UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2004
OR
For the transition period from to
Commission File No. 0-27206
SPACEHAB, Incorporated
(Exact name of registrant as specified in this charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
12130 Highway 3, Building 1
Webster, Texas 77598-1504
(713) 558-5000
The number of shares of Common Stock outstanding as of November 10, 2004:
Class
Number of Shares Outstanding
Common Stock
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 whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). Yes ¨ No x
SPACEHAB, INCORPORATED AND SUBSIDIARIES
SEPTEMBER 30, 2004 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Item 1.
Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2004 and June 30, 2004
Unaudited Condensed Consolidated Statements of Operations for the three months ended September 30, 2004 and 2003
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2004 and 2003
Notes to Unaudited Condensed Consolidated Financial Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Controls and Procedures
OTHER INFORMATION
Legal Proceedings
Exhibits
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DEFINITIONS
As used in this Form 10-Q, the abbreviations and acronyms contained herein have the meanings set forth below. Additionally, the terms “SPACEHAB”, “the Company”, “we”, “us” and “our” refer to SPACEHAB, Incorporated and its subsidiaries, unless the context clearly indicates otherwise.
APB
Accounting Principles Board
ASO
Astrotech Space Operations
Astrotech
Boeing
The Boeing Company
CM
Configuration Management
CMC
Cargo Mission Contract
SPACEHAB common stock
FASB
Financial Accounting Standards Board
ISS
International Space Station
JAXA
Japan Aerospace Exploration Agency
JE
Johnson Engineering Corporation
JETIS
Japanese Experiment Thermal Incubator Service
Lloyd’s
Lloyd’s of London
Lockheed Martin
Lockheed Martin Corporation
NASA
National Aeronautics and Space Administration
ORU
Orbital Replacement Unit
PI&C
Program Integration and Control
RDM
Research Double Module
ReALMS
Research and Logistics Mission Support
SEC
Securities and Exchange Commission
SFAS
Statement of Financial Accounting Standards
SFS
SPACEHAB Flight Services
SGS
SPACEHAB Government Services
SMI
Space Media, Inc.
SPF
Spacecraft Processing Facility
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PART 1: FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share data)
September 30,
2004(unaudited)
ASSETS
Cash and cash equivalents
Restricted cash
Short-term investments
Restricted short-term investments
Accounts receivable, net
Prepaid expenses and other current assets
Total current assets
Property and equipment, net of accumulated depreciation and amortization of $51,040 and $49,755, respectively
Deferred financing costs, net
Other assets, net
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Revolving loan payable
Mortgage loan payable, current portion
Accounts payable
Accounts payable-EADS
Accrued interest
Accrued expenses
Accrued subcontracting services
Deferred revenue, current portion
Total current liabilities
Accrued contract cost and other
Deferred revenue, net of current portion
Mortgage loan payable, net of current portion
Convertible subordinated notes payable
Total liabilities
Commitments and contingencies
Stockholders’ equity
Preferred Stock, no par value, convertible, 2,500,000 shares authorized, 1,333,334 shares issued and outstanding, (liquidation preference of $12,000)
Common stock, no par value, 30,000,000 shares authorized, 12,721,951 and 12,688,062 shares issued, respectively
Less treasury stock, 116,100 and 116,100 shares, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to unaudited condensed consolidated financial statements.
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Unaudited Condensed Consolidated Statements of Operations
Three Months
Ended September 30,
Revenue
Costs of revenue
Gross profit
Operating expenses
Selling, general and administrative
Research and development
Recovery of nonrecurring charge, loss of Research Double Module
Total operating expenses
Income from operations
Interest expense
Interest and other income, net
Income before income taxes
Income tax expense
Net income
Income per share:
Net income per share – basic
Shares used in computing net income per share – basic
Net income per share – diluted
Shares used in computing net income per share – diluted
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Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization
Loss on asset sales and write-offs
Changes in assets and liabilities:
Increase in accounts receivable
Increase in prepaid expenses and other current assets
Decrease in other assets
Decrease in accounts payable, accounts payable-EADS and accrued expenses
Increase (decrease) in accrued subcontracting services
Decrease in deferred revenue
Decrease in long-term contracts costs and other liabilities
Net cash used in operating activities
Cash flows from investing activities
Payments for flight assets under construction
Purchases of property, equipment and leasehold improvements
Proceeds received from sale of property and equipment
Sale of short-term investments
Investments in restricted cash
Net cash provided by investing activities
Cash flows from financing activities
Net borrowing under revolving loan payable
Payment of mortgage loan
Payment of convertible notes payable to shareholder
Proceeds from issuance of common stock, net of expenses
Purchase of treasury stock
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
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1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring accruals, except as discussed elsewhere within, necessary for a fair presentation of the consolidated financial position of SPACEHAB, Incorporated and subsidiaries (“SPACEHAB” or the “Company”) as of September 30, 2004, and the results of its operations and cash flows for the three months ended September 30, 2004 and 2003. However, the condensed consolidated financial statements are unaudited, and do not include all related footnote disclosures. Certain amounts presented for prior periods have been reclassified to conform with the fiscal year 2005 presentation.
The consolidated results of operations for the three month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the full year. The Company’s results of operations have fluctuated significantly from quarter to quarter. The interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements appearing in the Company’s Annual Report on Form 10-K for the year ended June 30, 2004.
The Company’s cash and short-term investments were approximately $6.2 million, of which $3.3 million is restricted, as of September 30, 2004. On October 20, 2004 the Company received $8.2 million from U.S. National Aeronautics and Space Administration (“NASA”) in indemnification of losses suffered in the Space Shuttle Columbia accident. Management believes that the Company has sufficient liquidity, including cash and short-term investments and cash anticipated or expected to be generated from operations to fund ongoing operations beyond the remainder of this fiscal year. We also expect to utilize existing cash, cash anticipated from future operations and any potential additional proceeds from NASA in settlement of the Company’s claims related to losses in the Space Shuttle Columbia tragedy, to support strategies for new business initiatives and reduce long term debt.
