FILED PURSUANT TO RULE 424(b)(3)
FILE NUMBER 333-131778
SPACEDEV, INC.
PROSPECTUS
12,140,280 shares of common stock
This prospectus relates to the sale of up to 12,140,280 shares of our common
stock by the selling shareholders identified in this prospectus. The prices at
which the selling shareholders may sell the shares will be determined by the
prevailing market price for the shares or in negotiated transactions. We are not
selling any shares of common stock in this offering and therefore will not
receive any proceeds from this offering.
Our common stock is traded on the OTC Bulletin Board under the trading symbol
"SPDV.OB," and the closing price of our common stock on February 6, 2006 was
$1.45.
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF THESE RISKS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this prospectus is February 15, 2006.
PAGE
TABLE OF CONTENTS
Page
----
Prospectus Summary 5
Risk Factors 7
Forward-Looking Statements 20
Use of Proceeds 20
Acquisition of Securities by Selling Shareholders 21
Selling Shareholders 23
Management's Discussion and Analysis of Financial Results of Operations 28
Information Regarding Business of SpaceDev. 45
Information Regarding Business of Starsys 55
Management 59
Principal Shareholders and Security Ownership of Management 70
Description of Securities 72
Legal Matters 77
Experts 77
Where You Can Find More Information 78
Unaudited Pro Forma Combined Consolidated Statements 79
Index to Consolidated Financial Statements F-1
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. The selling shareholders are offering to sell, and
are seeking offers to buy, common stock only in jurisdictions where offers and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or any sale of the common stock. In this prospectus, "SpaceDev,"
"we," "us" and "our" refer to SpaceDev, Inc., a Colorado corporation, unless the
context otherwise requires and references to the "combined company" refer to
SpaceDev and Starsys Research Corporation, following the merger of the two
companies which occurred on January 31, 2006.
PAGE
PROSPECTUS SUMMARY
------------------
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER BEFORE
BUYING SHARES IN THIS OFFERING. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS BEFORE MAKING
AN INVESTMENT DECISION ABOUT OUR COMPANY.
GENERAL
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.
On January 31, 2006, we acquired Starsys Research Corporation through a
reorganization merger, which we refer to as the Starsys merger. Starsys 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.
Our common stock trades on the OTC Bulletin Board under the trading symbol
"SPDV.OB."
PRINCIPAL EXECUTIVE OFFICES
SpaceDev's principal executive office is located at 13855 Stowe Drive,
Poway, California 92064. SpaceDev's website can be accessed at
http://www.spacedev.com. The information on SpaceDev's website is not a part of
this prospectus.
THE OFFERING
This prospectus relates to the following shares:
OCTOBER 2005 PRIVATE PLACEMENT
- 2,032,520 shares of common stock we sold to an investor at $1.23 per share
pursuant to a securities purchase agreement we entered into in October 2005,
which we refer to as the 2005 purchase agreement;
- 450,000 shares of common stock issued or issuable to this investor and its
assigns upon the exercise of warrants at an exercise price of $1.93 per share
granted pursuant to the 2005 purchase agreement;
JANUARY 2006 PRIVATE PLACEMENT
- 4,523,652 shares of common stock issued or issuable to investors or their
assigns upon the conversion or redemption of shares of our Series D Preferred
Stock that we sold to the investors pursuant to a securities purchase agreement
we entered into in January 2006, which we refer to as the 2006 purchase
agreement;
- 1,475,678 shares of common stock issued or issuable to the investors and
their assigns upon the exercise of warrants at an exercise price of $1.51 per
share granted pursuant to the 2006 purchase agreement;
- 1,756,757 shares of common stock issued or issuable to the investors and
their assigns upon conversion or redemption of shares of Series D Preferred
Stock which may be issued upon the exercise of preferred stock warrants issued
to the investors and their assigns that were granted pursuant to the 2006
purchase agreement. Alternatively, such shares of common stock may be issued
pursuant to our exercise of an additional investment option set forth in the
2006 purchase agreement;
PAGE 5
- 573,078 shares of common stock issuable to the investors and their assigns
upon exercise of warrants which may be issued upon exercise of preferred stock
warrants issued to the investors and their assigns that were granted pursuant to
the 2006 purchase agreement;
- 1,192,886 shares of common stock that may be issued as dividends to the
holders of the Series D Preferred Stock for a period of three years from January
2006; and,
- 135,709 shares of common stock that may be issued by us upon conversion
or redemption of shares of Series D Preferred Stock that may be issued as
liquidated damages for specified breaches of the registration rights agreement
entered into among us and the investors, which we refer to as the registration
rights agreement.
Each of the January 2006 private placement share amounts listed above have been
increased by 30%, as required by the registration rights agreement.
PAGE 6
RISK FACTORS
You should consider the following factors and other information in this
prospectus relating to our business and prospects before deciding to invest in
the securities. This investment involves a high degree of risk, and you should
purchase the securities only if you can afford to lose the entire sum invested
in these securities. If any of the following risks actually occurs, our
business, financial condition or operating results could be materially adversely
affected. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment. Additional risks and uncertainties,
including those that are not yet identified or that we currently believe are
immaterial, may also adversely affect our business, financial condition or
operating results. You should also refer to the other information in this
prospectus, including our consolidated financial statements and the related
notes.
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
prospectus and presented elsewhere by management from time to time.
RISKS RELATED TO OUR COMPANY
EACH OF SPACEDEV AND STARSYS HAS EXPERIENCED LOSSES FROM OPERATIONS IN
PRIOR PERIODS AND HAS 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 79. 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 may need additional financing to fund its projected operations for
the next twelve months. Additional financing may not be available to us on
acceptable terms, or at all. 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.
PAGE 7
WE RELY 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.
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.
OUR LIMITED OPERATING HISTORY AND LACK OF EXPERIENCE IN OUR NEW OR PROPOSED
LINES OF BUSINESS MAKES IT DIFFICULT TO PREDICT OUR FUTURE PROSPECTS.
We have a limited operating history and, as a result, our historical
financial information is of limited value in projecting our future success in
these markets. We launched our first microsatellite, CHIPSat, in January 2003
and, in June, September and October, 2004, our hybrid rocket technology was
first utilized in connection with SpaceShipOne. We plan to sell an increasing
percentage of our products and services in commercial markets, but virtually all
of our historical work has been from government contracts and government-related
work. We recently announced our intention to enter the launch services market
by providing a microsat bus, integration services, and a launch vehicle as a
package. We 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 our first launch vehicle. Our 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
PAGE 8
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 exceed the payments from the customers under the
contracts, our results of operations will be harmed.
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;
PAGE 9
- 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;
- 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;
PAGE 10
- delays related to the launch vehicle;
- weather; and
- other events beyond our control.
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 chairman and chief technology
officer, James W. Benson, our chief executive officer and vice-chairman, 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.
PAGE 11
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 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
PAGE 12
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.
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.
PAGE 13
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
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 with 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 February 6, 2006, the
high and low closing price of a share of SpaceDev common stock was $1.97 and
$1.35, 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;
PAGE 14
- changes in technology;
- potential loss of key personnel;
- changes in market valuations of similar companies and stock market price;
- the merger; and
- 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 February 6, 2006, our executive officers and directors together
beneficially owned approximately 50.5% of the issued and outstanding shares of
our common stock. As a result, 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 February 6, 2006, SpaceDev is obligated to issue 9,776,177 shares of
SpaceDev common stock if all of SpaceDev's outstanding warrants are exercised
and shares of preferred stock converted. In addition, as of February 6, 2006,
SpaceDev has outstanding stock options to purchase an aggregate of 10,452,266
PAGE 15
shares of SpaceDev common stock. The total number of shares, issuable upon the
exercise of currently vested warrants, options and preferred stock (20,228,443
shares) represents approximately 71% of SpaceDev's issued and outstanding shares
of common stock as of February 6, 2006.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS THE PRICE OF THE COMMON STOCK.
Sales by SpaceDev's current and future shareholders 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 248,460 shares of its
Series C Convertible Preferred Stock and 5,150 shares of its Series D 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
PAGE 16
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 and Series D Preferred Stock
rank 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
February 6, 2006, there was no balance outstanding under the revolving credit
facility, however, subject to the amount of our eligible accounts receivable and
certain conditions under our Series D Preferred Stock, 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.
RISKS RELATED TO THE MERGER WITH STARSYS RESEARCH CORPORATION
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 is ongoing and 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
PAGE 17
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 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. This could occur if, among other reasons:
- the integration of the two companies is unsuccessful;
- 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.
A SUBSTANTIAL NUMBER OF SPACEDEV SHAREHOLDERS MAY EXERCISE THEIR APPRAISAL
RIGHTS UNDER CALIFORNIA LAW.
The shares of SpaceDev common stock were not listed on a national
securities exchange or the NASDAQ National Market System at or prior to the
merger. SpaceDev shareholders therefore have dissenters' rights with regard to
shares of common stock not voted in favor of the merger and merger agreement
under the California General Corporation Law. Approximately 8,690,000 shares of
common stock were not voted in favor of the merger. Under the General
Corporation Law, a shareholder who does not vote shares in favor of the merger
and complies with the requirements of Chapter 13 of the General Corporation Law
may require SpaceDev to purchase those dissenting shares at their fair market
value as of the day before the first announcement of the terms of the merger,
which SpaceDev has determined to be $1.49 per share. Chapter 13 requires a
PAGE 18
shareholder to make a demand for payment within 30 days of the mailing by
SpaceDev of notice of the approval of the merger to the shareholder, and
requires SpaceDev to mail this notice within 10 days of the approval. SpaceDev
mailed this notice on February 6, 2006.
Under Chapter 5 of the California Corporations Code, however, SpaceDev may
pay for dissenting shares only to the extent its assets (excluding goodwill,
capitalized R&D expenses and deferred charges) exceed the sum of its liabilities
(excluding deferred taxes and other deferred credits) plus the aggregate
liquidation preferences of its outstanding shares of preferred stock. To the
extent funds are not lawfully available to pay dissenting shares, the right to
payment will be treated as a subordinated claim against SpaceDev earning
interest at the legal rate on judgments, or 10% per annum. SpaceDev would not
be able to pay this claim until funds become lawfully available therefor, as
determined under Chapter 5 of the General Corporation Law.
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.
We estimate that the combined company incurred aggregate direct transaction
costs of approximately $2,650,000 associated with the merger, and additional
costs associated with consolidation and integration of operations maybe
incurred, 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.
OUR BUSINESS COULD SUFFER AS A RESULT OF THE MERGER.
The merger may have a negative impact on our 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, we may experience deferrals,
cancellations or declines in the size or rate of orders for our products or
services or a deterioration in our customer or business partner relationships.
Any such events could harm our operating results and financial condition.
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 was 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. Under the purchase method
of accounting, the total estimated purchase price was 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 was 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.
PAGE 19
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. We have attempted to identify forward-looking statements by
terminology including "anticipates," "believes," "can," "continue," "could,"
"estimates," "expects," "intends," "may," "plans," "potential," "predicts," or
"should" or the negative of these terms or other comparable terminology. These
statements are only predictions and involve known and unknown risks,
uncertainties and other factors, including the risks outlined under "Risk
Factors" and other sections of this prospectus, that may cause our or our
industry's actual results, levels of activity, performance or achievements to be
materially different from any future results, levels or activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are not under any duty to update any
of the forward-looking statements after the date of this prospectus to conform
these statements to actual results, unless required by law.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by selling shareholders. We will pay the costs of
registering those shares. We will receive no proceeds from the sale of shares of
common stock in this offering, although we may receive up to an additional $4.45
million in gross cash proceeds upon the exercise of the warrants, the preferred
stock warrants, and the warrants included as part of the units to be issued upon
the exercise of the preferred stock warrants or the additional investment
option, as described in this prospectus. Any such proceeds we may receive are
not allocated for a specific purpose, and will be used for general corporate and
working capital purposes.
PAGE 20
ACQUISITION OF SECURITIES BY SELLING SHAREHOLDERS
OCTOBER 2005 PRIVATE PLACEMENT
On October 31, 2005, we entered into a Securities Purchase Agreement, which
we refer to as the 2005 purchase agreement, with Laurus Master Fund, Ltd.
