UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended...............March 31, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. Commission file number 0-27206 SPACEHAB, Incorporated 1595 Spring Hill Road Suite 360 Vienna, Virginia 22182 (703) 821-3000 Incorporated in the State of I.R.S. Employer Washington Identification No. 91-1273737 The number of shares of Common Stockoutstanding as of the close of business on May 1, 1998: Class Number of Shares Outstanding Common Stock 11,163,954 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 ------ -----
SPACEHAB, INCORPORATED AND SUBSIDIARY MARCH 31, 1998 QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS PART 1 FINANCIAL INFORMATION Page Item 1. Unaudited Consolidated Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1997 and March 31, 1998 3 Condensed Consolidated Statements of Operations for the Three and Nine months ended March 31, 1997 and 1998 4 Condensed Consolidated Statements of Cash Flows for the Nine months ended March 31, 1997 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13
PART 1: FINANCIAL INFORMATION Item 1. CONSOLIDATED FINANCIAL STATEMENTS SPACEHAB, INCORPORATED AND SUBSIDIARY Condensed Consolidated Balance Sheets <TABLE> <CAPTION> June 30, March 31, 1997 1998 (audited) (unaudited) ------------ ------------ ASSETS <S> ............................................ <C> <C> Cash and cash equivalents ...................... $ 12,886,731 $ 84,962,330 Receivables .................................... 5,176,255 12,972,376 Prepaid and other current assets ............... 199,247 1,766,573 ------------ ------------ Total current assets ....................... 18,262,233 99,701,279 Property, plant and equipment, net of accumulated depreciation and amortization of $38,115,620 and $41,996,592 ................ 90,961,873 100,890,281 Goodwill, net of accumulated amortization of ... 3,394,773 3,267,444 $55,947 and $187,105 Deferred mission costs ......................... 1,438,910 1,918,090 Other assets, net .............................. 392,587 5,774,449 ------------ ------------ Total assets .............................. $114,450,376 $211,551,543 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable, current portion ............. $ -- $ 3,160,000 Loan payable under credit agreement, current portion ........................... 500,000 500,000 Accounts payable and accrued expenses ..... 2,408,111 4,655,624 Accrued consulting and subcontracting services .................................. 9,052,308 6,870,578 Advanced billings ......................... 846,855 377,212 Total current liabilities ............ 12,807,274 15,563,414 ------------ ------------ Notes payable to shareholder ................... 11,225,246 11,895,001 Loan payable under credit agreement, net of current portion ................................ 1,500,000 1,000,000 Note payable, net of current portion ........... -- 9,547,123 Convertible notes payable ...................... -- 63,250,000 Deferred flight revenue ........................ 2,295,898 18,569,648 ------------ ------------ Total liabilities .................... 27,828,418 119,825,186 Commitments and contingencies Stockholders' equity: Common stock, no par value, authorized 30,000,000 shares, issued and outstanding 11,146,237 and 11,163,954 shares, respectively ............................ 81,057,164 81,197,574 Additional paid-in capital ................ 16,299 16,299 Accumulated earnings ...................... 5,548,495 10,512,484 ------------ ------------ Total stockholders' equity ........... 86,621,958 91,726,357 ------------ ------------ Total liabilities and stockholders' equity ............................. 114,450,376 211,551,543 ============ ============ </TABLE> See accompanying notes to unaudited condensed consolidated financial statements.