On February 1, 2003, the Space Shuttle Columbia was lost upon reentry in a tragic accident. SPACEHAB’s Research Double Module (“RDM”) was flown aboard the Columbia mission, flight STS-107, carrying research payloads for NASA and other customers. The Company provided the RDM and related services to NASA under the Research and Logistics Mission Support (“ReALMS”) contract with NASA. As a result of the accident, the RDM was totally destroyed, leading to the following:
Contract Claim. In January 2004 the Company filed a formal proceeding with NASA seeking indemnification under the Company’s ReALMS contract in the amount of $87.7 million for the value of the Company’s RDM and related equipment that was destroyed during the STS-107 Space Shuttle Columbia tragedy. NASA responded to this contract claim on October 5, 2004. NASA’s determination states that its liability is limited under the ReALMS contract to $8.0 million. The Company received payment of $8.2 million, which included $0.2 million of interest, from NASA in October 2004. The Company has the right to appeal NASA’s decision to deny its claim for indemnification in excess of $8.0 million. The appeal can be filed with either the Armed Services Board of Contract Appeals or the U.S. Court of Federal Claims. SPACEHAB is evaluating its options in appealing NASA’s determination.
Lloyd’s Complaint. In January 2004 Lloyd’s of London (“Lloyd’s”), the Company’s insurer for the RDM, filed a complaint in the United States District Court for the Western District of Washington seeking the return of the $17.7 million Lloyd’s had paid to the Company under the RDM insurance policy alleging that, among other things, (i) such proceeds were paid erroneously primarily due to the fact that NASA had not paid indemnification due to the Company prior to the payment of the insurance proceeds, (ii) the Company and its insurance broker misled Lloyd’s in issuing the policy, and (iii) the Company has not cooperated with Lloyd’s in protecting Lloyd’s right of subrogation. In February 2004 Lloyd’s withdrew its complaint from the United States District Court and filed a similar complaint in Superior Court of the State of Washington. On November 1, 2004 SPACEHAB filed a motion with the Superior Court of the State of Washington to dismiss under forum non conveniens. The Company believes that Lloyd’s complaint is without merit and will continue to respond to the complaint accordingly.
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Tort Claim. On November 8, 2004 the Company filed a second claim with NASA seeking damages of $79.7 million under the Federal Tort Claims Act for the loss of the RDM resulting from NASA’s alleged negligence leading to the destruction of the Space Shuttle Columbia and the loss of the RDM. The Company’s claim represents its loss of $87.7 million less the $8.0 million recovered from NASA. Under federal tort claim procedures, NASA has statutory deadlines for responding to such claims. In the event that the Company’s administrative claim is denied, the Company would have the right to pursue the claim in the Federal District Court.
2. Earnings per Share
The following are reconciliations of the numerators and denominators of the basic and diluted earnings per share (“EPS”) computations for the three month periods ended September 30, 2004 and 2003 (in thousands, except per share data):
Three months ended
September 30, 2004
September 30, 2003
Basic EPS:
Income available to common stockholders
Effect of dilutive securities:
Convertible notes payable
Options and warrants, using the treasury stock method
Convertible preferred shares
Diluted EPS:
Convertible notes payable outstanding as of September 30, 2004, convertible into 4,642,202 shares of common stock at $13.625 per share and due October 2007, were not included in the computation of diluted EPS for the three months ended September 30, 2004 and 2003, as the conversion price of the convertible notes payable per share were greater than the average market price of the common shares during the periods.
Options to purchase 1,191,697 shares of common stock, at prices ranging from $3.44 to $11.75 per share, were outstanding at September 30, 2004 but were not included in diluted EPS as the option prices were greater than the average market price of the common shares during the three months ended September 30, 2004. The options expire between October 21, 2004 and February 12, 2011.
Options to purchase 2,100,582 shares of common stock, at prices ranging from $0.93 to $12.00 per share, were outstanding at September 30, 2003 but were not included in diluted EPS as the option prices were greater than the average market price of the common shares during the three months ended September 30, 2003. The options expire between October 9, 2003 and August 7, 2013.
3. Revenue Recognition
SPACEHAB’s business units’ revenue is derived primarily from long-term contracts with the U.S. Government, U.S. Government contractors and commercial customers. Revenue under these contracts are recognized using the methods described below. Estimating future costs and, therefore, revenues and profits, is a process requiring a high degree of management judgment. Management bases its estimate on historical experience and on various assumptions that are believed to be reasonable under the circumstances including the negotiation of an equitable adjustment on the ReALMS contract which was added to the contract as a pricing amendment due to the delay in the return to flight of
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the space shuttle. Costs to complete include, when appropriate, material, labor, subcontracting costs, lease costs, commissions, insurance and depreciation. Our business segment personnel perform periodic contract status and performance reviews. In the event of a change in total estimated contract cost or profit, the cumulative effect of such change is recorded in the period that the change in estimate occurs.
A Summary of Revenue Recognition Methods Follows:
Business Segment
Services/Products Provided
Contract Type
Method of Revenue Recognition
Firm Fixed Price – Mission Specific
For the three months ended September 30, 2004, the Company recognized revenue of approximately $1.8 million under the Japanese Experiment Thermal Incubator Service (“JETIS”) contract with the Mitsubishi Corporation, representing the Japanese Aerospace Exploration Agency (“JAXA”), that was entered into in 2000 and originally scheduled to fly aboard SPACEHAB’s RDM. Subsequent to the suspension of the space shuttle flights and destruction of SPACEHAB’s RDM, we contracted for construction of certain space research equipment and for research space aboard the International Space Station (“ISS”) and up to three Russian Progress cargo missions with V.J.F. Russian Consulting, representing RSC Energia, a major Russian aerospace manufacturer and mission operator. Revenue on this contract is recognized on the percentage-of-completion method as costs are incurred.
