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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required] For the
Fiscal Year Ended June 30, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required] For the
transition period from _____________ to ____________
Commission File No. 0-27206
SPACEHAB, INCORPORATED
1595 SPRING HILL ROAD, SUITE 360
VIENNA, VA 22182
(703) 821-3000
Incorporated in the State of Washington IRS Employer Identification
Number 91-1273737
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Each Class Name of Each Exchange
Common Stock on which Registered
(no par value) NASDAQ National Market
Number of shares of Common Stock (no par value) outstanding as of
July 24, 1998: 11,168,161.
Aggregate market value of Common Stock (no par value) held by non-affiliates of
the registrant on July 24, 1998, based upon the closing price of the Common
Stock on the Nasdaq National Market of $10.625 was approximately $106,387,137.
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 .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the Annual Meeting of
Stockholders to be held October 20, 1998. Parts I, II and III of Form 10-K
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PART I
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) under "Products
and Services," "Company Strategy," "Dependence on a Single Customer," "Research
and Development," "Competition" and "Backlog" of Item 1 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
General" and "--Liquidity and Capital Resources" of Item 7. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected in such statements. In addition to those
risks and uncertainties discussed herein, such risks and uncertainties include,
but are not limited to, whether the Company will fully realize the economic
benefits under its U.S. National Aeronautics and Space Administration ("NASA")
and other customer contracts, the successful development and commercialization
of the Research Double Module, the unpressurized logistics carrier system, the
("Integrated Cargo Carrier" or "ICC") system and related new commercial space
assets, technological difficulties, product demand and market acceptance risks,
the effect of economic conditions, uncertainty in government funding and the
impact of competition.
ITEM 1. BUSINESS
COMPANY BACKGROUND AND HISTORY
SPACEHAB, Incorporated ("SPACEHAB" or the "Company") was incorporated
in 1984 and is the first company to commercially develop, own and operate
pressurized habitable modules that provide space-based laboratory research
facilities and cargo services aboard the U.S. Space Shuttle system (the "Space
Shuttle" or "STS"). A SPACEHAB Single Module, when installed in the cargo bay of
a Space Shuttle, more than doubles the working and living space available to
astronauts for research, experimentation, habitation and storage. The Company
presently offers its SPACEHAB Modules in a single modular version (the "Single
Module"), a logistics double modular version (the "Logistics Double Module" or
"LDM") and is currently developing a research double module (the "Research
Double Module" or "RDM") and an unpressurized logistics carrier system, the ICC,
for use in conjunction with its modules. During the second half of fiscal 1998,
the Company initiated development activities for a new asset, a docking double
module (the "Docking Double Module" or "DDM"), that could be used by NASA to
maintain the International Space Station ("ISS") in proper orbit while providing
more flexible re-supply services to the ISS. The Docking Double Module is
intended to carry logistics and perform research on Space Shuttle missions to
the ISS and enable the Space Shuttle to re-boost and reposition the ISS. All
versions of the SPACEHAB Modules can accommodate a combination of lockers, racks
and soft stowage arrangements, which are provided as a service primarily to
NASA. SPACEHAB Modules, which have been outfitted with systems to facilitate
laboratory research experiments in the near-weightless ("microgravity")
environment of space, are also capable of transporting food, clothing, equipment
and other vital supplies (collectively, "logistics") to the planned ISS.
SPACEHAB also provides a full range of pre-and post-flight experiment and
payload processing services, and in-flight operations support to assist
astronauts and researchers, in space and on the ground, in connection with the
performance of experiments aboard SPACEHAB Modules. From June 1993 through June
1998, SPACEHAB Modules have flown eleven successful missions on the Space
Shuttle.
To broaden the opportunities for companies to conduct space research,
SPACEHAB has established a "Microgravity Staircase" that provides a
comprehensive portfolio of ground-based, sub-orbital and space-based research
facilities. During fiscal year 1998, SPACEHAB completed a series of marketing
agreements, asset acquisitions and joint ventures that now enable SPACEHAB to
offer researchers progressive exposure to the microgravity environment.
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The Company is committed to expanding its business with NASA while
also diversifying its revenue and customer base by targeting new and related
space services markets. In addition to the Company's Astrotech subsidiary,
acquired on February 12, 1997, SPACEHAB, on July 1, 1998, expanded its core
business by acquiring Johnson Engineering Corporation ("JE"). With over 450
employees, JE performs several critical services for NASA including managing all
training operations and facility engineering at the Neutral Buoyancy Laboratory
(the "NBL"), NASA's underwater facility where astronauts train for space walks
and ISS assembly procedures.
INDUSTRY OVERVIEW
The U.S. space program encompasses four broad objectives: to advance
scientific research, to establish a permanent human presence in space, to
develop new technologies that contribute to U.S. economic growth and security
and to foster improved international relations through peaceful cooperation in
space with Europe, Japan, Russia and other nations. SPACEHAB is focused on two
markets: (i) microgravity and life sciences space research and (ii) space
support services such as space station logistics and resupply, ground operations
and payload processing and training.
Microgravity and Life Sciences Space Research
In orbit, the forces of inertia and gravity counterbalance each
other, thereby creating a condition of near weightlessness known as
"microgravity." In a microgravity environment, materials and living matter
behave in fundamentally different ways than they do on Earth. This phenomenon
has stimulated worldwide interest from scientists and commercial researchers who
are seeking improved ways to manipulate and process materials and to study
biological processes that cannot otherwise be achieved in ground-based
laboratories.
The demand for access to a microgravity environment can be divided
into two broad categories: scientific research and commercial applications. NASA
and other U.S. and international government research organizations provide
support for both basic scientific research and its commercial applications to
determine the fundamental effects that gravity has on physical processes.
Space Support Services and Training
Space support services include providing logistics and payload
processing support to NASA, other governments and commercial customers of the
Space Shuttle and the ISS. Permanently orbiting facilities such as the Russian
space station Mir and the planned ISS require reliable sources of logistics:
food, clothing, equipment and supplies that sustain the astronauts and enable
them to conduct research. NASA's current plans call for the Space Shuttle to be
launched at least seven times per year for the foreseeable future. As currently
planned, the ISS will require approximately five Space Shuttle logistics
missions per year.
In order to support the Space Shuttle and ISS operations, NASA
requires ground operations and payload support services before and after each
mission. Payload processing operations entail payload scheduling, mission
planning, safety/certification analysis, physical integration of the payload
into its carrier (such as SPACEHAB modules), the integration of the carriers
into the Space Shuttle's cargo bay, flight operations, technical data gathering
and synthesis, and launch and landing site activities. Space support services
also involve the provision of specialized services and support near launch sites
for commercial satellite manufacturers and launch services. These activities
include mechanical assembly or re-assembly, electrical check, calibration,
liquid propellant loading and related activities.
A significant component of Space Support Services includes managing
all training operations and facility engineering at the NBL. NASA also requires
design and fabrication of full-scale mockups of the ISS elements used in NBL
training and the development of hardware for the ISS crew living quarters that
is
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scheduled for launch in 2003.
PRODUCTS AND SERVICES
SPACEHAB Single Modules are aluminum cylinders, measuring 10 feet in
length by 13.5 feet in diameter, that incorporate a patented design including a
truncated top and flat-end caps. These fully instrumented modules provide
experiment resources such as power, data management, thermal control and vacuum
venting. SPACEHAB Single Modules are employed primarily for research missions.
In fiscal 1996, the Company completed a development program and introduced the
Logistics Double Module. This module was optimized to carry logistics and was
used by NASA to carry vital supplies to the astronauts and cosmonauts who reside
on the Russian space station Mir. SPACEHAB invested $12.5 million in the design,
development, and production of the Logistics Double Module. During fiscal 1997,
in an effort to anticipate the needs of customers, the Company began the
full-scale development and construction of its Research Module with double
module hardware, which when combined with a Single Module becomes the RDM. The
RDM will be fully dedicated to microgravity research and is expected to be
available in late 1999. Expenditures for the RDM through fiscal 1998 were $25.7
million. The Company anticipates additional expenditures of approximately $11.1
million to complete this asset and place it into service.
The Company expects that the RDM will meet or exceed all of NASA's
projected requirements for dedicated microgravity and life sciences research
that had been performed by Spacelab, the U.S. government-owned habitable module,
which was retired after its final mission in April 1998. As a result of the
retirement of NASA's Spacelab, the Company believes that its flight-proven
modules position SPACEHAB to become the sole provider of module based
crew-tended microgravity research capabilities for the Space Shuttles. The RDM
is currently under contract and is manifested to fly on its initial mission in
September 2000. The Company also initiated preliminary development activities
for the DDM, which could be used by NASA to maintain the ISS in the proper
orbit while providing more flexible re-supply services to the ISS.
SPACEHAB has addressed the need to carry unpressurized cargo to the
ISS by designing and developing the ICC. The ICC will be used in combination
with SPACEHAB Single or Double Modules to provide the optimum mix of pressurized
and unpressurized cargo on a single mission to the ISS. The ICC is to be flown
on the first resupply mission to the ISS, which is currently scheduled for May
1999.
In 1998, the Company built on a foundation of existing microgravity
research capabilities by establishing a "Microgravity Staircase" that offers
researchers a broader array of services to tailor experiments to specific
microgravity environments and budgets. The first step of the staircase provides
30 seconds of Microgravity aboard an airplane flying a parabolic arc. SPACEHAB
and NOVESPACE signed a marketing agreement that enables SPACEHAB to market
flights on the NOVESPACE Airbus-300. The next step provides approximately 12
minutes of Microgravity for small payloads using sub-orbital rockets. SPACEHAB
and Daimler-Benz Aerospace AG signed a joint marketing agreement to develop the
U.S. and Asian markets for industrial customers. The third step of the staircase
involves the flight proven capability of SPACEHAB research modules. Up to 16
days of experimentation can be performed on the Space Shuttle using SPACEHAB
research modules. The fourth step provides long-duration Microgravity using a
robotics free-flying spacecraft, the Wake Shield Facility which can be deployed
from the Space Shuttle or the ISS to perform research in the ultra-high vacuum
of space. SPACEHAB acquired the rights to the Wake Shield Facility, a free
flying spacecraft providing long duration access to micro-gravity developed by
the University of Houston. The Company entered into a joint venture with Guigne'
Technologies Ltd., to build the Space DRUMS (TM) facility, a facility that uses
acoustic energy to position samples inside an experiment device for
"containerless processing", which is scheduled to be the first commercial
research facility on the ISS.
The Astrotech payload processing business serves the commercial
satellite manufacturing and launch services industries in Florida and at the
Vandenberg Air Force Base in California. Although payload processing is
generally associated with the final preparation of a satellite or other space
payload for launch, it is also the first step in the launch process and requires
specialized facilities and support
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usually located at the launch site. Astrotech's payload processing activities
provide the necessary resources for mechanical assembly or reassembly,
electrical check, calibration, liquid propellant loading and numerous other
related activities. Additionally, Astrotech's specialized facilities include,
but are not limited to, clean rooms, airlock systems, overhead crane systems,
hazard-proof work areas and environmentally controlled rooms.
Astrotech recently completed expansion of its Florida facility to add
a new encapsulation high bay that enables parallel processing activities in
support of the new Atlas II and Delta III launch vehicle payloads. The expansion
also will support the small and medium classes of the Air Force's new Evolved
Expendable Launch Vehicle ("EELV"), which is scheduled to begin commercial
payload launch activities in 2001. Astrotech also completed an expansion of its
Vandenberg facility during 1998. Additional site improvements at Astrotech's
facilities are being performed under a cost reimbursable contract to NASA.
Expenditures for these expansions in fiscal 1998 were approximately $4.0
million.
SPACEHAB's fundamental business strategy is based on carefully
anticipating customer requirements, investing capital to develop space-flight
assets, contracting with established aerospace companies for engineering and
asset production while retaining ownership of these assets and then providing
innovative, cost-effective solutions that meet customer requirements using
fixed-price service contracts. This strategy has been successful in obtaining
three significant contracts with NASA: a $184.2 million Commercial Middeck
Augmentation Module contract (the "CMAM Contract") for five missions, a $91.5
million contract for four missions and three option missions to the Mir Space
Station (the "Mir Contract") and a $44.9 million Research and Logistics Mission
Support Contract (the "REALMS Contract") for three missions.
The CMAM Contract, signed in November 1990, required SPACEHAB to
furnish NASA with SPACEHAB module accommodations for experiments developed by
the Centers for the Commercial Development of Space ("CCDS") on five Space
Shuttle missions. The fifth and final CMAM mission was completed successfully
during September 1996.
The basic Mir Contract signed in July 1995, required the Company to
provide Single and Double Module accommodations for the provision of logistics
resupply to the Mir Space Station on four Space Shuttle missions. The fourth
mission was completed successfully in May 1997.
In late September 1996, the Company entered into agreements with the
Japanese Space Agency ("NASDA") and the European Space Agency ("ESA")
(collectively, the "NASDA/ESA Contract"). Pursuant to the NASDA/ESA Contract,
SPACEHAB provided hardware and integration and operations for scientific
microgravity experiments to NASDA and ESA aboard the Logistics Double Module on
STS-84. This mission was completed in May 1997.
In June 1997, NASA exercised all three options for additional
missions for $39.0 million under the Mir Contract. The Mir Contract options
called for two Logistics Double Module missions and one Single Module mission
which were successfully completed in September 1997, January 1998 and June 1998,
respectively.
The REALMS Contract, signed in December 1997, requires that the
Company provide a single and a double research module to support microgravity
research payloads on two missions and a double logistics module to the ISS to
support outfitting of the ISS. It is anticipated that these missions will take
place in October 1998 (STS-95), May 1999 (STS-96) and September 2000 (STS-107).
