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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Pre-Effective Amendment 1
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
SPACEDEV, INC.
Colorado 84-1374613
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13855 Stowe Drive Poway, California 92064
(Address of principal executive office) (Zip Code)
Issuer's telephone number: (858) 375-2030
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None. None.
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.0001 par value
(Title of Class)
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TABLE OF CONTENTS
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PART I................................................................................................................4
ITEM 1. DESCRIPTION OF BUSINESS..................................................................................4
BACKGROUND.........................................................................................................4
THE COMPANY........................................................................................................5
BUSINESS PLAN......................................................................................................6
PRODUCTS AND SERVICES..............................................................................................7
MARKET STRATEGIES..................................................................................................9
COMPETITION.......................................................................................................11
REGULATION........................................................................................................12
EMPLOYEES.........................................................................................................13
INTELLECTUAL PROPERTY.............................................................................................13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...............................................13
OVERVIEW..........................................................................................................14
RESULTS OF OPERATIONS FOR THE FOUR-MONTH PERIOD ENDED DECEMBER 31, 1997 AND THE FISCAL YEAR
ENDED DECEMBER 31, 1998...........................................................................................14
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 1999....................................................15
LIQUIDITY AND CAPITAL RESOURCES...................................................................................16
RECENT DEVELOPMENTS...............................................................................................17
YEAR 2000 COMPLIANCE..............................................................................................17
ITEM 3. DESCRIPTION OF PROPERTY.................................................................................18
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................18
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.........................................19
ITEM 6. EXECUTIVE COMPENSATION..................................................................................22
REMUNERATION PAID TO EXECUTIVES...................................................................................22
EMPLOYMENT AGREEMENTS.............................................................................................25
EMPLOYEE BENEFITS.................................................................................................26
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................................26
COMMON STOCK......................................................................................................27
PREFERRED STOCK...................................................................................................27
PART II..............................................................................................................27
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS..........................................................................................28
MARKET INFORMATION................................................................................................28
HOLDERS...........................................................................................................28
DIVIDENDS.........................................................................................................28
ITEM 2. LEGAL PROCEEDINGS.......................................................................................28
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS...........................................................28
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.................................................................29
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS...............................................................30
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ITEM 6. FINANCIAL STATEMENTS....................................................................................31
PART III.............................................................................................................32
ITEM 1. INDEX TO EXHIBITS.......................................................................................32
ITEM 2. DESCRIPTION OF EXHIBITS.................................................................................32
SIGNATURES...........................................................................................................33
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
SpaceDev, Inc., consisting of one wholly owned subsidiary and one Division,
is a development-stage company organized under the laws of the State of Colorado
on December 23, 1996. It became a publicly traded company in October 1997 and is
currently trading on the Over-The-Counter Bulletin Board exchange under the
symbol "SPDV."
SpaceDev's overall vision is to establish itself as the world's first
commercial space exploration and development company operating in "small space"
- - small spacecraft, small space transportation systems and focused, low-cost
mission solutions. SpaceDev believes it is pioneering a revolutionary
space-products business that has strong parallels to the early days of the
microcomputer revolution. The Company's approach is to provide small spacecraft
- - approximately 250 kg mass and less - and compatible small space transportation
vehicles to a growing market of commercial and government customers. SpaceDev
intends to use common commercial business practices, whenever possible, rather
than the government-driven processes that dominate the space industry. SpaceDev
seeks to avoid "re-inventing the wheel" on each project and instead intends to
rely on proven, "trailing-edge" technologies used in new ways, and relatively
innovative stable product and service offerings.
Since its inception, a specific SpaceDev objective has been to be the first
company to successfully define, implement and execute commercial, low-cost
deep-space missions, i.e., missions to the Moon and beyond. All prior deep-space
missions to date - U.S. and foreign - have been government-defined and
relatively expensive. However, following trends from the space
telecommunications sector that began decades ago and more recently in the space
remote-sensing sector, commercial practices have begun to penetrate the
deep-space sector - already a multi-billion-dollar market worldwide. As these
commercial practices take hold and the results of NASA's "faster, better,
cheaper" initiatives bear fruit, total mission costs should decrease.
SpaceDev's first entrant in this new arena, the Near Earth Asteroid
Prospector (NEAP) mission, was announced in 1997. The Company began offering
commercial Mars and lunar missions in 1999. Since then, the Company has been
actively marketing these missions as enabling products that could provide unique
information content to selected Internet, media, entertainment and education
markets.
From the outset, the Company's strategy has been to rapidly build a
growing, horizontally integrated company that provides low-cost access to space
through profitable, fixed-price commercial sales. This buildup is fueled by
in-house growth and by strategic acquisitions. Selected space-business niches
will be targeted for acquisition and integration.
A prime element of this strategy is a strong focus on small, capable,
low-cost satellites and launch systems addressing the deep space and
Earth-orbiting markets. Small satellites are also a key element of low-cost
Earth-orbiting missions, for which demand is rising. Analogous to the computer
field, such small satellites are often called "microsatellites" or
"micro-spacecraft," with their associated "micromissions."
Another key aspect of SpaceDev's strategy is the hiring of individuals with
world-class experience and skills in the areas above, combined with strategic
acquisitions of companies successfully engaged in these markets. The Company
intends to gain maximum competitive advantage by developing and offering a
limited yet relevant suite of proprietary, open-standard small satellites,
launch systems and related subsystem components. This is how the Company intends
to avoid re-inventing the wheel on each project.
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THE COMPANY
In February 1998, the Company acquired Integrated Space Systems (ISS, in
San Diego) ISS is now a wholly owned SpaceDev subsidiary. Most ISS employees are
former launch-vehicle engineers and managers who worked for General Dynamics in
San Diego. At ISS they perform aerospace-engineering services and R&D, with a
principal focus on launch-system and propulsion-module products. In August 1998
SpaceDev also acquired the patents and intellectual property produced by the
former American Rocket Company (AMROC), which specialized in hybrid rocket
technology (solid fuel and liquid or gas oxidizer) for small sounding rockets
and launch vehicles.
In October 1998 the Company entered into an agreement with Space
Innovations Limited (SIL) in Newbury, England to acquire all of the shares of
SIL in exchange for shares of SpaceDev. By mutual and amicable agreement of both
parties, this transaction was rescinded in December 1999. The primary reason for
the rescission was the difficulties that SpaceDev and SIL encountered in working
with each other due to the new highly restrictive technology-transfer
regulations instituted by the United States.
Commercial space missions are defined and offered by SpaceDev's Space
Missions Division, with support from ISS, and selected outside partner
organizations. In August 1998 SpaceDev hired two experts in the field of
low-cost spacecraft and space-mission development, Jan King and Rex Ridenoure;
together they form the core technical leadership of this Division.
With the acquisition of ISS, SpaceDev's employee base increased to 20
employees in February 1998. This number is expected to increase to approximately
40 over the next 12 months. The Company is actively investigating further
strategic acquisitions.
By 1998 the core SpaceDev team had refined the definition of the NEAP
mission to the degree that NASA formally recognized it as a "Mission of
Opportunity." Established scientists and engineers then began supporting the
concept with scientific-investigation proposals to NASA and commitments from
their home institutions, including three letters of intent for the design and
fabrication of science instruments. In late 1998 SpaceDev began the
approximately two-year process of working with NASA's Jet Propulsion Laboratory
(JPL) to secure scarce Deep Space Network (DSN) tracking time for the mission.
By the summer of 1999, JPL and NASA Headquarters formally agreed that NASA was
prepared to support the NEAP mission with the DSN. A firm contract for a ride on
NEAP was signed with a payload sponsor in mid-1999. Launch was planned for late
2001, with a rendezvous at the near-Earth asteroid Nereus in mid-2002. Multiple
back-up targets are available, if the mission schedule is required to slip. Due
to the number of factors involved and the Company's need for funding, there can
be no assurance that NEAP will be launched.
Also in late 1998, SpaceDev began bidding on and winning
government-sponsored R&D contracts directly relevant to its strategic interests.
The Company competed with seven other industry teams to perform a mission and
spacecraft feasibility assessment study of proposed 200-kg Mars micromissions
and was one of five firms selected by JPL. The final report was delivered to JPL
in March 1999. A few months later JPL initiated a procurement action for at
least one such spacecraft, to be launched in 2003. For several reasons, the
Company decided not to compete for this NASA contract, but has continued
refining its baseline micromissions concept independent of NASA and JPL, and is
now offering lunar and Mars commercial deep-space missions based on this design.
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In mid-1999 SpaceDev's ISS subsidiary competitively won an R&D contract
from the U.S. Air Force Office of Space Launch to study a family of very small,
hybrid-based "micro" kick-motors for small-satellite orbital transfer
applications. At about the same time, ISS and Lockheed Martin Astronautics (LMA)
entered into a joint marketing agreement to sell packaged commercial launch
services involving two to four small satellites on LMA's Athena launch vehicle.
In November 1999 the Space Missions Division was awarded a $4,995,868
million turnkey mission contract by the Space Sciences Laboratory (SSL) at
University of California, Berkeley (UCB). SpaceDev was competitively selected by
UCB/SSL to design, build, integrate, test and operate a small scientific,
Earth-orbiting spacecraft called CHIPSat.
Also in November 1999 SpaceDev hired Charles Lloyd, a leader in the
commercial launch systems field, to be CEO of ISS and CFO for SpaceDev. Mr.
Lloyd brings to the Company extensive experience in corporate finance and
strategic planning as well as direct, recent experience with the development and
implementation of a global marketing and sales organization for commercial
launch systems.
BUSINESS PLAN
SpaceDev's corporate goal is to increase the intrinsic value of the Company
by providing proprietary, reliable, low-cost access to space through innovative
solutions currently lacking in the marketplace. The Space Missions Division
intends to define and market proprietary, open standards-based, low-cost
space-mission solutions involving microsatellites and nanosatellites. ISS
continues to market its current products and services to the aerospace industry
as well as expand its offerings. SpaceDev intends to continue developing new
products and services the Company's management believes are needed in the
marketplace.
SpaceDev is successfully implementing a strategic thrust to be perceived
and regarded as an experienced provider of small-satellite launch-integration
services. Its staff and some carefully selected external partners have a
combined experience base with such systems - direct experience in defining,
implementing and operating several dozen small-spacecraft missions - believed to
be equal to any in the industry. This allows the Company to identify launch
opportunities (whether on U.S. or foreign launchers), conceive and evaluate
small-satellite designs matched with those opportunities and to support the
design, development, test, integration, launch and operations of these
satellites.
SpaceDev believes that a majority of its customers are drawn to the Company
because they are being underserved by the traditional aerospace industry. Most
of the companies that have been servicing this market - especially U.S.
companies - have recently redirected their efforts to larger systems, leaving a
relatively unpopulated market niche for SpaceDev to fill just as the demand for
small satellites is blossoming. The Company intends to continue to introduce new
and useful low-cost space products and services designed to meet customers'
needs, all with an aggressive and practical commercial approach.
The Company's preferred space-mission implementation approach has the
following attributes atypical of projects done by traditional defense
contractors:
o SpaceDev-proprietary spacecraft and launch-vehicle interfaces
o SpaceDev-defined products and services from a catalog, rather than
designs responding to government-supplied specifications
o A focus on "Small Space," involving turnkey mission solutions and
application of proven commercial business practices such as space
insurance, competitive pricing and creative billing arrangements
o Relatively simple and elegant programmatic and technical solutions
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The Company believes that this business model emphasizing smaller
satellites, commercial approaches, technological simplicity, architectural and
interface standardization and horizontal integration ("whole product") provides
the following advantages:
o 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
o Creates an easy and convenient way for customers to contract for space
missions and/or spacecraft subsystems
o Lowers total project costs and therefore provides greater value and
increases return on investment for SpaceDev and its customers
o Creates barriers to entry and competition from competitors
Though the Company prefers to define and execute complete space missions
for clients, it also offers customers space-delivery services (for
customer-supplied science or technology demonstration payloads);
science-instrument or technology-demonstration data-set products (from
SpaceDev-supplied payloads); integration and launch services (for a
customer-supplied spacecraft); and space hardware from commercial price lists
(for customer spacecraft).
These features of the Company's business approach thus place it more into
the template that existed during the early days of the microcomputer revolution
rather than into the classical patterns of the existing government-dominated,
limited-profit margin, aerospace industry.
PRODUCTS AND SERVICES
SpaceDev's products and services are grouped into three business areas:
Space Missions, Space Products and Engineering Services. Its business is not
seasonal to any significant extent; however, because it is a commercial
business, it follows normal industry trends.
SPACE MISSIONS
The Company's Space Missions Division offers commercial, standards-based
turnkey space missions for sale as products to a variety of customer bases
(government agencies, other countries, universities, corporations, consortia,
individuals, etc.). It is this product line for which SpaceDev was originally
formed, particularly in the deep-space arena.
DEEP-SPACE MISSIONS. SpaceDev defined the NEAP mission in 1997-99 and has
been in the process of taking the necessary steps for project implementation. In
1998 NASA Headquarters recognized the project as a valid commercial "Mission of
Opportunity" for both its Discovery Program of solar-system exploration missions
and Mid-class Explorer ("MIDEX") program of space-science missions. This opened
the door for space scientists to submit proposals to NASA for science-instrument
development funding and for coverage of the fee that SpaceDev would charge the
scientist for an instrument ride on NEAP. Three proposals were submitted (two to
Discovery and one to MIDEX) in 1998, but none were selected nor funded. In
December 1998, SpaceDev funded JPL to evaluate the feasibility of supporting the
NEAP mission with NASA's DSN, and in October 1999 JPL and NASA headquarters
concurred that such support was feasible. From the mission-operations
standpoint, NASA now treats NEAP as a valid mission (an "Advanced Planning"
mission). NEAP is the first proposed commercial deep-space mission to be granted
this status.
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In December 1998, approximately fifteen months after SpaceDev announced the
feasibility of deep space missions costing less than $50 million, a SpaceDev-led
team was awarded a contract by JPL to assess the feasibility of sending
"micromissions" to Mars for less than $50M total mission cost each. These
missions would cost approximately one-third to one-fifth of recent Mars-mission
costs. An extensive final report was submitted to JPL the following March. This
work formed the basis for redefining the NEAP mission to be significantly
smaller and lower cost than the previous baseline and also prompted SpaceDev to
offer low-cost commercial lunar orbiter and Mars probe-carrier missions
employing a similar design. The Company marketed its commercial micromissions
concept during the summer of 1999 and by late fall was fielding inquiries from
various U.S. and foreign prospects.
EARTH-ORBITING MISSIONS. A natural byproduct of the Company's focus on
small, low-cost spacecraft for commercial deep-space mission applications is the
in-house capability to design, build, market and sell similar concepts for
Earth-orbiting applications.
In November 1999 the Space Missions Division was awarded a turnkey mission
contract by the Space Sciences Laboratory (SSL) at University of California,
Berkeley (UCB). SpaceDev was competitively selected by UCB/SSL's Dr. Michael
Hurwitz to design, build, integrate, test and operate a small spacecraft called
CHIPSat. The 85-kg microspacecraft will carry one science instrument, the Cosmic
Hot Interstellar Plasma Spectrometer, or CHIPS. CHIPS facilitates the
observation and diagnosis of the astrophysical environment in the void outside
our solar system and between the nearby stars in our galaxy. Dr. Hurwitz, the
CHIPS Principal Investigator, and his team are responsible for the overall
CHIPSat mission, designing and building the CHIPS instrument, and performing the
science-data analysis.
CHIPSat is the first mission of NASA's low-cost University-Class Explorer
(UNEX) series to be approved for the implementation phase. SpaceDev started its
work on the CHIPSat project in November 1999 under the $4,995,868 million
commercial, fixed-price contract with UCB. Initial integration and testing of
the spacecraft's components are planned at the Company's headquarters in Poway
in late 2000. Launch at the Cape Canaveral Air Station on a Boeing Delta II is
expected in early 2002, followed by one year of mission operations to be
controlled at SpaceDev's Mission Control Center in Poway, California.
SpaceDev believes that the CHIPSat contract establishes the Company as a
significant competitor in the small-satellite arena, and it expects this
perception to spread rapidly among NASA, DoD, university/R&D, and foreign and
commercial customer bases during the next several months.
SPACE PRODUCTS
SpaceDev's space-products business currently includes spacecraft and
related space systems; launch vehicles and propulsion modules.
SPACECRAFT AND RELATED SPACE SYSTEMS. The Company is presently bidding on
several programs to supply spacecraft buses that would utilize the basic
elements of the CHIPSat and other proprietary spacecraft designs.
LAUNCH VEHICLES AND PROPULSION MODULES. Currently, SpaceDev's ISS
subsidiary is performing design analyses and computer simulations of various
sounding rockets and launch vehicles that primarily use hybrid-propulsion
technology (based on the AMROC intellectual property). The Company anticipates
the possible spin-off of this activity from ISS once specific product lines are
defined and developed. Currently, however, no action has been taken to
accomplish such a spin-off.
In mid-1999 ISS competitively won an R&D contract from the U.S. Air Force
Office of Space Launch to study the feasibility of building small, hybrid-based
"micro" kick-motors for small-satellite applications. The Secondary Payload
Orbital Transfer Vehicle (SPOTV) family has a multitude of possible on-orbit
uses and is now being marketed by SpaceDev as a part of its growing product
line.
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ENGINEERING SERVICES
SpaceDev corporate-level staff and staff in SMD and ISS are available for
supplying aerospace-related technical services to a variety of clients. ISS is
currently most actively engaged in such services.
Most ISS employees are former launch systems engineers and managers at
General Dynamics in San Diego; many have extensive experience with the Atlas
family of launch vehicles and other large-scale rockets and launch facilities.
The ISS staff has core competencies in engineering design and analysis; system
modeling and simulation; instrumentation and testing; launch-site operations and
range safety; launch environments and transport; and mission and trajectory
design. Other skills include project planning and development; systems
engineering and pre-design engineering (e.g., definition of engineering
processes and methods); and systems integration.
ISS has recently performed launch-vehicle design and testing support
services for the Atlas launcher program, Titan/Centaur program and the Kistler
Aerospace launcher development program. ISS has also provided launch-site
design, analysis, test and operations support for various U.S. launcher programs
and launch sites. Various engineering services have been supplied to over a
dozen unmanned spacecraft, manned spacecraft and Remotely Piloted Vehicles
(RPVs).
MARKET STRATEGIES
SPACE MISSIONS
The Company intends through its commercial deep-space and Earth-orbiting
missions to prove its viability and establish itself as the premier commercial
space-exploration and development company. Once it has established its
capabilities for insured, high-quality, fast turnaround and low-cost systems and
missions, the Company believes it will be able to effectively compete, develop
new markets and expand existing markets for space exploration and other
applications.
The Company believes that its low-cost commercial missions can provide
unique information content to various traditionally unconventional space-mission
customers. In particular, the Company is actively seeking potential strategic
partners and customers who share SpaceDev's vision of the convergence of
commercial deep-space activities with selected Internet, media, entertainment
and education activities.
DEEP-SPACE MISSIONS. Since all deep-space missions to date world-wide have
been defined and executed by various government agencies, SpaceDev's plan for
defining and executing such missions as a commercial venture places the Company
at the forefront of a new way of doing business in this arena. Under such
conditions, questions naturally arise within the space community about whether
the Company and its partners are capable of successfully performing in this
arena. The Company's approach is two-fold: (1) Selectively compete for
deep-space related work (R&D studies and development efforts as well as real
projects) against established space-systems companies, and (2) Define, develop
and execute space missions independently of government agencies. Inherent to the
latter approach is a concerted effort to define and cultivate alternative
sponsors for these missions, such as other commercial companies, research and
technology consortia, non-U.S. space interests, etc.
SpaceDev's win of the JPL-funded Mars Micromissions study in 1998 is
representative of approach (1) above, while its efforts to define and promote
the NEAP mission fit approach (2) above.
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EARTH-ORBITING MISSIONS. The market situation in this arena has
similarities to the deep-space arena, but there are more competitors and a wider
variety and greater number of missions to consider as marketing targets. The
challenge here, as in the deep-space arena, is for the Company to rapidly
establish credibility by selectively competing for and winning R&D studies and
development efforts as well as real projects. The Company's commercial focus
works more easily with government-funded efforts if it performs the work on a
commercial basis for a Principal Investigator or task manager who interfaces
directly with the government sponsor(s). For non-governmental sponsors, the
Company prefers to deal directly with the customer(s).
SPACE PRODUCTS
SPACECRAFT AND RELATED SPACE SYSTEMS. In general, the Company believes
that any market target in the space-missions segment discussed above also
represents a potential customer for its space products (vs. turnkey missions).
This includes both the earth-orbiting and deep space markets.
LAUNCH VEHICLES AND PROPULSION MODULES. SpaceDev addresses this market
segment with its ISS subsidiary. Small spacecraft are produced by government
agencies, universities and commercial companies throughout the United States,
Europe and Japan. These spacecraft represent significant science and
technology-demonstration opportunities that require exposure to the space
environment to fulfill their mission objectives. Annual launch rates for such
spacecraft are limited principally by the high cost of current launch vehicles.
These conditions result in many valuable experiments and payloads being left on
the ground.
Recognizing this problem, government and commercial industry have been
performing research and development in an attempt to reduce the cost per
kilogram (or pound) to orbit for small spacecraft. Paul Coleman, president of
the Universities Space Research Association (USRA), has challenged the space
industry with launch-cost targets priced between $2.0M and $3.5M for a 300-kg
spacecraft. Clearly, today's commonly used launch-vehicle technologies cannot
achieve this goal. Launch service users have pinned their future hopes on
reusable launch vehicles, which appear to be ten years or more away from
day-to-day use, to lower launch costs.
In the near term the only real hope for small spacecraft is to find an
alternative path to space using a secondary ride system such as the Ariane
Structure for Auxiliary Payloads (ASAP) or a low-cost launch system yet to be
developed. ISS retained key personnel critical in the development of General
Dynamics' Atlas Centaur launch vehicle. It is believed that this level of
experience has never before been available to the small launch-vehicle market.
ISS has also obtained the rights to the patents and intellectual property
produced by the former American Rocket Company (AMROC), which specialized in
hybrid rocket technology (solid fuel and liquid or gas oxidizer) in the design
of sounding rockets and launch vehicles.
The ISS approach of combining large-vehicle expertise with the lower cost
inherent in hybrid rocket technology could give small payload customers new and
valuable capabilities at small-business savings. SpaceDev research has indicated
a very large university and government market, starving for cost-effective
access to space. ISS intends to put that expertise to work building a family of
orbital transfer vehicles and small launch vehicles using hybrid rocket
technology. The funds need to fully develop this family of vehicles have not yet
been secured and there is no guarantee that these funds can be raised.
ENGINEERING SERVICES
SpaceDev addresses this market segment principally with its ISS subsidiary,
though the SMD staff can be applied selectively to provide such services. The
current business base lies principally within the aerospace- engineering and
test-services market. ISS can be distinguished from its competitors by its
highly experienced personnel, who gained their knowledge and know-how during
years of employment with major aerospace companies (General Dynamics Space
Systems in particular). Contemporary space-market analysis indicates an overall
trend toward shrinking budgets. This could result in smaller spacecraft, rapid
turn-ons, shorter schedules and smaller project budgets. ISS is being groomed to
work within this environment. ISS intends to exploit its technologies, low-cost
focus, rapid turn-on capabilities and small-business assets to form teaming
arrangements, solicit business and win contracts.
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Currently no experienced small launch-vehicle company is known to offer
this service to space-vehicle contractors. ISS also offers experienced personnel
to launch-vehicle customers as a low-cost alternative to in-house capabilities.
ISS provides companies the ability to complete jobs where the work has surpassed
workforce capabilities or the task requires unique expertise, without having to
hire permanent employees.
COMPETITION
SpaceDev believes that competition for sales of its products and services
is based on price, performance and other technical features, contracting
approach, reliability, scheduling, customization, and in some situations,
geography.
SPACE MISSIONS
The primary domestic competition for space missions in the targeted
SpaceDev markets comes from such companies as Orbital Sciences Corporation, Ball
Aerospace and Technology Corporation, Spectrum Astro, Inc., Space Dynamics
Laboratory and AeroAstro. Though Lockheed Martin Aerospace, TRW, Inc., Swales
Aerospace, GM Hughes Electronics and a few other companies and R&D organizations
are perhaps capable of mounting a competition in these markets, the Company is
not aware of any serious intent to do so. SpaceDev believes that it has made
much more substantial and significant progress compared to these firms in
defining business models and pursuing sales in the small, emerging commercial
deep-space and Earth-orbiting markets. In addition to private companies there
are certain universities in the United States that have the capability to
produce reasonably simple satellites.
The clear competitor in the international arena is Surrey Satellite
Technology Limited in the UK. Swedish Space Corporation is also able to compete
in the small-satellite arena; they were named in November 1999 as the prime
contractor for ESA's SMART-1 technology-demonstration spacecraft to the Moon.
