ THESE PRO FORMA UNAUDITED COMBINED FINANCIAL STATEMENTS IN
CONJUNCTION WITH EACH COMPANY'S HISTORICAL FINANCIAL STATEMENTS
The unaudited pro forma combined financial statements should be read in
Conjunction with the related notes included in this joint proxy
statement/prospectus and the consolidated audited and unaudited financial
statements of SpaceDev and the consolidated audited and unaudited financial
statements of Starsys included in this joint proxy statement/prospectus. The
unaudited pro forma combined financial statements are not necessarily indicative
of what the actual results of operations and financial position would have been
had the merger taken place on January 1, 2004 or September 30, 2005, and do not
indicate future results of operations or financial position.
-89-
UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2005
----------------------------------------------------------------------------------
HISTORICAL
-------------------------------
SPACEDEV STARSYS TOTAL PRO FORMA ADJUSTMENTS PRO FORMA
----------------- ---------- ----------------------------- --------------
ASSETS
CURRENT ASSETS
Cash. . . . . . . . . . . . $ 4,022,243 $ 216,934 $ (6,194,536) (d) & (e) $ (1,955,359)
Accounts receivable . . . . 1,096,645 3,045,479 - 4,142,124
Inventory . . . . . . . . . - 311,649 - 311,649
Costs in excess of billings - 2,095,781 - 2,095,781
Other current assets. . . . - 327,465 (236,025) (f) 91,440
Work in Progress. . . . . . 10,412 - - 10,412
Note Receivable . . . . . . 1,326,453 - (1,326,453) (d) -
------------------------------- ----------------- ---------- -------------------------- ---------------
Total current assets . . . . . 6,455,753 5,997,308 (7,757,014) 4,696,047
FIXED ASSETs - Net . . . . . . 822,980 2,031,440 - 2,854,420
GOODWILL . . . . . . . . . . . - - 12,493,143 (a), (b) & (c) 12,493,143
OTHER ASSETS . . . . . . . . . 64,469 26,469 - 90,938
------------------------------- ----------------- ---------- -------------------------- ---------------
TOTAL ASSETS . . . . . . . . . $ 7,343,202 $8,055,217 $ 4,736,129 $ 20,134,548
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-90-
UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2005
-------------------------------------------------------------------------------
HISTORICAL
-------------------------------
SPACEDEV STARSYS TOTAL PRO FORMA ADJUSTMENTS PRO FORMA
----------------- ------------ ----------------------------- --------------
LIABILITIES AND STOCKHOLDERSEQUITY
CURRENT LIABILITIES
Current portion of notes payable $ 18,797 $ 6,014,536 $ (6,014,536) (d) & (g) $ 18,797
Current portion of capitalized lease
obligations . . . . . . 2,479 33,998 - 36,477
Accounts payable and accrued expenses 398,443 1,291,739 - 1,690,182
Accrued payroll, vacation and related taxes 350,145 1,079,268 - 1,429,413
Customer deposits and deferred revenue . . 126,453 - (126,453) (d) -
Billings in excess of costs incurred and
estimated earnings. - 1,073,751 - 1,073,751
Provision for anticipated loss - 1,603,482 - 1,603,482
Employee Stock Purchase Plan 9,974 - - 9,974
Other accrued liabilities 168,470 451,586 - 620,056
----------------------------------------------- ----------------- ------------ ----------------------------- --------------
TOTAL CURRENT LIABILITIES . 1,074,761 11,548,360 (6,140,989) 6,482,132
----------------------------------------------- ----------------- ------------ ----------------------------- --------------
DEFERRED GAIN - ASSETS HELD FOR SALE. 859,996 - - 859,996
DEFERRED REVENUE. . . . . . . . . . - - - -
----------------------------------------------- ----------------- ------------ ----------------------------- --------------
TOTAL LIABILITIES . . . . . . . . . . 1,934,757 11,548,360 (6,140,989) 7,342,128
----------------------------------------------- ----------------- ------------ ----------------------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERSEQUITY (DEFICIT)
Convertible preferred stock. . . 248 - - 248
Common stock . . . . . . . . . . 2,231 520 (20) (a) & (b) 2,731
Additional paid-in capital . . . 20,091,408 51,886 7,447,614 (a) & (b) 27,590,908
Accumulated deficit. . . . . . . (14,685,442) (3,545,549) 3,429,524 (b) (14,801,467)
----------------------------------------------- ----------------- ------------ ----------------------------- --------------
TOTAL STOCKHOLDERSEQUITY (DEFICIT). . 5,408,445 (3,493,143) 10,877,118 12,792,420
----------------------------------------------- ----------------- ------------ ----------------------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. $ 7,343,202 $ 8,055,217 $ 4,736,129 $ 20,134,548
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
-91-
UNAUDITED PRO FORMA COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2004
----------------------------------------------------------------------------------
HISTORICAL
--------------------------------------------
SPACEDEV STARSYS PRO FORMA ADJUSTMENTS PRO FORMA
------------------------------ ------------ ---------------------- ------------
NET SALES . . . . . . . . . . . . . . . . . . $ 4,890,743 $18,085,414 $ - $22,976,157
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
COST OF SALES . . . . . . . . . . . . . . . . 3,820,683 18,720,454 - $22,541,137
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
GROSS MARGIN. . . . . . . . . . . . . . . . . 1,070,060 (635,040) - $ 435,020
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
OPERATING EXPENSES
Marketing and sales expense. . . . . . . . 418,831 - - 418,831
Research and development . . . . . . . . . 39,473 - - 39,473
Impairment of goodwill and development . . - - - -
EMC - stock based compensation . . . . . . - - - -
Stock and stock option based compensation. - - - -
General and administrative . . . . . . . . 467,471 4,472,103 - 4,939,574
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
TOTAL OPERATING EXPENSES. . . . . . . . . . . 925,775 4,472,103 - 5,397,878
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
INCOME/(LOSS) FROM OPERATIONS . . . . . . . . 144,285 (5,107,143) - (4,962,858)
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
NON-OPERATING EXPENSE/(INCOME)
Interest income. . . . . . . . . . . . . . (19,497) - - (19,497)
Rental Income. . . . . . . . . . . . . . . - (15,294) - (15,294)
Other Expense. . . . . . . . . . . . . . . - 528,264 - 528,264
Interest expense . . . . . . . . . . . . . 52,077 288,761 - 340,838
Non-cash interest expense debt discount. . - - - -
Gain on Building Sale. . . . . . . . . . . (117,272) - - (117,272)
Loan Fee - Equity Compensation . . . . . . 3,254,430 - - 3,254,430
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
TOTAL NON-OPERATING EXPENSE/(INCOME). . . . . 3,169,739 801,731 - 3,971,470
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . (3,025,454) (5,908,874) - (8,934,328)
Income tax provision. . . . . . . . . . . . . 1,600 (317,014) - (315,414)
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
NET INCOME (LOSS) . . . . . . . . . . . . . . $ (3,027,054) $(5,591,860) $ - (8,618,914)
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
NET INCOME (LOSS) PER SHARE:
Net income (loss). . . . . . . . . . . . $ (0.16) $ (10.74) $ - $ (0.37)
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
Weighted-Average Shares Outstanding. . . 18,610,141 520,447 4,479,553 (a) 23,089,694
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
-92-
UNAUDITED PRO FORMA COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2004
----------------------------------------------------------------------------------
HISTORICAL
--------------------------------------------
SPACEDEV STARSYS PRO FORMA ADJUSTMENTS PRO FORMA
------------------------------ ------------ ---------------------- ------------
NET SALES . . . . . . . . . . . . . . . . . . $ 5,942,558 $13,597,334 $ - $19,539,892
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
COST OF SALES . . . . . . . . . . . . . . . . 4,571,505 11,087,931 - $15,659,436
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
GROSS MARGIN. . . . . . . . . . . . . . . . . 1,371,053 2,509,403 - $ 3,880,456
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
OPERATING EXPENSES
Marketing and sales expense. . . . . . . . 493,344 - - 493,344
Research and development . . . . . . . . . - - - -
Impairment of goodwill and development . . - - - -
EMC - stock based compensation . . . . . . - - - -
Stock and stock option based compensation. - - - -
General and administrative . . . . . . . . 654,524 3,572,194 116,025 (f) 4,342,743
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
TOTAL OPERATING EXPENSES. . . . . . . . . . . 1,147,868 3,572,194 116,025 (f) 4,836,087
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
INCOME/(LOSS) FROM OPERATIONS . . . . . . . . 233,185 (1,062,791) (116,025) (f) (955,631)
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
NON-OPERATING EXPENSE/(INCOME)
Interest income. . . . . . . . . . . . . . (69,632) (75,998) - (145,630)
Rental Income. . . . . . . . . . . . . . . - (3,250) - (3,250)
Other Expense. . . . . . . . . . . . . . . - - - -
Interest expense . . . . . . . . . . . . . 2,283 378,513 - 380,796
Non-cash interest expense debt discount. . - - - -
Gain on Building Sale. . . . . . . . . . . (87,953) - - (87,953)
Loan Fee - Equity Compensation . . . . . . 28,875 - - 28,875
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
TOTAL NON-OPERATING EXPENSE/(INCOME). . . . . (126,427) 299,265 - 172,838
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . 349,612 (1,362,056) (116,025) (f) (1,128,469)
Income tax provision. . . . . . . . . . . . . 1,200 - - 1,200
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
NET INCOME (LOSS) . . . . . . . . . . . . . . $ 348,412) $(1,362,056) $ (116,025) (f) (1,129,669)
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
NET INCOME (LOSS) PER SHARE:
Net income (loss). . . . . . . . . . . . $ 0.02 $ (2.62) $ (0.03) $ (0.04)
---------------------------------------------- ------------------------------ ------------ ---------------------- ------------
Weighted-Average Shares Outstanding. . . 21,777,211 520,447 4,479,553 (a) 26,256,764
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
-93-
NOTES TO THE UNAUDITED PRO FORMA COMBINED
CONSOLIDATED STATEMENTS
The unaudited pro forma combined consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in the
United States after eliminating all material intercompany accounts and
transactions. The acquisition of Starsys is being accounted for under the
purchase method of accounting.
The purchase price of Starsys is approximately $9.0 million and is proposed
to be allocated as follows:
Current, tangible and identifiable intangible assets $ 8,055,217
Liabilities assumed. . . . . . . . . . . . . . . . . 11,548,360
---------------------------------------------------- ------------
Net liabilities. . . . . . . . . . . . . . . . . . . (3,493,143)
Implied Intangibles/Goodwill . . . . . . . . . . . . 12,493,143
---------------------------------------------------- ------------
Total purchase consideration . . . . . . . . . . . . $ 9,000,000
---------------------------------------------------- ------------
Comprised of:
Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 1,500,000
Stock consideration. . . . . . . . . . . . . . . . . 7,500,000
Total purchase consideration . . . . . . . . . . . . $ 9,000,000
---------------------------------------------------- ------------
Under the terms of the agreement and in accordance with SFAS No. 141, for
accounting purposes, SpaceDev has been deemed to be the acquirer. The cash and
stock consideration has been calculated by taking the outstanding common shares
of Starsys as of September 30, 2005, of approximately 520,000 shares of common
stock, and dividing it into the $9.0 million in cash and equity in SpaceDev.
This calculation results in a purchase consideration greater than the net book
value of Starsys as of September 30, 2005. This difference has been reflected as
an increase in the carrying value of the acquired intangible assets of SpaceDev.
At this time, the combined Company has not completed an independent valuation
and the allocation of the purchase price has not been completed. Thus, these
numbers do not include the effects, if any; of adjustments that might result
from the amortization of any potential identifiable intangible assets (separate
from goodwill). In addition, the purchase price excludes any reorganization
costs. For purposes of this presentation, the purchase price excludes the impact
of any value attributable to assumed stock options as their value was not deemed
to be material based on the value of the consideration to be issued in the
merger.
THE FOLLOWING PRO FORMA ADJUSTMENTS HAVE BEEN RECORDED TO REFLECT THE
ACQUISITION:
Combined Consolidated Balance Sheet-adjustments to reflect the acquisition
as if it had occurred on September 30, 2005.
(a) The issuance of approximately 5.0 million SpaceDev common shares, and
options for the issued and outstanding common stock and outstanding options of
Starsys, at a total value of $7.5 million. The common shares of SpaceDev
increase by approximately $500 and additional paid in capital increased by
approximately $7,499,500.
(b) Elimination of Starsys pre-acquisition shareholders' equity, as follows:
Common stock . . . . . . . $ (520)
Additional paid-in capital (51,886)
Accumulated deficit. . . . 3,545,549
------------------------------ -----------
$3,493,143
-----------
(c) Excess of the fair value of purchase consideration over the fair value of
the net tangible assets and identifiable intangible assets acquired. This excess
has been recorded in the pro forma statements as an increase in the carrying
value of the acquired intangible assets of Starsys. The final figure for
intangibles and/or goodwill will
-94-
be increased by any reduction in net assets at the date of closure of the
acquisition and by the reorganization costs which will be incurred as a result
of the transaction.
(d) Elimination of approximately $4.6 million of short term debt of Starsys
as required by the Agreement and Plan of Merger. Also, the forgiveness of
approximately $1.3 million of notes receivable and applicable fees from SpaceDev
to Starsys also based on the Agreement and Plan of Merger.
(e) Cash consideration at close of $1.5 million to Starsys and Starsys
shareholders by SpaceDev, Inc. The actual allocation of the purchase price will
not occur until the closing and will be based on the respective fair values of
the assets and liabilities of Starsys at that time.
(f) For the total of $236,025 pro forma adjustment in current assets
represents the release of the $120,000 fee on the Bridge Loan as well as the
payment of loan premium to Starsys shareholders at close and deferred legal and
other closing costs to be paid by Starsys at closing in the amount of $116,025.
(g) Represent remaining debt in the amount of $94,536 for the remaining
short term notes payable in which Starsys will pay at time of closing.
The unaudited pro forma combined consolidated information reflects our best
estimates; however the actual financial position and results of operations may
differ from the pro forma amounts reflected herein because of various factors,
including, without limitation, access to additional information, changes in
value and changes in operating results between the date of preparation of the
unaudited pro forma combined consolidated financial information and the date on
which the acquisition closes. However, in the opinion of management any final
adjustments will not be material to the future financial position and/or results
of operations of SpaceDev.
-95-
COMPARISON OF RIGHTS OF SHAREHOLDERS OF SPACEDEV
AND SHAREHOLDERS OF STARSYS
This section describes material differences between the rights of holders
of SpaceDev common stock and the rights of holders of Starsys common stock.
SpaceDev and Starsys are both organized under the laws of the State of Colorado.
While SpaceDev and Starsys believe that this description covers the material
differences between the two, this summary is not intended to be a complete
discussion of the articles of incorporation and bylaws of SpaceDev and the
articles of incorporation and bylaws of Starsys and is qualified in its entirety
by reference to the applicable document and applicable Colorado law. Starsys
shareholders should carefully read this entire document and the documents
referred to in this summary for a more complete understanding of the differences
between the rights of holders of SpaceDev common stock and the rights of holders
of Starsys common stock. Therefore, any differences in the rights of holders of
SpaceDev capital stock and Starsys capital stock arise primarily from
differences in their respective articles of incorporation and bylaws.
Additionally, SpaceDev's shareholders may have different rights by virtue of
Section 2115 of the California General Corporation Law, which applies certain
provisions of its corporate law to corporations incorporated in other states
with a significant nexus in California. Under Section 2115, the specified
California law is to be applied with respect to the foreign corporation "to the
exclusion" of the law of the jurisdiction in which the foreign company is
incorporated whenever there is a conflict. Section 2115 does not apply to a
"listed" corporation, which is defined under California law as a corporation
with (1) outstanding securities listed on the New York or American Stock
Exchange or (2) a class of securities designated as a national market security
on NASDAQ. Upon completion of the merger, holders of Starsys capital stock will
become holders of SpaceDev capital stock and their rights will be governed by
Colorado law, the articles of incorporation and bylaws of SpaceDev, as well as
certain provision of California law if Section 2115 applies. The following
discussion summarizes material differences between the rights of SpaceDev
shareholders and Starsys shareholders under the articles of incorporation and
bylaws of SpaceDev and of Starsys.
Because this summary does not provide a complete description of these documents,
all Starsys shareholders are urged to carefully read the relevant provisions of
Colorado law, as well as the articles of incorporation and bylaws of both
SpaceDev and Starsys. Copies of the articles of incorporation and bylaws of
Starsys and SpaceDev will be sent to SpaceDev and Starsys shareholders upon
request. See "Where You Can Find More Information" for more information.
SPACEDEV STARSYS
-------- -------
Capitalization
SpaceDev's articles of incorporation authorize: Starsys' articles of incorporation authorize:
- 50,000,000 shares of common stock, par value - 25,000,000 shares of common stock, par value
$.0001 per share $.001 per share, of which 522,437.47 are
o of which 24,606,255 were issued and issued and outstanding as of August 31, 2005
outstanding as of December 20,2005 - 10,000,000 shares of preferred stock, no par
o of which 12,941,393 were reserved for issuance value, of which none are issued and
upon conversion of preferred stock and outstanding as of November 9, 2005
exercise of warrants, options and convertible
debt as of December 20, 2005
- 10,000,000 shares of preferred stock, par
value $.001 per share, of which 248,460 were
issued and outstanding as of December 20, 2005
-96-
Number of Directors
SpaceDev's bylaws provide the number of directors Starsys' bylaws provide that the board of
Of our company shall be fixed from time to time by directors shall consist of two directors, but such
the board of directors, but in no event shall the number may be changed by amending the bylaws in
number of directors be less than one. SpaceDev's the manner set forth in the bylaws. Currently,
articles of incorporation provide that the number Starsys has two directors.
of directors may from time to time be increased or
decreased in such manner as is provided in the Upon completion of the merger, Starsys will be
bylaws. Currently, SpaceDev has nine directors. merged into Monoceros and the board of directors
of the surviving corporation will consist of one
director.
Cumulative Voting
Each holder of SpaceDev common stock is entitled Each shareholder of Starsys shall be entitled to
to one vote for each share held of record. Under one vote for each share of capital stock having
Colorado law, cumulative voting will apply in the voting power held by the shareholder. Starsys'
election of directors unless the articles of articles of incorporation provide that cumulative
incorporation contain an express provision to voting shall not be permitted in the election of
exclude cumulative voting in the election of directors or otherwise.
directors. SpaceDev's articles of incorporation
provide that cumulative voting shall not be
allowed.
However, SpaceDev is currently subject to Section
2115 of California law. California law states that
the right to vote cumulatively is mandatory and
cannot be taken away by a provision of the
articles of incorporation. Hence, under California
law, SpaceDev's shareholders may exercise
cumulative voting rights in the election of
directors. If cumulative voting rights exist, each
holder of common stock will be entitled, for each
share held, to the number of votes equal to the
number of directors to be elected. Each
shareholder may give one candidate, who has been
nominated prior to voting, all the votes such
shareholder is entitled to cast or may distribute
such votes among as many such candidates as such
shareholder chooses.
Shareholder Vote
SpaceDev's articles of incorporation provide that Starsys' articles of incorporation provide that
whenever shareholders must approve or authorize with respect to any action taken by the
any matter, whether now or hereafter required by shareholders of Starsys, unless Colorado law
the state of Colorado, the affirmative vote of a requires the vote or concurrence of the holders of
majority of the shares entitled to vote thereon two-thirds of the outstanding shares entitled to
shall be necessary to constitute such approval or vote thereon, or of any class of series, and
authorization. unless otherwise provided for in the corporation's
bylaws, such action may be taken by the vote or
concurrence of a majority of such shares or class
or series thereof eligible to vote.
-97-
Shareholder Voting - Statutory Mergers
California law generally requires that a majority Colorado law generally requires that a majority of
of the shareholders of both acquiring and target the shareholders of both acquiring and target
corporations approve statutory mergers. corporations approve statutory mergers.
Although Colorado law does not require approval of
the surviving or acquiring entity or its parent
entity in a merger (other than as described
above), under California law, applicable to
SpaceDev under Section 2115, shareholder approval
is required for reorganizations where shareholders
of the parent entity immediately prior to the
reorganization will own immediately after the
reorganization equity securities constituting less
than five sixths of the voting power of the
surviving or acquiring corporation or its parent
entity.
Removal of Directors
SpaceDev's directors may be removed in accordance Starsys' articles of incorporation provide that a
with Colorado law. Under Colorado law, a director director may be removed from office only for cause
of a corporation that does not have a staggered and only by the affirmative vote of the holders of
board of directors or cumulative voting may be not less than a majority of the number of shares
removed with or without cause with the approval of of common stock then outstanding. Except as
a majority of the outstanding shares entitled to otherwise provided by law or otherwise pursuant to
vote at an election of directors. In the case of a Starsys' articles of incorporation, these removal
Colorado corporation having cumulative voting, if provisions shall not apply with respect to any
less than the entire board is to be removed, a director elected by the holders of any such class
director may not be removed without cause if the or series of stock having a preference over the
number of shares voted against such removal would common stock as to dividends or liquidation.
be sufficient to elect the director under
cumulative voting.
Under California law, applicable to SpaceDev under
Section 2115, any director or the entire board of
directors may be removed, with or without cause,
with the approval of a majority of the outstanding
shares entitled to vote; however, no individual
director may be removed (unless the entire board
is removed) if the number of votes cast against
such removal would be sufficient to elect the
director under cumulative voting. A corporation's
board of directors may not remove a director
unless such director has been declared of unsound
mind by an order of court or convicted a felony. A
vacancy created by a removal of a director may be
filled only by the approval of shareholders. In
addition, California law provides that the
superior court may, at the suit of shareholders
holding at least ten percent of the number of
outstanding shares of any class, remove from
office any director in case of fraudulent or
dishonest acts or gross abuse of authority or
discretion with reference to the corporation and
may bar from reelection any director so removed
for a period prescribed by the court.
-98-
Special Meetings of Shareholders
Under SpaceDev's bylaws, special meetings of the Starsys' bylaws provide that special meetings of
shareholders for any purpose, unless otherwise shareholders, for any purpose, unless otherwise
provided for by statute, may be called by the prescribed by statute, may be called by the
chief executive officer, the president, the board president and shall be called by the president or
of directors or by the chief executive officer or secretary at the request in writing of a majority
president at the request of the holders of not of the board of directors, or at the request in
less than one-tenth of all the shares of SpaceDev writing of the holders of twenty percent or more
entitled to vote at the meeting. of all outstanding shares of the corporation
entitled to vote at the meeting.
Notice Provisions for Meetings of Shareholders
SpaceDev's bylaws provide that written notice, Starsys' bylaws provide that written or printed
stating the place, day and hour of the meeting notice stating the place, date and time of the
and, in case of a special meeting, the purpose for meeting and, in the case of a special meeting, the
which the meeting is called, shall be delivered as purpose or purposes for which the meeting is
the laws of the state of Colorado shall provide. called, shall be delivered not less than ten nor
Under Colorado law, a corporation shall give more than thirty days before the date of the
notice to shareholders of the date, time and place meeting, either personally or by mail, by or at
of each annual and special shareholders' meeting the direction of the president or board of
no fewer then ten and no more than sixty days directors, to each shareholder entitled to vote at
before the date of the meeting; except that, if such meeting.
the number of authorized shares is to be
increased, at least thirty days' notice shall be
given. Unless otherwise required by law or the
articles of incorporation, the corporation is
required to give notice only to shareholders
entitled to vote at the meeting.
Proxies
SpaceDev's bylaws provide that at all meetings of Starsys' bylaws provide that each shareholder
shareholders, a shareholder may vote by proxy entitled to vote may vote in person or by proxy,
executed in writing by the shareholder or his duly but no proxy shall be voted or acted upon after
authorized attorney in fact. Such proxy shall be eleven months from its date,
filed with the secretary of SpaceDev before or at
the time of the meeting. No proxy shall be valid
after 11 months from the date of its execution,
unless otherwise provided in the proxy.
Amendment to Articles of Incorporation
SpaceDev's articles of incorporation provide that Under Colorado law, the board of directors or the
its articles of incorporation may be amended by holders of shares representing at least ten
resolution of the board of directors and by percent of all of the votes entitled to be cast on
affirmative vote of the shareholders of at least a the amendment may propose an amendment to the
majority of the shares entitled to vote thereon at articles of incorporation for submission to
a meeting called for that purpose, or, when shareholders. For an amendment to be adopted, (i)
authorized, when such action is ratified by the the board shall recommend the amendment to the
written consent of all the shareholders of the shareholders unless the amendment is proposed by
shareholders or unless the board determines that
it should make no recommendation and communicates
its basis for its determination to the
shareholders with the amendment, and (ii) the
shareholders entitled to vote on the amendment
shall approve the amendment.
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Distributions to Shareholders
Under California law, no distributions to a Under Colorado law, a board of directors of a
corporation's shareholders may be made unless: (i) corporation may authorize, and the corporation may
the amount of the retained earnings of the make, distributions to its shareholders subject to
corporation immediately prior to the distribution any restriction in the articles of incorporation
equals or exceeds the amount of the proposed and subject to the limitations under Colorado law.
distribution; (ii) immediately after the Colorado law provides that no distribution may be
distribution, the sum of the assets of the made if, after giving it effect: (i) the
corporation (excluding certain items) is at least corporation would not be able to pay its debts as
equal to 1 times its liabilities; and the current they become due in the usual course of business;
assets of the corporation is at least equal to its or (ii) the corporation's total assets would be
current liabilities, or if the average of the less than the sum of its total liabilities plus
earnings of the corporation before taxes on income (unless the articles of incorporation permit
and before interest expense for the two preceding otherwise) the amount that would be needed, if the
fiscal years was less than the average of the corporation were to be dissolved at the time of
interest expense of the corporation for those the distribution, to satisfy the preferential
fiscal years, at least equal to 1 times its rights upon dissolution of shareholders whose
current liabilities. California law generally preferential rights are superior to those
provides that a corporation may acquire its own receiving the distribution.
shares, with the payment for such shares being
subject to thesame restrictions as dividend
payments.
Appraisal and Dissenters' Rights
See disclosure in " The Merger - Appraisal and See disclosure in "The Merger - Appraisal and
Dissenters' Rights" above. Dissenters' Rights" above.
Fiduciary Duties of Directors
Under California law, the duty of loyalty requires Under Colorado law, general standards of conduct
directors to perform their duties in good faith for directors and officers, requires each director
and in a manner that the director reasonably to discharge the director's duties as director,
believes to be in the best interests of the including the director's duties as a member of a
corporation and its shareholders. The duty of care committee, and each officer with discretionary
requires that directors act with such care, duty shall discharge that duty: (i) in good faith,
including reasonable inquiry, as an ordinarily (ii) with the care an ordinarily prudent person in
prudent person in a like position would use under a like situation would exercise under similar
similar circumstances. circumstances, and (iii) in a manner the director
or officer reasonably believes to be in the best
interest of the corporation.
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Conflicting Interest Transactions
SpaceDev's articles of incorporation provide that Starsys' articles of incorporation define three
no contract or other transactions of SpaceDev with types of conflicting interest transactions: (i) a
any other person, firm, or corporation, or in loan or other assistance by Starsys to a director
which SpaceDev is interested, shall be affected or of Starsys or an entity in which a director of
invalidated by (i) the fact that any one or more Starsys is a director or officer or has a
of the directors or officers of SpaceDev is financial interest; (ii) a guaranty by Starsys of
interested in or is a director or officer of such an obligation of a director of Starsys or of an
other firm or corporation; or (ii) the fact that obligation of an entity in which a director of
any director or officer of SpaceDev, individually Starsys is a director or officer of has a
or jointly with others, may be a party to or may financial interest; or (iii) a contract or
be interested in any such contract or transaction, transaction between Starsys and a director of
so long as the contract or transaction is Starsys or between Starsys and an entity in which
authorized, approved or ratified at a meeting of a director of Starsys is a director of officer or
the board of directors by sufficient vote thereon has a financial interest. No conflicting interest
by directors no interested therein, to which such transaction shall be void or voidable, be
fact or relationship or interest has been enjoined, or set aside, or give rise to an award
disclosed, or so long as the contract or of damages solely because the conflicting interest
transaction is fair and reasonable to the transaction involves a director of Starsys or an
corporation. entity in which a director of Starsys is a
director or officer or has a financial interest,
SpaceDev's officers, directors and other members or solely because the director is present at or
of management shall be subject to the doctrine of participates in the meeting of Starsys' board of
corporate opportunities only insofar as it applies directors or of the committee of the board which
to business opportunities in which SpaceDev has authorizes, approves or ratifies a conflicting
expressed an interest as determined by SpaceDev's interest transaction, or solely because the
board of directors as evidenced by resolutions director's vote is counted for such purposes if:
appearing in SpaceDev's minutes. When such areas (i) the material facts as to the director's
of interest are delineated, all such business relationship or interest and as to the conflicting
opportunities within such areas of interest which interest transaction are disclosed or are known to
come to the attention of the officer, directors, the board or directors or the committee, and the
and other members of management of SpaceDev shall board or committee in good faith authorizes,
be disclosed promptly to SpaceDev and made approves or ratifies the conflicting interest
available to SpaceDev. The board of directors may transaction by the affirmative vote of the
reject any business opportunity presented to it majority of the disinterested directors, even
and thereafter any officer, director, or other though the disinterested directors are less than a
member of management may avail himself of such quorum; (ii) the material facts as to the
opportunity. Until such time as SpaceDev has director's relationship or interest and as to the
designated an area of interest, the officer, conflicting transaction are disclosed or are known
directors, and other members of management of to the shareholders entitled to vote thereon, and
SpaceDev shall be free to engage in such areas of the conflicting interest transaction is
interest on their own and the corporate specifically authorized, approved or ratified in
opportunities provision shall not limit the rights good faith by a vote of the shareholders; or (iii)
of any director, officer, or other member of the conflicting interest transaction is fair as to
management to continue a business existing prior Starsys as of the time it is authorized, approved
to the time that such area of interest is or ratified by the board, a committee thereof, of
designated by SpaceDev. the shareholders. Common or interested directors
may be counted in determining the presence of a
quorum at a meeting of the board or of a committee
which authorizes, approves or ratifies the
conflicting interest transaction.
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Preferred Stock
SpaceDev's board of directors has the authority, Starsys' board of directors has the authority,
within the limitations and restrictions stated in within the limitations and restrictions stated in
SpaceDev's articles of incorporation, to provide Starsys' articles of incorporation, to issue up to
for the issuance of up to 10,000,000 shares of 10,000,000 shares of preferred stock. Starsys'
preferred stock in one or more series and to fix board has the authority to divide the class of
and determine the relative rights and preferences preferred stock into series and fix and determine
of the shares of any such series so established to the relative rights, limitations and preferences
the full extent permitted by its articles of of any such series so established to the full
incorporation and Colorado law in respect of: (i) extent permitted by its articles of incorporation
the number of shares to constitute a series, (ii) and Colorado law.
the rate of preference of dividends, (iii) whether
shares may be redeemed and, if so, the redemption
price and terms and condition of redemption, (iv)
the amount payable upon shares in event of
liquidation, (v) sinking fund or other provisions,
if any, for the redemption or purchase of shares,
(vi) the terms and conditions upon which shares
may be converted, (vii) voting powers and (viii)
any other relative rights and preferences of
shares of such series. Issuance of such preferred
stock, depending on its rights, preferences and
designations may have the effect of delaying,
deterring or preventing a change in control.
As of November 1, 2005, of the 10,000,000
authorized shares of Preferred Stock, SpaceDev
currently has issued and outstanding 248,460
shares of Series C Convertible Preferred Stock.
Each share of the Series C Preferred Stock is
convertible into shares of SpaceDev's common stock
at a rate of $1.54 per share.
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Dividend Rights
Holders of SpaceDev common stock will be entitled Holders of Starsys common stock shall be entitled
to receive dividends or other distributions when to receive dividends as may be declared from time
and if declared by SpaceDev's board of directors. to time by Starsys' board of directors, subject to
The right of SpaceDev's board of directors to the preferences, limitations, and relative rights
declare dividends, however, is subject to the of holders of shares of outstanding preferred
rights of holders of any outstanding SpaceDev stock.
preferred stock and the availability of sufficient
funds under Colorado law to pay dividends.
SpaceDev's articles of incorporation provide that
the rights of holders of common stock to receive
dividends or shares in the distribution of assets
in the event of liquidation, dissolution, or
winding up of the affairs of SpaceDev shall be
subject to the preferences, limitations and
relative rights of the shares of preferred stock
fixed in the resolution or which may be adopted
from time to time by the board providing for the
issuance of one or more series of preferred stock.
SpaceDev currently has one series of preferred
stock issued and outstanding. In 2004, SpaceDev
issued 250,000 shares of Series C Convertible
Preferred Stock to Laurus Master Fund, Ltd. for an
aggregate purchase price of $2,500,000, or $10.00
per share. Holders of the preferred shares shall
be entitled to receive quarterly preferential
cumulative dividends at a rate of 6.85%. Dividends
stock at the holder's option, subject to certain
exceptions.
Liquidation Rights
As to distribution of SpaceDev assets upon Starsys' articles of incorporation provide that
liquidation, dissolution or winding up, whether the holders of common stock shall be entitled to
voluntary or involuntary, the Series C Preferred receive the net assets of Starsys upon dissolution
Stock are ranked senior to the common stock. or liquidation, subject to the payment of any
preferences thereto applicable to outstanding
Under SpaceDev's articles of incorporation, upon preferred stock.
the dissolution, liquidation, or winding-up of
SpaceDev, whether voluntary or involuntary, the
holders of the Series C Preferred Stock shall be
entitled to receive before any payment or
distribution is made on the common or other such
junior stock, out of the assets of SpaceDev
available for distribution to shareholders, an
amount equal to the original issue price adjusted
for any stock dividends, combinations or splits
with respect to such shares of the Series C
Preferred Stock then outstanding plus all accrued
and unpaid dividends to and including the date
thereof. Upon payment in full of the amounts due
to holders of the Series C Preferred Stock, the
holders of common stock and any class of junior
stock shall receive all remaining assets of
SpaceDev legally available for distribution. If
upon liquidation, the assets of SpaceDev available
for distribution to the holders of the preferred
stock are insufficient to permit payment in full,
then all such assets shall be ratably distributed
among the holders of the Series C Preferred Stock.
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INFORMATION REGARDING BUSINESS OF SPACEDEV
OVERVIEW
SpaceDev, Inc. is engaged in the conception, design, development,
manufacture, integration and operations of space technology subsystems, systems,
products and services. SpaceDev is currently focused on the commercial and
military development of low-cost microsatellites, nanosatellites and related
subsystems, hybrid rocket propulsion for space and launch vehicles, as well as
the associated engineering technical services to government, aerospace and other
commercial enterprises. SpaceDev's products and solutions are sold directly to
these customers and include sophisticated micro- and nanosatellites, hybrid
rocket-based launch vehicles, orbital Maneuvering and orbital Transfer Vehicles
as well as safe sub-orbital and orbital hybrid rocket-based propulsion systems.
SpaceDev is also developing commercial hybrid rocket motors for possible use in
small launch vehicles, targets and sounding rockets, and small high performance
space vehicles and subsystems.
SpaceDev's approach is to provide smaller spacecraft - generally 250 kg (550
pounds) mass and less - and cleaner, safer hybrid propulsion systems to
commercial, government, university and limited international customers. SpaceDev
is developing smaller spacecraft and miniaturized subsystems using proven, lower
cost, high-quality off-the-shelf components. SpaceDev's space products are
modular and reproducible, which allows it to create affordable space solutions
for SpaceDev's customers. By utilizing SpaceDev's innovative technology and
experience, and space-qualifying commercial industry-standard hardware, software
and interfaces, SpaceDev provides increased reliability with reduced costs and
risks.
SpaceDev has been awarded, has successfully concluded or is successfully
concluding contracts from such esteemed government, university and commercial
customers as the Air Force Research Laboratory, Boeing, the California Space
Authority, the Defense Advanced Research Projects Agency, NASA's Jet Propulsion
Laboratory, Lockheed Martin, Lunar Enterprise Corporation, Malin Space Science
Systems, the Missile Defense Agency (formerly the "Ballistic Missile Defense
Organization"), the National Reconnaissance Office, Scaled Composites and the
University of California at Berkeley via NASA.
SpaceDev was incorporated under the laws of the State of Colorado on December
23, 1996 as Pegasus Development Group, Inc. ("PDGI"). SpaceDev, LLC of Colorado
was originally formed in 1997 for commercial space exploration and was the sole
owner of shares of common stock of SpaceDev (a Nevada corporation) ("SpaceDev"),
formed on August 22, 1997. On October 22, 1997, PDGI issued 8,245,000 of its
$0.0001 par value common stock for 100 percent (1,000,000 shares) of SpaceDev's
common stock owned by SpaceDev, LLC. Upon the acquisition of the SpaceDev
stock, SpaceDev was merged into PDGI and, on December 17, 1997, PDGI changed its
name to SpaceDev, Inc. After the merger, SpaceDev, LLC, changed its name to SD
Holdings, LLC on December 17, 1997. SpaceDev became a publicly traded company in
October 1997 and is currently trading on the Nasdaq Over-the-Counter Bulletin
Board ("OTCBB") under the symbol of "SPDV."
In February 1998, SpaceDev acquired Integrated Space Systems, located in San
Diego. Integrated Space Systems was fully integrated into SpaceDev. Most of the
Integrated Space Systems' employees were former commercial Atlas launch vehicle
engineers and managers who worked for General Dynamics in San Diego. As SpaceDev
employees, they primarily develop systems and products based on hybrid rocket
motor technology and launch vehicle systems. Integrated Space Systems was
dissolved in 2003.
In August 1998, SpaceDev acquired a license to the patents and intellectual
property produced by the American Rocket Company, which we refer to as AMROC.
The acquisition provided SpaceDev access to a large cache of hybrid rocket
documents, designs and test results. AMROC specialized in the design,
development and testing of hybrid rocket technology (solid fuel plus liquid
oxidizer) for small sounding rockets and launch vehicles.
In late 1998, SpaceDev bid and won a government-sponsored research and
development contract, which was directly related to SpaceDev's strategic
commercial space interests. SpaceDev competed with seven other industry teams
and was one of five firms selected by NASA's Jet Propulsion Laboratory to
perform a mission and spacecraft feasibility assessment study for the proposed
200-kg Mars MicroMissions. The final report was delivered to the Jet Propulsion
Laboratory in March 1999 and, as a result, SpaceDev now offers lunar and Mars
commercial deep-space missions based on this and subsequent innovative space
system designs.
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In mid-1999, SpaceDev won an R&D contract from the National Reconnaissance
Office to study small hybrid-based "micro" kick-motors for small-satellite
orbital transfer applications. During the contract, SpaceDev successfully
developed three Secondary Payload Orbital Transfer Vehicle design concepts.
SpaceDev subsequently created a prototype, which led to the development of
SpaceDev's capability to apply the Secondary Payload Orbital Transfer Vehicle
concept to SpaceDev's subsequent Maneuvering and orbit Transfer Vehicle
development programs.
In November 1999, SpaceDev won a $4.9 million mission contract by the Space
Sciences Laboratory at the University of California at Berkeley. SpaceDev was
competitively selected to design, build, integrate, test and operate, for one
year, a small NASA-sponsored scientific, Earth-orbiting spacecraft called
CHIPSat. CHIPSat is the first and, to SpaceDev's knowledge, only successful
mission of NASA's low-cost University-Class Explorer series to date. Due to
additional NASA and customer reviews, additional work, schedule extensions and a
fee for one year of satellite operations, the CHIPSat contract award was
increased by approximately $2.5 million in 2001 and 2002, bringing the total
contract value for design, build, launch and operations to approximately $7.4
million. CHIPSat launched as a secondary payload on a Delta-II rocket on January
12, 2003. CHIPSat is the world's first orbiting Internet node. The satellite
achieved 3-axis stabilization with all individual components and systems
successfully operating and continues to work well in orbit. After more than two
years. The CHIPSat program generated approximately $2.1 million, $3.2 million,
$1.7 million, $0.4 million and $0.1 million of revenue in 2000, 2001, 2002, 2003
and 2004, respectively.
On March 22, 2000, the California Spaceport Authority and the California Space
and Technology Alliance awarded SpaceDev a grant of approximately $100,000 to be
used for test firing SpaceDev's hybrid rocket motors. California's Western
Commercial Space Center also awarded SpaceDev approximately $200,000 to help
build and equip its satellite and space vehicle manufacturing facilities. These
capabilities were used to expand SpaceDev's project and technology base.
In July 2000, the National Reconnaissance Office granted SpaceDev two separate
follow-on competitive awards of approximately $400,000 each for further hybrid
rocket engine design, test, evaluation, and development. SpaceDev's work for the
National Reconnaissance Office has helped fund two innovative hybrid rocket
motor potential products:
- a family of small versatile orbital Maneuver and orbit Transfer Vehicles
using clean, safe hybrid rocket propulsion technology; and,
- a protoflight hybrid propulsion module for a 50-kg class microsatellite.
Both of those contracts were successfully completed.
In September 2001, Scaled Composites awarded SpaceDev a contract for a
proprietary hybrid propulsion development program for Scaled's "SpaceShipOne,"
valued in excess of $1 million. The entire contract, awarded upon the submitted
designs, was valued at approximately $2.2 million. The contract was indicative
of an increased demand for SpaceDev's hybrid motor technology and expertise in
the space industry. Work on this project generated approximately $1.2 million
and $397,000 of revenue in 2002 and 2003, respectively. In September of 2003,
SpaceDev was selected by Scaled Composites as the sole supplier of hybrid
propulsions systems, and was awarded the follow-on SpaceShipOne propulsion
contract. SpaceDev generated approximately $115,000 of revenue in 2003 and
$686,000 of revenue in 2004 from this contract and related engineering change
orders, with approximately $180,000 from engineering change orders and
approximately $506,000 from the contract.
- On December 17, 2003, which corresponded with the 100th anniversary of the
Wright Brothers flight, SpaceDev's hybrid propulsion system, which SpaceDev
believe is the world's largest of its kind, aboard SpaceShipOne, successfully
powered a pilot toward space on its historic first powered supersonic flight.
After being released by the White Knight, a carrier aircraft, the SpaceShipOne
Test Pilot flew the ship to a stable, 0.55 mach gliding flight condition,
started a pull-up, and fired SpaceDev's hybrid rocket motor. Nine seconds
later, SpaceShipOne broke the sound barrier and continued its steep powered
ascent. The climb was very aggressive, accelerating forward at more than 3-g
while pulling upward at more than 2.5-g. At motor shutdown, 15 seconds after
ignition, SpaceShipOne was climbing at a 60-degree angle and flying near 1.2
Mach (930 mph). The test
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pilot then continued the maneuver to a vertical climb, achieving zero speed at
an altitude of 68,000 feet.
- On June 21, 2004, SpaceDev's proprietary hybrid rocket motor technology
successfully powered SpaceShipOne on its fourth and most important
history-making flight to space. At approximately 7:45 AM PDT on Monday, June
21st, SpaceDev powered SpaceShipOne well beyond the 50 mile altitude required to
be considered a space flight, and created the world's first private sector
astronaut. After being released by the White Knight, SpaceShipOne's test pilot,
Mike Melvill, fired the rocket motor at the planned altitude and the rocket
motor then propelled SpaceShipOne to over 328,000 feet in approximately 80
seconds, flying near Mach 5.0.
- On September 29, 2004 and October 4, 2004, SpaceDev's hybrid propulsion
technology helped propel Scaled Composites/Paul Allen's SpaceShipOne into space
flight history as the craft garnered the $10 Million Ansari X Prize, a contest
created to stimulate the development of the private sector human space flight
industry. SpaceDev provided several critical components and the hybrid rocket
technology for the craft's motor, including igniter, injector and main operating
valve, which successfully performed as expected and powered SpaceShipOne on its
historic manned flight. SpaceShipOne exceeded the altitude requirement on both
scheduled flights as required by the Ansari X Prize competition. The hybrid
propulsion system burned full duration and pilot Brian Binnie steered
SpaceShipOne high above the Mojave, California desert to a height of 367,442
feet altitude (69.5 miles), which far exceeded the required 328,000 feet
altitude - the goal required by the X Prize Foundation of St. Louis, Missouri.
The altitude is generally considered to be the threshold of space.
Although SpaceDev was not the recipient of the Ansari X Prize, it was a
contest designed to jumpstart the space tourism industry through competition
among the most talented entrepreneurs and rocket experts in the world.
SpaceShipOne was built and launched with private funds from Paul Allen. The
craft was able to carry equivalent weight of three people to 100 kilometers
(62.5 miles) and return safely to earth. The competition followed in the
footsteps of more than 100 aviation incentive prizes offered between 1905 and
1935 credited with spawning today's multibillion-dollar air transport industry.
By helping SpaceShipOne succeed, SpaceDev was instrumental in moving the private
space community closer to realizing its vision of creating safe, affordable,
commercial human space flight.
On April 4, 2002, SpaceDev, Inc., an Oklahoma corporation, was formed for the
purpose of investigating and developing commercial space products in the state
of Oklahoma. SpaceDev currently has no plans to develop this business in
Oklahoma and SpaceDev's subsidiary there remains dormant.
On April 30, 2002, the Company was awarded Phase I of a contract to develop a
Shuttle-compatible propulsion module for the Air Force Research Laboratory.
SpaceDev received an award for Phase II of the contract on March 28, 2003.
SpaceDev is using the project to further expand SpaceDev's Maneuvering and
Orbital Transfer Vehicle technology and product line to satisfy government space
transportation requirements. The first two phases of the contract have an
estimated value of approximately $2.5 million, of which $100,000 was awarded for
Phase I. Phase II of the contract is cost-plus fixed fee. In order to complete
Phase II, SpaceDev requested and was granted approximately four months of
additional time and approximately $240,000 of additional funding, memorialized
by a contract amendment executed on July 7, 2004. In addition to the Phase I
and Phase II awards, there is an option worth approximately $800,000, which was
initiated on May 3, 2004. The additional funding to complete AFRL Phase II came
in part from the original $1 million option; thereby reducing the option to
approximately $800,000. An additional effort to develop a miniaturized
Shuttle-compatible propulsion module has been added to this contract and is
worth approximately $150,000.
On July 9, 2003, SpaceDev was awarded a contract by the Missile Defense Agency
to explore the use of microsatellites in national missile defense. It was a
precursor contract to the $43 million contract mentioned below. SpaceDev's
microsatellites are operated over the Internet and are capable of pointing and
tracking targets in space or on the ground. This study explored fast response
microsatellite launch and commissioning; small, low-power passive sensors;
target acquisition and tracking; formation flying and local area networking
within a cluster of microsatellites; and an extension of SpaceDev's proven use
of the Internet for on-orbit command, control and data handling. The contract
was successfully concluded on February 27, 2004. The total contract value was
$800,000. This contract was considered an investigatory phase by MDA.
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Also, on July 9, 2003, SpaceDev was awarded a Phase I Small Business Innovation
Research contract by Air Force Research Lab to design and effectively begin the
development of SpaceDev's small launch vehicle. The SpaceDev Small Launch
Vehicle will be designed to lift up to 1,000 pounds to Low Earth Orbit
responsively and affordably. The SpaceDev Small Launch Vehicle concept is based
on a proprietary combination of technologies to increase the performance of
hybrid rocket motor technology. Hybrid rocket motors are a combination of solid
fuel and liquid oxidizer, and can be relatively safe, clean, non-explosive, and
storable, and can be throttled, shut down and restarted. This contract was
valued at approximately $100,000, and was a fixed price, milestone-based
agreement, which was completed in about one year. The Phase II of this SBIR was
awarded on September 29, 2004 and is worth approximately $1,557,000. The
contract outlines the development and test firing of SpaceDev's large Common
Core Booster for the SpaceDev Small Launch Vehicle. Congress has awarded
SpaceDev approximately $3.0 million in additional funding for this project,
which SpaceDev expects will be available by mid-2005. SpaceDev believes that
there is additional interest by Congress in providing further funding to expand
and accelerate the scope of the work; however, there can be no assurance that
such work will be awarded to SpaceDev.
Also, on July 9, 2003, SpaceDev was awarded a Phase I contract to develop micro
and nanosatellite bus and subsystem designs. This Air Force Research Laboratory
Small Business Innovation Research contract, valued at approximately $100,000,
has enabled SpaceDev to explore the further miniaturization of SpaceDev's unique
and innovative microsatellite subsystems. It has also enabled SpaceDev to
explore ways to reduce the time and cost to build small satellites through
further standardization in order to help define de facto standards for payload
hardware and software interfaces. The contract is fixed price, milestone-based
and was completed in about one year. On August 23, 2004, SpaceDev was awarded
the Phase II of this Small Business Innovation Research grant, which was later
amended on September 8, 2004 to shorten the length of the overall contract,
worth approximately $739,000 for carry-forward work.
On July 24, 2003, SpaceDev was awarded a contract by Lunar Enterprise of
California for a first phase project to begin developing a conceptual mission
and spacecraft design for a lunar lander program. The unmanned mission is being
designed to put a small dish antenna near the south pole of the Moon. From that
location it will be in near-constant sunlight for solar power generation, and
should be able to perform multi-wavelength astronomy while communicating with
ground stations on Earth. The contract value was $100,000 and was completed by
November 2003. SpaceDev was awarded a follow-on phase to further analyze launch
opportunities, spacecraft design, trajectory possibilities, potential landing
areas, available technologies for a small radio astronomy system, and
communications and data handling requirements on July 20, 2004 in the amount of
$150,000. The contract has been completed.
On December 18, 2003, SpaceDev was awarded a contract by the Defense Advanced
Research Projects Agency for the study of Novel Satcom Microsat Constellation
Deployment. The contract was a milestone-based, fixed price contract with total
consideration of approximately $200,000. On August 6, 2004, an additional
$39,849 was added to the contract for increased scope, bringing the total
contract value on this fixed price effort to approximately $240,000. The
contract has been completed.
On March 31, 2004, SpaceDev was awarded a five-year, cost-plus-fixed fee
indefinite delivery/indefinite quantity contract for up to $43,362,271 to
conduct a microsatellite distributed sensing experiment, an option for a laser
communications experiment, and other microsatellite studies and experiments as
required in support of the Advanced Systems Deputate of the Missile Defense
Agency. This effort will be accomplished in a phased approach, with the first
Task Order for approximately $1.1 million awarded on April 1, 2004 and completed
by September 30, 2004. The second Task Order for approximately $8.3 million was
awarded on October 20, 2004. The principal place of performance will be Poway,
California. SpaceDev expects to complete the work under the contract before
March 2009. Government contract funds will not expire at the end of the current
government fiscal year. The microsatellite distributed sensing experiment is
intended to design and build up to six responsive, affordable, high performance
microsatellites to support national missile defense. The milestone-based,
multiyear, multiphase contract had an effective start date of March 1, 2004.
Approximately $1.14 million of revenue was generated under the first phase of
this contract. The first phase or "Task Order," resulted in a detailed mission
and microsatellite design. The second phase or "Task Order," was signed on
October 20, 2004 with an effective date of October 1, 2004. The second Task
Order is expected to be completed by January 2006. The overall contract calls
for SpaceDev to analyze, design, develop, fabricate, integrate, test, operate
and support a networked cluster of three formation-flying boost phase and
midcourse tracking microsatellites, with an option to design, develop,
fabricate, integrate, test, operate and support a
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second cluster of three formation flying microsatellites to be networked
on-orbit with high speed laser communications technology. The third phase is
anticipated to begin on or before February 2006.
BUSINESS STRATEGY
SpaceDev's strategy is based on the belief that innovative advancements in
technology and the application of standard business processes and practices will
make access to space much more practical and affordable. SpaceDev believes these
factors will cause growth in certain areas of space commerce and will create new
space markets and increased demand for SpaceDev's proprietary products.
SpaceDev's business strategy is to:
- Introduce commercial business practices into the space arena, use
off-the-shelf technology in innovative ways and standardize hardware and
software to reduce costs and to increase reliability and profits;
- Start with small, practical and profitable projects, and leverage
credibility and profits into larger and ever more bold initiatives, utilizing
partnerships where appropriate;
- Bid, win and leverage government programs to fund SpaceDev's research and
development and product development efforts;
- Integrate SpaceDev's smaller, low cost commercial spacecraft and hybrid
space transportation systems to provide one-stop turnkey payload and/or data
delivery services to target customers;
- Apply SpaceDev's low cost space products to new applications and to create
new users, new markets and new revenue streams;
- Produce and fly commercial missions, in conjunction with partners and
investors, throughout the inner solar system in the commercial beyond earth
orbit "space";
- Join or establish a team to build a safe, affordable sub-orbital,
passenger space plane to help initiate the space tourism business; and
- Establish a team to build a safe, affordable orbital passenger vehicle as
a potential shuttle replacement.
SpaceDev believe that its business model provides the following competitive
advantages:
- Enables small-space customers to contract for end-to-end mission
solutions, reducing the need for and complexity of finding other contractors for
different project tasks;
- Decreases schedule time and lowers total project costs, thereby providing
greater value and increases return on investment for SpaceDev and its customers;
and,
- Creates barriers to entry by and competition from competitors.
PRODUCTS AND SERVICES; MARKET
SpaceDev currently has two primary lines of space products and services on
which it believes a sound foundation and profitable, cash generating business
can be built:
- Spacecraft Products and Services - Microsatellites & Nanosatellites, BD-II
Spacecraft Buses, and Maneuvering and orbital Transfer Vehicles; and,
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- Propulsion Products and Services - Hybrid Propulsion and Launch Vehicle
Systems.
These products and services are being marketed and sold directly into
primarily domestic government, university, military and commercial markets.
SpaceDev considers itself a project company rather than a product company today,
although products are generated from projects. SpaceDev's long term goal and
vision is to migrate from a project company to a product company. SpaceDev's
business is not seasonal to any significant extent; however, its business
follows normal industry trends such as increased demand during bullish economic
periods, or slow-downs in demand during periods of recession.
In addition, SpaceDev is working with partners to create new markets that can
generate new space-related service, media, tourism and commercial revenue
streams. While SpaceDev believes that certain space market opportunities are
still several years away, it is currently working with industry-leading partners
to develop unique enabling technology for the potentially very large sub-orbital
manned space plane tourism market; and, creating a new unmanned Beyond Earth
Orbit commercial market with spacecraft derived from SpaceDev's NASA JPL Mars
MicroMission and Boeing Lunar Orbiter mission design contracts.
SPACEDEV'S SPACECRAFT PRODUCTS AND SERVICES
Microsatellites & Nanosatellites - SpaceDev designs and builds small,
light, high-performance, reliable and affordable micro- and nanosatellites. The
primary benefit of micro- and nanosatellites is lower cost and weight. Since
SpaceDev can dramatically reduce manufacturing costs and the costs to launch the
satellites to earth-orbit and deep space, SpaceDev can pass those cost savings
on to SpaceDev's customers. Small, inexpensive satellites were once the
exclusive domain of scientific and amateur groups; however, smaller satellites
are now a viable alternative to larger, more expensive ones, as they provide
cost-effective solutions to traditional problems. SpaceDev designs and builds
low cost, high-performance space-mission solutions involving microsatellites
(generally less than 100 kg) and even smaller satellites (less than 50 kg).
SpaceDev's approach is to provide smaller spacecraft and compatible low cost,
safe hybrid propulsion space systems to a growing market of commercial,
government and potentially international customers.
BD-II (Boeing Delta-II compatible) spacecraft buses - SpaceDev has a qualified
microsatellite bus available to sell as a standard, fixed-price product to
government and commercial customers needing an affordable satellite for small
payloads. SpaceDev began developing this product in 1999, when SpaceDev was
selected as the mission designer, spacecraft bus provider, integrator and
mission operator of the University of California at Berkeley Space Sciences
Laboratory's Cosmic Hot Interstellar Plasma Spectrometer ("CHIPS") mission.
CHIPSat was launched at 4:45 PM PST on January 12, 2003 from Vandenberg Air
Force Base in California. The satellite achieved 3-axis stabilization with all
individual components and systems successfully operating and continues to work
well in orbit.
Maneuvering and orbital Transfer Vehicle - SpaceDev's Maneuvering and orbital
Transfer Vehicle system is a family of small, affordable, elegantly simple,
throttleable, and restartable propulsion and integrated satellite products.
SpaceDev's Maneuvering and orbital Transfer Vehicle can be used as a standard
propulsion module to transport a customer's payload to different orbits. The
Maneuvering and orbital Transfer Vehicle provides the change in velocity and
maneuvering capabilities to support a wide variety of applications for on-orbit
maneuvering, proximity operations, rendezvous, inspection, docking,
surveillance, protection, inclination changes and orbital transfers.
Spacecraft and Subsystem Design - SpaceDev also provide reliable, affordable
access to space through innovative solutions currently lacking in the
marketplace. SpaceDev's approach is to provide smaller spacecraft - generally
250 kg mass and less - and compatible hybrid propulsion space systems to
commercial, university and government customers. The small spacecraft market is
supported by the evolution and enabling of microelectronics, common hardware &
software interface standards, and smaller launch vehicles. Reduction of the size
and mass of traditional spacecraft electronics has reduced the overall
spacecraft size, mass, and volume over the past 10 to 15 years. For example,
SpaceDev's miniature flight computer is only 24 cubic inches and provides 300
million instructions per second of processing power versus a competitor's more
"traditional" solution that requires about 63 cubic inches and only provides 10
MIPS.
Microsatellite & Nanosatellite Launches - To support the growth in customer
demand within the small satellite market, SpaceDev works with launch providers
to identify and market affordable launch opportunities and to provide customers
with a complete on-orbit data delivery service that combines SpaceDev's
spacecraft and hybrid
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propulsion products. These innovative, low-cost, turnkey launch solutions will
allow SpaceDev to provide one-stop shopping for launch services, spacecraft,
payload accommodation, total flight system integration and test and mission
operations. The customer only needs to provide the payload, and SpaceDev has the
capacity to perform all the tasks required for the customer to get to orbit and
to begin collecting their data. In November 2005, SpaceDev signed a contract
with SpaceX of El Segundo, CA to purchase specified launch services on a Falcon
I launch vehicle. The launch vehicle is planned for multiple primary
microsatellite payloads and multiple secondary nanosatellite payloads produced
by SpaceDev or other suppliers. SpaceDev has tentatively scheduled the first
launch for May 2008, with additional optional launches to follow. SpaceDev plans
to launch a combination of microsatellites and nanosats on each Falcon launch.
SpaceDev considers the Falcon I launch vehicle, which is capable of delivering
more than 600kg (1200 pounds) to low earth orbit, to be one of the most
cost-effective domestic launch vehicles currently available.
Mission Control and Operations - SpaceDev's mission control and operations
center, located in SpaceDev's headquarters building near San Diego, coupled with
SpaceDev's mission control and operations package, is uniquely Internet-based
and allows for the operation and control of missions from anywhere in the world
that has access to the Internet. CHIPSat was the first U.S. mission to use
end-to-end satellite operations with TCP/IP and FTP. While this concept has
been analyzed and demonstrated by the NASA OMNI team, CHIPSat is the first to
implement the concept as the only means of satellite communication. A formation
flying cluster or constellation of TCP/IP-based microsatellites, similar to the
cluster of microsats SpaceDev is developing for the Missile Defense Agency, can
be designed to communicate directly with each other, as in a wide area network
in space. Provided any one satellite/node in this network is in line-of-sight
with any ground station at any given time, the entire constellation could always
maintain ground station connectivity, thus creating a network on-orbit and on
the web, a direct extension of CHIPSat's elegantly simple TCP/IP mission
operations architecture.
SPACEDEV'S PROPULSION PRODUCTS AND SERVICES
Hybrid Rocket Propulsion and Launch Vehicle Systems - SpaceDev provides a
wide variety of safe, clean, simple, reliable, cost-effective hybrid propulsion
systems to safely and inexpensively enable satellites and on-orbit delivery
systems to rendezvous and maneuver on-orbit and deliver payloads to sub-orbital
altitudes. Hybrid rocket propulsion is a safe and low-cost technology that has
tremendous benefits for current and future space missions. SpaceDev's hybrid
rocket propulsion technology features a simple design, is restartable, is
throttleable and is easy to transport, handle and store.
Hybrid Orbital Vehicle - SpaceDev has begun designing a reuseable, piloted,
sub-orbital space ship that could be scaled to safely and economically transport
passengers to and from low earth orbit, including the International Space
Station. The name of the vehicle is the SpaceDev DreamChaser(TM). SpaceDev
signed a non-binding Space Act Memorandum of Understanding with NASA Ames
Research Center, which confirms SpaceDev's intention to explore novel, hybrid
propulsion based hypersonic test beds for routine human space access. SpaceDev
will explore with NASA collaborative partnerships to investigate the potential
of using SpaceDev's proven hybrid propulsion and other technologies, and a low
cost, private space program development approach, to establish and design new
piloted small launch vehicles and flight test platforms to enable near-term,
low-cost routine space access for NASA and the United States. One possibility
for collaboration is the SpaceDev DreamChaser(TM) project, which is currently
being discussed with NASA Ames. Unlike the more complex SpaceShipOne, for which
SpaceDev provided critical proprietary hybrid rocket motor propulsion
technologies and components, the SpaceDev DreamChaser(TM) would be crewed and
launch vertically, like most launch vehicles, and would glide back for a normal
horizontal runway landing. The sub-orbital SpaceDev DreamChaser(TM) will have
an altitude goal of approximately 160 km (about 100 miles) and will be powered
by a single, high performance hybrid rocket motor, under parallel development by
SpaceDev for the SpaceDev Streaker(TM), a family of small, expendable launch
vehicles, designed to deliver affordably small satellites to low earth orbit.
The SpaceDev DreamChaser(TM) will use motor technology being developed for the
SpaceDev Streaker(TM) booster stage, the most powerful motor in the Streaker
family. The SpaceDev DreamChaser(TM) motor will produce approximately 100,000
pounds of thrust, about six times the thrust of the SpaceShipOne motor, but less
than one-half the thrust of the 250,000 pounds of thrust produced by hybrid
rocket motors developed several years ago by the American Rocket Company.
SpaceDev's non-explosive hybrid rocket motors use synthetic rubber as the fuel,
and nitrous oxide for the oxidizer to make the rubber burn. Traditional rocket
motors use two liquids, or a solid propellant that combines the fuel and
oxidizer, but both types of rocket motors are explosive, and all solid motors
produce copious quantities of toxic exhaust. SpaceDev's hybrid rocket motors
are non-toxic and do not detonate like solid or liquid rocket motors.
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Mission Analysis and Design - SpaceDev can provide end-to-end mission design and
analysis, including the design of the mission and its science, commerce or
technology demonstration goals, the design of an appropriate space vehicle
(satellite or spacecraft), prototype development, construction and testing of
the spacecraft, integration of one or more payloads (instruments, experiments or
technologies) into the spacecraft, integration of the spacecraft onto the launch
vehicle (rocket), the launch and the mission control and operations during the
life of the mission. Many of SpaceDev's products and services are now qualified
or are nearing qualification to assist with missions that orbit the earth,
travel to another planetary body, or cruise through space taking measurements
and transmitting valuable data back to Earth.
COMPONENTS AND RAW MATERIALS
Although SpaceDev may experience a shortage of certain parts and components
related to its products, SpaceDev has many alternative suppliers and
distributors and is not dependent on any individual supplier or distributor.
Furthermore, SpaceDev has not experienced difficulty in its ability to obtain
parts or component materials, nor does it expect this to be a problem in the
future.
COMPETITION
SpaceDev competes for sales of its products and services based on price,
performance, technical features, contracting approach, reliability,
availability, customization, and, in some situations, geography. SpaceDev's
primary competition for low-cost propulsion systems using clean, safe,
commercially available hybrid rocket motor technology comes from Cesaroni
Technology Incorporated in Canada and their affiliates. While Lockheed Martin
has demonstrated large-scale hybrid rocket capability, and there are a number of
smaller enterprises, especially academic-based organizations, in the domestic
market currently investigating various aspects of hybrid rocket technology. To
date, SpaceDev has seen limited competitive pressures arising from these
organizations.
The primary domestic competition for unmanned earth-orbiting microsatellites,
unmanned deep space micro-spacecraft and microsatellite subsystems as well as
software systems comes from other small companies such as AeroAstro, Orbital
Sciences and Spectrum Astro. The most established international competitors are
Surrey Satellite Technology Limited in the United Kingdom, OHB Systems in
Germany, an OHB Technology AG Company, and EADS Astrium with locations
throughout Western Europe. Swedish Space Corporation is also able to compete in
the small-satellite arena, particularly in the European market. In addition to
private companies, there are a limited number of universities in the United
States that have the capability to produce reasonably simple microsatellites;
these include, Weber State in Ogden, Utah and Colorado University in Boulder,
Colorado.
While SpaceDev believes that its product and service offerings provide a wide
breadth of solutions for SpaceDev's customers and prospective customers, some of
its competitors compete across many of SpaceDev's product lines. Several of
SpaceDev's current and potential competitors have greater resources, including
technical and engineering resources. SpaceDev is not aware of any established
large companies (e.g., Northrop Grumman, Lockheed Martin, Boeing), which have
expressed corporate goals to design and build inexpensive micro-spacecraft for a
mission, which would be SpaceDev's direct competition.
SpaceDev also competes with each of its competitors for qualified engineers.
There are a limited number of individuals with all of the requirements that
SpaceDev seek and there can be no assurance that SpaceDev can locate and recruit
these individuals in a timely and cost-effective manner. Many of SpaceDev's
competitors have greater resources than SpaceDev does and can offer higher
salaries or better incentives to attract these individuals.
REGULATION
SpaceDev's business activities are regulated by various agencies and
departments of the U.S. government and, in certain circumstances, the
governments of other countries. Several government agencies, including NASA and
the United States Air Force, maintain Export Control Offices to ensure that any
disclosure of scientific and technical information complies with the Export
Administration Regulations and the International Traffic in Arms Regulations
("ITAR"). Exports of the Company's products, services and technical data
require either Technical Assistance Agreements or licenses from the United
States Department of State, depending on the level of technology being
transferred. This includes recently published regulations restricting the
ability of United States-based companies to
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complete offshore launches, or to export certain satellite components and
technical data to any country outside the United States. The export of
information with respect to ground-based sensors, detectors, high-speed
computers, and national security and missile technology items are controlled by
the Department of Commerce. The government is very strict with respect to
compliance and has served notice that failure to comply with the ITAR and/or the
Commerce Department regulations may subject guilty parties to fines of up to $1
million and/or up to 10 years imprisonment per violation. The failure of the
Company to comply with any of the foregoing regulations could have serious
adverse effects as dictated by the rules associated with compliance to the ITAR
regulations. Also, SpaceDev's ability to successfully market and sell into
international markets may be severely hampered due to ITAR regulation
requirements. SpaceDev's conservative position is to consider any material
beyond standard marketing material to be regulated by ITAR regulations. In 2003,
SpaceDev began an active and comprehensive internal and external ITAR training
program provided by SpaceDev's regulatory consulting firm, Q International
Group, and the Society for International Affairs, both for SpaceDev's employees
and SpaceDev's Empowered Official, Mr. Slansky. SpaceDev also introduced in 2003
an Internal Export Compliance Control Program for defense articles and defense
services controlled by the U.S. Department of State under ITAR.
In addition to the standard local, state and national government regulations
that all businesses must adhere to, the space industry has specific regulations.
In the United States, command and telemetry frequency assignments for space
missions are primarily regulated by the Federal Communications Commission for
SpaceDev's domestic commercial products. SpaceDev's products geared toward
domestic government customers are regulated by the National Telecommunications
Information Agency and any of SpaceDev's products sold internationally, if any,
are regulated by the International Telecommunications Union. All launch
vehicles that are launched from a launch site in the United States must pass
certain launch range safety regulations that are administered by the United
States Air Force. In addition, all commercial space launches that SpaceDev
might perform require a license from the Department of Transportation.
Satellites that are launched must obtain approvals for command and frequency
assignments. For international approvals, the Federal Communications Commission
and National Telecommunications and Information Administration obtain these
approvals from the International Telecommunication Union. These regulations
have been in place for a number of years to cover the large number of non
government commercial space missions that have been launched and put into orbit
in the last 15 to 20 years. Any commercial deep space mission that SpaceDev
might perform would be subject to these regulations. Presently, SpaceDev is not
aware of any additional or unique government regulations related to commercial
deep space missions.
SpaceDev is also required to obtain permits, licenses, and other authorizations
under federal, state, local and foreign statutes, laws or regulations or other
governmental restrictions relating to the environment or to emissions,
discharges or releases of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic or hazardous substances or wastes into
the environment including, without limitation, ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the clean-up or other
remediation thereof. Presently, SpaceDev does not have a requirement to obtain
any special environmental licenses or permits.
SpaceDev may need to utilize the Deep Space Network on some of its missions. The
Deep Space Network is a United States funded network of large antennas that
supports interplanetary spacecraft missions and radio and radar astronomy
observations for the exploration of the solar system and the universe. The
network also supports selected Earth-orbiting missions. The network is a
facility of NASA, and is managed and operated for NASA by the Jet Propulsion
Laboratory. The Telecommunications and Mission Operations Directorate manages
the program within the Jet Propulsion Laboratory. Coordination for the use of
this facility is arranged with the Telecommunications and Mission Operations
Command.
Also, as some of SpaceDev's projects with the Department of Defense proceed,
SpaceDev may need special clearances to continue working on and advancing
SpaceDev's projects. Classified programs generally will require that SpaceDev
comply with various Executive Orders, Federal laws and regulations and customer
security requirements that may include specialized facilities and restrictions
on how SpaceDev develops, stores, protects and shares information.
Laboratories, manufacturing and assembly areas, meeting spaces, office areas,
storage areas, computers systems and networks and telecommunications systems may
require modification or replacement in order to comply with customer
requirements. Classified programs may require SpaceDev's employees to obtain
government clearances and restrict SpaceDev's ability to have key employees work
on these programs until these clearances are received from
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the appropriate United States government agencies. In order to staff these
programs SpaceDev may need to recruit personnel with the appropriate
professional training, experience and security clearances. There are a very
limited number of individuals with all of the requirements that SpaceDev seeks.
There is no assurance that SpaceDev can locate and recruit these individuals in
a timely and cost-effective manner. SpaceDev may be required to modify existing
facilities and to develop new facilities and capabilities that will only be
utilized by these classified programs. SpaceDev may be required to install
computer networks, communications systems and monitoring systems that are
dedicated to these classified programs. Some or all of these requirements may
entail substantial additional expense. It is uncertain whether SpaceDev will be
able to recover any of the costs of these systems from SpaceDev's customers.
Many of these classified programs are regulated by Executive Orders, various
Federal laws and regulations and customer requirements. The failure of the
Company to comply with any of the foregoing Executive Orders, Federal laws and
regulations and customer requirements could have serious adverse effects. Also,
SpaceDev's ability to successfully market and sell into the Department of
Defense markets may be severely hampered if SpaceDev is unable to meet
classified program requirements. There is no assurance that SpaceDev will be
able to pass successfully the criteria required in order to win a classified
program or to maintain current contracts, such as SpaceDev's Missile Defense
Agency contract (which may become classified), and there is no assurance that
SpaceDev will maintain that status once it has been obtained. This year SpaceDev
began an active program to complete the steps required in order to win
preliminary certification for classified programs. A number of SpaceDev's
employees have received preliminary and permanent security clearances. SpaceDev
received preliminary certification for classified computer system processing in
early 2005.
EMPLOYEES
At December 9, 2005, SpaceDev employed approximately 50 persons, full and
part-time, most of whom are spacecraft, propulsion, systems, mechanical and
electrical engineers. SpaceDev expects to hire other personnel as necessary for
completion of projects, product development, quality assurance, sales and
marketing, finance and administration. In addition, due to the nature of
SpaceDev's business, it may become necessary to lay off employees whose work is
no longer required to maintain operations in order to prevent cost overruns.
SpaceDev does not anticipate any such lay-offs in the near future. SpaceDev
does not have any collective bargaining agreements with its employees and
believes its relations with employees are good.
INTELLECTUAL PROPERTY
SpaceDev relies, in part, on patents, trade secrets and know-how to develop
and maintain its competitive position and technological advantage. SpaceDev
has protected and intend to continue to protect its intellectual property
through a combination of patents, license agreements, trademarks, service marks,
copyrights, trade secrets and other methods of restricting disclosure and
transferring title. SpaceDev has filed patent applications relating to its
hybrid propulsion and satellite technology. There can be no assurance that
these applications will be granted. SpaceDev has and intends to continue to
enter into confidentiality agreements with its employees, consultants and
vendors, to enter into license agreements with third parties and generally to
seek to control access to and distribution of its intellectual property.
In August 1998, SpaceDev acquired rights to intellectual property (including
three patents and trade secrets) from an individual who had acquired them from
the former American Rocket Company, which specialized in hybrid rocket
technology. SpaceDev is obligated to issue warrants to this individual to
purchase a minimum of 100,000 and a maximum of 3,000,000 shares of SpaceDev's
common stock over ten years beginning at the inception of the agreement,
depending on SpaceDev's annual revenues directly related to sales of hybrid
technology-based products from the original technology acquisition. To date,
SpaceDev has issued warrants to purchase a total of 100,000 shares of SpaceDev's
common stock under the agreement, of which, none of the warrants have been
exercised and 25,000 warrants expired unexercised. SpaceDev acquired some of
its expertise in hybrid propulsion technology from the American Rocket Company;
however, SpaceDev is using its own technology to develop the responsive,
affordable SpaceDev Streaker(TM) small launch vehicle under an Air Force
contract.
PROPERTIES
In January 2003, SpaceDev entered into a sale and leaseback of its 25,000
square foot headquarters facility in Poway, California. SpaceDev originally
purchased the facility in December 1998. The rent is approximately $26,000
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per month with a 3.5% increase annually. SpaceDev is responsible for property
tax and liability insurance on the facility. SpaceDev was required to make an
advance payment in the form of a security deposit of approximately $25,700.
SpaceDev's Chief Executive Officer provided a guarantee for the lease. The lease
is scheduled to expire in 2013.
The facility includes a small Spacecraft Assembly and Test facility with an
1,800 square foot Class 100,000 clean room, avionics development lab, machine
shop with rocket motor casting capability, mechanical assembly lab, and mission
control and operations center. Key uses of the facility are program and project
conferences and meetings, engineering design, engineering analysis, spacecraft
assembly, avionics labs and software labs and media outreach. SpaceDev also has
an Internet-based Mission Control and Operations Center within the facility.
LITIGATION
SpaceDev is currently not aware of any legal proceedings or claims that it
believes will have, individually or in the aggregate, a material adverse affect
on its business, financial condition or operating results.
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SPACEDEV'S MARKET PRICE AND DIVIDEND INFORMATION
MARKET INFORMATION
SpaceDev common stock has been traded on the Over-the-Counter Bulletin
Board ("OTCBB") since August 1998 under the symbol "SPDV" or "SPDV.OB." The
following table sets forth the trading history of SpaceDev common stock on the
OTCBB for each quarter from fiscal 2003 through the third quarter of fiscal 2005
as reported by Yahoo! Finance Historical Prices (www.finance.yahoo.com). The
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not represent actual transactions.
QUARTERLY QUARTERLY
QUARTER ENDING HIGH LOW
-------------- ---------- ----------
3/31/2003. . . $ 0.55 $ 0.41
-------------- ---------- ----------
6/30/2003. . . $ 0.75 $ 0.33
9/30/2003. . . $ 1.80 $ 0.55
12/31/2003 . . $ 1.15 $ 0.81
3/31/2004. . . $ 1.85 $ 0.92
6/30/2004. . . $ 2.38 $ 1.04
9/30/2004. . . $ 2.46 $ 1.43
12/31/2004 . . $ 2.42 $ 1.51
3/14/2005. . . $ 1.97 $ 1.55
6/30/2005. . . $ 1.75 $ 1.51
9/30/2005. . . $ 1.70 $ 1.43
HOLDERS OF RECORD
As of December 9, 2005, there were approximately 600 holders of record of
SpaceDev common stock.
DIVIDENDS
SpaceDev has never paid a cash dividend on its common stock. Payment of
common stock dividends is at the discretion of the board of directors. The
board of directors plans to retain earnings, if any, for operations and does not
intend to pay common stock dividends in the foreseeable future.
SpaceDev accrued dividends on its Series C Convertible Cumulative Preferred
Stock from August 25, 2004 through December 31, 2004 of approximately $61,000.
The accrued dividends became payable in January 2005 and were converted into
shares of SpaceDev common stock at a conversion rate of $1.54 per share.
Payment of future dividends on SpaceDev's Series C Convertible Cumulative
Preferred Stock may be in cash or shares of common stock.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF SPACEDEV
The following discussion should be read in conjunction with the
consolidated financial statements of SpaceDev for the years ended December 31,
2004 and 2003 and the nine months ended September 30, 2005 and 2004 and related
notes and the other financial information appearing elsewhere in this document.
You are also urged to carefully review and consider the various disclosures in
this joint proxy statement/prospectus about SpaceDev including the risk factors
related to the combined company. See "Special Note Regarding Forward-Looking
Information" on page 14. In the following Management's Discussion and Analysis
of Financial Condition and Results of Operations of SpaceDev, references to
"us," "we," "our" and other first person declarations refer to SpaceDev.
OVERVIEW
We are engaged in the conception, design, development, manufacture,
integration and operation of space technology systems, products and services.
We are is currently focused on the commercial and military development of
low-cost microsatellites, nanosatellites and related subsystems, hybrid rocket
propulsion for space, launch and human flight vehicles as well as associated
engineering and technical services which are provided primarily to government
agencies, and specifically the Department of Defense. Our products and solutions
are sold, mainly on a project-basis, directly to these customers and include
sophisticated micro- and nanosatellites, hybrid rocket-based launch vehicles,
maneuvering and orbital transfer vehicles and safe sub-orbital and orbital
hybrid rocket-based propulsion systems. Although we believe there will be a
commercial market for our microsatellite and nanosatellite products and services
in the future, virtually all of our current work is for branches of the United
States military. We are also developing commercial hybrid rocket motors for use
in small launch vehicles, targets and sounding rockets, and small,
high-performance space vehicles and subsystems for commercial customers.
During the first nine months of 2005, 93% of our net sales were generated from
direct government contracts and 7% were generated from government-related work
through subcontracts with others. In 2004, approximately 90% of our net sales
were generated by government or government-related work. We anticipate that
over 90% of net sales generated during the remainder of 2005 will be generated
by government or government-related work. We will continue to seek both
government and commercial business and anticipate that net sales from government
sources will continue to represent in excess of 70% of our net sales for the
next several years as we increase government and commercial marketing efforts
for both our technology and product areas. Currently, we are focusing on the
domestic United States government market, which we believe is only about
one-half of the global government market for our technology, products and
services. Although we are interested in exploring international revenue and
contract opportunities, we are restricted by export control regulations,
including International Traffic in Arms Regulations, which may limit our ability
to develop market opportunities outside the United States.
At this time, over 90% of our forecasted sales for 2005 are under contract or
near contract award. We may not be able to win enough new business to achieve
our targeted growth projection or to maintain a positive cash flow position.
During the first nine months of 2005, we submitted five bids for government or
commercial programs and continued our work with the United States Congress to
identify directed funding for our programs.
In order to perform the Missile Defense Agency contract on schedule and
successfully execute other existing and new business opportunities, We must
substantially increase our staff and hire new engineers or subcontract the work
to third parties. We are actively seeking to hire spacecraft and propulsion
engineers, and we are investigating various partnership arrangements to increase
resource availability.
RECENT DEVELOPMENTS
In September 2005, we made a secured loan to Starsys in the principal
amount of $1.2 million. The loan accrues interest at 8% per annum and was
originally scheduled to mature on December 31, 2005, or earlier in certain
circumstances. Principal or interest payments are due before maturity. The
maturity date may be accelerated upon the occurrence of certain events of
default. The loan is secured by a security interest in all of the assets of
Starsys, subject to an intercreditor agreement with Vectra Bank Colorado,
National Association. On December 20, 2005, we agreed to extend the maturity
date of the loan to January 31, 2006.
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In July 2005, we were awarded a small contract by Lunar Enterprise Corporation,
a wholly owned subsidiary of Space Age Publishing Company to perform the work
necessary to create a conceptual mission architecture and mission design for a
human servicing mission to the Lunar south pole targeted for the period of 2010
to 2015. We were awarded an earlier phase by Lunar Enterprise for a conceptual
mission and spacecraft design for a lunar lander program to further analyze
launch opportunities, spacecraft design, trajectory possibilities, potential
landing areas, available technologies for a small radio astronomy system, and
communications and data handling requirements. These contracts are expected to
result in revenues of $125,000 and $150,000, respectively. The current contract
calls for us to identify and evaluate existing technology, technology currently
under development, and proposed technology that could be developed by NASA,
other countries or the private sector in time to be incorporated into the
mission.
On July 18, 2005, we were awarded a subcontract to provide scientific,
engineering, development and programmatic support to the development and
demonstration of innovative SSA (space situational awareness) nanosatellite
(<15kg) spacecraft. SSA is the ability to search, identify and monitor
spacecrafts for the purpose of obtaining space superiority. The subcontract
covers the conceptual/preliminary phase of development and includes all aspects
of potential systems from the platforms and associated payloads to the links and
nodes and ground support. The cost plus fixed fee subcontract is expected to
result in revenues of approximately $400,000, but only $120,000 has been funded
at this time. We expect to complete this subcontract by December 2005. We
believe a subcontract for the next phase of the project will be awarded at the
beginning of 2006 to complete the system requirements review of the development
phase. We will need to bid and compete for the next-phase subcontract if it is
awarded.
On June 27, 2005, we were awarded a $1.25 million fixed price subcontract by
Andrews Space, Inc. to design a small spacecraft that will travel to the
vicinity of the Moon through a gravity tunnel that is part of the InterPlanetary
Superhighway, a route which requires significantly less fuel than conventional
trajectories. In early June 2005, we were awarded a letter subcontract not to
exceed $100,000 by Andrews for the same program. The overall program, which
Andrews has signed with NASA, is to design, develop, launch, and operate a small
low-cost spacecraft, called SmallTug, on a mission to the Lunar L1 point to
demonstrate key technologies and advanced orbital mechanics in support of NASA's
human and robotic exploration of the Moon and Mars. On September 14, 2005, we
were notified by Andrews that the subcontract was cancelled. Revenues for the
nine months ended September 30, 2005 were approximately $400,000, including our
final invoice to Andrews.
For a description of our other material ongoing contracts, please see SpaceDev's
Form 10-KSB for the year ended December 31, 2004.
CRITICAL ACCOUNTING STANDARDS
Our revenues transitioned in 2003 and early 2004 from being based primarily
on fixed-price contracts, where revenues are recognized using the
percentage-of-completion method of contract accounting based on the ratio of
total costs incurred to total estimated costs, to primarily cost plus fixed fee
contracts, where revenues are recognized as costs are incurred and services are
performed. Losses on contracts are recognized when they become known and
reasonably estimable (see the Notes to SpaceDev's Consolidated Financial
Statements). Actual results of contracts may differ from management's estimates
and such differences could be material to the consolidated financial statements.
Professional fees are billed to customers on a time-and-materials basis, a
fixed-price basis or a per-transaction basis. Time-and-materials revenues are
recognized as services are performed. Deferred revenue represents amounts
collected from customers for services to be provided at a future date. Research
and development costs are expensed as incurred.
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
123, "Accounting for Stock-Based Compensation." We adopted SFAS No. 123 in
1997. We have elected to measure compensation expense for our stock-based
employee compensation plans using the intrinsic value method prescribed by APB
Opinion 25, "Accounting for Stock Issued to Employees" and have provided pro
forma disclosures as if the fair value based method prescribed in SFAS No. 123
has been utilized. (See the Notes to SpaceDev's Consolidated Financial
Statements.) We have valued our stock, stock options and warrants issued to
non-employees at fair value in accordance with the accounting prescribed in SFAS
No. 123, which states that all transactions in which goods or services are
received for the issuance of equity instruments shall be accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
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SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation,
was published by the Financial Accounting Standards Board on December 31, 2002.
The effective date of FASB No. 148 is December 15, 2002. SFAS No. 123
prescribes a "fair value" methodology to measure the cost of stock options and
other equity awards. Companies may elect either to recognize fair value
stock-based compensation costs in their financial statements or to disclose the
pro forma impact of those costs in the footnotes. We have chosen the latter
approach. The immediate impact of SFAS No. 148 is more frequent and prominent
disclosure of stock-based compensation costs, starting with financial statements
for the year ended December 31, 2002 for companies whose fiscal year is the
calendar year. SFAS No. 148 also provides some flexibility for the transition
if a company chooses the fair-value cost recognition of employee stock options.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2005 -VS.- NINE MONTHS ENDED SEPTEMBER 30, 2004
Net Sales
Our net sales increased by approximately 72% to $5,943,000 for the nine
months ended September 30, 2005 compared to net sales of $3,446,000 for the same
period in 2004. Net sales increased due to our acquisition of and performance
under new and existing government contracts. Net sales in the 2005 period
reflected our continued work on the Missile Defense Agency Task Order 2 contract
of approximately $4,114,000 which is part of our March 31, 2004 Missile Defense
Agency contract described below. We also recorded net sales on ongoing Small
Business Innovation Research contracts with the Air Force Research Laboratory.
These contracts are both for Phase II efforts, and are for our Small Launch
Vehicle and our micro and nanosatellite bus and subsystem designs work. Net
sales for these contracts totaled $592,000 and $509,000 for the nine months
ended September 30, 2005 and 2004, respectively. In addition, we started our
Phase I effort with Andrews Space which had revenues for the nine months ended
September 30, 2005 of $393,000.
Net sales for the nine months ended September 30, 2004 included $957,000 from
the Air Force Research Laboratory Phase II contract, $1,141,000 from the Missile
Defense Agency Phase I, $318,000 also from the Missile Defense Agency Phase 0
contract (which was the precursor to Phase I contract), $610,000 from the
SpaceShipOne program and $200,000 from our Defense Advanced Research Projects
Agency contract for the study of Novel Satcom Microsat Constellation Deployment.
On March 31, 2004, we were was awarded a five-year, cost-plus-fixed fee
indefinite delivery/indefinite quantity contract to conduct a microsatellite
distributed sensing experiment, an option for a laser communications experiment,
and other microsatellite studies and experiments as required in support of the
Advanced Systems Deputate of the Missile Defense Agency. The total five-year
contract provides for a maximum of $43,362,271 in aggregate payments. We
expect to complete the work under the contract before March 2009. The contract
is a milestone-based, multiyear, multiphase contract and had an effective start
date of March 1, 2004. The first phase was completed on September 30, 2004 and
generated approximately $1.14 million of revenue. The second phase of the
contract began in October 2004, and is expected to generate a total of
approximately $8.3 million of revenue over approximately 16 months. During the
nine months ended September 30, 2005, we recognized approximately $4,114,000 of
revenue from this second phase. The overall contract called for us to analyze,
design, develop, fabricate, integrate, test, operate and support a networked
cluster of three formation-flying boost phase and midcourse tracking
microsatellites, with an option to design, develop, fabricate, integrate, test,
operate and support a second cluster of three formation-flying microsats to be
networked on-orbit with high speed laser communications technology. In addition
to the three networked microsat under our Phase II task order, the $43 million
contract also envisioned an option for a second three microsats using laser
communication technology. We were recently informed that the Missile Defense
Agency had re-routed the laser communications experiment that would use this
option to another program and that they would not be exercising their option for
the additional microsats at this time; however, the contract vehicle remains at
$43 million and leaves open the opportunity for some other purchase to take its
place. We continue on-time and on-budget for delivery of the first three
microsats. We estimate that the second cluster would have represented
approximately $10 million of the $43 million contract, and have reduced our
current backorder accordingly. We believe the remaining unbilled contract
backlog amount of $33 million to be secure. We are currently proposing our
Phase III task order and the Missile Defense Agency continues to be very pleased
with our progress on the three microsat distributed sensing
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experiment and while we cannot be assured of any new business, the Missile
Defense Agency was interested in continuing a productive business relationship
with us.
Cost of Sales
For the nine months ended September 30, 2005, cost of sales were
approximately $4,572,000, or 76.9% of net sales, as compared to approximately
$2,703,000, or 78.4% of net sales, during the same period in 2004. Cost of
sales consists of direct and allocated costs associated with individual
contracts. The increase in cost of sales was directly tied to increases in net
sales, and the decrease in cost of sales as a percentage of net sales was due to
improved systems and processes for management of our projects and improved labor
productivity. Gross margin improvement is limited due to the cost plus fixed
fee nature of our contracts.
Operating Expenses
Operating expenses increased from $649,000, or 18.8% of net sales, for the
nine months ended September 30, 2004 to approximately $1,148,000, or 19.3% of
net sales, for the nine months ended September 30, 2005. Operating expenses
include general and administrative expenses and marketing and sales expenses.
- Marketing and sales expenses increased from approximately $336,000, or
9.7% of net sales, for the nine months ended September 30, 2004, to
approximately $493,000, or 8.3% of net sales, during the same period in 2005.
The increase was attributable to the allocation of a portion of the personnel
costs of our Vice President of New Business Development and our Chief Executive
Officer to marketing and sales expenses as well as costs associated with the
preparation and submission of bids for new projects.
- General and administrative expenses increased from $314,000, or 9.1% of
net sales, for the nine months ended September 30, 2004 to $655,000, or 11.0% of
net sales, for the nine months ended September 30, 2005. The increase was
attributable to the increase in personnel, including a Human Resources director
and a contract administrator, and upcoming SEC compliance efforts, including
those related to the Sarbanes-Oxley Act of 2002 and FASB 123(R). Research and
development costs are included in general and administrative expenses and did
not comprise a significant portion of general and administrative expenses for
the nine months ended September 30, 2004 and 2005.
Non-Operating Expense (Income)
Non-operating expense (income) consisted of deferred gain on the sale of
our building, other non-cash loan fees and expenses and interest expense.
Interest expense did not comprise a significant portion of non-operating expense
during the nine months ended September 30, 2004 or 2005. We recorded
non-operating income for the nine months ended September 30, 2005.
- We recognized approximately $88,000 of deferred gain on the sale of our
building during each of the nine month periods ended September 30, 2005 and
2004, and we will continue to amortize the remaining deferred gain of
approximately $860,000 into non-operating income over the remainder of the lease
of the building, which is scheduled to expire in 2013.
- We recorded loan fees related to our revolving credit facility of $29,000
and $2,457,000 for the nine months ended September 30, 2005 and 2004,
respectively. Although we did not have a balance on our revolving credit
facility during the nine months ended September 30, 2005, we recorded $29,000 in
non-cash loan fees upon Laurus's exercise of warrants to acquire 50,000 shares
of our common stock, which were granted in 2004 in connection with the revolving
credit facility. Additional non-cash loan fees will be recorded as the
warrants granted to Laurus related to the revolving credit facility are
exercised.
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Net Income and EBITDA
Net income was approximately $348,000, or 5.9% of net sales, compared to a
net loss of approximately $2,332,000, or 67.7% of net sales, for the nine months
ended September 30, 2005 and 2004, respectively. During the nine months ended
September 30, 2005, we had earnings before interest, taxes, depreciation and
amortization, or EBITDA, of approximately $331,000, or 5.6% of net sales,
compared to approximately $149,000, or 4.3% of net sales, for the nine months
ended September 30, 2005 and 2004.