The REALMS Contract provided an opportunity for the Company to offer similar
services to commercial customers on STS-95 and STS-107. During fiscal 1998, the
Company entered into agreements with NASDA, the ESA, the Canadian Space Agency
("CSA") and the Japanese Broadcasting Agency ("NHK") (collectively, the "STS-95
Commercial Customers"). Pursuant to the agreements, with an aggregate value of
$18.4 million, SPACEHAB will provide hardware and integration and operations
for scientific microgravity experiments to the STS-95 Commercial Customers
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aboard the Single Research Module on STS-95, planned for October 1998. The
Company initiated integration and operations efforts for the STS-95 and STS-96
missions during fiscal 1998 reporting $14.3 million in revenue in fiscal 1998
for these missions under the percentage-of-completion revenue recognition
policy.
The Company continues to pursue new business opportunities by
identifying customer requirements and creating and implementing innovative
technical solutions. The Company believes that the demand for microgravity and
life sciences research conducted on SPACEHAB Modules and demand for the use of
its modules for logistics support will increase both during the assembly phase
and after the planned ISS becomes operational. The ISS is the largest
engineering and scientific project ever undertaken. More than a dozen nations,
led by the United States, Russia, Japan and the European Community, have spent
over $25 billion to date and will spend over $90 billion to develop, build,
launch and operate the ISS. The ISS assembly is expected to begin in late 1998.
The Company also believes that the increasing demand for satellites and the
improvement in satellite technology will continue to provide opportunities in
the satellite launch services field.
Astrotech operates under exclusive multiyear agreements with Lockheed
Martin to process all commercial Atlas payloads and with Boeing to process all
Delta payloads and all Sea Launch program payloads at Boeing's facility in Long
Beach, California. Astrotech also plans to pursue additional opportunities,
including: (i) expanding its payload processing facilities to accommodate next
generation EELVs; (ii) providing payload processing facilities and services to
new U.S. Government customers in the defense and intelligence communities;
(iii) supporting new space launch facilities and related payload processing
functions internationally and (iv) expanding its services into microgravity
research by developing research facilities and flight hardware to support space
research programs on sounding rockets.
On July 1, 1998, SPACEHAB broadened its core business by acquiring
Johnson Engineering. JE performs a number of critical services for NASA
including managing all training operations and facility engineering at the NBL.
JE also builds full scale mockups of the ISS elements used in NBL training and
is developing hardware for the ISS crew living quarters that is scheduled for
launch in 2003. JE's ability to perform detailed design, fabrication, and
operations, complements the Company's traditional strengths in conceptual design
and program management. The acquisition of JE provides many of the critical
skills and capabilities used to perform SPACEHAB services that currently are
acquired through subcontracting relationships.
COMPANY STRATEGY
SPACEHAB's goal is to be recognized as a global market leader
providing products and services supporting the human space flight, logistics and
satellite launch industries. The Company seeks to achieve this goal through
implementation of the following strategy:
1. Focusing on Quality of Service. SPACEHAB has had eleven missions to
date, all of which have been completed successfully. The Company intends to
maintain and enhance its reputation for product reliability, process innovation
and performance excellence.
2. Expanding Scope of Business. SPACEHAB continuously evaluates
opportunities to offer new products and services to its customer base and to
develop assets and acquire complementary, attractively valued businesses. For
example, the Company is in the process of constructing the Research Double
Module and the Integrated Cargo Carrier and developing the Docking Double
Module. Based on SPACEHAB's continuing involvement in microgravity research and
logistics Space Shuttle missions, and its close interaction with NASA and other
users of its SPACEHAB Module services, the Company is well positioned to
anticipate emerging requirements for new services in the human space flight
industry. In 1998, the Company built on its foundation of microgravity research
services by establishing a "Microgravity Staircase." The Microgravity Staircase
offers researchers a broader array of services to tailor
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experiments to specific microgravity environments and budgets. The acquisition
of JE on July 1, 1998, complements SPACEHAB's traditional strengths in
conceptual design and program management while adding skills in engineering,
design and training critical to NASA and the successful completion of the ISS.
3. Maintaining Position as Low-Cost Provider. The Company continues to
offer its payload processing and logistics support services to NASA and other
customers using SPACEHAB owned assets, on a fixed-price basis that the Company
believes is significantly lower than the cost-plus basis used by traditional
aerospace contractors. Through the focus and rigorous application of commercial
best practices in the development and operation of its hardware and facilities,
SPACEHAB substantially reduces the cost, time and complexity that burden
conventional government contractors providing services under cost-plus
contracts. JE performs services under a completion-form cost-plus contract for
government services that is requested by and directed by NASA. This contract
form provides for the lowest cost to the government by requiring a separate
negotiation of the price for each task order, thereby allowing JE to implement
commercial best practices to reduce cost.
4. Continuing Entrepreneurial Initiative. The Company continues to develop
and offer innovative business arrangements to meet NASA and other customer
requirements. The Company has repeatedly taken the initiative to improve its
modules and payload processing services and to deploy new assets in anticipation
of customer needs. By focusing on the quality, cost and responsiveness of its
services, and by attracting and recruiting highly talented and experienced
personnel into its distinctly entrepreneurial organization, SPACEHAB seeks to
distinguish itself as an innovative and effective provider of commercial space
services while achieving higher contract profit margins than are customary in
traditional government aerospace contracts that provide services on a
traditional cost-plus basis.
5. Leveraging International Strategic Alliances. The Company seeks to
create and maintain strategic alliances with key international players in the
space industry. Such relationships include Mitsubishi in Japan; Alenia Spazio,
Daimler-Benz, and INTOSPACE in Europe; and RSC Energia in Russia. The Company
believes these alliances have produced and will continue to produce business
opportunities with these partners and the governments of their respective
countries.
Through the Company's contracts, it continues to implement its
business strategy by identifying customer requirements, creating innovative
technical solutions, raising private capital to develop assets and providing
services pursuant to those contracts.
DEPENDENCE ON A SINGLE CUSTOMER
Approximately $43.5 million (or 68%) of the Company's fiscal 1998
revenue was generated from two NASA contracts - the Mir Contract and the REALMS
Contract. While the acquisition of Astrotech, and the STS 95 Commercial Customer
Contracts represent additional revenue sources, the Company anticipates that
revenue from NASA will continue to account for a significant amount of the
Company's revenue over the next several years. There are no assurances, however,
that NASA will require the Company's module services in the future. Therefore,
the Company's failure to execute new contracts with NASA would have a material
adverse effect on the Company's financial condition and results of operations.
Additionally, a significant portion of the revenue for JE is derived under
contracts with NASA. Accordingly, the Company continues to focus its efforts on
diversifying its customer base to include commercial companies, as evidenced
by the Astrotech acquisition.
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RESEARCH AND DEVELOPMENT
The Company believes that the timely development of new products and
enhancements to existing hardware are essential to maintaining its competitive
position. In the past three fiscal years, the Company has spent an aggregate of
approximately $4.0 million on research and development.
Approximately $1.8 million of the Company's research and development
funds for fiscal 1998 were spent on the design, development and qualification of
the new SPACEHAB Universal Communications System ("SHUCS"). Beginning in fiscal
1996 and continuing throughout fiscal 1998, the Company has been working on the
development of this new proprietary module communications system that will be
independent of the Space Shuttle's existing data downlink. SPACEHAB began
capital asset construction of SHUCS in the fourth quarter of fiscal 1998. Once
implemented, it is expected that researchers with experiments on a SPACEHAB
mission will be able to have 24-hour, real-time monitoring and control of their
experiment hardware from their laboratories anywhere in the world. The Company
also performed research and development activities to enhance the basic
capabilities of its module systems with new features such as a video system
switch, a digital television downlink capability, and an experiment data
interface, which would result in time savings for astronauts while conducting
experiments inside SPACEHAB Modules.
The Company also completed its research and development activities on
the ICC and began capital asset development for the ICC in fiscal 1998.
Completion of this asset will expand the Company's product and service lines to
meet market requirements for low-cost unpressurized carriers for research
experiments and cargo. SPACEHAB is developing the ICC to carry unpressuried
cargo to the ISS, based on SPACEHAB's pallet technology for which a patent is
pending (the "Unpressurized Cargo Pallet" or "UCP"), that can be used
independently or in tandem with the SPACEHAB Single or Double Modules. The
ICC's design is such that it would be located in what is ordinarily unused
volume in the front of the Space Shuttle's cargo bay. By expanding the
capabilities of the Space Shuttle and by offering flexibility in the mix of
pressurized and unpressurized cargo carried on each mission, the Company
believes that the ICC could become the preferred method for providing logistics
and utilization resupply to the ISS.
COMPETITION
Currently, there are no other companies that compete directly with
SPACEHAB in providing pressurized module services that are carried aboard the
Space Shuttles. NASA has a government-owned and operated system, Spacelab, which
provides services similar to those provided by SPACEHAB modules. However, NASA
has terminated the Spacelab program with its final mission in April 1998. The
Company has commenced the design and construction of the Research Double Module
under a contract with Boeing (formerly McDonnell Douglas Aerospace). The
Research Double Module represents a commercial replacement for NASA's Spacelab.
The Company believes that this module will significantly outperform Spacelab in
terms of technology, capacity, functionality and cost-effectiveness.
The Company's long-term strategy for growth is to provide research,
logistics, infrastructure and payload processing services to NASA and others
during the International Space Station era. This strategy could require the
Company to compete with commercial companies such as Lockheed-Martin, Boeing and
others who have existing NASA support contracts, greater financial resources and
manufacturing capabilities, and larger marketing, sales and technical
organizations than the Company. In fiscal 1997, SPACEHAB entered into an
agreement with United Space Alliance ("USA"), a Boeing and Lockheed Martin joint
venture, to expand the commercial use of the Space Shuttle fleet. Although this
agreement has expired, SPACEHAB and USA are continuing to pursue joint business
opportunities. SPACEHAB's existing strategic relationships with Boeing, Alenia
Spazio S.p.A., Mitsubishi Corporation and Daimler-Benz A.G. may provide
additional opportunities for teaming and partnerships that management believes
will enable the Company to compete for market share.
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The Italian Space Agency has contracted to build a mini pressurized
logistics module ("MPLM") intended for use in connection with the ISS. Although
the MPLM is intended to be competitive with SPACEHAB's Modules for ISS logistics
missions, SPACEHAB believes that its Modules will be able to compete favorably
for such missions because of the flexibility and late access capabilities of the
SPACEHAB modules.
Astrotech's payload processing facilities are located in Florida and
California. At present, management believes that Astrotech's U.S. competition is
limited to the California Vandenberg Air Force Base launch site where a
competitor, California Commercial Spaceport, Inc. ("CCSI") is located. CCSI was
established by obtaining surplus U.S. Air Force facilities at the VAFB launch
complex before Astrotech established its facilities there and when no commercial
alternative was available. To the Company's knowledge, CCSI has won several
contracts to process NASA spacecraft for launch from VAFB. CCSI does not have
payload processing facilities in Florida, where the majority of U.S. commercial
satellite launches occur.
BACKLOG
A significant portion of the Company's revenue is currently generated
from its contract with NASA that, similar to contracts with other agencies of
the U.S. government, contain provisions for which NASA may terminate the
contract "for convenience." The Company's contract with NASA is conditioned by
its terms upon NASA receiving an adequate annual appropriation of funds from the
U.S. Congress. Failure to receive funds from Congress or a withdrawal by
Congress of prior appropriations would permit NASA to terminate its contracts
with SPACEHAB "for convenience." For the government's fiscal year 1998, both the
U.S. Senate and House of Representatives have authorized and approved an annual
appropriation of $13.6 billion for NASA, including $2.4 billion for the ISS,
indicating a commitment by the government to the space industry. However, there
can be no assurance that the level of approved funding will be adequate for NASA
to complete all of the initiatives including those relating to the contract with
the Company.
SPACEHAB anticipates that a portion of future revenue will be derived
from contracts with entities other than agencies of the U.S. government that
will not be subject to federal contract regulations such as termination "for
convenience of the government" or federal government funding restrictions.
However, to the extent that such contracts require the use of the Space Shuttle
for transportation, these systems must be available.
As of June 30, 1998, the Company's contract backlog is estimated to
be approximately $58.5 million, of which $38.7 million represents U.S.
government funded backlog and $19.8 million represents non-U.S government
contracts.
CERTAIN REGULATORY MATTERS
The Company is subject to federal, state and local laws and
regulations designed to protect the environment and to regulate the discharge of
materials into the environment. The Company believes that its policies,
practices and procedures are properly designed to prevent unreasonable risk of
environmental damage and consequential financial liability to the Company.
Compliance with environmental laws and regulations has not had in the past, and,
the Company believes, will not have in the future, material effects on the
capital expenditures, earnings or competitive position of the Company.
EMPLOYEES
As of June 30, 1998, the Company employed 83 regular employees, 25 of
whom are employed by the Astrotech subsidiary. Of these 83 employees, 30
(approximately 36%) hold advanced degrees, including 5 (approximately 6%) who
hold doctorate degrees. Additionally a significant number of the Company's
employees have experience in both the space industry and/or governmental space
agencies,
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with a special expertise in commercial space and human space flight. None of the
Company's employees are covered by collective bargaining agreements. Underlying
all of SPACEHAB's efforts has been the dedication and skill of its personnel.
The Company believes that the dedication of its employees is critical to its
success and that its relations with its employees are excellent.
ITEM 2. PROPERTIES
The Company and its wholly-owned subsidiary, Astrotech, currently
occupy six locations, with the corporate headquarters located at 1595 Spring
Hill Road, Suite 360, Vienna, Virginia 22182. The corporate headquarters occupy
approximately 9,700 square-feet of office space and house SPACEHAB's 27-person
executive management team. The term of the present lease expires on March 7,
2001.
The Company's 34-person flight systems development team is located at
1331 Gemini Avenue, Suites 300 & 310, Houston, Texas 77058. The Houston offices
consist of approximately 7,800 square feet of non-contiguous office space
located near the Johnson Space Center. In January 1998, the Company negotiated
an agreement for one lease for the two office suites. The new lease is a five
year term commencing March 1, 1998 and expiring February 28, 2003.
