| SPACEHAB INC \WA\ Item 1A Risk Factors |
| The risks and uncertainties described below are not the only risks facing us |
| Additional risks not presently known to us or which we consider immaterial based on information currently available may also materially adversely affect us |
| If any of the following risks or uncertainties actually occur, our business, financial condition, and results of operations could be materially adversely affected |
| Risks Related to Our Business In fiscal year 2006, our Flight Services business unit derived over 92prca of its revenues, which represented approximately 60prca of our fiscal year 2006 consolidated revenues, from the use of our modules and integrated cargo carriers by the space shuttle fleet, which is currently expected to be retired by 2010 |
| Our modules and integrated cargo carriers have been specifically designed to enhance the capabilities of the space shuttle and, therefore, our current Flight Services business is highly dependent on the availability of the space shuttle fleet |
| President Bush’s vision for US space exploration envisions that the United States will fulfill its commitments to international partners and complete its work on the International Space Station by 2010 |
| The shuttle is currently scheduled to be retired after its work on the station is complete |
| Our single module is currently scheduled to fly on 5 ______________________________________________________________________ [34]Table of Contents two space shuttle missions |
| Since the shuttle’s chief purpose is anticipated to be assisting in the completion of the assembly of the station, our modules may not be used for many additional missions, if any |
| We currently own one single module and a second module that can be added to our single module in order for it to be configured as a double module |
| We invested approximately dlra72dtta5 million in the design and construction of these two modules |
| We do not anticipate being able to sell or use these two modules or use our integrated cargo carriers following the retirement of the space shuttle fleet |
| If our Flight Services business is unable to develop projects or services that will be used by the crew exploration vehicle and other spacecraft that will replace the shuttle fleet, our financial condition and results of operations will be materially adversely affected |
| Our Flight Services business unit depends on regular space shuttle flights |
| In addition to the scheduled retirement of the space shuttle fleet, the orbiters have been grounded for extended periods numerous times |
| The space shuttle’s expected return to flight for the first time since the Space Shuttle Columbia was lost on re-entry in February 2003 did not occur until July 2005 |
| All missions were previously suspended from January 1986 to September 1988, pending the redesign of certain subcomponents which had caused the loss of the Space Shuttle Challenger |
| The space shuttle fleet has also been temporarily grounded for shorter periods of time on several occasions |
| No assurances can be made that the space shuttle will not be grounded, that future missions of the space shuttle will not be delayed, or that NASA will launch the number of space shuttle missions currently scheduled |
| There are three space shuttles in operation |
| Failure to have access to the space shuttle, either through technical difficulties affecting the entire fleet or the loss of an individual space shuttle, would have a material adverse effect on our financial condition and results of operations |
| We have incurred, and expect in the future to incur, significant legal costs related to the loss of our research double module in the Columbia tragedy |
| On February 1, 2003 we lost our research double module in the Columbia tragedy |
| We sought indemnification from NASA in the amount of dlra87dtta7 million for the value of our research double module and related equipment that was destroyed |
| We received insurance proceeds of dlra17dtta7 million and dlra8dtta0 million in indemnification from NASA in connection with the loss of this module |
| We have filed an appeal of NASA’s decision to deny our claim for indemnification in excess of dlra8dtta0 million with the Armed Services Board of Contract Appeals and a tort claim against NASA seeking damages of dlra79dtta7 million for the loss of the research double module |
| Our tort claim has been stayed pending results of our contract appeal |
| In pursuing our appeal and tort claims, we will be required to expend material amounts on legal fees, but may not recover any additional amounts from NASA Lloyd’s of London (“Lloyd’s”), our insurer, is entitled to participate in a recovery against NASA, if any, net of legal costs, in an amount no less than dlra500cmam000 and up to dlra17dtta7 million |
| The amount available to Lloyd’s for recovery is based upon a pre-agreed schedule |
| Since we do not intend to build any more modules, if our single module is lost, our net income from operations associated with space shuttle missions would be materially reduced and our insurance coverages may not be adequate |
| It can only be used in connection with our remaining single module |
| If our single module is lost as a result of another shuttle accident, we will not have any modules available for future shuttle missions |
| If we only lost our single module, we could not recover insurance proceeds for the second module, which is not usable without the single module |
| Although our modules are insured for replacement value if they are lost, we currently do not intend to build any additional modules due to the planned retirement of the space shuttle fleet in 2010 and the inability of our modules to be used on other spacecraft |
| As a result, the loss of one or both of our modules would materially reduce the amount of income we could potentially generate from the remaining shuttle missions |
| In addition, the loss of another space shuttle could result in the termination of the shuttle program earlier than is currently expected |
| In the event of another catastrophic space tragedy in which our modules or carriers cause damage to third parties, our liability may exceed the limits of our liability coverage |
