-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HzSpmJfPnHZ3TgHn5Rywl/ouW+BC/g7uttPljEw3zIrLoQuuY105plBtSAbUO024 X3WMyQU+8cGqGkV7I3GGyg== 0000928385-02-003112.txt : 20020917 0000928385-02-003112.hdr.sgml : 20020917 20020917154206 ACCESSION NUMBER: 0000928385-02-003112 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020917 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPACEHAB INC \WA\ CENTRAL INDEX KEY: 0001001907 STANDARD INDUSTRIAL CLASSIFICATION: GUIDED MISSILES & SPACE VEHICLES & PARTS [3760] IRS NUMBER: 911273737 STATE OF INCORPORATION: WA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27206 FILM NUMBER: 02765984 BUSINESS ADDRESS: STREET 1: 300 D STREET S W STREET 2: STE 814 CITY: WASHINGTON STATE: DC ZIP: 20024 BUSINESS PHONE: 7038213000 MAIL ADDRESS: STREET 1: 1595 SPRING HILL ROAD STREET 2: SUITE 360 CITY: VIENNA STATE: VA ZIP: 22182 10-K 1 d10k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the Fiscal Year Ended June 30, 2002. [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from _____________ to ____________ Commission File No. 0-27206 SPACEHAB, Incorporated 300 D Street, SW Suite 814 Washington, D.C. 20024 (202) 488-3500 Incorporated in the State of Washington IRS Employer Identification Number 91-1273737 Securities Registered pursuant to Section 12(b) of the Act: None Securities Registered pursuant to Section 12(g) of the Act: Title of Each Class Name of Each Exchange Common Stock on which Registered (no par value) NASDAQ National Market Number of shares of Common Stock (no par value) outstanding as of August 23, 2002, 12,154,465. Aggregate market value of Common Stock (no par value) held by non-affiliates of the registrant on August 23, 2002, based upon the closing price of the Common Stock on the Nasdaq National Market of $1.01 was approximately $12,276,010. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___. --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_]. Documents Incorporated by Reference: Proxy Statement for the Annual Meeting of Parts I, II, and III of Form 10-K Stockholders to be held November 12, 2002. PART I This document may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including (without limitation) statements under "Products and Services," "Company Strategy," "Dependence on a Single Customer," "Research and Development," "Competition" and "Backlog" in Item 1 and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General" and "Liquidity and Capital Resources" in Item 7. 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 U.S. National Aeronautics and Space Administration ("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 International Space Station ("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. Item 1. Business Company Background and History SPACEHAB Inc. ("SPACEHAB" or "the Company") was incorporated in 1984. It is the first Company to commercially develop, own and operate pressurized habitat modules. SPACEHAB habitat modules and unpressurized cargo carriers provide space-based research facilities and cargo services for use aboard the U.S. Space Shuttle system. A SPACEHAB Single Module, when installed in the payload bay of a Space Shuttle, more than doubles the space available to astronauts for research, habitation and storage. SPACEHAB offers its modules in single and double versions, outfitted for research, logistics, or a combination research and logistics depending on customer needs. SPACEHAB's newest space flight asset is the Research Double Module ("RDM"). The Company also offers an unpressurized cargo carrier system, the Integrated Cargo Carrier ("ICC"). SPACEHAB modules can accommodate a combination of lockers, racks and soft stowage arrangements. They are outfitted to support laboratory research in the microgravity environment of space and also are capable of transporting food, clothing, equipment and other vital supplies to the International Space Station ("ISS"). The Company sells research and logistics services to NASA and other customers who want to use the modules and carriers in space. In addition to its flight assets, SPACEHAB offers a full range of ground-based pre- and post-flight experiment and payload processing services and in-flight operations support. As of June 30, 2002, SPACEHAB modules and ICCs had flown 17 successful missions on the Space Shuttle, including 12 logistics missions (five to the ISS and seven to the Russian space station Mir). On February 12, 1997, SPACEHAB acquired the operating assets and business of Astrotech Space Operations Inc. ("Astrotech") from Northrop Grumman Corporation. Astrotech is a leading commercial provider of satellite processing services in the United States, supplying launch-site facilities used in the preparation of satellites by satellite manufacturers and space launch companies including Lockheed Martin Corporation ("Lockheed Martin"), The Boeing Company ("Boeing") and Orbital Sciences Corporation. In fiscal year 2002, Astrotech completed an additional facility in Titusville, Florida to process payloads for Evolved Expendable Launch Vehicles ("EELV") primarily for Lockheed Martin and Boeing. The Astrotech acquisition diversified SPACEHAB's customer base and broadened the Company's business base to include services that support satellite launches as well as human space flight activities. SPACEHAB expanded its capability to support human space flight activities by acquiring Johnson Engineering Corporation ("JE") on July 1, 1998. With over 460 employees, JE supplies several critical services to NASA including flight crew training operations support, facility operations, and fabrication of space vehicle mockups and trainers at NASA's Neutral Buoyancy Laboratory ("NBL") and Space Vehicle Mockup Facility ("SVMF"), where 2 astronauts train for Space Shuttle and ISS missions. JE also designs and fabricates flight hardware and provides stowage integration services and ISS configuration management support. On April 11, 2000, the Company announced the formation of Space Media Inc. ("SMI"), a majority-owned subsidiary intended to create proprietary space-themed content for education and commerce. In fiscal year 2001, SMI acquired The Space Store, an online retail operation, anticipating that e-commerce would become an integral part of its Internet business. The Space Store currently offers an assortment of space-related products through its website, www.spacestore.com., and a retail facility adjacent to Space Center Houston. In fiscal year 2002, SMI activities were refocused to develop content for the STARS Academy global education program and pursue corporate promotion and advertising opportunities. As part of Space Media, the STARS program currently is planning to launch six experiments designed by students in Australia, China, Israel, Japan, Liechtenstein and the United States on Space Shuttle mission STS-107, currently scheduled to launch in January 2003. The results of these experiments will be available online at www.starsacademy.com/sts107. In fiscal year 2000, SPACEHAB began design and construction of a commercial space station habitat module, in partnership with RSC Energia of Korolev, Russia. Named Enterprise(TM), this multipurpose module is intended to be attached to the ISS and could provide space station users habitation space, stowage space, communications, power and other utilities, and laboratory facilities for long-duration research. In the year ended June 30, 2001, SPACEHAB and Energia formed the Space Station Enterprise LLC ("SSE LLC"), a Delaware limited liability corporation, to complete development of Enterprise. SPACEHAB and Energia have an equal ownership interest in the SSE LLC. The LLC will be responsible for completing required financing for Enterprise and marketing and operating the facility planned as part of the ISS Russian Segment. Enterprise, if completed, would be launched in 2005 based upon the current ISS assembly schedule. Currently the ISS can only accommodate a three-person crew, which must spend most of its time maintaining the ISS with very little time for science. The ISS partners are in the process of evaluating four options, of which the Enterprise module constitutes two of the options, to increase crew time once requirements are clarified. The future utilization of Enterprise is expected to be determined within the next 9-12 months. Enterprise is actively being marketed to NASA and other potential users. Company Strategy SPACEHAB's goal is to be the world's leading provider of commercial space products and services, including human space flight support, space station logistics and satellite processing. SPACEHAB is committed to expanding its business with NASA while also diversifying its customer base by targeting new and related markets for space services. SPACEHAB's strategy for reaching these goals is described below. . Expanding the scope of business. SPACEHAB continues to focus on expanding its core business -- building on existing assets and Company expertise to offer new products and services. As it continues to provide research and resupply services on Space Shuttle missions, SPACEHAB is well positioned to anticipate emerging requirements for products and services supporting human space flight. With its acquisition of Astrotech in 1997 and JE in 1998, SPACEHAB diversified its revenue and customer base by targeting new space services markets in flight crew training support, facility operations and payload processing. SPACEHAB intends to augment its current core competencies by adding new services through strategic partnerships and innovative engineering. . Focusing on quality of service. SPACEHAB'S three business units products are known for providing high quality services, consistently earning excellent award fees and delivering flawless missions. SPACEHAB has successfully completed 17 Shuttle missions to date. The Company intends to maintain and enhance its reputation for product reliability, process innovation and performance excellence. . Maintaining its position as a low-cost service provider. SPACEHAB offers space services to NASA and other customers, using Company-owned and leased assets, on a fixed-price basis that the Company believes has proven to be a significantly less expensive alternative to the cost-plus basis used by conventional aerospace contractors. Through the application of commercial best practices in the development and operation of its hardware and facilities, SPACEHAB substantially reduces the cost, time and complexity typically associated with conventional government contractor services. SPACEHAB's JE subsidiary 3 provides services to NASA under cost-plus award and incentive fee contracts as requested by the customer. Cost-plus contracts require separate pricing negotiations for individual task orders, allowing JE to implement process improvements to reduce cost. . Continuing entrepreneurial initiatives. SPACEHAB continues to develop and offer innovative business arrangements to meet customer requirements. The Company has repeatedly taken the initiative to improve its modules and payload processing services and deploy new assets in anticipation of customer needs. By focusing on quality, cost and responsiveness and recruiting talented and experienced personnel into its distinctly entrepreneur organization, SPACEHAB seeks to distinguish itself as an innovative and effective provider of commercial space services. . Leveraging international strategic alliances. SPACEHAB seeks to create and maintain strategic alliances with key international players in the space industry. Existing relationships include Astrium GmbH (formerly DaimlerChrysler Aerospace AG), Intospace GmbH, Mitsubishi Corporation, RSC Energia and Alenia Spazio S.p.A. On August 2, 1999, Astrium strengthened its strategic relationship with SPACEHAB by purchasing a $12.0 million equity stake in the Company. These alliances have produced and will continue to produce business opportunities with these partners, the governments of their respective countries and other industries within those countries. Products and Services SPACEHAB's business segments provide a range of products and services to the aerospace market. Space Flight Services provides space research and space station resupply services using pressurized habitat modules and unpressurized cargo carriers that fly on NASA's Space Shuttle. Johnson Engineering supplies critical services to NASA in support of human space flight, including flight crew training support, facility operations, and fabrication of space vehicle mockups and trainers. Astrotech is a leading commercial provider of satellite processing services. Space Media Inc., a majority-owned subsidiary, operates the STARS Academy global education program and also includes The Space Store, an online retail operation. SPACEHAB's Strategic Programs segment is responsible for developing flight hardware and formulating new business initiatives. Flight Services NASA and other users of the Space Shuttle and ISS must follow a complex set of procedures to prepare payloads for launch, operate them in space, and process them upon return. SPACEHAB's Flight Services business segment offers these users affordable, customer-friendly, turn-key, fixed-price payload services using Company-controlled assets. These services include payload scheduling, mission planning, safety analysis and certification, physical integration with a carrier (such as a SPACEHAB module), integration of carriers with the Space Shuttle, flight operations, data gathering and synthesis, and launch and landing site activities. Flight Services is responsible for managing and operating the Company's fleet of single and double modules, ICCs, and supporting equipment. Modules and carriers are housed at the SPACEHAB Payload Processing Facility in Cape Canaveral, Florida. SPACEHAB Single Modules are aluminum cylinders, measuring 10 feet in length by 13.5 feet in diameter, that incorporate a patented design that includes a truncated top and flat end caps. These fully instrumented modules provide resources such as power, data management, thermal control and vacuum venting. Single Modules (payload capacity 4,800 lb.) are employed primarily for research and logistics missions. In fiscal year 1996, the Company completed development of the Logistics Double Module ("LDM" - payload capacity 10,000 lb.), optimized for resupply and used by NASA to carry vital supplies to cosmonauts and astronauts aboard the Russian space station Mir and the ISS. In fiscal year 1997, the Company began full-scale development of its RDM (payload capacity 9,000 lb.), outfitted to serve as a microgravity laboratory. The RDM was completed in fiscal year 2001 and will make its first flight on NASA Shuttle mission STS-107, currently scheduled to launch on January 16, 2003. With the retirement of the government-owned Spacelab in 1998, SPACEHAB believes that its flight-proven modules position the Company to be the top provider of crew-tended space research capabilities for NASA's Space Fleet Shuttle. 4 SPACEHAB developed the ICC system of unpressurized payload carriers to transport cargo that does not require a pressurized environment. Cargo suitable for transport on the ICC includes ISS assembly components, astronaut tools, and spare parts. Based on a patented pallet technology (the Unpressurized Cargo Pallet or "UCP"), the ICC flies in what is ordinarily unused volume in the front of the Space Shuttle's cargo bay. It can be used alone or in combination with SPACEHAB Single or Double Modules to provide the optimum mix of pressurized and unpressurized cargo capacity on a single mission to the ISS. By expanding the capabilities of the Space Shuttle and offering flexibility in the mix of pressurized and unpressurized cargo carried on each mission, the ICC is a cost-effective option for ISS logistics. SPACEHAB completed construction of the ICC in fiscal year 2000. The ICC initially flew on NASA's first supply mission to the ISS, Space Shuttle flight STS-96, in May 1999. In fiscal year 2001, the Company sold its ICC assets to Astrium and entered into an agreement with Astrium to lease back these assets for a period of four years with two additional four-year options. Through fiscal year 2002, the ICC had flown a total of five successful missions. Three more ICC flights are under contract. To meet particular NASA requirements for unpressurized cargo transport, SPACEHAB, in partnership with Astrium, developed a Vertical Cargo Carrier ("VCC", designed and built for SPACEHAB by RSC Energia). In fiscal year 2002, SPACEHAB completed construction of the VCC and sold this asset to Astrium. The ICC system, including the VCC and other derivatives, is a highly capable, flexible and adaptable payload transport option. Johnson Engineering SPACEHAB's JE subsidiary provides customer-responsive management and operation of complex facilities, high-end engineering services, high-fidelity flight mockup design and development, and disciplined configuration management of complex systems. JE performs several critical services for NASA, including support of flight crew training operations, facility operations, stowage integration, and ISS configuration management. JE provides flight mockups for NASA's Neutral Buoyancy Laboratory and Space Vehicle Mockup Facility, where astronauts train for Space Shuttle and ISS missions, and flight hardware such as crew equipment and crew quarters habitability outfitting. JE's Flight Crew Systems Development ("FCSD") contract with NASA is a cost-plus award and incentive fee contract that commenced in May 1993 which was currently scheduled to conclude on April 30, 2002. In the fourth quarter 2002, NASA granted JE a five-month extension covering work from May 1 through September 30, 2002, plus options for three one-month extensions covering the period from October 1 through December 31, 2002. NASA has exercised all three of these one-month options, adding approximately $9 million in value and bringing the total value of the 2002 contract extension to $23.2 million and the total value of the contract from May 1993 through December 2002 to $391.3 million. NASA intends to recompete elements of this contract for calendar year 2003 and beyond. JE is competing to continue performing this work. NASA and JE are also negotiating a bridge contract for stowage engineering and decal lab support, which will cover work through December 31, 2003, with three two-month options through June 30, 2004. JE is also leveraging its experience in building high-fidelity space vehicle mockups and trainers for NASA by developing additional commercial business in museum exhibit design engineering and fabrication. In fiscal year 2002, JE signed its first task order, for $1 million, under a new contract with KK.FTS Group of Japan to build a mockup of the International Space Station laboratory module Destiny for a new museum being built outside Tokyo. JE has also completed development of a major exhibit for Shanghai ScienceLand in China. Astrotech SPACEHAB's Astrotech subsidiary provides payload processing services to the satellite manufacturing and launch industries at Company-owned facilities in Titusville, Florida, near the Kennedy Space Center/Cape Canaveral launch complex, and at Vandenberg Air Force Base in California. Astrotech's payload processing services include support for spacecraft final mechanical assembly, electrical checkout, liquid propellant loading, solid rocket motor/ordnance installation, payload fairing encapsulation, providing vehicles for transport of payloads to the launch pad, and remote payload command and control through countdown. Payload processing requires specialized facilities located near the launch site. Astrotech's specialized facilities include environmentally controlled and hazard-proof work areas, airlock systems, and overhead crane systems. 5 Astrotech has long-term contracts in place with Lockheed Martin and Boeing to process payloads for EELVs. On August 21, 2002, Lockheed Martin successfully completed its first launch of the new Atlas V EELV. In support of the Lockheed Martin and Boeing contracts, Astrotech undertook a major facility expansion at its Florida site at a cost of approximately $30.5 million, building a new Spacecraft Processing Facility ("SPF") to support projected higher launch rates and larger sized payloads associated with new EELVs. In August 2001, Astrotech completed a $20 million financing of the expansion project. The new SPF, completed and dedicated in October 2001, is intended to support all planned configurations of the Delta IV and Atlas V EELVs. In fiscal years 2002 and 2001, expenditures for this expansion were approximately $15.2 million and $9.9 million, respectively. Astrotech also has agreements with Boeing to support the processing of all Sea Launch Expendable Launch Vehicle ("ELV") payloads at Sea Launch facilities in Long Beach, California, and with Orbital Sciences Corporation to support the processing of ELV payloads. In December 1998, Astrotech entered into a relationship with ATK (formerly Alliant Tech Services Inc.) to develop a new sounding rocket system called the Oriole. Astrotech completed a successful test launch of the Oriole on July 7, 2000, from NASA's Wallops Flight Facility in Virginia. In August 2001, following SPACEHAB's adoption of a cost-reduction plan, Astrotech sold the assets of its Oriole sounding rocket program to DTI Associates Inc. of Arlington, Virginia. The sale, effective July 26, 2001, turns over all physical and intellectual property assets of the Oriole program except for those required for Astrotech to fulfill the terms of an agreement with an existing customer. Astrotech is pursuing additional business opportunities, including the provision of payload processing services to new U.S. government customers in the defense and intelligence communities and support for new space launch facilities internationally. Space Media On April 11, 2000, SPACEHAB announced the formation of SMI, a majority-owned subsidiary intended to create proprietary space-themed content for education and commerce. In fiscal year 2000, SMI acquired The Space Store, an online retail operation, anticipating that e-commerce could become an integral part of its Internet business. The Space Store currently offers space-related products through its website, www.spacestore.com, and a retail facility in Houston, Texas, near NASA's Johnson Space Center. In fiscal year 2001, SMI's focus was to develop content for STARS Academy(TM) and to pursue corporate promotion and advertising opportunities. STARS Academy is a global education program offering students opportunities to learn about and even participate in research aboard NASA's Shuttle and the ISS. As part of Space Media, the STARS Program currently is planning to launch six student-designed experiments for schools in Australia, China, Israel, Japan, Liechtenstein and the United States on Space Shuttle mission STS-107, currently scheduled to launch in January 2003. In fiscal year 2002, due to limited funding opportunities in the education industry and a struggling Internet content market, SMI reduced staffing and ended its marketing program for the STARS Program. Other Operations SPACEHAB's Strategic Programs segment is responsible for new initiatives intended to build on the Company's expertise, expand existing markets and develop new markets. This segment is responsible for developing innovative, affordable, "no-box" solutions to complex customer problems identified within the space industry. In fiscal year 2000, SPACEHAB began design and construction of a commercial space station habitat module, in partnership with RSC Energia of Korolev, Russia. Named Enterprise(TM), this multipurpose module is intended to be attached to the ISS and could provide space station users habitation space, stowage space, communications, power and other utilities, and laboratory facilities for long-duration research. In the year ended June 30, 2001, SPACEHAB and Energia formed the Space Station Enterprise LLC ("SSE LLC"), a Delaware limited liability corporation, to complete development of Enterprise. SPACEHAB and Energia have an equal ownership interest in the SSE LLC. The LLC will be responsible for completing required financing for Enterprise and marketing and operating the facility planned as part of the ISS Russian Segment. Enterprise, if completed, would be launched in 2005 based upon the current ISS assembly schedule. Currently the ISS can only accommodate a three-person crew, which must spend most of its time maintaining the ISS with very little time for science. At an ISS partners' meeting currently scheduled for November/December 2002, four ISS configuration options will be reviewed and an option path may be 6 endorsed. The future utilization of Enterprise is expected to be determined within the next 9-12 months. Enterprise is actively being marketed to NASA and other potential users. In fiscal year 1996, SPACEHAB began development of a SPACEHAB Universal Communications System ("SHUCS") for use on the ISS and Space Shuttle. The Company invested $235,000 in this project during fiscal year 2002 and $6.0 million through the year ended June 30, 2002. SHUCS is a space-based commercial communications system designed to provide significantly increased on-orbit coverage using a reliable, low-bandwidth communication between Earth and low-earth-orbit vehicles using the Inmarsat Satellite system. The system can be used to communicate with the Space Shuttle or the ISS. As the SHUCS design is essentially complete, the next phase of the program will be to build, integrate and test the flight hardware, and outfit the ground communications facility. As of June 30, 2002, SHUCS development was on hold pending a revised business case. SPACEHAB initiated development of the Docking Double Module ("DDM") during the second half of fiscal year 1999. DDM was conceived for the purpose of enabling Columbia, the oldest and heaviest orbiter in NASA's Shuttle fleet, to support ISS resupply operations. The DDM eliminates the need for the orbiter docking module and ancillary attachment hardware by allowing orbiters to dock directly to the roof of the Spacehab module. The DDM could increase orbiter payload capacity and the orbiters' capability to "reboost" or restore the desired orbit of the ISS. The DDM utilizes the design of the existing Spacehab modules, but provides for a reinforced "roof" to allow direct docking to the ISS. As of June 30, 2002, DDM development was on hold pending a revised business case. In 1998 SPACEHAB entered into a joint venture agreement with Guigne Technologies Ltd. Of Canada to build SpaceDRUMSTM -- Dynamically Responding Ultrasonic Matrix Systems -- a space-based facility using acoustic energy to position samples for containerless processing. The Company's interest in the joint venture was converted to an equity interest in Guigne Inc., the parent Company of Guigne Technologies Ltd., effective January 1, 2000. The SpaceDRUMS facility is completed and scheduled for launch to the ISS on Space Shuttle mission STS-114 no earlier than January 2003. SpaceDRUMS will be installed in the U.S. space station laboratory module Destiny as a permanent facility. It is designed to operate on the ISS for five years, supporting space-based research experiments for NASA and commercial customers. Industry Overview Global public spending for space activities (civilian and military) totaled $38 billion in calendar year 2001, up from $37 billion in 2002, according to Euroconsult. The United States, European Union, and Japan account for 95% of this spending. The U.S. aerospace industry generated $151 billion in sales in calendar year 2001, the Aerospace Industries Association of America ("AIA") reports, up 3.3% over $146 billion in 2000. AIA projects that sales will decline to $144 billion in calendar year 2002. NASA and other federal agencies (excluding the Department of Defense) increased space spending by $927 million to $14.3 billion in 2001. In the commercial satellite industry, sales were strong through