The Company is not aware of any current direct and credible competition in
the field of commercial space exploration and development. Firms such as those
mentioned above and other R&D laboratories (e.g., JPL, Applied Physics
Laboratory, ISAS in Japan) have the technical knowledge and experience to design
and execute missions similar to NEAP and CHIPSat, but they are primarily
government agencies or contractors. SpaceDev management believes that federal
procurement regulations and accounting systems make it difficult if not
impossible for these companies and labs to compete on price with the Company.
Governments and government programs like those in NASA, ESA and the
Japanese space agencies (NASDA and ISAS) have executed many missions over a
period of many years, but all of these are characterized by long lead times,
high expense, little flexibility, and generally uninsured payloads. It is
SpaceDev's opinion that NASA Administrator Dan Goldin has done an excellent job
in lowering the cost of NASA missions, but the cost has declined from billions
of dollars to hundreds of millions of dollars, whereas SpaceDev is targeting
missions costing tens of millions. With the overhead and culture of such
agencies and their defense contractors, it may be difficult for the
government-defined and managed programs to lower costs much more.
The Company believes that government-driven programs pose very little
threat of competing on the basis of price, although governments have
considerably greater experience, and substantially greater financial, workforce
and facilities resources. The Company also believes that governments and their
legislatures will increasingly encourage and support private, routine commercial
space exploration due to budgetary pressures, private-sector job creation and
tax-revenue considerations.
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SPACE PRODUCTS
The trend in some sectors of the space industry to smaller, lower cost
spacecraft is creating a new market for smaller, cheaper, launch-on-demand space
systems. With respect to SpaceDev's initiatives into low-cost launch systems,
several competitors have already entered the top end of this small-satellite
market, including Lockheed Martin with its Athena launch vehicle and Orbital
Sciences Corporation with its Pegasus and Taurus. The launch costs of these
vehicles, beginning at approximately $16 million per launch, are considered by
many to be too expensive for university-class and micro-spacecraft missions,
resulting in low launch rates for these launch systems. Although these companies
have been operating longer than SpaceDev, the Company believes that it may be
able to effectively compete against them in the area of launching small
satellites for under $10 million. This, combined with what is perceived as the
rapid growth in the demand for mini and micro-satellites, has left the market
open for a low-cost, reliable, rapidly deployed family of launch vehicles.
EXPENDABLE LAUNCH VEHICLES. Today's launch mainstays in the large
launch-vehicle class are the United States' Titan, European Ariane and Russian
Proton and Zenit. In the medium launch-vehicle class the United States' Atlas
and Delta rockets face heavy competition from around the world from the European
Space Agency, former Soviet States and more recently from Japan, China and
India. In the small launch-vehicle class the United States' Athena, Taurus and
Pegasus are dominant. Microcosm, Inc. has been working on the development of a
low-cost family of expendables called Scorpius, with first orbital launch not
expected before 2002. A common thread in the existing medium and small
launch-vehicle classes is that the United States' launch systems are
consistently more expensive than their foreign counterparts. SpaceDev believes
there is a great need for a low-cost (less than $10 million) U.S.-built and
controlled micro launch system. SpaceDev has not formally initiated a launch
vehicle program and might not in the future.
RE-USABLE LAUNCH VEHICLES. There is only one partially re-usable launch
vehicle currently in use: the Space Shuttle (the "Space Transportation System,"
or STS). Over the past five years, a multitude of companies have been working on
a variety of designs to capture this market. The most notable attempts at
developing re-usable vehicles are the NASA co-sponsored X-33/Venture Star (with
a Lockheed Martin-led consortium), the X-34 (with an Orbital-led consortium) and
the X-38 (led by Boeing). Other commercial firms such as Kistler, Kelly, Roton,
and Pioneer Rocketplane are attempting to develop conceptually similar systems.
ENGINEERING SERVICES
There are a number of small to very large companies that supply engineering
services in the space arena. SpaceDev offers one unique capability in that it
has collocated in one area both launch and spacecraft engineers. This allows the
Company to provide efficient and coordinated responses to design issues that
almost always have both spacecraft and launch considerations.
REGULATION
The Company's business activities are regulated by various agencies and
departments of the U.S. Government and, in certain circumstances, the
governments of other countries. Exports of the Company's products, services, and
technical information require licenses from the U.S. Department of State, which
recently published new regulations restricting the ability of U.S. based
companies to complete off-shore launches, or to export certain satellite
components and technical data to certain non-NATO countries. Commercial space
launches require licenses from the U.S. Department of Transportation.
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Command and telemetry frequency assignments for space missions are
regulated internationally by the International Telecommunications Union (ITU)
and in the U.S. by the Federal Communications Commission (FCC) and National
Telecommunications Information Agency (NTIA).
In addition, the Company is 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.
The failure of the Company to comply with any of the above mentioned
regulations could have material adverse effects.
EMPLOYEES
As of the date of this registration statement, the Company, together with
ISS, employs approximately 25 persons full and part-time, of which most are
aerospace, mechanical and electrical engineers. The Company expects to hire
other personnel as necessary for product development, quality assurance, sales
and marketing and administration.
SpaceDev does not have any collective bargaining agreements with its
employees and believes its employee relations are good. An employee
stock-incentive program and an employee stock-purchase program were approved at
the 1999 annual shareholders meeting and have been implemented.
INTELLECTUAL PROPERTY
SpaceDev relies in part on patents, trade secrets and know-how to develop
and maintain its competitive position and technological advantage. The Company
intends to protect its intellectual property through a combination of license
agreements, trademark, servicemark, copyright, trade secret laws and other
methods of restricting disclosure and transferring title. There is no guarantee
that such applications will be granted. The Company has and intends to continue
entering into confidentiality agreements with its employees, consultants and
vendors; entering into license agreements with third parties; and generally
seeking to control access to and distribution of its intellectual property.
In August 1998, SpaceDev acquired license to intellectual property
(including patents and trade secrets) from an individual who had acquired them
from the former American Rocket Company (AMROC), which specialized in hybrid
rocket technology. The Company issued warrants to this individual to purchase a
minimum of 100,000 and a maximum of 3,000,000 shares of its Common Stock over
the next 10 years, depending on the Company's annual revenues related to sales
of hybrid technology-based products.
In 1999 the Company began preparing a new patent application addressing a
technological need in the small-satellite arena. It expects to submit the
application in early 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the Company
financial statements and the notes thereto and the other financial information
appearing elsewhere in this document. In addition to historical information, the
following discussion and other parts of this document contain forward-looking
information that involves risks and uncertainties. Actual results could differ
materially from those anticipated by such forward-looking information due to
risk factors discussed elsewhere in this submittal.
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OVERVIEW
SpaceDev, Inc. is a development-stage company organized under the laws of
the State of Colorado on December 23, 1996. It became a publicly traded company
in October 1997 and is currently trading on the Over-The-Counter Bulletin Board
exchange under the symbol "SPDV."
SpaceDev's overall vision is to establish itself as the world's first
commercial space exploration and development company operating in "small space"
- - small spacecraft, small space transportation systems and focused, low-cost
mission solutions. SpaceDev is pioneering a revolutionary space-products
business that has strong parallels to the early days of the microcomputer
revolution. The Company's approach is to provide small spacecraft -
approximately 250 kg mass and less - and compatible small launch vehicles to a
growing market of commercial and government customers. SpaceDev intends to use
common commercial business practices rather than the government-driven processes
that dominate the space industry. SpaceDev seeks to avoid "re-inventing the
wheel" on each project and instead intend to rely on proven, "trailing-edge"
technologies and relatively stable product and service offerings.
During 1997 operating activities consisted largely of developing the
preliminary designs and mission analysis for the NEAP mission. During 1998,
SpaceDev acquired ISS and SIL. In 1998, operating activities included
engineering technical services work for aerospace customers and continued
development of NEAP preliminary designs and mission analysis. During 1999,
operating activities included preliminary design and conceptual studies for the
CHIPSat program, engineering technical services and continued work on the NEAP
mission. SpaceDev's employee base increased with the acquisition of ISS to 20
employees in February 1998.
Effective December 17, 1999, SpaceDev. Inc. entered a "Mutual Release and
Rescission of Agreement" with the management of Space Innovations Limited (SIL)
to rescind the original acquisition of SIL by SpaceDev. Following general
acceptable accounting principles, SpaceDev Inc.'s 1998 Consolidated Financial
Statements have not been restated and include SIL as a wholly-owned subsidiary.
All interim financial statements for 1999 have been adjusted and will include
SIL under the equity method of accounting, as a consolidated entity since
control of SIL was only temporary. Goodwill related to the acquisition of SIL
was reclassified to investment in SIL and not eliminated on the consolidated
financial statements for 1999.
RESULTS OF OPERATIONS FOR THE FOUR-MONTH PERIOD ENDED DECEMBER 31, 1997 AND THE
FISCAL YEAR ENDED DECEMBER 31, 1998
NET SALES
For the four-month period ended December 31, 1997 the Company generated
no sales. In 1998, net sales consisted primarily of engineering technical
services to aerospace customers. Net sales were $2,093,254 in 1998.
COST OF SALES
Cost of sales primarily represents all costs directly associated with
individual contracts. Included in this category are direct labor and associated
fringe benefits, direct material and subcontracts, and direct travel. Cost of
sales was $1,152,813 (55.1% of net sales) for 1998 compared to no cost of sales
generated for 1997.
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SALES AND MARKETING
The Company did not incur sales and marketing expenses for the period
ended December 31, 1997. Sales and marketing expense consists primarily of
direct marketing expenses, salaries and commissions. Sales and marketing expense
was $141,581 (6.8% of net sales) during 1998.
RESEARCH AND DEVELOPMENT
Research and development expense in 1998 was $700,921 compared to
$904,094 expended in 1997. The 1998 expense was incurred in the continued
development of the NEAP project and SIL's program to develop their MiniSIL and
small satellite projects. The 1997 expenses were primarily subcontractor and
consulting expenses related to the NEAP project. The Company expenses research
and development costs as they are incurred.
GENERAL AND ADMINISTRATIVE
General and administrative expense consist primarily of salaries for
administrative personnel, fees for outside consultants, goodwill allocation of
acquisition costs, depreciation, facilities related costs, insurance, legal and
accounting fees, and other overhead. General and administrative expense was
$2,001,507 (95.6% of net sales) during 1998 compared with no general and
administrative expenses for 1997. Amortization expenses associated with the
acquisition of ISS, SIL and the hybrid technology totaled $894,688 (44.7% of
total general and administrative). It is anticipated that overall general and
administrative expense will increase in the foreseeable future. General and
administrative expense as a percentage of net sales may fluctuate depending upon
the level of future net sales and the timing of additional investments in
general and administrative infrastructure.
OTHER INCOME EXPENSE, (NET)
Net interest expense of $6,074 during 1998 resulted from interest
incurred on a building mortgage and various leases of $87,270 and other income
of $93,154 from SIL's Grant contract with the UK government. The Company did not
incur interest expenses for the period ended 1997.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 1999
NET SALES
Net sales, for the nine months ended September 30, 1999, consisted
primarily of the sales for engineering technical services to various aerospace
customers. Net sales were $634,145 for the nine months ending September 30, 1999
compared with sales of $1,083,096 for the same period in 1998 (41.5% reduction).
This reduction in sales was a direct result of Integrated Space Systems' move
from the Small Disadvantage Business classification after being acquired. This
reclassification resulted in loss contract opportunities of approximately
$500,000. However, during this period, contracts with seven new customers were
initiated.
Net sales are generated through either fixed price contracts or time
and material contracts. Sales recognition for time and material contracts is
recognized at time of work, while fixed price contracts are based on a percent
completion basis.
On November 1, 1999, SpaceDev entered into a $4,995,868 firm fixed
price contract with the University of California at Berkeley. It is anticipated
that net revenues will increase in the year 2000 with this contract award.
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COST OF SALES
Cost of sales primarily represents all costs directly associated with
individual contracts. Included in this category are direct labor and associated
fringe benefits, direct material and subcontracts, and direct travel. Cost of
sales for the nine-month period ended September 30, 1999 was $331,498 (52.3% of
net sales) compared to $493,268 (46% of net sales) for the first nine months of
1998.
RESEARCH AND DEVELOPMENT
Research and development expense for the nine-month period ended
September 30, 1999 was $67,816 compared to $173,754 for the first nine months in
1998 (61.0% reduction). These expenses were incurred in the continued
development of the NEAP project and other projects. The Company expenses
research and development costs as they are incurred.
GENERAL AND ADMINISTRATIVE
General and administrative expense consists primarily of salaries for
administrative personnel, fees for outside consultants, goodwill allocation of
acquisition costs, depreciation, facilities related costs, insurance, legal and
accounting fees, and other overhead. General and administrative expense for the
nine months ended September 30, 1999 was $1,896,045 (299% of net sales) compared
to $1,314,325 (121% of net sales) during first nine months of 1998. Amortization
expenses associated with the acquisition of Integrated Space Systems for the
nine months ending September 30, 1999 totaled $522,826 (24.3% of general and
administrative) compared to $462,078 in the same period in 1998 (35% of general
and administrative). SpaceDev anticipates that overall general and
administrative expense will increase in the foreseeable future; however, general
and administrative expense as a percentage of net sales may fluctuate depending
on the level of future net sales and the timing of additional investments in
general and administrative infrastructure.
OTHER INCOME EXPENSE, (NET)
Net interest expense of $500,541 for the nine-month period ended
September 30, 1999 was interest incurred on a building mortgage and various
leases of $220,680 and an equity loss in subsidiary of $280,127.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business strategy requires significant capital expenditures.
The Company will incur a substantial portion of these expenditures before it
generates significant sales. Combined with operating expenses, these capital
expenditures will result in a negative cash flow until the Company establishes
an adequate revenue-generating customer base. The Company expects losses through
2000 and does not expect to generate net positive cash flow from operations
sufficient to fund both operations and capital expenditures until the launch of
its first commercial spacecraft or launch vehicle. There is no assurance that
the Company will achieve or sustain any positive cash flow or profitability
thereafter.
During the year ended December 31, 1999, the Company raised approximately
$900,000 through private sales of stock. After consummation of this offering,
the Company still requires substantial additional funds, currently estimated at
more than of $10,000,000 to implement its business strategies. The Company does
not have a commitment from any placement agent or underwriter to obtain
additional funds or to implement this or any additional public offering. The
Company hopes to raise additional capital through private or public offerings.
The expected proceeds from such offerings are expected to generate sufficient
funds to meet the Company's cash requirements for the next twelve months and to
allow the Company to begin to implement various business strategies. The Company
has raised $360,000 of funding through a recent registered offering in Colorado,
and anticipates that such capital, when coupled with revenues generated by
CHIPSat and the Company's general operations, may be sufficient to help maintain
operations until additional funding becomes available.
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The Company's ability to consummate any additional public offering or
otherwise obtain funds is subject to numerous factors beyond the Company's
control, including, without limitation, a receptive securities market and
appropriate governmental clearances. No assurances can be given that the Company
will be profitable, or that any additional public offering will occur, that the
Company will be successful in obtaining additional funds from any source or that
the Company will be successful in implementing an acceptable exit strategy on
behalf of its investors. Moreover, additional funds, if obtainable at all, may
not be available on terms acceptable to the Company when the Company needs such
funds or may be on terms which are significantly adverse to the Company's
current shareholders. The unavailability of funds when needed would have a
material adverse effect on the Company.
The Company may also need to raise additional capital if, for example,
(i) significant delays occur in deploying its first deep-space mission due to
technical difficulties, launch, or satellite failure, or other reasons; (ii) the
Company does not enter into agreements with customers on the terms the Company
anticipates; (iii) the Company's net operating deficit increases because it
incurs significant unanticipated expenses; or (iv) the Company incurs additional
costs from modifying all or part of NEAP or its proposed hybrid-related systems
to meet changed or unanticipated market, regulatory, or technical requirements.
If these or other events occur, there is no assurance that the Company could
raise additional capital on favorable terms, on a timely basis or at all. A
substantial shortfall in funding would delay or prevent deployment of NEAP
and/or the hybrid-related systems.
RECENT DEVELOPMENTS
In December 1999 the Company completed negotiations with SIL to rescind
the 1998 Share Acquisition Agreement between the parties and to arrange a more
mutually beneficial trading relationship between SIL and the Company. It was
unclear what effect recent regulations released by the U.S. Department of State
(restricting export of technical information) would have on the offshore
operations of SIL as a wholly owned subsidiary of the Company. Management
believed rescission of the agreement would allow the Company more flexibility in
its relationship with SIL. Although the long-term financial effects of the
rescission on the Company are unclear, management anticipates that, initially,
the rescission will have a positive net effect on the Company's balance sheet.
In January 2000, the Company received preliminary approval from a
financial institution to refinance the $1.3 million first mortgage on the
company's office building. This refinancing changes the first mortgage from a
one-year term loan to a 25-year term loan and reduces the interest expense from
13% to 10%.
YEAR 2000 COMPLIANCE
Many existing computer systems and applications, and other control devices
use only two digits to identify a year in the date field, without considering
the impact of the recent change in the century. Others do not correctly process
"leap year" dates. The Company has not experienced any technical difficulties as
a result of this problem, however, systems and applications could fail or create
erroneous results during the next six months. While the Company has evaluated
its products for year 2000 compliance and believes that each is substantially
year 2000 compliant, there can be no assurance that the Company's products are
or will ultimately be year 2000 compliant. In addition, the Company believes
that it is not possible to determine whether all of its customers' products into
which the Company's products are incorporated are year 2000 compliant because
the Company has little or no control over the design production and testing of
its customers' products.
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The Company relies on its systems, applications and devices in operating
and monitoring all major aspects of its business, including financial systems
(such as general ledger, accounts payable and payroll modules), customer
services, infrastructure, embedded computer chips, networks and
telecommunications equipment and end products. The Company could be affected
through disruptions in the operation of the enterprises with which the Company
interacts or from general widespread problems or an economic crisis resulting
from non-compliant year 2000 systems. Despite the Company's efforts to address
the year 2000 impact on its internal systems and business operations, there can
be no assurance that such impact will not result in a material disruption of its
business or have a material adverse effect on the Company's business, financial
condition or results of operations. Contingency plans include alternative
vendors and procedures. Remediation costs associated with the Year 2000 have
been minimal for the Company. SpaceDev believes such costs will continue to be
nominal through the next six months.
ITEM 3. DESCRIPTION OF PROPERTY
SpaceDev owns over 25,000 square feet of office, engineering and
manufacturing space in Poway, CA.
In December 1998 the Company purchased its headquarters facility in the
Poway Industrial Park complex and proceeded to invest $300,000 in modifications
and improvements before moving in mid-May (SpaceDev corporate and ISS). Key uses
of the Poway facility are program and project conferences and meetings,
engineering design, engineering analysis, spacecraft assembly, avionics labs and
software labs and media outreach. By late 1999 the Company had defined plans for
outfitting the building with a 1,800 square foot clean-room facility to support
spacecraft integration and additional space for testing, an avionics test area,
machine shop and shipping/receiving area. Completion of these improvements is
expected in 2000. The Company also has plans for a Mission Control Center in the
Poway building and expects this to be completed in 2000. Avionics systems may be
built up from components and undergo system-level tests at this location prior
to shipment to other facilities. Because these improvements depend on the
Company obtaining adequate funding, there can be no assurance that they will be
completed as scheduled.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as December 31, 1999 concerning
the beneficial ownership of the Company's common stock by (i) each director,
(ii) each named executive officer, (iii) each shareholder known by the Company
to be the beneficial owner of more than 10% of its outstanding Common Stock, and
(iv) the directors and officers as a group. Except as otherwise indicated, the
persons named in the table have sole voting and investing power with respect to
all shares of Common Stock owned by them.
<TABLE>
<CAPTION>
- ------------------------------ ----------------------------------- ---------------------------- --------------------
Name and Address of Beneficial Amount and Nature of Percent of Class
Title of Class Owner(2) Beneficial Ownership
- ------------------------------ ----------------------------------- ---------------------------- --------------------
<S> <C> <C> <C>
$.0001 par value common stock James W. Benson, CEO and 9,628,413(2)(3) 66%(1)
President and
Susan Benson, Secretary
13855 Stowe Drive
Poway, California 92064
$.0001 par value common stock Philip E. Smith 333,335 2.2%
Chief Operating Officer
13855 Stowe Drive
Poway, California 92064
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$.0001 par value common stock Jan A. King, Vice President 5,000 <0.1%
13855 Stowe Drive
Poway, California 92064
$.0001 par value common stock Wesley T. Huntress Jr., Director 4,444 <0.1%
13855 Stowe Drive
Poway, California 92064
$.0001 par value common stock Officers and Directors as a group 9,971,192 67.2%(1)
</TABLE>
(1) Where persons listed on this table have the right to obtain additional
shares of Common Stock through the exercise of outstanding options or
warrants or the conversion of convertible securities within 60 days from
December 31, 1999, 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 14,839,945
Shares outstanding on December 31, 1999.
(2) Does not include options to purchase 500,000 shares of common stock
currently exercisable.
(3) Represents 236,000 shares held directly by James W. Benson; 8,895,000
shares held by SD Holdings, LLC, an entity controlled by James W. Benson;
and 497,413 shares recently transferred from SD Holdings, LLC to Space
Development Institute, a 501(c)(3) corporation.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The management and directors of the Company's business activities are under
the control of its Board of Directors. Its Chief Executive Officer, James W.
Benson, manages the Company's daily operations. The Company currently has four
directors. Below are the executive officers and directors of the Company.
NAME POSITION HELD
- ---- -------------
James W. Benson Chief Executive Officer, President,
13855 Stowe Drive Director, Chairman of the Board
Poway, California 92064
Charles H. Lloyd** Director, Chief Financial Officer
13855 Stowe Drive
Poway, California 92064
Philip E. Smith*** Chief Operating Officer - ISS
13855 Stowe Drive
Poway, California 92064
Susan Benson Secretary
13855 Stowe Drive
Poway, California 92064
Jan King Vice-President, Space Engineering
13855 Stowe Drive
Poway, California 92064
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Wesley T. Huntress* Director
13855 Stowe Drive
Poway, California 92064
* Denotes Independent Director
** Thomas W. Brown resigned as the Company's Chief Financial Officer on
November 3, 1999. He remains acting Chief Financial Officer of the
Company's wholly owned subsidiary, ISS. Mr. Lloyd has been appointed
Chief Financial Officer of SpaceDev.
*** Philip E. Smith resigned as a Director of the Company in November 1999.
The Board of Directors has appointed Charles H. Lloyd to act as interim
director until the next annual shareholders' meeting.
The following is a summary of the business experience of the officers and
directors of the Company as well as other key employees.
JAMES W. BENSON, age 54, is the founder of the Company, and has served as
its Chief Executive Officer and President since inception. Mr. Benson is also a
Director of the Company, a position he has held since October 1997. In 1984, Mr.
Benson founded Compusearch Corporation (later renamed Compusearch Software
Systems), in McLean, Virginia. The company was based on use of personal
computers to create full text indexes of massive government procurement
regulations and to provide fast full text searches for any word or phrase; the
first instance of large scale, commercial implementation of PC-based full text
searching, which later grew to encompass such systems as worldwide web search
engines. Seeing related opportunities in document and image management, Mr.
Benson started the award-winning ImageFast Software Systems in 1989, which later
merged with Compusearch. In 1995, Mr. Benson sold Compusearch and ImageFast, and
retired at age fifty. After months of research, Mr. Benson started SpaceDev LLC,
which was acquired by the Company in October 1997. 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 a
member of the American Society of Civil Engineers subcommittee on Near Earth
Object Impact Prevention and Mitigation.
CHARLES H. LLOYD, age 49, has been retained as the Company's Chief
Financial Officer following resignation of that position by Thomas W. Brown on
November 3, 1999. Mr. Lloyd has also been named the CEO of the Company's ISS
subsidiary. Mr. Lloyd was formerly the CEO and President of International Launch
Services (ILS), a joint venture of Lockheed Martin Corporation, Khrunichev State
Research and Production Space Center and RSC Energia. During his tenure at ILS,
he was responsible for the development, expansion, and ongoing operation of the
joint venture. Lloyd aggressively marketed product lines globally, not only by
overcoming cultural barriers, but also by structuring the organization to
support multiple product and management requirements. He is credited with
developing strategic international relationships between the United States and
Russia, and with setting the industry standard for strict controls in the
transfer of technology. Lloyd and his team at ILS generated over a billion
dollars in new contracts and developed competitive markets in Asia, Europe, and
North America, all of which have provided increased revenues. Mr. Lloyd has
close to 20 years of senior management experience in high technology,
international service and manufacturing environments, with most of that time in
positions focused on operations management, marketing and finance and
administration. Prior to his employment with Lockheed and ILS, Mr. Lloyd held
several management positions at General Dynamics (GD). He was Vice President and
Managing Director, and responsible for the management and operations of General
Dynamics Commercial Launch Services. Prior to that, he was Vice President of
Finance and Controller of GD Space Systems, and Vice President of Finance and
Administration of GD Services Company. Mr. Lloyd began his career as a Senior
Financial Planning Analyst at Ford Motor Company in 1975. Mr. Lloyd holds a
Masters of Business Administration from the University of Michigan and earned
his Bachelor of Arts Degree in Finance from Virginia Polytechnic Institute and
State University.