SPACEHAB, INCORPORATED AND SUBSIDIARY Unaudited Condensed Consolidated Statements of Operations <TABLE> <CAPTION> Three Months Nine Months Ended March 31, Ended March 31, ----------------------------- ---------------------------- 1997 1998 1997 1998 ------------- ------------ ------------ ------------ <S> .................................. <C> <C> <C> <C> Revenue .............................. $ 15,031,345 $ 18,997,057 $ 38,136,763 $ 39,290,001 Costs of revenue: Integration and operations ........ 5,804,721 7,563,134 14,777,180 18,370,066 Depreciation ...................... 2,376,139 978,460 7,128,416 2,935,381 Insurance other direct costs ...... 136,801 520,116 243,051 915,116 ------------ ------------ ------------ ------------ Total costs of revenue ......... 8,317,661 9,061,710 22,148,647 22,220,563 ------------ ------------ ------------ ------------ Gross profit ......................... 6,713,684 9,935,347 15,988,116 17,069,438 Operating expenses: Marketing, general and administrative .................. 2,663,375 3,979,981 6,543,551 10,021,402 Research and development .......... 136,776 741,796 451,340 1,793,373 ------------ ------------ ------------ ------------ Total operating expenses ....... 2,800,151 4,721,777 6,994,891 11,814,775 ------------ ------------ ------------ ------------ Income from operations ......... 3,913,533 5,213,570 8,993,225 5,254,663 Interest expense, net of capitalized amounts ............................ (187,201) (1,253,367) (865,518) (2,631,701) Interest and other income ............ 375,501 931,151 1,190,075 2,341,030 ------------ ------------ ------------ ------------ Income before income taxes ..... 4,101,833 4,891,354 9,317,782 4,963,992 Income tax expense ................... 894,659 -- 2,124,659 -- ------------ ------------ ------------ ------------ Income before extraordinary item 3,207,174 4,891,354 7,193,123 4,963,992 Extraordinary item - gain on early retirement of debt, net of taxes ... -- -- 3,274,029 -- ------------ ------------ ------------ ------------ Net income ..................... $ 3,207,174 $ 4,891,354 $ 10,467,152 $ 4,963,992 ============ ============ ============ ============ Basic earnings per share: Income before extraordinary item ... $ 0.29 $ 0.44 $ 0.65 $ 0.45 Extraordinary item ................. -- -- 0.29 -- ------------ ------------ ------------ ------------ Net income per share - basic ......... $ 0.29 $ 0.44 $ 0.94 $ 0.45 ============ ============ ============ ============ Shares used in computing net income per share - basic ................. 11,146,236 11,156,274 11,109,721 11,152,312 ============ ============ ============ ============ Diluted earnings per share: Income before extraordinary item ... $ 0.29 $ 0.37 $ 0.65 $ 0.44 Extraordinary item ................. -- -- 0.29 -- ------------ ------------ ------------ ------------ Net income per share - diluted ....... $ 0.29 $ 0.37 $ 0.94 $ 0.44 ============ ============ ============ ============ Shares used in computing net income per share - assuming dilution ..... 11,153,855 16,062,335 11,149,679 11,407,595 ============ ============ ============ ============ </TABLE> See accompanying notes to unaudited condensed consolidated financial statements.
SPACEHAB, INCORPORATED AND SUBSIDIARY Unaudited Condensed Consolidated Statements of Cash Flows <TABLE> <CAPTION> Nine Months Ended March 31, 1997 1998 ------------- -------------- Cash flows provided by (used for) operating activities: <S> ......................................... <C> <C> Net income ............................. $ 10,467,152 $ 4,963,992 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........ 7,420,550 4,115,536 Gain on early retirement of debt, net of taxes, before legal expenses (3,383,891) -- Amortization of financing fees ....... -- 340,939 Changes in assets and liabilities: Decrease (increase) in accounts receivable ........................ 1,915,136 (7,796,121) Increase in prepaid and other current assets ................... (681,184) (1,567,326) Decrease (increase) in deferred mission costs .................... 611,744 (479,180) Increase in other assets ........... (145,656) (1,774,900) Increase (decrease) in deferred flight revenue .................... (14,309,595) 16,273,750 Increase (decrease) in accounts payable and accrued expenses ..... (1,493,235) 2,247,513 Decrease in advanced billings ...... -- (469,643) Increase in accrued consulting and subcontracting services ...... 2,892,632 1,736,128 ------------ ------------ Net cash provided by operating activities ................. 3,293,653 17,590,688 ------------ ------------ Cash flows used for investing activities: Payments for modules under construction ...................... (3,679,552) (13,360,122) Purchase of Astrotech, net of cash acquired .......................... (19,960,021) -- Payments for building under construction ...................... -- (3,205,236) Purchase of property and equipment .... (2,878,931) (504,547) ------------ ------------ Net cash used for investing activities ................... (26,518,504) (17,069,905) ------------ ------------ Cash flows provided by (used for) financing activities: Payment of note payable to Insurers ... (3,185,060) (500,000) Payment of debt placement fees ....... -- (4,042,714) Proceeds from issuance of convertible notes payable ..................... -- 63,250,000 Payment of legal fees on early retirement of debt ................ (109,986) -- Proceeds from note payable ............ -- 14,119,025 Payment of note payable ............... (1,411,902) Proceeds from issuance of common stock 24,000 140,407 ------------ ------------ Net cash provided by (used for) financing activities ......... (3,271,046) 71,554,816 ------------ ------------ Net increase (decrease) in cash and cash equivalents ......... (26,495,897) 72,075,599 Cash and cash equivalents at beginning of period .............................. 50,795,548 12,886,731 ------------ ------------ Cash and cash equivalents at end of period ............................. $ 24,299,651 $ 84,962,330 ============ ============ </TABLE> See accompanying notes to unaudited condensed consolidated financial statements.