The Company's payload processing facility is located near the Kennedy
Space Center in Cape Canaveral, Florida. The facility is contained in an
approximately 40,000 square-foot plant. The Company owns the building which
houses the payload processing facility but leases the land upon which it is
constructed. The payload processing facility has a prime work area of
approximately 10,000 square-feet. This work area is designed to accommodate the
SPACEHAB Single and Double Modules and includes 11 secure experiment/payload
integration and work areas from 300 square-feet to 1,000 square-feet each, two
off-line modification shops, a tool room, a stock room and a conference/training
room. In July 1997, the Company negotiated a new agreement with the Canaveral
Port Authority for the lease of the land. The term of the new lease is for a
forty-three year period commencing August 28, 1997. Upon expiration of the land
lease, all improvements on the property revert at no cost to the lessor.
Astrotech occupies three locations. Its headquarters are located at
6305 Ivy Lane, Suite 520, Greenbelt, MD 20770. The headquarters occupy
approximately 6,250 square-feet of leased office space at this site and house a
six-person management and administrative team. The term of the present lease is
a five-year period expiring on May 31, 2003.
Astrotech's 12-person engineering and support team is located in a
seven-building, owned facility at 1515 Chaffee Drive, Titusville, Florida 32780.
This 88,000 square-foot facility supports non-hazardous and hazardous material
processing, payload storage and customer offices. These buildings presently
occupy one-third of the 37.5-acre property owned by Astrotech, with the
remaining two-thirds available for expansion.
Astrotech has a three-person technical staff located at the
Vandenberg Air Force Base in Vandenberg, California. Astrotech presently rents a
60-acre site on the Air Force Base and owns four buildings comprising 16,500
square-feet, which are dedicated to the same functions provided at the Florida
facility. The term of the present land lease expires on July 13, 2013. Upon
expiration of the land lease, all improvements on the property revert at no cost
to the lessor.
JE occupies three locations. Its headquarters are located at 555
Forge River Road, Suite 150, Webster, Texas 77598. The headquarters houses JE's
197-person engineering team, within a 48,214 square-foot facility. This office
lease will expire on June 30, 2003.
JE has an 11-person fabrication shop located at 920 Gemini Avenue,
Houston, Texas, 77027. This 17,920 square-foot facility is being leased for a
three-year term that will expire on January 31, 2001.
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JE occupies another facility in Houston Texas, which is located at
18100 Upper Bay Road. This is a 3,952 square-foot facility that contains a
19-person engineering and laboratory team. The lease will expire on February 28,
1999.
Additionally, JE has more than 200 additional employees who are
housed at various government facilities within the Houston area.
The Company believes that its current facilities and equipment are
generally well maintained and in good condition and are adequate for its present
and foreseeable needs.
ITEM 3. LITIGATION
The Company is not currently involved in any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
( a ) The Annual meeting was held on October 21, 1997.
( b ) The existing Board of Directors stood for and were duly
reelected at this Annual Meeting.
The names of the directors are as follows:
Hironori Aihara
Robert A. Citron
Dr. Edward E. David, Jr.
Dr. Shelley Harrison
Dr. Shi H. Huang
Chester M. Lee
Gordon S. Macklin
Dr. Brad M. Meslin
Dr. Udo Pollvogt
Alvin L. Reeser
James R. Tompson
Prof. Ernesto Vallerani
( c ) The following matters were brought to a vote of the
shareholders at the meeting:
1. To ratify the appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for fiscal year 1998.
For 7,180,750 Against 1,105 Abstain 3,699
2. To approve the amendments to the Company's 1994 Stock Incentive Plan
to increase the total number of shares reserved and available for distribution
under the Plan to 2,750,000.
For 2,896,691 Against 1,799,888 Abstain 13,040
3. To adopt the Company's 1997 Employee Stock Purchase Plan.
For 3,156,386 Against 1,540,226 Abstain 13,007
4. To approve the amendments to the Company's 1995 Directors Stock
Option Plan to increase the total number of shares reserved and available for
distribution under the Plan to 500,000.
For 3,916,733 Against 1,311,137 Abstain 15,048
All four items presented to the shareholders were approved and implemented.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock (the "Common Stock") trades on the NASDAQ
National Market System under the symbol "SPAB". The Common Stock has been
publicly traded since December 22, 1995, the date of the closing of the
Company's initial public offering. The quarterly high and low stock prices for
fiscal 1998, 1997 and 1996 are as follows:
Fiscal 1998:
- ------------
High Low
---- ---
First Quarter $12 3/16 $ 8 3/4
Second Quarter $11 3/8 $ 9 11/16
Third Quarter $11 3/8 $ 9 7/8
Fourth Quarter $12 $11
Fiscal 1997:
- ------------
High Low
---- ---
First Quarter $11 1/4 $ 8
Second Quarter $ 8 1/2 $ 5 1/2
Third Quarter $ 7 1/8 $ 5
Fourth Quarter $ 9 1/4 $ 5 3/4
Fiscal 1996:
- ------------
High Low
---- ---
First Quarter $12 1/4 $12
Second Quarter $15 1/4 $11 3/4
Third Quarter $16 $ 8 3/4
The Company has never paid cash dividends. It is the present policy
of the Company to retain earnings to finance the growth and development of its
business and, therefore, the Company does not anticipate paying cash dividends
on its Common Stock in the foreseeable future.
The Company has authorized 30,000,000 shares of Common Stock. At July
24, 1998, 11,168,161 shares of Common Stock were outstanding. The Company had
approximately 280 shareholders of record and 1,743 beneficial shareholders of
its Common Stock on June 30, 1998.
SALES OF UNREGISTERED SECURITIES
During fiscal 1998, the Company issued no unregistered securities.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below are derived from the
audited consolidated financial statements of SPACEHAB. This selected financial
information should be read in conjunction with the Consolidated Financial
Statements of the Company and the notes thereto included elsewhere in this
report.
Nine
Months Year Year
Ended Ended Ended
Years Ended September 30, June 30, June 30, June 30,
---------------------------------------------------------- -------------
1994 1995 1996(1) 1997 1998
------------ ------------- -------------- ------------- -------------
(in thousands, except per share data)
Statement of Operations Data:
Revenue(2) $ 43,800 $ 46,059 $ 56,397 $ 56,601(3) $ 64,087
Costs of revenue 24,227 23,349 20,985 34,120 35,058
------------ ------------- -------------- ------------- -------------
Gross profit 19,573 22,710 35,412 22,481 29,029
Marketing, general and administrative expenses 5,064 3,816 4,056 8,567 13,712
Research and development expenses - 1,600 100 1,252 2,620
------------ ------------- -------------- ------------- -------------
Operating income 14,509 17,294 31,256 12,662 12,697
Interest expense, net of capitalized amounts 4,863 1,365 699 955 4,480
Net income 8,638(4) 15,809 29,829 13,832(5) 12,131
Net income per common share - diluted(6) $ 1.29 $ 2.36 $ 3.19 $ 1.24 $ 0.84
Shares used in computing net income
per common share - diluted(6) 6,735 6,746 9,343 11,160 14,571
Other Data:
Cash provided by (used for) operations $ 21,831 $ 26,838 $ 13,151 $ (5,995) $ 31,604
Capital expenditures 76 4,943 6,266 29,308(7) 23,113
Balance Sheet Data (at period end):
Working capital (deficit) $(20,589) $ 7,192 $ 45,942 $ 3,159 $ 62,660
Total assets 95,261 86,701 129,709 114,450 220,604
Long-term debt, excluding current portion 22,884 24,886 17,318 12,725 85,322
Stockholders' equity (deficit) (21,184) (1,715) 71,596 86,622 96,408
- ------------------------------
(1) Effective October 1, 1995, the Company changed its fiscal year-end to June
30.
(2) The Company recognized revenue upon the completion of each flight under the
Mir and CMAM Contracts. For new contract awards for which the capability to
successfully complete the contract can be demonstrated at contract inception,
revenue recognition under the percentage-of-completion method is being reported
based on costs incurred over the period of the contract.
(3) Includes revenues of $2,860 generated by Astrotech subsequent to its
acquisition on February 12, 1997.
(4) Includes an extraordinary loss of $934, net of taxes, relating to the
write-off of unamortized deferred debt issuance costs, in conjunction with a
refinancing and retirement of debt on that date.
(5) Includes an extraordinary gain of $3,274, net of taxes and legal fees,
relating to the amendment and restatement of a credit agreement.
(6) In December 1997, the Company adopted the provisions of Statement of
Financial Accounting No. 128, Earnings Per Share, which establishes new
guidelines for the calculations of earnings per share. Earnings per share for
fiscal 1994 through fiscal 1997 have been restated to reflect the provisions of
this new standard.
(7) Includes $20,134 of consideration for the purchase of Astrotech.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
SPACEHAB was incorporated in 1984 to commercially develop space
habitat modules to operate in the cargo bay of the Space Shuttles.
During fiscal 1998 the Company operated under two contracts with
NASA. First, the Mir Contract, with a total contract value of $91.5 million,
including $39.0 million for three Mir option missions that were flown in fiscal
1998. Second, the REALMS Contract, with a total contract value of $44.9 million
consisting of three missions to be flown in October 1998, May 1999 and September
2000. This contract also provides SPACEHAB an opportunity to have direct
commercial relationships with other space agencies by providing them research
space in the modules. In fact, on the October 1998 flight, most of the revenue
recognized will come from customers other than NASA. The Company's revenues for
fiscal 1998 were generated primarily from the Mir Contract, the REALMS Contract,
and through the Company's commercial customer contracts.
SPACEHAB generates revenue by providing a turnkey service that
includes access to the modules and provides integration and operations support
services to scientists and researchers responsible for the experiments and/or
logistics supplies for module missions aboard the Space Shuttle System. Under
the CMAM and Mir Contracts, the Company recognized revenue only at the
completion of each Space Shuttle mission using Company assets. Accordingly, the
Company's quarterly revenue and profits fluctuated dramatically based on NASA's
launch schedule and will continue to do so for any contract for which revenue is
recognized only upon completion of a mission. For the REALMS Contract and for
new contract awards for which the capability to successfully complete the
contract can be demonstrated at contract inception, revenue recognition under
the percentage-of-completion method is being reported based on costs incurred
over the period of the contract. The percentage-of-completion method results in
the recognition of revenue over the period of contract performance, thereby
decreasing the quarter-by-quarter fluctuations of reported revenue.
In September 1996, SPACEHAB entered into the NASDA/ESA Contracts,
pursuant to which SPACEHAB provided hardware and integration and operations
services for scientific microgravity experiments aboard the SPACEHAB Logistics
Double Module on STS-84. SPACEHAB began integration work on the NASDA/ESA
Contracts during the first quarter of fiscal 1997 and recorded revenue under
percentage of completion for these contracts. This mission was completed in May
1997, concurrently with the final mission under the basic Mir Contract.
The expenses associated with the operations of SPACEHAB are recorded
differently based on the type of expense. Costs of revenue include integration
and operations expenses associated with the performance of two types of efforts:
(i) sustaining engineering in support of all missions under a contract and (ii)
mission specific support. Expenses associated with sustaining engineering are
expensed as incurred. Mission specific expenses relating to the CMAM Contract
and the Mir Contract were deferred as assets and not expensed until the specific
Space Shuttle mission was flown and the related revenue was recognized. Costs
associated with performance of the NASDA/ESA Contracts, the REALMS Contract and
future contracts using the percentage-of-completion method of revenue
recognition will be expensed as incurred. Other costs of revenue include
depreciation expense and costs associated with the Astrotech payload processing
facilities. Flight related insurance covering transportation of the SPACEHAB
Modules from SPACEHAB's payload processing facility to the Space Shuttle,
in-flight insurance and third-party liability insurance are also included in
costs of revenue and are recorded as incurred. Marketing, general and
administrative and interest and other expenses are recognized when incurred.
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
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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.
RESULTS OF OPERATIONS
In 1996, the Company elected to change its fiscal year end from
September 30 to June 30. Financial information for fiscal 1996, therefore,
reflects nine months of operations. Further, fiscal 1997 results include the
operations of Astrotech subsequent to its acquisition on February 12, 1997. Due
to the Company's rate of growth and its contract schedule, information for
fiscal 1996 has not been annualized.
Fiscal Year Ended June 30, 1998 as Compared to the Fiscal Year Ended June 30,
1997
Revenue. The Company's revenue increased approximately 13.3% to
approximately $64.1 million for the year ended June 30, 1998 as compared to
$56.6 million for the year ended June 30, 1997. Revenue for the year ended June
30, 1998 was from the Mir Contract ($39.0 million), the REALMS Contract and
related STS 95 Commercial Customers ($14.3 million) and Astrotech ($10.8
million). Conversely, for the year ended June 30, 1997 the Company's revenue was
attributable to the Mir Contract ($41.7 million), the CMAM contract ($8.0
million), the NASDA/ESA contract ($4.0 million), and Astrotech ($2.9 million).
Costs of Revenue. Costs of revenue for the year ended June 30, 1998
increased 2.7% to $35.1 million, as compared to $34.1 million for the year ended
June 30, 1997. The primary components of costs of revenue for the year ended
June 30, 1998 include integration and operation costs under the Mir Contract
($18.3 million), the REALMS Contract and related STS Commercial Customers ($7.1
million), Astrotech ($4.4 million), and depreciation ($4.9 million). In
contrast, the primary costs of revenue for the year ended June 30, 1997 included
integration and operation costs under the Mir Contract ($18.5 million), the CMAM
Contract ($1.0 million), the NASDA/ESA Contract ($3.5 million), Astrotech ($1.3
million), and depreciation ($9.8 million). The decrease in depreciation expense
is attributable to the impact of extending the estimated useful lives of the
Company's modules to 2012 effective July 1, 1997. This change in accounting
estimate is treated prospectively and is based on current available information
from NASA, which extends the estimated useful life of the Space Shuttle program
to at least 2012.