| The loss of one or both of our modules will materially reduce our net income from operations associated with shuttle missions and will have a material adverse affect on our financial condition and results of operations |
| 6 ______________________________________________________________________ [35]Table of Contents Since we are dependent on NASA as a customer, if the products and services we are currently developing for use by NASA’s successor to the space shuttle program are not used, our financial condition and results of operations will be materially adversely affected |
| Approximately 77prca of our fiscal year 2006 revenue was generated from seven contracts supporting NASA We anticipate that revenue from NASA-related projects will continue to account for a material amount of our revenue in the future |
| We currently are providing services supporting NASA under five primary contracts |
| There are no assurances, however, that NASA will require our module or integrated cargo carrier services in the future |
| We currently anticipate that NASA will not use our modules as much as they have in the past |
| Even if NASA continues to use our modules and integrated cargo carriers to the same extent that it did prior to the suspension of shuttle flights following the Columbia disaster, these products will become obsolete when the space shuttle is retired |
| See “In 2006, our Flight Services business unit derived over 92prca of its revenues, which represented approximately 60prca of our fiscal year 2006 consolidated revenues, from the use of our modules and integrated cargo carriers by the space shuttle fleet, which is currently expected to be retired by 2010 |
| ” Our failure to execute new contracts supporting NASA for use of our modules and integrated cargo carriers could have a material adverse effect on our financial condition and results of operations |
| In the past, we have developed products without any firm commitments from NASA Although we may invest substantial amounts developing products for the shuttle’s replacement program without any contracts with NASA, we cannot provide any assurances that such products will be used |
| Since the final program that will be chosen by NASA is not currently known, we can not provide any assurances that the products and services we may develop will be suitable for such replacement programs |
| If NASA or its contractors do not purchase the products and services we are developing for the shuttle’s replacement programs, our financial condition and results of operations will be adversely affected |
| Termination of our backlog of orders could negatively impact our revenues |
| As of June 30, 2006, we had a firm backlog of approximately dlra46dtta0 million and total backlog of approximately dlra57dtta0 million |
| Firm backlog consists of aggregate contract values, excluding the portion previously recognized as revenues, in work change orders on existing contracts, and our estimate of potential award fees |
| Total backlog includes firm backlog in addition to unexercised options under existing contracts and expected indefinite-quantity indefinite-delivery task orders under existing contracts, which may not result in definitive contracts or orders |
| Backlog as of June 30, 2006 does not give effect to new orders received or any terminations or cancellations since that date |
| Approximately 76prca of our firm contract backlog as of June 30, 2006 was derived from contracts with the US Government and its agencies or from subcontracts with the US Government’s prime contractors |
| Since our government contracts are contingent upon Congressional appropriations and are terminable “for convenience,” we cannot assure that our backlog will ultimately result in revenues |
| Our existing NASA contracts are subject to continued appropriations by Congress and may be terminated if future funding is not made available, which would have a material adverse effect on our business |
| Our financial performance is substantially dependent on the revenue generated from our contracts supporting NASA which, similar to contracts with other agencies of the US government, are conditioned upon the continuing availability of Congressional appropriations |
| The US Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may extend over many years |
| Failure to receive sufficient funds from Congress or a withdrawal by Congress of prior appropriations would permit NASA to terminate its contracts with us “for convenience |
| ” Therefore, no assurances can be made that Congress will continue to fund NASA at levels which will permit space shuttle missions to continue on their current schedules or that Congress will appropriate the funds necessary for NASA to fulfill its obligations under its contracts with us |
| Any substantial reduction in Congressional funding for space shuttle missions or annual appropriations to NASA to fulfill, among other things, NASA’s contracts with us or the US commitment to the International Space Station, would have a material adverse effect on our financial condition and results of operations |
| In addition, termination of large programs or multiple contracts affecting our Flight Services business unit could require us to evaluate the continued viability of operating that business |
| As a US Government contractor, we are subject to a number of rules and regulations the violation of which could result in us being barred from future NASA contracts |
| We must comply with and are affected by laws and regulations relating to the award, administration, and performance of US Government contracts |
| These laws and regulations, among other things: • Require certification and disclosure of all cost or pricing data in connection with certain contract negotiations 7 ______________________________________________________________________ [36]Table of Contents • Impose acquisition regulations that define allowable and unallowable costs and otherwise govern our right to reimbursement under certain cost-based US Government contracts • Restrict the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data A violation of specific laws and regulations could result in the imposition of fines and penalties, the termination of our contracts, or debarment from bidding on US Government contracts |