the mid-1990s and peaked in 2000, followed by a slow down in 2001, according to Euroconsult. The satellite market is expected to resume its growth, however, by 2004. With an annual budget approaching $15 billion, NASA is responsible for the U.S. civilian space program. Approximately 81% of SPACEHAB's fiscal year 2002 revenues came from contracts with NASA and other government agencies. The agency's Space Shuttle system and the ISS are the backbone of the U.S. Space program, and human space flight programs account for almost half of the space agency's fiscal year 2002 budget. SPACEHAB plays a key role in the Space Shuttle and ISS programs, providing its fleet of modules and carriers along with expertise in payload integration, flight crew systems development and space station configuration management to NASA, other U.S. and foreign government agencies, universities, and businesses. SPACEHAB anticipates that demand for its modules and carriers to support space-based research, space-station resupply and other flight requirements will grow throughout ISS assembly and operations. The U.S. space program is focused on advancing scientific research, establishing a permanent human presence in space, developing new technologies that contribute to economic growth and security and fostering improved international relations through peaceful cooperation in space with Europe, Japan, Russia and other nations. SPACEHAB is focused on two markets: microgravity and space life sciences research and space support services such as space station logistics and resupply, ground operations and payload processing. The microgravity 7 environment of space provides a unique opportunity to study physical, chemical, and biological processes without the influence of gravity. Demand for access to a microgravity environment can be divided into two broad categories: scientific research and commercial applications. Customers for space flight services supporting space-based research and development aboard the Space Shuttle and the ISS include NASA, other government agencies, academic institutions, and private companies. SPACEHAB provides single and double modules outfitted for laboratory research as well as unpressurized cargo carriers equipped to carry research projects and other payloads that do not require crew tending. The ISS is the largest international engineering project ever undertaken. More than a dozen nations, including the United States, Canada, Japan, Russia and members of the European Union, are committed to building and operating the ISS. Technical constraints and NASA funding limitations have delayed completion of the ISS, and the agency has not yet committed to the final configuration of ISS beyond the "core complete" phase, providing a space station crew of only three and little crew time for research. Members of Congress, the science community, and other constituencies are pressing NASA to commit to "assembly complete," accommodating a crew of six, without further delay and launch more frequent Shuttle missions, in order to provide greater opportunities for space-based research. The Enterprise module is one of the options under consideration to achieve this goal. NASA is reviewing ISS planning and spending in order to determine how to proceed toward completion of the project. The agency is not expected to complete its ISS review until mid-2003. Because the ISS will achieve the "core complete" configuration in approximately two years, the emphasis of ISS program is transitioning from assembly to operations and utilization. In order to prepare for this new emphasis, the ISS program office has announced its intent to consolidate its current contracts into five to eight new contracts designed to optimize performance in operations and utilization. Under the current plan these contracts will be awarded beginning in 2003. SPACEHAB'S core competencies directly support at least three of these consolidated contracts. The Company has begun planning for these opportunities and expects to submit proposals in 2003. Competition SPACEHAB ranked tenth on NASA's top-ten list of business contractors for the agency's fiscal year 2000, with $101 million (0.9%) of contract awards. SPACEHAB was the first small business (SIC Code 8731, less than 1000 employees) ever to appear on this list. The other nine companies on the 2000 list were Boeing, Lockheed Martin Corp., Raytheon Corp., Thiokol Corp., Northrup Grumman, United Technologies Corp., Computer Sciences Corp., SAIC Inc., and TRW Inc. While SPACEHAB competes with these companies in some market segments, no other companies currently compete directly with SPACEHAB's core business in providing pressurized modules and unpressurized cargo carriers that fly aboard the Space Shuttle. SPACEHAB provides research, logistics, infrastructure and payload processing services to NASA and other users of the Space Shuttle, ISS, and ELV's. In April 1998, NASA terminated the government-owned and operated Spacelab program, which provided laboratory modules for Shuttle missions. SPACEHAB developed RDM, a commercial successor to Spacelab, under contract with Boeing (formerly McDonnell Douglas Aerospace). SPACEHAB believes that the RDM will significantly outperform Spacelab in technology, functionality and cost-effectiveness. Boeing is NASA's prime contractor for the ISS, and United Space Alliance ("USA," a joint Boeing-Lockheed Martin initiative) is NASA's prime contractor for Space Shuttle operations. SPACEHAB routinely collaborates with Boeing and USA on Shuttle and ISS activities. SPACEHAB maintains a strategic partnership with Astrium GmbH. In August 1999, Astrium executed a SPACEHAB stock purchase that made it the largest single shareholder in the Company. Astrium also takes part in joint programs with SPACEHAB. The Company's strategic relationships with Mitsubishi Corporation and Energia may provide additional opportunities for teaming and partnerships that management believes will enable the Company to compete for greater market share. SPACEHAB's JE subsidiary competes with companies that provide operations support and, engineering and fabrication services to NASA. These competitors include Boeing, Lockheed Martin, United Space Alliance, Barrios Technologies Inc., Hernandez Engineering Inc., Cimarron and Oceaneering Space Systems. SPACEHAB subsidiary Astrotech's payload processing facilities are located in Florida and California. At present, Astrotech's U.S. competition is limited to the California launch site, at Vandenberg Air Force Base ("VAFB") 8 where Spaceport Systems International ("SSI") is located. SSI acquired surplus U.S. Air Force facilities at the VAFB launch complex before Astrotech established its facilities there. SSI does not have payload processing facilities in Florida, where the majority of U.S. commercial satellite launches occur. SMI has no known direct competitors. Dependence on a Single Customer Approximately $83 million (81%) of SPACEHAB's revenue in fiscal year 2002 was generated by two NASA contracts - Space Flight Services' Research and Logistics Mission Support ("REALMS") contract and JE's Flight Crew Systems Development ("FCSD") contract. A significant portion of the Company's revenue is currently generated from contracts with NASA that, similar to contracts with other agencies of the U.S. government, contain provisions pursuant to which NASA may terminate the contract "for convenience." The Company's contracts with NASA depend upon the agency's receipt of adequate annual appropriations from the U.S. Congress. Failure to receive adequate funds could prompt NASA to terminate its contracts with SPACEHAB "for convenience." For the government's fiscal year ended September 30, 2001, Congress appropriated $14.5 billion for NASA, including $2.1 billion for the ISS. There is no assurance that future funding will be adequate for NASA to complete all of its initiatives including those relating to contracts with SPACEHAB. In calendar year 2002, issues facing NASA have included an ISS funding shortfall that has prompted the agency to defer commitment to completion of the ISS beyond a "core complete" state and Space Shuttle flight delays due to the discovery of flaws in engine parts. SPACEHAB anticipates that a portion of future revenue will be derived from contracts with entities other than agencies of the U.S. government that will not be subject to federal contract regulations such as termination "for convenience" or government funding restrictions. While Astrotech, Space Flight Services and JE contracts with commercial customers provide additional revenue, SPACEHAB anticipates that NASA business will continue to account for a significant amount of the Company's revenue over the next several years. There are no assurances that NASA will require SPACEHAB's services in the future. A failure to execute new contracts with NASA would have a material adverse effect on the Company's financial condition and results of operations. SPACEHAB continues to work on diversifying its customer base to include private companies. Backlog As of June 30, 2002, and June 30, 2001, the Company's contract backlog was approximately $211.5 million and $205 million, respectively, of which $117 million and $97 million, respectively, represented U.S. government backlog and $94 million and $108 million, respectively, represented non-U.S. government contracts. Contract History SPACEHAB's initial business strategy focused on anticipating customer requirements, investing capital to develop space-flight assets, contracting with established aerospace companies for engineering and asset production, and retaining ownership of these assets. This strategy enabled SPACEHAB to obtain three significant space flight-services contracts with NASA to date: a $184.2 million Commercial Middeck Augmentation Module ("CMAM") contract for five missions, a $91.5 million contract for four missions and three option missions (all of which were exercised) to the Russian space station Mir, and a $160.3 million Research and Logistics Mission Support (REALMS) contract initially for four missions with pricing for six mission configurations. SPACEHAB continues to operate under the REALMS contract, which provides an opportunity for the Company to sell services to commercial customers as well as to NASA. Contracts with commercial customers on STS-95, STS-101, STS-105, STS-107 and STS-123 account for approximately $38.0 million in revenue. The REALMS contract, signed in December 1997 and amended in October 1999, requires SPACEHAB to provide single and double modules and unpressurized ICCs to support research payloads and outfitting of the ISS. REALMS missions flown include: STS-95, a research mission, October 1998; STS-96, a logistics mission, May 1999; STS-101, logistics, May 2000; STS-106, logistics, September 2000; STS-105, logistics, August 2001. REALMS 9 missions under contract but not yet launched include: STS-107, research, calendar year 2003; STS-112, research, to be determined; STS-116, logistics, calendar year 2003; and STS-118, logistics, calendar year 2003. The REALMS contract permits the Company to provide space flight services to commercial customers as well as to NASA on STS-95, STS-101, and STS-107. In fiscal year 1998, the Company entered into agreements with NASDA, ESA, the Canadian Space Agency (CSA) and the Japanese broadcasting agency NHK to provide them hardware, integration and operations for experiments flown aboard the SPACEHAB Single Research Module on STS-95. In fiscal year 2000, SPACEHAB completed integration and operations efforts for STS-101, began integration and operation efforts for STS-102, STS-105 and STS-106 and continued integration and operation efforts for STS-107, recognizing $39.6 million in revenue for these missions under the percentage-of-completion revenue recognition policy. In fiscal year 2001, the Company completed integration and operations efforts for STS-102 and STS-106 and continued integration and operations effects for STS-105, STS-107, STS-114 and STS-112, recognizing $45.0 million in revenue for these missions. In fiscal year 2002, the Company completed integration and operations efforts for STS-105, continued integration and operations efforts for STS-107, and began integration and operations efforts for STS-116 and STS-118. The Mir contract, signed in July 1995, required SPACEHAB to provide single and double module accommodations on four Space Shuttle flights for resupply missions to Mir. The fourth mission, STS-84, was completed successfully in May 1997. In September 1996, the Company entered into agreements with the National Space Development Agency of Japan (NASDA) and the European Space Agency (ESA) to provide them with hardware integration and operations for experiments on STS-84. In June 1997, NASA exercised three options under the Mir contract for additional resupply missions. These options, worth a total of $39.0 million, called for two logistics double module missions and one single module mission. These missions were successfully completed in September 1997, January 1998 and June 1998. The CMAM contract, signed in November 1990, required SPACEHAB to furnish NASA with SPACEHAB module accommodations on five Space Shuttle missions for experiments developed by NASA-sponsored Centers for the Commercial Development of Space. The fifth CMAM mission was completed successfully during September 1996. JE operates primarily under the FCSD contract, a multitask cost-plus-award and incentive-fee contract whose total value is currently $391.3 million, for the period from May 1993 through December 2002. In fourth quarter 2002, NASA granted JE a five-month FCSD contract extension covering work from May 1 through September 30, 2002, plus options for three one-month extensions covering the period from October 1 through December 31, 2002. NASA has exercised all three of these one-month options, adding approximately $9 million in value and bringing the total value of the 2002 contract extension to $23.2 million. NASA intends to recompete elements of this contract for calendar year 2003 and beyond. JE is competing to continue performing this work. JE performs several critical services for NASA including support of flight crew training operations and fabrication of space flight mockups at NASA facilities where astronauts train for Space Shuttle and ISS missions. Two contracts have a period of performance through the end of 2003, crew services and ISS configuration management. JE also provides stowage integration services and designs and fabricates space flight hardware, such as crew equipment and crew quarters habitability outfitting. JE is responsible for configuration management support to the ISS program under a contract won in a competitive bid in 2001. For fiscal years 2002, 2001 and 2000, JE recognized revenue of $40.5 million, $53.5 million and $58.2 million, respectively. In fiscal year 2002, Astrotech completed a major facility expansion at its Florida site at a cost of approximately $30.5 million, building a new Spacecraft Processing Facility ("SPF") to support projected higher launch rates and larger sized payloads associated with new EELVs. In August 2001, Astrotech completed a $20 million financing of the expansion project. The new SPF, completed and dedicated in October 2001, is intended to support all planned configurations of the Delta IV and Atlas V EELVs In fiscal year 2000, SPACEHAB's Astrotech subsidiary completed negotiations of long-term extensions to payload processing contracts with its two largest customers, Boeing and Lockheed Martin. The total revenue under these contracts is approximately $85 million. Astrotech also has payload processing contracts in place with Boeing Sea 10 Launch and Orbital Sciences Corporation. Astrotech has successfully supported the processing of over 150 satellites since the beginning operations in 1985 and continues to be recognized as the industry leader in commercial satellite processing. For fiscal years 2002, 2001 and 2000, Astrotech recognized revenues of $9.9 million, $6.2 million and $7.6 million, respectively. Research and Development SPACEHAB incurred $383,000, $393,000 and $2.4 million in research and development expenditures during fiscal years 2002, 2001 and 2000, respectively. Approximately $222,000 of the Company's research and development expenditures for fiscal year 2002 was spent on development of the Enterprise module. The remainder of $161,000 was spent on miscellaneous research and development projects in 2002. Approximately $139,000 of the Company's research and development expenditures for fiscal year 2001 was spent completing development of Astrotech's Oriole sounding rocket program, and $166,000 was spent on development of a Lightweight Tunnel to replace and improve upon the pressurized tunnel that NASA now uses to connect the Space Shuttle middeck to SPACEHAB modules in the Shuttle's cargo bay. The remainder of $88,000 was spent on miscellaneous research and development projects. Approximately $1.1 million of SPACEHAB's research and development expenditures for fiscal year 2000 was spent on development of the Oriole program. In addition, $0.5 million was spent on development of the Enterprise module, and $0.8 million was spent on various studies conducted by third parties. Certain Regulatory Matters The Company is subject to federal, state and local laws and regulations designed to protect the environment and to regulate the discharge of materials into the environment. The Company believes that its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and consequential financial liability to the Company. Compliance with environmental laws and regulations and technology export requirements has not had in the past, and, the Company believes, will not have in the future, material effects on the capital expenditures, earnings or competitive position of the Company. Employees As of June 30, 2002, the Company and its wholly and majority-owned subsidiaries employed 595 regular fulltime employees, 460 are employed by JE, 99 are employed by SPACEHAB, 28 are employed by the Astrotech subsidiary, and 4 are employed by the SMI subsidiary. Of these employees, approximately 11% hold advanced degrees, including 8 individuals who hold doctorate degrees. Additionally, a significant number of the Company's employees have experience in both the space industry and/or governmental space agencies, with a special expertise in commercial space and human space flight. None of the Company's employees are covered by collective bargaining agreements. Underlying all of SPACEHAB's efforts has been the dedication and skill of its personnel. The Company believes that the dedication of its employees is critical to its success and that its relations with its employees are excellent. Item 2. Properties The Company and its wholly and majority-owned subsidiaries, Astrotech, JE, and Space Media currently occupy 10 locations. The corporate headquarters which had been located at 300 D Street SW, Suite 814, Washington, DC 20024 was re-designated at 12130 State Highway 3, Webster, TX 77598. The office at 300 D Street SW, Suite 814, Washington, DC consists of 15,499 square-feet of office space and houses 11 employees including portion of SPACEHAB's executive management, finance and marketing team. The term of the present lease expires on December 16, 2007. As of June 30, 2002, the Company sublet the entire space through the end of the term of the Company's lease and is currently leasing a small office in Washington, D.C. on a month to month basis. 11 SPACEHAB has 99 employees encompassing executive management, sales and marketing, flight services and JE employees located at 12130 State Highway 3, Webster, TX 77598. The facility consists of 126,000 square feet of non-contiguous office and manufacturing space located near the Johnson Space Center. The term of the lease is for two and a half years and expires on March 15, 2003. SPACEHAB also leases offices at 1331 Gemini Avenue, Suites 300 and 310, Houston, Texas 77058. The Houston offices consist of approximately 23,000 square feet of non-contiguous office space located near the Johnson Space Center. The lease has a five-year term commencing March 1, 1998, and expiring February 28, 2003. On May 1, 2002 the Company terminated the lease on 11,735 square feet of space and on July 1, 2002 the Company signed a lease with a subtenant for 2,550 square feet of space leaving the Company with 8,695 square feet of space to sublease. The Company is actively seeking a subtenant for the remaining space. The Company's Flight Services payload processing facility, housing a 4-person operations team, is located near the Kennedy Space Center in Cape Canaveral, Florida. The facility is contained in an approximately 58,000 square-foot plant. The Company owns the building that houses the payload processing facility but leases the land upon which it is constructed. The payload processing facility has a clean room work area of approximately 24,000 square-feet. This work area is designed to accommodate the SPACEHAB Single and Double Modules, as well as the unpressurized flight assets. This area includes 11 secure experiment/payload integration and work areas ranging in size from 300 square-feet to 1,000 square-feet each. In addition, the facility provides office space, stock rooms, storage areas, a machine shop, an electrical shop, conference rooms, and other miscellaneous accommodations. In July 1997, the Company negotiated a new agreement with the Canaveral Port Authority for the lease of the land. The term of the new lease is for a forty-three year period commencing August 28, 1997. Upon expiration of the land lease, all improvements on the property revert at no cost to the lessor. SPACEHAB occupies 23,000 square feet of office space located at 6000 Technology Drive in Huntsville, Alabama housing the Company's subcontractor personnel. The lease expires on September 30, 2004. Astrotech occupies two locations. Astrotech's headquarters and Florida operations teams, consisting of 18 personnel, are located in a nine-building, owned facility at 1515 Chaffee Drive, Titusville, Florida 32780. This 140,000 square-foot facility supports non-hazardous and hazardous material processing, payload storage and customer offices. The construction of the new 50,000 square foot space craft processing facility was completed in March 2002. These buildings presently occupy one-third of the 62-acre property owned by Astrotech, with one-third available for expansion and the remaining one-third reserved for hazardous facility safety clearances. Astrotech has a 2-person technical staff located on Vandenberg Air Force Base in Santa Barbara County, California. Astrotech presently rents a 60-acre site on the Air Force Base and owns five buildings comprising 18,800 square-feet, which are dedicated to the same functions provided at the Florida facility. The term of the present land lease expires on July 13, 2013. Upon expiration of the land lease, all improvements on the property revert, at the lessor's option, to the lessor at no cost. Additionally, Astrotech has nine employees who are housed at the Sea Launch facility in Long Beach, California. JE occupies two locations. Its headquarters are located at 555 Forge River Road, Suite 150, Webster, Texas 77058. The headquarters house JE's 87-person engineering team within a 31,114 square-foot facility. This office lease expires on June 28, 2003. JE also occupies approximately 9,826 square feet of space at 18100 Upper Bay Road, Houston, Texas 77058 that houses an 11-person engineering and laboratory team. The lease will expire on December 31, 2002. SMI, Space Store, has 4 employees and occupies approximately 1,000 square feet of space located at 1400 NASA Road One, Suite E., Houston, TX 77058. The lease expires on August 2006. 12 Additionally, JE has more than 365 additional employees who are housed at various government facilities within the Houston area. The Company believes that its current facilities and equipment are generally well maintained and in good condition and are adequate for its present and foreseeable needs. Item 3. Legal Proceedings On June 21, 2002, Escott Ventures II, LLC ("ESV") filed Case Number 1:02CV01236 in the U.S. District Court for the District of Columbia against Space Media, Inc., SPACEHAB, Inc., Shelley A. Harrison and Julia A. Pulzone (collectively, "Defendants"). This suit relates to ESVs investment in Space Media, Inc., and asserts claims for federal securities fraud, fraud in the inducement, common law fraud, negligent misrepresentation, breach of contract, breach of duty of good faith and fair dealing, tortuous interference with contractual relations and conspiracy to commit fraud. ESV seeks rescission of its contract and return of its $750,000 investment, plus unspecified expenses, consequential damages, exemplary and punitive damages, prejudgment interest, and costs and disbursements, including attorney and expert fees. Defendants answered the complaint on July 17, 2002, asserted a number of affirmative defenses, and intend to contest the case vigorously. The parties have subsequently agreed to engage in mediation in an attempt to resolve this matter. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of stockholders during the fourth quarter of the year ended June 30, 2002. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock (the "Common Stock") trades on the NASDAQ National Market System under the symbol "SPAB". The Common Stock has been publicly traded since December 22, 1995, the date of the closing of the Company's initial public offering. The quarterly high and low closing stock prices for fiscal years 2002 and 2001 are as follows: Fiscal 2002 High Low - ----------- ---- --- First Quarter $2.600 $1.370 Second Quarter $1.660 $0.600 Third Quarter $1.839 $0.730 Fourth Quarter $1.650 $1.000 Fiscal 2001 High Low - ----------- ---- --- First Quarter $6.406 $4.375 Second Quarter $5.750 $2.063 Third Quarter $3.083 $2.000 Fourth Quarter $2.091 $2.063 The Company has never paid cash dividends. It is the present policy of the Company to retain earnings to finance the growth and development of its business and, therefore, the Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The Company has authorized 30,000,000 shares of Common Stock. At August 16, 2002, 12,154,465 shares of Common Stock were outstanding. The Company had approximately 2,946 shareholders of record and beneficial holders of its Common Stock on June 30, 2002. 13 On August 2, 1999, Astrium, a related party and a shareholder, purchased an additional $12.0 million equity stake in SPACEHAB representing 1,333,334 shares of Series B Senior Convertible Preferred Stock. Under the agreement, Astrium, a related party, purchased all of SPACEHAB's 975,000 authorized and unissued shares of preferred stock. At the annual stockholders meeting held on October 14, 1999, the shareholders approved the proposal to increase the number of authorized shares of preferred stock to 2,500,000, in order to complete the transaction with Astrium, a related party, allowing them to purchase the additional 358,334 preferred shares. The preferred stock purchase increased Astrium's, a related party, and investment interest in SPACEHAB to approximately 11.5%. The Series B Senior Convertible Preferred Stock is: convertible at the holders' option on the basis of one share of preferred stock for one share of common stock, entitled to vote on an "as converted" basis the equivalent number of shares of common stock and has preference in liquidation, dissolution or winding up of $9.00 per preferred share. No dividends are payable on the convertible preferred shares. Sales of Unregistered Securities During fiscal year 2002, the Company did not issue any unregistered securities. Item 6. Selected Financial Data The selected financial data presented below are derived from the audited consolidated financial statements of SPACEHAB. This selected financial information should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this report.