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. The
price per share represented 80% of the 20-day volume weighted average price of
our common stock through October 28, 2005. We also issued to Laurus a warrant to
purchase up to 450,000 shares at $1.93 per share. The warrant is exercisable
from October 31, 2005 until October 31, 2010.
JANUARY 2006 PRIVATE PLACEMENT
On January 11, 2006, we entered into a Securities Purchase Agreement, which
we refer to as the 2006 purchase agreement, with a limited number of
institutional accredited investors. On January 13, 2006, we issued and sold to
these investors 5,150 shares of our Series D-1 Amortizing Convertible Perpetual
Preferred Stock, par value $0.0001 per share, which we refer to as Series D-1
Preferred Stock, under the 2006 purchase agreement for an aggregate purchase
price of $5,150,000, or $1,000 per share. We also issued various warrants to
these investors under the 2006 purchase agreement, as described below.
Series D Preferred Stock. The 2006 purchase agreement contemplates the
authorization and issuance by SpaceDev of numerous series of preferred stock,
all of which are substantially similar to the Series D-1 Preferred Stock. We
refer to each series individually as Series D-X Preferred Stock, where X
represents a sequential number, and generically as Series D Preferred Stock. The
relative rights, preferences, limitations and other terms of the series of
Series D Preferred Stock are described below under the caption "Description of
Capital Stock - Series D Preferred Stock" below.
Additional Investment Option. Under the purchase agreement, from the date
of the effectiveness of the registration statement on Form SB-2 of which this
prospectus is a part, which we refer to as the effective date, until the
one-year anniversary of that date, if (1) on any trading day during such period
the volume weighted average price of our common stock for each of the 20 trading
days immediately prior to such date exceeds $1.63 and (2) the average daily
trading volume of our common stock exceeds $100,000 on each of those days, then
we have the option, subject to a number of additional conditions, to sell to the
investors up to 2,000 "units" for an aggregate purchase price of up to
$2,000,000 (or a lesser amount to the extent the preferred stock warrants issued
at the initial closing of the financing, which are described below, have been
exercised to purchase these units). Each "unit" consists of one share of Series
D Preferred Stock and a common stock warrant, which common stock warrants
entitle the holders to purchase up to an aggregate of 440,829 shares of our
common stock at an exercise price of $1.51 and otherwise have the same terms as
the warrants described in the following paragraph. We refer to this option as
the additional investment option.
Common Stock Warrants. Certain warrants that we issued to the investors at
the closing entitle the investors to purchase up to an aggregate of 1,135,138
shares of our common stock at an exercise price of $1.51 per share. The warrants
are exercisable for five years following the date of grant. The warrants feature
a net exercise provision, which enables the holder to choose to exercise the
warrant without paying cash by surrendering shares subject to the warrant with a
market value equal to the exercise price. However, this right is available only
if a registration statement or prospectus covering the shares subject to the
warrant is not available at any time after one year from the date of grant. The
warrants also have anti-dilution provisions reducing the warrant exercise price
if we issue equity securities (other than in specified exempt transactions) at
an effective price below the warrant exercise price to such lower exercise
price. We refer to these warrants as the common stock warrants.
Preferred Stock Warrants. We also issued certain other warrants to the
investors at the closing, which we refer to as the preferred stock warrants.
These warrants entitle the holder to purchase an aggregate number of 2,000
"units," which are identical to the "units" described above, at an exercise
price of $1,000 per unit. The preferred stock warrants are exercisable from the
effective date until the one-year anniversary of that date. If any units subject
to the preferred stock warrants remain unsold after (1) their expiration date
and (2) the exercise of the additional investment option described in the
preceding paragraph, if applicable, and any holder of a preferred stock warrant
PAGE 21
issued in the financing has exercised the warrant in full, then the preferred
stock warrant grants that holder the right to purchase a proportionate share of
the unsold units.
Prior Relationships with Investors. Laurus Master Fund, Ltd. is one of the
investors participating in the January 2006 private placement. We issued and
sold to Laurus 2,032,520 shares of its common stock and a warrant to purchase an
additional 450,000 shares of its common stock on October 31, 2005, as described
above under the caption "October 2005 Private Placement." In addition, we have
also entered into the following transactions with Laurus:
- On August 25, 2004, we issued and sold to Laurus 250,000 shares of our
Series C Cumulative Convertible Preferred Stock, par value $0.001, which we
refer to as the Series C Preferred Stock, and a warrant to purchase up to
487,000 shares of common stock, as described in the Form 8-K filed with the SEC
on August 30, 2004.
- On June 3, 2003, we entered into a secured revolving credit facility with
Laurus and issued warrants to Laurus to purchase up to an aggregate of 200,000
shares of our common stock, as described in the Form 8-K filed with the SEC on
July 18, 2003.
- In June 2004, we issued warrants to acquire 50,000 shares of our common
stock to Laurus in connection with the revolving credit facility. These
warrants were exercised in April 2005 at an exercise price of approximately
$1.06 per share.
- In August 2004, we issued warrants to acquire an additional 50,000 shares
of common stock to Laurus at an exercise price per share equal to $1.93 per
share in connection with the revolving credit facility. There is currently no
debt outstanding under this credit facility, and the purchase agreement
prohibits SpaceDev from drawing down on the facility without a specific consent
or waiver. The revolving credit facility with Laurus expires on June 3, 2006.
In connection with the January 2006 private placement, Laurus consented to and
waived certain preemptive and other rights under the SpaceDev Series C Preferred
Stock, the aforementioned agreements and certain related agreements in respect
of the authorization and issuance of one or more series of Series D Preferred
Stock and the other transactions described in this supplement, and certain other
transactions. SpaceDev paid Laurus Capital Management, L.L.C., the manager of
Laurus, $87,000 in connection with Laurus' delivery of the consent and $1,000 to
Laurus' counsel for their related fees.
PAGE 22
SELLING SHAREHOLDERS
The term "selling shareholder" includes the shareholders listed below and
their transferees, pledges, donees or other successors.
We are registering for resale certain shares of our common stock. The
following table presents information regarding the selling shareholders as of
February 6, 2006, on which date 28,414,531 shares of common stock were
outstanding. This information is based upon information provided by the selling
shareholders. The selling shareholders identified below may have sold,
transferred or otherwise disposed of all or a portion of their shares of common
stock in transactions exempt from the registration requirements of the
Securities Act since the date as of which they provided the information. Except
as described above under "Acquisition of Shares by Selling Shareholders" or as
provided below, none of the selling shareholders nor any of its affiliates, if
any, has held a position or office or had any other material relationship with
us or any of our predecessors or affiliates within the past three years other
than as a result of the ownership of our securities. None of the selling
shareholders is, or is affiliated with, a registered broker-dealer.
Maximum Shares Offered Hereby
Number
12,140,280
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
Total Shares of Common
Name Of Maximum Shares Stock Beneficially Owned Total Shares of Common Stock
Selling Offered Hereby Before Offering (1) Beneficially Owned After Offering
Shareholder Number Number Percentage Number Percentage
------------------------ --- -------------- ------------------------- ---------------------------------
Laurus Master Fund, Ltd. (2) 7,920,868 3,152,749 (3) 9.99% (3) 1,813,136 4.99% (3)
Omicron Master Trust (4) 1,875,293 1,244,087 4.19% - *
The Tail Wind Fund, Ltd. (5) 1,125,177 746,453 2.56% - *
Bristol Investment Fund Ltd. (6) 750,119 497,636 1.72% - *
Nite Capital, LP (7) 468,823 311,022 1.08% - *
------------------------ --- -------------- ------------------------- ---------------------------------
Total 12,140,280 5,951,947 1,813,136
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
(1) Beneficial ownership calculations exclude an amount equal to 30% of each
of the shares numbers set forth in the column entitled "Maximum Shares Offered
Hereby" that are underlying the Series D Preferred Stock and warrants issued in
the January 2006 private placement or may otherwise be issued pursuant to the
agreements and instruments executed in connection with the January 2006 private
placement. As discussed in the following footnotes, the number of shares set
forth in the column "Maximum Shares Offered Hereby" that are underlying shares
of Series D Preferred Stock and warrants issued in the January 2006 private
placement have been increased by 30% as required under the 2006 registration
rights agreement.
(2) Laurus Master Fund, Ltd. is managed by Laurus Capital Management, LLC.
Eugene Grin and David Grin, through other entities, are the controlling
principals of Laurus Capital Management, LLC and share sole voting and
investment power over the securities owned by Laurus Master Fund, Ltd. The
shares set forth in the first column include (A) 2,032,520 shares of common
stock issued in the October 2005 private placement, (B) 450,000 shares of common
stock underlying warrants issued in the October 2005 private placement, (C)
1,959,460 shares of common stock issued or issuable upon conversion or
redemption of shares of Series D Preferred Stock, assuming in the case of
redemption, that the ten-day volume weighted average price of the common stock
remains constant at $1.48 per share; (D) 639,203 shares of common stock issued
or issuable upon exercise of warrants; (E) 760,955 shares of common stock issued
or issuable upon conversion or redemption of shares of Series D Preferred Stock
that may be issued upon exercise of preferred stock warrants, assuming, in the
case of redemption, that the ten-day volume weighted average price of the common
stock remains constant at $1.48; (F) 248,234 shares of common stock issued or
issuable upon exercise of warrants that may be issued upon exercise of preferred
stock warrants; (G) 516,709 shares of common stock issued or issuable as
dividends on shares of our outstanding Series D Preferred Stock for a period of
three years from January 13, 2006, in the case of shares of Series D Preferred
Stock outstanding as of such date, and from February 10, 2006, in the case of
shares of Series D Preferred Stock that may be issued pursuant to the exercise
of preferred stock warrants (or upon the exercise by us of the additional
investment option), assuming in each case, that the ten-day volume weighted
average price of the common stock remains constant at $1.48 per share; (H)
58,784 shares of common stock issued or issuable upon conversion of shares of
Series D Preferred Stock that may be issued as liquidated damages upon the
occurrence or failure to occur of specified events in the 2006 registration
PAGE 23
rights agreement (representing 56.3% of the aggregate liquidated damages payable
to all investors assuming the liquidated damages were payable for a total of two
months). As required by the 2006 registration rights agreement, the aggregate
number of shares of common stock described in (C) through (G) above has been
increased by 30%.
(3) Under the terms of the certificate of designations for the Series D
Preferred Stock and the warrants issued in the January 2006 private placement,
holders of such Series D Preferred Stock and warrants may not convert their
Series D Preferred Stock into common stock, or exercise such warrants, to the
extent that, after giving effect to any such conversion or exercise, the holder
would beneficially own more than 4.99% (or for holders of greater than 4.99%,
the limitation is set at 9.99%) of our outstanding common stock. In addition,
the terms of the certificate of designations for the Series C Preferred Stock
and other warrants held by Laurus similarly limit conversions and exercises to
the extent that, after giving effect to any such conversion or exercise, Laurus
would beneficially own more than 4.99% of our outstanding common stock.
(4) Omicron Capital, L.P., a Delaware limited partnership ("Omicron
Capital"), serves as investment manager to Omicron Master Trust, a trust formed
under the laws of Bermuda ("Omicron"), Omicron Capital, Inc., a Delaware
corporation ("OCI"), serves as general partner of Omicron Capital, and
Winchester Global Trust Company Limited ("Winchester") serves as the trustee of
Omicron. By reason of such relationships, Omicron Capital and OCI may be
deemed to share dispositive power over the shares of our common stock owned by
Omicron, and Winchester may be deemed to share voting and dispositive power over
the shares of our common stock owned by Omicron. Omicron Capital, OCI and
Winchester disclaim beneficial ownership of such shares of our common stock.
Omicron Capital has delegated authority from the board of directors of
Winchester regarding the portfolio management decisions with respect to the
shares of common stock owned by Omicron and, as of February 9th, 2006, Mr.