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PHILIP E. SMITH, age 41, was a Director of the Company until November 1999
and has been COO of ISS since February 1998, when the Company acquired ISS, a
company he founded in 1994. Mr. Smith was the President and founder of ISS, a
profitable engineering services company from 1994 to 1998. Mr. Smith began his
aerospace career in 1983, when he joined then General Dynamics' Space Systems
Division in San Diego, California as a launch vehicle engineer. Prior to joining
GDSS, he worked for several engineering firms in the San Francisco Bay area,
including Bechtel, URS John Blume and EDS Nuclear. Mr. Smith earned a Bachelor
of Science degree in Civil Engineering (with honors) and a Master of Science
degree in Structural/Mechanical Engineering from University of California at
Berkeley in 1980 and 1982 respectively. He is currently a member of the Board of
Directors of California Space Technology Alliance, a California non-profit
corporation that is the "California Spaceport Authority." He is a registered
professional civil engineer in the State of California.
SUSAN BENSON, age 54, has served as the Company's Secretary since its
inception. She is the wife of James W. Benson. Ms. Benson was the Customer
Support Manager for Compusearch Software Systems in McLean, Virginia from 1986
through 1995.
JAN KING, age 52, has served as Vice-President of the Company since August
1998. With more than 30 years experience in the field, Mr. King has a
distinguished record within the small satellite and launch vehicle communities.
During this time he has been associated with the design and development of 17
small spacecraft and 9 larger spacecraft, as well as one launch vehicle. He has
also provided technical advice and consulting support to other corporations and
organizations regarding small satellite system technology. Some of his previous
positions include: Schriever Chair Professor (endowed chair), Dept. of
Astronautics, United States Air Force Academy; Vice President, Technology,
Qualcomm, Inc., Boulder, Colorado; Vice President of Boulder Operations, Orbital
Sciences Corporation; Vice President for Space Technology, Member BOD and
Founder, Skylink Corporation; Aerospace Technologist, NASA/GSFC; Vice President
for Engineering, Member of the BOD, Co-founder of the Radio Amateur Satellite
Corp., Washington, D.C. Mr. King received a Bachelor of Science degree in
Physics from Oakland University in 1968 and a Master of Science degree in
Electrical Engineering from Catholic University of America in 1973.
WESLEY T. HUNTRESS, age 57, was elected to the Company's Board of
Directors as an Independent Director at the Company's annual shareholder meeting
held June 30, 1999. 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. Prior to his appointment
at Carnegie, Dr. Huntress served the Nation's space program as the Associate
Administrator for Space Science at NASA from October 1993 through September 1998
where he was responsible for NASA's programs in astrophysics, planetary
exploration, and space physics. During his tenure, NASA space science produced
numerous major discoveries, and greatly increased the launch rate of missions.
These discoveries include the discovery of possible ancient microbial life in a
Mars meteorite; a possible subsurface ocean on Jupiter's moon Europa; the
finding that gamma ray bursts originate at vast distances from the Milky Way and
are extraordinarily powerful; discovery of massive rivers of plasma inside the
Sun; and a wealth of announcements and images from the Hubble Space Telescope,
which have revolutionized astronomy as well as increased public interest in the
cosmos. 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 (JPL). Dr.
Huntress joined JPL as a National Research Council resident associate after
receiving is B.S. 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. He and his JPL team gained an international reputation for their
pioneering studies of chemical evolution in interstellar clouds, comets and
planetary atmospheres. 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.
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REX RIDENOURE, age 43, is the Company's Chief Mission Architect, a position
he has held since August 1998. Mr. Ridenoure brings 20 years of broad experience
in the space-mission community, including a distinguished track record over the
past decade at Jet Propulsion Laboratory (JPL), the world's leading center for
deep-space mission planning, engineering, and implementation. During the past
two decades he has contributed to the success of five deep-space missions, eight
Earth-orbiting missions, and was directly involved with more than a dozen
mission studies, many of which evolved into ongoing programs and successful
missions. Mr. Ridenoure's previous positions include: Manager, Microcosm's Space
Systems Division; Program Architect, NASA's New Millennium Program; Project and
Mission Engineer on five projects, JPL; Mission Planner for the Voyager-2
Neptune Encounter; Mission Engineer on GEO comsats at Hughes and Hubble at
Lockheed. Mr. Ridenoure received a Bachelor of Science degree Cum Laude in
Aerospace Engineering from Iowa State University in 1978 and a Master of Science
degree in Aeronautics from California Institute of Technology in 1979.
THOMAS BROWN, age 46, has more than 20 years of management experience in
finance, new business development, contracts/estimating, and accounting in both
government and commercial manufacturing environments, including in-depth
knowledge of Government Cost Accounting Standards, advanced cost management
accounting, cost estimate preparation, and performance analysis. His
accomplishments include supervising staff of six employees in the development
and administration of General Dynamics Convair Division financial data for a $2
billion dollar fixed price commercial program; directing the reengineering of
the Convair Division financial forecasting system to integrated all disciplines
of forecasting (i.e. indirect budgets, rates development, material and revenue
forecasting, and performance measurement); supervising staff of twelve persons
in the development of over 100 government and commercial new business proposals
annually; holding various supervisory positions including Manager of Estimating,
Chief of Advanced Cruise Missile Estimating, and Chief of Proposal Rates and
Factors.
ITEM 6. EXECUTIVE COMPENSATION
REMUNERATION PAID TO EXECUTIVES
The following table sets forth the remuneration to the Company's
executive officers for the past three fiscal years:
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
---------------------------------------
Long Term Compensation
------------------------------------- -------------------------- ------------
Annual Compensation Awards Payouts
------------------------------------- -------------------------- ------------ ------------
Other Securities
Annual Restricted Under- All Other
Name and Compen- Stock lying LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year(3) Salary ($) Bonus ($) ($) ($) SARs (#) ($) ($)
- --------------- --------- ------------ ------------ ----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James W. 1997 - - - - 2,500,000 - -
Benson, CEO 1998 0 - - - - - -
1999 0 - - - 100,000 - -
22
<PAGE>
Charles H. 1997 - - - - - - -
Lloyd, CFO(1) 1998 - - - - - - -
1999 - - - - 450,000 - -
8,077
Philip E. 1997 - - - - - - -
Smith 1998 61,060 - - - 100,000 - -
COO(5) 1999 43,388 - - - - - -
Thomas 1997 - - - - - - -
Brown, 1998 59,246 - - - 100,000 - -
CFO(1) (5) 1999 68,454 - - - - - -
Susan 1997 - - - - - - -
Benson, 1998 0 - - - - - -
Secretary 1999 0 - - - - - -
Jan King, 1997 - - - - - - -
V.P. 1998 43,154 - - 10,000 - - 5,500(2)
1999 132,000 - - - - - -
</TABLE>
(1) Thomas W. Brown resigned as the Company's Chief Financial Officer on
November 3, 1999. He continues as acting Chief Financial Officer for ISS.
Charles H. Lloyd was appointed Chief Executive Officer upon Mr. Brown's
resignation.
(2) Represents a relocation allowance paid upon execution of Mr. King's
employment agreement.
(3) Figures for 1999 represent actual compensation and represent true year-end
compensation.
(4) James W. Benson purchased 100,000 shares for $.50 per share in December
1998.
(5) Certain of the employees listed above have earned compensation in excess of
the actual amount paid during fiscal year ended 1999, pursuant to the terms
of their various employment agreements, as discussed below. In 1999, Philip
E. Smith was paid a salary of $43,388 and Thomas Brown was paid $68,454.
These amounts are less than the amounts due to them under the provisions of
their employment agreements. The Company is currently in negotiations with
both Mr. Smith and Mr. Brown to determine the actual amount still due to
them for services provided in 1999 and the form of payment. It is possible
that all or a portion of the amount due will be paid to Mr. Smith and Mr.
Brown on a deferred basis or in the form of non-cash consideration. It is
anticipated that the final results of these negotiations will not have a
material impact on the Company's financial results.
During the last fiscal year and as of December 31, 1999, the Company
granted stock options to executive officers as set forth in the following table:
23
<PAGE>
<TABLE>
OPTION/SAR GRANTS ENDED DECEMBER 31, 1999
<CAPTION>
Individual Grants
- ----------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise of Base
Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date
- ---- ----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
James W. Benson - - - -
Charles H. Lloyd 450,000 100% $1.34 11/01/09
Philip E. Smith - - - -
Thomas W. Brown - - - -
Susan Benson - - - -
Jan King - - - -
</TABLE>
The following table is intended to provide information as to the number of
stock options exercised by each of the executive officers listed above, the
value realized upon exercise of such options, and the number and value of any
unexercised options still held by such individuals.
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised In-the-
Unexercised Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)
Shares Acquired on Exercisable/ Exercisable/
Name Exercise (#) Value Realized ($) Unexercisable Unexercisable
- -------------------------- ---------------------- --------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
James W. Benson(1) 0 0 500,000/ $500,000/
2,000,000 0
Charles H. Lloyd 0 0 0/450,000 0/0
Philip E. Smith 0 0 0/100,000 0/0
Thomas W. Brown 0 0 0/100,000 0/0
Susan Benson 0 0 0 0
Jan King 0 0 0 0
</TABLE>
(1) Mr. Benson owns options to purchase 2,500,000 shares of the Company's
Common Stock as follows: 500,000 Shares at $1.00 currently vested 500,000
Shares at $1.50 vesting upon the Company obtaining $6,500,000 additional
equity capital 500,000 Shares at $2.00 vesting upon the financing/execution
of NEAP 500,000 Shares at $2.50 vesting upon launch of NEAP 500,000 Shares
at $3.00 vesting upon NEAP rendezvous with target asteroid
(2) Under the terms of Mr. Lloyd's employment agreement with ISS, SpaceDev, as
the parent corporation, agreed to grant Mr. Lloyd incentive stock options
to purchase 250,000 shares of the Company's common stock pursuant to the
Company's Stock Option Plan upon execution of the employment agreement.
24
<PAGE>
These options begin vesting three(3) months after the date of grant. Mr.
Lloyd will receive an additional 750,000 incentive stock options at a rate
of 250,000 per quarter during his first year of employment with ISS.
Additionally, the Company agreed to issue Mr. Lloyd non-qualified stock
options to purchase up to 200,000 common shares, which will vest upon ISS
raising and acquiring a minimum equity financing of $3,000,000 within the
first nine (9) months of his employment. These options will be issued on a
sliding scale based on a maximum equity financing of $10,000,000, with
options to purchase 20,000 common shares for each $1,000,000 of equity
financing obtained. All options will be exercisable at the fair market
value of the common stock on the date the option was granted.
(3) Pursuant to employment agreements with Philip E. Smith and Thomas W. Brown,
the Company has issued performance-based options to purchase 100,000 shares
of common stock to each of those individuals. None of these options are
currently vested. The options will have exercise prices ranging from $1.50
per share to $3.50 per share.
REMUNERATION PAID TO DIRECTORS
The following table sets forth the remuneration paid to the Company's
directors during its fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
- ----------------------- ------------------------------------------------------ -------------------------------------
Cash Compensation Security Grants
------------------------------------------------------ -------------------------------------
Number of
Securities
Annual Retainer Consulting Number of Shares Underlying
Name Fees Meeting Fees Fees/Other Fees Options/SARs
- ----------------------- ----------------- ----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
James W. Benson - - - - -
- ----------------------- ----------------- ----------------- ------------------ ------------------ ------------------
Charles H. Lloyd(1) - - - - -
- ----------------------- ----------------- ----------------- ------------------ ------------------ ------------------
Wesley T. Huntress(2) - - - 4,444 -
- ----------------------- ----------------- ----------------- ------------------ ------------------ ------------------
Thomas W. Brown(3) - - - - -
- ----------------------- ----------------- ----------------- ------------------ ------------------ ------------------
Susan Benson (3) - - - - -
- ----------------------- ----------------- ----------------- ------------------ ------------------ ------------------
Philip E. Smith(1) - - - - -
- ----------------------- ----------------- ----------------- ------------------ ------------------ ------------------
</TABLE>
(1) Philip E. Smith resigned as a director of the Company in November 1999. The
Board has elected Charles H. Lloyd to serve as interim director until the
next annual shareholders' meeting.
(2) Wesley T. Huntress Jr. was elected to the Board at the 1999 Annual
Shareholders' Meeting
(3) Thomas B. Brown and Susan Benson resigned their positions on the Board by
not running for re-election at the 1999 Annual Shareholders' Meeting.
EMPLOYMENT AGREEMENTS
On November 21, 1997, the Company entered into a five-year employment
agreement with its President, James W. Benson. This agreement provides for
compensation of salary and stock as well as stock options. This agreement also
prohibits Mr. Benson from competing with the Company, disclosing any
confidential information, or soliciting any employees or customers of the
Company for one year after termination of employment.
25
<PAGE>
On February 7, 1998, the Company, through ISS, entered into three-year
employment agreements with its (then) Chief Operating Officer, Philip E. Smith,
its Manager of Business Development, Jack A. Rubidoux, and its (then) Chief
Financial Officer, Thomas W. Brown. These agreements provide for compensation of
salary and stock to the employees. The agreements also prohibit the employees
from competing with the Company, disclosing any confidential information, or
soliciting any employees or customers of the Company for three years after
termination of employment.
On August 3, 1998, the Company entered into a one-year employment agreement
with its Vice President, Space Engineering, Jan King. This contract will
automatically renew for one-year periods unless either party gives the other
written notice and provides for compensation of salary and stock to the
employee. Mr. King agreed to assign his interest in all inventions and
intellectual property developed by him in conjunction with his employment to the
Company. The agreement also prohibits Mr. King from competing with the Company,
disclosing any confidential information, or soliciting any employees or
customers of the Company for one year after termination of employment.
On November 1, 1999, the Company, through ISS, entered into an employment
agreement with its Chief Financial Officer, Charles H. Lloyd. The agreement
automatically renews for one-year periods until terminated by written notice of
either Mr. Lloyd or the Company. This agreement provides for compensation of
salary and options to the employee. The agreement also prohibits the employee
from competing with the Company for one year after termination of employment.
EMPLOYEE BENEFITS
The Company has adopted, at its 1999 Annual Stockholder Meeting, an
Incentive Employee Stock Option Plan under which its Board of Directors may
grant employees, directors and affiliates of the Company opportunities to
purchase Incentive Stock Options, Supplemental Stock Options and to receive
stock bonuses or rights to purchase restricted stock of the Company. Incentive
Stock Options will only be available to employees, including officers, and
affiliates of the Company; they will not be available to non-employee directors.
The exercise price of the Incentive Stock Options shall not be less than 100% of
the fair market value of the stock subject to the option on the date the option
is granted. The exercise price for the Supplemental Stock Options will not be
less than 85% of the fair market value of the stock subject to the option on the
date the option is granted. The Company will be required to reserve an amount of
common shares equal to the number of shares which may be purchased as a result
of such stock awards.
The Company also offers a variety of health, dental, vision and life
insurance benefits to its employees. The Company also offers a 401(k) program to
its employees.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
James W. Benson, the Company's Chief Executive Officer and Chairman of the
Board of Directors, and Susan Benson, the Company's Secretary, are husband and
wife.
James W. Benson has personally guaranteed the letters of credit of the
Company's subsidiary, Integrated Space Systems in the amount of $250,000. Mr.
Benson also personally guaranteed two loans for the purchase of the Company's
new headquarters; the loans are in the amount of $1,800,000.
ITEM 8. DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue up to 50,000,000 shares of its $.0001
par value common stock, of which 14,839,945 shares issued and outstanding as of
December 31, 1999. The Board of Directors may issue additional shares of Common
Stock without the consent of the holders of Common Stock.
26
<PAGE>
VOTING RIGHTS
Each outstanding share of Common Stock is entitled to one vote. The
holders of 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 the directors of the Company to be elected, if
they so choose.
NO PREEMPTIVE RIGHTS
Holders of Common Stock are not entitled to any preemptive rights.
DIVIDENDS AND DISTRIBUTIONS
Holders of Common Stock are entitled to receive such dividends as may be
declared by the directors out of funds legally available therefore and to share
pro rata in any distributions to holders of Common Stock upon liquidation or
otherwise. However, the Company has not paid cash dividends on its Common Stock,
and does not expect to pay such dividends in the foreseeable future.
PREFERRED STOCK
The Articles of Incorporation authorize the Board of Directors to issue, by
resolution, 10,000,000 shares of preferred stock, in classes or series, having
such designations, powers, preferences, rights, and limitations as the Board of
Directors may from time to time determine. The conversion ratio is subject to
certain anti-dilution adjustments, and the holder of each share of preferred
stock is entitled to one vote for each share of common stock into which it would
convert. In 1997, 82,450 shares of Series B Convertible Preferred Stock were
issued at $3.64 per share and each was convertible at the option of the holder
into 100 shares of common stock. As of the date of this Prospectus, all of the
Series B Convertible Preferred Stock has been converted, and there are no
preferred shares outstanding.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock has been traded on the Over the Counter
Bulletin Board since August 1998 under the symbol "SPDV." The following table
sets forth the trading history of the Common Stock on the Over the Counter
Bulletin Board for each quarter as reported by Tradeline. The quotations reflect
inter-dealer prices, without retail mark-up, markdown or commission and may not
represent actual transactions.
END DATE HIGH LOW CLOSE
- -------- ---- --- -----
03/31/99 2 1/2 1 7/8 2 1/4
06/30/99 2 3/8 1 1/2 2 1/4
09/30/99 2 3/8 1 1/8 1 3/8
12/31/99 1 7/8 7/8 1 1/8
27
<PAGE>
HOLDERS
As of December 31, 1999, there were approximately 156 holders of record of
the Company's common stock.
DIVIDENDS
The Company has never paid a cash dividend on its Common Stock. Payment of
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
dividends in the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS
On August 6, 1998, the Securities and Exchange Commission ("SEC")
issued an Cease-and-Desist Proceeding ("Order") against the Company and James W.
Benson, for violation of Section 17(a) of the Securities Act of 1933 and Section
10(b) of the Securities Exchange Act of 1934. Although the Company and Mr.
Benson disputed the allegations, they submitted offers of settlement to the SEC
that were accepted on April 13, 1999. No sanctions were imposed against either
the Company or Mr. Benson.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
During its last fiscal year and as of the date of this Registration
Statement, the Company has had no changes in or disagreements with its principal
independent accountant regarding any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, nor
has the Company's principal accounting firm resigned or declined to stand for
re-election.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
During 1997, the Company entered into a five-year employment agreement with
its president. As part of the employment agreement, the Company granted options
to the president to purchase up to 2,500,000 shares of the Company's $.0001 par
value restricted Common Stock. In accordance with APB 25, the Company recognized
$500,000 of compensation expense and $250,000 of deferred compensation. The
options are subject to vesting conditions and have exercise prices between $1.50
and $3.00 per share.
On October 22, 1997, the Company entered into three agreements to grant
options to purchase common stock restricted under Securities Exchange Commission
Rule 144 in consideration for consulting services. The options were granted for
a total of 573,150 shares of the Company's $.0001 par value common stock with an
exercise price of $.07 per share. All of the options were exercisable at
December 31, 1997 and each option was to expire on October 21, 2002. Based on
the use of the Black-Scholes option-pricing model, the fair value of the stock
options issued for these services was $211,333. As a result, the Company
recognized $211,333 in consulting expenses in 1998 related to the issuance of
Common Stock options. All of these options were exercised in 1998. The options
were issued pursuant to Rule 701 of the Securities Act. During 1998, the Company
recorded approximately $126,000 of compensation expense related to 348,000
shares of Common Stock issued to the president at less than fair market value.
Also, during 1998, the Company issued 573,150 shares of Common Stock upon the
exercise of stock options.
28
<PAGE>
On February 7, 1998, the Company entered into a Share Acquisition Agreement
with ISS, pursuant to which it issued 2,000,000 shares of its Common Stock under
Section 4(2) of the Securities Act in exchange for the outstanding shares of ISS
(then a privately held company). ISS is now a wholly owned subsidiary of the
Company. In addition to the issuance of shares, the ISS shareholders also
received two seats on the Board of Directors of the Company, and former
employees of ISS became employees of the Company; such employees to receive
performance options for an additional 300,000 shares.
In August 1998, the Company secured intellectual property, including
patents and trade secrets, from an individual who had acquired them from
American Rocket Company (AMROC), an aerospace company active during the late
1980s and early 1990s. The consideration for the intellectual property was
warrants to purchase a minimum of 100,000 and a maximum of 3,000,000 shares of
the Company's Common Stock over the following 10-year period, depending on the
Company's annual revenues. The shares issued to AMROC, were issued pursuant to
the private offering exemption in Section 4(2) of the Securities Act. In return
for the exclusive royalty free right to use, sell and apply patents and other
technology developed by an individual, the Company issued warrants to purchase
25,000 shares of Common Stock at 50% of their fair market value on the date of
issuance. The warrants were issued pursuant to Section 4(2) of the Securities
Act. The individual will receive warrants to purchase a minimum of 75,000 shares
and a maximum of 3,000,000 shares of Common Stock at 50% of their fair market
value on the date of issuance. The number of shares varies with revenue
generated by the technology on specific dates.
On October 1, 1998 the Company entered into a Common Stock Exchange
Agreement with SIL pursuant to Section 4(2) of the Securities Act. Upon
execution of the Agreement, the Company obtained all outstanding shares of SIL
(then a privately held company) and issued 1,000,000 shares of the Company's
Common Stock to the SIL shareholders. The Company also agreed to issue
additional shares of Common Stock valued at $1,000,000 to the SIL shareholders
in installments, with the final installment due on July 15, 2000. SIL
shareholders also received incentive stock options for 500,000 additional
shares. SIL became a wholly owned subsidiary as a result of this Agreement. In
December 1999, the Company and SIL negotiated a rescission of the Share
Acquisition Agreement.
In 1998, the Company's Chief Executive Officer, James W. Benson, purchased
100,000 shares of the Company's common stock at a per share price of $0.50
pursuant to Section 4(2) of the Securities Act. All of these options have been
exercised, and the underlying shares have been issued with the appropriate
resale restrictions.
During 1998, the Company entered agreements with sales, investor relations
and public relations firms to perform services for the Company. In return for
these services, the Company issued 92,190 shares of its Common Stock pursuant to
the exemption in Section 4(2) of the Securities Act and recorded expenses of
approximately $120,000.
As part of an employment agreement with Jan King, the Company issued 5,000
shares of Common Stock as a signing bonus and recorded $8,750 of compensation
expense. The agreement renews annually and can be canceled by either party under
provisions of the agreement. Upon renewal of the agreement, the employee will
receive 5,000 shares of Common Stock annually for two years. The agreement also
includes 50,000 stock options with exercise prices of between $2 and $3 per
share. These options will vest upon future events occurring.
In conjunction with the Common Stock Exchange Agreement between the Company
and SIL, the Company granted options to five key employees to purchase up to
350,000 shares of restricted Common Stock with exercise prices between $1.50 and
$3.50 per share. The vesting of these options is contingent on several future
events. Should these events occur, no options would vest. These options are
being issued pursuant to Rule 701 of the Securities Act. The option agreements
were rescinded in December 1999 as part of the mutual rescission and release
between the Company and the former SIL shareholders.
29
<PAGE>
During 1999, the Company entered into agreements with sales, investor
relations, public relations firms and an employee to perform services for the
Company. For the three and nine months ended September 30, 1999, the Company
issued 7,074 and 30,656 shares of its common stock and recorded expense of
approximately $11,000 and $164,000, respectively.
All of the above referenced securities are restricted by Rule 144 of the
Securities Act of 1933.
During 1998 and 1999, the Company issued 970,235 shares of its Common
Stock, priced at an average of $0.66 per share for a total amount of $634,412.
These shares were issued in reliance on the exemption from registration provided
by Rule 504 under Section 3(b) of the Securities Act.
