1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended...............March 31,FOR THE QUARTERLY PERIOD ENDED...............SEPTEMBER 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission file number 0-27206
SPACEHAB, Incorporated
300 D Street, SW
Suite 814
Washington, D.C.DC 20024
(202) 488-3500
Incorporated in the State of Washington I.R.S.IRS Employer Identification
No.Number 91-1273737
The number of shares of Common Stock outstanding as of the close of business on
April 30,November 1, 1999:
Class Number of Shares Outstanding
----- ----------------------------
Common Stock 11,205,31011,258,494
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ -----
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SPACEHAB, INCORPORATED AND SUBSIDIARIES
MARCH 31,SEPTEMBER 30, 1999 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART 1 FINANCIAL INFORMATION Page
----
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999
and June 30, 1998 3
Condensed Consolidated Statements of Operations for the Three
and Nine Months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months ended March 31, 1999 and 1998 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
PART 1 - FINANCIAL INFORMATION PAGE
----
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999 and
June 30, 1999 3
Condensed Consolidated Statements of Operations for the three months
ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
Three months ended September 30, 1999 and 1998 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
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PART 1: FINANCIAL INFORMATION
ItemITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SPACEHAB, INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Balance SheetsCONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) March 31, JuneSEPTEMBER 30, JUNE 30,
1999 1998
(unaudited) (audited)
-------------------- -------------------1999
(UNAUDITED) (AUDITED)
------------- -------------
ASSETS
Cash and cash equivalents $ 32,72619,310 $ 2,327
Receivables,21,346
Accounts receivable, net 13,553 5,97917,777 17,471
Prepaid expenses and other current assets 2,060 550
-------------------- -------------------1,658 1,146
-------- --------
Total current assets 48,339 98,85638,745 39,963
Property, plant, and equipment, net of
Accumulatedaccumulated depreciation and amortization
Of $47,745of $50,897 and $43,338 124,642 112,588$49,247 137,802 132,184
Goodwill, net of accumulated amortization of $1,090$1,616 and $230 26,262 3,224$1,339,
respectively 25,221 25,498
Investment in joint venture, at cost 1,600 1,400
Other assets, net 6,689 5,936
-------------------- -------------------6,266 5,301
-------- --------
Total assets $ 205,932 $ 220,604
==================== ===================$209,634 $204,346
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable, current portion $ 2,824 $ 2,824
LoanLoans payable under credit agreement, current portion $ 333 500$ 333
Loans payable, current portion 3,108 3,126
Accounts payable and& accrued expenses 11,299 6,20417,952 13,181
Accrued subcontracting services 7,145 13,1771,729 6,787
Deferred revenue 7,880 13,491
-------------------- -------------------3,639 4,162
-------- --------
Total current liabilities 29,481 36,196
Accrued contract costs 928 -
Notes payable to shareholder 7,860 11,895
Loan26,761 27,589
Loans payable under credit agreement, net of current portion 333 667
1,000
LoanLoans payable, net of current portion 7,059 9,1776,270 7,033
Convertible notes payable to shareholder 7,860 7,860
Convertible subordinated notes payable 63,250 63,250
Accrued contract costs 962 940
Deferred income taxes 2,094 2,678
-------------------- -------------------3,181 2,842
-------- --------
Total liabilities 111,339 124,196108,617 110,181
Commitments and contingencies
Stockholders' equity:
Series B Senior Convertible Preferred Stock (authorized 2,500,000 shares,
issued and outstanding 975,000 and 0 shares, respectively,
liquidation preference of $8,775 thousand) 8,688 -
Common stock, no par value, authorized
30,000,000 shares, issued and outstanding
11,204,76211,258,494 and 11,168,16111,229,646 shares, respectively 81,403 81,23981,708 81,585
Additional paid-in capital 16 16
Retained earnings 13,174 15,153
-------------------- -------------------10,605 12,564
-------- --------
Total stockholders' equity 94,593 96,408
-------------------- -------------------101,017 94,165
-------- --------
Total liabilities and stockholders' equity $ 205,932 $ 220,604
==================== ===================$209,634 $204,346
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
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SPACEHAB, INCORPORATED AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of OperationsUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Nine Months
(In thousands, except share data) Ended March 31, Ended March 31,
-------------------------------- ---------------------------------
1999 1998THREE MONTHS
ENDED SEPTEMBER 30,
1999 1998
-------------- -------------- --------------- -------------------------------
Revenue $ 26,69325,978 $ 18,997 $ 78,600 $ 39,29028,273
Costs of revenue:
Integration and operations 17,539 7,132 50,776 17,079
Depreciation 1,309 1,232 3,827 3,678
Insurance and other direct costs 658 697 3,439 1,464
Indirect costs 2,450 386 6,617 950revenue 23,835 22,224
-------------- --------------- --------------- ---------------
Total costs of revenue 21,956 9,447 64,659 23,171----------------
Gross profit 4,737 9,550 13,941 16,1192,143 6,049
-------------- ----------------
Operating expenses:
Marketing, general and administrative 3,691 3,018 10,781 7,7943,739 3,160
Research and development 708 1,318 2,678 3,070491 738
-------------- --------------- -------------- -------------------------------
Total operating expenses 4,399 4,336 13,459 10,8644,230 3,898
-------------- --------------- --------------- -------------------------------
Income (loss) from operations 338 5,214 482 5,255(2,087) 2,151
Interest expense, net of capitalized amounts 1,252 1,253 3,910 2,632interest 1,163 1,431
Interest and other income, (422) (930) (1,859) (2,341)net (234) (519)
Other expense 46 - 596 -550
-------------- --------------- --------------- ---------------
Income----------------
Net income (loss) before income taxes (538) 4,891 (2,165) 4,964(3,016) 689
Income tax expense (benefit) 3 - (186) -(1,057) 276
-------------- --------------- --------------- -------------------------------
Net income (loss) $ (541)(1,959) $ 4,891 $ (1,979) $ 4,964413
============== =============== =============== ===============================
Basic earnings (loss) per share:
Net income (loss) per share-share - basic $ (0.05)(0.17) $ 0.44 $ (0.18) $ 0.450.04
============== =============== =============== ===============================
Shares used in computing net income
(loss) per share-share - basic 11,189,242 11,156,274 11,178,004 11,152,31211,229,960 11,168,161
============== =============== =============== ===============================
Diluted earnings (loss) per share:
Net income (loss) per share - diluted $ (0.05)(0.17) $ 0.37 $ (0.18) $ 0.440.04
============== =============== =============== ===============================
Shares used in computing net income
(loss) per share - assuming dilution 11,189,242 16,062,335 11,178,004 11,407,595diluted 11,229,960 11,352,693
============== =============== =============== ===============================
See accompanying notes to unaudited condensed consolidated financial statements.