SPACEHAB, INCORPORATED AND SUBSIDIARY Notes to Unaudited Condensed Consolidated Financial Statements 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, necessary for a fair presentation of the consolidated financial position of SPACEHAB, Incorporated and subsidiary ("SPACEHAB" or the "Company") as of March 31, 1998, and the results of their operations for the three and nine month periods ended March 31, 1997 and 1998 and their cash flows for the nine months ended March 31, 1997 and 1998. However, the consolidated financial statements are unaudited, and do not include all related footnote disclosures. The results of operations for the three and nine months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the full year. The Company's results of operations fluctuate 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 Form 10-K for the year ended June 30, 1997. 2. Earnings per Share: In December 1997, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, which establishes 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 three and nine month periods ended March 31, 1998 and 1997, respectively: <TABLE> <CAPTION> Three months ended March Three months ended March 31, 1998 31, 1997 Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ------------ ------------- ---------- Basic EPS: Income available to <S> .................. <C> <C> <C> <C> <C> <C> common stockholders $4,891,354 11,156,274 $ 0.44 $3,207,174 11,146,236 $ 0.29 Effect of dilutive securities: Convertible notes payable ........... $ 990,803 4,642,202 -- -- -- -- Options and warrants -- 263,859 -- -- 7,619 -- ---------- ---------- ----- ---------- ---------- ------ Diluted EPS: Income available to common stockholders $5,882,157 16,062,335 $ 0.37 $3,207,174 11,153,855 $ 0.29 ========== ========== ====== ========== ========== ====== </TABLE>
<TABLE> <CAPTION> Nine months ended March Nine months ended March 31, 1998 31, 1997 Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ------------ ------------- ---------- Basic EPS: Income before <S> <C> <C> <C> <C> <C> <C> extraordinary item $4,963,992 11,151,312 $0.45 $7,193,123 11,109,721 $0.65 Extraordinary -- -- -- $3,274,029 11,109,721 $0.29 Effect of dilutive securities: Convertible notes payable -- -- -- -- 36,406 -- Options and warrants -- 256,283 -- -- 3,552 -- ---------- ----------- ------ ----------- ----------- ----- Diluted EPS: Income available to common stockholders: Income before extraordinary item $4,963,992 11,407,595 $0.44 $7,193,123 11,149,679 $0.65 Extraordinary item -- -- -- $3,274,029 11,149,679 $0.29 </TABLE> Convertible notes payable outstanding as of March 31, 1998, 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 nine month period ended March 31, 1998 as the inclusion of the converted notes would be anti-dilutive. Options and warrants to purchase 1,525,351 shares of common stock, at prices ranging from $8.63 to $14.88 per share, were outstanding for the nine months ended March 31, 1997, but were not included in the computation of diluted EPS because the options' and warrants' exercise prices were greater than the average market price of the common shares during the nine months ended March 31, 1997. Similarly, additional options to purchase 50,000 shares of common stock at a price of $7.00 per share were also not included in the diluted EPS calculation for the three month period ended March 31, 1997. The options expire between June 24, 1997 and August 1, 2005 and warrants expire between June 30, 1997 and June 21, 1998. Options and warrants to purchase 1,818,597 and 1,811,021 shares of common stock, at prices ranging from $11.00 to $14.00 per share, were outstanding for the three and nine month periods ended March 31, 1998, respectively. These were not included in the computation of diluted EPS because the options' and warrants' exercise prices were greater than the average market price of the common shares during the three and nine month periods ended March 31, 1998. The options expire between June 24, 1998 and October 21, 2004 and warrants expire June 21, 1998. 3. Depreciation of Flight Modules: 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 life of the Space Shuttle program through at least 2012. 4. Revenue Recognition: Revenue is recognized upon completion of each module flight under the Mir contract. Total contract revenue is allocated to each flight based on the amount of services the Company provides on the flight relative to total services provided for all flights under contract. Obligations associated with a specific mission, e.g., integration services, are also recognized upon completion of the mission. For new 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 reported based on costs incurred on a per mission basis over the period of the contract. The percentage of completion method will result in the recognition of revenue over the period of contract performance, thereby decreasing quarter by quarter fluctuations of reported revenue. Revenue provided by the Astrotech payload processing facilities is recognized ratably over the occupancy period of the satellites at the Astrotech facilities. 