On August 26, 1999, the Colorado Securities Division made effective the
Company's registration statement on Form U-7 for offers and sales to Colorado
residents. The offering is for an aggregate amount of $350,000 in units of the
Company's $.0001 par value common stock and re-pricing warrants. Following
closing on the first $350,000 in units, the Company filed a post-effective
amendment to the Form U-7 registration statement to raise the aggregate amount
of the offering to $730,000. The post-effective amendment was made effective on
October 13, 1999. The Company sold $10,000 in units pursuant to the
post-effective amendment for an approximate price of $0.83 per share. The
Company made a decision to close this offering in December 1999.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation contain a provision which, in
accordance with Colorado law, eliminates or limits the personal liability of
directors and officers of the Company for monetary damages for certain breaches
of their duty of care or other duty if he or she acted in good faith and in a
manner they believed to be in, or not opposed to, the best interests of the
Company, except that no indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable
for negligence or misconduct in the performance of his or her duty to the
Company unless otherwise determined by the court before which such action was
brought. The Company believes this provision is essential to maintain and
improve its ability to attract and retain competent directors. These
indemnification provisions do not reduce the exposure of directors and officers
to liability under federal and state securities laws, nor do they limit the
shareholders' ability to obtain injunctive relief or other equitable remedies
for a violation of a director's or officer's duty to the Company or its
shareholders, although such equitable remedies may not be an effective remedy in
certain circumstances.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company is informed that it is
the opinion of the Securities and Exchange Commission that such indemnification
is against public policy and therefore unenforceable.
ITEM 6. FINANCIAL STATEMENTS
Please see the Company financial statements attached hereto.
30
<PAGE>
<TABLE>
PART III
ITEM 1. INDEX TO EXHIBITS
<CAPTION>
ITEM EXH. NO.
- ----- --------
<S> <C>
Registrant's Articles of Incorporation 2.1*
Registrant's Articles of Amendment to Articles of Incorporation dated November 4, 1997 2.2*
Authorizing Series B Preferred Stock
Registrant's Articles of Amendment to Articles of Incorporation dated December 17, 1997 2.3*
Registrant's Bylaws 2.4*
Form of Common Stock Certificate 3.1*
Form of Non-Qualified Stock Option 3.2*
Form of Incentive Stock Option 3.3*
Form of Re-Pricing Warrant 3.4*
Form of Warrant 3.5*
Common Stock Exchange Agreement Between Registrant and SIL 6.1*
Mutual Rescission and Release of Share Acquisition Agreement 6.2*
Share Exchange Agreement Between Registrant and ISS 6.3*
Agreement of License and Purchase of Technology Between Registrant and AMROC 6.4*
Firm Fixed Price Agreement Number 108252 Between Registrant and Regents of the University of California 6.5*
1999 Stock Option Plan 6.6*
1999 Employee Stock Purchase Plan 6.7*
Employment Agreement of James W. Benson 6.8*
Employment Agreement between ISS and Thomas W. Brown 6.9*
Employment Agreement between ISS and Philip E. Smith 6.10*
Employment Agreement of Jan A. King 6.11*
Employment Agreement between ISS and Charles H. Lloyd 6.12*
SpaceDev 1997 Financials - Audited 15.1
Space Innovations Limited 1998 Audited Financials 15.2
Space Innovations Limited 3rd Quarter 1999 Reviewed Financials 15.3
</TABLE>
- ------------------
* Previously filed with 10SB12G filed January 18, 2000.
ITEM 2. DESCRIPTION OF EXHIBITS
As appropriate, the Registrant has attached those documents required to be
filed as Exhibit Numbers 2, 3, 5, 6 and 7 of Part III of Form 1-A.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
SPACEDEV, INC.
Date: /s/ January 27, 2000 By: /s/ James W. Benson
--------------------- -----------------------------------------
James W. Benson, President and CEO
Date: /s/ January 27, 2000 By: /s/ Charles H. Lloyd
--------------------- -----------------------------------------
Charles H. Lloyd, Chief Financial Officer
31
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1999
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
CONTENTS
================================================================================
REPORT ON REVIEWED CONSOLIDATED FINANCIAL STATEMENTS 3
FINANCIAL STATEMENTS
Consolidated Balance Sheet 4
Consolidated Statements of Operations 5
Consolidated Statements of Stockholders' Equity 6
Consolidated Statements of Cash Flows 7-8
Notes to Consolidated Financial Statements 9-23
<PAGE>
REPORT ON REVIEWED CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors of
SPACEDEV, INC.
We have reviewed the accompanying consolidated balance sheet of SPACEDEV, INC.
AND SUBSIDIARY (the "Company") (see Note 1(c) to the consolidated financial
statements) as of September 30, 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the three and nine months
ended, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants. All
information included in these consolidated financial statements is the
representation of the management of SPACEDEV, INC.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the consolidated financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements in order for them
to be in conformity with generally accepted accounting principles.
As discussed in Note 1(e) to the consolidated financial statements, the method
of accounting for its investment in SIL, a wholly-owned subsidiary, changed
effective January 1, 1999.
/s/ Nations, Smith, Hermes, Diamond
January 10, 2000
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEE ACCOUNTANTS' REVIEW REPORT
================================================================================
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
ASSETS (Note 4)
CURRENT ASSETS
Cash (Note 10) $ 18,009
Accounts receivable 134,622
Other current assets 6,974
- --------------------------------------------------------------------------------
Total current assets 159,605
FIXED ASSETS - NET (Notes 1(f) and 2) 2,035,842
INVESTMENT IN SUBSIDIARY (Note 1(e)) 2,561,096
INTANGIBLE ASSETS - NET (Notes 1(f) and 3) 2,326,319
OTHER ASSETS 130,321
- --------------------------------------------------------------------------------
$7,213,183
================================================================================
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
================================================================================
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 9,335
Line of credit (Note 4) 121,410
Current portion of notes payable (Note 5(a)) 1,298,921
Current portion of capitalized lease obligations (Note 9) 1,702
Acquisition price payable (Note 1(e)) 1,000,000
Accounts payable and accrued expenses 211,163
Customer deposits and deferred revenue 24,166
Related party note payable (Note 5(b)) 627,500
- --------------------------------------------------------------------------------
Total current liabilities 3,294,197
NOTES PAYABLE, LESS CURRENT MATURITIES (Note 5(a)) 960,000
CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES (Note 9) 2,581
- --------------------------------------------------------------------------------
Total liabilities 4,256,778
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.001 par value, 10,000,000 shares
authorized and no shares issued and outstanding (Note 8(a))
Common stock, $.0001 par value; 50,000,000 shares authorized,
14,857,851 shares issued and outstanding (Note 8(b)) 1,485
Additional paid-in capital 7,431,574
Additional paid-in capital - stock options (Note 8(d)) 750,000
Deferred compensation (Note 8(d)) (250,000)
Accumulated deficit (4,976,654)
- --------------------------------------------------------------------------------
Total stockholders' equity 2,956,405
- --------------------------------------------------------------------------------
$7,213,183
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS CONSOLIDATED FINANCIAL
STATEMENT.
4
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
SEE ACCOUNTANTS' REVIEW REPORT
================================================================================
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPT. 30, 1999 SEPT. 30, 1999
- --------------------------------------------------------------------------------
NET SALES $ 167,555 $ 634,145
Cost of sales 120,676 331,498
- --------------------------------------------------------------------------------
GROSS MARGIN 46,879 302,647
OPERATING EXPENSES
General and administrative 636,257 1,896,045
Research and development (Note 1(g)) 4,109 67,816
- --------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 640,366 1,963,861
- --------------------------------------------------------------------------------
LOSS FROM OPERATIONS (593,487) (1,661,214)
- --------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Equity loss from subsidiary (Note 1(e)) (174,806) (280,127)
Interest expense (83,363) (220,680)
- --------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (258,169) (500,807)
- --------------------------------------------------------------------------------
NET LOSS $ (851,656) $ (2,162,021)
================================================================================
BASIC AND DILUTED NET LOSS PER SHARE $ (.06) $ (.21)
- --------------------------------------------------------------------------------
Weighted-Average Shares Outstanding
(Basic and Diluted) 14,852,298 10,173,541
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE>
<TABLE>
SEE ACCOUNTANTS' REVIEW REPORT
====================================================================================================================================
<CAPTION>
Redeemable
Preferred Stock Common Stock
--------------------------------- ---------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 82,450 $ 82 6,047,743 $ 605
Shares issued for cash - - 30,000 3
Shares issued for services (Note 8(b)) - - 721 -
Comprehensive Income (Loss):
Net loss - - - -
Foreign currency translation adjustment - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1999 82,450 82 6,078,464 608
Preferred Stock Converted to Common Stock (82,450) (82) 8,245,000 825
Shares issued for cash - - 161,113 18
Shares issued for services (Note 8(b)) - - 22,861 -
Comprehensive Income (Loss):
Net loss - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 - - 14,507,438 1,451
Shares issued for cash - - 343,339 34
Shares issued for services (Note 8(b)) - - 7,074 -
Comprehensive Income (Loss):
Net loss - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) - - - -
BALANCE AT SEPTEMBER 30, 1999 - $ - 14,857,851 $ 1,485
====================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
============================================================================================================================
<CAPTION>
Additional
Paid-in: Accumulated
Additional Capital Other
Paid-In - Stock Deferred Accumulated Comprehensive
Capital Options Compensation Deficit Income Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$6,713,229 $ 750,000 $ (250,000) $(2,814,633) $ 7,323 $4,406,606
64,931 - - - - 64,934
1,666 - - - - 1,666
- - (527,535) - (527,535)
- - - - (7,323) (7,323)
- ----------------------------------------------------------------------------------------------------------------------------
- - - (527,535) (7,323) (534,858)
- ----------------------------------------------------------------------------------------------------------------------------
6,779,826 750,000 (250,000) (3,342,168) - 3,938,348
(743) - - - - -
176,984 - - - - 177,002
151,349 - - - - 151,349
- - - (782,830) - (782,830)
- ----------------------------------------------------------------------------------------------------------------------------
- - - (782,830) - (782,830)
- ----------------------------------------------------------------------------------------------------------------------------
7,107,416 750,000 (250,000) (4,124,998) - 3,483,869
312,966 - - - - 313,000
11,192 - - - - 11,192
- - - (851,656) - (851,656)
- ----------------------------------------------------------------------------------------------------------------------------
- - - (851,656) - (851,656)
- ----------------------------------------------------------------------------------------------------------------------------
$7,431,574 $ 750,000 $ (250,000) $(4,976,654) $ - $2,956,405
============================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
6
</TABLE>
<PAGE>
<TABLE>
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SEE ACCOUNTANTS' REVIEW REPORT
===================================================================================================================
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, 1999 SEPT. 30, 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (851,656) $(2,162,021)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 203,044 608,847
Loss on investment in subsidiary 174,806 280,127
Common stock issued for compensation and services 11,192 164,207
Change in operating assets and liabilities:
Accounts receivable 1,211 30,401
Prepaid assets - 2,050
Other assets 6,646 20,383
Accounts payable and accrued expenses 616 (49,089)
Customer deposits and deferred revenue 24,166 24,166
- -------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (429,975) (1,080,929)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets (2,433) (22,999)
Investment in subsidiary - (85,000)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,433) (107,999)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 313,000 554,936
Proceeds from notes payable - related party 99,500 390,500
Proceeds from bank lines of credit 32,300 21,410
Increase in bank overdraft 7,488 9,335
Payments on capitalized lease obligations (3,295) (10,381)
Payments on note payables (375) (1,079)
Proceeds from notes payable - 143,000
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 448,618 1,107,721
- -------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - (7,323)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 16,210 (88,530)
CASH AT BEGINNING OF PERIOD 1,799 106,539
- -------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 18,009 $ 18,009
===================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
7
</TABLE>
<PAGE>
<TABLE>
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS, CONTINUED
SEE ACCOUNTANTS' REVIEW REPORT
===================================================================================================================
<CAPTION>
THREE MONTHS NINE MONTHS ENDED
ENDED SEPT. 30, 1999
SEPT. 30, 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION:
Cash paid during the period for:
Interest $ 45,178 $ 235,400
NONCASH INVESTING AND FINANCING ACTIVITIES:
During the three and nine months ended September 30, 1999, the Company issued 7,074 and 30,656
shares of stock for consulting expense of $11,192 and $164,207, respectively.
===================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
8
</TABLE>
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF A summary of the Company's significant accounting
SIGNIFICANT policies consistently applied in the preparation of
ACCOUNTING the accompanying consolidated financial statements
POLICIES follows.
(a) NATURE OF SPACEDEV, INC. (the "Company") was incorporated under
OPERATIONS the laws of Colorado on December 23, 1996 as Pegasus
Development Group, Inc. (PDGI). The Company is engaged
in the commercial development of low cost satellites
and their subsystems, as well as engineering technical
services to major aerospace companies. The principal
markets of the Company are the United States and
Europe. See Note 11(a).
The principal activities from inception have been
organizational matters, the sale and issuance of shares
of its $.0001 par value common stock and $.001 par
value preferred stock as part of a public stock
offering and the execution of a stock acquisition
agreement.
PDGI was originally formed for the purpose of entering
the real estate industry. SpaceDev LLC was formed for
commercial space exploration. On October 22, 1997, the
PDGI acquired 100 percent, or 1,000,000 shares, of
SPACEDEV'S $.001 par value common stock from SpaceDev,
LLC in exchange for 82,450 shares of the Company's
$.001 par value convertible, preferred stock, pursuant
to a comprehensive plan of reorganization of PDGI.
Following the acquisition of SPACEDEV, SPACEDEV was
merged into PDGI and the name of the corporation was
changed to SPACEDEV, INC. After the reorganization, the
former stockholders of SPACEDEV owned a majority of the
outstanding common stock of the Company, after giving
effect to the conversion privilege of the preferred
stock which is convertible into 8,245,000 shares of
common stock.
For accounting purposes, the transaction has been
accounted for as a recapitalization of Company with the
Company as the acquirer (reverse acquisition). Since
SPACEDEV had, prior to the recapitalization, minimal
assets, the recapitalization has been accounted for as
the sale of 1,755,000 shares for net assets of $1,232.
The Company's preferred shares reflected in the
consolidated financial statements have been restated
based upon the exchange rates of preferred stock issued
in connection with the acquisition.
9
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(b) LIQUIDITY The accompanying consolidated financial statements as
of September 30, 1999 and for the three and nine months
ended September 30, 1999 have been prepared assuming
the Company will continue as a going concern. However,
the Company has a negative working capital of
approximately $3,135,000 as of September 30, 1999 and
incurred a net loss of approximately $2,162,000 for the
nine months ended September 30, 1999. Subsequent to
September 1999, management intends to raise additional
equity financing to fund future operations and
commitments. There is no assurance that the new equity
will be sufficient to meet the Company's needs.
Additionally, there is no assurance that additional
equity financing needed to fund operations will be
consummated or obtained in sufficient amounts necessary
to meet the Company's needs.
The accompanying consolidated financial statements do
not include any adjustments to reflect the possible
future effects on the recoverability and classification
of assets or the amounts and classification of
liabilities that may result from the possible inability
of the Company to continue as a going concern.
(c) PRINCIPLES OF The consolidated financial statements include the
CONSOLIDATION accounts of the Company and its wholly-owned
subsidiary, Integrated Space Systems, Inc. (ISS) (a
California corporation). See Note 1(e). All significant
intercompany balances and transactions have been
eliminated in the consolidation.
(d) USE OF The preparation of financial statements in conformity
ESTIMATES with generally accepted accounting principles requires
management to make estimates and assumptions that
affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those
estimates. Significant estimates used in preparing
these consolidated financial statements include those
assumed in computing the valuation allowance on
deferred tax assets. See Note 6. It is reasonably
possible that the significant estimates used will
change within the next year.
10
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(e) INVESTMENT IN During October 1998, the Company acquired 100 percent
SUBSIDIARY of SIL (an entity in England). The transaction was
accounted for under the purchase method of accounting
with the aggregate of the purchase price in excess of
the fair market value of the assets acquired being
capitalized as goodwill. The cost of the acquired
entity was $3,100,000 which was all capitalized as
goodwill. Amortization expense was approximately
$258,000 for the three months ended December 31, 1998.
The Company issued 1,000,000 shares of restricted
common stock for the outstanding common stock of SIL.
As part of the acquisition, the Company was to issue
$1,000,000 of common stock in four semi-annual
installments over the next two years. As a result of
the Mutual Release and Rescission Agreement discussed
below, the acquisition price payable of $1,000,000 is
included as a current liability.
Under the Revenue and Profit Incentive Stock Option
Plan and the Profit Sharing Stock Issuance Plan, the
former stockholders of SIL also received options to
purchase up to 500,000 additional shares at a price to
be determined in the year of grant should certain
future events occur in each of the next three years.
During 1998, 100,000 options expired as the qualifying
events did not occur. Effective December 17, 1999, all
remaining options have been cancelled.
The consolidated statement of operations for the year
ended December 31, 1998 included the operating results
from this entity.
In December 1999, the Company entered into a Mutual
Release and Rescission of Agreement to rescind the
original acquisition of SIL effective October 1, 1998.
The accounts of SIL were originally included in the
consolidated balances of the consolidated financial
statements of the Company. Effective January 1, 1999,
the investment in SIL was accounted for under the
equity method.
As a result of the change in accounting for SIL,
approximately $2,842,000 of unamortized goodwill was
reclassified to investment in subsidiary. In addition,
the Company's consolidated net loss decreased by
approximately $258,000 and $775,000 for the three and
nine months ended September 30, 1999. The decreases
resulted from the reversal of goodwill amortization.
11
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(e) INVESTMENT IN The Agreement further specified, all shares of
SUBSIDIARY, CONT'D outstanding common stock held by SIL's shareholders
will be returned to the Company and all outstanding
options are effectively cancelled. A promissory note
was received for approximately $345,000, which
represents additional cash provided to SIL during 1998
and 1999, and is payable in 24 monthly installments.
The Company will remain a guarantor on a bank loan used
to finance SIL's operations. Under terms of the Release
Agreement, SIL agreed to apply 25 percent of the
proceeds from each payment received on a specific
contract until the bank loan is paid in full. Once paid
in full, the loan agreement will be terminated.
Summary balance sheet and statements of operations for
SIL for the three months and nine months ended
September 30, 1999 are as follows:
ASSETS
Cash $ 94,000
Accounts receivable 973,000
Inventory 179,000
Other assets 58,000
Fixed assets - net 253,000
-------------------------------------------------------
$1,557,000
=======================================================
LIABILITIES
Current liabilities $1,780,000
Long-term liabilities 54,000
Stockholders' deficit (277,000)
-------------------------------------------------------
$1,557,000
=======================================================
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPT. 30, 1999 SEPT. 30, 1999
-------------------------------------------------------
Revenues $ 825,000 $2,410,000
Direct expenses (619,000) (1,319,000)
Other expenses (381,000) (1,371,000)
-------------------------------------------------------
Net loss $ (175,000) $ (280,000)
=======================================================
12
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(f) DEPRECIATION Fixed assets are depreciated over their estimated
AND useful lives of three to eight years using the
AMORTIZATION straight-line method of accounting. Leasehold
improvements are amortized over the shorter of the
estimated useful lives of the assets or the remaining
lease term.
Goodwill and other intangible assets were created upon
the acquisition of the Company's subsidiaries.
Intangible assets are amortized over their assets
estimated future useful lives on a straight-line basis
over three to five years. Goodwill and other
intangibles are periodically reviewed for impairment
based on an assessment of future operations to ensure
they are appropriately valued in accordance with
Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of."
(g) RESEARCH AND The Company is actively engaged in new product
DEVELOPMENT development efforts. Research and development
expenditures relating to possible future products are
expensed as incurred. Total expense was approximately
$4,000 and $68,000 for the three and nine months ended
September 30, 1999, respectively.
(h) ADVERTISING The Company follows the policy of charging the costs of
advertising to expense as incurred. The Company did not
incur advertising expenses for either the three months
or nine months ended September 30 1999.
(i) INCOME Deferred income taxes are recognized for the tax
TAXES consequences in future years of differences between
the tax basis of assets and liabilities and their
financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to
the periods 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 period and the change during the period in deferred
tax assets and liabilities.
13
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(j) NEW In 1997, the Financial Accounting Standards Board
ACCOUNTING issued Statement of Financial Accounting Standards No.
STANDARDS 130, "Reporting Comprehensive Income." This Statement
was adopted in 1998. In accordance with the Statement,
comprehensive income is presented in the consolidated
statements of stockholders' equity for the three and
nine months ended September 30, 1999.
Statement of Financial Accounting Standards No. 133,
"Accounting for Derivatives Instrument and Hedging
Activities," established accounting and reporting
standards for derivative instruments. The Company has
not in the past nor does it anticipate, that it will
engage in transactions involving derivative instruments
which will impact the consolidated financial
statements.
(k) STOCK-BASED In October 1995, the Financial Accounting Standards
COMPENSATION Board issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). The Company adopted SFAS 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 Opinion 25, "Accounting for Stock
Issued to Employees" (APB 25) and has provided pro
forma disclosures as if the fair value based method
prescribed SFAS 123 has been utilized. See Note 8(d).
(l) COMMON STOCK The Company has valued its stock and stock options
AND STOCK issued to non-employees at fair value in accordance
OPTIONS TO with the accounting prescribed in SFAS 123 which states
NON-EMPLOYEES 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.
(m) NET LOSS PER Net loss per common share has been computed on the
COMMON SHARE basis of the weighted average number of shares
outstanding, according to the rules of Statement of
Financial Accounting Standards No. 128, "Earnings per
Share."
14
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(n) FINANCIAL The Company's financial instruments consist primarily
INSTRUMENTS of cash, accounts receivable, accounts payable, line of
credit, accrued expenses, notes payable and acquisition
price payable. These financial instruments are stated
at their respective carrying values, which approximate
their fair values.
2. FIXED ASSETS Fixed assets consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------------------------------------------
<S> <C>
Building and improvements $2,020,189
Furniture, fixtures and equipment 18,443
Computer equipment 156,589
Leasehold improvements 38,538
--------------------------------------------------------------
2,233,759
Less accumulated depreciation and amortization (197,917)
--------------------------------------------------------------
$2,035,842
==============================================================
</TABLE>
Depreciation and amortization expense was approximately
$29,000 and $87,000 for the three and nine months ended
September 30, 1999, respectively.
3. ACQUISITIONS During 1998, the Company acquired 100 percent of the
outstanding common stock of Integrated Space Systems
(ISS), a San Diego-based company. The Company issued
2,000,000 shares of restricted common stock for the
outstanding shares of ISS. This transaction was
accounted for under the purchase method of accounting
with the aggregate of the purchase price in excess of
the fair market value of the assets acquired being
capitalized as goodwill. The cost of the acquisition
was $3,625,000, of which $3,461,000 was capitalized as
goodwill. Amortization expense was approximately
$174,000 and $523,000 for the three and nine months
ended September 30, 1999, respectively.
The consolidated statement of operations for the three
and nine months ended September 30, 1999 includes the
operating results from this entity.
15
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. ACQUISITIONS, The Company also acquired the exclusive royalty-free
cont'd rights to use, sell and apply all technology developed
by an individual. The purchase price for these
intangible assets was $24,500. See Note 8(c).
SEPTEMBER 30, 1999
-------------------------------------------------------
Goodwill $ 3,461,000
Other intangibles 24,500
-------------------------------------------------------
3,485,500
Less accumulated amortization (1,159,181)
-------------------------------------------------------
$ 2,326,319
=======================================================
4. LINE OF The Company (through ISS) obtained a bank line of
CREDIT credit in the amount of $250,000 which matures in
November 1999. At September 30, 1999, $121,410 was
outstanding on the line of credit.
The line of credit was secured by all of the assets of
ISS. The line is also guaranteed by SPACEDEV and a key
stockholder. The interest rate under the line of credit
is prime (8.5 percent at September 30, 1999) plus 2.0
percent.
5. NOTES
PAYABLE
(a) BUILDING In December 1998, the Company signed a $1,300,000 note
NOTES payable with a lender to finance the purchase of its
new facility. The note calls for monthly payments and a
balloon payment on December 21, 1999. The note accrues
interest at 13 percent.
In December 1998, the president of the Company entered
into a $500,000 loan agreement with another lender to
finance additional costs of its new facility. This
liability was assigned to the Company and calls for 59
monthly interest payments at 12.23 percent and a
balloon payment of $505,000, including interest, on
December 17, 2003.
16
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(a) BUILDING In 1999, the Company entered into a second loan
NOTES, CONT'D agreement with the lender. The $460,000 loan calls for
59 monthly interest payments at 10.5 percent and a
balloon payment of $464,000, including interest at
March 2004.
(b) RELATED At September 30, 1999, the Company had notes payable to
PARTY stockholders for $627,000 with interest between 4
percent and 12 percent. The notes, due in March 1999,
were converted to demand notes.
6. INCOME Deferred income taxes are provided for temporary
TAXES differences in recognizing certain income and expense
items for financial and tax reporting purposes. The
deferred tax asset of $1,494,000 as of September 30,
1999, consisted primarily of the income tax benefits
from net operating loss carryforwards and research and
development credits. A valuation allowance has been
recorded to fully offset the deferred tax asset as
realization of such asset is not assured. The valuation
allowance increased approximately $544,000 in the nine
months ended September 30, 1999 from $950,000 at
December 31, 1998 to $1,494,000 at September 30, 1999.
At September 30, 1999, the Company has federal and
state tax net operating loss carryforwards of
approximately $3,108,000 The federal and state tax loss
carryforwards will expire through 2019, unless
previously utilized.