Year Ended Year Ended Year Ended Year Ended Year Ended June 30 June 30 June 30 June 30 June 30 ------------------------------------------------------------------- 1998 1999 2000 2001 2002 ------------------------------------------------------------------- (in thousands, except per share data) Statement of Operations Data: Revenue $ 64,087/1/ $107,720/5/ $105,708 $105,254 $102,773 Costs of revenue 36,321 89,283 87,931 92,243 81,767 ------------------------------------------------------------------- Gross profit 27,766 18,437 17,777 13,011 21,006 Selling, general and administrative 13,712 14,599 17,832/6/ 21,796 19,507/9/ expenses Research and development expenses 2,620 3,636 2,440/7/ 393 383 ------------------------------------------------------------------- Operating income (loss) 12,697 202 (2,495) (9,178) 1,116 Interest expense, net of capatalized 4,480 4,905 3,773 4,804 5,533 amounts Net income (loss) 9,604 (2,589) (3,844) (12,785)/8/ (2,367) Net income (loss) per common share - $0.84 ($0.23) ($0.34) ($1.12) ($0.20) Diluted/2/ Shares used in computing net income 14,571 11,185 11,273 11,400 11,884 (loss) Per common share - diluted/2/ Other Data: Cash provided by (used for) operations $ 31,604 ($6,331) $ 1,424 $ 17,124 $ 8,592 Total investing activities 23,113/3/ 58,619/4/ 29,794 23,076 13,716 Balance Sheet Data (at period end): Working capital (deficiency) $ 62,660 $ 12,374 ($1,601) ($41,424) ($22,022) Total assets 220,604 204,346 225,109 222,477 220,826 Long-term debt, excluding current 85,322 78,810 75,901 64,589 82,416 portion Stockholders' equity 96,408 94,165 102,702 90,356 87,670
14 /1/ The Company recognized revenue upon the completion of each flight under the Mir and CMAM Contracts. For new contract awards for which the capability to successfully complete the contract can be demonstrated at contract inception, revenue recognition under the percentage-of-completion method is being reported based on costs incurred over the period of the contract. /2/ In December 1997, the Company adopted the provisions of Statement of Financial Accounting No. 128, Earnings Per Share, which establishes new guidelines for the calculations of earnings per share. Earnings per share for FY 1994 through FY 1997 have been restated to reflect the provisions of this new standard. /3/ Includes $20.1 million of consideration for the purchase of Astrotech. /4/ Includes $24.7 million of consideration for the purchase of JE and a $1.4 million investment in a joint venture. /5/ Includes revenues of $58.4 million generated by JE subsequent to its acquisition on July 1, 1998. /6/ Includes approximately $1.8 million of expenses associated with the startup of SMI. /7/ Includes approximately $0.5 million of expenses associated the Enterprise module. /8/ Includes approximately $3.3 million of non-cash expense to record a full valuation allowance on the Company's deferred tax asset. /9/ Includes approximately $0.8 million of non-cash expenses related to subleasing of excess facilities. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. SPACEHAB was incorporated in 1984 to commercially develop space habitat modules to operate in the cargo bay of NASA's Space Shuttles. SPACEHAB, along with its Johnson Engineering Corporation ("JE"), Astrotech Space Operations, Inc. ("Astrotech"), and Space Media, Inc. ("SMI") subsidiaries define the Company. SPACEHAB's Flight Services business unit generates revenue by providing a turnkey service that includes access to the modules and unpressurized cargo carriers and integration and operations support to scientists and researchers responsible for the experiments and/or logistics supplies for module missions aboard the Space Shuttle System and under the FCSD Contract. Revenue generated under the REALMS Contract and for new contract awards for which the capability to successfully complete the contract can be demonstrated at contract inception, revenue is recognized under the percentage-of-completion method and is being reported based on costs incurred over the period of the contract. With respect to the FCSD cost-plus award and incentive fee contract, revenue is recognized based on costs incurred plus a proportionate amount of estimated fee earned. Revenue provided by Astrotech's payload processing services is recognized ratably over the occupancy period of the satellite while in the Astrotech facilities. Under the multi-year contracts for payload processing services with commercial launch vehicle providers, revenue is billed and recognized on a quarterly basis as cost are incurred. JE primarily operates under the FCSD Contract which is currently a $391.3 million multitask cost-plus-award and incentive-fee contract. The contract commenced in May 1993 and was scheduled to conclude in September 2002. Subsequent to June 30, 2002, NASA exercised its option to extend the contract through December 2002. The contract is currently in the recompete process with a contactor selection expected by NASA in the fall of 2002. JE performs services under a cost-plus award and incentive fee contract for government services that is requested and directed by NASA. Astrotech revenue is generated from various multi-year fixed-price contracts with satellite and launch vehicle providers. 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. Under the multi-year contracts for payload processing services with commercial launch vehicle providers, revenue is billed and recognized on a quarterly basis as cost are incurred. Costs incurred by Astrotech are recognized as incurred. On April 11, 2000, SPACEHAB announced the formation of SMI, a majority-owned subsidiary intended to create proprietary space-themed content for education and commerce. In fiscal year 2000, SMI acquired The Space Store, an online retail operation, anticipating that e-commerce could become an integral part of its Internet business. The Space Store currently offers space-related products through its website, www.spacestore.com, and a retail 15 facility in Houston, Texas, near NASA's Johnson Space Center. In fiscal year 2001, SMI focused on content development and subscription expansion for STARS Academy(TM), corporate promotion and advertising opportunities, and creation of a library of content for redistribution through various media channels. STARS Academy is a global education program offering students opportunities to learn about and even participate in research aboard NASA's Shuttle and the ISS. As part of Space Media, the STARS Program currently is planning to launch six student-designed experiments for schools in Australia, China, Israel, Japan, Liechtenstein and the United States on Space Shuttle mission STS-107, currently scheduled to launch in January 2003. The Company's revenues for the year ended June 30, 2002 were primarily generated from the REALMS contract and contracts with related commercial customers in its flight services segment with one mission flown in August 2001, and the FCSD contract with JE. The Company's revenues for the year ended June 30, 2001 were primarily generated from the REALMS contract and contracts with related commercial customers, with two missions flown in September 2000 and March 2001, and the FCSD contract with JE. The Company's revenues for the year ended June 30, 2000 were primarily generated from the REALMS contract and contracts with related commercial customers, with one mission flown in May 2000 and the FCSD with JE. 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. 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 incentive fee contracts are expensed as incurred by JE. 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. Critical Accounting Policies Revenue Recognition. SPACEHAB's Flight Services business unit's revenue is derived primarily from long-term fixed- price contracts with the US Government and commercial customers. Revenue under these contracts is recognized using the percentage of completion method of accounting. Such revenues are recorded based on the percentage of costs incurred in the applicable reporting period as compared to the most recent estimates of costs to complete each mission. 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. Costs to complete include, when appropriate, material, labor, subcontracting costs, lease costs, commissions, insurance and depreciation. Reviews of the status of contracts are performed by business segment personnel through 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 in which the change in estimate occurs. Intangible Assets. In assessing the recoverability of goodwill and other intangibles, the Company must make assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets. If these circumstances or their related assumptions change in the future, the Company may be required to record impairment charges for these assets. The Company adopted Statement of Financial Standards No. 142, "Goodwill and Other Intangible Assets", on July 1, 2002, under which the Company will cease to amortize goodwill and will be required instead to analyze goodwill at least annually for impairment issues. Long-Lived Assets. In assessing the recoverability of long-lived assets, fixed assets and assets under construction, the Company evaluates the recoverability of those assets in accordance with the provisions of Statements of Financial Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of". This Statement requires that certain long-lived fixed assets of the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset 16 exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Results of Operations Fiscal Year Ended June 30, 2002 as Compared to the Fiscal Year Ended June 30, 2001 Revenue. The Company's revenue decreased slightly from last year at approximately $102.8 million for the year ended June 30, 2002, as compared to $105.3 million for the year ended June 30, 2001. For the year ended June 30, 2002, $51.4 million was recognized from the REALMS Contract and related commercial customers, $40.5 million from JE, $9.9 million from Astrotech, $0.7 million from SMI and $0.3 million of miscellaneous revenue. For the year ended June 30, 2001, $45.0 million was recognized from the REALMS Contract and related commercial customers, $53.5 million from JE, $6.2 million from Astrotech, $0.5 million from SMI and $0.1 million of miscellaneous revenue. The increase in revenue under the REALMS Contract and related commercial customers is due primarily to an increase in contract value resulting from the extended launch date of STS-107. Revenue at JE declined primarily due to the deletion of certain tasks under the FCSD contract partially offset by an increase in commercial contract revenue. Astrotech's revenue increase is due primarily to the structure of the multiyear contracts with its two largest customers, Boeing and Lockheed, whereby revenue is billed and recognized on a quarterly basis for cost incurred. SMI's revenue increase is primarily the result of the increased revenue generated by the Space Store. Costs of Revenue. Costs of revenue for the year ended June 30, 2002 decreased 11% to approximately $81.8 million, as compared to $92.2 million for the year ended June 30, 2001. For the year ended June 30, 2002, $29.8 million of costs were for integration and operation costs under the REALMS Contract and related commercial customers, $37.3 million for cost of revenue at JE, $4.2 million for integration and operations at Astrotech, $0.5 million for SMI, $0.2 million of miscellaneous cost of goods sold and depreciation of $9.7 million. In contrast, the primary costs of revenue for the year ended June 30, 2001 included $31.1 million of costs for integration and operation costs under the REALMS Contract and related commercial customers, $49.8 million for cost of revenue at JE, $4.3 million for integration and operations at Astrotech, $0.4 million for cost of revenue at SMI and depreciation of $6.6 million. Cost of revenue decreased under the REALMS Contract and related commercial customers contracts primarily as the result of the mix of missions flown and cost savings due to launch date extensions. Cost of revenue at JE decreased primarily due to the deletion of certain tasks under the FCSD contract partially offset by increased costs under its commercial contracts. JE recognized costs in excess of revenue of $1.0 million for a commercial contract. Cost of revenue remains relatively unchanged at Astrotech. Cost of goods sold at SMI increased primarily due to the increase of sales at the Space Store. Depreciation increased due primarily to the inclusion of a full year of depreciation on the RDM for the year ended June 30, 2002. Operating Expenses. Operating expenses decreased by 10% to approximately $19.9 million for the year ended June 30, 2002, as compared to $22.2 million for the year ended June 30, 2001. Selling, general and administrative ("SG&A") expenses decreased $2.3 million from the year ended June 30, 2001 due primarily to Company wide cost reduction actions. SMI's expenses decreased approximately $3.3 million associated with the downsizing of the SMI operation partially offset by $2.0 million of increased expenses associated with the Company's bid and proposal efforts to win the NASA Microgravity contract. In addition, the Company recognized $0.8 million of expense for excess facilities that have been sublet. Astrotech's SG&A expenses decreased approximately $0.2 million due to staff and facility cost reductions relative to the sale of the sounding rocket business. SG&A at SPACEHAB was reduced by approximately $0.3 million due to a reduction in depreciation expense for assets that reached the end of their depreciable lives. SG&A expenses at JE decreased by approximately $1.0 million due primarily to a reduction in facilities costs of $0.3 million, reduction in bid and proposal costs $0.1 million, reduction in management information expenses $0.3 million and approximately $0.3 million in other expense categories. SG&A expenses relative to Enterprise decreased approximately $0.2 million. Research and development costs for the year ended June 30, 2002 as compared to the year ended June 30, 2001 were essentially unchanged at approximately $0.4 million and $0.4 million, respectively. 17 Interest Expense, Net of Capitalized Interest. Interest expense was approximately $8.0 million and $7.5 million for the years ended June 30, 2002 and June 30, 2001, respectively. In the year ended June 30, 2002, the Company incurred interest on the mortgage for the Astrotech facility expansion. $1.3 million of interest expense was capitalized in 2002 as compared to $2.7 million in 2001. Interest is capitalized on the in-progress construction of the Company's modules and payload processing facilities. Interest and Other Income, Net. Interest and other income was approximately $1.2 million and $0.3 million for the years ended June 30, 2002 and 2001, respectively. The Company recognized a gain of approximately $1.1 million on the sale of the Oriole Sounding Rocket assets during the year ended June 30, 2002. Interest income is earned by the Company through the short-term investment of available funds. Net Loss. The net loss for the year ended June 30 2002 was approximately $2.4 million, or $0.20 per share (basic and fully diluted EPS), on 11,884,309 shares as compared to approximately $12.8 million, or $1.12 per share (basic and fully diluted EPS), on 11,400,482 shares for the year ended June 30, 2001. The net loss for the year ended June 30, 2002 included a non-cash charge of $0.8 million for the loss on excess facilities, in Washington, DC and Houston, TX. The net loss for the year ended June 30, 2001 included a $3.3 million non-cash charge to record a full valuation allowance on the Company's deferred tax asset. Income tax benefit for the year ended June 30, 2001 was ($0.9). As of June 30, 2002, the Company had approximately $40.7 million of available net operating loss carry-forwards expiring between 2007 and 2021 to offset future regular taxable income. The effects of inflation and changing prices have not significantly impacted the Company's revenue or income from continuing operations during the years ended June 30, 2002 and 2001. Fiscal Year Ended June 30, 2001 as Compared to the Fiscal Year Ended June 30, 2000 Revenue. The Company's revenue essentially remained unchanged from last year at approximately $105.3 million for the year ended June 30, 2001 as compared to $105.7 million for the year ended June 30, 2000. For the year ended June 30, 2001, $45.0 million was recognized from the REALMS contract and related commercial customers, $53.5 million from JE, $6.2 million from Astrotech and $0.5 million from SMI, $0.1 million of miscellaneous revenue. For the year ended June 30, 2000, $39.6 million was recognized from the REALMS contract and related commercial customers, $58.2 million from JE, $7.6 million from Astrotech and $0.3 million of miscellaneous revenue. The increase in revenue under the REALMS contract and related commercial customers is due primarily to an increase in contract value due to a two-year slip in the launch date of STS-107. Revenue at JE declined primarily due to the deletion of certain tasks under the FCSD contract partially offset by an increase in commercial contract revenue. Astrotech's revenue decline is primarily the result of the impact of a reduced number of launches, of customer launch vehicle failures, which have been subsequently corrected, and the bankruptcies of Iridium and ICO Satellite Systems. SMI had no revenue for the year ended June 30, 2000. Costs of Revenue. Costs of revenue for the year ended June 30, 2001, increased 5% to approximately $92.2 million, as compared to $87.9 million for the year ended June 30, 2000. For the year ended June 30, 2001, $31.1 million of costs were for integration and operation costs under the REALMS Contract and related commercial customers, $49.8 million for cost of revenue at JE, $4.3 million for integration and operations at Astrotech, $0.4 million for SMI and depreciation of $6.6 million. In contrast, the primary costs of revenue for the year ended June 30, 2000, $24.7 million of costs were for integration and operation costs under the REALMS Contract and related commercial customers, $53.1 million for cost of revenue at JE, $4.7 million for integration and operations at Astrotech, and depreciation of $5.4 million. Cost of revenue increased under the REALMS Contract and related commercial customers contracts primarily as the result of the increased costs of the launch date slippage of STS-107. Cost of revenue at JE decreased primarily due to the deletion of certain tasks under the FCSD contract partially offset by increased costs under its commercial contracts. In addition, approximately $1.2 million of non-reimbursable cost overruns related to the delivery of the robotic training arm for NASA under a fixed-price contract were included in cost of revenue for JE in the year ended June 30, 2000. JE completed this delivery during the year ended June 30, 2000. Cost of revenue decreased at Astrotech due to the reduced number of missions processed. SMI incurred no costs of revenue for the year ended June 30, 2000. 18 Operating Expense. Operating expenses increased by 9% to approximately $22.2 million for the year ended June 30, 2001, as compared to $20.3 million for the year ended June 30, 2000. Selling, general and administrative ("SG&A") expenses increased $4.0 million from the year ended June 30, 2000 due primarily to the start up costs associated with Space Media of $3.2 million, and expenses associated with JE's efforts to expand its customer base into commercial markets of $0.4 million. This increase was offset by a decrease in research and development costs of $2.0 million. Research and development costs for the year ended June 30, 2001 was approximately $0.4 million, as compared to $2.4 million for the year ended June 30, 2000. This decrease is due primarily to a shift in emphasis to the completion of the current assets under construction as opposed to the development of new assets. Approximately $0.1 million was spent by Astrotech for the completion of the development of the sounding rocket program this year as compared to $1.1 million in the year ended June 30, 2000 and $0.3 million was spent on the development of a lightweight tunnel and miscellaneous items in the year ended June 30, 2001 as compared to $0.5 million spent on research and development on the EnterpriseTM module during the year ended June 30, 2000. There were no research and development expenditures for Enterprise during the year ended June 30, 2001. Interest Expense, Net of Capitalized Interest. Interest expense was approximately $7.5 million and $7.4 million for the years ended June 30, 2001 and June 30, 2000 respectively. $2.7 million of interest expense was capitalized in 2001 as compared to $3.7 million in 2000. Interest is capitalized on the in-progress construction of the Company's modules and payload processing facilities. Interest and Other Income, Net. Interest and other income was approximately $0.3 million and $0.7 million for the years ended June 30, 2001 and 2000, respectively. Interest income is earned by the Company through the short-term investment of available funds. Net Loss. The net loss for the year ended June 30, 2001 was approximately $12.8 million, or $1.12 per share (basic and fully diluted EPS), on 11,400,482 shares as compared to a loss of $3.8 million, or $0.34 per share (basic and fully diluted EPS), for the year ended June 30, 2000 on 11,272,767 shares. The net loss for the year ended June 30, 2001 includes a $3.3 million non-cash charge to record a full valuation allowance on the Company's deferred tax asset. Income tax benefit for these periods was ($0.9) million and ($1.8) million for the years ended June 30, 2001 and 2000, respectively. As of June 30, 2001, the Company had approximately $41.7 million of available net operating loss carry-forwards expiring between 2007 and 2021 to offset future regular taxable income. The effects of inflation and changing prices have not significantly impacted the Company's revenue or income from continuing operations during the years ended June 30, 2001 and 2000. Liquidity and Capital Resources The Company has incurred net losses in the years ended June 30, 2002, 2001 and 2000. The Company has historically financed its capital expenditures, research and development and working capital requirements with progress payments under its various contracts, as well as with proceeds received from private debt and equity offerings and borrowings under credit facilities. During December 1995, SPACEHAB completed an initial public offering of Common Stock (the "Offering"), which provided the Company with net proceeds of approximately $43.5 million. On October 21, 1997, the Company completed a private placement offering of convertible subordinated notes payable (the "Notes Offering"), which provided the Company with net proceeds of approximately $59.9 million which has been used, in part, for capital expenditures associated with the development and construction of space related assets, the purchase of JE on July 1, 1998, and for general corporate purposes. In June 1997, the Company signed an agreement with a financial institution securing a $10.0 million revolving line of credit (the "Revolving Line of Credit") that the Company may use for working capital purposes. As of June 30, 2000, $4.5 million was drawn on the line of credit, which expired on August 31, 2000. On August 9, 2000, the Company entered into a $15 million revolving credit facility with a different financial institution, which provided a working capital line of credit with a letter of credit sub-limit of $10.0 million (the "New Credit Facility"). 