5. Statements of Cash Flows - Supplemental Information: (a) Cash paid for interest costs was $1.49 million and $0.87 million for the nine months ended March 31, 1998 and 1997, respectively. The Company capitalized interest of approximately $1.35 million and $0.11 million during the nine months ended March 31, 1998 and 1997, respectively. (b) The Company paid $1.34 million and $2.10 million for income taxes during the nine months ended March 31, 1998 and 1997, respectively. 6. New Credit Facilities: On June 16, 1997, the Company entered into a $10.0 million line of credit agreement with a financial institution. Outstanding balances on the line of credit accrue interest at either the lender's prime rate or a LIBOR-based rate, and are collateralized by certain assets of the Company. The term of the agreement is through October 1999. As of March 31, 1998, the Company had not drawn against the line of credit. On July 14, 1997, the Company's wholly-owned subsidiary, Astrotech, entered into a five year credit facility with a financial institution for loans of up to $15.0 million. This loan is collateralized by the assets of Astrotech and certain other assets of the Company, and is guaranteed by the Company. Interest accrues at LIBOR plus three percent. As of March 31, 1998, the Company had drawn $14.12 million against this loan. As of March 31, 1998, the outstanding balance on this loan was $12.71 million. In October 1997, the Company completed a private placement offering for $63.25 million of aggregate principal of 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 $59.91 million to be used for capital expenditures associated with the development and construction of space related assets and for general corporate purposes.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. General This document may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including (without limitation) the "General" and "Liquidity and Capital Resources" sections of this Item 2. Such statements are subject to certain risks and uncertainties, including those discussed herein, which could cause actual results to differ materially from those projected in such statements. SPACEHAB was incorporated in 1984 to commercially develop space habitat modules to operate in the cargo bay of the Space Shuttles. The Company currently operates under two contracts with NASA, the Mir Contract, with a total contract value of $90.2 million and the Research and Logistics Module Services Contract, (the "REALMS Contract"), a $61.8 million contract for two research missions on board the Space Shuttle and a logistics mission to resupply the International Space Station. To date, the Company has recognized $79.4 million of the Mir contract value, representing the completion of the first six missions. The remaining $10.8 million represents the final Mir option mission scheduled to be flown during the fourth quarter of fiscal 1998. The value of the newly awarded REALMS contract is $42.8 million for three firm missions for NASA. The additional $19.0 million will be derived from three of NASA's major International Space Station partners; the European Space Agency (ESA), the National Space Development Agency of Japan (NASDA) and the Canadian Space Agency (CSA). The Company has the potential to increase the total current REALMS contract value of $61.8 million by approximately $22.0 million through module usage sales to commercial customers for microgravity space research. Additionally, the REALMS contract has an option for a fourth mission valued at a minimum of $15.8 million. The first two missions under the REALMS Contract are scheduled for flights in the second and fourth quarters of fiscal 1999; the third is currently projected for launch in May 2000. SPACEHAB generates revenue by providing lockers and/or volume within the SPACEHAB Modules, and by integration and operations support services provided to scientists and researchers responsible for the experiments and/or by NASA or International Agencies to carry logistics supplies for Module missions aboard the Shuttle system. Under the Mir Contract, the Company recognizes revenue only at the completion of each Space Shuttle mission utilizing Company assets. Accordingly, the Company's quarterly revenue and profits have fluctuated dramatically based on NASA's launch schedule and will continue to do so under the Mir Contract and any other contract for which revenue is recognized only upon completion of a mission. For the REALMS