The following table reconciles EBITDA to net income (loss) for the nine months
ended September 30, 2005 and 2004:
FOR THE NINE-MONTHS ENDED. . . SEPTEMBER 30, 2005 September 30, 2004
(UNAUDITED) (Unaudited)
NET INCOME (LOSS). . . . . . . $ 348,412 $ (2,332,304)
------------------------------ -------------------- --------------------
Interest Income. . . . . . . . (69,632) (5,619)
Interest Expense . . . . . . . 2,283 62,633
Gain on Building Sale. . . . . (87,953) (87,954)
Loan Fee - Equity Conversion. 28,875 2,456,794
Provision for income taxes . . 1,200 -
Depreciation and Amortization. 108,265 55,236
------------------------------ -------------------- --------------------
EBITDA . . . . . . . . . . . . $ 331,450 $ 148,786
------------------------------ -------------------- --------------------
EBITDA is a non-GAAP financial measure and should not be considered as an
alternative to net income (as an indicator of operating performance) or as an
alternative to cash flow (as a measure of liquidity or ability to service debt
obligations). We believe that EBITDA provides an important additional
perspective on our operating results, our ability to service our long-term
obligations, our ability to fund continuing growth, and our ability to continue
as a going concern. Our management regularly evaluates our progress based on
EBITDA. Beginning in 2003 through the quarter ended September 30, 2005, we
showed continued improvement in net sales as well as in EBITDA.
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[GRAPHIC OMITED]
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[GRAPHIC OMITED]
YEAR ENDED DECEMBER 31, 2004 -VS.- YEAR ENDED DECEMBER 31, 2003
Net Sales
Our net sales were approximately $4,891,000 for the year ended December 31,
2004 compared to net sales of approximately $2,956,000 for the same period in
2003. Net sales increased primarily due to our new government contracts and
timely finalization of follow-on contracts for the current Missile Defense
Agency task orders. Net sales in 2004 reflected our completion of the Missile
Defense Agency Phase 0 and Task Order 1 on the Missile Defense Agency contract
of approximately $319,000 and $1,140,000, respectively, as well as the start of
Task Order II for approximately $574,500. We had ongoing contracts with the Air
Force Research Laboratory and the Small Business Innovation Research contract
Phase II, the option to that contract and an add-on contract totaled
approximately $1.4 million. Other ongoing work from SpaceShipOne totaled
approximately $686,000. We had a new Defense Advanced Research Projects Agency
contract that had revenues which totaled approximately $240,000 and our Air
Force Research Laboratory Small Business Innovation Research work for Phase I
and II had revenues which totaled approximately $323,000.
Net sales for the year ended December 31, 2003 were comprised of approximately
$29,600 and $997,000 from the Air Force Research Laboratory Small Business
Innovation Research (Phase I and II) contracts; $397,000 and $115,000 from the
original and new SpaceShipOne contracts; $250,000 and $481,000 from the Missile
Defense Agency (Phase I and II) contracts; $356,000 from the CHIPSat program;
$100,000 from the contract by Lunar Enterprises of California; and approximately
$234,400 from all other programs.
Cost of Sales
For the year ended December 31, 2004, cost of sales were approximately
$3,821,000, or 78.12% of net sales, as compared to approximately $2,415,000, or
81.69% of net sales, during the same period in 2003. The increase in cost
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of sales was directly tied to increases in net sales and the decrease in cost of
sales as a percentage of net sales was due to the implementation of stronger
cost controls and project monitoring. Also, we altered our cost allocation
method in the second quarter of 2003 as we completed CHIPSat, our main fixed
price contract at the time, and began work on our new Air Force Research
Laboratory and Missile Defense Agency cost plus fixed fee contracts.
Operating Expense
Operating expenses decreased from approximately $1,431,000, or 48.42% of
net sales, in the year ended December 31, 2003 to approximately $926,000, or
18.93% of net sales, for the year ended December 31, 2004. Operating expenses
include general and administrative expenses and marketing and sales expenses and
research and development expenses.
- Marketing and sales expenses increased from approximately $395,000, or
13.36% of net sales, for the year ended December 31, 2003, to approximately
$419,000, or 8.56% of net sales, during the same period in 2004. The increase
was attributable to the expansion of our marketing and sales department, and the
allocation of a portion of the personnel costs of our Vice President of New
Business Development and our Chief Executive Officer being charged to marketing
and sales expenses.
- General and administrative expenses decreased from approximately $746,000,
or 25.23% of net sales, for the year ended December 31, 2003 to approximately
$467,000, or 9.56% of net sales, for the same period in 2004. This decrease was
attributable to better controls and internal procedures, reduced overhead costs
and the classification of an increased portion of actual overhead costs as cost
of goods sold.
- Research and development expenses decreased approximately $242,000 during
2004. Although we focus our efforts on government-funded development and rarely
perform pure research, we devote certain resources to building our intellectual
property portfolio. We incurred research and development expenses of
approximately $281,000, or 9.51% of net sales, during the year ended December
31, 2003. We decreased non-funded research and development expenditures in 2004
to approximately $39,400. During 2003, approximately $192,000 of research and
development costs were related to our hybrid rocket propulsion design system and
technologies outside the scope of our SpaceShipOne contract and the remaining
$89,000 was related to our satellite bus design and development effort. In
2004, we continued to fund a small amount of hybrid rocket propulsion design
and development independent of any contract.
Non-Operating Expense (Income)
Non-operating expense/(income) consisted of interest expense, non-cash debt
discount expense and deferred gain on the sale of our building, as well as other
loan fees and expenses.
- We recognized approximately $117,000 and $107,500 of the deferred gain on
the sale of our building during the years ended December 31, 2004 and 2003, and
we will continue to amortize the remaining deferred gain of approximately
$948,000 into non-operating income over the remainder of the lease of the
building, which is scheduled to expire in 2013.
- We recorded loan fees related to our revolving credit facility
(approximately $2,480,000) and expenses related to the conversion of previous
notes payable (approximately $774,000) into common stock at below fair market
value for a total of approximately $3,254,000 and $258,000 for the years ended
December 31, 2004 and 2003.
Net Income (Loss) and EBITDA
- Net loss was approximately $3,027,000, or 61.89% of net sales, for the
year ended December 31, 2004 compared to a net loss of approximately $1,246,000,
or 42.15% of net sales, for the same period in 2003. During the year ended
December 31, 2004, we had earnings before interest, taxes,
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depreciation and amortization, or EBITDA, of approximately $228,000, or 4.66% of
net sales, compared to a negative EBITDA of approximately $723,000, or 24.46% of
net sales, for the year ended December 31, 2003.
The following table reconciles EBITDA to net loss for the twelve-months ended
December 31, 2004 and 2003, respectively:
FOR THE TWELVE-MONTHS ENDING . . . . . December 31, 2004 December 31, 2003
Audited Audited
NET LOSS . . . . . . . . . . . . . . . $ (3,027,054) $ (1,246,067)
-------------------------------------- ------------------- -------------------
Interest Income. . . . . . . . . . . . (19,497)
Interest Expense . . . . . . . . . . . 52,077 91,493
Non-Cash Interest exp. (Debt Discount) - 112,500
Gain on Building Sale. . . . . . . . . (117,272) (107,498)
Loan Fee - Equity Conversion. . . . . 3,254,430 257,882
Provision for income taxes . . . . . . 1,600 1,600
Depreciation and Amortization. . . . . 83,531 166,971
-------------------------------------- ------------------- -------------------
EBITDA (LBITDA) *. . . . . . . . . . . $ 227,815 $ (723,119)
-------------------------------------- ------------------- -------------------
* Loss before interes, taxes, depreciation, and amortization
EBITDA is a non-GAAP financial measure and should not be considered as an
alternative to net income (as an indicator of operating performance) or as an
alternative to cash flow (as a measure of liquidity or ability to service debt
obligations). We believe that EBITDA provides an important additional
perspective on our operating results, our ability to service our long-term
obligations, our ability to fund continuing growth, and our ability to continue
as a going concern. Our management regularly evaluates our progress based on
EBITDA. The increase in the net loss was primarily attributable to the non-cash
interest expense in conversions under the revolving credit facility. For the
eight consecutive quarters in 2003 and 2004, we showed continued progress in net
sales as well as in EBITDA.
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[GRAPHIC OMITED]
LIQUIDITY AND CAPITAL RESOURCES
Overview
Although we remained cash flow positive during the first nine months of
2005, we will need to raise additional capital to fulfill our obligations,
estimated between $2.5 million and $5 million, in connection with the Starsys
acquisition. We anticipate that such funds will come from public or private
sales of equity or debt securities. In October 2005, we entered into a
Securities Purchase Agreement with Laurus pursuant to which we issued and sold
2,032,520 shares of our common stock to Laurus for an aggregate purchase price
of $2,500,000 or $1.23 per share. (See Note 8 to SpaceDev's Consolidated
Financial Statements for more information regarding the October 2005 financing.)
In addition to amounts required in connection with the Starsys acquisition, we
may require investor or customer funding of $10 to $30 million in the near
future in order to execute our current business plan. Such funds could come
from further public or private sales of equity or debt securities, or government
and commercial customers, or a combination of both.
Our plan to increase cash generation from operations depends upon our ability to
ultimately implement our business plan, which includes (but is not limited to)
generating substantial new revenue from the Missile Defense Agency program by
successfully performing under our existing contract and continuing to attract
and successfully complete other government and commercial contracts. The
Missile Defense Agency contract is staged, and we cannot guarantee that all
subsequent phases will be awarded or will be awarded to us. Recent budget cuts
may affect government spending on these space-based contracts.
With the exception of our investment in a fabrication facility for our hybrid
rocket motor testing, for which we expect to incur approximately $1.5 million
over the next twelve months, we do not believe that significant capital
expenditures will be required to increase sales; however, additional capital may
be required to support and sustain our growth. We may also be required to make
certain capital expenditures to bring our facilities into compliance with
classified government projects if and when awarded to us, although at this time
we have insufficient information to estimate the cost of any such measures.
During the nine months ended September 30, 2005, we raised approximately
$648,000 through the exercise of options and warrants and from participation in
our Employee Stock Purchase Plan. During the nine months ended September 30,
2004, we raised approximately $5,258,000 through a combination of conversions on
our revolving credit facility and exercises of options and warrants.
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On March 31, 2004, we negotiated an amendment to our Secured Convertible Note
dated June 3, 2003 with Laurus to add a fixed conversion price at $0.85 per
share for the next $500,000 converted under the revolving credit facility after
the initial $1 million conversion. In exchange for the amendment, Laurus
granted us a six-month waiver to utilize the full revolving credit facility in
advance of our obtaining sufficient eligible accounts receivable. On August 25,
2004, we negotiated an amendment to our Secured Convertible Note to add a fixed
conversion price at $1.00 per share for the next $1 million converted under the
revolving credit facility after the $500,000 mentioned above. In exchange for
the amendment, Laurus granted us a waiver to utilize the full revolving credit
facility in advance of our obtaining sufficient eligible accounts receivable and
committed to convert the entire $1 million into equity by the end of 2004. At
December 31, 2004, Laurus had converted approximately $2,272,000 of debt into
2,990,000 shares under the revolving credit facility.
There are no outstanding borrowings under the Laurus revolving credit facility.
We currently have available borrowing capacity of approximately $1.5 million
under the revolving credit facility, subject to certain accounts receivable
limitation or subsequent waivers with Laurus. The borrowing limit under the
revolving credit facility varies based upon our eligible outstanding accounts
receivable. The credit facility will expire in June 2006, unless sooner
terminated by either party. We would be required to pay Laurus a termination
fee for early termination of the revolving credit facility.
Other than cash on hand and amounts available under the Laurus revolving credit
facility, we have no unused sources of liquidity at this time.
CASH POSITION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 -VS.-NINE MONTHS
ENDED SEPTEMBER 30, 2004
Net decrease in cash during the nine months ended September 30, 2005 was
approximately $1,046,000 compared to a net increase of approximately $3,487,000
for the same nine-month period in 2004. Net cash provided by operating
activities totaled approximately $313,000 for the nine months ended September
30, 2005, an increase of approximately $247,000 compared to approximately
$66,000 provided by operating activities during the same nine-month period in
2004. The improvement in cash from operating activities resulted from our
acquisition of and performance under new and existing government contracts.
Net cash used in investing activities totaled approximately $1,978,000 for the
nine months ended September 30, 2005, compared to approximately $166,000 used in
investing activities during the same nine-month period in 2004. The increase in
cash used in investing activities was attributable to the $1.2 million bridge
loan we entered into with Starsys, our purchase of certain fixed assets related
to the construction of our fabrication and test facility for hybrid rocket
motors and the purchase of additional computer hardware and software tools.
Net cash provided by financing activities totaled approximately $619,000 for the
nine months ended September 30, 2005, which is a decrease of approximately
$2,967,000 from the approximately $3,586,000 provided by financing activities
during the same nine-month period in 2004. The difference is attributable to
warrant and option exercises and the receipt of $2.5 million from the sale of
preferred stock to Laurus in August 2004.
Our cash, cash reserves and cash available for investment decreased slightly to
approximately $4,022,000 at September 30, 2005, compared to approximately
$4,079,000 at September 30, 2004. The decrease was attributable to cash
generated from operations, the receipt of $2.5 million from the issuance of
preferred stock to Laurus in August 2004, the exercise of stock options and
warrants throughout the first nine months of 2005 of approximately $600,000 as
well as those exercised during the same period in 2004 and advances/conversions
under our revolving credit facility in 2004, which offset the bridge loan to
Starsys on September 14, 2005. Cash plus accounts receivable increased
approximately 14% from approximately $4.5 million at September 30, 2004 to
approximately $5.1 million at September 30, 2005.
Our backlog of funded and non-funded business was approximately $33 million at
September 30, 2005, compared to approximately $44 million at September 30, 2004.
With respect to the Missile Defense Agency program, we expect to generate a
total of approximately $8 million in revenue in 2005. We were informed in
September 2005 that the Missile Defense Agency had re-routed the laser
communications experiment to another program and that they would not be
exercising their option for a second cluster, at this time; however, the Missile
Defense Agency also informed us of several other opportunities that might
replace the laser communibations experiment and while we cannot be assured of
any new business, the Missile Defense Agency was interested in continuing a
productive business relationship with us. As a result of this notification, we
reduced our backlog by approximately $10 million. The Missile Defense Agency
contract is an IDIQ contract, meaning it is an indefinite delivery, indefinite
quantity contract
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which can be re-funded up to the $43 million ceiling with other microsatellites
or new business without further signature authority. Although the Missile
Defense Agency contract was awarded to us, there can be no assurance that the
contract will be continued through all phases, and, if continued, that it will
generate the amounts anticipated.
We had a net deferred tax asset of approximately $2,193,000 and $2,218,000 at
September 30, 2005 and 2004, respectively, which consisted primarily of the
income tax benefits from net operating loss and capital loss carryforwards,
amortization of deferred gain on sale of building and research and development
credits. Deferred income taxes represent temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes. A
valuation allowance has been recorded to fully offset the deferred tax asset as
it is more likely than not that the assets will not be utilized. The valuation
allowance decreased from $2,318,000 at December 31, 2004 to $2,193,000 at
September 30, 2005.
We had federal and state tax net operating loss and capital loss carryforwards
of approximately $4,325,000 and $1,629,000 at September 30, 2005 respectively.
The federal tax loss carryforwards will expire in 2023 and the state tax loss
carryforwards will expire in 2013, unless previously utilized. The State of
California suspended the utilization of net operating loss for 2002 and 2003,
and limited them for 2004.
CASH POSITION FOR YEAR ENDED DECEMBER 31, 2004 -VS.- YEAR ENDED DECEMBER 31,
2003
Net increase in cash during the year ended December 31, 2004 was
approximately $4,477,000 compared to a net increase of approximately $564,000
for the same period in 2003. Net cash used in operating activities totaled
approximately $110,000 for the year ended December 31, 2004, a decrease of
approximately $925,000 as compared to approximately $1,035,000 used in operating
activities during the same period in 2003. The improvement in cash position was
mainly due to our improved operating performance, an increase in accounts
receivable from new and existing contracts and a reduction in work-in-process
due to the shift from fixed price contracts to cost plus fixed fee contracts, as
well as a few other small improvements.
Net cash used in investing activities totaled approximately $225,000 for the
year ended December 31, 2004, compared to approximately $3,111,000 provided by
investing activities during the same period in 2003. The increase in cash used
in investing activities is attributable to the sale of our building in January
2003 and the purchase of fixed assets, primarily computer hardware and software
tools, in 2004.
Net cash provided by financing activities totaled approximately $4,812,000 for
the year ended December 31 2004, which is an increase of approximately
$6,323,000 from the approximately $1,511,000 used in financing activities during
the same period in 2003. The increase was primarily attributable to the
approximately $2,500,000 of gross proceeds we received from the sale of our
preferred stock, the approximately $1,600,000 we received from the exercise of
stock options and warrants, and approximately $2,300,000 of advances/conversions
under our revolving credit facility with Laurus.
At December 31, 2004, our cash, which includes cash reserves and cash available
for investment, was approximately $5,069,000, as compared to approximately
$592,000 at December 31, 2003. The increase of approximately $4,477,000 was
primarily attributable to the sale of our preferred stock in August 2004, the
exercise of stock options and warrants throughout the year and
advances/conversions under our revolving credit facility throughout the year.
As of December 31, 2004, our backlog of funded and non-funded business was
approximately $47 million, compared to approximately $2 million as of December
31, 2003.
During the year ended December 31, 2004, we completed work on our Air Force
Research Laboratory Phase II Small Business Innovation Research contract worth
approximately $1.6 million, as well as negotiated a deferred option of
approximately $0.8 million. We completed Task Order 1 for the Missile Defense
Agency and won two Phase II Small Business Innovation Research awards related to
the Air Force Research Laboratory of approximately $2.3 million.
The deferred tax asset of $2,350,000 and $2,190,000 as of December 31, 2004 and
2003, respectively, consisted primarily of the income tax benefits from net
operating loss and capital loss carryforwards, amortization of goodwill and
research and development credits. A valuation allowance has been recorded to
fully offset the deferred tax asset as it is more likely than not that the
assets will not be utilized. The valuation allowance increased from $2,190,000
at December 31, 2003 to $2,318,000 at December 31, 2004.
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At December 31, 2004 and 2003, we had federal and state tax net operating loss
and capital loss carryforwards of approximately $4,826,000 and $2,146,000,
respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
A number of new accounting pronouncements have been issued for future
implementation as discussed in the footnotes to SpaceDev's Consolidated
Financial Statements.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements, as defined in Item
303(c)(2) of Regulation S-B.
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OWNERSHIP OF SPACEDEV COMMON STOCK
The following table provides information as of December 20, 2005 concerning
the beneficial ownership of SpaceDev's common stock by each director, each named
executive officer in SpaceDev's Annual Report on Form 10-KSB, each shareholder
known by SpaceDev to be the beneficial owner of more than 5% of SpaceDev's
outstanding common stock, and the directors and executive officers as a group.
Also includes information on Mark N. Sirangelo, who will become SpaceDev's chief
executive officer, vice chairman and a director on December 30, 2005. Except as
otherwise indicated, and subject to community property laws where
applicable, the persons named in the table have sole voting and investment power
over all shares of common stock beneficially owned by them and have an address
of 13855 Stowe Drive, Poway, CA 92064.
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Amount and
Nature of
Beneficial
Name and Address of Beneficial Owner Ownership(1)
----------------------------------------------------------- ------------ ---- ------
James W. Benson, CEO and Chairman . . . . . . . . . . . . . 7,799,707 (2) 29.75%
----------------------------------------------------------- ------------ ---- ------
Susan C. Benson, Director . . . . . . . . . . . . . . . . . 7,799,707 (3) 29.75%
----------------------------------------------------------- ------------ ---- ------
Mark N. Sirangelo, Prospective CEO and Vice Chairman. . . . 1,900,000 (4) 7.17%
----------------------------------------------------------- ------------ ---- ------
Richard B. Slansky, President, CFO, Secretary and Director. 2,235,723 (5) 8.36%
----------------------------------------------------------- ------------ ---- ------
Frank Macklin, Vice President of Engineering. . . . . . . . 323,073 (6) 1.31%
----------------------------------------------------------- ------------ ---- ------
Randy Simpson, Vice President of Project and New Business . 300,305 (7) 1.21%
----------------------------------------------------------- ------------ ---- ------
Wesley T. Huntress Jr., Director. . . . . . . . . . . . . . 293,515 (8) 1.18%
----------------------------------------------------------- ------------ ---- ------
Curt Dean Blake., Director. . . . . . . . . . . . . . . . . 341,930 (9) 1.37%
----------------------------------------------------------- ------------ ---- ------
General Howell M. Estes, III, Director. . . . . . . . . . . 219,667 (10) 0.88%
----------------------------------------------------------- ------------ ---- ------
Robert S. Walker, Director. . . . . . . . . . . . . . . . . 176,667 (11) 0.71%
----------------------------------------------------------- ------------ ---- ------
Stuart Schaffer, Director . . . . . . . . . . . . . . . . . 290,206 (12) 1.17%
----------------------------------------------------------- ------------ ------
Scott McClendon, Director . . . . . . . . . . . . . . . . . 272,460 (13) 1.10%
----
Officers and Directors as a group (12 Persons). . . . . . . 17,153,253 (14) 53.59%
---------------------------------------------------------------------------------------
(1) Where persons listed on this table have the right to obtain additional
shares of Common Stock through the exercise of outstanding options or warrants
or the conversion of convertible securities within 60 days from December 20,
2005, these additional shares are deemed to be outstanding for the purpose of
computing the percentage of common stock owned by such persons, but are not
deemed outstanding for the purpose of computing the percentage owned by any
other person. Percentages are based on total outstanding shares of 24,606,255
on December 20, 2005.
(2) Represents 3,000,000 shares held directly by Mr. James W. Benson as a
result of a stipulated order entered May 24, 2005 identifying the shares as a
separate property asset of Mr. Benson, plus beneficial ownership in 2,692,294
shares held jointly with Susan C. Benson, indirect beneficial ownership interest
in 497,413 shares held in Space Development Institute (where Mr. Benson is a
member of the board of directors along with Susan C. Benson)
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and beneficial ownership in vested options to purchase up to an aggregate of
1,610,000 shares (which may constitute community property with Susan C. Benson).
Excludes approximately 1.2 million shares held by children of Mr. Benson, for
which Mr. Benson disclaims beneficial ownership. Mr. Benson is the chairman and
current chief executive officer of SpaceDev. Mr. Benson will relinquish the
chief executive officer position on December 30, 2005 and assume the role of
chief technology officer.
(3) Represents 3,000,000 shares held directly by Ms. Susan Benson as a
result of a stipulated order entered May 24, 2005 identifying the shares as a
separate property asset of Ms. Benson, plus beneficial ownership in 2,692,294
shares held jointly with James W. Benson, indirect beneficial ownership interest
in 497,413 shares held in Space Development Institute (where Ms. Benson is a
member of the board of directors along with James W. Benson) and beneficial
ownership in vested options issued in the name of James W. Benson on 1,610,000
shares (which may constitute community property with James W. Benson). Excludes
approximately 1.2 million shares held by children of Ms. Benson, for which Ms.
Benson disclaims beneficial ownership. Ms. Benson is a director of SpaceDev.
(4) Mr. Sirangelo holds vested options to purchase up to an aggregate of
1,900,000 shares. Mr. Sirangelo will be vice chairman, chief executive officer,
and a director as of December 30, 2005.
(5) Mr. Slansky owns 110,723 shares of which 38,462 shares he purchased for
cash in a private transaction with Mr. Skarupa, the Company's former Vice
President of Operations and an additional 38,462 shares Mr. Slansky bought by
exercising his warrant rights which were also purchased from Mr. Skarupa. In
addition, Mr. Slansky holds vested options to purchase up to an aggregate of
2,125,000 shares. Mr. Slansky is president, chief financial officer, corporate
secretary, and a director of SpaceDev.
(6) Mr. Macklin owns 230,073 shares and vested options to purchase up to an
aggregate of 93,000 shares. Mr. Macklin is an executive officer of SpaceDev.
(7) Mr. Simpson owns 7,905 shares of our common stock, and holds vested
options to purchase up to an aggregate of 292,400 shares of our common stock.
Mr. Simpson is an executive officer of SpaceDev.
(8) Dr. Huntress owns 23,868 shares of our common stock. Dr. Huntress also
holds vested options to purchase up to an aggregate of 269,647 common shares,
which he received as compensation for his participation on our Board of
Directors. Dr. Huntress is a director of SpaceDev.
(9) Mr. Blake owns 61,224 shares of our common stock. Mr. Blake also holds
vested options to purchase up to an aggregate of 280,706 common shares, which he
received as compensation for his participation on our Board of Directors. Mr.
Blake is a director of SpaceDev.
(10) General Estes III holds vested options to purchase up to an aggregate
of 219,667 common shares, which he received as compensation for his
participation on our Board of Directors. General Estes is a director of
SpaceDev.
(11) Mr. Walker holds vested options to purchase up to an aggregate of
176,667 common shares, which he received as compensation for his participation
on our Board of Directors. Mr. Walker is a director of SpaceDev.
(12) Mr. Schaffer owns 128,206 shares of which 64,103 were converted from
warrants. In 2003, as part of the Company's convertible debt repayment, Mr.
Schaffer forgave warrants for 64,103 common shares and converted $25,000 of his
debt to the Company into 64,103 shares. Mr. Schaffer also holds vested options
to purchase up to an aggregate of 162,000 common shares, which he received as
part of his compensation package as Vice President of Product Development and
Marketing and for his participation on our Board of Directors. Mr. Schaffer is a
director of SpaceDev.
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(13) Mr. McClendon holds vested options to purchase up to an aggregate of
272,460 common shares, which he received as compensation for his participation
on our Board of Directors. Mr. McClendon is director of SpaceDev.
(14) Officers and directors as a group include our ten Board members, three
of whom are also officers of the Company, and Messrs. Simpson, and Macklin, who
are officers of the Company. For purposes of calculating total shares and
percentage held by all officers and directors as a group, shares held by James
W. Benson and Susan C. Benson were calculated as follows: 3,000,000 shares held
as separate property of Mr. Benson, 3,000,000 shares held as separate property
by Ms. Benson, 2,692,294 shares held jointly by Mr. and Ms. Benson, 497,413
shares held by Space Development Institute and fully vested options to purchase
up to an aggregate of 1,460,000 shares currently held in the name of Mr. Benson
but which may constitute a community property asset of Mr. Benson and Ms.
Benson.
CHANGES OF CONTROL
Following the transactions contemplated by the merger agreement, the
current directors and executive officers of SpaceDev as a group are expected to
beneficially own a significantly smaller percentage of SpaceDev, which reduction
in ownership may be deemed to be a change in control. Other than the foregoing,
SpaceDev is aware of no arrangements which may result in a change of control of
SpaceDev.
DESCRIPTION OF SPACEDEV CAPITAL STOCK
The descriptions in this section and in other sections of this joint proxy
statement / prospectus of SpaceDev's capital stock and various provisions of its
articles of incorporation and bylaws are limited solely to descriptions of the
material terms of its capital stock, articles of incorporation and bylaws.
SpaceDev's articles of incorporation and bylaws have been filed with the
Commission as exhibits to this registration statement of which this joint proxy
statement /prospectus forms a part.
COMMON STOCK
SpaceDev is authorized to issue up to 50,000,000 shares of its common
stock, $.0001 par value per share, of which 24,410,176 shares were issued and
outstanding as of December 9, 2005. The Board of Directors of SpaceDev may issue
additional shares of common stock without the consent of the holders of common
stock.
Each outstanding share of Common Stock is entitled to one vote. Except as may
be required by Section 2115 of the California General Corporation Law, the
holders of SpaceDev common stock do not have cumulative voting rights, which
means that the holders of more than 50% of such outstanding shares voting for
the election of directors can elect all of SpaceDev's directors, if they so
choose.
Holders of common stock are not entitled to any preemptive rights. Holders of
common stock are entitled to receive such dividends as may be declared by the
directors out of funds legally available therefor and to share pro rata in any
distributions to holders of common stock upon liquidation or otherwise.
However, SpaceDev has not paid cash dividends on its common stock, and does not
expect to pay such dividends in the foreseeable future. No dividends may be paid
on common stock unless all dividends due on SpaceDev's outstanding Series C
Convertible Cumulative Preferred Stock (described below) have been paid.
PREFERRED STOCK
SpaceDev is authorized to issue up to 10,000,000 shares of preferred
stock, $0.001 par value per share, of which 250,000 shares have been designated
Series C Convertible Cumulative Preferred Shares (referred to in this section
as the "Series C Shares") issued to Laurus Master Fund, Ltd. on August 25, 2004
at a stated value of $10.00 per share, for an aggregate purchase price of
$2,500,000 and are outstanding as of the date of this joint proxy statement /
prospectus. No other series of preferred shares is currently outstanding. The
Board of Directors may designate additional series of preferred stock ranking on
parity with or subordinate to the Series C Shares.
The Series C Shares have no voting rights.
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The Series C Shares carry a liquidation preference equal to the then stated
value ($10.00 per share) of the then outstanding Series C Shares. As a
result, the holders of the Series C Shares will receive a distribution out of
the assets of SpaceDev upon liquidation equal to the number of Series C Shares
then outstanding multiplied by $10.00 before the holders of our Common Stock
will be entitled to any distribution.
The Series C Shares are entitled to receive quarterly, cumulative dividends at
a rate of 6.85% with the first payment due on January 1, 2005. Dividends are
payable in cash or shares of Common Stock at the holder's option with
the exception that dividends must be paid in shares of common stock for up to
25% of the aggregate dollar trading volume if the fair market value of the
common stock for the 20-days preceding the conversion date exceeds 120% of
the conversion rate set forth in the certificate of designation.
The Series C Shares are convertible into common stock at a rate of $1.54 per
share at any time after the date of issuance, subject to adjustments for
stock splits, combinations and dividends and for shares of common stock
issued for less than the fixed conversion price (unless exempted pursuant
to the agreements).
We may redeem the Series C Shares in whole or in part at any time for (a)
115% of the stated value if the average closing price of the common stock for
the 22 days immediately preceding the date of conversion does not exceed $1.54
(as adjusted) or (b) the stated value if the average closing price of the common
stock for the 22 days immediately preceding the date of conversion exceeds
the stated value.
TRANSFER AGENT AND REGISTRAR
SpaceDev's transfer agent and registrar for the common stock is Continental
Stock Transfer and Trust, 17 Battery Place, 8th Floor, New York, NY 10004.
Corporate Stock Transfer can be contacted via telephone at (212)
845-3215.
MANAGEMENT OF SPACEDEV AFTER THE MERGER
INFORMATION REGARDING SPACEDEV'S DIRECTORS AND EXECUTIVE OFFICERS
The following are the current directors and executive officers of SpaceDev
and their background and ages as of December 9, 2005. Information is also
provided for Mark N. Sirangelo, who will join SpaceDev's board of directors and
become chief executive officer and vice chairman of SpaceDev on December 30,
2005.
NAME. . . . . . . . . . . . . . . . . . . . AGE TITLE
------------------------------------------- --- --------------------------------------------------------------------
James W. Benson . . . . . . . . . . . . . . 60 Chairman of the Board and Chief Executive Officer*
Mark N. Sirangelo . . . . . . . . . . . . . 45 Vice Chairman of the Board and Chief Executive Officer*
Richard B. Slansky. . . . . . . . . . . . . 48 President, Chief Financial Officer, Corporate Secretary and Director
Frank Macklin . . . . . . . . . . . . . . . 48 Vice President, Engineering
Randall K. Simpson. . . . . . . . . . . . . 58 Vice President, New Business Development & Project Management
Stuart Schaffer . . . . . . . . . . . . . . 45 Director
Wesley T. Huntress. . . . . . . . . . . . . 63 Director
Curt Dean Blake . . . . . . . . . . . . . . 47 Director
General Howell M. Estes, III (USAF Retired) 63 Director
Robert S. Walker. . . . . . . . . . . . . . 62 Director
Scott McClendon . . . . . . . . . . . . . . 66 Director
Susan Benson. . . . . . . . . . . . . . . . 60 Director
*Effective December 30, 2005, Mr. Sirangelo will succeed Mr. Benson as chief
executive officer of SpaceDev.
James W. Benson is SpaceDev's founder and has served as SpaceDev's chief
executive officer and chairman of the Board since October 1997. In 1984, Mr.
Benson founded Compusearch Corporation (later renamed Compusearch Software
Systems) in McLean, Virginia, which was engaged in the development of software
algorithms and
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applications for personal computers and networked servers to create full text
indexes of government procurement regulations and to provide instant full text
searches for any word or phrase. In 1989, Mr. Benson started the award-winning
ImageFast Software Systems, which later merged with Compusearch. In 1995, Mr.
Benson sold Compusearch and ImageFast, and retired at age fifty. Mr. Benson
started SpaceDev, Inc., a Nevada corporation, which was acquired by Pegasus
Development Corp, a Colorado corporation, in October of 1997. Mr. Benson
acquired a controlling ownership in Pegasus and later changed its name to
SpaceDev, Inc. Mr. Benson holds a Bachelor of Science degree in Geology from the
University of Missouri. He founded the non-profit Space Development Institute,
and introduced the $5,000 Benson Prize for Amateur Discovery of Near Earth
Objects. He is also vice-chairman and private sector representative on NASA's
national Space Grant Review Panel, and is a member of the American Society of
Civil Engineers subcommittee on Near Earth Object Impact Prevention and
Mitigation. Mr. Benson and Susan Benson are married but separated.
Mark N. Sirangelo is currently a member of "QS Advisors, LLC" and also a member
of The Quanstar Group, business consulting firms. Mr. Sirangelo's roles were as
a managing member from December 2003 and chief executive officer of the QuanStar
Group, LLC from December 2003 until November 2005 and the managing member of QS
Advisors, LLC from February 1998 to December 2005. The Quanstar Group and QS
Advisors are strategic and business advisors to SpaceDev. Mr. Sirangelo actively
participated in the development in a number of early-stage companies in
aerospace, technical, scientific and other industries. His work at Quanstar also
included hands-on involvement with technology commercialization transfer for
university and government laboratories. From 2001 until 2003, Mr. Sirangelo also
served as a senior officer of Natexis Bleichroeder, Inc., an international
investment banking firm. Prior to Natexis, he was the principal founder of
Production Group International, Inc., an advanced communications company. Mr.
Sirangelo served as Production Group International's chairman and chief
executive officer from December 1989 until December 1997. Mr. Sirangelo has a
bachelor's degree in science, a master's degree in business and juris doctorate,
all from Seton Hall University. Mr. Sirangelo is currently on the board of
directors of two privately held corporations: Advanced Cerametics, Inc. and
Adam Aircraft Industries, Inc. He is also a director for the National Center for
Missing and Exploited Children in addition to serving as a director and
treasurer of the International Center for Missing and Exploited Children.
Richard B. Slansky is currently SpaceDev's president, chief financial officer,
director and corporate secretary. He joined SpaceDev on February 10, 2003 as
chief financial officer and corporate secretary. In November 2004, Mr. Slansky
was appointed as president and director. Mr. Slansky served as interim chief
executive officer, interim chief financial officer, and director for Quick
Strike Resources, Inc., an IT training, services and consulting firm, from July
2002 to February 2003. From May 2000 to July 2002, Mr. Slansky served as chief
financial officer, vice president of finance, administration and operations and
corporate secretary for Path 1 Network Technologies, Inc., a public company
focused on merging broadcast and cable quality video transport with IP networks.
From January 1999 to May 2000, Mr. Slansky served as president, chief financial
officer and member of the Board of Directors of Nautronix, Inc., a marine
electronics/engineering services company. From August 1995 to January 1999, Mr.
Slansky served as chief financial officer of Alexis Corporation, an
international pharmaceutical research products technology company. He also
served as President and chief financial officer of C-N Biosciences, formerly
Calbiochem, from July 1989 to July 1995. Mr. Slansky is currently serving on
the Board of Directors of two privately held high technology companies,
including Sicomment, Inc., one private real estate company and the Girl Scouts
of San Diego and Imperial Counties. Mr. Slansky earned a bachelor's degree in
economics and science from the University of Pennsylvania's Wharton School of
Business and a master's degree in business administration in finance and
accounting from the University of Arizona.
Frank Macklin was appointed as SpaceDev's vice president of Engineering in 2004.
Mr. Macklin has been SpaceDev's chief engineer of hybrid propulsion systems and
the technical leader for SpaceDev's National Reconnaissance Office-funded SPOTV
Hybrid System Definition study, and is acting chief engineer for SpaceDev's
Maneuvering and Orbital Transfer Vehicle Hybrid Technology Development and
X-Motor Development. Mr. Macklin was a founder of Integrated Space Systems,
Inc., which was acquired by SpaceDev in 1998. From January 1987 to December
1994, Mr. Macklin worked at the General Dynamics Space Systems Division in San
Diego, California. From March 1984 to December 1986, Mr. Macklin served as a
member of the Peacekeeper developmental launch team at Vandenberg Air Force
Base. Mr. Macklin is a California State registered professional electrical
engineer with more than 20 years of experience with launch vehicles, ground
launch control systems, launch sites and launch teams. Mr. Macklin received his
B.S.E.E. degree from San Diego State University and is a California Board
Certified Professional Engineer.
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Randall K. Simpson is SpaceDev's vice president of new business development and
project management, having joined SpaceDev in January 2004. Mr. Simpson has
over 30 years of diversified experience in business development, product
definition, engineering development and support for aerospace, commercial and
international customers. From October 2000 to January 2004, Mr. Simpson served
as assistant vice president of program management for Alvarion, Inc., a high
technology commercial communications firm. From March 1997 to September 2000,
Mr. Simpson was vice president of engineering for Cubic Defense Systems, an
engineering and production company providing military training ranges, laser
instrumentation products, space avionics and battlefield communications
equipment. From November 1992 to February 1997, Mr. Simpson was program
director for advanced test systems and engineering director for GDE Systems,
which develops, integrates and produces test equipment for advanced electronic
aircraft, munitions, space launch, satellite and telecommunications systems.
Mr. Simpson began his career at General Dynamics/Convair where he held various
positions. Mr. Simpson received both his B.S.E.E. degree and M.S.E.E. from San
Diego State University.
Stuart Schaffer was appointed to SpaceDev's Board of Directors in May 2002. Mr.
Schaffer is currently the president of vendor affairs for Sicomment, Inc., an
internet marketplace company, where both Messrs. McClendon and Slansky are
members of the Sicommnet Board of Directors. From August 2003 to January 2005,
Mr. Schaffer was the vice president of marketing for Overture Performance
Marketing -- a business unit of Overture Services, which is a subsidiary of
Yahoo! From May 2002 to August 2003, Mr. Schaffer was SpaceDev's vice president
of product development/marketing. From 1998 to 2001, Mr. Schaffer acted as vice
president of marketing for Infocus Corporation. From 1985 to 1998, Mr. Schaffer
worked for the Hewlett-Packard Company, where he held various positions in
Business Development, Marketing and Business Planning. Mr. Schaffer has worked
with the Leukemia & Lymphoma Society, on a volunteer basis, as an assistant
coach and mentor. Mr. Schaffer has an M.B.A. degree from Harvard and a B.S.
degree in physics from Harvey Mudd College.
Wesley T. Huntress was elected to SpaceDev's Board of Directors as an
independent director in June 1999, and is a member of SpaceDev's Audit Committee
and Nominating/Corporate Governance Committee. Dr. Huntress is currently
director of the Geophysical Laboratory at the Carnegie Institution of Washington
in Washington, DC, where he leads an interdisciplinary group of scientists in
the fields of high-pressure science, astrobiology, petrology and
biogeochemistry. From October 1993 to September 1998, Dr. Huntress served as the
associate administrator for Space Science at NASA where he was responsible for
NASA's programs in astrophysics, planetary exploration, and space physics. Dr.
Huntress also served as a director of NASA's Solar System Exploration Division
from 1990 to 1993, and as special assistant to NASA's director of the Earth
Science and Applications from 1988 to 1990. Dr. Huntress came to NASA
Headquarters from Caltech's Jet Propulsion Laboratory, or JPL. Dr. Huntress
joined JPL as a National Research Council resident associate after receiving is
B.S. degree in Chemistry from Brown University in 1964 and his Ph.D. in Chemical
Physics from Stanford in 1968. He became a permanent research scientist at JPL
in 1969. At JPL Dr. Huntress served as co-investigator for the ion mass
spectrometer experiment in the Giotto Halley's Comet mission, and as an
interdisciplinary scientist for the Upper Atmosphere Research Satellite and
Cassini missions. He also assumed a number of line and research program
management assignments while at JPL, and spent a year as a visiting professor in
the Department of Planetary Science and Geophysics at Caltech.
Curt Dean Blake was appointed to SpaceDev's Board of Directors as an independent
director in September 2000. He serves as chairman of the SpaceDev Audit
Committee and is a member of SpaceDev's Compensation Committee. Mr. Blake is the
chief executive officer of GotVoice, Inc., a startup company in the voicemail
consolidation and messaging business. From 1999 to 2002, Mr. Blake provided
consulting services to various technology companies, including Apex Digital,
Inc. and SceneIt.com. Mr. Blake acted as the chief operating officer of the
Starwave Corporation from 1993 until 1999, where he managed business
development, finance, legal and business affairs. From 1992 to 1993, Mr. Blake
worked at Corbis, where he led the acquisitions and licensing effort to create a
taxonomic database of digital images. Mr. Blake acted as general counsel to
Aldus Corporation, a public company, from 1989 to 1992, where he was responsible
for all legal matters. Prior to that, Mr. Blake was an attorney at Shidler,
McBroom, Gates & Lucas in Washington State, during which time he was assigned as
onsite counsel to the Microsoft Corporation, where he was primarily responsible
for the domestic OEM/Product Support and Systems Software divisions. Mr. Blake
has an M.B.A. degree and J.D. degree from the University of Washington.
General Howell M. Estes, III (USAF Retired) was appointed to SpaceDev's Board of
Directors as an independent director in April 2001, is chairman of SpaceDev's
Nominating/Corporate Governance Committee and is a member of SpaceDev's
Compensation Committee. General Estes retired from the United States Air Force
in 1998 after serving for 33 years. At that time he was the Commander-in-Chief
of the North American Aerospace Defense Command and the United States Space
Command, and the Commander of the Air Force Space Command headquartered at
Peterson Air Force Base, Colorado. In addition to a bachelor of science degree
from the Air Force
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Academy, he holds a master of arts degree in Public Administration from Auburn
University and is a graduate of the Program for Senior Managers in Government at
Harvard's J.F.K. School of Government. Gen. Estes is the president of Howell
Estes & Associates, Inc., a consulting firm to chief executive officers,
presidents and general managers of aerospace and telecommunications companies
worldwide. He serves as vice chairman of the Board of Trustees at The Aerospace
Corporation. He served as a consultant to the Defense Science Board Task Force
on SPACE SUPERIORITY and more recently as a commissioner on the U.S.
Congressional Commission to Assess United States National Security Space
Management and Organization, also known as the Rumsfeld Commission.
Robert S. Walker was appointed to SpaceDev's Board of Directors as an
independent director April 2001. He is currently a member of SpaceDev's
Nominating/ Corporate Governance Committee. Mr. Walker has acted as chairman of
Wexler & Walker Public Policy Associates in Washington, D.C. since January 1997.
Mr. Walker was a member of the U.S. House of Representatives from 1977-1997,
during which time he served as chairman of the House Science Committee, vice
chairman of the Budget Committee, and participated in House Republican
leadership activities. Mr. Walker was the first sitting member of the U.S. House
of Representatives to be awarded NASA's highest honor, the Distinguished Service
Medal. Mr. Walker was on the board of directors of Aerospace Corporation, from
March 1997 to November 2005. Mr. Walker is currently on the board of directors
of the Zero Gravity Company, and will become chairman of the board of the Space
Foundation in January 2006.
Scott McClendon was appointed to SpaceDev's Board of Directors as an independent
director in July 2002. He is currently a member of SpaceDev's Audit Committee
and Chairman of SpaceDev's Compensation Committee. Mr. McClendon currently sits
on the Board of Directors for Overland Storage, Inc., a public company, where he
is the chairman of the Board. He became the chairman of the Board after serving
as president and chief executive officer from October 1991 to March 2001. Prior
to joining Overland Storage, Inc., Mr. McClendon was employed by Hewlett-Packard
Company for over 32 years in various positions of engineering, manufacturing,
sales and marketing. In addition to SpaceDev and Overland Storage, Mr.
McClendon is currently serving on the Board of Directors of Procera Networks,
Inc., a public company, and Sicommnet, Inc., a privately-held high technology
company. Mr. McClendon received a bachelor of science degree in electrical
engineering in June 1960, and a master of science degree in electrical
engineering in June 1962 from Stanford University School of Engineering.
Susan C. Benson was appointed to SpaceDev's Board of Directors in April 2005.
Ms. Benson joined SpaceDev in 1997, serving as corporate secretary until 2003.
From approximately 1998 to 2004, Ms. Benson was, in part, responsible for
SpaceDev's investor relations and public relations activities, managing
SpaceDev's strategic messaging to build industry and media awareness and
strengthen shareholder relations. From 1986 to 1995, Ms. Benson was the
customer support manager for Compusearch Software Systems in McLean, Virginia.
Ms. Benson also served as secretary and treasurer of the Compusearch Software
Systems Board of Directors. Ms. Benson currently sits on the Board of Directors
of Space Development Institute, a non-profit organization founded by James W.
Benson and Ms. Benson. Ms. Benson and James W. Benson are married but
separated.
The following is the background and ages as of December 1, 2005 of those
directors and executive officers of Starsys who will serve as directors and
executive officers of SpaceDev following the completion of the merger.
AGE
-----
NAME . . . . . TITLE
-------------- -----
Scott Tibbitts 48 Chairman, Chief Executive Officer, and Director
Robert Vacek . 44 President
Scott Tibbitts co-founded Starsys Research Corporation in 1988 and has
served as president, chief executive officer and a member of the Board of
Directors from 1988 until May 2005; and since May 2005 has served as chief
executive officer and a member of the Board of Directors. From 1986 to 1988,
Mr. Tibbitts served as the Engineering Manager for Maus Technologies, Inc., a
developer of high technology domestic water heaters and thermal actuator
technologies. Mr. Tibbitts has a B.S. in Chemical Engineering from the
University of Wisconsin.
Robert Vacek has served as president and general manager of Starsys since June
2005. From November 2004 to June 2005, Mr. Vacek served as Vice President of
Programs of Starsys. From 1996 until joining Starsys, Mr. Vacek held a variety
of management positions at Ball Aerospace and Technologies Corp., a provider of
advanced imaging, communications and information solutions to the aerospace
market, including director of Defense Systems. Mr. Vacek holds a B.S. in
electrical engineering from the University of Minnesota and an MBA from the
University of New Mexico.
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COMPENSATION OF DIRECTORS
SpaceDev's independent directors receive options to purchase up to an
aggregate of attending board meetings as follows:
- options to purchase 6,000 shares of common stock for each telephonic
meeting attended;
- options to purchase 12,000 shares of common stock for each meeting
attended in person, with a cap of options to purchase 36,000 shares of common
stock per year;
- options to purchase 5,000 shares of common stock for each Audit Committee
meeting attended;
- options to purchase 2,500 shares of common stock for each Compensation
Committee meeting attended;
- options to purchase 2,500 shares of commons stock for each
Nominating/Governance Committee meeting attended; and,
- options to purchase 5,000 shares of common stock on the date of election
or appointment.
All of such options are issued pursuant to the SpaceDev 2004 Equity
Incentive Plan at fair market value as of the date of the meeting attended or
date of election or appointment, vest 50% on the first anniversary of the grant
date and 50% on the second anniversary of the grant date and expire on the third
anniversary of the grant date. SpaceDev does not pay directors, who are also
officers, additional compensation for their services as directors. The options
granted to independent directors of SpaceDev during the fiscal year ended
December 31, 2004 under this compensation plan are as follows:
Wesley T. Huntress 75,000
Curt Dean Blake 74,000
General Howell M. Estes, III 30,000
Robert S. Walker 18,000
Scott McClendon 75,000
On December 20, 2005, the vesting on all outstanding options, including those
held by independent directors, was accelerated such that all outstanding options
became fully-vested.
EXECUTIVE OFFICER COMPENSATION
The following table shows the compensation paid to or earned by each person
who served as SpaceDev's Chief Executive Officer during the fiscal year ended
December 31, 2004 and each of SpaceDev's three next highest paid executive
officers serving as executive officers as of the end of fiscal year 2004. None
of SpaceDev's other executive officers serving as of the end of fiscal year 2004
earned more than $100,000 in salary and bonus in such year. No stock
appreciation rights were granted by SpaceDev during fiscal year 2004.
SUMMARY COMPENSATION TABLE - SPACEDEV
Annual Compensation Long Term Compensation
Other Annual Securities All Other
Name and Principal Fiscal Salary Compensation Underlying Compensation
Position Year ($) Bonus ($) Options (#) ($)
James W. Benson, . . . . . 2004 177,923 40,000 3,894 - 285
Chief Executive Officer(1) 2003 150,000 - - - -
2002 141,325 - - 10,000(2) -
Richard B. Slansky,. . . . 2004 150,000 27,672 - 395,000 -
President and. . . . . . . 2003 94,625 1,183 - 355,000 1,299
Chief Financial Officer(3) 2002 - - - - -
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Randall K. Simpson . . . . 2004 114,231 - - 250,000(4) 600
Vice President,. . . . . . 2003 - - - - -
New Business . . . . . . . 2002 - - - - -
Development
Frank Macklin. . . . . . . 2004 109,110 4,067 - 50,000(5) 100
Vice President . . . . . . 2003 - - - - -
Engineering. . . . . . . . 2002 - - - - -
(1) Mr. Benson was awarded options to purchase up to an aggregate of the
purchase of 10,000 shares in 2002 as a part of an annual award of options to
SpaceDev's employees. The options are incentive stock options and were granted
with an exercise price equal to 110% of the fair market value of SpaceDev common
stock on the date of grant. The options are fully vested.
(2) Mr. Slansky was awarded options to purchase up to an aggregate of the
purchase of up to 385,000 shares in 2003 as part of his employment agreement,
with 25,000 vested immediately, 180,000 vesting in six-month increments over
five years and the remaining vesting based on performance criteria established
by the Chief Executive Officer. The timeframe for certain performance criteria
lapsed in 2003 and options to purchase up to an aggregate of the purchase of
30,000 shares not earned were forfeited, resulting in a total of 355,000 shares
underlying options granted in 2003. Mr. Slansky was awarded options to purchase
up to an aggregate of the purchase of up to 395,000 shares in 2004; and these
options vest based on the following: 197,500 vesting in six-month increments
over five years and the remaining vesting based on performance criteria
established by the Chief Executive Officer, as approved by the Board of
Directors.
(3) Mr. Simpson was awarded options to purchase up to an aggregate of the
purchase of up to 250,000 shares in 2004 as part of his employment agreement,
with 125,000 vesting in six-month increments over five years and the remaining
vesting based on performance criteria established by the Chief Executive Officer
or President, as approved by the Board of Directors.
(4) Mr. Macklin was awarded options to purchase up to an aggregate of the
purchase of up to 50,000 shares in 2004 vesting in six-month increments over
five years.
The following table shows information regarding the executive officers of
Starsys who are expected to be appointed executive officers of SpaceDev (or a
subsidiary) following the merger, and who would have been included in the
Summary Compensation Table of SpaceDev if such persons had been serving as
executive officers of SpaceDev (or a subsidiary) as of December 31, 2004.
SUMMARY COMPENSATION TABLE - STARSYS
LONG TERM
ANNUAL COMENSATION COMPENSATION
---------------------------------------------------------------------------------------------------------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION FISCAL YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
------------------ ----------- ---------- --------- ----------------- --------------- ------------------
Scott Tibbitts . . 2004 190,248 490 - - 3,037(1)
2003 182,096 12,695 - - 2,563(1)
2002 168,355 23,223 - - -
------------------ ----------- ---------- --------- ----------------- ---------------- ------------------
Robert Vacek . . . 2004 24,462 - - - -
2003 - - - - -
2002 - - - - -
---------------------------------------------------------------------------------------------------------------
(1) Represents a vehicle allowance for 2003 and 2004.
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The following table shows all stock options granted during fiscal 2004 to
the SpaceDev executive officers named in the Summary Compensation Table. No
stock appreciation rights were granted during fiscal year 2004.
Number of Securities Percent of Total Options
Underlying Options Granted to Employees in Exercise Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
------------------ --------------------- ------------------------ --------------- ------------
James W. Benson - - - -
Richard B. Slansky 395,000 18% 0.92 3/25/2010
Randall K. Simpson 250,000 11% 1.19 1/26/2010
Frank Macklin 50,000 2% 0.92 3/25/2010
------------------ --------------------- ------------------------ --------------- ------------
The following table shows all stock options granted during fiscal 2004 by
Starsys to the executive officers of Starsys who are expected to be appointed
executive officers of SpaceDev (or a subsidiary) following the merger, and who
would have been included in the Summary Compensation Table of SpaceDev if such
persons had been serving as executive officers of SpaceDev (or a subsidiary) as
of December 31, 2004.
Number of Securities Percent of Total Options
Underlying Options Granted to Employees in Exercise of Base Expiration
Name Granted (#) Fiscal Year Price($/Sh) Date
------------------ --------------------- ------------------------ --------------- ------------
Scott Tibbitts - - - -
Robert Vacek - - - -
------------------ --------------------- ------------------------ --------------- ------------
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES - SPACEDEV
THE FOLLOWING TABLE SHOWS INFORMATION REGAR
Value of Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options/SARs at FY-
Shares Options/SARS at FY-End(#) End ($)
Acquired on Value
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
------------------ --------------- ------------- -------------------------- --------------------------
James W. Benson - - 255,000 / 1,000,000 254,734 / 375,000
Richard B. Slansky - - 276,250 / 473,750 184,860 / 359,590
Randall K. Simpson - - 12,500 / 273,500 14,875 / 282,625
Frank Macklin - - 8,000 / 45,000 48,583 / 41,400
------------------ --------------- ------------- -------------------------- --------------------------
(1) For purposes of determining whether options are "in-the-money," SpaceDev
defined fair market value as the five-day weighted average of the closing price
of SpaceDev common stock on the Over-The-Counter Bulletin Board as of December
31, 2004, or $1.56 per share.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES--STARSYS
The following table shows information regarding the executive officers of
Starsys who are expected to be appointed executive officers of SpaceDev (or a
subsidiary) following the merger, and who would have been included in the
Summary Compensation Table of SpaceDev if suc
Value of Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options/SARs at FY-
Shares Options/SARS at FY-End(#) End ($)
Acquired on Value
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
------------------ --------------- ------------- -------------------------- --------------------------
Scott Tibbitts - - - -
Robert Vacek - - - -
------------------ --------------- ------------- -------------------------- --------------------------
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LONG-TERM INCENTIVE AWARDS
SpaceDev did not have any long-term incentive plan awards during fiscal
year 2004.
EMPLOYMENT AGREEMENTS
On December 20, 2005, SpaceDev entered into an executive employment
agreement with Mark N. Sirangelo pursuant to which Mr. Sirangelo will be
employed as SpaceDev's chief executive officer and vice chairman effective
December 30, 2005. The agreement has an initial term of two years, and will be
automatically renewed for a third year unless either SpaceDev or Mr. Sirangelo
provides written notice of an intent not to renew. Under the agreement, Mr.
Sirangelo is entitled to receive (1) a base salary of $22,500 per month, subject
to adjustment up to $27,500 per month upon the happening of certain events, (2)
performance-based cash bonuses based on the achievement of specific goals set
forth in the agreement (including a bonus of $25,000 upon the completion of the
merger with Starsys), and (3) a fully-vested option to purchase up to 1,900,000
shares of SpaceDev common stock under the terms and conditions of a non-plan
stock option agreement between SpaceDev and Mr. Sirangelo. The option has an
exercise price equal to $1.40 per share, which was the closing sale price
reported on the OTCBB on the date of grant, and will expire five years after the
date of grant. Some of the shares subject to the option are subject to sale
restrictions that expire upon the achievement of certain specific milestones or
four years from the date of grant, whichever comes first. Subject to certain
limitations, the option may be exercised by means of a net exercise provision by
surrendering shares with a fair market value equal to the exercise price upon
exercise. SpaceDev will pay severance to Mr. Sirangelo if his employment is
terminated by SpaceDev without cause or by Mr. Sirangelo for good reason. The
severance payment is equal to: (1) if Mr. Sirangelo's employment is terminated
by SpaceDev without cause, his then-current base salary per month multiplied by
the greater of (A) 12 months and (B) the number of months remaining in the term
of the agreement (prorated with respect to any partial month); or (2) if Mr.
Sirangelo's employment is terminated by Mr. Sirangelo for good reason, his
then-current base salary per month multiplied by the lesser of (A) 12 months and
(B) the number of months remaining in the term of the agreement provided that
such number of months will not be deemed to be less than six months. Under the
agreement, SpaceDev will indemnify Mr. Sirangelo to the extent provided in
SpaceDev's articles of incorporation, as may be amended from time to time, to
the maximum extent permitted by law and pursuant to SpaceDev's standard
indemnification agreement with its officers and directors.
On December 20, 2005, SpaceDev entered into an amended and restated
executive employment agreement with Richard B. Slansky pursuant to which Mr.
Slansky is employed as SpaceDev's president and chief financial officer. The
agreement supersedes in full the employment agreement dated February 10, 2003
between SpaceDev and Mr. Slansky. The agreement has an initial term of two
years, and will be automatically renewed for a third year unless either SpaceDev
or Mr. Slansky provides written notice of an intent not to renew. Under the
agreement, Mr. Slansky is entitled to receive (1) a base salary of $14,500 per
month, subject to adjustment up to $20,000 per month upon the happening of
certain events, (2) performance-based cash bonuses based on the achievement of
specific goals set forth in the agreement (including a bonus of $25,000 upon the
completion of the merger with Starsys), and (3) a fully-vested option to
purchase up to 1,400,000 shares of SpaceDev common stock under the terms and
conditions of a non-plan stock option agreement between SpaceDev and Mr.
Slansky. The option has an exercise price equal to $1.40 per share, which was
the closing sale price reported on the OTCBB on the date of grant, and will
expire five years after the date of grant. Some of the shares subject to the
options are subject to sale restrictions that expire upon the achievement of
certain specific milestones or four years from the date of grant, whichever
comes first. Subject to certain limitations, the option may be exercised by
means of a net exercise provision by surrendering shares with a fair market
value equal to the exercise price upon exercise. SpaceDev will pay severance to
Mr. Slansky if his employment is terminated by SpaceDev without cause or by Mr.
Slansky for good reason. The severance payment is equal to: (1) if Mr. Slansky's
employment is terminated by SpaceDev without cause, his then-current base salary
per month multiplied by the greater of (A) 12 months and (B) the number of
months remaining in the term of the agreement (prorated with respect to any
partial month); or (2) if Mr. Slansky's employment is terminated by Mr. Slansky
for good reason, his then-current base salary per month multiplied by the lesser
of (A) 12 months and (B) the number of months remaining in the term of the
agreement provided that such number of months will not be deemed to be less than
six months. Under the agreement, SpaceDev will indemnify Mr. Slansky to the
extent provided in SpaceDev's articles of incorporation, as may be amended from
time to time, to the maximum extent permitted by law and pursuant to SpaceDev's
standard indemnification agreement with its officers and directors.
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On December 20, 2005, SpaceDev entered into an executive employment
agreement with James W. Benson pursuant to which Mr. Benson is employed as
SpaceDev's chairman and chief technology officer. The agreement supersedes all
prior employment agreements between SpaceDev and Mr. Benson. The agreement has
an initial term of two years, and will be automatically renewed for a third year
unless either SpaceDev or Mr. Benson provides written notice of an intent not to
renew. Under the agreement, Mr. Benson is entitled to receive (1) a base salary
of $14,000 per month, subject to adjustment up to $17,000 per month upon the
happening of certain events, (2) performance-based cash bonuses based on the
achievement of specific goals set forth in the agreement (including a bonus of
$22,500 upon the completion of the merger with Starsys), and (3) a fully-vested
option to purchase up to 950,000 shares of SpaceDev common stock under the terms
and conditions of a non-plan stock option agreement between SpaceDev and Mr.
Benson. The option has an exercise price equal to$1.40 per share, which was the
closing sale price reported on the OTCBB on the date of grant, and will expire
five years after the date of grant. Some of the shares subject to the options
are subject to sale restrictions that expire upon the achievement of certain
specific milestones or four years from the date of grant, whichever comes first.
Subject to certain limitations, the option may be exercised by means of a net
exercise provision by surrendering shares with a fair market value equal to the
exercise price upon exercise. SpaceDev will pay severance to Mr. Benson if his
employment is terminated by SpaceDev without cause or by Mr. Benson for good
reason. The severance payment is equal to: (1) if Mr. Benson's employment is
terminated by SpaceDev without cause, his then-current base salary per month
multiplied by the greater of (A) 12 months and (B) the number of months
remaining in the term of the agreement (prorated with respect to any partial
month); or (2) if Mr. Benson's employment is terminated by Mr. Benson for good
reason, his then-current base salary per month multiplied by the lesser of (A)
12 months and (B) the number of months remaining in the term of the agreement
provided that such number of months will not be deemed to be less than six
months. Under the agreement, SpaceDev will indemnify Mr. Benson to the extent
provided in SpaceDev's articles of incorporation, as may be amended from time to
time, to the maximum extent permitted by law and pursuant to SpaceDev's standard
indemnification agreement with its officers and directors.
On December 20, 2005, Mr. Benson also received an option to purchase up to
150,000 shares of our common stock in connection with his services as chairman
of SpaceDev pursuant to the terms of a separate non-plan stock option agreement
between SpaceDev and Mr. Benson. The option has an exercise price equal to $1.40
per share, which was the closing sale price reported on the OTCBB on the date of
grant, and will expire five years after the date of grant. Some of the shares
subject to the option are subject to sale restrictions that expire upon the
achievement of certain specific milestones or four years from the date of grant,
whichever comes first. Subject to certain limitations, the option may be
exercised by means of a net exercise provision by surrendering shares with a
fair market value of the exercise price upon exercise.
Mr. Simpson is an at-will employee and his current base salary is $140,000
per year. Mr. Simpson participates in a SpaceDev bonus program, and benefit and
other incentives at the discretion of the compensation committee of our board of
directors.
Mr. Macklin is an at-will employee and his current base salary is $135,000
per year. Mr. Macklin participates in a SpaceDev bonus program, and, benefit and
other incentives at the discretion of the compensation committee of our board of
directors.
EMPLOYEE BENEFITS
At SpaceDev's 1999 Annual Shareholder Meeting, the shareholders approved
the 1999 Stock Option Plan under which the Board of Directors had the ability to
grant SpaceDev's employees, directors and affiliates Incentive Stock Options,
non-statutory stock options and other forms of stock-based compensation,
including bonuses or stock purchase rights. Incentive Stock Options, which
provide for preferential tax treatment, are only available to employees,
including officers and affiliates, and may not be issued to non-employee
directors. The exercise price of the Incentive Stock Options must be 100% of the
fair market value of the stock (110% for holders of 10% or more of SpaceDev's
outstanding voting stock) on the date the option is granted. Pursuant to the
1999 Stock Option Plan, the exercise price for the non-statutory stock options
may not be less than 85% of the fair market value of the stock on the date the
option is granted. SpaceDev is required to reserve an amount of common shares
equal to the number of shares which may be purchased as a result of awards made
under the Plan at any time.
At the SpaceDev 2000 Annual Shareholder Meeting, the shareholders approved an
amendment to the 1999 Stock Option Plan, increasing the number of shares
eligible for issuance under the plan to 30% of the then outstanding common stock
and allowing the Board of Directors to make annual adjustments to the plan to
maintain a 30% ratio to outstanding common stock at each annual meeting of the
Board of Directors. The Board, at its annual meetings in 2001 and 2002, made no
adjustment, as a determination was made that the number of shares then available
under the Plan was sufficient to meet SpaceDev's then current needs. The 1999
Stock Option Plan is no longer available for new grants but continues to govern
outstanding options awarded under such plan.
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At SpaceDev's 2004 Annual Shareholder Meeting, held on August 5, 2004, the
shareholders approved the 2004 Equity Incentive Plan. The 2004 Equity Incentive
Plan authorized and reserved for issuance under the plan 2,000,000 shares of
SpaceDev common stock. The 2004 Equity Incentive Plan is an important part of
SpaceDev's total compensation program because competitive benefit programs are a
critical component of SpaceDev's efforts to attract and retain qualified
employees, directors and consultants. Options granted under the plan may be
Incentive Stock Options or non-statutory stock options, as determined by the
Board of Directors or a committee appointed by the Board of Directors at the
time of grant. Limited rights and stock awards may also be granted under the
plan. As of December 31, 2004, a total of 6,184,698 shares were authorized for
issuance under the 1999 Stock Option Plan and the 2004 Equity Incentive Plan,
3,878,766 of which are currently subject to outstanding options and awards and
options to purchase up to an aggregate of the purchase of 1,005,035 shares were
exercised in 2004. During 2004, SpaceDev issued non-statutory options to
purchase 272,000 shares to SpaceDev's independent directors for attendance at
SpaceDev's 2004 Board of Directors meetings. At SpaceDev's Annual Meeting of
Shareholders held on August 12, 2005, SpaceDev's shareholders approved an
increase of the total shares authorized and reserved for issuance under the 2004
Equity Incentive Plan from 2,000,000 to 4,000,000. See the discussion under
"SpaceDev Proposal No. 2 - Amendment to the 2004 Equity Incentive Plan" for a
discussion of the further increase in total shares authorized and reserved for
issuance under the plan proposed by this joint proxy statement/prospectus.
The 1999 Stock Option Plan was registered with the SEC on Form S-8 on October 5,
2000. Shares issuable under the 2004 Equity Incentive Plan were registered with
the SEC on Form S-8 on March 28, 2005.
In addition to the 1999 Stock Option Plan and the 2004 Equity Incentive Plan,
SpaceDev's shareholders authorized the 1999 Employee Stock Purchase Plan, which
authorized SpaceDev's Board of Directors to make twelve consecutive offerings of
SpaceDev common stock to SpaceDev's employees. The 1999 Employee Stock Purchase
Plan has been instituted and the first employees enrolled in the plan in August
2003. The first shares of common stock were issued under the Plan in February
2004 and shares are issued on every six-month anniversary thereafter. The 1999
Employee Stock Purchase Plan expired by its terms in June 2005; however, the
Board of Directors authorized a one-year extension of the plan at its meeting in
November 2004, in order to enable the Compensation Committee to review the value
of the plan to employees and the desire for its continuance.
On December 20, 2005, SpaceDev approved the accelerated vesting of all
unvested stock options held by its officers, directors, employees, and
consultants, effective December 20, 2005. The primary purpose of the accelerated
vesting is to eliminate future stock-based employee compensation expense
SpaceDev would otherwise recognize in its consolidated statement of operations
with respect to the accelerated options once FASB Statement No. 123R
(Share-Based Payment) becomes effective. The estimated maximum future expense
that is eliminated is approximately $5 million.
SpaceDev also offers a variety of health, dental, vision, 401(k) and life
insurance benefits to employees in conjunction with SpaceDev's co-employment
partner, Administaff.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
James W. Benson, SpaceDev's current chief executive officer and chairman of
the board of directors, has personally guaranteed the building lease on
SpaceDev's facility and has pledged his home in Poway, California as collateral
for the guarantee.
From October 14, 2002 through November 14, 2002, SpaceDev sold an aggregate of
$475,000 of 2.03% convertible debentures to James W. Benson ($375,000), Stuart
Schaffer ($50,000), and Emery Skarupa ($50,000). The total funding was completed
on November 14, 2002. The convertible debentures entitled the holder to convert
the principal and unpaid accrued interest into SpaceDev common stock when the
convertible debentures matured. The convertible debentures originally were set
to mature six months from issue date and were subsequently extended to twelve
months from issue date on March 19, 2003. The convertible debentures were
exercisable into a number of SpaceDev's common shares at a conversion price of
$0.37 to $0.42 per share. Concurrent with the issuance of the convertible
debentures, SpaceDev issued to the subscribers, warrants to purchase up to
1,229,705 shares of SpaceDev common stock. These warrants were exercisable for
three years from the date of issuance at the initial exercise price. On
September 5, 2003, SpaceDev repaid one-half of the convertible debentures, with
the condition that the holders would convert the other half. Also, as a
condition of the partial repayment, the holders were required to relinquish
one-half of the previously issued warrants. Finally, as additional consideration
for the transaction, the holders were offered 5% interest on their convertible
debentures, rather than the stated 2.03%. All the holders accepted the offer and
the
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convertible debentures were retired. Of the 614,852 remaining warrants, all were
exercised in 2004 and none remained outstanding at December 31, 2004.
On November 17, 2003, SpaceDev entered into an "at-will" employment arrangement
with Dario ("Dan") DaPra to become SpaceDev's Vice President of Engineering.
SpaceDev's offer letter provided for compensation consisting of base salary of
$125,000 per year, health and other benefits and options to purchase up to
250,000 shares of SpaceDev common stock. The offer letter also provided for
severance under specified conditions and prohibited Mr. DaPra from soliciting
SpaceDev's employees or competing with SpaceDev. Mr. DaPra resigned on March 5,
2004, and subsequently entered into a Confidential Separation Agreement and
General Release with SpaceDev. The separation agreement provided for Mr. DaPra
to receive one-half of his base salary through April 30, 2004 in lieu of
severance, and to retain options to purchase up to an aggregate of the purchase
of 40,000 shares of SpaceDev's common stock with the ability to exercise those
options until October 31, 2004.
Mark N. Sirangelo, who will become chief executive officer, vice chairman
and a director of SpaceDev effective December 30, 2005, is a member of QS
Advisors, LLC and also a member of The QuanStar Group, business advisors to
SpaceDev. SpaceDev and QS Advisors have entered into an agreement for which QS
Advisors is paid a monthly fee of $5,000. In addition, under the agreement,
upon the consummation of the merger with Starsys, QS Advisors will receive
$200,000 cash and 250,000 shares of SpaceDev common stock. This agreement will
terminate upon consummation of Mr. Sirangelo's employment with SpaceDev.
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INFORMATION REGARDING BUSINESS OF STARSYS
OVERVIEW
Starsys Research Corporation is engaged in the design and manufacture of
mechanical and electromechanical subsystems and components for spacecraft.
Starsys' subsystems enable critical spacecraft functions such as pointing solar
arrays and communication antennas and restraining, deploying and actuating of
moving spacecraft components. Starsys manufactures a wide range of products
that include bi-axis gimbals, flat plate gimbals, solar array pointing
mechanisms, deployable booms, separation systems, thermal louvers, actuators,
restraint devices and cover systems. Starsys' products are sold both as
"off-the-shelf" catalog products which represent previously qualified devices
with spaceflight history, and as custom systems that are developed for specific
applications. Starsys' products are typically sold directly to spacecraft
manufacturers. Starsys' customer base is segregated into three major segments:
(1) domestic and international commercial spacecraft (communication and imaging
satellites), (2) civil spacecraft (NASA) that are primarily scientific in nature
and (3) defense spacecraft that support the United States' military capability.
Starsys also offers products to non-space customers, including aerospace,
maritime, and industrial customers.
Starsys' engineering and manufacturing capabilities position the company to
provide both mechanical and electromechanical subsystems for spacecraft.
Starsys' strategy is to identify opportunities to develop products from custom
mechanical and electromechanical subsystems. To extend the product life cycle,
Starsys has developed and expanded this "product platforms" business model.
Product platforms are subsystems for which non-recurring and development
engineering has been retired and for which there is continued customer demand.
Starsys' product offerings currently include High Output Paraffin ("HOP")
actuators, hinges, battery bypass switches, thermal louvers, bi-axial gimbals
and solar array drives, among others. The product life cycle for this type of
product within the space industry is approximately 15 years.
HISTORY AND RECENT EVENTS
Starsys incorporated under the laws of Colorado in April 1988 as Helicon
Research Corporation. In May 1988, the company changed its name to Starsys
Research Corporation. Starsys is headquartered in Boulder, Colorado, with an
engineering and manufacturing facility in Durham, North Carolina.
Starsys was founded as a provider of non-explosive HOP actuators for spacecraft
that replaced explosive actuators traditionally used for spacecraft deployables.
Through the early 1990's, Starsys became a supplier of mechanisms based on this
non-explosive, re-settable actuator technology and also expanded from HOP
actuator products to mechanical and electromechanical components.
In 2000, Starsys acquired the assets of American Technologies Consortium,
referred to as ATC, to meet the growing demand for electromechanical systems in
the spacecraft industry. This acquisition expanded Starsys' range of
electromechanical components, added a new line of electromechanical subsystems,
and enabled Starsys to develop additional high value products, including
bi-axial gimbals, "quiet drive" (QuAD) electronics controllers, and solar array
drives.
STARSYS PRODUCT MIX
Starsys targets two distinct markets, mechanical subsystems and
electromechanical subsystems. The mechanical subsystems market includes hinges,
latches, release mechanisms, and deployable structures and systems for
spacecraft and payloads. The electromechanical subsystems market includes
antenna pointing mechanisms, gimbals, solar array deployment actuators,
instrument mechanisms and actuators, and deployment and aperture mechanisms for
spacecraft and payloads. For 2004, Starsys' product mix was 69% mechanical and
31% electromechanical by program count and approximately 30% mechanical and
approximately 70% electromechanical by program value.
COMPETITION
Starsys' competition varies by business segment and product areas. The
following summarizes principal organizations that compete with Starsys.
Mechanical subsystems range from customized hinges and latching devices to cover
systems and integrated structures for payloads, typically not requiring
customized, or Starsys supplied, electromagnetic devices. Competition includes:
Alliance Spacesystems Inc. and Swales Aerospace. Starsys provides clamp band
systems for small satellite separations and deployable structures. Starsys
believes its primary competitor in the small satellite
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separations market is Planetary Systems Inc. Starsys believes that the primary
competitors in the deployable structures market are ATK Space Systems (formerly
AEC Able Engineering), NGST Astro (formerly SPAR Astro Aerospace) and Harris
Corporation.
Electromechanical subsystems range from motors and actuators (typically motors
with transmissions and various ancillary elements) to sophisticated systems that
incorporate control electronics for applications such as antenna and solar array
pointing, and instruments that sweep a pattern or actively track. Starsys
Research believes that the competition for motors and actuators are MPC Products
Corporation, CDA Astro, Aeroflex (a subsidiary of UMTC), Moog Inc. and ATK
Satellite Systems. As these products become more specialized the competition
may include Aeroflex, MOOG and the Ball Aerospace & Technologies Corp.
Some competitors of Starsys are also customers of Starsys.
Starsys believes the alternatives for its restraint and release products are
pyrotechnic devices built by Hi-Shear and Pacific Scientific and non-pyrotechnic
products, supplied by NEA, TiNi Aerospace, and G&H Technologies.
Many of our competitors are larger and have substantially greater resources than
we do. Furthermore, it is possible that other domestic or foreign companies or
governments, some with greater experience in the space and defense industry and
many with greater financial resources than we possess, will seek to provide
products or services that compete with our products or services. Any such
foreign competitor could benefit from subsidies from or other protective
measures by its home country.
ENGINEERING AND DESIGN
In addition to its manufacturing operations, Starsys has a team of
experienced engineers focused on advanced engineering of mechanical and
electromechanical subsystems. The engineering group includes mechanical and
aerospace engineers, engineering technicians and designers. Areas of expertise
include mechanical and electromechanical subsystem design, analysis, test, and
program management.
MANUFACTURING
Starsys has manufacturing facilities in Boulder, CO and Durham, NC.
Starsys' manufacturing resources include:
- A team of 53 manufacturing engineers, technicians and quality assurance
personnel
- Computer Aided Design (CAD) software and systems
- 45,000 square foot of floor space in facilities in Boulder and Durham
- 9,000 square foot class 300,000 clean room manufacturing area
- Three class 10,000 clean rooms manufacturing area
- One class 1,000 clean room manufacturing area
- Class 100 flow benches
- Electrostatic discharge (ESD) manufacturing areas
- Multiple thermal and thermal vacuum chambers
- Multiple, coordinate measurement machines (CMM) for part inspection
- In-house, computer numerically controlled (CNC) machine shop
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QUALITY ASSURANCE AND TESTING
Starsys is ISO-9001 certified and AS9100 compliant. Starsys is currently
engaged in AS9100 certification.
Starsys utilizes test equipment that is calibrated and traceable to NBS
standards. Starsys also maintains access to certified suppliers for vibration,
shock and electromagnetic interference (EMI) testing.
RESEARCH AND DEVELOPMENT
Starsys invests in product-related research and development to conceive and
develop new products and to enhance existing products. Starsys' research and
development expenses totaled approximately $10,524,603 in the year ended
December 31, 2004, and $6,717,296 in the year ended December 31, 2003. In
addition, a large portion of Starsys' total new product development and
enhancement programs is funded under customer contracts.
PATENTS
Starsys relies, in part, on patents, trade secrets and know-how to develop
and maintain its competitive position and technological advantage, particularly
with respect to its launch vehicle and satellite products. Starsys holds U.S.
and foreign patents relating to release devices, deployable truss structures and
battery cell shorting mechanisms. The majority of Starsys' U.S. patents
relating to the noted technologies expire between 2019 and 2022.
COMPONENTS AND RAW MATERIALS
Starsys purchases a significant percentage of its product components,
structural assemblies and certain key satellite components and instruments from
third parties. Starsys also occasionally obtains from the U.S. government parts
and equipment that are used in the production of its products or in the
provision of its services. Generally, Starsys has not experienced material
difficulty in obtaining product components or necessary parts and equipment, and
believes that alternatives to its existing sources of supply are available,
although increased costs and possible delays could be incurred in securing
alternative sources of supply. Starsys relies upon sole source suppliers for
potentiometers, slip ring assemblies, specialized impellers, specialized heaters
and paraffin material. While alternative sources would be available, the
inability of any such supplier to provide us with these items to qualified
specifications would result in an adverse effect on our ability to manufacture
our products.
CUSTOMERS
Our business is focused on mechanical and electro-mechanical systems,
sub-systems and components that support assembly of spacecraft by our customers.
Those customers, primarily the Prime Contractors in the aerospace market,
support the government and commercial end users by integrating our products into
higher level assemblies and spacecraft. Lockheed Martin Companies, Boeing
Company, Northrop Grumman Space Technologies, ITT Industries, and Swales
Aerospace are prime contract customer, which have each accounted for 10% or more
of our consolidated revenues. We have multiple contracts with each of these
customers and we do not believe any single customer contract is material to
Starsys. The remainder of our business is with multiple customers that support
the Department of Defense through the prime contractors, and the commercial
spacecraft market, the civil spacecraft market, and NASA, including through
Small Business Innovative Research (SBIR) grants and Long Term Agreements
(LTA's) with the prime contractors.
Our business development process is generally competitive bid in response to a
request for proposal (RFP) that is generated by our potential customers. These
proposals have various bases, including firm fixed price, cost plus fixed fee,
and time and materials. We typically prepare between ten and twenty proposals
in a given month and we have usually one to three weeks to respond to the
request.
These proposals are managed by product area. We define three specific product
areas for our business: electromechanical systems, which includes motors,
control, and logic, mechanical systems, which includes spring and paraffin
driven mechanisms as well as deployable structures, and catalog products, which
includes our release mechanisms, hinges and thermal control devices. We also
execute on long term build to print contracts with some of the prime
contractors.
We average between 55 and 70 active programs at any time and the average
duration of our programs is 11 months, with programs as short as 60 days and as
long as 3 years. Currently this mix is approximately 70% in support of
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governmental work, both open and classified, 20% commercial, and 10% with NASA,
but this mix changes frequently with new contract awards.
U.S. GOVERNMENT CONTRACTS
During 2004, approximately 78% of Starsys' total annual revenues were derived
from contracts with the U.S. government and its agencies or from subcontracts
with other U.S. government prime contractors. In 2003, approximately 88% of
Starsys' total annual revenues were derived from these contracts, and, in 2002,
this percentage was 73%. Most of Starsys' U.S. government contracts are funded
incrementally on a year-to-year basis.
Major contracts with the U.S. government primarily fall into two categories:
cost-reimbursable contracts and fixed-price contracts. Approximately 5% of
revenues from U. S. government contracts in 2004 were derived from
cost-reimbursable contracts and 95% of revenues from U.S. government contracts
were derived from fixed-price contracts. Under a cost-reimbursable contract,
Starsys recovers its actual allowable costs incurred, allocable overhead costs
and a fee consisting of a base amount that is fixed at the inception of the
contract and/or an award amount that is based on the customer's evaluation of
its performance in terms of the criteria stated in the contract. Starsys'
fixed-price contracts include fixed-price and fixed-price incentive fee
contracts. Under firm fixed-price contracts, work performed and products
shipped are paid for at a fixed price without adjustment for actual costs
incurred in connection with the contract. Therefore, Starsys bears the risk of
loss due to increased cost, although some of this risk may be passed on to
subcontractors. Fixed-price incentive fee contracts provide for sharing by
Starsys and the customer of unexpected costs incurred or savings realized within
specified limits, and may provide for adjustments in price depending on actual
contract performance other than costs. Costs in excess of the negotiated
maximum (ceiling) price and the risk of loss by reason of such excess costs are
borne by Starsys, although some of this risk may be passed on to subcontractors.
All of Starsys' U.S. government contracts and, in general, its subcontracts with
other U.S. government prime contractors provide that such contracts may be
terminated for convenience by the U.S. government or the prime contractor,
respectively. Furthermore, any of these contracts may become subject to a
government-issued stop work order under which Starsys would be required to
suspend production. In the event of a termination for convenience, contractors
generally are entitled to receive the purchase price for delivered items,
reimbursement for allowable costs for work in process and an allowance for
reasonable profit thereon or adjustment for loss if completion of performance
would have resulted in a loss. For a more detailed description of risks
relating to the U.S. government contract industry, see the "Risk Factors"
section beginning on page 15. Starsys derives a significant portion of its
revenues from U.S. government contracts, which are dependent on continued
political support and funding and are subject to termination by the U.S.
government at any time.
A portion of Starsys' business is classified for national security purposes by
the U.S. government and cannot be specifically described. The operating results
of these classified programs are included in Starsys' consolidated financial
statements. The business risks associated with classified programs, as a
general matter, do not differ materially from those of our other U. S.
government programs and products.
REGULATION
Starsys' ability to pursue our business activities is regulated by various
agencies and departments of the U.S. government and, in certain circumstances,
the governments of other countries. Starsys' classified programs require that
it and certain employees maintain appropriate security clearances. Starsys also
requires licenses from the U.S. Department of State and the U.S. Department of
Commerce with respect to work Starsys does for foreign customers or with foreign
subcontractors.
BACKLOG
Starsys' firm backlog was approximately $10.6 million at December 31, 2004
and approximately $7.2 million at December 31, 2003.
Starsys' firm backlog as of December 31, 2004 consisted entirely of contracts
with the U.S. government and its agencies or from subcontracts with prime
contractors of the U.S. government. Most of Starsys' government contracts are
funded incrementally on a year-to-year basis. Changes in government policies,
priorities or funding levels through agency or program budget reductions by the
U.S. Congress or executive agencies could materially adversely affect the
financial condition and results of operations of Starsys. Furthermore, contracts
with the U.S. government may
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be terminated or suspended by the U.S. government at any time, with or without
cause. Such contract suspensions or terminations could result in unreimbursable
expenses or charges or otherwise adversely affect the business of Starsys.
Total backlog was approximately $11 million at December 31, 2004. Total backlog
includes firm backlog in addition to unexercised options, indefinite-quantity
contracts and undefinitized orders and contract award selections. Backlog at
December 31, 2004 does not give effect to new orders received or any
terminations or cancellations since that date.
EMPLOYEES
As of August 31, 2005, Starsys Research had approximately 130 employees.
None of our employees is subject to collective bargaining agreements.
STARSYS' MARKET PRICE AND DIVIDEND INFORMATION
There is no established public trading market for Starsys' capital stock.
No cash dividends have been declared with respect to any class of Starsys'
capital stock at any time in the period since December 31, 2001. At the present
time, we are prohibited from paying dividends by financial covenants in our
credit agreement with Vectra Bank Colorado, National Association. We intend to
repay Vectra at closing of the merger.
As of November 21, 2005 there were 139 holders of Starsys capital stock
(assuming full distribution of the ESOP, but not including shares to be received
pursuant to the exercise of options prior to closing of the merger).
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OWNERSHIP OF STARSYS COMMON STOCK
The following table provides information as of November 1, 2005 concerning
the beneficial ownership of Starsys' common stock by each director, the four
most highly compensated executive officers of Starsys other than the Chief
Executive Officer, each shareholder known by Starsys to be the beneficial owner
of more than 5% of Starsys' outstanding common stock, and the directors and
executive officers as a group. Except as otherwise indicated, and subject to
community property laws, where applicable, the persons named in the table have
sole voting and investment power over all shares of common stock beneficially
owned by them and have an address of 4909 Nautilus Court North, Boulder, CO
80301.
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER. . . . . BENEFICIALLY OWNED(1) PERCENTAGE OF CLASS(1)
--------------------------------------------- ---------------------- -----------------------
Scott Tibbitts. . . . . . . . . . . . . . . . 248,602.77 47.60%
Scott Christiansen. . . . . . . . . . . . . . 53,692.83 (2) 9.80%
Robert Vacek. . . . . . . . . . . . . . . . . 243.33 (3) *
Mitch Weins . . . . . . . . . . . . . . . . . 16,630.21 (4) 3.20%
Kevin Hoskins . . . . . . . . . . . . . . . . 28,524.11 (5) 5.20%
Jeff Harvey . . . . . . . . . . . . . . . . . 2,787.52 *
Robert Harr . . . . . . . . . . . . . . . . . 740.78 (6) *
Theodore Tibbitts . . . . . . . . . . . . . . 38,087.54 7.30%
John Tibbitts . . . . . . . . . . . . . . . . 43,056.75 8.20%
--------------------------------------------- ---------------------- -----------------------
Officers and Directors as a Group (8 persons) 351,296.60 (7) 59.20%
--------------------------------------------- ---------------------- -----------------------
*Less than 1%.
(1) Where persons listed on this table have the right to obtain additional
shares of Common Stock through the exercise of outstanding options or warrants
or the conversion of convertible securities within 60 days from November 1,
2005, these additional shares are deemed to be outstanding for the purpose of
computing the percentage of common stock owned by such persons, but are not
deemed outstanding for the purpose of computing the percentage owned by any
other person. Percentages are based on total outstanding shares of 522,437.47
on November 1, 2005, and assumes the allocation and distribution to the plan
participants of common stock held in the separate plan holding Starsys common
stock under the Starsys 401(k) and Stock Bonus Plan dated August 4, 1997.
(2) Includes vested options to purchase an aggregate of 26,060.38 shares of
Starsys common stock.
(3) Does not include shares of SpaceDev common stock to be issued to Mr.
Vacek pursuant to his employment agreement with Starsys.
(4) Includes a vested option to purchase 1,456 shares of Starsys common
stock.
(5) Includes vested options to purchase an aggregate of 23,351.25 shares of
Starsys common stock.
(6) Includes a vested option to purchase 326.8 shares of Starsys common
stock.
(7) Includes vested options to purchase an aggregate of 51,194.43 shares of
Starsys common stock held by the Starsys officers and directors.
CHANGES OF CONTROL
Other than the transactions contemplated by the merger agreement, Starsys
is aware of no arrangements which may result in a change of control of Starsys.
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DESCRIPTION OF STARSYS CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The authorized capital of Starsys consists of 25,000,000 shares of common
stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, no
par value per share. As of November 21, 2005, Starsys has 522,437.47 shares
issued and outstanding.
COMMON STOCK
Each shareholder of record is entitled to one vote for each share, except
that in the election of directors, each shareholder of common stock is entitled
to as many votes for each share as there are directors to be elected by the
common shareholders and for whose election the shareholder has a right to vote.
Cumulative voting is not permitted in the election of directors or otherwise.
Subject to the rights of any then outstanding shares of preferred stock, of
which there are currently none, the holders of common stock are entitled to
receive the net assets of the corporation upon dissolution or liquidation.
Holders of common stock are also entitled to dividends as may be declared in the
discretion of the board of directors. However, Starsys does not anticipate
paying dividends in the foreseeable future. The holders of common stock have no
preemptive rights.
PREFERRED STOCK
The board of directors of Starsys may divide and issue preferred stock in
series and determine the relative rights, limitations and preferences of the
shares of any such series in respect to the number of shares and the distinctive
designations thereof, dividend rights (including whether dividends are
cumulative), terms of redemption (including sinking fund provisions), redemption
price, the amount payable upon voluntary or involuntary liquidation, conversion
rights and voting rights. The holders of preferred stock have no preemptive
rights unless designated by the board of directors. Starsys has no current
plans to issue any shares of preferred stock of any class or series.
STOCK BONUS PLAN AND STOCK OPTION PLAN
Starsys Employee's 401(k) and Stock Bonus Plan (the "Stock Bonus Plan")
currently holds 36,610 shares of common stock. However, Starsys will terminate
the Stock Bonus Plan and distribute the shares to the participants prior to
closing of the merger.
Starsys has reserved 160,000 shares of common stock for issuance under its 1998
Stock Option Plan, of which options to purchase 101,396 shares of common stock
are outstanding, 1,989 shares of common stock have been acquired through the
exercise of options, and 56,615 shares of common stock remain available for
grant. Starsys does not intend to grant additional options prior to closing of
the merger.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF STARSYS
The following discussion should be read in conjunction with the
consolidated financial statements of Starsys for the years ended December 31,
2004 and 2003 and the nine months ended September 30, 2005 and 2004 and related
notes and the other financial information appearing elsewhere in this document.
You are also urged to carefully review and consider the various disclosures in
this joint proxy statement/prospectus about Starsys including the risk factors
related to the combined company. The forward looking statements regarding 2006
are made as if Starsys were to remain an independent company. See "Special Note
Regarding Forward-Looking Information" on page 14.
OVERVIEW
Starsys is engaged in the design and manufacture of mechanical and
electromechanical subsystems and components for spacecraft. Starsys' subsystems
enable critical spacecraft functions such as pointing solar arrays and
communication antennas and restraint, deployment and actuation of moving
spacecraft components.
Our products are typically sold directly to spacecraft manufacturers on a fixed
price basis. Recently, we have increased the percentage of our contracts
performed on a cost reimbursable basis. In particular, we have focused on
performing those projects that we believe are high risk development projects on
a cost reimbursable basis. In addition, Starsys has entered into a number of
contracts which include an initial cost reimbursable development phase followed
by a fixed price manufacturing phase.
In 2004, Starsys experienced a net loss of approximately $5,592,000 or
approximately a negative 31% of net sales due to losses generated from
performance on fixed price contracts for high risk development projects.
Starsys performed work on greater than 50 contracts in 2004 and suffered
negative income on approximately half of these contracts. In particular, 8
contracts contributed over 80% of the net loss in 2004. This net loss resulted
in a significant reduction in Starsys working capital during 2004 and a working
capital deficit as of December 31, 2004.
The financial performance in 2004 and resulting working capital deficit caused
Starsys to violate its financial covenants under its credit agreement with
Vectra Bank of Colorado, its primary lender. As a result, in June 2005, Starsys
entered into a forbearance agreement with Vectra Bank of Colorado. The
forbearance agreement requires Starsys to improve its financial performance and
obtain additional working capital. Starsys intends to meet its working capital
needs and satisfy terms of the forbearance agreement through improved operations
and the merger with SpaceDev. If Starsys does not achieve expected revenue and
net income levels or successfully close the merger with SpaceDev, Vectra Bank of
Colorado is entitled to appoint a receiver to protect its collateral. This
includes the right to operate Starsys' business.
To improve operations, Starsys has taken significant corrective action. These
actions have focused on improvements in the processes necessary to profitably
win and execute complex spacecraft subsystem development and production
contracts and the hiring of people to execute these contracts. These changes
have included:
- implementing a process based organization;
- completing a reduction in force in April 2005;
- making several executive leadership changes including appointing a new
President in June 2005;
- implementing an improved bid and proposal process;
- implementing recurring program reviews
- implementing a project checklist which needs to be completed before one
phase of the project can be completed and a new phase initiated ; and
- implementation and integration of process based management information
systems.