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SPACEHAB, INCORPORATED AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash FlowsUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Nine Months Ended March 31,THREE MONTHS ENDED SEPTEMBER 30,
1999 1998
--------------------- ------------------------------ ----------
Cash flows provided by (used for) operating activities:
Net income (loss) $ (1,979)(1,959) $ 4,964413
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities:
Depreciation and amortization 5,661 4,4562,081 1,840
Changes in assets and liabilities:
(Increase) decreaseDecrease (increase) in accounts receivable 792 (7,796)
Increase(306) 3,508
Decrease (increase) in prepaid expenses and other Currentcurrent assets (1,204) (1,567)
Increase in deferred mission costs - (479)
Increase(512) (654)
Decrease (increase) in other assets (204) (1,775)(949) (183)
Increase (decrease) in deferred flight revenue (4,044) 16,274(523) (7,118)
Increase (decrease) in accounts payable and
accrued expenses (2,374) 2,248
Decrease in advanced billings (1,567) (470)4,896 (2,299)
Increase (decrease) in accrued consulting
and subcontracting services (6,032) 1,736
--------------------- ---------------------(5,059) (480)
Increase (decrease) in deferred taxes 67 -
---------- ----------
Net cash provided by (used for)used for operating activities (10,951) 17,591
--------------------- ---------------------(2,264) (4,973)
---------- ----------
Cash flows used for investing activities:
Payments for flight assets under construction (12,893) (13,360)
Payments for building under construction (1,020) (3,205)
Investment in joint venture (800) -
Purchase of property and equipment and other assets (2,104) (505)(5,594) (1,586)
Purchase of Johnson Engineering, net of cash acquired (25,344) - --------------------- ---------------------(25,308)
Payments for building under construction (444) (28)
Purchases of property, equipment and leasehold improvements (1,231) (459)
Investment in joint venture (200) (500)
---------- ----------
Net cash used for investing activities (42,161) (17,070)
--------------------- ---------------------(7,469) (27,881)
---------- ----------
Cash flows provided by (used for) financing activities:
Payment of noteloan payable to Insurers (500) (500)
Payment of debt placement fees - (4,043)
Proceeds from issuance of convertible notes payable - 63,250(781) (706)
Payment of note payable to shareholder (4,035) -
Proceeds from note payable - 14,119
Payment of loan payable (2,118) (1,412)under credit agreement (333) (500)
Proceeds from issuance of common stock 164 140
--------------------- ---------------------123 63
Proceeds from issuance of preferred stock, net of expenses 8,688 -
---------- ----------
Net cash provided by (used for) financing activities (6,489) 71,554
--------------------- ---------------------7,697 (1,143)
---------- ----------
Net increase (decrease)decrease in cash and cash equivalents (59,601) 72,075(2,036) (33,997)
Cash and cash equivalents at beginning of period 21,346 92,327
12,887
--------------------- ------------------------------- ----------
Cash and cash equivalents at end of period $ 32,72619,310 $ 84,962
===================== =====================58,330
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
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SPACEHAB, INCORPORATED AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial StatementsNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting of only normal
recurring accruals, necessary for a fair presentation of the consolidated
financial position of SPACEHAB, Incorporated and subsidiaries ("SPACEHAB" or the
"Company") as of March 31,September 30, 1999, and the results of their operations for the
three and nine month periods ended March 31,September 30, 1999 and 1998 and their cash flows for
the nine monthsthree month periods ended March 31,September 30, 1999 and 1998. However, the
consolidated financial statements are unaudited, and do not include all related
footnote disclosures. Certain items in cost of revenues, S,G&A and R&D for the
three and
nine months ending March 31,September 30, 1998 have been reclassified to conform with
the 1999fiscal 2000 consolidated financial statement presentation (see accompanying
table). Management believes that the reclassifications of costs provides better
matching of the specific activities to the costs incurred in conjunction with
such activities.
The consolidated results of operations for the three and nine months ended March
31,September 30,
1999 and 1998 are not necessarily indicative of the results that may be expected for the
full year. The Company's results of operations have fluctuated significantly
from quarter to quarter (see note 4)3). The interim unaudited condensed
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements appearing in the Company's
Form 10-K for the year ended June 30, 1998.1999.
(In thousands) Three Months Ended
Nine Months Ended Six Months Ended
(In thousands) March 31,September 30, 1998
March 31, 1998 December 31, 1998--------------------------
Reclassified Reclassified Reclassified
As Statement of As Statement of
As Statement of
Reported Operations
Reported Operations Reported Operations
- ------------------------------------------ ----------- -------------- ----------- ---------------------------------------------------------------------- ------------ ---------------
Revenue $18,997 $ 18,997 $39,290 $39,290 $51,907 $ 51,907$28,273 $28,273
Costs of revenue:
Integration & Operations 7,563 7,132 18,380 17,079 33,237 33,237
Depreciation 979 1,232 3,936 3,678 2,517 2,517
Insurance & other direct costs 520 697 915 1,464 6,142 2,781
Indirect costs 0 386 0 950 0 4,167
----------- -------------- ----------- -------------- ------------ ---------------
Total costs of revenue 9,062 9,447 22,221 23,171 41,896 42,70221,740 22,224
------- -------
Gross profit 9,935 9,550 17,069 16,119 10,011 9,2056,533 6,049
Operating expenses:
Marketing, general & administrative 3,980 3,018 10,021 7,794 8,857 7,0904,135 3,160
Research and development 741 1,318 1,793 3,070 1,010 1,971
----------- -------------- ----------- -------------- ------------ ---------------247 738
------- -------
Total operating expenses 4,721 4,336 11,814 10,864 9,867 9,0614,382 3,898
------- -------
Income (loss) from operations $ 5,2142,151 $ 5,214 $ 5,255 $ 5,255 $ 144 $ 144
----------- -------------- ----------- -------------- ------------ ---------------2,151
======= =======
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2. Earnings per Share:EARNINGS PER SHARE:
The following are reconciliations of the numerators and denominators
of the basic and diluted earnings per share computations for the three and nine-monthmonth
periods ended March 31,September 30, 1999 and 1998, respectively:
6
1998:
(In(in thousands except Three months ended March 31, 1999 Three months ended March 31, 1998per share data) Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------Basic Diluted
----- -------
Basic EPS:
Income available toSEPTEMBER 30, 1999
Net loss $ (1,959) $ (1,959)
Weighted average outstanding common stockholders $(541) 11,189,242 $(0.05) $4,891 11,156,274 $0.44
Effect of dilutive
securities:
Convertible notes payableshares 11,229,960 11,229,960
- - ----------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998
Net income $ 991 4,642,202 -
Options413 $ 413
Weighted average outstanding common shares 11,168,161 11,168,161
Outstanding stock options and warrants, using the
treasury stock method
- 184,532
- - - 263,859 -
----------------------------------------------------------------------------------
Diluted EPS:
Income available to
common stockholders $(541) 11,189,242 $(0.05) $5,882 16,062,335 $0.37
Nine months ended March 31, 1999 Nine months ended March 31, 1998
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------
Basic EPS:
Income available to
common stockholders $ (1,979) 11,178,004 $(0.18) $4,964 11,151,312 $0.45
Effect of dilutive
securities:
Convertible notes payable - - - - - -
Options and warrants - - - - 256,283 -
----------------------------------------------------------------------------------
Diluted EPS:
Income available to
common stockholders : $(1,979) 11,178,004 $(0.18) $4,964 11,407,595 $0.44---------------------------------------------------------------------------------------------------------------
Adjusted shares 11,168,161 11,352,693
Convertible notes payable outstanding as of March 31,September 30, 1999, convertible into
4,642,202 shares of common stock at $13.625 per share and due October 2007, were
not included in the computation of diluted EPS for the three and nine months ended
March 31,September 30, 1999 or the nine months ended March 31,and 1998, as the inclusion of the converted notes would be
anti-dilutive for these periods.
Options to purchase 99,993 shares of common stock at a price of $5.125 per share
were outstanding as of September 30, 1999, but were not included in the
computation of diluted EPS as the inclusion of these options would be
anti-dilutive. These options expire July 1, 2004.
Options and warrants to purchase 1,468,5081,876,541 shares of common stock, for the three
month period ended March 31, 1999, at prices
ranging from $8.875$5.75 to $24.00 per share, were outstanding as of March 31,September 30,
1999 but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares during the three months ended March 31,September 30, 1999. TheseThe options
expire between June 24,November 1, 1999 and August 3, 2007.July 1, 2008.