A reconciliation of the statutory income tax rates and
the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------------------------
<S> <C>
Statutory U.S. federal rate 34%
State income taxes - net of federal benefit 5%
Net operating loss for which no tax benefit is
currently available (39)%
---------------------------------------------------------------
-
===============================================================
</TABLE>
17
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
6. INCOME The tax effects of temporary differences and
TAXES, cont'd carryforwards that give rise to deferred tax assets
and liabilities consist of the following:
SEPTEMBER 30, 1999
-------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 1,444,000
Research and development credits 50,000
-------------------------------------------------------
Gross deferred tax assets 1,494,000
Valuation allowance (1,494,000)
-------------------------------------------------------
$ -
=======================================================
7. EMPLOYEE
BENEFIT PLAN
(a) PROFIT SHARING During 1997, the Company adopted a 401(k) retirement
401(K) PLAN savings plan for its U.S. employees which allows each
eligible employee to voluntarily make pre-tax salary
contributions up to 15 percent of their compensation.
The Company may elect to make a matching contribution.
During the three and nine months ended September 30,
1999, the Company did not contribute to the Plan. The
total Company contribution and participant salary
reduction may not exceed 25 percent of the compensation
of eligible participants.
(b) EMPLOYEE STOCK During 1999, the Company implemented an Incentive Stock
PURCHASE AND Option Plan as well as an Employee Stock Purchase Plan.
OPTION PLANS
8. STOCKHOLDERS'
EQUITY
(a) REDEEMABLE In 1997, 82,450 shares of $.001 par value redeemable
PREFERRED STOCK preferred stock were issued at $3.64 per share. Each
share of redeemable preferred stock is convertible, at
the option of the holder, into 100 shares of common
stock. The conversion ratio is subject to certain
anti-dilution adjustments, and the holder of each share
of preferred stock is entitled to one vote for each
share of common stock into which it would convert.
These shares were converted to 8,245,000 shares of
common stock on May 11, 1999.
18
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(b) COMMON During 1999, the Company entered agreements with sales,
investor relations and public relations firms and
employees to perform services for the Company. For the
three and nine months ended September 30, 1999, the
Company issued 7,074 and 30,656 shares of its common
stock and recorded expense of approximately $11,000 and
$164,000, respectively.
During 1998, the Company entered a five-year employment
agreement with a key employee. The agreement renews
annually and can be canceled by either party under
provisions of the agreement. Upon renewal of the
agreement, the employee will receive 5,000 shares of
common stock annually for two years. The agreement also
includes 50,000 shares of stock these shares become
available upon future events occurring.
(c) WARRANTS During 1998, the Company issued warrants to purchase
25,000 shares of common stock at 50 percent of their
fair market value on the date of issuance, in return
for the exclusive royalty free right to use, sell and
apply patents and other technology developed by an
individual. The individual will receive warrants to
purchase a minimum of 75,000 shares and a maximum of
3,000,000 shares of common stock at 50 percent of the
fair market value on the date of issuance. The number
of shares varies with revenue generated by the
technology on specific dates. At September 30, 1999,
the unissued warrants were not recorded as the future
exercise price of the warrants cannot be estimated.
(d) STOCK During 1997, the Company entered into a five-year
employment agreement with its president. As part of the
employment agreement, the Company granted options to
the president to purchase up to 2,500,000 shares of the
Company's $.0001 par value restricted common stock. In
accordance with APB 25, the Company recognized $500,000
of compensation expense and $250,000 of deferred
compensation. The options are subject to vesting
conditions and have exercise prices between $1.50 and
$3.00 per share.
19
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(d) STOCK OPTIONS, The following summarizes stock option activity related
CONT'D to the Plan:
<TABLE>
<CAPTION>
Weighted
Options Average
Outstanding Exercise Prices
------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1998 500,000 $1.00
Granted - -
Exercised - -
------------------------------------------------------------------
Balance at September 30, 1999 500,000 $1.00
==================================================================
</TABLE>
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 three and nine
months ended September 30, 1999 using the minimum value
method as prescribed by SFAS 123. Under this method,
the Company used the risk-free interest rate at date of
grant, expected volatility, 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 5.4 percent to 6.0 percent; expected
volatility of 100% and the dividend yield was assumed
to be zero, and the expected life of the options was
assumed to be 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 three and six months ended September
30, 1999 would be amortized on a pro forma basis over
the vesting period of the options. Thus, the Company's
consolidated net loss would have increased as reflected
in the following pro forma amounts:
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------------
Net loss:
As reported $(851,656) $(2,162,021)
Pro forma $(851,656) $(2,162,021)
Pro forma net loss per share $ (.06) $ (.21)
=======================================================
20
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
9. COMMITMENTS
AND
CONTINGENCIES
CAPITAL The Company leases certain equipment under
LEASES non-cancelable capital leases, which are included in
fixed assets as follows:
SEPTEMBER 30, 1999
-------------------------------------------------------
Computer equipment $ 39,000
Less accumulated depreciation (35,000)
-------------------------------------------------------
$ 4,000
=======================================================
Depreciation expense related to these capitalized
leases was $3,000 and $9,000 during the three and nine
months ended September 30, 1999, respectively.
Future minimum lease payments are as follows:
YEAR ENDING SEPTEMBER 30,
-------------------------------------------------------
2000 $ 1,872
2001 2,831
-------------------------------------------------------
Total minimum lease payments 4,703
Amount representing interest (420)
-------------------------------------------------------
Present value of minimum lease payments $ 4,283
=======================================================
Total obligation $ 4,283
Less current portion (1,702)
-------------------------------------------------------
Long-term portion $ 2,581
=======================================================
10. CONCENTRATIONS
CREDIT RISK The Company maintains cash balances at various
financial institutions primarily located in San Diego.
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. Management believes that the Company is not
exposed to any significant credit risk on cash.
21
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
11. OPERATING The Company's operating structure includes operating
SEGMENTS segments:
(a) SEGMENT The Company has two reportable segments: Space Missions
Division (SMD) and ISS. The Space Missions Division is
in the process of developing deep space science
exploration satellites. Through September 30, 1999,
this Division had no revenue with outside customers.
ISS provides engineering services, launch integration
services and space vehicle integration services.
The following is a summary of operating results and
assets by segment for the nine months ended September
30, 1999:
<TABLE>
<CAPTION>
(IN THOUSANDS) ISS SMD Total
---------------------------------------------------------------------
<S> <C> <C> <C>
Net revenue from external
customers $ 634 $ - $ 634
Depreciation and
amortization expense 86 523 609
Other segment expenses 633 1,554 2,187
--------------------------------------
Segment profit (loss) $ (85) $ (2,077) $ (2,162)
--------------------------------------
Total segment assets $ 7,046 $ 428 $ 7,474
Less intersegment assets (80) (181) (261)
--------------------------------------
Net segment assets $ 6,966 $ 247 $ 7,213
======================================
</TABLE>
(b) METHOD OF Management evaluates the performance of its operating
DETERMINING segments separately to individually monitor the
SEGMENT PROFIT different factors affecting financial performance.
OR LOSS Segment profit or loss includes substantially all of
the segment's costs of production, distribution and
administration. The Company manages income taxes on a
global basis. Thus, management evaluates segment
performance based on profit or loss before income
taxes, exclusive of any significant gains or losses on
the disposition of investments or other assets. The
Company typically manages and evaluates equity
investments and related income on a segment level.
22
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. SETTLEMENT In August 1998, the U.S. Securities and Exchange
WITH U.S. Commission (SEC) alleged that the Company and its
SECURITIES AND chairman made statements on the Internet regarding
EXCHANGE revenue and earnings estimates without a reasonable
COMMISSION basis and also misrepresented a financing agreement it
had with a broker-dealer.
During April 1999, the Company and its chairman agreed
to settle the SEC's charges. Neither party paid any
fines. Under the settlement, the Company neither
admitted nor denied wrongdoing. The Company and its
chairman agreed to be subject to stiffer sanctions for
any future violations.
13. SUBSEQUENT In November 1999, the Company entered an employment
EVENT agreement with a key employee. The agreement can be
terminated by either party under certain circumstances.
The agreement also includes stock options contingent on
future events as well as grants under the Company's
Incentive Stock Option Plan.
23
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 1998 and
Four Month Period Ended December 31, 1997
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
CONTENTS
================================================================================
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statements of Stockholders' Equity 6
Consolidated Statements of Cash Flows 7-8
Notes to Consolidated Financial Statements 9-23
2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
SPACEDEV, INC.
We have audited the accompanying consolidated balance sheet of SPACEDEV, INC.
AND SUBSIDIARIES (the "Company")(see Note 1(c) to the consolidated financial
statements) as of December 31, 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. These
consolidated statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. We did not audit the financial statements of
SPACE INNOVATIONS LIMITED, a wholly-owned subsidiary, whose statements reflect
total assets constituting 20% of consolidated assets as of December 31, 1998,
and net sales constituting 36% of consolidated net sales for the three-month
period then ended. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it related to the amounts
included for SPACE INNOVATIONS LIMITED is based solely on the report of other
auditors. The financial statements of SPACEDEV, INC. as of December 31, 1997
were audited by other auditors whose report dated January 30, 1998, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit and the report of
other auditors provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to in the first paragraph present
fairly, in all material respects, the financial position of SPACEDEV, INC. AND
SUBSIDIARIES as of December 31, 1998, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/
May 14, 1999
<PAGE>
<TABLE>
<CAPTION>
================================================================================================
DECEMBER 31, 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Note 4)
CURRENT ASSETS
Cash (Note 10(a)) $ 106,539 $ 148,095
Accounts receivable 1,392,336 -
Inventory (Note 1(e)) 165,283 -
Other current assets (Note 1(f)) 125,709 1,040
- ------------------------------------------------------------------------------------------------
Total current assets 1,789,867 149,135
FIXED ASSETS - NET (Notes 1(f) and 2) 2,031,240 -
INTANGIBLE ASSETS - NET (Notes 1(f) and 3) 5,690,812 -
OTHER ASSETS (Note 1(f)) 150,704 -
- ------------------------------------------------------------------------------------------------
$9,662,623 $ 149,135
================================================================================================
</TABLE>
<PAGE>
<TABLE>
SPACEDEV, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
===============================================================================================================
<CAPTION>
DECEMBER 31, 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft facility $ 477,298 $
Line of credit (Note 4) 100,000 -
Current portion of notes payable (Note 5) 1,350,663 -
Current portion of acquisition price payable (Note 3) 500,000 -
Current portion capitalized leases (Note 9(b)) 43,666 -
Accounts payable 617,395 31,561
Customer deposits and deferred revenue 564,736 -
Accrued payroll, vacation and related taxes 282,170 -
Related party notes payable (Note 5(c)) 237,000 -
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 4,172,928 31,561
NOTE PAYABLE, LESS CURRENT MATURITIES (Note 5) 500,000 -
ACQUISITION PRICE PAYABLE, LESS CURRENT MATURITIES (Note 3) 500,000 -
CAPITALIZED LEASES, LESS CURRENT MATURITIES (Note 9) 28,351 -
OTHER LIABILITIES 54,738 -
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 5,256,017 31,561
COMMITMENTS AND CONTINGENCIES (Notes 8(c), 9, and 12)
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.001 par value, 10,000,000 shares
authorized and 82,450 shares issued and outstanding (Notes 8(a)) 82 82
Common stock, $.0001 par value; 25,000,000 shares authorized,
6,047,743 and 1,755,000 shares issued and outstanding,
respectively (Note 8(b)) 605 176
Additional paid-in capital 6,713,229 300,974
Additional paid-in capital - stock options (Note 8(d)) 750,000 971,333
Deferred compensation (Note 8(d)) (250,000) (250,000)
Accumulated deficit (2,814,633) (904,991)
Accumulated other comprehensive income:
Cumulative foreign currency translation adjustments (Note 1(j)) 7,323 -
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 4,406,606 117,574
- ---------------------------------------------------------------------------------------------------------------
$9,662,623 $ 149,135
===============================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
</TABLE>
<PAGE>
<TABLE>
SPACEDEV, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
=========================================================================================================================
<CAPTION>
Four Month
YEAR ENDED Period Ended
DECEMBER 31, December 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES $ 2,093,254 $ -
Cost of sales 1,152,813
- -------------------------------------------------------------------------------------------------------------------------
GROSS MARGIN 940,441 -
OPERATING EXPENSES
General and administrative 2,143,088 -
Research and development (Note 1(g)) 700,921 904,094
- -------------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,844,009 904,094
- -------------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (1,903,568) (904,094)
- -------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (47,494) -
Other income - net 41,420 -
- -------------------------------------------------------------------------------------------------------------------------
Total other income (expense) (6,074) -
- -------------------------------------------------------------------------------------------------------------------------
NET LOSS ($1,909,642) $ (904,094)
=========================================================================================================================
BASIC NET LOSS PER SHARE $ (.47) $ (.52)
- -------------------------------------------------------------------------------------------------------------------------
Weighted-Average Shares Outstanding 4,095,975 1,755,000
- -------------------------------------------------------------------------------------------------------------------------
Weighted-Average Shares Outstanding Assuming Dilution 12,883,975 10,500,000
=========================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
5
</TABLE>
<PAGE>
<TABLE>
================================================================================
<CAPTION>
Redeemable
Preferred Stock Common Stock
--------------------------------- --------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT AUGUST 22, 1997 (INCEPTION) - $ - - $ -
Shares issued for cash (Note 8(a)) 82,450 82 - -
Reverse acquisition of SpaceDev, Inc. (Note 1(a)) - - 1,755,000 176
Common stock options issued for
compensation (Note 1(l) and 8(d)) - - - -
Common stock options issued for deferred
compensation (Notes 1(m) and 8(b)) - - - -
Common stock options issued for services
(Note 1(m)) and 8(d)) - - - -
Net loss - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 82,450 82 1,755,000 176
Common stock issued for cash - - 622,403 62
Acquisition of intangible assets (Notes 1(f) and 3) - - - -
Common stock issued for compensation
(Notes 1(m) and 8(b)) - - 5,000 1
Common stock issued for business acquisition
of subsidiary - SIL (Note 1(c) and 3) - - 1,000,000 100
Common stock issued for business acquisition
of subsidiary - ISS (Note 1(c) and 3) - - 2,000,000 200
Common stock issued for services (Note 1(m)
and 8(b) - - 92,190 9
Common stock issued for exercise of options
(Note 8(d)) - - 573,150 57
Comprehensive income:
Net loss - - - -
Foreign currency translation adjustment - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 82,450 $ 82 6,047,743 $ 605
====================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
SPACEDEV, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================
<CAPTION>
Additional
Paid-In Accumulated
Additional Capital Other
Paid-In Stock Deferred Accumulated Comprehensive
Capital Options Compensation Deficit Income Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ - $ - $ - $ - $ - $ -
299,918 - - - - 300,000
1,056 - - - - 1,232
- 500,000 - - - 500,000
- 250,000 (250,000) - - -
- 221,333 - - - 221,333
- - - (904,991) - (904,991)
- -------------------------------------------------------------------------------------------------------------------------------
300,974 971,333 (250,000) (904,991) - 117,574
637,688 - - - - 637,750
24,500 - - - - 24,500
8,749 - - - - 8,750
1,667,900 - - - - 1,668,000
3,624,800 - - - - 3,625,000
189,572 - - - - 189,581
259,046 (221,333) - - - 37,770
- - - (1,909,642) - (1,909,642)
- - - - 7,323 7,323
- ------------------------------------------------------------------------------------------------------------------------------
7,323 (1,902,319)
- ------------------------------------------------------------------------------------------------------------------------------
$6,713,229 $750,000 $(250,000) $(2,814,633) $ 7,323 $4,406,606
==============================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
6
</TABLE>
<PAGE>
<TABLE>
SPACEDEV, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
===================================================================================================================
<CAPTION>
Four Month
YEAR ENDED Period Ended
DECEMBER 31, December 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,909,642) $(904,991)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 956,015 43
Common stock issued for compensation and services 324,081 -
Stock options issued for compensation and services - 721,333
Reverse acquisition of SpaceDev, Inc. - 149
Change in operating assets and liabilities:
Accounts receivable (391,032) -
Inventory (51,198) -
Other current assets (52,411) -
Other assets (20,474) -
Accounts payable 52,080 31,561
Customer deposits and deferred revenue (33,909) -
Accrued payroll, vacation and related taxes 75,172 -
Other liabilities (31,476) -
- -------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,082,794) (151,905)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets (61,826) -
Cash acquired in purchase of subsidiaries 31,427 -
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (30,399) -
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 512,000 -
Increase in bank overdraft 302,749 -
Proceeds from notes payable - related party 175,000 -
Proceeds from bank lines of credit 75,000 -
Proceeds from exercise of options 37,700 -
Payments on capital leases (29,383) -
Payments on note payables (10,544)
Proceeds from preferred stock issuance - 300,000
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,062,522 300,000
Effect of exchange rate changes on cash 9,115 -
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (41,556) 148,095
===================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
7
</TABLE>
<PAGE>
<TABLE>
SPACEDEV, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
===================================================================================================================
<CAPTION>
Four Month
YEAR ENDED Period Ended
DECEMBER 31, December 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH AT BEGINNING OF PERIOD 148,095 -
- -------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 106,539 $ 148,095
===================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION:
Cash paid during the period for:
Interest $ 32,954 $ -
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITY:
During 1998, the Company issued 2,000,000 and 1,000,000 shares of restricted
stock for 100% of the outstanding stock of ISS and SIL, respectively. The
Company also incurred a liability to issue $1,000,000 of restricted common stock
when acquiring SIL. This amount was recorded as an acquisition price payable.
See Note 3.
In 1998, the Company issued warrants to purchase 25,000 shares of restricted
common stock for developed technology. See Note 3.
During 1998, the Company financed its new facility and related costs with
$1,800,000 of notes payable. The Company also financed approximately $6,300 of
equipment with capital leases.
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
8
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF A summary of the Company's significant accounting
SIGNIFICANT policies consistently applied in the preparation of the
ACCOUNTING accompanying consolidated financial statements follows.
POLICIES
(a) NATURE OF SPACEDEV, INC. (the "Company") was incorporated as
Pegasus Development Group, Inc. The Company is engaged
in the commercial development of low cost satellites
and their subsystems, as well as engineering technical
services to major aerospace companies. The principal
markets of the Company are 65% in the United States and
35% in Europe. (See Note 11(a))
The Company was incorporated under the laws of Colorado
on December 23, 1996 as Pegasus Development Group, Inc.
(PDGI). The principal activities from inception have
been organizational matters, the sale and issuance of
shares of its $.0001 par value common stock and $.001
par value preferred stock as part of a public stock
offering and the execution of a stock acquisition
agreement.
PDGI was originally formed for the purpose of entering
the real estate industry. However, on October 22, 1997,
the PDGI acquired 100 percent, or 1,000,000 shares, of
SpaceDev's $.001 par value common stock from SpaceDev,
LLC in exchange for 82,450 shares of the Company's
$.001 par value convertible, preferred stock, pursuant
to a comprehensive plan of reorganization of PDGI.
Following the acquisition of SpaceDev, SpaceDev was
merged into PDGI and the name of the corporation was
changed to SpaceDev, Inc. After the reorganization, the
former shareholders of SpaceDev owned a majority of the
outstanding common stock of the Company, after giving
effect to the conversion privilege of the preferred
stock which is convertible into 8,245,000 shares of
common stock.
For accounting purposes, the transaction has been
accounted for as a recapitalization of Company with the
Company as the acquirer (reverse acquisition). Since
SpaceDev had, prior to the recapitalization, minimal
assets, the recapitalization has been accounted for as
the sale of 1,755,000 shares for net assets of $1,232.
The Companys preferred shares reflected in the
consolidated financial statements have been restated
based upon the exchange rates of preferred stock issued
in connection with the acquisition.
9
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(b) LIQUIDITY The accompanying consolidated financial statements as
of December 31, 1998 have been prepared assuming the
Company will continue as a going concern. However, the
Company has a negative working capital of $1,883,061 as
of December 31, 1998 and incurred net losses of
$1,909,642 and $904,991 for the periods ended December
31, 1998 and 1997, respectively. Subsequent to December
1998, management intends to raise additional equity
financing to fund future operations and commitments.
There is no assurance that the new equity will be
sufficient to meet the Company's needs. Additionally,
there is no assurance that additional equity financing
needed to fund operations will be consummated or
obtained in sufficient amounts necessary to meet the
Company's needs.
The accompanying consolidated financial statements do
not include any adjustments to reflect the possible
future effects on the recoverability and classification
of assets or the amounts and classification of
liabilities that may result from the possible inability
of the Company to continue as a going concern.
(c) PRINCIPLES OF The consolidated financial statements include the
CONSOLIDATION accounts of the Company and its wholly-owned
subsidiaries, Space Innovations Limited (SIL) (a United
Kingdom entity) and Integrated Space Systems, Inc.
(ISS) (a California corporation). All significant
intercompany balances and transactions have been
eliminated in the consolidation.
(d) USE OF The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those
estimates. Significant estimates used in preparing
these consolidated financial statements include those
assumed in computing the valuation allowance on
deferred tax assets (see Note 6). It is reasonably
possible that the significant estimates used will
change within the next year.
(e) INVENTORY Inventory consists mainly of raw materials and is
stated at the lower of cost (first-in, first-out) or
market.
10
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(f) DEPRECIATION Fixed assets are depreciated over their estimated
AND useful lives of three to eight years using the
AMORTIZATION straight-line method of accounting. Leasehold
improvements are amortized over the shorter of the
estimated useful lives of the assets or the remaining
lease term.
Goodwill and other intangible assets were created upon
the acquisition of the Company's subsidiaries.
Intangible assets are amortized over their assets
estimated future useful lives on a straight-line basis
over three to five years. Goodwill and other
intangibles are periodically reviewed for impairment
based on an assessment of future operations to ensure
they are appropriately valued in accordance with
Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of."
(g) RESEARCH AND The Company is actively engaged in new product
DEVELOPMENT development efforts. Research and development
expenditures relating to possible future products are
expensed as incurred. Total expense was approximately
$701,000 and $907,000 for 1998 and 1997, respectively.
(h) ADVERTISING The Company follows the policy of charging the costs of
advertising to expense as incurred. Advertising
expenses were approximately $11,400 for 1998.
(i) INCOME Deferred income taxes are recognized for the tax
TAXES consequences in future years of 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 periods
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.
(j) FOREIGN For the foreign subsidiary, assets and liabilities are
CURRENCY translated at the current year end exchange rate,
equity at the historical rate and income statement
items at the weighted average exchange rate for the
period. Resulting translation adjustments are made
directly to a separate component of stockholders
equity.
11
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(k) NEW In 1997, the Financial Accounting Standards Board
ACCOUNTING issued Statement of Financial Accounting Standards No.
STANDARDS 130, "Reporting Comprehensive Income." This Statement
was adopted in 1998. In accordance with the Statement,
comprehensive income is presented in the consolidated
statements of stockholders' equity for 1998 and 1997.
Statement of Financial Accounting Standards No. 133,
"Accounting for Derivatives Instrument and Hedging
Activities", established accounting and reporting
standards for derivative instruments. The Company has
not in the past nor does it anticipate, that it will
engage in transactions involving derivative instruments
which will impact the financial statements.
Statement of Position 98-5, "Accounting for Start-up
Costs", requires an entity to expense all start-up
related costs as incurred for fiscal years beginning
after December 15, 1998. The Company believes that this
statement will not have a material effect on the
Company's accounting for start-up costs.
(l) STOCK-BASED In October 1995, the Financial Accounting Standards
COMPENSATION Board issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). The Company adopted SFAS 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 Opinion 25, "Accounting for Stock
Issued to Employees" (APB 25) and has provided pro
forma disclosures as if the fair value based method
prescribed SFAS 123 has been utilized. See Note 8(d).
(m) COMMON STOCK The Company has valued its stock and stock options
AND STOCK issued to non-employees at fair value in accordance
OPTIONS TO with the accounting prescribed in SFAS 123 which states
NON-EMPLOYEES 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.
(n) NET LOSS PER Net loss per common share has been computed on the
COMMON SHARE basis of the weighted average number of shares
outstanding, according to the rules of Statement of
Financial Accounting Standards No. 128, "Earnings per
Share".
12
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(o) FINANCIAL The Company's financial instruments consist primarily
INSTRUMENTS of cash, accounts receivable, accounts payable, line of
credit, accrued expenses, notes payable and common
stock subscribed. These financial instruments are
stated at their respective carrying values, which
approximate their fair values.
2. FIXED ASSETS Fixed assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------------------
<S> <C>
Furniture, fixtures and equipment $ 222,073
Computer equipment 151,890
Leasehold improvements 36,769
----------------------------------------------------------------
410,732
Less accumulated depreciation and amortization (239,964)
----------------------------------------------------------------
170,768
Construction in progress 1,860,472
----------------------------------------------------------------
$2,031,240
================================================================
</TABLE>
Depreciation and amortization expense was approximately
$60,807 in 1998.