Operating Expenses. Operating expenses increased by 66.3% to
approximately $16.3 million for the year ended June 30, 1998 as compared to
approximately $9.8 million for the year ended June 30, 1997. This increase is
due primarily to the Company's efforts to increase staff, adding strength in
engineering, design and research and development capabilities. Research and
development costs for the year ended June 30, 1998 were $2.6 million, as
compared to $1.3 million for the year ended June 30, 1997. This increase is due
to the Company's efforts to develop space related assets including the ICC and
the SHUCS, which is being developed to provide reliable and Shuttle-independent
data communication channels that are responsive to payload user requirements.
Operating expenses related to Astrotech were approximately $1.6 million for the
year ended June 30, 1998 as compared to $0.4 million for the year ended June 30,
1997, which included only expenses subsequent to the February 1997 acquisition.
Interest Expense. Interest expense was approximately $6.4 million for
the year ended June 30, 1998, as compared with approximately $1.3 million for
the year ended June 30, 1997. The increase in interest expense was caused by the
Company's issuance of its Subordinated Convertible Notes due 2007 and interest
costs from the use of a term note. There was also approximately $1.9 million and
$0.3 million of interest capitalized during the year ended June 30, 1998 and
year ended June 30, 1997, respectively. Interest is capitalized based primarily
on the construction of the Company's research double module and double module
hardware.
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Interest Income. Interest and other income was approximately $3.9
million and $1.8 million for the years ended June 30, 1998 and 1997,
respectively. This increase is due to interest earned by the Company through the
short-term investment of funds raised by the Company's financing activities.
Net Income. Net income for the year ended June 30, 1998 was
approximately $9.6 million, or $0.86 per share (basic EPS), on 11,154,271 shares
as compared to $13.8 million, or $1.24 per share (basic EPS), for the year ended
June 30, 1997, on 11,118,825 shares. Income tax expense for these periods was
$2.5 million and $3.6 million for the years ended June 30, 1998 and 1997,
respectively. As of June 30, 1998, the Company had approximately $7.9 million of
available net operating loss carry-forwards expiring between 2006 and 2009 to
offset future regular taxable income. Utilization of these net operating loss
carry-forwards may be subject to limitations in the event of significant changes
in the stock ownership of the Company. While there are no restrictions on
transfers or sales of shares of Common Stock that would prevent such a change
from occurring, there is no plan to initiate any such changes of ownership
resulting in the loss of these carry-forwards.
The effects of inflation and changing prices have not significantly
impacted the Company's revenue or income from continuing operations during
fiscal 1998 and 1997.
Fiscal Year Ended June 30, 1997 as Compared to the Nine Months Ended June 30,
1996
Revenue. The Company recorded revenue of approximately $56.6 million
and $56.4 million for the year ended June 30, 1997 and the nine months ended
June 30, 1996, respectively. Revenue for the year ended June 30, 1997 was from
the Mir Contract ($41.7 million), the CMAM contract ($8.0 million), the
NASDA/ESA Contracts ($4.0 million), and Astrotech ($2.9 million). Conversely,
for the nine months ended June 30, 1996 the Company's revenue was attributable
to the Mir Contract ($10.8 million) and the CMAM contract ($45.6 million).
Costs of Revenue. Costs of revenue for the year ended June 30, 1997
increased 62.4% to $34.1 million, as compared to $21.0 million for the nine
months ended June 30, 1996. The primary components of costs of revenue for the
year ended June 30, 1997 include integration and operation costs under the Mir
Contract ($18.5 million), the CMAM Contract ($1.0 million), the NASDA/ESA
Contracts ($3.5 million), Astrotech Operations ($1.3 million), and depreciation
($9.8 million). In contrast, the primary costs of revenue for the nine months
ended June 30, 1996 included integration and operation costs under the Mir
Contract ($7.7 million), the CMAM Contract ($7.0 million), and depreciation
($6.2 million).
Operating Expenses. Operating expenses increased by 133.3% to
approximately $9.8 million for the year ended June 30, 1997 as compared to
approximately $4.2 million for the nine months ended June 30, 1996. This
increase is due primarily to the Company's efforts to increase staff, adding
strength in engineering, design and research and development capabilities. In
addition, the increase reflects the additional costs of approximately $0.4
million for operating the Astrotech subsidiary, which was acquired in February
1997. Research and development costs for year ended June 30, 1997 were $1.3
million, as compared to $0.1 million for the nine months ended June 30, 1996.
This increase is due to the Company's efforts to develop space related assets
including the ICC and the SHUCS, which is being developed to provide reliable
and Shuttle-independent data communication channels that are responsive to
payload user requirements.
Interest Expense. Interest expense was approximately $1.3 million for
the year ended June 30, 1997, as compared with approximately $1.5 million for
the nine months ended June 30, 1996. There was also approximately $0.3 million
and $0.8 million of interest capitalized during the year ended June 30, 1997 and
nine months ended June 30, 1996, respectively. Interest was capitalized based on
the construction of the Company's research double module and double module
hardware.
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Interest Income. Interest and other income was approximately $1.8
million and $1.2 million for the year ended June 30, 1997 and the nine months
ended June 30, 1996, respectively. This increase is due to the fact that there
were three additional months of interest proceeds from short term, commercial
paper and interest bearing cash accounts in fiscal 1997.
Net Income. Net income for the year ended June 30, 1997 was
approximately $13.8 million, or $1.24 per share (basic EPS), on 11,118,825
shares as compared to $29.8 million, or $3.26 per share (basic EPS), for the
nine months ended June 30, 1996, on 9,139,465 shares. Income tax expense for
these periods was $3.6 million and $1.9 million for the year ended June 30, 1997
and the nine months ended June 30, 1996, respectively, due to the Company's use
of available net operating loss carry-forwards, offset by alternative minimum
taxes.
The effects of inflation and changing prices have not significantly
impacted the Company's revenue or income from continuing operations during
fiscal 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its capital expenditures, research
and development and working capital requirements with progress payments under
its contracts, including the CMAM Contract, the Mir Contract, the NASDA/ESA
Contracts and Astrotech's operations, as well as with proceeds received from
private equity offerings and borrowings under credit facilities. During December
1995, SPACEHAB completed an initial public offering of common stock (the
"Offering"), which provided the Company with net proceeds of approximately $43.3
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
June 30, 1998, no amounts have ever been drawn on this 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 June 30, 1998, the Company had
cumulatively drawn $14.1 million on this loan and had an outstanding balance on
that date of $12.0 million. Further, on October 21, 1997 the Company completed a
private placement offering of convertible subordinated notes due 2007 (the
"Notes Offering"), which 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 and for general corporate
purposes.
Cash Flows From Operating Activities. Cash provided by (used for)
operations for the nine months ended June 30, 1996 and the fiscal years
ended June 30, 1997 and 1998 was $13.2 million, ($6.0) million and $31.6
million, respectively. The significant change was primarily caused by the
timing of progress payments received by the Company under its contracts. Under
the Mir Contract, the REALMS Contract and the NASDA/ESA Contracts progress
payments are structured such that expenses incurred under these contracts are
billed as incurred.
Cash Flows Used in Investing Activities. For the nine months ended
June 30, 1996 and the fiscal years ended June 30, 1997 and 1998, cash flows
used in investing activities were $6.3 million, $29.3 million and $23.1
million, respectively. Expenditures during the nine months ended June 30, 1996
were for (i) the development and construction of a tunnel and an adapter ring
to be used in conjunction with the Logistics Double Module and (ii) structural
upgrade work performed on the SPACEHAB structural test article so that it can
be attached to an existing Single Module to form a Logistics Double Module. The
Company paid approximately $20.1 million for Astrotech during fiscal 1997.
During fiscal 1997 the Company began the construction of its Research Double
Module. The Company paid approximately $8.4 million and $17.2 million for
construction costs during fiscal 1997 and 1998, respectively. The Company
anticipates that it will spend approximately $36.8 million in the aggregate to
complete this project. Additionally, the Company paid approximately $4.0
million for the construction of two buildings on the Astrotech properties.
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The Company expects to continue funding any additional capital
expenditures and working capital requirements from internally generated cash
flow, draw-downs on existing credit facilities and through future debt and/or
equity offerings.
Cash Flows From Financing Activities. For the nine months ended June
30, 1996 and the fiscal years ended June 30, 1997 and 1998, cash flows provided
by (used for) financing activities were $36.9 million, ($2.6) million and $71.0
million, respectively. During the year ended June 30, 1998, the Company received
net proceeds of approximately $14.1 million and made payments of $2.1 million
under the Term Loan Agreement. In October 1997, the Company received net
proceeds after commissions and other expenses of approximately $59.9 million by
completing an offering of $55.0 million of its 8% Convertible Subordinated Notes
due 2007 as well as the underwriters' exercise of the over-allotment for an
additional $8.3 million.
The Company believes that cash flows from the Convertible Notes
Offering, the Term Loan Agreement, and the Revolving Line of Credit will be
sufficient to meet any cash flow requirements from operations and other funding
requirements for capital asset construction and development for at least the
next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" (Statement 130). Statement 130 establishes standards for the reporting
and display of comprehensive income and its components in the financial
statements. The Company is required to adopt the provisions of Statement 130 for
the year ended June 30, 1999. Earlier application is not permitted; however,
upon adoption, the Company will be required to reclassify previously reported
annual and interim financial statements. The Company believes that the
disclosure of comprehensive income in accordance with the provisions of
Statement 130 will not materially impact the manner of presentation of its
financial statements as currently and previously reported.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (Statement 131). Statement
131 establishes new procedures and requirements for the (i) determination of
business segments and (ii) presentation and disclosure of segment information.
The Company is required to adopt the provisions of Statement 131 for the year
ended June 30, 1999, and is currently evaluating the impact Statement 131 will
have on its financial statements.
YEAR 2000 CONSIDERATIONS
The Year 2000 issue is the result of computer programs that were
written using two digits rather than four to define the applicable year. Any
computer programs that have date-sensitive software may recognize the date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based upon a recent initial assessment of its Year 2000 readiness,
the Company has determined that the majority of its hardware and software is
Year 2000 compliant. Accordingly, the Company believes that it will not be
required to modify or replace significant portions of its software and hardware
so that its computer systems will function properly with respect to dates in the
Year 2000 and thereafter. Additionally, because the majority of the hardware and
software in use by the Company is of the commercial off the shelf variety with
minimal customization, the Company expects its efforts and costs to bring 100%
of the hardware and software into compliance to be minimal. Final verification
of this initial assessment, including assessment of the recently acquired
Johnson Engineering, is currently underway and will result in specific
plans to upgrade the remaining non-compliant hardware and software to Year 2000
compliance by the end of fiscal year 1999. The costs of bringing non-compliant
hardware and software into compliance will be expensed as incurred.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
The Board of Directors:
SPACEHAB, Incorporated and Subsidiary:
We have audited the accompanying consolidated balance sheets of SPACEHAB,
Incorporated and subsidiary (the Company) as of June 30, 1997 and 1998, and the
related consolidated statements of income, stockholders' equity (deficit), and
cash flows for the nine months ended June 30, 1996 and the years ended June 30,
1997 and 1998. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SPACEHAB,
Incorporated and subsidiary as of June 30, 1997 and 1998, and the results of
their operations and their cash flows for the nine months ended June 30, 1996
and the years ended June 30, 1997 and 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
McLean, Virginia
August 31, 1998
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CONSOLIDATED BALANCE SHEETS
June 30,
-------------------------------------
(In thousands, except share data) 1997 1998
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 12,887 $ 92,327
Accounts receivable (note 4) 5,176 5,979
Prepaid expenses and other current assets 199 550
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 18,262 98,856
- ------------------------------------------------------------------------------------------------------------------------
Property and equipment:
Flight modules 95,046 95,046
Module improvements in progress 13,013 33,829
Payload processing facilities 17,651 21,755
Furniture, fixtures and equipment 3,368 5,296
- ------------------------------------------------------------------------------------------------------------------------
129,078 155,926
Less accumulated depreciation (38,116) (43,338)
- ------------------------------------------------------------------------------------------------------------------------
Property and equipment, net 90,962 112,588
Goodwill, net of accumulated amortization of $56 and $230, respectively 3,395 3,224
Deferred mission costs 1,439 -
Other assets, net 392 5,936
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 114,450 $ 220,604
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Loans payable under credit agreement, current portion (note 6) $ 500 $ 500
Loans payable, current portion (note 8) - 2,824
Accounts payable 682 1,075
Accrued expenses 1,762 5,129
Accrued subcontracting services 9,052 13,177
Deferred flight revenue 2,260 11,924
Advance billings 847 1,567
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 15,103 36,196
- ------------------------------------------------------------------------------------------------------------------------
Loans payable under credit agreement, net of current portion (note 6) 1,500 1,000
Loans payable, net of current portion (note 8) - 9,177
Notes payable to shareholder (note 7) 11,225 11,895
Convertible subordinated notes payable (note 8) - 63,250
Deferred income taxes (note 13) - 2,678
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 27,828 124,196
- ------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 1, 8, 13, 15 and 16)
Stockholders' equity (notes 8, 11 and 12):
Common stock, no par value, authorized 30,000,000 shares, issued
and outstanding 11,146,237 and 11,168,161 shares, respectively 81,057 81,239
Additional paid-in capital 16 16
Retained earnings 5,549 15,153
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 86,622 96,408
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 114,450 $ 220,604
========================================================================================================================
See accompanying notes to consolidated financial statements.