19 This New Credit Facility replaced the $10 million Revolving Line of Credit. Certain assets of the Company collateralize the new credit facility. The term of the new agreement was through August 2003. In conjunction with the Astrotech Financing, discussed below, of its satellite processing facility in Titusville, Florida in August 2001, the terms of the New Credit Facility were amended. Space Media, Inc. is no longer a party to the New Credit Facility and the maximum amount allowable to be drawn under the New Credit Facility was reduced to $3.0 million in May 2002. Effective December 31, 2001, the New Credit Facility was further amended. Certain collateral was released by the financial institution and the maximum amount allowable to be drawn under the New Credit Facility was to be reduced each month beginning January 1, 2002 through July 1, 2002. As of June 30, 2002, $2.15 million was drawn on the New Credit Facility. Subsequent to the year ended June 30, 2002, the Company entered into a $5.0 million line of credit with a new financial institution. This credit facility replaces the New Credit Facility which was repaid and expired subsequent to the year ended June 30, 2002. The term of this new credit facility is through June 2005. In July 1997, Astrotech obtained a five-year term loan (the "Term Loan Agreement"), which is guaranteed by SPACEHAB, and provides for loans of up to $15.0 million for general corporate purposes and equipment financing. In conjunction with the Astrotech financing of its satellite processing facility in Titusville, Florida in August 2001, $3.1 million of the term Loan Agreement was repaid. As of June 30, 2002, the Company had loans payable of $0.2 million. In December 1998, the Company amended its agreement with Alenia Spazio S.p.A ("Alenia") relative to the subordinated convertible notes payable to Alenia with an outstanding balance of $11.9 million. In consideration for a payment of $4.0 million, Alenia agreed to reduce the annual interest rate from 12% to 10% on the outstanding balance as of January 1, 1999, and the interest payment due for the quarter ended December 31, 1998, was waived resulting in an effective interest rate of 8.75%. The maturity date of this debt was August 1, 2001 and was subsequently extended to November 15, 2001 to provide for completion of a restructuring agreement. On November 15, 2001 the Company entered into an agreement with Alenia to restructure the terms of this debt to provide for a $3.0 million payment of principal and interest on December 31, 2001 and quarterly amortization of the remaining principal beginning March 2002 through December 2003. In addition, the interest rate was reduced to 8% effective January 1, 2002. The balance at the date of restructure was $7.9 million and the outstanding balance is $3.9 million as of June 30, 2002. On August 2, 1999 Astrium GmbH ("Astrium"), a related party and shareholder, purchased an additional $12.0 million equity stake in SPACEHAB representing 1,333,334 shares of Series B Senior Convertible Preferred Stock. Under the agreement, Astrium, a related party, purchased all of SPACEHAB's 975,000 authorized and unissued shares of preferred stock. At the annual stockholders meeting held on October 14, 1999, the shareholders approved the proposal to increase the number of authorized shares of preferred stock to 2,500,000, in order to complete the transaction with Astrium, a related party, allowing them to purchase the additional 358,334 preferred shares. The preferred stock purchase increased Astrium's, a related party, investment voting interest in SPACEHAB to approximately 11.5%. The Series B Senior Convertible Preferred Stock is: convertible at the holders' option on the basis of one share of preferred stock for one share of common stock, entitled to vote on an "as converted" basis the equivalent number of shares of common stock and has preference in liquidation, dissolution or winding up of $9.00 per preferred share. No dividends are payable on the convertible preferred shares. Cash Flows From Operating Activities. Cash provided by operations for the years ended June 30, 2002, 2001, and 2000 was $8.6 million, $17.1 million and $1.4 million, respectively. For the year ended June 30, 2002, the significant items affecting cash provided by operating activities were primarily the result of depreciation and amortization of $13.4 million, a non-cash charge of approximately $770,000 to record a loss on subletting two facilities, an decrease in accounts payable of $6.1 million and a decrease in accounts receivable of $4.2 million. For the year ended June 30, 2001, the significant items affecting cash provided by operating activities were primarily the result of deprecation and amortization of $10.6 million, a non-cash charge of approximately $3.3 million to record a full valuation allowance against the Company's deferred tax asset, an increase in deferred revenue of $11.0 million, primarily related to equitable adjustment payments for STS-107, and a decrease in accounts receivable of $8.4 million. For the year ended June 30, 2000, the significant items affecting cash provided by operating activities were primarily the result of depreciation and amortization of $8.8 million, $11.1 million provided by deferred revenue, 20 primarily from a payment received for STS-123, the increase in accounts receivable of $8.3 million and decrease in accrued subcontracting services of $4.8 million. Cash Flows Used in Investing Activities. For the years ended June 30, 2002, 2001, and 2000, cash flows used in investing activities were $13.7 million, $23.1 million and $29.8 million, respectively. During the year ended June 30, 2002, the Company's expenditures for flight assets under construction relate primarily to the completion of the VCC for sale to Astrium, a related party, adapter plates for unpressurized ICC and VCC missions and for the Enterprise Module. Approximately, $15.4 million was spent for buildings under construction and equipment, primarily for the expansion of Astrotech's Payload processing facilities in Titusville, Florida. The Company received $4.4 million in services payments for the sale of its VCC assets to Astrium, a related party, completing the last phase of its asset sale and received $1.4 million in cash, primarily for the Oriole sounding rocket business and the Clear Lake Industries sales. During the year ended June 30, 2001, the Company's expenditures for flight assets under construction relate primarily to the completion for the Research Double Module ("RDM"), which was placed in service in April 2001 and expenditures for the Enterprise Module. Approximately, $8.9 million was spent for buildings under construction, primarily for the expansion of Astrotech's Payload processing facilities in Titusville, Florida. The Company received $7.6 million in cash for the sale of its ICC assets to Astrium, a related party. Expenditures for the year ended June 30, 2000 were primarily for the continued construction of the Company's flight assets including, among others, the RDM, Adaptable Double Module, Enterprise module and completion of the ICC. A significant portion of the cash used for buildings under construction relate to the expansion of Astrotech's payload processing facilities. Expenditures for this expansion in the year ended June 30, 2000 were approximately $4.0 million. In addition, $1.2 million was returned to the Company as certain escrow funds relative to the purchase of JE were received. An additional $0.6 million was invested in Guigne, completing the Company's contractual obligation for the financing of the SpaceDRUMS(TM) joint venture Cash Flows From Financing Activities. For the years ended June 30, 2002, 2001, and 2000, cash flows (used for) provided by financing activities were $7.2 million, ($1.0) million and $14.0 million, respectively. During the year ended June 30, 2002 the Company received $20.0 million related to the financing of the Astrotech payload processing facility in Titusville, Florida and repaid approximately $0.9 million of the loan. The Company repaid $4.0 million of the loan payable, $4.0 million of the note payable and repaid in full, $333,000, the note payable to insurers. In addition the Company repaid $4.6 million of the New Credit Facility and subsequent to the year ended June 30, 2002, repaid the New Credit Facility. During the year ended June 30, 2001 the Company borrowed $2.25 million under the New Credit Facility and made payments of $3.3 million on the notes payable and $0.3 million on the note payable to the senior debt holders. During the year ended June 30, 2000 the Company received $11.9 million from the issuance of convertible preferred shares to Astrium, a related party and borrowed $4.5 million on the Revolving Line of Credit. In addition, the Company paid approximately $2.9 million on other notes payable. The Company has incurred net losses in the years ended June 30, 2002, 2001 and 2000. Historically, the Company has financed its capital expenditures, research and development and working capital requirements with cash generated from operations under its various contracts, as well as with proceeds received from both public and private debt and equity offerings and borrowings under credit facilities. The Company's liquidity has been constrained over the previous two fiscal years. A significant portion of this constraint arose from funding of new operations and assets to support future Company growth, funding a portion of the construction cost of the new Astrotech Florida facility and funding of required debt repayments. In addition, the Company was committed to capital investments to complete certain flight assets. Due to changes in the external markets, the Company re-evaluated its strategy. Beginning in the third quarter of the fiscal year 2001, management began an aggressive multi-faceted plan to improve the Company's financial position and liquidity. This plan included the following components: i) completing the external financing for the new facility required to support operations at Astrotech's Florida location; ii) reducing operating costs and establishing an operating plan for fiscal year 2002 which provides for sufficient cash flow to support efficient operations; iii) renegotiating the terms and conditions of the revolving line of credit; iv) limiting cash commitments for future capital investments and new asset development; v) restructuring the repayment of certain debts maturing in fiscal year 2002; vi) divesting non-core assets; vii) obtaining external investor funding for its Space Media 21 subsidiary; viii) completing negotiations for certain contract equitable adjustments due to the Company under it long-term services contract with NASA; and ix) improving the overall liquidity of the Company. Under this Plan, the Company undertook extensive efforts to reduce cash required for both operations and capital investments. Specifically, the Company took steps to reduce overhead beginning in the third quarter of the fiscal year 2001 and reduced its workforce by approximately 10%. The Company's fiscal year 2002 operating plan realized efficiencies from these actions. In August 2001, Astrotech obtained $20 million of financing for the expansion of its payload processing facilities. The financing provided funds for completion of the facility construction as well as a return of approximately $6.5 million of previously invested working capital of the Company. The Company used approximately $3.1 million of these working capital funds to repay an existing obligation under Astrotech's credit facility. Additionally, the Company completed planned divesting of non-core assets. Development and construction of new assets is currently limited to those assets required to fulfill existing commitments under contracts. The Company has no further on-going commitments to fund development or construction of any asset. Under this Plan, the Company refocused the scope of SMI's operations on near term initiatives in order to maximize the potential return of capital invested to date in SMI. In September 2001, the Company obtained $750,000 from an investor to fund future operations of SMI in exchange for equity in SMI. As a result, the Company's ownership interest in SMI was reduced to approximately 51%. The Company completed the restructure of certain debt obligations and secured contract funding on the equitable adjustment due under its contract with NASA. The Company is in compliance with the terms of the restructured debt as of June 30, 2002. As discussed above, management implemented and completed the Plan begun in the third quarter of fiscal year 2001. Management continues to focus its efforts on improving the overall liquidity of the Company through reducing operating expenses and limiting cash commitments for future capital investments and new asset development, and believes it will be successful in these efforts. The Company's plans indicate that all cash generated from operations during the next fiscal year will be used to fund operations and reduce existing debt. The Company believes that the cash flows from operations, borrowings under the replacement credit facility and elimination of discretionary capital expenditures and other expenses will be sufficient to enable the Company to meet its cash requirements for the next twelve months. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and Other Intangible Assets." The Statement eliminates the requirement to amortize costs in excess of net assets acquired (goodwill) under the purchase method of accounting, and sets forth a new methodology for periodically assessing and, if warranted, recording impairment of goodwill. The Company will be required to adopt the new rules effective July 1, 2002. The elimination of amortization of goodwill is expected to increase earnings by approximately $1.0 million. The Company will analyze and assess the impairment provisions of the new Statement, but has not yet determined the impact, if any, of the adoption of those provisions. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations- reporting the effects of disposal of a segment of a business, and extraordinary, unusual and infrequently occurring events and transactions. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company expects to adopt SFAS 144 as of July 1, 2002 and it does not expect that the adoption of this statement will have a significant impact on the Company's financial position and results of operations. 22 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk. SPACEHAB's primary exposure to market risk relates to interest rates. SPACEHAB's financial instruments which are subject to interest rate risk principally include the New Credit Facility, the Term Loan Agreement and fixed rate long-term debt. SPACEHAB's long-term debt obligations are generally not callable until maturity. On September 30, 2001 SPACEHAB's Astrotech Space Operations, Inc. subsidiary completed a financing for a building under construction. In conjunction with this financing, a swap agreement was entered into to provide for a fixed rate of interest under the loan commitment beginning January 2002. SPACEHAB does not use any other interest rate swaps or derivative financial instruments to manage its exposure to fluctuations in interest rates are subject to interest rate risk principally include the New Credit Facility, the Term Loan Agreement and fixed rate long-term debt. The value of the swap agreement declined by approximately $1.0 million during the year ended June 30, 2002 due to declines in the market rate of interest. SPACEHAB does not use any other interest rate swaps or derivative financial instruments to manage its exposure to fluctuations in interest rates. 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. 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, the successful development and commercialization of the Research Double Module and related new commercial space assets, deployment of the International Space Station, technological difficulties, product demand and market acceptance risks, the effect of economic conditions, uncertainty in government funding and the impact of competition. 23 Item 8. Financial Statements and Supplementary Data. Report of Independent Auditors The Board of Directors SPACEHAB, Incorporated and Subsidiaries We have audited the accompanying consolidated balance sheets of SPACEHAB, Incorporated and subsidiaries (the Company) as of June 30, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SPACEHAB, Incorporated and subsidiaries at June 30, 2002 and 2001, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP McLean, Virginia August 23, 2002 24 Report of Independent Auditors The Board of Directors SPACEHAB, Incorporated and Subsidiaries: We have audited the accompanying consolidated statements of operations, stockholders' equity and cash flows of SPACEHAB, Incorporated and subsidiaries for the year ended June 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of SPACEHAB, Incorporated and subsidiaries for the year ended June 30, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP KPMG LLP McLean, Virginia August 31, 2000 25 SPACEHAB, INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share data)
June 30, ---------------------- Assets 2002 2001 - ------------------------------------------------------------------------------------------------------ Current assets Cash and cash equivalents $ 2,145 $ 34 Restricted cash (note 8) 549 - Accounts receivable, net (note 4) 13,802 17,358 Prepaid expenses and other current assets 464 1,381 - ------------------------------------------------------------------------------------------------------ Total current assets 16,960 18,773 - ------------------------------------------------------------------------------------------------------ Property and equipment Flight assets 162,166 159,400 Module improvements in progress 19,622 24,188 Payload processing facilities 45,367 40,192 Furniture, fixtures, equipment and leasehold improvements 23,003 13,854 - ------------------------------------------------------------------------------------------------------ 250,158 237,634 Less accumulated depreciation and amortization (74,307) (63,580) - ----------------------------------------------------------------------------------------------------- Property and equipment, net 175,851 174,054 Goodwill, net of accumulated amortization of $ 4,553 and 3,500, respectively 20,294 21,347 Investment in Guigne, (note 19) 1,800 1,800 Other assets, net 5,921 6,503 - ------------------------------------------------------------------------------------------------------ Total assets $ 220,826 $ 222,477 ====================================================================================================== Liabilities and Stockholders' Equity - ------------------------------------------------------------------------------------------------------ Current liabilities Loans payable under credit agreement, current portion (note 6) $ - $ 333 Loans payable, current portion (note 8) 169 3,126 Revolving loan payable (note 8) 2,150 6,750 Accounts payable 5,996 10,533 Accounts payable- Astrium 2,767 2,751 Accrued expenses 5,586 7,739 Accrued subcontracting services 3,043 2,112 Convertible notes payable to shareholder (note 7) 1,827 7,860 Mortgage loan payable (note 8) 2,039 - Deferred revenue 15,405 18,993 - ------------------------------------------------------------------------------------------------------ Total current liabilities 38,982 60,197 - ------------------------------------------------------------------------------------------------------ Loans payable (note 8) 49 1,139 Accrued contract costs 100 100 Miscellaneous note payable - 200 Accrued expenses 338 - Deferred revenue 9,560 7,235 Convertible notes payable to shareholder (note 7) 2,039 - Mortgage loan payable (note 8) 18,088 - Convertible subordinated notes payable (note 8) 63,250 63,250 - ------------------------------------------------------------------------------------------------------ Total liabilities 132,406 132,121 - ------------------------------------------------------------------------------------------------------ Minority interest in subsidiary 750 - - ------------------------------------------------------------------------------------------------------ Commitments and contingencies (notes 1, 11 and 16) Stockholders' equity (notes 7, 8, 11 and 12) Preferred stock, no par value, convertible, authorized 2,500,000 shares, issued and outstanding 1,333,334 shares,(liquidation preference of $12,000) 11,892 11,892 Common stock, no par value, authorized 30,000,000 shares, issued and outstanding 12,154,465 and 11,528,145 shares, respectively 83,204 82,513 Additional paid-in capital 16 16 Accumulated other comprehensive loss (1,010) - Accumulated deficit (6,432) (4,065) - ------------------------------------------------------------------------------------------------------ Total stockholders' equity 87,670 90,356 - ------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 220,826 $ 222,477 ====================================================================================================== See accompanying notes to consolidated financial statements.