During 1998, the Company entered into construction
contracts on its new facility totaling approximately
$350,000.
3. ACQUISITIONS During 1998, the Company acquired 100% of the
outstanding common stock of two entities in San Diego
(ISS) and England (SIL) (see Note 8(b)). These
transactions were accounted for under the purchase
method of accounting with the aggregate of the purchase
price in excess of the fair market value of the assets
acquired being capitalized as goodwill. The cost of the
acquired entities was $5,725,000, of which $5,561,000
was capitalized as goodwill.
As part of the acquisition of SIL, the Company will
issue $1,000,000 of common stock in four semi-annual
installments over the next two years. The number of
shares issued will be determined on the then quoted
fair market value of its common stock. This amount was
recorded as acquisition price payable with $500,000 as
a current and $500,000 as a long-term liability.
13
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. ACQUISITIONS, The consolidated statement of operations for 1998
cont'd includes the operating results from cont'd these
entities beginning in February 1998 for ISS and October
1998 for SIL (see Note 1(c)).
The following unaudited pro forma information presents
a summary of consolidated results of operations of the
Company and its subsidiaries, ISS and SIL, as if the
acquisitions had occurred in August of 1997, with pro
forma adjustments to give effect to amortization of
goodwill and other intangible assets and certain other
adjustments:
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
PERIOD ENDED DECEMBER 31, 1998 1997
-------------------------------------------------------
Net sales $ 3,765 $ 1,415
Net losses $ (3,282) $ (751)
Basic net loss per share $ (.69) $ (.16)
=======================================================
The Company also acquired the exclusive royalty-free
rights to use, sell and apply all technology developed
by an individual. The purchase price for these
intangible assets was $24,500. See Note 8(c).
DECEMBER 31, 1998
-------------------------------------------------------
Goodwill $6,561,000
Other intangibles 24,500
-------------------------------------------------------
6,585,500
Less accumulated amortization (894,688)
-------------------------------------------------------
$5,690,812
=======================================================
4. LINE OF In July 1997, the Company (through ISS) obtained a bank
CREDIT line of credit in the amount of $100,000 which matured
in July 1998. In November 1998, the Company renewed the
line with a $250,000 agreement for one year. At
December 31, 1998, $100,000 was outstanding on the line
of credit.
The line of credit was secured by all of the assets of
ISS. The line is also guaranteed by SpaceDev and a key
shareholder. The interest rate under the line of credit
is prime (7.75% at December 31, 1998) plus 2.0% and
matures in November 1999.
14
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
5. NOTES
PAYABLE
(a) BUILDING In December 1998, the Company signed a $1,300,000 note
NOTES payable with a lender to finance the purchase of its
new facility. The note calls for monthly payments and a
balloon payment on December 21, 1999. The note accrues
interest at 13%.
In December 1998, the president of the Company entered
a $500,000 loan agreement with another lender to
finance additional costs of its new facility. This
liability was assigned to the Company and calls for 59
monthly interest payments at 12.23% and a balloon
payment of $505,000, including interest, on December
17, 2003.
(b) BANK LOAN - SIL has a bank loan due in monthly installments of
SIL approximately $5,000 with interest at 2.5% over the
bank's base rate. The $50,663 balance at December 31,
1998 is a current liability.
(c) RELATED At December 31, 1998, the Company had notes payable to
PARTY stockholder for $237,000. The notes were due between
January 1999 and March 1999 with interest between 4%
and 10%. These notes were extended as demand notes.
6. INCOME Deferred income taxes are provided for temporary
TAXES differences in recognizing certain income and expense
items for financial and tax reporting purposes. The
deferred tax asset of $950,000 and $311,000 as of
December 31, 1998 and 1997, respectively, consisted
primarily of the income tax benefits from net operating
loss carryforwards, amortization of goodwill and
research and development credits. A valuation allowance
has been recorded to fully offset the deferred tax
asset as realization of such asset is not assured. The
valuation allowance increased approximately $639,000 in
1998 from $311,000 at December 31, 1997 to $950,000 at
December 31, 1998.
At December 31, 1998, the Company has federal and state
tax net operating loss carryforwards of approximately
$1,700,000. The federal and state tax loss
carryforwards will expire between 1999 through 2018,
unless previously utilized.
15
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
6. INCOME A reconciliation of the statutory income tax rates and
TAXES the Company's effective rates is as follows:
cont'd
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31, 1998 1997
------------------------------------------------------------------------
<S> <C> <C>
Statutory U.S. federal rate 34% 34%
State income taxes - net of federal benefit 5% 5%
Net operating loss for which no tax benefit is
currently available (39)% (39)%
------------------------------------------------------------------------
-% -%
========================================================================
</TABLE>
The tax effects of temporary differences and
carryforwards that give rise to deferred tax assets and
liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
-------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 688,000 $ 311,000
Temporary differences 220,000 -
Research and development credits 42,000 -
-------------------------------------------------------------------------
Gross deferred tax assets 950,000 311,000
Valuation allowance (950,000) (311,000)
-------------------------------------------------------------------------
$ - $ -
=========================================================================
</TABLE>
7. EMPLOYEE
BENEFIT PLAN
(a) PROFIT SHARING During 1997, the Company adopted a 401(k) retirement
401(k) PLAN savings plan for its U.S. employees which allows each
eligible employee to voluntarily make pre-tax salary
contributions up to 15% of their compensation. The
Company may elect to make a matching contribution. In
1998 and 1997, the Company did not contribute to the
Plan. The total Company contribution and participant
salary reduction may not exceed 25% of the compensation
of eligible participants.
(b) UNITED KINGDOM The Company provided a pension plan under the United
PENSION PLAN Kingdom Government social security system for Space
Innovations Limited employees. The expense related to
this plan was approximately $18,000 for 1998.
16
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. STOCKHOLDERS'
EQUITY
(a) REDEEMABLE In 1997, 82,450 shares of $.001 par value redeemable
PREFERRED STOCK preferred stock were issued at $3.64 per share. Each
share of redeemable preferred stock is convertible, at
the option of the holder, into 100 shares of common
stock. The conversion ratio is subject to certain
anti-dilution adjustments, and the holder of each share
of preferred stock is entitled to one vote for each
share of common stock into which it would convert.
Subsequent to year end, these shares were converted to
8,245,000 shares of common stock.
(b) COMMON In 1998, the Company issued 2,000,000 and 1,000,000
STOCK shares of restricted common stock for 100% of the
outstanding stock of ISS and SIL, respectively. See
Note 3.
During 1998, the Company entered agreements with sales,
investor relations and public relations firms to
perform services for the Company. In return for these
services, the Company issued 92,190 shares of its
common stock and recorded expense of approximately
$120,000.
As part of a five-year employment agreement with a key
employee, the Company issued 5,000 shares of common
stock as a signing bonus and recorded $8,750 of
compensation expense. The agreement renews annually and
can be canceled by either party under provisions of the
agreement. Upon renewal of the agreement, the employee
will receive 5,000 shares of common stock annually for
two years. The agreement also includes 50,000 stock
options with exercise prices of between $2 and $3 per
share. These options will vest upon future events
occurring. See Note 8(d).
During 1998, the Company recorded approximately
$126,000 of compensation expense related to 348,000
shares of restricted common stock issued to the
president at less than fair market value.
During 1998, the Company issued 573,150 shares of
common stock upon the exercising of stock options.
17
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(c) WARRANTS In return for the exclusive royalty free right to use,
sell and apply patents and other technology developed
by an individual, the Company issued warrants to
purchase 25,000 shares of common stock at 50% of their
fair market value on the date of issuance. The
individual will receive warrants to purchase a minimum
of 75,000 shares and a maximum of 3,000,000 shares of
common stock at 50% of the fair market value on the
date of issuance. The number of shares varies with
revenue generated by the technology on specific dates.
At December 31, 1998, the unissued warrants were not
recorded as the future exercise price of the warrants
cannot be estimated. See Note 3.
(d) STOCK OPTIONS
On October 22, 1997, the Company entered into three
agreements to grant options to purchase common stock
restricted under Securities Exchange Commission Rule
144 in consideration for consulting services. The
options were granted for a total of 573,150 shares of
the Company's $.0001 par value common stock with an
exercise price of $.07 per share. All of the options
were exercisable at December 31, 1997 and each option
was to expire on October 21, 2002. Based on the use of
the Black-Scholes option pricing model, the fair value
of the stock options issued for these services was
$221,333. As a result, the Company recognized $221,333
in consulting expense in 1998 related to the issuance
of the common stock options. All of these options were
exercised in 1998.
During 1997, the Company entered into a five-year
employment agreement with its president. As part of the
employment agreement, the Company granted options to
the president to purchase up to 2,500,000 shares of the
Company's $.0001 par value restricted common stock. In
accordance with APB 25, the Company recognized $500,000
of compensation expense and $250,000 of deferred
compensation. The options are subject to vesting
conditions and have exercise prices between $1.50 and
$3.00 per share.
During 1998, the Company granted options to five key
employees to purchase up to 350,000 shares of
restricted common stock with exercise prices between
$1.50 and $3.50 per share. The vesting of these options
are contingent on several future events. Should these
events not occur, no options would vest. Therefore,
these options were excluded from the pro forma amounts
shown below.
18
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(d) STOCK OPTIONS, All options expire 60 months from the date of the
CONT'D employment agreements.
The following summarizes stock option activity related
to the Plan:
<TABLE>
<CAPTION>
Weighted
Options Average
Outstanding Exercise Prices
------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at August 22, 1997 (inception) - $ -
Granted 1,073,150 $.07 - $1.00
Exercised - $ -
-----------------------------------------------------------------------------------------
Balance at December 31, 1997 1,073,150 $.07 - $1.00
Granted - $ -
Exercised (573,150) $.07
-----------------------------------------------------------------------------------------
Balance at December 31, 1998 500,000 $1.00
=========================================================================================
</TABLE>
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 1998 and 1997 using
the minimum value method as prescribed by SFAS 123.
Under this method, the Company used the risk-free
interest rate at date of grant, expected volatility,
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 5.4% to 6.0%;
expected volatility of 30% and a 0% dividend yield was
assumed to be zero, and the expected life of the
options was assumed to be 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 1998 and 1997 would be amortized on a
pro forma basis over the vesting period of the options.
Thus, the Company's consolidated net loss would have
increased as reflected in the following pro forma
amounts:
19
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(d) STOCK OPTIONS,
CONT'D
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31, 1998 1997
-------------------------------------------------------------------------
<S> <C> <C>
Net loss:
As reported $(1,909,642) $ (907,094)
Pro forma $(1,909,642) $(1,268,529)
Pro forma net loss per share $ (.47) $ (.72)
=========================================================================
</TABLE>
9. COMMITMENTS
AND
CONTINGENCIES
(a) OPERATING The Company leases its office facilities and certain
LEASES office and computer equipment under non-cancelable
operating leases which expire by December 2005. Rent
expense under these leases was approximately $94,800
for 1998.
Future minimum rental payments required under operating
leases that have initial or remaining non-cancelable
lease terms in excess of one year are as follows:
YEAR ENDING DECEMBER 31,
-------------------------------------------------------
1999 $ 89,409
2000 83,336
2001 77,274
-------------------------------------------------------
Total $ 250,019
=======================================================
(b) CAPITAL The Company leases certain equipment under
LEASES non-cancelable capital leases, which are included in
fixed assets as follows:
DECEMBER 31, 1998
-------------------------------------------------------
Computer equipment $ 39,000
Less accumulated depreciation (29,000)
-------------------------------------------------------
$ 10,000
=======================================================
Depreciation expense related to these capitalized
leases was $14,000 during 1998.
20
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(b) CAPITAL Future minimum lease payments are as follows:
LEASES, CONT'D
YEAR ENDING DECEMBER 31,
-------------------------------------------------------
1999 $ 53,410
2000 23,689
2001 3,560
-------------------------------------------------------
Total minimum lease payments 80,659
Amount representing interest (8,642)
-------------------------------------------------------
Present value of minimum lease payments $ 72,017
-------------------------------------------------------
Total obligation $ 72,017
Less current portion (43,666)
-------------------------------------------------------
Long-term portion $ 28,351
=======================================================
10. CONCENTRATIONS
(a) CREDIT RISK The Company maintains cash balances at various
financial institutions primarily located in San Diego.
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. Management believes that the Company is not
exposed to any significant credit risk on cash and cash
equivalents.
(b) FOREIGN ASSETS Included in the Company's consolidated balance sheet at
December 31, 1998 are the assets of the Company's
United Kingdom operations, which total approximately
$1,765,000.
(c) CUSTOMER During 1998, the Company had two major customers that
accounted for sales of approximately $1,142,000 or 55%
of consolidated revenue. At December 31, 1998, the
amount receivable from these customers was
approximately $122,000.
11. OPERATING The Company's operating structure includes operating
SEGMENTS segments:
(a) SEGMENT The Company has three reportable segments: Space
PRODUCTS AND Missions Division (SMD), ISS and SIL. The Space
SERVICES Missions Division is in the process of developing deep
space science exploration satellites. Through December
31, 1998, this Division had no revenue with outside
customers. ISS provides engineering services, launch
integration services and space vehicle integration
services. SIL develops low cost satellites and
satellite subsystems for use in space.
21
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(a) SEGMENT The following is a summary of operating results and
PRODUCTS AND assets by segment for the year ended December 31, 1998:
SERVICES, cont'd
<TABLE>
<CAPTION>
(IN THOUSANDS) ISS SIL SMD Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue from external
customers $ 1,340 $ 753 $ - $ 2,093
Depreciation and
amortization expense (44) (21) (897) (962)
Other segment expenses (1,256) (644) (1,141) (3,041)
---------------------------------------------
Segment profit (loss) $ 40 $ 88 $ (2,038) $ (1,910)
=============================================
Total segment assets $ 575 $ 1,765 $ 7,675 $ 10,015
Less intersegment assets (278) - (507) (785)
---------------------------------------------
Net segment assets $ 297 $ 1,765 $ 7,168 $ 9,230
=============================================
Geographic Information:
Revenue
---------------------------------------------------------------------------
United States $ 1,340 $ - $ - $ 1,340
Europe - 753 - 753
---------------------------------------------
$ 1,340 $ 753 $ - $ 2,093
=============================================
Assets
---------------------------------------------------------------------------
United States $ 297 $ - $ 7,168 $ 7,465
Europe - 1,765 - 1,765
---------------------------------------------
$ 297 $ 1,765 $ 7,168 $ 9,230
=============================================
</TABLE>
(b) METHOD OF Management evaluates the performance of its operating
DETERMINING segments separately to individually monitor the
SEGMENT PROFIT different factors affecting financial performance.
OR LOSS Segment profit or loss includes substantially all of
the segment's costs of production, distribution and
administration. The Company manages income taxes on a
global basis. Thus, management evaluates segment
performance based on profit or loss before income
taxes, exclusive of any significant gains or losses on
the disposition of investments or other assets. The
Company typically manages and evaluates equity
investments and related income on a segment level.
22
<PAGE>
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. SETTLEMENT In August 1998, the U.S. Securities and Exchange
WITH U.S. Commission (SEC) alleged that the Company and its
SECURITIES AND chairman made statements on the Internet regarding
EXCHANGE revenue and earnings estimates without a reasonable
COMMISSION basis and also misrepresented a financing agreement it
had with a broker-dealer.
During April 1999, the Company and its chairman agreed
to settle the SEC's charges. Neither party paid any
fines. Under the settlement, the Company neither
admitted nor denied wrongdoing. The Company and its
chairman agreed to be subject to stiffer sanctions for
any future violations.
23
SPACEDEV, INC. AND SUBSIDIARY
-----------------------------
(formerly Pegasus Development Group, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Index To Consolidated Financial Statements
Page
----
Independent auditors' report................................................ F-2
Consolidated balance sheet, December 31, 1997............................... F-3
Consolidated statement of Operations, August 22, 1997
(inception) through December 31, 1997.................................... F-4
Consolidated statement of Shareholders' Equity,
August 22, 1997 (inception) through December 31, 1997.................... F-5
Consolidated statement of Cash Flows, August 22, 1997
(inception) through December 31, 1997.................................... F-6
Summary of Significant Accounting Policies.................................. F-7
Notes to Consolidated Financial Statements.................................. F-9
F-1
<PAGE>
To the Board of Directors
SpaceDev, Inc. and subsidiary (formerly
Pegasus Development Group, Inc.)
INDEPENDENT AUDITORS' REPORT
We have audited the balance sheet of SpaceDev Inc. and subsidiary (formerly
Pegasus Development Group, Inc.) (a development stage, company) as of December
31, 1997 and the related statements of operations, shareholders' equity and cash
flows for the period from August 22, 1997 (inception) through December 31, 1997.
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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides 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 SpaceDev, Inc. and subsidiary, as
of December 31, 1997 and the results of its operations and its cash flows for
the period from August 22, 1997 (inception) through December 31, 1997 in
conformity with generally accepted accounting principles.
Cordovano and Harvey, P.C.
Denver, Colorado
January 30, 1998
F-2
<PAGE>
SPACEDEV, INC. AND SUBSIDIARY
-----------------------------
(formerly Pegasus Development Group, Inc.)
(A DEVELOPMENT STAGE C0MPANY)
Consolidated Balance Sheet
December 31, 1997
ASSETS
CASH............................................................... $ 148,095
ORGANIZATION COSTS, less accumulated
amortization of $260............................................. 1,040
----------
$ 149,135
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable................................................. $ 28,561
Accrued liabilities.............................................. 3,000
----------
TOTAL LIABILITIES 31,561
----------
SHAREHOLDERS' EQUITY (Note B)
Preferred stock, $.001 par value, 10,000,000 shares
authorized, 82,450 issued and outstanding...................... $ 82
Common stock, $.0001 par value, 25,000,000 shares
authorized, 1,755,000 issued and outstanding................... 176
Additional paid-in capital....................................... 300,974
Deferred compensation (Note D)................................... (250,000)
Outstanding stock options (Note D)............................... 971,333
Deficit accumulated during the development stage................. (904,991)
----------
TOTAL SHAREHOLDERS' EQUITY 117,574
----------
$ 149,135
==========
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-3
<PAGE>
SPACEDEV, INC. AND SUBSIDIARY
-----------------------------
(formerly Pegasus Development Group, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statement of Operations
August 22, 1997 (inception) through December 31, 1997
COSTS AND EXPENSES
Consulting....................................................... $ 307,563
Compensation (Note D)............................................ 500,000
Public relations................................................. 33,261
Investor relations............................................... 7,525
Travel........................................................... 11,012
Professional services............................................ 35,641
Filing fees...................................................... 6,205
Other............................................................ 5,887
----------
INCOME TAXES (907,094)
NONOPERATING INCOME
Interest income.................................................. 2,103
----------
NET LOSS BEFORE INCOME TAXES (904,991)
INCOME TAXES (Note C)
Income tax benefit............................................... 311,197
Income tax, deferred............................................. (311,197)
----------
NET LOSS $(904,991)
==========
Weighted average common shares outstanding
(See Summary of significant Accounting Policies)................. 1,755,000
==========
Net loss per common share.......................................... $ (0.52)
==========
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
SPACEDEV, INC. AND SUBSIDIARY
-----------------------------
(formerly Pegasus Development Group, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statement of Shareholders' Equity
August 22, 1997 (inception) through December 31, 1997
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock Additional Outstanding During
--------------------- --------------------- Paid-in Deferred Stock Development
Shares Amount Shares Amount Capital Compensation Options Stage Total
---------- ---------- ---------- ---------- ---------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, August 22, 1997
(Inception).............. - $ - - $ - $ - $ - $ - $ - $ -
Shares issued for cash..... 82,450 82 - - 299,918 - - - 300,000
Reverse acquisition of
SpaceDev (Note A)........ - - 1,755,000 176 1,056 - - - 1,232
Common stock options
issued for compensation
(Note D)................. - - - - - - 500,000 - 500,000
Common stock options
issued for deferred
compensation (Note D).... - - - - - (250,000) 250,000 - -
Common stock options
issued for services
(Note D)................. - - - - - - 221,333 - 221,333
Net loss for the period.... - - - - - - - (904,991) (904,991)
---------- ---------- ---------- ---------- ---------- ------------ ----------- ----------- ----------
Balance, December 31,
1997..................... 82,450 $ 82 1,755,000 $ 176 $ 300,974 $ (250,000) $ 971,333 $ (904,991) $ 117,574
========== ========== ========== ========== ========== ============ =========== =========== ==========
</TABLE>
* Restated from 1,000,000 (see Note A).
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-5
<PAGE>
SPACEDEV, INC. AND SUBSIDIARY
-----------------------------
(formerly Pegasus Development Group, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statement of Cash Flows
August 22, 1997 (inception) through December 31, 1997
OPERATING ACTIVITIES
Net loss........................................................ $ (904,991)
------------
Transactions not requiring cash:
Reverse acquisition of SpaceDev (Note A)...................... 149
Amortization.................................................. 43
Stock options issued for compensation (Note D)................ 500,000
Stock options issued for services (Note D).................... 221,333
Changes in current liabilities:
Accounts payable and accrued expenses......................... 31,561
------------
NET CASH (USED IN)
OPERATING ACTIVITIES (151,905)
------------
FINANCING ACTIVITIES
Issuance of preferred stock..................................... 300,000
------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 300,000
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 148,095
Cash and cash equiva1ents, beginning of period.................... -
------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 148,095
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest........................................................ $ -
Income taxes.................................................... $ -
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-6
<PAGE>
SPACEDEV, INC. AND SUBSIDIARY
-----------------------------
(formerly Pegasus Development Group, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Summary of Significant Accounting Policies
December 31, 1997
Principles of consolidation
- ---------------------------
The accompanying consolidated financial statements include the amounts of
SpaceDev, Inc., a Colorado corporation (the Company), and its wholly-owned
subsidiary, SpaceDev, a Nevada corporation. Intercompany balances and
transactions have been eliminated in consolidation.
Development stage company
- -------------------------
The Company is in the development stage in accordance with Statement of
Financial Accounting Standard (SFAS) No. 7.
Use of estimates
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Cash equivalents
- ----------------
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Organization costs and amortization
- -----------------------------------
Organization costs are recorded at cost. Amortization is calculated by the
straight-line method over a period of sixty months.
Income Taxes
- ------------
Income taxes are provided for the tax effects of transactions reported in
the consolidated financial statements and consist of taxes currently due
plus deferred taxes related primarily to differences between the recorded
book basis and tax basis of assets and liabilities for financial and income
tax reporting. The deferred tax assets and liabilities represent the future
tax return consequences of those differences, which will either be taxable
or deductible, when the assets and liabilities are recovered or settled.
Deferred taxes are also recognized for operating losses that are available
to offset future taxable income and tax credits that are available to
offset future federal income taxes.
F-7
<PAGE>
SPACEDEV, INC. AND SUBSIDIARY
-----------------------------
(formerly Pegasus Development Group, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Summary or Significant Accounting policies
December 31, 1997
Stock--based compensation
- -------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). The Company adopted SFAS 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 Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and has provided pro
forma disclosures as if the fair value based method prescribed SFAS 123 had been
utilized.
Stock options to non-employees
- ------------------------------
The Company has valued its stock options issued to non-employees at fair value
in accordance with the accounting prescribed in SFAS 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 the Securities and
Exchange Commission. Such rules require that any stock sold at a nominal value,
as compared to a public offering, should be considered outstanding for all
periods presented.
F-8
<PAGE>
SPACEDEV, INC. AND SUBSIDIARY
-----------------------------
(formerly Pegasus Development Group, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1997
Note A: Nature of organization
----------------------
The Company was incorporated under the laws of Colorado on December 23,
1996 as Pegasus Development Group, Inc. (PDGI). The principal activities
from inception have been organizational matters and the sale and
issuance of shares of its $.0001 par value common stock and $.001. par
value preferred stock as part of a public stock offering and the
execution of a stock acquisition agreement.
PDGI was originally formed for the purpose of entering the real estate
industry. However, on October 22, 1997, the PDGI acquired 100 percent,
or 1,000,000 shares, of SpaceDev's $.00l par value common stock from
SpaceDev, LLC in exchange for 82,450 shares of the Company's $.001, par
value convertible, preferred stock. Each share of preferred stock is
convertible to 100 shares of common stock at the option of the holder of
the preferred stock. As a result of the merger, SpaceDev became a
wholly-owned subsidiary of PDGI. Following the merger, the former
shareholders of SpaceDev owned a majority of the outstanding common
stock of the PDGI, after giving effect to the conversion privilege of
the preferred stock which are convertible into 8,245,000 shares of
common stock. Upon completion of the merger, PDGI changed its name to
SpaceDev, Inc. In addition, a new slate of officers and directors has
been elected. The Company's activities are now focused to engage in the
development and commercialization of routine space exploration.
The accompanying financial statements, prior to the merger, are those of
SpaceDev. See also, the separate financial statements of PDGI prior to
the merger.