During this timeframe, Starsys has also achieved ISO certification and is
now AS-9100 compliant.
Starsys believes that its net earnings performance in 2005 reflects the effort
to improve overall operational performance. During the nine months ended
September 30, 2005, Starsys' net loss was approximately $1,362,000 or
approximately a negative 10% of net sales versus $5,674,000 or approximately a
negative 46% of net sales for the nine months ended September 30, 2004. This
improved performance is primarily due to our increasing ability to efficiently
perform on our existing contracts and our entering into contracts with improved
economics. In addition, Starsys has completed all work on six of the previously
mentioned eight contracts that contributed most of our net loss. We have
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also generated increased new business during 2005 and anticipate that projected
2005 awards will improve upon 2004 awards by approximately 2%.
Further improvements in Starsys' operations are planned and include hiring
additional people with needed skill mix, winning new business with more
conservative pricing and lower risk contract types, and implementing recurring
training against high impact processes. Starsys anticipates that its past and
planned improvements should result in an increase in revenue and financial
performance for the year ending December 31, 2006.
BUSINESS CONCENTRATION
Starsys markets products in four primary technology areas:
Electromechanical Systems, Mechanical Systems, Structures, and Catalog Products.
Our new business results and net sales are not dominated by any one technology
area or contract. New business awards for 2004 increased 44% over 2003 with all
four technology areas contributing to this increase. New business awards in
2005 are anticipated to achieve an approximately 2% increase over 2004
performance with all four technology areas providing consistent results.
Starsys expects to achieve modest new business growth in 2006 with no single
contract or technology area dominating results.
[GRAPHIC OMITED]
To support improvement in overall Starsys net income performance, Starsys
has implemented several changes to its bid and proposal process. These changes
are focused on achieving improved margins and decreased contract execution risk.
These changes include:
- senior executive review of all bids;
- formal quality exit criteria prior to bid submittal; and
- more conservative pricing based on previous actual performance, a
standardized and detailed work breakdown structure, and improved cost estimating
relationships.
In addition, through a management risk assessment and evaluation process,
Starsys is focused on avoiding high risk development contracts on a fixed price
basis. As a result, Starsys has increased its percentage of cost reimbursable
contracts to approximately 35% of our current awards versus a historical average
of 5%.
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CRITICAL ACCOUNTING POLICIES
Our revenues are based primarily on fixed-price contracts, where revenues
are recognized using the percentage-of-completion method of contract accounting
based on the ratio of total costs incurred to total estimated costs. The amount
of revenues recognized is that portion of the total contract amount that the
actual cost expended bears to the anticipated final total cost based on current
estimates of cost to complete the project (cost-to-cost method).
If final total cost is anticipated to exceed the contract amount, the excess of
cost over contract amount is immediately recognized as a loss on the contract.
Recognition of profit commences on an individual project only when cost to
complete the project can reasonably be estimated and after there has been some
meaningful performance achieved on the project. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions, when applicable, and final contract settlements which may
result in revisions to costs and income are recognized in the period in which
the revisions are determined. These revisions could be material to the
financial statements. Professional fees are billed to customers on a
time-and-materials basis, a fixed-price basis or a per-transaction basis.
Time-and-materials revenues are recognized as services are performed.
Starsys also generates revenues from cost-reimbursable contracts.
Cost-reimbursable contracts provide for payment of allowable incurred costs, to
the extent prescribed in the contract. These contracts establish an estimate of
total cost for the purpose of obligating funds and establishing a ceiling that
the contractor may not exceed (except at its own risk) without the approval of
the customer. There are multiple types of cost-reimbursable contracts which
vary from no fee type to cost plus fixed fee (profit) type to fixed fee plus
incentive.
Starsys has a stock-based employee compensation plan. Starsys accounts for this
plan under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and Related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under this plan had an exercise price equal to the market value
of the underlying common stock on the date of grant.
In December 2004, The Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards No. 123 (Revised), "Shared-Based
Payment" (SFAS 123R). This standard revises SFAS No. 123, Accounting Principles
Board Option 25 and related interpretations, and eliminates use of the intrinsic
value method of accounting for stock options. Starsys currently uses the
intrinsic value method to value stock options, and, accordingly, no compensation
expense has been recognized for stock options. SFAS 123R requires that all
employee share-based payments to employees, including stock options, be valued
using a fair-value-based method and recorded as expense in the statement of
operations. For Starsys , SFAS 123R will first be effective for its first
reporting period after January 1, 2006. This new Statement will not affect
accounting for the Starsys stock options currently outstanding, which are fully
vested at December 31, 2005, but it will affect financial statement disclosures
regarding those stock options, and it will change the accounting for any stock
options issued in future years.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 2004 VERSUS TWELVE MONTHS ENDED DECEMBER 31,
2003
During the twelve months ended December 31, 2004, Starsys' net sales were
approximately $18,085,000 as compared to net sales of approximately $18,239,000
during the same period in 2003. This slight reduction in sales performance was
primarily a result of an approximately 8.0% reduction in new business awards
between 2002 and 2003. Starsys expects net sales to achieve modest growth in
both 2005 and 2006 over 2004 net sales. This is due to improved new business
awards in 2004 and 2005.
During the twelve months ended December 31, 2004, we incurred a net loss of
approximately $5,592,000, representing approximately a negative 30.9% of net
sales, compared to a net gain of approximately $1,364,000 or 7.5% of net sales,
for the same twelve-month period in 2003. Our net income decreased primarily
because of higher than anticipated costs incurred in performing on work under
certain high risk, fixed price development contracts. To meet the delivery
requirements on these programs, Starsys increased its staffing from
approximately 110 full time equivalent at year-end 2003 to approximately 140
full time equivalent at year-end 2004, or a 27% increase without an increase in
revenue. Of the active contracts in 2004, approximately 50% experienced a loss
with 8 contracts contributing approximately $4,872,000 to our total net loss
position. Starsys expects net income to improve in the year ending December 31,
2005 and be positive in 2006.
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The effort to complete these contracts is also reflected in a significant
increase in cost of sales and corresponding decrease in gross margin percentage.
For the twelve months ended December 31, 2004, Starsys had costs of sales
including direct and allocated costs associated with individual contracts of
approximately $19,138,000 or 105.8% of net sales, as compared to approximately
$13,512,000 or 74.1% of net sales, during the same period in 2003. This
represents an approximately $5,627,000 increase in cost of sales. The gross
margin for the twelve months ended December 31, 2004 was negative 5.8%, as
compared to a gross margin of 25.9% for the same period in 2003. The majority
of this approximately $5,627,000 increase in cost of sales is due to an increase
in the reserve for losses on contracts in progress, representing approximately
$2,511,000 or 44.6% of this increase. In addition, there was an increase in
direct and indirect labor of approximately $1,692,000 or 30.1%. The remainder
is primarily due to an increase in material costs attributable to re-work and an
increase in contract labor employed.
For the twelve months ended December 31, 2004, Starsys had operating expenses of
approximately $4,054,000, or 22.4% of net sales as compared to approximately
$3,027,000, or 16.6% of net sales, for the twelve months ended December 31,
2003. This represents an approximately $1,028,000 increase in operating
expenses. Operating expenses include general and administrative expenses, which
includes research and development and bid and proposal expenses. The increase
in operating expenses is primarily due to an increase in labor of approximately
$878,000, or approximately 85.4% of the total increase, to implement information
systems, develop improved processes, and increase functional management depth.
Specifically, approximately $569,000 is due to implementing improved information
systems and process improvements in support of increasing overall operational
efficiency. A further increase in operational expenses is expected in 2005 due
to higher than expected costs associated with completing a research and
development program.
Non-operating expense (income) consisted primarily of interest expense and was
approximately $291,000 for the twelve months ended December 31, 2004 as compared
to approximately $233,000 for the twelve months ended December 31, 2003. This
increase of approximately $58,000 is primarily due to restructuring our debt
facility with Wells Fargo Bank.
NINE MONTHS ENDED SEPTEMBER 30, 2005 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2004
During the nine months ended September 30, 2005, Starsys' net sales were
approximately $13,597,000 as compared to net sales of approximately $12,390,000
during the same period in 2004. The 9.7% increase in sales reflects both
improved operational performance and a steady increase in new business (72 open
contracts at the close of September 2005 versus 47 open contracts at the close
of September 2004). Starsys expects this positive trend to continue through
December 31, 2005. Starsys believes net sales will achieve modest growth in
2006 over 2005 results.
During the nine months ended September 30, 2005, we incurred a net loss of
approximately $1,362,000, representing a negative 10.0% of net sales, compared
to a net loss of approximately $5,675,000 or a negative 46% of net sales, for
the same nine-month period in 2004. Starsys' net sales and income performance
reflects the continued effort to improve overall operational performance and the
completion of certain high risk fixed price development contracts. This is
reflected in final delivery on six of the eight high risk fixed priced
development contracts previously mentioned and improved schedule stability on
the remainder. Starsys expects our improved operating performance to continue
through the end of 2005. Starsys also expects net income in 2006 to be
positive.
For the nine months ended September 30, 2005, we had costs of sales including
direct and allocated costs associated with individual contracts of approximately
$11,088,000 or 81.5% of net sales, as compared to approximately $15,023,000, or
121.3% of net sales, during the same period in 2004. The gross margin
percentage for the nine months ended September 30, 2005 was 18.4% of net sales,
as compared to a negative gross margin of 21.3% of net sales for the same period
in 2004. These improvements are primarily due to focused efforts to increase
operational efficiency, the completion of under-performing fixed price
development contracts, and a reduction in force implemented in April 2005.
Starsys expects the positive trend in cost of sales as a percentage of new sales
to continue through the year ending December 31, 2005 and into 2006.
For the nine months ended September 30, 2005, Starsys had operating expenses of
approximately $3,572,000, or 26.3% of net sales as compared to approximately
$2,854,000, or 23.0% of net sales, for the nine months ended September 30, 2004.
This represents an approximately $718,000 increase. Operating expenses include
general and administrative expenses, which includes research and development and
bid and proposal expenses. The increase in operating expenses is primarily due
to execution of a significant R&D program during the first nine months of 2005.
This program accounted for approximately $680,000 of this increase and resulted
in a new electronics product. In addition, Starsys added management personnel
to improve operational efficiency and account for the increased
-153-
business administration complexity associated with sales growth. Starsys expects
operating expenses in 2006 to be approximately level on an absolute basis but
decrease as a percentage of net sales as compared to 2005.
Non-operating expense (income) consisted of interest expense plus loan fees and
expenses. Non-operating expenses increased by $141,000, or 1.0% of sales for
the nine months ended September 30, 2005. Interest expense for the nine months
ended September 30, 2005 and 2004 was approximately $379,000, or 2.8% of net
sales, and $178,000, or 1.4% of net sales, respectively. The increase was due
to increased borrowing under our restructured debt agreement with Vectra Bank of
Colorado and penalty interest for being outside of contractual covenants. We
continue to pay and accrue interest on our revolving credit facility which had a
balance of approximately $3,716,000 for the nine months ended September 30,
2005. We have also begun accruing interest expense on related party notes
(described in detail below) executed during the first nine months of 2005. We
recognized approximately $48,000 of the deferred gain on taxes during the nine
months ended September 30, 2005 as a reclassification to 2004 estimated tax.
There was no deferred gain on taxes during the same period ended September 30,
2004.
EBITDA
During the nine months ended September 30, 2005, we incurred a negative
Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) of
approximately $708,000, or negative 5% of net sales, compared to a negative
EBITDA of approximately $5,231,000 or a negative 42% of net sales, for the nine
months ended September 30, 2004. During the twelve months ended December 31,
2004, we incurred a negative EBITDA of approximately $4,910,000 or a negative
27% of net sales, compared to a positive EBITDA of approximately $1,870,000 or
10% of net sales, for the twelve months ended December 31, 2003. Beginning in
2003 through September 30, 2005, the impact of completing certain fixed price
development contracts along with product and process investments impaired our
earnings ability as well as slowing progress in total revenue and EBITDA.
The following table reconciles EBITDA to net income (loss) for the periods
discussed.
DECEMBER 31, 2003 DECEMBER 31, 2004 SEPTEMBER 30, 2004 SEPTEMBER 30, 2005
FOR PERIODS ENDING . . . . . (Audited) (Audited) (Unaudited) (Unaudited)
---------------------------- ------------------- ------------------ ------------------- -------------------
NET INCOME (LOSS). . . . . . $ 1,363,504 (5,591,861) (5,674,774) (1,362,056)
---------------------------- ------------------- ------------------ ------------------- -------------------
Interest/Rental Income . . . (19,099) (15,293) (18,862) (79,248)
Interest Expense . . . . . . 255,028 306,693 177,519 378,513
Depreciation & Amortization. 271,054 390,682 285,341 354,386
EBITDA . . . . . . . . . . . $ 1,870,487 (4,909,779) (5,230,776) (708,405)
---------------------------- ------------------- ------------------ ------------------- -------------------
EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations). We believe that
EBITDA provides an important additional perspective on our operating results;
our ability to service our long-term obligations; our ability to fund continuing
growth; and our ability to continue as a going concern. In addition, SpaceDev
uses EBITDA as a performance measure and the Performance Consideration in the
Merger Agreement is tied to EBITDA milestones.
INCOME TAXES
Deferred income taxes provide for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes. The
net deferred tax asset was $0 as of September 30, 2005. This consisted
primarily of the income tax benefits from net operating loss and capital loss
carry-forward, amortization of goodwill and research and development credits for
the period ended September 30, 2005.
At September 30, 2005, Starsys had estimated R&D credit carry forwards of
approximately $1,534,000. These carry forwards begin to expire in 2022 to 2024.
Starsys also had Federal net operating loss carry forwards of approximately
$3,546,000 and State net operating loss carry forwards of $5,315,000. These
carry forwards begin to expire in 2024.
-154-
ACCOUNTS RECEIVABLE
Our accounts receivable balance has decreased from approximately $4,996,000
at December 31, 2003 to approximately $2,555,000 at September 30, 2005. This
decrease is due to a reduction in days aging by improving collection of accounts
receivable. Starsys has accomplished this while increasing net sales.
LIQUIDITY AND CAPITAL RESOURCES
CASH POSITION AT DECEMBER 31, 2003
During the period ended December 31, 2003, net cash decreased by
approximately $9,000 due to a decrease in cash collection on accounts receivable
and work in progress.
At December 31, 2003, Starsys had cash of approximately $1,000, working capital
of approximately $2,686,000, and borrowings of approximately $4,236,000.
The primary sources of cash during this period, in addition to net income, were
approximately $2,557,000 from an increase in borrowings on our bank facilities
and the following two cash cycle changes:
- An approximately $738,000 increase in accounts payable; and
- An approximately $556,000 increase in billings in excess of costs on
uncompleted contracts.
The primary uses of cash during this period were the following two cash
cycle changes:
- an approximately $2,408,000 increase in accounts receivable; and
- an approximately $2,560,000 increase in costs in excess of billings on
uncompleted contracts.
Starsys also made investments totaling approximately $183,000 in fixed
assets in support of operational requirements and repaid approximately $211,000
in capital lease obligations.
CASH POSITION AT DECEMBER 31, 2004
At December 31, 2004, Starsys had cash of approximately $14,000, working
capital deficit of approximately $3,899,000, and borrowings of approximately
$3,942,000.
Though Starsys incurred a significant loss during the year ended December 31,
2004, net cash increased approximately $120,000 as a result of improvements in
cash collection on accounts receivable of approximately $1,356,000 and work in
progress of approximately $2,895,000. In addition, the reserve for loss on
contracts in progress increased by approximately $2,511,000.
The primary uses of cash, in addition to the net loss for the year, were
repayments of outstanding balances under the Starsys bank facility of
approximately $418,000, repayment of capital lease obligations of approximately
$288,000, and an approximate $1,136,000 investment in property and equipment.
This investment resulted in the build-out of our manufacturing and test
facilities and additional computer hardware and software tools in support of
expanding sales and staff.
CASH POSITION AT SEPTEMBER 30, 2005
At September 30, 2005, Starsys had cash of approximately $217,000, a
working capital deficit of approximately $5,551,000, and borrowings of
approximately $6,015,000. Starsys intends to fund this working capital deficit
through improved operations and the merger described in Proposal No. 1 of this
joint proxy statement/prospectus.
Though Starsys incurred a significant loss during this period, net cash
increased by approximately $203,000. This is primarily a result of additional
financing totaling approximately $1,873,000 and an improvement in cash
collection on accounts receivable of approximately $1,084,000.
-155-
The primary uses of cash, in addition to the net loss for the period, were
repayment of capital lease obligations of approximately $458,000 and a reduction
in the reserve for loss on contracts in progress of approximately $1,078,000.
As of September 30, 2005, our backlog of funded and non-funded business was
approximately $10.3 million. Starsys continues to generate new business while
it completes remaining development programs and executes on existing backorders.
Starsys expects backlog to increase slightly in the fourth quarter of 2005.
Starsys entered into a loan agreement with Vectra Bank of Colorado on March 30,
2005, which included:
- creation of a line of credit having a balance of $4,250,000 with interest
accruing at a prime rate plus .5% and maturing on March 30, 2006;
- a new term note A of $2,100,000 with interest accruing at 7.25% and
maturing on April 1, 2010; and
- a new term note B of $1,250,000 with interest accruing at LIBOR plus 5% and
maturing on March 30, 2006.
On June 24, 2005, Starsys entered into a forbearance agreement with Vectra
Bank as a result of its violation of bank covenants under the loan agreement.
The primary covenant violation related to work on contracts which resulted in
costs that were un-collectable and largely due to the net loss recognized on
high risk fixed price development contracts described above. The agreement was
amended on July 26, 2005, on August 23, 2005, on November 7, 2005, and on
December 20, 2005. Under the original agreement, as amended, Starsys is required
to raise a minimum of $6,000,000 by January 31, 2006 to bring Starsys in
compliance with its borrowing base and other covenants. In addition, the
forbearance agreement as amended requires:
- Starsys to incrementally pay down the Vectra debt prior to its required
full repayment on January 31, 2006;
- the execution of a "Letter of Intent" by July 26, 2005 from a bona fide
third party for the purchase of all or a portion of the assets of Starsys;
and
- the amendment of the maturity date of the term note B from March 30, 2006
to the earlier of receipt of the required cash equity amounts or January
31, 2006.
On July 26, 2005, Starsys raised $800,000 from current shareholders in
accordance with the first milestone of the above mentioned forbearance agreement
to remain compliant until further capital was raised. The shareholder loans
have a premium of $80,000 with interest accruing at 15% per annum and were
necessary for Starsys to meet the first forbearance milestone payment of
$800,000. These loans are due on March 31, 2006.
On September 8, 2005, Starsys issued a secured promissory note in the principal
amount of $1,200,000 to SpaceDev to remain compliant with the second milestone
of the above mentioned forbearance agreement. The SpaceDev note accrues interest
at 8% per annum and matures on December 31, 2005 or earlier in certain
circumstances. This note is due and payable if the merger does not close. No
principal or interest payments are due before maturity. The SpaceDev note is
secured by a security interest in all of the assets of Starsys, subject to an
intercreditor agreement with Vectra Bank. In addition, Starsys agreed to pay
SpaceDev a placement agent fee and to reimburse SpaceDev's expenses in the
aggregate amount of $120,000. This amount was added to the principal balance of
the note evidencing the loan but will be forgiven in certain circumstances
including the closing of the merger.
Starsys signed the merger agreement with SpaceDev on October 24, 2005. The
merger agreement requires Vectra Bank to be repaid (up to $4.6 million for both
the Vectra and shareholder loans) at the closing of the merger. The merger may
not close prior to the January 31, 2006 repayment date under the forbearance
agreement. We may accordingly have to negotiate revisions to the forbearance
agreement with Vectra Bank to accommodate the revised schedule until the merger
is closed and the loans are repaid in full. If we are not able to negotiate such
revisions, Vectra Bank may exercise its rights under the forbearance agreement
including foreclosing on its security interest in substantially all of our
assets. Starsys has kept Vectra Bank informed on a weekly basis of its cash
position and the status of the merger. As a result, Vectra Bank has allowed
Starsys to use funds from an approved $500,000 over line of credit to cover
weekly variations in working capital requirements.
-156-
LEGAL MATTERS
Selected legal matters with respect to this offering and the validity of
the common stock offered by this prospectus and certain tax matters with respect
to the merger will be passed upon for SpaceDev by Sheppard, Mullin, Richter &
Hampton LLP.
EXPERTS
The financial statements of SpaceDev, Inc. in this joint proxy
statement/prospectus have been audited by PKF, a Professional Corporation, an
independent registered public accounting firm, to the extent and for the periods
set forth in their report included herein, and are included herein in reliance
upon such reports given upon the authority of said firm as experts in auditing
and accounting.
The financial statements of Starsys Research Corporation included in the joint
proxy statement/prospectus have been audited by Clifton Gunderson, LLP, an
independent registered public accounting firm, to the extent and for the periods
set forth in their report, appearing elsewhere herein and are included in
reliance upon such report given upon the authority of said firm as experts in
auditing and accounting. The report of Clifton Gunderson LLP covering the
December 31, 2004 financial statements contains an explanatory paragraph that
states that Starsys' loss from operations and net capital deficiency raise
substantial doubt about the entity's ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
WHERE YOU CAN FIND MORE INFORMATION
SpaceDev has filed with the SEC a Form S-4 registration statement under the
Securities Act of 1933 with respect to the common stock offered by this joint
proxy statement/prospectus. This joint proxy statement/prospectus, which
constitutes part of the registration statement, does not contain all of the
information set forth in the registration statement and its exhibits and
schedules, certain parts of which are omitted in accordance with the rules and
regulations of the SEC. For further information regarding SpaceDev's common
stock and SpaceDev, please review the registration statement, including
exhibits, schedules and reports filed as a part of the registration statement.
Statements in this joint proxy statement/prospectus about the contents of any
contract or other document filed as an exhibit to the registration statement,
set forth the material terms of contracts or other documents but are not
necessarily complete. The registration statement, including the exhibits and
schedules, may be inspected without charge at the principal office of the public
reference facilities maintained by the SEC at 100 F Street, N.E., Washington,
D.C. 20549. Copies of this material can also be obtained at prescribed rates by
writing to the Public Reference Section of the SEC at its principal office at
100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the
operation of the public reference facilities by calling the SEC at
1-800-SEC-0330. The SEC maintains a Web site (http://www.sec.gov) that contains
reports, proxy statements and other information regarding registrants that file
electronically with the SEC, including SpaceDev. Additional information about
SpaceDev can be obtained from its Internet website at http://www.spacedev.com.
The content of this website does not constitute part of this prospectus.
-157-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SPACEDEV, INC.
PAGE
----
Consolidated Financial Statements for the Nine Month Period Ended
September 30, 2005
Consolidated Balance Sheets (Unaudited) F-2
Consolidated Statements of Operations (Unaudited) F-4
Consolidated Statements of Cash Flows (Unaudited) F-5
Notes to Consolidated Financial Statements F-7
Consolidated Financial Statements for the Fiscal Year Ended
December 31, 2004
Report of Independent Registered Public Accounting Firm F-16
Consolidated Balance Sheets F-17
Consolidated Statements of Operations F-19
Consolidated Statements of Stockholders' Equity (Deficit) F-20
Consolidated Statements of Cash Flows F-23
Notes to Consolidated Financial Statements F-25
STARSYS RESEARCH CORPORATION
------------------------------
PAGE
----
Financial Statements for the Nine Month Period Ended September 30, 2005
Balance Sheet (Unaudited) F-40
Statement of Operations (Unaudited) F-41
Statement of Cash Flows (Unaudited) F-42
Notes to Condensed Consolidated Financial Statements F-43
Financial Statements for the Fiscal Year Ended December 31, 2004
Independent Auditor's Report F-53
Balance Sheets F-54
Statements of Liabilities and Stockholders' Equity (Deficit) F-55
Statements of Operations F-56
Statements of Stockholders' Equity (Deficit) F-57
Statements of Cash Flows F-58
Summary of Significant Accounting Policies F-60
Notes to Consolidated Financial Statements F-63
PAGE F-1
SPACEDEV, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
-------------------------------------------------------------------------- ------------- -------------
-------------------------------------------------------------------------- ------------- -------------
At September 30, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004
-------------------------------------------------------------------------- ------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . $4,022,243 $4,078,593
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . 1,096,645 427,358
Work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . 10,412 5,754
Note reveivable (Note 5) . . . . . . . . . . . . . . . . . . . . . . 1,326,453 -
-------------------------------------------------------------------------- ------------- -------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,455,753 4,511,705
FIXED ASSETS - NET. . . . . . . . . . . . . . . . . . . . . . . . . . . . 822,980 248,066
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,469 43,042
-------------------------------------------------------------------------- ------------- -------------
$7,343,202 $4,802,813
-------------------------------------------------------------------------- ------------- -------------
-------------------------------------------------------------------------- ------------- -------------
The accompanying notes are an integral part of these
consolidated financial statements.
PAGE F-2
SPACEDEV, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
-------------------------------------------------------------------------- ------------- -------------
-------------------------------------------------------------------------- ------------- -------------
At September 30, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004
-------------------------------------------------------------------------- ------------- -------------
LIABILITIES AND STOCKHOLDERSEQUITY
CURRENT LIABILITIES
Current portion of notes payable (Note 3(a)). . . . . . . . . . . . $ 18,797 $ 36,239
Current portion of capitalized lease obligations . . . . . . . . . . 2,479 3,943
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . 398,443 161,980
Accrued payroll, vacation and related taxes. . . . . . . . . . . . . 350,145 207,028
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 126,453 49,779
Employee stock purchase plan . . . . . . . . . . . . . . . . . . . . 9,974 3,406
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . 168,470 265,547
-------------------------------------------------------------------------- ------------- -------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . $ 1,074,761 727,922
NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 3(A)). . . . . . . . . . . . - 18,797
CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES. . . . . . . . . . - 2,479
DEFERRED GAIN - ASSETS HELD FOR SALE (NOTE 3(A)). . . . . . . . . . . . . 859,996 977,267
-------------------------------------------------------------------------- ------------- -------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,934,757 1,726,465
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERSEQUITY
Convertible preferred stock, $.001 par value, 10,000,000 shares
authorized, 248,460 and 250,000 shares issued and outstanding,
respectively (Note 4) . . . . . . . . . . . . . . . . . . . . . 248 250
Common stock, $.0001 par value; 50,000,000 shares authorized, and
22,319,156 and 20,026,263 shares issued and outstanding,
respectively (Note 4) . . . . . . . . . . . . . . . . . . . . . 2,231 2,002
Additional paid-in capital (Note 4). . . . . . . . . . . . . . . . . 20,091,408 16,724,176
Additional paid-in capital - stock options . . . . . . . . . . . . . - 750,000
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . . . - (250,000)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . (14,685,442) (14,150,080)
-------------------------------------------------------------------------- ------------- -------------
TOTAL STOCKHOLDERSEQUITY. . . . . . . . . . . . . . . . . . . . . . . . . 5,408,445 3,076,348
-------------------------------------------------------------------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY . . . . . . . . . . . . . . . . $ 7,343,202 $ 4,802,813
-------------------------------------------------------------------------- ------------- -------------
-------------------------------------------------------------------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements.
PAGE F-3
SPACEDEV, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Three and Nine Months Ending Three-Months Ending Nine-Months Ending
------------------------------------------- ------------------------------------------
September 30, 2005 % 2004 % 2005 % 2004 %
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
NET SALES. . . . . . . . . . . . . . $ 2,234,010 100.0% $ 1,230,126 100.0% $ 5,942,558 100.0% $ 3,445,569 100.0%
TOTAL COST OF SALES. . . . . . . . . 1,709,077 76.5% 952,944 77.5% 4,571,505 76.9% 2,702,583 78.4%
GROSS MARGIN . . . . . . . . . . . . 524,933 23.5% 277,182 22.5% 1,371,053 23.1% 742,986 21.6%
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
OPERATING EXPENSES
Marketing and sales expense . . . 188,655 8.4% 120,367 9.8% 493,344 8.3% 335,652 9.7%
General and administrative. . . 253,341 11.3% 108,049 8.8% 654,524 11.0% 313,784 9.1%
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
TOTAL OPERATING EXPENSES . . . . . . 441,996 19.8% 288,416 18.6% 1,147,868 19.3% 649,436 18.8%
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
INCOME FROM OPERATIONS . . . . . . . 82,937 3.7% 48,766 4.0% 223,185 3.8% 93,550 2.7%
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
NON-OPERATING (INCOME) EXPENSE
Interest income . . . . . . . . . (24,848) -1.1% (5,619) -0.5% (69,632) -1.2% (5,619) -0.2%
Interest expense. . . . . . . . . 452 0.0% 23,110 1.9% 2.283 0.0% 62,633 1.8%
Gain on building sale (Note 3(a)) (29,318) -1.3% (29,318) -2.4% (87,953 -1.5% (87,954) -2.6%
Non-Cash loan fee - equity conversions
(Note 3(c)). - 0.0% 663,481 53.9% 28,875 0.5% 2,456,794 71.3%
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
TOTAL NON-OPERATING (INCOME) EXPENSE (53,714) -2.4% 651,654 53.0% (126,427) -2.1% 2,425,854 70.4%
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
INCOME (LOSS) BEFORE TAXES . . . . . 136,651 6.1% (602,888) -49.0% 349,612 5.9% (2,332,304) -67.7%
INCOME TAX PROVISION . . . . . . . . 400 0.0% - 0.0% 1,200 0.0% - 0.0%
NET INCOME (LOSS). . . . . . . . . . $ 136,251 6.1% (602,888) -49.0% $ 348,412 5.90% $(2,332,304) -67.7%
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
NET INCOME (LOSS) PER SHARE:
Net income (loss) . . . . . . . $ 0.01 $ (0.03) $ 0.02 $ (0.13)
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
Weighted-Average Shares
Outstanding 21,241,448 19,228,019 21,777,211 18,019,886
FULLY DILUTED NET INCOME (LOSS) PER SHARE:
Net income (loss) . . . . . . . $ 0.00 ($0.03) $ 0.01 $ (0.13)
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
Fully Diluted Weighted-Average
Shares Outstanding 29,362,131 19,228,019 29,719,369 18,019,886
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE F-4
SPACEDEV, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
------------------------------------------------------------- ------------ ------------
------------------------------------------------------------- ------------ ------------
Nine-Months Ended September 30,. . . . . . . . . . . . . . . 2005 2004
------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . $ 348,412 $(2,332,304)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . 108,265 55,236
Gain on disposal of building sale. . . . . . . . . (87,953) (87,954)
Non-cash loan fees . . . . . . . . . . . . . . . . 28,875 2,456,794
Change in operating assets and liabilities . . . . (84,760) (25,552)
NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . . . . 312,839 66,220
CASH FLOWS FROM INVESTING ACTIVITIES
Notes Receivable. . . . . . . . . . . . . . . . . . . . (1,326,453) -
Purchases of fixed assets . . . . . . . . . . . . . . . (651,864) (165,770)
------------------------------------------------------------- ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . (1,978,317) (165,770)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable . . . . . . . . . . (27,330) (32,555)
Principal payments on capitalized lease obligations . . (2,774) (9,163)
Employee Stock Purchase Plan. . . . . . . . . . . . . . 48,343 -
Payments on notes payable - related party . . . . . . . - (614,778)
Proceeds from issuance of common and preferred stock. . 600,881 3,783,725
Proceeds from revolving credit facility . . . . . . . . - 458,908
------------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . . . 619,120 3,586,137
Net (decrease) increase in cash and cash equivalents . . . . (1,046,358) 3,486,587
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . 5,068,601 592,006
------------------------------------------------------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . $ 4,022,243 $ 4,078,593
------------------------------------------------------------- ------------ ------------
------------------------------------------------------------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE F-5
SPACEDEV, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT'D.
(UNAUDITED)
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Nine-Months Ended September 30, . . . . . . . . . . . . . . . . . . . .. . . . 2005 2004
---------------------------------------------------------------------------- ------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,283 $305,038
NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine-months ending September 30, 2005 and 2004, the Company converted
$47,702 and $12,628 of employee stock purchase plan contributions into
34,040 and 14,070 shares of common stock, respectively.
During the nine-months ending September 30, 2005, the Company declared dividends
payable of $128,057 to the holders of its preferred stock.
During the nine-months ending September 30, 2005, the Company converted
dividends payable of $174,976 into 113,621 shares of common stock to the
holders of its preferred stock.
During the nine-months ending September 30, 2005, the Company did not maintain a
balance under its revolving credit facility, therefore the Company recorded
no non-cash loan fees.
During the nine-months ending September 30, 2004, the Company issued 1,954,661
shares of its common stock to the Laurus Master Fund from conversions under
its revolving credit facility, thereby realizing a corresponding reduction
in current liabilities of approximately $1,240,500 The Company recorded
additional non-cash loan fees of approximately $1,718,000 and charged these
fees to expense.
During the nine-months ending September 30, 2004, the Company issued 589,212
shares of its common stock to the participants in our convertible debt
program in 2003 from conversions of warrants thereby receiving cash in the
amount of $227,500. The Company recorded additional non-cash loan fees of
approximately $738,700 and charged these fees to expense.
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of SpaceDev, Inc. (the
"Company") include the accounts of the Company and its inactive subsidiary,
SpaceDev, Inc., an Oklahoma corporation. In the opinion of management, the
consolidated financial statements reflect all normal and recurring adjustments,
which are necessary for a fair presentation of the Company's financial position,
results of operations and cash flows as of the dates and for the periods
presented. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Consequently, these statements do not include all disclosures
normally required by generally accepted accounting principles of the United
States of America for annual financial statements nor those normally made in an
Annual Report on Form 10-KSB. Accordingly, reference should be made to the
Company's Form 10-KSB filed on March 28, 2005 and other reports the Company
filed with the U.S. Securities and Exchange Commission for additional
disclosures, including a summary of the Company's accounting policies, which
have not materially changed. The consolidated results of operations for the
three- and nine month periods ending September 30, 2005 are not necessarily
indicative of results that may be expected for the fiscal year ending December
31, 2005 or any future period, and the Company makes no representations related
thereto.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities and the results of
operations during the reporting period. Actual results could differ materially
from those estimates.
2. REVENUE RECOGNITION
The Company's revenues for the nine months ended September 30, 2005 and 2004
were derived primarily from United States government cost plus fixed fee
(CPFF). Revenues from the CPFF contracts during the nine months ended September
30, 2005 and 2004 were recognized as expenses as incurred. Estimated contract
profits are taken into earnings in proportion to revenues recorded. Time and
material revenues are recognized as services are performed and costs incurred.
Actual results of contracts may differ from management's estimates and such
differences could be material to the consolidated financial statements.
Professional fees are billed to customers on a time and materials basis. Time
and material revenues are recognized as services are performed and costs
incurred.
3. NOTES PAYABLE
a) Building and Settlement Notes
In December 2002, the Company entered an agreement to sell its interest in its
facility. The transaction closed in January 2003. The escrow transaction
included the sale of the land and building. Net fixed assets were reduced by
approximately $1.9 million and notes payable were reduced by approximately $2.4
million while a deferred gain was recorded. In conjunction with the sale, the
Company entered into a lease agreement with the buyer to leaseback its
facilities. The Company's Chief Executive Officer provided a guarantee for the
leaseback. The gain on the sale of the facility was deferred and amortized in
proportion to the gross rental charged to expense over the lease term. Deferred
gain of $1,172,720 is being amortized at the rate of $117,272 per year for ten
(10) years ending in January 2013. As of September 30, 2005, the deferred gain
was $859,996. This amortization is included in the Company's occupancy and
facility expense, included in the Company's non-operating expenses, and totaled
$87,953 and $87,954 for the nine months ended September 30, 2005 and 2004,
respectively.
Deferred gain consisted of the following:
Nine Months Ended September 30, 2005
Original Deferred Gain $1,172,720
Less Amortization 2003 (107,499)
Less Amortization 2004 (117,272)
Less Amortization 2005 (87,953)
---------------------- -----------
$ 859,996
---------------------- -----------
PAGE F-7
In 2001, the Company entered into three settlement loan agreements with various
vendors. The total of $171,402 for all three loans called for payments between
24 and 50 months with interest that ranges from 0% to 8%. At September 30, 2005
and 2004, the outstanding balances on these notes were $18,797 and $55,036,
respectively, with interest expense for the nine months ended September 30, 2005
and 2004 of $1,277 and $3,691, respectively. As of September 30, 2005, only one
note remained outstanding.
Future -minimum principal payments on settlement notes are as follows:
For the twelve months ended September 30,
2006 $ 18,797
2007 -
2008 -
---------------------- -----------
Total Settlement Notes $ 18,797
b) Related Parties
The Company had a note payable to its CEO. As part of the Company's preferred
stock offering (see Note 5), the note was paid in full during the third quarter
of 2004 and no amounts were outstanding at September 30, 2005 or 2004.
Interest expense on this note was $0 and $29,256 for the nine months ended
September 30, 2005 and 2004, respectively.
c) Revolving Credit Facility.
In June 2003, the Company entered into a Security Agreement, Secured Convertible
Note, Registration Rights Agreement and Common Stock Purchase Warrant with
Laurus Master Fund, Ltd. ("Laurus"). Pursuant to the agreements, the Company
received a $1 million revolving credit facility in the form of a three-year
Convertible Note secured by the Company's assets subject to the amount of
eligible accounts receivables. The net proceeds from the Convertible Note were
used for general working capital purposes. Advances on the Convertible Note may
be repaid at the Company's option, in cash or through the issuance of shares of
the Company's common stock provided the market price of the common stock was
118% of the fixed conversion price or greater. The Convertible Note carries an
interest rate of Wall Street Journal Prime plus 0.75% on any outstanding
balance. In addition, the Company is required to pay a collateral management
payment of 0.55% of the average aggregate outstanding balance during each month
plus an unused line payment of 0.20% per annum. Approximately $29,600 in
interest and approximately $4,000 in fees were recorded under the revolving
credit facility in the first nine months of 2004. There was no outstanding
balance on the revolving credit facility at any time during the nine months
ended September 30, 2005.
The Convertible Note includes a right of conversion in favor of Laurus. Laurus
exercised its conversion rights from time to time in 2004 on outstanding
balances. There have been no outstanding balances in 2005. When Laurus chooses
to exercise its conversion rights, the Convertible Note is converted into shares
of the Company's common stock at a fixed conversion price, subject to
adjustments for stock splits, combinations and dividends and for shares of
common stock issued for less than the fixed conversion price (unless exempted
pursuant to the agreements). The Agreement was modified on March 31, 2004 to
provide for a six-month waiver of the accounts receivable restrictions and a
fixed conversion price to Laurus of $0.85 per share on the first $500,000 after
the first $1 million. The agreement was further modified on August 25, 2004 to
provide for a fixed conversion price to Laurus of $1.00 per share on the next $1
million. Thereafter, the fixed conversion price will be adjusted to 103% of the
then fair market value of the Company's common stock ("Adjusted Fixed Conversion
Price").
Laurus converted $1,240,507 under the Convertible Note into 1,954,661 shares
during the nine months ended September 30, 2004. Laurus has converted a total of
$2,500,000 into 3,406,417 shares under the Convertible Note since the inception
of the revolving credit facility. For the nine month period ending September 30,
2004, the Company recorded $1,718,120 in expense for the non-cash loan fee based
on the fair market value of the stock when Laurus converted and $2,607,099 in
expense for the non-cash loan fee since the inception of the revolving credit
facility. There have been no conversions during the first nine months of 2005.
The fair market value of the common stock used in 2004 was established using the
closing price on the date of conversion.
PAGE F-8
Availability of funds under the revolving credit facility is based on the
Company's accounts receivable, except as waivers are provided by Laurus. In
2003, an initial three-month waiver was offered by Laurus, under which Laurus
permitted a credit advance up to $300,000, which amount would have otherwise
exceeded eligible accounts receivable. Laurus subsequently extended the waiver
for two additional six-month periods into 2004, under which Laurus permitted a
credit advance up to $1 million, which amount would have otherwise exceeded
eligible accounts receivable. The revolving credit facility is secured by all of
the assets of the Company.
In conjunction with the 2004 waiver, Laurus was paid a fee of $10,000, which was
recorded as additional interest expense in 2004. The Company is required to pay
a continuation fee of $10,000 for 2005. In addition, Laurus received a warrant
to purchase 200,000 shares of the Company's common stock for the initial $1
million revolving credit facility. The warrant exercise price was computed as
follows: $0.63 per share for the purchase of up to 125,000 shares; $0.69 per
share for the purchase of an additional 50,000 shares; and $0.80 per share for
the purchase of an additional 25,000 shares. The warrant exercise price may be
paid in cash, in shares of the Company's common stock, or by a combination of
both. Laurus exercised the warrant in part for 25,000 shares in April 2005. The
warrant may be exercised for the balance of the shares any time or from time to
time until June 3, 2008. The warrant exercise price and the number of shares
underlying the warrant are subject to adjustments for stock splits, combinations
and dividends.
In addition to the initial warrant, the Company was obligated to issue an
additional five-year warrant to Laurus to purchase one share of common stock at
an exercise price equal to 125% of the Adjusted Fixed Conversion Price for every
ten dollars ($10) in principal of the Convertible Note converted into common
stock if and when over $1 million was converted under the revolving credit
facility. On June 18, 2004, the Company issued an additional warrant to purchase
50,000 shares at an exercise price of $1.0625 per share in relation to the March
31, 2004 credit facility modification. This additional warrant was exercised by
Laurus in April 2005 and resulted in a non-cash interest expense of $28,875 for
the nine months ended September 30, 2005. Since no more than an aggregate of
100,000 shares of the Company's common stock were authorized as additional
warrants under the Laurus Agreements, on August 25, 2004, the Company issued an
additional warrant to purchase 50,000 shares at an exercise price of $1.925 per
share in relation to the August 25, 2004 credit facility modification, i.e.,
there was a 100,000 share ceiling on the number of warrants to be issued
regardless of the amount converted under the revolving credit facility.
The Company may terminate its agreements with Laurus before the end of the
initial three-year term, i.e., June 3, 2006, and Laurus will release its
security interests upon payment to Laurus of all obligations, if the Company
has: (i) provided Laurus with an executed release of all claims which the
Company may have under the agreements; and, (ii) paid to Laurus an early payment
fee in an amount equal to two percent (2%) of the total amount available under
the revolving credit facility if such payment occurs after June 3, 2005 and
prior to June 3, 2006. The early payment fee is also due and payable by the
Company to Laurus if the Company terminates its Agreement after the occurrence
of an Event of Default, as defined in the agreements.
As a result of the amendments and modifications discussed above, at September
30, 2005 the revolving credit facility provided for up to a maximum of $1.5
million in principal amount of aggregate borrowing The fixed conversion price
for future amounts under the revolving credit facility will be set at 103% of
the fair market value of our common stock. There was no balance on the revolving
credit facility for the nine months ended September 30, 2005.
4. STOCKHOLDER'S EQUITY - PREFERRED STOCK, COMMON STOCK AND WARRANTS
PREFERRED STOCK
In August 2004, the Company entered into a Securities Purchase Agreement with
Laurus, whereby the Company issued 250,000 shares of its Series C Convertible
Preferred Stock, par value $0.001 per share, to Laurus for an aggregate purchase
price of $2,500,000 or $10.00 per share (the "Stated Value"). The preferred
shares are convertible into shares of the Company's common stock at a rate of
$1.54 per share at any time after the date of issuance, and are entitled to
quarterly, cumulative dividends at a rate of 6.85% beginning on January 1, 2005.
For the nine months ended September 30, 2005, approximately $128,000 has been
accrued for dividends earned in 2005. Approximately $175,000 of accrued
dividends were satisfied by the issuance of the Company's common stock during
the nine months ended September 30, 2005. Dividends are payable in cash or
shares of the Company's common stock at the holder's option with the exception
that dividends must be paid in shares of the Company's common stock for up to
25% of the aggregate dollar trading volume if the fair market value of the
Company's common stock for the 20-days preceding the conversion date exceeds
$1.85 per share. In January 2005, $60,967 was converted into 39,589 shares of
PAGE F-9
the Company's common stock from previous dividend accruals. In May 2005, $56,300
was converted into 36,559 shares of the Company's common stock from dividends
accrued from January through April 2005 and in September 2005, $57,708 was
converted into 37,473 shares of the Company's common stock from dividends
accrued from May through August 2005. The preferred shares are redeemable by the
Company in whole or in part at any time after issuance for (a) 115% of the
Stated Value if the average closing price of the common stock for the 22 days
immediately preceding the date of conversion does not exceed the conversion rate
or (b) the Stated Value if the average closing price of the common stock for the
22 days immediately preceding the date of preferred stock conversion exceeds the
Stated Value. The preferred shares have a liquidation preference equal to the
Stated Value upon the Company's dissolution, liquidation or winding-up. The
preferred shares have no voting rights. As of September 30, 2005, 1,540
preferred shares had been converted into 10,000 shares of the Company's common
stock
In conjunction with the preferred stock, the Company issued a five-year common
stock purchase warrant to Laurus for the purchase of 487,000 shares of the
Company's common stock at an exercise price of $1.77 per share. The Company
filed a registration statement for the resale of all of the shares of its common
stock issuable upon conversion of the preferred shares and the warrant, as well
as an estimated number of shares payable as dividends on the preferred shares,
which was declared effective in November 2004.
COMMON STOCK AND WARRANTS
The Company has elected to account for its stock-based compensation plans under
APB 25. However, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during the nine months ended September 30, 2005
and 2004 using the minimum value method as prescribed by SFAS 123 and amended by
SFAS 148. Under this method, the Company used the risk-free interest rate at the
date of grant, the expected volatility, the expected dividend yield and the
expected life of the options to determine the fair value of options granted. The
risk-free interest rates ranged from 6.0% to 6.5%, expected volatility was 117%,
the dividend yield was assumed to be zero, and the expected life of the options
was assumed to be three to five years based on the average vesting period of
options granted.
If the Company had accounted for these options in accordance with SFAS 123, the
total value of options granted during the nine months ended September 30, 2005
and 2004 would be amortized on a pro forma basis over the vesting period of the
options. Thus, the Company's consolidated net income (loss) would have been as
follows:
===================================================================== ========== ============
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004
===================================================================== ========== ============
As reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 348,412 $(2,332,304)
Add: Stock based employee compensation
expense included in reported net income. . . . . . . . . . . . . . . $ - $ -
Deduct: Stock based employee compensation expense determined under
the fair value based method for all awards . . . . . . . . . . . . . $ 553,989 $ 303,425
--------------------------------------------------------------------- ---------- ------------
Pro forma. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(205,577) $(2,635,729)
===================================================================== ========== ============
NET INCOME (LOSS) PER SHARE:
As reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.02 $ (0.13)
Pro forma. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.01) $ (0.15)
===================================================================== ========== ============
Beginning January 2006, the Company plans to adopt SFAS 123R as currently
required by the Securities and Exchange Commission. See Note 7 below. As of
September 30, 2005, the Company had not yet determined the impact of SFAS 123(R)
on its financial statements.
November 1997, the Company entered into a five-year employment agreement with
Mr. James W. Benson, its CEO. On July 16, 2000, the Company amended the
employment agreement with Mr. Benson extending the term until July 16, 2005. As
part of the original employment agreement, the Company granted options to Mr.
Benson to purchase up to 2,500,000 of non-plan, non-registered shares of the
Company's common stock. Options for 500,000 of these shares were vested prior to
the expiration of Mr. Benson's employment agreement and those options remain
outstanding, and the balance expired unvested. The vested options have an
exercise price of $1.00 and expire in July 2010. The options previously granted
to Mr. Benson, as part of his employment contract were subject to the following
vesting conditions, which were amended in January 2000 and later ratified by the
Board in July 2000. The agreement provided the Board
PAGE F-10
flexibility to award options for an additional 1,500,000 of non-plan,
non-registered shares of restricted common stock to Mr. Benson, which additional
options were not granted.
On December 20, 2005, SpaceDev entered into an executive employment agreement
with James W. Benson pursuant to which Mr. Benson is employed as SpaceDev's
chairman and chief technology officer. The agreement supersedes all prior
employment agreements between SpaceDev and Mr. Benson. The agreement has an
initial term of two years, and will be automatically renewed for a third year
unless either SpaceDev or Mr. Benson provides written notice of an intent not to
renew. Under the agreement, Mr. Benson is entitled to receive (1) a base salary
of $14,000 per month, subject to adjustment up to $17,000 per month upon the
happening of certain events, (2) performance-based cash bonuses based on the
achievement of specific goals set forth in the agreement (including a bonus of
$22,500 upon the completion of the merger with Starsys), and (3) a fully-vested
option to purchase up to 950,000 shares of SpaceDev common stock under the terms
and conditions of a non-plan stock option agreement between SpaceDev and Mr.
Benson. The option will have an exercise price equal to the closing sale price
reported on the OTCBB on the date of grant, and will expire five years after the
date of grant. Some of the shares subject to the options are subject to sale
restrictions that expire upon the achievement of certain specific milestones or
four years from the date of grant, whichever comes first. SpaceDev will pay
severance to Mr. Benson if his employment is terminated by SpaceDev without
cause or by Mr. Benson for good reason. The severance payment is equal to: (1)
if Mr. Benson's employment is terminated by SpaceDev without cause, his
then-current base salary per month multiplied by the greater of (A) 12 months
and (B) the number of months remaining in the term of the agreement (prorated
with respect to any partial month); or (2) if Mr. Benson's employment is
terminated by Mr. Benson for good reason, his then-current base salary per month
multiplied by the lesser of (A) 12 months and (B) the number of months remaining
in the term of the agreement provided that such number of months will not be
deemed to be less than six months. Under the agreement, SpaceDev will indemnify
Mr. Benson to the extent provided in SpaceDev's articles of incorporation, as
may be amended from time to time, to the maximum extent permitted by law and
pursuant to SpaceDev's standard indemnification agreement with its officers and
directors.
On December 20, 2005, Mr. Benson also received an option to purchase up to
150,000 shares of our common stock in connection with his services as chairman
of SpaceDev pursuant to the terms of a separate non-plan stock option agreement
between SpaceDev and Mr. Benson. The option has an exercise price equal to $1.40
per share, which was the closing sale price reported on the OTCBB on the date of
grant, and will expire five years after the date of grant. Some of the shares
subject to the option are subject to sale restrictions that expire upon the
achievement of certain specific milestones or four years from the date of grant,
whichever comes first. Subject to certain limitations, the option may be
exercised by means of a net exercise provision by surrendering shares with a
fair market value of the exercise price upon exercise.
5. NOTES RECEIVABLE
On September 8, 2005, the Company made a secured loan in the principal amount of
$1.2 million to Starsys Research Corporation ("Starsys"), a design, engineering,
and manufacturing company located in Boulder, Colorado which provides mechanical
systems to the aerospace industry. The loan, as amended on December 20, 2005,
accrues interest at 8% per annum and matures on January 31, 2006 or earlier in
certain circumstances. No principal or interest payments are due before
maturity. The maturity date may be accelerated upon the occurrence of certain
events of default. The loan is secured by a security interest in all of the
assets of Starsys, subject to an intercreditor agreement with Vectra Bank
Colorado, National Association ("Vectra"), described below. In addition, Starsys
has agreed to pay the Company a placement agent fee and to reimburse the Company
expenses in the aggregate amount of $120,000. This amount was deferred until the
closing of the Plan of Merger (see Note 7) and added to the principal balance of
the note evidencing the loan.
In connection with making the loan, the Company entered into an exclusivity
agreement with Starsys which provides that Starsys will not discuss a material
sale of its assets, a material sale of its stock, a merger, or similar
transaction with any other party until October 31, 2005. Prior to completion of
the loan described above, the Company and Starsys entered into a non-binding
letter of intent concerning a transaction of the nature described in the
exclusivity agreement. The structure and economic terms of a potential
transaction, however, remained subject to further negotiations and due diligence
by both parties; however, on October 26, 2005, the Company and Starsys entered
into a definitive merger agreement (see Note 7, Subsequent Events).
6. NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 153, Exchanges of Nonmonetary Assets- An Amendment of APB Opinion No. 29.
The guidance in APB Opinion No. 29, Accounting for
PAGE F-11
Nonmonetary Transactions, is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. The guidance in that Opinion, however, included certain exceptions to
that principle. SFAS No. 153 amends Opinion No. 29 to eliminate the exception
for nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early
application was permitted and companies must apply the standard prospectively.
The adoption of this standard is not expected to have a material effect on the
Company's financial position or results of operations.
In December 2004, FASB issued Statement of Financial Accounting Standards No.
123 (revised 2004), Share-Based Payment (SFAS No. 123R). FAS No. 123R revised
SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS No. 123R will require compensation costs related
to share-based payment transactions to be recognized in the financial statement
(with limited exceptions). The amount of compensation cost will be measured
based on the grant-date fair value of the equity or liability instruments
issued. Compensation cost will be recognized over the period that an employee
provides service in exchange for the award.
In March 2005, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 (SAB No. 107), Share-Based Payment, providing guidance on
option valuation methods, the accounting for income tax effects of share-based
payment arrangements upon adoption of SFAS No. 123R, and the disclosures in MD&A
subsequent to the adoption. In April 2005, the Securities and Exchange
Commission adopted a rule which delayed the compliance date for small business
issuers to the start of the first fiscal year beginning after December 15, 2005.
The Company will provide SAB No. 107 required disclosures upon adoption of SFAS
No. 123R in January 2006 and is currently evaluating the impact the adoption of
the standard will have on the Company's financial condition and results of
operations.
In June 2005, FASB issued SFAS No. 154, Accounting Changes and Errors
Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The Statement
applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impractical. APB Opinion No. 20 previously required that most voluntary changes
in accounting principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new accounting principle.
SFAS No.154 is not expected to have a material adverse effect on the Company's
financial position or results of operations.
7. SUBSEQUENT EVENTS
In October 2005, the Company entered into an Agreement and Plan of Merger and
Reorganization ("merger agreement"), with Starsys Research Corporation
("Starsys"), a Colorado corporation, and Scott Tibbitts, its largest
shareholder. Pursuant to the merger agreement, Starsys will merge with and into
a newly-created, wholly-owned subsidiary of the Company. Holders of Starsys
common stock will become holders of the Company's common stock following the
merger. The merger agreement is subject to a number of conditions described
below, including effectiveness of a Form S-4 registration statement and approval
of the respective shareholders of SpaceDev and Starsys.
Merger Consideration. The Company will pay and issue the following
consideration at the effective time of the merger, subject to adjustment as
provided in the merger agreement:
- cash in the aggregate amount of $1,500,000; and
- an aggregate number of shares of the Company's common stock equal to the
quotient of (A) $7,500,000 divided by (B) the greater of (1) $1.40 and (2)
the lesser of (x) $1.90 and (y) the volume weighted average price of the
Company's common stock for the preceding 20 trading days.
Fifty percent (50%) of the number of shares of the Company's common stock issued
at closing will be deposited in escrow as security for the payment of
indemnification claims under the merger agreement, which escrow
PAGE F-12
will generally last until ten (10) days following the date of audited financial
statements prepared for the surviving corporation for the fiscal year ending
2006 (i.e., approximately April 2007).
Following the merger, Starsys shareholders may also be entitled to receive,
based on the achievement by the surviving corporation of certain performance
criteria for each of the fiscal years ending December 31, 2005, December 31,
2006 and December 31, 2007, additional consideration consisting of up to:
- For the fiscal year ended December 31, 2005, $350,000 in cash and an
aggregate number of shares of the Company's common stock equal to the
quotient of (A) $3,000,000 divided by (B) the greater of (1) $2.00 and (2)
the volume weighted average price of the Company's common stock for the
twenty (20) trading days preceding the date of the audit opinion for
Starsys' fiscal year ended December 31, 2005;
- For the fiscal year ended December 31, 2006, $350,000 in cash and an
aggregate number of shares of the Company's common stock equal to the
quotient of (A) $7,500,000 divided by (B) the greater of (1) $2.50 and (2)
the volume weighted average price of the Company's common stock for the
twenty (20) trading days preceding the date of the audit opinion for
Starsys' fiscal year ended December 31, 2006; and,
- For the fiscal year ended December 31, 2007, $350,000 in cash and an
aggregate number of shares of the Company's common stock equal to the
quotient of (A) $7,500,000 divided by (B) the greater of (1) $3.00 and (2)
the volume weighted average price of the Company's common stock for the
twenty (20) trading days preceding the date of the audit opinion for
Starsys' fiscal year ended December 31, 2007.
If any shares of the Company's common stock are payable as consideration for the
fiscal year ending December 31, 2005, fifty percent (50%) of those shares will
be deposited in the escrow described above.
Each outstanding share of the Company's common stock will remain unchanged in
the merger.
Working Capital Contribution. The Company will contribute $2.5 million to the
working capital of the surviving corporation through the end of 2006.
Treatment of Stock Options and Warrants. The holders of options, warrants and
other rights to purchase Starsys common stock must exercise such rights on or
before the closing of the merger. Any options, warrants or other rights to
purchase Starsys common stock which are not exercised prior to the closing of
the merger will be cancelled and will terminate and expire as of that closing of
the merger. The Company will assume no options, warrants or other rights to
purchase Starsys common stock pursuant to the merger.
Loan Repayments. At the closing of the merger, the Company will (i) pay off the
remaining principal and interest of all loans to Starsys from Vectra Bank
Colorado, together with any other costs incurred in connection with those loans,
(ii) cancel and terminate the secured loan of $1.2 million and all accrued
interest and fees, from the Company to Starsys (the "SpaceDev loan"), and (iii)
pay off subordinated loans in the aggregate amount of approximately $920,000
owed by Starsys to certain Starsys shareholders. The Company will not be
obligated to pay off more than $4,600,000 in the aggregate (excluding the amount
of the SpaceDev loan) for all of the loans and related costs described above.
Reservation of Options. The Company has agreed to reserve for issuance to
Starsys officers, employees and consultants options to buy a number of shares of
the Company's common stock equal to at least 15% of the number of shares of the
Company's common stock issued at the closing and as earnout consideration. The
Company will seek approval of its shareholders to increase the amount of shares
available under the Company's 2004 Equity Incentive Plan, or under a new stock
or equity plan to be adopted, to provide sufficient reserves for the issuance of
the options referenced above.
Representations, Warranties and Covenants. The Company and Starsys have made
customary representations, warranties and covenants in the merger agreement,
including, among others, covenants (i) not to (A) solicit proposals relating to
alternative business combination transactions or (B) subject to certain
exceptions, enter into discussions
PAGE F-13
concerning or provide information in connection with alternative business
combination transactions, (ii) to cause shareholder meetings to be held to
consider approval of the merger agreement (in the case of Starsys and the
Company), and (iii) subject to certain exceptions, for the board of directors of
Starsys to recommend adoption by its shareholders of the merger agreement and
for our board of directors to recommend adoption by its shareholders of the
merger agreement.
Conditions to Closing. Consummation of the merger is subject to certain closing
conditions, including, among others, shareholder approvals, absence of
governmental restraints, effectiveness of a Form S-4 registration statement, and
accuracy of representations. The merger agreement allows Starsys and us to
terminate the merger agreement upon the occurrence (or non-occurrence) of
certain events.
Following the effective time of the merger, Scott Tibbitts, who is currently the
Chief Executive Officer of Starsys, will become a director and executive officer
of the Company.
In October 2005, the Company entered into a Securities Purchase Agreement with
Laurus Master Fund, Ltd. whereby the Company issued 2,032,520 shares of its
common stock to Laurus for an aggregate purchase price of $2,500,000, or $1.23
per share, representing 80% of the 20-day volume weighted average price of the
Company's common stock through October 28, 2005. In conjunction with the
Securities Purchase Agreement, the Company issued a five-year common stock
purchase warrant to Laurus for the purchase of 450,000 shares of common stock at
an exercise price of $1.93 per share. The Company has committed to register all
of the shares of stock underlying the common stock and the warrant after the
Form S-4 (described above) becomes effective. Also in conjunction with the
agreement, the Company has agreed to pay Laurus a fee equal to 3.5% of the
proceeds raised from them, exclusive of the proceeds obtained from the exercise
of the warrants.
On December 20, 2005, SpaceDev entered into an executive employment agreement
with James W. Benson pursuant to which Mr. Benson is employed as SpaceDev's
chairman and chief technology officer. The agreement supersedes all prior
employment agreements between SpaceDev and Mr. Benson. The agreement has an
initial term of two years, and will be automatically renewed for a third year
unless either SpaceDev or Mr. Benson provides written notice of an intent not to
renew. Under the agreement, Mr. Benson is entitled to receive (1) a base salary
of $14,000 per month, subject to adjustment up to $17,000 per month upon the
happening of certain events, (2) performance-based cash bonuses based on the
achievement of specific goals set forth in the agreement (including a bonus of
$22,500 upon the completion of the merger with Starsys), and (3) a fully-vested
option to purchase up to 950,000 shares of SpaceDev common stock under the terms
and conditions of a non-plan stock option agreement between SpaceDev and Mr.
Benson. The option has an exercise price equal to $1.40 per share, which was the
closing sale price reported on the OTCBB on the date of grant, and will expire
five years after the date of grant. Some of the shares subject to the options
are subject to sale restrictions that expire upon the achievement of certain
specific milestones or four years from the date of grant, whichever comes first.
Subject to certain limitations, the option may be exercised by means of a net
exercise provision by surrendering shares with a fair market value equal to the
exercise price upon exercise. SpaceDev will pay severance to Mr. Benson if his
employment is terminated by SpaceDev without cause or by Mr. Benson for good
reason. The severance payment is equal to: (1) if Mr. Benson's employment is
terminated by SpaceDev without cause, his then-current base salary per month
multiplied by the greater of (A) 12 months and (B) the number of months
remaining in the term of the agreement (prorated with respect to any partial
month); or (2) if Mr. Benson's employment is terminated by Mr. Benson for good
reason, his then-current base salary per month multiplied by the lesser of (A)
12 months and (B) the number of months remaining in the term of the agreement
provided that such number of months will not be deemed to be less than six
months. Under the agreement, SpaceDev will indemnify Mr. Benson to the extent
provided in SpaceDev's articles of incorporation, as may be amended from time to
time, to the maximum extent permitted by law and pursuant to SpaceDev's standard
indemnification agreement with its officers and directors.
On December 20, 2005, Mr. Benson also received an option to purchase up to
150,000 shares of our common stock in connection with his services as chairman
of SpaceDev pursuant to the terms of a separate non-plan stock option agreement
between SpaceDev and Mr. Benson. The option has an exercise price equal to $1.40
per share, which was the closing sale price reported on the OTCBB on the date of
grant, and will expire five years after the date of grant. Some of the shares
subject to the option are subject to sale restrictions that expire upon the
achievement of certain specific milestones or four years from the date of grant,
whichever comes first. Subject to certain limitations, the option may be
exercised by means of a net exercise provision by surrendering shares with a
fair market value of the exercise price upon exercise.
On December 20, 2005, SpaceDev entered into an executive employment agreement
with Mark N. Sirangelo pursuant to which Mr. Sirangelo will be employed as
SpaceDev's chief executive officer and vice chairman effective December 30,
2005. The agreement has an initial term of two years, and will be automatically
renewed for a third year
PAGE F-14
unless either SpaceDev or Mr. Sirangelo provides written notice of an intent not
to renew. Under the agreement, Mr. Sirangelo is entitled to receive (1) a base
salary of $22,500 per month, subject to adjustment up to $27,500 per month upon
the happening of certain events, (2) performance-based cash bonuses based on the
achievement of specific goals set forth in the agreement (including a bonus of
$25,000 upon the completion of the merger with Starsys), and (3) a fully-vested
option to purchase up to 1,900,000 shares of SpaceDev common stock under the
terms and conditions of a non-plan stock option agreement between SpaceDev and
Mr. Sirangelo. The option has an exercise price equal to $1.40 per share, which
was the closing sale price reported on the OTCBB on the date of grant, and will
expire five years after the date of grant. Some of the shares subject to the
option are subject to sale restrictions that expire upon the achievement of
certain specific milestones or four years from the date of grant, whichever
comes first. SpaceDev will pay severance to Mr. Sirangelo if his employment is
terminated by SpaceDev without cause or by Mr. Sirangelo for good reason. The
severance payment is equal to: (1) if Mr. Sirangelo's employment is terminated
by SpaceDev without cause, his then-current base salary per month multiplied by
the greater of (A) 12 months and (B) the number of months remaining in the term
of the agreement (prorated with respect to any partial month); or (2) if Mr.
Sirangelo's employment is terminated by Mr. Sirangelo for good reason, his
then-current base salary per month multiplied by the lesser of (A) 12 months and
(B) the number of months remaining in the term of the agreement provided that
such number of months will not be deemed to be less than six months. Under the
agreement, SpaceDev will indemnify Mr. Sirangelo to the extent provided in
SpaceDev's articles of incorporation, as may be amended from time to time, to
the maximum extent permitted by law and pursuant to SpaceDev's standard
indemnification agreement with its officers and directors.
On December 20, 2005, SpaceDev entered into an amended and restated executive
employment agreement with Richard B. Slansky pursuant to which Mr. Slansky is
employed as SpaceDev's president and chief financial officer. The agreement
supersedes in full the employment agreement dated February 10, 2003 between
SpaceDev and Mr. Slansky. The agreement has an initial term of two years, and
will be automatically renewed for a third year unless either SpaceDev or Mr.
Slansky provides written notice of an intent not to renew. Under the agreement,
Mr. Slansky is entitled to receive (1) a base salary of $14,500 per month,
subject to adjustment up to $20,000 per month upon the happening of certain
events, (2) performance-based cash bonuses based on the achievement of specific
goals set forth in the agreement (including a bonus of $25,000 upon the
completion of the merger with Starsys), and (3) a fully-vested option to
purchase up to 1,400,000 shares of SpaceDev common stock under the terms and
conditions of a non-plan stock option agreement between SpaceDev and Mr.
Slansky. The option has an exercise price equal to $1.40 per share, which was
the closing sale price reported on the OTCBB on the date of grant, and will
expire five years after the date of grant. Some of the shares subject to the
options are subject to sale restrictions that expire upon the achievement of
certain specific milestones or four years from the date of grant, whichever
comes first. Subject to certain limitations, the option may be exercised by
means of a net exercise provision by surrendering shares with a fair market
value equal to the exercise price upon exercise. SpaceDev will pay severance to
Mr. Slansky if his employment is terminated by SpaceDev without cause or by Mr.
Slansky for good reason. The severance payment is equal to: (1) if Mr. Slansky's
employment is terminated by SpaceDev without cause, his then-current base salary
per month multiplied by the greater of (A) 12 months and (B) the number of
months remaining in the term of the agreement (prorated with respect to any
partial month); or (2) if Mr. Slansky's employment is terminated by Mr. Slansky
for good reason, his then-current base salary per month multiplied by the lesser
of (A) 12 months and (B) the number of months remaining in the term of the
agreement provided that such number of months will not be deemed to be less than
six months. Under the agreement, SpaceDev will indemnify Mr. Slansky to the
extent provided in SpaceDev's articles of incorporation, as may be amended from
time to time, to the maximum extent permitted by law and pursuant to SpaceDev's
standard indemnification agreement with its officers and directors.
On December 20, 2005, SpaceDev approved the accelerated vesting of all unvested
stock options held by its officers, directors, employees, and consultants,
effective December 20, 2005. The primary purpose of the accelerated vesting is
to eliminate future stock-based employee compensation expense SpaceDev would
otherwise recognize in its consolidated statement of operations with respect to
the accelerated options once FASB Statement No. 123R (Share-Based Payment)
becomes effective. The estimated maximum future expense that is eliminated is
approximately $5 million.
On December 20, 2005, SpaceDev and Starsys agreed to extend to January 31, 2006
the maturity date of the $1.2 million loan from SpaceDev to Starsys, which loan
was originally extended to Starsys pursuant to the terms of a bridge loan
agreement dated September 8, 2005. Under that agreement, the loan to Starsys was
for the purpose of paying down Stasys' credit facility with Vectra. The loan
accrues interest at 8% per annum and was originally set to mature on December
31, 2005 or earlier in certain circumstances. No principal or interest payments
are due before maturity. The maturity date may be accelerated upon the
occurrence of certain events of default. The loan is secured by
PAGE F-15
a security interest in all of the assets of Starsys, subject to an intercreditor
agreement with Vectra. This intercreditor agreement precludes SpaceDev from
foreclosing on its loan, absent Vectra's consent, until May 31, 2006. Starsys
was required to use the proceeds of the loan to make a progress payment To
Vectra on the outstanding principal balance of loans under th credit facility,
which payment was due under the forebearance a
greement.
PAGE F-16
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
SPACEDEV, INC.
We have audited the accompanying consolidated balance sheets of SPACEDEV, INC.
AND SUBSIDIARY as of December 31, 2004 and 2003, respectively, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
SPACEDEV, INC. AND SUBSIDIARY as of December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ PKF
San Diego, California PKF
February 10, 2005 Certified Public Accountants
A Professional Corporation
PAGE F-17
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,. . . . . . . . . . . . . 2004 2003
-------------------------------------- ---------- ----------
ASSETS
CURRENT ASSETS
Cash (Note 10(a)). . . . . . . . . $5,068,601 $ 592,006
Accounts receivable (Note 10(b)) . 620,097 187,062
Inventory. . . . . . . . . . . . . - 9,961
Work in Progress . . . . . . . . . - 110,490
-------------------------------------- ---------- ----------
Total current assets. . . . . . . . . 5,688,698 899,519
FIXED ASSETs - Net (Notes 1(g) and 2) 279,381 137,532
CAPITALIZED SOFTWARE COSTS . . . . . - -
OTHER ASSETS. . . . . . . . . . . . . 122,355 47,768
-------------------------------------- ---------- ----------
TOTAL ASSETS. . . . . . . . . . . . . $6,090,434 $1,084,819
-------------------------------------- ---------- ----------
-------------------------------------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE F-18
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 2003
---------------------------------------------------------------------- ------------- -------------
LIABILITIES AND STOCKHOLDERSEQUITY
CURRENT LIABILITIES
Current portion of notes payable (Note 4(a)) . . . . . . . . . . . $ 36,670 $ 41,464
Current portion of capitalized lease obligations (Note 9(a)) . . . 3,784 10,332
Notes payable - related party (Note 4(b)). . . . . . . . . . . . . - 80,000
Accounts payable and accrued expenses. . . . . . . . . . . . . . . 338,809 311,606
Accrued payroll, vacation and related taxes. . . . . . . . . . . . 195,045 84,001
Revolving line of credit (Note 4(c)) . . . . . . . . . . . . . . . - 748,893
Employee Stock Purchase Plan (Note (7(b)). . . . . . . . . . . . . 9,332 5,498
Other accrued liabilities (Note 9(b)). . . . . . . . . . . . . . . 207,262 248,530
---------------------------------------------------------------------- ------------- -------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . 790,902 1,530,324
NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 4(A)). . . . . . . . . . 9,457 46,127
CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES (NOTE 9(A)). . 1,469 5,253
NOTES PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES (NOTE 4(B)). . - 505,522
DEFERRED GAIN - ASSETS HELD FOR SALE (NOTE 2) . . . . . . . . . . . . 947,949 1,065,221
DEFERRED REVENUE (NOTE 1(F)). . . . . . . . . . . . . . . . . . . . . 5,000 5,000
---------------------------------------------------------------------- ------------- -------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 1,754,777 3,157,447
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERSEQUITY (DEFICIT)
Convertible preferred stock, $.001 par value, 10,000,000 shares
authorized, and 250,000 shares issued and outstanding (Note 8(a)). 250 -
Common stock, $.0001 par value; 50,000,000 shares authorized, and
21,153,660 and 16,413,260 shares issued and outstanding,
respectively (Note 8(b)) . . . . . . . . . . . . . . . . . . . . . 2,114 1,641
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 18,739,090 9,243,507
Additional paid-in capital - stock options (Note 8(d)) . . . . . . 750,000 750,000
Deferred compensation (Note 8(d)). . . . . . . . . . . . . . . . . (250,000) (250,000)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . (14,905,797) (11,817,776)
---------------------------------------------------------------------- ------------- -------------
TOTAL STOCKHOLDERSEQUITY (DEFICIT). . . . . . . . . . . . . . . . . . 4,335,657 (2,072,628)
---------------------------------------------------------------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . . . . . . . . $ 6,090,434 $ 1,084,819
---------------------------------------------------------------------- ------------- -------------
---------------------------------------------------------------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE F-19
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,. . . . . . . . . . . . . . 2004 % 2003 %
---------------------------------------------------- ------------ ------------ ------------ -------
NET SALES . . . . . . . . . . . . . . . . . . . . . $ 4,890,743 100.00% $ 2,956,322 100.00%
---------------------------------------------------- ------------ ------------ ------------ -------
COST OF SALES . . . . . . . . . . . . . . . . . . . 3,820,683 78.12% 2,414,997 81.69%
---------------------------------------------------- ------------ ------------ ------------ -------
GROSS MARGIN. . . . . . . . . . . . . . . . . . . . 1,070,060 21.88% 541,325 18.31%
OPERATING EXPENSES
Marketing and sales expense. . . . . . . . . . . 418,831 8.56% 394,974 13.36%
Research and development . . . . . . . . . . . . 39,473 0.81% 281,280 9.51%
Stock and stock option based compensation. . . . 0 0.00% 9,170 0.31%
General and administrative . . . . . . . . . . . 467,471 9.56% 745,993 25.23%
---------------------------------------------------- ------------ ------------ ------------ -------
TOTAL OPERATING EXPENSES. . . . . . . . . . . . . . 925,775 18.93% 1,431,417 48.42%
---------------------------------------------------- ------------ ------------ ------------ -------
INCOME/(LOSS) FROM OPERATIONS . . . . . . . . . . . 144,285 2.95% (890,092) -30.11%
---------------------------------------------------- ------------ ------------ ------------ -------
NON-OPERATING EXPENSE/(INCOME)
Interest income. . . . . . . . . . . . . . . . . (19,497) -0.40% - 0.00%
Interest expense . . . . . . . . . . . . . . . . 52,077 1.06% 91,492 3.09%
Non-cash interest expense debt discount (Note 5) 0 0.00% 112,500 3.81%
Gain on Building Sale (Note 4(a)). . . . . . . . (117,272) -2.40% (107,499) -3.64%
Loan Fee - Equity Compensation (Note 4(c) & 5) . 3,254,430 66.54% 257,882 8.72%
---------------------------------------------------- ------------ ------------ ------------ -------
TOTAL NON-OPERATING EXPENSE/(INCOME). . . . . . . . 3,169,739 64.81% 354,375 11.99%
---------------------------------------------------- ------------ ------------ ------------ -------
LOSS BEFORE INCOME TAXES. . . . . . . . . . . . . . (3,025,454) -61.86% (1,244,467) -42.10%
Income tax provision (Notes 1(j) and 6) . . . . . . 1,600 0.03% 1,600 0.05%
---------------------------------------------------- ------------ ------------ ------------ -------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . $(3,027,054) -61.89% $(1,246,067) -42.15%
---------------------------------------------------- ------------ ------------ ------------ -------
---------------------------------------------------- ------------ ------------ ------------ -------
NET LOSS PER SHARE:
Net loss . . . . . . . . . . . . . . . . . . . $ (0.16) $ (0.08)
-------------------------------------------------------------------------------------------------------
Weighted-Average Shares Outstanding. . . . . . 18,610,141 16,092,292
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE F-20
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock Common Stock
--------------- -------------
Shares Amount Shares Amount
---------------------------------------------------------------------------- --------------- ------------- ---------- -------
BALANCE AT JANUARY 1, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . - $ - 14,477,640 $ 1,447
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . . . . - - 861,267 86
Common stock issued from notes on revolving credit facility (Note 4( c)) . . - - 415,000 42
Common stock issued for services (Note 8 (b)). . . . . . . . . . . . . . . . - - 7,500 1
Common stock issued from convertible debt program (Note 5 and 8(c)). . . . . - - 614,853 61
Common stock issued from employee stock options (Note 7(b)). . . . . . . . . - - 37,000 4
Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . . . . - - - -
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -
---------------------------------------------------------------------------- --------------- ------------- ---------- -------
BALANCE AT DECEMBER 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . - - 16,413,260 1,641
Preferred Stock stock issued for cash (Note 8(a)). . . . . . . . . . . . . . 250,000 250 - -
Common stock issued for cash from employee stock purchase plan (Note 8(b)) . - - 14,010 1
Common stock issued from notes on revolving credit facility (Note 4( c)) . . - - 2,991,417 299
Common stock issued from employee stock options (Note 7(b)). . . . . . . . . - - 1,005,035 100
Common stock issued from private placement memorandum warrants (Note 8(b)) . - - 115,085 12
Common Stock issued from convertible debt program warrants (Note 5 and 8(c)) - - 614,853 61
Declared Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -
---------------------------------------------------------------------------- --------------- ------------- ---------- -------
BALANCE AT DECEMBER 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . 250,000 $ 250 21,153,660 $ 2,114
---------------------------------------------------------------------------- --------------- ------------- ---------- -------
---------------------------------------------------------------------------- --------------- ------------- ---------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE F-21
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
Additional
Additional Paid-In
Paid-in Capital - Deferred
Capital Stock Options Compensation
---------------------------------------------------------------------------- ------------ -------------- -------------
BALANCE AT JANUARY 1, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,302,803 $ 750,000 $ (250,000)
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . . . . 425,856 - -
Common stock issued from notes on revolving credit facility (Note 4( c)) . . 354,679 - -
Common stock issued for services (Note 8 (b)). . . . . . . . . . . . . . . . 9,169 - -
Common stock issued from convertible debt program (Note 5 and 8(c)). . . . . 368,850 - -
Common stock issued from employee stock options (Note 7(b)). . . . . . . . . 19,650 - -
Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . . . . (237,500)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
---------------------------------------------------------------------------- ------------ -------------- -------------
9,243,507 750,000 (250,000)
BALANCE AT DECEMBER 31, 2003
Preferred Stock stock issued for cash (Note 8(a)). . . . . . . . . . . . . . 2,366,250
Common stock issued for cash from employee stock purchase plan (Note 8(b)) . 12,626 - -
Common stock issued from notes on revolving credit facility (Note 4( c)) . . 4,752,079 - -
Common stock issued from employee stock options (Note 7(b)). . . . . . . . . 1,264,649 - -
Common stock issued from private placement memorandum warrants (Note 8(b)) . 88,738 - -
Common Stock issued from convertible debt program warrants (Note 5 and 8(c)) 1,011,241 - -
Declared Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
- - -
Net loss - - -
---------------------------------------------------------------------------- ------------ -------------- -------------
BALANCE AT DECEMBER 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . $18,739,090 $ 750,000 $ (250,000)
---------------------------------------------------------------------------- ------------ -------------- -------------
---------------------------------------------------------------------------- ------------ -------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE F-22
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT)
Accumulated
Deficit Total
---------------------------------------------------------------------------- ------------- ------------
BALANCE AT JANUARY 1, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . $(10,571,710) $(1,767,459)
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . . . . - 425,942
Common stock issued from notes on revolving credit facility (Note 4( c)) . . - 354,721
Common stock issued for services (Note 8 (b)). . . . . . . . . . . . . . . . - 9,170
Common stock issued from convertible debt program (Note 5 and 8(c)). . . . . - 368,911
Common stock issued from employee stock options (Note 7(b)). . . . . . . . . - 19,654
Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . . . . - (237,500)
-
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,246,067) (1,246,067)
---------------------------------------------------------------------------- ------------- ------------
-
BALANCE AT DECEMBER 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . (11,817,776) (2,072,628)
Preferred Stock stock issued for cash (Note 8(a)). . . . . . . . . . . . . . - 2,366,500
Common stock issued for cash from employee stock purchase plan (Note 8(b)) . - 12,627
Common stock issued from notes on revolving credit facility (Note 4( c)) . . - 4,752,378
Common stock issued from employee stock options (Note 7(b)). . . . . . . . . - 1,264,749
Common stock issued from private placement memorandum warrants (Note 8(b)) . - 88,750
Common Stock issued from convertible debt program warrants (Note 5 and 8(c)) - 1,011,302
Declared Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (60,967) (60,967)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,027,054) (3,027,054)
---------------------------------------------------------------------------- ------------- ------------
BALANCE AT DECEMBER 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . $(14,905,797) $ 4,335,657
---------------------------------------------------------------------------- ------------- ------------
---------------------------------------------------------------------------- ------------- ------------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE F-23
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, . . . . . . . . . . . . . . . . . 2004 2003
----------------------------------------------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . . . $(3,027,054) $(1,246,067)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . 83,531 166,971
Gain on disposal of building . . . . . . . . . . . . (117,272) (107,499)
Non-cash interest expense - convertible debt program 773,802 131,411
Non-cash loan fees . . . . . . . . . . . . . . . . . 2,480,628 126,471
Common stock issued for compensation and services. . - 9,170
Change in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . (433,035) (104,737)
Work in Progress . . . . . . . . . . . . . . . . . 110,490 (110,490)
Prepaid and other current assets . . . . . . . . . (74,587) (33,888)
Inventory. . . . . . . . . . . . . . . . . . . . . 9,961 (8,232)
Convertible debt notes payable . . . . . . . . . . - 130,661
Costs in excess of billings and estimated earnings - 281,175
Interest on revolving line of credit . . . . . . . 18,349 13,601
Accounts payable and accrued expenses. . . . . . . 27,203 (286,874)
Accrued payroll, vacation and related taxes. . . . 111,044 (90,187)
Customer deposits and deferred revenue . . . . . . - (69,402)
Provision for anticipated loss . . . . . . . . . . - (11,044)
Interest - related party . . . . . . . . . . . . . 29,256 47,023
Other accrued liabilities. . . . . . . . . . . . . (102,235) 126,919
----------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. . . . (109,919) (1,035,018)
----------------------------------------------------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in investing activities:
Proceeds from the sale of building. . . . . . . . . . - 3,150,124
Purchases of fixed assets . . . . . . . . . . . . . . (225,380) (39,292)
----------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . . . . (225,380) 3,110,832
----------------------------------------------------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable . . . . . . . . . (41,464) (2,432,595)
Principal payments on capitalized lease obligations . (10,332) (35,764)
Payments on notes payable - related party . . . . . . (427,280) (199,997)
Proceeds from revolving credit facility . . . . . . . 1,504,508 963,542
Employee Stock Purchase Plan. . . . . . . . . . . . . 16,460 5,498
Proceeds from issuance of preferred stock . . . . . . 2,366,500 -
Proceeds from issuance of common stock. . . . . . . . 1,403,502 445,596
----------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. . . . 4,811,894 (1,511,456)
----------------------------------------------------------- ------------ ------------
Net increase in cash . . . . . . . . . . . . . . . . . . . 4,476,595 564,358
----------------------------------------------------------- ------------ ------------
CASH AT BEGINNING OF YEAR. . . . . . . . . . . . . . . . . 592,006 27,648
----------------------------------------------------------- ------------ ------------
CASH AT END OF YEAR. . . . . . . . . . . . . . . . . . . . $ 5,068,601 $ 592,006
----------------------------------------------------------- ------------ ------------
----------------------------------------------------------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE F-24
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, . . . . . . . . . . . . . 2004 2003
--------------------------------------------------- -------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . $313,978 $41,726
Income Taxes . . . . . . . . . . . . . . . . . $ 1,600 $ 1,600
--------------------------------------------------- -------- -------
NONCASH INVESTING AND FINANCING ACTIVITIES:
During the years ending December 31, 2004 and 2003, the Company issued 2,991,417
and 415,000 shares of its common stock, respectively, to the Laurus Master
Fund from conversions under its revolving credit facility, thereby
realizing a corresponding reduction in current liabilities of approximately
$2,271,750 and $228,500, respectively. The Company recorded additional
non-cash loan fees of $2,480,628 and $126,471, respectively, and charged
these fees to expense.
During the year ending December 31, 2004, the Company issued 614,853 shares of
its common stock to the participates in its' prior convertible debt program
from conversions of warrants, thereby receiving cash in the amount of
$187,500. The Company recorded additional non-cash loan fees of $773,802
and charged these fees to expense.
During 2004 the Company converted $12,627 of employee stock purchase plan
contributions into 14,010 shares of common stock.
During 2004 the Company declared dividends payable of $60,967 to the holder's of
its preferred stock.
During 2003, the Company issued 7,500 shares of restricted stock for employee
awards and services and for summer & student interns, and recorded expenses
of $9,170.
During 2003, the Company issued 861,267 shares of stock under the Company's
Private Placement Memorandum for cash of $425,942.
During 2003, the Company eliminated its convertible debt by repaying half of the
notes in cash ($237,500) and having the note holders convert the other half
into 614,853 shares of the Company's common stock. The Company recorded
additional loan fees of $131,411 and charged these fees to equity.
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE F-25
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial statements
follows.
Nature of operations
SPACEDEV, INC. (the "Company") is engaged in the conception, design,
development, manufacture, integration and operations of SPACE TECHNOLOGY
SYSTEMS, products and services. The Company is currently focused on the
development of low-cost microsatellites, nanosatellites and related subsystems,
and hybrid rocket propulsion as well as associated engineering and technical
services, primarily to government agencies, and specifically to the United
States Department of Defense. The Company's products and solutions are sold,
mainly on a project-basis, directly to these customers, and include
sophisticated micro- and nanosatellites, hybrid rocket-based orbital Maneuvering
and orbital Transfer Vehicles as well as safe sub-orbital and orbital hybrid
rocket-based propulsion systems. The Company believes there will be an evolving
and developing commercial market for its space technology systems (e.g., its
microsatellite and nanosatellite products and services) in the long-term. In the
short-term, the early adopters of this technology appear to be in the United
States Department of Defense and the Company's "products" are considered to be
the outcome of specific projects. The Company is also designing and developing
commercial hybrid rocket motors and small high performance space vehicles and
subsystems for commercial and military customers.
The Company was incorporated under the laws of the State of Colorado on December
23, 1996 as Pegasus Development Group, Inc. ("PDGI"). SpaceDev, LLC of Colorado
was originally formed in 1997 for commercial space exploration and was the sole
owner of shares of common stock of SpaceDev (a Nevada corporation) ("SpaceDev"),
formed on August 22, 1997. On October 22, 1997, PDGI issued 8,245,000 of its
$0.0001 par value common stock for 100 percent (1,000,000 shares) of SpaceDev's
common stock owned by SpaceDev, LLC. Upon the acquisition of the SpaceDev stock,
SpaceDev was merged into PDGI and, on December 17, 1997, PDGI changed its name
to SPACEDEV, INC. After the merger, SpaceDev, LLC, changed its name to SD
Holdings, LLC on December 17, 1997. For accounting purposes, the transaction was
accounted for as a reverse merger with the Company as the acquirer. Since
SpaceDev had minimal assets prior to the merger, the transaction was accounted
for as the sale of the Company's common stock for net assets of $1,232. The
Company became publicly traded in October 1997 and is currently trading on the
Over-the-Counter Bulletin Board ("OTCBB") under the symbol "SPDV."
In February 1998, the Company's operations were expanded with the acquisition of
Integrated Space Systems, Inc. ("ISS"), a California corporation founded for the
purpose of providing engineering and technical services related to space-based
systems. The ISS employee base, acquired upon acquisition, largely consisted of
former Atlas and General Dynamics personnel and enlarged the Company's then
current employee base to 20 employees. ISS was purchased for approximately $3.6
million, paid in Rule 144 restricted common shares of SpaceDev. Goodwill of
approximately $3.5 million was capitalized and was to be amortized over a period
of sixty (60) months, based on the purchase price exceeding the net asset value
of approximately $164,000. As a result of a change in corporate focus, on
November 15, 2001, the Company determined that the unamortized balance of
goodwill from ISS, which was approximately $923,000, had become impaired and it
was written-off. While the ISS segment did provide small hybrid propulsion
space systems and engineering services on separate contracts (mainly with
government agencies), the engineering service contracts had expired and,
therefore, would not be producing revenue or cash flow to support future
operations. The Company determined that all future business, contracts and
proposals would be sought after only in the SpaceDev name, making it a more
efficient way for it to manage and track multiple contracts and work on many
different business ventures at the same time within the same operating segment.
The Company filed for dissolution of ISS in December 2003, since all activities
had been integrated into SpaceDev, Inc.
The Company had working capital of $4,897,796 and incurred an operational profit
of $144,285 as well as a net loss of $3,027,054 for the year ended December 31,
2004. For the year ended December 31, 2003, the Company had a working capital
deficit of $630,805 and a loss from operations of $890,092 as well as a net loss
of $1,246,067. On March 31, 2004, the Company was awarded a $43,362,271 contract
from the Missile Defense Agency. Management intends to continue obtaining new
commercial and government contracts and discontinue the utilization of its
revolving credit facility. The Company may raise additional equity capital in a
public or private offering in certain circumstances. There can be no assurance
that existing contracts will be completed successfully or that new contracts or
additional debt or equity financing that may be needed to fund operations will
be available or, if available, obtained
PAGE F-26
in sufficient amounts necessary to meet the Company's needs. Management does
believe that current contracts will be sufficient to fund the Company through
2005 and beyond.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned inactive subsidiary, SpaceDev Oklahoma, Inc., and former
wholly-owned inactive subsidiary Integrated Space Systems, Inc., a California
corporation. Integrated Space Systems was dissolved in December 2003 after all
activities had been integrated into SpaceDev, Inc.
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions, including estimates of anticipated contract costs and
revenues utilized in the earnings recognition process, that affect the reported
amounts in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Accounts Receivable and Allowances for Uncollectible Accounts
Accounts receivable are stated at the historical carrying amount net of
write-offs and allowances for uncollectible accounts. The Company establishes an
allowance for uncollectible accounts based on historical experience and any
specific customer collection issues that the Company has identified.
Uncollectible accounts receivable are written-off when a settlement is reached
for an amount that is less than the outstanding balance or when the Company has
determined that balance will not be collected. At December 31, 2004 and 2003,
the allowance for uncollectible accounts was $32,637 and $17,500 respectively.
Software Development Costs
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalized the direct costs and allocated overhead
associated with a software development product. Initial costs were capitalized
as development costs prior to the design of a detailed program or working model.
Costs incurred subsequent to the product release and development costs performed
under contract were charged to operations. Beginning in the second quarter
2002, and completing in 2003, capitalized software costs were amortized over
their estimated useful life of eighteen months using the straight-line method.
Periodically, and at least annually, management performs a review for impairment
in accordance with SFAS No. 144. As of December 31, 2003, the Company had fully
amortized the capitalized software costs.
Revenue recognition
The Company's revenues in 2004 and 2003 were derived primarily from United
States government cost plus fixed fee (CPFF) contracts compared to a
predominance of fixed price contracts prior to 2003. Revenues from the CPFF
contracts during 2004 and 2003 were recognized as expenses were incurred.
Estimated contract profits were taken into earnings in proportion to revenues
recorded. Revenues under certain long-term fixed price contracts, which provide
for the delivery of minimal quantities or require significant amounts of
development effort in relation to total contract value, would be recorded upon
achievement of performance milestones or using the cost-to-cost method of
accounting where revenues and profits would be recorded based on the ratio of
costs incurred to estimated total costs at completion. Losses on contracts would
be recognized when estimated costs were reasonably determined. Actual results of
contracts may differ from management's estimates and such differences could be
material to the consolidated financial statements. Professional fees are billed
to customers on a time and materials basis, a fixed price basis or a
per-transaction basis depending on the terms and conditions of the specific
contract. Time and material revenues are recognized as services are performed
and costs are incurred.
Deferred revenue represents amounts collected from customers for projects,
products or services to be provided at a future date.
PAGE F-27
Depreciation and amortization
Fixed assets are depreciated over their estimated useful lives of three-to-five
years using the straight-line method of accounting.
In December 2002, the Company entered an agreement to sell its interest in its
only facility, which closed in January 2003. The escrow transaction included
the sale of the land and building at 13855 Stowe Drive, Poway, CA 92064. In
conjunction with the sale of its only facility in December 2002, the Company
entered into a non-cancelable operating lease with the buyer to lease-back its
facilities for ten years. The base rent is increased by 3.5% per year (see Note
2).