Options and warrants to purchase 1,352,9431,309,015 shares of common stock, for the nine
months ended March 31, 1999, at prices
ranging from $9.875 to $24.00 per share, were outstanding but were not included in the computationas of diluted EPS because
the options' exercise prices were greater than the average market price of the
common shares during the nine months ended March 31, 1999. These options expire
between June 24, 1999 and August 3, 2007.
Options and warrants to purchase 1,818,597 and 1,811,021 shares of common stock,
respectively, at prices ranging from $11.00 to $14.00 per share, were
outstanding for the three and nine month periods ended March 31,September 30,
1998, but were not included in the computation of diluted EPS because the options' and
warrants'
exercise prices were greater than the average market price of the common shares
during the three and nine month periodsmonths ended March 31,September 30, 1998.
These options and warrants expire between June 21, 1998 and October 21, 2004.
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3. Acquisition of Johnson Engineering:
On July 1, 1998, the Company acquired all of the outstanding shares of capital
stock of Johnson Engineering Corporation ("Johnson Engineering"). Johnson
Engineering performs several critical services for NASA including flight crew
support services, operations, training and fabrication of mockups at NASA's
Neutral Buoyancy Laboratory and at NASA's Mockup and Integration Laboratory,
where astronauts train for both Space Shuttle and International Space Station
missions. Johnson Engineering also designs and fabricates flight hardware, such
as flight crew equipment and crew quarters habitability outfitting as well as
providing stowage integration services. Johnson Engineering is also responsible
for configuration management of the International Space Station (ISS).
The Company paid approximately $25.3 million, including transaction costs, to
acquire all of the capital stock of Johnson Engineering. The business
combination is being accounted for using the purchase method under Accounting
Principles Board Opinion No. 16, Business Combinations, (APB Opinion 16). The
purchase price has been allocated to the assets and liabilities acquired based
on preliminary estimates of fair value as of the date of acquisition. Based on
the allocation of the net assets acquired, goodwill of approximately $24 million
was recorded. Such goodwill is being amortized on a straight-line basis over 25
years. The purchase price has been allocated as follows (in thousands):
Cash $
2
Prepaid and other current assets 306
Accounts receivable, net 8,366
Inventory 5
Property, plant and equipment, net 446
Other assets 622
Goodwill 23,962
Current liabilities (7,470)
Accrued contract costs (928)
--------
Total purchase price $ 25,311
========
APB Opinion 16 requires, for purchase business computations, the presentation of
pro forma combined results of operations for the current year and the preceding
year as if the combination had occurred at the beginning of the periods
presented. The following unaudited pro forma consolidated results of operations
are not necessarily indicative of actual or future results of operations.
(in thousands except per share data) Three Months Nine Months
Ended March 31, Ended March 31,
1999 1998 1999 1998
----------------- ------------------ ---------------- ----------------
Revenue $ 26,693 $ 30,811 $ 78,600 $ 76,278
Gross profit 4,737 10,823 13,941 17,729
Net income (loss) $ (541) $ 4,881 $ (1,979) $ 4,940
=========== ========== ========== =========
Net income (loss) per share - diluted $ (0.05) $ 0.37 $ (0.18) $ 0.43
=========== ========== ========== =========
4. Revenue Recognition:REVENUE RECOGNITION:
Under the Mir contract, revenue was recognized upon completion of each module
flight, and total contract revenue was allocated to each flight based on the
amount of services the Company provided on the flight relative to total
8
services provided for all flights under contract. Obligations associated with a
specific mission, e.g., integration services, were also recognized upon
completion of the mission. For the REALMS (Research and Logistics Mission Support) contract and for new
contract awards for which the capability to successfully complete the contract
can be reasonably assured and the costs at completion can be reliably estimated
at contract inception, revenue is recognized under the percentage-of-completion
method. This percentage-of-completion method allows the Company to report
revenue based on costs incurred on a per mission basis over the period of that
mission. The percentage of completion method results in the recognition of
revenue over the period of contract performance, thereby decreasing significant quarter by
quarter fluctuations in reported revenue.performance. Revenue provided by the
Astrotech payload processing facilities is recognized ratably over the occupancy
period of the satellites at the Astrotech facilities. Revenue provided by
Johnson Engineering is primarily based on cost-plus award fee contracts, whereby
revenue is recognized to the extent of costs incurred plus estimates of award
fee revenues using the percentage-of-completion method. Award fees, which
provide earnings based on the Company's contract performance as determined by
NASA evaluations, are recorded when the amounts can be reasonably estimated, or
are awarded. Changes in estimated costs to complete and estimated amounts
recognized as award fees are recognized in the period they become known.
5. Statements of Cash Flows7
8
4. STATEMENTS OF CASH FLOWS - Supplemental Information:SUPPLEMENTAL INFORMATION:
(a) Cash paid for interest costs was $4.0 million and $1.5$0.6 million for each of the nine
monthsthree month
periods ended March 31,September 30, 1999 and 1998, respectively.1998. The Company capitalized interest of
approximately $1.8$0.8 million and $1.4$0.6 million during the ninethree months ended
March 31,September 30, 1999 and 1998, respectively.
(b) The Company paid $0.4 millionno income taxes during the three months ended September 30,
1999, and $1.3paid $0.4 million for income taxes during the ninethree months ended
March 31, 1999 and 1998, respectively.
6. Credit Facilities:September 30, 1998.
5. CREDIT FACILITIES:
On June 16, 1997, the Company entered into a $10.0 million line of credit
agreement with a financial institution. Outstanding balances on the line of
credit accrue interest at either the lender's prime rate or a LIBOR-based rate,
and are collateralized by certain assets of the Company. The term of the
agreement is through October 1999.January 2000. As of March 31,September 30, 1999, the Company had not
drawn against the line of credit.
On July 14, 1997, the Company's wholly owned subsidiary, Astrotech, entered into
a five-year credit facility with a financial institution for loans of up to
$15.0 million. This loan is collateralized by the assets of Astrotech and
certain other assets of the Company, and is guaranteed by the Company. Interest
accrues at LIBOR plus three percent. As of March 31,September 30, 1999, the Company had
drawn $14.1$15.0 million against this loan. As of March 31,September 30, 1999 and 1998, the
outstanding balance on this loan was $9.9$9.4 million and $12.7$11.3 million,
respectively.
In October 1997, the Company completed a private placement offering for $63.3
million of aggregate principal of its 8% Convertible Subordinated Notes due
2007. Interest is payable semi-annually. The notes are convertible into the
common stock of the Company at a rate of $13.625 per share. This offering
provided the Company with net proceeds of approximately $59.9 million to be used
for capital expenditures associated with the development and construction of
space related assets, the purchase of Johnson Engineering and for other general
corporate purposes.
In December 1998, the Company amended its agreement with Alenia Spazio S.p.A.6. PREFERRED STOCK:
On August 2, 1999, DaimlerChrysler Aerospace AG (Dasa), a shareholder, relative to subordinated notes payable withpurchased
an outstanding
principal balanceadditional $12.0 million equity stake in SPACEHAB representing 1,333,334
shares of $11.9 million due in August 2001. In exchange for paymentSeries B Senior Convertible Preferred Stock. Under the agreement, Dasa
purchased all of $4.0 millionSPACEHAB's 975,000 authorized and unissued shares of principal on or before December 31,1998, Alenia agreed to
waive the interest payment due for the quarter ended December 31, 1998 and to
reducepreferred
stock. At the annual stockholders meeting held on October 14, 1999, the
shareholders approved the proposal to increase the number of authorized shares
of preferred stock to 2,500,000, in order to complete the transaction with Dasa.