| In some instances, these laws and regulations impose terms or rights that are more favorable to the Government than those typically available to commercial parties in negotiated transactions |
| For example, the Government may terminate any of our government contracts for convenience, as well as for default based on performance |
| In addition, US Government contracts generally contain provisions that allow the Government to unilaterally suspend us from receiving new contracts pending resolution of alleged violations of certain federal laws or regulations, reduce the value of existing contracts, issue modifications to a contract, and control and potentially prohibit the export of our services and associated materials |
| Since a majority of our revenues are currently, and a material portion of future revenues are expected to be, derived from contracts supporting NASA, material modifications to our existing contracts or a prohibition against bidding on future US Government contracts would have a material adverse affect on our financial condition and results of operations |
| Our business could be adversely affected by a negative audit by the US Government |
| US Government agencies, including NASA, routinely audit and investigate government contractors |
| These agencies review a contractor’s performance under its contracts, cost structure, and compliance with applicable laws, regulations, and standards |
| The US Government also may review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation, and management information systems |
| Any costs found to be improperly allocated to a specific contract will not be reimbursed, while such costs already reimbursed must be refunded |
| If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or prohibition from doing business with the US Government |
| In addition, we could suffer serious reputational harm that affects our non-governmental business if allegations of impropriety were made against us |
| Most of our competitors, including NASA which is also our largest customer, have much greater financial resources than we do |
| The US Government, the governments of other countries, and private companies participate in the highly competitive space industry often as both suppliers and end-users of space services |
| Our long-term strategy for growth is to provide research, logistics, infrastructure and payload processing services to NASA and others during the International Space Station era and for the manned and unmanned programs that will replace the space shuttle program |
| This strategy could require us to compete with commercial companies such as The Boeing Company, Lockheed Martin Corporation and other large aerospace companies, many of which have existing NASA support contracts, substantially greater financial resources and manufacturing capabilities, more established and larger marketing and sales organizations, and larger technical staffs than we have |
| Pursuant to a treaty between the United States and Italian governments, the Italian government has provided three multi-purpose logistics modules to NASA for use in the construction and operation of the International Space Station |
| These NASA-owned and operated modules are capable of carrying pressurized logistics and other payloads in the cargo bay of the space shuttle to and from the International Space Station |
| These NASA-owned modules are our most direct competitor for pressurized logistics resupply to the International Space Station |
| Russia also operates Progress unmanned, expendable logistics resupply vehicles, which were the sole means of re-supplying the International Space Station while shuttle flights were suspended |
| Japan and certain European countries are also currently working on their own expendable, automated docking modules for logistics resupply missions |
| The NASA-owned modules might, and successful implementation of the proposed expendable docking modules could further, reduce the demand for our modules, which would have a material adverse effect on our future financial performance |
| Prior to January 2004, Boeing was our subcontractor for processing payloads for our modules |
| We now perform all of our payload processing services using our employees |
| Boeing and United Space Alliance currently perform payload processing services for NASA’s multi-purpose logistics modules |
| In addition, there are several other space 8 ______________________________________________________________________ [37]Table of Contents shuttle payload processing contractors currently performing flight and ground operations work for NASA, including but not limited to: United Space Alliance, The Boeing Company, Lockheed Martin Corporation, and Teledyne Technologies Incorporated |
| United Space Alliance, which is equally owned by The Boeing Company and Lockheed Martin Corporation, is the prime contractor for NASA’s space shuttle program |
| United Space Alliance is responsible for the day-to-day operation and management of the US space shuttle fleet |
| United Space Alliance is currently the primary contractor in the market for civil ground operations and payload processing services |
| We believe that the privatization of space station operations and successor programs will continue to result in intense competitive pressure among contractors to retain their current contracts and/or capture new payload processing work from other contractors |
| To the extent that these contractors are able to retain or enlarge their roles in payload processing operations, our ability to successfully compete for a share in this market could be impeded, which could have a material adverse effect on our future financial performance |
| At present, competition in the United States for our Astrotech spacecraft launch processing services is limited to the California (Vandenberg) launch site, where a competing company called California Commercial Spaceport Systems International is located |
| California Commercial Spaceport Systems International does not have payload processing facilities in Florida, where the majority of US commercial satellite launches occur |