For accounting purposes, the transaction has been accounted for as a
recapitalization of SpaceDev with SpaceDev as the acquirer (reverse
acquisition). Since SpaceDev had, prior to the recapitalization, minimal
assets, the recapitalization has been accounted for as the sale of
1,755,000 shares for net assets of $1,232.
SpaceDev preferred shares reflected in the financial statements have
been restated based upon the exchange rates of preferred stock issued in
connection with the acquisition.
F-9
<PAGE>
SPACEDEV, INC. AND SUBSIDIARY
-----------------------------
(formerly Pegasus Development Group, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1997
Note B: Shareholder's equity
--------------------
On November 21, 1997, the shareholders approved an amendment to the
Company's Articles at Incorporation which increased the aggregate number
of shares which the Company has authority to issue to 35,000,000
(10,000,000 shares of preferred stock at $.001 par value and 25,000,000
shares of common stock at $.0001 par value).
Note C: Income taxes
------------
A reconciliation of the U.S. statutory federal income tax rate to the
effective rate follows for the period ended December 31, 1997:
U.S. statutory federal rate....................... 34.0%
State income tax rate............................. 5.0%
Net operating loss for which no tax
benefit is currently available.................. (39.0%)
--------
-%
========
At December 31, 1997 deferred taxes consisted of the following:
Deterred tax asset,
net operating lose carryforward............ $ 311,197
Valuation allowance............................ (311,197)
-----------
Net deferred taxes............................. $ -
===========
The valuation allowance offsets the net deferred tax asset for which
there is no assurance or recovery. The change in the valuation allowance
for the period ended December 31, 1997 totalled $311,197. Net operating
loss carryforwards will expire in 2012.
The valuation allowance will be evaluated at the end of each year,
considering positive and negative evidence about whether the asset will
be realized. At that time, the allowance will either be increased or
reduced, reduction could result in the complete elimination of the
allowance if positive evidence indicates that the value of the deferred
tax asset is no longer impaired and the allowance is no longer required.
F-10
<PAGE>
SPACEDEV, INC. AND SUBSIDIARY
-----------------------------
(formerly Pegasus Development Group, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1997
Note D: Stock options
-------------
Options for services
On October 23, 1997, the Company entered into three agreements to grant
options to purchase common stock restricted under Securities Exchange
commission Rule 144 in consideration for consulting services. The
options were granted for a total of 572,700 shares of the Company's
$.0001 par value common stock with an exercise price of $.066 per share.
All of the option were exercisable at December 31, 1997 and each option
expires on October 21, 2002. No options were exercised during the period
ended December 31, 1997.
Based on the use of the Black--Scholes option pricing model, the fair
value of the stock options issued for the services was $221,333. As a
result, the Company recognized $221,333 in consulting services related
to the issuance of the common stock options.
Incentive stock option plan
On November 21, 1997, the Company entered into a five year employment
agreement with its president. As part of the employment agreement, the
company granted the president options to purchase up to 2,500,000 shares
of the Company's $.0001 par value restricted common stock. The options
are subject to the following vesting conditions at the exercise prices
set forth:
Exercise
Number price
of shares Vested upon the Company: per share
--------- ------------------------ ---------
500,000 Currently vested $ 1.00
500,000 Obtaining $6,500,000 additional $ 1.50
equity capital
500,000 Financing and executing a $ 2.00
definitive space launch
agreement
500,000 Launching its initial spacecraft $ 2.50
500,000 Spacecraft rendezvous with $ 3.00
target asteroid
All options expire 60 months from the date of the employment agreement.
F-11
<PAGE>
SPACEDEV, INC. AND SUBSIDIARY
-----------------------------
(formerly Pegasus Development Group, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1997
Note D: Stock options, continued
------------------------
A summery of the status of the Company's stock option plan as of
December 31, 1997, and the changes during the period ending December 31,
1997 is presented below:
Number of
Fixed Options Shares
------------- ------
August 22, 1997................... -0-
Granted........................... 2,500,000
Exercised......................... -0-
-----------
December 31, 1997................. 2,500,000
===========
Exercisable at December 31, 1997............... 500,000
Each set of options with individual vesting requirements is regarded as
a separate fixed option. Therefore, the weighted average value of the
options granted is equal to the exercise price.
As of the grant date, the Company's common stock had a fair market value
of $2.00. In accordance with APB 25, the Company recognized $500,000 of
compensation expense related to the 500,000 vested stock options
exercisable at $1.00 per share and $250,000 in deferred compensation
related to the 500,000 stock options exercisable at $1.50 but not vested
as of December 31, 1997.
The Company has adopted the disclosure-only provisions of SFAS 123 under
which no compensation cost has been recognized. If the Company had
elected to recognize compensation costs based on the fair value on the
date of grant for awards in 1997, consistent with the provisions of SPAS
123, net loss and net loss per share would have been increased to the
following amounts:
1997
----
Pro forms net loss..................... $ 1,268,529
Pro forma net loss per share........... $ (0.72)
F-12
<PAGE>
SPACEDEV, INC. AND SUBSIDIARY
-----------------------------
(formerly Pegasus Development Group, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1997
Note D: Stock options, continued
------------------------
The weighted-average fair values at date of grant for options granted
during 1997 were between $1.00 and $3.00 and were estimated using the
Black--Scholes option pricing model. The following assumptions were
applied: expected dividend yield of -0- percent; expected volatility
rate of 30 percent; expected life of 5 years; and a risk-free interest
rate of 5.43 percent.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. Option valuation models also
require the input of highly subjective assumptions such as expected
option life and expected stock price volatility. Because the Company's
employee stock-based compensation plan has characteristics significantly
different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value
estimate, the Company believes that the existing option valuation models
do not necessarily provide a reliable single measure of the fair value
of awards from those plans.
Note E: Concentration of credit risk
----------------------------
The Company maintains its cash balance in one financial institution. The
accounts at the institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. As of December 31, 1997, the Company's
uninsured cash balance totalled $62,369.
Note F: Commitment
----------
The Company's employment agreement with its president also provides for
an annual salary and increases to the salary based on the Company's
attainment of certain performance requirements. As of December 31, 1997,
the Company had not reached any of the performance requirements and had
not accrued any salary expense.
F-13
<PAGE>
SPACEDEV, INC. AND SUBSIDIARY
-----------------------------
(formerly Pegasus Development Group, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
December 31, 1997
Note G: Subsequent event-acquisition
----------------------------
The Company entered into a Share Acquisition Agreement on February 7,
1998 to acquire Integrated Space Systems, Inc. (ISS). The company
acquired 100 percent of the issued and outstanding shares of ISS common
stock in exchange for 2,000,000 shares of the Company's .000l par value
restricted common stock. Upon closing, the Company shall have two
persons identified by ISS to be appointed as members of the board of
directors of the Company. After the transaction, approximately 16.7
percent of the issued and outstanding shares of the Company's common
stock (including convertible preferred stock) will be held by
shareholders of ISS.
Note H: Proposed common stock offering
------------------------------
As of December 31, 1997, the Company was in the process of drafting an
offering memorandum in accordance with Rule 504 of Regulation D of the
Securities Act of 1933, as amended. The memorandum will offer a minimum
of 170,000 and a maximum of 600,000 shares of the Company's $.0001 par
value common stock at $1.50 per share.
Upon completion of the offering, the Company expects to receive proceeds
of approximately $216,750 assuming the minimum offering and
approximately $765,000 assuming the maximum offering after the deduction
of commissions and other expenses of the offering. The Company plans to
use proceeds for acquisitions, salaries, consulting fees, hardware and
software, marketing, working capital, and other general corporate
purposes.
F-14
SPACE INNOVATIONS LIMITED
DIRECTORS' REPORT AND ACCOUNTS
YEAR ENDED 31 DECEMBER 1998
Company Registration No. 03193413 (England and Wales)
<PAGE>
SPACE INNOVATIONS LIMITED
COMPANY INFORMATION
- --------------------------------------------------------------------------------
DIRECTORS A K Ward
J L Culhane
J E Holloway
A J Barrington Brown
D R Brindley
J Anzalchi
H K K Ngan
T W Brown
SECRETARY J E Holloway
COMPANY NUMBER 03193413
REGISTERED OFFICE 3 The Paddock
Hambridge Road
Newbury
Berks
RG14 5TQ
AUDITORS BDO Stoy Hayward
Reading
BANKERS Lloyds Bank
Newbury
SOLICITORS Bird & Bird
London
<PAGE>
SPACE INNOVATIONS LIMITED
CONTENTS
- --------------------------------------------------------------------------------
DIRECTORS' REPORT.........................................................1
AUDITORS' REPORT..........................................................4
PROFIT AND LOSS ACCOUNT...................................................5
BALANCE SHEET.............................................................6
CASH FLOW STATEMENT.......................................................7
NOTES TO THE ACCOUNTS.....................................................8
<PAGE>
SPACE INNOVATIONS LIMITED
DIRECTORS' REPORT
YEAR ENDED 31 DECEMBER 1998
- --------------------------------------------------------------------------------
The directors present their report and accounts for the year ended 31 December
1998.
DIRECTORS
The following directors have held office since 1 January 1998:
A K Ward
J L Culhane
J E Holloway
A J Barrington Brown
D R Brindley
J Anzalchi
H K K Ngan
T W Brown (Appointed 1 October 1998)
DIRECTORS' RESPONSIBILITIES
Company law requires the directors to prepare accounts for each financial year
which give a true and fair view of the state of affairs of the company and of
the profit or loss of the company for that period. In preparing those accounts,
the directors are required to:
- - select suitable accounting policies and then apply them consistently;
- - make judgements and estimates that are reasonable and prudent;
- - prepare the accounts on the going concern basis unless it is inappropriate to
presume that the company will continue in business.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
company and to enable them to ensure that the accounts comply with the Companies
Act 1985. They are also responsible for safeguarding the assets of the company
and hence for taking reasonable steps for the prevention and detection of fraud
and other irregularities.
PRINCIPAL ACTIVITIES AND REVIEW OF THE BUSINESS
The principal activities of the company in the period under review included the
research, design and development of space related hardware and software, and the
manufacture, test and supply of associated systems and products.
Following the recommendation of the Board, there was a unanimous decision by the
shareholders to accept the offer for the purchase of the company from SpaceDev
Inc. a company incorporated in the state of Colorado, USA. The sale was
completed on 1 October 1998 and at that date the Company became a wholly owned
subsidiary of SpaceDev, but remains a United Kingdom registered Company
operating as an autonomous organisation.
Due to the potential for rapid growth foreseen for the immediate future, the
acquisition by SpaceDev has given added strength to the Company and its product
development. The high level of research and development costs expended through
the year from (pound)86,124 in 1997 to (pound)226,609 for 1998 has resulted in
considerable added value to products that support the planned growth. The
Balance Sheet naturally reflects these costs although to a lesser extent than
the monies actually expended on the additional research and development.
-1-
<PAGE>
SPACE INNOVATIONS LIMITED
DIRECTORS' REPORT
YEAR ENDED 31 DECEMBER 1998
- -------------------------------------------------------------------------------
It is now hoped that a rapid expansion amounting to more than an 80% increase in
sales turnover will be achieved next year. This is based on the finalisation of
a contract for the purchase of a MicroSIL (small satellite) platform for the
FedSat Australian satellite where work has already started under a
limit-of-liability arrangement and the success of sales in the RF and digital
communications sub-system areas in particular. As an affiliate of SpaceDev the
Company's sales opportunities in the USA have dramatically improved. Past
experience has shown that United States customers make excellent working
partners and the USA represents a large potential market for the company's
products.
Following the continuing successful operation in-orbit of several of the
Company's subsystems, including most recently the on-board S-band transponders
on the Danish Orsted satellite launched in February, 1999 a growing measure of
credibility has been achieved within the Space industry. This will substantially
enhance the Company's ability to promote sales in future years.
A satellite communications ground station has been delivered and installed on
site in Morocco during 1998. Although this has been a high cost development, a
significant number of resulting future sales are expected.
The Company also continued to lead and manage one of the UK Government's (DTI)
Sector Challenge programme for innovations within the UK small satellite arena
involving a group of space SMEs.
A number of management changes have been implemented during the year in order to
put expertise within the Company to its most effective use and to achieve the
success and expansion which is now planned and expected as a part of SpaceDev
both in Europe and in the USA.
Year 2000
The directors are aware of the potential problems associated with the
"Millennium Bug" and have given the issue due consideration. The company has
considerable in-house expertise in the IT area and these experts have been
charged with ensuring that all of the company's computer systems are not going
to be adversely affected by the year 2000 date change problem.
Although no organisation can guarantee that no year 2000 problems will arise,
the directors are satisfied that all necessary steps are being taken to ensure
that there will not be any significant problems arising from this cause.
The directors an unable to quantify the cost of any potential modifications that
may be necessary, but where new equipment is required the expenditure will be
capitalised in accordance with the company's accounting policy. Other
expenditure will be expensed when incurred.
RESULTS AND DIVIDENDS
The results for the year are set out on page 5.
The directors are unable to recommend payment of a dividend for the year.
-2-
<PAGE>
SPACE INNOVATIONS LIMITED
DIRECTORS' REPORT
YEAR ENDED 31 DECEMBER 1998
- --------------------------------------------------------------------------------
DIRECTORS' INTERESTS
The directors' beneficial interests in the shares of the company were as stated
below:
ORDINARY SHARES OF (POUND)1 EACH
31 DECEMBER 1998 1 JANUARY 1998
A K Ward - 10,000
J L Culhane - 10,000
J E Holloway - 3,000
A J Barrington Brown - 10,000
D R Brindley - 10,000
J Anzalchi - 10,000
H K K Ngan - 10,000
T W Brown - -
PARENT COMPANY
With effect from 1 October 1998, SpaceDev Inc, a company incorporated in the
state of Colorado, USA, is considered to be the company's ultimate parent
company.
AUDITORS
On 1 March 1999 the auditors, Moores Rowland, merged their practice with that of
BDO Stoy Hayward and are now practising under that name. A resolution will be
proposed at the annual general meeting that BDO Stoy Hayward be re-appointed as
the auditors to the company for the ensuing year.
On behalf of the board
/s/ J E Holloway
J E Holloway
Director
10 June 1999
-3-
<PAGE>
SPACE INNOVATIONS LIMITED
AUDITORS' REPORT
TO THE SHAREHOLDERS OF SPACE INNOVATIONS LIMITED
- --------------------------------------------------------------------------------
We have audited the accounts pages 5 to 19.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described in the directors' report the company's directors are responsible
for the preparation of accounts. It is our responsibility as auditors to form
an independent opinion, based an our audit, on those accounts and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the accounts. It also
includes an assessment of the significant estimates and judgements made by the
directors in the preparation of the accounts, and of whether the accounting
policies are appropriate to the company's circumstances, consistently applied
and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations that we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the accounts an free from
material misstatement, whether caused by fraud or other irregularity or error.
In forming our opinion we also evaluated the overall adequacy of the
presentation of information in the accounts.
OPINION
In our opinion the accounts give a true and fair view of the state of the
company's affairs as at 31 December 1998 and of its loss for the year then ended
and have been properly prepared in accordance with the Companies Act 1985.
/s/ BDO Stoy Hayward
BDO STOY HAYWARD
Chartered Accountants
Registered Auditors
Reading
21 June 1999
-4-
<PAGE>
<TABLE>
SPACE INNOVATIONS LIMITED
PROFIT AND LOSS ACCOUNT
YEAR ENDED 31 DECEMBER 1998
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
1998 1997
Notes (pound) (pound)
<S> <C> <C> <C>
Turnover 2 1,361,309 1,347,991
Cost of sales (600,532) (601,883)
------------- -------------
Gross profit 760,777 746,108
Administrative expenses (871,144) (734,245)
Research and development costs (226,609) (86,124)
Other operating income 120,859 -
------------- -------------
Operating Loss 3 (216,117) (74,261)
Interest payable and similar charges 4 (19,555) (6,300)
------------- -------------
Loss on ordinary activities before
taxation (235,672) (80,561)
Tax on loss on ordinary activities 7 - -
------------- -------------
Loss on ordinary activities after
taxation 16 (235,672) (80,561)
============= =============
The profit and loss account has been prepared on the basis that all operations
are continuing operations.
There are no recognised gains and losses other than those passing through the
profit and loss account.
</TABLE>
-5-
<PAGE>
<TABLE>
SPACE INNOVATIONS LIMITED
BALANCE SHEET
AS OF 31 DECEMBER 1998
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
1998 1997
Notes (pound) (pound) (pound) (pound)
<S> <C> <C> <C> <C> <C>
Fixed assets
Intangible assets 8 - 9,447
Tangible assets 9 150,344 138,508
----------- -----------
150,344 147,955
Current assets
Stocks 10 99,646 47,109
Debtors 11 810,272 598,822
Cash at bank and in hand 4,102 16,719
----------- -----------
914,020 662,650
Creditors: amounts falling due
within one year 12 (1,061,369) (726,130)
----------- -----------
Net current liabilities (147,349) (63,480)
----------- -----------
Total assets less current liabilities 2,995 84,475
Creditors: amounts falling due after
more than one year 13 (17,092) (52,527)
Provisions for liabilities and charges 14 (33,001) -
----------- -----------
(47,098) 31,948
=========== ===========
Capital and reserves
Called up share capital 15 82,000 82,000
Capital contributions 21 156,626 -
Share premium account 16 30,000 30,000
Profit and loss account 16 (315,724) (80,052)
----------- -----------
Shareholders' funds - equity interests 17 (47,098) 31,948
=========== ===========
</TABLE>
The accounts were approved by the Board on 10 June 1999
DR Brindley JE Holloway
Director Director
-6-
<PAGE>
<TABLE>
SPACE INNOVATIONS LIMITED
CASH FLOW STATEMENT
YEAR ENDED 31 DECEMBER 1998
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
1998 1997
Notes (pound) (pound)
<S> <C> <C> <C> <C> <C>
Net case outflow from operating
activities 18 (390,684) (2,619)
Returns on investments and
servicing of finance
interest paid (19,555) (6,300)
----------- -----------
Net cash outflow for returns on
investments and servicing of finance (19,555) (6,300)
CAPITAL EXPENDITURE
Payments to acquire tangible assets (52,654) (37,951)
----------- -----------
Net cash outflow for capital
expenditure (52,654) (37,951)
----------- -----------
Net cash outflow before
management of liquid resources
and financing (462,893) (46,870)
FINANCING
Capital contributions 156,626 -
Other new short term loans 94,568 40,000
Repayment of other short term loans (72,429) (33,333)
Capital element of hire purchase contracts (16,243) (4,051)
----------- -----------
Net cash inflow from financing 162,522 2,616
----------- -----------
Decrease in cash in the year 20 (300,371) (44,254)
=========== ===========
</TABLE>
-7-
<PAGE>
SPACE INNOVATIONS LIMITED
NOTES TO THE ACCOUNTS
YEAR ENDED 31 DECEMBER 1998
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
1.1 ACCOUNTING CONVENTION
The accounts are prepared under the historical cost convention.
1.2 TURNOVER
Turnover represents amounts receivable for goods and services net of VAT
and trade discounts.
1.3 GOODWILL
The goodwill arising on the acquisition of the business, being the amount
paid in respect of contracts which had not commenced at 30 May 1996, has
been capitalized and is amortised through the profit and loss account over
a period of three years, estimated by the directors to be the period during
which profits will arise from these contracts. Where the carrying value of
the goodwill is considered to be impaired, it has been written down to its
recoverable amount.
1.4 TANGIBLE FIXED ASSETS AND DEPRECIATION
Tangible fixed assets are stated at cost less depreciation. Depreciation is
provided at rates calculated to write off the cost less estimated residual
value of each asset over its expected useful life, as follows:
Leasehold improvements 20% straight line basis
Plant and equipment 20% straight line basis
Fixtures and fittings 20% straight line basis
Motor vehicles 33% straight line basis
1.5 LEASING AND HIRE PURCHASE COMMITMENTS
Assets obtained under hire purchase contracts and finance leases are
capitalised as tangible assets and depreciated over the shorter of the
lease term and their useful lives. Obligations under such agreements are
included in creditors not of the finance charge allocated to future
periods. The finance element of the rental payment is charged to the profit
and loss account so as to produce a constant periodic rate of charge on the
net obligation outstanding in each period.
Rentals payable under operating leases are charged against income on a
straight line basis over the lease term.
1.6 STOCK
Stocks are valued at the lower of cost, including appropriate overhead
expenses, and net realisable value.
-8-
<PAGE>
SPACE INNOVATIONS LIMITED
NOTES TO THE ACCOUNTS
YEAR ENDED 31 DECEMBER 1998
- --------------------------------------------------------------------------------
1.7 LONG TERM CONTRACTS
Long term contracts are stated at total costs incurred, net of amounts
transferred to the profit and loss account in respect of work carried out
to date after deducting foreseeable losses if applicable and payments on
account.
Amounts recoverable on contracts are included in debtors, net of progress
payments received and receivable.
Payments made in excess of amounts (i) matched with turnover, (ii) offset
against long term contract balances are classified as payments on account
and disclosed under: Creditors: Amounts Failing Due Within One Year.
Turnover and attributable profit have been calculated by reference to the
percentage completion of the job at the balance sheet date.
1.8 PENSIONS
The pension costs charged in the account represent the contributions
payable by the company during the year in accordance with SSAP 24.
1.9 FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities denominated in foreign currencies are
translated into sterling at the rates of exchange ruling at the balance
sheet date. Transactions in foreign currencies are recorded at the rate
ruling at the date of the transaction. Differences arising are dealt with
in the profit and loss account.
1.10 RESEARCH AND DEVELOPMENT
Research and development expenditure is written off to the profit and loss
account in the year in which it is incurred.
1.11 CONTINGENCIES AND WARRANTIES
Expenditure associated with contingencies or warranties on contracts is
written off to the profit and loss account in the year in which it is
incurred.
1.12 GOVERNMENT GRANTS
Government grants in respect of research and development activities are
credited to the profit and loss account as the related expenditure is
incurred.
2 TURNOVER
GEOGRAPHICAL MARKET TURNOVER
1998 1997
(pound) (pound)
United Kingdom 130,632 32,004
Europe 734,095 471,853
Rest of the World 496,582 844,134
---------- ----------
1,361,309 1,347,991
========== ==========
-9-
<PAGE>
<TABLE>
SPACE INNOVATIONS LIMITED
NOTES TO THE ACCOUNTS
YEAR ENDED 31 DECEMBER 1998
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
3 OPERATING LOSS 1998 1997
(pound) (pound)
<S> <C> <C>
Operating loss is stated after charging:
Amortisation of intangible assets 9,447 6,667
Depreciation of tangible assets 40,818 27,340
Operating lease rentals
- Plant and machinery 7,596 6,240
- Other assets 52,589 52,589
Auditors' remuneration 16,500 7,500
Loss on exchange - 6,572
and after crediting:
Government grants 120,859 -
Profit on exchange 4,834 -
========== ==========
4 INTEREST PAYABLE AND SIMILAR CHARGES 1998 1997
(pound) (pound)
On bank loans and overdrafts 14,881 5,551
Hire purchase interest 2,674 749
On overdue tax 2,000 -
---------- ----------
19,555 6,300
========== ==========
5 EMPLOYEES
NUMBER OF EMPLOYEES
The average monthly number of employees (including directors) during the
year was:
1998 1997
Number Number
Production and sales 23 23
Administration 11 10
------- -------
34 33
======= =======
EMPLOYMENT COSTS
(pound) (pound)
Wages and salaries 928,822 744,039
Social security costs 93,072 73,897
Other pension costs 19,621 23,283
---------- ----------
1,041,515 841,219
========== ==========
</TABLE>
-10-
<PAGE>
<TABLE>
SPACE INNOVATIONS LIMITED
NOTES TO THE ACCOUNTS
YEAR ENDED 31 DECEMBER 1998
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
6 DIRECTORS' EMOLUMENTS 1998 1997
(pound) (pound)
<S> <C> <C>
Emoluments for qualifying services 236,441 221,107
Company pension contributions to money purchase schemes 4,112 4,113
---------- ----------
240,553 225,220
========== ==========
Emoluments disclosed above include the following amounts paid to the
highest paid director:
Emoluments for qualifying services 54,371 56,482
========== ==========
</TABLE>
During the year three (1997: three) directors were accruing benefits under
the company's money purchase pension scheme.
In addition to the pension contributions disclosed above, amounts totaling
(pound)5,150 (1997: (pound)4,360) have been charged to the profit and loss
account in respect of a scheme to be set up for the directors of the
company.
7 TAXATION
No liability to UK Corporation Tax arises on the results for the year
(1997: (pound)Nil). The company has tax losses available to offset against
future chargeable profits.