The ReALMS contract expired January 31, 2004 and support for STS-121, 116, and 118 will continue under a subcontract with Lockheed Martin Corporation (“Lockheed Martin”), effective February 1, 2004. SPACEHAB is currently providing these services under letter contract and is in final contract negotiations with Lockheed Martin for this new contract. Pending finalization of contract negotiations with Lockheed Martin, the Company is providing asset maintenance and continuing services in anticipation of the contractual missions under letter agreements, generally entered into on a month-to-month basis. Revenues for the Lockheed Martin agreement are being accounted for under the percentage-of-completion method based on costs incurred over the period of the agreement.
For the period ended March 31, 2003, the Company recognized a non-recurring charge of $50.3 million net of insurance proceeds, on the loss of its RDM in the Space ShuttleColumbia accident. Upon notification by NASA of its acceptance of the Company’s claim for indemnification of $8.0 million plus interest of $0.2 million, the Company recognized a recovery of $8.2 million of previously recognized loss in the period ended September 30, 2004.
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4. Statements of Cash Flows - Supplemental Information
5. Credit Facilities
On August 29, 2002 the Company entered into a $5.0 million line of credit with a financial institution. The term of this credit facility is through August 28, 2005. Covenants include a liquidity ratio and a limited pledge of $5.6 million of the Company’s investment account. The restriction on the Company’s investment balance is limited to 111% of the Company’s borrowings on the line of credit. In June 2004 the credit agreement was amended again to remove the financial covenant on capital expenditures. As of September 30, 2004 the outstanding balance on this line of credit was $2.5 million and the restricted investment balance was $2.8 million. The weighted average interest rate for the three months ended September 30, 2004 was 6.35%.
On August 30, 2001 our Astrotech subsidiary completed a $20.0 million financing of its Spacecraft Processing Facility (“SPF”) expansion project in Titusville, Florida (the “term loan”) with a financial institution. The proceeds of this financing were used to complete the construction of the SPF and supporting infrastructure. The term loan was collateralized primarily by the multi-year payload processing contracts with The Boeing Company (“Boeing”) and Lockheed Martin and by the building. The net book value of the building as of September 30, 2004 was $32.7 million. Interest accrued on the outstanding principal balance at a LIBOR-based rate, adjusted quarterly. The term loan was scheduled to mature on January 15, 2011. The term loan was converted from a construction loan to a term loan on December 31, 2001. Amortization of term loan principal began on January 15, 2002 on a quarterly basis through the maturity date.
On October 1, 2003 Astrotech was notified by Boeing that it was exercising its termination rights with regards to its financial guarantees under the contract agreement with Astrotech for payload processing support services for the Delta launch vehicle program. Boeing indicated that the decision to terminate its guarantees for future Astrotech services was based on the downturn of the commercial expendable launch market rather than performance related considerations. Astrotech was in full compliance with the contract terms at the time of the termination. Under the contract provision related to termination of its financial guarantees, Boeing paid Astrotech $17.5 million representing consideration of future contract payments previously used to collateralize the obligation. On December 31, 2003, the Company repaid $9.5 million of principal on the term loan.
In conjunction with the original financing, a swap agreement was required to be entered into to provide for a fixed rate of interest under the term loan commitment beginning January 15, 2002. The fixed rate of interest on the outstanding principal balance was 5.62% plus 225 basis points. The objective of the swap was to eliminate the variability of cash flows in the interest payments for the total amount of the variable rate debt, the sole source of which are changes in the USD-LIBOR-BBA interest rate. Due to the repayment of the Boeing portion of the term loan and the subsequent amendment of the loan agreement, the swap was no longer effective as a hedge. The unrealized loss in other comprehensive loss for the portion of the debt that was repaid in December 2003 was recorded as interest expense in the period ended December 31, 2003 in the amount of $0.8 million. The Company recognized interest expense of $0.4 million for the unamortized debt placement costs related to the debt repayment in the period ended December 31, 2003. The Company recognized as additional interest expense the unamortized debt placement costs of $0.2 million and the balance of the deferred loss on the swap in other comprehensive loss of $0.5 million in the third quarter of fiscal year 2004 in connection with the amendment of the loan agreement.
The term loan agreement was amended on January 29, 2004, whereby the maturity date was shortened to January 2007, the interest rate was fixed at 5.5% and the hedge requirement was eliminated. For the fiscal year ended June 30, 2004, approximately $11.4 million of principal was repaid and the outstanding balance was $5.6 million as of June 30, 2004. For the three months ended September 30, 2004, approximately $0.5 million was repaid and the outstanding balance was $5.1 million as of September 30, 2004.
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6. Segment Information
Based on our organization, we operate in four business segments: SFS, Astrotech, SGS, and SMI. SFS was founded to commercially develop space habitat modules to operate in the cargo bay of the space shuttles. SFS provides access to the modules and integration and operations support services for both NASA and commercial customers. Astrotech provides payload processing facilities and services to serve the satellite manufacturing and launch services industry. SGS is primarily engaged in providing engineering services and products to the Federal government including NASA. SMI was established in April 2000 to develop space-themed commercial business activities.
On April 3, 2003 the Company changed the name of its Johnson Engineering Corporation (“JE”) subsidiary to SPACEHAB Government Services, Incorporated, to more appropriately reflect the subsidiary’s strategic direction of operating in the government business section. In the fourth quarter of our fiscal year ended June 30, 2004 and on a going forward basis, the Other segment represents corporate selling, general and administrative expenses. Segment amounts have been restated based on the revised reporting structure.
The Company’s chief operating decision maker utilizes both revenue and income (loss) before income taxes, in assessing performance and making overall operating decisions and resource allocations.
Three Months Ended September 30, 2004 (in thousands):
Net
Fixed
Assets
SPACEHAB Flight
Services
SPACEHAB
Government Services
Space Media
Other
Three Months Ended September 30, 2003 (in thousands):
FixedAssets
7. Stock – Based Compensation
In December 2002 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value-based method of
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accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of the Company’s stock at the date of the grant over the exercise price of the related option.