The preferred stock purchase increased Dasa's investment interest ratein SPACEHAB to
approximately 11.5 percent. The Series B Senior Convertible Preferred Stock is:
convertible at the holders' option on the subordinated notes from 12%basis of one share of Preferred Stock
for one share of common stock, entitled to 10%vote on an "as converted" basis the
equivalent number of shares of common stock and has preference in liquidation,
dissolution or winding up of $9.00 per preferred share. No dividends are payable
on the outstanding balanceconvertible preferred shares.
7. SEGMENT INFORMATION:
The Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information", as of January 1,June 30, 1999. The interest expense benefit, $0.4
millionSFAS No. 131 establishes annual
and interim reporting standards for an enterprise's operating segments.
Based on its organization, the payment waived,Company operates in three business segments;
Astrotech, Johnson Engineering and SPACEHAB. Astrotech, acquired in February
1997, provides payload processing facilities to serve the satellite
manufacturing and launch services industry. Astrotech currently provides launch
site preparation of flight ready satellites to major U.S. space launch companies
and satellite manufacturers. Johnson Engineering, acquired in July 1998, is
being amortized overprimarily engaged in providing engineering services and products to the remaining termFederal
Government and NASA, primarily under the Flight Crew Systems Development
Contract (FCSD). SPACEHAB was founded to commercially develop space habitat
modules to operate in the cargo bay of the loan which is due August 2001. Beginning January 1, 1999, the same interest
rate will be appliedSpace Shuttles. SPACEHAB provides
access to the
senior debt (the Insurers' note) that has an
outstanding balance of $1.0 million as of December 31, 1998.8
9
Formodules and integration and operations support services for both NASA and
commercial customers.
The Company's chief operating decision maker utilizes both revenue and income
before taxes, including allocated interest based on the period ended March 31, 1999,investment in the
Company wassegment, in breach of certain loan
covenants of the term loanassessing performance and line of credit facility. The covenants hadmaking overall operating decisions and
resource allocations. As such, other income/expense items including taxes and
corporate overhead have not been negotiated priorallocated to the acquisition of Johnson Engineering. While the Company
had not drawn against the line of credit, covenant waivers were requestedvarious segments. Other income
and received, for the quarter ended March 31, 1999, from both lending institutions.
The Company isexpense items are included in SPACEHAB. Pretax income (loss) in the
process or renegotiating the loan covenants.
7. Shareholder Rights Plan:
On March 26, 1999 the Boardfollowing table includes an allocation of Directors adopted a Stockholder Rights
Plan designed to deter coercive takeover tactics and to prevent a potential
acquirer from gaining control of the Company without offering a fair price to
all of the Company's stockholders. Each Right under the Plan entitles the holder
to buy one one-thousandth of a share of a new series of junior participating
preferred stock for $35. If any person or group becomes the beneficial owner of
15% or more of SPACEHAB's common stock (with certain limited exceptions), then
each Right (not owned by the 15% stockholder) will then entitle its holder to
purchase, at the Right's then current exercise price, common shares having a
market value of twice the exercise price. In addition, if after any person has
become a 15% stockholder, and SPACEHAB is involved in a merger or other business
combination transaction with another person, each Right will entitle its holder
(other than the 15% stockholder) to purchase, at the Right's then current
exercise price, common shares of the acquiring company having a value of twice
the Right's then current exercise price. The rights were granted to each
shareholder of record on April 9, 1999. SPACEHAB generally will be entitled to
redeem the Rights at a redemption price of $.01 per Right until a person or
group acquires a 15% position. The Rights will expire on April 9, 2009.interest expense.
(in thousands)
Three Months Ended September 30, 1999
Pre-Tax Net Depreciation
Income Fixed And
Revenue (loss) Assets Amortization
-----------------------------------------------------------------------------
SPACEHAB $ 5,610 $ (3,644) $ 114,980 $ 1,489
Astrotech 2,801 138 20,918 249
Johnson Engineering 17,567 491 1,903 342
-----------------------------------------------------------------------------
$ 25,978 $ (3,016) $ 137,802 $ 2,081
Three Months Ended September 30, 1998
Net Depreciation
Pre-Tax Fixed And
Revenue Income Assets Amortization
-----------------------------------------------------------------------------
SPACEHAB $ 11,400 $ 602 $ 93,701 $ 1,241
Astrotech 2,518 134 19,528 319
Johnson Engineering 14,354 (48) 454 280
-----------------------------------------------------------------------------
$ 28,273 $ 689 $ 113,682 $ 1,840
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
GeneralMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
This document may contain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including (without limitation) the "General"
and "Liquidity and Capital Resources" sections of this Item 2. Such statements
are subject to certain risks and uncertainties, including those discussed
herein, which could cause actual results to differ materially from those
projected in such statements.
SPACEHAB was incorporated in 1984 to commercially develop space
habitat modules to operate in the cargo bay of the Space Shuttles. SPACEHAB
currently provides space within and on the modules for both NASA and commercial
customers. Astrotech was established in 1984 to provide payload processing
facilities to serve the satellite manufacturing and launch services industry.
Astrotech currently provides launch site preparation of flight-ready satellites
to major U.S. space launch companies and satellite manufacturers. Johnson
Engineering was incorporated in the state of Colorado in 1973 and is primarily
engaged in providing engineering services and products to the federal
government.
The Company currently operates under two significant contracts with
NASA: the REALMS Contract, a $92.6$99.7 million contract for two research missions
aboard the Space Shuttle and two logistics missions to resupply the
International Space Station;Station ("ISS"); and, the Flight Crew Systems Development
Contract (the "FCSD Contract") currently a $324.9$331.5 million multitask
cost-plus-award and incentive-fee contract, that commenced in May 1993 and will
conclude in April 2001. The value of the NASA portion of the REALMS contract is
$67.5$68.4 million for four firm
9
10
missions and the commercial value is currently $25.1$31.3 million. The Company has
the potential to increase the total REALMS Contract value by an additional $12.2
million through module usage sales to commercial customers for microgravitymicro gravity
space research such as the European Space Agency (ESA), the National Space
Development Agency of Japan (NASDA) and the Canadian Space Agency (CSA). The
first mission under the REALMS Contract, STS-95 which carried Senator John Glenn
back into space, was completed in October 1998. The threesecond mission, STS-96, a
re-supply mission to the ISS, was completed in May, 1999. The two remaining
flights are currently scheduled for launch in May 1999, December 1999March 2000 and December 2000.
NASA has recently executed a modification to the REALMS contract whereby up to
six option missions may be added which could potentially increase the contract
value by $128 million. Under the FCSD Contract,
10
Johnson Engineering provides a
variety of critical crew training, support and manufacturing functions on a cost
plus award fee and incentive fee basis.
RevenueREVENUE
SPACEHAB generates revenue by: (i) providing lockers and/or volume
within and on the SPACEHAB Modules; (ii) integration and operations support
services provided to scientists and researchers responsible for the experiments;
and/or (iii) from NASA or International Agencies to carry logistics supplies for
Module missions aboard the Shuttle system. Under the Mir Contract, the Company
recognized revenue only at the completion of each Space Shuttle mission
utilizing Company assets. Accordingly, the Company's quarterly revenue and
profits had fluctuated dramatically based on NASA's launch schedule and will
continue to do so under any contract for which revenue is recognized only upon
completion of a mission. For the REALMS contract and for future
contract awards for which the capability to successfully complete the contract
can be demonstrated at contract inception, revenue recognition is being reported
under the percentage-of-completion method is being reported based on costs incurred on a per
mission basis over the period of the mission. The percentage-of-completion
method results in the recognition of revenue over the period of contract
performance, thereby significantly decreasing the quarter-by-quarter
fluctuations in reported revenue.performance.
