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
2 3 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. 3 4 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. 4 5 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. 5 6 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 ======= =======
6 7 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. 7 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. 16 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 15 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 15 16 ITEM 5. OTHER INFORMATION NONE 17 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 19 17