Research and development
The Company is engaged in design and development activities with its commercial
and government customers. The Company has SBIR (Small Business Innovation
Research) grants from the government and continues to seek new SBIR
opportunities. Costs incurred under SBIR grants are charged against revenues
received under SBIR grants. Non-reimbursable research and development
expenditures relating to possible future products are expensed as incurred. The
Company incurred $39,473 in non-reimbursable research and development costs
during 2004, as compared to $281,280 in non-reimbursable research and
development costs during 2003.
Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising expense was $1,113 and $1,460 in 2004 and 2003,
respectively. Although the direct cost of advertising is low, the Company
incurs costs related to general public relations and website development as part
of its general and administrative expenses.
Income taxes
Deferred income taxes are recognized for the tax consequences in future years of
the differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the years in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the combination of the tax payable for the year and the
change during the year in deferred tax assets and liabilities.
Stock-based compensation
In October 1995, the FASB (Financial Accounting Standards Board) issued SFAS
(Statements of Financial Accounting Standards) No. 123, "Accounting for
Stock-Based Compensation." The Company adopted SFAS No. 123 in 1997. The
Company has elected to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB
(Accounting Principles Board) Opinion No. 25, "Accounting for Stock Issued to
Employees," and has provided pro forma disclosures as if the fair value based
method prescribed in SFAS No. 123 had been utilized. See Note 8(d). During
December 2002, FASB issued SFAS No. 148 "Accounting for Stock Based Compensation
- Transition and Disclosure," which amends SFAS No. 123 to require companies to
elect to recognize fair value stock based compensation costs in their financial
statements or to disclose the pro forma
PAGE F-28
impact of those costs in the footnotes. If the Company had accounted for these
options in accordance with SFAS No. 123, the total value of options granted
during 2004 and 2003 would be amortized on a pro forma basis over the vesting
period of the options. Thus, the Company's consolidated net loss would have been
as follows:
Years Ended December 31
--------------------------------------------------------------------------- ------------ ------------
Net Loss: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 2003
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,027,054) $(1,246,067)
ADD: Stock based employee compensation expense
included in reported net income - -
DEDUCT: Stock based employee compensation expense determined under
the fair value based method for all awards . . . . . . . . . . . . $ (390,773) $ (234,525)
--------------------------------------------------------------------------- ------------ ------------
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,417,827) $(1,480,592)
--------------------------------------------------------------------------- ------------ ------------
--------------------------------------------------------------------------- ------------ ------------
Loss per Share:
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.16) $ (0.08)
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.18) $ (0.09)
--------------------------------------------------------------------------- ------------ ------------
Common stock, stock options and warrants to non-employees
The Company has valued its stock, stock options and warrants issued to
non-employees at fair value in accordance with the accounting prescribed in SFAS
No. 123, which states that all transactions in which goods or services are
received for the issuance of equity instruments shall be accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
Net loss per common share
Net loss per common share has been computed on the basis of the weighted average
number of shares outstanding, according to the rules of SFAS No. 128, "Earnings
per Share." Diluted net loss per share has not been presented, as the
computation would result in anti-dilution.
Financial instruments
The Company's financial instruments consist primarily of cash, T-bills, accounts
receivable, capital leases and notes payable. These financial instruments are
stated at their respective carrying values, which approximate their fair values.
Segment reporting
The Company merged its Space Missions Division business segment and ISS business
segment in 2002 and closed ISS in 2003. The Company has one other inactive
subsidiary, SpaceDev Oklahoma, Inc. The Company follows the requirement of SFAS
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131").
New accounting standards
In December 2004, FASB issued SFAS No. 123 (revised 2004) "Share Based Payment"
(SFAS No. 123R), a revision to Statement No. 123, Accounting for Stock-Based
Compensation which supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. The revised SFAS 123 eliminates the alternative to use Opinion 25's
PAGE F-29
intrinsic value method of accounting and, instead, requires entities to
recognize the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of those awards.
Furthermore, public entities are required to measure liabilities incurred to
employees in share-based payment transactions at fair value as well as estimate
the number of instruments for which the requisite service is expected to be
rendered. Any incremental compensation cost for a modification of the terms or
conditions of an award is measured by comparing the fair values before and after
the modification. The Company has yet to determine the effect SFAS No. 123R may
have on its financial statements, if any.
Effective as of December 31, 2004, the Company adopted the revised
interpretation of Financial Accounting Standards Board (FASB) Interpretation No.
46 (FIN 46), "Consolidation of Variable Interest Entities," (FIN 46-R). FIN 46-R
requires that certain variable interest entities be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The Company does not have any
investments in entities it believes are variable interest entities for which the
Company is the primary beneficiary.
Inventory
Inventories are valued at the lower of cost or market using the average cost
method, which approximates the first-in, first-out method of inventory
valuation.
FIXED ASSETS
In December 2002, the Company entered an agreement to sell its interest in its
only facility. As of December 31, 2002 the Company listed a receivable held for
sale of $3,150,124 which was realized when the transaction closed in January
2003. The escrow transaction included the sale of the land and building at
13855 Stowe Drive, Poway, CA 92064.
In conjunction with the sale, the Company entered into a lease agreement with
the buyer to lease-back its facilities (see Note 9(c)). The gain on the sale of
the facility was deferred and will be amortized over the remaining term of the
lease. Deferred gain of $1,172,720 will be amortized on a straight-line basis
over ten (10) years beginning February 2003 and ending in February 2013. This
amortization will be included in the Company's non-operating income and expense.
Fixed assets consisted of the following:
December 31, . . . . . . . . . . . . . . 2004 2003
---------------------------------------- ---------- ----------
Capital leases . . . . . . . . . . . . . $ 153,097 $ 153,097
Computer equipment . . . . . . . . . . . 383,512 163,721
Building improvements. . . . . . . . . . 14,124 9,488
Furniture and fixtures . . . . . . . . . 6,224 5,271
---------------------------------------- ---------- ----------
556,957 331,577
Less accumulated depreciation
and amortization. . . . . . . . . . . (277,576) (194,045)
---------------------------------------- ---------- ----------
$ 279,381 $ 137,532
---------------------------------------- ---------- ----------
---------------------------------------- ---------- ----------
Depreciation and amortization expense for fixed assets was approximately $83,500
and $53,000 for the years ending December 31, 2004 and 2003, respectively.
Depreciation and amortization expense was higher during 2004 due to the purchase
of new fixed assets, mainly new computer hardware and software, during 2004. Of
the above depreciation, approximately $33,000 and $28,000, for the year ending
December 31, 2004 and 2003, respectively, was for depreciation on equipment
under capital leases.
ACQUISITIONS
All acquisitions have been accounted for using the purchase method of accounting
and intangible assets were amortized using the straight-line method. Initial
purchase price included stock issued at the date of acquisition, direct
acquisition costs and any guaranteed future consideration.
PAGE F-30
AMROC
On August 14, 1998, the Company entered an Agreement for License and Purchase of
Technology from American Rocket Company (AMROC) with an unrelated individual who
had obtained ownership of such technology from AMROC. The intellectual property
acquired was hybrid rocket technology that has been modified and may be used in
the future operations of the Company. Upon execution of the Agreement, the
Company issued the seller a warrant to purchase 25,000 shares of restricted
common stock at a strike price equal to 50% of the market price of the common
stock on the issuance date. This warrant expired in 2003 having been
unexercised.
For each of the three years following the Agreement date, the licensor received
warrants to purchase 25,000 shares of restricted common stock. In the fourth
through tenth year following the Agreement date, the licensor may receive a
warrant to purchase a number of shares, if revenue is generated from the
acquired technology. All revenue based warrants are earned at a rate of one
share per $125 of revenue generated from the technology acquired. Under the
terms of the Agreement, the minimum number of shares to be issued is 100,000 and
the maximum consideration shall not exceed warrants to purchase 3,000,000 shares
of common stock or $6,000,000 in recognized value. Recognized value is the sum
of (a) the cumulative difference between the market price of the common stock
and the strike price and (b) the cumulative difference between the market price
on the date of exercise and the strike price for each warrant previously
exercised. To date, no revenue has been generated from the acquired technology.
The Company valued the warrants using the fair value method as prescribed by
SFAS No. 123. Under this method, the Company used the risk-free interest rate
at the date of grant, the expected volatility of the stock, the expected
dividend yield on the stock and the expected life of the warrants to determine
the fair value of the warrants. The risk-free rate of interest used to value
the initial issuance was 5.4 percent, a zero percent dividend yield was assumed
and the expected life of the warrants was five years from the date of issuance.
This calculation resulted in a fair value of $24,500 and was used as the value
of the intangible assets acquired. All warrants are immediately exercisable
after issuance and expire on the fifth anniversary of their issuance.
Other intangible assets consisted of the following:
December 31,. . . . . . . . . . . . . . . . . . . . 2004 2003
--------------------------------------------------- ----- ----------
Other intangibles . . . . . . . . . . . . . . . . . $ - $ 116,292
Less accumulated amortization . . . . . . . . . . . - (116,292)
--------------------------------------------------- ----- ----------
$ - $ -
--------------------------------------------------- ----- ----------
--------------------------------------------------- ----- ----------
The Company's intangible assets were fully amortized in 2003. Amortization
expense was approximately $11,000 for 2003.
NOTES PAYABLE
(a) Building and settlement notes
In December 2002, the Company entered into an agreement to sell its ownership
interest in its only facility. The transaction closed in January 2003. The
escrow transaction included the sale of the land and building at 13855 Stowe
Drive, Poway, CA 92064. In conjunction with the sale, the Company entered into a
lease agreement with the buyer to leaseback its facilities. Net fixed assets
were reduced by approximately $1.9 million and notes payable were reduced by
approximately $2.4 million, while a deferred gain was recorded. The Company's
Chief Executive Officer provided a guarantee for the leaseback. The gain of
$1,172,720 on the sale of the facility was deferred and is being amortized on a
straight-line basis over the ten (10) year term of the lease at the rate of
$117,272 per year. As of
PAGE F-31
December 31, 2004 and 2003, the deferred gain was $947,949 and $1,065,221,
respectively. This amortization will be included in the Company's non-operating
income and expense and totaled $117,272 in 2004 and $107,499 in 2003.
Deferred Gain consisted of the following:
December 31,. . . 2004 2003
----------------- ----------- -----------
Deferred Gain . . $1,172,720 $1,172,720
Less Amortization (224,771) (107,499)
----------------- ----------- -----------
$ 947,949 $1,065,221
----------------- ----------- -----------
----------------- ----------- -----------
In 2001, the Company entered into three settlement loan agreements with various
vendors. The total of $171,402 for all three loans called for payment between
24 and 50 months with interest that ranged from 0% to 8%. At December 31, 2004
and 2003, the outstanding balances on these notes were $46,127 and $87,591, with
interest expense of $3,258 and $4,956, respectively.
Future minimum principal payments on notes payable are as follows:
Year Ending December 31,
------------------------ -------
2005 . . . . . . . . . . $36,670
2006 . . . . . . . . . . 9,457
2007 . . . . . . . . . . 0
------------------------ -------
Total Settlement Notes . $46,127
------------------------ -------
------------------------ -------
Related parties
The Company had a note payable to its CEO. At December 31, 2004 and 2003, the
balances were $0 and $585,522, respectively, with accrued interest of 10%. The
note was amended on March 20, 2000 to call for annual payments of not less than
$80,000 per year with interest at 10%. As part of the Company's preferred stock
offering (see Note 8(a)), the note was paid in full during the third quarter of
2004.
Interest expense on this note was $29,256 and $47,023 for 2004 and 2003,
respectively.
Revolving Credit Facility.
On June 3, 2003, the Company entered into a Security Agreement, Secured
Convertible Note, Registration Rights Agreement and Common Stock Purchase
Warrant, with the Laurus Master Fund, Ltd. ("Laurus"), which were filed on Form
8-K dated June 18, 2003. Pursuant to the agreements, the Company received a $1
million revolving credit facility in the form of a three-year Convertible Note
secured by its assets subject to the amount of eligible accounts receivables.
The net proceeds from the Convertible Note were used for general working capital
purposes. Advances on the Convertible Note are repaid at the Company's option,
in cash or through the issuance of the Company's shares of common stock provided
the market price is 118% of the fixed conversion price or greater. The
Convertible Note carries an interest rate of Wall Street Journal Prime plus
0.75% on any outstanding balance. In addition, the Company is required to pay a
collateral management payment of 0.55% of the average aggregate outstanding
balance during the month plus an unused line payment of 0.20% per annum.
Approximately $19,500 in interest and approximately $5,000 in fees were expensed
under the revolving credit facility in 2004. There was no outstanding balance
on the revolving credit facility at December 31, 2004.
The Company filed a Form SB-2 registration statement on July 25, 2003 in
connection with this transaction. The shares were registered with the Securities
and Exchange Commission ("SEC") for public resale on August 6, 2003. Once the
market price exceeded 118% of the fixed conversion price, which occurred on or
about July 21, 2003, the Company obtained the ability to pay amounts outstanding
under the revolving credit facility in cash or shares of its common stock at the
fixed conversion price.
The Convertible Note includes a right of conversion in favor of Laurus. Laurus
has exercised its conversion rights from time to time on outstanding balances.
When Laurus chooses to exercise its conversion rights, the Convertible Note is
convertible into shares of the Company's common stock at a fixed conversion
price, subject to
PAGE F-32
adjustments for stock splits, combinations and dividends and for shares of
common stock issued for less than the fixed conversion price (unless exempted
pursuant to the agreements). The Agreement was modified on March 31, 2004 to
provide for a six-month waiver of the accounts receivable restrictions and a
fixed conversion price to Laurus of $0.85 per share on the first $500,000 after
the first $1 million. The agreement was further modified on August 25, 2004 to
provide for a fixed conversion price to Laurus of $1.00 per share on the next $1
million. Thereafter, the fixed conversion price will be adjusted after
conversion of a total of $2.5 million to 103% of the then fair market value of
our common stock ("Adjusted Fixed Conversion Price").
Laurus converted 2,991,417 shares to reduce the Company's debt by $2,271,750 for
the twelve-month period ending December 31, 2004. Laurus converted a total of
3,406,417 shares to reduce the debt by $2,500,000 since the inception of the
revolving credit facility. For the twelve-month period ending December 31,
2004, the Company expensed $2,480,628 for the non-cash loan fee based on the
fair market value of the stock when Laurus converted and $2,607,099 for the
non-cash loan fee expense since the inception of the revolving credit facility.
The fair market value used in 2003 was established using a 20% discount to the
closing price on the date of conversion based on the restricted and
thinly-traded nature of the Company stock in 2003 and the fair market value used
in 2004 was established using the closing price on the date of conversion with
no discount taken due to the increased volume in the Company's stock.
Availability of funds under the revolving credit facility is based on the
Company's accounts receivable, except as waivers are provided by Laurus. An
initial three (3) month waiver was offered by Laurus, under which Laurus
permitted a credit advance up to $300,000, which amount would have otherwise
exceeded eligible accounts receivable during the period. Laurus subsequently
extended the waiver for two additional six (6) month periods, under which Laurus
permitted a credit advance up to $1 million, which amount would have otherwise
exceeded eligible accounts receivable during the period. The revolving credit
facility is secured by all of the assets of the Company.
In conjunction with this transaction, Laurus was paid a fee of $20,000 for the
first year, which was expensed as additional interest expense in 2003. The
Company was required to pay a continuation fee of $10,000 each year thereafter.
In addition, Laurus received a warrant to purchase 200,000 shares of the
Company's common stock for the initial $1 million revolving credit facility, as
stated herein. The warrant exercise price was computed as follows: $0.63 per
share for the purchase of up to 125,000 shares; $0.69 per share for the purchase
of an additional 50,000 shares; and $0.80 per share for the purchase of an
additional 25,000 shares. The warrant exercise price may be paid in cash, in
shares of the Company's common stock, or by a combination of both. The warrant
expiration date is June 3, 2008. The warrant exercise price and the number of
shares underlying the warrant are subject to adjustments for stock splits,
combinations and dividends.
In addition to the initial warrant, the Company was obligated to issue an
additional five-year warrant to Laurus to purchase one share of common stock at
an exercise price equal to 125% of the Adjusted Fixed Conversion Price for every
ten dollars ($10) in principal of the Convertible Note converted into common
stock if and when over $1 million was converted under the revolving credit
facility. The value of the warrant was determined when issued, and was treated
as additional interest expense and is being amortized over the remaining term of
the Convertible Note, unless sooner terminated. On June 18, 2004, the Company
issued an additional warrant to purchase 50,000 shares at an exercise price of
$1.0625 per share in relation to the $500,000 revolving credit facility
expansion convertible at $0.85 per share. Since no more than an aggregate of
100,000 shares of the Company's common stock were authorized as additional
warrants under the Laurus Agreements, on August 25, 2004, the Company issued an
additional warrant to purchase 50,000 shares at an exercise price of $1.925 per
share in relation to the $1 million revolving credit facility expansion
convertible at $1.00 per share.
The Company may terminate its agreements with Laurus before the end of the
initial three year term and Laurus will release its security interests upon
payment to Laurus of all obligations, if the Company has: (i) provided Laurus
with an executed release of all claims which the Company may have under the
agreements; and, (ii) paid to Laurus an early payment fee in an amount equal to
(x) three percent (3%) of the Capital Availability Amount if such payment occurs
after the first anniversary (i.e., June 3, 2004) and prior to the second
anniversary of the Initial Term; and, (y) two percent (2%) of the Capital
Availability Amount if such payment occurs after the second anniversary and
prior to the end of the Initial Term. The early payment fee is also due and
payable by the Company to Laurus if the Company terminates its Agreement after
the occurrence of an Event of Default, as defined in the agreements.
As stated above, in conjunction with the Company's Preferred Stock financing on
August 25, 2004, Laurus agreed to extend the revolving credit facility reported
on Form 8-K filed June 18, 2003 from $1.0 million to $1.5 million. The first
$1.0 million converted under the revolving credit facility was converted last
year and earlier this year
PAGE F-33
at a rate of $0.55 per share during 2003 and 2004. On March 31, 2004, the
conversion price for the next $500,000 under the revolving credit facility was
set at $0.85 per share. The next $1 million under the revolving credit facility
was convertible at a rate of $1.00 per share. There was no balance on the
revolving credit facility at December 31, 2004.
CONVERTIBLE DEBENTURES
From October 14, 2002 through November 14, 2002, the Company sold an aggregate
of $475,000 of 2.03% convertible debentures to various directors and officers of
the Company. The total funding was completed on November 14, 2002. The
convertible debentures entitled the holder to convert the principal and unpaid
accrued interest into the Company's common stock when the note matured. The
maturity on the notes was six (6) months from issue date. On March 25, 2003, an
amendment was executed which extended these notes an additional six (6) months.
The convertible debentures were exercisable into a number of the Company's
common shares at a conversion price that equals the 20-day average ask price
less 10%, which was, established when the note was issued, or the initial
conversion price.
Concurrent with the issuance of the convertible debentures, the Company issued
warrants to purchase up to 1,229,705 shares of the Company's common stock to the
subscribers. These warrants are exercisable for three (3) years from the date
of issuance at the initial exercise price which is equal to the 20-day average
ask price less 10%, which was established when the note was issued, or the
initial conversion price of the notes. Upon issuance, the issued warrants were
valued using the Black-Scholes pricing model based on the expected fair value at
issuance and the estimated fair value was recorded as debt discount. As a
result of the change to the maturity date of the convertible debt, the
amortization period for the debt discounts was also extended during the first
quarter in 2003.
On September 5, 2003, the Company repaid one-half of the convertible notes, with
the condition that the note holders convert the other half. Also, as a condition
of the partial repayment, the note holders were required to relinquish one-half
of the previously issued warrants. Finally, as additional consideration for the
transaction, the note holders were offered 5% interest on their notes, rather
than the stated 2.03%. All the note holders accepted the offer and the
convertible notes were retired. As of December 31, 2003, the Company recorded a
credit of $88,408, as debt discount recovery; therefore, for the year ending
December 31, 2003, the debt discount expense was $112,500. The Company also
expensed $131,411 for non-cash loan fee expense. Fair market value of the stock
was determined by discounting the closing market price on the date of the
transaction by 20%, based on the nature of the restricted securities.
Convertible debentures - beginning balance . $ 475,000
Total interest expense incurred . . . . $ 20,236
Accrued interest paid - current year. . $ (18,161)
Accrued interest paid - prior year. . . $ (2,075)
Convertible debtures paid . . . . . . . $(237,500)
Convertible debtures converted. . . . . $(237,500)
-------------------------------------------------------
$(475,000)
-------------------------------------------------------
Convertible debentures - ending balance. . . $ 0
-------------------------------------------- ----------
Debt discount (Warrants) - beginning balance $ 475,000
Amount forfeited. . . . . . . . . . . . $(237,500)
Amount expensed prior year. . . . . . . $(125,000)
Amount expensed current year. . . . . . $(267,879)
Current year - adjustment . . . . . . . $ 155,379
-------------------------------------------------------
$(475,000)
-------------------------------------------------------
Debt discount (Warrants) - ending balance. . $ 0
-------------------------------------------- ----------
As of December 31, 2004, all of the warrants under the convertible debt program
had been converted to equity and the Company received approximately $50,000 in
cash, received the reduction in $187,500 in related party debt and expensed
$773,802 in non-cash loan fees.
PAGE F-34
INCOME TAXES
Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes. The
deferred tax asset of $2,350,000 and $2,190,000 as of December 31, 2004 and
2003, respectively, consisted primarily of the income tax benefits from net
operating loss and capital loss carryforwards, amortization of goodwill and
research and development credits. A valuation allowance has been recorded to
fully offset the deferred tax asset as it is more likely than not that the
assets will not be utilized. The valuation allowance increased approximately
$126,000 in 2004 from $2,190,000 at December 31, 2003 to $2,318,000 at December
31, 2004.
Significant components of the benefit for income taxes for the years ended
December 31, 2004 and 2003 are as follows:
2004 2003
------ ------
Current
Federal . . . . . $ - $ -
State . . . . . . 1,600 1,600
------ ------
1,600 1,600
Deferred
Federal . . . . . - -
State . . . . . . - -
------ ------
- -
Income tax expense $1,600 $1,600
====== ======
At December 31, 2004, the Company had federal and state tax net operating loss
and capital loss carryforwards of approximately $4,826,000 and $2,146,000,
respectively. The federal and state tax loss carryforwards will expire in 2012
and 2007, respectively, unless previously utilized. The State of California has
suspended the utilization of net operating loss for 2003 and limited them in
2004.
A reconciliation of the statutory income tax rates and the Company's effective
tax rate is as follows:
Years Ended December 31,. . . . . . . . . . 2004 2003
--------------------------------------------- ------- -------
Statutory U.S. federal rate . . . . . . . . 35.0% 34.0%
--------------------------------------------- ------- -------
State income taxes - net of federal benefit 5.7% 5.8%
Permanent differences . . . . . . . . . . . (37.8%) -
Change in valuation allowance . . . . . . . (2.9%) (39.8%)
--------------------------------------------- ------- -------
Provision for income taxes. . . . . . . . . 0.0% 0.0%
--------------------------------------------- ------- -------
The tax effects of temporary differences and carryforwards that give rise to
deferred tax assets consist of the following:
December 31,. . . . . . . . . . . . . 2004 2003
--------------------------------------- ------------ ------------
Deferred tax assets:
--------------------------------------- ------------ ------------
Loss carryforwards . . . . . . . . . $ 1,765,000 $ 1,588,000
Deferred gain on sale of building 416,000 435,000
Temporary differences. . . . . . . . 77,000 127,000
Research and development credits . . 92,000 40,000
--------------------------------------- ------------ ------------
Gross deferred tax assets . . . . . . 2,350,000 2,190,000
--------------------------------------- ------------ ------------
Deferred tax liability. . . . . . (32,000) -
--------------------------------------- ------------ ------------
Valuation allowance . . . . . . . . . (2,318,000) (2,190,000)
$ - $ -
--------------------------------------- ------------ ------------
--------------------------------------- ------------ ------------
PAGE F-35
As of December 31, 2004, the Company recorded a valuation allowance of $214,000
related to deferred tax assets created by the exercise and/or disposition of
employee stock options in recent periods. The deferred tax asset originating
from deductions for the exercise and/or disposition of stock options and the
related valuation allowance have been recorded against additional paid-in
capital and did not effect the net earnings for the period. Any tax benefits
realized from the reduction of this valuation allowance will be recorded to
additional paid-in capital.
Pursuant to Internal Revenue Code Section 382, the Company's use of its net
operating loss carryforwards may be limited as a result of cumulative changes in
ownership of more than 50% over a three year period.
The Company has unused U.S. and state tax credits of approximately $52,000 and
$39,000, that begin to expire 2013 and 2008, respectively.
EMPLOYEE BENEFIT PLAN
(a) Profit sharing 401(k) plan
During 2004, the Company amended their previous 401(k) retirement savings plan
from 1997 for its employees, which allows each eligible employee to voluntarily
make pre-tax salary contributions up to 93% of their compensation or $13,000 per
year, whichever is lower, for the year ending December 31, 2004. The Company
has elected to begin making a matching contribution of 10% of employee
contributions, which matching portion vests over 5 years as specified in the
plan amendment. During 2004 and 2003, the Company contributed $2,705 and $0
to the Plan.
Incentive stock option and employee stock purchase plans
At its 1999 Annual Stockholder Meeting, the shareholders adopted an Incentive
Stock Option Plan under which its Board of Directors had the ability to grant
its employees, directors and affiliates Incentive Stock Options, non-statutory
stock options and other forms of stock-based compensation, including bonuses or
stock purchase rights. Incentive Stock Options, which provided for preferential
tax treatment, were only available to employees, including officers and
affiliates, and were not issued to non-employee directors. The exercise price
of the Incentive Stock Options is 100% of the fair market value of the stock on
the date the options were granted. Pursuant to our plan, the exercise price for
the non-statutory stock options were not less than 85% of the fair market value
of the stock on the date the option was granted. The Company is required to
reserve an amount of common shares equal to the number of shares, which may be
purchased as a result of awards made under the Plan at any time.
At the 2000 Annual Stockholder Meeting, the shareholders approved an amendment
to the Stock Option Plan of 1999, increasing the number of shares eligible for
issuance under the Plan to 30% of the then outstanding common stock to 4,184,698
and allowing the Board of Directors to make annual adjustments to the Plan to
maintain a 30% ratio to outstanding common stock at each annual meeting of the
Board of Directors. The Board, at its annual meetings in 2004 and 2003, made no
adjustment, as a determination was made that the number of shares then available
under the Plan was sufficient to meet the Company's needs.
At the 2004 Annual Stockholder Meeting, the shareholders approved the 2004 Stock
Option Plan authorizing options on 2,000,000 shares be set apart under this
plan. As of December 31, 2004, 6,184,698 shares were authorized for issuance
under both plans, 3,878,766 of which were subject to outstanding options and
awards. Shares issuable under the 1999 plan were registered with the U.S.
Securities & Exchange Commission on Form S-8. A Form S-8 registration statement
for shares issuable under the 2004 plan will be filed simultaneously with this
report.
During 2004, the Company issued non-statutory options to purchase 287,000 shares
to its independent directors for attendance at its 2003 Board of Directors
meetings. In addition to the Stock Option Plan of 1999, the shareholders
adopted the 1999 Employee Stock Purchase Plan with 1,000,000 shares reserved
under the plan and authorized the Board of Directors to make twelve consecutive
offerings of our common stock to its employees. The 1999 Employee Stock
Purchase Plan has been instituted and the first employees enrolled in the plan
in August 2003. The first shares of common stock were issued under the Plan in
February 2004. The exercise price for the Stock Purchase Plan will not be less
than 85% of the fair market value of the stock on the date the stock is
purchased. During 2004 and 2003 employees contributed $16,464 and $6,440 to the
employee stock purchase plan, and 14,010 and 0 shares were issued under the plan
as of December 31, 2004 and 2003, respectively. The 1999 Employee Stock
PAGE F-36
Purchase Plan was to expire in June 2005; however, the Board of Directors
extended the plan for another year at their Board meeting in November 2004.
STOCKHOLDERS' EQUITY
Convertible preferred stock
On August 25, 2004, the Company entered into a Securities Purchase Agreement
with the Laurus Master Fund, Ltd., whereby the Company issued 250,000 shares of
its Series C Non-Redeemable Convertible Preferred Stock, par value $0.001 per
share (the "Preferred Stock"), to Laurus for an aggregate purchase price of
$2,500,000 or $10.00 per share (the "Stated Value"). The preferred shares are
convertible into shares of the Company's $0.0001 par value common stock at a
rate of $1.54 per share at any time after the date of issuance, and pay
quarterly, cumulative dividends at a rate of 6.85% with the first payment due on
January 1, 2005. As of December 31, 2004, approximately $61,000 has been
accrued for dividends and are payable in cash or shares of our common stock at
the holder's option with the exception that dividends must be paid in shares of
our common stock for up to 25% of the aggregate dollar trading volume if the
fair market value of the Company's common stock for the 20-days preceding the
conversion date exceeds 120% of the conversion rate. The preferred shares are
redeemable by the Company in whole or in part at any time after issuance for (a)
115% of the Stated Value if the average closing price of the common stock for
the 22 days immediately preceding the date of conversion does not exceed the
conversion rate or (b) the Stated Value if the average closing price of our
common stock for the 22 days immediately preceding the date of conversion
exceeds the Stated Value. The preferred shares have a liquidation right equal to
the Stated Value upon the Company's dissolution, liquidation or winding-up. The
preferred shares have no voting rights.
In conjunction with the Preferred Shares, the Company issued a five-year common
stock purchase warrant to Laurus for the purchase of 487,000 shares of the
Company's common stock at an exercise price of $1.77 per share. The Company
registered all of the shares of its common stock underlying the Preferred Shares
and the warrant, as well as an estimated number of shares payable as dividends
on the Preferred Shares, for resale.
Common stock
During 2004 and 2003, the Company issued 0 and 7,500 shares, respectively, of
its common stock for employee awards and services and for summer and student
interns, and recorded expenses of $0 and $9,170, respectively. The fair value
of the shares issued was calculated using the closing price on the date of
issuance.
On November 5, 2000, the Company commenced a private placement offering (PPO)
for a maximum of 1,000,000 shares of the Company's $0.0001 par value common
stock and warrants to purchase an additional 1,000,000 shares of common stock
(the "Units"). The offering price of the Unit(s) was the five-day average of
the bid and ask price for the Company's common stock on the date of issuance,
with a minimum per Unit price of $1.00. The warrants allowed the holder to
acquire additional shares at $0.50 above the offering price of the shares. The
Company sold to one related-party investor under these terms.
On March 2, 2001, the PPO price was amended to the average of the high bid
prices on the date of issuance and four preceding days, with no minimum per
share price, and the warrants were amended to allow the holder to acquire
additional shares at the Unit price.
The Company sold 153,060 Units under the PPO during 2002 for $75,000.
On January 16, 2003 and February 14, 2003, pursuant to an extension of the PPO,
the Company sold 665,188 and 196,079 Units, respectively. The Company received
approximately $326,000 and $100,000, respectively, for the Units sold under the
PPO during the first quarter 2003. The PPO was subsequently closed.
Warrants
Concurrent with the issuance of the convertible debentures from October 2002
through November 2002, the Company issued to subscribers warrants to purchase up
to 1,229,705 shares of the Company's common stock. On September 5, 2003, the
Company repaid one-half of the convertible notes, with the condition that the
note holders would convert the other half. As a condition of the partial
repayment, the note holders were required to relinquish one-half of the
previously issued warrants reducing the total warrants issued under the
convertible debt program to 614,853.
PAGE F-37
These warrants are exercisable for three (3) years from the date of issuance at
the initial exercise price, which is equal to the 20-day average asking price
less 10% established when the notes were issued. Upon issuance the warrants were
valued using the Black-Scholes pricing model based on the expected fair value at
issuance and the estimated fair value was also recorded as debt discount. As of
December 31, 2004, all of the warrants under the convertible debt program had
been converted and the Company received $237,500 in cash and expensed $773,802
in non-cash loan fees. As of December 31, 2004, the Company had other warrants
outstanding issued as part of its private placement and other equity raising
ventures as well as services that allow the holders to purchase up to 2,363,827
shares of common stock at prices between $0.435 and $2.79 per share. The
warrants may be exercised any time within three (3) and five (5) years of
issuance.
Stock options
On November 21, 1997, the Company entered into a five (5) year employment
agreement with its CEO. As part of the employment agreement, the Company
granted options to the CEO to purchase up to 2,500,000 shares of the Company's
$0.0001 par value restricted common stock.
The options are subject to the following vesting conditions, which were amended
on January 21, 2000, with an option for the board to award an additional
1,500,000 options at a later date:
Exercise
Number price per
of Shares Vesting Conditions share
---------------- --------- ----------------------------------------------------------- -----------------
Granted Options:
500,000. . . . . Currently vested $ 1.00
500,000. . . . . Obtaining $6,500,000 additional equity capital $ 1.50
500,000. . . . . Financing and executing a definitive space launch agreement $ 2.00
500,000. . . . . Launching of first lunar or deep-space mission $ 2.50
500,000. . . . . Successful completion of first lunar or deep-space mission $ 3.00
Options to be
Granted upon
the Occurrence
of Certain Events:
250,000. . . . . Upon the Company market capitalization reaching $250 million $ 5.00
500,000. . . . . Upon the Company market capitalization reaching $500 million $ 10.00
750,000. . . . . Upon the Company market capitalization reaching $1 billion $ 20.00
---------------- --------- ----------------------------------------------------------- -----------------
All options expire ten (10) years from date of amendment.
In accordance with APB 25, the Company recognized $500,000 of compensation
expense and $250,000 of deferred compensation in 1997. The options granted to
the CEO are subject to vesting conditions and have exercise prices between $1.00
and $3.00 per share.
On August 27, 2001, as part of an annual review process, an additional 10,000
options were granted to the CEO at the exercise price of $0.9469 per share with
a set vesting schedule of 3,333 shares per year after issuance with the third
year having 3,334 options vest. These options expire five (5) years from grant
date.
PAGE F-38
The following summarizes stock option activity related to all of the option plan
and employee compensation agreements:
Weighted
Options Average
Outstanding Exercise Prices
---------------------------- ------------ -----------------
Balance at January 1, 2003 . 5,448,772 $ 0.91
Granted. . . . . . . . . . . 1,219,615 0.76
Exercised. . . . . . . . . . (37,000) (0.53)
Expired. . . . . . . . . . . (1,006,580) (0.52)
---------------------------- ------------ -----------------
Balance at December 31, 2003 5,624,807 1.39
Granted. . . . . . . . . . . 2,218,500 1.23
Exercised. . . . . . . . . . (1,005,035) (1.26)
Expired. . . . . . . . . . . (459,506) (1.04)
---------------------------- ------------ -----------------
Balance at December 31, 2004 6,378,766 $ 1.50
---------------------------- ------------ -----------------
---------------------------- ------------ -----------------
The weighted average fair value of options granted to employees under the 1999
Incentive Stock Option Plan and the 2004 Equity Incentive Plan during 2004 and
2003 was $1.23 and $0.76, respectively. At December 31, 2004 and 2003, there
were 1,900,460 and 2,266,520 options exercisable at a weighted average exercise
price of $0.83 and $1.05 per share, respectively. The weighted average
remaining life of outstanding options under the plan at December 31, 2004 was
4.40 years.
Weighted-Average Weighted-
Range of . . Remaining Contractual Average Exercisable Price
Exercise . . Number of Shares Life of Shares Number of Shares Exercisable
Price . . . . Outstanding Outstanding Exercisable Price
------------ --------------------- ------------------------- ----------------- ------------
0.42-0.99 . 2,317,413 3.92 1,036,607 $ 0.64
1.00-1.99. 2,459,131 4.53 861,631 1.05
2.00-2.99. 1,102,222 5.11 2,222 2.25
3.00-3.50. 500,000 5.05 - -
------------ --------------------- ------------------------- ----------------- ------------
6,378,766. . 4.40 1,900,460 $ 0.83
------------ --------------------- ------------------------- ----------------- ------------
------------ --------------------- ------------------------- ----------------- ------------
The Company has elected to account for its stock-based compensation plans under
APB 25. However, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during 2004 and 2003 using the minimum value
method as prescribed by SFAS No. 123. Under this method, the Company used the
risk-free interest rate at date of grant, the expected volatility, the expected
dividend yield and the expected life of the options to determine the fair value
of options granted. The risk-free interest rates ranged from 6.0% to 6.5%;
expected volatility of 117% and the dividend yield was assumed to be zero, and
the expected life of the options was assumed to be three to five years based on
the average vesting period of options granted.
COMMITMENTS AND CONTINGENCIES
Capital leases
The Company leases certain equipment under non-cancelable capital leases, which
are included in fixed assets as follows:
December 31,. . . . . . . . . 2004 2003
----------------------------- ---------- ----------
Computer equipment. . . . . . $ 153,097 $ 153,097
Less accumulated depreciation (136,640) (103,857)
$ 16,457 $ 49,240
----------------------------- ---------- ----------
----------------------------- ---------- ----------
PAGE F-39
Future minimum lease payments are as follows:
Year Ending December 31, 2004
--------------------------------------- --------
2005. . . . . . . . . . . . . . . . . . $ 4,425
2006. . . . . . . . . . . . . . . . . . 1,526
2007. . . . . . . . . . . . . . . . . . -
2008. . . . . . . . . . . . . . . . . . -
Thereafter. . . . . . . . . . . . . . . -
--------------------------------------- --------
Total minimum lease payments. . . . . . 5,951
Amount representing interest. . . . . . 698
--------------------------------------- --------
Present value of minimum lease payments 5,253
Total obligation. . . . . . . . . . . . 5,253
Less current portion. . . . . . . . . . (3,784)
--------------------------------------- --------
Long-term portion . . . . . . . . . . . $ 1,469
--------------------------------------- --------
--------------------------------------- --------
Other accrued liabilities
During 2004 and 2003, the Company accrued expenses in connection with current
projects, our preferred stock sale, and other commitments. The total of these
accruals were $207,262 and $248,530 as of December 31, 2004 and 2003,
respectively.
In November 2002, the Company entered an agreement to sell its interest in its
only facility. The transaction closed in January 2003. The escrow transaction
included the sale of the land and building at 13855 Stowe Drive, Poway, CA
92064. The fees that were incurred for the sale of the building were $121,311
and were recorded as other accrued liabilities. The fees include broker fees,
escrow and title fees and property taxes.
Building lease
In conjunction with the sale of its only facility, the Company entered into a
non-cancelable operating lease with the buyer to lease-back its facilities for
ten (10) years (see Note 2). The base rent was $25,678 per month at lease
inception and is currently $26,577 as of December 31, 2004 and will continue to
increase by 3.5% per year. Mr. Benson, the Company's current chief executive
officer, provided a guarantee for the leaseback.
CONCENTRATIONS
Credit risk
The Company maintains cash balances at various financial institutions primarily
located in San Diego, California and New York, New York. The accounts at these
institutions are secured by the Federal Deposit Insurance Corporation up to
$100,000. The Company has not experienced any losses in such accounts.
Customer
During 2004 and 2003, the Company had two and three major customers that
accounted for sales of approximately $3,737,000, or 76% and $1,782,600 or 60% of
consolidated revenue, respectively. At December 31, 2004 and 2003, the amount
receivable from these customers was approximately $612,900 and $160,200,
respectively.
Contract
In November 1999, the Space Missions Division was awarded a turnkey mission
contract by the Space Sciences Laboratory at the University of California at
Berkeley worth as of December 31, 2002 approximately $7.2 million, including two
change orders worth approximately $412,000 on June 12, 2002 and October 7, 2002.
This contract represented 14% of the Company's revenue in 2003. The contract
concluded on December 31, 2003.
PAGE F-40
STARSYS RESEARCH CORPORATION
BALANCE SHEET
(UNAUDITED)
9 MONTHS ENDED
9/30/05
CURRENT ASSETS
----------------------
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 216,934
Contract Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,555,507
Accounts Receivable - Other . . . . . . . . . . . . . . . . . . . . . . . . 44,270
C/P of Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 80,194
Income Tax Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 365,508
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts 2,095,781
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311,649
Prepaid Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,440
Deferred Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236,025
------------
5,997,308
------------
FIXED ASSETS
----------------------
Property Plant and Equipment. . . . . . . . . . . . . . . . . . . . . . . . 3,813,551
Less Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . (1,782,111)
------------
2,031,440
OTHER ASSETS
----------------------
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,469
------------
26,469
------------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,055,217
------------
------------
CURRENT LIABILITIES
----------------------
Accounts Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,291,739
Current Portion of Notes Payable. . . . . . . . . . . . . . . . . . . . . . 6,014,536
Current Portion of Capital Lease Obligations. . . . . . . . . . . . . . . . 33,998
Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts 1,073,751
Accrued Wages and Benefits. . . . . . . . . . . . . . . . . . . . . . . . . 1,079,268
Other Accrued Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 451,586
Reserve for Loss on Contracts . . . . . . . . . . . . . . . . . . . . . . . 1,603,482
------------
11,548,360
COMMITMENTS AND CONTINGENCIES
----------------------
STOCKHOLDERS' DEFICIT
----------------------
Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520
Additional Paid in Capital. . . . . . . . . . . . . . . . . . . . . . . . . 51,886
Accumulated Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,545,549)
------------
(3,493,143)
------------
Total Liabilities and Stockholders' Deficit . . . . . . . . . . . . . . . . $ 8,055,217
------------
------------
PAGE F-41
STARSYS RESEARCH CORPORATION
STATEMENT OF OPERATIONS
(UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
Revenues
----------------------------
Contract Revenues. . . . . . $ 13,597,334 $ 12,389,762
Cost of Revenues . . . . . . 11,087,931 15,023,140
-------------------- --------------------
Gross Margin (Loss). . . . . 2,509,403 (2,633,378)
---------------------------- -------------------- --------------------
Operating Expenses
----------------------------
General & Administrative . . 3,572,194 2,882,739
-------------------- --------------------
Other Income (Expense)
----------------------------
Rental Income. . . . . . . . 3,250 4,672
Other Income . . . . . 75,998 14,190
Interest Expense . . . . . . (378,513) (177,519)
-------------------- --------------------
Total Other Income (Expense) (299,265) (158,657)
-------------------- --------------------
Loss Before Income & Taxes . (1,362,056) (5,674,774)
----------------------------
Income Tax Provision . . . . - -
-------------------- --------------------
Net Loss . . . . . . . . . . $ (1,362,056) $ (5,674,774)
---------------------------- -------------------- --------------------
-------------------- --------------------
PAGE F-42
STARSYS RESEARCH CORPORATION
STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . . . $ (1,362,056) $ (5,674,774)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 354,386 285,341
Effects of changes in operating assets and liabilities:
Contracts receivable. . . . . . . . . . . . . . . . . . 1,084,460 1,703,023
Accounts receivable - employees and other . . . . . . . (4,374) (68,811)
Income taxes receivable . . . . . . . . . . . . . . . . (48,494) -
Costs and estimated earnings in excess of billings
on uncompleted contracts. . . . . . . . . . . . . . . 995,855 1,270,552
Inventory . . . . . . . . . . . . . . . . . . . . . . . (33,924) 6,696
Prepaid expenses. . . . . . . . . . . . . . . . . . . . (44,702) 19,079
Deferred expenses . . . . . . . . . . . . . . . . . . . (81,831) (447,105)
Deposits. . . . . . . . . . . . . . . . . . . . . . . . - (7,000)
Accounts payable. . . . . . . . . . . . . . . . . . . . (42,268) (7,395)
Accrued wages and benefits. . . . . . . . . . . . . . . 250,230 409,453
Billings in excess of costs and estimated earnings
on uncompleted contracts. . . . . . . . . . . . . . . (1,021,148) 1,011,825
Other accrued expenses. . . . . . . . . . . . . . . . . 68,811 188,194
Reserve for loss on contracts in progress . . . . . . . (1,078,430) 1,972,070
Income taxes payable. . . . . . . . . . . . . . . . . . (31,643) (220,296)
-------------------- --------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES . . (995,128) 440,852
CASH FLOWS FROM INVESTING ACTIVITIES
Payments received on notes receivable . . . . . . . . 10,574 -
Purchases of property & equipment . . . . . . . . . . (227,561) (336,831)
-------------------- --------------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . (216,987) (336,831)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capitalized lease obligations . . (457,983) (167,412)
Proceeds from revolving credit facility . . . . . . . . 6,437,472 3,933,343
Payments to revolving credit facility . . . . . . . . . (5,387,912) (3,753,982)
Proceeds on notes payable - stockholder . . . . . . . . 823,333 -
-------------------- --------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . 1,414,910 11,949
-------------------- --------------------
NET INCREASE IN CASH. . . . . . . . . . . . . . . . . . 202,795 115,970
CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . 14,139 712
-------------------- --------------------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . $ 216,934 $ 116,682
-------------------- --------------------
-------------------- --------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . $ 657,799 $ 177,519
Income Taxes. . . . . . . . . . . . . . . . . . . . . . - -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Loan premium on notes payable - stockholders. . . . . . $ 80,000 $ -
Agency fee on SpaceDev loan . . . . . . . . . . . . . . $ 120,000 $ -
Borrowings on capital lease obligations . . . . . . . . $ - $ 327,360
PAGE F-43
NOTES TO CONDENSED FINANCIAL STATEMENTS
Starsys Research Corporation (the "Company") was incorporated in the State
of Colorado on April 6, 1988. The Company specializes in contract production of
spacecraft mechanisms, actuators and structures for commercial and government
customers. The Company grants credit to its customers, which are located in the
United States. Significant accounting policies followed by the Company are
presented below.
BASIS OF PRESENTATION
In the opinion of management, the financial statements reflect all normal
and recurring adjustments, which are necessary for a fair presentation of the
Company's financial position, results of operations and cash flows as of the
dates and for the periods presented. The financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Consequently, these statements may not include all
disclosures normally required by generally accepted accounting principles of the
United States of America for annual financial statements nor those normally made
in an Annual Report on Form 10-KSB. Accordingly, reference should be made to
the Company's audited financial statements included in this prospectus for
additional disclosures, including a summary of the Company's accounting
policies, which have not materially changed. The results of operations for the
nine month periods ended September 30, 2005 and 2004 are not necessarily
indicative of results that may be expected for the fiscal year ended December
31, 2005 or any future period, and the Company makes no representations related
thereto.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates included in these financial statements relate to revenue
recognition on uncompleted contracts, billings in excess of costs and estimated
earnings and costs on uncompleted contracts and estimated earnings in excess of
billings on uncompleted contracts (see Note 3). Revisions in estimated contract
profits and losses are made in the period in which circumstances requiring the
revision become known. The effect of changes in estimates of contract profits
and losses on contracts in process at September 30, 2005 was to increase the net
loss for the nine months ended September 30, 2005 and 2004, by approximately
$965,000 and $1,972,00, respectively, from that which would have been reported
had the revised estimate been used as the basis of recognition of contract
profits and losses in the preceding period. The amount of this change includes
effects of changes in estimates and change orders subsequent to September 30,
2005.
ACCOUNTS RECEIVABLE
Accounts receivable are uncollateralized customer obligations which
generally require payment within thirty days from the invoice date. Accounts
receivable are stated at the invoice amount. Notes receivable are stated at
principal plus accrued interest.
Account balances with invoices over ninety days old are considered delinquent.
Payments of accounts receivable are applied to the specific invoices identified
on the customer's remittance advice or, if unspecified, to the earliest unpaid
invoices. Payments of notes receivable are allocated first to unpaid interest
with the remainder to the outstanding principal balance.
The carrying amount of accounts receivable is reduced by a valuation allowance
if necessary that reflects management's best estimate of amounts that will not
be collected. At September 30, 2005, management recorded an allowance of
$17,500 for future estimates of uncollectible accounts. If there is a
deterioration of a major customer's credit worthiness or actual defaults are
higher than the historical experience, management's estimates of the
recoverability of amounts due the Company could be affected.
REVENUE AND COST RECOGNITION
The accompanying financial statements are prepared according to the
"percentage-of-completion" method of accounting for long-term contracts. The
amount of revenues recognized is that portion of the total contract amount that
the actual cost expended bears to the anticipated final total cost based on
current estimates of cost to complete the project (cost-to-cost method).
PAGE F-44
If final total cost is anticipated to exceed the contract amount, the
excess of cost over contract amount is immediately recognized as a loss on the
contract. Recognition of profit commences on an individual project only when
cost to complete the project can reasonably be estimated and after there has
been some meaningful performance achieved on the project. Changes in job
performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions (when applicable), and final contract
settlements may result in revisions to costs and income and are recognized in
the period in which the revisions are determined.
Contract costs include all direct material, direct labor and sub-contractor
costs, other costs such as supplies, tools and travel which are specifically
related to a particular contract. All other selling, general and administrative
costs are expensed as incurred.
The current asset reflected on the balance sheet as "Costs and estimated
earnings in excess of billings on uncompleted contracts" represents revenues
recognized in excess of amounts billed.
The current liability reflected on the balance sheet as "Billings in excess
of costs and estimated earnings on uncompleted contracts" represents billings in
excess of revenues recognized.
INVENTORIES
Inventories consist of supplies or other finished products not yet charged
to a contract and are stated at the lower-of-cost or market with cost determined
using an average-cost method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization,
which include amortization of property under capital leases, are provided by use
of the straight-line and accelerated methods over the estimated useful lives of
the related assets. Accelerated depreciation methods are used for income tax
reporting purposes. Total depreciation expense for the nine months ended
September 30, 2005 and 2004, was $308,580 and $285,341 respectively.
During the nine months ended September 30, 2005, and in conjunction of the
paydown of the capital leases (see Notes 5 and 6), the Company reclassified
these assets from equipment under capital leases to facility equipment. The
Company will also depreciate the remaining net book value of these assets over
their useful lives ranging between 3 and 7 years, and in conjunction with its
internal policies.
DEFERRED EXPENSES
During the nine months ended September 30, 2005, the Company borrowed funds
from four of its stockholders and from SpaceDev, Inc. ("SpaceDev") to meet the
Company's obligations under its agreement with its current bank (see Note 5). In
conjunction with these borrowings, the Company agreed to pay an $80,000 premium
and a $120,000 agency fee, respectively. The Company is amortizing the costs
associated with the loan premiums over the expected terms of the loan
agreements. As of September 30, 2005, the Company has recognized interest
expense of $45,806 in connection with the amortization of the loan premium. As
of September 30, 2005, the Company has deferred the remainder of these costs. In
conjunction with the expected closing of the Merger (as defined in Note 1) with
SpaceDev, the Company has recorded as deferred expenses an additional $81,831 of
closing costs.
PRODUCT WARRANTY
The Company warrants its products against defects in workmanship. The
Company has accrued $72,123 for warranty claims at September 30, 2005. The
accrual is based on an estimate of the cost to be incurred based on the claims
received and historical experience (see Note 10).
INCOME TAXES
Deferred income taxes are provided for temporary differences in the
recognition of depreciation expense for financial reporting and income tax
reporting purposes, tax credit carryforwards and for reserves for contract
losses.
PAGE F-45
STOCK OPTION PLAN
The Company has a stock-based employee compensation plan which is described
more fully in Note 7. The Company accounts for this plan under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and Related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under this plan had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income if the
Company had applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation for the nine months ended September 30, 2005 and 2004:
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
-------------------- --------------------
Net loss - as reported. . . . . . . $ (1,362,056) $ (5,674,774)
Deduct: total stock-based employee
compensation expense
determined under fair value
based method for all awards . . . (3,000) (3,000)
-------------------- --------------------
Estimated net loss - pro forma. . . $ (1,365,056) $ (5,677,774)
-------------------- --------------------
-------------------- --------------------
In December 2004, The Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards No. 123 (Revised), "Shared-Based
Payment" (SFAS 123R). This standard revises SFAS No. 123, Accounting Principles
Board Option 25 and related interpretations, and eliminates use of the intrinsic
value method of accounting for stock options. The Company currently uses the
intrinsic value method to value stock options, and, accordingly, no compensation
expense has been recognized for stock options. SFAS 123R requires that all
employee share-based payments to employees, including stock options, be valued
using a fair-value-based method and recorded as expense in the statement of
operations. For the Company, SFAS 123R will first be effective for its first
reporting period after January 1, 2006. This new Statement will not affect
accounting for the Company's stock options currently outstanding, but it will
affect financial statement disclosures about those stock options, and it will
change the accounting for stock options issued in future years.
NOTE 1 - FUTURE OPERATIONS OF THE COMPANY
The Company incurred a net loss of $1,362,056, for the nine months ended
September 30, 2005 and has a stockholders' deficit of $3,545,549 as of September
30, 2005. The Company also has negative working capital at September 30, 2005
of $5,551,052. The Company is also in default of certain covenants with its
current lender. Management of the Company intends to fund 2005 operations
primarily through revenues generated by product sales and additional debt and
additional equity investment (see Note 5). The Company's future operations are
dependent upon the profitability of the Company's contracts and related revenues
generated and its efforts to raise additional capital. If the Company does not
achieve expected revenue levels or receive sufficient additional funding to meet
its requirements with its lender, the Company's lender is entitled to appoint a
receiver to protect the lender's collateral including the right to operate the
Company's business (see Note 5).
On August 23, 2005, the Company entered into a non-binding letter of intent
to sell the shares of the Company's stock (the "Letter of Intent") to SpaceDev,
a publicly traded company (the "Merger"). The Letter of Intent projected a
closing on November 30, 2005. The Letter of Intent provides for consideration to
be paid at closing comprised of a cash payment of $1,500,000 and shares of
SpaceDev having an aggregate market value of $7,500,000. The Letter of Intent
also provides that SpaceDev will repay the remaining principal and interest of
the Company's credit facility with the current bank and any subordinated debt.
The Letter of Intent also provided that SpaceDev will provide the Company with a
bridge loan in the amount $1,200,000 prior to closing to comply with the bank's
requirements under the Forbearance Agreement. (See Note 5)
The Letter of Intent also provides for additional consideration to be paid
to the stockholders of the Company based upon results of the audited financial
statements for the years ending December 31, 2005, 2006 and 2007.
The accompanying financial statements do not include any adjustments as a
result of these uncertainties.
PAGE F-46
NOTE 2 - CONTRACT RECEIVABLES
Contract receivables consist of the following at September 30, 2005:
Billed
Completed contracts . . . . . . . . $ 122,972
Contracts in progress . . . . . . . 2,450,035
-----------
2,573,007
Less allowance for doubtful accounts (17,500)
-----------
TOTAL CONTRACTS RECEIVABLES. . . . . $2,555,507
-----------
-----------
Billed contract receivables consist of the following at September 30, 2005:
Billed commercial. . . . . . . . . $ 334,280
Billed governmental. . . . . . . . 2,238,727
----------
TOTAL BILLED CONTRACTS RECEIVABLES $2,573,007
----------
----------
NOTE 3 - CONTRACTS IN PROGRESS
Contracts in progress are summarized as follows at September 30, 2005:
Costs incurred on uncompleted contracts $ 44,635,503
Estimated earnings (loss) thereon . . . (4,281,006)
-------------
40,354,497
Less billings to date . . . . . . . . . (39,332,467)
-------------
TOTAL . . . . . . . . . . . . . . . . . $ 1,022,030
-------------
-------------
These amounts are reflected in the accompanying balance sheet under the
following captions at September 30, 2005:
Costs and estimated earnings in excess
of billings on uncompleted contracts. . . $ 2,095,781
Billings in excess of costs and estimated
earnings on uncompleted contracts . . . . (1,073,751)
------------
TOTAL . . . . . . . . . . . . . . . . . . $ 1,022,030
------------
------------
NOTE 4 - NOTES AND EMPLOYEE RECEIVABLES
Notes receivable at September 30, 2005, consist of notes due from employees
and existing stockholders, which total $80,194. The notes bear interest at 5.5%
and are due on demand. Total accrued interest on these notes was $9,141 at
September 30, 2005.
In addition, during the nine months ended September 30, 2005, the Company had
advanced amounts to various employees. Accounts receivable due from employees at
September 30, 2005 were $44,270. There were no signed note agreements for these
advances due to the short repayment terms of the advances.
NOTE 5 - NOTES PAYABLE
Notes payable consists of the following at September 30, 2005:
PAGE F-47
Line of credit agreement with bank; maximum of
4,250,000; interest at prime plus 3.5%; matures
December 15, 2005 . . . . . . . . . . . . . . . . . . . . . . $ 558,267
Two term notes for $2,100,000 and $1,250,000,
respectively; interest at 10.25% and LIBOR plus 8%
respectively; mature December 15, 2005. . . . . . . . . . . . . 3,157,445
Note payable to SpaceDev; interest at 8%
principal and interest is due at the earlier of the
close of the Merger or December 31, 2005.. . . . . . . . . . . . 1,369,044
Stockholder notes of $800,000 plus loan premium
of $80,000; interest at 15%; principal and unpaid
interest due on November 30, 2005. . . . . . . . . . . . . . . . 903,333
Note payable to Ford Motor Credit for asset
purchase, interest at 0%; monthly payments of
principal of $1,069; maturity at September 4,
2005; collateralized by equipment. . . . . . . . . . . . . . . . 1,069
Promissory note with former stockholder; maturity
at May 1, 2005; two equal payments of principal
and accrued interest at 10% are due May 1, 2005
and May 1, 2005; uncollateralized. . . . . . . . . . . . . . . . 25,378
------------
Total: . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,014,536
Less current portion . . . . . . . . . . . . . . . . . . . . . (6,014,536)
------------
LONG-TERM PORTION. . . . . . . . . . . . . . . . . . . . . . . $ -
------------
------------
All bank notes payable are also personally guaranteed by a stockholder and
director of the Company. The line of credit and term loan agreement contain
restrictive covenants relating to the financial position and operations of the
Company. The Company was in violation of certain covenants at September 30,
2005.
On March 30, 2005, the Company refinanced the line of credit, term loan,
and certain capital leases with a new bank. The refinancing included creation of
a new line of credit having a balance of $4,250,000, which interest accrues at a
prime rate plus 0.5% and matures March 30, 2006, a new term note A of $2,100,000
which accrues interest at 7.25% and matures April 1, 2010, and a new term note B
of $1,250,000 which accrues interest at LIBOR plus 5% and matures March 30,
2006.
On June 24, 2005, the Company entered into a Forbearance Agreement (the
"Agreement") for certain financial covenant and other violations under its
existing loans with its current bank. The Agreement was later amended on July
25, 2005 on November 7, 2005, and on December 20, 2005. The Agreement sets forth
default interest rates for the line of credit, term note A, and term note B,
which accrue interest at prime rate plus 3.5%, 10.25%, and at LIBOR plus 8%,
respectively. The amended Agreement requires the Company to raise the necessary
capital to bring the Company in compliance with its borrowing base and other
financial covenants. The Company's obligations under the amended Agreement
include, but are not limited to, the following:
- On or before July 26, 2005, the Company shall receive a minimum of
$800,000 of additional cash equity.
- On or before September 8, 2005, the Company shall receive an
additional minimum of $1,200,000 of cash equity.
PAGE F-48
- On or before January 31, 2006, the Company shall receive a minimum of
$4,000,000 of additional cash equity.
The total amount of cash equity the Company is required to obtain on or
before January 31, 2006 is at least $6,000,000. The amended Agreement also
requires the Company to provide the bank a "Letter of Intent" by July 26, 2005
from a bona fide third party for the purchase of all or a portion of the
Company's assets. The Agreement also accelerates and amends the maturity date of
term note B from March 30, 2006 to the earlier of the required cash equity
amounts received or January 31, 2006.
Any default under the Agreement constitutes a default under the existing
loan agreements with the bank and the bank shall be entitled to appoint a
receiver to preserve and protect the bank's collateral, including the right to
operate the Company's business. Any such receivership will continue until the
Company's obligations under the Agreement have been satisfied in full. The
Company did receive minimum proceeds of $800,000 and a Letter of Intent to
comply with the amended Agreement as noted below.
The Company has not closed the Merger with SpaceDev and has not received
the additional $4,000,000 minimum cash equity required under the terms of the
aforementioned lending agreement. As such, on December 20, 2005 the Company
entered into a Fourth Amendment to the Forbearance Agreement (the "Fourth
Amendment"). The Fourth Amendment included the following modification to the
Agreement:
- The Company must obtain the additional $4,000,000 minimum cash equity
required "Equity Infusion" on or before January 31, 2006.
- The term note B maturity date is modified and amended to be the earlier of
the date the Company obtains the Equity Infusion, or January 31, 2006.
During the nine months ended September 30, 2005, the Company issued notes
payable to four of its stockholders in the amount of $800,000. These notes bear
interest at 15% per annum. These notes plus the loan premium (see Deferred
Expenses) and any unpaid principal and accrued interest are due on the earlier
of July 22, 2006 or the closing of the Merger.
On September 8, 2005, the Company issued a secured promissory note in the
principal amount of $1.2 million to SpaceDev. The note, as amended on December
20, 2005, accrues interest at 8% per annum and matures on January 31, 2006 or
earlier in certain circumstances. No principal or interest payments are due
before maturity. The maturity date may be accelerated upon the occurrence of
certain events of default. The loan is secured by a security interest in all of
the assets of Starsys, subject to an intercreditor agreement with the Company's
current bank. In addition, the Company has agreed to pay SpaceDev a placement
agent fee and to reimburse the Company expenses in the aggregate amount of
$120,000. This amount was added to the principal balance of the note evidencing
the loan but will be forgiven in certain circumstances, including the closing of
the Merger.
NOTE 6 - LEASES
The Company leases certain equipment and software under capital leases
which expire at various times through 2006. Accumulated depreciation for these
assets presented as capital leased assets was $19,807 at September 30, 2005.
During the nine months ended September 30, 2005, the Company extinguished its
debt on all but one of these capital leases and reclassified the assets from
capital assets to facility equipment. The Company leases its facility and
office equipment under various non-cancelable operating leases which expire
through 2007. The Company also leases certain equipment under month-to-month
leases.
Minimum rental commitments under these leases are as follows at September
30, 2005:
PAGE F-49
CAPITAL OPERATING
LEASES LEASES
YEAR ENDING DECEMBER 31,
2005 . . . . . . . . . . $ 9,197 $ 104,212
2006 . . . . . . . . . . 27,590 416,497
2007 . . . . . . . . . . - 38,578
--------- -----------
36,786 $559,287
-----------
-----------
Less interest. . . . . . (2,788)
---------
33,998
Less current portion . . (33,998)
---------
LONG TERM PORTION. . . . $ -
---------
---------
Total rent expense for the nine months ended September 30, 2005 was
$499,844. This amount includes normal operating expenses paid with the leases.
The Company is also subleasing a portion of its facilities under various
month-to-month subleases. Total sublease and other rental income was $3,250 for
the nine months ended September 30, 2005.
The Company paid down certain capital leases on March 30, 2005. The balance
of the remaining capital lease obligations at September 30, 2005 was $33,998.
NOTE 7 - STOCKHOLDERS' EQUITY
STOCK OPTION PLAN
The Company adopted a Stock Option Plan in 1998 which provides for the
granting of incentive stock options to employees and nonstatutory stock options
to directors and consultants of the Company as selected by the Board of
Directors. The maximum number of shares authorized to be granted under the plan
is 160,000. The options are exercisable at a price as determined and authorized
by the Board of Directors. The options generally expire at 10 years from the
date of grant.
In 1998, the Company adopted the disclosure - only provisions of Statement
of Financial Accounting Standards No. 123 for Stock-Based Compensation ("SFAS
123"). SFAS 123 encourages entities to adopt a fair value-based method of
accounting for employee stock compensation plans, but allows companies to
continue to account for those plans using the accounting prescribed by APB
Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company
has elected to continue to account for stock based compensation using APB 25,
making pro forma disclosures of net earnings as if the fair value-based method
had been applied. Accordingly, no compensation expense has been recorded for the
stock option plan.
The fair value of each option granted is estimated on the date of grant
using the minimum value option-pricing model with the following weighted average
assumptions:
Expected dividend yield 0%
Expected stock price volatility 0%
Risk-free interest rate 4.2% to 6.7%
Expected life of options 10 years
PAGE F-50
Incentive stock option transactions are summarized as follows:
WEIGHTED AVERAGE
INCENTIVE STOCK EXERCISE PRICE
OPTION SHARES PER SHARE
---------------- ---------------
OUTSTANDING, AT DECEMBER 31, 2004. 106,080 $ 9.64
Options granted. . . . . . . . . . - -
Options expired. . . . . . . . . . - -
Options forfeited. . . . . . . . . (3,694) 8.80
Options exercised. . . . . . . . . - -
---------------- ---------------
OUTSTANDING, AT SEPTEMBER 30, 2005 102,386 $ 9.61
---------------- ---------------
---------------- ---------------
The following table summarizes information concerning outstanding and
exercisable options at September 30, 2005:
Weighted Outstanding Exercisable
Average Weighted Weighted
Range of Remaining Average Average
Option Exercise Number Contractual Exercise Number Exercise
Type Price Outstanding Life (years) Price Exercisable Price
Incentive $7.11-$15.30 102,386 5 $ 9.61 102,049 $ 9.61
The number exercisable and the exercisable weighted average exercise price
per share are based upon the vesting schedules for the individual options.
AUTHORIZED STOCK
On October 29, 2004, the Company amended its articles of incorporation to
increase the number of shares of common stock it is authorized to issue from
1,000,000 to 25,000,000 at $.001 par value and to authorize the issuance of up
to 10,000,000 shares designated as preferred stock with no par value. There
were no shares of preferred stock issued or outstanding at September 30, 2005.
NOTE 8 - RETIREMENT PLAN
The Company maintains an Employees' 401(k) and Stock Bonus Plan which gives
employees the opportunity to save a portion of their pre-tax wages for
retirement. Employees are eligible to participate in the Company's 401(k) Plan
upon date of hire. In addition to the participant's contribution to the plan,
the Company may make discretionary profit sharing and discretionary matching
401(k) contributions under the plan. The discretionary profit sharing
contributions are currently paid 50% to the employee and 50% is accrued for
conversion into shares of stock in the Company based on the employee's
respective contributions received under the plan. For the nine months ended
September 30, 2005, the Company made no discretionary profit sharing
contributions. The Company accrued discretionary matching 401(k) contributions
for the period ended September 30, 2005 in the amount of $19,468.
The total number of shares of the Company's stock allocated to and held by
the plan was 36,611 at September 30, 2005. Any dividends paid on the plan shares
are charged to retained earnings as the Company has an accumulated deficit.
The Stock Bonus Plan provides a put option whereby terminated participants
may elect to sell and require the Company to redeem the participant's vested
common shares at their fair market value. The Company was not required to redeem
any of the vested shares during the period ended September 30, 2005.
PAGE F-51
NOTE 9 - INCOME TAXES
The sources of deferred tax assets and the tax effect of each at September
30, 2005 is as follows:
Deferred tax assets:
Accrued expenses . . . . . . . . . . . . . . . . . $ 278,100
Reserve for loss on contracts in progress. . . . . 619,400
Research and development credit carryforward . . . 1,533,600
Federal and State net operating loss carryforwards 1,451,900
Valuation allowance for deferred tax assets. . . . (3,445,200)
------------
TOTAL DEFERRED TAX ASSETS . . . . . . . . . . . . . 437,800
Deferred tax liability:
Tax over financial statement depreciation. . . . . (437,800)
------------
NET DEFERRED TAX ASSETS . . . . . . . . . . . . . . $ -
------------
------------
The deferred tax asset is presented in the accompanying balance sheet at
September 30, 2005 as follows:
Current deferred tax asset. . . . $ 897,500
Noncurrent deferred tax asset . . 2,985,500
Noncurrent deferred tax liability (437,800)
Less: Valuation allowance. . . . (3,445,200)
------------
NET DEFERRED TAX ASSET. . . . . . $ -
------------
------------
The (provision) benefit for income taxes at September 30, 2005 and
September 30, 2004 consists of the following:
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
----------------------------------------------- ------------------- -------------------
Current . . . . . . . . . . . . . . . . . . . . $ - $ -
Deferred. . . . . . . . . . . . . . . . . . . . - -
Benefit of Federal net operating loss carryback - -
------------------- -------------------
TOTAL . . . . . . . . . . . . . . . . . . . . . $ - $ -
------------------- -------------------
------------------- -------------------
The Company's provision for income taxes differs from the tax that would
result from applying statutory rates to income before income taxes primarily
because of state income taxes, nondeductible expenses, change in the valuation
allowance of $2,008,600 for the nine months ended September 30, 2005.
At September 30, 2005, the Company had estimated research and development
credit carryforwards of approximately $1,533,600 available to offset future
years' income taxes. These carryforwards begin to expire in 2022 to 2024. The
Company also had Federal and State net operating loss carryforwards of
approximately $3,546,000 and $5,315,000, respectively. These carryforwards begin
to expire in 2024.
Pursuant to Internal Revenue Code Section 382, the Company's use of its net
operating loss carryforwards may be limited as a result of cumulative changes in
ownership of more than 50% over a three year period.
PAGE F-52
NOTE 10 - ACCRUED PRODUCT WARRANTY CLAIMS
The following is a reconciliation of changes in the accrued product
warranty claims liability included in other accrued expenses at September 30,
2005:
SEPTEMBER 30
--------------
BEGINNING BALANCE . . . . . . . . . . . . . . . . $ 72,123
Change in product warranties issued during period 7,730
Payments made in cash or in-kind. . . . . . . . . $ (7,730)
--------------
ENDING BALANCE. . . . . . . . . . . . . . . . . . $ 72,123
--------------
--------------
NOTE 11 - RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense when incurred. Total
research and development costs incurred for the nine months ended September 30,
2005 were $7,367,222. The Company records research and development costs
specific to projects to cost of goods sold. All other research and development
costs are expensed to general and administrative expenses.
NOTE 12 - SIGNIFICANT CONCENTRATIONS
Generally accepted accounting principles require disclosure of information
about current vulnerabilities due to certain concentrations. These matters
include the following:
REVENUES FROM MAJOR CUSTOMERS
For the nine months ended September 30, 2005, approximately 55% of the
Company's revenues were from four customers. At September 30, 2005, these
customers represented approximately 35% of total contract receivables.
NOTE 13 - BONUS AND ROYALTY OBLIGATIONS
The Company entered into an employment agreement and an independent
contractor agreement (the "Agreements") with former employees of ATC. The
Agreements contain certain provisions for bonus payments to be made to these
individuals. In the event of voluntary termination of either agreement by these
individuals, the Company is still obligated to pay 50% of the total bonuses to
the individuals. As such, $188,982, was accrued by the Company and must be paid
over a five-year term. This amount was recorded as the Company's bonus
obligation at September 1, 2000.
For the nine months ended September 30, 2005, the Company made $20,101 in bonus
payments. The accrued bonus obligation at September 30, 2005 was $32,559. The
Company also accrued royalties to the two individuals in the amount of $308,049
for the period ended September 30, 2005. During the nine months ended September
30, 2005, the Company received $30,010 of services from a company owned by one
of the individuals.
PAGE F-53
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Starsys Research Corporation
Boulder, Colorado
We have audited the accompanying balance sheets of Starsys Research Corporation
as of December 31, 2004 and 2003, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Starsys Research Corporation as
of December 31, 2004 and 2003, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered loss from operations and has a net capital
deficiency that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Denver, Colorado
July 31, 2005, except for Note 14 as to
which the date is August 23, 2005
PAGE F-54
STARSYS RESEARCH CORPORATION
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
ASSETS
DECEMBER 31 DECEMBER 31
------------- -------------
2004 2003
------------- -------------
Current assets:
Cash. . . . . . . . . . . . . . . . . . . $ 14,139 $ 712
Contract receivables. . . . . . . . . . . 3,639,966 4,996,159
Accounts receivable - employees and other 39,894 12,784
Current portion of notes receivable . . . 52,768 16,000
Income taxes receivable . . . . . . . . . 317,014 -
Costs and estimated earnings in excess of
billings on uncompleted contracts. . . . 3,091,636 5,008,187
Inventories . . . . . . . . . . . . . . . 277,725 208,434
Prepaid expenses. . . . . . . . . . . . . 46,738 91,772
Deferred income taxes . . . . . . . . . . 231,167 63,227
------------- -------------
Total current assets . . . . . . . . . . 7,711,047 10,397,275
------------- -------------
Property and Equipment:
Vehicles. . . . . . . . . . . . . . . . . 74,975 74,975
Facility equipment. . . . . . . . . . . . 1,045,104 226,241
Laboratory equipment. . . . . . . . . . . 351,898 317,857
Office equipment and furniture. . . . . . 312,774 286,405
Computer equipment. . . . . . . . . . . . 705,735 441,300
Leasehold improvements. . . . . . . . . . 36,041 18,517
Equipment under capital leases. . . . . . 1,059,464 806,455
------------- -------------
Total, at cost . . . . . . . . . . . . . 3,585,991 2,171,750
Less accumulated depreciation . . . . . . (1,476,530) (1,082,848)
------------- -------------
Total property and equipment . . . . . . 2,112,461 1,088,902
------------- -------------
Other Assets:
Notes receivable, less current
portion included above . . . . . . . . . 38,000 43,993
Deposits. . . . . . . . . . . . . . . . . 26,469 21,969
Deferred income taxes . . . . . . . . . . - 447,105
Goodwill. . . . . . . . . . . . . . . . . - 153,254
------------- -------------
Total other assets . . . . . . . . . . . 64,469 666,321
------------- -------------
Total assets . . . . . . . . . . . . . . $ 9,887,977 $12,152,498
------------- -------------
------------- -------------
PAGE F-55
STARSYS RESEARCH CORPORATION
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
DECEMBER 31 DECEMBER 31
------------- -------------
2004 2003
------------- -------------
Current liabilities:
Bank overdraft . . . . . . . . . . . . . . . . . . . . . $ - $ 106,552
Accounts payable . . . . . . . . . . . . . . . . . . . . 1,334,007 1,515,899
Current portion of notes payable . . . . . . . . . . . . 3,933,343 3,576,217
Current portion of obligations
under capital leases . . . . . . . . . . . . . . . . . . 322,406 236,174
Current portion of accrued bonuses . . . . . . . . . . . 56,695 37,796
Billings in excess of costs and estimated
earnings on uncompleted contracts. . . . . . . . . . . . 2,094,899 1,117,342
Accrued wages and benefits . . . . . . . . . . . . . . . 772,342 491,665
Other accrued expenses . . . . . . . . . . . . . . . . . 382,776 245,611
Reserve for loss on contracts in progress. . . . . . . . 2,681,912 170,999
Income taxes payable . . . . . . . . . . . . . . . . . . 31,643 212,929
------------- -------------
Total current liabilities 11,610,023 7,711,184
------------- -------------
Long-Term liabilities:
Notes payable, less current portion included above 8,300 660,205
Obligations under capital leases,
less current portion included above 169,574 265,939
Accrued bonuses, less current portion included above - 37,796
Deferred income taxes 231,167 -
------------- -------------
Total long-term liabilities 409,041 963,940
------------- -------------
Total liabilities 12,019,064 8,675,124
------------- -------------
Stockholders' equity (deficit)
Common stock, $.001 par value; 25,000,000 and 1,000,000
shares authorized for 2004 and 2003, respectively;
530,447 and 521,127 shares issued and outstanding
for 2004 and 2003, respectively 520 521
Additional paid-in capital 51,886 68,485
Retained earnings (accumulated deficit) (2,183,493) 3,408,368
------------- -------------
Total stockholders' equity (deficit) (2,131,087) 3,477,374
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 9,887,977 $12,152,498
------------- -------------
------------- -------------
These financial statements should be read only in connection with the
accompanying summary of significant accounting policies and notes to financial
statements.
PAGE F-56
STARSYS RESEARCH CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31
--------------------------------------
2004 2003
------------------ ------------------
Revenues . . . . . . . . . . . . . . $ 18,085,414 $ 18,239,401
Cost of Revenues . . . . . . . . . . 19,138,106 13,512,703
------------------ ------------------
Gross profit (loss). . . . . . . . (1,052,692) 4,726,698
------------------ ------------------
Operating expenses
General and administrative . . . . 3,901,198 3,026,939
Goodwill impairment loss . . . . . 153,254 -
------------------ ------------------
Total operating expenses. . . . . 4,054,452 3,026,939
------------------ ------------------
Income (loss) from operations . . (5,107,144) 1,699,759
------------------ ------------------
Other income (expense)
Rental income. . . . . . . . . . . 7,800 7,800
Gain on sale of assets . . . . . . - 2,468
Interest and other income. . . . . 7,493 11,299
Interest and other expense . . . . (306,693) (255,028)
------------------ ------------------
Total other income (expense). . . (291,400) (233,461)
------------------ ------------------
Income (loss) before income taxes. (5,398,544) 1,466,298
Income Taxes . . . . . . . . . . . . (193,317) (102,794)
------------------ ------------------
Net Income (Loss) . . . . . . . . . $ (5,591,861) $ 1,363,504
------------------ ------------------
------------------ ------------------
These financial statements should be read only in connection with the
accompanying summary of significant accounting policies and notes to financial
statements.
PAGE F-57
STARSYS RESEARCH CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31,
RETAINED
ADDITIONAL EARNINGS
COMMON STOCK PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) Total
----------- ---------- ----------- -------------- --------------
Balances at December 31, 2002 522,826 $ 523 $ 94,485 $ 2,044,864 $ 2,137,872
Stock repurchase. . . . . . . (1,699) (2) (26,000) - (26,002)
Net income. . . . . . . . . . - - - 1,363,504 1,363,504
----------- ---------- ----------- -------------- --------------
Balances at December 31, 2003 521,127 521 68,485 3,408,368 3,477,374
Stock repurchase. . . . . . . (680) (1) (16,599) - (16,600)
Net loss. . . . . . . . . . . - - - (5,591,861) (5,591,861)
----------- ---------- ----------- -------------- --------------
Balances at December 31, 2004 520,447 $ 520 $ 51,886 $ (2,183,493) $ (2,131,087)
----------- ---------- ----------- -------------- --------------
----------- ---------- ----------- -------------- --------------
These financial statements should be read only in connection with the
accompanying summary of significant accounting policies and notes to financial
statements.
PAGE F-58
STARSYS RESEARCH CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31
-----------------------------------
2004 2003
----------------- ---------------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . $ (5,591,861) $ 1,363,504
Adjustments to reconcile net income (loss)
to net cash provided (used by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . 390,682 271,054
Goodwill impairment loss . . . . . . . . . . . . . . . . 153,254 -
Deferred income taxes. . . . . . . . . . . . . . . . . . 510,332 (215,008)
Gain on sale of assets . . . . . . . . . . . . . . . . . - (2,468)
Effects of changes in operating assets and liabilities:
Contract receivables . . . . . . . . . . . . . . . . . . 1,356,193 (2,407,625)
Accounts receivable - employees and other. . . . . . . . (27,110) (5,429)
Income taxes receivable. . . . . . . . . . . . . . . . . (317,014) -
Costs and estimated earnings in excess of
billings on uncompleted contracts. . . . . . . . . . . . 1,916,551 (2,559,934)
Inventories. . . . . . . . . . . . . . . . . . . . . . . (69,291) (25,073)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . 45,034 (74,016)
Deposits . . . . . . . . . . . . . . . . . . . . . . . . (4,500) -
Accounts payable . . . . . . . . . . . . . . . . . . . . (181,892) 738,093
Accrued bonuses. . . . . . . . . . . . . . . . . . . . . (18,897) (62,365)
Billings in excess of costs and estimated
earnings on uncompleted contracts. . . . . . . . . . . . 977,557 555,768
Accrued wages and benefits . . . . . . . . . . . . . . . 280,677 132,905
Other accrued expenses . . . . . . . . . . . . . . . . . 137,165 (44,043)
Reserve for loss on contracts in progress. . . . . . . . 2,510,913 (62,602)
Income taxes payable . . . . . . . . . . . . . . . . . . (181,286) 207,511
----------------- ---------------
Net cash provided (used) by operating activities. . . . 1,886,507 (2,189,728)
----------------- ---------------
Cash flows from investing activities:
Proceeds received from sale of assets. . . . . . . . . . - 17,988
Payments received on notes receivable. . . . . . . . . . 7,225 29,000
Disbursements for notes receivable . . . . . . . . . . . (38,000) (30,000)
Purchase of property and equipment . . . . . . . . . . . (1,136,428) (182,597)
----------------- ---------------
Net cash used by investing activities . . . . . . . . . (1,167,203) (165,609)
----------------- ---------------
Cash flows from financing activities:
Advances on notes payable. . . . . . . . . . . . . . . . 7,195,282 7,184,717
Repayment of notes payable . . . . . . . . . . . . . . . (7,506,661) (4,734,282)
Repayment of capital lease obligations . . . . . . . . . (287,946) (210,988)
Increase (decrease in bank overdraft). . . . . . . . . . (106,552) 106,552
----------------- ---------------
Net cash provided (used) by financing activities. . . . (705,877) 2,345,999
----------------- ---------------
Net increase (decrease) in cash . . . . . . . . . . . . 13,427 (9,338)
Cash at beginning of year. . . . . . . . . . . . . . . . . 712 10,050
----------------- ---------------
Cash at end of year. . . . . . . . . . . . . . . . . . . . $ 14,139 $ 712
----------------- ---------------
----------------- ---------------
Supplemental disclosures
Cash paid for interest . . . . . . . . . . . . . . . . . $ 270,801 $ 212,131
----------------- ---------------
----------------- ---------------
Income taxes paid. . . . . . . . . . . . . . . . . . . . $ 181,286 $ 62,400
----------------- ---------------
----------------- ---------------
These financial statements should be read only in connection with the
accompanying summary of significant accounting policies and notes to financial
statements.
PAGE F-59
NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the years ended December 31, 2004 and 2003, equipment acquire with capital
lease obligations totaled $277,814 and $99,037, respectively, and common stock
repurchased with a note payable totaled $16,600 and $26,002, respectively.
PAGE F-60
STARSYS RESEARCH CORPORATION
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 2004 AND 2003
Starsys Research Corporation (the "Company") was incorporated in the State
of Colorado on April 6, 1988. The Company specializes in contract production of
spacecraft mechanisms, actuators and structures for commercial and government
customers. The Company grants credit to its customers, which are located in the
United States. Significant accounting policies followed by the Company are
presented below.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates included in these financial statements relate to revenue
recognition on uncompleted contracts, billings in excess of costs and estimated
earnings and costs on uncompleted contracts and estimated earnings in excess of
billings on uncompleted contracts (see Note 3). Revisions in estimated contract
profits and losses are made in the year in which circumstances requiring the
revision become known. The effect of changes in estimates of contract profits
and losses on contracts in process at December 31, 2003 was to increase the net
loss for the year ended December 31, 2004 by approximately $3,100,000 from that
which would have been reported had the revised estimate been used as the basis
of recognition of contract profits and losses in the preceding year. The amount
of this change includes effects of changes in estimates and change orders
subsequent to December 31, 2003, and it was not considered practical to
segregate the effects of changes in estimates from the effects of subsequent
change orders.
ACCOUNTS RECEIVABLE
Accounts receivable are uncollateralized customer obligations which
generally require payment within thirty days from the invoice date. Accounts
receivable are stated at the invoice amount. Notes receivable are stated at
principal plus accrued interest.
Account balances with invoices over ninety days old are considered
delinquent. Payments of accounts receivable are applied to the specific invoices
identified on the customer's remittance advice or, if unspecified, to the
earliest unpaid invoices. Payments of notes receivable are allocated first to
unpaid interest with the remainder to the outstanding principal balance.
The carrying amount of accounts receivable is reduced by a valuation
allowance if necessary that reflects management's best estimate of amounts that
will not be collected. At December 31, 2004 and 2003, no allowance was necessary
as all accounts are considered collectible by management. If there is a
deterioration of a major customer's credit worthiness or actual defaults are
higher than the historical experience, management's estimates of the
recoverability of amounts due the Company could be adversely affected.
REVENUE AND COST RECOGNITION
The accompanying financial statements are prepared according to the
"percentage-of-completion" method of accounting for long-term contracts. The
amount of revenues recognized is that portion of the total contract amount that
the actual cost expended bears to the anticipated final total cost based on
current estimates of cost to complete the project (cost-to-cost method). If
final total cost is anticipated to exceed the contract amount, the excess of
cost over contract amount is immediately recognized as a loss on the contract.
Recognition of profit commences on an individual project only when cost to
complete the project can reasonably be estimated and after there has been some
meaningful performance achieved on the project. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract
penalty provisions (when applicable), and final contract settlements may result
in revisions to costs and income and are recognized in the period in which the
revisions are determined.
Contract costs include all direct material, direct labor and sub-contractor
costs, other costs such as supplies, tools and travel which are specifically
related to a particular contract. All other selling, general and administrative
costs are expensed as incurred.
PAGE F-61
The current asset reflected on the balance sheet as "Costs and estimated
earnings in excess of billings on uncompleted contracts" represents revenues
recognized in excess of amounts billed. The current liability reflected on the
balance sheet as "Billings in excess of costs and estimated earnings on
uncompleted contracts" represents billings in excess of revenues recognized.
INVENTORIES
Inventories consist of supplies or other finished products not yet charged
to a contract and are stated at the lower-of-cost or market with cost determined
using an average-cost method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization,
which include amortization of property under capital leases, are provided by use
of the straight-line and accelerated methods over the estimated useful lives of
the related assets. Accelerated depreciation methods are used for income tax
reporting purposes. Total depreciation expense for the years ended December 31,
2004 and 2003 was $390,682 and $271,054, respectively.
PRODUCT WARRANTY
The Company warrants its products against defects in workmanship. The
Company accrued $72,123 for warranty claims at December 31, 2004. The accrual
is based on an estimate of the cost to be incurred based on the claims received
and historical experience. No provision for estimated future warranty claims
was recorded at December 31, 2003, as management believed any such claims would
be insignificant, based on historical experience.
INCOME TAXES
Deferred income taxes are provided for temporary differences in the
recognition of depreciation expense for financial reporting and income tax
reporting purposes, tax credit carryforwards and for reserves for contract
losses.
GOODWILL INTANGIBLE ASSETS AND AMORTIZATION
Goodwill had been recorded for the acquisition of the assets of American
Technology Consortium, Inc. ("ATC") by the Company in 2000. Goodwill was
previously amortized over five years using the straight-line method.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 (FAS-142), Goodwill and Other Intangible
Assets. FAS-142 requires goodwill and other intangible assets that have
indefinite useful lives to no longer be amortized; however, these assets must be
tested at least annually for impairment. FAS-142 also requires an evaluation of
existing acquired goodwill and other intangible assets for proper classification
under the new requirements. In addition, intangible assets (other than goodwill)
that have finite useful lives will continue to be amortized over their useful
lives. The Company adopted FAS-142 effective January 1, 2002 and, accordingly,
ceased amortizing amounts related to goodwill starting January 1, 2002. In
accordance with FAS-142, the Company has compared its fair value to the carrying
value of its associated assets to determine if there was any impairment of
goodwill. The fair value at December 31, 2003 was determined using a reasonable
estimate of future cash flows of the Company and a risk adjusted discount rate
to compute a net present value of future cash flows. As a result of this
comparison, the Company determined that no impairment of goodwill had occurred
at December 31, 2003.
Due to the operating loss incurred by the Company for the year ended
December 31, 2004, an impairment loss for the entire carrying amount of the
goodwill of $153,254 was recorded for the year ended December 31, 2004.
STOCK OPTION PLAN
The Company has a stock-based employee compensation plan which is described
more fully in Note 6. The Company accounts for this plan under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and Related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under this plan had an
exercise price equal to the market value of the underlying
PAGE F-62
common stock on the date of grant. The following table illustrates the effect on
net income if the Company had applied the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
YEAR ENDED DECEMBER 31,
---------------------------------------
2004 2003
------------------ ----------------
Net income (loss) - as reported. . . . . . . . . . . . . $ (5,591,861) $ 1,363,504
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards. (4,302) (18,769)
------------------ ----------------
Estimated net income - pro forma . . . . . . . . . . . . $ (5,596,163) $ 1,344,735
------------------ ----------------
------------------ ----------------
In December 2004, The Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards No. 123 (Revised), "Shared-Based
Payment" (SFAS 123R). This standard revises SFAS No. 123, Accounting Principles
Board Option 25 and related interpretations, and eliminates use of the intrinsic
value method of accounting for stock options. The Company currently uses the
intrinsic value method to value stock options, and, accordingly, no compensation
expense has been recognized for stock options. SFAS 123R requires that all
employee share-based payments to employees, including stock options, be valued
using a fair-value-based method and recorded as expense in the statement of
operations. For the Company, SFAS 123R will first be effective for its December
31, 2006 financial statements. This new Statement will not affect accounting for
the Company's stock options currently outstanding, but it will affect financial
statement disclosures about those stock options, and it will change the
accounting for stock options issued in future years.
This information is an integral part of the accompanying financial statements.
PAGE F-63
STARSYS RESEARCH CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1 - FUTURE OPERATIONS OF THE COMPANY
The Company incurred a net loss of $5,591,861 for the year ended December
31, 2004 and has an stockholders' deficit of $2,131,087 as of December 31, 2004.
The Company also has negative working capital at December 31, 2004 of
$3,898,976. The Company is also in default of certain covenants with its
current lender. Management of the Company intends to fund 2005 operations
primarily through revenues generated by product sales and the additional debt
and additional equity investment (see Note 14). The Company's future operations
are dependent upon the profitability of the Company's contracts and related
revenues generated and its efforts to raise additional capital. If the Company
does not achieve expected revenue levels or receive sufficient additional
funding to meet its requirements with its lender, the Company's lender is
entitled to appoint a receiver to protect the lender's collateral including the
right to operate the Company's business (see Note 14).
The accompanying financial statements do not include any adjustments as a
result of these uncertainties.
NOTE 2 - CONTRACT RECEIVABLES
Contract receivables consist of the following at December 31, 2004 and
2003:
2004 2003
---------- ----------
Billed
Completed contracts. . . . . . . . . . . . . $1,502,016 $1,613,459
Contracts in progress. . . . . . . . . . . . 1,871,089 2,258,620
Unbilled. . . . . . . . . . . . . . . . . . . 266,861 1,124,080
---------- ----------
3,639,966 4,996,159
Less allowance for doubtful accounts. . . . . - -
---------- ----------
TOTAL CONTRACT RECEIVABLES. . . . . . . . . . $3,639,966 $4,996,159
---------- ----------
---------- ----------
Billed contract receivables consist of the following at December 31, 2004
and 2003:
2004 2003
---------- ----------
Billed commercial . . . . . . . . . . . . . . $ 788,563 $ 747,282
Billed governmental . . . . . . . . . . . . . 2,584,542 3,124,797
---------- ----------
TOTAL BILLED CONTRACT RECEIVABLES . . . . . . $3,373,105 $3,872,079
---------- ----------
---------- ----------
NOTE 3 - CONTRACTS IN PROGRESS
Contracts in progress at December 31, 2004 and 2003 are summarized as
follows:
2004 2003
------------- -------------
Costs incurred on uncompleted contracts $ 25,872,527 $ 15,789,115
Estimated earnings (loss) thereon . . . (1,997,034) 536,787
23,875,493 16,325,902
------------- -------------
Less billings to date . . . . . . . . . (22,878,756) (12,435,057)
TOTAL . . . . . . . . . . . . . . . . . $ 996,737 $ 3,890,845
PAGE F-64
These amounts are reflected in the accompanying balance sheet under the
following captions:
2004 2003
------------ ------------
Costs and estimated earnings in excess
of billings on uncompleted contracts. . . $ 3,091,636 $ 5,008,187
Billings in excess of costs and estimated
earnings on uncompleted contracts . . . . (2,094,899) (1,117,342)
------------ ------------
TOTAL . . . . . . . . . . . . . . . . . . $ 996,737 $ 3,890,845
------------ ------------
------------ ------------
NOTE 4 - NOTES AND EMPLOYEE RECEIVABLES
Notes receivable at December 31, 2004 and 2003, consist of notes due from
employees and a stockholder, which total $90,768 and $59,993, respectively. The
notes bear interest at 5.5% and are due on demand. Total accrued interest on
these notes was $5,963 and $3,935 at December 31, 2004 and 2003, respectively.