If compensation costs for the Company’s stock options were determined based on SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income (loss) and earnings per share would have been as follows (in thousands, except per share amounts):
Net income, as reported
Deduct: Total stock-based compensation expense determined under fair value based method (SFAS No. 123) for all awards, net of related tax effects
Pro forma net income
Earnings per share:
Basic - as reported
Diluted - as reported
Basic - pro forma
Diluted - pro forma
8. Stock Repurchase
On March 25, 2003 the Board of Directors authorized the Company to repurchase up to $1.0 million of the Company’s outstanding common stock at market prices. Any purchases under the Company’s stock repurchase program may be made from time to time, in the open market, through block trades or otherwise in accordance with applicable regulations of the Securities and Exchange Commission (“SEC”). For the three months ended September 30, 2004, the Company did not repurchase any shares. As of September 30, 2004, the Company had repurchased 116,100 shares at a cost of $117,320 under the program.
9. Related Party Transaction
The Company engaged in certain transactions with directors, executive officers, shareholders, and certain former officers during the three months ended September 30, 2004. Following is a description of these transactions:
EADS Space Transportation
Dr. Graul, a member of SPACEHAB’s Board of Directors, is the Executive Vice President for EADS Space Transportation.
EADS provides unpressurized payload and integration efforts to SPACEHAB on a fixed price basis in addition to providing engineering services as required. For the three months ended September 30, 2004 and 2003, EADS’s payload and integration services included in cost of revenue were approximately $3.4 million and $1.9 million, respectively.
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V.J.F. Russian Consulting
On January 30, 2004 the Company entered into a subcontract agreement with V.J.F. Russian Consulting. The president of V.J.F. Russian Consulting, Vladimir Fishel, is a former Vice President of SPACEHAB was receiving severance payments from the Company and working on a part-time employment arrangement for other consulting activities. The services being provided under the subcontract agreement (valued at $2.6 million) is in support of a contract that SPACEHAB has with the Mitsubishi Corporation in support of JAXA. The amount paid for the three months ended September 30, 2004 was $0.3 million.
On June 1, 2004 the Company entered into a consulting agreement with V.J.F. Russian Consulting for:
Total commitments under the consulting agreement are $0.4 million, of which $0.1 million was paid in the three months ended September 30, 2004.
10. Subsequent Event
Contract Claim. On October 5, 2004 the Company received NASA’s final determination by its Contracting Officer in regards to the Company’s claim for indemnification of losses of its RDM and other equipment on the Space Shuttle Columbia. The Contracting Officer’s determination agreed with the Company’s claim for contractually stipulated losses of $8.0 million, plus interest, but rejected the Company’s claims for indemnification and recovery of losses beyond $8.0 million under the contract. The Company received payment of $8.0 million plus interest of $0.2 million on October 20, 2004. As a result of this final determination by NASA, the Company recorded the $8.2 million in the three months ended September 30, 2004 as a change in estimate from a prior period. The Company has the right to appeal NASA’s decision to deny the claim for indemnification beyond $8.0 million. The appeal can be filed with either the Armed Services Board of Contracts Appeals or the U.S. Court of Federal Claims. SPACEHAB is evaluating its options in appealing NASA’s determination.
Lloyd’s Complaint. In January 2004 Lloyd’s, the Company’s insurer for the RDM, filed a complaint in the United States District Court for the Western District of Washington seeking the return of the $17.7 million Lloyd’s had paid to the Company under the RDM insurance policy alleging that, among other things, (i) such proceeds were paid erroneously primarily due to the fact that NASA had not paid indemnification due to the Company prior to the payment of the insurance proceeds, (ii) the Company and its insurance broker misled Lloyd’s in issuing the policy, and (iii) the Company has not cooperated with Lloyd’s in protecting Lloyd’s right of subrogation. In February 2004 Lloyd’s withdrew its complaint from the United States District Court and filed a similar complaint in Superior Court of the State of Washington. On November 1, 2004 SPACEHAB filed a motion with the Superior Court of the State of Washington to dismiss underforum non conveniens. The Company believes that Lloyd’s complaint is without merit and will continue to respond to the complaint accordingly.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read together with the audited consolidated financial statements and the notes thereto included in this report.
OVERVIEW
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) statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Liquidity and Capital Resources.” Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the 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 NASA and other customer contracts, continued utilization by NASA and others of the Company’s habitat modules and related commercial space assets, completion of the ISS, continued availability and use of the U.S. space shuttle system, technological difficulties, product demand and market acceptance risks, the effect of economic conditions, uncertainty in government funding and the impact of competition, delays and uncertainties in future space shuttle and ISS programs, uncertainties related to the government’s commitment to President Bush’s vision for space exploration, and resolution of the Company’s claim’s against NASA arising from the loss of the Columbia orbiter and its crew during the STS-107 mission.
Management is pleased that the White House recently issued a new vision for U.S. space leadership. SPACEHAB views the President’s commitment to space exploration, the human spaceflight program, and the plan for missions to the Moon, Mars, and beyond as positive indicators that will reinvigorate the space program, likely yielding benefits to the aerospace and space commerce industries. The new vision provides NASA with a clear focus, stabilizes the NASA Program, and supplies increased funding for the new pursuits.
We believe the impacts of this vision will materialize over time, and SPACEHAB management will continue to align its business direction to remain a constructive force in the human spaceflight program. In the long term, management believes that the Company’s core competencies offer opportunities to continue to provide high-value services as well as to design, build, and operate assets that could support initiatives beyond low earth orbit. SPACEHAB plans to pursue these new opportunities aggressively. In the near term, SPACEHAB’s primary objective is to continue providing services to NASA and the space community in support of the space shuttle and ISS programs. Even with the renewed vision, the Company expects that the space shuttle and ISS will remain an integral part of the human spaceflight program through at least 2010. SPACEHAB is currently supporting four of the next six scheduled space shuttle flights and is pursuing additional missions that will be important for completing the final assembly and beginning operation of the ISS.