26 SPACEHAB, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except share and per share data)
================================================================================================================== Year ended Year ended Year ended June 30, June 30, June 30, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Revenue $ 102,773 $ 105,254 $ 105,708 - ------------------------------------------------------------------------------------------------------------------ Costs of revenue 81,767 92,243 87,931 - ------------------------------------------------------------------------------------------------------------------ Gross profit 21,006 13,011 17,777 - ------------------------------------------------------------------------------------------------------------------ Operating expenses: Selling, general and administrative 18,737 21,796 17,832 Loss on subleases 770 - - Research and development 383 393 2,440 - ------------------------------------------------------------------------------------------------------------------ Total operating expenses 19,890 22,189 20,272 - ------------------------------------------------------------------------------------------------------------------ Income (loss) from operations 1,116 (9,178) (2,495) Interest expense, net of capitalized interest (note 3) (6,683) (4,804) (3,773) Interest and other income, net 1,150 311 662 - ------------------------------------------------------------------------------------------------------------------ Loss before income taxes (4,417) (13,671) (5,606) Income tax benefit (note 13) (2,050) (886) (1,762) - ------------------------------------------------------------------------------------------------------------------ Net loss $ (2,367) $ (12,785) $ (3,844) ================================================================================================================== Loss per share: Net loss per share - basic and diluted $ (0.20) $ (1.12) $ (0.34) ================================================================================================================== Shares used in computing net loss per share - basic and diluted 11,884,309 11,400,482 11,272,767 ================================================================================================================== See accompanying notes to consolidated financial statements.
27 SPACEHAB, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (In thousands, except share data)
---------------------------------------------------------------------------------------------------------------------------------- Convertible Preferred Stock Accumulated Total Common Stock Additional other Stockholders' ------------------- ----------------------- Paid-In (Accumulated Comprehensive Shares Amount Shares Amount Capital Deficit) (Loss) Equity ---------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1999 - $ - 11,229,646 $ 81,585 $ 16 $ 12,564 $ $ 94,165 ==================================================================================================================================== Preferred stock issued 1,333,334 11,892 - - - - - 11,892 Common stock issued under employee stock purchase plan - - 115,386 489 - - - 489 Net loss - - - - - (3,844) - (3,844) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 2000 1,333,334 $ 11,892 11,345,032 $ 82,074 $ 16 $ 8,720 - $ 102,702 ==================================================================================================================================== Common stock issued under employee stock purchase plan - - 183,113 439 - - - 439 Net loss - - - - - (12,785) - (12,785) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 2001 1,333,334 $ 11,892 11,528,145 $ 82,513 $ 16 $ (4,065) - $ 90,356 ==================================================================================================================================== Common stock issued under bonus plan - - 224,635 350 - - - 350 Common stock issued under employee stock purchase plan - - 401,685 341 - - - 341 Accumulated other comprehensive - - - - - - (1,010) (1,010) income Net loss - - - - - (2,367) - (2,367) - ------------------------------------------------------------------------------------------------------------------------------------ Total comprehensive loss - - - - - - - (3,377) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 2002 1,333,334 $ 11,892 12,154,465 $ 83,204 $ 16 $ (6,432) $ (1,010) $ 87,670 ====================================================================================================================================
See accompanying notes to consolidated financial statements. 28 SPACEHAB, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands)
Year ended Year ended Year ended June 30, 2002 June 30, 2001 June 30, 2000 - ------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net loss $ (2,367) $(12,785) $ (3,844) Adjustments to reconcile net loss to net cash provided by operating activities: Gain on sale of property & equipment (1,096) - - Loss on subleases 770 - - Depreciation 11,595 8,691 7,133 Amortization 1,089 1,259 1,089 Amortization of debt placement costs 730 623 528 Valuation allowance of deferred tax asset - 3,292 - Valuation allowance of investment in Guigne - - (200) Changes in assets and liabilities: Decrease (increase) in accounts receivable 4,211 8,440 (8,327) Decrease (increase) in prepaid expenses and other current assets 917 947 (1,182) Increase in deferred mission costs - - (1,031) Increase in other assets (691) (1,064) (240) (Decrease) increase in deferred flight revenue (1,262) 10,973 11,093 (Decrease) increase in accounts payable and accrued expenses (6,135) 2,007 1,955 Increase (decrease) in accrued subcontracting services 831 113 (4,788) Decrease increase in deferred taxes - (5,372) (762) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 8,592 17,124 1,424 - ------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities Payments for flight assets under construction (2,600) (20,150) (23,009) Payments for building under construction and leasehold improvements (15,409) (8,934) (4,868) Purchases of property and equipment (983) (1,558) (2,361) Sale of Vertical Cargo Carrier 4,400 - - Proceeds from sale of flight assets - 7,566 - Proceeds from sale of property and equipment 1,425 - - Increase in restricted cash (549) - - Purchase of Johnson Engineering, net of cash acquired - - 1,200 Purchase of The Space Store - - (156) Investment in Guigne - - (600) - ------------------------------------------------------------------------------------------------------------------------ Net cash used for investing activities (13,716) (23,076) (29,794) - ------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities Payments of note payable to insurers (333) (333) (333) Proceeds from issuance of convertible preferred stock - - 11,892 (Repayment) proceeds from revolving line of credit (4,600) 2,250 4,500 Payments of note payable (4,047) (3,319) (2,575) Payments of note payable to shareholder (3,994) - - Proceeds from sale of minority interest in SMI 750 - - Proceeds from mortgage loan 20,000 - - Payment of mortgage loan (882) - - Proceeds from issuance of common stock, net of expenses 341 439 489 - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used for) financing activities 7,235 (963) 13,973 - ------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 2,111 (6,915) (14,397) Cash and cash equivalents at beginning of year 34 6,949 21,346 - ------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 2,145 $ 34 $ 6,949 ========================================================================================================================
See accompanying notes to consolidated financial statements. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Description of the Company, Operating Environment and Liquidity Description of the Company and Operating Environment SPACEHAB, Incorporated (the "Company") is the first Company to commercially develop, own and operate habitable modules that provide space-based laboratory research facilities and cargo services aboard the U.S. Space Shuttle system. The Company currently owns and operates four pressurized laboratory and logistics supply modules, which significantly enhance the capabilities of the Space Shuttle fleet. The Company is currently constructing a module that will attach to the International Space Station ("ISS") and be primarily used for storage, power and utility service and laboratory facilities for long-duration research. The Company's modules are unique to the Space Shuttle fleet and ISS. To date, the Company has successfully completed seventeen missions aboard the Space Shuttle and substantially all of the Company's revenue has been generated under contracts with National Aeronautics and Space Administration ("NASA"). The Company's contracts are subject to periodic funding allocations by NASA. NASA's funding is dependent on receiving annual appropriations from the United States government. During the years ended June 30, 2002, 2001, and 2000 approximately 81%, 83% and 86% of the Company's revenues were generated under U.S. Government contracts, respectively. On February 12, 1997, the Company acquired the assets and certain of the liabilities of Astrotech Space Operations, L.P. ("Astrotech"), a subsidiary of Northrop Grumman, a provider of commercial satellite launch processing services and payload processing facilities in the United States. These services are provided at the Astrotech facilities in Cape Canaveral, Florida and Vandenberg Air Force Base in California, and are provided to launch service providers on a fixed-price basis. Additionally, Astrotech provides management and consulting services to The Boeing Company for its Sea Launch program at the Sea Launch facility in Long Beach, California. On July 1, 1998, the Company acquired all of the outstanding shares of capital stock of Johnson Engineering Corporation ("JE"). JE performs several critical services for NASA including flight crew support services, operations, training support and fabrication of mockups at NASA's Neutral Buoyancy Laboratory and at NASA's Space Vehicle Mockup Facility, where astronauts train for both Space Shuttle and ISS missions. JE also designs and fabricates flight hardware, such as flight crew equipment and crew quarters' habitability outfitting as well as providing stowage integration services. JE is also responsible for configuration management of the ISS. On April 11, 2000, the Company announced the formation of Space Media, Inc. ("SMI"), a majority-owned subsidiary that intends to create proprietary space-themed content for education and commerce. During the year ended June 30, 2001, SMI's activities were refocused primarily to develop content for the STARS Academy(TM), corporate promotion and advertising opportunities and offering a library of content that can be redistributed through various media channels. The STARS Academy is a global education program offering students a scientific, cultural and social adventure across the earth, into the oceans and aboard the International Space Station. SMI offers retail products associated with the STARS Academy. As part of Space Media, the STARS program currently is planning to launch six experiments designed by students in Australia, China, Israel, Japan, Liechtenstein and the United States on Space Shuttle mission STS-107, currently scheduled to launch in January, 2003. During the year ended June 30, 2000, SMI acquired The Space Store, an online retail operation. The Space Store currently offers an assortment of space-related products through its Space Store website, www.spacestore.com. In fiscal year 2000, SPACEHAB began design and construction of a commercial space station habitat module, in partnership with RSC Energia of Korolev, Russia. Named Enterprise(TM), this multipurpose module is intended to be attached to the ISS and could provide space station users habitation 30 space, stowage space, communications, power and other utilities, and laboratory facilities for long-duration research. In the year ended June 30, 2001, SPACEHAB and Energia formed the Space Station Enterprise LLC ("SSE LLC"), a Delaware limited liability corporation, to complete development of Enterprise. SPACEHAB and Energia have an equal ownership interest in the SSE LLC. The LLC will be responsible for completing required financing for Enterprise and marketing and operating the facility planned as part of the ISS Russian Segment. Enterprise, if completed, would be launched in 2005 based upon the current ISS assembly schedule. Currently the ISS can only accommodate a three-person crew, which must spend most of its time maintaining the ISS with very little time for science. At an ISS partners' meeting currently scheduled for late 2002, four ISS configuration options will be reviewed and one option path endorsed. The future utilization of Enterprise is expected to be determined within the next 9-12 months. Enterprise is actively being marketed to NASA and other potential users. SSE LLC is actively pursuing additional investors to provide investment funds and participate as owners of SSE LLC in completing Enterprise. (2) Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of SPACEHAB, Incorporated and its wholly owned and majority-owned subsidiaries Astrotech, JE and SMI. All significant intercompany transactions have been eliminated in consolidation. Cash and Cash Equivalents For purposes of its consolidated statements of cash flows, the Company considers short-term investments with original maturities of three months or less to be cash equivalents. Cash equivalents are primarily made up of money market investments and overnight repurchase agreements recorded at cost, which approximates market value. Property and Equipment Property and equipment are stated at cost. All furniture, fixtures and equipment are depreciated using the straight-line method over the estimated useful lives of the respective assets, which is generally five years. The Company's payload processing facilities are depreciated using the straight-line method over their estimated useful lives ranging from sixteen to forty-three years. Effective January 1, 2002, the Company extended the estimated useful lives of its space flight assets, which is a component of plant, property and equipment, through June 30, 2016. This change in accounting estimate is treated prospectively and is based on current available space related programs and activities which extends the expected life of the international space station and Space Shuttles from 2012 through at least 2016. Goodwill The excess of the cost over the fair value of net tangible and identifiable intangible assets acquired in business combinations accounted for as a purchase has been assigned to goodwill. Goodwill has been amortized on a straight-line basis over five to twenty-five years. Beginning July 1, 2002, goodwill will no longer be amortized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and Other Intangible Assets." The Company periodically evaluates whether changes have occurred that would require revision of the remaining estimated useful life of the assigned goodwill or render the goodwill not recoverable. If such circumstances arise, the Company would use an estimate of the undiscounted value of expected future operating cash flows to determine whether the goodwill is recoverable. 31 Investments in Affiliates The Company uses the equity method of accounting for its investments in, and earnings of, investees in which it exerts significant influence. In accordance with the equity method of accounting, the carrying amount of such an investment is initially recorded at cost and is increased to reflect the Company's share of the investor's income and is reduced to reflect the Company's share of the investor's losses. Investments in which the Company has less than 20% ownership and no significant influence are accounted for under the cost method and are carried at cost. Impairment of Long- Lived Assets The Company accounts for long-lived assets in accordance with the provisions SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Stock-Based Compensation The Company accounts for stock-based employee compensation arrangements using the intrinsic value method as prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB Opinion 25"), and related interpretations. Accordingly, compensation cost for options to purchase common stock granted to employees is measured as the excess, if any, of the fair value of common stock at the date of the grant over the exercise price an employee must pay to acquire the common stock. The Company has adopted the disclosure requirements of SFAS No. 123, Accounting for Stock-based Compensation ("SFAS 123"). Warrants to purchase common stock granted to other than employees as consideration for goods or services rendered are recognized at fair value. Revenue Recognition Revenue generated under the REALMS Contract and for all other contract awards for which the capability to successfully complete the contract can be reasonably assured and costs at completion can be reliably estimated at contract inception, is recognized under the percentage-of-completion method based on costs incurred over the period of the contract. Revenue provided by JE is primarily derived from cost-plus award fee contracts, whereby revenue is recognized to the extent of costs incurred plus estimates of award fee revenues using the percentage-of-completion method. Award fees, which provide earnings based on the Company's contract performance as determined by NASA evaluations, are recorded when the amounts can be reasonably estimated, or are awarded. Changes in estimated costs to complete, provisions for contract losses and estimated amounts recognized as award fees are recognized in the period they become known. Revenue provided by Astrotech's payload processing services is recognized ratably over the occupancy period of the satellite while in the Astrotech facilities. For the multi-year contracts with Boeing and Lockheed, revenue is billed and recognized on a quarterly basis for costs incurred. Research and Development Research and development costs are expensed as incurred. 32 Income Taxes The Company recognizes income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforward. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Net Income (Loss) Per Share Basic earnings (loss) per share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share includes all common stock options and warrants and other common stock, to the extent dilutive, that potentially may be issued as a result of conversion privileges, including the convertible subordinated notes payable (note 8). Accounting Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. Derivatives The Company accounts for derivatives pursuant to SFAS No.133, Accounting for Derivative Instruments and Hedging Activities, as amended. This standard requires that all derivative instruments be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative instruments are either recognized periodically in income or shareholders' equity (as a component of accumulated other comprehensive income), depending on their use and designation. Reclassifications Certain 2001 and 2000 amounts have been reclassified to conform with the 2002 consolidated financial statement presentation. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and Other Intangible Assets." The Statement eliminates the requirement to amortize costs in excess of net assets acquired (goodwill) under the purchase method of accounting, and sets forth a new methodology for periodically assessing and, if warranted, recording impairment of goodwill. The Company will be required to adopt the new rules effective July 1, 2002. The elimination of amortization of goodwill is expected to increase earnings by approximately $1.0 million. The Company will analyze and assess the impairment provisions of the new Statement, but has not yet determined the impact, if any, of the adoption of those provisions. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the 33 Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations- reporting the effects of disposal of a segment of a business, and extraordinary, unusual and infrequently occurring events and transactions. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company expects to adopt SFAS 144 as of July 1, 2002 and it does not expect that the adoption of this statement will have a significant impact on the Company's financial position and results of operations. (3) Statements of Cash Flows - Supplemental Information Cash paid for interest costs was approximately $7.3 million, $7.0 million and $6.9 million for the years ended June 30, 2002, 2001 and 2000, respectively. The Company capitalized interest of approximately $1.3 million, $2.7 million and $3.7 million during the years ended June 30, 2002, 2001 and 2000, respectively, related to the module improvements and a building in progress. The Company paid no income taxes for the years ended June 30, 2002, 2001 and 2000. (4) Accounts Receivable At June 30, 2002 and 2001, accounts receivable consisted of (in thousands): 2002 2001 ---------------------------------------------------------------- U.S. government contracts: Billed $ 6,371 $ 9,181 Unbilled 1,233 3,085 ---------------------------------------------------------------- Total U.S. government contracts 7,604 12,266 ---------------------------------------------------------------- Commercial contracts: Billed 6,168 4,378 Unbilled 30 714 ---------------------------------------------------------------- Total commercial contracts 6,198 5,092 ---------------------------------------------------------------- Total accounts receivable $ 13,802 $ 17,358 ================================================================ The Company anticipates collecting substantially all receivables within one year. Unbilled receivables represent estimated future revenue billings for contract milestones not achieved or amounts accrued for future cost-based billings. The accuracy and appropriateness of the Company's direct and indirect costs and expenses under its government contracts, and therefore its accounts receivable recorded pursuant to such contracts, are subject to extensive regulation and audit, including by the U.S. Defense Contract Audit Agency or by other appropriate agencies of the U.S. government. Such agencies have the right to challenge the Company's cost estimates or allocations with respect to any government contract. Additionally, a substantial portion of the payments to the Company under government contracts are provisional payments that are subject to potential adjustment upon audit by such agencies. In the opinion of management, any adjustments likely to result from inquiries or audits of its contracts would not have a material adverse impact on the Company's financial condition or results of operations. 