In addition, during the years ended December 31, 2004 and 2003, the Company
had advanced amounts to various employees. Accounts receivable due from
employees as of December 31, 2004 and 2003 were $20,412 and $7,879,
respectively. There were no signed note agreements for these advances due to the
short repayment terms of the advances.
PAGE F-65
NOTE 5 - NOTES PAYABLE
Notes payable at December 31, 2004 and 2003 consists of the following:
2004 2003
-------------- ---------------
Line-of-credit agreement with bank; maximum of $3,200,000
maturity at February 28, 2005; interest at prime plus .75%
(a total of 6% at December 31, 2004); collateralized by
accounts receivable, equipment and inventory. $ 2,479,308 $ 2,829,717
Term loan with bank; maturity at February 28, 2005; monthly
payments of $29,480, with a balloon payment of $1,403,507
due at maturity. Interest at 6.5%; collateralized by
accounts receivable, equipment and inventory. 1,417,994. . -
Term loan with bank; maturity at August 31, 2007; monthly
payments of $21,650 including interest at 7.75%;
collateralized by accounts receivable, equipment and
inventory. - 822,620
Note payable to ATC for asset purchase; interest at 7%;
quarterly payments of principal and interest of $4,178;
maturity at June 30, 2005. 18,119 33,265
Term loan with bank; maturity at August 1, 2004; monthly
payments of $309 including interest at 9.75%; collateralized
by equipment. - 2,417
Note payable to Ford Motor Credit for asset purchase,
interest at 0%; monthly payments of principal of $1,069.08;
maturity at September 4, 2005; collateralized by equipment. 9,622 22,401
Term loan with bank; maturity at April 30, 2004; monthly
interest-only payments at prime plus .75% (a total of 4.75%
at December 31, 2003); lump sum principal payment due April
30, 2004; collateralized by accounts receivable, equipment
and inventory. - 500,000
Promissory note with former stockholder; maturity at May 1,
2006; two equal payments of principal and accrued interest
at 10% are due May 1, 2005 and May 1, 2006;
uncollateralized. 16,600 -
Promissory note with former stockholder; maturity at July 1,
2005; two equal payments of principal and accrued interest
at 10% are due July 1, 2004 and July 1, 2005;
uncollateralized. - 26,002
-------------- ---------------
Total 3,941,643 4,236,422
Less current portion (3,933,343) (3,576,217)
-------------- ---------------
Long-term portion $ 8,300 $ 660,205
-------------- ---------------
-------------- ---------------
Maturities of notes payable are as follows:
Year Ending December 31,
2005 $ 8,300
-------------- ---------------
Total $ 8,300
-------------- ---------------
-------------- ---------------
All bank notes payable are also personally guaranteed by a stockholder of
the Company. The line of credit and term loan agreement contain restrictive
covenants relating to the financial position and operations of the Company. The
Company was in violation of certain covenants at December 31, 2004.
PAGE F-66
On March 30, 2005, the Company refinanced the line-of-credit, term loan,
and certain capital leases with a new bank (see Note 6). The balances at
December 31, 2004 of the line of credit and term note that were refinanced were
$2,479,308 and $1,417,994, respectively. The refinancing included creation of a
new line of credit having a balance of $4,250,000, which interest accrues at a
prime rate plus .5% and matures March 30, 2006, a new term note A of $2,100,000
which accrues interest at 7.25% and matures April 1, 2010, and a new term note B
of $1,250,000 which accrues interest at LIBOR plus 5% and matures March 30, 2006
(see Note 14).
NOTE 6 - LEASES
The Company leases certain equipment and software under capital leases
which expire through 2005. Accumulated depreciation for these assets was
$372,783 and $202,456 at December 31, 2004 and 2003 respectively. The Company
leases its facility and office equipment under various non-cancelable operating
leases which expire through 2007. The Company also leases certain equipment
under month-to-month leases.
Minimum rental commitments under these leases are as follows:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
---------- ----------
2005 . . . . . . . . . . $ 345,507 $ 416,849
2006 . . . . . . . . . . 118,558 416,497
2007 . . . . . . . . . . 59,339 38,578
----------- ----------
523,404 $ 871,924
----------
----------
Less interest. . . . . . (31,424)
-----------
491,980
Less current portion . . (322,406)
-----------
LONG-TERM PORTION. . . . $ 169,574
-----------
-----------
Total rent expense for the years ended December 31, 2004 and 2003 was
$633,859 and $524,874, respectively. This amount includes normal operating
expenses paid with the leases.
The Company is also subleasing a portion of its facilities under various
month-to-month subleases. Total sublease and other rental income was $7,800 for
both the years ended December 31, 2004 and 2003.
Certain capital leases were refinanced on March 30, 2005 with a new bank.
The balance of these capital lease obligations at December 31, 2004 was $433,138
(see Note 5).
NOTE 7 - STOCKHOLDERS' EQUITY
STOCK OPTION PLAN
The Company adopted a Stock Option Plan in 1998 which provides for the
granting of incentive stock options to employees and nonstatutory stock options
to directors and consultants of the Company as selected by the Board of
Directors. The maximum number of shares authorized to be granted under the plan
is 160,000. The options are exercisable at a price as determined and authorized
by the Board of Directors. The options generally expire at 10 years form the
date of grant.
In 1998, the Company adopted the disclosure - only provisions of Statement
of Financial Accounting Standards No. 123 for Stock-Based Compensation ("SFAS
123"). SFAS 123 encourages entities to adopt a fair value-based method of
accounting for employee stock compensation plans, but allows companies to
continue to account for those plans using the accounting prescribed by APB
Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company
has elected to continue to account for stock based compensation using APB 25,
making pro forma disclosures of net earnings as if the fair value-based method
had been applied. Accordingly, no compensation expense has been recorded for the
stock option plan.
PAGE F-67
The fair value of each option granted is estimated on the date of grant
using the minimum value option-pricing model with the following weighted average
assumptions:
Expected dividend yield 0%
Expected stock price volatility 0%
Risk-free interest rate 4.2% to 6.7%
Expected life of options 10 years
Incentive stock option transactions are summarized as follows:
INCENTIVE STOCK WEIGHTED AVERAGE
OPTION SHARES EXERCISE PRICE PER SHARE
2004 2003 2004 2003
Outstanding, beginning of year 106,080 105,592 $ 9.64 $ 9.61
Options granted. . . . . . . . - 488 - 15.30
Options expired. . . . . . . . - - - -
Options forfeited. . . . . . . - - - -
Options exercised. . . . . . . - - - -
-------- -------- --------- ---------
Outstanding, end of year . . . 106,080 106,080 $ 9.64 $ 9.64
-------- -------- --------- ---------
-------- -------- --------- ---------
The number exercisable and the exercisable weighted average exercise price
per share are based upon the vesting schedules for the individual options.
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2004:
Weighted Outstanding Exercisable
Average Weighted Weighted
Range of Remaining Average Average
Option Exercise Number Contractual Exercise Number Exercise
Type Price Outstanding Life (years) Price Exercisable Price
Incentive $7.11-$15.30 106,080 5 $ 9.64 105,508 $ 9.64
AUTHORIZED STOCK
On October 29, 2004, the Company amended its articles of incorporation to
increase the number of shares of common stock it is authorized to issue from
1,000,000 to 25,000,000 at $.001 par value and to authorize the issuance of up
to 10,000,000 shares designated as preferred stock with no par value. There
were no shares of preferred stock issued or outstanding at December 31, 2004.
NOTE 8 - RETIREMENT PLAN
The Company maintains an Employees' 401(k) and Stock Bonus Plan which gives
employees the opportunity to save a portion of their pre-tax wages for
retirement. Eligible employees include all employees who complete six months of
continuous employment with the Company or have completed one year of service
provided that the employee is employed with the Company at the time of
participation in the plan. In addition to the participant's contribution to the
plan, the Company may make discretionary profit sharing and discretionary
matching 401(k) contributions under the plan. The discretionary profit sharing
contributions are currently paid 50% to the employee and 50% is accrued for
conversion into shares of stock in the Company based on the employee's
respective contributions received under the plan. For the years ended December
31, 2004 and 2003 the Company made discretionary profit sharing contributions of
$0 and $136,615, respectively. Discretionary matching 401(k) contributions made
during 2004 and 2003 were $17,537 and $0, respectively. The above plans are not
leveraged by the Company.
PAGE F-68
The total number of shares of the Company's stock allocated to and held by
the plan was and 36,611 at December 31, 2004 and 2003, respectively. Any
dividends paid on the plan shares are charged to retained earnings.
The Stock Bonus Plan provides a put option whereby terminated participants
may elect to sell and require the Company to redeem the participant's vested
common shares at their fair market value. The Company was not required to redeem
any of the vested shares during the years ended December 31, 2004 and 2003.
NOTE 9 - INCOME TAXES
The sources of deferred tax assets and the tax effect of each at December
31, 2004 and 2003 is as follows:
------------------------
2004 2003
------------ ----------
Deferred tax assets:
Accrued vacation . . . . . . . . . . . . . . . . . $ 45,144 $ 23,422
Reserve for loss on contracts in progress. . . . . 525,732 39,805
Research and development credit carryforward . . . 672,717 549,515
Federal and State net operating loss carryforwards 423,163 -
Valuation allowance for deferred tax assets. . . . (1,435,589) -
------------ ----------
Total deferred tax assets. . . . . . . . . . . . . . 231,167 612,742
Deferred tax liability:
Tax over financial statement depreciation. . . . . (213,167) (102,410)
------------ ----------
Net deferred tax assets. . . . . . . . . . . . . . . $ - $ 510,332
------------ ----------
------------ ----------
The deferred tax asset is presented in the accompanying balance sheet at
December 31, 2004 and 2003 as follows:
2004 2003
---------- --------
Current deferred tax asset. . . . $ 231,167 $ 63,227
Noncurrent deferred tax asset . . - 447,105
Noncurrent deferred tax liability (231,167) -
---------- --------
Net deferred tax asset. . . . . . $ - $510,332
---------- --------
---------- --------
The (provision) benefit for income taxes at December 31, 2004 and 2003
consists of the following:
2004 2003
---------- ----------
Current . . . . . . . . . . . . . . . . . . . . $ - $(317,802)
Deferred. . . . . . . . . . . . . . . . . . . . (510,332) 215,008
Benefit of Federal net operating loss carryback 317,015 -
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . $(193,317) $(102,794)
---------- ----------
---------- ----------
The Company's provision for income taxes differs from the tax that would
result from applying statutory rates to income before income taxes primarily
because of state income taxes, nondeductible expenses, change in the valuation
allowance of $1,435,589, and general business credits utilized of $0 and
$174,882 for the years ended December 31, 2004 and 2003, respectively.
At December 31, 2004, the Company had estimated research and development
credit carryforwards of $672,717 available to offset future years' income taxes.
These carryforwards begin to expire in 2022 to 2024. The
PAGE F-69
Company also had Federal and State net operating loss carryforwards of
approximately $1,500,000 and $3,270,000, respectively. These carryforwards begin
to expire in 2024.
NOTE 10 - ACCRUED PRODUCT WARRANTY CLAIMS
The following is a reconciliation of changes in the accrued product
warranty claims liability included in other accrued expenses:
Beginning Balance. . . . . . . . . . . . . . . . . . . $ -
Changes in product warranties issued during the year 125,888
Payments made in cash or in-kind . . . . . . . . . . (53,765)
----------
Ending Balance . . . . . . . . . . . . . . . . . . . . $ 72,123
----------
----------
NOTE 11 - RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense when incurred. Total
research and development costs incurred for the years ended December 31, 2004
and 2003 were $10,524,603 and $6,717,296, respectively.
NOTE 12 - SIGNIFICANT CONCENTRATIONS
Generally accepted accounting principles require disclosure of information
about current vulnerabilities due to certain concentrations. These matters
include the following:
REVENUES FROM MAJOR CUSTOMERS
For the year ended December 31, 2004, approximately 69% of the Company's
revenues were from four customers. At December 31, 2004, these customers
represented approximately 53% of total contract receivables. For the year ended
December 31, 2003, approximately 48% of the Company's revenues were from two
customers. At December 31, 2003, these customers represented approximately 20%
of total contract receivables.
NOTE 13 - BONUS AND ROYALTY OBLIGATIONS
The Company entered into an employment agreement and an independent
contractor agreement (the "Agreements") with former employees of ATC. The
Agreements contain certain provisions for bonus payments to be made to these
individuals. In the event of voluntary termination of either agreement by these
individuals, the Company is still obligated to pay 50% of the total bonuses to
the individuals. As such, $188,982, was accrued by the Company and must be paid
over a five-year term. This amount was recorded as the Company's bonus
obligation at September 1, 2000.
For the years ended December 31, 2004 and 2003, the Company made $56,695
and $100,161 in bonus payments, respectively. The accrued bonus obligation at
December 31, 2004 and 2003 was $56,695 and $75,592, respectively. The Company
also accrued royalties to the two individuals in the amount of $231,585 and
$187,040 for the years ended December 31, 2004 and 2003, respectively. During
the years ended December 31, 2004 and 2003, the Company received $114,132 and
$82,368, respectively, of services from a company owned by one of the
individuals.
NOTE 14 - SUBSEQUENT EVENTS
On June 24, 2005, the Company entered into a Forbearance Agreement (the
"Agreement") for certain financial covenants and other violations under its
existing loans with its current bank (see Note 5). The Agreement was later
amended on July 26, 2005. The amended Agreement requires the Company to raise
the necessary capital to bring the Company in compliance with its borrowing base
and other financial covenants. The Company's obligations under the amended
Agreement include, but are not limited to, the following:
- On or before July 26, 2005, the Company shall receive a minimum of
$800,000 of additional cash equity.
PAGE F-70
- On or before September 8, 2005, the Company shall receive an additional
minimum of $1,200,000 of cash equity.
- On or before October 31, 2005, the Company shall receive a minimum of
$4,000,000 of additional cash equity.
The total amount of cash equity the Company is required to obtain on or
before October 31, 2005 is at least $6,000,000. The amended Agreement also
requires the Company to provide the bank a "Letter of Intent" by July 26, 2005
from a bona fide third party for the purchase of all or a portion of the
Company's assets. The Agreement also accelerates and amends the maturity date
of term note B from March 30, 2006 to the earlier of the required cash equity
amounts received or October 31, 2005 (see Note 5).
Any default under the Agreement constitutes a default under the existing
loan agreements with the bank and the bank shall be entitled to appoint a
receiver to preserve and protect the bank's collateral, including the right to
operate the Company's business. Any such receivership will continue until the
Company's obligations under the Agreement have been satisfied in full. The
Company did receive minimum proceeds of $800,000 and a Letter of Intent to
comply with the amended Agreement.
On August 23, 2005, the Company entered into an offer to sell the shares of
the Company's stock (the "Offer") to SpaceDev, a publicly traded company. The
Offer is projected to close on October 31, 2005. The Offer provides for
consideration to be paid at closing comprised of a cash payment of $1,500,000
and shares of SpaceDev having an aggregate market value of $7,500,000. SpaceDev
will also repay the remaining principal and interest of the Company's credit
facility with the bank and any subordinated debt. SpaceDev will also provide the
Company with a bridge loan in the amount of $1,200,000 prior to closing to
comply with the bank's requirements under the Agreement.
The Offer also provides for additional consideration to be paid to the
stockholders of the Company based upon results of the audited financial
statements for the years ending December 31, 2005, 2006 and 2007.
This information is an integral part of the accompanying financial statements.
PAGE F-71
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (THE "MERGER AGREEMENT")
CONTAINS CERTAIN REPRESENTATIONS AND WARRANTIES (THE "REPRESENTATIONS") BY
STARSYS RESEARCH CORPORATION ("STARSYS") AND A KEY SHAREHOLDER OF STARSYS IN
FAVOR OF SPACEDEV, INC. ("SPACEDEV"), AND BY SPACEDEV AND ITS WHOLLY-OWNED
SUBSIDIARY IN FAVOR OF STARSYS. NO PERSON, OTHER THAN THE PARTIES TO THE
AGREEMENT, ARE ENTITLED TO RELY ON THE REPRESENTATIONS CONTAINED IN THE MERGER
AGREEMENT. THE MERGER AGREEMENT IS FILED IN ACCORDANCE WITH THE RULES OF THE
SECURITIES AND EXCHANGE COMMISSION AS A MATERIAL PLAN OF ACQUISITION, AND IS
INTENDED BY SPACEDEV SOLELY AS A RECORD OF THE AGREEMENT REACHED BY THE PARTIES
THERETO. THE FILING OF THE MERGER AGREEMENT IS NOT INTENDED AS A MECHANISM TO
UPDATE, SUPERSEDE OR OTHERWISE MODIFY PRIOR DISCLOSURES OF INFORMATION AND RISKS
CONCERNING SPACEDEV WHICH SPACEDEV HAS MADE TO ITS SHAREHOLDERS.
INVESTORS AND POTENTIAL INVESTORS SHOULD ALSO BE AWARE THAT THE REPRESENTATIONS
ARE QUALIFIED BY INFORMATION IN CONFIDENTIAL DISCLOSURE SCHEDULES THAT STARSYS
HAS DELIVERED TO THE SPACEDEV, AND DISCLOSURE SCHEDULES THAT SPACEDEV HAS
DELIVERED TO STARSYS (THE "DISCLOSURE SCHEDULES"). THE DISCLOSURE SCHEDULES
CONTAIN INFORMATION THAT MODIFIES, QUALIFIES AND CREATES EXCEPTIONS TO THE
REPRESENTATIONS.
INVESTORS AND POTENTIAL INVESTORS SHOULD ALSO BE AWARE THAT CERTAIN
REPRESENTATIONS MADE IN THE MERGER AGREEMENT ARE NOT INTENDED TO BE AFFIRMATIVE
REPRESENTATIONS OF FACTS, SITUATIONS OR CIRCUMSTANCES, BUT ARE INSTEAD DESIGNED
AND INTENDED TO ALLOCATE CERTAIN RISKS BETWEEN SPACEDEV AND ITS WHOLLY-OWNED
SUBSIDIARY, ON THE ONE HAND, AND STARSYS AND ITS KEY SHAREHOLDER, ON THE OTHER
HAND. THE USE OF REPRESENTATIONS AND WARRANTIES TO ALLOCATE RISK IS A STANDARD
DEVICE IN MERGER AGREEMENTS.
ACCORDINGLY, SHAREHOLDERS SHOULD NOT RELY ON THE REPRESENTATIONS AS AFFIRMATIONS
OR CHARACTERIZATIONS OF INFORMATION CONCERNING SPACEDEV OR STARSYS AS OF THE
DATE OF THE MERGER AGREEMENT, OR AS OF ANY OTHER DATE.
Agreement and Plan of Merger
PAGE
_________________________________________________________
Project Spirit
Acquisition of
Starsys Research Corporation
_________________________________________________________
Agreement and Plan of Merger and Reorganization,
by and among
SpaceDev, Inc.,
Monoceros Acquisition Corp.,
Starsys Research Corporation,
Scott Tibbitts, a Key Shareholder,
And
Scott Tibbitts, as Shareholder Agent
___________________________________
October 24, 2005
___________________________________
Agreement and Plan of Merger
PAGE
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I THE MERGER A-1
Section 1.1 The Merger A-1
Section 1.2 Effective Time A-1
Section 1.3 Closing A-2
Section 1.4 Effects of the Merger A-2
Section 1.5 Articles of Incorporation and Bylaws A-2
Section 1.6 Directors and Officers A-2
ARTICLE II MERGER CONSIDERATION; CANCELLATION OF COMPANY STOCK A-2
Section 2.1 Certain Definitions. A-2
Section 2.2 Effect on Capital Stock A-3
Section 2.3 Loan Repayments. A-4
Section 2.4 Shareholder Consideration A-4
Section 2.5 Calculation of Performance Consideration A-5
Section 2.6 Protective Provisions A-7
Section 2.7 Allocation and Distribution of Shareholder Consideration A-7
Section 2.8 Adjustments to Parent Common Stock A-7
Section 2.9 No Fractional Shares A-7
Section 2.10 Surrender of Certificates; Lost, Stolen or Destroyed
Certificates A-8
Section 2.11 Stock Options; Stock Bonus Plan A-8
Section 2.12 Treasury Stock A-9
Section 2.13 Shares of Dissenting Shareholders A-9
Section 2.14 Tax Consequences A-9
Section 2.15 Accounting Treatment A-9
Section 2.16 Withholding Rights A-9
Section 2.17 Escrow Account. A-9
Section 2.18 Expense Fund. A-10
Section 2.19 Company Expense Payments. A-11
Section 2.20 Closing Working Capital Deficit Adjustment A-11
Section 2.21 Transfer Of Contingent Rights. A-12
Section 2.22 Taking of Necessary Action; Further Action A-12
ARTICLE III REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY A-12
Section 3.1 Organization and Qualification. A-12
Section 3.2 Subsidiaries. A-12
Section 3.3 Capital Structure. A-13
Section 3.4 Approval of Transactions. A-13
Section 3.5 Authority. A-13
Section 3.6 No Conflict. A-14
Section 3.7 Consents. A-14
Section 3.8 Books and Records. A-15
Section 3.9 Company Financial Statements. A-15
Section 3.10 No Undisclosed Liabilities. A-15
Section 3.11 No Off-Balance Sheet Arrangements. A-16
Section 3.12 No Changes. A-16
Section 3.13 Tax Matters. A-18
Section 3.14 Restrictions on Business Activities. A-19
Section 3.15 Title of Properties; Absence of Liens and Encumbrances;
Condition of Equipment. A-20
Section 3.16 Intellectual Property. A-20
Section 3.17 Agreements, Contracts and Commitments. A-23
Section 3.18 Government Contracts. A-24
Section 3.19 Related Party Transactions. A-26
Section 3.20 Compliance with Law; Governmental Authorization. A-26
Section 3.21 Litigation. A-26
Section 3.22 Accounts Receivable, Customers and Inventory. A-26
PAGE-i- Agreement and Plan of Merger
Section 3.23 Environmental Matters. A-27
Section 3.24 Brokers' and Finders' Fees. A-28
Section 3.25 Employee Benefit Plans and Compensation. A-28
Section 3.26 Insurance. A-31
Section 3.27 Relations With Governmental Entities. A-31
Section 3.28 Warranties. A-31
Section 3.29 Complete Copies of Materials. A-31
Section 3.30 Customer Relations. A-31
Section 3.31 Equity Ownership. A-31
Section 3.32 Form S-4 Information. A-32
Section 3.33 Expenses of Sale. A-32
Section 3.34 Representations Complete. A-32
ARTICLE IV PARENT AND MERGER SUB REPRESENTATIONS AND WARRANTIES A-32
Section 4.1 Organization and Qualification. A-33
Section 4.2 Subsidiaries. A-33
Section 4.3 Power and Authority; Enforceability. A-33
Section 4.4 No Conflict. A-33
Section 4.5 Consents. A-33
Section 4.6 Capitalization. A-34
Section 4.7 SEC Filings; Financial Statements. A-34
Section 4.8 Form S-4 Information. A-34
Section 4.9 No Undisclosed Liabilities. A-35
Section 4.10 Valid Issuance. A-35
Section 4.11 Merger Sub. A-35
Section 4.12 SpaceDev Oklahoma. A-35
Section 4.13 Suspension and Trading. A-35
Section 4.14 Government Contracts. A-37
Section 4.15 Agreements, Contracts and Commitments. A-37
Section 4.16 Representations Complete. A-37
ARTICLE V COVENANTS RELATED TO CONDUCT OF BUSINESS A-37
Section 5.1 Conduct of Business of the Company Until Closing. A-37
Section 5.2 Reasonable Efforts and Further Assurances. A-39
Section 5.3 Certain Tax Matters. A-39
Section 5.4 Access to Information. A-40
Section 5.5 No Solicitation. A-40
Section 5.6 Public Announcements; Employee Announcements. A-41
Section 5.7 Notification of Certain Matters. A-41
Section 5.8 Pre-Approval of Certain Transactions. A-41
Section 5.9 Consents to Merger. A-42
Section 5.10 Export Licenses. A-42
Section 5.11 Petercsak Release. A-42
Section 5.12 Preparation of Form S-4 and Proxy Statement. A-42
Section 5.13 Parent Shareholders Meeting. A-43
Section 5.14 Company Shareholders Meeting. A-43
Section 5.15 Financial Statements. A-44
Section 5.16 Repayment of Certain Loans and Advances. A-44
Section 5.17 Private Financing. A-44
ARTICLE VI CONDITIONS TO CLOSING A-44
Section 6.1 Conditions to Obligations of Each Party Under This
Agreement A-44
Section 6.2 Additional Conditions to the Obligations of Parent A-45
Section 6.3 Additional Conditions to the Obligations of the Company A-48
ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION A-49
Section 7.1 Survival of Representations, Warranties and Covenants. A-49
Section 7.2 Indemnification; Escrow Account; Expense Fund. A-50
Section 7.3 Limitation on Indemnification. A-51
Section 7.4 Indemnification Procedures. A-52
PAGE-ii- Agreement and Plan of Merger
Section 7.5 Shareholder Agent. A-54
Section 7.6 Resolution of Conflicts. A-54
Section 7.7 No Contribution. A-55
Section 7.8 Fraud; Willful Misrepresentation. A-55
Section 7.9 Exclusive Remedies. A-55
Section 7.10 Purchase Price Adjustment. A-55
ARTICLE VIII POST-CLOSING COVENANTS A-55
Section 8.1 Parent Board of Directors A-55
Section 8.2 Separate Books and Records. A-55
Section 8.3 Operation of Surviving Corporation. A-55
Section 8.4 Sale of Surviving Corporation. A-56
Section 8.5 Stock Options. A-56
Section 8.6 Capital Investments. A-56
Section 8.7 Continuity of Business Enterprise. A-56
Section 8.8 Attorney-Client Privilege. A-57
ARTICLE IX EMPLOYEES A-57
Section 9.1 Retaining Employees. A-57
Section 9.2 Employee Benefit Arrangements. A-57
Section 9.3 No Benefit to the Company Employees Intended. A-57
ARTICLE X TERMINATION A-57
Section 10.1 Circumstances for Termination. A-57
Section 10.2 Effect of Termination. A-58
ARTICLE XI MISCELLANEOUS A-58
Section 11.1 Entire Agreement. A-58
Section 11.2 Parties In Interest. A-58
Section 11.3 Assignment; Amendment. A-58
Section 11.4 Notices A-58
Section 11.5 Specific Performance. A-59
Section 11.6 Submission to Jurisdiction; No Jury Trial; Service of
Process. A-60
Section 11.7 Time. A-60
Section 11.8 Counterparts. A-60
Section 11.9 Governing Law. A-60
Section 11.10 Expenses. A-60
Section 11.11 Certain Taxes. A-61
Section 11.12 Extensions; Waiver. A-61
Section 11.13 Severability. A-61
Section 11.14 Incorporation of Exhibits and Disclosure Schedules. A-61
Section 11.15 Titles and Headings. A-61
Section 11.16 Facsimile Execution. A-61
Section 11.17 Construction. A-61
Section 11.18 Definitions. A-62
PAGE-iii- Agreement and Plan of Merger
TABLE OF EXHIBITS AND SCHEDULES
-------------------------------
EXHIBIT A-1 Form of Company Voting Agreement
EXHIBIT A-2 Form of Parent Voting Agreement
EXHIBIT B Form of Statement of Merger
EXHIBIT C Form of Letter of Transmittal
EXHIBIT D-1 Form of Legal Opinion of Holland & Hart LLP
EXHIBIT D-2 Form of Legal Opinion of Sheppard, Mullin, Richter &
Hampton, LLP
EXHIBIT E-1 Form of Officers' Certificate - Company
EXHIBIT E-2 Form of Key Shareholder's Certificate
EXHIBIT E-3 Form of Officer's Certificate - Parent
EXHIBIT F Form of Non-Competition Agreement
EXHIBIT G Form of Tibbitts Executive Employment Agreement
EXHIBIT H Form of Standstill and Lock-Up Agreement
EXHIBIT I Form of Executive Officer Release
EXHIBIT J Form of Parent Approval of Proposed Transaction
SCHEDULE 2.20(a) Sample Working Capital Deficit Calculation
PAGE-i- Agreement and Plan of Merger
INDEX OF DEFINED TERMS
----------------------
ACCOUNTING DISPUTE . . . . . . . . . . . . . 6
ACCOUNTING REFEREE . . . . . . . . . . . . . 6
ACCOUNTS RECEIVABLE. . . . . . . . . . . . . 62
ACTION . . . . . . . . . . . . . . . . . . . 63
ACTUAL KNOWLEDGE . . . . . . . . . . . . . . 63
AFFILIATE. . . . . . . . . . . . . . . . . . 63
AGREEMENT. . . . . . . . . . . . . . . . . . 1
AMEND. . . . . . . . . . . . . . . . . . . . 63
APPLICABLE TIME. . . . . . . . . . . . . . . 63
APPROVED CONTRACT. . . . . . . . . . . . . . 45
APPROVED TRANSACTION . . . . . . . . . . . . 42
BASKET AMOUNT. . . . . . . . . . . . . . . . 51
BEST EFFORTS . . . . . . . . . . . . . . . . 63
BREACH . . . . . . . . . . . . . . . . . . . 63
CAPITAL INVESTMENTS. . . . . . . . . . . . . 56
CAPITAL LEASE OBLIGATION . . . . . . . . . . 63
CAPITALIZATION ADJUSTMENT. . . . . . . . . . 2
CASH EARNOUT . . . . . . . . . . . . . . . . 2
CBCA . . . . . . . . . . . . . . . . . . . . 1
CERCLA . . . . . . . . . . . . . . . . . . . 63
CERTIFICATES . . . . . . . . . . . . . . . . 8
CLAIM NOTICE . . . . . . . . . . . . . . . . 49
CLOSING. . . . . . . . . . . . . . . . . . . 2
CLOSING BALANCE SHEET. . . . . . . . . . . . 11
CLOSING CONSIDERATION. . . . . . . . . . . . 63
CLOSING DATE . . . . . . . . . . . . . . . . 2
CLOSING DEBT . . . . . . . . . . . . . . . . 63
CODE . . . . . . . . . . . . . . . . . . . . 63
COMMITMENT . . . . . . . . . . . . . . . . . 64
COMPANY. . . . . . . . . . . . . . . . . . . 1
COMPANY AUTHORIZATIONS . . . . . . . . . . . 26
COMPANY BOARD RESOLUTIONS. . . . . . . . . . 13
COMPANY COMMON STOCK . . . . . . . . . . . . 64
COMPANY CONTRACT . . . . . . . . . . . . . . 64
COMPANY EMPLOYEE PLAN. . . . . . . . . . . . 64
COMPANY EXPENSE PAYMENTS . . . . . . . . . . 64
COMPANY INFORMATION. . . . . . . . . . . . . 64
COMPANY INTELLECTUAL PROPERTY. . . . . . . . 64
COMPANY LICENSES . . . . . . . . . . . . . . 64
COMPANY OPTION HOLDERS . . . . . . . . . . . 8
COMPANY OPTION PLAN. . . . . . . . . . . . . 13
COMPANY OPTIONS. . . . . . . . . . . . . . . 13
COMPANY PRODUCTS . . . . . . . . . . . . . . 64
COMPANY SHAREHOLDERS MEETING . . . . . . . . 43
COMPANY SOFTWARE . . . . . . . . . . . . . . 64
COMPANY TRANSACTION EXPENSES . . . . . . . . 32
COMPANY VOTING AGREEMENTs. . . . . . . . . . 1
COMPENSATION COMMITTEE . . . . . . . . . . . 56
COMPETING PARTY. . . . . . . . . . . . . . . 40
COMPETING TRANSACTION. . . . . . . . . . . . 40
CONFIDENTIAL INFORMATION . . . . . . . . . . 65
CONFLICT . . . . . . . . . . . . . . . . . . 14
CONSENT. . . . . . . . . . . . . . . . . . . 65
CONSIDERATION RECEIVED . . . . . . . . . . . 51
PAGE-i- Agreement and Plan of Merger
CONTRACT . . . . . . . . . . . . . . . . . . 65
COPYRIGHTS . . . . . . . . . . . . . . . . . 65
CURRENT BALANCE SHEET. . . . . . . . . . . . 65
CURRENT BALANCE SHEET DATE . . . . . . . . . 65
CUSTOMER INFORMATION . . . . . . . . . . . . 20
DEBT . . . . . . . . . . . . . . . . . . . . 65
DEFENDING PARTY. . . . . . . . . . . . . . . 54
DISCLOSING PARTY . . . . . . . . . . . . . . 65
DISSENTING SHAREHOLDER . . . . . . . . . . . 65
DISSENTING SHARES. . . . . . . . . . . . . . 65
EARNOUT PERIOD . . . . . . . . . . . . . . . 55
EBITDA . . . . . . . . . . . . . . . . . . . 2
EBITDA RATIO . . . . . . . . . . . . . . . . 2
EBITDA TARGET. . . . . . . . . . . . . . . . 2
EFFECTIVE TIME . . . . . . . . . . . . . . . 1
EMPLOYEE . . . . . . . . . . . . . . . . . . 65
EMPLOYEE AGREEMENT . . . . . . . . . . . . . 66
EMPLOYEE BENEFIT PLAN. . . . . . . . . . . . 66
EMPLOYEE PENSION PLAN. . . . . . . . . . . . 66
ENCUMBRANCE. . . . . . . . . . . . . . . . . 66
ENFORCEABLE. . . . . . . . . . . . . . . . . 66
ENTITY . . . . . . . . . . . . . . . . . . . 66
ENVIRONMENT. . . . . . . . . . . . . . . . . 66
ENVIRONMENTAL LAW. . . . . . . . . . . . . . 66
ENVIRONMENTAL PROPERTY . . . . . . . . . . . 67
ENVIRONMENTAL RELEASE. . . . . . . . . . . . 67
ENVIRONMENTAL, HEALTH AND SAFETY LIABILITIES 66
EQUIPMENT. . . . . . . . . . . . . . . . . . 20
EQUITY INTEREST. . . . . . . . . . . . . . . 67
ERISA. . . . . . . . . . . . . . . . . . . . 67
ESCROW ACCOUNT . . . . . . . . . . . . . . . 9
ESCROW AGENT . . . . . . . . . . . . . . . . 67
ESCROW AGREEMENT . . . . . . . . . . . . . . 10
ESCROW PERIOD. . . . . . . . . . . . . . . . 10
ESCROW STOCK . . . . . . . . . . . . . . . . 9
ESCROW TERMINATION DATE. . . . . . . . . . . 67
EVENT. . . . . . . . . . . . . . . . . . . . 67
EXCHANGE ACT . . . . . . . . . . . . . . . . 67
EXCHANGE AGENT . . . . . . . . . . . . . . . 67
EXCLUDED SOFTWARE. . . . . . . . . . . . . . 67
EXECUTIVE EMPLOYMENT AGREEMENT . . . . . . . 47
EXPENSE FUND . . . . . . . . . . . . . . . . 10
EXPENSES . . . . . . . . . . . . . . . . . . 60
FACILITIES . . . . . . . . . . . . . . . . . 67
FIDUCIARY. . . . . . . . . . . . . . . . . . 67
FINANCIAL PROJECTIONS. . . . . . . . . . . . 32
FINANCIALS . . . . . . . . . . . . . . . . . 67
FOREIGN EXPORT AND IMPORT LAWS . . . . . . . 68
FORM S-4 . . . . . . . . . . . . . . . . . . 68
FY 2005. . . . . . . . . . . . . . . . . . . 68
FY 2006. . . . . . . . . . . . . . . . . . . 68
FY 2007. . . . . . . . . . . . . . . . . . . 68
GAAP . . . . . . . . . . . . . . . . . . . . 68
GOVERNMENT . . . . . . . . . . . . . . . . . 68
PAGE-i- Agreement and Plan of Merger
GOVERNMENT CONTRACT. . . . . . . . . . . . . 68
GOVERNMENTAL BODY. . . . . . . . . . . . . . 68
GOVERNMENTAL PERMIT. . . . . . . . . . . . . 68
GUARANTEE. . . . . . . . . . . . . . . . . . 68
HAZARDOUS ACTIVITY . . . . . . . . . . . . . 68
HAZARDOUS MATERIALS. . . . . . . . . . . . . 68
INDEBTEDNESS . . . . . . . . . . . . . . . . 68
INDEMNIFIED PARTY. . . . . . . . . . . . . . 53
INDEMNIFYING PARTY . . . . . . . . . . . . . 53
INTELLECTUAL PROPERTY RIGHTS . . . . . . . . 68
INTERCREDITOR AGREEMENT. . . . . . . . . . . 69
INVENTORIES. . . . . . . . . . . . . . . . . 27
IRS. . . . . . . . . . . . . . . . . . . . . 69
JAMS . . . . . . . . . . . . . . . . . . . . 54
KEY SHAREHOLDERS . . . . . . . . . . . . . . 1
KNOWLEDGE. . . . . . . . . . . . . . . . . . 69
LAW. . . . . . . . . . . . . . . . . . . . . 69
LEASE. . . . . . . . . . . . . . . . . . . . 69
LETTER OF TRANSMITTAL. . . . . . . . . . . . 8
LIABILITY. . . . . . . . . . . . . . . . . . 69
LIABLE . . . . . . . . . . . . . . . . . . . 69
LICENSE. . . . . . . . . . . . . . . . . . . 69
LIEN . . . . . . . . . . . . . . . . . . . . 69
LOSSES . . . . . . . . . . . . . . . . . . . 69
MARK . . . . . . . . . . . . . . . . . . . . 69
MASK WORK. . . . . . . . . . . . . . . . . . 70
MATERIAL . . . . . . . . . . . . . . . . . . 70
MATERIAL ADVERSE EFFECT. . . . . . . . . . . 70
MATERIAL COMPANY CONTRACT. . . . . . . . . . 70
MATERIAL COUNTERPARTY. . . . . . . . . . . . 42
MATERIAL CUSTOMERS . . . . . . . . . . . . . 31
MATERIAL EXCLUDED SOFTWARE . . . . . . . . . 70
MATERIAL INTELLECTUAL PROPERTY RIGHTS. . . . 70
MATERIAL INTEREST. . . . . . . . . . . . . . 70
MATERIALS OF ENVIRONMENTAL CONCERN . . . . . 70
MERGER . . . . . . . . . . . . . . . . . . . 1
MERGER CONSENT . . . . . . . . . . . . . . . 42
MERGER CONSIDERATION . . . . . . . . . . . . 70
MERGER SUB . . . . . . . . . . . . . . . . . 1
MULTIEMPLOYER PLAN . . . . . . . . . . . . . 70
NET REVENUES . . . . . . . . . . . . . . . . 2
NET REVENUES RATIO . . . . . . . . . . . . . 3
NET REVENUES TARGET. . . . . . . . . . . . . 3
NON-COMPETITION AGREEMENT. . . . . . . . . . 47
OCCUPATIONAL SAFETY AND HEALTH LAW . . . . . 71
OPTION ELIGIBLE EMPLOYEE . . . . . . . . . . 56
ORDER. . . . . . . . . . . . . . . . . . . . 71
ORDINARY COURSE OF BUSINESS. . . . . . . . . 71
ORGANIZATIONAL DOCUMENTS . . . . . . . . . . 71
OTCBB. . . . . . . . . . . . . . . . . . . . 71
OTHER IP . . . . . . . . . . . . . . . . . . 71
OUTSIDE DATE . . . . . . . . . . . . . . . . 58
OWNED RIGHTS . . . . . . . . . . . . . . . . 71
PARENT . . . . . . . . . . . . . . . . . . . 1
PARENT COMMON STOCK. . . . . . . . . . . . . 71
PARENT DISCLOSURE SCHEDULES. . . . . . . . . 33
PAGE-ii- Agreement and Plan of Merger
PARENT FORM 10-Q . . . . . . . . . . . . . . 34
PARENT INDEMNIFIED PARTY . . . . . . . . . . 53
PARENT INDEMNIFYING PARTY. . . . . . . . . . 53
PARENT SHAREHOLDERS MATTERS. . . . . . . . . 56
PARENT SHAREHOLDERS MEETING. . . . . . . . . 56
PARENT VOTING AGREEMENTs . . . . . . . . . . 1
PARTY. . . . . . . . . . . . . . . . . . . . 1
PATENTS. . . . . . . . . . . . . . . . . . . 71
PERFORMANCE CONSIDERATION. . . . . . . . . . 4
PERFORMANCE CONSIDERATION TABLE. . . . . . . 3
PERFORMANCE DISPUTE NOTICE . . . . . . . . . 5
PERFORMANCE PERIODS. . . . . . . . . . . . . 3
PERSON . . . . . . . . . . . . . . . . . . . 71
POST SIGNING RETURNS . . . . . . . . . . . . 39
PRINCIPAL MARKET . . . . . . . . . . . . . . 3
PRIVATE FINANCING. . . . . . . . . . . . . . 71
PROHIBITED TRANSACTION . . . . . . . . . . . 71
PROPERTY . . . . . . . . . . . . . . . . . . 71
PROPOSED TRANSACTION . . . . . . . . . . . . 41
PROPRIETARY INFORMATION. . . . . . . . . . . 71
PRORATION PERCENTAGE . . . . . . . . . . . . 3
PROSECUTING PARTY. . . . . . . . . . . . . . 54
PROXY STATEMENT. . . . . . . . . . . . . . . 72
RECEIVING PARTY. . . . . . . . . . . . . . . 72
REGISTERED INTELLECTUAL PROPERTY RIGHTS. . . 72
REJECTED CONTRACT. . . . . . . . . . . . . . 46
RELATED AGREEMENT. . . . . . . . . . . . . . 72
RELATED PARTY. . . . . . . . . . . . . . . . 72
REMEDIAL ACTION. . . . . . . . . . . . . . . 72
REPRESENTATIVE . . . . . . . . . . . . . . . 72
RESTRICTED TERRITORY . . . . . . . . . . . . 72
SEC. . . . . . . . . . . . . . . . . . . . . 72
SECURITIES . . . . . . . . . . . . . . . . . 72
SECURITIES ACT . . . . . . . . . . . . . . . 72
SECURITY INTEREST. . . . . . . . . . . . . . 73
SHARE AUTHORIZATION. . . . . . . . . . . . . 42
SHAREHOLDER. . . . . . . . . . . . . . . . . 73
SHAREHOLDER AGENT. . . . . . . . . . . . . . 1
SHAREHOLDER CLOSING CONSIDERATION. . . . . . 73
SHAREHOLDER CONSIDERATION. . . . . . . . . . 73
SHAREHOLDER INDEMNIFIED PARTY. . . . . . . . 53
SHAREHOLDER LOAN . . . . . . . . . . . . . . 73
SHAREHOLDER PERFORMANCE CONSIDERATION. . . . 4
SHAREHOLDER TABLE. . . . . . . . . . . . . . 15
SOFTWARE . . . . . . . . . . . . . . . . . . 73
SPACEDEV . . . . . . . . . . . . . . . . . . 1
SPACEDEV LOAN. . . . . . . . . . . . . . . . 73
STANDSTILL AND LOCK-UP AGREEMENT . . . . . . 47
STARSYS. . . . . . . . . . . . . . . . . . . 1
STARSYS FINANCIAL STATEMENTS . . . . . . . . 5
STOCK BONUS PLAN . . . . . . . . . . . . . . 73
STOCK EARNOUT. . . . . . . . . . . . . . . . 3
SUBSIDIARY . . . . . . . . . . . . . . . . . 74
TANGIBLE PERSONAL PROPERTY . . . . . . . . . 74
TAX. . . . . . . . . . . . . . . . . . . . . 74
TAX RETURN . . . . . . . . . . . . . . . . . 74
PAGE-ii- Agreement and Plan of Merger
TECHNOLOGY . . . . . . . . . . . . . . . . . 74
THIRD-PARTY LICENSE. . . . . . . . . . . . . 74
THREAT OF RELEASE. . . . . . . . . . . . . . 74
TRADE SECRET . . . . . . . . . . . . . . . . 74
TRADEMARK. . . . . . . . . . . . . . . . . . 75
TRADING DAY. . . . . . . . . . . . . . . . . 3
TRANSACTION. . . . . . . . . . . . . . . . . 75
TRANSACTION DOCUMENT . . . . . . . . . . . . 75
TRANSACTION EXPENSE PAYMENT SCHEDULE . . . . 11
TRANSFER . . . . . . . . . . . . . . . . . . 75
TREASURY REGULATION. . . . . . . . . . . . . 75
TRIGGER CONDITIONS . . . . . . . . . . . . . 3
TWENTY DAY VWAP. . . . . . . . . . . . . . . 3
U.S. EXPORT AND IMPORT LAWS. . . . . . . . . 75
UPDATED DISCLOSURE SCHEDULES . . . . . . . . 75
UPDATED PARENT DISCLOSURE SCHEDULES. . . . . 75
VECTRA . . . . . . . . . . . . . . . . . . . 75
VECTRA LOAN. . . . . . . . . . . . . . . . . 75
VWAP . . . . . . . . . . . . . . . . . . . . 3
PAGE-iii- Agreement and Plan of Merger
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
This AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (together with all
Schedules and Exhibits hereto, this "AGREEMENT") is made and entered into as of
October 24, 2005, by and among (i) SpaceDev, Inc., a Colorado corporation
(together with its successors and permitted assigns, "PARENT" or "SPACEDEV"),
(ii) Monoceros Acquisition Corp., a Colorado corporation and a wholly-owned
subsidiary of Parent (together with its successors and permitted assigns,
"MERGER SUB"), (iii) Starsys Research Corporation, a Colorado corporation
(together with its successors, the "COMPANY" or "STARSYS"), (iv) Scott Tibbitts,
an individual resident of the State of Colorado, and any other key shareholder
of the Company identified on the signature pages hereof (collectively, the "KEY
SHAREHOLDERS"), and (v) Scott Tibbitts, as agent for the shareholders of the
Company (including the Key Shareholders) (together with its successors in such
capacity, the "SHAREHOLDER AGENT"). Parent, Merger Sub, the Company, the
Shareholder Agent and the Key Shareholders are individually referred to as a
"PARTY" and collectively as the "PARTIES". Capitalized terms shall have the
respective meanings ascribed thereto in Section 11.18 or elsewhere in this
Agreement.
R E C I T A L S
---------------
A. This Agreement contemplates a merger of the Company with and into Merger
Sub (the "MERGER"), with Merger Sub being the surviving corporation. In such
Merger, one hundred percent (100%) of the issued and outstanding shares of
capital stock of the Company will be converted into the right to receive cash
and shares of Common Stock of Parent (as set forth in Article II), on the terms
and subject to the conditions set forth in this Agreement.
B. The Parties desire to make certain representations and warranties and
other agreements in connection with the Merger as set forth in this Agreement.
C. Concurrently with the execution and delivery of this Agreement, as
material inducements of the several Parties to enter into this Agreement, (i)
each Key Shareholder is executing and delivering to Parent a (1) Voting
Agreement, substantially in the form attached hereto as Exhibit A-1 (the
"COMPANY VOTING AGREEMENTS"), (2) a Proxy relating to shares of Company Common
Stock, substantially in the form attached to the Company Voting Agreement, and
(3) a Proxy relating to shares of Parent Common Stock, substantially in the form
attached to the Company Voting Agreement, and (ii) each director of Parent
holding not less than 1% of the outstanding shares of Parent Common Stock is
executing and delivering to the Company a (x) Voting Agreement, substantially in
the form attached hereto as Exhibit A-2 (the "PARENT VOTING AGREEMENTS"), and
(y) a Proxy, substantially in the form attached to the Parent Voting Agreement.
A G R E E M E N T
-----------------
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants contained herein, the Parties, intending to be legally bound,
hereby agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. At the Effective Time, subject to and upon the
terms and conditions of this Agreement and in accordance with the applicable
provisions of the Colorado Business Corporation Act (the "CBCA"), the Company
shall be merged with and into Merger Sub, the separate corporate existence of
the Company shall cease, and Merger Sub shall continue as the surviving
corporation and as a wholly-owned Subsidiary of Parent (together with its
successors, the "SURVIVING CORPORATION").
Section 1.2 Effective Time. Subject to the provisions of this Agreement,
the Company, Parent and Merger Sub shall cause the Merger to be consummated by
filing a Statement of Merger in substantially the form attached hereto as
Exhibit B (the "STATEMENT OF MERGER"), in accordance with the relevant
provisions of the CBCA, as soon as practicable after the Closing Date, such
filing to be made no later than three business days
PAGE A-1 Agreement and Plan of Merger
after the Closing). The Merger shall become effective upon the filing of the
Statement of Merger with the Secretary of State of the State of Colorado (the
"EFFECTIVE TIME").
Section 1.3 Closing. The closing of the Merger (the "CLOSING") shall take
place at the offices of Sheppard, Mullin, Richter & Hampton LLP, 12544 High
Bluff Drive, Suite 300, San Diego, California, 92130-3051, commencing at 10:00
a.m. local time on December 12, 2005, or such other later date which shall not
be more than two (2) business days after the date on which the last of the
conditions in Article VI has been satisfied or waived or at such other time,
date and place as Parent and Company may mutually determine (the "CLOSING
DATE"), and in no event later than the Outside Date specified in Section
10.1(d)(2).
Section 1.4 Effects of the Merger. The Merger shall have the effects set
forth in this Agreement, the Statement of Merger and the applicable provisions
of the CBCA. Without limiting the generality of the foregoing, subject to any
provisions hereof expressly disclaiming the assumption of any Liabilities, at
the Effective Time, all of the properties, rights, privileges and powers of
Merger Sub and the Company shall vest in the Surviving Corporation, and all
Liabilities of Merger Sub and the Company shall become the Liabilities of the
Surviving Corporation.
Section 1.5 Articles of Incorporation and Bylaws. The Articles of
Incorporation and Bylaws of Merger Sub immediately prior to the Effective Time
shall be the Articles of Incorporation and Bylaws of the Surviving Corporation
after the Effective Time (except that the name of the Surviving Corporation
shall be "Starsys Research Corporation") until thereafter amended.
Section 1.6 Directors and Officers. Unless otherwise determined by Parent
prior to the Effective Time, Merger Sub's directors and officers immediately
prior to the Effective Time shall be the Surviving Corporation's initial
directors and officers and shall hold office in accordance with the Articles of
Incorporation and Bylaws of the Surviving Corporation until their successors are
duly elected or appointed and qualified or until their earlier death,
resignation or removal.
ARTICLE II
MERGER CONSIDERATION;
CANCELLATION OF COMPANY STOCK
Section 2.1 Certain Definitions. The following terms, whenever used in this
Article II, shall have the meanings ascribed to them below or in the referenced
Sections of this Article II:
"CAPITALIZATION ADJUSTMENT" means an adjustment based on any stock split,
reverse stock split, combination, consolidation or reclassification of, or any
stock dividend on, the Parent Common Stock, the recapitalization of Parent, or
any like change.
"CASH EARNOUT" means, with respect to any Performance Period, an amount of
cash calculated as set forth in the "Cash Earnout" column in the Performance
Consideration Table for such Performance Period.
"EBITDA" means, subject to Section 2.6, consolidated net income before
interest income, interest expense, income Taxes, depreciation and amortization
of the Surviving Corporation.
"EBITDA RATIO" means, with respect to any Performance Period, the lesser of
(a) 1.0, and (b) the quotient of (x) EBITDA of the Surviving Corporation for
such Performance Period, divided by (y) the EBITDA Target for such Performance
Period.
"EBITDA TARGET" means, with respect to any Performance Period, the amount
listed in the "EBITDA Target" column in the Performance Consideration Table for
such Performance Period.
"NET REVENUES" means, with respect to any Performance Period and subject to
Section 2.6, gross sales revenues of the Surviving Corporation in such
Performance Period, after adjustment for normal and customary trade, quantity
and cash discounts and sales returns and allowances, consistent with past
practices of the Company or
PAGE A-2 Agreement and Plan of Merger
approved by the Shareholder Agent (such approval not to be unreasonably withheld
or conditioned), including (A) those granted on account of price adjustments,
billing errors, rejected goods, returns, rebates or similar payments, (B)
administrative and other fees and reim-burse-ments and similar payments to
wholesalers and other distributors, buying groups and other institutions, (C)
allowances, rebates and fees paid to distributors, and (D) chargebacks.
"NET REVENUES RATIO" means, with respect to any Performance Period, the
lesser of (a) 1.0, and (b) the quotient of (x) Net Revenues of the Surviving
Corporation for such Performance Period, divided by (y) the Net Revenues Target
for such Performance Period.
"NET REVENUES TARGET" means, with respect to any Performance Period, the
amount listed in the "Net Revenues Target" column in the Performance
Consideration Table for such Performance Period.
"PERFORMANCE CONSIDERATION TABLE" means the table set forth immediately
succeeding Section 2.4(c).
"PERFORMANCE PERIODS" means each of FY 2005, FY 2006 and FY 2007.
"PRINCIPAL MARKET" means the Nasdaq National Market, the Nasdaq Capital
Market, the OTCBB, the American Stock Exchange or the New York Stock Exchange,
whichever is at the time the principal trading exchange, market or inter-dealer
or automated quotation system for the Parent Common Stock and, for purposes of
calculating VWAP, for which Bloomberg Financial, L.P. publishes the necessary
reports.
"PRORATION PERCENTAGE" means, with respect to any Performance Period, a
percentage equal to:
[ 60% (EBITDA Ratio for such Performance Period - 0.8) x 5 ] +
[ 40% (Net Revenues Ratio for such Performance Period - 0.8 ) x 5 ] .
"STOCK EARNOUT" means, with respect to any Performance Period, a number of
shares of Parent Common Stock calculated as set forth in the "Stock Earnout"
column in the Performance Consideration Table for such Performance Period.
"TRADING DAY" means any day other than a Saturday or a Sunday on which the
Principal Market is open for trading in equity securities.
"TRIGGER CONDITIONS" means, with respect to any
Performance Period, each of the following conditions: (i) the Net Revenues of
the Surviving Corporation for such Performance Period is equal to or greater
than 80% of the Net Revenues Target for such Performance Period, and (ii) the
EBITDA of the Surviving Corporation for such Performance Period is equal to or
greater than 80% of the EBITDA Target for such Performance Period.
"TWENTY DAY VWAPTWENTY DAY VWAP" means, with respect to any date of
determination, the arithmetic mean of the VWAP for the twenty (20) consecutive
Trading Days ending on such date or, if such date is not a Trading Day, the next
preceding Trading Day.
"VWAP" means, with respect to any Trading Day, the volume weighted average
price of the Parent Common Stock on such Trading Day (equal to the aggregate
sales price of all trades of Parent Common Stock during such Trading Day on the
Principal Market divided by the total number of shares of Common Stock traded
during such Trading Day on the Principal Market), as reported by Bloomberg
Financial, L.P. using the AQR function.
Section 2.2 Effect on Capital Stock. At the Effective Time, because of the
Merger and without any further action on the part of Parent, Merger Sub or the
Company:
(a) Common Stock of Merger Sub. Each share of the common stock of Merger
Sub issued and outstanding immediately prior to the Effective Time shall remain
a validly issued, fully paid, and non-assessable share of common stock of Merger
Sub.
PAGE A-3 Agreement and Plan of Merger
(b) Common Stock of the Company. At the Effective Time and subject to the
Dissenting Shareholders' rights set forth in Section 2.13, each share of the
Company Common Stock, issued and outstanding immediately prior to the Effective
Time shall automatically be canceled and retired and shall cease to exist, and
the holder of a stock certificate that, immediately prior to the Effective Time,
represented outstanding shares of Company Common Stock shall cease to have any
rights with respect thereto, except the right to receive, upon the surrender of
such certificates (or delivery of the affidavit and bond, if any, specified in
Section 2.10(e)) and upon the terms and subject to the conditions set forth in
this Article II and elsewhere in this Agreement, the Shareholder Consideration
to be distributed to holders of Company Common Stock as provided in this Article
II and elsewhere in this Agreement (including the deposit of a portion of such
Shareholder Consideration into the Escrow Account and the Expense Fund, as
provided in Section 2.17 and Section 2.18, respectively).
(c) Stock Transfer Books. After the Effective Time, the Company's stock
transfer books shall be closed and there shall be no further Transfers of
Company Common Stock. If, at or after the Effective Time, certificates
represented outstanding shares of Company Common Stock are presented to the
Surviving Corporation, they shall be canceled and exchanged in accordance with
this Agreement.
Section 2.3 Loan Repayments. At Closing, Parent shall (i) pay off the
remaining principal and interest of the Vectra Loans and any other amounts due
and owing to Vectra, (ii) cancel and terminate the SpaceDev Loan and related
Secured Promissory Note; provided that any representations, warranties or
agreements therein which by their terms survive the termination of the SpaceDev
Loan or such Secured Promissory Note, as the case may be, shall survive such
cancellation and termination, and (iii) pay off each Shareholder Loan in full;
provided that Parent shall have no obligation to pay more than $4,600,000 in the
aggregate to pay off in full all of the Vectra Loans and Shareholder Loans,
including all Liabilities in respect thereof; and, provided, further, that if
Parent shall not have paid off the Vectra Loans at Closing as required, Parent
shall tender Vectra a guaranty of the Vectra Loans, in form and substance
reasonably satisfactory to Vectra, in exchange for Vectra releasing the Scott
Tibbitts guaranty.
Section 2.4 Shareholder Consideration. In consideration for 100% of the
issued and outstanding Company Common Stock, Parent shall, subject to the terms
and conditions of this Article II and elsewhere in this Agreement, including the
Dissenting Shareholders proviso and retention rights of Section 2.7, the
withholding provisions of Section 2.16, if applicable, the escrow provisions of
Section 2.17, the expense fund provisions of Section 2.18 and the retention and
set-off rights provided with respect to Key Shareholders in Article VII, pay and
distribute the following Shareholder Consideration:
(a) $1,500,000 (subject to reduction pursuant to Section 2.20) in cash,
less the aggregate amount of funds payable to the Shareholder Agent at Closing
for the payment of Company Transaction Expenses in accordance with Section 2.19;
to be delivered at Closing by wire transfer of immediately available funds to
the Exchange Agent;
(b) a number of shares of Parent Common Stock equal to the quotient of (x)
$7,500,000 (subject to reduction pursuant to Section 2.20), divided by (y) the
greater of (1) $1.40 (subject to Capitalization Adjustments, if any), and (2)
the lesser of (A) $1.90 (subject to Capitalization Adjustments, if any), and (B)
the Twenty Day VWAP as of the Trading Day next preceding the Closing Date; less
the number of shares deliverable to the Shareholder Agent at Closing for the
satisfaction of Company Transaction Expenses in accordance with Section 2.19, to
be delivered at Closing by delivery of appropriate share certificates evidencing
such number of shares to the Exchange Agent; and
(c) subject to the Surviving Corporation satisfying each Trigger Condition
for a Performance Period (it being understood and agreed that, except to the
extent set forth in Section 2.5(d), no performance consideration shall be earned
or paid in respect of such Performance Period if any of the Trigger Conditions
is not fully satisfied), performance consideration in respect of such
Performance Period, as provided in Section 2.5, consisting of Cash Earnout and
Stock Earnout (the "Performance Consideration"), less the number of shares
deliverable to the Shareholder Agent in respect of such Performance Period for
the satisfaction of Company Transaction Expenses in accordance with Section 2.19
(the Performance Consideration, as so reduced, the "Shareholder Performance
Consideration"); to be delivered within ten (10) days after Parent and the
Shareholder Agent agree on the calculation thereof, or if no agreement is
reached, after the conclusion of any dispute resolution
PAGE A-4 Agreement and Plan of Merger
pursuant to Section 2.5(c), by wire transfer of Cash Earnout (if any), and by
delivery of appropriate share certificates evidencing the Stock Earnout (if
any), to the Exchange Agent.
PERFORMANCE CONSIDERATION TABLE
-------------------------------
PERFORMANCE PERIOD NET REVENUES TARGET EBITDA TARGET CASH EARNOUT STOCK EARNOUT
FY 2005 $21,500,000 $250,000 $350,000 x The number of shares of Parent Common Stock
Proration equal to $3,000,000 multiplied by the Proration
Percentage Percentage and divided by the greater of (a)
Twenty Day VWAP as of the Trading Day immediately
preceding the date of the audit opinion for the
Starsys Financial Statements for FY 2005, and
(b) $2.00 per share (subject to Capitalization
Adjustments, if any).
FY 2006 $22,500,000 $2,000,000 $350,000 x The number of shares of Parent Common Stock
Proration equal to $7,500,000 multiplied by the Proration
Percentage Percentage and divided by the greater of (a) Twenty
Day VWAP as of the Trading Day immediately
preceding the date of the audit opinion for the
Starsys Financial Statements for FY 2006, and
(b) $2.50 per share (subject to Capitalization
Adjustments, if any).
FY 2007 $24,000,000 $2,500,000 $350,000 x The number of shares of Parent Common Stock equal
Proration to $7,500,000 multiplied by the Proration Percentage
Percentage and divided by the greater of (a) Twenty Day VWAP as
of the Trading Day immediately preceding the
date of the audit opinion for the Starsys Financial
Statements for FY 2007, and (b) $3.00 per share
(subject to Capitalization Adjustments, if any).
Section 2.5 Calculation of Performance Consideration. The determination of
Performance Consideration (if any) for any Performance Period, shall be subject
to the following provisions:
(a) Following the end of each Performance Period, Parent shall have
separate audited financial statements for the Surviving Corporation (or a
successor Person or business unit contemplated by Section 8.2) prepared in
accordance with GAAP, subject to the guidelines set forth in Section 2.6 (the
"Starsys Financial Statements"). Upon receipt of the Starsys Financial
Statements, Parent shall promptly calculate the Performance Consideration (if
any) for such Performance Period and shall promptly (and in no event later than
the date Parent files its annual report on Form 10-KSB or Form 10-K (or
successor form thereto) with the SEC covering the end of such Performance
Period) deliver the Starsys Financial Statements and such calculation to the
Shareholder Agent.
(b) If within thirty (30) days following receipt of the Starsys Financial
Statements and the Performance Calculation, the Shareholder Agent has not given
Parent a written notice setting forth in reasonable detail its objection to
Parent's calculation of the Performance Consideration and the reasons therefor
(the "Performance Dispute Notice"), then the Shareholder Agent shall be deemed
to agree thereto and such calculation shall be binding and conclusive on the
Parties and all Shareholders. The Shareholder Agent may waive this thirty (30)
day period by providing Parent with written notice of its agreement with
Parent's calculation of the Performance Consideration, whereupon such
calculation shall be binding and conclusive on the Parties and all Shareholders.
PAGE A-5 Agreement and Plan of Merger
(c) If the Shareholder Agent delivers to Parent a Performance Dispute
Notice within the thirty (30) day period specified in Section 2.5(b), Parent and
Shareholder Agent shall use their respective commercially reasonable efforts for
a period of ten (10) days after Parent's receipt of the Performance Dispute
Notice (or such longer period as Parent and Shareholder Agents shall mutually
agree) to resolve any disputes raised by Shareholder Agent. If at the end of
such period the Shareholder Agent and Parent fail to agree on the calculation of
the Performance Consideration:
(1) if the dispute relates solely to the calculation of EBITDA, the
Net Revenues, Cash Earnout, the Stock Earnout or other accounting matters,
and not to any other matters (an "Accounting Dispute"), the Shareholder
Agent shall promptly engage an independent accounting firm to review the
disputed calculations and to propose what such firm determines to be the
correct calculations, based on the terms and provisions of this Agreement,
to Parent and the Shareholder Agent. If the Shareholder Agent and Parent
still fail to agree on the calculation of the Performance Consideration,
Parent and the Shareholder Agent shall negotiate in good faith to select a
reputable independent auditing firm, other than Parent's independent public
accounting firm, the Company's accounting firm prior to the Closing or the
independent accounting firm engaged by the Shareholder Agent as aforesaid
(the "ACCOUNTING REFEREE"); provided that if Parent and the Shareholder
Agent are unable to agree on an Accounting Referee, the Accounting Referee
shall be selected by the Audit Committee of the Board of Directors of
Parent (subject to the aforesaid qualifications and disqualifications).
Parent and the Shareholder Agent shall engage the Accounting Referee
promptly to review the remaining disputed calculations and to deliver a
report containing what the Accounting Referee determines to be the correct
calculations, based on the terms and provisions of this Agreement, to
Parent and the Shareholder Agent. The fees and costs of the Accounting
Referee shall be borne by (i) Parent, if the Accounting Referee's
calculations increase the aggregate value of the Cash Earnout and the Stock
Earnout by more than 5%; and (ii) the Shareholder Agent, otherwise; or
(2) if the dispute is not solely an Accounting Dispute, the
calculation of the Performance Consideration shall be submitted to dispute
resolution under Section 7.6 (as if the dispute had arisen under Section
7.4(b)(1) and Parent were the Indemnified Party) (it being agreed that the
arbitrator in any arbitration shall consider applying the procedures
applicable to Accounting Disputes to resolve any disputed accounting
matters brought before such arbitrator).
(d) Notwithstanding anything to the contrary in this Section 2.5, in the
event that in any Performance Period Parent materially breaches any of the
covenants applicable to it in Section 8.2, Section 8.4 or Section 8.5 (it being
agreed that any reduction in the number of shares of Parent Common Stock to be
reserved or granted pursuant to Section 8.5 shall be deemed to be material), or
breaches any of the covenants applicable to it Section 8.6 (any of the foregoing
breaches, an "Earn-Out Breach"), and such breach shall not have been cured
within 30 days of written notice thereof by the Shareholder Agent, specifying in
reasonable detail the nature thereof, the Performance Consideration for such
Performance Period shall be the full amount available to the Shareholders in
respect of such Performance Period (that is, all Trigger Conditions will be
deemed satisfied and the Proration Percentage will be deemed to be 1.0, but the
payment date therefor and the denominator used in the Performance Consideration
Table to calculate the Stock Earnout shall not be affected thereby; provided
that in the event of a material breach of Section 8.4, (i) the payment date for
all remaining Performance Periods shall be accelerated to the date 90 days after
the closing of the applicable sale, and (ii) the denominator used in the
Performance Consideration Table to calculate the Stock Earnout shall be based on
the date of the closing, except that the minimum per-share price for calculating
the Stock Earnout for each remaining Performance Period shall be the respective
minimum per-share price applicable to such Performance Period, as set forth in
the Performance Consideration Table). The remedy set forth in this Section
2.5(d) (i) shall not be available with respect to any particular Earn-Out Breach
if the Shareholder Agent brings a claim pursuant to Section 7.4(b)(2) for such
Earn-Out Breach, and (ii) if obtained, shall be the sole and exclusive remedies
of the Parties, the Shareholder Agent and the Shareholders (including the Key
Shareholders) with respect to any claim relating to any Earn-Out Breaches,
including any previous or subsequent Earn-Out Breaches (it being understood and
agreed that Parent shall be entitled to recover, including by set-off against
amounts otherwise to be paid under this Section 2.5(d), any amounts previously
paid on account of any prior Earn-Out Breaches).
(e) The amount of the Performance Consideration (if any) determined
pursuant to this Section 2.5 shall be binding and conclusive on the Parties and
all Shareholders.
PAGE A-6 Agreement and Plan of Merger
Section 2.6 Protective Provisions. The Parties hereto agree that, following
the Closing and until the end of the final Performance Period, the determination
of Net Revenues and EBITDA shall be computed in accordance with the following
guidelines:
(a) there shall be no charge to EBITDA for any transactional costs of
Parent in completing this Merger, other than expenses incurred by Parent in
respect of the review by Parent's independent public accounting firm of the
Company's interim financial statements for FY 2005;
(b) Parent corporate, management, compliance and other general
administrative overhead shall be allocated to the Surviving Corporation in a
reasonable and equitable manner;
(c) Parent's compensation to Scott Tibbitts consistent with his
compensation level at the date of this Agreement shall be considered an expense
of the Surviving Corporation;
(d) any services provided by Parent to the Surviving Corporation and
vice-versa will be at burdened cost incurred for such services, if applicable;
(e) no effect will be given for any change in accounting methods for the Company
and the Surviving Corporation from those utilized as of the date of this
Agreement;
(f) indemnification amounts recovered by the Surviving Corporation pursuant
to Article VII shall not be considered income of the Surviving Corporation;
(g) no effect will be given for any writedown or writeoff of goodwill of
the Surviving Corporation;
(h) for the purpose of calculating the Net Revenues and EBITDA of the
Surviving Corporation, the allocation of costs and revenues on cooperative or
joint contracts involving the joint sale of products or services of both Parent
and the Surviving Corporation will be negotiated in advance in good faith as if
the agreements were arm's-length; and
(i) a portion of Parent's audit fees will be allocated to the Surviving
Corporation for the expenses of auditing the Surviving Corporation's financial
statements, which amount shall equal for each Performance Period the arithmetic
mean of the aggregate accounting and auditing fees paid by the Company in
respect of the two fiscal years immediately preceding the Closing.
Section 2.7 Allocation and Distribution of Shareholder Consideration.
Subject to Section 2.12, Section 2.16, Section 2.17, Section 2.18, and other
provisions of this Article II, the Shareholder Consideration shall be allocated
among all pre-Closing shareholders of the Company pro rata according to the
respective number of shares of Company Common Stock held by each such
shareholder immediately prior to the Effective Time. Parent (and, to the extent
applicable, the Shareholder Agent) shall deliver the Shareholder Consideration
to the Exchange Agent for distribution to such shareholders, provided that
Parent may (i) retain any consideration in respect of any Dissenting
Shareholders for distribution pursuant to Section 2.13 or for paying any
settlement, award or judgment of any Actions relating to such shareholder's
Dissenting Shares, and (ii) retain or refrain from issuing, as the case may be,
any consideration forfeited or assigned to Parent pursuant to the terms of any
Non-Competition Agreements.
Section 2.8 Adjustments to Parent Common Stock. The number of shares of
Parent Common Stock issuable hereunder and held in escrow (pursuant to Section
2.17 and the Escrow Agreement) shall be appropriately adjusted to fully reflect
the effect of any Capitalization Adjustment after the date hereof.
Section 2.9 No Fractional Shares. No fractional shares of Parent Common
Stock shall be issued in the Merger and in lieu thereof any fractional share
shall be rounded up to the nearest whole share of Parent Common Stock.
PAGE A-7 Agreement and Plan of Merger
Section 2.10 Surrender of Certificates; Lost, Stolen or Destroyed
Certificates.
(a) Exchange Agent. Continental Stock Transfer & Trust Co. (or such other
Person as Parent may appoint as transfer agent for the Parent Common Stock or
exchange agent for purposes hereof from time to time) shall serve as the
exchange agent (the "EXCHANGE AGENT") for the Merger.
(b) Exchange Procedures. As promptly as practicable after the Effective
Time, to the extent any holder of record of any certificates which, immediately
prior to the Effective Time, represented outstanding shares of Company Common
Stock (the "CERTIFICATES"), has not already delivered a letter of transmittal
substantially in the form attached as Exhibit C (a "LETTER OF TRANSMITTAL"),
which provides, inter alia, for a release of all claims from such shareholder
qua shareholder against the Company, Merger Sub and Parent, at the Closing,
Parent shall cause the Exchange Agent to mail to each holder of record of any
Certificates whose Company Common Stock was converted into the right to receive
shares of Parent Common Stock pursuant to this Article II, a Letter of
Transmittal. Upon surrender of a Certificate to the Exchange Agent for exchange
(or the delivery of the affidavit and bond, if any, specified in Section
2.10(e)), together with a duly executed Letter of Transmittal and such other
documents as may be reasonably required by the Exchange Agent, the Exchange
Agent shall (i) deliver to the holder of such Certificate a certificate
representing the number of shares of Parent Common Stock that such holder has
the right to receive as Shareholder Closing Consideration pursuant to this
Article II, and (ii) deliver to the Escrow Agent under the Escrow Agreement on
behalf of such holder a certificate in the name of the Escrow Agent with respect
to the portion of the Escrow Shares that such holder has placed in escrow
pursuant to this Article II.
(c) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the Effective Time with respect to Parent
Common Stock with a record date after the Effective Time but prior to the
surrender of a Certificate (or the delivery of the affidavit and bond, if any,
specified in Section 2.10(e)) will be paid to the holder of such Certificate in
respect of the shares of Parent Common Stock exchangeable therefor.
(d) Transfers of Ownership. If any certificate for shares of Parent Common
Stock is to be issued in a name other than that in which the Certificates
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificates so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the Person requesting such
exchange will have paid to Parent or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
Certificates surrendered, or established to the satisfaction of Parent or any
agent designated by it that such tax has been paid or is not payable.
(e) Lost Stock Certificates. If any Certificate shall have been lost,
stolen, or destroyed, Parent shall deliver the applicable portion of the
Shareholder Consideration exchangeable therefor only upon (i) the making of an
affidavit of that fact by the holder thereof claiming such Certificate to be
lost, stolen, or destroyed, including the form of affidavit included in the
Letter of Transmittal, and (ii) if Parent reasonably requires, the posting by
such holder of a bond in such reasonable amount as Parent may direct as
indemnity against any claim that may be made against it with respect to such
Certificate.
Section 2.11 Stock Options; Stock Bonus Plan. The Company shall notify all
holders of options to purchase Company Common Stock issued under the Company
Option Plan and all other Commitments to acquire Company Common Stock (the
"COMPANY OPTION HOLDERS") of the need to exercise such options or Commitments on
or prior to the Closing Date and that such options and Commitments will
terminate as of the Effective Time in accordance with the Company Option Plan.
All such options and Commitments that are not exercised prior to the Effective
Time shall be cancelled, retired and extinguished and shall terminate and expire
as of the Effective Time and the Company shall take all actions necessary to
timely effectuate such termination. The Company shall terminate its Stock Bonus
Plan and distribute the assets thereof prior to the Effective Time. Neither
Parent nor the Surviving Corporation shall assume, become responsible for or
otherwise assume any obligations with respect to, any outstanding options,
warrants or other Commitments to purchase or otherwise acquire capital stock of
the Company or the Stock Bonus Plan, and no consideration shall be delivered or
deliverable in respect thereof. The Company shall cause Company Option Holders
who exercise their options or Commitments prior to the Closing Date to execute a
Letter of Transmittal together with an
PAGE A-8 Agreement and Plan of Merger
addendum thereto prior to the Closing, which addendum shall ratify, affirm and
approve each of the actions taken by the shareholders of the Company at the
Company Shareholders Meeting.
Section 2.12 Treasury Stock. All shares of capital stock of the Company
held on the treasury of the Company immediately prior to the Effective Time
shall be cancelled, retired and extinguished without any conversion thereof, and
no consideration shall be delivered or deliverable in exchange therefor.
Section 2.13 Shares of Dissenting Shareholders. Notwithstanding anything in
this Agreement to the contrary, as and if applicable, Dissenting Shares that are
issued and outstanding immediately prior to the Effective Time shall not be
converted into or be exchangeable for the right to receive the Shareholder
Consideration unless and until the corresponding Dissenting Shareholders shall
have failed to perfect or shall have effectively withdrawn or lost their
dissenter's rights under the CBCA or other applicable Law, and until such time
Parent shall retain the Shareholder Consideration otherwise payable in respect
of such Dissenting Shares. If any Dissenting Shareholder shall have failed to
perfect or shall have effectively withdrawn or lost such right, the applicable
Dissenting Shares shall thereupon be treated as though such shares of Company
Common Stock had been converted into and become exchangeable for the right to
receive, as of the Effective Time, the appropriate share of the Shareholder
Consideration as provided in Section 2.7 from the Shareholder Consideration
retained by Parent. The Company shall give Parent: (a) prompt notice of any
notice of dissenters' rights with respect to any shares of Company Common Stock
or attempted withdrawals of such notices and any other instruments served
pursuant to the CBCA or other applicable Law and received by the Company
relating to the Dissenting Shareholders' dissenters' rights, and (b) the
opportunity to direct, in its reasonable business judgment, all negotiations and
proceedings with respect to exercise of such dissenters' rights. Neither the
Company nor the Surviving Corporation shall, except with the prior written
consent of Parent, voluntarily make any payment with respect to, or settle or
offer to settle, any such exercise of dissenters' rights.
Section 2.14 Tax Consequences. For federal income tax purposes, the Merger
is intended to constitute a reorganization within the meaning of Section 368 of
the Code.
Section 2.15 Accounting Treatment. For accounting purposes, the Merger is
intended to be treated as a "purchase."
Section 2.16 Withholding Rights. Each of the Surviving Corporation, Parent
and the Exchange Agent shall be entitled to deduct and withhold from the
Shareholder Consideration otherwise payable pursuant to this Agreement to a
Shareholder such amounts as it is required to deduct and withhold with respect
to the making of such payment under the Code and the rules and regulations
promulgated thereunder, or any provision of a Tax Law. To the extent that
amounts are withheld from the Shareholder Consideration as provided in this
Article II, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the Shareholder in respect to which such
deduction and withholding was made.
Section 2.17 Escrow Account.
(a) At the Closing, Parent shall deliver to the Escrow Agent, on behalf of
the Shareholders, stock certificates evidencing a number of shares equal to 50%
of the number of shares of Parent Common Stock issuable at Closing pursuant to
Section 2.4(b) (without taking into account any shares deliverable to the
Shareholder Agent at Closing for the satisfaction of Company Transaction
Expenses in accordance with Section 2.19). If any Performance Consideration is
payable for FY 2005, Parent shall deliver to the Escrow Agent on behalf of the
Shareholders stock certificates evidencing a number of shares equal to 50% of
the number of shares of Parent Common Stock issuable as Stock Earnout for FY
2005 (without taking into account any shares deliverable to the Shareholder
Agent at Closing for the satisfaction of Company Transaction Expenses in
accordance with Section 2.19).
(b) Subject to the obligation to fund the Expense Fund pursuant to Section
2.18, Parent shall cause the Escrow Agent to deposit any shares of Parent Common
Stock delivered to the Escrow Agent from time to time pursuant to Section
2.17(a) ("ESCROW STOCK") into an escrow account with the Escrow Agent (the
"ESCROW ACCOUNT") for the purpose of securing the indemnification obligations
set forth in Article VII, which Escrow Account shall be subject to the terms and
provisions of Section 7.2 and the Escrow Agreement. The Escrow Agent
PAGE A-9 Agreement and Plan of Merger
shall maintain the Escrow Account for such purpose until ten days after the date
of the audit opinion for the Starsys Financial Statements for FY 2006 (the
"ESCROW PERIOD"); provided, however, that in the event any Indemnified Parties
have made any claims under Article VII prior to the end of the Escrow Period,
the Escrow Period and the release of any Escrow Stock shall be tolled, and a
number of shares having an aggregate value up to the maximum aggregate amount of
such claims shall remain in the Escrow Account as security and not be released
to the Shareholders, until all such claims shall have been fully and finally
resolved and settled.
(c) Releases of Escrow Stock from the Escrow Account shall be subject to
the terms and conditions of an Escrow Agreement (the "ESCROW AGREEMENT") and
Section 2.9. In the event that this Agreement is adopted by the Shareholders,
then all Shareholders shall, without further act of any Shareholder, be deemed
to have consented to and approved (i) the terms and conditions of the Escrow
Agreement, (ii) the use of the Escrow Account as collateral to secure the rights
of the Indemnified Parties under Article VII in the manner set forth herein and
in the Escrow Agreement, and (iii) the appointment of the Shareholder Agent as
the representative under the Escrow Agreement of the Shareholders receiving
shares of Parent Common Stock under this Agreement and as the attorney-in-fact
and agent for and on behalf of each such Person (other than holders of
Dissenting Shares).
(d) The terms and provisions of the Escrow Agreement shall be in the form
reasonably agreed by Parent, the Company and the Escrow Agent prior to the
filing of the Form S-4, consistent with the terms and provisions hereof, and
shall provide, among other standard and customary terms for agreements of its
type and nature, that (i) shares of Parent Common Stock claimed by Parent
pursuant to Article VII shall be valued at the per-share value calculated
pursuant to Section 2.4(b) or Section 2.4(c), as applicable, (ii) claims against
shares of Parent Common Stock held in the Escrow Account shall be satisfied
against shares in the order delivered to the Escrow Account, and (ii) no shares
of Parent Common Stock held in the Escrow Account or Expense Fund may be
released or otherwise Transferred prior to the date 270 days after the Closing,
except for shares of Parent Common Stock claimed by Parent pursuant to Article
VII.
Section 2.18 Expense Fund.
(a) Funding. At the Closing, Parent shall deliver to the Escrow Agent, on
behalf of the Shareholders, out of the shares of Parent Common Stock to be
delivered to the Escrow Agent at the Closing pursuant to Section 2.17(a), a
number of shares of Parent Common Stock having a value equal to $100,000, with
such shares being valued at their VWAP as of the Trading Day next preceding the
Closing Date, for deposit into a separate escrow account with the Escrow Agent
(the "EXPENSE FUND"), to be held pursuant to the Escrow Agreement free and clear
of any lien or other claim of any creditor of any of the Parties.
(b) Use of Fund. The Escrow Agent shall maintain the Expense Fund solely
for the purposes of paying the out-of-pocket fees and expenses, including
independent accounting firm fees and attorneys' fees, reasonably incurred by the
Shareholder Agent in connection with performing and exercising its duties,
rights and responsibilities hereunder on behalf of the Shareholders. The Expense
Fund may be released, in whole or in part, solely upon written authority of the
Shareholder Agent. The Shareholder Agent may withdraw funds from the Expense
Fund only upon certification that such funds shall be used strictly in
accordance with the terms and provisions of this Section 2.18 and the Escrow
Agreement. The Expense Fund shall be deemed to have been withheld from each
Shareholder in proportion to amounts allocable to Shareholders pursuant to
Section 2.7.
(c) Closing. The Shareholder Agent shall close and liquidate the Expense
Fund, and cause any remaining shares in the Expense Fund to be deposited or
transferred to the Escrow Account for distribution in accordance with the terms
thereof, upon the latest to occur of (i) the final determination of the
Performance Consideration (if any) for the final Performance Period, (ii) the
Escrow Termination Date, and (iii) the final determination of any pending claim
for indemnification under Article VII.
(d) Illiquidity. The Shareholder Agent expressly acknowledges that the
shares of Parent Common Stock delivered to the Expense Fund will be illiquid for
a substantial period of time after the Closing and that Parent has no obligation
whatsoever, express or implied, to provide liquidity, or to waive any transfer
restrictions otherwise applicable to such shares.
PAGE A-10 Agreement and Plan of Merger
Section 2.19 Company Expense Payments.
(a) Prior to the Closing, the Company shall deliver to Parent an itemized
schedule of Company Transaction Expenses to be paid at Closing or out of the
Performance Consideration (if any), which shall include all Company Transaction
Expenses as of the Closing Date and be reasonably satisfactory to Parent (the
"TRANSACTION EXPENSE PAYMENT SCHEDULE"), indicating for each cost or expense
itemized therein (A) the payee thereof, (B) the amount thereof, if any, to be
paid in cash, (C) and the amount thereof, if any, to be paid with shares of
Parent Common Stock, such amount to be specified either as a number of shares
or, in the case of Performance Consideration, a specified percentage of the
Stock Earnout (if any); provided that (i) the aggregate amount of Company
Transaction Expenses to be paid (1) in cash at Closing may not exceed the amount
of cash available for distribution under Section 2.4(a) (after giving effect to
any reduction pursuant to Section 2.20), (2) in cash and shares of Parent Common
Stock (using the per-share value calculated pursuant to Section 2.4(b)) at
Closing may not exceed $2,000,000, (3) in shares of Parent Common Stock out of
Performance Consideration shall not exceed 1% of the Stock Earnout (if any), and
(4) in cash and shares of Parent Common Stock (using the per-share value
calculated pursuant to Section 2.4(c)) out of Performance Consideration may not
exceed $250,000, and (ii) each payee receiving more than an aggregate of 50,000
shares of Parent Common Stock in connection with the Closing and the first
Performance Period shall have duly executed and delivered to Parent a Standstill
and Lock-Up Agreement; provided that with respect to any such payee receiving
less than 50,000 shares of Parent Common Stock in connection with the Closing,
such Standstill and Lock-Up Agreement shall apply only to the number of shares
of Parent Common Stock received by such payee in connection with the first
Performance Period.
(b) At the Closing, if the Transaction Expense Payment Schedule satisfies
the provisos of Section 2.19(a), Parent shall deliver to the Shareholder Agent
(A) an amount of cash, to be delivered by wire transfer of same day funds to a
deposit account at a United States commercial bank notified by the Shareholder
Agent in writing prior to the Closing, equal to the aggregate sum of cash costs
and expenses listed in the Transaction Expense Payment Schedule, and (B) a stock
certificate evidencing for each payee listed as obtaining shares in the
Transaction Expense Payment Schedule the applicable number of shares of Parent
Common Stock. The Shareholder Agent shall apply such funds solely to the
satisfaction of the Company Transaction Expenses as provided in the Transaction
Expense Payment Schedule and, upon paying all such amounts, shall deliver any
remaining or returned funds and stock certificates to the Exchange Agent, to be
allocated and distributed as provided in Section 2.7.
Section 2.20 Closing Working Capital Deficit Adjustment.
(a) For purposes of this Section 2.20, the following terms shall have the
meanings ascribed to them below:
(1) "PRO FORMA WORKING CAPITAL" means, as of the date two business
days prior to the Closing Date, as reflected in a balance sheet delivered
by the Company to Parent the business day before the Closing Date (the
"CLOSING BALANCE SHEET"), an amount equal to: (i) the amount of the
Company's current assets; minus (ii) the amount of (A) the Company's
current liabilities (excluding the Company Transaction Expenses included
therein); minus (B) the lesser of (x) the Closing Debt, and (y) $5,800,000;
plus (C) $2,680,000.
(2) "WORKING CAPITAL DEFICIT" means an amount equal to:
[ 0 - Pro Forma Working Capital - $1,000,000 ].
For the avoidance of doubt, if the Pro Forma Working Capital is less than
-$1,000,000, the Working Capital Deficit will be a positive number. An
example of the calculation of the Working Capital Deficit is illustrated in
Schedule 2.20(a).
(b) If the Working Capital Deficit at Closing is a positive value, then
(i) the cash to be paid pursuant to Section 2.4(a) shall be reduced by
the product of (x) the Working Capital Deficit, times (y) the fraction 1/6,
and (b) the $7,500,000 value set forth in Section 2.4(b)(x) shall be
reduced by the product of (A) the Working Capital Deficit times (B) the
fraction 5/6.
PAGE A-11 Agreement and Plan of Merger
Section 2.21 Transfer Of Contingent Rights.
(a) No Transfer. The Shareholder Consideration and the interests in the
Escrow Account, and the provisions of this Article II and the Escrow Agreement
related thereto, are intended solely for the benefit of the Persons who
immediately prior to the Effective Time were holders of shares of Company Common
Stock. Without limiting the generality of Section 11.3(a), except as expressly
provided in Section 2.21(b), no Person may sell, assign or otherwise Transfer
(whether in connection with any sale, assignment or other Transfer of any shares
of Parent Common Stock or otherwise) to any other Person (i) any interest in any
Shareholder Consideration or in the Escrow Account or the Expense Fund, or in
any portion of either of them, or (ii) any right to participate, in whole or in
part, in any Shareholder Consideration or to obtain any proceeds or shares from
the Escrow Account pursuant to Section 2.17 or the Escrow Agreement; and any
attempt to do so shall be null and void ab initio and of no force or effect. In
no event shall the right to receive contingent shares or cash be evidenced by a
negotiable instrument or certificated security, or be readily marketable.
(b) Exceptions. Notwithstanding Section 2.21(a) and Section 11.3(a), an
interest in Shareholder Consideration may be assigned or Transferred: (i)
involuntarily pursuant to bequest, the laws of intestate succession or the order
of a court in connection with a settlement of property rights incident to
divorce, and (ii) voluntarily to a Key Shareholder in a transaction exempt from
the registration and prospectus delivery requirements of the Securities Act and
the registration or qualification requirements of applicable state securities or
"blue sky" laws, and otherwise in strict accordance with all applicable Law (it
being understood that Parent may require an opinion of counsel in form and
substance satisfactory to Parent to the effect that such transaction does not
require such registration or qualification).
Section 2.22 Taking of Necessary Action; Further Action. If, at any time
after the Effective Time, any such further action is necessary or desirable to
carry out the purposes of this Agreement and to vest the Surviving Corporation
with full right, title, and possession to all Contracts, Property, rights,
privileges and powers of the Company and Merger Sub, the officers and directors
of the Company, Parent and Merger Sub are fully authorized in the name of their
respective corporations or otherwise to take, and the Company and Parent shall
cause them to take, all such lawful and necessary action.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
CONCERNING THE COMPANY
The Company and, with respect to Section 3.3, Section 3.5, Section 3.6,
Section 3.31, Section 3.32, Section 3.33 and Section 3.34, the Key Shareholders
each jointly and severally represents and warrants to Parent that the statements
contained in this Article III are true, correct and complete as of the date of
this Agreement and as of the Closing Date, except as set forth, with respect to
any specific Section or subsection in this Article III, in the corresponding
section or subsection of the schedules the Company has delivered to Parent on
the date hereof and as of the Closing Date (the "DISCLOSURE SCHEDULES").
Section 3.1 Organization and Qualification. The Company: (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Colorado; (ii) has the full corporate power and authority to own
or use its properties and assets, to carry on its business as currently
conducted and as currently contemplated to be conducted, and to perform all of
its obligations under this Agreement and the Related Agreements to which it is a
party or by which it is bound; (iii) is qualified or licensed to do business in
all jurisdictions in which the failure to do so would have a Material Adverse
Effect. The Company has delivered to Parent and its legal counsel a true and
correct copy of its Articles of Incorporation and Bylaws, including all
corrections, amendments and other modifications thereto, each of which is in
full force and effect. The Company is not in violation of any provision of its
Articles of Incorporation or Bylaws. Section 3.1 of the Disclosure Schedules
lists by name and title the directors and officers of the Company.
Section 3.2 Subsidiaries. The Company presently does not have any
Subsidiaries or own or control, directly or indirectly, any Equity Interest in
any other Entity.
PAGE A-12 Agreement and Plan of Merger
Section 3.3 Capital Structure.
(a) The authorized capital stock of the Company consists of twenty-five
million (25,000,000) shares of Company Common Stock, of which 520,448
shares are issued and outstanding. Except as provided in Section 3.3(a) of the
Disclosure Schedules, all outstanding shares have been duly authorized and
validly issued, are fully paid and non-assessable.
(b) The Company has reserved 160,000 shares of Company Common Stock for
issuance under the Company's 1998 Stock Incentive Plan (the "COMPANY OPTION
PLAN"), of which options to purchase 103,385 shares of Company Common Stock are
outstanding as of the date of this Agreement and of which no options will be
outstanding as of the Closing Date. All options to purchase capital stock of the
Company that have been granted under the Company Option Plan or otherwise since
the Company's inception (collectively, the "COMPANY OPTIONS") are set forth in
Section 3.3(b) of the Disclosure Schedules, including (i) the name of the Person
granted such Company Option, (ii) the total number and class of shares of stock
that are or were subject to such Company Option, and (iii) the vesting schedule
of such Company Option. The Company Options shall be exercised or otherwise
terminated prior to Closing.
(c) All outstanding shares of Company Common Stock and all outstanding
Company Options have been offered, issued, sold and granted in compliance with
(i) all applicable securities and "blue sky" Laws and other applicable Laws, and
(ii) all terms set forth in applicable Contracts and Commitments. Section 3.3(c)
of the Disclosure Schedules provides an accurate and complete description of the
terms of each repurchase option which is held by the Company and to which any
shares of capital stock of the Company is subject.