SPACEHAB is also actively engaged in defining commercial solutions to ISS on-orbit re-supply and return requirements which could more effectively be satisfied independent of the space shuttle transportation system. These activities, some of which leverage the Company’s international strategic partnerships, include the development of an affordable cargo delivery system based on an expendable launch vehicle, the Russian Progress family of carriers, and a SPACEHAB payload integration architecture to transport pressurized and unpressurized cargo to and from the ISS. Management further believes that the Company’s experience and expertise in the conceptual design, development, ground processing, and on-orbit operations support of payload and crew accommodations position it well for a role in the development of NASA’s Crew Exploration Vehicle, the envisioned next phase in human exploration of space.
During the three months ended September 30, 2004, the SFS Space Commerce Development group was awarded a six-month NASA study contract valued at approximately $1.0 million to support the space agency’s new exploration initiatives. As one of a just a handful of the proposals selected from the multitude submitted, SPACEHAB will define concepts for accomplishing human lunar exploration with a focus on innovative solutions and commercial approaches that could be extensible to Mars and beyond. In addition to this six-month contract effort, the Company may be awarded a contract option that includes an additional six-month effort also expected to be valued at nearly $1.0 million.
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SPACEHAB operates through three main areas generally related to space flight activities within the aerospace industry: space assets and mission support services for manned and unmanned space exploration and research missions; commercial and exploratory satellite pre-launch services; and administrative services in support of government space operations. We also operate a retail space merchandise operation and provide space-related educational services. Because of the diversity among the operations of our activities, we report the results of each business as a separate segment in our consolidated financial statements. Our consolidated financial results also reflect corporate-level expenses such as general and administrative, interest, and depreciation and amortization, but because of their nature, these items are not reported as a separate segment.
Business Segments
Following is a brief discussion of each of our four business segments, including a list of key factors that have affected, and are expected to continue to affect, their respective earnings and cash flows. We also present a brief discussion of our corporate-level expenses. This “Overview” section concludes with a summary of our current liquidity position and items that could impact our liquidity position in fiscal year 2005 and beyond. This “Overview” section is merely a summary and should be read together with the remainder of Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as the audited consolidated financial statements, including the notes thereto, and the other information included in the Company’s 10-K for year ended June 30, 2004.
SPACEHAB Flight Services generates revenue by providing space shuttle-based, turnkey services that include customer access to space via our fleet of pressurized modules and unpressurized pallet carriers; integration and operations support to logistics suppliers transporting their cargo aboard our carriers to and from the orbiting ISS; and/or integration and operations support to scientists and technologists responsible for experiments performed aboard module and pallet research platforms.
On a space-available basis for each mission, additional revenue can be generated by SFS under commercial contracts with non-NASA customers, including both government and private customers. Commercial contracts with non-NASA customers will continue to be established directly between SPACEHAB and its commercial customers.
Additionally, during the space shuttle stand-down period, SFS is providing cargo shipment coordination services to NASA for all U.S. cargo shipped to the ISS via the Russian Progress space vehicle. These services are provided under contract to Lockheed Martin, the Cargo Mission Contract (“CMC”) contractor to NASA. We are also providing research access to space and on the ISS to JAXA through RSC Energia, a major Russian aerospace enterprise. SPACEHAB contracted through V.J.F. Russian Consulting with RSC Energia for construction of certain space research equipment, launch vehicle, and research space aboard the Russian Progress carrier when the originally-scheduled services on the space shuttle were suspended due to the Columbia tragedy.
The primary factors impacting our SFS earnings and cash flows are the number of space shuttle missions flown and the configuration of the cargo handling and research logistics required for each mission. Our revenues and earnings, if any, from each mission are dependent upon the space assets required in the cargo or research logistics configuration and the mission support services required to employ those assets. Other factors that have impacted, and are expected to continue to impact, earnings and cash flows for this business unit include:
Astrotech Space Operations, Inc. revenue is generated from various fixed-price contracts with launch service providers in both the commercial and government markets. The services and facilities Astrotech provides to its customers support the final assembly, checkout, and countdown functions associated with preparing a satellite for
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launch. This preparation may include: the final assembly and checkout of the satellite, check-out and installation of the solid rocket motors, loading of the liquid propellants, encapsulation of the satellite in the launch vehicle payload fairings, and command and control of the satellite during pre-launch countdown.
The earnings and cash flows generated from our Astrotech operations are related to the number of commercial satellite launches, which reflects the growth in the satellite-based communication industries, and the requirement to replace aging satellites. Other factors that have impacted, and are expected to continue to impact, earnings and cash flows for this business include:
SPACEHAB Government Services, Inc.expands SPACEHAB’s core business of supporting people living and working in space. Specifically, SGS has proven capabilities supporting the Government in the areas of large-scale configuration and data management programs such as the ISS; specialized hardware design, development, and fabrication; low- to high-fidelity mockup design and construction; and safety and quality support services. This business unit offers a wide array of products and services in these varied fields and brings over thirty years of advanced ideas and solid execution of these innovations to its customers. SGS is currently under contract to provide configuration management services within the Program Integration and Control (“PI&C”) contract of which ARES Corporation is the prime contractor.
Our earnings in SGS operations are dependent on our ability to continue to win contracts with NASA or other government entities through the competitive bidding process and our performance under those contracts in achieving performance bonuses. Other factors that have impacted, and are expected to continue to impact, earnings and cash flows for this business include:
Space Media, Incorporated operates a retail store and internet store offering space-themed products and is engaged in space-related educational programs and other space-themed activities. Revenue and earnings in our retail operations are dependent upon general enthusiasm for the space exploration program, advertising and promotion, and competition.
Corporate and Other. Significant items impacting future earnings and cash flows include:
Liquidity. As of September 30, 2004 we had cash on hand and in short-term investments of $6.2 million. Our $5.0 million revolving credit facility, which includes a potential restriction on $5.6 million of our short-term investments if fully utilized, had a balance drawn of $2.5 million as of September 30, 2004, and requires approximately $3.3 million of restricted cash and investments. On October 20, 2004 the Company received payment of $8.2 million from NASA in indemnification of losses suffered by the Company in the Space Shuttle Columbia accident. Our ability to
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maintain sufficient liquidity in the future will depend on a number of factors including our ability to acquire future business, control our costs and manage capital expenditures, the return to flight of the space shuttle and the continued activity in the commercial and governmental satellite launch industry.