20
21
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data) Nine months ended Year ended Year ended
June 30, 1996 June 30, 1997 June 30, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Revenue $ 56,397 $ 56,601 $ 64,087
- -----------------------------------------------------------------------------------------------------------------------------
Costs of revenue:
Integration, operations and transportation 14,220 23,726 25,762
Depreciation 6,192 9,825 4,923
Insurance and other direct costs 573 569 4,373
- -----------------------------------------------------------------------------------------------------------------------------
Total costs of revenue 20,985 34,120 35,058
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 35,412 22,481 29,029
- -----------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Marketing, general and administrative 4,056 8,567 13,712
Research and development 100 1,252 2,620
- -----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 4,156 9,819 16,332
- -----------------------------------------------------------------------------------------------------------------------------
Income from operations 31,256 12,662 12,697
Interest expense, net of capitalized interest (note 3) (699) (955) (4,480)
Interest and other income, net 1,184 1,822 3,914
- -----------------------------------------------------------------------------------------------------------------------------
Net income before income taxes and extraordinary item 31,741 13,529 12,131
Income tax expense (note 13) 1,912 2,971 2,527
- -----------------------------------------------------------------------------------------------------------------------------
Net income before extraordinary item 29,829 10,558 9,604
Extraordinary item -- gain on early retirement of debt,
net of taxes and legal fees (note 6) - 3,274 -
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 29,829 $ 13,832 $ 9,604
=============================================================================================================================
Basic earnings per share:
Net income before extraordinary item $ 3.26 $ 0.95 $ 0.86
Extraordinary item - 0.29 -
- -----------------------------------------------------------------------------------------------------------------------------
Net income per share - basic $ 3.26 $ 1.24 $ 0.86
=============================================================================================================================
Shares used in computing net income per share-basic 9,139,465 11,118,825 11,154,271
=============================================================================================================================
Diluted earnings per share:
Net income before extraordinary item $ 3.19 $ 0.95 $ 0.84
Extraordinary item - 0.29 -
- -----------------------------------------------------------------------------------------------------------------------------
Net income per share - diluted $ 3.19 $ 1.24 $ 0.84
=============================================================================================================================
Shares used in computing net income per share-diluted 9,343,018 11,160,322 14,571,278
=============================================================================================================================
See accompanying notes to consolidated financial statements.
21
22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
Total
Convertible preferred stock Common stock Additional Retained stockholders'
----------------------------- --------------------- paid-in earnings equity
Shares Amount Shares Amount capital (deficit) (deficit)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 4,011,345 $ 2,311 5,083,427 $ 34,070 $ 16 $ (38,112) $ (1,715)
Common stock issued upon
stock option exercises - - 75,000 180 - - 180
Common stock issued in public
offering, net of expenses
(note 11) - - 4,014,500 43,302 - - 43,302
Common stock issued upon
conversion of preferred
stock (note 11) (4,011,345) (2,311) 1,671,312 2,311 - - -
Common stock issued in private
placement guarantee (note 11) - - 224,998 - - - -
Net income - - - - - 29,829 29,829
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 - - 11,069,237 79,863 16 (8,283) 71,596
Common stock issued upon stock
option exercises - - 2,000 24 - - 24
Common stock issued upon
conversion of debt (note 8) - - 75,000 1,170 - - 1,170
Net income - - - - - 13,832 13,832
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 - - 11,146,237 81,057 16 5,549 86,622
Common stock issued upon stock
option exercises - - 8,725 60 - - 60
Common stock issued under
employee stock purchase plan - - 13,199 122 - - 122
Net income - - - - - 9,604 9,604
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 - $ - 11,168,161 $ 81,239 $ 16 $ 15,153 $ 96,408
================================================================================================================================
See accompanying notes to consolidated financial statements.
22
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine months ended Year ended Year ended
June 30, 1996 June 30, 1997 June 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 29,829 $ 13,832 $ 9,604
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization 6,387 10,185 5,587
Amortization of debt placement costs - - 226
Gain on early retirement of debt - (4,093) -
Interest converted to notes payable 1,425 1,300 670
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 119 1,843 (803)
Increase in prepaid expenses and other current assets (132) (15) (351)
Decrease in deferred mission costs 445 1,267 1,439
Decrease (increase) in other assets 194 (258) (1,980)
Increase (decrease) in deferred flight revenues (27,752) (28,051) 9,628
Increase (decrease) in accounts payable and
accrued expenses 1,993 (968) 3,633
Increase (decrease) in advance billings - (239) 720
Increase (decrease) in accrued
subcontracting services 643 (798) 533
Increase in deferred taxes - - 2,678
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 13,151 (5,995) 31,604
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for modules under construction - (8,443) (17,245)
Payments for building under construction - - (3,988)
Purchase of Astrotech, net of cash acquired - (20,134) -
Purchases of property and equipment (6,266) (731) (1,880)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (6,266) (29,308) (23,113)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments of note payable to insurers (3,854) (2,520) (500)
Payment of debt placement costs - - (3,984)
Proceeds from issuance of convertible
subordinated notes payable - - 63,250
Proceeds from note payable - - 14,119
Payments of note payable - - (2,118)
Proceeds from note payable to shareholder 7,359 - -
Payments of note payable to shareholder (10,117) - -
Payments of legal fees on early retirement of debt - (110) -
Proceeds from exercise of stock options 180 24 60
Proceeds from issuance of common stock, net of expenses 43,302 - 122
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 36,870 (2,606) 70,949
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 43,755 (37,909) 79,440
Cash and cash equivalents at beginning of year 7,041 50,796 12,887
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 50,796 $ 12,887 $ 92,327
==============================================================================================================================
See accompanying notes to consolidated financial statements.
23
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 9 9 8
(1) DESCRIPTION OF THE COMPANY
SPACEHAB, Incorporated (the Company) is the first company to
commercially develop, own and operate habitable modules that provide space-based
laboratory research facilities and cargo services aboard the U.S. Space Shuttle
system. The Company currently owns and operates three pressurized laboratory and
logistics supply modules which significantly enhance the capabilities of the
Space Shuttle fleet. The Company is currently constructing a new science module
with associated double module hardware. The Company's modules are unique to the
Space Shuttle fleet.
To date, the Company has successfully completed eleven missions
aboard the Space Shuttle and substantially all of the Company's revenue has been
generated under fixed price contracts with NASA. The Company's contracts are
subject to termination for convenience and periodic funding allocations by
NASA. NASA's funding is dependent on receiving annual appropriations from the
United States government.
On February 12, 1997, the Company acquired the assets and certain of
the liabilities of Astrotech Space Operations, L.P., a subsidiary of Northrop
Grumman, a provider of commercial satellite launch processing services and
payload processing facilities in the United States. These services are provided
at the Astrotech facilities in Cape Canaveral, Florida and Vandenberg Air Force
Base in California, and are provided to launch service providers on a
fixed-price basis. Additionally, Astrotech provides management and consulting
services to the Boeing Company for its Sea Launch program at the Boeing facility
in Long Beach, California.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
SPACEHAB, Incorporated and its wholly owned subsidiary, Astrotech Space
Operations, Inc. (Astrotech). All significant intercompany transactions have
been eliminated in consolidation.
FISCAL YEAR
Effective October 1, 1995, the Company changed its fiscal year-end
from September 30 to June 30. Accordingly, the accompanying consolidated
financial statements present the Company's results of operations for the nine
months ended June 30, 1996 and the years ended June 30, 1997 and 1998.
CASH AND CASH EQUIVALENTS
For purposes of its consolidated statements of cash flows, the
Company considers short-term investments with original maturities of three
months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. All furniture, fixtures
and equipment are depreciated using the straight-line method over the estimated
useful lives of the respective assets, which is generally five years. The
Company's payload processing facilities are depreciated using the straight-line
method over their estimated useful lives ranging from sixteen to forty-three
years.
Through June 30, 1997, the Company's flight modules were depreciated
over a ten-year period using the straight-line method. Effective July 1, 1997,
the Company extended the estimated useful lives of its space modules through
2012. This change in accounting estimate is treated prospectively and is based
on current available information from NASA, which has estimated the duration of
the Space Shuttle Program through at least 2012. As a result of this change in
estimate, the Company's net income increased by $4,145,000 for fiscal year 1998.
During fiscal year 1997, SPACEHAB adopted Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed Of (Statement 121). Statement 121
requires that long-lived assets to be held and used, including goodwill, be
reviewed by the Company for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
is recognized when the undiscounted net cash flows associated with the asset are
less than the asset's carrying amount. Impairment losses, if any, are measured
as
24
25
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the excess of the carrying amount of the asset over its estimated fair market
value. The adoption of Statement 121 did not have an impact on the Company's
consolidated results of operations for the years ended June 30, 1997 or 1998.
GOODWILL
The excess of the cost over the fair value of Astrotech's net
tangible and identifiable intangible assets acquired has been assigned to
goodwill. Goodwill is being amortized on a straight-line basis over twenty
years.
STOCK-BASED COMPENSATION
During fiscal year 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, Accounting for
Stock-based Compensation (Statement 123), which encourages, but does not
require, the recognition of stock-based employee compensation at fair value. The
Company has elected to continue to account for stock-based employee compensation
using the intrinsic value method as prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, compensation cost for options to purchase common
stock granted to employees is measured as the excess, if any, of the fair value
of common stock at the date of the grant over the exercise price an employee
must pay to acquire the common stock.
Warrants to purchase common stock granted to other than employees as
consideration for goods or services rendered are recognized at fair market
value.
REVENUE RECOGNITION
Revenue was recognized upon completion of each module flight for the
CMAM and Mir contracts (note 10). Total contract price was allocated to each
flight based on the amount of services the Company provided on the flight
relative to the total 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. Costs directly related to
specific CMAM and Mir missions were deferred until the respective missions were
completed. The CMAM contract was completed in October 1996 and the Mir contract
was completed in June 1998.
For all other contract awards for which the capability to
successfully complete the contract can be reasonably assured and costs at
completion can be reliably estimated at contract inception, revenue recognition
under the percentage-of-completion method is being used based on costs incurred
over the period of the contract. Revenue provided by Astrotech's payload
processing services is recognized ratably over the occupancy period of the
satellite while in the Astrotech facilities. Contract losses are recognized when
they become known.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
INCOME TAXES
The Company recognizes income taxes under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
NET INCOME PER SHARE
In December 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, Earnings per Share, (Statement 128).
Statement 128 supersedes Accounting Principles Board Opinion No. 15, Earnings
per Share (APB 15) and its related interpretations, and promulgates new
accounting standards for the computation and manner of presentation of the
Company's earnings per share. The Company has restated previously reported
annual earnings per share data in accordance with the provisions of Statement
128 (note 14). The Company does not believe that the adoption of Statement 128
had a material impact on the computation or manner of presentation of its
earnings per share data as currently or previously presented under APB 15.
Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period.
25
26
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The computation of diluted earnings per share includes all common stock options
and warrants and other common stock, to the extent dilutive, that potentially
may be issued as a result of conversion privileges, including the convertible
subordinated notes payable (note 8).
All computations of income per share include the effect of the 1 for
2.4 reverse split of common stock in December 1995 (note 11).
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reported periods. Actual results could differ from these estimates.
RECLASSIFICATIONS
Certain fiscal year 1996 and 1997 amounts have been reclassified to
conform to the fiscal 1998 consolidated financial statement presentation.
(3) STATEMENTS OF CASH FLOWS - SUPPLEMENTAL INFORMATION
Cash paid for interest costs was approximately $264,000, $1,300,000
and $3,400,000 for the nine months ended June 30, 1996 and the years ended June
30, 1997 and 1998, respectively. The Company capitalized interest of
approximately $766,000, $345,000 and $1,900,000 during the nine months ended
June 30, 1996 and the years ended June 30, 1997 and 1998, respectively, related
to the module improvements and building in progress.
The Company paid income taxes of approximately $248,000, $2,385,000
and $18,500 for the nine months ended June 30, 1996 and the years ended June 30,
1997 and 1998, respectively.
During fiscal year 1997, the Company's convertible note payable, with
a carrying value of approximately $1,200,000, was converted into 75,000 shares
of common stock (note 8). During fiscal year 1998, the Company entered into two
capital leases for equipment with a carrying value of approximately $180,000.
(4) ACCOUNTS RECEIVABLE
At June 30, 1997 and 1998, accounts receivable consisted of (in
thousands):
1997 1998
- --------------------------------------------------------------------
U.S. government contracts
Billed $ - 452
Unbilled 3,521 3,202
- --------------------------------------------------------------------
Total U.S. government contracts 3,521 3,654
- --------------------------------------------------------------------
Commercial contracts
Billed 1,344 2,277
Unbilled 311 48
- --------------------------------------------------------------------
Total commercial contracts 1,655 2,235
- --------------------------------------------------------------------
Total accounts receivable $ 5,176 5,979
====================================================================
The Company anticipates collecting substantially all receivables within one
year.
(5) ACQUISITION OF ASTROTECH
The Company paid $20,136,000, including transaction costs, to acquire
substantially all of the assets and certain of the liabilities of Astrotech. The
purchase was effective on February 12, 1997. The business combination has been
accounted for using the purchase method. The purchase price has been allocated
to the assets and liabilities acquired based on appraisals and other studies.
The purchase price was allocated as follows (in thousands):
Cash acquired $ 2
Receivables 1,573
Land 580
Buildings 13,389
Furniture, fixtures, and equipment 2,319
Goodwill 3,451
Other assets 49
Accounts payable (141)
Advanced billings (1,086)
- -------------------------------------------------------------------------
Total purchase price $ 20,136
=========================================================================
26
27
(5) ACQUISITION OF ASTROTECH (CONTINUED)
The following represents pro forma combined results of operations for
the prior two years as if the acquisition of Astrotech had occurred as of
October 1, 1995 (in thousands, except per share data):
Nine months ended Year ended
June 30, 1996 June 30, 1997
- ------------------------------------------------------------------------
Revenue $ 62,716 59,980
Gross profit 39,902 23,531
Income before
extraordinary item 31,622 10,309
Net income 31,622 13,583
- ------------------------------------------------------------------------
Net income per
common share - basic $ 3.46 1.22
========================================================================
(6) LOANS PAYABLE UNDER CREDIT AGREEMENT
Prior to an August 1996 amendment, the Company's credit agreement
consisted of a $6,458,000 term loan bearing interest at 1 percent per month and
a $5,495,000 noninterest-bearing term loan with several insurance companies. In
addition, a revolving credit commitment with a subcontractor and former
shareholder, provided a maximum outstanding balance of $6,000,000 and bore
interest at a rate of 1 percent per month.