34 (5) Acquisition The Space Store On June 28, 2000, the Company paid approximately $200,000 including transaction costs, to acquire all of the capital stock of The Space Store. The business combination has been accounted for using the purchase method under APB Opinion 16. The purchase price has been allocated to the assets and liabilities acquired based on estimates of fair value as of the date of acquisition. Based on the allocation of the net assets acquired, goodwill of approximately $200,000 was recorded. Such goodwill is being amortized on a straight-line basis over 5 years. With the implementation of SFAS 142 goodwill will no longer be amortized beginning July 1, 2002. Historical results of operations of The Space Store are insignificant. The Space Store is a wholly owned subsidiary of SMI. The Space Store is involved in e-commerce and sells space related items. (6) Loans Payable Under Credit Agreement Prior to an August 1996 amendment, the Company's credit agreement consisted of a $6.5 million term loan bearing interest at 1% per month and a $5.5 million non-interest-bearing term loan with several insurance companies. In addition, a revolving credit commitment with a subcontractor and former shareholder provided a maximum outstanding balance of $6.0 million and bore interest at a rate of 1% per month. In August 1996, the Company's credit agreement was amended. In exchange for the full satisfaction of the Company's term loans with the various insurance companies, the Company paid the insurance companies $2.5 million and agreed to pay an additional $2.0 million under a new non-interest-bearing term loan. In conjunction with a payment in December 1998 of certain principal of notes payable due to Alenia Spazio S.p.A., (note 7), the annual interest rate on the outstanding balances under the credit agreement was amended to be 8.25% per year. Aggregate interest cost incurred on the debts due under the credit agreement was approximately $5,000, $30,000 and $57,000 for the years ended June 30, 2002, 2001 and 2000, respectively. As of June 30, 2001, the remaining balance due under the term loan was $0.33 million. This amount was paid in full August 1, 2002. (7) Convertible Notes Payable to Shareholder The Company issued subordinated notes for a portion of the amount due to Alenia Spazio S.p.A. ("Alenia"), a shareholder, under a previously completed construction contract for the Company's flight modules. Alenia may elect to convert, in whole or part, the remaining principal amount into equity, on terms and conditions to be agreed with the Company. On November 15, 2001 the Company entered into an agreement with Alenia to restructure the terms of this debt to provide for a $3.0 million payment of principal and interest on December 31, 2001 and quarterly amortization of the remaining principal beginning March 2002 through December 2003. In addition, the interest rate was reduced from 10% to 8% beginning January 1, 2002. The obligation is collateralized by one of the Company's flight assets. The payments required under the agreement were made on December 31, 2001, March 31, 2002, and June 30, 2002 and the outstanding balance is $3.9 million at June 30, 2002. The Company paid approximately $584,000 interest during 2002 and approximately $800,000 during each of the years ended June 30, 2001 and 2000. (8) Other Debt Revolving Loan Payable 35 On June 16, 1997, the Company entered into a $10.0 million revolving loan payable 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. Certain assets of the Company collateralize this loan. The agreement expired on August 31, 2000. On August 9, 2000, the Company entered into a $15 million revolving credit facility with a financial institution that provides a working capital line of credit with a letter of credit sub-limit of $10.0 million. This new credit facility replaced the previous $10 million revolving line of credit. Certain assets of the Company collateralize the new credit facility. The term of the agreement was through August 2003. In conjunction with the Astrotech financing (Mortgage Loan Payable) of its satellite processing facility in Titusville, Florida, in August 2001, the terms of the credit facility were amended. Space Media, Inc. is no longer a party to the credit facility and the maximum amount allowable to be drawn under the Credit Facility has been reduced to $6.5 million. Effective as of October 24, 2001 the New Credit Facility was further amended. New covenants were established and the term of the agreement was revised to July 31, 2002 with a reduction in the maximum amount allowable to be drawn under the New Credit Facility to $6.5 million. Effective December 31, 2001, the New Credit Facility was further amended. Certain collateral was released by the financial institution and the maximum amount allowable to be drawn under the New Credit Facility was to be reduced each month beginning January 1, 2002 through July 1, 2002 and matures on July 31, 2002. The Company also provided certain flight assets as additional collateral to secure the obligation. As of June 30, 2002, $2.15 million was drawn on the New Credit Facility and the maximum amount allowable to be drawn under the New Credit Facility was $2.25 million as of June 30, 2002. Subsequent to the year end, the loan was paid in full. Subsequent to the year ended June 30, 2002, the Company entered into a $5.0 million line of credit with a new financial institution. This credit facility replaces the New Credit Facility which was repaid and expired subsequent to the year ended June 30, 2002. The term of this new credit facility is through June 2005. Covenants under this credit facility include, but are not limited to, tangible net worth, debt to worth and debt service coverage. Loans Payable In July 1997, the Company's subsidiary, Astrotech, obtained a five-year loan (the "Term Loan Agreement"), which is guaranteed by SPACEHAB, and provided for loans of up to $15.0 million for general corporate purposes and equipment financing. In conjunction with the Astrotech financing of its satellite processing facility in Titusville, Florida in August 2001, approximately $3.1 million of the Term Loan Agreement was repaid. As of June 30, 2002, the Company had total loans payable under the term loan agreement of $218,000. Mortgage Loan Payable On August 30, 2001, SPACEHAB's Astrotech subsidiary completed a $20.0 million financing of its satellite processing facility expansion project in Titusville, Florida with a financial institution. The proceeds of this financing were used to complete the construction of the payload processing facility and supporting infrastructure. The loan is collateralized primarily by the multi-year payload processing contracts with The Boeing Company ("Boeing") and Lockheed Martin Corporation ("Lockheed Martin"). Interest accrues on the outstanding principal balance at a LIBOR-based rate, adjustable quarterly. The loan matures on January 15, 2011. The loan was converted from a construction loan to a term loan on December 31, 2001. Amortization of loan principal began on January 15, 2002 and continues on a quarterly basis through the loan maturity date. Interest is payable quarterly on the outstanding principal balance at the rate of 5.62% plus 225 basis points. For the year ended June 30, 2002, $20.0 million was drawn on the loan and $883,500 of principal was repaid during the year. On June 30, 2002, $0.5 million of cash is restricted for payment on the construction loan. 36 In conjunction with this financing, a swap agreement was required to be entered into to provide for a fixed rate of interest under the loan commitment beginning January 2002. The value of the swap agreement declined by approximately $1 million during the year ended June 30, 2002 due to declines in the market rate of interest. The objective of the hedge 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 is due to changes in the USD-LIBOR-BBA interest rate. Changes in the cash flows of the interest rate swap are expected to exactly offset the changes in cash flows attributable to fluctuations in the USD-LIBOR-BBA interest rates on the total variable rate debt. Convertible Subordinated Notes In October 1997, the Company completed a private placement offering for $63.25 million of aggregate principal of unsecured 8% Convertible Subordinated Notes due October 2007. Interest is payable semi-annually. The notes are convertible into the common stock of the Company at a rate of $13.625 per share. This offering provided the Company with net proceeds of approximately $59.9 million which were used for capital expenditures associated with the development and construction of space related assets and for other general corporate purposes. Loan Covenants For the year ended June 30, 2002 the Company was in compliance with all of the loan covenants of the Term Loan and the New Credit Facility. Covenants include, but are not limited to, tangible net worth, debt to worth and debt service coverage. (9) Fair Value of Financial Instruments The following table presents the carrying amounts and estimated fair values of the Company's financial instruments as of June 30, 2002 and 2001 in accordance with SFAS No. 107, Disclosures about Fair Value of Financial Instruments (in thousands):
June 30, 2002 June 30, 2001 ------------------------ --------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------------------------------------------------------------------------------------------- Financial liabilities: Loans payable under credit agreement $ - $ - $ 333 $ 333 Convertible notes payable to shareholder 3,866 3,866 7,860 7,860 Loans payable under credit facility 218 218 4,264 4,264 Mortgage loan payable 20,127 20,127 - - Convertible subordinated notes payable 63,250 30,044 63,250 38,029
The fair value of the Company's long-term debt is based on quoted market price or is estimated based on the current rates offered to the Company for debt of similar remaining maturities and other terms. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximate their fair market value because of the relatively short duration of these instruments. (10) NASA Contracts Research and Logistics Module Services Contract On December 21, 1997, the Company entered into the REALMS Contract to provide to NASA its flight modules and related integration services over three missions at an aggregate fixed price of $44.9 37 million. This contract provides for NASA to use the flight modules for both science and logistics missions. During the period from December 21, 1997 to June 30, 2002, this contract was amended whereby the REALMS contract value was increased to $224.5 million and the number of missions was increased to nine. During the years ended June 30, 2002, 2001 and 2000, the Company recognized $43.0 million, $36.6 million and $33.3 million of revenue, respectively, under this contract. Subsequent to the year ended June 30, 2002, SPACEHAB negotiated an equitable adjustment in excess of the REALMS contract value due to an additional slip in the launch date of the Space Shuttle flight STS-107 from July 19, 2002 to January 16, 2003. Flight Crew Systems Development Contract ("FCSD") JE primarily operates under the FCSD Contract which is currently a $391.3 million multitask cost-plus-award and incentive-fee contract. The contract commenced in May 1993 and was scheduled to conclude in September 2002. Subsequent to June 30, 2002, NASA exercised its option to extend the contract through December 2002. The contract is currently in the recompete process with a contactor selection expected by NASA in the fall of 2002. JE performs services under a cost-plus award and incentive fee contract for government services that is requested and directed by NASA. (11) Stockholder Rights Plan On March 26, 1999, the Board of Directors adopted a Stockholder Rights Plan designed to deter coercive takeover tactics and to prevent a potential acquirer from gaining control of the Company without offering a fair price to all of the Company's stockholders. A dividend of one preferred share purchase right (a "Right") was declared on every share of Common Stock outstanding on April 9, 1999. Each Right under the Plan entitles the holder to buy one one-thousandth of a share of a new series of junior participating preferred stock for $35. If any person or group becomes the beneficial owner of 15% or more of common stock (with certain limited exceptions), then each right (not owned by the 15% stockholder) will then entitle its holder to purchase, at the Right's then current exercise price, common shares having a market value of twice the exercise price. In addition, if after any person has become a 15% stockholder, and is involved in a merger or other business combination transaction with another person, each Right will entitle its holder (other than the 15% stockholder) to purchase, at the Right's then current exercise price, common shares of the acquiring Company having a value of twice the Right's then current exercise price. The rights were granted to each shareholder of record on April 9, 1999. At any time before a person or group acquires a 15% position, the Company generally will be entitled to redeem the Rights at a redemption price of $0.01 per Right. The Rights will expire on April 9, 2009. (12) Common Stock Option and Stock Purchase Plans As of June 30, 2002, approximately 2,156,602 shares of common stock were reserved for future grants of stock options under the Company's three stock option plans. Non-qualified Options Non-qualified options are granted at the sole discretion of the Board of Directors. Prior to the adoption of the 1994 Stock Incentive Plan (the "1994 Plan"), stock options granted to the Company's officers and employees were part of their employment contract or offer. The number and price of the options granted was defined in the employment agreements and such options vest incrementally over a period of four years and generally expire within ten years of the date of grant. 38 The 1994 Plan Under the terms of the 1994 Plan, the number and price of the options granted to employees is determined by the Board of Directors and such options vest, in most cases, incrementally over a period of four years and expire no more than ten years after the date of grant. The Directors' Stock Option Plan Each new non-employee director receives a one-time grant of an option to purchase 10,000 shares at an exercise price equal to fair market value on the date of grant. In addition, effective as of the date of each annual meeting of the Company's stockholders, each non-employee director who is elected or continues as a member of the Board of Directors of the Company shall be awarded an option to purchase 5,000 shares of common stock. Options under the Director's Plan vest after one year and expire seven years from the date of grant. 1997 Employee Stock Purchase Plan The Company adopted an employee stock purchase plan that permits eligible employees to purchase shares of common stock of the Company at prices no less than 85% of the current market price. Eligible employees may elect to participate in the plan by authorizing payroll deductions from 1% to 10% of gross compensation for each payroll period. On the last day of each quarter, each participant's contribution account is used to purchase the maximum number of whole and fractional shares of common stock determined by dividing the contribution account's balance by the lesser of 85% of the price of a share of common stock on the first day of the quarter or the last day of a quarter. The number of shares of common stock that may be purchased under the plan is 1,500,000. Through June 30, 2002, employees have purchased approximately 774,000 shares under the plan. Space Media, Inc. Stock Option Plan During the year ended June 30, 2000, Space Media, Inc., a majority owned subsidiary of the Company, adopted an option plan ("SMI Plan") for employees, officers, directors and consultants of Space Media, Inc. Under the terms of the SMI Plan, 1,500,000 shares have been reserved for future grants for which the number and price of the options granted is determined by the Board of Directors and such options vest, in most cases, incrementally over a period of four years and expire no more than ten years after the date of grant. At June 30, 2002, there were 394,750 options issued and outstanding under the SMI Plan at a weighted average exercise price of $1.16. The options vest equally over a four-year period and have a life of 10 years. There were 192,375 options exercisable as of June 30, 2002. 39 Stock Option Activity Summary The following table summarizes the Company's stock option plans, excluding the SMI plan:
Non-qualified Options 1994 Plan Directors' Plan --------------------------- ------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise Outstanding Price Outstanding Price Outstanding Price - ------------------------------------------------------------------------------------------------------------------- Outstanding at June 30, 1999 493,804 $ 13.42 1,909,226 $ 9.50 240,000 $ 9.37 Granted - - 1,034,674 5.10 35,000 4.13 Exercised - - - - - - Forfeited 95,831 12.39 360,287 7.06 - - - ------------------------------------------------------------------------------------------------------------------- Outstanding at June 30, 2000 397,973 $ 13.66 2,583,613 $ 8.05 275,000 $ 8.70 Granted - - 1,036,040 4.44 40,000 4.00 Exercised - - - - - - Forfeited 67,707 12.55 967,539 8.11 - - - ------------------------------------------------------------------------------------------------------------------- Outstanding at June 30, 2001 330,266 $ 13.89 2,652,114 $ 6.62 315,000 $ 8.11 Granted - - 52,000 2.31 65,000 1.40 Exercised - - - - - - Forfeited 316,100 14.03 804,882 6.97 - - - ------------------------------------------------------------------------------------------------------------------- Outstanding at June 30, 2002 14,166 $ 10.68 1,899,232 $ 6.34 380,000 $ 6.96 - ------------------------------------------------------------------------------------------------------------------- Options exercisable at: June 30, 2000 397,973 13.66 1,423,660 8.58 240,000 9.37 June 30, 2001 330,266 13.89 1,272,238 7.89 275,000 8.70 June 30, 2002 14,166 10.68 1,114,160 7.26 315,000 8.11 Weighted-average fair value at date of grant during the fiscal year ended June 30, 2000 - - 1,034,674 3.02 35,000 1.87 June 30, 2001 - - 1,036,040 2.06 40,000 1.85 June 30, 2002 - - 52,000 1.14 65,000 .64 - -------------------------------------------------------------------------------------------------------------------
The following table summarizes information about the Company's stock options outstanding at June 30, 2002:
Options outstanding Options exercisable ----------------------------------------- ------------------------------ Weighted- Average Weighted- Weighted- Number Remaining Average Average -------------- Contractual Exercise Number Exercise Range of exercise prices Outstanding Life (years) Price Exercisable Price - -------------------------------------------------------------------------------------------------------------- $ 2.31 - 3.44 390,000 8.38 $ 3.01 136,501 $ 3.00 4.00 - 5.00 496,246 7.37 4.74 242,996 4.6 5.13 - 8.88 759,600 4.90 5.94 545,362 6.26 9.88 - 14.00 582,552 2.65 11.33 518,467 11.28 - -------------------------------------------------------------------------------------------------------------- 2,228,398 5.55 6.47 1,443,326 7.48 - --------------------------------------------------------------------------------------------------------------
40 The Company applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, as all options have been granted at exercise prices equal to the fair market value as of the date of grant, no compensation cost has been recognized under these plans in the accompanying consolidated financial statements. Had compensation cost been determined consistent with SFAS 123, the Company's net income (loss) and earnings (loss) per common share would have been reduced (increased) to the pro forma amounts indicated below (in thousands, except per share data):
Year Ended Year Ended Year Ended June 30, 2002 June 30, 2001 June 30, 2000 -------------------------------------------------------------------------------- Net loss: As reported $ (2,367) $ (12,785) $ (3,844) Pro forma (3,340) (13,982) (4,996) ================================================================================ Net loss per share - basic: As reported $ (0.20) $ (1.12) $ (0.34) Pro forma (0.27) (1.23) (0.44) ================================================================================
The fair value of each option granted and each employee stock purchase right is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in fiscal years 2002, 2001 and 2000, respectively: 0.0% dividend rate; expected volatility ranging from 35% to 50%; risk-free interest rates ranging from 3.875% to 7.875%; and expected lives ranging from three months to seven years. The effects of compensation cost as determined under SFAS 123 on pro forma net income (loss) in years ended June 30, 2002, 2001 and 2000 may not be representative of the effects on pro forma net income (loss) in future periods. Warrants The Company also has 53,000 currently exercisable warrants outstanding to purchase the Company's common stock at $9.00 per share, with an expiration date of July 1, 2002. The fair market value of these warrants was recognized at issuance. All such warrants were issued at exercise prices equivalent to, or in excess of, the determined fair market value of the Company's common stock at the date of issuance. No warrants were exercised as of June 30, 2002. (13) Income Taxes The Company accounts for taxes under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). Under SFAS 109, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. 41 The components of income tax expense (benefit) from continuing operations are as follows (in thousands): Years Ended June 30, -------------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------------------- Current: Federal $ (2,134) $ - $ - State 84 127 - Foreign - 70 - ---------------------------------------------------------------------------- (2,050) 197 - - ---------------------------------------------------------------------------- Deferred: Federal - (685) (1,477) State and local - (398) (285) Foreign - ---------------------------------------------------------------------------- - (1,083) (1,762) - ---------------------------------------------------------------------------- Income tax expense (benefit) $ (2,050) $ (886) $ (1,762) ============================================================================ A reconciliation of the reported income tax expense to the amount that would result by applying the U.S. federal statutory rate of 34 percent to the income (loss) before income taxes to the actual amount of income tax expense (benefit) recognized follows (in thousands): Years Ended June 30, ------------------------------------- 2001 2001 2000 - ------------------------------------------------------------------------------ Expected expense (benefit) $ (1,502) $ (4,648) $ (1,906) Change in valuation allowance (946) 3,948 43 State income taxes (128) (491) (188) Other, primarily goodwill amortization 526 305 289 Total $ (2,050) $ (886) $ (1,762) ============================================================================= The Company's deferred tax asset as of June 30, 2002 and 2001 consists of the following (in thousands): 2002 2001 - ------------------------------------------------------------------------------ Deferred tax assets: Net operating loss carryforwards $ 15,459 $ 15,818 General business credit carryforwards 2,170 2,170 Alternative minimum tax credit carryforwards 499 3,292 Accrued expenses 1,478 1,636 Capitalized start-up and organization costs 1,430 1,602 Other 191 190 - ------------------------------------------------------------------------------ Total gross deferred tax assets 21,227 24,708 Less - valuation allowance (3,214) (4,160) - ------------------------------------------------------------------------------ Net deferred tax assets 18,013 20,548 ============================================================================== Deferred tax liabilities: Property and equipment, principally due to differences in depreciation 17,749 20,493 Other 264 55 - ------------------------------------------------------------------------------ Total gross deferred tax liabilities 18,013 20,548 - ------------------------------------------------------------------------------ Net deferred tax assets/(liabilities) 0 $ 0 ============================================================================== 42 At June 30, 2002, the Company had accumulated net operating losses of approximately $40.7 million for Federal income tax purposes, which are available to offset future regular taxable income. These operating loss carryforwards expire between the years 2007 and 2022. Utilization of these net operating losses may be subject to limitations in the event of significant changes in stock ownership of the Company. Additionally, the Company has approximately $2.2 million and $0.5 million of research and experimentation and alternative minimum tax credit carryforwards, respectively, available to offset future regular tax liabilities. The research and experimentation credits expire between the years 2002 and 2008; the alternative minimum tax credits carry-forward indefinitely. In assessing the realizability of its net deferred tax assets, management considers whether it is more likely than not that some portion or all of the net deferred tax assets are realizable. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of June 30, 2002, the Company provided a full valuation allowance of approximately $3.2 million against its net deferred tax assets. The Company has received approximately $2.1 million in refund claims related to net operating loss carryforwards for alternative minimum taxes paid in prior years. (14) Net Income (Loss) Per Share The following are reconciliations of the numerators and denominators of the basic and diluted earnings (loss) per share computations for the years ended June 30, 2002, 2001 and 2000 (in thousands, except share data): Per common Assuming share Dilution ------------------------------------------------------------------------ Year Ended June 30, 2002 Net loss $ (2,367) $ (2,367) Net loss, as adjusted $ (2,367) $ (2,367) ======================================================================== Weighted average outstanding common shares 11,884,309 11,884,309 Adjusted shares 11,884,309 11,884,309 ======================================================================== Year Ended June 30, 2001 Net loss $ (12,785) $ (12,785) Net loss, as adjusted $ (12,785) $ (12,785) ======================================================================== Weighted average outstanding common shares 11,400,482 11,400,482 Adjusted shares 11,400,482 11,400,482 ======================================================================== Year Ended June 30, 2000 Net loss $ (3,844) $ (3,844) Net loss, as adjusted $ (3,844) $ (3,844) Weighted average outstanding common shares 11,272,767 11,272,767 Adjusted shares 11,272,767 11,272,767 ======================================================================== All options and warrants to purchase shares of common stock were excluded from the computations of diluted earnings (loss) per share for the years ended June 30, 2002, 2001 and 2000, because the impact of such options and warrants is anti-dilutive. (15) Employee Benefit Plan The Company has a defined contribution retirement plan, which covers all employees and officers. For the years ended June 30, 2002, 2001 and 2000, the Company contributed $1.4 million, $1.8 million and 43 $1.5 million, respectively, to the plan. The Company has the right, but not the obligation, to make contributions to the plan in future years at the discretion of the Company's Board of Directors. (16) Commitments Integration and Operations Contracts On August 13, 1997, the Company initiated a letter agreement with Boeing, a major subcontractor for standard integration and operation services to the Company for future missions that were not already provided for under its contract for missions to the Mir Space Station. In August 1998, this letter agreement became a cost plus incentive fee contract whereby Boeing will provide integration and operations services required to successfully complete four research missions (one single module mission and three double module missions) and seven logistics double module missions. Additionally, there are several tasks that are separately priced to yield a contract value of up to $139.5 million. As of June 30, 2002 $123.2 million has been incurred under this commitment. Leases The Company is obligated under capital leases for equipment and noncancelable operating leases for equipment, office space, storage space, the land for a payload processing facility and certain flight assets. Future minimum payments under these capital leases and noncancelable operating leases are as follows (in thousands): Capital Operating Year ending June 30, Leases Leases ------------------------------------------------------------------------- 2003 $ 218 $ 5,752 2004 212 4,751 2005 67 3,899 2006 - 693 2007 - 674 2008 and thereafter - 3,759 ------------------------------------------------------------------------- 497 $ 19,527 ------------------ Less: amount representing interest between 9% and 12% (45) - ------------------------------------------------------------------------- Less: payments due for sublease - (2,777) ------------------------------------------------------------------------- Present value of net minimum capital lease payments $ 452 16,750 ------------------------------------------------------------------------- Rent expense for the years ended June 30, 2002, 2001 and 2000 was approximately $2.6 million, $2.9 million and $2.1 million, respectively. For fiscal years 2003, 2004, 2005, 2006, 2007 and 2008, the Company expects to receive net payments of approximately $0.5 million, $0.5 million, $0.5 million, $0.5 million, $0.5 million, and $0.3 million respectively for sub leases. At June 30, 2002, the capitalized lease assets are recorded at $361,852 and the annual amortization is $98,762. (17) Segment information Based on its organization, the Company operates in four business segments: SPACEHAB, now designated Flight Services for Company management reporting, JE, Astrotech and SMI. SPACEHAB was founded to commercially develop space habitat modules to operate in the cargo bay of the Space Shuttles. Flight Services provides access to the modules and integration and operations support services for both NASA and commercial customers. JE is primarily engaged in providing engineering services and products to the Federal Government and NASA, primarily under the FCSD Contract. Astrotech provides payload-processing facilities to serve the satellite manufacturing and launch services industry. Astrotech currently 44 provides launch site preparation of flight ready satellites to major U.S. space launch companies and satellite manufacturers. SMI was established in April 2000, to develop space themed commercial business activities. The Company's chief operating decision maker utilizes both revenue and income before taxes, including allocated interest based on the investment in the segment, in assessing performance and making overall operating decisions and resource allocations. As such, other income/expense items including taxes and corporate overhead have not been allocated from Flight Services to the various segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies, see note 2. Information about the Company's segments is as follows:
(in thousands) Year Ended June 30, 2002: Net Depreciation Pre-Tax Fixed And Revenue Income (loss) Assets Amortization ----------------------------------------------------------------- Flight Services $ 51,374 $ 1,178 $124,153 $ 9,492 Johnson Engineering 40,504 (2,657) 1,553 1,633 Astrotech 9,936 2,005 50,074 1,266 SMI 678 (1,655) 71 293 Other 281 (3,288) - - ----------------------------------------------------------------- $102,773 $ (4,417) $175,851 $12,684 ----------------------------------------------------------------- Year Ended June 30, 2001: Net Depreciation Pre-Tax Fixed And Revenue Income (loss) Assets Amortization ----------------------------------------------------------------- Flight Services $ 44,997 $ (7,868) $135,055 $ 7,107 Johnson Engineering 53,526 (887) 2,806 1,647 Astrotech 6,230 18 36,135 966 SMI 501 (4,934) 58 230 ----------------------------------------------------------------- $105,254 $(13,671) $174,054 $ 9,950 ----------------------------------------------------------------- Year ended June 30, 2000: Net Depreciation Pre-Tax Fixed And Revenue Income Assets Amortization ----------------------------------------------------------------- Flight Services $ 39,871 $ (928) $129,709 $ 5,702 Johnson Engineering 58,254 108 3,000 1,537 Astrotech 7,583 (2,944) 25,975 983 SMI - (1,842) - - ----------------------------------------------------------------- $105,708 $ (5,606) $158,684 $ 8,222 -----------------------------------------------------------------
Foreign revenue for the years ended June 30, 2002, 2001 and 2000 was approximately $5.9 million, $6.6 million and $1.7 million respectively. Domestic revenue for the years ended June 30, 2002, 2001 and 2000 was approximately $96.8 million, $98.7 million and $104.0 million, respectively. (18) Convertible Preferred Stock On August 2, 1999, Astrium, a related party, a shareholder, purchased an additional $12.0 million equity stake in SPACEHAB representing 1,333,334 shares of Series B Senior Convertible Preferred Stock. Under the agreement, Astrium, a related party, purchased all of SPACEHAB's 975,000 authorized and unissued shares of preferred stock. At the annual stockholders meeting held on October 14, 1999, the 45 shareholders approved the proposal to increase the number of authorized shares of preferred stock to 2,500,000, in order to complete the transaction with Astrium, a related party, allowing them to purchase the additional 358,334 preferred shares. The preferred stock purchase increased Astrium's, a related party, voting interest in SPACEHAB to approximately 11.5%. The Series B Senior Convertible Preferred Stock is: convertible at the holders' option on the basis of one share of preferred stock for one share of common stock, entitled to vote on an "as converted" basis the equivalent number of shares of common stock and has preference in liquidation, dissolution or winding up of $9.00 per preferred share. No dividends are payable on the convertible preferred shares. Astrium, a related party, provides unpressurized payload and integration efforts to SPACEHAB on a fixed price basis in addition to providing engineering services as required. For the years ended June 30, 2002, 2001 and 2000, Astrium's, a related party, payload and integration services included in cost of revenue was approximately $4.3 million, $4.3 million and $3.6 million, respectively. (19) Investment in Guigne During June 1998, the Company entered into a joint venture agreement with Guigne Technologies Limited ("GTL"), a Canadian Company, for the purpose of developing, fabricating, marketing and selling of SpaceDRUMS services, a containerless processing facility intended to be deployed on the ISS. In accordance with the joint venture agreement, the Company had contributed, in exchange for a 50% interest in the joint venture, an aggregate of $2.0 million of working capital to the joint venture through December 1999. The Company's contributions were made in the form of an unsecured non-interest bearing note. The joint venture has entered into contracts with an aggregate value of $6.9 million for the lease of the SpaceDRUMS facility with an unrelated party. The joint venture agreement contained an option whereby the Company could exchange its interest in the joint venture and the $2.0 million note for a common equity interest in Guigne Inc. ("GI"), the ultimate parent of GTL. In accordance with the terms of the joint venture agreement, in December 1999 the Company notified GI of its intention to exercise its option. Under the option, the equity interest obtained in GI was determined by dividing the $2.0 million contributed by the Company by the fair market value of GI, as determined by independent appraisal, at the date of exchange. However, such equity interest could not exceed 19% of the outstanding equity of GI. The independent appraisal and conversion were finalized subsequent to June 30, 2000, with an effective date of January 1, 2000, and resulted in the Company obtaining a 15% common equity interest in GI. The Company accounts for its investment in GI on the cost method. Upon the exchange, the joint venture was dissolved and all property, rights, assets and liabilities of the joint venture became the property, rights, assets and liabilities of GI. The Company did not have the ability to exclusively control the operational and financial policies of the joint venture, although the Company did exert significant influence and as such recognized its investment in the joint venture prior to the exchange using the modified equity method of accounting. During the year ended December 31, 1999, no revenues and no expenses were recognized by the joint venture. During the quarter ended December 31, 1999, at the time of the Company's exercise of its option, the Company recognized a $0.2 million valuation allowance against its investment in GI based on the Company's estimate of the fair value of GI. (20) Asset Sale On November 30, 2000, Astrium, a related party, entered into an agreement with the Company to purchase the Company's Integrated Cargo Carrier ("ICC") and Vertical Cargo Carrier ("VCC") flight assets. The total purchase price of $15.4 million is comprised of both cash and services payments. The transaction will occur in two phases. The first phase is for the purchase of the ICC assets and the second phase is for the purchase of the VCC assets. Phase one of the transactions was completed in the three months ended March 31, 2001. Phase two was completed in June 30, 2002. The sale was approximately at book value and the Company recognized a minimal loss. SPACEHAB has entered into an agreement with Astrium, a related party, to lease these assets for a period of four years with two additional four-year options. 46 On August 2, 2001, SPACEHAB'S Astrotech subsidiary sold the assets of its Oriole sounding rocket program and related property for approximately $1.2 million to DTI Associates of Arlington, Virginia. The sale turns over all physical and intellectual property assets of Astrotech's sounding rocket program, including the design of the Oriole Rocket, except for those assets required for Astrotech to fulfill the terms of an agreement with an existing customer. The terms of the sale are as follows: an initial cash payment at closing, five equal monthly payments beginning September 2001 and a promissory note of $655,000, bearing interest and secured by the Astrotech Sounding Rocket Program intellectual property and due July 26, 2002. Astrotech recognized a gain of approximately $1.1 million on the sale in the quarter ended September 30, 2002. Subsequent to the year ended June 30, 2002, all payments due under the arrangement have been received by Astrotech. (21) Investment in SMI Pursuant to agreements entered into as of September 27, 2001, eScottVentures II, LLC, of Melbourne, Florida, purchased 5,914,826 newly issued shares of SMI's Series A redeemable, convertible preferred stock for $750,000. These shares are convertible at the option of the holder one for one into SMI common stock. Holders of the Series A preferred stock are entitled to receive dividends only when and if declared by SMI's Board. On and after September 28, 2004, the holders of at least two-thirds of the outstanding series A preferred stock can require SMI to redeem their shares. eScottVentures II appointed a representative to SMI's board of directors along with its equity stake. SPACEHAB's ownership in Space Media, Inc. has been reduced to approximately 51% based on voting rights as a result of eScottVentures II equity investment. In February 2002, eScottVentures II's representative resigned his seat on the board of directors. SPACEHAB is required to record 100% of SMI's losses for financial reporting purposes. (22) Subsequent Event Subsequent to the year ended June 30, 2002, the Company entered into a $5.0 million line of credit with a new financial institution. This credit facility replaces the New Credit Facility which was repaid and expired subsequent to the year ended June 30, 2002. The term of this new credit facility is through June 2005. Covenants under this credit facility include, but are not limited to, tangible net worth, debt to worth and debt service coverage. (23) Summary of Selected Quarterly Financial Data (Unaudited) The following is a summary of selected quarterly financial data for the previous two fiscal years (in thousands, except per share data):
Three months ended --------------------------------------------------- September 30 December 31 March 31 June 30 - --------------------------------------------------------------------------------------------- Year ended June 30, 2002 Revenue $22,292 $27,727 $24,711 $28,043 Income (loss) from operations (2,528) 2,010 1,530 (104) Net income (loss) (2,850) 685 66 (241) Net income (loss) per share - basic (0.24) 0.06 0.01 (0.02) Net income (loss) per share - diluted (0.24) 0.05 0.00 (0.02) - --------------------------------------------------------------------------------------------- Year ended June 30, 2001 Revenue $26,966 $23,975 $24,453 $29,860 Income (loss) from operations (1,602) (3,066) (3,089) (1,421) Net income (loss) (1,480) (2,738) (2,973) (5,594) Net income (loss) per share - basic (0.13) (0.24) (0.26) (0.49) Net income (loss) per share - diluted (0.13) (0.24) (0.26) (0.49) - ---------------------------------------------------------------------------------------------
47 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None PART III Item 10. Directors and Executive Officers of the Registrant. The information required by this item will be contained in the Company's definitive Proxy Statement for its 2002 Annual Meeting of Stockholders and is hereby incorporated by reference thereto. Item 11. Executive Compensation. The information required by this item will be contained in the Company's definitive Proxy Statement for its 2002 Annual Meeting of Stockholders and is hereby incorporated by reference thereto. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item will be contained in the Company's definitive Proxy Statement for its 2002 Annual Meeting of Stockholders and is hereby incorporated by reference thereto. Item 13. Certain Relationships and Related Transactions. The information required by this item will be contained in the Company's definitive Proxy Statement for its 2002 Annual Meeting of Stockholders and is hereby incorporated by reference thereto. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed as part of the report: 1. Financial Statements. The following consolidated financial statements of SPACEHAB, Incorporated and its wholly owned and majority-owned subsidiaries and related notes, are set forth herein as indicated below.
Page Report of Ernst & Young LLP, Independent Auditors ............... 24 Report of KPMG LLP, Independent Auditors ........................ 25 Consolidated Balance Sheets ..................................... 26 Consolidated Statements of Operations ........................... 27 Consolidated Statements of Stockholders' Equity ................. 28 Consolidated Statements of Cash Flows ........................... 29 Notes to Consolidated Financial Statements ...................... 30
2. Financial Statement Schedules. All financial statement schedules required to be filed in Part IV, Item 14 (a) have been omitted because they are not applicable, not required, or because the required information is included in the financial statements or notes thereto. 3. Exhibits. 48 Exhibit No. Description of Exhibit 3.1* Amended and Restated Articles of Incorporation of the Company. 3.2 Designation of Rights, Terms and Preferences of Series A Junior Preferred Stock (see Exhibit 4.4 of this Report on Form 10-K). 3.3++ Designation of Rights, Terms and Preferences of Series B Senior Convertible Preferred Stock of SPACEHAB, Incorporated. 3.4* Articles of Amendment of SPACEHAB, Incorporated, including the Designation of Rights, Terms and Preferences of Additional Shares of Series B Senior Convertible Preferred Stock of SPACEHAB, Incorporated. 3.5* Amended and Restated By-Laws of the Company. 4.1++ Designation of Rights, Terms and Preferences of Series B Senior Convertible Preferred Stock of the Registrant. 4.2++ Preferred Stock Purchase Agreement between the Registrant and DaimlerChrysler Aerospace AG dated as of August 2, 1999. 4.3++ Registration Rights Agreement between the Registrant and DaimlerChrysler Aerospace AG dated as of August 5, 1999. 4.4+ Rights Agreement, dated as of March 26, 1999, between the Registrant and American Stock Transfer & Trust Company. The Rights Agreement includes the Designation of Rights, Terms and Preferences of Series A Junior Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights as Exhibit C. 10.3* Cost Plus Incentive Fee Contract (Number SHB 1009), dated November 23, 1994, between the Registrant and McDonnell Douglas (including the amendments thereto) (the "Mir Contract"). 10.6* Amended and Restated Representation Agreement, dated August 15, 1995, by and between the Registrant and Mitsubishi Corporation. 10.7* Letter Agreement dated August 15, 1995, by and between the Registrant and Mitsubishi Corporation. 10.12*** Amended and Restated Credit Agreement, dated August 20, 1996 among the Registrant, the Insurers listed therein and the Chase Manhattan Bank (National Association), as agent. 10.13*////// SPACEHAB, Incorporated 1995 Directors' Stock Option Plan (as amended and restated effective October 21, 1997). 10.27** Indemnification Agreement, dated December 27, 1995, between the Company and Dr. Shelley A. Harrison. 10.28** Indemnification Agreement, dated December 27, 1995, between the Company and Dr. Edward E. David, Jr. 10.32** Indemnification Agreement, dated December 27, 1995, between the Company and James R. Thompson. 49 10.36** Indemnification Agreement, dated December 27, 1995, between the Company and David A. Rossi. 10.37** Indemnification Agreement, dated December 27, 1995, between the Company and Dr. Shi H. Huang. 10.38** Indemnification Agreement, dated December 27, 1995, between the Company and Nelda J. Wilbanks. 10.39** Indemnification Agreement, dated December 27, 1995, between the Company and M. Dale Steffey. 10.43** Indemnification Agreement, dated December 27, 1995, between the Company and Hironori Aihara. 10.49*// Cost Plus Fee Contract (Number SHB 1013), dated July 31, 1997, between the Registrant and McDonnell Douglas Corporation, McDonnell Douglas Aerospace Huntsville Division (the "Research Double Module Contract"). 10.52*// Office Building Lease Agreement, dated October 6, 1993, between Astrotech and the Secretary of the Air Force (Lease number SPCVAN - 2-94-001). 10.54*// Loan and Security Agreement, dated June 16, 1997, between the Registrant, Astrotech and First Union National Bank (formerly known as Signet Bank) (the "Revolving Credit Agreement"). 10.55*// Loan and Security Agreement, dated July 14, 1997, between Astrotech and the CIT Group/Equipment Financing, Inc. (the "Term Loan Agreement"). 10.57*// Employment and Non-Interference Agreement, dated April 10, 1997, between the Company and John M. Lounge. 10.58*// Indemnification Agreement, dated October 22, 1996, between the Company and John M. Lounge. 10.69*/// ESA Contract, Dated October 10, 1997, between the Registrant and Intospace GmbH (the "ESA Contract"). 10.70*//// NAS 9-97199, dated December 21, 1997, between the Registrant and NASA (the "REALMS Contract"). 10.73*//// Employment Agreement and Non-Interference Agreement dated January 15, 1998, between the Company and David A. Rossi. 10.74*//// Amendment number 1 to Loan and Security Agreement dated December 31, 1997, between the Company and First Union National Bank. 10.80*///// CSA Contract, dated May 21, 1998, between the Registrant and the Canadian Space Agency. 10.81*///// Gemini Office Building Lease Agreement, dated January 14, 1998, between the Registrant and Puget of Texas 10.82*///// SHB98006, dated July 8, 1998, between the Registrant and Benz Aerospace AG, Raumfahrt-Infrastuktur 10.84*///// Capital Office Park Lease as amended, dated April 23, 1998, between Astrotech and Eleventh Springhill Lake Associates L.L.P. 50 10.85+++ Letter Agreement between the Company and Alenia Aerospazio. 10.86+++ Employment and Non-Interference Agreement dated July 1, 1998 between the Company and William A. Jackson 10.87+++ Employment and Non-Interference Agreement dated July 1, 1998 between the Company and Eugene A. Cernan 10.88+++ Employment and Non-Interference Agreement dated July 1, 1998 between the Company and W.T. Short 10.89+++ Modification S/A 14 to NAS9-97199 dated November 25, 1998, between the Company and NASA. 10.90++++ SPACEHAB, Incorporated 1994 Stock Incentive Plan (as amended and restated effective October 14, 1999). 10.92++++ Employment and Non-Interference Agreement, dated March 1, 1999, between the Company and Michael Kearney. 10.93++++ Contract No. NAS 9-18800 between NASA and Johnson Engineering dated April 28, 1993. 10.94++++ Cost Plus Incentive Fee Contract No. SHB 1014 dated August 14, 1997 between the Boeing Company and the Registrant. 