| However, if California Commercial Spaceport Systems International or another satellite launch processing service provider were to build, or NASA were to expand its facilities in Florida, our financial performance could be adversely affected |
| Our earnings and margins may vary based on the mix of our cost-reimbursable and fixed-price contracts |
| As of June 30, 2006, we had one significant cost-reimbursable and four significant fixed-price contracts |
| Cost-reimbursable contracts generally have lower profit margins than fixed-price contracts |
| Our Flight Services and Astrotech spacecraft processing business units’ contracts are mainly fixed-price contracts, while our Government Services business unit contracts are generally cost reimbursable contracts |
| Our earnings and margins may vary materially depending on the types of contracts undertaken, the costs incurred in their performance, the achievement of other performance objectives and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined |
| Under fixed-price contracts, we receive a fixed price irrespective of the actual costs we incur and, consequently, any costs in excess of the fixed price are absorbed by us |
| Under cost-reimbursable contracts, subject to a contract-ceiling amount in certain cases, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based |
| However, if our costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we may not be able to obtain reimbursement for all such costs and may have our fees reduced or eliminated |
| The failure to perform to customer expectations and contract requirements can result in reduced fees and may affect our financial performance for the affected period |
| Cost over-runs also may adversely affect our ability to sustain existing programs and obtain future contract awards |
| Under each type of contract, if we are unable to control costs we incur in performing under the contract, our financial condition and operating results could be materially adversely affected |
| Our financial results could be affected if the estimates that we use in accounting for contracts are incorrect and need to be changed |
| Contract accounting requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues |
| The estimation of total revenues and cost at completion for many of our contracts is complicated and subject to many variables |
| Assumptions have to be made regarding the length of time to complete the contract because costs also include expected increases in wages and prices for materials |
| Incentives or penalties related to performance on contracts are considered in estimating revenue and profit rates, and are recorded when there is sufficient information for us to assess anticipated performance |
| Estimates of award and incentive fees are also used in billing customers and estimating revenue and profit rates based on actual and anticipated awards |
| If our performance under a cost reimbursable contract results in an award fee that is lower than we have estimated, we would be required to refund previously billed fee amounts and would have to adjust our revenue recognition accordingly |
| If our performance was determined to be significantly deficient, we may be required to reimburse our customer for the entire amount of previously billed awards |
| Because of the significance of the judgments and estimation processes described above, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change |
| Changes in underlying assumptions, circumstances, or estimates may adversely affect future period financial performance |
| 9 ______________________________________________________________________ [38]Table of Contents Most of the costs for our Astrotech business unit are fixed regardless of the number of spacecraft that are processed at our facility |
| The primary costs related to our Astrotech business unit are associated with operating and running our three spacecraft launch processing facilities |
| These costs remain relatively unchanged regardless of whether or not customers are using the facilities |
| As a result, if we do not properly estimate the number of satellites that will be processed when calculating our price structure for our spacecraft processing services, our financial results could be adversely affected |
| If we do not receive additional contracts to use our modules or cargo carriers, or if we are unable to find users of future products we develop without a contract for such product, we will have to write off the value of such assets |
| We have in the past, and expect to continue in the future, to fund development of certain projects prior to being awarded a contract for such projects |
| No assurances can be made that any funds we may spend in the future in connection with the development of new products will lead to the award of a contract or that any such contract will be awarded on terms that are economically favorable to us |
| In addition, we depreciate space hardware, and intend to depreciate our modules and cargo carriers and other future capital assets that are dedicated to supporting the space shuttle over a period that approximates the useful life of the space shuttles |
| In the event we are not awarded additional contracts for the use of our modules, cargo carriers, or future products or services, we could be required to write-off the remaining value of our modules, cargo carriers and any future capital assets, and/or costs of prepaid services performed, which could have a material adverse effect on our financial condition and results of operations |
| Our spacecraft payload processing facilities that are specifically designed to process satellites and other payloads as well as our modules and integrated cargo carriers would lose a substantial portion of their value if we no longer provided these services |
| Our Astrotech spacecraft processing facilities and the payload processing facilities for our Flight Services business unit were built specifically to process satellites and our modules and integrated cargo carriers |
| These facilities are not well suited for other uses |
| Currently, our Astrotech facilities in Titusville, Florida are depreciated using the straight-line method over their estimated useful lives which range from 16 to 40 years |