In August 1996, the Company's credit agreement was amended. Under the
amendment, the revolving credit commitment with a subcontractor and former
shareholder was canceled. In exchange for the full satisfaction of the Company's
term loans with the various insurance companies, the Company paid the insurance
companies $2,500,000 and agreed to pay an additional $2,000,000 under a new
noninterest-bearing term loan. The new term loan is due in installments of
$500,000 on each of August 1, 1997 and 1998, and $334,000 on each of August 1,
1999, 2000 and 2001. As a result of this amended and restated agreement, the
Company recognized an extraordinary gain of $3,274,000, net of income taxes and
other related expenses of $819,000 and $110,000, respectively, during the year
ended June 30, 1997.
Aggregate interest cost incurred on the debts due under the various
credit agreements was approximately $561,000 and $64,000 for the nine months
ended June 30, 1996 and the year ended June 30, 1997. There was no interest
incurred under these agreements during the year ended June 30, 1998.
(7) NOTES PAYABLE TO SHAREHOLDER
The Company issued subordinated notes for a portion of the amount due
to Alenia Spazio S.p.A. (Alenia), a shareholder, under a previously completed
construction contract for the Company's flight modules. Such notes had aggregate
outstanding balances of $11,225,000 and $11,895,000 at June 30, 1997 and 1998,
respectively. The notes bear interest at an annual rate of 12 percent. No amount
of principal or accrued interest on the notes is due until all amounts under the
amended and restated credit agreement due to the various insurance companies
(note 6) are repaid. As such, all principal payments are due under these notes
on August 1, 2001. However, during fiscal 1998, the Company began paying
interest quarterly. The Company paid $357,000 of interest during the year ended
June 30, 1998 and will continue to pay interest quarterly. Additionally, the
Company has accrued interest of $357,000 as of June 30, 1998 included in
accounts payable and accrued expenses.
Interest cost converted on the notes to Alenia was approximately
$846,000, $1,300,000, and $670,000 for the nine months ended June 30, 1996 and
the years ended June 30, 1997 and 1998, respectively.
(8) LONG-TERM DEBT
CONVERTIBLE NOTE PAYABLE
On August 12, 1992, the Company issued a subordinated promissory note
to an investment bank in the amount of $900,000, carrying interest at LIBOR plus
3 percent, and maturing six months after the payment of all other indebtedness
due under the amended and restated credit agreement and the subordinated notes
to Alenia. Through June 30, 1996, the Company had elected to defer the payment
of interest under the note, which accrued and was converted to additional
outstanding principal. The note was convertible at the option of the holder into
75,000 shares of the Company's common stock at any time prior to maturity. On
October 25, 1996, the investment bank exercised its option to convert the note
into the Company's common stock. In accordance with the terms of the agreement,
interest that accrued during fiscal year 1997 of approximately $25,000 through
the date of conversion was waived.
Interest cost incurred on this note was approximately $58,000 for the
nine months ended June 30, 1996.
27
28
(8) LONG-TERM DEBT (CONTINUED)
CREDIT FACILITIES
On June 16, 1997, the Company entered into a $10,000,000 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 LIBO-based
rate. This loan is collateralized by the Company's intangible assets, accounts
receivable, and other property in which a lien is granted to the lender. The
term of the agreement is through October 1998. Through June 30, 1998, the
Company has not drawn against the line of credit.
On July 14, 1997, the Company's subsidiary, Astrotech, entered into
another credit facility for loans of up to $15,000,000 with a financial
institution. The term of the agreement is through July 13, 2002. 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. Principal and interest are payable on a quarterly basis. Principal
payments of $2,824,000 are due in fiscal year 1999, 2000, 2001, and 2002 and
principal payments of $705,000 is due in fiscal year 2003. At June 30, 1998, the
Company had outstanding debt of $12,001,000 under this credit facility and
accrued interest of $330,000.
CONVERTIBLE SUBORDINATED NOTES
In October 1997, the Company completed a private placement offering
for $63,250,000 of aggregate principal of unsecured 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 $59,910,000 to
be used for capital expenditures associated with the development and
construction of space related assets and for other general corporate purposes.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments as of June 30, 1997 and 1998 in
accordance with Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments (in thousands):
1997 1998
-------------------- -------------------
Carrying Fair Carrying Fair
amount value amount value
- -----------------------------------------------------------------------
Financial liabilities:
Loans payable under
credit agreement $ 2,000 1,630 1,500 1,279
Notes payable
to shareholder 11,225 11,225 11,895 11,895
Loans payable under
credit facility - - 12,001 12,001
Convertible notes
payable - - 63,250 68,784
=======================================================================
The fair value of the Company's long-term debt is based on quoted
market price or is estimated based on the current rates offered to the Company
for debt of the same remaining maturities. The carrying amounts of cash and cash
equivalents, receivables, and accounts payable and accrued expenses approximate
their fair market value because of the relatively short duration of these
instruments.
(10) NASA CONTRACTS
COMMERCIAL MIDDECK AUGMENTATION MODULE CONTRACT
On November 30, 1990, NASA and the Company entered into the
Commercial Middeck Augmentation Module contract (CMAM) to lease to NASA a
portion of the middeck augmentation modules and related integration services at
an aggregate firm fixed price of $184,236,000 over six missions. During the year
ended September 30, 1994, the terms of the CMAM contract were amended to reduce
the number of missions from six to five, although the total locker space leased
by NASA and the contract value remained the same.
During the nine months ended June 30, 1996, and the years ended June
30, 1997 and 1998, the Company recognized approximately $45,634,000, $7,963,000,
and $0, respectively, of revenue under the CMAM contract. The CMAM contract was
completed during fiscal year 1997.
28
29
(10) NASA CONTRACTS (CONTINUED)
MIR SPACE STATION CONTRACT
On July 14, 1995, NASA and the Company completed final negotiations
to lease the Company's flight modules and provide related integration services
over four missions to the Russian Space Station Mir during fiscal 1996 and 1997,
at an aggregate firm fixed price of $53,980,000. During December 1995, the
contract was amended whereby the contract price was reduced by $2,400,000 in
exchange for the indemnification by NASA of certain damage to, or loss of, "the
modules during flight and increased by $927,000 for additional services for a
new contract value of $52,507,000. During fiscal 1998, the Company and NASA
further amended the terms of the basic contract to provide for three additional
missions for an additional $38,954,000.
During the nine months ended June 30, 1996 and the years ended June
30, 1997 and 1998, the Company recognized $10,772,000, $41,735,000 and
$38,954,000, respectively, of revenue under the Mir contract. The Mir contract,
as amended, was completed with its final mission in June 1998.
RESEARCH AND LOGISTICS MODULE SERVICES CONTRACT
On December 21, 1997, the Company entered into the Research and
Logistics Module Services (REALMS) Contract to lease to NASA its flight modules
and provide related integration services over three missions at an aggregate
fixed price of $44,860,000. This contract provides for NASA to use the flight
modules for both science and logistical missions. This contract also enables the
Company to provide similar services to commercial customers.
During the year ended June 30, 1998, the Company recognized
$14,274,000 of revenue under this contract and related commercial customer
contracts.
(11) STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
In December 1995 and January 1996, the Company sold, through an
underwritten initial public offering, an aggregate of 4,014,500 common shares at
$12.00 per share, which resulted in net proceeds to the Company of $43,302,000
after associated commissions and discounts, and other expenses of the offering.
CONVERTIBLE PREFERRED STOCK
Pursuant to the initial public offering of the Company's common
stock, all of the Company's preferred stock was automatically converted into
common stock on a 1 for 1 basis in accordance with the terms of the preferred
stock agreement. At which point, all shares of common stock were subject to the
reverse stock split.
REVERSE STOCK SPLIT
Prior to the initial public offering, on December 11, 1995, the
Company's Board of Directors effected a 1 for 2.4 reverse split of common stock
whereby each 2.4 shares of existing common stock were exchanged for one share of
common stock. All share and per share data appearing in the consolidated
financial statements and notes thereto have been retroactively adjusted for this
reverse split.
PRIVATE EQUITY PLACEMENT
During August 1995, the Company completed the sale of 150,000 shares
of its common stock to five investors for an aggregate price of $3,600,000. The
terms of sale included a guarantee by the Company that in the event of the
completion of an initial public offering prior to December 31, 1996, the
investors would realize no less than a 25 percent premium on their investment
based on the initial offering price. Based on the initial public offering price,
the Company issued an aggregate of 224,998 common shares to the investors in
settlement of the guarantee.
(12) COMMON STOCK OPTION AND STOCK PURCHASE PLANS
NON-QUALIFIED OPTIONS
Prior to the adoption of the 1994 Stock Incentive Plan (the 1994
Plan), stock options granted to the Company's officers and employees were part
of their employment contract or offer. The number and price of the options
granted was defined in the employment agreements and such options vest
incrementally over a period of four years and generally expire within ten years
of the date of grant.
THE 1994 PLAN
Under the terms of the 1994 Plan, the number and price of the options
granted to employees is determined by the Board of Directors and such options
vest, in most cases, incrementally over a period of four years and expire no
more than ten years after the date of grant.
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(12) COMMON STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
THE DIRECTORS' STOCK OPTION PLAN
Prior to an amendment on October 21, 1997, each nonemployee member of
the Board of Directors was annually granted options to purchase 5,000 shares of
common stock at exercise prices equal to the fair market value of the date of
grant. Subsequent to the amendment, each nonemployee member of the Board of
Directors received a one time grant of an option to purchase 10,000 shares of
common stock. Further, each new nonemployee director after the amendment date
shall receive a one-time grant of an option to purchase 10,000 shares. In
addition, effective as of the date of each annual meeting of the Company's
stockholders on or after the effective date, each nonemployee director who is
elected or continues as a member of the Board of Directors of the Company shall
be awarded an option to purchase 5,000 shares of common stock. Options under the
Director's Plan vest after one year and expire seven years from the date of
grant.
1997 EMPLOYEE STOCK PURCHASE PLAN
During the year ended June 30, 1998, the Company adopted an employee
stock purchase plan that permits eligible employees to purchase shares of common
stock of the Company at prices no less than 85 percent of the current market
price. Eligible employees may elect to participate in the plan by authorizing
payroll deductions from one percent to ten percent of gross compensation for
each payroll period. On the last day of each quarter, each participant's
contribution account is used to purchase the maximum number of whole and
fractional shares of common stock determined by dividing the contribution
account's balance by the lesser of 85 percent of the price of a share of common
stock on the first day of the quarter or the last day of a quarter. The maximum
number of shares of common stock that may be purchased under the plan is
1,500,000. Through June 30, 1998, 13,199 shares have been issued under the plan.
STOCK OPTION ACTIVITY SUMMARY
The following table summarizes the Company's stock option plans:
Non-qualified options 1994 Plan Directors' plan
------------------------ ------------------------ -----------------------
Weighted Weighted Weighted
average average average
Shares exercise Shares exercise Shares exercise
outstanding price outstanding price outstanding price
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at 9/30/95 933,852 $ 11.31 256,156 $ 12.00 - $ -
Granted 8,133 24.00 744,582 13.85 - -
Exercised 75,000 2.40 - - - -
Forfeited 246,523 12.00 - - - -
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at 6/30/96 620,462 12.28 1,000,738 13.35 - -
Granted 14,166 8.88 1,024,751 6.90 50,000 7.00
Exercised - - 2,000 12.00 - -
Forfeited 194,642 12.00 790,266 13.14 - -
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at 6/30/97 439,986 12.01 1,233,223 8.20 50,000 7.00
Granted 10,000 10.13 257,338 11.00 145,000 10.92
Exercised - - 3,725 10.02 5,000 10.13
Forfeited 149,941 12.16 8,583 11.96 - -
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at 6/30/98 300,045 $ 12.33 1,478,253 $ 8.62 190,000 $ 9.99
- ----------------------------------------------------------------------------------------------------------------------
Options exercisable at:
June 30, 1996 543,585 $ 12.07 58,247 $ 12.00 - $ -
June 30, 1997 429,720 12.16 819,742 8.49 - -
June 30, 1998 295,978 12.17 983,620 8.55 45,000 7.00
Weighted-average fair value at
date of grant during the
fiscal period ended:
June 30, 1996 8,133 5.96 744,582 6.24 - -
June 30, 1997 14,166 2.80 1,024,751 2.56 50,000 2.19
June 30, 1998 10,000 4.25 257,338 3.83 145,000 3.43
======================================================================================================================
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(12) COMMON STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
The following table summarizes information about the Company's stock
options outstanding at June 30, 1998:
Options outstanding Options exercisable
-------------------------------------------- -------------------------
Weighted-
average Weighted- Weighted-
remaining average average
Number contractual exercise Number exercise
Range of exercise prices outstanding life (years) price exercisable price
- -----------------------------------------------------------------------------------------------------------
$24.00 6,100 4.25 $ 24.0000 2,033 $ 24.0000
$9.875 - $14.88 917,197 3.90 12.0114 577,035 12.6270
$5.75 - $8.88 1,045,001 4.73 6.8653 745,530 6.6988
- -----------------------------------------------------------------------------------------------------------
$5.75 - $24.00 1,968,298 4.34 $ 9.3164 1,324,598 $ 9.3078
===========================================================================================================
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, as all options have been granted at
exercise prices equal to the fair market value as of the date of grant, no
compensation cost has been recognized under these plans in the accompanying
consolidated financial statements. Had compensation cost been determined
consistent with Statement 123, the Company's net income and earnings per common
share would have been reduced to the pro forma amounts indicated below (in
thousands, except per share data):
Nine months Years ended
ended June 30, ------------------------
1996 1997 1998
- ------------------------------------------------------------------------
As reported $ 29,829 $ 10,558 9,604
Pro forma 29,257 8,964 8,772
========================================================================
Net income per share - basic:
As reported $ 3.26 $ 0.95 0.86
Pro forma 3.20 0.81 0.79
========================================================================
The fair value of each option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in fiscal years 1996, 1997 and 1998: 0.0
percent dividend growth; expected volatility ranging from 35 percent to 40
percent; risk-free interest rates ranging from 5.68 percent to 6.71 percent; and
expected lives ranging from three to seven years.