(d) The Company has not issued any Equity Interests or Securities other
than the Company Common Stock, the Company Options and notes evidencing the
Vectra Loans, the Shareholder Loans and the SpaceDev Loan. Except as set forth
in Section 3.3(d) of the Disclosure Schedules, there is no (i) outstanding
Commitment (whether or not currently exercisable) to acquire any Equity
Interests or other Securities of the Company, (ii) outstanding financial asset,
instrument or obligation that is or may become convertible into or exchangeable
for any Equity Interests or other Securities of the Company, (iii) Contract
under which the Company is or may become obligated to sell or otherwise issue
any Equity Interests or any other Securities of the Company, or (iv) condition
or circumstance that may give rise to or provide a reasonable basis for the
assertion of a claim, whether contingent or vested and whether or not subject to
conditions, by any Person to the effect that such Person is entitled to acquire
or receive any Equity Interests or other Securities of the Company.
Section 3.4 Approval of Transactions.
(a) The only notices or Consents required to execute and deliver this
Agreement and the Related Agreements or to consummate the Transactions are (i)
approval by a majority of the Company's board of directors, at a duly held
meeting at which quorum is present, and (ii) approval by the holders of a
majority of the shares of outstanding Company Common Stock, at a duly held
meeting at which a quorum is present.
(b) The Company's Board of Directors, by resolutions duly adopted (the
"COMPANY BOARD RESOLUTIONS"), has duly: (i) determined that this Agreement and
the Merger are advisable and are fair to and in the best interests of the
Company and all Shareholders, (ii) approved this Agreement, the Related
Agreements to which the Company is a party or by which it is bound, the Merger
and the other Transactions, (iii) recommended that all of the Shareholders of
the Company adopt this Agreement and approve the Merger and the other
Transactions, and (iv) directed that this Agreement, the Merger and the other
Transactions be submitted for consideration by the Company's shareholders at a
meeting or by written consent of all of the shareholders of the Company to occur
on or about, or prior to, the date of the Parent Shareholders Meeting. The
Company Board Resolutions are in full force and effect. No action has been taken
or is pending for the purpose of revoking, rescinding, annulling, repealing,
correcting, changing, amending or otherwise modifying the Company Board
Resolutions or any of them.
Section 3.5 Authority. Each of the Company and the Key Shareholders has all
requisite right, power and authority, or all necessary legal capacity, as the
case may be, to execute, deliver, enter into and perform its obligations under
this Agreement and any Related Agreement to which it is a party or signatory and
to consummate the Merger and the other Transactions. The execution and delivery
of this Agreement, any Related
PAGE A-13 Agreement and Plan of Merger
Agreement to which the Company or such Key Shareholder is a party or signatory
and the consummation of the Merger will be duly authorized at Closing at a duly
held meeting at which quorum is present. Subject to obtaining the Shareholders'
approval set forth in Section 3.4(a), no further action is required on the part
of the Company or its shareholders to authorize this Agreement, any Related
Agreement to which it is a party or signatory or the Merger. This Agreement has
been duly executed and delivered by the Company and the Key Shareholders, and
assuming the due authorization, execution and delivery by the other parties
hereto and thereto, constitute its valid and binding obligations, enforceable
against them according to their respective terms.
Section 3.6 No Conflict. Except as set forth in Section 3.6 of the
Disclosure Schedules, the execution and delivery by the Company and the Key
Shareholders of this Agreement and any Related Agreement to which it is a party
or signatory, and the consummation of the Merger, will not directly or
indirectly:
(a) conflict with or result in any Breach of or default under (with or
without the giving of notice or the lapse of time, or both) or give rise to a
right of termination, cancellation, modification or acceleration of any
obligation or loss of any benefit under (any such Event, a "CONFLICT") (i) any
provision of the Organizational Documents of the Company, or any resolutions of
the board of directors or the Company Shareholders, each as in effect and
Amended to date, (ii) any Contract to which the Company, or any of the Key
Shareholders is a party, or to which it is subject or by which any of them is
bound, or any license under which any of them is a licensee, or (iii) any Law or
Order applicable to the Company, the Key Shareholders, or the Company's
Property;
(b) give any Person the power, right or authority to challenge any of the
Transactions or to exercise any remedy or obtain any relief under any Law or
Order to which the Company or any Key Shareholders may be subject;
(c) contravene, conflict with or result in a violation or Breach of any of
the terms or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate or modify, any Governmental Permit held by
the Company or that otherwise relates to the Properties or to the businesses of
the Company;
(d) cause Parent to become subject to, or to become liable for the payment
of, any Taxes owed by or on behalf of the Company or any properties, assets,
shareholder, officer or employee of the Company;
(e) result in the imposition or creation of any Encumbrance upon or with
respect to any Property of the Company; or
(f) result in any shareholder of the Company having the right to exercise
dissenters', appraisal or other similar rights pursuant to any Contract,
Organizational Document of the Company or, except for dissenters' rights under
the CBCA, applicable Law.
Section 3.7 Consents. Except as set forth in Section 3.7 of the Disclosure
Schedules, no Order or Consent of, or registration, declaration or filing with,
any Governmental Body or any third party (including any party to any Contract
with, or licensor of, the Company), is required by or with respect to the
Company and the Key Shareholders in connection with the execution, delivery or
performance of this Agreement, any of the Related Agreements to which it is a
party or signatory, or the consummation of the Transactions, so as not to
trigger any Conflict (including the Breach of any Company Contract), except for
(i) such Orders and Consents as may be required under applicable securities or
"blue sky" Laws, (ii) the filing of the Statement of Merger with the Secretary
of State of the State of Colorado, (iii) the approval of this Agreement and the
Merger by the shareholders of the Company, (iv) the Consents required under
Section 3.4(a), and (v) any Consents of parties to Company Contracts (including
Company Licenses) summarized in reasonable detail in Section 3.7 of the
Disclosure Schedules, indicating for each such Company Contract if it is a
Material Company Contract and, if so, the name of each counterparty to such
Material Company Contract whose Consent is required.
PAGE A-14 Agreement and Plan of Merger
Section 3.8 Books and Records.
(a) Financial Records. The books of account and other financial records,
all of which have been made available to Parent, (i) are accurate, complete and
correct in all Material respects, (ii) have been maintained in accordance with
sound business practices, (iii) fairly and accurately reflect the income,
expenses, assets and liabilities of the Company, and (iv) represent actual, bona
fide transactions.
(b) Minute Books. Except as set forth in Section 3.8(b) of the Disclosure
Schedules, the minute books of the Company, all of which have been made
available to Parent, contain accurate, complete and correct records of all
meetings held of, and corporate action taken by, the shareholders and board of
directors, and all committees of the shareholders and board of directors, of the
Company, including each action by written consent, since the inception of the
Company, no Material corporate action of such shareholders, board of directors
or committees has been taken, for which minutes have not been prepared and
provided to Parent, or which are not contained in such minute books.
(c) Stock Records. The stock record books, records and ledgers of the
Company, all of which have been made available to Parent, contain accurate,
complete and correct records of all issuances and transfers of Equity Interests
in the Company.
(d) Shareholder Table. Section 3.8(d) of the Disclosure Schedules sets
forth a shareholder table (as updated in accordance with the terms hereof, the
"SHAREHOLDER TABLE") containing a true and complete accounting of each
shareholder of record of the Company and all outstanding shares of capital stock
of the Company, and contains for each such shareholder (i) the full name(s) of
such shareholder, (ii) the number of certificates evidencing shares of Company
Common Stock held of record by such shareholder, specifying for each such
certificate its certificate number and the number of shares of Company Common
Stock evidenced thereby, and (iii) the full mailing address for such shareholder
set forth in the Company's stock transfer books and records.
Section 3.9 Company Financial Statements. Section 3.9 of the Disclosure
Schedules sets forth (i) the Company's audited balance sheets as of December 31,
2004 and 2003, and the related audited statements of income and cash flows for
the Company's fiscal years ended December 31, 2004 and 2003, and (ii) the
Company's (x) unaudited balance sheet as of (A) on the date of this Agreement
only (this sub-clause (A) having no force or effect as of the Closing Date),
June 30, 2005, or (B) as of the Closing Date only (this sub-clause (B) having no
force or effect as of the date of this Agreement), the last day of a calendar
month ended not more than 45 prior to the Closing Date; and (y) the related
unaudited statements of income and cash flows for the partial-year period ended
on the Current Balance Sheet Date, including in each case the notes thereto,
except that no statement of cash flows is included for the partial-year period
ended June 30, 2005. The Financials are correct in all Material respects and
have been prepared in accordance with GAAP, consistently applied throughout the
periods indicated and with each other, except as disclosed in the notes to the
Financials, subject in the case of interim statements to normal year-end
adjustments. The Financials fairly and accurately present the financial
condition, operating results, changes in shareholders' equity and cash flows of
the Company as of the respective dates and during the respective periods
indicated therein. The Company maintains and will continue through the Closing
Date to maintain a standard system of accounting established and administered in
accordance with GAAP.
Section 3.10 No Undisclosed Liabilities.
(a) Except as provided in Section 3.10(a) of the Disclosure Schedules, the
Company has no Liabilities, Debt, Capital Lease Obligation, Guarantees,
obligations, expenses, claims, deficiencies, or endorsements of any type,
whether or not known, accrued, absolute, contingent, matured, secured,
conditional, liquidated, vested, due or required to be reflected in financial
statements in accordance with GAAP, except for those which (i) have been
adequately reserved against or otherwise reflected in the Current Balance Sheet,
(ii) have arisen in the Ordinary Course of Business consistent with past
practices since December 31, 2004, and which are not Material, and (iii) are an
Expense under Section 11.10, which will be paid at or prior to Closing.
(b) Section 3.10(b) of the Disclosure Schedules contains a complete and
accurate list of all trade accounts payable (other than a trade account payable
(i) to any shareholder or any Related Person of the Company or any Shareholder
for or with respect to the Expenses of the Company or the Shareholder Agent, and
PAGE A-15 Agreement and Plan of Merger
(ii) adequately accounted for in the Company's financial statements delivered
from time to time to Parent prior to the date hereof) that remains unpaid as of
the Closing Date, specifying for each such trade account (A) its aging, and (B)
any amounts due as interest, penalties or similar charge thereon.
Section 3.11 No Off-Balance Sheet Arrangements. Except as set forth in
Section 3.11 of the Disclosure Schedules, the Company is not a party to, and has
no commitment to become a party to, any joint venture, off-balance sheet
partnership or any similar Contract (including any Contract relating to any
transaction or relationship between or among the Company, on the one hand, and
any unconsolidated affiliate, including any structured finance, special purpose
or limited purpose Entity, on the other hand, or any "off-balance sheet
arrangements" (as defined in Item 303(a) of Regulation S-K of the SEC)), where
the result, purpose or effect of such Contract is to avoid disclosure of any
material transaction involving, or material liabilities of, the Company in the
Company's financial statements.
Section 3.12 No Changes. Except as set forth on Section 3.12 of the
Disclosure Schedules, since (A) December 31, 2004 (with respect to subsections
(a) through (y) below) and (B) the Current Balance Sheet Date (with respect to
subsections (z) and (aa) below), there has not been, occurred or arisen any of
the following with respect to the Company:
(a) any transaction not in the Ordinary Course of Business;
(b) any Amendment to any Organizational Document of the Company or to the
rights, powers, privileges, designations or preferences of any Company Stock;
(c) any capital expenditure or capital expenditure commitment exceeding
$5,000 individually or $10,000 in the aggregate;
(d) payment, discharge or satisfaction of any claim or Liability, other
than payment, discharge or satisfaction in the Ordinary Course of Business of
claims or Liabilities reflected or adequately reserved against in the Current
Balance Sheet;
(e) destruction of, damage to or loss of any Property or business;
(f) loss of, or notice or other clear and overt indication of an intention
to discontinue or change the terms of its relationship with the Company by, any
supplier, manufacturer, management-level employee, officer, senior engineer or
consultant, in each case whether or not covered by insurance;
(g) labor trouble or claim of wrongful discharge or other unlawful labor
practice or action; (h) change in accounting methods or practices (including any
change in depreciation or amortization policies or rates) other than as required
by GAAP;
(i) change in any election in respect of Taxes, adoption or change in any
accounting method in respect of Taxes, agreement or settlement of any claim or
assessment in respect of Taxes, or extension or waiver of the limitation period
applicable to any claim or assessment in respect of Taxes;
(j) revaluation by the Company of any of its Properties or assets;
(k) declaration, setting aside or payment of a dividend or other
distribution (whether in cash, stock or property) in respect of any outstanding
share of capital stock or other Equity Interests of the Company, or any split,
combination or reclassification in respect of any share of capital stock of the
Company, or any issuance or authorization of any issuance of any other
Securities of the Company in respect of, in lieu of or in substitution for any
share of capital stock or other Equity Interests of the Company, or any direct
or indirect repurchase or redemption of any Equity Interests or other Securities
of the Company (or Commitments therefor);
PAGE A-16 Agreement and Plan of Merger
(l) payment (other than in the Ordinary Course of Business) of, or increase
in, the salary, bonuses or other compensation (cash, equity or otherwise), or
material increase in fringe benefits, payable or to become payable to any
shareholder, director, officer, employee or consultant of the Company (other
than payments to outside counsel in connection with this Agreement and the
Transactions), or Related Person of the Company, or the declaration, payment or
commitment or obligation of any kind for the payment of a severance payment,
termination payment, bonus, substantial fringe benefit or other additional or
supplemental salary, bonus, substantial fringe benefit or other compensation
(cash, equity or otherwise) to any such Person;
(m) adoption, establishment or Amendment of any Company Employee Plan,
except as necessary to comply with applicable Law;
(n) entry into any Contract to which the Company is a party or signatory or
by or to which it or any of its Properties is bound or subject, except for the
Shareholder Loans, the SpaceDev Loan and the Vectra Loans, or any termination,
Amendment or receipt of notice of termination or non-renewal in respect of, any
such Contract;
(o) Transfer, Lease or Encumbrance of any of its material assets or other
Properties, other than (i) sales of Inventories in the Ordinary Course of
Business and the security interests in favor of Vectra in respect of the Vectra
Loans and Parent in respect of the SpaceDev Loan, and (ii) with respect to any
Intellectual Property Rights (which are addressed in Section 3.12(u));
(p) a loan or advance to any Person, the incurrence, issuance or sale of
any Debt of the Company (except for the Shareholder Loans, the Vectra Loans and
the SpaceDev Loan) or the making of any Guarantee in respect of any other
Person, except for advances to employees for travel and business expenses in the
Ordinary Course of Business consistent with past practices;
(q) waiver or release of any right or claim, including any write-off or
other compromise of any Account Receivable in any amount; (r) the commencement,
settlement, notice or overt threat of any Action against the Company or its
business, Properties or affairs;
(s) written notice to the Company, or any of its Representatives, of any
claim or potential claim of ownership by any Person of any Company Intellectual
Property or of any interference with, misappropriation, violation or
infringement by the Company of any other Person's Intellectual Property Rights;
(t) issuance, grant or sale, or make or enter into a Contract to issue,
grant or sell, of any Equity Interests or other Securities of the Company, or
any Commitments to purchase or acquire any of the foregoing;
(u) (i) Transferring, Encumbering or licensing, or making or entering into
any other Contract or license regarding, any Company Intellectual Property,
other than in the Ordinary Course of Business, (ii) purchasing, licensing or
otherwise making or entering into any Contract with respect to any Material
Intellectual Property Rights owned or controlled or licensed by any other
Person, other than in the Ordinary Course of Business, (iii) making or entering
into any Contract with respect to the development of any Intellectual Property
Rights, other than in the Ordinary Course of Business, or (iv) changing the
pricing, fees, royalties or other compensation set or charged by the Company to
its customers or licensees or the pricing, fees, royalties or other compensation
set or charged by Persons who have licensed or granted rights to the Company to
use Intellectual Property Rights;
(v) entry into a Contract, or Amendment of any Contract, other than in the
Ordinary Course of Business, pursuant to which any other party was granted
marketing, distribution, development or similar rights of any type or scope with
respect to any Technology or any Company Products (including proposed Company
Products and Company Products under development);
PAGE A-17 Agreement and Plan of Merger
(w) hiring or terminating any officer, director or senior employee of the
Company or terminating any management-level or senior employee or engineer
employed by the Company for a total period (whether or not continuous) in excess
of 3 years;
(x) any known material defect or design issue with the Company's existing
products in development, production or installed with the Company's customers;
(y) agreement or other Contract by the Company or any officer, director,
manager or employee thereof on behalf of the Company to do any of the things
described in Section 3.12(a) through (y) (other than negotiations with Parent
and its Representatives regarding the Transactions);
(z) any Events having a Material Adverse Effect; or (aa) any Contract by
the Company or any officer, director, manager or employee thereof on behalf of
the Company that is likely to result in a Material Adverse Effect.
Section 3.13 Tax Matters.
(a) Tax Returns and Audits. Except as described in Section 3.13 of the
Disclosure Schedules:
(1) The Company has prepared and timely filed all required federal,
state, local and foreign Tax Returns and Tax estimates concerning or
attributable to itself or its operations, except where the failure to file
such Tax Returns and Tax estimates will not have a Material Adverse Effect,
and such Tax Returns and estimates are true and correct in all material
respects and have been completed in accordance with applicable Law.
(2) The Company (A) has timely paid all Taxes it is required to pay
and withheld and properly remitted with respect to its employees (and
timely paid over to the appropriate Taxing authority) all federal and state
income taxes, Federal Insurance Contribution Act, Federal Unemployment Tax
Act and other Taxes of any kind or nature required to be withheld, and (B)
has accrued on the Current Balance Sheet all Taxes attributable to the
periods preceding the Current Balance Sheet and will not have incurred any
liability for Taxes for the period commencing after the date of the Current
Balance Sheet and ending immediately prior to the Closing Date, other than
in the Ordinary Course of Business.
(3) The Company has not been delinquent in the payment of any material
Tax, nor is there any Tax deficiency or adjustment outstanding, assessed or
proposed against the Company, and the Company has not executed any waiver
of any statute of limitations on or extending the period for the assessment
or collection of any Tax.
(4) No audit or other examination of any Tax Return of the Company is
presently in progress, nor has the Company been notified of any request for
such an audit or other examination.
(5) The Company has made available to Parent, its legal counsel and
its accountants, copies of all Tax Returns filed by the Company for all
periods since its inception.
(6) There are (and immediately following the Closing Date there will
be) no Encumbrances on the assets of the Company relating or attributable
to Taxes other than Encumbrances for Taxes not yet due and payable.
(7) The Company has no Actual Knowledge of any basis for the assertion
of any claim for Taxes, which, if adversely determined, would result in any
Encumbrance on the assets of the Company.
PAGE A-18 Agreement and Plan of Merger
(8) The Company has (a) never been a member of an affiliated group
(within the meaning of Code Section 1504(a)) filing a consolidated federal
income tax return (other than a group the common parent of which was the
Company), (b) never been a party to any Tax sharing, indemnification or
allocation Contract, and never owed any amount under any such Contract, (c)
no liability for the Taxes of any Person under Treas. Reg. Section 1.1502-6
(or any similar provision of state, local or foreign law), as a transferee
or successor, by Contract, or otherwise, and (d) never been a party to any
joint venture, partnership or other agreement that could be treated as a
partnership for Tax purposes.
(9) The Company has not constituted either a "distributing
corporation" or a "controlled corporation" in a distribution of stock
intended to qualify for tax-free treatment under Section 355 of the Code.
(10) The Company has not engaged in a transaction that is the same or
substantially similar to one of the types of transactions that the Internal
Revenue Service has determined to be a tax avoidance transaction and
identified by notice, regulation, or other form of published guidance as a
listed transaction, as set forth in Treas. Reg. Section 1.6011-4(b)(2).
(11) The Company has not disposed of any property in a transaction
being accounted for under the installment method pursuant to Section 453 of
the Code.
(12) The Company (i) has not agreed nor is required to make any
adjustment pursuant to Section 481 of the Code by reason of a change in
accounting methods or otherwise, (ii) has no Actual Knowledge that any
taxing authority has proposed any such adjustment or change, which proposal
is currently pending, and (iii) does not have an application pending with
any taxing authority requesting permission for any change in accounting
methods that relate to its business and operations.
(13) No power of attorney has been granted by the Company with respect
to any matter relating to Taxes, which power of attorney is currently in
force.
(14) The Company has no direct or indirect beneficial ownership
interest in (i) a "passive foreign investment company", (ii) a "foreign
sales corporation", or (iii) a person other than a United States person,
each within the meaning of the Code.
(15) The Company does not own "corporate acquisition indebtedness"
within the meaning of Section 279 of the Code.
(16) No property of the Company is "tax-exempt use property" within
the meaning of Section 168 of the Code.
(b) Executive Compensation Tax. The Company is not a party to any Contract,
including the provisions of this Agreement, covering any employee or former
employee of the Company, which, individually or collectively, could give rise to
the payment of any amount that would not be deductible pursuant to Sections 280G
or 404 of the Code.
Section 3.14 Restrictions on Business Activities. Except as is described in
Section 3.14 of the Disclosure Schedules, there is no Contract (non-compete
agreement or otherwise) or Order to which the Company is a party or by which it
is bound, which has or may reasonably be expected to have the effect of
prohibiting or impairing any business practice, any acquisition of Property, the
conduct of business or otherwise limiting the freedom of the Company to engage
in any line of business or to compete with any Person. Without limiting the
generality of the foregoing, except as is described in Section 3.14 of the
Disclosure Schedules, the Company has not entered into any Contract under which
it is restricted from selling, licensing or otherwise distributing any of its
Material Intellectual Property Rights, Technology or Company Products, or
providing services, to customers or potential customers or any class of
customers, in any geographic area, during any period of time or in any segment
of the market.
PAGE A-19 Agreement and Plan of Merger
Section 3.15 Title of Properties; Absence of Liens and Encumbrances;
Condition of Equipment.
(a) The Company does not own any real property, and has never owned any
real property. Section 3.15(a) of the Disclosure Schedules sets forth a list of
all real property currently leased by the Company, the name of the lessor, the
correct street address, the date and term of the lease, the aggregate annual
rental payable under such lease and a description of any other material terms of
the lease and each Amendment thereto. All such current leases are in full force
and effect, are valid and effective in accordance with their respective terms,
and there is no, existing default or event of default (or event which with
notice or lapse of time, or both, would constitute a default) by the Company, or
to the Knowledge of the Company, by any other party.
(b) Except as provided in Section 3.15(b) of the Disclosure Schedules, the
Company has good and valid title to, or, in the case of Leased properties and
assets, valid leasehold interests in, all of its tangible properties and assets,
real, personal and mixed, used or held for use in its business, free and clear
of any Encumbrances, except (i) as reflected in the Current Balance Sheet, (ii)
Encumbrances for Taxes not yet due and payable, and (iii) such imperfections of
title and Encumbrances, if any, which do not detract from the value, or
interfere with the present use, of the Property subject thereto or affected
thereby.
(c) Section 3.15(c) of the Disclosure Schedules lists all material items of
Tangible Personal Property (the "EQUIPMENT") owned or Leased by the Company.
Except as set forth in Section 3.15(c) of the Disclosure Schedules, such
Equipment is (i) adequate for the conduct of the business of the Company as
currently conducted and as currently anticipated to be conducted, (ii) in good
operating condition, regularly and properly maintained, subject to normal wear
and tear, (iii) suitable for immediate use in the Ordinary Course of Business,
and (iv) in the possession of the Company. No item of Equipment is in need of
repair or replacement other than as part of routine maintenance in the Ordinary
Course of Business.
(d) Except as provided in Section 3.15(d) of the Disclosure Schedules, the
Company owns free and clear of any Encumbrances, all customer correspondence,
customer licensing and purchasing histories, customer pricing mechanisms,
customer contract proposals and customer contracts awarded relating to their
respective current and former customers (the "CUSTOMER INFORMATION"). No Person
other than the Company possesses any claims or rights with respect to use of the
Customer Information.
Section 3.16 Intellectual Property.
(a) Intellectual Property Rights Owned, Licensed or Used. Section 3.16(a)
of the Disclosure Schedules contains a true and complete list of all (A)(i)
Patents, (ii) Trademarks (other than goodwill), and (iii) Copyrights which are
registered or constitute Material Intellectual Property Rights (other than
website content, marketing or sales materials, moral rights and publicity
rights), in each case licensed to, owned by or used by the Company or any of its
Subsidiaries with respect to the conduct of its business as presently conducted,
(B) all Company Licenses, and (C) Excluded Software. The Company or its
Subsidiaries has in its possession or control correct and complete,
fully-executed copies of all of the Company Licenses, and the Company has
heretofore delivered to Parent true and complete copies thereof. The Company
owns the "starsys.com" domain name
(b) Licenses. Section 3.16(b) of the Disclosure Schedules contains a true
and complete list of all Third-Party Licenses. Except as described in Section
3.16(b) of the Disclosure Schedules, (i) neither the Company nor any of its
Subsidiaries has licensed, sub-licensed, restricted or Encumbered any of the
Company Intellectual Property, whether orally or in writing, and (ii) no
licensing fees, royalties or payments are due or payable by the Company or any
of its Subsidiaries in connection with its Material Intellectual Property Rights
or Excluded Software, other than registration, maintenance or renewal fees or
the like which are not Material individually or in the aggregate. The Company
has in its possession or control correct and complete, fully-executed copies of
all of the Third-Party Licenses, and the Company has heretofore delivered to
Parent true and complete copies thereof.
(c) No Actions or Payments Due. Except as set forth in Section 3.16(c), no
actions must be taken by the Company or the Surviving Corporation within sixty
(60) calendar days of the Closing for the purposes of maintaining, perfecting,
preserving or renewing any of its Registered Intellectual Property Rights,
Material
PAGE A-20 Agreement and Plan of Merger
Intellectual Property Rights, Company Licenses or Excluded Software, including
the payment of any registration, maintenance or renewal fees or the filing of
any documents, applications or certificates or the sending of any renewal,
change of control or other notices.
(d) No Infringement / Misappropriation of Third Party Rights. Except as set
forth on Section 3.16(d) of the Disclosure Schedules, neither the Company nor
any of its Subsidiaries (i) has interfered with, infringed upon, violated or
misappropriated any Intellectual Property Rights of any third party; (ii) has
Actual Knowledge that any of their respective current or former officers,
directors, employees, consultants or independent contractors has interfered
with, infringed upon, violated or misappropriated or is interfering with,
infringing upon, violating or misappropriating or has made or is making unlawful
use of any Intellectual Property Rights of any Person for the benefit of the
Company or any of its Subsidiaries; or (iii) has, nor has any of their
respective management level employees with direct responsibility for
Intellectual Property Rights matters, received any charge, complaint, claim,
demand, notice or other communication in writing alleging any such interference,
infringement, misappropriation or violation (including any demand or claim that
the Company or any of its Subsidiaries must license or refrain from using any
Intellectual Property Rights of any third party). Except as set forth on Section
3.16(d) of the Disclosure Schedules, to the Actual Knowledge of the Company and
its Subsidiaries, no third party (including their respective current or former
Representatives) has interfered with, infringed upon or misappropriated any
Company Intellectual Property.
(e) No Encumbrances on Company Rights. Except as set forth on Section
3.16(e) of the Disclosure Schedules, the Company and each of its Subsidiaries
(A) owns all right, title and interest in and to, or has a valid, binding,
unexpired and subsisting right and license to use (whether or not exclusive),
all Material Intellectual Property Rights and Material Excluded Software, and,
solely to the extent required in connection with the manner in which it has
conducted or is conducting its business, to make, have made, use, sell, import
and export, distribute, have distributed, publicly perform, publicly display,
reproduce and prepare derivative works of Material Intellectual Property Rights;
(B) have rights to the Material Intellectual Property Rights which are free and
clear of all Liens; (C) have taken all commercially reasonable action required
to maintain the validity and effectiveness of all registrations with and
applications to Governmental Bodies in respect of their respective Registered
Intellectual Property Rights, all of which, to the Knowledge of the Company, are
valid, subsisting and in full force and effect; (D) are not subject to any
restrictions (other than those which have been complied with or waived) on the
direct or indirect transfer or assignment of any Third-Party Licenses, or any
interest therein; and (E) has taken commercially reasonable measures to protect
the secrecy, confidentiality and value of its Proprietary Information.
(f) No Default; No Required Approvals or Consents. Except as set forth on
Section 3.16(f) of the Disclosure Schedules, (A) the Company and its
Subsidiaries and, to the Actual Knowledge of the Company all third parties are,
and upon the consummation of the Merger or other Transactions contemplated
hereby will be, in compliance in all material respects with the Licenses; (B)
the rights of the Company and its Subsidiaries or any successor to the Company
and such Subsidiaries to the respective Material Intellectual Property Rights
will not be affected in any material respect as a result of the execution,
delivery or performance of this Agreement or the consummation of the Merger and
other Transactions contemplated hereby; (C) neither the Company nor any of its
Subsidiaries is, or as a result of the execution, delivery or performance of
this Agreement or the consummation of the Merger or other Transactions
contemplated hereby will be, in material Breach of any Licenses; (D) no event
has occurred, or by virtue of the execution, delivery or performance of this
Agreement or the consummation of the Merger or other Transactions contemplated
hereby will occur, which with notice or lapse of time or both would constitute a
material Breach or constitute a valid basis for the termination, modification or
acceleration under any License, and none of the Company and its Subsidiaries and
their respective management level employees with direct responsibility for
Intellectual Property Rights matters, has received any notice or other
communication in writing to the contrary; (E) no Consent of any Person is needed
so that the interest of the Surviving Corporation in the Material Intellectual
Property Rights shall continue to be in full force and effect upon the
consummation of the Merger and other Transactions contemplated hereby; and (F)
neither the Company nor any of its Subsidiaries is subject to any Contract,
Company License or Order pertaining to Material Intellectual Property Rights or
Material Excluded Software which would be Breached by the execution or delivery
of this Agreement or the consummation of the Merger and the other Transactions.
(g) No Claims or Actions. Other than examinations by intellectual property
officers of any pending Patent, Copyright or Trademark applications which are
not material, there are no claims or demands in
PAGE A-21 Agreement and Plan of Merger
writing of any Person pertaining to, or any Actions that are pending or, to the
Actual Knowledge of the Company, threatened, including any interferences,
oppositions, cancellations or other contested proceedings, nor to the Actual
Knowledge of the Company is there any valid basis for the same, which challenge
the rights of the Company or any of its Subsidiaries in respect of any
Intellectual Property Rights set forth in Section 3.16(a) of the Disclosure
Schedules or their respective Material Intellectual Property Rights or Material
Excluded Software.
(h) Confidential Treatment. Except as provided in Section 3.16(h) of the
Disclosure Schedules, (i) all Intellectual Property Rights of the Company or any
of its Subsidiaries for which confidentiality is appropriate has been maintained
in confidence in accordance with protection procedures believed by the Company
and such Subsidiary to be adequate for protection customarily used in the
industry to protect rights of like importance or in accordance with the
applicable Third-Party Licenses, as the case may be, and (ii) all commercially
reasonable measures have been taken to maintain the confidentiality of the
Proprietary Information of the Company and its Subsidiaries, and of all other
information the value of which to the Company and its Subsidiaries is contingent
upon maintenance of the confidentiality thereof.
(i) Assignment of Inventions. Except as set forth on Section 3.16(i) of the
Disclosure Schedules, each former and current shareholder or Representative of
the Company or any of its Subsidiaries who has (A) contributed in any material
way to or participated in any material way in the conception and development of
(i) any Intellectual Property Rights listed on Section 3.16(a) of the Disclosure
Schedules as being owned, in whole or in part, by the Company or any of its
Subsidiaries, or (ii) any Material Intellectual Property Rights, or (B) had
access to Proprietary Information of the Company or any of its Subsidiaries,
including Customer Information; in each case (1) was in an employment
relationship sufficient, or has executed and delivered to the Company or such
Subsidiary an agreement suitable, to vest full ownership rights to any
inventions, discoveries, innovations, improvements, creations, developments,
results and works in the Company or such Subsidiary, as applicable, and (2)
either (1) has entered into an agreement for maintaining Proprietary Information
of the Company or such Subsidiary in confidence, true and complete copies of
which Contracts have heretofore been delivered to Parent and all of which are
now in full force and effect and Enforceable in accordance with their respective
terms, or (2) entered into a professional relationship with the Company which
obligates such Representative to maintain the confidentiality of such
Proprietary Information. Except as set forth on Section 3.16(i) of the
Disclosure Schedules, no former or current shareholder, director, officer,
employee or consultant of the Company or any of its Subsidiaries has filed,
asserted in writing or, to the Actual Knowledge of the Company or any of its
Subsidiaries (or management employees of the Company or such Subsidiary with
direct responsibility for Intellectual Property Rights matters), threatened in
writing any claim or Action against the Company or such Subsidiary in connection
with such Person's involvement in the conception and development of any of such
Intellectual Property Rights. Except as set forth on Section 3.16(i) of the
Disclosure Schedules, to the Actual Knowledge of the Company and its
Subsidiaries (or management employees of the Company or its Subsidiaries with
direct responsibility for Intellectual Property Rights matters), none of the
current employees or consultants of the Company or such Subsidiary has any
Patents issued or applications pending for any device, process, design or
invention of any kind used or expected to be used by the Company or such
Subsidiary in the furtherance of its businesses as presently conducted or as
contemplated to be conducted, which Patents or applications have not been duly,
validly and fully assigned to the Company or such Subsidiary.
(j) No Rights to Royalties. Except as set forth on Section 3.16(j) of the
Disclosure Schedules, no former or current shareholder or Representative of the
Company or any of its Subsidiaries has or will have any valid rights to future
royalty payments or license fees from the Company or such Subsidiary, deriving
from licenses, technology agreements or other agreements, whether written or
oral, among any such Person and the Company or such Subsidiary.
(k) Supporting Documents. The Company has in its possession or control true
and complete copies of all documents (including patents, registration
certificates, renewal certificates, applications, prosecution histories, and all
documents submitted to or received from the relevant patent, copyright,
trademark, domain name or other authorities in the United States and foreign
jurisdictions, as the case may be) relating to any Intellectual Property Rights
listed on Section 3.16(a) of the Disclosure Schedules that in whole or in part
are or are purported to be owned by the Company or any of its Subsidiaries. The
Company has heretofore delivered to Parent true and complete, fully-executed
copies of all of such documents.
PAGE A-22 Agreement and Plan of Merger
(l) Documentation. The Company has heretofore delivered to Parent
documentation (to the extent in the possession of or under the control of the
Company) with respect to any invention, process, design, Software or other
know-how or Trade Secret included in the Material Intellectual Property Rights,
which documentation is (1) accurate in all material respects, and (2) reasonably
sufficient in detail and content to identify and explain such invention,
process, design, Software or other know-how or trade secret and to facilitate
its use and further improvement and development by an individual of ordinary
skill in the applicable art.
Section 3.17 Agreements, Contracts and Commitments.
(a) Except as set forth in Section 3.17(a) of the Disclosure Schedules, the
Company is not party to or bound by:
(1) any employment, sales or consulting agreement or other Contract
with an employee, individual consultant or salesperson;
(2) any agreement or plan, including any option plan, incentive plan
or purchase plan with respect to Equity Interests of the Company, any of
the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the Transactions or
the value of any of the benefits of which will be calculated on the basis
of any of the Transactions;
(3) any fidelity or surety bond or completion bond;
(4) any Lease of personal property having an annual rental rate in
excess of $5,000 individually or $10,000 in the aggregate;
(5) any Contract relating to capital expenditures involving future
payments in excess of $5,000 individually or $10,000 in the aggregate;
(6) any Contract relating to the disposition or acquisition of assets
or any interest in any Entity outside the Ordinary Course of Business;
(7) any mortgages, indentures, guarantees, loans or credit agreements,
security agreements or other Contracts relating to the borrowing of money
or extension of credit;
(8) any purchase order or contract for the purchase of materials
exceeding $5,000 individually or $10,000 in the aggregate;
(9) any construction contracts;
(10) any dealer, distribution, sales, joint marketing or development
Contract;
(11) any sales representative, original equipment manufacturer, value
added, remarketing, reseller or independent software vendor or other
Contract (other than Licenses) for use or distribution of any Company
Product, any Company Intellectual Property, Material Intellectual Property
Rights or any services provided by the Company; or
(12) any other Contract not otherwise set forth in Section 3.17(a) of
the Disclosure Schedules that is not cancelable without penalty within
thirty (30) calendar days.
(b) Except as set forth in Section 3.17(b) of the Disclosure Schedules, the
Company is in compliance with and has not Breached or defaulted under, or
received notice that it has Breached or defaulted under, any of the terms or
conditions of any Contract or license to which it is party or by which it is
bound or under which it is a licensee, nor does the Company have Knowledge of
any Event that would constitute such a Breach or default with the lapse of time,
giving of notice or both. Each such Contract and license is in full force and
effect and is not subject to any default thereunder.
PAGE A-23 Agreement and Plan of Merger
(c) Except as set forth in Section 3.17(c) of the Disclosure Schedules, the
Company has obtained, or will obtain prior to the Closing, all necessary
Consents of parties to all Company Contracts as are required thereunder in
connection with the consummation of the Transactions, so that (i) the
consummation of the Transactions shall not Breach any such Company Contract, and
(ii) each such Company Contract shall remain in full force and effect without
modification, limitation or alteration after the Closing. Following the Closing,
the Surviving Corporation will be permitted to exercise all of its rights under
the Contracts without the payment of any additional amounts or consideration
other than amounts or consideration which the Company would otherwise be
required to pay had the Merger not occurred. Without limiting the foregoing, the
consummation of the Transactions will not (i) result in the Breach of any
Company Contract, (ii) adversely impact any existing Company Contract with any
Governmental Body, or (iii) to the Knowledge of the Company, result in any
Material decrease in orders of Company Products or Technology from, or sales,
licensing or other distributions of Company Products or Technology to, any
customer or client set forth in Section 3.30 of the Disclosure Schedules.
(d) Section 3.17(d) of the Disclosure Schedules sets forth a complete and
accurate list of all offers or bids made to any customer or prospective customer
of the Company, which offer or bid (i) could generate revenues or involve
expenses in excess of $150,000, and (ii) has not been rejected by each Person
who has the right to accept such offer or bid. The Company has heretofore
delivered true and complete copies of each such offer or bid to Parent.
Section 3.18 Government Contracts. Except for Section 3.18(a), which
applies to the time periods set forth therein, at all times since January 1,
1998:
(a) Section 3.18(a)(i)-(iv) of the Disclosure Schedules set forth a true
and complete list of (i) all Government Contracts, past and present, awarded by
the Government or by any higher tier subcontractor or prime contractor to the
Government to the Company or any of its Subsidiaries since December 31, 2002,
(ii) all Government Contracts (including options) currently in force between the
Company or any of its Subsidiaries and either the Government or any higher tier
subcontractor or prime contractor of the Government, (iii) all outstanding
quotations, bids and proposals submitted by the Company or any of its
Subsidiaries to either the Government or any proposed higher tier subcontractor
or prime contractor of the Government, and (iv) all Government Contracts
(including options) on which delivery or performance is currently in an
unsatisfactory or delinquent status, behind schedule or which the Company or any
of its Subsidiaries has Actual Knowledge or should have Actual Knowledge will be
unsatisfactory, behind schedule or delinquent in the future.
(b) The Company has complied in all material respects with all statutory
and regulatory requirements with respect to each Government Contract and each
bid, quotation or proposal submitted by the Company to the Government or any
prospective higher tier subcontractor or prime contractor of the Government.
(c) The Company has complied in all material respects with each and every
certification executed, acknowledged or set forth by the Company with respect to
each Government Contract awarded to the Company and each bid, quotation or
proposal submitted by the Company to the Government or any higher tier
subcontractor or prospective prime contractors of the Government.
(d) The Company has complied in all material respects with each
representation executed, acknowledged or set forth by the Company with respect
to each Government Contract awarded to the Company and each and every bid
quotation or proposal submitted by the Company to the Government or any higher
tier subcontractor or prospective prime contractor of the Government.
(e) Except as provided in Section 3.18(e) of the Disclosure Schedules, the
Company has complied in all material respects with all contract clauses,
provisions and requirements incorporated expressly, by reference, or by
operation of Law in each Government Contract awarded to the Company.
(f) Any and all facts set forth in or acknowledged by the Company in any
certifications, representations or disclosure statements submitted by the
Company with respect to any Government Contract were current, accurate and
complete in all material respects as of the date of submission.
PAGE A-24 Agreement and Plan of Merger
(g) Except as provided in Section 3.18(g) of the Disclosure Schedules,
neither the Government nor any higher tier subcontractor or prime contractor has
notified the Company, either orally or in writing, that the Company has breached
or violated in any material respect any regulation, statute, certification,
representation or contract clause, provision or requirement with respect to any
Government Contract awarded to the Company or with respect to any bid, quotation
or proposal submitted by the Company.
(h) Except as provided in Section 3.18(h) of the Disclosure Schedules, the
Company is not currently debarred or suspended from doing business with the
Government and the Company knows of no circumstances that would warrant the
institution of debarment or suspension proceedings in the future.
(i) Except as provided in Section 3.18(i) of the Disclosure Schedules, no
show cause notices or cure notices have been issued against the Company on any
of its Government Contracts with the Government or on any of the its Contracts
relating to any Government Contract.
(j) Except as provided in Section 3.18(j) of the Disclosure Schedules, no
default terminations have ever been issued against the Company on any of its
Contracts with the Government or on any of its Contracts relating to any
Government Contract.
(k) No negative determination of responsibility has ever been issued
against the Company in connection with any bid, quotation or proposal submitted
by the Company.
(l) No costs incurred by the Company have been disallowed or, within the
last six months, questioned, in either case as a result of a finding or
determination of any kind by the Government.
(m) Except as provided in Section 3.18(m) of the Disclosure Schedules,
neither the Government nor any higher tier subcontractor or prime contractor
under a Government prime contract has withheld or setoff monies, or in the last
six months attempted to withhold or set off material monies, due to the Company
or has made any claims against the Company under any of its Contracts, and there
are no outstanding claims arising under any Government Contract.
(n) To the Company's Knowledge there are not any irregularities,
misstatements or omissions relating to any of its Government Contracts, bids,
quotations or proposals, past or present, that have led or could lead to, either
before or after the Merger, (i) any administrative, civil or criminal
investigation or indictment of the Company, (ii) the questioning or disallowance
of any costs submitted for payment by the Company or Parent, (iii) the
recoupment of any payments previously made to the Company, or (iv) the
assessment of any penalties or damages of any kind against the Company or
Parent, arising out of such irregularities, misstatements or omissions.
(o) The Company is not currently under administrative, civil or criminal
investigation indictment with respect to any alleged irregularity, misstatement
or omission arising under or in any way relating to any of its Government
Contracts, bids, quotations or proposals, past or present.
(p) Except as set forth in Section 3.18(p) of the Disclosure Schedules,
there exist (i) no outstanding claims against the Company either by the
Government or by higher tier subcontractor, any prime contractor, subcontractor,
vendor or other third party arising under or relating to any Government
Contract, (ii) no facts or allegations which are known or should be known by the
Company upon which such a material claim may reasonably be based in the future,
(iii) no disputes between the Company and the Government or any prime
contractor, higher or lower tier subcontractor or vendor arising under or
relating to any Government Contract, and (iv) no facts or allegations which are
known or should be known by the Company over which such a material dispute may
reasonably arise in the future.
(q) Except as set forth in Section 3.18(q) of the Disclosure Schedules, the
Company is not undergoing and since January 1, 2001 has not undergone any audit,
and has no Actual Knowledge or reason to know of any basis for impending audits
in the future, arising under or relating to any Government Contract.
PAGE A-25 Agreement and Plan of Merger
Section 3.19 Related Party Transactions. To the Actual Knowledge of the
Company, no Related Party of the Company has, directly or indirectly, (i) any
interest in any Entity (A) which furnished or sold, or furnishes or sells,
services, products or Technology that the Company furnishes or sells, or
proposes to furnish or sell, or which otherwise competes with the Company with
respect to such services, products or Technology, or (B) that purchases from, or
sells or furnishes to, the Company any services, products or Technology, (ii) an
interest in any Property or Equipment used in or pertaining to any Company
Products or the business of the Company, or (iii) a beneficial interest in any
Contract to which the Company is a party or by which it is bound or any license
granted to or by the Company; provided, however, that ownership of no more than
1% of the outstanding voting stock of a publicly traded corporation with a
market capitalization in excess of $100 million shall not be deemed to be an
"interest in any entity" for purposes of this Section 3.19. No Related Party of
the Company is a party to any Contract with the Company. Except as provided in
Section 3.19 of the Disclosure Schedules, the Company (i) does not have
outstanding any loan or other extension of credit to, or any guarantee of any
loan or other debt of, any officer or director of the Company, and (ii) has not
forgiven or waived, in whole or in part, any extended credit, in the form of a
personal loan to or for any director or officer of the Company, which credit or
loan is reflected as an asset in the Financials.
Section 3.20 Compliance with Law; Governmental Authorization.
(a) Except as provided in Section 3.20(a)(i)-(iii) of the Disclosure
Schedules, (i) the Company is, and in the last three-year period has been, in
compliance in all material respects with all applicable Law that is or was
applicable to the Company or to its business or operations or to the ownership
or use of its Properties, (ii) no Event has occurred or circumstances exist that
(with or without notice or lapse of time) (A) may constitute or result in a
violation by the Company of, or a failure on the part of the Company to comply
with, any applicable Law in any material respect, or (B) may give rise to any
obligation of the Company to undertake, or to bear all or any portion of the
cost of, any remedial action of any nature; and (iii) the Company has not
received, at any time in the last three-year period, any oral or written notice
or other communication from any Governmental Body or any other Person regarding
any actual, alleged, possible or potential (x) violation of, or failure to
comply with, any applicable Law in any material respect, or (y) obligation on
the part of the Company to undertake, or to bear all or any portion of the cost
of, any remedial action of any nature.
(b) Each Consent and Governmental Permit (i) pursuant to which the Company
currently operates or holds any interest in any of its Properties, or (ii) which
is necessary for, or the absence of which would be Materially adverse to, the
operation of its business as currently conducted or currently contemplated to be
conducted or the holding of any such interest (collectively, "COMPANY
AUTHORIZATIONS") has been issued or granted. Section 3.20(b) of the Disclosure
Schedules lists all Company Authorizations and such list constitute all Company
Authorizations required to permit the Company to operate or conduct its business
as presently conducted or to hold any interest in its Properties. Each Company
Authorization is in full force and effect, and shall remain in full force and
effect without modification after the Closing.
Section 3.21 Litigation. Except as set forth on Section 3.21 of the
Disclosure Schedules, there is no Action of any nature pending or, to the Actual
Knowledge of the Company, threatened against the Company, its Properties or any
of its officers, managers or directors.
Section 3.22 Accounts Receivable, Customers and Inventory.
(a) Section 3.22(a) of the Disclosure Schedules sets forth a list of all
Accounts Receivable of the Company as of the date of the Current Balance Sheet,
together with a range of days elapsed since invoice. All of such Accounts
Receivable represent valid obligations arising from sales actually made or
services actually performed by the Company in the Ordinary Course of Business,
are carried at values determined in accordance with GAAP consistently applied,
and are current and collectible (and within 270 days of the Closing Date will be
collected in full without any setoff) except to the extent (i) of reserves
therefor set forth in the Current Balance Sheet or, for receivables arising
subsequent to the date of the Current Balance Sheet, as reflected on the books
and records of the Company (which are prepared in accordance with GAAP), as
applicable, and (ii) the applicable customer files for bankruptcy or is
otherwise not able to pay its bills generally through no fault of the Company or
any of its Representatives. No Person has any Encumbrance on any Accounts
Receivable of the Company and no written
PAGE A-26 Agreement and Plan of Merger
request or oral or written agreement for deduction or discount has been made
with respect to any of such Accounts Receivable.
(b) All raw materials, components and other parts, work-in-process,
finished goods and all other inventory (collectively, the "INVENTORIES")
reflected on the Current Balance Sheet or on the accounting records of the
Company as of the Closing Date, or thereafter acquired by the Company (and not
subsequently disposed of in the Ordinary Course of Business), are adequate and
sufficient for work in progress, consistent with the historical inventory
policies and practices of the Company. The Inventory consists of items of a
quality and quantity which are merchantable and fully usable in the normal
course of such business. The values at which such Inventories are carried on the
Current Balance Sheet or on the accounting records of the Company as of the
Closing Date reflect the normal inventory valuation policy of the Company
(including the writing down of or reserving against the value of slow-moving or
obsolete inventory) and state Inventory at the lower of cost or market (on a
first-in, first-out method) in accordance with GAAP, consistently applied. All
the Inventory is located at facilities owned or leased by the Company, the
addresses of which have previously been disclosed to Parent in writing.
(c) Section 3.22(c) of the Disclosure Schedules sets forth the customers of
the Company, as well as the aggregate dollar amount of business between each
customer and the Company, from December 31, 2002 to June 30, 2005. The Company
has not received any customer complaint since December 31, 2002 that the Company
has not been able to address to the satisfaction of the complainant, and no
purchaser or recipient of any Company Product has rejected or returned such
Company Product.
Section 3.23 Environmental Matters. Except as set forth in Section 3.23 of
the Disclosure Schedules, the Company now is, and at all times has been, in
compliance with, and has not been and is not in violation of or liable under,
any Environmental Law. Except as set forth in Section 3.23 of the Disclosure
Schedules, the Company has no basis to expect, nor has the Company or any other
Person for whose conduct the Company is or may be held to be responsible
received, any actual or threatened order, notice or other communication from (i)
any Governmental Body or private citizen acting or purporting to act in the
public interest, or (ii) the current or prior owner or operator of any
Facilities, in each case of any actual or potential violation or failure to
comply with any Environmental Law, or of any actual or threatened obligation to
undertake or bear the cost of any Environmental, Health and Safety Liabilities
with respect to any Environmental Property, or with respect to any such
Environmental Property at or to which Hazardous Materials were generated,
manufactured, refined, transferred, imported, used or processed by the Company
or any other Person for whose conduct the Company is or may be held responsible,
or from which Hazardous Materials have been transported, treated, stored,
handled, transferred, disposed, recycled or received. Except as set forth in
Section 3.23 of the Disclosure Schedules:
(a) There are no pending or, to the Actual Knowledge of the Company,
threatened claims, Encumbrances, or other restrictions of any nature resulting
from any Environmental, Health and Safety Liabilities or arising under or
pursuant to any Environmental Law with respect to or affecting any Environmental
Property.
(b) The Company has no Actual Knowledge of, nor has it or any other Person
for whose conduct it is or may be held responsible received, any citation,
directive, inquiry, notice, Order, summons, warning or other communication that
relates to Hazardous Activity, Hazardous Materials, or any alleged, actual, or
potential violation or failure to comply with any Environmental Law, or of any
alleged, actual, or potential obligation to undertake or bear the cost of any
Environmental, Health and Safety Liabilities with respect to any Environmental
Property, or with respect to any property or facility to which Hazardous
Materials generated, manufactured, refined, transferred, imported, used or
processed by the Company or any other Person for whose conduct it is or may be
held responsible, have been transported, treated, stored, handled, transferred,
disposed, recycled or received.
(c) The Company nor any other Person for whose conduct the Company is or
may be held responsible has any Environmental, Health and Safety Liabilities
with respect to any Environmental Property.
(d) To the Company's Knowledge there are no Hazardous Materials present on
or in the Environment at any Facility, including any Hazardous Materials
contained in barrels, aboveground or underground storage tanks, landfills, land
deposits, dumps, equipment (whether movable or fixed) or other containers,
either temporary or permanent, and deposited or located in land, water, sumps,
or any other part of the Facility or such adjoining property, or incorporated
into any structure therein or thereon. Neither the Company nor any other Person
PAGE A-27 Agreement and Plan of Merger
for whose conduct the Company is or may be held responsible, nor to the Actual
Knowledge of the Company any other Person, has permitted or conducted, or is
aware of, any Hazardous Activity conducted with respect to Environmental
Property, except in full compliance with all applicable Environmental Laws.
(e) There has been no Environmental Release or, to the Knowledge of the
Company, threat of Environmental Release, of any Hazardous Materials at or from
any Facility or at any other location where any Hazardous Materials were
generated, manufactured, refined, transferred, produced, imported, used, or
processed from or by any Facility, or from any other Environmental Property, or
to the Actual Knowledge of the Company any geologically or hydrologically
adjoining property, whether by the Company or any other Person.
(f) The Company has delivered to Parent true and complete copies and
results of any reports, studies, analyses, tests, or monitoring possessed or
initiated by the Company pertaining to Hazardous Materials or Hazardous
Activities in, on, or under the Facilities or any other Environmental Property,
or concerning compliance, by the Company or any other Person for whose conduct
the Company is or may be held responsible, with Environmental Laws.
Section 3.24 Brokers' and Finders' Fees. Except as provided in Section 3.24
of the Disclosure Schedules, for which obligations the shareholders of the
Company are solely responsible, the Company has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement, any
Related Agreement or any Transaction.
Section 3.25 Employee Benefit Plans and Compensation.
(a) Definitions. For all purposes of this Section 3.25 only, the following
terms shall have the following respective meanings:
(1) "AFFILIATE" means any other Entity under common control with the
Company within the meaning of Section 414(b), (c), (m) or (o) of the Code,
and the regulations issued thereunder.
(2) "COBRA" means the Consolidated Omnibus Budget Reconciliation Act
of 1985, as amended.
(3) "DOL" means the United States Department of Labor.
(4) "EMPLOYMENT AGREEMENT" means each management, employment,
severance, consulting, relocation, repatriation, expatriation, visas, work
permit or other agreement, or contract between the Company or any Affiliate
and any Employee.
(5) "FMLA" means the Family Medical Leave Act of 1993, as amended.
(6) "PENSION PLAN" means each Company Employee Plan which is an
"employee pension benefit plan" (within the meaning of Section 3(2) of
ERISA).
(b) Schedule. Section 3.25(b) of the Disclosure Schedules contains an
accurate and complete list of each Company Employee Plan and each Employment
Agreement. The Company has no plan or commitment to establish any new Company
Employee Plan or Employment Agreement, to modify any Company Employee Plan or
Employment Agreement, or to enter into any Company Employee Plan or Employee
Agreement. Section 3.25(b) of the Disclosure Schedules also sets forth a table
setting forth the name, annual salary and, if applicable, bonus, of each
director, officer and employee of the Company, and the name of each consultant
of the Company.
(c) Documents. Except as set forth in Section 3.25(c) of the Disclosure
Schedules, the Company has provided to Parent correct and complete copies of (i)
all documents embodying each Company Employee Plan and each Employment Agreement
(including all Amendments thereto) and all related trust documents,
administrative service agreements, group annuity contracts, group insurance
contracts, and policies pertaining to fiduciary liability insurance covering the
fiduciaries for each Plan, (ii) the most recent annual actuarial
PAGE A-28 Agreement and Plan of Merger
valuations, if any, prepared for each Company Employee Plan, (iii) the three (3)
most recent annual reports (Form Series 5500 and all schedules and financial
statements attached thereto), if any, required under ERISA or the Code in
connection with each Company Employee Plan, (iv) if the Company Employee Plan is
funded, the most recent annual and periodic accounting of Company Employee Plan
assets, (v) the most recent summary plan description, together with the
summaries of material modifications thereto, if any, required under ERISA with
respect to each Company Employee Plan, (vi) all IRS determination, opinion,
notification and advisory letters, and all applications and correspondence to or
from the IRS or the DOL with respect to any such application or letter, (vii)
all communications Material to any Employee or Employees relating to any Company
Employee Plan and any proposed Company Employee Plans, in each case, relating to
any Amendments, terminations, establishments, increases or decreases in
benefits, acceleration of payments or vesting schedules or other Events which
would result in any Material liability to the Company, (viii) all correspondence
to or from any Governmental Body relating to any Company Employee Plan, (ix) all
COBRA forms and related notices (or such forms and notices as required under
comparable Law), (x) the three (3) most recent plan years discrimination tests
for each Company Employee Plan, and (xi) all registration statements, annual
reports (Form 11-K and all attachments thereto) and prospectuses prepared in
connection with each Company Employee Plan.
(d) Employee Plan Compliance. Except as set forth in Section 3.25(d) of the
Disclosure Schedules, (i) the Company has performed in all material respects all
obligations required to be performed by it under, is not in default or Breach
of, and has no Actual Knowledge of any default or Breach by any other party to
each Company Employee Plan, and each Company Employee Plan has been established
and maintained in all material respects in accordance with its terms and in
compliance with all applicable Laws, including ERISA and the Code, (ii) each
Company Employee Plan intended to qualify under Section 401(a) of the Code and
each trust intended to qualify under Section 501(a) of the Code has either
received a favorable determination, opinion, notification or advisory letter
from the IRS with respect to each such Company Employee Plan as to its qualified
status under the Code, including all amendments to the Code effected by the Tax
Reform Act of 1986 and subsequent legislation, or has remaining a period of time
under applicable Treasury regulations or IRS pronouncements in which to apply
for such a letter and make any amendments necessary to obtain a favorable
determination as to the qualified status of each such Company Employee Plan,
(iii) no "prohibited transaction" (within the meaning of Section 4975 of the
Code or Sections 406 and 407 of ERISA) and not otherwise exempt under Section
4975 of the Code or Section 408 of ERISA (or any administrative class exemption
issued thereunder) has occurred with respect to any Company Employee Plan, (iv)
there are no Actions pending, or, to the Actual Knowledge of the Company,
threatened or reasonably anticipated (other than routine claims for benefits),
against any Company Employee Plan or against the assets of any Company Employee
Plan, (v) each Company Employee Plan (other than any stock option plan) can be
amended, terminated or otherwise discontinued after the Closing Date, without
Material liability to Parent, the Surviving Corporation, the Company or any of
its Affiliates (other than ordinary administration expenses), (vi) there are no
Actions pending or, to the Knowledge of the Company or any Affiliates,
threatened by the IRS or DOL with respect to any Company Employee Plan, and
(vii) neither the Company nor any Affiliate is subject to any penalty or tax
with respect to any Company Employee Plan under Section 502(i) of ERISA or
Sections 4975 through 4980 of the Code.
(e) No Pension Plans. Neither the Company nor any Affiliate has ever
maintained, established, sponsored, participated in, or contributed to, any (i)
Pension Plans subject to Title IV of ERISA or Section 412 of the Code; (ii)
"multiemployer plan" within the meaning of Section (3)(37) of ERISA; or (iii)
multiemployer plan, or to any plan described in Section 413 of the Code.
(f) No Post-Employment Obligations. No Company Employee Plan provides, or
reflects or represents any liability to provide, retiree life insurance, retiree
health or other retiree employee welfare benefits to any person for any reason,
except as may be required by COBRA or other applicable statute, and the Company
has never represented, promised or contracted (whether in oral or written form)
to any Employee (either individually or to Employees as a group) or any other
person that such Employee(s) or other person would be provided with retiree life
insurance, retiree health or other retiree employee welfare benefit, except to
the extent required by statute and described in Section 3.25(f) of the
Disclosure Schedules.
(g) Health Care Compliance. Neither the Company nor any Affiliate has,
prior to the Closing Date and in any respect, violated in any material respect
any of the health care continuation requirements of COBRA, the requirements of
FMLA, the requirements of the Health Insurance Portability and Accountability
Act of
PAGE A-29 Agreement and Plan of Merger
1996, the requirements of the Women's Health and Cancer Rights Act of 1998, the
requirements of the Newborns' and Mothers' Health Protection Act of 1996, or any
amendment to each such act, or any similar provisions of state law applicable to
its Employees.
(h) Effect ofTransactions.
(1) Except as set forth on Section 3.25(h) of the Disclosure
Schedules, the execution of this Agreement and the consummation of the
Transactions will not (either alone or upon the occurrence of any
additional or subsequent events) constitute an event under any Company
Employee Plan, Employment Agreement, trust or loan that will or may result
in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of Debt, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee.
(2) Except as set forth on Section 3.25(h) of the Disclosure
Schedules, no payment or benefit which will or may be made by the Company
or its Affiliates with respect to any Employee or any other "disqualified
individual" (as defined in Code Section 280G and the regulations
thereunder) will be characterized as a "parachute payment," within the
meaning of Section 280G(b)(2) of the Code.
(i) Employment Matters. Except as set forth in Section 3.25(i) of the
Disclosure Schedules, the Company (i) is in compliance with all applicable
foreign, federal, state and local Laws respecting employment, employment
practices, terms and conditions of employment and wages and hours, in each case,
with respect to Employees, (ii) has withheld and reported all amounts required
by law or by agreement to be withheld and reported with respect to wages,
salaries and other payments to Employees, (iii) is not liable for any arrears of
wages or any Taxes or any penalty for failure to comply with any of the
foregoing, (iv) is not liable for any payment to any trust or other fund
governed by or maintained by or on behalf of any Governmental Body, with respect
to unemployment compensation benefits, social security or other benefits or
obligations for Employees (other than routine payments to be made in the
Ordinary Course of Business), and (v) has taken all commercially reasonable
actions necessary to comply with any applicable Law in connection with the
Company's employment of its employees and any terminations of employment
contemplated by this Agreement or the Merger, including the WARN Act, and has
paid, or adequately reserved against in the Current Balance Sheet, all amounts
required to be paid under any applicable Law, including the WARN Act and any
similar state laws, as a result of the termination or layoff of any employee of
the Company who is not a Transferred Employee in connection with the Merger.
There are no pending or, to the Actual Knowledge of the Company threatened or
reasonably anticipated, Actions against the Company under any worker's
compensation policy or long-term disability policy.
(j) Labor. No work stoppage or labor strike against the Company or, to the
Company's Actual Knowledge, its material suppliers, manufacturers and other
contractors is pending, threatened or reasonably anticipated. There are neither
any activities nor proceedings of any labor union to organize any Employees, nor
have there ever been. There are no Actions, labor disputes or grievances
pending, threatened or reasonably anticipated relating to any labor, safety or
discrimination matters involving any Employee, including charges of unfair labor
practices or discrimination complaints. Neither the Company nor any of its
Affiliates has engaged in any unfair labor practices within the meaning of the
National Labor Relations Act. The Company is not presently, nor has been in the
past, a party to, or bound by, any collective bargaining agreement or union
contract with respect to Employees, and no collective bargaining agreement is
being negotiated by the Company.
(k) No Interference or Conflict. To the Actual Knowledge of the Company, no
Shareholder, officer, director, employee or consultant of the Company is
obligated under any Contract or subject to any Order of any court or
administrative agency that would interfere with such Person's efforts to promote
the interests of the Company or that would interfere with the Company's
business. Neither the execution nor delivery of this Agreement or any Related
Agreement, nor the carrying on of the Company's business and operations as
presently conducted or proposed to be conducted, nor any activity of such
officers, directors, employees or consultants in connection with the carrying on
of the Company's business as presently conducted (or, to the Company's Actual
Knowledge, as currently proposed to be conducted), will conflict with or result
in a Breach of the terms, conditions or provisions of any Contract under which
any of such officers, directors, employees or consultants is now bound.
PAGE A-30 Agreement and Plan of Merger
(l) Perquisites. Section 3.25(l) of the Disclosure Schedule sets forth all
personal or non-business costs and expenses paid by the Company to, on behalf of
or for the benefit of any of its directors, officers, employees, consultants and
customers, including dues, costs and expenses for (i) personal travel, (ii) club
and other memberships, (iii) charge cards, (iv) cell or smart phones, (v) PDAs
or similar electronic devices, (vi) notebook or personal computers, (vii)
automobiles, (viii) office d cor, (ix) use of Company property for personal use,
(x) home office equipment, and (xi) any other perquisites.
Section 3.26 Insurance. Except as set forth in Section 3.26 of the
Disclosure Schedules, no claim by the Company or any of its Subsidiaries is
pending under any insurance policies or fidelity bonds covering the assets,
business, equipment, properties, operations, employees, officers and directors
of the Company as to which coverage has been questioned, denied or disputed by
the underwriters of such policies or bonds. All premiums due and payable under
all such policies and bonds have been paid, and the Company and its Affiliates
are otherwise in Material compliance with the terms of such policies and bonds
(or other policies and bonds providing substantially similar insurance
coverage). The Company has no Actual Knowledge of any threatened termination of,
or premium increase with respect to, any of such policies.
Section 3.27 Relations With Governmental Entities. Neither the Company, nor
the Key Shareholders, nor to the Knowledge of the Company, any Representative of
the Company, has paid, given or received, or offered or promised to pay, give or
receive, any bribe or other unlawful payment of money or other thing of value,
any unlawful discount, or any other unlawful inducement, to or from any Person
or Governmental Body anywhere worldwide in connection with or in furtherance of
the business of the Company (including any offer, payment or promise to pay
money or other thing of value (a) to any foreign official, political party (or
official thereof) or candidate for political office for the purposes of
influencing any act, decision or omission in order to assist the Company in
obtaining business or orders for or with, or directing business to, any Person,
or (b) to any Person while knowing that all or a portion of such money or other
thing of value will be offered, given or promised to any such official or party
for such purposes). Neither the Company nor the Key Shareholders has otherwise
taken any action that would cause the Company to be in violation of the Foreign
Corrupt Practices Act of 1977, as amended, or any applicable Laws of similar
effect.
Section 3.28 Warranties. Except as provided in Section 3.28 of the
Disclosure Schedules, all Company Products and services provided by the Company
are sold, licensed or otherwise provided pursuant to terms that include (a) a
disclaimer of all warranties, express or implied, including those of
merchantability, fitness for a particular purpose and non-infringement, (b) a
disclaimer of all consequential damages arising from the use or possession of
the product or use or provision of the services, regardless of whether such
liability is based on tort, contract or otherwise, and (c) language stating that
if the foregoing disclaimers are held to be unenforceable, the Company's maximum
liability shall not exceed the amount of money(ies) paid for such product(s).
Section 3.29 Complete Copies of Materials. Except as set forth in Section
3.29 of the Disclosure Schedules, the Company has delivered true and complete
copies of each document (or summaries of same) that has been requested by Parent
or its counsel. Section 3.30 Customer Relations.
Section 3.30 of the Disclosure Schedules sets forth the names and addresses
of customers or clients of the Company (the "MATERIAL CUSTOMERS") which on
December 31, 2004, the date hereof or at the Closing (i) have Contracts with the
Company that have or are expected to generate sales revenues or expenses in
excess of $500,000, or (ii) accounted for 5% or more of the net revenue of the
Company, taken as a whole, for the fiscal year ended December 31, 2004 or the
partial-year period ended on the Current Balance Sheet Date. None of the
Material Customers has (A) registered any material complaint regarding the
services rendered by the Company, (B) overtly indicated any intention to reduce
the level of services under any Contract with the Company, other than based
solely on dissatisfaction with the Company's financial condition, (C) stated
verbally or in writing any intention to terminate any Contract with the Company,
or (D) delivered a written indication that it will not (1) rehire, (2) accept
offers or bids from, (3) purchase any Company Products from, or (4) enter into
new, or renew existing, Contracts with; the Company or the Surviving
Corporation.
Section 3.31 Equity Ownership. Each Key Shareholder hereby severally
represents and warrants to Parent that it is the sole record and beneficial
owner of the shares of Company Common Stock in the amount set forth next to its
name in the Shareholder Table. Such Securities are not subject to any
Encumbrance of
PAGE A-31 Agreement and Plan of Merger
any kind or nature. There are no Commitments or Contracts of any character,
written or oral, to which any Key Shareholder is a party or by which it or any
of its Properties is bound obligating such Shareholder to issue, Transfer,
repurchase or redeem, or cause to be issued, Transferred, sold, repurchased or
redeemed, any such Securities or obligating such Shareholder to grant or enter
into any such Commitment or Contract. Each Key Shareholder has good and valid
title to, and has the sole right to Transfer or Encumber (if applicable), such
Securities.
Section 3.32 Form S-4 Information.
(a) The information supplied or to be supplied by or on behalf of the
Company or any of its Shareholders for inclusion or use, or incorporation by
reference, in (i) the Form S-4, (ii) the Proxy Statement, or (iii) any other
document (including any report filed by Parent under the Exchange Act) filed
with any Governmental Body in connection with the Transactions, or in each case
any amendment or supplement thereto; in each case do not and will not, at the
Applicable Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein regarding the Company Information, in light of the
circumstances under which they are made, not misleading. The Company Information
provides all information relating to the Company or its operations, business,
directors, officers, Subsidiaries and Shareholders required to be provided by
the provisions of the Securities Act and the Exchange Act, and the rules and
regulations promulgated by the SEC thereunder, including Form S-4 and Regulation
14A.
(b) Notwithstanding the foregoing provisions of this Section 3.32, the
Company makes no representation or warranty, and assumes no responsibility, with
respect to statements made or incorporated by reference in the Form S-4, the
Proxy Statement or any other such document based on information (other than
Company Information) supplied by Parent for inclusion or incorporation by
reference therein.
Section 3.33 Expenses of Sale. Section 3.33 of the Disclosure Schedule (the
"COMPANY TRANSACTION EXPENSES") itemizes in reasonable detail (A) on the date of
this Agreement only (this sub-clause (A) having no force or effect as of the
Closing Date), all costs and expenses the Company has incurred or paid or
reasonably expects to incur or pay related to the sale of the Company, including
all Expenses, and (B) as of the Closing Date only (this sub-clause (B) having no
force or effect as of the date of this Agreement), all costs and expenses the
Company has incurred or paid related to the sale of the Company, including all
Expenses, other than costs and expenses which have already been paid (as
reflected in the Closing Balance Sheet). All of the Company Transaction
Expenses, including all bonuses or transaction fees owed any Company
Representative in connection with the Merger or the other Transactions, shall be
fully and finally paid prior to the Closing or shall be properly itemized in the
Transaction Expense Payment Schedule to be paid at Closing or out of Performance
Consideration.
Section 3.34 Representations Complete. Except as set forth in Section 3.34
of the Disclosure Schedules, none of the representations or warranties made by
the Company or any Key Shareholder, and no financial statement, other written
financial information or statements made in any exhibit, schedule or certificate
furnished by the Company or any Key Shareholder pursuant to this Agreement or
any Related Agreement, or furnished by the Company or any Key Shareholder in or
in connection with documents mailed or delivered to the shareholders of the
Company or Parent for use in soliciting their consent to this Agreement and the
Merger, contains or will contain at the Closing Date any untrue statement of a
material fact or omits or will omit at the Closing Date to state any material
fact necessary in order to make the statements contained herein or therein, in
light of the circumstances under which they were made, not misleading. The
Company has prepared the financial projections relating to the Company and its
Subsidiaries that were delivered to Parent prior to the date of this Agreement
(the "FINANCIAL PROJECTIONS") in good faith based upon reasonable assumptions,
and the Company and the Key Shareholder each believes that there is a reasonable
basis for such projections.
ARTICLE IV
PARENT AND MERGER SUB
REPRESENTATIONS AND WARRANTIES
Parent and Merger Sub represent and warrant to the Company that the
statements contained in this Article IV are true, correct and complete as of the
date of this Agreement and as of the Closing Date, except as set forth, with
respect to any specific Section or subsection in this Article IV, in the
corresponding section or subsection of the
PAGE A-32 Agreement and Plan of Merger
schedules Parent has delivered to the Company on the date hereof and on the
Closing Date (the "PARENT DISCLOSURE SCHEDULES").
Section 4.1 Organization and Qualification. Each of Parent and Merger Sub:
(i) is a corporation duly organized, validly existing and in good standing under
the laws of the State of Colorado; (ii) has the full corporate power and
authority to own or use its properties and assets, to carry on its business as
currently conducted and as currently contemplated to be conducted, and to
perform all of its obligations under this Agreement and the Related Agreements;
(iii) is qualified or licensed to do business in all jurisdictions in which the
failure to do so would have a Material Adverse Effect. Parent is not in
violation of any provision of its Articles of Incorporation and bylaws.
Section 4.2 Subsidiaries. Parent presently does not have any Subsidiaries
or own or control, directly or indirectly, any Equity Interest in any other
Entity, other than (i) Merger Sub, and (ii) SpaceDev Oklahoma, an Oklahoma
corporation ("SPACEDEV OKLAHOMA").
Section 4.3 Power and Authority; Enforceability. Parent has the relevant
corporate power and authority to execute and deliver each Transaction Document
to which it is party, and to perform and consummate the Merger. Except for
approval of the Merger by Parent's shareholders, Parent has taken all action
necessary to authorize the execution and delivery of each Transaction Document
to which it is party, the performance of its obligations thereunder, and the
consummation of the Merger including solicitation of Shareholders' consent. This
Agreement and each Transaction Document to which Parent is a party has been duly
authorized, executed, and delivered by, and is Enforceable against Parent.
Section 4.4 No Conflict. The execution and delivery by Parent and Merger
Sub of this Agreement and any Related Agreement to which it is a party or
signatory, and the consummation of the Merger, will not directly or indirectly:
(a) any Conflict with (i) any provision of the Organizational Documents of
Parent or Merger Sub, or any resolutions of the board of directors or Parent
shareholders, each as in effect and Amended to date, (ii) any Contract to which
Parent or Merger Sub is a party, or to which it is subject or by which any of
them is bound, or any license under which any of them is a licensee, or (iii)
any Law or Order applicable to Parent or Merger Sub, or Parent's Property;
(b) give any Person the power, right or authority to challenge any of the
Transactions or to exercise any remedy or obtain any relief under any Law or
Order to which Parent or Merger Sub may be subject;
(c) contravene, conflict with or result in a violation or Breach of any of
the terms or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate or modify, any Governmental Permit held by
Parent or that otherwise relates to the Properties or to the businesses of
Parent;
(d) cause the Company or the Surviving Corporation to become subject to, or
to become liable for the payment of, any Taxes owed by or on behalf of Parent or
any properties, assets, shareholder, officer or employee of Parent;
(e) result in the imposition or creation of any Encumbrance upon or with
respect to any Property of Parent or Merger Sub; or
(f) result in any shareholder of Parent having the right to exercise
dissenters', appraisal or other similar rights pursuant to any Contract,
Organizational Document of Parent or, except for dissenters' rights under the
California General Corporation Law, applicable Law.
Section 4.5 Consents. No Order or Consent of, or registration, declaration
or filing with, any Governmental Body or any third party, including any party to
any Contract with, or licensor of, Parent (so as not to trigger any Conflict),
is required by or with respect to Parent and Merger Sub in connection with the
execution,
PAGE A-33 Agreement and Plan of Merger
delivery or performance of this Agreement, any of the Related Agreements to
which it is a party or signatory, or the consummation of the Transactions,
except for (i) the filing with the SEC of the Form S-4, the Proxy Statement, a
Form 8-K and such other reports under the Exchange Act as may be required from
time to time in connection with this Agreement and the Transactions, (ii) such
Orders and Consents as may be required under applicable state securities or
"blue sky" laws, (iii) the filing of the Statement of Merger with the Secretary
of State of the State of Colorado, (iv) the approval of this Agreement, the
Merger and other matters referred to herein by the shareholders of Parent, (v)
the Consents which have been obtained, (vii) such other Consents and filings the
failure of which to be made or obtained would not reasonably be expected to (A)
have a Material Adverse Effect on Parent, (B) impair in any material respect the
ability of Parent to perform its obligations under this Agreement or any Related
Agreement to which it is a party or signatory, or (C) prevent or materially
impede, interfere with, hinder or delay the consummation of the Transactions,
and (vi) such other Orders and Consents as are specified with reasonable
particularity in Section 4.5 of the Parent Disclosure Schedules.
Section 4.6 Capitalization. As of August 15, 2005, the authorized, issued
and outstanding capital stock of Parent is as set forth in the Quarterly Report
on Form 10-Q filed with the SEC on August 15, 2005 (the "PARENT FORM 10-Q"). All
of the outstanding shares of capital stock of Parent have been duly authorized
and are validly issued, fully paid and non-assessable and have not been issued
in violation of the preemptive or similar rights of any shareholder of Parent
arising by operation of securities or "blue sky" laws or the Articles of
Incorporation or bylaws of Parent.
Section 4.7 SEC Filings; Financial Statements.
(a) Parent has made available to the Company accurate and complete copies
(excluding copies of exhibits) of each report filed by Parent with the SEC for
the last two years (the "PARENT SEC DOCUMENTS"). As of the time it was filed
with the SEC (or, if amended or superseded by a filing prior to the date hereof,
then on the date of such later filing), (i) each of the Parent SEC Documents
complied in all material respects with the applicable requirements of the
Securities Act or the Exchange Act, as the case may be, and (ii) none of the
Parent SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
(b) The consolidated financial statements contained in the Parent SEC
Documents: (i) complied as to form in all material respects with the published
rules and regulations of the SEC applicable thereto; (ii) were prepared in
accordance with GAAP applied on a consistent basis throughout the periods
covered, except as may be indicated in the notes to such consolidated financial
statements and (in the case of unaudited statements) as permitted by Form 10-QSB
of the SEC, and except that unaudited financial statements are subject to
year-end audit adjustments; and (iii) fairly present the consolidated financial
position of Parent as of the respective dates thereof and the consolidated
results of operations of Parent for the periods covered thereby.
Section 4.8 Form S-4 Information.
(a) None of the information (other than the Company Information) supplied
or to be supplied by or on behalf of Parent for inclusion or use, or
incorporation by reference, in (i) the Form S-4, (ii) the Proxy Statement, and
(iii) any other document (including any report filed by Parent under the
Exchange Act) filed with any Governmental Body in connection with the
Transactions, or in each case any amendment or supplement thereto; in each case
do not and will not, at the Applicable Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading. Except with respect to the Company
Information, as to which Parent makes no representation or warranty and assumes
no responsibility, the Form S-4 and the Proxy Statement will each comply as to
form in all material respects with the provisions of the Securities Act and the
Exchange Act and the rules and regulations promulgated by the SEC thereunder,
including Form S-4 and Regulation 14A.
(b) Notwithstanding the foregoing provisions of this Section 4.8, Parent
makes no representation or warranty, and assumes no responsibility, with respect
to statements made or incorporated by
PAGE A-34 Agreement and Plan of Merger
reference in the Form S-4, the Proxy Statement or any other such document
relating to the Company Information or based on information supplied by the
Company for inclusion or incorporation by reference therein.
Section 4.9 No Undisclosed Liabilities.
Parent has no Liabilities, Debt, Capital Lease Obligation, Guarantees,
obligations, expenses, claims, deficiencies, or endorsements of any type,
whether or not known, accrued, absolute, contingent, matured, secured,
conditional, liquidated, vested, due or required to be reflected in financial
statements in accordance with GAAP, except for those which (i) have been
adequately reserved against or otherwise reflected or incorporated by reference
in the Parent Form 10-Q, as of the date of the financial statements contained
therein, (ii) have been disclosed in Parent SEC Documents filed after the Parent
Form 10-Q, (iii) have arisen in the Ordinary Course of Business consistent with
past practices since December 31, 2004, which are not Material, and (iv) are an
Expense under Section 11.10, which will be paid at or prior to Closing.
Section 4.10 Valid Issuance. The shares of Parent Common Stock to be issued
to shareholders of the Company as Shareholder Consideration, will, when issued
to such shareholders in accordance with the provisions of this Agreement, be
validly issued, fully paid and non-assessable.
Section 4.11 Merger Sub. Merger Sub has been formed for the sole purpose of
effecting the Merger and, except as contemplated by this Agreement, Merger Sub
has not conducted any business activities. Parent directly owns all of the
issued and outstanding shares of capital stock of Merger Sub.
Section 4.12 SpaceDev Oklahoma. Parent directly owns all of the issued and
outstanding shares of capital stock of SpaceDev Oklahoma. SpaceDev Oklahoma in
an inactive corporation with no operations, assets or liabilities.
Section 4.13 Suspension and Trading. No order ceasing or suspending trading
in securities of Parent is currently outstanding, and no proceeding for this
purpose have been instituted or, to Parent's Knowledge, are pending or
threatened.
Section 4.14 Government Contracts. Except for Section 4.14(a), which
applies to the time periods set forth therein, at all times since January 1,
1998:
(a) Section 4.14(a)(i)-(iv) of the Parent Disclosure Schedules set forth a
true and complete list of (i) all Government Contracts, past and present,
awarded by the Government or by any higher tier subcontractor or prime
contractor to the Government to Parent or any of its Subsidiaries since December
31, 2002, (ii) all Government Contracts (including options) currently in force
between Parent or any of its Subsidiaries and either the Government or any
higher tier subcontractor or prime contractor of the Government, (iii) all
outstanding quotations, bids and proposals submitted by Parent or any of its
Subsidiaries to either the Government or any proposed higher tier subcontractor
or prime contractor of the Government, and (iv) all Government Contracts
(including options) on which delivery or performance is currently in an
unsatisfactory or delinquent status, behind schedule or which Parent or any of
its Subsidiaries has Actual Knowledge or should have Actual Knowledge will be
unsatisfactory, behind schedule or delinquent in the future.
(b) Parent has complied in all material respects with all statutory and
regulatory requirements with respect to each Government Contract and each bid,
quotation or proposal submitted by Parent to the Government or any prospective
higher tier subcontractor or prime contractor of the Government.
(c) Parent has complied in all material respects with each and every
certification executed, acknowledged or set forth by Parent with respect to each
Government Contract awarded to Parent and each bid, quotation or proposal
submitted by Parent to the Government or any higher tier subcontractor or
prospective prime contractors of the Government.
(d) Parent has complied in all material respects with each representation
executed, acknowledged or set forth by Parent with respect to each Government
Contract awarded to Parent and each and every bid quotation or proposal
submitted by Parent to the Government or any higher tier subcontractor or
prospective prime contractor of the Government.
PAGE A-35 Agreement and Plan of Merger
(e) Parent has complied in all material respects with all contract clauses,
provisions and requirements incorporated expressly, by reference, or by
operation of Law in each Government Contract awarded to Parent.
(f) Any and all facts set forth in or acknowledged by Parent in any
certifications, representations or disclosure statements submitted by Parent
with respect to any Government Contract were current, accurate and complete in
all material respects as of the date of submission.
(g) Neither the Government nor any higher tier subcontractor or prime
contractor has notified Parent, either orally or in writing, that Parent has
breached or violated in all material respect any regulation, statute,
certification, representation or contract clause, provision or requirement with
respect to any Government Contract awarded to Parent or with respect to any bid,
quotation or proposal submitted by Parent.
(h) Parent is not currently debarred or suspended from doing business with
the Government and Parent knows of no circumstances that would warrant the
institution of debarment or suspension proceedings in the future.
(i) No show cause notices or cure notices have been issued against Parent
on any of its Government Contracts with the Government or on any of the its
Contracts relating to any Government Contract.
(j) No default terminations have ever been issued against Parent on any of
its Contracts with the Government or on any of its Contracts relating to any
Government Contract.
(k) No negative determination of responsibility has ever been issued
against Parent in connection with any bid, quotation or proposal submitted by
Parent.
(l) No costs incurred by Parent have been disallowed or, within the last
six months, questioned, in either case as a result of a finding or determination
of any kind by the Government.
(m) Neither the Government nor any higher tier subcontractor or prime
contractor under a Government prime contract has withheld or setoff monies, or
in the last six months attempted to withhold or set off material monies, due to
Parent or has made any claims against Parent under any of its Contracts, and
there are no outstanding claims arising under any Government Contract.
(n) To Parent's Knowledge there are not any irregularities, misstatements
or omissions relating to any of its Government Contracts, bids, quotations or
proposals, past or present, that have led or could lead to, either before or
after the Merger, (i) any administrative, civil or criminal investigation or
indictment of Parent, (ii) the questioning or disallowance of any costs
submitted for payment by Parent or The Company, (iii) the recoupment of any
payments previously made to Parent, or (iv) the assessment of any penalties or
damages of any kind against Parent or The Company, arising out of such
irregularities, misstatements or omissions.
(o) Parent is not currently under administrative, civil or criminal
investigation indictment with respect to any alleged irregularity, misstatement
or omission arising under or in any way relating to any of its Government
Contracts, bids, quotations or proposals, past or present.
(p) Except as set forth in Section 4.14(p) of the Parent Disclosure
Schedules, there exist (i) no outstanding claims against Parent either by the
Government or by higher tier subcontractor, any prime contractor, subcontractor,
vendor or other third party arising under or relating to any Government
Contract, (ii) no facts or allegations which are known or should be known by
Parent upon which such a material claim may reasonably be based in the future,
(iii) no disputes between Parent and the Government or any prime contractor,
higher or lower tier subcontractor or vendor arising under or relating to any
Government Contract, and (iv) no facts or allegations which are known or should
be known by Parent over which such a material dispute may reasonably arise in
the future.
PAGE A-36 Agreement and Plan of Merger
(q) Except as set forth in Section 4.14(q) of the Parent Disclosure
Schedules, Parent is not undergoing and has not undergone any audit, and has no
Actual Knowledge or reason to know of any basis for impending audits in the
future, arising under or relating to any Government Contract.
Section 4.15 Agreements, Contracts and Commitments.
(a) Parent is in compliance with and has not Breached or defaulted under,
or received notice that it has Breached or defaulted under, any of the terms or
conditions of any Contract or license to which it is party or by which it is
bound or under which it is a licensee, nor does Parent have Knowledge of any
Event that would constitute such a Breach or default with the lapse of time,
giving of notice or both. Each such Contract and license is in full force and
effect and is not subject to any default thereunder.
(b) Parent has obtained, or will obtain prior to the Closing, all necessary
Consents of parties to any Governmental Contract as are required thereunder in
connection with the Transactions, or for such Governmental Contracts to remain
in full force and effect without modification, limitation or alteration after
the Closing. Following the Closing, Parent will be permitted to exercise all of
its rights under its Government Contracts without the payment of any additional
amounts or consideration other than amounts or consideration which Parent would
otherwise be required to pay had the Merger not occurred.
Section 4.16 Representations Complete. None of the representations or
warranties made by Parent or Merger Sub, and no financial statement, other
written financial information or statements made in any exhibit, schedule or
certificate furnished by Parent pursuant to this Agreement or any Related
Agreement, or furnished by Parent in or in connection with documents mailed or
delivered to the shareholders of the Company or Parent for use in soliciting
their proxies for approval of or consent to this Agreement and the Merger, other
than the Company Information (as to which neither Parent nor Merger Sub makes
any representation or warranty) contains or will contain at the Closing Date any
untrue statement of a material fact or omits or will omit at the Closing Date to
state any material fact necessary in order to make the statements contained
herein or therein, in light of the circumstances under which they were made, not
misleading.
ARTICLE V
COVENANTS RELATED TO CONDUCT OF BUSINESS
Section 5.1 Conduct of Business of the Company Until Closing. The Company
hereby covenants and agrees that, from the date of this Agreement until the
Closing or the earlier termination of this Agreement, unless otherwise expressly
contemplated by this Agreement or consented to in advance and in writing by
Parent, the Company shall carry on its businesses only in the Ordinary Course of
Business, use its Best Efforts to preserve intact its business organization and
assets, maintain its rights and franchises, retain the services of its officers
and employees and maintain its relationships with customers, suppliers,
consultants, licensors, licensees and others having business dealings with it,
and use its Best Efforts to keep in full force and effect liability insurance
and bonds comparable in amount and scope of coverage to that currently
maintained. Without limiting the generality of the foregoing, subject to
applicable Laws, without the prior written consent of Parent, the Company shall
not:
(a) except as provided in Section 5.1(a) of the Disclosure Schedules, (i)
increase in any manner the compensation or fringe benefits of, or pay any bonus
to, any director, officer or employee; (ii) grant any severance or termination
pay to, or enter into any severance agreement with, any director, officer or
employee, or enter into any employment agreement with any director, officer or
employee; (iii) establish, adopt, enter into or amend any Employee Benefit Plan
or other arrangement, except (A) as may be required to comply with applicable
Law, and (B) the termination of the Company's Stock Bonus Plan and the
distribution of its assets; (iv) pay any benefit not provided for under any
Employee Benefit Plan or other arrangement; (v) grant any awards under any
bonus, incentive, performance or other compensation plan or arrangement or
Employee Benefit Plan or other arrangement (including the grant of stock
options, stock appreciation rights, stock based or stock related awards,
performance units or restricted stock, or the removal of existing restrictions
in any Employee Benefit Plan or other arrangement or agreement or awards made
thereunder); (vi) take any action to fund or in any other way secure the payment
of compensation or benefits under any Employee Agreement; (vii) promote or fire
any director, officer or managerial employee; or (viii) change, alter or enter
into any employment agreement or consulting agreement;
PAGE A-37 Agreement and Plan of Merger
(b) other than the distribution of the assets of the Stock Bonus Plan in
connection with the termination thereof, declare, set aside or pay any dividend
on, or make any other distribution in respect of, outstanding shares of capital
stock;
(c) (i) redeem, purchase or otherwise acquire any shares of Company Common
Stock or any Commitments of the Company; (ii) effect any reorganization,
recapitalization, merger or share exchange; or (iii) split, combine or
reclassify any of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for, shares of its capital stock;
(d) issue, deliver, award, grant or sell, or authorize (by Contract or
otherwise) the issuance, delivery, award, grant or sale (including the grant of
any limitations in voting rights or other Encumbrances) of, any shares of
Company Common Stock (including shares held in treasury) or other Equity
Interests in or Securities of the Company, or Commitments therefor, other than
(i) the net exercise of outstanding Company Options in conformity with Section
2.11, and (ii) making required contributions to the Company's Stock Bonus Plan
in shares of Company Common Stock having a value not to exceed $60,000;
(e) acquire or agree to acquire, by merging or consolidating with, by
purchasing an Equity Interest in or a portion of the assets of, or by any other
manner, any business or any Entity or division thereof, or otherwise acquire or
agree to acquire any assets of any other Person (other than the purchase of
assets from suppliers or vendors in the Ordinary Course of Business);
(f) enter into any new real property, personal property or building Lease
or Amend any existing Lease or Contract involving personal property that has the
effect of increasing the Company's Liabilities or diminishing its rights, powers
or privileges thereunder;
(g) Amend, or propose or take any action to Amend, any of its
Organizational Documents (except as contemplated hereby);
(h) make or rescind any express or deemed election relating to Taxes,
settle or compromise any Action or controversy relating to Taxes, or change any
of its methods of reporting income or deductions for federal income Tax purposes
from those employed in the preparation of the federal income Tax Returns;
(i) make or agree to make any new capital expenditures which exceed,
individually or in the aggregate, $10,000;
(j) Transfer, Encumber or license, or agree to Transfer, Encumber or
license, any of its Property, except for Transfers, Encumbrances and licenses
made in the Company's Ordinary Course of Business;
(k) (i) incur any Debt or Capital Lease Obligation, or Guarantee any Debt
or Capital Lease Obligation of another Person, except for borrowings incurred in
the Ordinary Course of Business pursuant to Contracts set forth on the
Disclosure Schedules, or (ii) make any loans, advances or capital contributions
to, or investments in, or purchase any Securities of, any other Person, except
travel, expense and payroll advances made to employees in the Ordinary Course of
Business;
(l) pay, discharge, settle or satisfy any Liabilities, other than (i)
payments, discharges or satisfactions of obligations in the Ordinary Course of
Business in accordance with their terms or liabilities reflected or reserved
against in the Financials, (ii) payments on the Company's Debt after providing
notice to Parent, or (iii) Expenses pursuant to Section 11.10;
(m) waive any material benefits of, or Amend or agree to Amend in any
material respect, any confidentiality, standstill or similar agreements to which
the Company is a party;
(n) waive, release or assign any rights or claims, or Amend or terminate
any Contract, to which the Company is a party or of which the Company is a
beneficiary;
PAGE A-38 Agreement and Plan of Merger
(o) make any change in any method of accounting or accounting practice or
policy other than those required by GAAP or a Governmental Body;
(p) take any action or fail to take any action that could reasonably be
expected to have an adverse effect on the Company prior to the Closing or an
adverse effect on the Surviving Corporation or Parent after the Closing, or that
would adversely affect the ability of the Company prior to the Closing, or
Parent or the Surviving Corporation after the Closing, to obtain Consents of
third parties or Governmental Permits;
(q) collect Accounts Receivable or pay accounts payable other than
consistent with past practice and in the Ordinary Course of Business;
(r) enter into or make any Contract or Commitment with, or Amend any
existing Contract or Commitment with, any Related Party; or
(s) take, propose to take, or commit or agree in writing or otherwise to
take, any of the actions described in Section 5.1(a) through Section 5.1(r), or
any actions which would, individually or taken together, make any of the
representations or warranties made in Article III, or otherwise made by the
Company in this Agreement or any Related Agreement, untrue, misleading,
incomplete or incorrect.
