Kistler Teeters on the Brink After Main Investor Withdraws Support

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WASHINGTON — Kistler Aerospace Corp. will lay off the majority of its 25 employees by the end of October after its main financial benefactor opted to pull the plug on the company, which has spent over a decade and some $500 million trying to develop a reusable rocket.

Blaming NASA’s sluggish follow-through on a pledge to buy space station resupply services from the private sector, Douglas Teitelbaum, director of corporate bailout specialist Bay Harbour Management LLC, said he was “radically reducing” his investment in the Kirtland, Wash.-based company.

Kistler emerged from Chapter 11 bankruptcy in March after New York-based Bay Harbour agreed to provide $15 million in financing to get Kistler back into the business of building its reusable K-1 rocket.

The K-1 was conceived in the early 1990s as a low-cost alternative to expendable rockets for launching small low Earth-orbiting satellites. More recently, Kistler has shifted its focus to the government market, repackaging the K-1 as a reusable cargo carrier for the international space station.

Teitelbaum, Kistler’s controlling creditor, told Space News Sept. 27 that he was done waiting for NASA to make good on its pledge to buy space station resupply services from the private sector. “I’m not in the business of throwing money down a rat hole while the government tries to organize itself to decide whether or not it can accomplish what [President George W. Bush] directed it to do,” Teitelbaum said.

After a meeting of Kistler’s board of directors Sept. 30, Randy Brinkley, the company’s chief executive officer, said Teitelbaum’s decision will force Kistler to lay off the majority of its staff in the weeks ahead. Brinkley said Kistler has been talking to other potential investors and would continue to do so. He said there were no immediate plans to dissolve up the company and sell off its assets.

“We are not taking any irreversible actions,” Brinkley said. “We are maintaining at this point in time all our material with our subcontractors and our subsidiaries in Australia.”

Most, if not all, of Kistler’s K-1 hardware resides with its subcontractors. Kistler has two subsidiaries in Australia that were established to operate the K-1 out of the country’s Woomera launch range .

Teitelbaum’s money has been critical to keeping Kistler’s doors open while it pursues NASA business.

“While I don’t like laying people off and shutting down operations, I just can’t keep tossing money at this thing with nothing in sight,” Teitelbaum said. “Candidly, I told NASA this. I said, ‘if I don’t get to a decision soon I am going to cut my bleed.'”

NASA has been looking for alternatives to the space shuttle for launching cargo to the space station since at least 2002, when it awarded four companies contracts worth a combined $10 million to study the options.

Kistler was not among the companies selected for the so-called Alternate Access to Station contracts. But Kistler the year before made an unsolicited proposal to NASA offering to sell data from a series of K-1 demonstration flights. Such a contract would give Kistler credibility with the prospective financial backers while giving NASA an opportunity to leverage private-sector investment to resupply the space station.

NASA officially bought into the idea in early 2004, awarding Kistler a $227.4 million contract for flight data from the still unfinished K-1. The award was a boon for Kistler, giving the company what many saw as the inside track in NASA’s planned competition to buy space station resupply services from commercial providers.

But one of Kistler’s fiercest competitors, Space Exploration Technologies (SpaceX), cried foul, protesting the award to the U.S. Government Accountability Office on the grounds that NASA should have given other companies a chance to bid to provide the flight data. NASA rescinded Kistler’s award in June 2004 after being informed that the congressional watchdog agency intended to rule in SpaceX’s favor.

Elon Musk, president of El Segundo, Calif.-based SpaceX, said Kistler’s singular focus on winning NASA contracts is largely responsible for the company’s undoing.

“Kistler was too heavily dependent on a large development contract from a single entity, which has been the root cause of failure in many prior launch vehicle start-ups,” Musk said in an e-mail. “In contrast, the SpaceX Falcon has been a private development with no major external dependencies, and we are fortunate to have earned eight distinct customers prior to first launch.”

Musk, an entrepreneur who made a fortune before turning 30, is bankrolling the development of the Falcon 1. SpaceX is preparing to launch the Falcon 1 this autumn carrying a small experimental satellite built by students at the U.S. Air Force Academy.

Marc Schlather, president of ProSpace, a grass roots lobbying group, said Kistler’s troubles are typical of what entrepreneurial companies face when trying to sell commercial services to NASA.

“This is a situation we’ve seen time and time again,” Schlather said. “If you talk to the capital markets, if you talk to the people in the know about investment, they will tell you that no one is going to close a privately financed business plan based on the expectation of business from NASA, because they are not a dependable customer.”

NASA spokesman Michael Braukus said Sept. 29 that the agency is “working hard” to issue a bid solicitation this autumn for space station launch services.

Lori Garver, a Washington aerospace consultant and former senior NASA official, said blaming the agency for the struggles of space-launch start-ups is not entirely fair.

“The situation with entrepreneurial companies and NASA has evolved over time,” Garver said. “Yes, it has taken longer to get clarified than anybody would have hoped, but keep in mind that most of these companies were initially looking for commercial business.”

That certainly is true of Kistler. The company was founded in 1993 by physicist and serial entrepreneur Walter Kistler with $1 million in seed money and a concept for a $250 million reusable rocket that could be ready within five years to launch commercial satellites at far less cost than existing conventional rockets.

Kistler Aerospace raised hundreds of millions of dollars during the 1990s on the strength of its technical team and its prospects for capturing a healthy share of projected market for launching constellations of low Earth-orbiting communications satellites planned by Iridium, Globalstar, Teledesic and others.

Reality, however, never matched forecasts. By the time the so-called low Earth-orbit telecommunications market went bust with the collapse of Iridium and Globalstar around 2000, Kistler Aerospace was still at least several years and several hundred-million dollars away from achieving the first test flight of K-1.

It was around then that Kistler began to shift its attention to NASA and the international space station.