| If we were required to terminate our satellite or module processing businesses, the value of these facilities would be significantly impaired |
| In addition to having to take a substantial write-down of the value of our Titusville, Florida facility on our books, if we attempted to sell this facility we do not think that we would be able to recover the amounts we have invested |
| If we were able to sublease our leased facilities, we do not think such subleases would be sufficient to cover our current rental payments |
| Due to our substantial capital expenditures for our spacecraft processing facilities and the limited uses of these facilities, the termination of operations at our Titusville, Florida facility that we own, or one or more of our other leased facilities could have a material adverse effect on our financial condition and results of operations |
| We incur substantial costs in preparing proposals to bid on contracts that we may not be awarded |
| Preparing a proposal to bid on a contract competition is generally a three to six month process |
| This process is time consuming and results in the incurrence of substantial costs that are generally not reimbursable even if the contract is awarded |
| We have prepared proposals for and bid on contracts that were not awarded to us in the past and anticipate that we could incur substantial costs related to contracts that are not ultimately awarded to us in the future |
| In addition, even if we are awarded a contract, we generally do not begin performing work for several months after the bidding process is complete |
| If funding problems by the party awarding the contract or other matters further delay our commencement of work on the contract, these delays may sufficiently lower the value of the contract to us, even rendering it unprofitable |
| Because our operating results are highly dependent on the timing of space shuttle missions and spacecraft launches, they may fluctuate significantly from quarter to quarter |
| On contracts for which the capability to successfully complete the contract can be demonstrated at contract inception, we recognize revenue using the percentage-of-completion method based on costs incurred over the period of the contract |
| The timing of space shuttle missions which carry our modules, the number and types of missions flown, the number and timing of satellite launches that use our Astrotech spacecraft processing facilities, and other factors can cause our results of operations to fluctuate significantly from quarter to quarter |
| Revenue recognition on cost reimbursable contracts that our Government Services business unit enters into is based on reimbursable costs incurred plus an award fee |
| 10 ______________________________________________________________________ [39]Table of Contents Most obligations under our contracts, including contract-related engineering, research and development, and selling, general and administrative expenses, are recorded in the periods in which they are incurred |
| Accordingly, we may report routine operating losses in quarters in which no space shuttle missions are in process |
| In addition, we have incurred significant losses in the past and, as such, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance |
| If we are unable to anticipate technological advances and customer requirements, including NASA’s requirements for products and services following the retirement of the space shuttle fleet, our business and financial condition will be adversely affected |
| Our growth and future financial performance depend in part upon our ability to anticipate technological advances and customer requirements, particularly NASA’s post-shuttle needs |
| There can be no assurance that we will be able to achieve the technological advances that may be necessary for us to remain competitive |
| Our failure to anticipate or respond adequately to changes in technology and NASA requirements, or delays in additional product development or introduction, could have a material adverse effect on our business and financial performance |
| Compliance with environmental and other government regulations could be costly and could negatively affect our financial condition |
| Our business, particularly our Astrotech spacecraft processing business unit, is subject to numerous laws and regulations governing the operation and maintenance of our facilities and the release or discharge of hazardous or toxic substances, including spacecraft fuels and oxidizers, into the environment or otherwise relating to environmental protection |
| Under these laws and regulations, we could be liable for personal injury and clean-up costs and other environmental and property damages, as well as administrative, civil, and criminal penalties in the event of a violation of these laws, or a release of a hazardous substances at or from our facilities, and such liabilities could have a material adverse effect on our business, financial condition, and results of operations |
| Our failure to comply with US export control laws and regulations could adversely affect our business |
| We are obligated by law and under our NASA contracts to comply, and to ensure that our subcontractors comply, with all US export control laws and regulations, including the International Traffic in Arms Regulations and the Export Administration Regulations |
| We are responsible for obtaining all necessary licenses or other approvals, if required, for exports of hardware, technical data, and software, or for the provision of technical assistance |
| We are also required to obtain export licenses, if required, before utilizing foreign persons in the performance of our NASA contracts if the foreign person will have access to export-controlled technical data or software |
| The violation of any of the applicable export control laws and regulations, whether by us or any of our subcontractors, could subject us to administrative, civil, and criminal penalties |
| Our facilities located in Florida and California are particularly susceptible to damage caused by hurricanes, earthquakes, or other natural disasters |
| Our largest Astrotech spacecraft processing facility, which we own, and our leased Flight Services facility on the east coast of Florida are particularly susceptible to damage caused by hurricanes or other natural disasters |