Section 5.2 Reasonable Efforts and Further Assurances.
(a) Subject to the terms and conditions of this Agreement, each of Parent
and the Company shall (i) obtain (and cooperate with the other Party to obtain)
any Consent or Governmental Permit of, or any exemption by, any Governmental
Body and any other third party which is required to be obtained by the Company
or Parent or any of their respective Subsidiaries (if any) in connection with
the Transactions, and to comply with the terms and conditions of any such
Consent or Governmental Permit, (ii) obtain from any Governmental Bodies,
including the Government, any material licenses or novation agreements, if any,
required to be obtained or made by Parent, Merger Sub or the Company, in
connection with the authorization, execution and delivery of this Agreement and
the consummation of the Transactions, and (iii) make all necessary filings,
including the Form S-4 and the Proxy Statement (including any amendments or
supplements thereto) and any reports required to be filed under the Exchange
Act, and thereafter making any other required submissions, with respect to this
Agreement and the consummation of the Transactions required under any applicable
Law; provided that Parent and the Company shall cooperate with each other in
connection with the making of all such filings and submissions, including
providing copies of all such documents to the non filing party and its advisors
prior to filing and discussing all reasonable additions, deletions or changes
suggested in connection therewith. The Company and Parent shall furnish to each
other all information, including regarding itself and its Affiliates and
Representatives, required for any application or other filing to be made
pursuant to applicable Law in connection with the transactions contemplated by
this Agreement.
(b) In the event that the Company and Parent fail to obtain any
Governmental Permit, the Company shall take any such actions reasonably
requested by Parent to minimize any adverse effect upon the Company and Parent
and their respective Subsidiaries and their respective businesses and
operations, which could reasonably be expected to result after the Closing from
the failure to obtain such Governmental Permit.
(c) Subject to the terms and conditions of this Agreement, each of Parent
and the Company shall use commercially reasonable efforts to take, or cause to
be taken, all actions, and to do, or cause to be done, all things necessary,
proper or advisable to consummate and make effective, as soon as practicable
after the date of this Agreement, the Transactions, including using commercially
reasonable efforts to lift or rescind any injunction or restraining order or
other Order adversely affecting the ability of such Party to consummate the
Transactions, and use commercially reasonable efforts to defend any Action
seeking to enjoin, prevent or delay the consummation of the Transactions or
seeking material damages.
Section 5.3 Certain Tax Matters. From the date hereof until the Closing,
the Company (a) will prepare and timely file with the relevant Governmental
Bodies all Tax Returns required to be filed by the Company during such period
("POST SIGNING RETURNS"), which Post Signing Returns shall be complete and
accurate
PAGE A-39 Agreement and Plan of Merger
in all material respects, (b) will timely pay all Taxes due and payable with
respect to such Post Signing Returns, (c) will pay or otherwise make adequate
provision for all Taxes payable by the Company for which no Post Signing Return
is due prior to the Closing, and (d) will promptly notify Parent of any Action
pending against or with respect to the Company in respect of any Taxes. The
Company shall submit each Tax Return described in clause (a) of the preceding
sentence to Parent at least ten business days prior to the date on which such
Tax Return is to be filed, and the Company shall not file such Tax Return
without Parent's prior approval (which approval shall not be unreasonably
withheld, conditioned or delayed). Each such Tax Return shall be prepared and
filed in a manner consistent with past practice and, on such Tax Return, no
position shall be taken, election made or method adopted that is inconsistent
with positions taken, elections made or methods used in preparing and filing
similar Tax Returns in prior periods. Without limiting the generality of the
foregoing, the Company shall not, in any such Tax Return, adopt a new position,
election or method that would have the effect of (i) deferring income from
periods or portions of periods ending on or before the Closing Date to periods
or portions of periods commencing after the Closing Date or (ii) accelerating
deductions from periods or portions of periods commencing after the Closing Date
to periods or portions or periods ending on or before the Closing Date.
Section 5.4 Access to Information.
(a) Between the date hereof and the Closing Date, the Company shall give to
Parent and its authorized Representatives reasonable access to all employees,
consultants, contractors, offices, warehouses, properties and other facilities
and to all books and records of such Company and will permit Parent to make such
reasonable inspections and reasonable investigations as Parent may from time to
time in their sole discretion require. The Company shall cause its
Representatives to furnish to Parent such financial, accounting, tax, business
and operating data and other information with respect to the business,
operations, prospects, properties, and Representatives of such Company as Parent
or Merger Sub may from time to time reasonably request
(b) Each of Parent and Merger Sub will hold and will cause its authorized
representatives to hold in confidence all documents and information concerning
the Company furnished to Parent or Merger Sub in connection with the
Transactions pursuant to the terms of that certain Mutual Nondisclosure
Agreement entered into between the Company and Parent dated as of July 20, 2005;
provided that all of the obligations of Parent under such Mutual Nondisclosure
Agreement shall terminate as of the Effective Time.
Section 5.5 No Solicitation. Until the earlier of: (a) the Closing Date;
and (b) the termination of this Agreement pursuant to its terms, the Company and
the Key Shareholders shall not, and the Company and the Key Shareholders shall
cause their respective Representatives not to, directly or indirectly: (i)
initiate, solicit or encourage (including by way of furnishing information
regarding the Company) any inquiries, or make any statements to third parties
which may reasonably be expected to lead to any proposal concerning the sale of
the Company, its businesses or its Property (whether by way of merger, purchase
of capital shares, purchase of assets or otherwise) (each, a "COMPETING
TRANSACTION"); or (ii) subject to the fiduciary duties of the board of directors
of the Company under applicable Law, hold any discussions or enter into any
agreements with, or provide any information or respond to, any third party
concerning a proposed Competing Transaction or cooperate in any way with, agree
to, assist or participate in, solicit, consider, entertain, facilitate or
encourage any effort or attempt by any third party to do or seek any of the
foregoing. If at any time prior to the earlier of (x) the Closing Date and (y)
the termination of this Agreement pursuant to its terms, the Company or its
Representatives are approached in any manner by a third party concerning a
Competing Transaction (a "COMPETING PARTY"), the Company promptly shall inform
Parent regarding such contact and furnish Parent with a copy of any inquiry or
proposal, or, if not in writing, a description thereof, including the name of
such Competing Party, and the Company shall keep Parent informed of the status
and details of any future notices, requests, correspondence or communications
related thereto. In the event of Breach of this Section 5.5 by the Company or
any Key Shareholders, the Company shall be liable to Parent and shall pay to
Parent the greater of (i) all of the expenses incurred in connection with the
preparation, negotiation and drafting of this Agreement and Related Agreements,
and (ii) $250,000. The foregoing remedy shall not limit or prevent the exercise
by Parent of all other rights and remedies it may have against the Company and
the Key Shareholders. The provisions of this Section 5.5 shall survive the
termination of this Agreement, unless terminated by Parent other than because
the Company or any Key Shareholder is (A) in Material Breach of this Agreement,
or (B) responsible for the failure of a condition to the obligation of Parent to
consummate the Merger to be satisfied.
PAGE A-40 Agreement and Plan of Merger
Section 5.6 Public Announcements; Employee Announcements.
(a) Each of Parent, Merger Sub, the Company and the Key Shareholders will
consult with one another before issuing any press release or otherwise making
any public statements in respect of the Transactions and shall not issue any
such press release or make any such public statement prior to such consultation,
except as may be required by applicable Law or by obligations pursuant to any
listing agreement with the OTCBB or the American Stock Exchange, as determined
by Parent.
(b) Prior to the Closing Date, each of Parent and the Company will consult
with one another regarding any written and spoken statements to be made to the
Company's employees, consultants or independent contractors in respect of the
Transactions, employee benefits, employee compensation and other transition and
integration matters. All written communications and formal oral presentations
shall be mutually agreed upon by Parent and the Company prior to any such
communication or presentation, and the Company shall not make any written or
oral statements to employees, consultants or independent contractors
inconsistent with the guidelines provided in conjunction with such consultation.
Section 5.7 Notification of Certain Matters.
(a) The Company shall give prompt notice to Parent and Merger Sub, and
Parent and Merger Sub shall give prompt notice to the Company, of (i) the
occurrence or nonoccurrence of any fact or Event the occurrence or nonoccurrence
of which would be likely to cause any representation or warranty contained in
this Agreement to be Materially untrue or inaccurate at or prior to the Closing
Date, (ii) the discovery or receipt of information or Actual Knowledge
concerning any fact or circumstance which would be likely to cause any
representation or warranty contained in this Agreement to be Materially untrue
or inaccurate at or prior to the Closing Date, (iii) any failure of the Company,
Parent or Merger Sub, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder, (iv) any notice or other communication from any third party alleging
that the Consent of such third party is or may be required in connection with
the Transactions, or (v) any Events which would be likely to result in a
Material Adverse Effect; provided that with respect to any Event, information,
knowledge, failure, notice or communication referred to in clauses (i) through
(iv) next above, a Party shall not be required to provide notice pursuant to
this Section 5.7 unless such Event, information, knowledge, failure, notice or
communication, taken together with all other Events, information, knowledge,
failures, notices or communications described but not previously notified
pursuant to this Section 5.7, shall be material to Parent, Merger Sub or the
Company. The delivery of any notice pursuant to this Section 5.7 shall not cure
such Breach or non compliance or limit or otherwise affect the rights,
obligations or remedies available hereunder to the Party receiving such notice.
(b) From the date of this Agreement until the earlier of the Closing or the
termination of the Agreement, the Company and Parent shall promptly notify each
other in writing of any pending or, to the Actual Knowledge of the Company or
Parent, threatened action, proceeding or investigation by any Governmental Body
or any other Person (A) challenging or seeking damages in connection with the
Transactions, or (B) seeking to restrain or prohibit the consummation of the
Transactions or otherwise limit the right of Parent or its Subsidiaries to own
or operate all or any portion of the business or assets of the Company.
Section 5.8 Pre-Approval of Certain Transactions. Commencing on the date
hereof, the Company may propose transactions to Parent specifically for written
approval pursuant to this Section 5.8. In connection with any such proposed
transaction (a "PROPOSED TRANSACTION"), at the request of Parent, the Company
shall (i) prepare and deliver to Parent a written description of the Proposed
Transaction, summarizing in reasonable detail all of the material terms thereof
and any foreseeable material risks associated therewith, (ii) deliver to Parent
any definitive documentation proposed to be executed in connection with the
Proposed Transaction, and (iii) make available to Parent the opportunity to ask
questions of, and receive answers from, the Company and its Representatives
concerning the Proposed Transaction, and otherwise to obtain any additional
information, to the extent that the Company or its Representatives possess such
information or could acquire it without unreasonable effort or expense, related
to the Proposed Transaction. Any written request for such approval by the
Company shall constitute a representation and warranty of the Company that the
description of the Proposed Transaction made in writing to Parent does not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
regarding the Proposed Transaction, in light of the
PAGE A-41 Agreement and Plan of Merger
circumstances under which they are made, not misleading. Based on the
description of the Proposed Transaction and such other information, in reliance
thereon, Parent may specifically approve the Proposed Transaction in a writing
substantially in the form of Exhibit J, which writing must specifically
reference this Section 5.8 (such an approved Proposed Transaction, an "APPROVED
TRANSACTION").
Section 5.9 Consents to Merger. Commencing on the date hereof, the Company
shall use its Best Efforts to obtain an unconditional, unlimited, enforceable
written consent to the consummation of the Merger (the "MERGER CONSENTS") from
each Person identified in Section 3.7 of the Disclosure Schedules as a
counterparty to a Material Company Contract (each, a "MATERIAL COUNTERPARTY").
The Company shall cooperate fully with Parent in seeking such Merger Consents
and, with respect to Company Contracts with the Government, in discussing the
novation of such Company Contracts with the applicable Government contracting
officers.
Section 5.10 Export Licenses. Commencing on the date hereof, the Company
shall use its Best Efforts to amend (i) the "Permanent Export Licenses", or
applications therefor, identified in Section 3.20 of the original Disclosure
Schedules, and (ii) and the "Manufacturing License Agreement" identified in
Section 3.16(c) of the original Disclosure Schedules; in each case in connection
with the Merger and the other Transactions, as required by the International
Traffic in Arms Regulations (Title 22, Chapter 1, Subchapter M of the Code of
Federal Regulations) promulgated under the Arms Export Control Act, 22 U.S.C.
Sec. 2778, or any successor regulations.
Section 5.11 Petercsak Release. Commencing on the date hereof, the Company
shall use its commercially reasonable efforts to negotiate a release of all
claims arising from or related to the Petercsak Agreements (as defined in
Section 3.16(j) of the original Disclosure Schedules), in form and substance
reasonably satisfactory to Parent, to be tendered at the Closing in return for
the payment of a sum certain (which sum may be paid pursuant to Section 8.6).
Section 5.12 Preparation of Form S-4 and Proxy Statement.
(a) Subject to the strict satisfaction by the Company of the terms and
provisions of Section 5.15 and the condition specified in Section 6.2(n), and
the agreement of the applicable parties to the terms and conditions of the
Escrow Agreement as provided in Section 2.17(d), as promptly as practicable
after the execution of this Agreement, Parent shall, subject to the full and
prompt assistance of the Company and the Key Shareholders, prepare and file with
the SEC the Proxy Statement, and Parent shall prepare and file with the SEC the
Form S-4, in which the Proxy Statement shall be included as a prospectus. Each
of Parent and the Company shall use its reasonable Best Efforts to have the Form
S-4 declared effective under the Securities Act by the SEC as promptly as
practicable after such filing.
(b) The Company and Key Shareholders shall promptly provide, and shall use
their Best Efforts to cause the other shareholders of the Company promptly to
supply, to Parent and its Representatives any and all information in writing
concerning the Company, its business, operations, directors, officers,
Subsidiaries, shareholders or any other matters which may in Parent's reasonable
discretion be required for inclusion in the Form S-4 or Proxy Statement, or to
respond to any comments from the SEC thereon, or reasonably requested by Parent
in connection therewith.
(c) The Proxy Statement will solicit proxies for the approval by the
shareholders of Parent for (i) this Agreement and the Merger, (ii) an increase
in the amount of shares reserved for issuance under the SpaceDev 2004 Equity
Incentive Plan, or the approval of a new stock or equity plan, as provided in
Section 8.5(b), (iii) an increase in the number of shares of Parent Common Stock
authorized by its Articles of Incorporation (the "SHARE AUTHORIZATION") to
provide sufficient reserves for the issuance of (A) the Merger Consideration,
(B) any Private Financing, and (C) such additional shares as Parent in its
discretion deems prudent to have authorized, (iv) at the option of Parent, a
reverse stock split of the Parent Common Stock, (v) at the option of Parent, the
redomestication of Parent in the State of Delaware or other state selected by
Parent, (vi) at the option of Parent, the approval of a Private Financing, and
(vii) subject to the consent of the Company (which consent shall not be
unreasonably withheld, conditioned or delayed), such other matters as Parent
deems appropriate for approval of its shareholders in furtherance of the
Transactions contemplated herein (collectively, the "PARENT SHAREHOLDERS
MATTERS"). Parent, with the assistance of the Company and the Key Shareholders
(which such Parties shall promptly provide upon Parent's reasonable request),
shall promptly respond to any comments from the SEC. Parent shall use
PAGE A-42 Agreement and Plan of Merger
its reasonable Best Efforts to cause the Proxy Statement to be mailed to the
shareholders of Parent as promptly as practicable after the Form S-4 is declared
effective under the Securities Act. Parent shall also take any action (other
than qualifying to do business in any jurisdiction in which it is not now so
qualified) required to be taken under any applicable state securities or "blue
sky" laws in connection with the issuance of shares of Parent Common Stock in
the Merger, and the Company shall furnish all information concerning the Company
and the Shareholders as may be reasonably requested in connection with any such
action.
(d) Parent shall promptly provide the Proxy Statement, as amended or
supplemented from time to time, to the Company for use in connection with the
meeting of the shareholders of the Company to approve, among other matters, this
Agreement and the Merger.
(e) If at any time prior to the final conclusion of the Parent Shareholders
Meeting or Company Shareholders Meeting any Events occur relating to Parent or
the Company, or any of their respective officers, directors, Shareholders or
Subsidiaries, is discovered or learned by Parent or the Company which,
individually or together, (i) should be set forth in an amendment or supplement
to the Form S-4 or the Proxy Statement, so that the Form S-4 or Proxy Statement
would not include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, (ii) cause the Form S-4 or Proxy Statement to become incorrect,
incomplete or misleading in any material respect, or (iii) under the Securities
Act or the Exchange Act, or the rules and regulations promulgated thereunder,
are otherwise required to be set forth in an amendment or supplement to the Form
S-4 or Proxy Statement; then in each such case, the Party which discovers or
learns of such Events shall promptly inform the other of such Events, and shall
cooperate with Parent in filing with the SEC or its staff or any other
Governmental Bodies or officials thereof, or Parent and the Company mailing to
the shareholders of Parent or the Company, any appropriate amendment or
supplement thereto, including by providing Parent with such corrected, updated
or supplemental information as may be necessary in order to cause the Form S-4
and Proxy Statement, insofar as they relate to the Company and its directors,
officers, subsidiaries and Shareholders or the Company Information, to comply
with the Securities and the Exchange Act, and the rules and regulations
promulgated thereunder, and not to include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
Section 5.13 Parent Shareholders Meeting. Promptly after the date on which
the Form S-4 is declared effective by the SEC and mailed to Parent's
shareholders, Parent will take all lawful and commercially reasonable action
necessary in accordance with the CBCA and its Organizational Documents to call,
notice, convene and hold a special meeting of its shareholders to approve this
Agreement, the Merger and the other applicable Parent Shareholders Matters (the
"PARENT SHAREHOLDERS MEETING"). Parent shall use its Best Efforts to hold the
Parent Shareholders Meeting within forty-five days of the date the SEC declares
the Form S-4 effective. Except to the extent that the Board of Directors of
Parent concludes, based upon facts, events or circumstances, or the context
thereof, unknown or changed since the date of this Agreement, that a
recommendation to Parent's shareholders to vote in favor of the Merger or any of
the other Parent Shareholders Matters related thereto would be a violation of
any of its fiduciary obligations under applicable Law as determined by the Board
of Directors of Parent in good faith after consultation with its legal counsel,
Parent's Board of Directors shall include in the Proxy Statement its
recommendation that Parent's shareholders vote in favor of the Merger.
Notwithstanding anything to the contrary contained in this Agreement, Parent may
adjourn or postpone the Parent Shareholders Meeting to the extent necessary to
ensure that any required supplement or amendment to the Form S-4 or Proxy
Statement is provided to the shareholders of Parent or, if as of the time for
which the Parent Shareholders Meeting is originally scheduled (as set forth in
the Proxy Statement) there are insufficient shares of the Parent Common Stock
represented (either in person or by proxy) to constitute a quorum necessary to
conduct the business of the Parent Shareholders Meeting.
Section 5.14 Company Shareholders Meeting. Promptly after the date on which
the Form S-4 is declared effective by the SEC, the Company shall mail a copy of
the Proxy Statement to each of its shareholders and shall take all lawful and
commercially reasonable action necessary in accordance with the CBCA and its
Organizational Documents to call, notice, convene and hold a special meeting of
its shareholders to approve this Agreement and the Merger (the "COMPANY
SHAREHOLDERS MEETING"). The Company shall use its Best Efforts to hold the
Company Shareholders Meeting within forty days of the date the SEC declares the
Form S-4 effective. Except to the extent that the Board of Directors of the
Company concludes, based upon facts, events or
PAGE A-43 Agreement and Plan of Merger
circumstances, or the context thereof, unknown or changed since the date of this
Agreement, that a recommendation to the Company's shareholders to vote in favor
of this Agreement or the Merger would be a violation of any of its fiduciary
obligations under applicable Law as determined by the Board of Directors of the
Company in good faith after consultation with its legal counsel, the Company's
Board of Directors shall mail with the Proxy Statement, and inform the
shareholders of the Company at the Company Shareholders Meeting, its
recommendation that the Company's shareholders vote in favor of the Merger.
Notwithstanding anything to the contrary contained in this Agreement, Parent may
adjourn or postpone the Company Shareholders Meeting to the extent necessary to
ensure that any required supplement or amendment to the Form S-4 or Proxy
Statement is provided to the shareholders of the Company or, if as of the time
for which the Company Shareholders Meeting is originally scheduled there are
insufficient shares of the Company Common Stock represented (either in person or
by proxy) to constitute a quorum necessary to conduct the business of the
Company Shareholders Meeting.
Section 5.15 Financial Statements. No later than (i) November 4, 2005, the
Company shall prepare and deliver to Parent the Company's unaudited balance
sheet as of September 30, 2005, together with the Company's related unaudited
statements of income and cash flows for the nine-month periods ended on
September 30, 2005 and September 30, 2004, and (ii) one business day prior to
the Closing Date, the Company shall prepare and deliver to Parent the Closing
Balance Sheet; in each case, together with a certificate duly executed by the
principal execute officer and principal financial officer of the Company
certifying, representing and warranting (with no qualifications, exceptions or
limitations) that (A) such balance sheet and, if applicable, statements of
income and cash flows, are correct in all Material respects and have been
prepared in accordance with GAAP, consistently applied throughout the periods
indicated and with each other, except as may be disclosed in notes thereto
(which notes, if any, may consist of (x) notes substantially identical to the
notes to the June 30, 2005 Financials, and (y) any other notes approved in
writing by Parent in its reasonable discretion), subject in the case of interim
statements to normal year-end adjustments, and (ii) such balance sheet and, if
applicable, statements of income and cash flows, fairly and accurately present
the financial condition, operating results (if applicable) and changes in
shareholders' equity and cash flows (if applicable) of the Company as of the
respective dates and during the respective periods indicated therein. The
Company shall continue through the Closing Date to maintain a standard system of
accounting established and administered in accordance with GAAP.
Section 5.16 Repayment of Certain Loans and Advances. Prior to the Closing,
the Company shall collect from each Key Shareholder in full all loans, advances
or other debt or credits owed by such Key Shareholder to the Company, including
the obligations set forth in Section 3.12(p) of the original Disclosure
Schedules, and the Company shall not in whole or in part forgive, cancel, assume
or otherwise reduce any of the foregoing.
Section 5.17 Private Financing. Parent shall use its Best Efforts to
execute definitive agreements for a Private Financing no later than December 15,
2005 and to close such Private Financing prior to or at the Closing.
ARTICLE VI
CONDITIONS TO CLOSING
Section 6.1 Conditions to Obligations of Each Party Under This Agreement.
The respective obligations of the Company, Merger Sub and Parent to consummate
the Merger and the Transactions are subject to the fulfillment at or prior to
the Closing of each of the following additional conditions, any or all of which
may be waived in writing in whole or part by the Company or Parent (on behalf of
itself and Merger Sub), as the case may be, to the extent permitted by
applicable Law:
(a) No Governmental Body shall have enacted, issued, promulgated, enforced
or entered any Law or Order (in each case, whether temporary, preliminary or
permanent), which is in effect and which prevents or prohibits consummation of
the Transactions.
(b) (i) The shareholders of Parent shall have approved this Agreement, the
Merger and the Share Authorization at the Parent Shareholders Meeting, (ii) such
approval shall have satisfied all shareholder approval requirements under
applicable Law, and (iii) not more than 1.5% of the outstanding shares of Parent
PAGE A-44 Agreement and Plan of Merger
Common Stock shall have exercised, or shall retain the unexpired right to
exercise, dissenters' rights (or similar rights of dissent), if any, in respect
of the Merger available under applicable Law.
(c) The SEC shall (i) have declared the Form S-4 effective under the
Securities Act, (ii) not have issued a stop order suspending the effectiveness
of the Form S-4, and (iii) shall not have initiated or threatened to initiate
any proceedings for that purpose. Any material state securities or "blue sky"
laws applicable to the issuance of the Closing Shares shall have been complied
with.
(d) There shall be no pending or threatened Action (i) challenging or
seeking to restrain or prohibit the consummation of the Transactions; (ii)
relating to the Transactions and seeking to obtain from Parent, Merger Sub or
the Company any damages that may be material to Parent, Merger Sub or the
Company; (iii) seeking to prohibit or limit in any respect Parent's ability to
vote, receive dividends with respect to or otherwise exercise ownership rights
with respect to the stock of the Company or the Surviving Corporation; or (iv)
which would have a Material Adverse Effect on the Company or a material adverse
effect on Parent's ability to operate the Surviving Corporation's business, or
to own, use and enjoy the Property of the Surviving Corporation, after
consummation of the Transactions.
(e) The VWAP as of the Trading Day next preceding the Closing shall be not
less than $0.77 per share.
Section 6.2 Additional Conditions to the Obligations of Parent. The
respective obligations of Parent and Merger Sub to consummate the Merger and the
Transactions are subject to the fulfillment at or prior to the Closing of each
of the following additional conditions, any or all of which may be waived in
writing in whole or part by Parent, to the extent permitted by applicable Law:
(a) Each of the representations and warranties of or in respect of the
Company and the Key Shareholders contained in Article III or elsewhere in this
Agreement shall be true and correct as of the date of this Agreement and shall
be true and correct as of the Closing Date, except for representations and
warranties which address matters only as of a particular date, which
representations and warranties shall be true and correct as of such date, except
for failures of representations and warranties to be true and correct as and as
of the dates as aforesaid which are not Material. For the purpose of determining
the truth and correctness of such representations and warranties, the Updated
Disclosure Schedules, and any other update or modification to the Disclosure
Schedules made or purported to have been made after the date of this Agreement,
shall be disregarded.
(b) Each of the representations and warranties of or in respect of the
Company and the Key Shareholders contained in Section 3.2, Section 3.3, Section
3.5 and Section 3.9, and each of the representations and warranties of or in
respect of the Company and the Key Shareholders contained in Article III or
elsewhere in this Agreement which expressly includes a Knowledge, Actual
Knowledge, Material Adverse Effect, or other materiality qualification, shall be
true and correct as of the date of this Agreement and shall be true and correct
as of the Closing Date, except for representations and warranties which address
matters only as of a particular date, which representations and warranties shall
be true and correct as of such date. For the purpose of determining the truth
and correctness of such representations and warranties, the Updated Disclosure
Schedules, and any other update or modification to the Disclosure Schedules made
or purported to have been made after the date of this Agreement, shall be
disregarded.
(c) The Company and Key Shareholders shall each have performed or complied
in all material respects with all agreements and conditions contained herein
required to be performed or complied with by it prior to or on the Closing Date.
(d) The Company shall have delivered to Parent all Merger Consents it has
obtained from each Material Counterparty to Material Company Contracts, together
with a schedule indicating each Material Company Contract as to which a Merger
Consent from all Material Counterparties has been obtained (each, an "APPROVED
CONTRACT"). The Approved Contracts shall represent not less than 75% of all
Material Company Contracts, based, with respect to each Material Company
Contract, on the aggregate revenues generated in FY 2005 and projected by the
Company in good faith to be generated in FY 2006 under such Material Company
Contract. The Company shall also have delivered to Parent a schedule indicating
each Material Company Contract as to which
PAGE A-45 Agreement and Plan of Merger
one or more Material Counterparties has affirmatively indicated that it does not
intend to, or will not, provide a Merger Consent (each, a "REJECTED CONTRACT").
The Rejected Contracts shall represent not more than 10% of all Material Company
Contracts, based on revenues generated in FY 2005 and projected by the Company
in good faith to be generated in FY 2006 under each Material Company Contract;
provided that, with respect to Company Licenses, revenues shall be calculated
based on the aggregate revenues the Company may reasonably expect to lose from
all other Company Contracts if the Company is unable to use or exploit the
applicable Intellectual Property Rights (taking into account any increased costs
of alternate Intellectual Property Rights). For purposes of this Section 6.2(d),
each Government counterparty to a Material Company Contract shall be deemed to
have provided a Merger Consent, unless the applicable contracting officer shall
have (A) expressed opposition to the Merger to Parent or the Company, or (B)
indicated to Parent or the Company that such officer would not support a
novation of the applicable Contract; in which event such Contract shall be
deemed a Rejected Contract.
(e) Vectra shall not have foreclosed or collected on any collateral for any
Vectra Loan or otherwise.
(f) The Closing Debt shall not exceed $6,800,000 (as evidenced by full
pay-off notices or receipts tendered by the applicable lenders of the Vectra
Loans, the Shareholder Loans and the SpaceDev Loan).
(g) The Company shall have delivered the Transaction Expense Payment
Schedule in compliance with Section 2.19 and such Transaction Expense Payment
Schedule shall provide for the payment in full of all outstanding Company
Transaction Expenses.
(h) (i) The Company shall have delivered to Parent an executed officers'
certificate, in substantially the form attached hereto as Exhibit E-1, dated the
Closing Date, signed by the Chief Executive Officer, the President and the
Director of Business Management of the Company, certifying (A) the fulfillment
of the conditions specified in Section 6.2(a) through Section 6.2(f), inclusive,
(B) that the updated Shareholder Table delivered at the Closing is true, correct
and complete in all respects as of the Closing, (C) that the balance sheets of
the Company described in Section 5.15 comply with the provisions thereof, and
(D) that the Company has not entered into any Contract or, to the Knowledge of
the signatory, incurred any Liabilities since the date of the Closing Balance
Sheet, except in the Ordinary Course of Business; and (ii) each Key Shareholder
shall have delivered to Parent an executed key shareholder's certificate, in
substantially the form attached hereto as Exhibit E-2, dated the Closing Date.
(i) No Events, effects, violations or Breaches shall have occurred since
the date hereof which have had, or are likely to have, a Material Adverse Effect
on the Company.
(j) The Escrow Agent and the Shareholder Agent shall have entered into the
Escrow Agreement, which shall be in full force and effect as of the Closing
Date.
(k) Shareholders of the Company holding not less than 98% of the shares of
each class of capital stock of the Company shall have approved this Agreement
and the Merger.
(l) The Company and all Shareholders shall have delivered to Parent
certificates evidencing not less than 98% of the shares of each class of capital
stock of the Company (including shares issued upon the exercise of any Company
Options on or prior to the Closing Date), or, in lieu thereof, the affidavit and
bond, if any, required of the holder of record of such shares by Section
2.10(e).
(m) At the Closing, the Company shall have delivered or caused to be
delivered to Parent all of the agreements, instruments and documents required to
be delivered to Parent pursuant to the foregoing provisions of this Section 6.2,
together with:
(1) the Updated Disclosure Schedules;
(2) the written and, other than with reference to the consummation of
the Merger, unconditional resignations of all of the current members of the
board of directors and of the current officers
PAGE A-46 Agreement and Plan of Merger
of the Company (other than those offices to which Merger Sub has appointed
such current officer), effective as of the Effective Time;
(3) the Shareholder Table, updated as of the Closing Date;
(4) a legal opinion of Holland & Hart LLP, special counsel to the
Company, in substantially the form attached hereto as Exhibit D-1;
(5) certificates dated as of a date within a reasonable period of time
prior to the Closing Date as to the good standing of the Company, executed
by the appropriate officials of the State of Colorado and each other
jurisdiction in which the Company is licensed or qualified to do business
as a foreign corporation, as specified in Section 3.1 of the Disclosure
Schedules;
(6) a certificate signed by the secretary of the Company certifying,
as complete and accurate as of the Closing Date, (i) the complete
Organizational Documents of the Company, (ii) the resolutions or actions of
each of the Shareholders and the Board of Directors of the Company
approving the execution, delivery and performance of this Agreement and the
consummation of the Merger, and (iii) the Shareholder Table delivered at
the Closing;
(7) a pay off letter or similar paid-in-full receipt from Vectra, and
UCC-3 Terminations of financing statement encumbering any Property of the
Company and any other documents reasonably requested by Parent's counsel in
connection with the repayment in full of the Vectra Loan and the
termination of the security interests and liens on the Properties of the
Company;
(8) a pay off letter or similar paid-in-full receipt from each lender
who made a Shareholder Loan;
(9) a duly executed counterpart of the Non-Competition Agreement with
each Key Shareholder, substantially in the form attached hereto as Exhibit
F (the "NON-COMPETITION AGREEMENT");
(10) a duly executed Letter of Transmittal from (i) each of the
shareholders of the Company who voted in favor of the Agreement and Merger,
(ii) each Company Option Holder required to execute a Letter of Transmittal
pursuant to Section 2.11; for delivery to the Exchange Agent, and (iii)
each Person listed as receiving shares of Parent Common Stock on the
Transaction Expense Payment Schedule;
(11) the Transaction Expense Payment Schedule, in form and substance
reasonably satisfactory to Parent and otherwise complying with the terms
and provisos of Section 2.19;
(12) a duly executed Executive Officer Release, substantially in the
form attached as Exhibit I, from each executive officer and director of the
Company; and
(13) a duly executed employment agreement with (i) Scott Tibbitts for
the position of Managing Director of the Company, substantially in the form
attached hereto as Exhibit G-1, and (ii) Robert Vacek, for the position of
President of the Surviving Corporation, in form and substance to be agreed
between Parent and Mr. Vacek (together, the "EXECUTIVE EMPLOYMENT
AGREEMENTS").
(n) As promptly as practicable after the date hereof, the Company shall
have delivered or caused to be delivered to Parent a duly executed Standstill
and Lock-Up Agreement, substantially in the form of Exhibit H (each, a
"STANDSTILL AND LOCK-UP AGREEMENT"), from each Shareholder or other Person
(including any Person to be listed as receiving shares of Parent Common Stock on
the Transaction Expense Payment Schedule or exercising Company Options in
conformity with Section 2.11 and the Shareholder Agent with respect to shares
held in the Expense Fund) expected to be entitled to receive 50,000 or more
shares of Parent Common Stock at or in connection with the Closing and the
payment of Performance Consideration (if any) for FY 2005, pursuant to this
Agreement or any Related Agreement.
PAGE A-47 Agreement and Plan of Merger
Section 6.3 Additional Conditions to the Obligations of the Company. The
obligations of the Company to consummate the Transactions are subject to the
fulfillment at or prior to the Closing of each of the following conditions, any
or all of which may be waived in writing in whole or in part by the Company to
the extent permitted by applicable Law:
(a) Each of the representations and warranties of or in respect of Parent
and Merger Sub contained in Article IV or elsewhere in this Agreement shall be
true and correct as of the date of this Agreement and shall be true and correct
as of the Closing Date, except for representations and warranties which address
matters only as of a particular date, which representations and warranties shall
be true and correct as of such date, except for failures of representations and
warranties to be true and correct as and as of the dates as aforesaid which are
not Material. For the purpose of determining the truth and correctness of such
representations and warranties, the Updated Parent Disclosure Schedules, and any
other update or modification to the Parent Disclosure Schedules made or
purported to have been made after the date of this Agreement, shall be
disregarded.
(b) Each of the representations and warranties of or in respect of Parent
and Merger Sub contained in Section 4.2, Section 4.3, Section 4.6 and Section
4.7(b), and each of the representations and warranties of or in respect of
Parent and Merger Sub contained in Article IV or elsewhere in this Agreement
which expressly includes a Knowledge, Actual Knowledge, Material Adverse Effect,
or other materiality qualification, shall be true and correct as of the date of
this Agreement and shall be true and correct as of the Closing Date, except for
representations and warranties which address matters only as of a particular
date, which representations and warranties shall be true and correct as of such
date. For the purpose of determining the truth and correctness of such
representations and warranties, the Updated Parent Disclosure Schedules, and any
other update or modification to the Parent Disclosure Schedules made or
purported to have been made after the date of this Agreement, shall be
disregarded.
(c) Parent and Merger Sub shall have performed in all material respects
(considered collectively and individually) all covenants and obligations in this
Agreement required to be performed by Parent or Merger Sub as of the Closing
Date.
(d) Parent shall have consummated the Private Financing.
(e) Parent's quantity contract awarded by the Missile Defense Agency on
March 31, 2004, shall not have terminated without a successor contract being in
effect.
(f) Parent shall have delivered to the Company an executed officer's
certificate, in substantially the form attached hereto as Exhibit E-3, dated the
Closing Date, signed by the President and Chief Financial Officer of Parent,
certifying the fulfillment of the conditions specified in Section 6.3(a) and
Section 6.3(e), inclusive.
(g) Parent shall have delivered or tendered the Closing Consideration
required under Article II.
(h) Parent shall have delivered a duly executed counterpart of each
Non-Competition Agreement.
(i) Parent shall have delivered a duly executed counterpart of each
Executive Employment Agreement.
(j) Sufficient funds to pay the Vectra Loans and Shareholder Loans in full
shall have been wired or delivered to the lenders thereunder contemporaneously
with the Closing.
(k) Parent shall have delivered or caused to be delivered to the Company a
legal opinion of Sheppard, Mullin, Richter & Hampton LLP, special counsel to
Parent, in substantially the form attached hereto as Exhibit D-2.
PAGE A-48 Agreement and Plan of Merger
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
Section 7.1 Survival of Representations, Warranties and Covenants.
(a) The representations, warranties and certifications of Parent, Merger
Sub, the Company and the Key Shareholders contained in this Agreement, or in any
certificate or other instrument delivered pursuant to this Agreement by such
Person or on its behalf, shall remain in effect until, and will expire on, the
Escrow Termination Date, except that:
(1) the representations and warranties contained in Section 3.13 (Tax
Matters), Section 3.18 (Agreements, Contracts and Commitments - Government
Contracts) and Section 4.15(a) (Agreements, Contracts and Commitments -
Government Contracts) shall survive until the date three calendar years
after the Closing Date;
(2) the representations and warranties contained in Section 3.3
(Capital Structure), Section 3.5 (Authority), Section 3.8(c) (Stock
Records), Section 3.8(d) (Shareholder Table), Section 3.31 (Equity
Ownership), Section 4.3 (Power and Authority) and Section 4.6
(Capitalization) shall survive until the termination of the statutes of
limitations applicable to the subject matter thereof;
(3) neither the Escrow Termination Date nor any of the other foregoing
time limits shall apply to claims based upon fraud or willful
misrepresentation; and
(4) the representation, warranty, covenant or obligation that is the
subject matter of a Claim Notice made in accordance with Section 7.1(c) on
or before the Escrow Termination Date, or such later date as applies to the
survival of such representation, warranty, covenant or obligation pursuant
to this Section 7.1(a), shall not so expire with respect to such Claim
Notice or any subsequent Claim Notice that is reasonably related to the
subject matter of such Claim Notice, but rather shall remain in full force
and effect until such time as each and every claim that is based upon has
been fully and finally resolved, either by means of a written settlement
agreement or by the dispute resolution procedure set forth in Section 7.6.
(b) The representations, warranties, certifications, covenants and
obligations of Parent, Merger Sub, the Company and the Key Shareholders, and the
rights and remedies that may be exercised by any Person having a right to
indemnification pursuant to this Article VII (collectively, the "INDEMNIFIED
PARTIES"), shall not be limited or otherwise affected by or as a result of any
information furnished to, or any investigation made by or any Knowledge of, any
of the Indemnified Parties or any of their Representatives.
(c) For purposes of this Agreement, a "CLAIM NOTICE" relating to a
particular representation, warranty, covenant or obligation shall be deemed to
have been delivered if any Indemnified Party, acting in good faith, delivers (i)
in the case of any claim against or on account of the Company, to the
Shareholder Agent and, if a claim is to be made against the Escrow Account, to
the Escrow Agent, (ii) in the case of any claim against a Key Shareholder, to
such Key Shareholder, or (iii) in the case of any claim against Parent, to
Parent; a written notice stating that such Indemnified Party believes that there
is or has been a possible breach of such representation, warranty, covenant or
obligation and containing (A) a brief description of the circumstances
supporting such Indemnified Party's belief that there is or has been such a
possible breach; and (B) a non-binding, preliminary estimate of the aggregate
dollar amount of the actual and potential Losses that have arisen and may arise
as a direct or indirect result of such possible breach.
(d) It is the intent of the Parties that all indemnification obligations
under this Article VII shall apply without regard to whether or not (x) the
Indemnifying Party was negligent or otherwise at fault in any respect with
regard to the existence or occurrence of any of the matters covered by any such
indemnification obligation, or (y) the Indemnifying Party otherwise caused or
created, or is claimed to have caused or created, the existence or occurrence of
any of the matters covered by any such indemnification obligation, whether
through its own acts or omissions or otherwise. Notwithstanding the foregoing,
the indemnification obligation of the Indemnifying Party shall be reduced to the
extent that the Indemnified Party receives insurance proceeds or other
PAGE A-49 Agreement and Plan of Merger
payment from a third party that specifically covers the Losses for which the
Indemnifying Party otherwise would be required to indemnify such Indemnified
Party pursuant to this Article VII. If an Indemnified Party receives insurance
proceeds or other payment from a third party that specifically covers Losses for
which one or more of the Indemnifying Parties previously paid such Indemnified
Party pursuant to this Article VII, then such Indemnified Party shall refund to
such Indemnifying Parties an amount equal to the lesser of (i) the amount that
such Indemnifying Parties previously paid to such Indemnified Party relating to
such Losses, and (ii) the amount of such insurance proceeds or other payment.
Section 7.2 Indemnification; Escrow Account; Expense Fund.
(a) The Key Shareholders and other Shareholders agree that from and after
the Closing Date, the Key Shareholders and other Shareholders (the "PARENT
INDEMNIFYING PARTIES") shall, subject to Section 7.3, indemnify and hold Parent
and its Representatives and Affiliates (including the Surviving Corporation)
(collectively, the "PARENT INDEMNIFIED PARTIES") harmless against all Losses
incurred by the Parent Indemnified Parties directly or indirectly as a result of
any material inaccuracy or Breach of a representation, warranty or certification
of the Company contained in this Agreement (without giving effect to (i) any
Updated Disclosure Schedules, or (ii) to any sections of the Disclosure
Schedules, or portions thereof, identified in Section 7.2 of the original Parent
Disclosure Schedules delivered on or prior to the date hereof) or any of the
Transaction Documents; provided that the Parent Indemnifying Parties shall have
no obligation to indemnify or hold the Parent Indemnified Parties harmless
against (A) Losses to the extent accrued for in the Closing Balance Sheet, and
(B) Losses arising out of Approved Transactions (other than for any such Losses
based on any breach of the representations and warranties made or deemed made by
the Company pursuant to Section 5.8 in connection with any Approved
Transaction).
(b) Each Key Shareholder further agrees that from and after the Closing
Date, such Key Shareholder shall, subject to Section 7.3 and in addition to its
obligations under Section 7.2(a), indemnify and hold the Parent Indemnified
Parties harmless against all Losses incurred by the Parent Indemnified Parties
directly or indirectly as a result of:
(1) any material inaccuracy or Breach of a representation, warranty or
certification of such Key Shareholder contained in this Agreement (without
giving effect to (i) any Updated Disclosure Schedules, or (ii) to any
sections of the Disclosure Schedules, or portions thereof, identified in
Section 7.2 of the original Parent Disclosure Schedules delivered on or
prior to the date hereof) or any of the Transaction Documents; or
(2) any Breach by such Key Shareholder of any covenants applicable to
it contained in this Agreement or the Non-Competition Agreement between
Parent and such Key Shareholder.
(c) Parent agrees that from and after the Closing Date, Parent (together
with the Parent Indemnifying Parties, the "INDEMNIFYING PARTIES") shall, subject
to Section 7.3, indemnify and hold the Shareholders (collectively, the
"SHAREHOLDER INDEMNIFIED PARTIES") harmless against all Losses incurred by such
Shareholder Indemnified Parties directly or indirectly as a result of any
material inaccuracy or Breach of a representation, warranty or certification of
Parent or (prior to the Closing) Merger Sub, as the case may be, contained in
this Agreement (without giving effect to any Updated Parent Disclosure
Schedules) or any of the Transaction Documents.
(d) As security for the indemnity provided to the Parent Indemnified
Parties in this Article VII and by virtue of this Agreement and the Statement of
Merger, Parent will deposit the Escrow Stock into the Escrow Account pursuant to
the terms set forth in Section 2.17 and the Escrow Agreement.
(e) As security for the out-of-pocket expenses reasonably incurred by the
Shareholder Agent in performing its duties under this Article VII and by virtue
of this Agreement, Parent will deposit cash into the Expense Fund pursuant to
the terms set forth in Section 2.18 and the Escrow Agreement.
PAGE A-50 Agreement and Plan of Merger
Section 7.3 Limitation on Indemnification.
(a) Notwithstanding any provision of this Agreement to the contrary, after
the Closing Date, the Shareholders and Key Shareholders shall have no obligation
to indemnify any Parent Indemnified Parties, and Parent shall have no obligation
to indemnify any Shareholder Indemnified Parties, until the aggregate of all
Losses suffered by the Parent Indemnified Parties or Shareholder Indemnified
Parties, as the case may be, exceeds $100,000 (the "BASKET AMOUNT"), in which
case the Parent Indemnified Parties or Shareholder Indemnified Parties, as the
case may be, shall be entitled to recover all Losses including the Basket
Amount; provided, however, any Losses resulting from a willful or intentional
Breach of this Agreement or any Transaction Document or fraud by any Party shall
not be subject to such Basket Amount.
(b) In the event any Parent Indemnified Party shall suffer any Losses for
which such Parent Indemnified Party is entitled to indemnification under this
Article VII, such Parent Indemnified Party shall be entitled to recover such
Losses:
(1) first, from the Escrow Account pursuant to the terms and
conditions set forth in the Escrow Agreement, until no additional amounts
remain in the Escrow Account (without consideration of any amounts to be
deposited therein at a later date); and
(2) next, to the extent such Losses shall not have been fully
recovered, from the Key Shareholders or any of them (including by set-off
against any Shareholder Performance Consideration to be delivered to the
Key Shareholders).
(c) Subject to Section 7.8, (i) the Shareholders shall have no liability
for Losses in excess of the Escrow Stock deposited in the Escrow Account under
the Escrow Agreement, and (ii) each Key Shareholder shall be liable to the
Parent Indemnified Parties for Losses up to the Consideration Received by such
Key Shareholder. For purposes of Section 7.3(c), "CONSIDERATION RECEIVED" means,
with respect to any Key Shareholder, the excess of (i) the aggregate value of
the Shareholder Consideration received from time to time by such Key Shareholder
pursuant to this Agreement (for avoidance of doubt, not including any
Shareholder Consideration held in the Escrow Account in respect of such Key
Shareholder until released therefrom), over (ii) the amount of Taxes actually
paid by such Key Shareholder in respect of the Shareholder Consideration
received by such Key Shareholder in exchange for such Key Shareholder's shares
of Company Common Stock, exclusive of any Taxes paid by such Key Stockholder (A)
if the Merger is determined (pursuant to a final determination, as defined in
Section 1313(a) of the Code or comparable provisions of state Laws) not to
constitute a reorganization within the meaning of Section 368 of the Code, but
only with respect to any Claim Notice delivered prior to the date of such
determination (any Claim Notice delivered after such determination being subject
to the limitations in this Section 7.3(c) without regard to this sub-clause
(A)), or (B) in respect of any other actual or deemed consideration received on
the Closing Date in connection with the Merger or the other Transactions, the
Merger Agreement or the Related Agreements. For purposes of calculating the
value of such Shareholder Consideration consisting of shares of Parent Common
Stock, (i) shares sold by a Key Shareholder in an arm's length transaction shall
be valued at the lesser of (A) the per-share value calculated pursuant to
Section 2.4(b) or Section 2.4(c), as the case may be, at the time issued, and
(B) the greater of (x) the actual per-share value obtained by such Key
Shareholder in such sale (as determined by Parent in good faith), and (y) the
per-share value calculated pursuant to Section 2.4(b) or Section 2.4(c), as the
case may be, at the time issued but without giving effect to any minimum
per-share value contained in such subsections, and (ii) all other such shares
shall be deemed to have the per-share value calculated pursuant to Section
2.4(b) or Section 2.4(c), as the case may be, at the time issued or to be
issued, as the case may be. If Parent recovers any amounts owed by the Key
Shareholder hereunder from shares of Parent Common Stock of the Key Shareholder,
it may, in its sole discretion, elect to recover first against shares having the
lowest per-share value, as determined pursuant to this Section 7.3(c), even if
shares of greater value, as so determined, are evidenced by the same or other
stock certificates.
(d) Parent shall have no liability to the Shareholder Indemnified Parties
for their aggregate Losses in excess of 50% of the total Shareholder
Consideration actually paid in accordance with Article II; provided that, in the
event of any Breach of the representations and warranties contained in Section
4.6 (Capitalization) or Section 4.7 (SEC Filings; Financial Statements), Parent
shall have liability to the Shareholder Indemnified Parties for their aggregate
Losses up to (but no more than) 75% of the total Shareholder Consideration
actually paid in
PAGE A-51 Agreement and Plan of Merger
accordance with Article II. Parent shall make all payments for its Liabilities
under this Article VII to the Shareholder Agent and shall have no obligation or
responsibility whatsoever to allocate such payments among the Shareholder
Indemnified Parties.
(e) Subject to Section 7.8 and any claim based on the enumerated
representations set forth in Section 7.1(a), no claim for indemnification
hereunder or otherwise with respect to a breach of this Agreement may be made by
any Indemnified Party after the Escrow Termination Date.
Section 7.4 Indemnification Procedures. All claims for indemnification
under this Article VII shall be asserted and resolved as follows:
(a) Third-Party Claims.
(1) Notice. In the event (i) Parent becomes aware of a third-party
claim that Parent believes may result in a demand against the Escrow
Account or a claim against any Key Shareholder pursuant to this Article
VII, Parent shall promptly notify the Shareholder Agent of such claim, and
(ii) the Shareholder Agent becomes aware of a third-party claim that the
Shareholder Agent believes may result in a demand against Parent or the
Surviving Corporation (as successor to Merger Sub) pursuant to this Article
VII (it being understood that each Shareholder who becomes aware of a
third-party claim that such Shareholder believes may result in a demand
against Parent or the Surviving Corporation (as successor to Merger Sub)
pursuant to this Article VII shall promptly notify the Shareholder Agent of
such claim), the Shareholder Agent shall promptly notify Parent of such
claim; provided in any case that the failure to notify the Shareholder
Agent or Parent as aforesaid shall not relieve any Indemnifying Person of
any liability that it may have to any Indemnified Person, except to the
extent that the Indemnifying Person demonstrates that the defense of such
third-party claim is prejudiced by the failure to give such notice. For
purposes of this Section 7.4(a), Parent (in case of a third-party claim
described in clause (i) next above) and the Shareholder Agent (in case of a
third-party claim described in clause (ii) next above, as representative
for the Shareholders and Key Shareholders) shall be the "INDEMNIFIED
PERSON", and the Shareholder Agent (in case of a third-party claim
described in clause (i) next above, as representative for the Shareholders
and Key Shareholders) and Parent (in case of a third-party claim described
in clause (ii) next above) shall be the "PARTY IN INTEREST".
(2) Defense. If an Indemnified Person gives notice to the Party in
Interest pursuant to Section 7.4(a)(1) of the assertion of a third-party
claim, the Party in Interest shall be entitled to participate in the
defense of such third-party claim and, to the extent that it wishes (unless
(i) the Party in Interest is also a Person against whom the third-party
claim is made and the Indemnified Person determines in good faith that
joint representation would be inappropriate, or (ii) the Party in Interest
fails to provide reasonable assurance to the Indemnified Person of both (x)
its financial capacity to defend such third-party claim, and (y) its
ability to provide indemnification, including against the Escrow Account or
Shareholder Performance Consideration (if any), if appropriate, with
respect to such third-party claim), to assume the defense of such
third-party claim with counsel satisfactory to the Indemnified Person.
After notice from the Party in Interest to the Indemnified Person of its
election to assume the defense of such third-party claim, the Party in
Interest shall not, so long as it diligently conducts such defense, be
liable to the Indemnified Person under Article VII for any fees of other
counsel or any other expenses with respect to the defense of such
third-party claim, in each case subsequently incurred by the Indemnified
Person in connection with the defense of such third-party claim, other than
reasonable costs of investigation. If the Party in Interest assumes the
defense of a third-party claim, (A) such assumption will conclusively
establish for purposes of this Agreement that the claims made in that
third-party claim are within the scope of and subject to indemnification,
and (B) no compromise or settlement of such third-party claims may be
effected by the Party in Interest without the Indemnified Person's written
consent unless (1) there is no finding or admission of any violation of Law
or any violation of the rights of any Person, (2) the sole relief provided
is monetary damages that are paid in full by the Party in Interest (or, as
applicable, the Escrow Account or a Key Shareholder), and (3) the
Indemnified Person shall have no liability with respect to any compromise
or settlement of such third-party claims effected without its written
consent. If notice is given to a Party in Interest of the assertion of any
third-party claim and the Party in Interest does not, within ten days after
the Indemnified Person's notice is given, give notice to the Indemnified
Person of its election to assume the
PAGE A-52 Agreement and Plan of Merger
defense of such third-party claim, the Party in Interest shall be bound by
any determination made in such third-party claim or any compromise or
settlement effected by the Indemnified Person. The Shareholder Agent, if
acting as the Party in Interest pursuant to this Section 7.4(a)(2), shall
be entitled to reimbursement from the Expense Account as provided herein.
(3) Exception. Notwithstanding the foregoing, if an Indemnified Person
determines in good faith that there is a reasonable probability that a
third-party claim may adversely affect it or its Related Persons other than
as a result of monetary damages for which it would be entitled to
indemnification under this Agreement, the Indemnified Person may, by notice
to the Party in Interest, assume the exclusive right to defend, compromise
or settle such third-party claim, but the Party in Interest shall not be
bound by any determination of any third-party claim (including the Losses
incurred in connection therewith) so defended for the purposes of this
Agreement or any compromise or settlement effected without its written
consent.
(4) Disputes. Any dispute between the Indemnified Person and the Party
in Interest under this Section 7.4(a) shall be resolved pursuant to the
dispute resolution procedures described in Section 7.4(b) and Section 7.6
(5) Finality. In the event that the Shareholder Agent has conducted
any defense or consented to any settlement under this Section 7.4(a),
neither the Shareholder Agent nor any of the Parent Indemnifying Parties
shall have the power or authority to object to the amount of any claim by
any Parent Indemnified Party against the Escrow Account, any Key
Shareholder or otherwise with respect to such settlement. In the event that
Parent has conducted any defense or consented to any settlement under this
Section 7.4(a), neither Parent nor the Surviving Corporation (as successor
to Merger Sub) shall have the power or authority to object to the amount of
any claim by any Shareholder Indemnified Party against Parent with respect
to such settlement.
(b) Non-Third Party Claims.
(1) Parent. In the event a Parent Indemnified Party has a claim
hereunder that does not involve a claim being asserted against or sought to
be collected by a third party, such Parent Indemnified Party shall with
reasonable promptness deliver a Claim Notice with respect to such claim to
the Shareholder Agent and, if such Parent Indemnified Party intends to make
a claim against the Escrow Account, to the Escrow Agent. If the Shareholder
Agent does not notify such Parent Indemnified Party within thirty (30)
calendar days from the date of receipt of such Claim Notice that the
Shareholder Agent disputes such claim, the amount of such claim shall be
conclusively deemed a liability of the Parent Indemnifying Parties
hereunder. In case the Shareholder Agent shall object in writing to any
claim made in accordance with this Section 7.4(b)(1), the Parent
Indemnified Party shall have fifteen (15) calendar days to respond in a
written statement to the objection of the Shareholder Agent. If after such
fifteen (15) calendar day period there remains a dispute as to any claim,
the Parent Indemnified Party and Shareholder Agent shall attempt in good
faith for sixty (60) calendar days to agree upon the rights of the
respective Parties with respect to each of such claims. If the Parent
Indemnified Party and Shareholder Agent should so agree, a memorandum
setting forth such agreement shall be prepared and signed by both Parties.
If such Parties do not so agree, the Parent Indemnified Party and
Shareholder Agent shall resolve such dispute pursuant to Section 7.6.
(2) Shareholder. In the event a Shareholder Indemnified Party has a
claim hereunder that does not involve a claim being asserted against or
sought to be collected by a third party, such Shareholder Indemnified Party
shall with reasonable promptness notify the Shareholder Agent and the
Shareholder Agent shall promptly (and in any event within two business
days) deliver a Claim Notice with respect to such claim to Parent. If
Parent does not notify the Shareholder Agent within thirty (30) calendar
days from the date of receipt of such Claim Notice that Parent disputes
such claim, the amount of such claim shall be conclusively deemed a
liability of Parent hereunder. In case Parent shall object in writing to
any claim made in accordance with this Section 7.4(b)(2), the Shareholder
Agent shall have fifteen (15) calendar days to respond in a written
statement to the objection of Parent. If after such fifteen (15) calendar
day period there remains a dispute as to any claim, the Shareholder Agent
and Parent shall attempt in good
PAGE A-53 Agreement and Plan of Merger
faith for sixty (60) calendar days to agree upon the rights of the
respective Parties with respect to each of such claims. If the Shareholder
Agent and Parent should so agree, a memorandum setting forth such agreement
shall be prepared and signed by both Parties. If such Parties do not so
agree, the Shareholder Agent and Parent shall resolve such dispute pursuant
to Section 7.6.
(c)Claims Against Escrow Account and Shareholder Performance Consideration.
If Parent or any Parent Indemnified Party is making a claim against the Escrow
Account, the Escrow Agent shall refrain from disbursing any portion of the
Escrow Account until resolution of such dispute pursuant to Section 7.4
(including, if applicable, Section 7.6). If Parent or any Parent Indemnified
Party is making or planning a claim of set-off against Shareholder Performance
Consideration (if any) payable to any Key Shareholders, Parent may retain and
refrain from distributing any portion of such Shareholder Performance
Consideration until resolution of such dispute pursuant to Section 7.4(a)(1),
Section 7.4(b)(1) or, if applicable, Section 7.6.
(d) Failure to Provide Notice. An Indemnified Party's failure to give
reasonably prompt notice to the Indemnifying Party of any actual, threatened or
possible claim or demand which may give rise to a right of indemnification
hereunder shall not relieve the Indemnifying Party of any liability which the
Indemnifying Party may have to the Indemnified Party unless the failure to give
such notice materially and adversely prejudiced the Indemnifying Party.
Section 7.5 Shareholder Agent.
(a) Each of the Shareholders, including each Key Shareholder, has
irrevocably appointed and constituted the Shareholder Agent as its exclusive
agent, and by virtue of this Agreement the Shareholder Agent is constituted as
the agent of all Shareholder Indemnified Parties and Parent Indemnifying
Parties, to do the following: (i) to give and receive notices and
communications, to agree to, negotiate, enter into settlements and compromises
of, make claims and demand arbitration and comply with orders of courts and
awards of arbitrators with respect to claims made or any other action to be
taken by or on behalf of any Shareholders under this Article VII, and to take
all actions necessary or appropriate in the judgment of the Shareholder Agent
for the accomplishment of the foregoing, and (ii) the deposit and withdrawal of
funds into and from the Expense Fund, and the use of the Escrow Stock as
collateral to secure the rights of the Indemnified Parties under this Article
VII in the manner set forth herein and in the Escrow Agreement. No bond shall be
required of the Shareholder Agent, and the Shareholder Agent shall receive no
compensation for its services.
(b) The Shareholder Agent shall not be liable for any act done or omitted
hereunder as Shareholder Agent while acting in good faith, and any act done or
omitted pursuant to the advice of counsel shall be conclusive evidence of such
good faith. The Key Shareholders shall severally indemnify the Shareholder Agent
and hold such agent harmless against any loss, liability or expense incurred
without bad faith on the part of the Shareholder Agent and arising out of or in
connection with the acceptance or administration of the Shareholder Agent's
duties hereunder. The Shareholder Agent may recover its reasonable out-of-pocket
costs and expenses incurred in connection with the performance of its duties,
rights and responsibilities hereunder on behalf of the Shareholders from the
Expense Fund, all as provided in Section 2.18 and in the Escrow Agreement.
Section 7.6 Resolution of Conflicts.
(a) Arbitration. If no agreement can be reached after good faith
negotiation between the Parent Indemnified Parties and the Shareholder Agent
pursuant to Section 7.4(b)(1), or between the Shareholder Agent and Parent
pursuant to Section 7.4(b)(2), the Person defending the claim (the "DEFENDING
PARTY"), may, by written notice to the Person asserting the claim (the
"PROSECUTING PARTY"), demand arbitration of the matter, which arbitration shall
be conducted by a single arbitrator. The Prosecuting Party and the Defending
Party shall agree on the arbitrator, provided that if the Prosecuting Party and
the Defending Party cannot agree on such arbitrator, either the Prosecuting
Party or the Defending Party can request that Judicial Arbitration and Mediation
Services ("JAMS") select the arbitrator. The arbitrator shall set a limited time
period and establish procedures designed to reduce the cost and time for
discovery while allowing the parties an opportunity, adequate in the sole
judgment of the arbitrator, to discover relevant information from the opposing
parties about the subject matter of the dispute. The arbitrator shall rule upon
motions to compel or limit discovery and shall have the authority to impose
sanctions, including attorneys' fees and costs, to the same extent as a court of
competent law or equity, should the arbitrator
PAGE A-54 Agreement and Plan of Merger
determine that discovery was sought without substantial justification or that
discovery was refused or objected to without substantial justification. The
decision of the arbitrator shall be written, shall be in accordance with
applicable Law and with this Agreement, and shall be supported by written
findings of fact and conclusion of law, which shall set forth the basis for the
decision of the arbitrator. The decision of the arbitrator as to the validity
and amount of any claim in a Claim Notice shall be binding and conclusive upon
the Prosecuting Party, the Defending
Party, the Parties, the Shareholders, the Parent Indemnified Parties and,
notwithstanding any other provision of this Article VII, the Escrow Agent, if
applicable, and each of such Persons shall be entitled to act in accordance with
such decision and the Escrow Agent, if applicable, shall be entitled to make or
withhold payments out of the Escrow Account in accordance therewith.
(b) Judgment; Arbitration Expenses. Judgment upon any award rendered by the
arbitrator may be entered in any court having jurisdiction. Any such arbitration
shall be held in San Diego, California under the commercial rules then in effect
for JAMS. The non-prevailing party to an arbitration shall pay its own expenses,
the fees of the arbitrator, any administrative fee of JAMS, and the expenses,
including attorneys' fees and costs, reasonably incurred by the other party to
the arbitration.
Section 7.7 No Contribution. The Shareholder Agent waives, and acknowledges
and agrees that it shall not, on behalf of the Indemnifying Parties, or
otherwise, have and shall not exercise or assert (or attempt to exercise or
assert), any right of contribution, right of indemnity or other right or remedy
against the Surviving Corporation in connection with any indemnification or
other rights any Indemnified Party may have under or in connection with this
Agreement.
Section 7.8 Fraud; Willful Misrepresentation. Notwithstanding any provision
in this Agreement to the contrary, the liability of any Key Shareholder for
fraud or willful misrepresentation on the part of such Key Shareholder shall not
be subject to any limitations set forth in this Article VII. Without limiting
the generality of the foregoing, any claim with respect to such liability need
not be presented within the time limits set forth in Section 7.1(a) and shall be
subject only to the applicable statutes of limitation, and notwithstanding
Section 7.9, any such claim shall be cumulative to any remedies provided in this
Article VII.
Section 7.9 Exclusive Remedies. Except as set forth in Section 2.5(d) and
Section 7.8, the remedies set forth in this Article VII and elsewhere in this
Agreement shall be the sole and exclusive remedies of the Parties, the
Shareholders and the other Indemnified Parties against any Indemnifying Party,
Shareholder or other Party with respect to any claim relating to this Agreement
or the Merger and the facts and circumstances relating and pertaining thereto.
Section 7.10 Purchase Price Adjustment. Any payments made pursuant to this
Article VII shall be treated for tax purposes as an adjustment to the
Shareholder Consideration.
ARTICLE VIII
POST-CLOSING COVENANTS
Section 8.1 Parent Board of Directors. Promptly following the Closing,
Parent will take any actions necessary so that Scott Tibbitts shall be appointed
to the Board of Directors of Parent, subject to the fiduciary obligations of the
Board of Directors of Parent under applicable Law.
Section 8.2 Separate Books and Records. From the Closing until the end of
FY 2007 (the "EARNOUT PERIOD"), Parent shall operate the business of the Company
at Closing separately and shall maintain separate books and records for such
business, such that the financial results of such business can be audited and
reported as a separate business unit. Any such successor separate business unit
shall for purposes of this Agreement, unless the context requires otherwise, be
deemed to be the Surviving Corporation.
Section 8.3 Operation of Surviving Corporation. During the Earnout Period,
Parent shall use its Best Efforts to operate the Surviving Corporation, or cause
the Surviving Corporation to be operated, in conformity with sound business
practices. Parent agrees that during the Earnout Period, taking into account the
goal of the Shareholders to earn the maximum Performance Consideration available
under Article II, it shall make all
PAGE A-55 Agreement and Plan of Merger
business decisions which affect the financial or operating results of the
Surviving Corporation in good faith, and shall not take any action with the
purpose of distorting the operational results of the Surviving Corporation in a
manner adverse to the Shareholders. Any dispute regarding compliance by Parent
with the terms and provisions of this Section 8.3, or the remedy or Losses as a
result thereof, shall be submitted to dispute resolution under Section 7.6 (as
if the dispute had arisen under Section 7.4(a)(1)).
Section 8.4 Sale of Surviving Corporation. Parent shall not sell all or
substantially all of the Surviving Corporation or its business during the
Earnout Period (it being understood and agreed that (i) for purposes of Section
2.5(d), the direct or indirect sale or other Transfer of shares of capital stock
of the Surviving Corporation in connection with a sale or other Transfer of the
capital stock of Parent or all or substantially all of the business or assets of
Parent shall be deemed not to be a material Breach of this Section 8.4, and (ii)
in the event of a direct sale or other Transfer of shares of capital stock of
the Surviving Corporation described in clause (i) next above, Parent shall
structure such sale or other Transfer to provide the Shareholders with
substantially similar protections and rights as are provided hereunder). No
injunctive relief shall be available to prevent a Breach of this Section 8.4.
Section 8.5 Stock Options.
(a) After the Closing, Parent shall cause the compensation committee of its
Board of Directors (the "COMPENSATION COMMITTEE"), at its first meeting held
following the Effective Time, to take appropriate action to reserve, to the
extent from time to time available under the SpaceDev 2004 Equity Incentive Plan
(or any other SpaceDev stock or equity plan in effect from time to time),
options to buy a number of shares of Parent Common Stock equal to at least 15%
of the number of shares of Parent Common Stock issued at Closing for issuance to
the executives, managers, employees and consultants from time to time of the
Company and, after the Closing, the Surviving Corporation (the "OPTION ELIGIBLE
EMPLOYEES"). Following each payment of Performance Consideration described in
Section 2.4(c), Parent shall, subject to the fiduciary duties of the
Compensation Committee under applicable Law, cause the Compensation Committee,
at its first meeting held after such payment, to take appropriate action to
grant options for a number of shares of Parent Common Stock under the SpaceDev
2004 Equity Incentive Plan (or any other SpaceDev stock or equity plan in effect
at the time of grant) equal to 15% of the number of shares of Parent Common
Stock issued as part of such Performance Consideration to Option Eligible
Employees, with due regard to the joint recommendations of the chief executive
officer of SpaceDev and the president of the Surviving Corporation.
(b) Parent shall seek approval of its shareholders at the Parent
Shareholder Meeting to increase the amount of shares available under the
SpaceDev 2004 Equity Incentive Plan, or under a new stock or equity plan to be
adopted at the Parent Shareholder Meeting, to provide sufficient reserves for
the issuance of the options contemplated by this Section 8.5.
(c) Parent shall grant the options to be granted Option Eligible Employees
pursuant to this Section 8.5 on substantially the same terms as are
contemporaneously awarded to Parent's officers and employees, including
registration of such options, and the shares of Parent Common Stock to be issued
upon exercise thereof, under the Securities Act.
Section 8.6 Capital Investments. After the Closing, Parent shall make
working capital investments (the "CAPITAL INVESTMENTS") in the Surviving
Corporation of not less than (i) $1,250,000 within thirty days of Closing in
respect of FY 2005, and (ii) an additional $1,250,000 no later than the end of
FY 2006; provided that Parent shall receive a credit against the required FY
2005 Capital Investment for any payments made by Parent, in its sole discretion,
at the request of the Company to (i) the Company after the date hereof and prior
to Closing, to the extent not reflected as a current liability on the Closing
Balance Sheet, (ii) Vectra in respect of the Vectra Loans (other than payments
to the extent required by Section 2.3), or (iii) any Person at or in connection
with the Closing. Such working capital shall, subject to the foregoing proviso,
be used by the Surviving Corporation to implement the Surviving Corporation's
strategic plan, ongoing programs and internal initiatives, including a potential
relocation to an alternative primary facility in the Boulder or Denver, Colorado
metropolitan areas.
Section 8.7 Continuity of Business Enterprise. Parent intends to either
continue the Company's historic business or use a significant portion of the
Company's historic business assets in a business (within the meaning of Treasury
Regulations Section 1.368-1(d)(1)).
PAGE A-56 Agreement and Plan of Merger
Section 8.8 Attorney-Client Privilege. The attorney-client privilege of the
Company related to the Merger shall be deemed to be the right of the
Shareholders, and not that of the Surviving Corporation, following the Closing,
and may only be waived by the Shareholder Agent. Absent the consent of the
Shareholder Agent, neither Parent nor the Surviving Corporation shall have a
right to access attorney-client privileged material related to the Merger
following the Closing.
ARTICLE IX
EMPLOYEES
Section 9.1 Retaining Employees. From the date hereof until the Closing,
the Company shall use its Best Efforts to retain its employees and consultants
in their employment or consulting relationship, until and following the Closing
Date.
Section 9.2 Employee Benefit Arrangements. In order to secure an orderly
and effective transition of the employee benefit arrangements for employees of
the Company and their respective beneficiaries and dependents, the Company and
its Representatives shall cooperate, before the Closing Date, with Parent to (i)
provide to Parent information related to such employees, including employment
records, benefits information and financial records, and (ii) take any other
actions requested by Parent or Merger Sub with respect to such employees and
their respective beneficiaries and dependents.
Section 9.3 No Benefit to the Company Employees Intended. This Article IX
is not intended to, and does not, create any rights or obligations to or for the
benefit of any Person other than Parent and Merger Sub.
ARTICLE X
TERMINATION
Section 10.1 Circumstances for Termination. At any time prior to the
Closing Date, this Agreement may be terminated by written notice explaining the
reason for such termination (without prejudice to other remedies which may be
available to the Parties under this Agreement, at law or in equity):
(a) by the mutual written consent of Parent and the Company;
(b) by Parent:
(1) if the closing condition specified in Section 6.2(n) has not been
satisfied within two weeks of the date hereof;
(2) if the Company or any of the Key Shareholders is in Material
Breach of this Agreement, subject to the expiration of any cure period
expressly provided herein; or
(3) if Vectra Bank forecloses or collects on any collateral for any
Vectra Loan;
(c) by the Company:
(1) if Parent or Merger Sub is in Material Breach of this Agreement,
subject to the expiration of any cure period expressly provided herein; or
(2) if Parent has not held the Parent Shareholders Meeting within
forty-five days of the date the SEC declares the Form S-4 effective; and
(d) by either Parent or the Company:
(1) if (i) Parent has not received notice from the SEC that the SEC
will review the Form S-4 or any other report filed by Parent with the SEC;
(ii) shares of Parent Common Stock are listed
PAGE A-57 Agreement and Plan of Merger
on the American Stock Exchange; (iii) the Closing has not occurred on or
prior to December 31, 2005 for any reason; (iv) the terminating Party is
not, on the date of termination, in Material Breach of this Agreement; and
(v) the terminating Party has not Breached this Agreement in a manner which
is responsible for delaying the Closing;
(2) if (i) the Closing has not occurred on or prior to March 31, 2006
(the "OUTSIDE DATE") for any reason; (ii) the terminating Party is not, on
the date of termination, in Material Breach of this Agreement; and (iii)
the terminating Party has not Breached this Agreement in a manner which is
responsible for delaying the Closing;
(3) if (i) the satisfaction of a closing condition of the terminating
Party in Article VI is impossible; (ii) the terminating Party is not, on
the date of termination, in Material Breach of this Agreement; and (iii)
the terminating Party has not Breached this Agreement in a manner causing
the impossibility of satisfying such closing condition; or
(4) pursuant to Section 5.15.
Section 10.2 Effect of Termination. If this Agreement is terminated in
accordance with Section 10.1, all obligations of the Parties hereunder shall
terminate, except for the obligations set forth in Section 5.5, Article XI and
the confidentiality and non-disclosure provisions (and any associated remedies)
contained herein. The termination of this Agreement for any reason shall not
affect any of Parent's rights under the SpaceDev Loan.
ARTICLE XI
MISCELLANEOUS
Section 11.1 Entire Agreement. This Agreement and the Related Agreements,
and any certificates, schedules and proxies delivered pursuant hereto or
thereto, constitute the entire agreement and understanding of the Parties in
respect of its and their subject matter and supersedes all prior understandings,
agreements, or representations by or among the Parties, written or oral, (except
for the SpaceDev Loan, its ancillary agreements, including that certain
Exclusivity Agreement, made effective September 8, 2005, by and between Parent
and the Company), to the extent they relate in any way to the subject matter
hereof or the transactions contemplated by this agreement.
Section 11.2 Parties In Interest. This Agreement and the Transaction
Documents shall be binding upon and inure solely to the benefit of each Party
and its successors and permitted assigns and nothing in this Agreement, express
or implied, is intended to or shall confer upon any other Person (other than
Parent Indemnified Persons) any rights, benefits or remedies of any nature
whatsoever under or by reason of this Agreement.
Section 11.3 Assignment; Amendment.
(a) Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder or under the Escrow Agreement shall be assigned without
the prior written consent of each other Party; provided, however, that Parent or
Merger Sub may assign, in its sole discretion, any or all of its rights,
interests and obligations under this Agreement to any direct wholly owned
Subsidiary of Parent. Any assignment in violation of the preceding sentence
shall be null and void and of no force or effect. Subject to the preceding
sentence, this Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the Parties and their respective successors and permitted
assigns.
(b) Amendment. This Agreement may not be modified, amended, altered or
supplemented except upon the execution and delivery of a written agreement
executed by Parent, the Company (prior to the Closing), the Key Shareholders and
the Shareholder Agent.
Section 11.4 Notices. All notices, requests, instructions or other
documents to be given under this Agreement shall be in writing and shall be
deemed given, (i) five business days following sending by registered
PAGE A-58 Agreement and Plan of Merger
or certified mail, postage prepaid, (ii) when sent if sent by facsimile;
provided, however, that the facsimile is promptly confirmed by telephone
confirmation thereof, (iii) when delivered, if delivered personally to the
intended recipient, and (iv) one business day following sending by overnight
delivery via a national courier service, and in each case, addressed to a party
at the following address for such Party:
If to Parent or Merger Sub (or, after consummation of the Merger, to the
Surviving Corporation):
SpaceDev, Inc.
Attn: Chief Executive Officer
13855 Stowe Drive
Poway, CA 92064
Tel: (858) 375-2030
Fax: (858) 375-1000
with copies (which will not constitute notice) to:
Sheppard, Mullin, Richter & Hampton LLP
Attn: John J. Hentrich, Esq.
12544 High Bluff Drive, Suite 300
San Diego, CA 92130-3051
Tel: (858) 720-8942
Fax: (858) 509-3691
If to the Company (prior to consummation of the Merger) or any Shareholder:
Starsys Research Corporation
Attn: Scott Tibbitts, Chief Executive Officer
4909 Nautilus Court North
Boulder, Colorado 80301
Tel: (303) 530-1925
Fax: (303) 530-2401
with a copy (which will not constitute notice) to:
Holland & Hart, LLP
Attn: Betty Arkell
555 17th Street, Suite 3200
Denver, Colorado 80202
Tel: (303) 295-8526
Fax: (303) 295-8261
If to the Shareholder Agent:
Scott Tibbitts
7237 Spring Creek Circle
Niwot, Colorado 80503
Fax: (303) 530-2401
If to a Key Shareholder, to the address set forth under such Key Shareholder's
name on the signature pages hereof.
Any Party may change its address or fax number for purposes hereof to such other
address or fax number as such Party may have previously furnished to the other
Parties in writing in accordance with this Section 11.4.
Section 11.5 Specific Performance. Each of the Parties acknowledges and
agrees that any Breach or non-performance of, or default under, any of the terms
and provisions hereof would cause substantial and
PAGE A-59 Agreement and Plan of Merger
irreparable damage to the other Parties, and that money damages would be an
inadequate remedy therefor. Accordingly, subject to Section 7.9, each of the
Parties agrees that each of them shall be entitled to seek equitable relief,
including specific performance and injunctive relief, in the event of any such
Breach, non-performance or default in any Action instituted in any court of the
United States or any state having competent jurisdiction, or before any
arbitrator, in addition to any other remedy to which such Party may be entitled,
at law or in equity.
Section 11.6 Submission to Jurisdiction; No Jury Trial; Service of Process.
(a) Submission to Jurisdiction. Except as set forth in Section 7.6, each
Party submits to the exclusive jurisdiction of the federal courts located in
Denver, Colorado, in any Action arising out of or relating to this Agreement,
any Transaction Document or any Transaction and agrees that all claims in
respect of the Action shall be heard and determined in any such court. Each
Party agrees that a final judgment in any Action so brought shall be conclusive
and may be enforced by Action on the judgment or in any other manner provided at
law or in equity. Each Party waives any defense of inconvenient forum to the
maintenance of any Action so brought and waives any bond, surety, or other
security that might be required of any other party with respect thereto.
(b) Waiver of Jury Trial. THE PARTIES EACH HEREBY AGREE TO WAIVE THEIR
RESPECTIVE RIGHTS TO JURY TRIAL OF ANY DISPUTE BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY OTHER AGREEMENTS RELATING HERETO OR ANY DEALINGS AMONG THEM
RELATING TO THE TRANSACTIONS. The scope of this waiver is intended to be all
encompassing of any and all Actions that may be filed in any court and that
relate to the subject matter of any Transactions, including, contract claims,
tort claims, breach of duty claims, and all other common law and statutory
claims. The Parties each acknowledge that this waiver is a material inducement
to enter into a business relationship and that they will continue to rely on the
waiver in their related future dealings. Each Party further represents and
warrants that it has reviewed this waiver with its legal counsel, and that each
knowingly and voluntarily waives its jury trial rights following consultation
with legal counsel. NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, THIS WAIVER
IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED ORALLY OR IN WRITING, AND
THE WAIVER SHALL APPLY TO ANY AMENDMENTS, RENEWALS, SUPPLEMENTS, OR
MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING
HERETO. In the event of an Action, this Agreement may be filed as a written
consent to trial by a court.
(c) Service of Process. Any Party may make service on any other Party by
sending or delivering a copy of the process to the Party to be served at the
address and in the manner provided for the giving of notices in Section 11.17.
Nothing in this Section 11.6 shall affect any Party's right to serve legal
process in any other manner permitted at Law or in equity.
Section 11.7 Time. Time is of the essence in the performance of this
Agreement.
Section 11.8 Counterparts. This Agreement may be executed in two or more
original or facsimile counterparts, each of which shall be deemed an original
but all of which together shall constitute but one and the same instrument.
Section 11.9 Governing Law. This Agreement and the performance of the
Transactions and obligations of the Parties hereunder shall be governed by and
construed in accordance with the laws of the State of Colorado applicable to
contracts negotiated, executed and to be performed entirely within such State.
Section 11.10 Expenses. The Company and the Shareholder Agent shall be
solely responsible for their respective legal, accounting and other fees and
expenses incurred or reasonably expected to be incurred by the Company or the
Shareholder Agent in connection with the preparation, execution and delivery of
this Agreement and the consummation of the Transactions contemplated hereby,
including the preparation and filing of the Form S-4 and the holding of the
Company Shareholders Meeting ("EXPENSES"). Parent and Merger Sub shall be solely
responsible for their respective Expenses.
PAGE A-60 Agreement and Plan of Merger
Section 11.11 Certain Taxes. All transfer, documentary, sales, use, stamp,
registration and other such Taxes and fees (including any penalties and
interest) incurred in connection with this Agreement, if any, shall be paid by
the Shareholders.
Section 11.12 Extensions; Waiver.
(a) Extension. At any time following the Closing Date, Parent and the
Surviving Corporation, on the one hand, and the Shareholder Agent, on the other,
to the extent legally allowed, may (i) extend the time for the performance of
any of the obligations of the other of them, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any certificate,
instrument or other document delivered pursuant hereto, or (iii) waive
compliance with any of the agreements contained herein. Any agreement to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of the Person against which enforcement of such
extension or waiver is sought.
(b) Waiver. The failure of any party hereto to exercise any right, power or
remedy provided under this Agreement or otherwise available in respect hereof at
law or in equity, or to insist upon compliance by any other party hereto with
its obligations hereunder, or any custom or practice of the parties at variance
with the terms hereof shall not constitute a waiver by such party of its right
to exercise any such or other right, power or remedy or to demand such
compliance. No waiver by any party of any default, misrepresentation or breach
hereunder, whether intentional or not, shall be effective unless in writing and
signed by the party against whom such waiver is sought to be enforced, and no
such waiver shall be deemed to extend to any prior or subsequent default,
misrepresentation or breach hereunder or affect in any way any rights arising
because of any prior or subsequent such occurrence.
Section 11.13 Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof;
providedthat if any provision of -------- this Agreement, as applied to any
Party or to any circumstance, is adjudged by a Governmental Body, arbitrator, or
mediator not to be enforceable in accordance with its terms, the Parties agree
that the Governmental Body, arbitrator, or mediator making such determination
shall have the power to modify the provision in a manner consistent with its
objectives such that it is enforceable, and to delete specific words or phrases,
and in its reduced form, such provision shall then be enforceable and shall be
enforced.
Section 11.14 Incorporation of Exhibits and Disclosure Schedules. The
Exhibits and the Disclosure Schedules are incorporated herein by reference and
made a part hereof.
Section 11.15 Titles and Headings. The article, section and paragraph
titles and headings, and the table of contents, contained herein are inserted
purely as a matter of convenience and for ease of reference and shall be
disregarded for all other purposes, including the construction, interpretation
or enforcement of this Agreement or any of its terms or provisions.
Section 11.16 Facsimile Execution. A facsimile, telecopy or other
reproduction of this Agreement may be executed by one or more Parties, and an
executed copy of this Agreement may be delivered by one or more Parties by
facsimile or similar electronic transmission device pursuant to which the
signature of or on behalf of such Party can be seen, and such execution and
delivery shall be considered valid, binding and effective for all purposes. At
the request of any Party, all Parties agree to execute an original of this
Agreement as well as any facsimile, telecopy or other reproduction hereof.
Section 11.17 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement with the assistance of legal counsel,
and any rule of construction or interpretation otherwise requiring this
Agreement to be construed or interpreted against any party shall not apply to
any construction or interpretation hereof. If an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party because of the authorship of any provision of
this Agreement. The Parties intend that each representation, warranty, and
covenant contained herein shall have independent significance. If any Party has
Breached any representation, warranty, or covenant contained herein in any
respect, the fact that there exists another representation, warranty, or
covenant relating to a similar subject matter (regardless of the relative levels
of
PAGE A-61 Agreement and Plan of Merger
specificity) which the Party has not breached shall not detract from or mitigate
the fact that the Party is in Breach of the first representation, warranty, or
covenant. For all purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires:
(a) all references in this Agreement to designated "Articles," "Sections"
and other subdivisions, or to designated "Exhibits," "Schedules" or
"Appendices," are to the designated Articles, Sections and other subdivisions
of, or the designated Exhibits, Schedules or Appendices to, this Agreement;
(b) references to any Person includes such Person's successors and assigns
but, if applicable, only if such successors and assigns are not prohibited by
this Agreement, and reference to a Person in a particular capacity excludes such
Person in any other capacity or individually;
(c) references to any agreement, document or instrument means such
agreement, document or instrument as Amended and in effect from time to time in
accordance with the terms thereof, and shall be deemed to refer as well to all
addenda, annexes, appendices, exhibits, schedules and other attachments thereto;
(d) reference to any Law means such Law as Amended, codified, replaced or
reenacted, in whole or in part, and in effect from time to time, including rules
and regulations promulgated thereunder, and reference to any section or other
provision of any Law means that provision of such Law from time to time in
effect and constituting the substantive Amendment, codification, replacement or
reenactment of such section or other provision;
(e) references to "dollars" or "cash", and the "$" symbol, are references
to the lawful money of the United States of America;
(f) with respect to the determination of any period of time, "from" means
"from and including" and "to" means "to but excluding";
(g) the words "include," "includes," and "including" shall be deemed to be
followed by "without limitation";
(h) the term "or" shall not be exclusive;
(i) pronouns in masculine, feminine, and neuter genders shall be construed
to include any other gender;
(j) whenever the singular number is used, if required by the context, the
same shall include the plural, and vice versa;
(k) the words "this Agreement," "herein," "hereof," "hereby," "hereunder,"
and words of similar import refer to this Agreement as a whole and not to any
particular Article, Section or other subdivision; and
(l) all accounting terms shall be interpreted, and all accounting
determinations hereunder shall be made, in accordance with GAAP.
Section 11.18 Definitions. Unless otherwise expressly provided herein, the
following terms, whenever used in this Agreement, shall have the meanings
ascribed to them below or in the referenced Sections of this Agreement:
"ACCOUNTS RECEIVABLE" means (i) all trade accounts receivable and other
rights to payment from customers of the Company and the full benefit of all
security for such accounts or rights to payment, including all trade accounts
receivable representing amounts receivable in respect of goods shipped or
products sold or services rendered to customers of the Company, (ii) all other
accounts or notes receivable of the Company and the full benefit of all security
for such accounts or notes, and (iii) any claim, remedy or other right related
to any of the foregoing.
PAGE A-62 Agreement and Plan of Merger
"ACTION" means any action, appeal, petition, plea, charge, complaint,
claim, suit (whether civil, criminal, administrative, judicial or investigative,
whether formal or informal, whether public, private or otherwise, whether at law
or in equity), demand, litigation, arbitration, mediation, hearing, inquiry,
investigation, audit or similar event, occurrence, or proceeding, in each case
commenced, brought, conducted or heard by or before, or otherwise involving, any
Governmental Body, arbitrator or mediator.
"ACTUAL KNOWLEDGE" of a particular fact or other matter means (i) with
respect to an individual, when such individual is actually aware of such fact or
other matter, and (ii) with respect to an Entity, if any Person who is serving,
or who has at any time served, as a director, officer, management-level
employee, partner, executor or trustee of such Entity (or, in all cases above,
in any similar or equivalent capacity), or any employee of such Entity charged
with responsibility for a particular functional or regional area of such
Entity's business or operations, has, or at any time had, Actual Knowledge of
such fact or other matter.
"AFFILIATE" or "AFFILIATED" with respect to any specified Person, means a
Person that, directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with, such specified
Person. For purposes of this definition, "CONTROL" (and its derivatives) means
the possession, directly or indirectly, or as trustee or executor, of the power
to direct or cause the direction of the management and policies of a Person,
whether through ownership of voting Equity Interests, as trustee or executor, by
contract or credit arrangements or otherwise.
"AMEND" means, with respect to any Contract or Organizational Document, to
amend, supplement, extend, waive a provision of or otherwise modify such
Contract or Organizational Document. The terms "AMENDED" and "AMENDMENT" shall
have the correlative meanings.
"APPLICABLE TIME" means (i) with respect to the Form S-4, the time the Form
S-4 is filed with the SEC, any time the Form S-4 is amended or supplemented and
the time the Form S-4 becomes effective under the Securities Act, (ii) with
respect to the Proxy Statement, the date the Proxy Statement or any amendment or
supplement thereto is first mailed to the shareholders of Parent and at the time
of the Parent Shareholder Meeting, or (iii) with respect to any other document,
the date such other document, or any amendment or supplement thereto, is filed
with the applicable Governmental Body.
"BEST EFFORTS" means the efforts that a prudent Person desirous of
achieving a result would use in similar circumstances to achieve that result as
expeditiously and effectively as possible.
"BREACH" means (a) any breach of, or inaccuracy in, any representation or
warranty, (b) any breach or violation of, default under, failure to perform,
failure to comply with or failure to notify, or noncompliance with, any
covenant, agreement or obligation, or (c) any one or more other Events the
existence of which, individually or together, whether unconditionally or with
the passing of time or the giving of notice, or both, would (i) constitute a
breach, violation, default, failure or noncompliance referred to in clauses (a)
and (b) next above, (ii) permit any Person to accelerate any monetary
obligation, (iii) permit any Person to abridge, delay, condition, terminate,
revoke, rescind or cancel any right, license, liability, debt, power, authority,
privilege or obligation, or (iv) require, or permit any Person to require, the
payment of a monetary penalty or liquidated damages.
"CAPITAL LEASE OBLIGATIONS" means a payment obligation under a Lease of
Property, real or personal, classified as a capital lease pursuant to FASB
Statement of Financial Accounting Standards No. 13, Accounting for Leases (Nov.
1976).
"CERCLA" means the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended.
"CLOSING CONSIDERATION" means, collectively, (i) all amounts payable by
Parent at the Closing pursuant to Section 2.3, (ii) the Shareholder Closing
Consideration, and (iii) the Company Expense Payments to be made at Closing
"CLOSING DEBT" means the sum of (i) the aggregate amount of "Bank Debt" (as
defined in the Intercreditor Agreement), together with any other Liabilities
under or in respect of the Vectra Loans, at Closing, plus (ii) the
PAGE A-63 Agreement and Plan of Merger
aggregate Liabilities under or in respect of the Shareholder Loans at Closing,
plus (iii) the aggregate Liabilities under or in respect of the SpaceDev Loan at
Closing.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITMENT" means (a) options, warrants, convertible securities,
exchangeable securities, subscription rights, purchase or acquisition rights,
conversion rights, exchange rights, or other Contracts that require an Entity to
issue any of its Equity Interests, (b) any other securities convertible into,
exchangeable or exercisable for, or representing the right to subscribe for, in
each case with or without consideration, any Equity Interest of an Entity, (c)
statutory pre-emptive rights or pre-emptive rights granted under an Entity's
Organizational Documents, (d) rights of first refusal, tag-along rights, co-sale
rights, drag-along rights, piggyback rights, buy-sell arrangements, or voting
agreements, or (e) stock appreciation rights, phantom stock, profit
participation, or other similar rights with respect to an Entity.
"COMPANY COMMON STOCK" means the common stock, par value $.0001, of the
Company.
"COMPANY CONTRACT" means any Contract to which the Company or any of its
Subsidiaries is a party or signatory or by which any of them is bound, and any
Company License.
"COMPANY EMPLOYEE PLAN" means any plan, program, policy, practice,
contract, agreement or other material arrangement providing for compensation,
severance, termination pay, deferred compensation, performance awards, stock or
stock related awards, fringe benefits or other employee benefits or remuneration
of any kind, whether written, unwritten or otherwise, funded or unfunded,
including each "employee benefit plan" (within the meaning of Section 3(3) of
ERISA) which is or has been maintained, contributed to, or required to be
contributed to, by the Company or any Affiliate thereof for the benefit of any
Employee, or with respect to which the Company or any Affiliate thereof has or
may have any liability or obligation.