Astrotech revenue is derived from various multi-year fixed price
contracts with satellite and launch vehicle manufacturers. The services and
facilities Astrotech provides to its customers support the final assembly,
checkout and countdown functions associated with preparing a satellite for
launch. This preparation includes: the final assembly and checkout of the
satellite, installation of the solid rocket motors, loading of the liquid
propellant, encapsulation of the satellite in the launch vehicle, transportation
to the launch pad and command and control of the satellite during pre-launch
countdown. Revenue provided by the Astrotech payload processing facilities is
recognized ratably over the occupancy period of the satellites in the Astrotech
facilities. In addition, Astrotech expects to generate additional revenue from
an exclusive multi-year agreement to process all Sea Launch program payloads at
the Boeing facility in Long Beach, California. The first Sea Launch payload was
processed by Astrotech and successfully launched during March 1999.
Johnson Engineering generates revenue primarily from its multi-year
cost plus award and incentive-fee contract with NASA. Johnson Engineering's
flight crew support services include operations, training and fabrication of
mockups at NASA's Neutral Buoyancy Laboratory, and at NASA's Space Vehicle
Mockup and Integration
Laboratory,Facility ("SVMF"), where astronauts train for both Space Shuttle and
International Space Station missions. Johnson Engineering also designs and
fabricates flight hardware including flight crew equipment and crew quarters
habitability outfitting and provides stowage integration services. Johnson is
also responsible for configuration management of the ISS. Revenue provided by
Johnson Engineering is recognized to the extent of costs incurred plus award fee
using the percentage of completion method, measured on costs incurred. Award
fees, which provide earnings based on contract performance as determined by
periodic NASA evaluations, are recorded when the amounts can be reasonably
estimated or are awarded.
Costs of RevenueCOSTS OF REVENUE
Costs of revenue for SPACEHAB missions include integration and
operations expenses associated with the performance of three types of efforts:
(i) sustaining engineering in support of all missions under a contract, (ii)
mission specific support and (iii) other costs of revenue including depreciation
expense, related insurance, costs associated with the both the Astrotech and
Spacehab payload processing facilities and Johnson Engineering direct and
indirect costs under the FCSD Contract.
10
11
RESULTS OF OPERATIONS
For the three months ended March 31,September 30, 1999 as compared to the three months
ended March 31,September 30, 1998.
Revenue. Revenue increaseddecreased by 41%8% to approximately $26.7$26.0 million as
compared to $19.0$28.3 million for the three months ended March 31,September 30, 1999 and
1998, respectively. Revenue of $9.0$5.6 million was recognized from the REALMS
Contract with NASA and with related commercial customers, $15.5$17.6 million from
Johnson Engineering under the FCSD Contract and $2.2$2.8 million from Astrotech. In
contrast, for the quarter ended March 31,September 30, 1998, revenue of $13.6$11.4 million was
recognized forfrom the sixth Mir mission uponREALMS contract with NASA and with related commercial
customers, $14.4 million from Johnson Engineering and $2.5 million from
Astrotech. The increase in Johnson Engineering's revenue was due primarily to
increased astronaut training at the return ofNeutral Buoyancy Laboratory and partially to
a retroactive increase in the module, $2.8 million
was recognizedavailable fee pool. The decrease in revenue under
the REALMS Contractcontract is due to the slippage of the assembly of the International
Space Station (ISS) and the stand down of the Shuttle fleet for both NASAwiring
inspections. These delays not only reduced the revenue recognized in the current
period, but increased the related costs and related commercial
customers and revenuetherefore reduced gross margin.
These delays have resulted in the slippage of $2.6 million was generated by Astrotech.STS-101 from November 1999 to
March 2000.
Costs of Revenue. Costs of revenue for the quarter ended March 31,September
30, 1999 increased by 132%7% to $22.0$23.8 million, as compared to $9.4$22.2 million for the
prior year's quarter. This significant increase was due to the inclusion of Johnson
Engineering's costs of $13.9 million, primarily for costs incurred in support of
the FCSD contract. For the quarter ended March 31,September 30, 1999, integration and
operations costs for the REALMS and related commercial customer contracts were
$5.6$5.4 million, $1.2 million for Astrotech payload processing, $15.9 for Johnson
Engineering, and $1.3 million of depreciation expense. For the three months
ended MarchSeptember 30, 1998, the components of
costs of revenue include integration and operations costs under the Mir contract
of $5.7 million, $1.3 million underfor the REALMS and
related commercial customer contracts were $6.4 million, $1.2 million for
Astrotech payload processing, $13.2 for Johnson Engineering, and $1.3 million of
depreciation expenseexpense. The increase in costs of $1.2 million.revenue is due primarily to the
increased training by Johnson Engineering for astronaut training.
Operating Expenses. Operating expenses increased approximately 1%9% to
approximately $4.4$4.2 million for the three months ended March 31,September 30, 1999 as
compared to approximately $4.3$3.9 million for the three months ended March 31,September 30,
1998. Marketing, general and administrativeR&D expenses increased 22% to approximately
$3.7 milliondecreased for the three monthsperiod ended March 31,1998 as compared to $3.0
million for the quarter ended March 31, 1998. The increase is due to the
inclusion of $0.7 million of Johnson Engineering's expenses. Research and
development costs decreased by approximately 46% to $0.7 million for the quarter
ended March 31,September 30, 1999 as compared
to $1.3 millionthe comparable period last year due to the Company's emphasis on completing
existing assets in progress. SG&A expenses increased for the quarterperiod ended
March 31,
1998. R&D costs decreased by $1.2 million during the quarter ended March 31,September 30, 1999 due primarilyas compared to the reduction of R&D efforts, particularly for the ICC and
SHUCS systems, for use aboard Space Shuttle missions. This decrease was
partially offset by $0.5 million of R&D expenses at Astrotech for the
development of a new product line, sounding rockets.comparable period last year primarily due
to personnel costs.
Interest and Other Expense. Interest expense was approximately $1.3$1.2
million for the three months ended March 31,September 30, 1999 and approximately $1.4
million for the three months ended March 31,September 30, 1998. There was also
approximately $0.6$0.8 million and $1.4$0.6 million of interest capitalized for the
quarters ended March 31,September 30, 1999 and 1998, respectively. Interest wasis
capitalized based on the construction of the Company's research module with double module hardwaremodules and additional
facilities being constructed by Astrotech.
Interest and Other Income. Interest and other income was
approximately $0.4$0.2 million and $0.9 million for the three months ended March 31,September
30, 1999 and 1998, respectively. The decrease in interest income for the period
ended September 30, 1999 is due to the use of cash for operations and capital
expenditures. Interest is earned on the Company's short-term investments of the
proceeds received from the Company's debt financings completed during
July and October 1997.preferred stock
purchase by DaimlerChrysler.
Income Taxes. Based on the Company's projected taxable earnings for
fiscal year 1999,2000, the Company did not record significant incomerecorded a tax expense
(benefit)benefit of $1.1 million for the
quarter ended March 31, 1999.September 30, 1999, as compared to $0.3 million income tax expense
recorded for the quarter ended September 30, 1998.