| In addition, our leased launch processing facilities at Vandenberg Air Force Base and the facilities we operate at the Port of Long Beach are subject to damage caused by earthquakes |
| The extent to which the buildings located at these facilities are designed to sustain natural disasters varies |
| Although we insure our properties and maintain business interruption insurance, there can be no assurance that such insurance would be sufficient |
| If a severe hurricane, earthquake, or other natural disaster materially affected any of these facilities, our financial condition and results of operations could be adversely affected |
| The loss of key management and other employees could have a material adverse effect on our business |
| We are dependent on the personal efforts and abilities of our senior management, and our success will also depend on our ability to attract and retain additional qualified employees |
| We do not maintain key man insurance with any of these employees |
| Failure to attract personnel sufficiently qualified to execute our strategy, or to retain existing key personnel, could have a material adverse effect on our business |
| 11 ______________________________________________________________________ [40]Table of Contents If we fail to comply with Section 404 of the Sarbanes-Oxley Act of 2002, our reputation, financial condition, and the value of our notes and Common Stock may be adversely affected |
| Beginning with our report for the fiscal year ending June 30, 2008, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include an internal control report of management with our annual report on Form 10-K, which is to include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year |
| The report will also be required to include a statement that our independent auditors have issued an attestation report on management’s assessment of our internal control over financial reporting |
| In order to achieve compliance with Section 404 within the prescribed period, management is utilizing outside consultants to aid us in the adoption of a detailed project work plan that assesses the adequacy of our internal control over financial reporting, remediate any control weaknesses that may be identified, validate through testing that controls are functioning as documented, and implement a continuous reporting and improvement process for internal control over financial reporting |
| However, we may not be able to complete the work necessary for our management to issue its management report in a timely manner, or any work that will be required for our management to be able to report that our internal control over financial reporting is effective |
| In addition, our independent auditors may not be able to issue an attestation report on management’s assessment |
| Our failure to comply with Section 404, including issuing the management report and obtaining the attestation report, may materially adversely affect our reputation, our financial condition, and the value of our securities, including our outstanding notes, exchange notes, and Common Stock |
| Furthermore, our costs of compliance with Section 404, including the cost of remedying any identified weaknesses, could be material and could adversely affect our financial condition and results of operations |
| Competition Our competition and the barriers to entry vary amongst our business units |
| We believe that, generally, barriers to entry for new competitors for our Flight Services and Astrotech business units remain high |
| The modules, facilities, and other assets that we own represent a capital investment that many new entrants into the market would have difficulty matching |
| We estimate that it would take another organization three to five years to develop, and certify for use by NASA, a module service similar to that operated by our Flight Services business unit |
| We are not aware of any company that is currently making such an effort and, given the proposed retirement of the space shuttle fleet in 2010, would not expect any company to commence such an effort |
| For our logistics module and unpressurized integrated cargo carriers there are similar assets currently owned and periodically used by NASA (ie the Italian Space Agency-built Multi Purpose Logistics Module, the Multi Purpose Experiment Support Structure carrier, and the Spacelab pallet) |
| However, we believe our assets provide more utility in supporting powered experiments and are able to carry more weight and volume than the other solutions available to NASA Our Astrotech spacecraft and payload processing facilities are located in Florida and California and process satellites constructed in the United States |
| Due to the costs of transporting spacecraft internationally, our Astrotech business unit generally does not compete with launch services based in other countries |
| At present, our Astrotech business unit’s commercial US competition is limited to the California launch site at Vandenberg Air Force Base where California Commercial Spaceport Systems International is located |
| California Commercial Spaceport Systems International acquired surplus United States Air Force (“USAF”) facilities through a lease agreement with the USAF at Vandenberg Air Force Base before we established our facilities there |
| California Commercial Spaceport Systems International does not have payload processing facilities in Florida, where the majority of US commercial satellite launches occur |
| In addition, as the commercial space industry continues to evolve, we expect to face increasing competition from new companies |
| NASA previously instituted a policy that required Agency spacecraft programs to utilize commercial payload processing facilities for all missions that do not have a nuclear power source or planetary protection requirement |
| As stated in NASA’s Commercialization Plan issued in August 2006, a trade study was recently performed, comparing commercial facilities, such as SPACEHAB’s Astrotech campus, with government-owned facilities |
| The study also reexamined the policy of using mostly commercial payload processing services at the Kennedy Space Center |