contract and for future contact 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 on a per mission basis 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. Astrotech revenue is derived from various multiyear fixed price contracts with satellite and launch vehicle manufacturers. The services and facilities Astrotech provides to its customers support the final assembly, checkout and countdown functions associated with preparing a satellite for launch. This preparation includes: the final assembly and checkout of the satellite, installation of the solid rocket motors, loading of the liquid propellant, encapsulation of the satellite in the launch vehicle, transportation to the launch pad and command and control of the satellite during pre-launch countdown. Revenue provided by the Astrotech payload processing facilities is recognized ratably over the occupancy period of the satellites in the Astrotech facilities. In addition, Astrotech will generate additional revenue from an exclusive multiyear agreement to process all Sea Launch program payloads at the Boeing facility in Long Beach, California. 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 Mir Contract are recorded as assets and not expensed until the specific Space Shuttle mission is flown and the related revenue is recognized. 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 expensed as incurred. Marketing, general and administrative, research and development and interest and other expenses are recognized when incurred. RESULTS OF OPERATIONS For the three months ended March 31, 1998 as compared to the three months ended March 31, 1997. Revenue. The Company recorded revenue of approximately $19.00 million and $15.03 million for the three months ended March 31, 1998 and 1997, respectively. In accordance with the Company's revenue recognition policy for the Mir Contract, revenue is recorded at the completion of a mission when the SPACEHAB modules are returned to the Company. Revenue was recognized for the sixth Mir Contract mission ($13.60 million) during the quarter ended March 31, 1998 in addition to revenue generated from the REALMS Contract ($2.83 million) and from Astrotech ($2.53 million). In contrast, revenue for the quarter ended March 31, 1997 was primarily derived from the Mir Contract ($13.81 million). Costs of Revenue. Costs of revenue for the quarter ended March 31, 1998 increased 8.94% to $9.06 million, as compared to $8.32 million for quarter ended March 31, 1997. The primary components of costs of revenue for the quarter ended March 31, 1998 include integration and operation costs under the Mir Contract ($5.33 million), the REALMS Contract ($1.04 million), and the NASDA/ESA Contract ($0.15 million); Astrotech operations ($1.47 million); and, depreciation ($0.98 million). The primary components of costs of revenue for the quarter ended March 31, 1997 included integration and operations costs under the Mir Contract ($5.30 million), the NASDA/ESA Contract ($0.19 million); and, depreciation ($2.38 million). The decrease in depreciation expense during 1998 is primarily attributable to the impact of extending the estimated useful lives of the Company's modules. 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 approximately 68.62% to approximately $4.72 million for the three months ended March 31, 1998 as compared to approximately $2.80 million for the three months ended March 31, 1997. This increase is due primarily to the Company's efforts to increase staff, adding strength in engineering, design and research and development capabilities and reflects the additional costs of approximately $0.21 million incurred for operating the Astrotech subsidiary, which was acquired in February 1997. Research and Development costs increased 442.4% to $0.74 million from $0.14 million. This increase was due to the Company's continuous efforts to develop space- related assets. Interest Expense. Interest expense was approximately $1.25 million for the three months ended March 31, 1998 as compared to approximately $0.19 million for the three months ended March 31, 1997. There was also approximately $1.35 million and $0.10 million of interest capitalized amounts for the quarter ended March 31, 1998 and 1997, respectively. The capitalized is interest was based on the construction of the Company's science module with double module hardware, which will be placed in service beginning in late 1999. Additional amounts were capitalized during the quarter ended March 31, 1998, relating to the construction of an expanded facility for Astrotech which was acquired in February 1997. Interest and Other Income. Interest and other income was approximately $0.93 million and $0.38 million for the three months ended March 31, 1998 and 1997, respectively. This increase is due to interest earned