Olivier H. Morali and Mr. Bruce T. Bernstein, officers of OCI, have delegated
authority from the board of directors of OCI regarding the portfolio management
decisions of Omicron Capital with respect to the shares of common stock owned by
Omicron. By reason of such delegated authority, Messrs. Morali and Bernstein
may be deemed to share dispositive power over the shares of our common stock
owned by Omicron. Messrs. Morali and Bernstein disclaim beneficial ownership of
such shares of our common stock and neither of such persons has any legal right
to maintain such delegated authority. No other person has sole or shared voting
or dispositive power with respect to the shares of our common stock being
offered by Omicron, as those terms are used for purposes under Regulation 13D-G
of the Securities Exchange Act of 1934, as amended. Omicron and Winchester are
not "affiliates" of one another, as that term is used for purposes of the
Securities Exchange Act of 1934, as amended, or of any other person named in
this prospectus as a selling stockholder. No person or "group" (as that term is
used in Section 13(d) of the Securities Exchange Act of 1934, as amended, or
the SEC's Regulation 13D-G) controls Omicron and Winchester. The shares set
forth in the first column include (A) 675,676 shares of common stock issued or
issuable upon conversion or redemption of shares of Series D Preferred Stock,
assuming in the case of redemption, that the ten-day volume weighted average
price of the common stock remains constant at $1.48 per share; (B) 220,415
shares of common stock issued or issuable upon exercise of warrants; (C)
262,398 shares of common stock issued or issuable upon conversion or redemption
of shares of Series D Preferred Stock that may be issued upon exercise of
preferred stock warrants, assuming, in the case of redemption, that the ten-day
volume weighted average price of the common stock remains constant at $1.48; (D)
85,598 shares of common stock issued or issuable upon exercise of warrants that
may be issued upon exercise of preferred stock warrants; (E) 178,176 shares of
common stock issued or issuable as dividends on shares of our outstanding Series
D Preferred Stock for a period of three years from January 13, 2006, in the case
of shares of Series D Preferred Stock outstanding as of such date, and from
February 10, 2006, in the case of shares of Series D Preferred Stock that may be
issued pursuant to the exercise of preferred stock warrants (or upon the
exercise by us of the additional investment option), assuming in each case, that
the ten-day volume weighted average price of the common stock remains constant
at $1.48 per share; (F) 20,270 shares of common stock issued or issuable upon
conversion of shares of Series D Preferred Stock that may be issued as
liquidated damages upon the occurrence or failure to occur of specified events
in the 2006 registration rights agreement (representing 19.4% of the aggregate
liquidated damages payable to all investors assuming the liquidated damages were
payable for a total of two months). As required by the 2006 registration rights
agreement, the aggregate number of shares of common stock described in (A)
through (F) above has been increased by 30%.
(5) Tail Wind Advisory & Management Ltd., a UK corporation authorized and
regulated by the Financial Services Authority of Great Britain ("TWAM"), is the
investment manager for The Tail Wind Fund Ltd., and David Crook is the chief
executive officer and controlling shareholder of TWAM. Each of TWAM and David
Crook expressly disclaims any equitable or beneficial ownership of the shares
being registered hereunder and held by The Tail Wind Fund Ltd. The shares set
forth in the first column include (A) 405,406 shares of common stock issued or
issuable upon conversion or redemption of shares of Series D Preferred Stock,
assuming in the case of redemption, that the ten-day volume weighted average
price of the common stock remains constant at $1.48 per share; (B) 132,249
PAGE 24
shares of common stock issued or issuable upon exercise of warrants; (C)
157,439 shares of common stock issued or issuable upon conversion or redemption
of shares of Series D Preferred Stock that may be issued upon exercise of
preferred stock warrants, assuming, in the case of redemption, that the ten-day
volume weighted average price of the common stock remains constant at $1.48 (D)
51,359 shares of common stock issued or issuable upon exercise of warrants that
may be issued upon exercise of preferred stock warrants; (E) 106,905 shares of
common stock issued or issuable as dividends on shares of our outstanding Series
D Preferred Stock for a period of three years from January 13, 2006, in the case
of shares of Series D Preferred Stock outstanding as of such date, and from
February 10, 2006, in the case of shares of Series D Preferred Stock that may be
issued pursuant to the exercise of preferred stock warrants (or upon the
exercise by us of the additional investment option), assuming in each case, that
the ten-day volume weighted average price of the common stock remains constant
at $1.48 per share; (F) 12,162 shares of common stock issued or issuable upon
conversion of shares of Series D Preferred Stock that may be issued as
liquidated damages upon the occurrence or failure to occur of specified events
in the 2006 registration rights agreement (representing 11.7% of the aggregate
liquidated damages payable to all investors assuming the liquidated damages were
payable for a total of two months). As required by the 2006 registration rights
agreement, the aggregate number of shares of common stock described in (A)
through (F) above has been increased by 30%.
(6) Bristol Capital Advisors, LLC ("BCA") is the investment advisor to
Bristol Investment Fund, Ltd. ("Bristol"). Paul Kessler is the manager of BCA
and as such has voting and investment control over the securities held by
Bristol. Mr. Kessler disclaims beneficial ownership of these securities. The
shares set forth in the first column include (A) 270,271 shares of common stock
issued or issuable upon conversion or redemption of shares of Series D Preferred
Stock, assuming in the case of redemption, that the ten-day volume weighted
average price of the common stock remains constant at $1.48 per share; (B)
88,167 shares of common stock issued or issuable upon exercise of warrants; (C)
104,959 shares of common stock issued or issuable upon conversion or redemption
of shares of Series D Preferred Stock that may be issued upon exercise of
preferred stock warrants, assuming, in the case of redemption, that the ten-day
volume weighted average price of the common stock remains constant at $1.48; (D)
34,239 shares of common stock issued or issuable upon exercise of warrants that
may be issued upon exercise of preferred stock warrants; (E) 71,270 shares of
common stock issued or issuable as dividends on shares of our outstanding Series
D Preferred Stock for a period of three years from January 13, 2006, in the case
of shares of Series D Preferred Stock outstanding as of such date, and from
February 10, 2006, in the case of shares of Series D Preferred Stock that may be
issued pursuant to the exercise of preferred stock warrants (or upon the
exercise by us of the additional investment option), assuming in each case, that
the ten-day volume weighted average price of the common stock remains constant
at $1.48 per share; (F) 8,108 shares of common stock issued or issuable upon
conversion of shares of Series D Preferred Stock that may be issued as
liquidated damages upon the occurrence or failure to occur of specified events
in the 2006 registration rights agreement (representing 7.8% of the aggregate
liquidated damages payable to all investors assuming the liquidated damages were
payable for a total of two months). As required by the 2006 registration rights
agreement, the aggregate number of shares of common stock described in (A)
through (F) above has been increased by 30%.
(7) Keith Goodman, Manager of Nite Capital, LLC, the General Partner of Nite
Capital, LP, has voting and investment power of the shares held by Nite Capital,
LP. Mr. Goodman disclaims beneficial ownership of the shares held by Nite
Capital, LP. The shares set forth in the first column include (A) 168,919 shares
of common stock issued or issuable upon conversion or redemption of shares of
Series D Preferred Stock, assuming in the case of redemption, that the ten-day
volume weighted average price of the common stock remains constant at $1.48 per
share; (B) 55,104 shares of common stock issued or issuable upon exercise of
warrants; (C) 65,600 shares of common stock issued or issuable upon conversion
or redemption of shares of Series D Preferred Stock that may be issued upon
exercise of preferred stock warrants, assuming, in the case of redemption, that
the ten-day volume weighted average price of the common stock remains constant
at $1.48; (D) 21,399 shares of common stock issued or issuable upon exercise of
warrants that may be issued upon exercise of preferred stock warrants; (E)
44,544 shares of common stock issued or issuable as dividends on shares of our
outstanding Series D Preferred Stock for a period of three years from January
13, 2006, in the case of shares of Series D Preferred Stock outstanding as of
such date, and from February 10, 2006, in the case of shares of Series D
Preferred Stock that may be issued pursuant to the exercise of preferred stock
warrants (or upon the exercise by us of the additional investment option),
assuming in each case, that the ten-day volume weighted average price of the
common stock remains constant at $1.48 per share; (F) 5,068 shares of common
stock issued or issuable upon conversion of shares of Series D Preferred Stock
that may be issued as liquidated damages upon the occurrence or failure to occur
of specified events in the 2006 registration rights agreement (representing 4.9%
of the aggregate liquidated damages payable to all investors assuming the
PAGE 25
liquidated damages were payable for a total of two months). As required by the
2006 registration rights agreement, the aggregate number of shares of common
stock described in (A) through (F) above has been increased by 30%.
* Less than one percent.
PLAN OF DISTRIBUTION
The selling shareholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on the Over-the-Counter Bulletin Board ("OTCBB") or any other
stock exchange, market or trading facility on which the shares are traded or in
private transactions. These sales may be at fixed or negotiated prices. A
selling shareholder may use any one or more of the following methods when
selling shares:
- ordinary brokerage transactions and transactions in which the broker-
dealer solicits purchasers;
- block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
- purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
- an exchange distribution in accordance with the rules of the applicable
exchange;
- privately negotiated transactions;
- settlement of short sales entered into after the effective date of the
registration statement of which this prospectus is a part;
- broker-dealers may agree with the selling shareholders to sell a specified
number of such shares at a stipulated price per share;
- a combination of any such methods of sale;
- through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise; or
- any other method permitted pursuant to applicable law.
The selling shareholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling shareholders may arrange for other
brokers dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling shareholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated, but, except as set forth in a supplement to this prospectus, in the
case of an agency transaction not in excess of a customary brokerage commission
in compliance with NASDR Rule 2440; and in the case of a principal transaction a
markup or markdown in compliance with NASDR IM-2440.
In connection with the sale of the common stock or interests therein, the
selling shareholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
shareholders may also sell shares of the common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
shareholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The selling shareholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Each selling shareholder has
informed us that it does not have any written or oral agreement or
understanding, directly or indirectly, with any person to distribute the common
stock. In no event shall any broker-dealer receive fees, commissions and markups
which, in the aggregate, would exceed eight percent (8%).
PAGE 26
We are required to pay certain fees and expenses incident to the
registration of the shares of common stock listed offered in this prospectus.
We have agreed to indemnify the selling shareholders against certain losses,
claims, damages and liabilities, including liabilities under the Securities Act.
Because selling shareholders may be deemed to be "underwriters" within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by this
prospectus which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under this prospectus. Each selling
shareholder has advised us that it has not entered into any written or oral
agreements, understandings or arrangements with any underwriter or broker-dealer
regarding the sale of the resale shares. There is no underwriter or
coordinating broker acting in connection with the proposed sale of the resale
shares by the selling shareholders.
We agreed to keep this prospectus effective until the earlier of (i) the
date on which the shares of common stock included in the registration statement
in which this prospectus is included, which we refer to as the resale shares,
may be resold by the selling shareholders without registration and without
regard to any volume restrictions pursuant to Rule 144(k) under the Securities
Act or (ii) all of the resale shares have been sold pursuant to the prospectus
or Rule 144 under the Securities Act or any other rule of similar effect. The
resale shares will be sold only through registered or licensed brokers or
dealers if required under applicable state securities laws. In addition, in
certain states, the resale shares may not be sold unless they have been
registered or qualified for sale in the applicable state or an exemption from
the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to the common stock for the applicable
restricted period, as defined in Regulation M, prior to the commencement of the
distribution. In addition, the selling shareholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases and
sales of shares of the common stock by the selling shareholders or any other
person. We will make copies of this prospectus available to the selling
shareholders and have informed them of the need to deliver a copy of this
prospectus to each purchaser at or prior to the time of the sale.
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 fourth 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.
QUARTER QUARTERLY QUARTERLY
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
12/31/2005 $1.65 $1.36
---------- ----- -----
---------- ----- -----
PAGE 27
HOLDERS OF RECORD
As of February 6, 2006, 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 Cumulative Convertible Preferred
Stock from August 25, 2004 through December 31, 2004 of approximately $61,000
and approximately $171,000 for the year ended December 31, 2005. The original
accrued dividends of $61,000 became payable in January 2005 and were converted
into shares of SpaceDev common stock at a conversion rate of $1.54 per share.
Approximately $114,000 of the 2005 accrued dividends were satisfied by the
issuance of the Company's common stock during the nine-months ended September
30, 2005. Payment of future dividends on SpaceDev's Series C Cumulative
Convertible Preferred Stock may be in cash or shares of common stock, provided
that the payment of cash dividends on the Series C Cumulative Convertible
Preferred Stock is prohibited in the event of our noncompliance with our
obligations under the certificate of designations for any series of Series D
Preferred Stock.