We expect that our operating cash flows over the remainder of the current fiscal year will be sufficient to satisfy our capital expenditures, debt maturities, interest expenses, and operating commitments. In order to increase our liquidity and to provide capacity to ultimately redeem our subordinated convertible notes due in October 2007; to fund capital expenditures for stand-by spare parts for our modules; and for costs of developing and submitting proposals for new government contracts, we will seek to replace or amend our $5.0 million revolving credit facility to remove its restriction on our short-term investments and to increase the amount available under the facility.
Over the longer term we believe that the space shuttle return to flight and the Nation’s Vision for Space Exploration will lead to increased activity and related cash flows from operations for our SFS business segment. The Company has recently been awarded contract with NASA for the study of the space agency’s new exploration initiatives; additions to its contract with Lockheed Martin for ISS configuration hardware and contract additions in its satellite processing business, reflecting increased activity in the space exploration and commercial satellite industries. However, there can be no assurance that the space shuttle will return to flight in the near term or that we will be able to win future contracts with NASA, other national space agencies, or commercial space enterprises, or to successfully exploit other business opportunities. Failure to achieve such events would have a material adverse effect on our financial condition and results of operations and could adversely affect our ability to redeem our subordinated convertible notes when they mature in October 2007.
The Company’s revenue for the three months ended September 30, 2004 and 2003 was generated primarily from the ReALMS contract, Lockheed Martin letter contract, and contracts with related commercial customers in the SFS segment; the remaining contracts under the FCSD contract and the PI&C contract in the SGS segment; and its contract with Lockheed Martin in the Astrotech segment. Revenue for SMI was immaterial for the three months ended September 30, 2004 and 2003. Astrotech recognized scheduled idle time at its facilities during the quarter ended September 30, 2004, recognizing revenue primarily from the pro-rata guarantee under its contract with Lockheed Martin.
On February 1, 2003 the Company’s RDM was lost in the STS-107 tragedy. The net book value of the RDM was $67.9 million, which, net of insurance proceeds of $17.7 million, was recognized as a loss in the third quarter of fiscal year 2003. The $8.0 million plus interest of $0.2 million paid by NASA as indemnification for the Company’s loss of the RDM is recognized as a recovery of previously recognized loss in the quarter ended September 30, 2004. At this time the Company does not plan to replace the RDM. SPACEHAB’s SFS business segment has two additional modules and other flight assets available to support the Company’s current NASA requirements. These modules and assets can also be used to support future NASA requirements. Based on public statements made by NASA, the Company believes the shuttle will return to flight; however, that return is currently expected to be no earlier than May 2005.
SPACEHAB’s SFS business segment is supporting NASA’s return-to-flight activities and is continuing its operations in preparation for shuttle missions including STS-114, 121, 116, and 118 (in order of their anticipated flight sequence). SFS is preparing a cargo carrier for STS-114, the External Stowage Platform 2 (“ESP2”), that will be deployed and permanently mounted to the ISS. SPACEHAB contracted directly with NASA’s prime ISS contractor, Boeing, for the STS-114 mission. For STS-121, a new mission added to the NASA ReALMS contract during the period ended December 31, 2003, SPACEHAB is scheduled to provide its non-deployable unpressurized carrier to NASA for transport of several critical ISS Orbital Replacement Unit (“ORU”) spares. For both STS-116 and 118, missions previously placed under ReALMS, SPACEHAB is scheduled to provide its pressurized single module and its unpressurized non-deployable carrier for transport of critical cargo and ORUs to and from the ISS. The Company has successfully completed negotiations with Boeing and Lockheed Martin for the respective contract equitable adjustments required to continue uninterrupted support to ongoing STS-114, 121, 116 and 118 mission preparation activities during the shuttle down period following the Columbia tragedy. As previously described, the ReALMS
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contract expired January 31, 2004 and support for missions STS-121, 116 and 118 is continuing under a subcontract agreement to Lockheed Martin, effective February 1, 2004. SPACEHAB is currently providing these services under a letter contract and is in final contract negotiations with Lockheed Martin for this new contract. Additionally, after approximately April 15, 2004, SFS no longer is subcontracting its module mission integration, operations and sustaining engineering technical support to Boeing. Most module mission tasks previously performed by Boeing personnel are now being performed by SPACEHAB’s SFS personnel and selected NASA cargo integration tasks on SPACEHAB module missions are now being performed by Lockheed Martin as a part of their CMC with NASA. This decision enables SFS to continue to provide services to NASA and is consistent with the direction of the ISS Program Office.
In January 2004 the Company initiated activity under the JETIS contract with the Mitsubishi Corporation, representing JAXA, that was entered into in 2000 and originally scheduled to fly aboard SPACEHAB’s RDM. Subsequent to the suspension of the space shuttle flights and destruction of SPACEHAB’s RDM, the Company contracted for construction of certain space research equipment and for research space aboard the ISS and up to three Russian Progress cargo missions with V.J.F. Russian Consulting, representing RSC Energia, a major Russian aerospace manufacturer and mission operator. The first experiment was successfully launched on the Russian Progress spacecraft on August 11, 2004.
During the three months ended September 30, 2004 and 2003, deferred revenue decreased by $3.0 million and $1.4 million, respectively, as the Company recognized revenue on contracts where milestone payments had been received in prior periods. Management expects further reduction of deferred revenue through the remainder of the next fiscal year which will result in revenue recognition on contracts for which the related cash was received in a prior period.
Costs of Revenue
SPACEHAB has several types of costs of revenue in its business segments. Costs of revenue for SFS 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. Costs associated with the performance of the contracts using the percentage-of-completion method of revenue recognition are expensed as incurred. Costs associated with the cost-plus award and fixed-fee contracts are expensed as incurred by SGS. 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. Selling, general and administrative and interest and other expenses are recognized when incurred.