on short-term investment vehicles by the Company for the investment of proceeds received from the Company's debt financings completed during July and October 1997. Net Income. Net income was approximately $4.89 million, or $0.44 per share (basic EPS), for the quarter ended March 31, 1998, on 11,156,274 shares, as compared to $3.21 million, or $0.29 per share (basic EPS), for the quarter ended March 31, 1997, on 11,146,236 shares. There is no income tax expense for the three months ended March 31, 1998 primarily due to depreciation timing differences between book and tax on the Company's flight modules. For the nine months ended March 31, 1998 as compared to the nine months ended March 31, 1997. Revenue. The Company recorded revenue of approximately $39.29 million and $38.14 million for the nine months ended March 31, 1998 and 1997, respectively. Revenue recognized during the nine months ended March 31, 1998 was from the Mir Contract ($27.20 million), REALMS Contract ($4.55 million), NASDA/ESA Contract ($0.03 million) and Astrotech ($7.51 million). Conversely, for the nine months ended March 31, 1997 the Company's revenue was attributable to the Mir Contract ($27.83 million), the CMAM Contract ($7.96 million), the NASDA/ESA Contracts ($1.13 million) and Astrotech ($1.22 million). Costs of Revenue. Costs of revenue for the nine months ended March 31, 1998 increased 0.03% to $22.22 million, as compared to $22.15 million for the nine months ended March 31, 1997. The primary components of costs of revenue for the nine months ended March 31, 1998 include integration and operation costs under the Mir Contract ($12.84 million), REALMS Contract ($1.97 million), and the NASDA/ESA Contract ($0.35 million); Astrotech operations ($3.93 million); and, depreciation ($2.94 million). In contrast, the primary components of costs of revenue for the nine months ended March 31, 1997 included integration and operations costs under the Mir Contract ($12.35 million), the NASDA/ESA Contract ($1.04 million) and the CMAM Contract ($1.07 million); and, depreciation ($7.13 million). The decrease in depreciation expense is attributable to the impact of extending the estimated useful lives of the Company's modules. 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 approximately 68.90% to approximately $11.81 million for the nine months ended March 31, 1998 as compared to approximately $6.99 million for the nine months ended March 31, 1997. This increase is due primarily to the Company's efforts to increase staff, adding strength in engineering, design and research and development capabilities and reflects the additional costs of approximately $0.88 million for operating the Astrotech subsidiary, which was acquired in February 1997. Research and development costs increased 297.34% to $1.79 million from $0.45 million. This increase is due to the Company's efforts to develop space related assets including the Integrated Cargo Carrier and the SPACEHAB Universal Communications System to be used in future space flights. Interest Expense. Interest expense was approximately $2.63 million for the nine months ended March 31, 1998 as compared to approximately $0.87 million for the nine months ended March 31, 1997. There was also approximately $1.35 million and $0.10 million of interest capitalized during the nine months ended March 31, 1998 and 1997, respectively. Interest is capitalized based on the construction of the Company's science module with double module hardware. Additional amounts were capitalized during the nine months ended March 31, 1998 based on costs incurred on the construction of an expanded facility for Astrotech. Interest and Other Income. Interest and other income was approximately $2.34 million and $1.19 million for the nine months ended March 31, 1998 and 1997, respectively. This increase is due to interest earned by the Company on short-term investment of proceeds received from the Company's credit facilities. Net Income. Net income was approximately $4.96 million, or $0.45 per share (basic and diluted EPS), on 11,152,312 shares (basic EPS) as compared to $10.47 million, or $0.94 per share (basic EPS), for the nine months ended March 31, 1997, on 11,109,721 shares. There is no income tax expense for the nine months ended March 31, 1998 primarily due to depreciation timing differences between book and tax on the Company's flight modules. . LIQUIDITY AND CAPITAL RESOURCES 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 $43.48 million. In June 1997, the Company signed an agreement with a financial institution securing a $10.0 million revolving line of credit (the "Revolving Line of Credit") that the Company may use for working capital purposes. As of March 31, 1998, no amounts were 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 March 