SpaceDev has not paid dividends on its Series D Preferred Stock as of the
date of this prospectus. Shares of Series D Preferred Stock were first issued
by SpaceDev on January 13, 2006, and the first dividend payment date for the
Series D Preferred Stock will be April 1, 2006.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS OF OPERATIONS
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 the financial statements of Starsys for the years ended December 31, 2004
and 2003 and the nine months ended September 30, 2005 and 2004 and the other
financial information appearing elsewhere in this document. You are also urged
to carefully review and consider the various disclosures in this prospectus
about SpaceDev, including the risk factors related to an investment in SpaceDev.
See "Risk Factors" beginning on page 7 and "Forward-Looking Statements" on page
20. The following Management's Discussions and Analysis of Financial Condition
and Results of Operation presents separate discussions of the financial
condition and results of operation of SpaceDev and Starsys as separate companies
for the periods reflected in the financial statements included in this
prospectus for each company. 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
SpaceDev
We are engaged in the conception, design, development, manufacture,
integration and operation of space technology systems, products and services.
We are 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
PAGE 28
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 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.
STARSYS
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.
Starsys products are typically sold directly to spacecraft manufacturers on
a fixed price basis. Recently, Starsys increased the percentage of its contracts
performed on a cost reimbursable basis. In particular, Starsys has focused on
performing those projects that it believes 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, eight 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. Upon the closing of the
merger, amounts due under the credit agreement with Vectra Bank were paid in
full and the credit agreement was terminated.
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;
PAGE 29
- 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.
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 Starsys'
increasing ability to efficiently perform on its existing contracts and Starsys'
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 its net loss.
RECENT DEVELOPMENTS
On January 31, 2006, we closed the Starsys merger. In connection with the
Starsys merger, we paid approximately $411,000 in cash consideration and issued
approximately 3.8 million shares of common stock to the former Starsys
shareholders. Of the approximately 3.8 million shares of common stock issued in
the merger, approximately 1.8 million shares have been placed in escrow to
satisfy indemnification obligations of the former Starsys shareholders, if
applicable, and to pay certain expenses of the Starsys shareholder agent. In
addition, former Starsys shareholders may be entitled to receive, based on the
achievement of the Starsys business of certain performance criteria following
the closing of the merger, additional performance consideration consisting of up
to an aggregate of $1,050,000 in cash and shares of common stock valued at up to
$18,000,000, subject to reduction for some merger related expenses and the
escrow arrangements described above.
On January 11, 2006, we entered into a securities purchase agreement, which
we refer to as the 2006 purchase agreement, with a limited number of
institutional accredited investors. On January 13, 2006, we issued and sold to
these investors 5,150 shares of our Series D-1 Amortizing Convertible Perpetual
Preferred Stock, par value $0.0001 per share, which we refer to as Series D-1
Preferred Stock, under the 2006 purchase agreement for an aggregate purchase
price of $5,150,000, or $1,000 per share. We also issued various warrants to
these investors under the 2006 purchase agreement. See "Acquisition of
Securities by Selling Shareholders" on page 23 for a description of the
various warrants and the Series D-1 Preferred Stock.
In October 2005, we entered into a securities purchase agreement with
Laurus Master Fund, Ltd. 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. The price per share represented 80% of the 20-day volume
weighted average price of our common stock through October 28, 2005. We also
issued to Laurus a warrant to purchase up to 450,000 shares at $1.93 per share.
The warrant is exercisable from October 31, 2005 until October 31, 2010.
On October 24, 2005, we entered into an Agreement and Plan of Merger and
Reorganization, which we refer to as the merger agreement, with Starsys Research
Corporation ("Starsys"), and Scott Tibbitts, its largest shareholder. Pursuant
to the merger agreement, Starsys will merge with and into a newly-created,
wholly-owned subsidiary of SpaceDev.
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. On January 31, 2006, as part of the
merger with Starsys, we agreed to forgive this loan, including all accrued
interest and premiums.
PAGE 30
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 completed this subcontract in 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
submitted a bid for the next-phase subcontract and are awaiting an award
decision.
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.
PAGE 31
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 OF SPACEDEV
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 microsats 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 experiment and while we
PAGE 32
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 then 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.
PAGE 33
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.
PAGE 34
[GRAPHIC OMITED]
PAGE 35
[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
PAGE 36
81.69% of net sales, during the same period in 2003. 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 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 then 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, depreciation and
PAGE 37
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 interest 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.
PAGE 38
[GRAPHIC OMITED]
RESULTS OF OPERATIONS OF STARSYS
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.
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. Starsys' 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 eight contracts contributing approximately $4,872,000 to Starsys' total net
loss position.
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.
PAGE 39
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
Starsys' 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).
During the nine months ended September 30, 2005, Starsys 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.
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.
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 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 Starsys' restructured debt agreement with Vectra Bank
of Colorado and penalty interest for being outside of contractual covenants.
Starsys' revolving credit facility had a balance of approximately $3,716,000 for
the nine months ended September 30, 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, Starsys incurred a
negative 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, Starsys 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 Starsys' earnings ability as well as slowing
progress in total revenue and EBITDA.
PAGE 40
The following table reconciles EBITDA to net income (loss) for the periods
discussed.
FOR PERIODS ENDING DECEMBER 31, 2003 DECEMBER 31, 2004 SEPTEMBER 30, 2004 SEPTEMBER 30, 2005
(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 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.
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.
Accounts Receivable
Starsys' accounts receivable balance decreased from approximately
$4,996,000 at December 31, 2003 to approximately $2,555,000 at September 30,
2005. This decrease was 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 OF SPACEDEV
OVERVIEW
In connection with the Starsys merger, we paid approximately $411,000 in
cash consideration and issued approximately 3.8 million shares of common stock
to the former Starsys shareholders. Of the approximately 3.8 million shares of
common stock issued in the merger, approximately 1.8 million shares have been
placed in escrow to satisfy indemnification obligations of the former Starsys
shareholders, if applicable, and to pay certain expenses of the Starsys
shareholder agent. In addition, former Starsys shareholders may be entitled to
receive, based on the achievement of the Starsys business of certain performance
criteria following the closing of the merger, additional performance
consideration consisting of up to an aggregate of $1,050,000 in cash and shares
of common stock valued at up to $18,000,000, subject to reduction for some
merger related expenses and the escrow arrangements described above.
We recently raised a total of $7.6 million from two private sales of equity
securities to institutional accredited investors, a portion of which funds were
utilized, to fulfill our obligations in connection with the Starsys merger. 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. In
January 2006, we entered into a securities purchase agreement with a limited
number of institutional accredited investors, including Laurus, pursuant to
which we issued and sold 5,150 shares of our Series D Preferred Stock for an
aggregate purchase price of $5,150,000, or $1,000 per share. 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.
PAGE 41
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.
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.
SPACEDEV
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.
PAGE 42
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 communications 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 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.
PAGE 43
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.
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.
STARSYS
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 Starsys' 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.
PAGE 44
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 Starsys' 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.
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.
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, Starsys' 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 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.
Amounts due under the loan agreement with Vectra Bank were paid off in
connection with the closing of the merger with SpaceDev and the loan agreement
was terminated.
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 were due on March 31, 2006. These loans were paid off in
connection with the closing of the merger with SpaceDev.
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. 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. The secured promissory
note was forgiven at the closing of the merger on January 31, 2006.
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.
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.
PAGE 45
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.
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
PAGE 46
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
believes 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 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.
PAGE 47
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.
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.
PAGE 48
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 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;
PAGE 49
- 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 believes 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
- 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
PAGE 50
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 provides 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 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
PAGE 51
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. 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 seeks and there can be no assurance that SpaceDev can
PAGE 52
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 SpaceDev'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 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 SpaceDev 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
PAGE 53
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 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 SpaceDev 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 February 6, 2006, SpaceDev employed approximately 180 persons, full and
part-time, most of whom are spacecraft, propulsion, systems, mechanical and
electrical engineers, certified assembly, integration and test technicians and
other support personnel. 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 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.
PAGE 54
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 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.
James W. Benson, SpaceDev's Chairman and Chief Technology 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.
Upon the acquisition of Starsys, we acquired manufacturing facilities in
Boulder, Colorado and Durham, North Carolina, which facilities include:
- 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; and
- In-house, computer numerically controlled (CNC) machine shop.
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.
INFORMATION REGARDING BUSINESS OF STARSYS
OVERVIEW
Starsys Research Corporation was acquired by SpaceDev on January 31, 2006,
and is currently a wholly-owned subsidiary of SpaceDev. 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
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
PAGE 55
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 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 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. We believe
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 SpaceDev.
PAGE 56
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.
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 Starsys with these items to qualified
specifications would result in an adverse effect on Starsys' ability to
manufacture its products.
CUSTOMERS
Starsys' 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. Starsys has multiple contracts with each of these
customers and we do not believe any single customer contract is material to
PAGE 57
Starsys. The remainder of Starsys' 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.
Starsys' business development process is generally competitive bid in
response to a request for proposal (RFP) that is generated by Starsys' potential
customers. These proposals have various bases, including firm fixed price, cost
plus fixed fee, and time and materials. Starsys typically prepares between ten
and twenty proposals in a given month and it usually has one to three weeks to
respond to the request.
These proposals are managed by product area. Starsys defines three specific
product areas for its 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. Starsys also executes on long term build to print contracts with some
of the prime contractors.
Starsys averages between 55 and 70 active programs at any time and the
average duration of its 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
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 7. Starsys derives a significant portion of its revenues
from U.S. government contracts. 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' financial statements.
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.
PAGE 58
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 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.
MANAGEMENT
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 February 6, 2006.
NAME. . . . . . . . . . . . . . . . . . . . AGE TITLE
------------------------------------------- --- --------------------------------------------------------------------
James W. Benson . . . . . . . . . . . . . . 60 Chairman of the Board and Chief Technology 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
Scott Tibbitts. . . . . . . . . . . . . . . 48 Managing Director and Director
Robert Vacek. . . . . . . . . . . . . . . . 44 President of Starsys, Inc.
Frank Macklin . . . . . . . . . . . . . . . 48 Vice President, Engineering
Randall K. Simpson. . . . . . . . . . . . . 59 Vice President, New Business Development & Project Management
Stuart Schaffer . . . . . . . . . . . . . . 46 Director
Wesley T. Huntress. . . . . . . . . . . . . 63 Director
Curt Dean Blake . . . . . . . . . . . . . . 48 Director
General Howell M. Estes, III (USAF Retired) 64 Director
Robert S. Walker. . . . . . . . . . . . . . 63 Director
Scott McClendon . . . . . . . . . . . . . . 66 Director
Susan Benson. . . . . . . . . . . . . . . . 60 Director
James W. Benson is SpaceDev's founder and has served as SpaceDev's Chairman
of the Board since October 1997. Mr. Benson also served as Chief Executive
Officer of SpaceDev from October 1997 until December 2005, at which time he was
succeeded by Mark Sirangelo in such position and became SpaceDev's Chief
Technology Officer. 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 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.
PAGE 59
Mark N. Sirangelo was a member QS Advisors, LLC, and also a member of The
QuanStar Group LLC, business advisors to SpaceDev until he was appointed Vice
Chairman and Chief Executive Officer of SpaceDev. 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. QS Advisors, and The
QuanStar Group 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 Sicommnet, 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.
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.
PAGE 60
Stuart Schaffer was appointed to SpaceDev's Board of Directors in May 2002.
Mr. Schaffer is currently the president of vendor affairs for Sicommnet, 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 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.
PAGE 61
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.
Scott Tibbitts was appointed Managing Director and a Director of SpaceDev
at the closing of the Starsys merger on January 31, 2006. Mr. 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 was appointed president of Starsys at the closing of the
Starsys merger on January 31, 2006. Mr. Vacek previously 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.