The effects of compensation cost as determined under Statement 123 on
net income in fiscal year 1996, 1997 and 1998 may not be representative of the
effects on pro forma net income in future periods.
WARRANTS
The Company also has 53,000 currently exercisable warrants
outstanding to purchase the Company's common stock at $9.00 per share, with
various expiration dates through June 2002. The fair market value of these
warrants was recognized at issuance.
(13) INCOME TAXES
The components of income tax expense from continuing operations are
as follows (in thousands):
Nine months ended Year ended Year ended
June 30, 1996 June 30, 1997 June 30, 1998
- -------------------------------------------------------------------------
Current:
Federal $ 1,912 2,706 -
State and local - 85 -
- -------------------------------------------------------------------------
1,912 2,791 -
- -------------------------------------------------------------------------
Deferred:
Federal - - 2,148
State and local - - 379
- -------------------------------------------------------------------------
- - 2,527
- -------------------------------------------------------------------------
Income tax
expense $ 1,912 2,791 2,527
=========================================================================
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(13) INCOME TAXES (CONTINUED)
During the year ended June 30, 1997, income tax expense of $819,000
was allocated to the extraordinary gain on early retirement of debt.
A reconciliation of the expected amount of income tax expense,
calculated by applying the statutory federal income tax rate of 34 percent in
fiscal 1996 and 1997 and 35 percent in fiscal 1998 to income from continuing
operations before taxes, to the actual amount of income tax expense recognized
follows (in thousands):
Nine months ended Year ended Year ended
June 30, 1996 June 30, 1997 June 30, 1998
- ---------------------------------------------------------------------------
Expected expense $10,792 4,600 4,241
Change in valuation
allowance (8,884) (2,640) (2,058)
State income tax - 1,011 299
Other 4 - 45
- ---------------------------------------------------------------------------
Income tax
expense $ 1,912 2,971 2,527
===========================================================================
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities as
of June 30, 1997 and 1998 are presented below (in thousands):
1997 1998
- ------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 1,504 3,140
General business credit
carryforwards 2,189 2,189
Alternative minimum tax
credit carryforwards 5,044 4,905
Capitalized research
and development costs 4,223 452
Other 63 225
- ------------------------------------------------------------------------
Total gross deferred tax assets 13,023 10,911
Less - valuation allowance 2,058 -
- ------------------------------------------------------------------------
Net deferred tax assets 10,965 10,911
- ------------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment, principally
due to differences in depreciation 10,873 13,364
Other 92 74
- ------------------------------------------------------------------------
Total gross deferred tax liabilities 10,965 13,438
- ------------------------------------------------------------------------
Net deferred taxes $ - (2,527)
========================================================================
As of June 30, 1998, current deferred tax assets of $151,000 are
included in prepaid expenses and other current assets in the accompanying
balance sheet.
The net changes in the total valuation allowance for the nine months
ended June 30, 1996 and the years ended June 30, 1997 and 1998 were decreases of
$10,144,000, $4,655,000, and $2,058,000, respectively.
At June 30, 1998, the Company had accumulated net operating losses of
$7,850,000 available to offset future regular taxable income. These operating
loss carryforwards expire between the years 2006 and 2009. Utilization of these
net operating losses may be subject to limitations in the event of significant
changes in stock ownership of the Company.
Additionally, the Company has approximately $2,189,000 and $4,905,000
of research and experimentation and alternative minimum tax credit
carryforwards, respectively, available to offset future regular tax liabilities.
The research and experimentation credits expire between the years 2001 and 2007;
the alternative minimum tax credits carryforward indefinitely.
In assessing the realizably of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets are realizable. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of projected future
regular taxable income over the periods which the deferred tax assets are
deductible, management believes that the Company will realize the benefits of
these deductions. The amount of the deferred tax assets considered realizable,
however, could be reduced in the near term if estimates of future regular
taxable income during the carryforward period are reduced.
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(14) NET INCOME PER SHARE
In December 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, which
established new guidelines for the calculations of earnings per share. Earnings
per share for all prior periods have been restated to reflect the provisions of
this Statement.
The following are reconciliations of the numerators and denominators
of the basic and diluted earnings per share computations for "income before
extraordinary item" and "extraordinary item" for the years ended June 30, 1998
and 1997 and the nine months ended June 30, 1996, respectively (in thousands,
except share data):
Per common share Assuming dilution
- ---------------------------------------------------------------------------------------------------------------
1998
Net income $ 9,604 $ 9,604
Assuming conversion of convertible subordinated notes - 2,625
- ---------------------------------------------------------------------------------------------------------------
Net income, as adjusted $ 9,604 $ 12,229
===============================================================================================================
Outstanding common shares 11,154,271 11,154,271
Outstanding stock options - 269,898
Assuming conversion of convertible subordinated notes - 3,147,109
- ---------------------------------------------------------------------------------------------------------------
Adjusted shares 11,154,271 14,571,278
===============================================================================================================
1997
Net income before extraordinary item 10,558 10,558
Net income 13,832 13,832
- ---------------------------------------------------------------------------------------------------------------
Outstanding common shares 11,118,825 11,118,825
Outstanding stock options - 14,168
Assuming conversion of convertible notes - 27,329
- ---------------------------------------------------------------------------------------------------------------
Adjusted shares 11,118,825 11,160,322
===============================================================================================================
1996
Net income $ 29,829 $ 29,829
Assuming conversion of convertible notes - 59
- ---------------------------------------------------------------------------------------------------------------
Net income, as adjusted $ 29,829 $ 29,888
- ---------------------------------------------------------------------------------------------------------------
Outstanding common shares 9,139,465 9,139,465
Outstanding stock options - 128,553
Assuming conversion of convertible notes - 75,000
- ---------------------------------------------------------------------------------------------------------------
Adjusted shares 9,139,465 9,343,018
===============================================================================================================
Options and warrants to purchase 561,132, 792,361 and 899,131 shares
of common stock, at prices ranging from $7.50 to $24.00 per share were
outstanding for the nine months ended June 30, 1996 and the years ended June 30,
1997 and 1998, respectively. These were not included in the computation of
diluted earnings per share because the options' and warrants' exercise prices
were greater than the average market price of the common shares during the nine
months ended June 30, 1996 and the years ended June 30, 1997 and 1998.
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34
(15) EMPLOYEE BENEFIT PLAN
The Company has a defined contribution retirement plan which covers
all employees and officers. For the nine months ended June 30, 1996 and the
years ended June 30, 1997 and 1998, the Company contributed $0, $95,000 and
$143,000, respectively, to the plan. The Company has the right, but not the
obligation, to make contributions to the plan in future years at the discretion
of the Company's Board of Directors.
(16) COMMITMENTS
INTEGRATION AND OPERATIONS CONTRACTS
On August 13, 1997, the Company initiated a letter agreement with
Boeing Corporation, a major subcontractor, for standard integration and
operation services to the Company for future missions that were not already
provided for under its contract for missions to the Mir Space Station. In August
1998, this letter agreement became a letter contract whereby Boeing Corporation
will provide integration and operations services required to successfully
complete four science missions (one single module mission and three double
module missions) and two logistics double module missions. Additionally, there
are several tasks that are separately priced to yield a committed letter
contract value of $17,321,000, which provides funding through December 31, 1998.
As of June 30, 1998, $4,553,000 has been incurred under this commitment.
MODULE CONSTRUCTION CONTRACT
During fiscal year 1997, the Company entered into a $36,800,000
cost-plus-fee contract with Boeing Corporation, to construct a new research
module with associated double module hardware. The Company expects to take
delivery of the module in the spring of 1999. The Company has incurred
approximately $29,523,000 in construction costs through June 30, 1998.
JOINT VENTURE
During June 1998, the Company entered into a joint venture agreement
with Guigne Technologies Limited for the purpose of developing, fabricating,
marketing and sales of SpaceDRUMS(TM) services. In accordance with the joint
venture agreement, the Company has agreed to contribute an aggregate of
$2,000,000 of working capital to the joint venture at varying dates and amounts
through October 1999. The Company's contributions will be in the form of an
unsecured non-interest bearing note. Through June 30, 1998, the Company has made
no contributions to the joint venture.
LEASES
The Company is obligated under capital leases for equipment and
noncancelable operating leases for equipment, office space, storage space, and
the land for a payload processing facility. Future minimum payments under these
capital leases and noncancelable operating leases are as follows (in thousands):
Capital Operating
Year ending June 30, leases leases
- ------------------------------------------------------------------------
1999 $ 68 828
2000 68 722
2001 39 639
2002 9 453
2003 and thereafter - 4,068
- ------------------------------------------------------------------------
184 $ 6,710
Less: amount representing =========
interest between 9% and 12% (18)
- ------------------------------------------------
Percent value of net minimum
capital lease payment $ 166
- ------------------------------------------------
Rent expense for the nine months ended June 30, 1996 and the years
ended June 30, 1997 and 1998, was approximately $183,000, $456,000, and
$503,000, respectively.
(17) SUBSEQUENT EVENT
On July 1, 1998, the Company acquired the outstanding common stock of
Johnson Engineering Corporation ("Johnson Engineering"), a privately held
corporation, for $24,500,000. This acquisition was accounted for using the
purchase method. Johnson Engineering has a contract with NASA to provide a
number of human space flight associated services and products used on the Space
Shuttle and International Space Station Programs. These services include program
management support, engineering services, and the development and fabrication of
training and flight crew equipment.
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35
(18) SUMMARY OF SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for
the previous three fiscal periods (in thousands):
Three months ended
---------------------------------------------------------
September 30 December 31 March 31 June 30
- ----------------------------------------------------------------------------------------------------------------
Year ended June 30, 1998
Revenue $ 2,537 17,756 18,997 24,797
Income (loss) from operations (5,685) 5,833 5,214 7,335
Net income (loss) (5,654) 5,727 4,891 4,640
Net income (loss) per share - basic (0.51) 0.51 0.44 0.42
Net income (loss) per share - diluted (0.51) 0.43 0.37 0.35
- ----------------------------------------------------------------------------------------------------------------
Year ended June 30, 1997
Revenue $ 113 22,992 15,031 18,465
Income (loss) from operations (6,171) 12,148 3,914 2,771
Net income (loss) before extraordinary item (7,074) 11,060 3,207 3,365
Net income (loss) (3,800) 11,060 3,207 3,365
Net income (loss) per share - basic (0.34) 1.00 0.29 0.30
Net income (loss) per share - diluted (0.34) 0.99 0.29 0.28
- ----------------------------------------------------------------------------------------------------------------
Period ended June 30, 1996
Revenue $ - - 56,397
Income (loss) from operations (5,003) (6,458) 42,717
Net income (loss) (5,274) (6,022) 41,125
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) per share - basic (0.98) (0.55) 3.72
Net income (loss) per share - diluted (0.98) (0.55) 3.63
================================================================================================================
35
36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Company's directors and executive
officers; as well as with respect to Item 405 of Regulation S-K will be
contained in the Company's definitive 1998 Proxy Statement in accordance with
the Company's annual meeting of stockholders and is hereby incorporated by
reference thereto.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be contained in the
Company's definitive 1998 Proxy Statement with respect to the Company's annual
meeting of stockholders and is hereby incorporated by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item will be contained in the
Company's definitive 1998 Proxy Statement with respect to the Company's annual
meeting of stockholders and is hereby incorporated by reference thereto.
.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will be contained in the
Company's definitive 1998 Proxy Statement with respect to the Company's annual
meeting of stockholders and is hereby incorporated by reference thereto.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of the report:
1. Financial Statements.
The following consolidated financial statements of SPACEHAB,
Incorporated and subsidiary and related notes, together with the
report thereon of KPMG Peat Marwick LLP, the Company's independent
auditors, are set forth herein as indicated below.
PAGE
Report of KPMG Peat Marwick LLP, Independent Public Accountants............................... 19
Consolidated Balance Sheets .................................................................. 20
Consolidated Statements of Income ............................................................ 21
Consolidated Statements of Stockholders' Equity (Deficit)..................................... 23
Consolidated Statements of Cash Flows......................................................... 23
Notes to Consolidated Financial Statements.................................................... 24
36
37
2. Financial Statement Schedules.
All financial statement schedules required to be filed in Part IV,
Item 14 (a) have been omitted because they are not applicable, not
required, or because the required information is included in the
financial statements or notes thereto.
3. Exhibits.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
2.1 */ Asset Purchase Agreement, dated February 5, 1997, by and among Spacehab Acquisition Corp.; SPACEHAB,
Incorporated; Astrotech Space Operations, L.P.; and Northrop Grumman Corporation.
2.2 */ Amendment No. 1 to Asset Purchase Agreement, dated as of February 12, 1997, by and among Spacehab Acquisition
Corp; SPACEHAB, Incorporated; Astrotech Space Operations, L.P.; and Northrop Grumman Corporation.
3.1* Amended and Restated Articles of Incorporation of the Company.
3.2* Amended and Restated By-Laws of the Company.
10.1* NAS 9-18371, dated November 30, 1990, between the National Aeronautics and Space Administration ("NASA") and
the Registrant (including the amendments thereto) (the "CMAM Contract").
10.2* Cost Plus Incentive Fee Contract (Number SHB 1002), dated July 11, 1990, between the Registrant and McDonnell
Douglas Corporation, McDonnell Douglas Aerospace-Huntsville Division ("McDonnell Douglas") (including the
amendments thereto) (the "CMAM I/O Contract").
10.3* Cost Plus Incentive Fee Contract (Number SHB 1009), dated November 23, 1994, between the Registrant and
McDonnell Douglas (including the amendments thereto) (the "Mir I/O Contract").