| NASA concluded that it was in the Agency’s best interest to continue the current policy of using commercial facilities for nominal payload processing |
| Our Government Services business unit competes with companies that provide operations support, configuration management, and engineering and fabrication services to NASA These competitors include aerospace contractors such as Boeing, Lockheed Martin, United Space Alliance, ARES Corporation, Barrios Technologies Inc, Hernandez Engineering Inc, Cimarron, and Oceaneering Space Systems |
| However, this business unit’s primary source of revenue comes from a subcontract arrangement that expires in 2008 with options to extend up to two years |
| 12 ______________________________________________________________________ [41]Table of Contents Space Media competes with various suppliers of space education and retail goods |
| This includes internet sites and retailers with space-related toys, food, games, clothing, and patches; builders of space museum exhibits, mockups, and displays; and some providers of space-based education curriculum |
| Dependence on a Single Customer Approximately three quarters of our revenue in fiscal year 2006 was generated by various NASA contracts or subcontracts |
| While other contracts with commercial customers provide revenue from varying sources, we anticipate that contracts servicing NASA will continue to account for a significant amount of our revenue in the near future |
| Although we cannot make any assurances that NASA will require our services in the future, we are under firm contracts with NASA to support a variety of activities for the next several years |
| We continue to work on diversifying our customer base to include other government agencies, foreign space agencies, aerospace partners, and private companies |
| Similar to contracts with other agencies of the US Government, our contracts servicing NASA contain provisions pursuant to which NASA or the prime contractor may terminate the contract “for convenience |
| ” Our contracts servicing NASA depend upon their receipt of adequate annual appropriations from the US Congress, and failure to receive adequate funds could prompt NASA to terminate its contracts with us or the prime contractor “for convenience |
| ” There is no assurance that future funding will be adequate for NASA to complete all of its initiatives including those relating to contracts with us |
| We anticipate that a portion of our revenue for our next fiscal year will be derived from contracts with entities other than agencies of the US Government that will not be subject to federal contract regulations such as termination “for convenience” or government funding restrictions |
| Our Astrotech business unit serves the satellite launch industry, which is dominated domestically by Lockheed Martin and Boeing |
| We have a contract in place with Lockheed Martin to support payload processing for the Atlas launch vehicle program and we also provide payload processing services for Boeing’s Delta launch vehicle program |
| Our Lockheed Martin contract guarantees us a minimum of four launches annually through December 2006 |
| Certain processing activities on Boeing’s launch vehicles count towards this minimum |
| We have other current contracts in place with NASA, Boeing, and Orbital Sciences Corp |
| for support of spacecraft processing activities in both Florida and California |
| Our Astrotech business unit manages the Sea Launch facility under a long-term contract with Sea Launch Company, LLC which expires in 2011 |
| Backlog As of June 30, 2006, our contract backlog was approximately dlra57dtta0 million, of which dlra46dtta0 million represented US Government backlog and dlra11dtta0 million, represented non-US Government contracts |
| See “Risk Factors – Termination of our backlog orders could negatively impact our revenues” for additional discussion of our backlog |
| Contract History Our business strategy focuses on anticipating customer requirements, investing capital to develop space flight assets, contracting with established aerospace companies for engineering and asset production, and retaining control of these assets |
| For our Flight Services business unit, we have obtained four significant contracts with NASA to date, one of which is still in effect, that utilize our privately-developed modules and unpressurized integrated cargo carriers |
| This includes the Cargo Mission Contract subcontract in support of NASA’s International Space Station logistics requirements served through Lockheed Martin |
| For the first half of fiscal 2004, the Research and Logistics Mission Support contract was the vehicle used by NASA to obtain the use of our modules and unpressurized integrated cargo carriers |
| Upon the restructuring of NASA’s various International Space Station contracts, Lockheed Martin became the Cargo Mission Contract prime contractor, and we now provide our logistics services and assets as a subcontractor |
| The contract calls for our single module as well as integrated cargo carriers to support payloads and outfitting of the International Space Station |
| As of June 30, 2006 we were supporting three missions under this contract, STS-121, STS-116, and STS-118 |
| We are paid an equitable adjustment for delays in launching these missions under contract |
| The equitable adjustment is a cost-based contract price adjustment to cover the period until the space shuttle launches |
| 13 ______________________________________________________________________ [42]Table of Contents Our Astrotech spacecraft processing business unit has successfully supported the processing of 240 spacecraft since beginning operations in 1985 |
| In fiscal year 2000, we completed negotiation of a long-term extension to our payload processing contract with Lockheed Martin |
| Additionally, we have payload processing contracts in place with NASA Our Astrotech business unit also operates and maintains the payload processing infrastructure of, and provides operational support to, Sea Launch Company, LLC In fiscal year 2006 our Government Services business unit operated primarily under one contract |