Non-Recurring Charge
For the period ended March 31, 2003, the Company recognized a non-recurring charge of $50.3 million net of insurance proceeds, on the loss of its RDM in the Space Shuttle Columbia accident. Upon notification by NASA of its acceptance of the Company’s claim for indemnification of $8.0 million plus interest of $0.2 million, the Company recorded the $8.2 million as an increase in accounts receivable and a decrease in operating expense for the three months ended September 30, 2004.
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RESULTS OF OPERATIONS
For the three months ended September 30, 2004 as compared to the three months ended September 30, 2003.
Revenue. Revenue decreased approximately 31% to $13.0 million as compared to $18.9 million for the three months ended September 30, 2004 and 2003, respectively (in millions).
Revenue from the SFS business segment has been adversely affected by the temporary grounding of the shuttle fleet due to the STS-107 tragedy in February 2003, partially offset by revenue from the Lockheed Martin letter contract, and other contract revenue. The following summarizes the significant items:
The decrease of revenue at the Astrotech Space Operations (“Astrotech”) business unit is primarily due to Boeing’s termination of the fixed guarantee payments to ASO. During the period ended September 30, 2003 Boeing’s total guaranteed revenue was $1.7 million. During the quarter ended September 30, 2004, Astrotech underwent scheduled downtime between launches recognizing contractually guaranteed revenues of $0.8 million and $0.6 million from missions that began in fourth quarter of fiscal year 2004 and other contract revenue of $0.3 million.
The decrease in revenue at the SGS business segment is primarily due to the closeout of the Stowage, Engineering and Decal Contract (“SEDC”) and Configuration Management (“CM”) contract in December 2003 partially offset by the PI&C contract which started in January 2004. The following summarizes the significant items:
Costs of Revenue. Costs of revenue for the three months ended September 30, 2004 decreased by 20% to approximately $10.8 million, as compared to $13.5 million for the prior year’s quarter (in millions).
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Costs of revenue from the SFS business segment has been adversely affected by the temporary grounding of the shuttle fleet due to the STS-107 tragedy in February 2003, partially offset by costs of revenue from the Lockheed Martin letter contract, the termination of Boeing as a subcontractor for module services, and other contract costs of revenue. The following summarizes the significant items:
Astrotech’s increase in costs of revenue is due to increased mission support costs and increase in the costs of operations at the satellite processing facilities.
The decrease in costs of revenue at the SGS business segment is primarily due to the closeout of the SEDC and CM contracts in December 2003 partially offset by the PI&C contract. The following summarizes the significant items:
Operating Expenses. Operating expenses, other than the recovery of non-recurring charge for the loss of the RDM, decreased to $2.0 million for the three months ended September 30, 2004 as compared to approximately $2.9 million for the three months ended September 30, 2003. The primary factors attributable to this decrease are the Company’s on-going reductions in staff and facilities. In addition, the Company recorded NASA’s settlement of the Company’s contract claim for the loss of its RDM in the Columbia accident in the amount of $8.2 million. During the period ended September 30, 2004, the Company recognized legal expenses of $0.1 million relating to its claims against NASA for loss of the RDM and response to Lloyd’s complaint regarding its payment of insurance proceeds on the accident.
For the period ended September 30, 2004, there were no significant bid and proposal efforts. In the period ended September 30, 2003, the Company incurred bid and proposal costs of $0.2 million primarily relating to the Mission Integration Contract (“MIC”) proposal. Operating expenses also are lower in this period as compared to last year’s quarter due to the Company’s ongoing cost reduction efforts and staffing reductions in selling, general and administrative expenses. Research and development expenses were immaterial for the three months ended September 30, 2004 and 2003 as the Company continued to emphasize utilizing its existing asset base and limiting new investments in research and development.
Interest Expense. Interest expense was approximately $1.5 million for the three months ended September 30, 2004 as compared to approximately $1.7 million for the three months ended September 30, 2003. The decrease in interest expense is primarily due to the amendment and partial prepayment of the mortgage loan for the Astrotech facilities which resulted in decreased interest expense in this period and on a going forward basis.
Interest and Other Income. Interest and other income was immaterial for the three months ended September 30, 2004 and September 30, 2003. Interest income is earned on the Company’s short-term investments. Interest of $0.2 million due on NASA’s indemnification under the RDM claim is included as recovery of previously recognized non-recurring loss.
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Income Taxes. Based on the Company’s projected effective tax rate for fiscal year 2004, the Company recorded $0.1 million for tax expense for the three months ended September 30, 2004 as compared to a minimal tax expense during the three months ended September 30, 2003.
Net Income. Net income for the three months ended September 30, 2004 was approximately $7.0 million or $0.55 per share basic and $0.49 per share diluted on 12,574,224 and 14,247,860 shares, respectively, as compared to net income of approximately $0.7 million or $0.05 per share basic and diluted on 12,370,955 and 13,745,450 shares, respectively, for the three months ended September 30, 2003.
Liquidity and Capital Resources
Historically, the Company obtained operating and capital investment funds from the proceeds of its initial public offering of common stock and an offering of Series B Senior Convertible Preferred Stock. The Company also completed a private placement offering of convertible subordinated notes to support capital investments required for development and construction of space flight assets.
The Company’s primary source of liquidity is cash flow from operations and short-term investments. The principal uses of cash flow that affect the Company’s liquidity position include both operational expenditures and debt service payments. Management is focused on increasing the Company’s cash flow and on managing cash effectively through limiting cash investments in long-term assets.
The Company currently maintains a working capital line of credit facility totaling $5.0 million in order to ensure appropriate levels of liquidity. The term of this credit facility is through August 28, 2005. Covenants include a liquidity ratio and a limited pledge of $5.6 million of the Company’s investment account. The restriction on the Company’s investment balance is limited to 111% of the Company’s borrowings on the line of credit. As of September 30, 2004, amounts unused and available under this credit facility were $2.5 million.