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 common 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:
PAGE 62
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, 2005 and each of SpaceDev's four next highest paid executive
officers serving as executive officers as of the end of fiscal year 2005. No
stock appreciation rights were granted by SpaceDev during fiscal year 2005.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------- ------------------------------------------------
Other Annual Securities All Other
Name and Principal Fiscal Salary Bonus Compensation Underlying Compensation
Position Year ($) ($) ($) Options (#) ($)
------------------------- ------ -------- ------ ------------ ----------- ------------
Mark N. Sirangelo . . . 2005 1,038 - - 1,900,000 (1) -
Chief Executive Officer 2004 - - - - -
2003 - - - - -
James W. Benson,. . . . 2005 180,000 2,587 - 1,100,000 (2) 1,400
Chief Executive Officer 2004 177,923 40,000 3,894 - 285
2003 150,000 - - - -
Richard B. Slansky, . . 2005 150,000 2,448 - 1,400,000 (3) 111,254
President and . . . . . 2004 150,000 - - 395,000 (3) 27,672
Chief Financial Officer 2003 94,625 - - 355,000 (3) 2,482
Randall K. Simpson. . . 2005 131,923 1,797 - 42,500 (4) 1,255
Vice President, . . . . 2004 114,231 - - 250,000 (4) 600
New Business. . . . . . 2003 - - - - -
Development
Frank Macklin . . . . . 2005 124,231 1,667 - 40,000 (5) 1,400
Vice President. . . . . 2004 109,110 4,067 - 50,000 (5) 100
Engineering . . . . . . 2003 - - - - -
------------------------- ------ -------- ------ ------------ ----------- ------------
------------------------- ------ -------- ------ ------------ ----------- ------------
Note: The executive officer compensation information for 2005 in the above
table is unaudited.
(1) Mr. Sirangelo joined the Company as Vice Chairman and Chief Executive
Officer on December 30, 2005 and was awarded options to purchase up to an
aggregate of 1,900,000 shares in 2005 as part of his employment agreement. The
options are fully vested.
(2) Mr. Benson was awarded options to purchase up to an aggregate of
1,100,000 shares in 2005 as a part of his employment agreement. The options are
fully vested.
(3) Mr. Slansky was awarded options to purchase up to an aggregate of
1,400,000 shares in 2005 and 385,000 shares in 2003 as part of his employment
agreement. 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. The options are fully vested.
PAGE 63
(4) Mr. Simpson was awarded options to purchase up to an aggregate of
42,500 shares in 2005 as part of the Company's annual stock option award program
and certain special project awards and 250,000 shares in 2004 as part of his
employment agreement. The options are fully vested.
(5) Mr. Macklin was awarded options to purchase up to an aggregate of
40,000 shares in 2005 as part of the Company's annual stock option award program
and 50,000 shares in 2004. The options are fully vested.
The following table shows information regarding the executive officers of
Starsys who were 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, 2005.
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------- ------------------------------------------------
Other Annual Securities All Other
Name and Principal Fiscal Salary Bonus Compensation Underlying Compensation
Position Year ($) ($) ($) Options (#) ($)
------------------------- ------ -------- ------ ------------ ----------- ------------
Scott Tibbitts 2005 186,754 12,417 - - 5,697 (1)
2004 190,248 490 - - 3,037 (1)
2003 182,096 12,695 - - 2,563 (1)
------------------------- ------ -------- ------ ------------ ----------- ------------
Robert Vacek 2005 30,000 - - - -
2004 24,462 - - - -
2003 - - - - -
------------------------- ------ -------- ------ ------------ ----------- ------------
------------------------- ------ -------- ------ ------------ ----------- ------------
(1) Represents a vehicle allowance for 2003, 2004 and 2005.
The following table shows all stock options granted during fiscal 2005 to
the SpaceDev executive officers named in the Summary Compensation Table. No
stock appreciation rights were granted during fiscal year 2005.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
Number of Securities Percent of Total Options
Underlying Options Granted to Employees in Exercise Price Expiration
Name Granted (#) Fiscal Year ($/Share) Date
------------------ -------------------- ------------------------ -------------- ----------
Mark N. Sirangelo 1,900,000 30% $1.40 12/20/2010
James W. Benson 1,100,000 17% 1.40 12/20/2010
Richard B. Slansky 1,400,000 22% 1.40 12/20/2010
Randall K. Simpson 42,400 1% 1.40 12/20/2010
Frank Macklin 40,000 1% 1.40 12/20/2010
------------------ -------------------- ------------------------ -------------- ----------
------------------ -------------------- ------------------------ -------------- ----------
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table shows information regarding the executive officers of
SpaceDev named in the Summary Compensation Table.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at FY-End (#) Options/SARs at FY-End ($)
-------------------------- ------------------------------
Shares
Acquired on Value
Name Exercise (#) Realized ($) Exercisable / Unexercisable Exercisable / Unexercisable (1)
------------------ ------------ ----------- --------------------------- -------------------------------
Mark N. Sirangelo - - 1,900,000 / - $2,660,000 / -
James W. Benson - - 1,610,000 / - 1,839,469 / -
Richard B. Slansky 25,000 12,750 2,125,000 / - 2,491,700 / -
Randall Simpson - - 292,400 / - 357,436 / -
Frank Macklin - - 93,000 / - 104,583 / -
------------------ ------------ ----------- --------------------------- -------------------------------
------------------ ------------ ----------- --------------------------- -------------------------------
PAGE 64
(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
30, 2005, or $1.40 per share.
LONG-TERM INCENTIVE AWARDS
SpaceDev did not have any long-term incentive plan awards during fiscal
year 2005.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE OF
CONTROL AGREEMENTS
On January 31, 2006, SpaceDev entered into a three year executive
employment agreement with Scott Tibbitts, pursuant to which Mr. Tibbitts is
employed as managing director of SpaceDev. Under the agreement, Mr. Tibbitts
earns 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
Starsys merger.
On January 31, 2006, SpaceDev entered into an executive employment
agreement with Robert Vacek pursuant to which Mr. Vacek was employed as the
president of Starsys, Inc., a subsidiary of SpaceDev, Inc. The agreement has an
initial term of two years, and will be automatically renewed for a third year
unless either SpaceDev or Mr. Vacek provides written notice of an intent not to
renew. Under the agreement, Mr. Vacek is entitled to receive (1) a base salary
of $17,000 per month, subject to adjustment up to $19,000 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, and (3) an option to
purchase up to 825,000 shares of SpaceDev common stock under the terms and
conditions of SpaceDev's 2004 Equity Incentive Plan, as amended. The option has
an exercise price equal to $1.46 per share, which was the closing sale price
reported on the OTCBB on the date of grant, and will expire upon the termination
of Mr. Vacek's continuous employment (as defined in the Plan). SpaceDev will
pay severance to Mr. Vacek if his employment is terminated by SpaceDev without
cause or by Mr. Vacek for good reason. The severance payment is equal to: (1)
if Mr. Vacek'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. Vacek's employment is
terminated by Mr. Vacek 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. Vacek 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 January 31, 2006, SpaceDev entered into a non-competition agreement with
Scott Tibbitts, 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.
On December 20, 2005, SpaceDev entered into an executive employment
agreement with Mark N. Sirangelo pursuant to which Mr. Sirangelo was 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
PAGE 65
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.
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
PAGE 66
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 SpaceDev 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 SpaceDev bonus programs and benefits 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 SpaceDev bonus programs and benefits 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.
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
PAGE 67
Equity Incentive Plan from 2,000,000 to 4,000,000. In November 2005, SpaceDev's
Board of Directors approved an amendment to SpaceDev's 2004 Equity Incentive
Plan, subject to shareholder approval (which occurred on January 30, 2006): (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. In November
2005, the board also changed the method for determining the fair market value of
shares, which amendment did not require shareholder approval.
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 chairman of the Board of Directors and Chief
Technology Officer, 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 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.
PAGE 68
Until joining SpaceDev, Mark N. Sirangelo, chief executive officer, vice
chairman and a director of SpaceDev, was a member of QS Advisors, LLC, and also
a member of The QuanStar Group LLC, business advisors to SpaceDev. SpaceDev and
QS Advisors 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 received $200,000 cash and 250,000 shares of
SpaceDev common stock. This agreement terminated upon consummation of Mr.
Sirangelo's employment with SpaceDev.
In connection with the acquisition of Starsys, SpaceDev entered into a
non-competition agreement with Scott Tibbitts, a director and executive officer,
pursuant to which Mr. Tibbitts has agreed 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.
PAGE 69
PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT
The following table provides information as of February 6, 2006 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.
The following table also includes information on Scott Tibbitts and Robert
Vacek, who became SpaceDev's managing director and a director, and Starsys'
president, respectively on January 31, 2006. 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 a business address of 13855 Stowe Drive,
Poway, CA 92064.
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership (1)
--------------------------------------------------------------- -------------------------- --------
James W. Benson, CEO and Chairman . . . . . . . . . . . . . . . 7,799,707 (2) 25.98%
Susan C. Benson, Director . . . . . . . . . . . . . . . . . . . 7,762,907 (3) 25.86%
Mark N. Sirangelo, Prospective CEO, Vice Chairman and Director. 1,900,000 (4) 6.27%
Richard B. Slansky, President, CFO, Secretary and Director. . . 2,235,723 (5) 7.32%
Scott F. Tibbitts, Managing Director and Director . . . . . . . 845,501 (6) 2.98%
Robert M. Vacek, President Starsys Inc. . . . . . . . . . . . . 144,812 (7) 0.51%
Frank Macklin, Vice President of Engineering. . . . . . . . . . 323,073 (8) 1.13%
Randy Simpson, Vice President of Project and New Business . . . 300,305 (9) 1.05%
Wesley T. Huntress Jr., Director. . . . . . . . . . . . . . . . 293,515 (10) 1.02%
Curt Dean Blake., Director. . . . . . . . . . . . . . . . . . . 332,224 (11) 1.16%
General Howell M. Estes, III, Director. . . . . . . . . . . . . 219,667 (12) 0.77%
Robert S. Walker, Director. . . . . . . . . . . . . . . . . . . 176,667 (13) 0.62%
Stuart Schaffer, Director . . . . . . . . . . . . . . . . . . . 290,206 (14) 1.02%
Scott McClendon, Director . . . . . . . . . . . . . . . . . . . 272,460 (15) 0.95%
--------------------------------------------------------------- -------------------------- --------
Laurus Master Fund, Ltd. 3,152,749 (16) 9.99%
C/O Laurus Capital Management
825 Third Ave, 14th Floor
New York, NY 10022
--------------------------------------------------------------- -------------------------- --------
Officers and Directors as a group (14 Persons). . . . . . . . . 18,097,060 (17) 50.48%
--------------------------------------------------------------- -------------------------- --------
--------------------------------------------------------------- -------------------------- --------
PAGE 70
(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 February 6,
2006, 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 28,414,531
on February 6, 2006.
(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) 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 technology officer of SpaceDev.
(3) Represents 2,963,200 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 became the 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. Tibbitts currently owns 845,501 shares of which he received in the
Merger with Starsys Research on January 31, 2006. Mr. Tibbitts is a Managing
Director as well as a director for SpaceDev, Inc.
(7) Mr. Vacek currently owns 19,812 shares of which he received in the
Merger with Starsys Research on January 31, 2006. In addition, Mr. Vacek holds
vested options to purchase 125,000 shares of SpaceDev common stock as well as
unvested options to purchase 700,000 shares of SpaceDev common stock which are
not expected to vest within the next 60 days. Mr. Vacek is the President of
Starsys, Inc. a subsidiary of SpaceDev, Inc.
(8) 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.
(9) 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.
(10) Dr. Huntress owns 33,868 shares of our common stock. Dr. Huntress also
holds vested options to purchase up to an aggregate of 259,647 common shares,
which he received as compensation for his participation on our Board of
Directors. Dr. Huntress is a director of SpaceDev.
(11) Mr. Blake owns 61,224 shares of our common stock. Mr. Blake also holds
vested options to purchase up to an aggregate of 271,000 common shares, which he
received as compensation for his participation on our Board of Directors. Mr.
Blake is a director of SpaceDev.
(12) 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.
(13) 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.
(14) 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
PAGE 71
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.
(15) 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.
(16) Laurus holds 2,032,520 shares of our common stock, and beneficially
owns an aggregate of 8,238,725 shares of common stock issuable pursuant to the
exercise of warrants and upon conversion of shares of our Series C Preferred
Stock and Series D Preferred Stock or upon exercise of warrants within 60 days
from February 6, 2006. Under the terms of such warrants and the certificate of
designations for the Series C Preferred Stock and Series D Preferred Stock,
Laurus may not convert their Series C Preferred Stock or Series D Preferred
Stock into common stock, or exercise such warrants, to the extent that, after
giving effect to any such conversion or exercise, Laurus would beneficially own
more than 9.99% of our outstanding common stock.