"COMPANY EXPENSE PAYMENTS" means all amounts paid, whether in cash or
shares of Parent Common Stock and whether at Closing or thereafter, in
satisfaction of Company Transaction Expenses pursuant to Section 2.19.
"COMPANY INFORMATION" means the statements regarding the Company, its
operations, business, directors, officers, Subsidiaries and Shareholders
contained in the Form S-4 or Proxy Statement.
"COMPANY INTELLECTUAL PROPERTY" means any Material Intellectual Property
Rights that are or are purported to be owned by, licensed exclusively to or
otherwise controlled by the Company.
"COMPANY LICENSES" means the license Contracts or licenses governing or
relating to Intellectual Property Rights licensed by the Company or any of its
Subsidiaries in writing from third parties, but excluding licenses solely for
Excluded Software.
"COMPANY PRODUCTS" means all products designed, manufactured, shipped,
sold, marketed, distributed, licensed, Leased, delivered or introduced into the
stream of commerce by or on behalf of the Company, including any such products
sold in the United States by the Company as the distributor or agent, or
pursuant to any other contractual relationship with an offshore manufacturer,
and including all Company Software and all services provided by or through the
Company on or prior to the Closing Date.
"COMPANY SOFTWARE" means any Software constituting Company Intellectual
Property.
PAGE A-64 Agreement and Plan of Merger
"CONFIDENTIAL INFORMATION" means all Trade Secrets and other confidential
or proprietary information of a Person disclosing such information (the
"DISCLOSING PARTY"), including information derived from reports, investigations,
research, work in progress, codes, marketing and sales programs, financial
projections, cost summaries, pricing formula, contract analyses, financial
information, projections, confidential filings with any Governmental Body, and
all other confidential concepts, methods of doing business, ideas, materials or
information prepared or performed for, by or on behalf of the Disclosing Party
by its Representatives; providedthat the following information shall not be
deemed to be Confidential Information: (i) information which is or becomes
available to or known by the public generally through no fault of the Person
receiving such information (the "RECEIVING PARTY"); or (ii) information that was
in the Receiving Party's possession at the time of disclosure or receipt, as
evidenced and verified by prior tangible evidence, and was not acquired under an
obligation of confidence or non-disclosure; (iii) information that the Receiving
Party demonstrates was rightfully received by it from a third party after the
time it was disclosed or obtained from the Disclosing Party, providedthat such
third party was not directly or indirectly under an obligation of confidence or
non-disclosure with the Disclosing Party at the time of the third party's
disclosure to the Receiving Party; or (iv) information that is independently
developed by the Receiving Party without use of or reference to the Confidential
Information of the Disclosing Party, as evidenced and verified by prior tangible
evidence.
"CONSENT" means any consent, approval, ratification, favorable vote,
authorization, waiver, or other similar action.
"CONTRACT" means any Government Contract, contract, agreement, instrument,
commitment, covenant, lease, promise, undertaking or other agreed or consensual
obligation, whether written or oral and whether express or implied.
"COPYRIGHTS" means worldwide (i) registered copyrights in published or
unpublished works, mask work rights and similar rights, including rights created
under Sections 901-914 of Title 17 of the United States Code, mask work
registrations, and copyright applications for registration, including any
renewals thereof, and (ii) copyrightable works and other rights of authorship in
published or unpublished works.
"CURRENT BALANCE SHEET" means (i) on the date hereof until the delivery of
the balance sheet described in clause (ii) of this definition, the balance sheet
described in Section 3.9(ii)(A), (ii) upon the certification and delivery
thereof to Parent until the Closing Date, the balance sheet described in Section
5.15, and (iii) on and after the Closing Date, the balance sheet described in
Section 3.9(ii)(B)
"CURRENT BALANCE SHEET DATE" means the date of the Current Balance Sheet
from time to time.
"DEBT" means, with respect to any Person, without duplication, (i) all
obligations of such Person for borrowed money, including bank loans, mortgages,
notes payable and earnouts payable, and all obligations of such Person evidenced
by bonds, debentures, notes or other similar instruments or Securities, in each
case together with any interest, fees, prepayment penalties or other amounts due
in respect thereof, (ii) all obligations of such Person to pay the deferred
purchase price of property or services, including Lease obligations, except
trade accounts payable arising in the Ordinary Course of Business, and (iii) all
obligations of such Person to purchase Securities which arise out of or in
connection with the sale of the same or substantially similar Securities.
"DISCLOSING PARTY" has the meaning ascribed to such term in the definition
of the term "Confidential Information".
"DISSENTING SHAREHOLDERS" means shareholders of the Company who are
"Dissenters" (as defined in Sec. 7-113-101 of the CBCA), or are otherwise duly
exercising dissenters' rights under applicable Law, in respect of the Merger.
"DISSENTING SHARES" means the shares of Company Common Stock as to which a
Dissenting Shareholder has exercised such Person's right to dissent.
"EMPLOYEE" means any current or former employee, consultant or director of
the Company or any Affiliate.
PAGE A-65 Agreement and Plan of Merger
"EMPLOYEE AGREEMENT" means each management, employment, severance,
consulting, or similar Contract between the Company and any employee,
consultant, independent contractor, or other individuals providing services
thereto pursuant to which the Company has or may have any Liability.
"EMPLOYEE BENEFIT PLAN" means each plan, program, policy, payroll practice,
contract, agreement (including Employee Agreements), or other arrangement
providing for compensation, severance, termination pay, performance awards,
stock or stock related awards, fringe benefits, or other employee benefits of
any kind, whether formal or informal, funded or unfunded, written or oral and
whether or not legally binding, including each "employee benefit plan," within
the meaning of Section 3(3) of ERISA and each "multiemployer plan" within the
meaning of Sections 3(37) or 4001(a)(3) of ERISA.
"EMPLOYEE PENSION PLAN" means any Employee Benefit Plan that is an
"employee pension benefit plan," as that term is defined in Section 3(2) of
ERISA.
"ENCUMBRANCE" means, with respect to any Property, any Order, Lien,
easement, right of way, encroachment, servitude, right of first option, right of
first refusal or similar restriction, community or other marital property
interest, condition, equitable interest, license, encumbrance or other binding
restriction of any kind (including restrictions on use, Transfer, receipt of
income or exercise of any other attribute or indicia of ownership) on such
Property or any interest therein or right thereto, whether directly or
indirectly (through one or more intermediary Persons or otherwise), whether
voluntarily, involuntarily or by operation of law, and, where applicable, any
restriction on voting thereof or receipt of income thereon and any Commitments
in respect thereof; providedthat Transfer restrictions under federal and state
securities and "blue sky" laws and regulations shall be deemed not to be an
Encumbrance. The term "Encumber" has the correlative meaning.
"ENFORCEABLE" means, with respect to any Contract and any Person, that such
Contract is the legal, valid, and binding obligation of such Person enforceable
against such Person in accordance with its terms, except as such enforceability
may be subject to the effects of, or limited by, bankruptcy, insolvency,
reorganization, moratorium, or other Laws relating to or affecting the rights of
creditors, and general principles of equity.
"ENTITY" means any corporation (including any non profit corporation),
general partnership, limited partnership, limited liability partnership, joint
venture, estate, trust, company (including any limited liability company or
joint stock company), firm, labor organization, unincorporated organization, or
other enterprise, association, organization or business entity.
"ENVIRONMENT" means soil, land surface or subsurface strata, surface waters
(including navigable waters and ocean waters), groundwaters, drinking water
supply, stream sediments, ambient air (including indoor air), plant and animal
life and any other environmental medium or natural resource.
"ENVIRONMENTAL, HEALTH AND SAFETY LIABILITIES" means any costs, damages,
expenses, Liabilities, or other responsibility arising from or under any
Environmental Law or Occupational Safety and Health Law, including those
consisting of or relating to (i) any environmental, health or safety matter or
condition (including on-site or off-site contamination, occupational safety and
health and regulation of any chemical substance or product), (ii) any Orders or
Losses arising under any Environmental Law or Occupational Safety and Health
Law, (iii) financial responsibility under any Environmental Law or Occupational
Safety and Health Law for cleanup costs or corrective action, including any
cleanup, removal, containment or other remediation or response actions
("Cleanup") required by any Environmental Law or Occupational Safety and Health
Law (whether or not such Cleanup has been required or requested by any
Governmental Body or any other Person) and for any natural resource damages, or
(iv) any other compliance, corrective or remedial measure required under any
Environmental Law or Occupational Safety and Health Law. For purposes of this
Agreement, the terms "removal," "remedial" and "response action" include the
types of activities covered by CERCLA.
"ENVIRONMENTAL LAW" means any Law that requires or relates to (i) advising
appropriate authorities, employees or the public of intended, threatened or
actual Environmental Releases of Materials of Environmental Concern, violations
of discharge limits or other prohibitions and the commencement of activities,
such as resource extraction or construction, that could have significant impact
on the Environment, (ii) preventing or reducing to acceptable levels the
Environmental Release of Materials of Environmental Concern into the
PAGE A-66 Agreement and Plan of Merger
Environment, (iii) reducing the quantities, preventing the Environmental Release
or minimizing the hazardous characteristics of wastes that are generated, (iv)
assuring that products are designed, formulated, packaged and used so that they
do not present unreasonable risks to human health or the Environment when used
or disposed of, (v) protecting the Environment, resources, species or ecological
amenities, (vi) reducing to acceptable levels the risks inherent in the
transportation of Materials of Environmental Concern, (vii) cleaning up
Materials of Environmental Concern that have been Environmental Released,
preventing the Threat of Release or paying the costs of such clean up or
prevention, (viii) making responsible parties pay private parties, or groups of
them, for damages done to their health or the Environment or permitting
self-appointed representatives of the public interest to recover for injuries
done to public assets, or (ix) the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Materials of
Environmental Concern or the protection of human health or the Environment.
"ENVIRONMENTAL PROPERTY" means any Facility or other property or asset
(whether real, personal or mixed) in which the Company has or had an interest.
"ENVIRONMENTAL RELEASE" means any release, spill, emission, leaking,
pumping, pouring, dumping, emptying, injection, deposit, disposal, discharge,
dispersal, leaching or migration on or into the Environment or into or out of
any property.
"EQUITY INTEREST" means (a) with respect to a corporation, any and all
shares of capital stock and any Commitments with respect thereto, (b) with
respect to a partnership, limited liability company, trust, or similar Person,
any and all units, interests, or other partnership/limited liability company
interests, and any Commitments with respect thereto, and (c) any other direct or
indirect equity ownership, participation or interest in a Person.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ESCROW AGENT" means the escrow agent appointed by Parent to act as escrow
agent under the Escrow Agreement, together with its successors as escrow agent
thereunder.
"ESCROW TERMINATION DATE" means the last day of the Escrow Period.
"EVENT" means any act, omission, occurrence, circumstance, condition or
other event.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCLUDED SOFTWARE" means any Software or rights thereto which (a) the
Company has purchased or licensed for less than a total annual aggregate cost
for all copies owned, licensed or used by the Company of $25,000, and (b) either
(1) is subject to a "shrink wrap" or similar commercial end-user licenses or
commodity type licenses widely available to the public generally, or (b)
consists of non-customized third-party Software licensed to the Company for
internal use on a non-exclusive basis and which is generally available to other
Persons, including the Surviving Corporation, on substantially similar terms and
conditions.
"FACILITIES" means any real property, leasehold or other interest in real
property currently owned, operated, occupied or Leased by the Company, including
the Tangible Personal Property used, operated or Leased by the Company at the
respective locations of the leased real property specified in Section 3.15(a) of
the Disclosure Schedules. Notwithstanding the foregoing, for purposes of the
definitions of "Hazardous Activity" and "Remedial Action" and Section 3.24,
Facilities means any real property, leasehold or other interest in real property
currently or formerly owned, operated, occupied or Leased by the Company,
including the Tangible Personal Property used, operated or Leased by the Company
at the respective locations of such real property.
"FIDUCIARY" means "fiduciary", as defined in ERISA Section 3(21).
"FINANCIALS" means the balance sheets and statements of income and cash
flows described in Section 3.9 and Section 5.15.
PAGE A-67 Agreement and Plan of Merger
"FOREIGN EXPORT AND IMPORT LAWS" means the laws and regulations of a
foreign government regulating the provision of services to parties not of the
foreign country or the export and import of articles and information from and to
the foreign country and to parties not of the foreign country.
"FORM S-4" means the registration statement on Form S-4 to be filed by
Parent with the SEC in connection with the issuance of the shares of Parent
Common Stock in the Merger.
"FY 2005" means the fiscal year of the Surviving Corporation ended December
31, 2005.
"FY 2006" means the fiscal year of the Surviving Corporation ended December
31, 2006.
"FY 2007" means the fiscal year of the Surviving Corporation ended December
31, 2007.
"GAAP" means United States generally accepted accounting principles for
financial reporting, as in effect from time to time.
"GOVERNMENT" means any agency, division, subdivision, audit group, or
procuring office of the United States federal government, including the
employees or agents thereof.
"GOVERNMENT CONTRACT" means any prime contract, subcontract, basic ordering
agreement, letter contract, purchase order or delivery order of any kind.
"GOVERNMENTAL BODY" and "GOVERNMENT BODIES" means any (i) nation, state,
county, city, town, borough, village, district or other jurisdiction, (ii)
federal, state, local, municipal, foreign or other government, (iii)
governmental or quasi-governmental authority of any nature (including any
legislature, agency, board, bureau, branch, department, division, commission,
court, tribunal, magistrate, justice or other entity exercising governmental or
quasi-governmental powers), (iv) multi national organization or body, (v) body
exercising, or entitled to exercise, any administrative, executive, judicial,
legislative, police, military, regulatory or taxing authority or power, or (v)
official of any of the foregoing.
"GOVERNMENTAL PERMIT" means any permit, license, certificate, Consent,
clearance, accreditation, or other similar authorization required by any Law or
Governmental Body.
"GUARANTEE" means, with respect to any Person, any obligation, contingent
or otherwise, of such Person directly or indirectly guaranteeing or insuring any
Debt or Capital Lease Obligation.
"HAZARDOUS ACTIVITY" means the distribution, generation, handling,
importing, exporting, management, manufacturing, processing, production,
refinement, Environmental Release, sale, storage, transfer, transportation,
treatment or use (including any withdrawal or other use of groundwater) of
Hazardous Material in, on, under, about or from any of the Facilities or any
part thereof into the Environment and any other act, business, operation or
thing that increases the danger, or risk of danger, or poses an unreasonable
risk of harm, to Persons or property.
"HAZARDOUS MATERIALS" means any material, substance or waste which is
defined as a "hazardous waste," "hazardous material," "hazardous substance,"
"extremely hazardous waste," "restricted hazardous waste," "contaminant," "toxic
waste" or "toxic substance" under any provision of Environmental Law, and
including radioactive materials, petroleum, petroleum products, asbestos,
presumed asbestos-containing material or asbestos-containing material, urea
formaldehyde and polychlorinated biphenyls.
"INDEBTEDNESS" means all Debt or Capital Lease Obligation of the Company as
of the Closing, including any prepayment or similar fees or charges related to
the retirement or termination of bank Debt of the Company which will be
discharged or satisfied at or in connection with the consummation of the
Transactions.
"INTELLECTUAL PROPERTY RIGHTS" means Patents, Trademarks, Copyrights, Owned
Rights and Proprietary Information, and includes any rights to exclude others
from using or appropriating any Intellectual Property Rights, including the
rights to sue for or assets claims against and remedies against past, present or
future infringements of any
PAGE A-68 Agreement and Plan of Merger
or all of the foregoing and rights of priority and protection of interests
therein, and any other proprietary, intellectual property or other rights
relating to any or all of the foregoing anywhere in the world; provided that
"Intellectual Property Rights" shall excluded any rights for which a license is
merely implied by the sale of a product.
"INTERCREDITOR AGREEMENT" means that certain Intercreditor Agreement, dated
as of September 8, 2005, by and among Vectra, Parent and the Company.
"IRS" means the United States Internal Revenue Service and, to the extent
relevant, the United States Department of the Treasury.
"KNOWLEDGE" of a particular fact or other matter means when: (i) an
individual is actually aware of such fact or other matter, or (ii) a prudent
individual could be expected to discover or otherwise become aware of such fact
or other matter in the course of conducting a comprehensive investigation
concerning the existence of such fact or other matter. If any individual who is
serving, or who has at any time served, as a director, officer, management-level
employee, partner, executor or trustee of such Person (or, in all cases above,
in any similar or equivalent capacity), or any employee of such Person charged
with responsibility for a particular functional or regional area of such
Person's business or operations, has, or at any time had, Knowledge of such fact
or other matter.
"LAW" means any federal, state, local, domestic, foreign, international or
multi national law (statutory, common, or otherwise), constitution, treaty,
order, writ, injunction, decree, award, stipulation, ordinance or administrative
doctrine, ordinance, equitable principle, code, rule, regulation, executive
order, request, or other similar authority enacted, adopted, promulgated, or
applied by any Governmental Body, each as amended.
"LEASE" means any lease of real or personal property or any lease or rental
agreement, license, right to use or installment and conditional sale agreement
to which the Company is a party or subject, and any other Contract of the
Company pertaining to the leasing or use of any Tangible Personal Property. The
terms "LEASE" and "LEASED" used as a verb shall have the correlative meanings.
"LIABILITY" or "LIABLE" means any liability or obligation of any kind,
character or description, whether known or unknown, absolute or contingent,
matured or unmatured, disputed or undisputed, secured or unsecured, conditional
or unconditional, accrued or unaccrued, liquidated or unliquidated, vested or
unvested, joint or several, due or to become due, executory, determined,
determinable or otherwise, and whether or not the same is required to be accrued
on financial statements.
"LICENSES" means, collectively, all Company Licenses and all Third-Party
Licenses.
"LIENS" means, in respect of any Property, any security interest, deed of
trust, mortgage, pledge, lien, statutory liens of any kind or nature,
hypothecation, charge, claim, lease or other similar interest or right in
respect of such Property.
"LOSSES" means, without duplication, all damages, losses (including loss
due to business interruption or operation shutdowns, increased costs of
operation, the loss of any available tax deduction, and including special,
exemplary, punitive or incidental loss or damage), deficiencies, costs of
mitigation or avoidance, Liabilities, expenses of whatever nature, costs
(including increased costs of business or operations), obligations, fines,
interest, penalties, and payments, whether incurred by or issued against a
Person, including (i) with respect to environmental liabilities and losses,
clean-up, remedial correction and responsive action, and (ii) with respect to
any Action or threatened Action, amounts paid in defense, settlement and
discovery, costs associated with obtaining injunctive relief, administrative
costs and expenses, reasonable fees and expenses of attorneys, expert witnesses,
accountants and other professional advisors, and other out-of-pocket costs of
investigation, preparation, and litigation in connection therewith. In computing
the amount of Losses, no offset shall be taken into account for tax savings,
insurance benefits (except as set forth in Section 7.1(d)) or similar reductions
for Losses.
"MARKS" means all fictitious business names, corporate names, trade names,
registered and unregistered trademarks and service marks, logos, product names
and slogans, Internet domain names, and trade dress rights, worldwide, including
PAGE A-69 Agreement and Plan of Merger
any and all common law rights, registrations and applications (including intent
to use applications) for registration of any of the foregoing, and the goodwill
associated with all of the foregoing.
"MASK WORKS" means mask work and similar rights, worldwide, including
rights created under Sections 901-914 of Title 17 of the United States Code,
including all registrations and applications to register any of the foregoing,
and any other rights protecting integrated circuit or chip topographies or
designs.
"MATERIAL" or "MATERIALLY" means, with respect to any Event, effect,
violation or Breach, any of the foregoing which, alone or in combination with
any other Events, effects, violations or Breaches, is reasonably likely to
result in or have a Material Adverse Effect, taken as a whole, on the Company.
"MATERIAL ADVERSE EFFECT" means, with respect to any Event, effect,
violation or Breach and any Party, that the effect thereof, alone or in
combination with any other Events, effects, violations or Breaches, is or is
reasonably likely to be materially adverse to the business, prospects,
operations, condition (financial or otherwise), assets, capitalization, equity
ownership, Properties or Liabilities of such Party; provided that, without
limiting the generality of, or implying a measure for, any of the foregoing,
losses to the Company in excess of $50,000 shall be deemed to be materially
adverse to its financial condition; and provided, further, that for purposes of
construing the terms "Material" and "Material Adverse Effect" as used in Article
VI (and only as used in Article VI), only Losses in excess of 10% of the
Shareholder Closing Consideration shall be deemed "materially adverse", as
reasonably calculated, in light of the probabilities and uncertainties of such
Losses in fact occurring and the magnitude thereof, by Parent (in the case of
Section 6.2) and the Company (in the case of Section 6.3) (it being agreed and
understood that, for purposes of this proviso, Losses related to customer
Contracts shall be calculated as any decrease in the margin between gross
revenues from such Contract less the costs and expenses, including properly
allocated general, overhead and administrative expenses, of performing under
such Contract and less the costs of goods sold under such Contract).
"MATERIAL COMPANY CONTRACT" means (i) any Contract which generated in FY
2005, or can reasonably be expected to generate in FY 2006, $200,000 or more of
revenues or expected revenues, as the case may be, for such fiscal year, and
(ii) any Company License licensing or governing Material Intellectual Property
Rights.
"MATERIAL EXCLUDED SOFTWARE" means Excluded Software which would constitute
Material Intellectual Property Rights but for the express exclusion from the
definition thereof.
"MATERIAL INTELLECTUAL PROPERTY RIGHTS" means all Intellectual Property
Rights, other than Excluded Software, which (a) are licensed to or sold,
licensed, owned, used or otherwise exploited by the Company or any of its
Subsidiaries, and (b) in the Company's reasonable determination, are necessary
for the conduct of the respective businesses of the Company or its Subsidiaries
as presently conducted or proposed to be conducted. For purposes of this
definition of "Material Intellectual Property Rights", Intellectual Property
Rights shall be deemed "necessary for the conduct of the business" of the
Company or any of its Subsidiaries if their inability to sell, license, use or
otherwise exploit such Intellectual Property Rights, individually or together
with other Intellectual Property Rights, would be reasonably likely to cause a
Material Adverse Effect on the Company and its Subsidiaries, taken as a whole.
"MATERIAL INTEREST" means direct or indirect beneficial ownership (as
defined in Rule 13d-3 under the Exchange Act) of voting securities or other
voting interests representing at least ten percent (10%) of the outstanding
voting power of an Entity or Equity Interests representing at least ten percent
(10%) of the outstanding Equity Interests in an Entity.
"MATERIALS OF ENVIRONMENTAL CONCERN" means chemicals, pollutants,
pollution, contaminants, wastes, Hazardous Materials and any other substance
that is now or hereafter regulated by any applicable Environmental Law or that
is otherwise a danger to health, reproduction or the Environment.
"MERGER CONSIDERATION" means, collectively, (i) the Closing Consideration,
and (ii) the Performance Consideration.
"MULTIEMPLOYER PLAN" is defined in ERISA Section 3(37).
PAGE A-70 Agreement and Plan of Merger
"OCCUPATIONAL SAFETY AND HEALTH LAW" means any Law designed to provide safe
and healthful working conditions and to reduce occupational safety and health
hazards, including the Occupational Safety and Health Act of 1970, as amended.
"ORDER" means any order, ruling, decision, verdict, decree, writ, subpoena,
award, judgment, injunction, assessment, or other similar determination or
finding by, before, or under the supervision of any Governmental Body,
arbitrator or mediator.
"ORDINARY COURSE OF BUSINESS" means, with respect to any action by any
Person, that such action (i) is consistent in nature, scope, quality, frequency
and magnitude with the past customs and practices of such Person, to the extent
practicable if such Person has a rapidly growing business, and is taken in the
ordinary course of the normal, day-to-day operations of such Person, and (ii)
does not require authorization by the board of directors (or any committee
thereof) or shareholders of such Person (or by any Person or group of Persons
exercising similar authority) or by the chief executive officer, chief operating
officer, president or any other officer performing substantially similar
functions of such Person.
"ORGANIZATIONAL DOCUMENTS" means, with respect to any Entity, (i) if a
corporation, the articles or certificate of incorporation and the bylaws, (ii)
if another type of Entity, any other charter, regulations or similar document,
including Contracts, adopted or filed in connection with the creation, formation
or organization of such Entity, in each case as Amended.
"OTHER IP" means moral rights, publicity rights and any other proprietary,
intellectual or industrial property or similar intangible rights of any kind or
nature, worldwide, that do not comprise or are not protected by Marks, Patents,
Copyrights, Trade Secrets or Mask Works, including, to the extent not so
covered, software and websites (including all related computer code and
content).
"OTCBB" means the OTC Bulletin Board.
"OWNED RIGHTS" means worldwide (i) Internet domain names; (ii) website
content; (iii) toll-free telephone numbers; and (iv) moral rights and publicity
rights; in each case (A) owned, purported to be owned, licensed exclusively to
or otherwise controlled by the Company or any of its Subsidiaries, and (B) to
the extent the same does not comprise or is not protected by Copyrights, Patents
or Trademarks.
"PARENT COMMON STOCK" means the common stock, par value $.0001, of Parent.
"PATENTS" means worldwide patents, patent applications, invention
disclosures and other rights of invention, filed with any Governmental Body, and
all reissues, divisions, renewals, extensions, provisional, continuations and
continuations-in-part thereof and all reexamined patents or other applications
or patents claiming the benefit of the filing date of any of the foregoing.
"PERSON" means any individual, Governmental Body or Entity.
"PRIVATE FINANCING" means a private financing of debt or equity securities
by Parent of at least $4.5 million in gross proceeds made on or before the
Closing Date.
"PROHIBITED TRANSACTIONS" is defined in ERISA Section 406 and Code Section
4975.
"PROPERTY" means any present or future, legal or equitable, vested or
contingent right to or interest in any fixture, real property, personal property
or any other property or asset, including goods, leases, securities (whether or
not certificated), commercial paper, financial assets, commodities, accounts,
equipment, chattel paper, derivatives, instruments, money, claims, licenses,
Contracts, Intellectual Property Rights, royalties and general intangibles, and
any proceeds of any of the foregoing.
"PROPRIETARY INFORMATION" means worldwide Confidential Information or Trade
Secrets, including technical information, inventions and discoveries (whether or
not patentable and whether or not reduced to practice) and
PAGE A-71 Agreement and Plan of Merger
improvements thereto, know-how, processes, discoveries, developments, designs,
techniques, marketing and purchasing strategies, plans, schematics, drawings,
blue prints, formulae, formulas, patterns, compilations, databases,
specifications, research and development information, data bases, computer
programs (including source code, scripts and interpreted instruction sets),
technical data, inventions, algorithms, concepts, ideas, devices, methods,
processes, technical data, data and other and other proprietary or confidential
information or intellectual property rights, whether business, technical or
otherwise, including emails and other electronic communications, such as instant
messenger logs and website submissions, website usage information, customer
complaints and feedback, customer and supplier lists and related information,
pricing and cost information, promotional ideas, advertising statistics, product
roadmaps and financial, business and marketing plans, data, specifications,
technical data, schematics, know-how and information.
"PROXY STATEMENT" means the proxy materials which shall constitute the
joint proxy statement and prospectus in connection with the Form S-4 and the
Merger.
"RECEIVING PARTY" has the meaning ascribed to such term in the definition
of the term "Confidential Information".
"REGISTERED INTELLECTUAL PROPERTY RIGHTS" means, with respect to any
Person, Intellectual Property Rights owned or purported to be owned by such
Person that have been issued, registered, filed, certified or otherwise
perfected by recordation, or are currently pending, by or with any Governmental
Body anywhere in the world.
"RELATED AGREEMENTS" means the Escrow Agreement, the Company Voting
Agreements, the Parent Voting Agreements, the Statement of Merger, the
Non-Competition Agreements, the Executive Employment Agreements, the Standstill
and Lock-Up Agreements and any other agreement delivered at the Closing.
"RELATED PARTY" means, (A) with respect to any individual, (i) each other
member of such individual's Family, (ii) any Entity that is directly or
indirectly controlled by any one or more members of such individual's Family,
and (iii) any Entity with respect to which one or more members of such
individual's Family has either a Material Interest or serves as a director,
officer, member, partner, executor or trustee (or in a similar capacity), and
(B) with respect to any Entity, (i) any Affiliate of specified Entity, and (ii)
each Person that either has a Material Interests, serves as a director, officer,
employee, partner, manager, member, executor or trustee (or in a similar
capacity) of such specified Entity.
"REMEDIAL ACTION" means all actions, including any capital expenditures,
required (i) to clean up, remove, treat or in any other way address any
Materials of Environmental Concern or other substance, (ii) to prevent the
Environmental Release or Threat of Release or to minimize the further
Environmental Release of any Materials of Environmental Concern or other
substance so it does not migrate or endanger or threaten to endanger public
health or welfare or the Environment, (iii) to perform pre-remedial studies and
investigations or post-remedial monitoring and care, or (iv) to bring all
Facilities and the operations conducted thereon into compliance with
Environmental Laws and environmental Governmental Permits.
"REPRESENTATIVES" means, with respect to any Person, such Person's
officers, directors, employees, managers, consultants, contractors, agents,
financial, banking and legal advisors or other representatives.
"RESTRICTED TERRITORY" means every state, territory, country or
jurisdiction in which the Company has carried on business prior to the Closing
Date.
"SEC" means the United States Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES" means any stock, capital stock or similar security, shares,
partnership (general or limited) interests, membership or limited liability
company interests or units, interests in a joint venture, voting trust
certificates, certificates of interest or participation in any profit sharing
agreement or arrangement or business trust, voting trust certificate, investment
contract, bonds, debentures, notes, or other evidences of indebtedness, secured
or unsecured, convertible, subordinated or otherwise, or in general any
instruments commonly known as "securities", or any
PAGE A-72 Agreement and Plan of Merger
certificates of interest or participations in, temporary or interim certificates
for, receipt for, guarantees of, warrants or rights to subscribe to, purchase or
otherwise acquire, or any other Commitments, puts or other options, futures, or
certificate of deposit for, any of the foregoing.
"SECURITY INTEREST" means any Lien, except for (i) liens for taxes,
assessments, governmental charges, or claims that are being contested in good
faith by appropriate Actions promptly instituted and diligently conducted and
only to the extent that a reserve or other appropriate provision, if any, has
been made on the face of the Company Financial Statements in an amount equal to
the Liability for which the lien is asserted, (ii) statutory liens of landlords
and warehousemen's, carriers', mechanics', suppliers', materialmen's,
repairmen's or other like liens (including Contractual landlords' liens) arising
in the Ordinary Course of Business and with respect to amounts not yet
delinquent, or with respect to amounts being contested in good faith by
appropriate proceedings, and (iii) liens incurred or deposits made in the
Ordinary Course of Business in connection with workers' compensation,
unemployment insurance and other similar types of social security.
"SHAREHOLDER CLOSING CONSIDERATION" means all of the consideration payable
by Parent at the Closing pursuant to Section 2.4(a) or Section 2.4(b) (for
avoidance of doubt, exclusive of any Company Expense Payments to be made at
Closing).
"SHAREHOLDER CONSIDERATION" means the Shareholder Closing Consideration and
Shareholder Performance Consideration (if any) for each Performance Period,
inclusive of portions thereof released from the Escrow Account from time to
time.
"SHAREHOLDER LOANS" means (i) the loan evidenced by that certain
Subordinated Promissory Note, dated July 22, 2005, from the Borrower to Ted
Tibbitts, in the principal amount of $100,000; (ii) the loan evidenced by that
certain Subordinated Promissory Note, dated July 22, 2005, from the Borrower to
Steve Tibbitts, in the principal amount of $100,000; (iii) the loan evidenced by
that certain Subordinated Promissory Note, dated July 22, 2005, from the
Borrower to Jack Tibbitts, in the principal amount of $100,000; and (iv) the
loan evidenced by that certain Subordinated Promissory Note, dated July 22,
2005, from the Borrower to Frank Tai, in the principal amount of $500,000.
"SHAREHOLDERS" means all of the shareholders of the Company from time to
time, other than Dissenting Shareholders who do not hold any shares of Company
Common Stock other than Dissenting Shares.
"SOFTWARE" means any software or computer program, including firmware and
other software embedded in hardware devices, whether in the form of source code,
assembly code, script, interpreted language, instruction sets or binary or
object code (including compiled and executable programs), including any library,
component or module of any of the foregoing, together with (i) any related
default configuration files, (ii) runtime data, files and objects, such as
icons, buttons, configuration files and the like, needed for the proper
operation of the Software, (iii) screens, user interfaces, report formats,
templates and menus, and (iv) user documentation and help files, including with
regard to any command-line options and switches. With respect to source code,
"Software" also includes (i) all code written in any programming language or
scripting language, (ii) developer comments, (iii) associated header or
interface definition files, (iv) IDE configuration or project files and the
like, (v) compilation or build files, scripts or tools, including makefiles,
(vi) API and class documentation, Gantt charts and other diagrams, materials or
other documentation explaining the structure, flow controls, class hierarchy,
algorithms, data structures, API or composition of such source code, (vii)
compilation or build instructions (whether meant for use by developers or
compilation or build programs, scripts or tools), (viii) interpreted data,
icons, buttons and other images, files, materials and data used in the
generation of the executable or needed for the proper execution or use of the
Software, and (ix) any design notes and material proprietary information or
algorithms contained in or relating to such source code.
"SPACEDEV LOAN" means (i) that certain Loan Agreement, dated September 8,
2005, by and between Parent and the Company, and (ii) that certain Secured
Promissory Note dated September 8, 2005 issued pursuant such Loan Agreement.
"STOCK BONUS PLAN" means the separate plan incorporating certain accounts,
attributable to investments of monies in the Company's 401(k) and Stock Bonus
Plan, dated August 4, 1997, as amended, which was spun-off therefrom by the
Board of Directors effective as of October 21, 2005.
PAGE A-73 Agreement and Plan of Merger
"SUBSIDIARY" means, with respect to any Person: (a) any corporation in
which a controlling interest in the total voting power of all classes of the
Equity Interests entitled (without regard to the occurrence of any contingency)
to vote in the election of directors is owned by such Person directly or through
one or more other Subsidiaries of such Person and (b) any Person other than a
corporation of which at least a controlling interest of the Equity Interests
(however designated) entitled (without regard to the occurrence of any
contingency) to vote in the election of the governing body, partners, managers,
or others that will control the management of such entity is owned by such
Person directly or through one or more other Subsidiaries of such Person.
"TANGIBLE PERSONAL PROPERTY" means all machinery, equipment, tools,
furniture, office equipment, computer hardware, supplies, materials, vehicles
and other items of tangible personal property (other than inventories) of every
kind owned or leased by the Company, wherever located and whether or not carried
on the Company's books.
"TAX" or, collectively, "TAXES," means (i) any and all taxes, including
federal, foreign, territorial, provincial, regional, state, city, municipal,
county, possession and local taxes, assessments and other governmental charges,
levies, fees, duties, impositions and liabilities, including taxes based upon or
measured by gross receipts, income, profits, sales, use, capital, occupation and
volume, quantity or weight of hazardous wastes generated or disposed of, and
value added, ad valorem, transfer, registration, stamp, estimated, franchise,
inventory, withholding, payroll, recapture, employment, windfall profits,
property, GST, capital, severance, premium, customs, duties and excise taxes,
retail sales, goods and services, commodity, harmonized, health, education,
social service, estate, succession, death, interest equalization, severance,
license, payroll, business, branch, premium, environmental, disability,
employee's income withholding, worker's compensation, employment insurance,
unemployment insurance, social insurance, health insurance and social security
taxes together with all interest, penalties and additions imposed with respect
to such amounts by any taxing authority (domestic or foreign) and any
obligations under any Contracts with any other Person with respect to such
amounts and including any liability for taxes of a predecessor entity, including
transferee liability, (ii) any liability for the payment of any amounts of the
type described in clause (i) next above as a result of being a member of an
affiliated, consolidated, combined or unitary group for any period; and (iii)
any liability for the payment of any amounts of the type described in clauses
(i) or (ii) next above as a result of any express or implied obligation to
indemnify any other Person or as a result of any obligations under any Contract
with any other Person with respect to such amounts.
"TAX RETURN" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes required to be filed with any
Governmental Body, including any schedule or attachment thereto, and including
any amendment thereof.
"TECHNOLOGY" means (A) the Company Products currently provided or proposed
to be provided (including those under development) by the Company in connection
with its business, and (B) the technology, tools, materials, products (other
than Excluded Software) and services used or proposed to be used in the
operation of the business of the Company.
"THIRD-PARTY LICENSES" means the Contracts or licenses governing or
relating to Intellectual Property Rights licensed by the Company or any of its
Subsidiaries in writing to third parties.
"THREAT OF RELEASE" means a reasonable likelihood of an Environmental
Release that may require action in order to prevent or mitigate damage to the
public health or welfare or the Environment that may result from such
Environmental Release.
"TRADE SECRETS" means all confidential or proprietary inventions and
discoveries (whether or not patentable or whether or not reduced to practice),
improvements thereto, trade secrets, know-how, concepts, ideas, devices,
methods, processes, designs, plans, schematics, drawings, blue prints, source
code, interpreted instruction sets, formulae, formulas, patterns, compilations,
databases, technical data, data, specifications, research and development
information, data bases and other proprietary or confidential information,
whether business, technical or otherwise, including emails and other electronic
communications, such as instant messenger logs and website submissions, customer
complaints and feedback, customer and supplier lists and related information,
pricing and cost information, advertising statistics, website user information,
technology, product roadmaps, and financial, sales, business and marketing
plans, data, specifications, technical data, schematics and information; which
in each case have some value and which a reasonably prudent Person would
maintain in confidence.
PAGE A-74 Agreement and Plan of Merger
"TRADEMARKS" means worldwide (i) registered trademarks and service marks
and registrations and applications for such registrations, (ii) unregistered
trademarks and service marks, trade names, fictitious business names, corporate
names, trade dress, logos, product names and slogans, including any common law
rights; in each case together with the goodwill associated therewith.
"TRANSFER" means, with respect to any Property, to sell, deed, dividend,
distribute (including upon liquidation or distribution), exchange, convey,
consign, negotiate, gift, devise, bequeath, pass by intestate succession,
assign, issue, or otherwise alienate, transfer or dispose of such Property or
any interest therein or right thereto, whether directly or indirectly (through
another Person or otherwise), whether voluntarily, involuntarily or by operation
of law, and whether with or without consideration. The terms "TRANSFERRED" and
"TRANSFERRING" shall have the correlative meanings
PAGE A-76 Agreement and Plan of Merger
"TRANSACTION DOCUMENTS" means this Agreement, the Related Agreements and
any certificates, instruments or documents delivered pursuant to or in
connection with this Agreement, any Related Agreement or any Transaction.
"TRANSACTIONS" means all of the transactions contemplated by this
Agreement, including the Merger.
"TREAS. REG." or "TREASURY REGULATIONS" means the temporary and final
regulations promulgated under the Code.
"UPDATED DISCLOSURE SCHEDULES" means any amendment or supplement to, or
update of, the original Disclosure Schedules (which were delivered to Parent on
or prior to the date hereof).
"UPDATED PARENT DISCLOSURE SCHEDULES" means any amendment or supplement to,
or update of, the original Parent Disclosure Schedules (which were delivered to
the Company on or prior to the date hereof).
"U.S. EXPORT AND IMPORT LAWS" means the Arms Export Control Act (22 U.S.C.
2778), the International Traffic in Arms Regulations (ITAR) (22 C.F.R. 120-130),
the Export Administration Act of 1979, as amended (50 U.S.C. 2401-2420), the
Export Administration Regulations (EAR) (15 C.F.R. 730-774), and all other laws
and regulations of the United States Government regulating the provision of
services to non-U.S. parties or the export and import of articles or information
from and to the United States of America and non-U.S. parties.
"VECTRA" means Vectra Bank Colorado, National Association, a national
banking association.
"VECTRA LOANS" means, collectively, (i) those certain loans made from time
to time under that certain Revolving Credit and Term Loan Agreement, dated as of
March 30, 2005, by and between Vectra and the Company, together with any
forbearance agreements related thereto, and (ii) that certain Revolving
Promissory Note, dated March 30, 2005, those certain Term Promissory Notes,
dated March 30, 2005, and any other promissory notes issued by the Company to
Vectra in connection with any Vectra Loan.
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PAGE A-75 Agreement and Plan of Merger
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
SPACEDEV, INC.
By: /s/ James W. Benson
-----------------------------------------
James W. Benson
Chairman and Chief Executive Officer
STARSYS RESEARCH CORPORATION
By: /s/ Scott Tibbitts
-----------------------------------------
Scott Tibbitts
Chief Executive Officer
KEY SHAREHOLDERS:
/s/ Scott Tibbitts
-----------------------------------------
Scott Tibbitts
Address for notices, etc.:
7237 Spring Creek Circle
Niwot, Colorado 80503
Facsimile: (303) 530-2401
SHAREHOLDER AGENT, as agent for all
Shareholders
By: /s/ Scott Tibbitts
----------------------------------------
Scott Tibbitts
Shareholder Agent
MONOCEROS ACQUISITION CORP.
By: /s/ Richard Slansky
----------------------------------------
Richard Slansky
President
A-76 Agreement and Plan of Merger
09EY-117690
SPACEDEV, INC.
RICHARD B. SLANSKY
President
13855 Stowe Drive Poway, CA 92064
(858) 375-2030 Fax: (858) 375-1000
e-mail: Richard.Slansky@SpaceDev.com
December 7, 2005
VIA E-MAIL
-----------
Starsys Research Corporation
Attention: Scott Tibbitts, Chairman and Chief Executive Officer
4909 Nautilus Court North
Boulder, Colorado 80301
Re: Amendment No. 1 to that certain Agreement and Plan of Merger and
------------------------------------------------------------------------
Reorganization
-------
Dear Mr. Tibbitts:
Reference is made to that certain Agreement and Plan of Merger and
Reorganization made and entered into as of October 24, 2005 (the "MERGER
AGREEMENT"), by and among SpaceDev, Inc. ("SPACEDEV"), Monoceros Acquisition
Corp., Starsys Research Corporation ("STARSYS"), Scott Tibbitts, as a key
shareholder, and Scott Tibbitts, as shareholder agent.
By executing a copy of this Amendment No. 1 to the Merger Agreement (this
"AMENDMENT") below, the parties to the Merger Agreement hereby agree to the
following amendments to the Merger Agreement:
(a) Section 6.1(e) of the Merger Agreement is hereby amended by
replacing the amount "$0.77" therein with the amount "$1.00".
(b) Section 6.2(n) of the Merger Agreement is hereby amended by adding the
following proviso immediately prior to the period at the end thereof:
"; provided, however, that the Company shall not solicit a Standstill and
-------- -------
Lock-Up Agreement, and shall not be obligated to deliver to Parent a Standstill
---
and Lock-Up Agreement, from any such Shareholder or other Person who is not a
director or executive officer of the Company and who does not own 5% of more of
the outstanding shares of Company Common Stock, until after the SEC has declared
effective the Form S-4 under the Securities Act".
(c) Section 7.5(b) of the Merger Agreement is hereby amended by
deleting in its entirety the following sentence therefrom: "The Key
Shareholders shall severally indemnify the Shareholder Agent and hold such agent
harmless against any loss, liability or expense incurred without bad faith on
the part of the Shareholder Agent and arising out of or in connection with the
acceptance or administration of the Shareholder Agent's duties hereunder."
(d) A new Section 7.5(c) is hereby added to the Merger Agreement, which
shall read in its entirety as follows:
" (c) The resignation, removal and succession of the Shareholder Agent
shall be governed by Section 4 of the Escrow Agreement, and any successor
shareholder agent under the Escrow Agreement shall automatically, without any
further act or notice, become the successor Shareholder Agent for all purposes
hereunder.".
(e) Section 10.1(d)(1) of the Merger Agreement is hereby amended by
replacing the words "December 31, 2005" therein with the words "January 31,
2006".
A-77 Amendment No. 1 to the Agreement
and Plan of Merger and Reorganization
(f) Section 10.1(d)(3) of the Merger Agreement is hereby amended by
replacing the characters "; or" at the end thereof with the character ".".
(g) Section 10.1(d)(4) of the Merger Agreement is hereby deleted in its
entirety.
Except as expressly amended by this Amendment, the Merger Agreement shall
remain in full force and effect in accordance with the terms and conditions
thereof, and this Amendment shall be incorporated into, and become a part of,
the Merger Agreement.
This Amendment may be executed in one or more counterparts, each of which shall
be deemed to constitute an original but all of which together shall constitute
but one and the same instrument.
This Amendment shall be governed by, and construed and interpreted in accordance
with, the laws of the State of Colorado applicable to contracts negotiated,
executed and to be performed entirely within the State of Colorado.
A facsimile, telecopy or other reproduction of this Amendment may be executed by
one or more parties hereto, and an executed copy of this Amendment may be
delivered by one or more parties hereto by facsimile or similar electronic
transmission device pursuant to which the signature of or on behalf of such
party can be seen, and such execution and delivery shall be considered valid,
binding and effective for all purposes. At the request of any party hereto, all
parties hereto agree to execute an original of this Amendment as well as any
facsimile, telecopy or other reproduction hereof.
The undersigned hereby also agree that the November 2005 adjustment by Starsys
of the accounting treatment for certain equipment having a value of $250,000
from capital equipment to equipment shall, for purposes of Section 2.6(e) of the
Merger Agreement, be deemed to be a change in accounting methods for Starsys
from those utilized as of the date of the Merger Agreement.
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A-78 Amendment No. 1 to the Agreement
and Plan of Merger and Reorganization
Please signify your agreement with the foregoing agreements by signing this
Amendment and returning one original to us by facsimile or electronic
transmission. If you have any questions, please call me. Thank you for your
prompt assistance with this matter.
Best regards,
SPACEDEV, INC.
MONOCEROS ACQUISITION CORP.
By: /s/ Richard B. Slansky
--------------------------
Richard B. Slansky
President
AGREED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN:
STARSYS RESEARCH CORPORATION
By: /s/ Scott Tibbitts
-----------------------
Scott Tibbitts
Chief Executive Officer
SCOTT TIBBITTS, as a key shareholder
SCOTT TIBBITTS, as shareholder agent
By: /s/ Scott Tibbitts
-----------------------
Scott Tibbitts
A-81 Amendment No. 1 to the Agreement
and Plan of Merger and Reorganization
ANNEX B
COLORADO BUSINESS CORPORATION ACT
ARTICLE 113-DISSENTERS' RIGHTS
PART 1. RIGHT OF DISSENT - PAYMENT FOR SHARES
SEC. 7-113-101. DEFINITIONS
For purposes of this article:
(1) "Beneficial shareholder" means the beneficial owner of shares held in a
voting trust or by a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring domestic or foreign
corporation, by merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from corporate
action under section 7-113-102 and who exercises that right at the time and in
the manner required by part 2 of this article.
(4) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action except to the extent that exclusion would
be inequitable.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at the legal rate as
specified in section 5-12-101, C.R.S.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares
that are registered in the name of a nominee to the extent such owner is
recognized by the corporation as the shareholder as provided in section
7-107-204.
(7) "Shareholder" means either a record shareholder or a beneficial
shareholder.
SEC. 7-113-102. RIGHT TO DISSENT
(1) A shareholder, whether or not entitled to vote, is entitled to dissent
and obtain payment of the fair value of the shareholder's shares in the event of
any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party
if:
(I) Approval by the shareholders of that corporation is required for
the merger by section 7-111-103 or 7-111-104 or by the articles of
incorporation; or
(II) The corporation is a subsidiary that is merged with its parent
corporation under section 7-111-104;
(b) Consummation of a plan of share exchange to which the corporation is a party
as the corporation whose shares will be acquired;
(c) Consummation of a sale, lease, exchange, or other disposition of all, or
substantially all, of the property of the corporation for which a shareholder
vote is required under section 7-112-102 (1); and
PAGE B-1 Article 113 of CBCA
(d) Consummation of a sale, lease, exchange, or other disposition of all, or
substantially all, of the property of an entity controlled by the corporation if
the shareholders of the corporation were entitled to vote upon the consent of
the corporation to the disposition pursuant to section 7-112-102 (2).
(1.3) A shareholder is not entitled to dissent and obtain payment, under
subsection (1) of this section, of the fair value of the shares of any class or
series of shares which either were listed on a national securities exchange
registered under the federal "Securities Exchange Act of 1934", as amended, or
on the national market system of the national association of securities dealers
automated quotation system, or were held of record by more than two thousand
shareholders, at the time of:
(a) The record date fixed under section 7-107-107 to determine the
shareholders entitled to receive notice of the shareholders' meeting at
which the corporate action is submitted to a vote;
(b) The record date fixed under section 7-107-104 to determine shareholders
entitled to sign writings consenting to the corporate action; or
(c) The effective date of the corporate action if the corporate action is
authorized other than by a vote of shareholders.
(1.8) The limitation set forth in subsection (1.3) of this section shall not
apply if the shareholder will receive for the shareholder's shares, pursuant to
the corporate action, anything except:
(a) Shares of the corporation surviving the consummation of the plan of
merger or share exchange;
(b) Shares of any other corporation which at the effective date of the plan
of merger or share exchange either will be listed on a national securities
exchange registered under the federal "Securities Exchange Act of 1934", as
amended, or on the national market system of the national association of
securities dealers automated quotation system, or will be held of record by
more than two thousand shareholders;
(c) Cash in lieu of fractional shares; or
(d) Any combination of the foregoing described shares or cash in lieu of
fractional shares.
(2) (Deleted by amendment, L. 96, p. 1321, Sec. 30, effective June 1, 1996.)
(2.5) A shareholder, whether or not entitled to vote, is entitled to dissent
and obtain payment of the fair value of the shareholder's shares in the event of
a reverse split that reduces the number of shares owned by the shareholder to a
fraction of a share or to scrip if the fractional share or scrip so created is
to be acquired for cash or the scrip is to be voided under section 7-106-104.
(3) A shareholder is entitled to dissent and obtain payment of the fair
value of the shareholder's shares in the event of any corporate action to the
extent provided by the bylaws or a resolution of the board of directors.
(4) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this article may not challenge the corporate action
creating such entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
SEC. 7-113-103. DISSENT BY NOMINEES AND BENEFICIAL OWNERS
(1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
person and causes the corporation to receive written notice which states such
dissent and the name, address, and federal taxpayer identification number, if
any, of each person on whose behalf the record shareholder asserts dissenters'
rights. The rights of a record shareholder under this subsection (1) are
determined as if the shares as to which the record shareholder dissents and the
other shares of the record shareholder were registered in the names of different
shareholders.
PAGE B-2 Article 113 of CBCA
(2) A beneficial shareholder may assert dissenters' rights as to the shares
held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder causes the corporation to receive the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder dissents with respect to all shares
beneficially owned by the beneficial shareholder.
(3) The corporation may require that, when a record shareholder dissents
with respect to the shares held by any one or more beneficial shareholders, each
such beneficial shareholder must certify to the corporation that the beneficial
shareholder and the record shareholder or record shareholders of all shares
owned beneficially by the beneficial shareholder have asserted, or will timely
assert, dissenters' rights as to all such shares as to which there is no
limitation on the ability to exercise dissenters' rights. Any such requirement
shall be stated in the dissenters' notice given pursuant to section 7-113-203.
PART 2. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
SEC. 7-113-201. NOTICE OF DISSENTERS' RIGHTS
(1) If a proposed corporate action creating dissenters' rights under section
7-113-102 is submitted to a vote at a shareholders' meeting, the notice of the
meeting shall be given to all shareholders, whether or not entitled to vote. The
notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this article and shall be accompanied by a copy of this
article and the materials, if any, that, under articles 101 to 117 of this
title, are required to be given to shareholders entitled to vote on the proposed
action at the meeting. Failure to give notice as provided by this subsection (1)
shall not affect any action taken at the shareholders' meeting for which the
notice was to have been given, but any shareholder who was entitled to dissent
but who was not given such notice shall not be precluded from demanding payment
for the shareholder's shares under this article by reason of the shareholder's
failure to comply with the provisions of section 7-113-202 (1).
(2) If a proposed corporate action creating dissenters' rights under section
7-113-102 is authorized without a meeting of shareholders pursuant to section
7-107-104, any written or oral solicitation of a shareholder to execute a
writing consenting to such action contemplated in section 7-107-104 shall be
accompanied or preceded by a written notice stating that shareholders are or may
be entitled to assert dissenters' rights under this article, by a copy of this
article, and by the materials, if any, that, under articles 101 to 117 of this
title, would have been required to be given to shareholders entitled to vote on
the proposed action if the proposed action were submitted to a vote at a
shareholders' meeting.Failure to give notice as provided by this subsection (2)
shall not affect any action taken pursuant to section 7-107-104 for which the
notice was to have been given, but any shareholder who was entitled to dissent
but who was not given such notice shall not be precluded from demanding payment
for the shareholder's shares under this article by reason of the shareholder's
failure to comply with the provisions of section 7-113-202 (2).
SEC. 7-113-202. NOTICE OF INTENT TO DEMAND PAYMENT
(1) If a proposed corporate action creating dissenters' rights under section
7-113-102 is submitted to a vote at a shareholders' meeting and if notice of
dissenters' rights has been given to such shareholder in connection with the
action pursuant to section 7-113-201 (1), a shareholder who wishes to assert
dissenters' rights shall:
(a) Cause the corporation to receive, before the vote is taken, written
notice of the shareholder's intention to demand payment for the
shareholder's shares if the proposed corporate action is effectuated; and
(b) Not vote the shares in favor of the proposed corporate action.
PAGE B-3 Article 113 of CBCA
(2) If a proposed corporate action creating dissenters' rights under section
7-113-102 is authorized without a meeting of shareholders pursuant to section
7-107-104 and if notice of dissenters' rights has been given to such shareholder
in connection with the action pursuant to section 7-113-201 (2), a shareholder
who wishes to assert dissenters' rights shall not execute a writing consenting
to the proposed corporate action.
(3) A shareholder who does not satisfy the requirements of subsection (1) or
(2) of this section is not entitled to demand payment for the shareholder's
shares under this article.
SEC. 7-113-203. DISSENTERS' NOTICE
(1) If a proposed corporate action creating dissenters' rights under section
7-113-102 is authorized, the corporation shall give a written dissenters' notice
to all shareholders who are entitled to demand payment for their shares under
this article.
(2) The dissenters' notice required by subsection (1) of this section shall
be given no later than ten days after the effective date of the corporate action
creating dissenters' rights under section 7-113-102 and shall:
(a) State that the corporate action was authorized and state the effective
date or proposed effective date of the corporate action;
(b) State an address at which the corporation will receive payment demands
and the address of a place where certificates for certificated shares must
be deposited;
(c) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(d) Supply a form for demanding payment, which form shall request a
dissenter to state an address to which payment is to be made;
(e) Set the date by which the corporation must receive the payment demand
and certificates for certificated shares, which date shall not be less than
thirty days after the date the notice required by subsection (1) of this
section is given;
(f) State the requirement contemplated in section 7-113-103 (3), if such
requirement is imposed; and
(g) Be accompanied by a copy of this article.
SEC. 7-113-204. PROCEDURE TO DEMAND PAYMENT
(1) A shareholder who is given a dissenters' notice pursuant to section
7-113-203 and who wishes to assert dissenters' rights shall, in accordance with
the terms of the dissenters' notice:
(a) Cause the corporation to receive a payment demand, which may be the
payment demand form contemplated in section 7-113-203 (2) (d), duly
completed, or may be stated in another writing; and
(b) Deposit the shareholder's certificates for certificated shares.
(2) A shareholder who demands payment in accordance with subsection (1) of
this section retains all rights of a shareholder, except the right to transfer
the shares, until the effective date of the proposed corporate action giving
rise to the shareholder's exercise of dissenters' rights and has only the right
to receive payment for the shares after the effective date of such corporate
action.
(3) Except as provided in section 7-113-207 or 7-113-209 (1) (b), the demand
for payment and deposit of certificates are irrevocable.
PAGE B-4 Article 113 of CBCA
(4) A shareholder who does not demand payment and deposit the shareholder's
share certificates as required by the date or dates set in the dissenters'
notice is not entitled to payment for the shares under this article.
SEC. 7-113-205. UNCERTIFICATED SHARES
(1) Upon receipt of a demand for payment under section 7-113-204 from a
shareholder holding uncertificated shares, and in lieu of the deposit of
certificates representing the shares, the corporation may restrict the transfer
thereof.
(2) In all other respects, the provisions of section 7-113-204 shall be
applicable to shareholders who own uncertificated shares.
SEC. 7-113-206. PAYMENT
(1) Except as provided in section 7-113-208, upon the effective date of the
corporate action creating dissenters' rights under section 7-113-102 or upon
receipt of a payment demand pursuant to section 7-113-204, whichever is later,
the corporation shall pay each dissenter who complied with section 7-113-204, at
the address stated in the payment demand, or if no such address is stated in the
payment demand, at the address shown on the corporation's current record of
shareholders for the record shareholder holding the dissenter's shares, the
amount the corporation estimates to be the fair value of the dissenter's shares,
plus accrued interest.
(2) The payment made pursuant to subsection (1) of this section shall be
accompanied by:
(a) The corporation's balance sheet as of the end of its most recent fiscal
year or, if that is not available, the corporation's balance sheet as of
the end of a fiscal year ending not more than sixteen months before the
date of payment, an income statement for that year, and, if the corporation
customarily provides such statements to shareholders, a statement of
changes in shareholders' equity for that year and a statement of cash flow
for that year, which balance sheet and statements shall have been audited
if the corporation customarily provides audited financial statements to
shareholders, as well as the latest available financial statements, if any,
for the interim or full-year period, which financial statements need not be
audited;
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under section
7-113-209; and
(e) A copy of this article.
SEC. 7-113-207. FAILURE TO TAKE ACTION
(1) If the effective date of the corporate action creating dissenters'
rights under section 7-113-102 does not occur within sixty days after the date
set by the corporation by which the corporation must receive the payment demand
as provided in section 7-113-203, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(2) If the effective date of the corporate action creating dissenters'
rights under section 7-113-102 occurs more than sixty days after the date set by
the corporation by which the corporation must receive the payment demand as
provided in section 7-113-203, then the corporation shall send a new dissenters'
notice, as provided in section 7-113-203, and the provisions of sections
7-113-204 to 7-113-209 shall again be applicable.
SEC. 7-113-208. SPECIAL PROVISIONS RELATING TO SHARES ACQUIRED AFTER
ANNOUNCEMENT OF PROPOSED CORPORATE ACTION
(1) The corporation may, in or with the dissenters' notice given pursuant to
section 7-113-203, state the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action creating dissenters'
rights under section 7-113-102 and state that the dissenter shall certify in
writing, in or with the dissenter's payment
PAGE B-5 Article 113 of CBCA
demand under section 7-113-204, whether or not the dissenter (or the person on
whose behalf dissenters' rights are asserted) acquired beneficial ownership of
the shares before that date. With respect to any dissenter who does not so
certify in writing, in or with the payment demand, that the dissenter or the
person on whose behalf the dissenter asserts dissenters' rights acquired
beneficial ownership of the shares before such date, the corporation may, in
lieu of making the payment provided in section 7-113-206, offer to make such
payment if the dissenter agrees to accept it in full satisfaction of the demand.
(2) An offer to make payment under subsection (1) of this section shall
include or be accompanied by the information required by section 7-113-206 (2).
SEC. 7-113-209. PROCEDURE IF DISSENTER IS DISSATISFIED WITH PAYMENT OR OFFER
(1) A dissenter may give notice to the corporation in writing of the
dissenter's estimate of the fair value of the dissenter's shares and of the
amount of interest due and may demand payment of such estimate, less any payment
made under section 7-113-206, or reject the corporation's offer under section
7-113-208 and demand payment of the fair value of the shares and interest due,
if:
(a) The dissenter believes that the amount paid under section 7-113-206 or
offered under section 7-113-208 is less than the fair value of the shares
or that the interest due was incorrectly calculated;
(b) The corporation fails to make payment under section 7-113-206 within
sixty days after the date set by the corporation by which the corporation
must receive the payment demand; or
(c) The corporation does not return the deposited certificates or release
the transfer restrictions imposed on uncertificated shares as required by
section 7-113-207 (1).
(2) A dissenter waives the right to demand payment under this section unless
the dissenter causes the corporation to receive the notice required by
subsection (1) of this section within thirty days after the corporation made or
offered payment for the dissenter's shares.
PART 3. JUDICIAL APPRAISAL OF SHARES
SEC. 7-113-301. COURT ACTION
(1) If a demand for payment under section 7-113-209 remains unresolved, the
corporation may, within sixty days after receiving the payment demand, commence
a proceeding and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the sixty-day period, it shall pay to each dissenter whose demand remains
unresolved the amount demanded.
(2) The corporation shall commence the proceeding described in subsection
(1) of this section in the district court for the county in this state in which
the street address of the corporation's principal office is located, or, if the
corporation has no principal office in this state, in the district court for the
county in which the street address of its registered agent is located, or, if
the corporation has no registered agent, in the district court for the city and
county of Denver. If the corporation is a foreign corporation without a
registered agent, it shall commence the proceeding in the county in which the
domestic corporation merged into, or whose shares were acquired by, the foreign
corporation would have commenced the action if that corporation were subject to
the first sentence of this subsection (2).
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unresolved parties to the proceeding commenced
under subsection (2) of this section as in an action against their shares, and
all parties shall be served with a copy of the petition. Service on each
dissenter shall be by registered or certified mail, to the address stated in
such dissenter's payment demand, or if no such address is stated in the payment
demand, at the address shown on the corporation's current record of shareholders
for the record shareholder holding the dissenter's shares, or as provided by
law.
PAGE B-6 Article 113 of CBCA
(4) The jurisdiction of the court in which the proceeding is commenced under
subsection (2) of this section is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend a decision
on the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to such order. The parties to the
proceeding are entitled to the same discovery rights as parties in other civil
proceedings.
(5) Each dissenter made a party to the proceeding commenced under subsection
(2) of this section is entitled to judgment for the amount, if any, by which the
court finds the fair value of the dissenter's shares, plus interest, exceeds the
amount paid by the corporation, or for the fair value, plus interest, of the
dissenter's shares for which the corporation elected to withhold payment under
section 7-113-208.
SEC. 7-113-302. COURT COSTS AND COUNSEL FEES
(1) The court in an appraisal proceeding commenced under section 7-113-301
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation; except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under section 7-113-209.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any dissenters if the court
finds the corporation did not substantially comply with part 2 of this
article; or
(b) Against either the corporation or one or more dissenters, in favor of
any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this article.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to said counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who were benefited.
PAGE B-7 Article 113 of CBCA
ANNEX C
ANNEX C
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
SEC. 1300. SHAREHOLDER IN SHORT-FORM MERGER; PURCHASE AT FAIR MARKET VALUE;
"DISSENTING SHARES"; "DISSENTING SHAREHOLDER"
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed reorganization or
short-form merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stock split, or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the National Market System of the NASDAQ Stock Market, and
the notice of meeting of shareholders to act upon the reorganization
summarizes this section and Sections 1301, 1302, 1303 and 1304; provided,
however, that this provision does not apply to any shares with respect to
which there exists any restriction on transfer imposed by the corporation
or by any law or regulation; and provided, further, that this provision
does not apply to any class of shares described in subparagraph (A) or (B)
if demands for payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
SEC. 1301. NOTICE TO HOLDER OF DISSENTING SHARES OF REORGANIZATION APPROVAL;
DEMAND FOR PURCHASE OF SHARES; CONTENTS OF DEMAND
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
PAGE C-1 Chapter 13 of CGCL
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SEC. 1302. STAMPING OR ENDORSING DISSENTING SHARES
Within 30 days after the date on which notice of the approval by the outstanding
shares or the notice pursuant to subdivision (i) of Section 1110 was mailed to
the shareholder, the shareholder shall submit to the corporation at its
principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SEC. 1303. DISSENTING SHAREHOLDER ENTITLED TO AGREED PRICE WITH INTEREST
THEREON; WHEN PRICE TO BE PAID
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
SEC. 1304. ACTION BY DISSENTERS TO DETERMINE WHETHER SHARES ARE DISSENTING
SHARES OR FAIR MARKET VALUE OF DISSENTING SHARES OR BOTH; JOINDER OF
SHAREHOLDERS; CONSOLIDATION OF ACTIONS; DETERMINATION OF ISSUES; APPOINTMENT OF
APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
PAGE C-2 Chapter 13 of CGCL
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SEC. 1305. DUTY AND REPORT OF APPRAISERS; COURT'S CONFIRMATION OF REPORT;
DETERMINATION OF FAIR MARKET VALUE BY COURT; JUDGMENT AND PAYMENT; APPEAL; COSTS
OF ACTION
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SEC. 1306. PREVENTION OF PAYMENT TO HOLDERS OF DISSENTING SHARES OF FAIR MARKET
VALUE; EFFECT
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SEC. 1307. DISPOSITION OF DIVIDENDS UPON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting shares
after the date of approval of the reorganization by the outstanding shares
(Section 152) and prior to payment for the shares by the corporation shall be
credited against the total amount to be paid by the corporation therefor.
SEC. 1308. RIGHTS AND PRIVILEGES OF DISSENTING SHARES; WITHDRAWAL OF DEMAND FOR
PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
PAGE C-3 Chapter 13 of CGCL
SEC. 1309. WHEN DISSENTING SHARES LOSE THEIR STATUS
Dissenting shares lose their status as dissenting shares and the holders thereof
cease to be dissenting shareholders and cease to be entitled to require the
corporation to purchase their shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SEC. 1310. SUSPENSION OF PROCEEDINGS FOR COMPENSATION OR VALUATION PENDING
LITIGATION
If litigation is instituted to test the sufficiency or regularity of the votes
of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SEC. 1311. SHARES TO WHICH CHAPTER INAPPLICABLE
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
SEC. 1312. ATTACK ON VALIDITY OF REORGANIZATION OR SHORT-FORM MERGER; RIGHTS OF
SHAREHOLDERS; BURDEN OF PROOF
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
PAGE C-4 Chapter 13 of CGCL
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
SEC. 1313. CONVERSION DEEMED TO CONSTITUTE REORGANIZATION FOR PURPOSES OF
CHAPTER
A conversion pursuant to Chapter 11.5 (commencing with Section 1150) shall be
deemed to constitute a reorganization for purposes of applying the provisions of
this chapter, in accordance with and to the extent provided in Section 1159.
PAGE C-5 Chapter 13 of CGCL
ANNEX D
SPACEDEV, INC.
AMENDMENT NO. 2 TO
SPACEDEV, INC. 2004 EQUITY INCENTIVE PLAN
THIS AMENDMENT NO. 2 TO THE SPACEDEV, INC. 2004 EQUITY INCENTIVE PLAN is
made and effective as of November 29, 2005 (this "Amendment").
R E C I T A L S
---------------
WHEREAS, the Board of Directors (the "Board") of SpaceDev, Inc., a Colorado
corporation (the "Company"), initially approved and adopted the SpaceDev, Inc.
2004 Equity Incentive Plan (as amended from time to time, the "Plan")
authorizing and reserving 2,000,000 shares of the Company's common stock, par
value $.0001 (the "Common Stock") for issuance under the Plan, subject to
approval by the shareholders of the Company (the "Shareholders"), and
recommended that the Shareholders approve and adopt the Plan at the next annual
meeting of the Shareholders;
WHEREAS, the Shareholders approved and adopted the Plan at the annual meeting of
the Shareholders held on August 5, 2004;
WHEREAS, on May 12, 2005, the Board approved and adopted Amendment No. 1 to
the Plan, authorizing and reserving an additional 2,000,000 shares of Common
Stock for issuance under the Plan, subject to approval by the Shareholders, and
recommended that the Shareholders approve and adopt said Amendment No. 1 at the
next annual meeting of the Shareholders;
WHEREAS, the Shareholders approved and adopted Amendment No. 1 to the Plan
at the annual meeting of the Shareholders held on August 12, 2005;
WHEREAS, the Company has entered into that certain Agreement and Plan of
Merger and Reorganization, made and entered into as of October 24, 2005 (the
"Merger Agreement"), by and among the Company, Monoceros Acquisition Corp., a
Colorado corporation and wholly-owned subsidiary of the Company, Starsys
Research Corporation, a Colorado corporation ("Starsys"), Scott Tibbitts, a key
shareholder, and Scott Tibbitts, as shareholder agent, and pursuant to the
Merger Agreement, subject to the terms and conditions thereof, the Company is
obligated to reserve shares under the Plan (or a successor stock option plan)
for officers and employees of Starsys; and
WHEREAS, on November 29, 2005, the Board approved and adopted the form of
this Amendment No. 2 to the Plan, authorizing and reserving an additional
3,000,000 shares of Common Stock for issuance under the Plan, subject to
approval by the Shareholders, and recommended that the Shareholders approve and
adopt said Amendment No. 2 at the next special meeting of the Shareholders.
A G R E E M E N T
-----------------
NOW, THEREFORE, the Plan is hereby amended as follows:
1. AMENDMENT AND RESTATEMENT.
1.1 Subject to the approval and adoption of Section 1.1 of this
Amendment by the Shareholders within twelve months after the date of
this Amendment, Section 5 of the Plan is hereby amended and restated
in its entirety to read as follows:
"5. STOCK SUBJECT TO THE PLAN.
PAGE D-1 Amendment to Equity Incentive Plan
"(a) Available Shares. Subject to adjustment as provided in Section 17
hereof, the maximum number of shares of Common Stock reserved for Awards under
the Plan is 7,000,000 shares. These shares of Common Stock may be either
authorized but unissued shares or authorized shares previously issued and
reacquired by the Company. To the extent that Options and Stock Awards are
granted under the Plan, the shares underlying such Awards will be unavailable
for any other use including future grants under the Plan except that, to the
extent that Options terminate, expire, or are forfeited without having been
exercised (or in cases where a Limited Right has been granted in connection with
an Option, the amount of such Limited Right received in lieu of the exercise of
such Option), new Awards may be made with respect to those shares underlying
such terminated, expired or forfeited Options. Notwithstanding the foregoing,
the maximum number of shares of Common Stock that may be issued under the Plan
through Incentive Stock Options is 7,000,000, and any shares of Common Stock
issued under the Plan that are reacquired by the Company shall not be available
for grants of Incentive Stock Options.
"(b) Code Section 162(m) Limit. Subject to adjustment as provided in
Section 17 hereof, the aggregate number of shares of Common Stock subject to
Awards granted under this Plan during any calendar year to any one Participant
shall not exceed 1,000,000, except that in connection with his or her initial
service, a Participant may be granted Awards covering up to an additional
1,000,000 shares of Common Stock. Notwithstanding anything to the contrary in
the Plan, the limitations set forth in this Section 5(b) shall be subject to
adjustment under Section 17 hereof only to the extent that such adjustment will
not affect the status of any Award intended to qualify as "performance based
compensation" under Section 162(m) of the Code."
1.2 Section 2(s) of the Plan is hereby amended and restated in
its entirety to read as follows as of the date of this Amendment:
"(s) "Fair Market Value" means, unless the Committee
determines otherwise, as of any date, the closing sales price for
the Common Stock on such date (or if no sale was reported on such
date, the closing price on the last preceding day on which a sale
was reported), as reported in such source as the Committee shall
determine."
2. LIMITED AMENDMENT.
Except as expressly amended by this Amendment, the Plan shall remain in
full force and effect in accordance with the terms and conditions thereof, and
this Amendment shall be incorporated into, and become a part of, the Plan.
3. GOVERNING LAW.
This Amendment shall be governed by, and construed and interpreted in
accordance with, the laws of the State of Colorado applicable to contracts
negotiated, executed and to be performed entirely within such State.
PAGE D-2 Amendment to Equity Incentive Plan
IN WITNESS WHEREOF, this Amendment was duly approved and adopted as of the date
first written above.
By: /s/ Richard B. Slansky
----------------------------
Richard B. Slansky
Secretary
PAGE D-3 Amendment to Equity Incentive Plan
ANNEX E
Document processing fee
If document is filed on paper $125.00
If document is filed electronically $ 50.00
Fees & forms/cover sheets
are subject to change
To file electronically, access instructions
For this form/cover sheet and other
information or print copies of filed
documents, visit www.sos.state.co.us
and select Business Center.
Paper documents must be typewritten or machine printed. ABOVE SPACE FOR
OFFICE USE ONLY
ARTICLES OF AMENDMENT
filed pursuant to Sec.7-90-301, et seq. and Sec.7-110-106 of the Colorado
Revised Statutes (C.R.S.)
ID number: 19961166285
1. Entity name: SpaceDev, Inc.
--------------------------
(If changing the name of the corporation, indicate name
BEFORE the name change)
2. New entity name:
(if applicable)
3. Use of Restricted Words (IF ANY OF THESE
TERMS ARE CONTAINED IN AN ENTITY NAME, TRUE NAME
OF AN ENTITY, TRADE NAME OR TRADEMARK STATED IN
THIS DOCUMENT, MARK THE APPLICABLEBOX):
[ ] "bank" or "trust" or any derivative thereof
[ ] "credit union" [ ] "savings and loan"
[ ] "insurance", "casualty", "mutual", or "surety"
4. Other amendments, if any, are attached. See attachment A.
5. If the amendment provides for an exchange, reclassification or cancellation
of issued shares, the attachment states the provisions for implementing the
amendment.
6. If the corporation's period of duration as amended is less than perpetual,
state the date on which the period of duration expires:
------------------
(mm/dd/yyyy)
OR
If the corporation's period of duration as amended is perpetual, mark this box:
7. (Optional) Delayed effective date:
------------------
(mm/dd/yyyy)
Notice:
Causing this document to be delivered to the secretary of state for filing shall
constitute the affirmation or acknowledgment of each individual causing such
delivery, under penalties of perjury, that the document is the individual's act
and deed, or that the individual in good faith believes the document is the act
and deed of the person on whose behalf the individual is causing the document to
be delivered for filing, taken in conformity
PAGE E-1 Articles of Amendment
with the requirements of part 3 of article 90 of title 7, C.R.S., the
constituent documents, and the organic statutes, and that the individual in good
faith believes the facts stated in the document are true and the document
complies with the requirements of that Part, the constituent documents, and the
organic statutes.
This perjury notice applies to each individual who causes this document to be
delivered to the secretary of state, whether or not such individual is named in
the document is one who has caused it to be delivered.
8. Name(s) and address(es) of the individual(s) causing the document to be
delivered for filing:
----------- --------------- ---------------- -------------
(Last) (First) (Middle) (Suffix)
----------------------------------------------------------
(Street name and number or Post Office information)
---------------------------------------------------
----------------- -------- ----------------------
(City) (State) (Postal/Zip Code)
----------------------------- -----------------------------
(Province - if applicable) (Country - if not US)
(The document need not state the true name and address of more than one
individual. However, if you wish to state the name and address
of any additional individuals causing the document to be delivered for filing,
mark this box and include an attachment stating the
name and address of such individuals.)
DISCLAIMER:
This form, and any related instructions, are not intended to provide legal,
business or tax advice, and are offered as a public service without
representation or warranty. While this form is believed to satisfy minimum legal
requirements as of its revision date, compliance with applicable law, as the
same may be amended from time to time, remains the responsibility of the user of
this form. Questions should be addressed to the user's attorney.
PAGE E-2 Articles of Amendment
ATTACHMENT A to
Articles of Amendment of Articles of Incorporation of
SpaceDev, Inc.
ARTICLE III
Article III of the Articles of Incorporation of the corporation is hereby
amended by deleting the opening paragraph thereof and replacing it with the
following paragraph:
"The aggregate number of shares which the corporation shall have authority
to issue is 110,000,000 of which 10,000,000 shall be shares of preferred stock,
$.001 par value per share, and 100,000,000 shall be shares of common stock,
$.0001 par value per share. The designations, voting powers, preferences,
limitations, restrictions and relative rights of the shares of each class shall
be set forth below in this Article III or in certificates of designation filed
by the Board of Directors of the corporation pursuant to authority conferred
upon the Board by this Article III."
SPACEDEV, INC.
Date: ----------------, 2006 By:
----------------------
Richard B. Slansky
President and Chief Financial Officer
PAGE E-3 Articles of Amendment
ANNEX F
TRANSMITTAL LETTER
SPACEDEV, INC.
Return this form with your original stock certificate(s) in Starsys Research
Corporation in the enclosed envelope to Continental Stock Transfer & Trust Co.,
Attn: Reorganization Department, to 17 Battery Place, New York, NY 10004.
DO NOT MAIL THIS ELECTION FORM TO
STARSYS RESEARCH CORPORATION OR SPACEDEV, INC.
DIRECT ANY QUESTIONS TO
CONTINENTAL STOCK TRANSFER & TRUST CO. AT (212) 509-4000.
TO: CONTINENTAL STOCK TRANSFER & TRUST CO., AS EXCHANGE AGENT
RE: MERGER OF STARSYS RESEARCH CORPORATION, A COLORADO CORPORATION ("STARSYS"),
WITH AND INTO MONOCEROS ACQUISITION CORP., A COLORADO CORPORATION
("MONOCEROS") AND WHOLLY-OWNED SUBSIDIARY OF SPACEDEV, INC., A COLORADO
CORPORATION ("SPACEDEV")
The undersigned is the holder of record of the number of shares of common stock,
par value $.001, of Starsys ("EXCHANGEABLE SHARES"), which shares are
represented by the certificate(s), described below:
CERTIFICATE NUMBER NUMBER OF SHARES REGISTERED IN THE NAME OF(1)
------------------- ------------------ Full name:
------------------- ------------------ Mailing Address:
------------------- ------------------ City, State, Zip:
------------------- ------------------ Email address:
-----------------------------------------------TOTAL NUMBER OF EXCHANGEABLE
SHARES ENCLOSED
(1) Indicate the full name as set forth on the stock certificates. Include
your mailing address, with city, state and zip code, and e-mail address.
SpaceDev, Monoceros, Starsys and certain other parties have as of October 24,
2005 made and entered into that certain Agreement and Plan of Merger and
Reorganization (as amended, modified or supplemented from time to time, the
"MERGER AGREEMENT"), and Starsys has provided to the undersigned a Prospectus
Dated December 29, 2005 , 2005 (the "Proxy Statement") relating to the Merger
Agreement and the merger contemplated thereby.
The undersigned is delivering this letter of transmittal (this "LETTER") to
Continental Stock Transfer & Trust Co., as exchange agent ("EXCHANGE AGENT"),
and encloses with this Letter (i) the above-described certificate(s), to the
extent the same is or are in the possession of the undersigned, or (ii) the
affidavit by the undersigned in paragraph 0 below certifying the fact that such
certificate(s) have been lost, stolen, or destroyed, and, upon request of
SpaceDev; in either case to be exchanged for the consideration described in the
Merger Agreement (the "DISTRIBUTED CONSIDERATION") upon the closing (the
"CLOSING") of the merger described in the Merger Agreement and the Proxy
Statement (the "MERGER"). The Distributed Consideration is described in detail
in the Proxy Statement. The date of the Closing is referred to in this Letter
as the Closing Date.
PAGE F-1 Letter of Transmittal
The undersigned understands that execution and delivery of this Letter is a
condition to the obligation of SpaceDev and Monoceros to close the Merger. The
undersigned also understands that SpaceDev and Monoceros will rely on this
Letter, including the provisions below regarding the release and affidavit of
lost stock certificates, in closing the Merger.
By executing this Letter, the undersigned represents that it (1) has read the
Proxy Statement and the Merger Agreement (which is included with the Proxy
Statement), including but not limited to the sections of the Proxy Statement
entitled "[The Merger Agreement - Merger Considerations]" and "[The Merger
Agreement - Indemnification]," and (2) has good title to the Exchangeable Shares
free and clear of all liens, charges and encumbrances, and has full power and
authority to surrender such shares upon the Closing.
The above-listed certificate(s), or appropriate affidavits and, upon request,
bonds in lieu thereof, will be surrendered to the Exchange Agent upon the
Closing, or if no Closing occurs, will be returned to the undersigned. All
Exchangeable Shares, whether or not represented by a certificate, will be
cancelled by operation of law upon the Closing.
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are
hereby expressly acknowledged, and intending to be legally bound, in order to
induce SpaceDev and Monoceros to consummate the Merger pursuant to the Merger
Agreement, the undersigned hereby agrees as follows:
1. RELEASE
a. Release. Upon the Closing, the undersigned, on behalf of myself and
each member of my Immediate Family (as defined below), and each of our
respective successors and assigns, hereby irrevocably and forever releases and
discharges (i) SpaceDev, (ii) Monoceros, and (iii) Starsys; and each of their
respective individual, joint or mutual, past, present and future shareholders,
affiliates, controlling persons, directors, officers, managers, employees,
consultants, contractors, agents, financial, banking and legal advisors and
other representatives, and each of their respective successors and assigns,
(individually, a "RELEASEE" and, collectively, the "RELEASEES") from any and all
claims, demands, actions, orders, obligations, contracts, debts and liabilities
whatsoever, whether absolute or contingent, matured or unmatured, disputed or
undisputed, secured or unsecured, conditional or unconditional, accrued or
unaccrued, liquidated or unliquidated, vested or unvested, joint or several, due
or to become due, executory, determined, determinable or otherwise, both at law
and in equity, (collectively, the "CLAIMS") which the undersigned and my
successors and assigns now has, has ever had or may hereafter have against the
respective Releasees arising contemporaneously with or prior to the Closing Date
or on account of or arising out of any matter, cause or event occurring, in my
capacity as a direct or indirect shareholder of Starsys or as a beneficial owner
or record holder of any shares of capital stock of Starsys, contemporaneously
with or prior to the Closing Date, including, without limitation, (a) any
dissenter's rights under applicable law, (b) any rights to bring any lawsuit
action against any person or entity in the name or on behalf of Starsys or
Monoceros, and (c) any rights to indemnification or reimbursement from Starsys
or Monoceros, whether pursuant to their respective organizational documents,
contracts, applicable law or otherwise and whether or not relating to claims
pending on, or asserted after, the Closing Date; provided, however, that nothing
contained herein shall operate to release any obligations of SpaceDev or
Monoceros arising under the Merger Agreement or any Related Agreements (as
defined in the Merger Agreement). "IMMEDIATE FAMILY" means my (i) children,
stepchildren, grandchildren, parents, stepparents, grandparents, spouse, former
spouses, siblings, nieces, nephews, or current or former mothers-in-law,
fathers-in-law, sons-in-law, daughters-in-law, brothers-in-law or
sisters-in-law, including in each case by adoption, and (ii) any individual
sharing my household (other than a tenant or employee).
b. No Actions. Upon the Closing, the undersigned irrevocably covenants
to refrain from, directly or indirectly, asserting any claim or demand, or
commencing, instituting or causing to be commenced, any action or other
proceeding of any kind against any Releasee, based upon any matter purported to
be released by paragraph 0 next above. Without limiting the generality of the
foregoing, the undersigned hereby agrees not to bring any action or make any
claim for indemnification against Starsys or Monoceros or any other Releasee by
reason of the fact that the undersigned was a director, officer, manager,
employee, consultant, agent or other representative of Starsys or Monoceros or
any of their subsidiaries or was serving at the request of Starsys or Monoceros
as a partner, member, manager, trustee, director, officer, manager, employee,
consultant, agent or other representative of another entity (whether such claim
or action is for judgments, damages, penalties, fines, costs, amounts paid in
settlement, losses, expenses or otherwise and whether such claim is pursuant to
any law, organizational document, contract or otherwise) with respect to any
action brought by SpaceDev or Monoceros against the undersigned or my successors
or assigns (whether such action is pursuant to the Merger Agreement, applicable
law or otherwise).
PAGE F-2 Letter of Transmittal
c. Indemnity. Without in any way limiting any of the rights and remedies
otherwise available to any Releasee, the undersigned shall indemnify and hold
harmless each Releasee from and against all losses, liabilities, Claims, damages
(including without limitation incidental and consequential damages) or expense
(including costs of investigation and defense and reasonable attorney fees),
whether or not involving third party claims, arising directly or indirectly from
or in connection with (i) the assertion by or on behalf of the undersigned or
any of my Immediate Family or our respective successors and assigns of any claim
or other matter sought to be released pursuant to paragraph 0 next above, and
(ii) the assertion by any third party of any claim or demand against any
Releasee which claim or demand arises directly or indirectly from, or in
connection with, any assertion by or on behalf of the undersigned or any of my
Immediate Family or our respective successors and assigns against such third
party of any claims or other matters sought to be released pursuant to paragraph
0 next above.
d. Unknown Claims. It is the intention of the parties hereto that the
release provisions in paragraph 0 next above shall be effective as a bar to each
and every claim, demand and action specified in paragraph 0 next above. In
furtherance of this intention, the undersigned waives and relinquishes all
rights and benefits under Section 1542 of the Civil Code of the State of
California, and any and all statutes of other jurisdictions to the same or
similar effect. Section 1542 of the Civil Code of the State of California
provides:
A general release does not extend to claims which the creditor does
not know or suspect to exist in his or her favor at the time of
executing the release, which if known by him or her might have
materially affected his or her settlement with the debtor.
The undersigned acknowledge that it may, after execution of this letter,
discover facts different from or in addition to those now known or believed to
be true with respect to such claims, demands or action, and agrees that the
release provisions in paragraph 0 next above shall be and remain in full force
and effective in all respects notwithstanding any such differences or additional
facts.
2. AFFIDAVIT OF LOST STOCK CERTIFICATE(S)
If the undersigned has not enclosed with this Letter one or more certificate(s)
for the Exchangeable Shares, the undersigned certifies, represents and warrants
that the following is true and correct with respect to any and all certificates
that may have been issued for Exchangeable Shares not represented by
certificates enclosed with this letter (collectively, the "LOST
CERTIFICATE(S)"), to the best of its knowledge:
a. The Lost Certificate(s) have been stolen or, despite a diligent
search that I have conducted to locate the Lost Certificate(s), it or they
remain lost or missing.
b. Neither the Exchangeable Shares evidenced by the Lost Certificate(s),
nor any interest therein, has been directly or indirectly sold, assigned,
devised, pledged or otherwise transferred, whether or not for consideration.
c. In the event that the Lost Certificate(s) are located by the
undersigned, the undersigned agrees to surrender them promptly to the Exchange
Agent.
3. DIRECTION TO EXCHANGE AGENT.
Please forward the Distributed Consideration to be issued in exchange for the
Exchangeable Shares, as the case may be, as follows:
Name:
-----------------------------------------
(please print)
PAGE F-3 Letter of Transmittal
Address:
-----------------------------------------
(address)
-----------------------------------------
(city, state, zip code)
4. REQUIRED SIGNATURES
All shareholders must sign below. The shareholder whose Social Security Number
or Employer Identification Number appears to the right (if any) must also sign
the W-9 Certification.
X
---------------------------------------
Signature of Shareholder Date
X
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Signature of Shareholder (if joint account) Date
( ) -
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Daytime telephone number, including area code
Social Security Number or Tax
Identification Number
---------------------
W-9 CERTIFICATION
I certify under penalties of perjury that the number shown above is my correct
Taxpayer Identification Number (TIN), that I have entered the correct TIN or
that I am waiting for a TIN to be issued to me and I am not subject to
withholding. If I fail to furnish my correct TIN, I may be subject to a penalty
by the IRS. Also, such a failure would result in backup withholding of 30% of
any payment made to me.
Dated:
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X
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SIGNATURE OF SHAREHOLDER WHOSE
SOCIAL SECURITY NUMBER OR TAX IDENTIFICATION NUMBER IS SHOWN ABOVE
PAGE F-4 Letter of Transmittal
INSTRUCTIONS FOR COMPLETING THE LETTER OF TRANSMITTAL
1. USE OF LETTER OF TRANSMITTAL
a. You are requested to send or deliver this Letter duly completed,
signed and dated together with the stock certificate(s) described
herein to the Exchange Agent at the office listed below. Please use
the enclosed, pre-paid courier envelope for this purpose.
b. Stock certificate(s) registered in the name of the person by whom (or
on whose behalf) this Letter is signed need not be endorsed or
accompanied by any share transfer power of attorney.
c. Stock certificate(s) not registered in the name of the person by whom
(or on whose behalf) the Letter signed must be endorsed by the
registered holder thereof or deposited together with a share transfer
power of attorney properly completed by the registered holder. Such
signature must be guaranteed by an Eligible Institution (as defined
below), or in some other manner satisfactory to the Exchange Agent.
"ELIGIBLE INSTITUTION" means a Securities Transfer Agent Medallion
Program (STAMP), a member of the Stock Exchanges Medallion Program
(SEMP) or a member of the New York Stock Exchange Inc. Medallion
Signature Program (MSP). Members of these programs are usually members
of a recognized stock exchange in the United States, members of the
National Association of Securities Dealers or banks and trust
companies in the United States.
PLEASE CONTACT THE EXCHANGE AGENT IF YOU HAVE QUESTIONS CONCERNING
THIS PROCEDURE.
d. Where this Letter is executed on behalf of a corporation, partnership
or association, or by an agent, executor, administrator, trustee,
guardian or any person acting in a representative capacity, this
Letter must be accompanied by satisfactory evidence of the
representative's authority to act.
e. SpaceDev and Monoceros reserve the right, if they so elect in their
absolute discretion, to instruct Exchange Agent to waive any defect or
irregularity contained in this Letter.
2. BACKUP WITHHOLDING
In order to avoid backup withholding of United States federal income tax on
payments of cash pursuant to the stockholder whose Exchangeable Shares are
accepted pursuant to the exchange must, unless an exemption applies, provide
Exchange Agent (as payer) with such U.S. Stockholder's correct Taxpayer
Identification Number ("TIN") on the enclosed Form W-9, which in the case of a
stockholder who is an individual, is his or her social security number. If the
Exchange Agent is not provided with the correct TIN or an adequate basis for an
exemption, the stockholder may be subject to a US $50 penalty imposed by the
Internal Revenue Service. In addition, delivery to such Exchangeable Shares may
result in backup withholding. Backup withholding is not an additional tax.
Rather, the amount of the backup withholding can be credited against the United
States federal income tax liability of the individual subject to the backup
withholding, provided that the required information is given to the Internal
Revenue Service. If withholding results in an overpayment of taxes, a refund
may be obtained.
Certain holders of Exchangeable Shares (including, among others, all
corporations and certain foreign individuals and entities) are not subject to
United States backup withholding. Non-corporate foreign holders of Exchangeable
Shares should complete and sign the main signature form and a Form W-8BEN,
Certificate of Foreign Status, a copy of which may be obtained from Exchange
Agent, in order to avoid backup withholding. See the enclosed Guidelines of
Certification of Taxpayer Identification Number on Form W-9 (the "GUIDELINES")
for additional instructions.
To prevent backup withholding, a stockholder must provide the correct TIN by
completing the Form W-9, certifying that the TIN provided is correct (or that
stockholder is awaiting a TIN); that (i) the stockholder is exempt from backup
withholding, or (ii) the stockholder has not been notified by the Internal
Revenue Service that such
PAGE F-5 Letter of Transmittal
stockholder is subject to backup withholding as a result of a failure to report
all interest or dividends, or (iii) the Internal Revenue Service has notified
the stockholder that said stockholder is no longer subject to backup withholding
and that the stockholder is a U.S. person. If the Exchangeable Shares are in
more than one name or are not in the name of the actual owner, the stockholder
should consult the Guidelines for information on which TIN to report. If the
stockholder does not have a TIN, the stockholder should consult the Guidelines
for instructions on applying for a TIN. Holders of Exchangeable Shares should
consult their tax advisors for guidance in completing the enclosed Form W-9.
3. MISCELLANEOUS
Additional copies of this Letter may be obtained from Exchange Agent at the
office listed below.
By Mail
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Continental Stock Transfer and Trust Company
17 Battery Place
New York, NY 10004
Attention: Reorganization Department
Telephone 212.509.4000
Any questions may also be directed to Investor Relations at SpaceDev, Inc. at
(858) 375-2026.
PAGE F-6 Letter of Transmittal
FORM W-9
(Attached)
PAGE F-7 Letter of Transmittal