| We support the International Space Station Program Integration & Control contract as a subcontractor to ARES Corporation through a NASA contract awarded at the completion of the original International Space Station Configuration Management contract |
| We spent dlra0dtta2 million in 2004 on miscellaneous research and development projects, including the design of a new commercial payload service |
| Research and development in fiscal year 2006 and 2005 has been directed towards development of commercial responses to the National Vision for Space Exploration |
| Certain Regulatory Matters We are subject to federal, state, and local laws and regulations designed to protect the environment and to regulate the discharge of materials into the environment |
| We believe that our policies, practices, and procedures are properly designed to prevent unreasonable risk of environmental damage and consequential financial liability to us |
| Compliance with environmental laws and regulations and technology export requirements has not had in the past, and, we believe, will not have in the future, material effects on our capital expenditures, earnings, or competitive position |
| Our operations are subject to various regulations under federal laws relative to the international transfer of technology as well as to various federal and state laws relative to business operations |
| In addition, we are subject to federal contracting procedures, audit, and oversight under Federal Acquisition Regulations |
| Significant federal regulations impacting our operations include the following: Federal Regulation of International Business |
| We are subject to various federal regulations relative to the export of certain goods, services, and technology |
| These regulations, which include the Export Administration Act of 1979 administered by the Commerce Department and the Arms Export Control Act administered by the State Department, impose substantial restrictions on the sharing or transfer of technology to foreign entities |
| Our activities in the development of space technology and in the processing of commercial satellites deal with technology of the type subject to these regulations |
| Our operations are conducted pursuant to a comprehensive export compliance policy that provides close review and documentation of activities subject to these laws and regulations |
| Foreign Corrupt Practices Act |
| The Foreign Corrupt Practices Act establishes rules for US companies doing business internationally |
| Compliance with these rules is achieved through established and enforced corporate policies and documented procedures in our internal procedures and financial controls |
| Iran Nonproliferation Act of 2000 |
| This act includes specific prohibitions on commercial activities with certain specified Russian entities engaged in providing goods or services to the International Space Station |
| Our activities with RSC Energia of Russia are not subject to this act |
| Federal Acquisition Regulations |
| Goods and services provided by us to NASA and other US Government agencies are subject to Federal Acquisition Regulations |
| These regulations provide rules and procedures for invoicing, documenting, and conducting business under contract with such entities |
| The Federal Acquisition Regulations also subject us to audit by federal auditors to confirm such compliance |
| Truth in Negotiations Act |
| The Truth in Negotiations Act was enacted for the purpose of providing for full and fair disclosure by contractors in the conduct of negotiations with the US Government |
| The most significant provision included in the Truth in Negotiations Act is the requirement that contractors submit certified cost and pricing data for negotiated procurements above a defined threshold |
| 14 ______________________________________________________________________ [43]Table of Contents Regulatory Compliance and Risk Management We maintain compliance with regulatory requirements and manage our risks through a program of compliance, awareness, and insurance which includes the following: Safety |
| We place a continual emphasis on safety throughout our organization |
| A staff of senior safety professionals within our Flight Services business unit provides safety as a component of our space flight operations and augments the safety awareness and oversight available at the corporate level |
| Export Control Compliance |
| We have a designated senior officer responsible for export control issues and the procedures detailed in our export control policy |
| This officer and the designated export compliance administrator monitor training and compliance with regulations relative to foreign business activities |
| Employees are provided comprehensive training in compliance with regulations relative to export and foreign activities through our interactive training program and are certified as proficient in such regulations as are relative to their job responsibilities |
| Our operations are subject to the hazards associated with operating assets in the severe environment of space |
| These hazards include the risk of loss or damage to the assets during storage, preparation for launch, in transit to the launch site, and during the space mission itself |
| We maintain insurance coverage against these hazards with reputable insurance underwriters |
| Although we did not fully insure our flight assets in the past, we now insure our flight assets at replacement value for risk of loss during future space flight missions |
| Employees As of June 30, 2006 SPACEHAB and its wholly-owned subsidiaries employed 231 regular full-time employees |
| The breakdown by area is as follows: SPACEHAB corporate and executive management is 31; 112 are employed by SFS; SGS personnel total 51; 33 are employed by Astrotech; and SMI, specifically The Space Store, employs 4 |
| Of these employees, approximately 17prca hold advanced degrees beyond a bachelor’s degree |
| Additionally, a significant number of our employees have experience in both the space industry and/or governmental space agencies, with a special expertise in commercial space and human space flight |
| None of our employees are covered by collective bargaining agreements |
| Underlying all of SPACEHAB’s efforts has been the dedication and skill of its personnel |