(17) Officers and directors as a group include our eleven Board members,
four of whom are also officers of the Company, and Messrs. Simpson, Macklin, and
Vacek 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, 2,963,200 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 1,610,000 shares currently held in the name of
Mr. Benson but which may constitute a community property asset of Mr. Benson and
Ms. Benson.
DESCRIPTION OF SECURITIES
The descriptions in this section and in other sections of this prospectus
of our securities and various provisions of our articles of incorporation and
our bylaws are limited solely to descriptions of the material terms of our
securities, articles of incorporation and bylaws. Our articles of incorporation
and bylaws have been incorporated by reference as exhibits to this registration
statement of which this prospectus forms a part. Our authorized capital stock
consists of 100,000,000 shares of common stock, par value $0.0001 per share, and
10,000,000 shares of preferred stock, par value $0.001 per share. As of February
6, 2006, 28,414,531 shares of our common stock were issued and outstanding. This
excludes an aggregate of approximately 18.4 million shares of common stock
reserved for issuance upon exercise of stock options and warrants and upon the
conversion of preferred stock.
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
Cumulative Convertible Preferred Stock (described below) have been paid. The
terms of SpaceDev's Series D Preferred Stock (described below) prohibit SpaceDev
from paying cash dividends on its common shares.
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.
SERIES C PREFERRED STOCK
Set forth below is a summary of the relative rights, preferences and
limitations of the SpaceDev Series C Cumulative Convertible Preferred Stock,
which we refer to as the Series C Preferred Stock, as set forth in the
Certificate to Set Forth Designations, Voting Powers, Preferences, Limitations,
PAGE 72
Restrictions and Relative Rights of the Series C Preferred, $0.001 Par Value Per
Share, which we refer to as the Series C Certificate of Designations. We issued
250,000 shares of Series C Preferred Stock 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. 248,460 shares of Series C Preferred Stock are outstanding as of
the date of this prospectus.
Dividend Rights. The shares of Series C Preferred Stock are entitled to
receive quarterly, cumulative dividends at a rate of 6.85%. Subject to certain
limitations, dividends are payable in cash or in shares of common stock at the
holder's option. 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 "Fixed
Conversion Price" (defined below). Each series of Series D Preferred Stock
(described below) will rank pari passu to the Series C Preferred Stock with
respect to the payment of dividends. The payment of cash dividends on the
Series C Preferred Stock is prohibited in the event of our noncompliance with
our obligations under the certificate of designations for any series of Series D
Preferred Stock.
Conversion Rights. Each share of the Series C Preferred Stock is
convertible at any time into shares of SpaceDev's common stock at the "Fixed
Conversion Price" (initially $1.54), 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 terms of the
agreements governing the Series C Preferred Stock). The foregoing rights of
conversion are also subject to a limitation that no holder of Series C Preferred
Stock is, for purposes of the federal securities laws, deemed to beneficially
own more than 4.99% of the outstanding shares of SpaceDev common stock. A
holder of Series C Preferred Stock may waive this limitation with 75 days
notice.
Voting Rights. The shares of Series C Preferred Stock have no voting
rights, but must consent to the issuance by SpaceDev of any securities ranking
senior or pari passu to the Series C Preferred Stock.
Redemption Rights. If (1) the shares of common stock underlying the shares
of Series C Preferred Stock (and the shares subject of common stock underlying a
warrant issued to Laurus contemporaneously with the Series C Preferred Stock)
are not registered for resale on a registration statement declared effective by
the SEC, or if a registration statement previously declared effective by the SEC
for the resale of such shares is no longer effective, and (2) the closing market
price of SpaceDev common stock for any of the 22 trading days immediately
preceding a redemption payment date does not exceed the then applicable Fixed
Conversion Price by at least 15%, then SpaceDev may redeem the shares of Series
C Preferred Stock in whole or in part at any time for 115% of the stated value
of each share of the Series C Preferred Stock (together with accrued and unpaid
dividends and other sums due thereon).
If (1) the shares of common stock underlying the shares of Series C
Preferred Stock (and the shares subject of common stock underlying a warrant
issued to Laurus contemporaneously with the Series C Preferred Stock) are
registered for resale on a registration statement declared effective by the SEC,
and (2) the closing market price of SpaceDev common stock for each of the 22
trading days immediately preceding a redemption payment date exceeds the then
applicable Fixed Conversion Price by at least 15%, then SpaceDev may redeem the
shares of Series C Preferred Stock in whole or in part at any time for 100% of
the stated value of each share of the Series C Preferred Stock (together with
accrued and unpaid dividends and other sums due thereon), subject to a
limitation that the number of shares redeemed may not exceed 50% of the
aggregate dollar trading volume of SpaceDev's common stock during the 22 trading
days preceding the applicable notice of redemption.
Conversion Price Adjustments. The Fixed Conversion Price of the Series C
Preferred Stock is automatically reduced and reset by certain issuances of
SpaceDev's equity securities at a price per share (or equivalent price per
share) of SpaceDev common stock less than such Fixed Conversion Price, the
payment by SpaceDev of certain dividends and distributions, and the occurrence
of certain merger, reclassification, asset sale, liquidation and other corporate
events. The Fixed Conversion Price for the Series C Preferred Stock will not be
adjusted in the event of the declaration of any dividends or distributions on
the shares of any series of Series D Preferred Stock.
Liquidation Preference. The Series C Preferred Stock has a liquidation
preference equal to the then stated value (currently $10.00 per share) of the
then outstanding Series C Preferred Stock. As a result, the holders of the
Series C Preferred Stock will receive a distribution out of the assets of
SpaceDev upon liquidation equal to the number of shares of Series C Preferred
Stock then outstanding multiplied by $10.00 before the holders of SpaceDev
common stock will be entitled to any distribution. Each series of Series D
Preferred Stock will rank pari passu to the Series C Preferred Stock upon
liquidation.
PAGE 73
The summary of the relative rights, preferences and privileges of the
Series C Preferred Stock set forth above does not purport to be complete and is
qualified in its entirety by reference to the Series C Certificate of
Designations, which was filed as Exhibit 3.1 to the current report on Form 8-K
filed by SpaceDev with the SEC on August 30, 2004.
SERIES D PREFERRED STOCK
Set forth below is a summary of the relative rights, preferences and
limitations of the SpaceDev Series D Preferred Stock as set forth in (1) the
Certificate to Set Forth Designations, Voting Powers, Preferences, Limitations,
Restrictions and Relative Rights of the Series D-1 Amortizing Convertible
Perpetual Preferred Stock, $0.001 Par Value per Share, which we refer to as the
Series D-1 Certificate of Designations, and (2) a Certificate to Set Forth
Designations, Voting Powers, Preferences, Limitations, Restrictions and Relative
Rights of the Series D-2 Amortizing Convertible Perpetual Preferred Stock,
$0.001 Par Value per Share, which we refer to as the Series D-2 Certificate of
Designations. We issued 5,150 shares of Series D-1 Preferred Stock to a limited
number of institutional accredited investors on January 13, 2006, as described
in "Acquisition of Securities by Selling Shareholders - January 2006 Private
Placement." No other shares of Series D Preferred Stock are outstanding as of
the date of this prospectus.
Under the purchase agreement described under the caption "Acquisition of
Securities by Selling Shareholders - January 2006 Private Placement" above,
SpaceDev may be obligated to file additional certificates of designation which
will be substantially similar to the Series D-2 Certificate of Designations,
except as to the issue date and number of authorized shares in the series. We
refer to all of the foregoing certificates of designations as the Series D
Certificates of Designations. All series are substantially the same in all
respects except for the issue date and the number of authorized shares in the
series; in addition, the Series D-1 Preferred Stock, but no other series of
Series D Preferred Stock, includes an explicit reference to the amendment of the
SpaceDev Series C Preferred Stock, and the original issue date for all series of
Series D Preferred Stock is based on the original issue date of the Series D-1
Preferred Stock.
Dividend Rights. Holders of the Series D Preferred Stock are entitled to
receive cumulative preferential dividends at the annual rate per share (as a
percentage of the stated value per share, which is initially $1,000), which we
refer to as the dividend rate, equal to LIBOR (as determined for each calendar
quarter) for the applicable dividend period plus 4.0% on a quarterly basis. On
the 6 month anniversary of the issue date of any series of Series D Preferred
Stock, the dividend rate will be increased to 15% per annum per share with
respect to any portion of outstanding shares of the Series D Preferred Stock not
redeemed pursuant to SpaceDev's monthly redemption option (described in the
paragraph "Redemption Rights" below); and commencing at the beginning of the
37th month of the issue date of the series of Series D Preferred Stock, the
dividend rate will be increased to the greater of LIBOR plus 10% per annum and
15% per annum. These dividends may be paid in cash or, at SpaceDev's option, if
the equity conditions described below have been satisfied, in shares of SpaceDev
common stock, with each share being valued at approximately 89% of its fair
market value.
Conversion Rights. A holder of a share of the Series D Preferred Stock may
convert the share at any time into a number of shares of SpaceDev common stock
determined by dividing the current stated value of the share (initially $1,000)
by the conversion price (initially $1.48). SpaceDev also has the option,
subject to certain requirements, of forcing a conversion of the shares of the
Series D Preferred Stock, at the same conversion rate, if, after 24 months from
the issue date of the Series D-1 Preferred Stock, the volume weighted average
price for each trading day in any 20 consecutive trading day period exceeds the
then conversion price by 250%. If SpaceDev fails to deliver share certificates
for converted shares in a timely manner, the holder may cover a short sale of
those shares in the market and SpaceDev will be obligated to pay the holder the
difference between the cover price and the prior sale price of those shares. In
addition, SpaceDev has the right to force a conversion of any series of Series D
Preferred Stock anytime after the two-year anniversary of the issue date of that
series if all of the equity conditions have been satisfied and the
volume-weighted average price of SpaceDev common stock for each of 20
consecutive trading days exceeds 2.5 times the current conversion price
(initially $1.48). The foregoing rights of conversion are subject to a
limitation that no holder of Series D Preferred Stock is, for purposes of the
federal securities laws, deemed to beneficially own more than 4.99% of the
outstanding shares of SpaceDev common stock or, if the holder waives this limit
with 61 days notice, more than 9.99% of the outstanding shares of SpaceDev
common stock.
Voting Rights. The Series D Preferred Stock has no general voting rights,
but the holders of a majority of the outstanding shares of Series D Preferred
Stock must vote in favor of or consent to certain corporate actions, including:
- changing the relative rights, preferences or limitations of the applicable
series of Series D Preferred Stock;
- authorizing or issuing any securities that are pari passu or senior to the
applicable series of Series D Preferred Stock, other than other series of Series
D Preferred Stock permitted by the financing documents;
PAGE 74
- amending the SpaceDev articles of incorporation in a manner which
adversely affects the rights of any holder of shares of Series D Preferred Stock
or amending the SpaceDev bylaws in a manner which materially and adversely
affects any rights of any holder of shares of Series D Preferred Stock;
- increasing of the authorized number of shares of the applicable series of
Series D Preferred Stock;
- incurring or guaranteeing any indebtedness by SpaceDev or any of its
subsidiaries, other than for specified permitted indebtedness;
- creating or suffering to exist any lien on SpaceDev's property or the
property of any of its subsidiaries, other than for specified permitted liens;
- designating any class or series of capital stock having any rights or
preferences senior or pari passu with the Series D Preferred Stock, other than
additional series of Series D Preferred Stock;
- redeeming, repurchasing or acquiring any shares of SpaceDev's common stock
or equivalent securities or junior securities;
- issuing any variable-priced securities or entering into any variable-rate
transaction; or
- paying dividends or other distributions on SpaceDev's shares of junior
securities or common stock, other than ordinary dividends on pari passu
securities if no dividends or other payments are past due on any series of
Series D Preferred Stock.