Cash Flows From Operating Activities. Cash used by operations for the three months ended September 30, 2004 and 2003 was $1.9 million and $2.2 million, respectively. The significant items affecting the differences in cash flows from operating activities for the three months ended September 30, 2004 as compared to the three months ended September 2003 are discussed below:
Cash Flows From Investing Activities. For the three months ended September 30, 2004 and 2003, cash flows provided by investing activities were $0.7 million and $2.2 million, respectively. The significant items affecting the differences in cash flows from investing activities for the three months ended September 30, 2004 as compared to the three months ended September 2003 are discussed below:
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Cash Flows From Financing Activities. For the three months ended September 30, 2004 and 2003, cash flows provided by (used in) financing activities were $0.6 million and ($1.4) million, respectively. The significant items affecting the differences in cash flows from financing activities for the three months ended September 30, 2004 as compared to the three months ended September 2003 are discussed below:
On March 25, 2003 the Board of Directors authorized the Company to repurchase up to $1.0 million of the Company’s outstanding common stock at market prices. Any purchases under the Company’s stock repurchase program may be made from time to time, in the open market, through block trades or otherwise in accordance with applicable regulations of the Securities and Exchange Commission. As of September 30, 2004, the Company had repurchased 116,100 shares at a cost of $117,320 under the program. The Company will continue to evaluate the stock repurchase program and the funds authorized for the program.
Management continues to focus its efforts on improving the overall liquidity of the Company through identifying new business opportunities within the areas of the Company’s core competencies, reducing operating expenses, and limiting cash commitments for future capital investments and new asset development. SGS was pursuing significant new contracts to provide services for the ISS. On November 5, 2003 NASA notified the Company that it was not
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awarded the ISS Mission Integration contract. Additionally, the Boeing team’s bid for the Cargo Mission contract with NASA, of which SGS was a subcontractor, was not selected for contract award. As the result of the loss of these contract awards, the Company has made significant adjustments to its staffing and cost base structure during the period ended December 31, 2003. The Company reduced staffing by 67 employees in the quarter ended December 31, 2003 as a result of NASA’s award decisions. On October 1, 2003 the Company announced that it would close its corporate office in Washington, D.C. by December 31, 2003 and consolidate those operations into its headquarters in Houston, Texas. The Company took these actions as part of its continuing efforts to further reduce operating expenses and improve profitability. The Company subleased its Washington, D.C. facility for the remaining lease period which is under lease through May 31, 2006. The Company has continued to restrict new capital investment and new asset development, limiting projects to those required to support current contracts and facility maintenance. Additionally, management continues to evaluate operating expenses in an effort to reduce or eliminate costs not required to effectively operate the Company.
The Company’s cash and short-term investments were approximately $6.2 million as of September 30, 2004. On October 20, 2004 the Company received $8.2 million from NASA in indemnification of losses suffered in the Space Shuttle Columbia accident. Management believes that the Company has sufficient liquidity, including cash and short-term investments and cash anticipated or expected to be generated from operations to fund ongoing operations beyond the remainder of this fiscal year. The Company also expects to utilize existing cash, cash anticipated from future operations and any potential additional proceeds from NASA in settlement of the Company’s claims related to losses in the Space Shuttle Columbia tragedy, to support strategies for new business initiatives and reduce long-term debt.
The Company’s contractual obligations as of September 30, 2004 are as follows (in thousands):
Contractual Obligations
Remaining in
Fiscal Year
2005
Fiscal
Year
2008
2009
Long-term Debt
Loan payable under credit facility
Mortgage Loan Payable
V.J.F. Russian Consultant Agreement
V.J.F. Russian Subcontract
Capital Leases
Operating leases1
Total Contractual Cash Obligations2
(excluding interest payments)
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Company has no material changes to the disclosure made on this matter in the Company’s Annual Report on Form 10-K for the year ended June 30, 2004.
ITEM 4. Controls and Procedures
Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this quarterly report, and, based on its evaluation, the Company’s principal executive officer and principal financial officer have concluded that these
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controls and procedures are effective. There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that we file under the Exchange Act is accumulated and communicated to its management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Section 404 of the Sarbanes Oxley Act of 2002 requires the Company to perform an evaluation of its internal control over financial reporting and have its auditors attest to such evaluation. The Company has been actively preparing for the implementation of this requirement by, among other things, establishing an ongoing program to perform the system and process evaluation and testing necessary for compliance. The Company is not an accelerated filer under the rules of the SEC and, therefore, will not be subject to these requirements until its fiscal year ending June 30, 2006. While the Company anticipates that it will be able to comply on a timely basis with this requirement, unforeseen delays may occur which could prevent the Company from achieving timely compliance. If the Company fails to complete its evaluation on a timely basis and in a satisfactory manner, or if its auditors are unable to attest on a timely basis to the adequacy of the Company’s internal control, the Company may be subject to additional regulatory scrutiny and to a loss of public confidence in its internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Lloyd’s Complaint. In January 2004 Lloyd’s, the Company’s insurer for the RDM, filed a complaint in the United States District Court for the Western District of Washington seeking the return of the $17.7 million Lloyd’s had paid to the Company under the RDM insurance policy alleging that, among other things, (i) such proceeds were paid erroneously primarily due to the fact that NASA had not paid indemnification due to the Company prior to the payment of the insurance proceeds, (ii) the Company and its insurance broker misled Lloyd’s in issuing the policy, and (iii) the Company has not cooperated with Lloyd’s in protecting Lloyd’s right of subrogation. In February 2004 Lloyd’s withdrew its complaint from the United States District Court and filed a similar complaint in Superior Court of the State of Washington. On November 1, 2004 SPACEHAB filed a motion with the Superior Court of the State of Washington to dismiss under forum non conveniens. The Company believes that Lloyd’s complaint is without merit and will continue to respond to the complaint accordingly.
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ITEM 6. EXHIBITS
The following exhibits are filed herewith:
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SPACEHAB, INCORPORATED
Date: November 12, 2004
/s/ Michael E. Kearney
Michael E. Kearney
President and Chief Executive Officer
/s/ Brian K. Harrington
Brian K. Harrington
Senior Vice President and
Chief Financial Officer
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