Net Income (Loss). The net loss for the quarter ended March 31,September 30,
1999 was approximately ($0.5)2.0) million or ($.05).17) per share (basic and diluted
EPS) on 11,189,24211,229,960 shares as compared to net income of $4.9$0.4 million or $0.44$0.04 per
share (basic EPS) on 11,156,27411,168,161 shares or $0.37$0.04 (diluted EPS) on 16,062,335 shares.
12
For the nine months ended March 31, 1999 as compared to the nine months ended
March 31, 1998.
Revenue. Revenue increased by 100% to $78.6 million as compared to $39.3
million11,352,693
shares for the nine monthsquarter ended March 31, 1999 and 1998, respectively. Revenue
recognized during the nine months ended March 31, 1999 was from: REALMS and
commercial customer contracts of $29.8 million; Astrotech operations of $6.9
million and Johnson Engineering operations of $41.9 million, primarily under the
FCSD contract. Conversely, for the nine months ended March 31, 1998 the
Company's revenue was attributable to the Mir Contract of $27.2 million, REALMS
and commercial customer contracts of $4.6 million and Astrotech operations of
$7.5 million. Johnson Engineering's revenue was reduced during the period ended
December 31, 1998 by $0.7 million as the result of their award score, for the
award period April-September 1998, which was lower than accrued and resulted in
no fee earned for the period. The fee reduction addressed performance at Johnson
Engineering prior to its acquisition by SPACEHAB. Corrective action has been
taken. For the current award period, Johnson Engineering has been recognizing
revenue based on an anticipated award score of 75%, which management believes is
reasonable based on its understanding of the reasons for the previous low score
and the corrective actions taken by the Company in response to the customer's
concerns. There can be no assurance that Johnson Engineering will achieve that
score.
Costs of Revenue. Costs of revenue for the nine months ended March 31,
1999 increased 179% to $64.7 million, as compared to $23.2 million for nine
months ended March 31,September 30, 1998.
The primary components of costs of revenue for the
nine months ended March 31, 1999 include integration and operation costs under
the REALMS and commercial customer contracts of $18.7 million, Astrotech
operations of $3.5 million and Johnson Engineering of $38.7 million.
Depreciation expense for the period was $3.8 million. In contrast, the primary
components of costs of revenue for the nine months ended March 31, 1998 included
integration and operations costs under the Mir contract of $13.9 million, REALMS
and commercial customers contracts of $2.4 million, and Astrotech operations of
$3.2 million. Depreciation expense for the period was $3.7 million.
Operating Expenses. Operating expenses increased by approximately 24% to
approximately $13.5 million for the nine months ended March 31, 1999 as compared
to approximately $10.9 million for the nine months ended March 31, 1998.
Marketing, general and administrative expenses increased by 38% to $10.8 million
as compared to $7.8 million primarily as the result of Johnson Engineering's
expenses of $2.0 million, staff added in the administrative and marketing
functions and depreciation for additional assets used in the marketing and
general and administrative functions.
Research and development costs decreased 13% to $2.7 million for the
period ended March 31, 1999 as compared to $3.1 million for the period ended
March 31, 1998. R&D costs decreased by $0.9 million dollars for the period
ending March 31, 1999 due primarily to the completion of the R&D effort of the
SPACHAB SHUCS system. This reduction was partially offset by $0.5 million of R&D
expense incurred at Astrotech for the development of a new product line,
sounding rockets.
Interest and Other Expense. Interest expense was approximately $3.9
million for the nine months ended March 31, 1999 as compared to approximately
$2.6 million for the nine months ended March 31, 1998. There was approximately
$1.8 million and $1.4 million of capitalized interest for the nine months ended
March 31, 1999 and 1998, respectively. Interest for the current fiscal year is
capitalized primarily on the construction of the Company's science module with
adapter hardware and an additional payload processing facility being constructed
by Astrotech. The increase in interest expense between the two periods is due
primarily to the interest accrued on the convertible notes that were issued on
October 21, 1997. Additionally during the nine months ended March 31, 1999, the
Company recognized $0.6 million in other expense related to costs associated
with a debt offering that the Company canceled in July 1998.
Interest and Other Income. Interest and other income was approximately
$1.9 million for the nine months ended March 31, 1999 as compared to $2.3
million for the period ended March 31, 1998. Interest income is due to
short-term interest earned by the Company for the investment of the proceeds
received from the Company's credit facilities completed during July and October
1997.
1311
Income Taxes. Based on the Company's projected taxable earnings for
fiscal year 1999, the Company recorded a $0.2 million income tax benefit for the
nine months ended March 31, 1999.
Net Income (Loss). The net loss for the period ended March 31, 1999 was
approximately ($2.0) million, or ($0.18) per share (basic and diluted EPS), on
11,178,004 shares as compared to net income of $5.0 million, or $0.45 per share
(basic EPS), and $0.44 per share (diluted EPS) for the nine months ended
December 31, 1997, on 11,152,312 shares and 11,407,595 shares, respectively.12
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its capital expenditures,
research and development and working capital requirements with progress payments
under its various contracts, as well as with proceeds received from private debt
and equity offerings and borrowings under credit facilities. During December
1995, SPACEHAB completed an initial public offering of common stockCommon Stock (the
"Offering"), which provided the Company with net proceeds of approximately $43.5
million. In June 1997, the Company signed an agreement with a financial
institution securing a $10.0 million revolving line of credit (the "Revolving
Line of Credit") that the Company may use for working capital purposes. As of
March 31,September 30, 1999, no amounts were drawn on this line of credit which expires
in October 1999.January 2000. The Company is currently in the process of negotiating a new
revolving line of credit. In July 1997, Astrotech obtained a five-year term loan
(the "Term Loan Agreement"), which is guaranteed by SPACEHAB, and provides for
draws of up to $15.0 million for general corporate purposes. As of March 31,September 30,
1999, the Company had drawn $14.1$15.0 million on this loan, which had an outstanding
balance on that date of $9.9$9.4 million. On October 21, 1997, the Company completed
a private placement offering of convertible subordinated notes (the "Notes
Offering"), which provided the Company with net proceeds of approximately $59.9
million which has been used, in part, for capital expenditures associated with
the development and construction of space related assets, the purchase of
Johnson Engineering, and for general corporate purposes. In December 1998, the
Company amended its agreement with Alenia Spazio S.p.A. relative to subordinated notes payable
with an outstanding balance of $11.9 million. In exchange for payment of $4.0
million of principal, Alenia agreed to reduce the annual interest rate from 12%12
percent to 10%10 percent on the outstanding balance as of January 1, 1999, and the
interest payment due for the quarter ended December 31, 1998, was waived.waived
resulting in an effective interest rate of 8.75 percent. An amended agreement
with the senior debt holders under the Insurers' note requires that the samean interest
rate of 8.25 percent be applied to the senior debt with an outstanding balance
of $1.0$0.7 million as of December 31, 1998.
ForSeptember 30, 1999. On August 2, 1999, DaimlerChrysler
Aerospace AG (Dasa), a shareholder, purchased an additional $12.0 million equity
stake in SPACEHAB representing 1,333,334 shares of Series B Senior Convertible
Preferred Stock. Under the period ended March 31,agreement, Dasa purchased all of SPACEHAB's 975,000
authorized and unissued shares of preferred stock. At the annual stockholders
meeting held on October 14, 1999, the Company wasshareholders approved the proposal to
increase the number of authorized shares of preferred stock to 2,500,000, in
breach of certain loan
covenants oforder to complete the term loan and line of credit facility.transaction with Dasa. The covenants had been
negotiated priorpreferred stock purchase
increased Dasa's investment interest in SPACEHAB to approximately 11.5 percent.