Liquidation Preferences. Upon any liquidation, dissolution or winding up
of SpaceDev, the holders of the Series D Preferred Stock are entitled to receive
from the assets available for distribution to shareholders, for each share of
the Series D Preferred Stock, an amount equal to the current stated value per
share (initially $1,000), plus any accrued and unpaid dividends thereon and any
other fees or liquidated damages owing thereon, before any distribution or
payment may be made to any other holders of SpaceDev capital stock, other than
other pari passu shares (including the Series C Preferred Stock). If the assets
available for distribution to shareholders are insufficient to pay the
liquidation preferences of all shares of Series D Preferred Stock and other pari
passu shares, then each holder of shares of Series D Preferred Stock and/or pari
passu shares will receive a percentage of the assets available for distribution
equal to (1) the full amount that would otherwise be payable to that holder upon
liquidation, dissolution or winding-up of SpaceDev, divided by (2) the full
amount that would be otherwise be payable to all holders of any series of Series
D Preferred Stock or any pari passu stock upon liquidation, dissolution or
winding-up of SpaceDev.
Redemption Rights. SpaceDev has the option of redeeming shares of Series D
Preferred Stock, in whole or in part, for cash upon 20 trading days notice if
the equity conditions described below (other than the volume and share price
condition) have been satisfied and SpaceDev is not participating in a change in
control transaction. The redemption price equals the current stated value of
the shares, multiplied by 115%, if prior to the 9 month anniversary of the issue
date of the shares, or 110%, if thereafter but prior to the 24 month anniversary
of that issue date, plus accrued and unpaid dividends and other amounts due on
the shares. On and after the 24 month anniversary of the issue date, the
redemption price is equal to 100% of the current stated value of the shares,
plus accrued and unpaid dividends and other amounts due on the shares. SpaceDev
may also redeem all the shares of Series D Preferred Stock for cash equal to the
stated value of such shares (plus all accrued and unpaid dividends and other
amounts due on such shares) if SpaceDev is required to reclassify all of the
value of the applicable series of Series D Preferred Stock as a liability on its
balance sheet. If SpaceDev sends a redemption notice, a holder of shares of
Series D Preferred Stock may elect to convert those shares pursuant to its
conversion rights described above before the redemption becomes effective. If a
change of control transaction occurs within 6 months of a redemption that occurs
within 24 months following the issue date, the holder of the redeemed shares
will be entitled to receive any additional compensation the holder would have
received had those shares been redeemed due to the change in control
transaction, as described below.
In addition, on each monthly anniversary of the issue date of any series of
Series D Preferred Stock, following the 6 month anniversary of that issue date,
SpaceDev may elect to redeem in part each share of that series of Series D
Preferred Stock, in an amount equal to the quotient of 1/54 of the aggregate
stated value of the shares of that series on such date, which we refer to in
each case as the monthly optional redemption amount. SpaceDev may pay this
amount in cash or, subject to satisfaction of the equity conditions, with a
number of shares of SpaceDev common stock equal to 1.12 times the monthly
optional redemption amount, divided by the volume weighted average price of
SpaceDev common stock for the 10 trading days immediately preceding the monthly
redemption date. Such a partial redemption will decrease the stated value of
each share of the applicable series of Series D Preferred Stock by an amount per
share equal to the monthly optional redemption amount divided by the number of
then outstanding shares of that series. If SpaceDev does not redeem a part of
any series of Series D Preferred Stock which SpaceDev has the right to redeem,
the dividend rate on that portion will increase to not less than 15%, as
described above.
SpaceDev is also required to redeem the shares of Series D Preferred Stock
upon the occurrence of a triggering event other than a change in control
transaction at a price equal to the sum of greater of (x) 130% and (y) the
volume weighted average price of its common stock on the trading date preceding
the triggering event divided by the conversion price, multiplied by the stated
value of the shares, plus all accrued but unpaid dividends and other amounts due
on the shares. In the event of a change in control transaction, the redemption
price equals 130% of the stated value of the shares. In the event the
PAGE 75
triggering event is the failure of the Starsys merger to occur by March 31,
2006, the holder requiring the redemption of its shares of Series D Preferred
Stock must surrender its preferred stock warrants.
Conversion Price Adjustments. The conversion price of the shares of Series
D Preferred Stock will be appropriately adjusted in the event of stock
dividends, stock splits, reverse stock splits or reclassifications, or specified
pro rata asset distributions, affecting SpaceDev common stock. The stock into
which the shares of Series D Preferred Stock can be converted and the conversion
price will also be adjusted upon the occurrence of a fundamental transaction (a
merger or consolidation of SpaceDev, the sale of all or substantially all
SpaceDev assets, a successful tender or exchange offer affecting SpaceDev common
stock, or a reclassification of SpaceDev common stock).
Equity Conditions. SpaceDev's right to take certain actions under the
Series D Preferred Stock, including its option to redeem shares of Series D
Preferred Stock, to force the conversion of a series of Series D Preferred
Stock, to make optional monthly redemptions of shares of Series D Preferred
Stock in shares of its common stock in lieu of cash or to pay dividends on
shares of Series D Preferred Stock in shares of its common stock in lieu of
cash, depend on the following conditions being satisfied, which we refer to as
the equity conditions:
- SpaceDev has complied with specified obligations to holders of shares of
Series D Preferred Stock, including honoring all conversions and paying all
amounts owed to holders;
- An effective registration statement which the holders may use to resell
shares of SpaceDev common stock acquired pursuant to the financing documents is
available to the holders;
- The SpaceDev common stock is trading on a public trading market (including
the OTC Bulletin Board) and the shares of SpaceDev common stock to be issued
pursuant to the financing documents are listed for trading on that market;
- No triggering event (as described below) exists or is imminent;
- The issuance of shares to the holder would not violate the beneficial
ownership limitations described above;
- For a period of 20 trading days prior to the date of determination, the
daily average dollar volume for shares of SpaceDev common stock on the trading
market exceeds $100,000 per trading day and the volume weighted average price of
SpaceDev common stock for each of those trading days is at least $1.50 per share
(subject to adjustment); and
- No fundamental transaction or change in control transaction is pending or
proposed.
Triggering Events. For purposes of the Series D Certificates of
Designations, a triggering event is defined as the occurrence of any of the
following events:
- The initial registration statement required by the registration rights
agreement does not become effective by June 12, 2006 or, after the issuance of
shares of a new series of Series D Preferred Stock, a registration statement
required by the registration rights agreement to cover the shares of common
stock issuable on account of that series does not become effective within 120
days of the issue date of those shares;
- Any registration statement required to be effective under the registration
rights agreement is unavailable for more than 45 days during any 12-month
period, or a holder may not resell its securities under the registration
statement for 15 consecutive days or for more than 45 days during any 12-month
period, in either case subject to a 20-day increase for delays caused by an SEC
review of our registration statement or periodic reports;
- SpaceDev does not comply with its obligations promptly to achieve
effectiveness of the initial registration statement under the registration
rights agreement;
- SpaceDev breaches various obligations due to holders of Series D Preferred
Stock, including: failing to deliver share certificates upon conversion on time;
failing to pay specified amounts owed on time; failing to reserve sufficient
shares of its common stock to issue upon the conversion of shares of Series D
Preferred Stock; or redeeming junior securities;
- the occurrence of a change in control transaction affecting SpaceDev,
including the acquisition by a group of 33% of the voting securities of
SpaceDev;
- the occurrence of various insolvency or bankruptcy events affecting
SpaceDev or any of its significant subsidiaries;
- the failure of SpaceDev common stock to be traded on a trading market for
more than 5 trading days (whether or not consecutive); and
- the failure of the Starsys merger to be consummated by March 31, 2006.
PAGE 76
The summary of the relative rights, preferences and privileges of the
Series D Preferred Stock set forth above does not purport to be complete and is
qualified in its entirety by reference to the Series D-1 Certificate of
Designations and Series D-2 Certificate of Designations, which have been filed
as exhibits to the current report on Form 8-K filed by SpaceDev with the SEC on
January 13, 2006 and are incorporated by reference as exhibits to the
registration statement in which this prospectus is included.
"BLANK CHECK" PREFERRED STOCK
The term "blank check" refers to preferred stock, the creation and issuance
of which is authorized in advance by the shareholders and the terms, rights and
features of the series of which are determined by our board of directors from
time to time. The authorization of this blank check preferred stock permits our
board of directors to authorize and issue preferred stock from time to time in
one or more series. Subject to our articles of incorporation, and the
limitations prescribed by law or any stock exchange or national securities
association trading system on which our securities may then be listed, the board
of directors is expressly authorized, at its discretion, to adopt resolutions to
issue shares, to fix the number of shares and to change the number of shares
constituting any series and to provide for or change the voting powers,
designations, preferences, and relative, participating, optional or other
special rights, qualifications, limitations or restrictions thereof, in each
case without any further action or vote by the shareholders. Our board of
directors is required to make any determination to issue shares of preferred
stock based on its judgment as to the best interests of our company and its
shareholders.
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;
- The occurrence of a change of control transaction affecting us would be a
triggering event under the Series D Certificates of Designations requiring us to
redeem shares of Series D Preferred Stock at a premium to stated value; and
- Our board of directors may 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.
LEGAL MATTERS
Legal matters in connection with the validity of the shares of common stock
offered hereby will be passed upon for us by Sheppard, Mullin, Richter & Hampton
LLP.
EXPERTS
The financial statements of SpaceDev, Inc. in this prospectus have
been audited by PKF, Certified Public Accountants, 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.
PAGE 77
The financial statements of Starsys Research Corporation included in the
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 SB-2 registration statement under
the Securities Act with respect to the common stock offered by this prospectus.
This 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 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.
PAGE 78
UNAUDITED PRO FORMA COMBINED CONSOLIDATED 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 prospectus and the
consolidated audited and unaudited financial statements of SpaceDev and
unaudited financial statements of Starsys included in this 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.