10.4* Cost Plus Incentive Fee Contract (Number SHB 1010), dated November 23, 1994, between the Registrant and
McDonnell Douglas (including the amendments thereto) (the "Double Module Contract").
10.5* NAS 9-19250, dated July 14, 1995, between NASA and the Registrant (including amendments thereto) (the "Mir
Contract").
10.6* Amended and Restated Representation Agreement, dated August 15, 1995, by and between the Registrant and
Mitsubishi Corporation.
10.7* Letter Agreement dated August 15, 1995, by and between the Registrant and Mitsubishi Corporation.
10.8* Exclusive European Broker Agreement, dated February 15, 1989, by and between Intospace, GmbH and the
Registrant.
37
38
10.9* Memorandum of Agreement, dated July 28, 1995, between the Registrant and McDonnell Douglas Corporation.
10.10* Amended and Restated Credit Agreement (the "Credit Agreement"), dated December 29, 1993, among the Registrant,
the Insurers listed therein, McDonnell Douglas Corporation, the Chase Manhattan Bank (National Association),
as agent.
10.11* Amendment No. 1 to the Credit Agreement, dated July 18, 1995.
10.12*** Amended and Restated Credit Agreement, dated August 20, 1996 among the Registrant, the Insurers listed therein
and the Chase Manhattan Bank (National Association), as agent.
10.13* SPACEHAB, Incorporated Directors' Stock Option Plan.
10.14* SPACEHAB, Incorporated 1994 Stock Incentive Plan.
10.15*** Office Building Lease Agreement, dated November 30, 1995, between The Equitable Life Assurance Society of The
United States and the Registrant (Vienna, Virginia headquarters lease).
10.16* Agreement of Sublease, dated April 9, 1991, by and between Eastern American Teak Corporation and the Registrant
(land lease for Cape Canaveral, Florida facility).
10.17* Letter Agreement, dated March 24, 1995, between Alenia Spazio and the Registrant.
10.18* Consulting Agreement, dated August 7, 1995, by and between CSP Associates, Inc. and the Registrant.
10.19*** Extension of Consulting Agreement between CSP Associates, Inc. and the Registrant, dated February 21, 1996.
10.20*** Consulting Agreement, dated August 14, 1996, by and between Gordon S. Macklin and the Registrant.
10.21** Employment and Non-Interference Agreement, dated December 27, 1995, between the Company and Chester M. Lee.
10.22** Employment and Non-Interference Agreement, dated December 27, 1995, between the Company and David A. Rossi.
10.23** Employment and Non-Interference Agreement, dated December 27, 1995, between the Company and Nelda J. Wilbanks.
10.24** Employment and Non-Interference Agreement, dated December 27, 1995, between the Company and M. Dale Steffey.
10.25** Employment and Non-Interference Agreement, dated December 27, 1995, between the Company and Margaret E.
Grayson.
10.26** Employment and Non-Interference Agreement, dated December 27, 1995, between the Company and Richard P. Hora.
38
39
10.27** Indemnification Agreement, dated December 27, 1995, between the Company and Dr. Shelley A. Harrison.
10.28** Indemnification Agreement, dated December 27, 1995, between the Company and Dr. Edward E. David, Jr.
10.29** Indemnification Agreement, dated December 27, 1995, between the Company and Richard P. Hora.
10.30** Indemnification Agreement, dated December 27, 1995, between the Company and Robert A. Citron.
10.31** Indemnification Agreement, dated December 27, 1995, between the Company and Alvin L. Reeser.
10.32** Indemnification Agreement, dated December 27, 1995, between the Company and James R. Thompson.
10.33** Indemnification Agreement, dated December 27, 1995, between the Company and Jeffrey Schuss.
10.34** Indemnification Agreement, dated December 27, 1995, between the Company and Dr. Brad S. Meslin.
10.35** Indemnification Agreement, dated December 27, 1995, between the Company and Chester M. Lee.
10.36** Indemnification Agreement, dated December 27, 1995, between the Company and David A. Rossi.
10.37** Indemnification Agreement, dated December 27, 1995, between the Company and Dr. Shi H. Huang.
10.38** Indemnification Agreement, dated December 27, 1995, between the Company and Nelda J. Wilbanks.
10.39** Indemnification Agreement, dated December 27, 1995, between the Company and M. Dale Steffey.
10.40** Indemnification Agreement, dated December 27, 1995, between the Company and Margaret E. Grayson.
10.41** Indemnification Agreement, dated December 27, 1995, between the Company and Dr. Udo Pollvogt.
10.42** Indemnification Agreement, dated December 27, 1995, between the Company and Ernesto Vallerani.
10.43** Indemnification Agreement, dated December 27, 1995, between the Company and Hironori Aihara.
10.44***** NASDA Contract, dated July 1996, between the Registrant and Mitsubishi Corporation (the "NASDA/ESA Contracts").
39
40
10.45***** ESA Contract, dated September 1996, between the Registrant and INTOSPACE GmbH (the "NASDA/ESA Contracts").
10.46*// Amendment to the Agreement, dated as of August 27, 1996, between the Registrant and Mitsubishi Corporation.
10.47*// Letter Contract Number SHB 1014, dated August 13, 1997, between the Registrant and McDonnell Douglas
Aerospace - Huntsville.
10.48*// Letter Agreement, dated July 23, 1997, between the Registrant and Daimler-Benz.
10.49*// Cost Plus Fee Contract (Number SHB 1013), dated July 31, 1997, between the Registrant and McDonnell Douglas
Corporation, McDonnell Douglas Aerospace Huntsville Division (the "Research Double Module Contract").
10.50*// Amendment dated March 8, 1996, to Office Building Lease Agreement, dated November 30, 1995, between The
Equitable Life Assurance Society of the United States and the Registrant (Vienna, Virginia headquarters lease).
10.51*// Agreement of Sublease, dated February 26, 1996, by and between Barrios Technology, Inc. and the Registrant
(Expansion of Houston Facility).
10.52*// Office Building Lease Agreement, dated October 6, 1993, between Astrotech and the Secretary of the Air Force
(Lease number SPCVAN -2-94-0001).
10.53*// Office Building Lease Agreement, dated May 30, 1983, between Astrotech and Randolph Park Associates II Limited
Partnership (Silver Spring, Maryland headquarters lease).
10.54*// Loan and Security Agreement, dated June 16, 1997, between the Registrant, Astrotech and Signet Bank. (the
"Revolving Credit Agreement").
10.55*// Loan and Security Agreement, dated July 14, 1997, between Astrotech and the CIT Group/Equipment Financing, Inc.
(the "Term Loan Agreement").
10.56*// Employment and Non-Interference Agreement, dated April 1, 1997, between the Company and Dr. Shelly A. Harrison.
10.57*// Employment and Non-Interference Agreement, dated April 10, 1997, between the Company and John M. Lounge.
10.58*// Indemnification Agreement, dated October 22, 1996, between the Company and John M. Lounge.
10.59*// Consulting Agreement, dated August 15, 1997, between Gordon S. Macklin and the Registrant.
10.60*// Extension of Consulting Agreement, dated August 18, 1997, between CSP Associates, Inc. and the Registrant.
10.61*// Consulting Agreement, dated October 24, 1996, between Harbor Securities and the Registrant.
10.62*// Teaming Agreement, dated May 29, 1997, between United Space Alliance, LLC (USA) and the Registrant.
40
41
10.63*// Letter Agreement, dated July 30, 1997, between RSC Energia (Energia) and the Registrant.
10.64*// Letter of Cancellation, dated June 10, 1997, of the Memorandum of Agreement, dated July 28, 1995, between
McDonnell Douglas and the Registrant (with attachment thereto).
10.65*// Royalty Agreement, dated May 1, 1997, between the University of Maryland Biotechnical Institute (UMBI) and the
Registrant.
10.66*// Agreement, dated July 15, 1997, between UAB Research Foundation on behalf of the University of Alabama at
Birmingham, Center for Macromolecular Crystallography and the Registrant (including amendments thereto).
10.67*// Letter Agreement, dated April 26, 1996, between Pennsylvania State University, Center for Cell Research and the
Registrant.
10.68*// SA42, dated July 16, 1997, between NASA and the Registrant (Amendment to the Mir Contract).
10.69*/// ESA Contract, Dated October 10, 1997, between the Registrant and INTOSPACE GmbH (the "ESA Contract")
10.70*//// NAS 9-97199, dated December 21, 1997, between the Registrant and NASA (the "REALMS Contract").
10.71*//// Letter Contract Number SHB 1014, dated August 13, 1997, between the Registrant and McDonnell Douglas
Aerospace-Huntsville (as amended).
10.72*//// Employment Agreement and Non-Interference Agreement dated January 15, 1998, between the Company and Chester
M. Lee.
10.72*//// Employment Agreement and Non-Interference Agreement dated January 15, 1998, between the Company and David A.
Rossi.
10.73*//// Amendment number 1 to Employment Agreement and Non-Interference Agreement dated April 1, 1997, between the
Company and Shelley A. Harrison.
10.74*//// Amendment number 1 to Loan and Security Agreement dated December 31, 1997, between the Company and First Union
National Bank.
10.75 STS-95 Agreement A, dated December 20, 1997, between the Registrant and Mitsubishi Corporation
10.76 STS-95 Agreement B, dated March 18, 1998, between the Registrant and Mitsubishi Corporation
10.77 NHK Contract, dated May 8, 1998, between the Registrant and Mitsubishi Corporation
10.78 SHB98001, dated January 31, 1998, between the Registrant and RSC Energia
10.79 SHB98002, dated February 11, 1998, between the Registrant and Daimler-Benz Aerospace, Space Infrastructure
Division
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10.80 CSA Contract, dated May 21, 1998, between the Registrant and the Canadian Space Agency
10.81 Gemini Office Building Lease Agreement, dated January 14, 1998, between the Registrant and Puget of Texas
10.82 SHB98006, dated July 8, 1998, between the Registrant and Daimler-Benz Aerospace AG, Raumfahrt-Infrastuktur
10.83 Modification No. 22 to SHB1014, dated July 22, 1998, between the Registrant and McDonnell Douglas Corporation,
a Wholly-Owned Subsidiary of The Boeing Company
10.84 Capital Office Park Lease as amended, dated April 23, 1998, between Astrotech and Eleventh Springhill Lake
Associates L.L.P.
11. Statement regarding Computation of Per Share Earnings.
21.*// Subsidiary of the Registrant.
23. Consent of KPMG Peat Marwick LLP.
27. Financial Data Schedule.
* Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 33- 97812) and all
amendments thereto, originally filed with the Securities and Exchange Commission on October 5, 1995.
** Incorporated by reference to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1995,
filed February 14, 1996.
*** Incorporated by reference to the Registrant's Report on Form 10-K for the fiscal year ended June 30, 1996,
filed with the Securities and Exchange Commission on September 17, 1996.
**** Incorporated by reference to the Registrant's Annual Report on Form 10-K/A for the year ended June 30, 1996,
filed with the Securities and Exchange Commission on December 20, 1996.
***** Incorporated by reference to the Registrant's Report on Form 10-Q/A for the quarter ended September 30, 1996,
filed with the Securities and Exchange Commission on December 20, 1996.
*/ Incorporated by reference to the Registrant's Report on Form 8-K filed with the Securities and Exchange
Commission on February 27, 1997.
*// Incorporated by reference to the Registrant's Report on Form 10-K for the fiscal year ended June 30, 1997,
filed with the Securities and Exchange Commission on September 12, 1997.
*/// Incorporated by reference to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1997,
filed November 6, 1997.
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*//// Incorporated by reference to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1997,
filed February 5, 1998.
(b) The following Reports on Form 8-K were filed by the Registrant during the period covered by this report.
1. Report on Form 8-K filed on October 29, 1997 disclosing the Registrant's completion of an offering of $55
million of its 8% Convertible Subordinated Notes due 2007 and the closing on an over-allotment option for an
additional $8.250 million of its 8% Convertible Subordinated Notes due 2007.
2. Report on Form 8-K filed on January 21, 1998 disclosing the Registrant's retirement of Chester M. Lee as
president and appointment of David A. Rossi, current senior Vice President of Business Development, to
president, effective on January 14, 1998.
3. Report on Form 8-K was dated on July 1, 1998 and filed on July 13, 1998 announcing the Registrant's
acquisition of all of the outstanding shares of capital stock of Johnson Engineering Corporation.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
SPACEHAB, Incorporated
By: /s/ Dr. Shelley A. Harrison
-----------------------------------
Dr. Shelley A. Harrison
Chairman of the Board and
Chief Executive Officer
Date: September 16, 1998
By: /s/ Margaret E. Grayson
-----------------------------------
Margaret E. Grayson Vice
President of Finance, Treasurer
and Assistant Secretary (Principal
Accounting Officer and CFO)
Date: September 16, 1998
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of this
registrant in the capacities and on the dates indicated.
Director September 16, 1998
- -------------------------------
Hironori Aihara
Director September 16, 1998
- -------------------------------
Robert A. Citron
/s/ Dr. Edward A. David, Jr. Director September 16, 1998
- -------------------------------
Dr. Edward A. David, Jr.
Director September 16, 1998
- -------------------------------
Dr. Shi H. Huang
/s/ Chester M. Lee Director September 16, 1998
- -------------------------------
Chester M. Lee
/s/ Dr. Brad M. Meslin Director September 16, 1998
- -------------------------------
Dr. Brad M. Meslin
/s/ Gordon S. Macklin Director September 16, 1998
- -------------------------------
Gordon S. Macklin
/s/ Dr. Udo Pollvogt Director September 16, 1998
- -------------------------------
Dr. Udo Pollvogt
/s/ Alvin L. Reeser Director September 16, 1998
- -------------------------------
Alvin L. Reeser
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/s/ James R. Thompson Director September 16, 1998
- -------------------------------
James R. Thompson
Director September 16, 1998
- -------------------------------
Guiseppe Viriglio
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