No dividends are payable on the acquisition of Johnson Engineering. While the Company
had not drawn against the line of credit, covenant waivers were requested and
received, for the quarter ended March 31, 1999, from both lending institutions.
The Company is in the process of renegotiating the loan covenants.preferred shares which are convertible into
common shares on a one-for-one basis.
Cash Flows from Operating Activities. Cash flows provided by (used
for) operating activities for the ninethree months ended March 31,September 30, 1999 and
March 31,September 30, 1998 were ($11.0)2.3) million and $17.6,($5.0) million, respectively. The
major items
contributingsignificant changes during the current period were; accounts payable increased
by $4.9 million due to the useinclusion of funds for the period ended March 31, 1999 were the
decrease in deferred flight revenue of ($4.0) million dollars and thecertain accrued subcontracting services
with accounts payable this fiscal year, which is offset by a decrease in accrued
consulting and subcontractorsubcontracting services of ($6.0)$5.1 million. The decrease
in deferred flight revenue wasOther assets increased by $0.9 million
primarily due to recognition of all deferredthe tax benefit accrued for the current quarter. Deferred
flight revenue on STS-95 which flew in October 1998 partially offsetincreased by increases in
deferred revenue for STS-101 and STS-107. The decrease in accrued consulting and
subcontractor services was$0.5 million due to the payment of subcontractor costs under the
MIR contractprogress payments received from
NASA for STS-101. Prepaid expenses increased by $0.5 million primarily due to
prepaid insurance and the payment of accrued subcontractor costs for the research
module with adapter hardware. The increase in cash flows provided by operating
activities for the period ended March 31, 1998 were due primarily to the
increase in billings for the option missions under the MIR contract, the REALMS
contract and the NASDA/ESA contracts.other prepaid expenses.
Cash Flows from Investing Activities. For the ninethree months ended
March 31,September 30, 1999 and 1998, cash flows used for investing activities consisted
primarily of capital
expenditures related toapproximately $7.5 million and $27.9 million, respectively. The significant
difference between the acquisitiontwo periods was the purchase of Johnson Engineering in July 1998 for
$25.3 million. Additional investingmillion in the period ended September 30, 1998. The significant
expenditure for the current quarter included approximately $12.9$5.6 million attributable tofor the construction
of flight assets, primarily the ICC system and the Company's research
module with adapter hardware. $1.0 million was investedResearch Double Module (RDM) which is expected
to be completed in the expansionsecond half of the Astrotech facilities, $2.1 million for the purchase of additional property and
equipment and $0.8 million in a
14
joint venture with Guigne Technologies Limited. For the period ended March 31,
1998 the Company's investing activities primarily consisted of the expansion of
the Astrotech facility, $3.2 million, $8.7 million of capital expenditures
relating to building the research module with adapter hardware and $0.5 million
relating to the increase in machinery and equipment.fiscal year.
Cash Flows from Financing Activities. Cash flows provided by (used
for) financing activities were approximately ($6.5)$7.7 million and $71.6($1.1) million for
the ninethree months ended March 31,September 30, 1999 and 1998, respectively. DuringThe most
significant event was the period ended
March 31,receipt of $8.7 million, net of expenses, from Dasa, a
shareholder, on August 2, 1999, the Company made an early payment of $4.0 million of Alenia debt in exchange for a lower interest rate975,000 authorized and a waiver of interest expense due and
payable for the quarter ended December 31, 1998. Additional payments were made
on outstanding debt of $2.6 million. During the nine months ended March 31,
1998, the Company received net proceeds of approximately $14.1 million under the
Term Loan Agreement. In August 1997, the Company also made the first payment of
$0.5 million under the Credit Agreement. In October 1997, the Company received
net proceeds of approximately $59.9 million by completing an offering of $55.0
million of its 8%unissued
shares Series B Senior Convertible Subordinated Notes due 2007 as well as exercise of
the underwriters' over-allotment for an additional $8.3 million.Preferred Stock.
The Company believes that cash flows from the preferred share
purchase by Dasa, the Convertible Notes Offering, the Term Loan Agreement, and
the Revolving Line of Credit and other current financing activities will be sufficient to meet any cash flow
12
13
requirements from operations and other funding requirements for capital asset
construction and development for at least the next twelve months.
RecentRECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Pronouncements
In June 1997, the FASBStandards Board issued SFAS No. 131, "Disclosures about Segments of an
Enterprise133,
"Accounting for Derivative Instruments and Related Information" (SFAS 131)Hedging Activities" ("SFAS 133").
SFAS 131 establishes new
procedures133 becomes effective June 15, 2000 and requirements forwill require the (i) determination of business segments and
(ii) presentation and disclosure of segment information.Company to
disclose additional information on its hedging activities. The Company is
required
to adoptreviewing this standard; however, it is not expected that implementing this
Standard will significantly impact the provisions of SFAS 131 for the year ended June 30, 1999.Company.
Year 2000 Readiness Disclosure Statement
The Year 2000 ("Y2K") issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. Any computer
program that has date-sensitive software may recognize the date using "00" as
the year 1900 rather than the year 2000. This error could result in systems
failures and computational errors causing disruptions of operations, including,
among other things, the temporary inability to process transactions, send
invoices or engage in similar normal business activities.
SPACEHAB has established a Y2K program to address both information-technology
("IT") and non-IT problems that may exist within the SPACEHAB system, including
its vendors and customers, e.g.- NASA and the Space Shuttle. SPACEHAB's Y2K
program is divided into five major phases- Awareness and Risk Assessment,
Inventory and Risk Assessment, Repair, Replacement and Renovation, Verification
and Validation, and Implementation and Monitoring.
Phases
AWARENESS AND RISK ASSESSMENT- This phase is intended to ensure the
establishment of the Y2K program and the awareness of potential risks and
issues. This phase involves communicating the status and progress of the Y2K
program within SPACEHAB and to third parties. It isSPACEHAB expects that this will be
an on-going activity and
will continue as SPACEHAB proceeds through the other phases.activity.
INVENTORY AND RISK ASSESSMENT- This phase involves taking an inventory of SPACEHAB
hardware, software and infrastructure to identify those systems that are and are
not Y2K compatible. The emphasis is on those items, which are believed by
SPACEHAB to have a significant impact on the business from a financial, legal or
15
service perspective. While this process is ongoing, SPACEHAB estimates that this
phase is substantially complete for Company owned hardware and software.
SPACEHAB is in the process of surveyingcontinuing to survey third party vendors to determine their state of
readiness. NASA has informed SPACEHAB that the Space Shuttle, all onboard
systems, shuttle facilities and operations are Y2K compliant.
REPAIR, REPLACEMENT AND RENOVATION- This phase, also known as "conversion","conversion," is
intended to ensure that the appropriate items identified in the preceding phase
are upgraded to meet the Y2K compliance criteria. Material repairs, replacements
and renovations will beare substantially complete by the end of the Company's
current fiscal year for systems that are under direct
control of SPACEHAB. No assessment of completion dates are available for those
items for which third parties are responsible until the completion of that
portion of the Inventory and Risk Assessment phase. Nearly all of the third
parties have responded that they are Y2K compatible.
VERIFICATION AND VALIDATION- This phase ensures that critical processes, systems
and infrastructure are verified and tested to ensure Y2K issues will not cause
major disruptions in the on-going operations and business of the Company.
Verification and testing of systems under SPACEHAB's direct control are being
performedhas been
substantially completed by SPACEHAB personnel and personnel of Spacehab'sSPACEHAB's major
subcontractor, Boeing. SPACEHAB expects that all testing of these systems will be complete by
the end of the Company's current fiscal year.