PAGE 79
UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2005
---------------------------------------------------------------------------------
HISTORICAL
-------------------------------
TOTAL PRO FORMA
SPACEDEV STARSYS ADJUSTMENTS PRO FORMA
------------- ----------- -------------------------- ---------------
ASSETS
CURRENT ASSETS
Cash. . . . . . . . . . . . $ 4,022,243 $ 216,934 $ (5,576,718) (d) & (e) $ (1,337,541)
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 (7,139,196) 5,313,865
FIXED ASSETS - Net . . . . . . 822,980 2,031,440 - 2,854,420
GOODWILL . . . . . . . . . . . - - 9,952,061 (a) (b) (c) 9,952,061
OTHER ASSETS . . . . . . . . . 64,469 26,469 - 90,938
------------- ----------- -------------------------- ---------------
TOTAL ASSETS . . . . . . . . . $ 7,343,202 $ 8,055,217 $ 2,812,865 $ 18,211,184
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
PAGE 80
UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2005
----------------------------------------------------------------------------
HISTORICAL
----------------------------
TOTAL PRO FORMA
SPACEDEV STARSYS 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) (f) -
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
------------------------------------------------ ------------- ----------- -------------------------- ---------------
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 5,524,350 (a) & (b) 27,590,908
Additional pain-in capital - stock options - - - -
Deferred Compensation - - - -
Accumulated deficit (14,685,442) (3,545,549) 3,429,524 (b) (14,801,467)
------------------------------------------------ ------------- ----------- -------------------------- ---------------
TOTAL STOCKHOLDERSEQUITY (DEFICIT) 5,408,445 (3,493,143) 8,953,853 10,869,156
------------------------------------------------ ------------- ----------- -------------------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,343,202 $ 8,055,217 $ 2,812,865 $ 18,211,284
------------------------------------------------ ------------- ----------- -------------------------- ---------------
------------------------------------------------ ------------- ----------- -------------------------- ---------------
PAGE 81
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2004
----------------------------------------------------------------------------
HISTORICAL
----------------------------
TOTAL PRO FORMA
SPACEDEV STARSYS ADJUSTMENTS PRO FORMA
------------------------------------------------ ------------- ------------ -------------------------- ---------------
NET SALES . . . . . . . . . . . . . . . . . . $ 4,890,743 $ 18,085,414 $ - $22,976,157
------------------------------------------------ ------------- ------------ -------------------------- ---------------
COST OF SALES . . . . . . . . . . . . . . . . 3,820,683 19,138,106 - $22,958,789
------------------------------------------------ ------------- ------------ -------------------------- ---------------
GROSS MARGIN. . . . . . . . . . . . . . . . . 1,070,060 (1,052,692) - $ 17,368
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 4,054,452 - 4,521,923
------------------------------------------------ ------------- ------------ -------------------------- ---------------
TOTAL OPERATING EXPENSES. . . . . . . . . . . 925,775 4,054,452 - 4,980,227
------------------------------------------------ ------------- ------------ -------------------------- ---------------
INCOME/(LOSS) FROM OPERATIONS . . . . . . . . 144,285 (5,107,144) - (4,962,859)
------------------------------------------------ ------------- ------------ -------------------------- ---------------
NON-OPERATING EXPENSE/(INCOME)
Interest income. . . . . . . . . . . . . . (19,497) - - (19,497)
Rental Income. . . . . . . . . . . . . . . - 7,800 - 7,800
Other Expense. . . . . . . . . . . . . . . - 7,493 - 7,493
Interest expense . . . . . . . . . . . . . 52,077 (306,693) - (254,616)
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 (291,400) - 2,878,339
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . (3,025,454) (5,398,544) - (8,423,998)
Income tax provision. . . . . . . . . . . . . 1,600 (193,317) - (191,717)
------------------------------------------------ ------------- ------------ -------------------------- ---------------
NET INCOME (LOSS) . . . . . . . . . . . . . . $(3,027,054) $(5,591,861) $ - (8,618,915)
------------------------------------------------ ------------- ------------ -------------------------- ---------------
NET INCOME (LOSS) PER SHARE:
Net income (loss). . . . . . . . . . . . $ (0.16) $ (0.09) $ - $ (0.26)
------------------------------------------------ ------------- ------------ -------------------------- ---------------
Weighted-Average Shares Outstanding. . . 18,610,141 520,447 3,242,000 (a) 22,372,588
------------------------------------------------ ------------- ------------ -------------------------- ---------------
------------------------------------------------ ------------- ------------ -------------------------- ---------------
PAGE 82
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2005
--------------------------------------------------------------
HISTORICAL
-------------------------
TOTAL PRO FORMA
SPACEDEV STARSYS 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 . . . . . . . . 223,185 (1,062,791) (116,025)(f) (955,631)
NON-OPERATING EXPENSE/(INCOME)
Interest income. . . . . . . . . . . . . . (69,632) (75,998) - (145,630)
Rental Income. . . . . . . . . . . . . . . 2,283 (3,250) - (967)
Other Expense. . . . . . . . . . . . . . . - - - -
Interest expense . . . . . . . . . . . . . - 378,513 - 378,513
Non-cash interest expense debt discount. . - - - -
Gain on Building Sale. . . . . . . . . . . (87,953) - - (87,953)
Non-Cash 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 $ (0.38) $ - $ (0.37)
---------------------------------------------- ------------ ------------ ----------------- -------------
Weighted-Average Shares Outstanding. . . 21,777,211 520,447 3,242,000 (a) 25,539,658
---------------------------------------------- ------------ ------------ ----------------- -------------
---------------------------------------------- ------------ ------------ ----------------- -------------
PAGE 83
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 unaudited pro forma combined consolidated financial statements shown
above reference the closing considerations to Starsys Research Corporation at
January 31, 2006, the date of closing, and attempt to take into consideration
the adjustments which were necessary for the most recent unauditied Financial
Statements for the period ending September 30, 2005.
The purchase price of Starsys was approximately $6.7 million and is
proposed to be allocated as follows:
DOLLARS
------------
Current, tangible and identifiable intangible assets $ 5,739,806
Liabilities assumed. . . . . . . . . . . . . . . . . (8,999,785)
---------------------------------------------------- ------------
Net assets . . . . . . . . . . . . . . . . . . . . . (3,259,979)
Implied Intangibles/Goodwill . . . . . . . . . . . . 9,952,061
---------------------------------------------------- ------------
Total purchase consideration . . . . . . . . . . . . $ 6,692,083
---------------------------------------------------- ------------
Comprised of:
Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 1,115,347
Stock consideration. . . . . . . . . . . . . . . . . 5,576,736
---------------------------------------------------- ------------
Total purchase consideration . . . . . . . . . . . . $ 6,692,083
---------------------------------------------------- ------------
---------------------------------------------------- ------------
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 $6.7 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. There were approximately 558,000 shares of Starsys common stock
outstanding at January 31, 2006.
THE FOLLOWING PRO FORMA ADJUSTMENTS HAVE BEEN RECORDED TO REFLECT THE
ACQUISITION:
Combined Consolidated Balance Sheet-adjustments to reflect the acquisition
that occurred on January 31, 2006.
(a) The issuance of approximately 3.8 million SpaceDev common shares, and
options for the issued and outstanding common stock and outstanding options of
Starsys, at a total value of $5.6 million. The common shares of SpaceDev
increase by approximately $380 and additional paid in capital increased by
approximately $5.58 million.
(b) Elimination of Starsys pre-acquisition shareholders' equity, as follows:
DOLLARS
-----------
Common stock . . . . . . . $ (523)
Additional paid-in capital (74,386)
Accumulated deficit. . . . 5,726,542
------------------------------ -----------
$5,651,633
------------------------------ -----------
------------------------------ -----------
PAGE 84
(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 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.
PAGE 85
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 receivable (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.
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 Nonmonetary Transactions, is
based on the principle that exchanges of nonmonetary assets should be measured
PAGE F-11
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 the credit
facility, which payment was due under the forbearance agreement.
Upon consummation of the merger on January 31, 2006, SpaceDev canceled and
terminated the $1.2 million secured bridge loan that it extended to Starsys on
September 8, 2005, and SpaceDev repaid and terminated Starsys' credit facility
with Vectra Bank Colorado and Starsys' subordinated loans from four of its
shareholders.
On January 31, 2006, SpaceDev completed the acquisition of Starsys Research
Corporation pursuant to an agreement and plan of merger and reorganization,
referred to as the merger agreement, with Starsys Research Corporation, Scott
Tibbitts, its largest shareholder, and Scott Tibbitts, as shareholder agent for
the other shareholders of Starsys. The merger agreement was dated October 24,
2005 and amended on December 7, 2005 and January 31, 2006. Pursuant to the
merger agreement, Starsys merged with and into a newly-created, wholly-owned
subsidiary of SpaceDev. Immediately after the merger, the subsidiary was renamed
Starsys, Inc.
Starsys shareholders received approximately $411,000 in cash and 3.8 million
shares of SpaceDev common stock at the consummation of the merger. SpaceDev also
paid approximately $705,000 in Starsys transaction expenses connected to the
merger.
Following the merger, the pre-merger Starsys shareholders may also be entitled
to receive additional performance consideration, based on the achievement by the
Starsys business of specific financial performance criteria for fiscal years
2005, 2006 and 2007. This consideration could consist of up to an aggregate of
$1,050,000 in cash and shares of SpaceDev common stock valued at up to $18
million, subject to reduction for some merger related expenses and to escrow
arrangements.
Approximately one-half of the shares issued to Starsys shareholders at the
closing have been placed in escrow to satisfy indemnification obligations of
Starsys shareholders under the merger agreement and to pay reasonable expenses
of the shareholder agent. Approximately one-half of the shares (if any) to be
issued for the first performance period will similarly be placed in escrow. The
indemnification escrow will generally last until ten days following the date of
audited financial statements prepared for the Starsys business for the fiscal
year ending 2006 (approximately April 2007). In addition, 1% of any shares of
SpaceDev common stock payable as performance consideration will be paid as
transaction expenses to Robert Vacek, who became president of Starsys, Inc., a
subsidiary of SpaceDev, Inc., after the merger and who was the president of
Starsys Research Corporation prior to the merger. Scott Tibbitts, became
SpaceDev's managing director and a member of the board of directors of SpaceDev,
Inc. after the merger
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 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 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 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
---------------------------- -------------------- --------------------
Operating Loss (1,062,791) (5,516,478)
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 $1,972,000, 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)
-------------------- --------------------
-------------------- --------------------
On January 31, 2006, SpaceDev, Inc. acquired the Company pursuant to an
agreement and plan of merger and reorganization, which we refer to as the merger
agreement, with SpaceDev, Inc. The merger agreement was dated October 24, 2005
and amended on December 7, 2005 and January 31, 2006. Pursuant to the merger
agreement, the Company merged with and into a newly-created, wholly-owned
subsidiary of SpaceDev, Inc. Immediately after the merger, the subsidiary was
renamed Starsys, Inc.
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 provided 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.
On January 31, 2006, SpaceDev acquired the Company pursuant to an
agreement and plan of merger and reorganization, which we refer to as the merger
agreement, with the Company, Scott Tibbitts, its largest shareholder, and Scott
Tibbitts, as shareholder agent for the other shareholders of Starsys. The
merger agreement was dated October 24, 2005 and amended on December 7, 2005 and
January 31, 2006. Pursuant to the merger agreement, the Company merged with and
into a newly-created, wholly-owned subsidiary of SpaceDev. Immediately after
the merger, the subsidiary was renamed Starsys, Inc.
In connection with the consummation of the merger on January 31, 2006,
pursuant to which Starsys became a wholly-owned subsidiary of SpaceDev, we
paid-off in-full the remaining principal and interest of all loans extended to
the Company by Vectra pursuant to the credit facility and forbearance agreement,
together with all other costs incurred in connection with those loans, which
aggregated approximately $3.7 million. The credit facility and associated
security agreements with Vectra were terminated upon receipt of the payment by
Vectra. We cancelled and terminated our $1.2 million secured bridge loan to
SpaceDev, together with accrued interest, in accordance with the terms of the
merger agreement. We also paid-off in-full the remaining principal and interest
of all subordinated loans extended to the Company by four of its shareholders,
which aggregated approximately $944,000. The notes evidencing the loans were
terminated upon receipt of payment in full by the individual shareholders of the
Company.
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.
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.
In connection with the merger, the loan agreement and all amounts due
thereunder were paid in full.
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.
On January 31, 2006, SpaceDev acquired the Company pursuant to an agreement
and plan of merger and reorganization, which we refer to as the merger
agreement, with SpaceDev, Inc. The merger agreement was dated October 24, 2005
and amended on December 7, 2005 and January 31, 2006. Pursuant to the merger
agreement, the Company merged with and into a newly-created, wholly-owned
subsidiary of SpaceDev, Inc. Immediately after the merger, the subsidiary was
renamed Starsys, Inc.
In connection with the consummation of the merger with SpaceDev on January
31, 2006, pursuant to which Starsys became a wholly-owned subsidiary of
SpaceDev, the note held by SpaceDev was cancelled and terminated, the
cancellation included our $1.2 million loan payable to SpaceDev, together with
accrued interest and fees, in accordance with the terms of the merger agreement.
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.
On January 26, 2006, options that were exercised and converted into
common stock equated to 570.13 shares. All other options were terminated as of
close of business on January 26, 2006. On January 31, 2006, SpaceDev completed
the acquisition of the Company pursuant to an agreement and plan of merger and
reorganization, which we refer to as the merger agreement, with the Company,
Scott Tibbitts, its largest shareholder, and Scott Tibbitts, as shareholder
agent for the shareholders of the Company. The merger agreement was dated
October 24, 2005 and amended on December 7, 2005 and January 31, 2006. Pursuant
to the merger agreement, the Company merged with and into a newly-created,
wholly-owned subsidiary of SpaceDev. Immediately after the merger, the
subsidiary was renamed Starsys, Inc.
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.
As of November 11, 2005, all deferrals to the 401(k) elected stock
contributions were terminated and separated from the Company's 401(k) Plan.
Employees were given the option to elect in favor of stock distribution to
themselves or transfer into an Individual Retirement Account (IRA) of their
choice. By January 31, 2006, all elections and distributions were made.
On January 31, 2006, SpaceDev acquired the Company pursuant to an agreement
and plan of merger and reorganization, which we refer to as the merger
agreement, with SpaceDev, Inc. The merger agreement was dated October 24, 2005
and amended on December 7, 2005 and January 31, 2006. Pursuant to the merger
agreement, the Company merged with and into a newly-created, wholly-owned
subsidiary of SpaceDev, Inc. Immediately after the merger, the subsidiary was
renamed Starsys, Inc.
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 . . . . . . (1,473,530) (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;
520,447 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 $ 2,139,872
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
----------------- ---------------
----------------- ---------------
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.
These financial statements should be read only in connection with the
accompanying summary of significant accounting policies and notes to financial
statements.
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 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.
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 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
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 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. . . . . (231,167) (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