31, 1998, the Company had drawn $14.12 million on this loan and had an outstanding balance on that date of $12.71 million. Further, on October 21, 1997 the Company completed a private placement offering of convertible subordinated notes (the "Notes Offering"), which provided the Company with net proceeds of approximately $59.91 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 flows provided by operating activities for the nine months ended March 31, 1998 and 1997, were $17.59 million and $3.29 million respectively. The increase in cash flows provided by operating activities is due primarily to a significant increase in deferred flight revenue, which reflects billings during the nine months ended March 31, 1998 for the option missions under the Mir contract, the REALMS contract and the NASDA/ESA Contracts. Cash Flows from Investing Activities. For the nine months ended March 31, 1998 and 1997, cash flows used for investing activities consisted of capital expenditures of approximately $13.36 million and $3.68 million, respectively. Of this amount, $8.71 million of the expenditures in the current year are attributable to the construction of the Company's science module with double module hardware, which module is to be completed in early 1999. The Company anticipates that it will spend between $35.0 million and $38.0 million in total on the asset. As of March 31, 1998, the Company has spent approximately $21.72 million on this asset. In addition, the Company has spent approximately $3.65 million for the construction of an expanded facility for Astrotech. Cash Flows from Financing Activities. Cash flows provided by (used for) financing activities were approximately $71.55 million and ($3.27) million for the nine months ended March 31, 1998 and 1997, respectively. During the nine months ended March 31, 1998, the Company received net proceeds of approximately $14.12 million and made payments of $1.41 million under the Term Loan Agreement. In August 1997, the Company also made a payment of $0.50 million under the Credit Agreement. In October 1997, the Company received net proceeds of approximately $59.91 million by completing an offering of $55.00 million of its 8% Convertible Subordinated Notes due 2007 as well as exercise of the underwriters' over-allotment for an additional $8.25 million. The Company believes that cash flows from the Notes Offering, the Term Loan Agreement, the Revolving Line of Credit and other current financing activities 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.
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS NONE ITEM 2. CHANGES IN SECURITIES NONE ITEM 3. DEFAULTS UPON SENIOR SECURITIES NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE ITEM 5. OTHER INFORMATION NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)Exhibits. The separate Index to Exhibits accompanying this filing is incorporated herein by reference. (b)Reports on Form 8-K. No Report on Form 8-K was filed during the period ended March 31, 1998. Exhibit No. Description of Exhibits 10.1* ESA Contract, dated October 10, 1997, between the Registrant and INTOSPACE GmbH (the "ESA Contract"). 10. 2*** NAS 97-199, dated December 21, 1997, between the Registrant and NASA (the "REALMS Contract"). 10. 3*** Letter Contract Number SHB 1014, dated August 13, 1997, between the Registrant and McDonnell Douglas Aerospace-Huntsville, (as amended). 10. 4*** Employment Agreement and Non-Interference Agreement dated January 15, 1998, between the Company and Chester M. Lee. 10. 5*** Employment Agreement and Non-Interference Agreement dated January 15, 1998, between the Company and David A. Rossi. 10. 6*** Amendment number 1 to Employment Agreement and Non-Interference Agreement dated April 1, 1997, between the Company and Shelley A. Harrison. 10. 7*** Amendment number 1 to Loan and Security Agreement dated December 31, 1997, between the Company and First Union National Bank. 11. Statement regarding Computation of Earnings Per Common Share. 21.** Subsidiary of the Registrant 27 Financial Data Schedule * Incorporated by reference to the Registrant's Form 10-Q for the quarter ended September 30, 1997 filed with the Securities and Exchange Commission on November 6, 1997. ** Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1997 filed with the Securities and Exchange Commission on September 12, 1997. *** Incorporated by reference to the Registrant's Form 10-Q for the quarter ended December 31, 1997 filed with the Securities and Exchange Commission on February 6, 1998.
Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SPACEHAB, INCORPORATED Date: May 07, 1998 /S/ MARGARET E. GRAYSON ---------------------------------- Margaret E. Grayson Vice President of Finance (CFO) Treasurer, and Assistant Secretary (Principal Financial and Accounting Officer)