IMPLEMENTATION AND MONITORING- Y2K upgrades are and will be installed into
SPACEHAB's operating systems as necessary. Monitoring will be employed to ensure
that unforeseen Y2K critical items are appropriately prioritized for correction.
SPACEHAB's implementation and monitoring activities are ongoing.
13
14
State of Readiness
While there is uncertainty inherent in the Y2K problem resulting in large part
from the uncertainty of the readiness of third party vendors, SPACEHAB's
progress towards completing risk assessment within the SPACEHAB systems is
expected to be completed before the end of 1999.
A) Based on an ongoing assessment, the Company has determined that the vast
majority of the hardware
and software used in its administrative functions are Y2K compliant. The few
computers that are not compliant are not critical to the operation and are being
replaced and theas required. The replacement will be completed during 1999.
B) Some computer hardware used in the operations function of SPACEHAB will
require upgrading. The computers at SPACEHAB's Payload Process Facilitypayload processing facility in
Florida used for ground support electrical testing (GSE)("GSE") are antiquated,
inefficient and are not Y2K compatible. A proposal has been submitted to upgrade
those systems during 1999fiscal year 2000 and work is progressing on the upgrade.
SPACEHAB has a workable contingency plan for the GSE equipment Y2K readiness.
The GSE will be upgraded and replaced by June 2000.
C) Surveys and/or questionnaires are still being sent to those third parties
that might have an impact on SPACEHAB's business to determine their state of
readiness. Those third parties include; NASA, Boeing, Lockheed-Martin and the
various utility service companies serving our locations. SPACEHAB's customers
and vendors have responded that they are compliant and are assessing the
compliance of their third parties.
Costs
The costs associated with required modifications to become Y2K compliant are not
expected to be material to SPACEHAB's financial position or results of
operations. The current estimate to become Y2K compliant is minimal,
approximately $0.2 million, for the replacement of all hardware and software.
This estimate excludes system enhancements, modifications and upgrades to
replace the inefficient and antiquated GSE equipment, which costs are estimated
to be $0.8 million. Through September 30, 1999, $145 thousand has been incurred
relative to the GSE. These upgrades and replacements are not expected to be
completed until June 2000 as SPACEHAB has a workable contingency plan to the Y2K
readiness. The costs of the Year 2000 program are being expensed as incurred.
Replacement of the GSE equipment will be capitalized. There was no specific
budget in fiscal yearFY 1999 or for FY 2000 for Y2K costs.
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Risks
In a likely worseworst case scenario, the failure to correct a material Y2K problem
could result in an interruption in, or a failure of, certain normal business
activities or operations, including operations that are essential to the
provision of SPACEHAB's services. Due to the general uncertainty inherent in the
Y2K problem, resulting in major part from the state of readiness of third
parties, SPACEHAB is unable to determine at this time whether the consequences
of Y2K failures will have a material impact on SPACEHAB's results of operations,
liquidity or financial condition. The potentialPotential Y2K impacts from third parties
include;include the failure of the utility companies and power grids NASA and the
Space Shuttle in particular and from the customer
owned IT systems whichthat are located at Astrotech's payload processing facilities.
Contingency Plans
After gathering information from SPACEHAB's Y2K readiness program and to prepare
for the possibility that certain information systems or third parties will not
be Y2K compliant, SPACEHAB intends to develop appropriate contingency plans.
Based on third party responses to date, it appears that no significant systems
will be affected by the Y2K issue. The GSE at SPACEHAB's payload processing
facility in Florida, while not Y2K compliant, is still usable. The only
functionality of the GSE that is expected to be impaired is the printing of the
correct date on computer generated reports.
Readers are cautioned that the discussion of SPACEHAB's efforts and expectations
related to Year14
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READERS ARE CAUTIONED THAT THE DISCUSSION OF SPACEHAB'S EFFORTS AND EXPECTATIONS
RELATED TO YEAR 2000 are forward looking statements and should be read in
conjunction with SPACEHAB's disclosure under "Management's Discussion and
Analysis of Financial Condition and Results of Operations- Forward Looking
Statements.ARE FORWARD LOOKING STATEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH SPACEHAB'S DISCLOSURE UNDER "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS- FORWARD LOOKING
STATEMENTS."
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONEOn August 2, 1999, SPACEHAB designated a new class of Series B
Senior Convertible Preferred Stock (the "Series B Preferred Stock"). On August
5, 1999, SPACEHAB issued and sold 975,000 shares of this newly authorized Series
B Preferred Stock to DaimlerChrysler Aerospace AG. In connection with that
transaction, SPACEHAB agreed that, following an amendment to its Articles of
Incorporation to permit an increase in the number of authorized shares of
preferred stock, it would designate, issue and sell an additional 358,334 shares
of Series B Preferred Stock. The amendment to SPACEHAB's Articles of
Incorporation was approved by SPACEHAB's stockholders at their Annual Meeting on
October 14, 1999 and was effected on that day. The sale by SPACEHAB of the
additional 358,334 shares of Series B Preferred Stock was completed on October
14, 1999. Total consideration of $12 million was paid by DaimlerChrysler
Aerospace AG for all 1,333,334 shares of SPACEHAB's Series B Preferred Stock so
issued.
The sale of the Series B Preferred Stock was effected as a private
placement in reliance on Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act") as the transaction involved only one other party and
therefore did not involve a public offering.
The Series B Preferred Stock is entitled to dividends as declared by
SPACEHAB's Board of Directors, and SPACEHAB may pay dividends upon its Common
Stock only if the Series B Preferred Stock will participate equally in any such
dividend. Upon liquidation, dissolution or winding up of SPACEHAB, the Series B
Preferred Stock will rank senior to the Common Stock of SPACEHAB as to dividends
and distributions and will be entitled, prior and in preference to any
distribution to the holders of Common Stock, to be paid $9 per share of Series B
Preferred Stock upon such liquidation, dissolution or winding up of SPACEHAB.
The Series B Preferred Stock is convertible at any time at the option of the
stockholder into shares of SPACEHAB's Common Stock on a one for one basis,
subject to anti-dilution provisions. The Series B Preferred Stock will be
entitled to an equal number of votes as the number of shares of SPACEHAB's
Common Stock into which such Series B Preferred Stock is then convertible on all
matters except the election of directors. The Series B Preferred Stock is
entitled, voting separately as a class, to elect one director of SPACEHAB.
The above summary is qualified in its entirety by the terms and
provisions of the exhibits filed with SPACEHAB's Current Report on Form 8-K
dated August 19, 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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ITEM 5. OTHER INFORMATION
NONE
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The separate Index to Exhibits accompanying this
filing is incorporated herein by reference.
(b) Reports on Form 8-K.
None
Exhibit No. DescriptionA report on Form 8-K was dated August 5, 1999 and filed
on August 19, 1999 announcing the purchase of Exhibits
----------- -----------------------SPACEHAB's
new Series B Senior Convertible Preferred Stock by
DaimlerChrysler Aerospace AG.
EXHIBIT NO. DESCRIPTION OF EXHIBITS
11. Statement regarding Computation of Earnings
Per Common Share.
27Share
21. Subsidiaries of the Registrant
27. Financial Data Schedule
1816
Signature17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPACEHAB, INCORPORATED
Date: May 13,November 12, 1999 /S//s/Mark A. Kissman
-----------------------------------------
Mark A. Kissman
Senior Vice President, Finance
Chief Financial Officer
/S//s/David A. Rossi
-----------------------------------------
David A. Rossi
President and Chief Operating Officer
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