-11-
<PAGE>
<TABLE>
SPACE INNOVATIONS LIMITED
NOTES TO THE ACCOUNTS
YEAR ENDED 31 DECEMBER 1998
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
8 INTANGIBLE FIXED ASSETS
PATENTS AND GOODWILL TOTAL
TRADE MARKS
(pound) (pound) (pound)
<S> <C> <C> <C>
Cost
At 1 January 1998 & at 31 December 1998 2 20,001 20,003
---------- ---------- ----------
Amortisation
At 1 January 1998 - 10,556 10,556
Charge for year 2 9,445 9,447
---------- ---------- ----------
At 31 December 1998 2 20,001 20,003
---------- ---------- ----------
Net book value
At 31 December 1998 - - -
========== ========== ==========
At 31 December 1997 2 9,445 9,447
========== ========== ==========
</TABLE>
Goodwill represents the amount paid for contracts which had not commenced
at the date of the acquisition of the business. This is being amortised
over a period of three years which is the directors' estimate of the period
during which profits will arise from these contracts. Where the carrying
value of the goodwill is considered to be impaired, it has been written
down to its recoverable amount.
The goodwill amortisation charge for the year includes impairment losses
recognized amounting to (pound)2,778. The cumulative amount of impairment
losses recognized at 31 December 1998 in respect of goodwill amounted to
(pound)2,778.
The patents and trade marks amortisation charge for the year represents
impairment losses recognized amounting to (pound)2. The cumulative amount
of impairment losses recognized at 31 December 1998 in respect of patents
and trade marks amounted to (pound)2.
-12-
<PAGE>
<TABLE>
SPACE INNOVATIONS LIMITED
NOTES TO THE ACCOUNTS
YEAR ENDED 31 DECEMBER 1998
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
9 INTANGIBLE FIXED ASSETS
LEASEHOLD PLANT AND FIXTURES AND MOTOR TOTAL
IMPROVEMENTS EQUIPMENT FITTINGS VEHICLES
(pound) (pound) (pound) (pound) (pound)
COST
<S> <C> <C> <C> <C> <C>
At 1 January 1998 2,526 78,940 82,626 10,700 174,792
Additions 17,187 29,260 6,207 - 52,654
--------- --------- --------- --------- ---------
At 31 December 1998 19,713 108,200 88,833 10,700 227,446
--------- --------- --------- --------- ---------
DEPRECIATION
At 1 January 1998 374 18,731 11,829 5,350 36,284
Charge for the year 2,797 17,720 16,734 3,567 40,818
--------- --------- --------- --------- ---------
At 31 December 1998 3,171 36,451 28,563 8,917 77,102
--------- --------- --------- --------- ---------
NET BOOK VALUE
At 31 December 1998 16,542 71,749 60,270 1,783 150,344
========= ========= ========= ========= =========
At 31 December 1997 2,152 60,209 70,797 5,350 138,508
========= ========= ========= ========= =========
</TABLE>
Included above are assets held under finance leases or hire purchase
contracts as follows:
<TABLE>
<CAPTION>
FIXTURES MOTOR TOTAL
AND FITTINGS VEHICLES
(pound) (pound) (pound)
NET BOOK VALUES
<S> <C> <C> <C>
At 31 December 1998 35,472 1,783 37,255
========= ========= =========
At 31 December 1997 45,575 5,350 50,925
========= ========= =========
DEPRECIATION CHARGE FOR THE YEAR
31 December 1998 9,526 3,567 13,093
========= ========= =========
31 December 1997 1,716 3,567 5,283
========= ========= =========
</TABLE>
-13-
<PAGE>
<TABLE>
SPACE INNOVATIONS LIMITED
NOTES TO THE ACCOUNTS
YEAR ENDED 31 DECEMBER 1998
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
10 STOCKS 1998 1997
(pound) (pound)
<S> <C> <C>
Raw materials and consumables 99,646 47,109
========== =========
-13
<PAGE>
SPACE INNOVATIONS LIMITED
NOTES TO THE ACCOUNTS
YEAR ENDED 31 DECEMBER 1998
- ------------------------------------------------------------------------------------------------------------------
11 DEBTORS 1998 1997
(pound) (pound)
Trade debtors 347,280 139,971
Amounts recoverable on long term contracts 372,891 413,209
Other debtors 19,753 23,240
Prepayments and accrued income 70,348 22,402
---------- ---------
810,272 598,822
========== =========
12 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 1998 1997
(pound) (pound)
Bank loans and overdrafts 318,298 33,333
Payments received on account 264,970 342,349
Net obligations under finance lease and hire purchase contracts 17,485 20,516
Trade creditors 194,107 132,194
Taxes and social security costs 136,110 137,397
Directors' current accounts 47,151 -
Other creditors 7,749 22,268
Accruals and deferred income 75,499 38,073
---------- ----------
1,061,369 726,130
========== =========
Debt due within one year 382,934 33,333
========== =========
</TABLE>
The bank loan and overdraft is secured by a fixed and floating charge over
the assets of the company, together with deeds of postponement in respect
of directors loans to the company. The bank loan is repayable in monthly
installments of (pound)3,021 and carries an interest rate of 2.5% over the
base rate.
Obligations under finance leases and hire purchase contracts are secured
upon the assets concerned.
-14-
<PAGE>
<TABLE>
SPACE INNOVATIONS LIMITED
NOTES TO THE ACCOUNTS
YEAR ENDED 31 DECEMBER 1998
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
13 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR 1998 1997
(pound) (pound)
<S> <C> <C>
Bank loans - 22,223
Net obligations under finance leases and hire purchase agreements 17,092 30,304
---------- ----------
17,092 52,527
========== ==========
ANALYSIS OF LOSES
Wholly repayable within five years 30,544 55,556
---------- ----------
30,544 55,556
Included in current liabilities (30,544) (33,333)
---------- ----------
- 22,223
========== ==========
MATURITY OF DEBT
Between one and two years 16,358 39,707
Between two and five years 734 12,820
========== ==========
14 PROVISIONS FOR LIABILITIES AND CHARGES Provisions for
foreseeable
losses
(pound)
Profit and loss account 33,001
==========
15 SHARE CAPITAL 1998 1997
(pound) (pound)
AUTHORIZED
100,000 Ordinary shares of (pound)1 each 100,000 100,000
========== ==========
ALLOTTED, CALLED UP AND FULLY PAID
82,000 Ordinary shares of (pound)1 each 82,000 82,000
========== ==========
</TABLE>
-15-
<PAGE>
<TABLE>
SPACE INNOVATIONS LIMITED
NOTES TO THE ACCOUNTS
YEAR ENDED 31 DECEMBER 1998
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
16 STATEMENT OF MOVEMENTS ON RESERVES
SHARE PROFIT AND
PREMIUM LOSS ACCOUNT
ACCOUNT
(pound) (pound)
<S> <C> <C>
Balance at 1 January 1998 30,000 (80,052)
Retained loss for the year - (235,672)
---------- ----------
30,000 (315,724)
========== ==========
17 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS 1998 1997
(pound) (pound)
Loss for the financial year (235,672) (80,561)
Capital contributions 156,626 -
---------- ----------
Net depletion in shareholders' funds (79,046) (80,561)
Opening shareholders' funds 31,948 112,509
---------- ----------
Closing shareholders' funds (47,098) 31,948
========== ==========
18 RECONCILIATION OF OPERATING LOSS TO NET CASH OUTFLOW
FROM OPERATING ACTIVITIES 1998 1997
(pound) (pound)
Operating loss (216,117) (74,261)
Depreciation of tangible assets 40,818 27,340
Amortisation of intangible assets 9,447 6,667
Increase in stocks (52,537) (31,625)
Increase in debtors (211,450) (78,464)
Increase in creditors within one year 6,154 147,724
Increase in pension provision 33,001 -
---------- ----------
Net cash outflow from operating activities (390,684) (2,619)
========== ==========
</TABLE>
-16-
<PAGE>
<TABLE>
SPACE INNOVATIONS LIMITED
NOTES TO THE ACCOUNTS
YEAR ENDED 31 DECEMBER 1998
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
19 ANALYSIS OF NET DEBT 1 January Cash Flow 31 December
1998 1998
(pound) (pound) (pound)
<S> <C> <C> <C>
NET CASH:
Cash at bank and in hand 16,719 (12,617) 4,102
Bank overdrafts - (287,754) (287,754)
---------- ---------- ----------
16,719 (300,371) (283,652)
---------- ---------- ----------
DEBT:
Finance leases (50,820) 16,243 (34,577)
Debts falling due within one year (33,333) (44,362) (77,695)
Debts falling due after one year (22,223) 22,223 -
---------- ---------- ----------
(106,376) (5,896) (112,272)
---------- ---------- ----------
NET DEBT (89,657) (306,267) (395,924)
========== ========== ==========
</TABLE>
<TABLE>
20 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT 1998 1997
(pound) (pound)
<CAPTION>
<S> <C> <C>
Decrease in cash in the year (300,371) (44,254)
Cash inflow from increase in debt and lease financing (5,896) (2,616)
---------- ----------
Change in net debt resulting from cash flows (306,267) (46,870)
New finance lease - (47,631)
---------- ----------
Movement in net debt in the year (306,267) (94,501)
Opening net (debt)/funds (89,657) 4,844
---------- ----------
Closing net debt (395,924) (89,657)
========== ==========
</TABLE>
21 CAPITAL CONTRIBUTIONS
Capital contributions represent amounts of capital provided by equity
shareholders which are not represented by issued shares. The company has no
obligation to transfer economic benefits to shareholders in respect of
these contributions, as defined by Financial Reporting Standard Number 4.
-17-
<PAGE>
<TABLE>
SPACE INNOVATIONS LIMITED
NOTES TO THE ACCOUNTS
YEAR ENDED 31 DECEMBER 1998
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
22 FINANCIAL COMMITMENTS
At 31 December 1998 the company had annual commitments under
non-cancellable operating leases as follows:
LAND AND BUILDINGS OTHER
1998 1997 1998 1997
(pound) (pound) (pound) (pound)
<S> <C> <C> <C> <C>
Expiry date:
Within one year - - 4,705 -
Between two and five years - - 10,487 11,303
In over five years 43,876 43,876 - -
---------- ---------- ---------- ----------
43,876 43,876 15,192 11,303
========== ========== ========== ==========
</TABLE>
23 PENSION COSTS
The company operates a defined contribution pension scheme. The assets of
the scheme are held separately from those of the company in an
independently administered fund. The pension cost charge represents
contributions payable by the company to the fund and amounted to
(pound)19,621 (1997: (pound)23,283). Contributions totaling (pound)10,821
(1997: (pound)2,508) were payable to the fund at the year end and are
included in creditors; amounts falling due within on year.
In addition to the contributions payable to fund as described above amounts
totaling (pound)5,150 (1997: (pound)4,860) have been charged to the profit
and loss account in respect of a pension scheme to be set up for the
directors of the company. At the year end amounts totaling (pound)12,689
(1997: (pound)7,539) had been accrued but not paid in respect of this
scheme.
24 CONTROL
The directors consider SpaceDev Inc., a company incorporated in the state
of Colorado, USA, to be the company's immediate controlling party and
ultimate parent company.
J W Benson a director of SpaceDev Inc., is considered to be the company's
ultimate controlling party.
-18-
<PAGE>
<TABLE>
SPACE INNOVATIONS LIMITED
NOTES TO THE ACCOUNTS
YEAR ENDED 31 DECEMBER 1998
- -------------------------------------------------------------------------------------------------------------------
25 RELATED PARTY TRANSACTIONS
Up until 30 September 1998 Crossnet Systems Limited was regarded as a
related party by virtue of three directors/shareholders of Space
Innovations Limited (Joan Holloway, Dennis Brindley, and Professor John
Culhane) holding between them 52% of the issued share capital of Crossnet
Systems Limited. Joan Holloway and Dennis Brindley are also directors of
Crossnet Systems Limited.
Purchases/(sales) made from/to Crossnet Systems Limited during the period
to 30 September 1998 were:
<CAPTION>
Value of
transactions Debtor/(creditor)
in the year at 31/12/98
(pound) (pound)
<S> <C> <C>
Reimbursement of wages - (1,996)
========== ==========
Contribution to overheads (11,981) -
========== ==========
Purchases/(sales) made from/to Crossnet Systems Limited during 1997 were:
Value of
transactions Debtor/(creditor)
in the year at 31/12/97
(pound) (pound)
Reimbursement of wages - (3,200)
========== ==========
Contribution to overheads (22,740) (1,839)
========== ==========
During the year, the following directors advanced loans to the company:
Amount of loan Balance
Outstanding at
31/12/98
(pound) (pound)
J L Culhane 11,000 11,000
A J Barrington Brown 10,000 9,429
A K Ward 10,000 6,944
J E Holloway 5,000 3,889
J Anzalchi 12,000 8,667
D R Brindley 10,000 7,222
In addition to the capital amounts above, the company reimburses directors
for interest charges and premiums incurred on their loans.
</TABLE>
-19-
INDEPENDENT REVIEW REPORT TO SPACE INNOVATIONS LIMITED
INTRODUCTION
We have been instructed by the company to review the financial information for
the 3 months ended 30 September 1999, production of which is the responsibility
of the directors.
REVIEW WORK PERFORMED
A review consists principally of making enquiries of management and applying
analytical procedures to the financial information and underlying financial data
and based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with Auditing Standards and therefore provides a lower
level of assurance than an audit. Accordingly, we do not express an audit
opinion on the financial information.
REVIEW CONCLUSION
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the 3 months ended
30 June 1999.
We would point out the following:
The company is currently in the process of refining the way it derives estimates
of costs to complete, in respect of its long-term contracts. The figures used in
determining the costs to complete contracts as at 30 September 1999 are based on
best judgement at that time; subsequent refinements to the process may result in
different conclusions being reached.
During the quarter ended 30 September 1999 the company has changed the way it
accounts for stock. In previous periods stock purchased for a job was booked to
general stock and allocated to that job when used. With effect from the 30
September 1999 quarter all stock purchased for a specific job is allocated to
that job when received, regardless of whether used or not.
At 30 September 1999 there was a difference of approximately (pound)5,000
between the petty cash held and the balance recorded in the accounting records.
BDO STOY HAYWARD
CHARTERED ACCOUNTANTS
READING
4 November 1999
<PAGE>
SPACE INNOVATIONS LIMITED
BALANCE SHEET AT 30 SEP 1999
(POUND) (POUND)
Fixed assets at cost 255,205
less depreciation (101,334)
-----------
153,871
CURRENT ASSETS
Stock 107,082
Work in progress 1,617
Trade debtors 240,501
Amounts recoverable on long term contracts 301,181
Other debtors (see note 1) 48,979
Prepayments and accrued grant income (note 2) 35,317
Cash at bank and in hand 57,383
-----------
792,060
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Bank overdraft -
Bank loans (330)
Amounts received re factored debtors (238,485)
Trade creditors (153,143)
Hire purchase (16,023)
Payments received on account (281,245)
Other taxes and social security (284,634)
Other creditors (39,332)
Accruals (67,694)
-----------
(1,080,886)
Net current liabilities (288,826)
CREDITORS: AMOUNTS FALLING DUE AFTER ONE YEAR
Provisions for losses on contracts (33,001)
-----------
(167,956)
===========
CAPITAL AND RESERVES
Share capital (see note 3) 82,000
Capital contributions (see note 4) 208,898
Share premium 30,000
-----------
320,898
Profit and loss account (see note 5) (488,854)
-----------
(167,956)
===========
Note 1 Other debtors includes(pound)2,500 owed by a director
Note 2 Prepayments includes accrued income totalling (pound)10,240 in
respect OF government grants receivable for the company's Sector
Challenge project
Note 3 - share capital has not moved in the quarter to 30 September 1999
Note 4 - the movement of (pound)52,272 in capital contributions since 31/12/98
represent the following:
8 February 1999 - USD 30,000 @(pound)1=$1.6447 18,240
2 March 1999 - USD 55,000 @(pound)1=$1.6158 34,032
----------
52,272
----------
Note 5 - Profit and loss reserves at 31 December 1998 (315,724)
Profit for the quarter to 31/3/99 21,446
Loss for the quarter to 30/6/99 (86,539)
Loss for the quarter to 30/9/99 (108,037)
----------
Profit and loss reserves at 30 September 1999 (488,854)
----------
<PAGE>
SPACE INNOVATIONS LIMITED
PROFIT AND LOSS ACCOUNT
FOR THE QUARTER ENDED 30 SEPTEMBER 1999
(pound) (pound)
Sales 509,619
Direct costs:
Raw materials 185,947
Direct labour 128,815
------------
314,762
------------
Gross profit 194,857
Overheads
Direct overheads 294,886
Research and development 68,096
Other operating income (64,980)
------------
298,002
------------
Profit before interest (103,145)
Interest payable 4,892
------------
LOSS FOR THE QUARTER (108,037)
============
<PAGE>
SPACE INNOVATIONS LIMITED
PROFIT AND LOSS ACCOUNT
FOR THE 9 MONTHS ENDED 30 SEPTEMBER 1999
(pound) (pound)
Sales 1,489,637
Direct costs:
Raw materials 400,080
Direct labour 414,859
------------
814,939
------------
Gross profit 674,698
Overheads
Direct overheads 790,474
Research and development 202,606
Other operating income (161,261)
------------
831,819
------------
Profit before interest (157,121)
Interest payable 16,008
------------
LOSS FOR THE NINE MONTHS (173,129)
============
<PAGE>
<TABLE>
SPACE INNOVATIONS LIMITED
-------------------------
CASH FLOW STATEMENT
-------------------
FOR THE QUARTER ENDED 30 SEPTEMBER 1999
---------------------------------------
<CAPTION>
1999
(POUND) (POUND)
<S> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES 108,896
RETURNS ON INVESTMENT AND SERVICING OF
FINANCE
Interest received 0
Interest paid (4,892)
Non equity dividends paid 0
Dividends received 0
---------------
(4,892)
TAXATION
Corporation tax paid 0
ACT 0
---------------
0
CAPITAL EXPENDITURE
Payments to acquire tangible fixed assets (10,859)
Receipts from sale of tangible fixed assets 0
---------------
(10,859)
EQUITY DIVIDENDS PAID 0
---------------
0
---------------
Cash inflow before use of liquid resources & financing 93,145
FINANCING
Capital element of hire purchase borrowings (9,224)
Capital contributions 0
Loan advanced in year 0
Loan repayments (5,678)
---------------
(14,902)
---------------
INCREASE/(DECREASE) IN CASH 78,243
===============
0
--------------------------------------------------------------------------------------------
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
(pound) (pound)
Decrease in cash in the period 78,243
Cash outflow from decrease in debt financing 14,902
---------------
Changes in net debt resulting from cash flows 93,145
New finance leases 0
---------------
MOVEMENT IN NET DEBT IN THE PERIOD 93,145
NET DEBT AT 1ST JULY 1999 (323,462)
---------------
NET DEBT AT 30TH SEPTEMBER 1999 (230,317)
===============
</TABLE>
<PAGE>
SPACE INNOVATIONS LIMITED
-------------------------
NOTES TO THE CASH FLOW STATEMENT
--------------------------------
FOR THE QUARTER ENDED 30 SEPTEMBER 1999
---------------------------------------
<TABLE>
<CAPTION>
1. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM
OPERATING ACTIVITIES
1999
(POUND)
<S> <C>
Operating profit/(loss) (103,145)
Depreciation charges 11,181
Amortisation and impairment of intangible fixed assets 0
Increase in provisions 0
Profit on sale of tangible fixed assets 0
(Increase) / decrease in stocks 45,606
(Increase) / decrease in debtors 866,195
(Decrease) / increase in creditors (710,941)
---------------
108,896
===============
</TABLE>
<TABLE>
<CAPTION>
2. ANALYSIS OF CHANGES IN NET DEBT
At 1st Cash Non-Cash At 30th
July 1999 Flows Flows September 1999
(pound) (pound) (pound) (pound)
<S> <C> <C> <C> <C>
Cash in hand, at bank 6,425 50,958 57,383
Bank overdrafts (27,285) 27,285 0
------------------------------
78,243 0
Debt due within one year (277,355) 5,678 (271,677)
Debt due after one year 0 0 0
Finance leases (25,247) 9,224 0 (16,023)
------------------------------
14,902 0
-----------------------------------------------------------
TOTAL (323,462) 93,145 0 (230,317)
===========================================================
Non cash transactions: (pound)0
</TABLE>
<PAGE>
SPACE INNOVATIONS LIMITED
-------------------------
QUARTER ENDED 30 SEPTEMBER 1999
-------------------------------
CASH FLOW STATEMENT WORKINGS
----------------------------
<TABLE>
<CAPTION>
1a. TANGIBLE FIXED ASSETS
TOTAL
<S> <C>
NBV at 1st July 1999 154,193
Additions 10,859
Depreciation/impairment (11,181)
Fixed asset adjustments
Revaluation
Loss on sale
Disposal proceeds 0
---------------
NBV at 30th September 1999 153,871
---------------
153,871 Proof (s/be NBV @ 30/09/99)
Total additions as above 10,859
New HP/finance leases 0
---------------
PAYMENTS TO ACQUIRE FA'S PER CASH FLOW 10,859
===============
1B. INTANGIBLE FIXED ASSETS
TOTAL
NBV at 1st January 1998 0
Additions
Amortisation/impairment 0
---------------
NBV at 31st December 1998 0
---------------
0 Proof (s/be NBV @ 31/03/99)
</TABLE>
<TABLE>
<CAPTION>
2. MOVEMENT IN STOCKS
09/30/1999 31/6/99
<S> <C> <C>
RM stock 107,082 163,459
WIP (materials & labour) 1,617 (9,154)
=============== =============
Per balance sheet 108,699 154,305
=============== =============
Decrease / (increase) for the year 45,606
===============
3. MOVEMENT IN DEBTORS
09/30/1999 31/6/99
Trade debtors 240,501 847,621
Amounts recoverable on long term contracts 301,181 478,949
Other debtors 48,979 52,044
Prepayments 35,317 113,559
--------------- -------------
625,978 1,492,173
=============== =============
Decrease / (increase) for the year 866,195
===============
<PAGE>
4. MOVEMENT IN CREDITORS
09/30/1999 31/6/99
Trade creditors 153,143 410,463
Due to group companies
Payments on account 281,245 713,457
Other creditors 6,470 95,315
Other taxes 284,634 252,134
Accruals 67,694 32,758
--------------- -------------
793,186 1,504,127
=============== =============
(Decrease) / increase for the year (710,941)
===============
</TABLE>
<TABLE>
<CAPTION>
5. LOANS
BANK FACTORS DIRECTORS TOTAL
<S> <C> <C> <C> <C>
Outstanding at 1st July 1999 6,373 238,485 32,497 277,355
Advanced in the year 0
Repaid in the year (6,043) 0 365 (5,678)
----------------------------------------------------------
Outstanding at 30th September 1999 330 238,485 32,862 271,677
==========================================================
</TABLE>
<PAGE>
SPACE INNOVATIONS LIMITED
-------------------------
QUARTER ENDED 30 SEPTEMBER 1999
-------------------------------
CASH FLOW STATEMENT WORKINGS
----------------------------
<TABLE>
<CAPTION>
6. HIRE PURCHASE
SIL TOTAL
<S> <C> <C>
As at 1st July 1999 25,247 25,247
New agreements 0
Repayments (9,224) (9,224)
--------------- -------------
As at 30th September 1999 16,023 16,023
=============== =============
</TABLE>
7A. PROVISIONS
Dr Cr
B/fwd at 1st July 1999 33,001
Paid in year
Charge to P&L in year
C/fwd at 30th September 1999 33,001
-----------------------------
33,001 33,001
=============================
8. MOVEMENT IN CASH BALANCES
At 31st At 30th
July 1999 September 1999 Change
Cash 6,425 57,383 50,958
Bank overdraft (27,285) 0 27,285
-----------------------------------------
(20,860) 57,383 78,243
-----------------------------------------
<TABLE>
<CAPTION>
9. CORPORATION TAX
Dr Cr
<S> <C> <C>
B/fwd at 1st July 1999
ACT set off
Under provision re prior year
Charge for the year
Paid in year (balancing figure)
C/fwd at 30th September 1999
------------------------------
0 0
==============================
Interest received
===============
Interest paid (4,892)
===============
Dividends received
===============
Dividends paid - equity
===============
Dividends paid - non equity
===============
Capital contributions
===============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 18,009
<SECURITIES> 0
<RECEIVABLES> 134,622
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 159,605
<PP&E> 2,233,759
<DEPRECIATION> 197,917
<TOTAL-ASSETS> 7,213,183
<CURRENT-LIABILITIES> 3,294,197
<BONDS> 960,000
0
0
<COMMON> 1,485
<OTHER-SE> 2,954,920
<TOTAL-LIABILITY-AND-EQUITY> 7,213,183
<SALES> 0
<TOTAL-REVENUES> 634,145
<CGS> 0
<TOTAL-COSTS> 331,498
<OTHER-EXPENSES> 1,963,861
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 220,680
<INCOME-PRETAX> (2,162,031)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,162,031)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,162,031)
<EPS-BASIC> (.21)
<EPS-DILUTED> (.21)
</TABLE>