10.95++++ Amended and Restated Employment and Non-Interference Agreement, dated April 1, 1997, between the Company and Dr. Shelly A. Harrison, amended and restated as of January 15, 1999. 10.97++++ Lease for property at 555 Forge River Dr. Suite #150, Webster, TX between Johnson Engineering and CD UP LP a wholly owned subsidiary of Carey Diversified LLC, successor in interest to J.A. Billip Development Corporation dated April 30, 1993, as amended. 10.98++++ Lease for property at 18100 Upper Bay Road, Suite #208, Houston, TX between Johnson Engineering Corporation and Nassau Development Company, dated February 19, 1998. 10.99++++ Lease for property at 920, 926 and 928 Gemini Ave., Houston, TX under Standard Commercial Lease between Johnson Engineering Corporation and Lakeland Development dated February 1, 1998. 10.100++++ Lease for property at 300 D Street, SW, Suite #814, Washington, DC, between the Registrant and The Washington Design Center, LLC dated December 16, 1998. 10.101++++ Lease for property at 16850 Titan, Houston, TX between Johnson Engineering Corporation and Computer Extension Systems, Inc. dated August 1, 1999. 10.102++++ Agreement of Sale and Purchase of Leasehold Interest between Eastern American Technologies Corporation and SPACEHAB, Incorporated dated August 1997. 10.103*////// SPACEHAB, Incorporated 1997 Employee Stock Purchase Plan. 10.104*+ Secured Promissory Note, dated March 30, 1999, between the Company and The CIT Group/Equipment Financing, Inc. 51 10.105*+ Amendment No 2 to Loan and Security Agreement, dated October 15, 1999 between the Company, First Union National Bank and certain other parties. 10.106+++++ Agreement between Astrotech Space Operations, Inc. and McDonnell Douglas Corporation, dated January 7, 2000. 10.107+++++ Agreement between Astrotech Space Operations, Inc. and Lockheed Martin Commercial Launch Services, Inc. dated January 24, 2000. 10.108*+ Amendment No. 3 to Loan and Security Agreement, dated January 31, 2000 between the Company, First Union National Bank and certain other parties. 10.109*+ Employment and Non-Interference Agreement, dated February 14, 2000, between the Company and Julia A. Pulzone. 10.110*+ Amendment No. 4 to Loan and Security Agreement, dated May 18, 2000 between the Company, First Union National Bank and certain other parties. 10.111*+ Third Amendment and Assignment of Industrial Real Estate Lease, and Consent to Assignment of Industrial Real Estate Lease, dated July 24, 2000, between the Company, American National Insurance Company and Pall Corporation. 10.112*+ Financing and Security Agreement, dated August 9, 2000, by and among Bank of America, N.A. and the Company, Johnson Engineering Corporation, Astrotech Space Operations, Inc. and Space Media, Inc. 10.113*++++ Employment and Non-Interference Agreement, dated as of January 1, 2001, between the Company and Michael Kearney. 10.114*+++++ Credit agreement dated as of August 30, 2001 by and between Astrotech Florida Holdings, Inc. and SouthTrust Bank. 10.115*+++++ Third Amendment to Financing and Security Agreement, dated as of October 24, 2001 by and among Bank of America, N.A. and the Company, Johnson Engineering Corporation and Astrotech Space Operations, Inc. 10.116*++++++ Amendment to the Alenia Loan Agreement, dated as of November 15, 2001 by the Company and Alenia Spazio, S.P.A. 10.117*++++++ Fourth Amendment to Financing and Security Agreement, dated as of January 16, 2002 by and among Bank of America, N.A. and the Company, Johnson Engineering Corporation and Astrotech Space Operations, Inc. 10.118 Financing and Security Agreement, dated August 29, 2000, by and among Riggs Bank N.A. and the Company, Johnson Engineering Corporation and Astrotech Space Operations, Inc. 16.*++ Changes in Registrant's Certifying Accountant. 21. Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. September 23, 2002 23.2 Consent of KPMG LLP. 52 99.1 Certification Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 33-97812) and all amendments thereto, originally filed with the Securities and Exchange Commission on October 5, 1995. ** Incorporated by reference to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1995, filed February 14, 1996. *** Incorporated by reference to the Registrant's Report on Form 10-K for the fiscal year ended June 30, 1996, filed with the Securities and Exchange Commission on September 17, 1996. **** Incorporated by reference to the Registrant's Annual Report on Form 10-K/A for the year ended June 30, 1996, filed with the Securities and Exchange Commission on December 20, 1996. ***** Incorporated by reference to the Registrant's Report on Form 10-Q/A for the quarter ended September 30, 1996, filed with the Securities and Exchange Commission on December 20, 1996. */ Incorporated by reference to the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission on February 27, 1997. *// Incorporated by reference to the Registrant's Report on Form 10-K for the fiscal year ended June 30, 1997, filed with the Securities and Exchange Commission on September 12, 1997. */// Incorporated by reference to the Registrant's Report on Form 10-Q for the quarter ended September 30, 2000, filed November 14, 2000. *//// Incorporated by reference to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1997, filed February 5, 1998. *///// Incorporated by reference to the Registrant's Report on Form 10-K for the fiscal year ended June 30, 1998, filed with the Securities and Exchange Commission on September 17, 1998. *////// Incorporated by reference to the Registrant's Definitive Proxy Statement, filed with the Securities and Exchange Commission on September 12, 1997. + Incorporated by reference to the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission on April 1, 1999. ++ Incorporated by reference to the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission on August 19, 1999. +++ Incorporated by reference to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1998. ++++ Incorporated by reference to the Registrant's Report on Form 10-K for the fiscal year ended June 30, 1999, filed with the Securities and Exchange Commission on September 17, 1999. 53 +++++ Incorporated by reference to the Registrant's Report on Form 10-Q for the quarter ended March 31, 2000, filed with the Securities and Exchange Commission on May 12, 2000. *+ Incorporated by reference to the Registrant's Report on Form 10-K for the fiscal year ended June 30, 2000, filed with the Securities and Exchange Commission on September 12, 2000. *++ Incorporated by reference to the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission on September 13, 2000. *+++ Incorporated by reference to the Registrant's Report on Form 10-Q for the quarter ended September 30, 2000. *++++ Incorporated by reference to the Registrant's Report on Form 10-Q for the quarter ended March 31, 2001. *+++++ Incorporated by reference to the Registrant's Report on Form 10-Q for the quarter ended September 30, 2001. *++++++ Incorporated by reference to the Registrant's Report on Form 10-Q for the quarter ended December 31, 2001. The following Reports on Form 8-K were filed by the Registrant during the period covered by this report. (a) Reports on Form 8-K. None. 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. SPACEHAB, Incorporated By: /s/ Dr. Shelley A. Harrison --------------------------- Dr. Shelley A. Harrison Chairman of the Board and Chief Executive Officer Date: September 17, 2002 By: /s/ Julia A. Pulzone ----------------------- Julia A. Pulzone Senior Vice President, Finance and Chief Financial Officer Date: September 17, 2002 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of this registrant in the capacities and on the dates indicated. /s/ Hironori Aihara Director September 17, 2002 - ------------------------------------ Hironori Aihara /s/ Melvin D. Booth Director September 17, 2002 - ------------------------------------- Melvin D. Booth /s/ Dr. Edward E. David, Jr. Director September 17, 2002 - ------------------------------------ Dr. Edward E. David, Jr. /s/ Richard Fairbanks, III Director September 17, 2002 - ------------------------------------ Richard Fairbanks /s/ Michael E. Kearney Director September 17, 2002 - ------------------------------------ Michael Kearney /s/ Josef Kind Director September 17, 2002 - ------------------------------------ Josef Kind /s/ Gordon S. Macklin Director September 17, 2002 - ------------------------------------ Gordon S. Macklin /s/ James R. Thompson Director September 17, 2002 - ------------------------------------ James R. Thompson 55 CERTIFICATIONS I, Dr. Shelley A. Harrison, certify that: 1. I have reviewed this annual report on Form 10-K of SPACEHAB, Incorporated; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 17, 2002 /s/ Dr. Shelley A. Harrison ----------------------------- Dr. Shelley A. Harrison Chairman of the Board, And Chief Executive Officer I, Julia A. Pulzone, certify that: 4. I have reviewed this annual report on Form 10-K of SPACEHAB, Incorporated; 5. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 6. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 17, 2002 /s/ Julia A. Pulzone --------------------------- Julia A. Pulzone Chief Financial Officer 56 EX-10.118 3 dex10118.txt EXHIBIT 10.118 EXHIBIT 10.118 FINANCING AND SECURITY AGREEMENT Dated August 29, 2002 By and Between SPACEHAB, INC., ET AL. And RIGGS BANK N.A. TABLE OF CONTENTS ARTICLE I DEFINITIONS 6 Section 1.1 Certain Defined Terms. 6 Section 1.2 Accounting Terms and Other Definitional Provisions. 24 ARTICLE II THE CREDIT FACILITIES 25 Section 2.1 The Revolving Credit Facility. 25 2.1.1 Revolving Credit Facility. 25 2.1.2 Procedure for Making Advances Under the Revolving Credit; Lender Protection Loans. 25 2.1.3 Borrowing Base. 26 2.1.4 Borrowing Base Report. 26 2.1.5 Revolving Credit Note. 27 2.1.6 Mandatory Prepayments of Revolving Credit. 27 2.1.7 Optional Prepayments of Revolving Credit. 27 2.1.8 The Collateral Account. 28 2.1.9 Revolving Loan Account. 29 2.1.10 Revolving Credit Unused Line Fee. 29 Section 2.2 The Letter of Credit Facility. 29 2.2.1 Letters of Credit. 29 2.2.2 Letter of Credit Fees. 30 2.2.3 Terms of Letters of Credit; Post-Expiration Date Letters of Credit. 30 2.2.4 Procedures for Letters of Credit. 31 2.2.5 Payments of Letters of Credit. 31 2.2.6 Change in Law; Increased Cost. 32 2.2.7 General Letter of Credit Provisions. 33 Section 2.3 General Financing Provisions. 34 2.3.1 Borrowers' Representatives. 34 2.3.2 Use of Proceeds of the Revolving Credit. 36 2.3.3 Origination Fee. 36 2.3.4 Monitoring Fees. 36 2.3.5 Computation of Interest and Fees. 36 2.3.6 Maximum Interest Rate. 36 2.3.7 Payments. 37 2.3.8 Liens; Setoff. 37 2.3.9 Requirements of Law. 37 2.3.10 ACH Transactions. 38 2.3.11 Guaranty. 38 ARTICLE III THE COLLATERAL 41 Section 3.1 Debt and Obligations Secured. 41 Section 3.2 Grant of Liens. 41 Section 3.3 Collateral Disclosure List. 42 Section 3.4 Personal Property. 42 Section 3.5 Record Searches. 42 Section 3.6 Costs. 42 Section 3.7 Release. 42 Section 3.8 Inconsistent Provisions. 43 ARTICLE IV REPRESENTATIONS AND WARRANTIES 43 Section 4.1 Representations and Warranties. 43
2 4.1.1 Subsidiaries. 43 4.1.2 Existence. 43 4.1.3 Power and Authority. 43 4.1.4 Binding Agreements. 43 4.1.5 No Conflicts. 44 4.1.6 No Defaults, Violations. 44 4.1.7 Compliance with Laws. 44 4.1.8 Margin Stock. 44 4.1.9 Investment Company Act; Margin Stock. 44 4.1.10 Litigation. 45 4.1.11 Financial Condition. 45 4.1.12 Full Disclosure. 45 4.1.13 Indebtedness for Borrowed Money. 45 4.1.14 Convertible Debt. 46 4.1.15 Taxes. 46 4.1.16 ERISA. 46 4.1.17 Title to Properties. 47 4.1.18 Patents, Trademarks, Etc. 47 4.1.19 Employee Relations. 47 4.1.20 Presence of Hazardous Materials or Hazardous Materials Contamination. 47 4.1.21 Perfection and Priority of Collateral. 48 4.1.22 Collateral Disclosure List. 48 4.1.23 Business Names and Addresses. 48 4.1.24 No Suspension or Debarment. 48 4.1.25 Equipment. 48 4.1.26 Accounts. 48 4.1.27 Compliance with Eligibility Standards. 49 Section 4.2 Survival; Updates of Representations and Warranties. 49 ARTICLE V CONDITIONS PRECEDENT 49 Section 5.1 Conditions to the Initial Advance and Initial Letter of Credit. 49 5.1.1 Organizational Documents. 49 5.1.2 Opinion of Borrowers' Counsel. 50 5.1.3 Consents, Licenses, Approvals, Etc. 50 5.1.4 Note. 50 5.1.5 Financing Documents and Collateral. 51 5.1.6 Other Financing Documents. 51 5.1.7 Other Documents, Etc. 51 5.1.8 Payment of Fees. 51 5.1.9 Collateral Disclosure List. 51 5.1.10 Recordings and Filings. 51 5.1.11 Insurance Certificate. 51 5.1.12 Field Examination. 51 5.1.13 Landlord's Waivers. 52 5.1.14 Stock Certificates and Stock Powers. 52 5.1.15 Pledge of Membership Interests in Space Station. 52 5.1.16 Required Availability under the Revolving Credit Facility. 52 Section 5.2 Conditions to all Extensions of Credit and Issuance of Letters of Credit. 52 5.2.1 Compliance. 52 5.2.2 Borrowing Base. 52 5.2.3 Default. 53 5.2.4 Representations and Warranties. 53 5.2.5 Adverse Change. 53 5.2.6 Legal Matters. 53
3 ARTICLE VI COVENANTS OF THE BORROWERS 53 Section 6.1 Affirmative Covenants. 53 6.1.1 Financial Statements. 53 6.1.2 Reports to SEC and to Stockholders. 55 6.1.3 Recordkeeping, Rights of Inspection, Field Examination, Etc. 55 6.1.4 Existence. 56 6.1.5 Compliance with Laws. 56 6.1.6 Preservation of Properties. 56 6.1.7 Line of Business. 56 6.1.8 Insurance. 56 6.1.9 Taxes. 57 6.1.10 ERISA. 57 6.1.11 Government Contracts. 57 6.1.12 Notification of Events of Default and Adverse Developments. 58 6.1.13 Hazardous Materials; Contamination. 59 6.1.14 Disclosure of Significant Transactions. 60 6.1.15 Financial Covenants. 60 6.1.16 Collection of Receivables. 61 6.1.17 Assignments of Receivables. 61 6.1.18 Insurance With Respect to Equipment. 62 6.1.19 Maintenance of the Collateral. 62 6.1.20 Equipment. 62 6.1.21 Defense of Title and Further Assurances. 63 6.1.22 Business Names; Locations. 63 6.1.23 Use of Premises and Equipment. 63 6.1.24 Protection of Collateral. 64 Section 6.2 Negative Covenants. 64 6.2.1 Capital Structure, Merger, Acquisition or Sale of Assets. 64 6.2.2 Subsidiaries. 65 6.2.3 Issuance of Stock. 65 6.2.4 Purchase or Redemption of Stock, Dividend Restrictions. 65 6.2.5 Indebtedness. 66 6.2.6 Investments, Loans and Other Transactions. 66 6.2.7 Stock of Subsidiaries. 67 6.2.8 Subordinated Indebtedness. 67 6.2.9 Liens. 68 6.2.10 Transactions with Affiliates. 68 6.2.11 Debenture. 68 6.2.12 ERISA Compliance. 69 6.2.13 Prohibition on Hazardous Materials. 69 6.2.14 Method of Accounting; Fiscal Year. 69 6.2.15 Compensation. 69 6.2.16 Transfer of Collateral. 69 6.2.17 Disposition of Collateral. 70 ARTICLE VII DEFAULT AND RIGHTS AND REMEDIES 70 Section 7.1 Events of Default. 70 7.1.1 Failure to Pay. 70 7.1.2 Breach of Representations and Warranties. 70 7.1.3 Failure to Comply with Specific Covenants. 70 7.1.4 Other Covenants 70 7.1.5 Default Under Other Financing Documents or Obligations. 71 7.1.6 Receiver; Bankruptcy. 71 7.1.7 Involuntary Bankruptcy, etc. 71 7.1.8 Judgment. 71
4 7.1.9 Execution; Attachment. 72 7.1.10 Default Under Other Borrowings. 72 7.1.11 Challenge to Agreements. 72 7.1.12 Material Adverse Effect. 72 7.1.13 Liquidation, Termination, Dissolution, Change in Management, etc. 72 7.1.14 Contract Default, Debarment or Suspension. 72 Section 7.2 Remedies. 73 7.2.1 Acceleration. 73 7.2.2 Further Advances. 73 7.2.3 Uniform Commercial Code. 73 7.2.4 Specific Rights With Regard to Collateral. 74 7.2.5 Application of Proceeds. 75 7.2.6 Performance by Lender. 75 7.2.7 Other Remedies. 76 ARTICLE VIII MISCELLANEOUS 76 Section 8.1 Notices. 76 Section 8.2 Amendments; Waivers. 76 8.2.1 In General. 76 Section 8.3 Cumulative Remedies. 77 Section 8.4 Severability. 77 Section 8.5 Assignments by Lender. 77 Section 8.6 Participations by Lender. 78 Section 8.7 Disclosure of Information by Lender. 78 Section 8.8 Successors and Assigns. 78 Section 8.9 Continuing Agreements. 78 Section 8.10 Enforcement Costs. 79 Section 8.11 Applicable Law; Jurisdiction. 79 8.11.1 Applicable Law. 79 8.11.2 Submission to Jurisdiction. 79 8.11.3 Appointment of Agent for Service of Process. 79 8.11.4 Service of Process. 80 Section 8.12 Duplicate Originals and Counterparts. 80 Section 8.13 Headings. 80 Section 8.14 No Agency. 80 Section 8.15 Date of Payment. 80 Section 8.16 Entire Agreement. 80 Section 8.17 Waiver of Trial by Jury. 81 Section 8.18 Liability of the Lender. 81 Section 8.19 Indemnification. 81 Section 8.20 Joinder of Additional Borrowers. 82
5 FINANCING AND SECURITY AGREEMENT THIS FINANCING AND SECURITY AGREEMENT (this "Agreement") is made this 29th day of August, 2002, by and among SPACEHAB, INCORPORATED, a corporation organized under the laws of the State of Washington (the "Company"), JOHNSON ENGINEERING CORPORATION, a corporation organized under the laws of the State of Colorado ("Johnson Engineering"), ASTROTECH SPACE OPERATIONS, INC., a corporation organized under the laws of the State of Delaware ("Astrotech"), jointly and severally (each of Company, Johnson Engineering and Astrotech, a "Borrower"; Company, Johnson Engineering and Astrotech, collectively, the "Borrowers"); and RIGGS BANK N.A., a national banking association ("Lender"). RECITALS A. The Borrowers have applied to the Lender for a revolving credit facility in the maximum principal amount of Five Million Dollars ($5,000,000), a letter of credit facility in the maximum principal amount of One Million Dollars ($1,000,000), as part of that revolving credit facility to be used by the Borrowers for the Permitted Uses described in this Agreement. B. The Lender is willing to make these credit facilities available jointly and severally to the Borrowers upon the terms and subject to the conditions set forth in this Agreement. AGREEMENTS NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 Certain Defined Terms. As used in this Agreement, the terms defined in the Preamble and Recitals hereto shall have the respective meanings specified therein, and the following terms shall have the following meanings: "Account" individually and "Accounts" collectively mean all presently existing or hereafter acquired or created accounts, accounts receivable, health-care insurance receivables, contract rights (other than accounts, accounts receivable and contract rights arising under the Astrotech Excluded Contracts), notes, drafts, instruments, acceptances, chattel paper, leases and writings evidencing a monetary obligation or a security interest in, or a lease of, goods, all rights to payment of a monetary obligation or other consideration under present or future contracts (including, without limitation, all rights (whether or not earned by performance) to receive payments under presently existing or hereafter acquired or created letters of credit), or by virtue of property that has been sold, leased, licensed, assigned or otherwise disposed of, services rendered or to be rendered, loans and advances made or other considerations given, by or set 6 forth in or arising out of any present or future chattel paper, note, draft, lease, acceptance, writing, bond, insurance policy, instrument, document or general intangible, and all extensions and renewals of any thereof, all rights under or arising out of present or future contracts, agreements or general interest in goods which gave rise to any or all of the foregoing, including all commercial tort claims, other claims or causes of action now existing or hereafter arising in connection with or under any agreement or document or by operation of law or otherwise, all collateral security of any kind (including, without limitation, real property mortgages and deeds of trust) Supporting Obligations, letter-of-credit rights and letters of credit given by any Person with respect to any of the foregoing, all books and records in whatever media (paper, electronic or otherwise) recorded or stored, with respect to any or all of the foregoing and all equipment and general intangibles necessary or beneficial to retain, access and/or process the information contained in those books and records, and all -Proceeds of the foregoing. "Account Debtor" means any Person who is obligated on a Receivable and "Account Debtors" mean all Persons who are obligated on the Receivables. "ACH Transactions" means any cash management or related services including the automatic clearing house transfer of funds by the Lender for the account of any of the Borrowers pursuant to agreement or overdrafts. "Additional Borrower" means each Person that has executed and delivered an Additional Borrower Joinder Supplement that has been accepted and approved by the Lender. "Additional Borrower Joinder Supplement" means an Additional Borrower Joinder Supplement in substantially the form attached hereto as EXHIBIT A, with the blanks appropriately completed and executed and delivered by the Additional Borrower and accepted by the Company on behalf of the Borrowers. "Adjustment Date" has the meaning described in Section 8.5 (Assignments by Lender). "Affiliate" means, with respect to any designated Person, any other Person (other than a natural person), (a) directly or indirectly controlling, directly or indirectly controlled by, or under direct or indirect common control with the Person designated, (b) directly or indirectly owning or holding five percent (5%) or more of any equity interest in such designated Person, or (c) five percent (5%) or more of whose stock or other equity interest is directly or indirectly owned or held by such designated Person. For purposes of this definition, the term "control" (including with correlative meanings, the terms "controlling", "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities or other equity interests or by contract or otherwise. "Agreement" means this Financing and Security Agreement, as amended, restated, supplemented or otherwise modified in writing in accordance with the provisions of Section 8.2 (Amendments; Waivers). "Assets" means at any date all assets that, in accordance with GAAP consistently applied, should be classified as assets on a consolidated balance sheet of the Borrowers and their respective Subsidiaries. 7 "Assignee" means any Person to which the Lender assigns all or any portion of its interests under this Agreement, any Revolving Credit Commitment, and any Loan, in accordance with the provisions of Section 8.5 (Assignments by Lender), together with any and all successors and assigns of such Person; "Assignees" means the collective reference to all Assignees. "Astrotech Excluded Contracts" means CLIN 1 payments under (i) the McDonnell Douglas Corporation ( subcontract 99797075 as amended) and (ii) the Lockheed Martin Commercial Launch Services, Inc. ( subcontract no. 48801, as amended). "Astrotech Loan" means that certain credit agreement between Astrotech Florida Holdings, Inc. a Florida Corporation and wholly owned subsidiary of Astrotech Space Operations, Inc. and SouthTrust Bank in the original principal amount of $20,000,000. "Astrotech Loan Collateral" means (i) the real property which is the subject of the Astrotech Loan located in Titusville, Florida and having the addresses of 1515 Chafee Drive and 8720 Grissom Parkway and (ii) all monies due under the Astrotech Excluded Contracts. "Bankruptcy Code" means Title 11 of the United States Code, as amended from time to time, and any successor Laws. "Base Rate" means the higher of (a) the Federal Funds Rate plus 1/2 of 1%; or (ii) The Wall Street Journal Prime Rate. The "Federal Funds Rate" is a fluctuating rate of interest equal to the Federal Funds Rate as published in the "Money Rates" Section of The Wall Street Journal. "The Wall Street Journal Prime Rate" is a fluctuating rate of interest equal to the highest quoted annual rate of interest which is published from time to time in the "Money Rates" Section of The Wall Street Journal as the Prime Rate (or, if such source is not available, such alternate source as determined by the Lender), as adjusted from time to time in the Lender's sole discretion for reserve requirements, deposit insurance assessment rates and other regulatory costs. "Borrower" means each Person defined as a "Borrower" in the preamble of this Agreement and each Additional Borrower; "Borrowers" means the collective reference to all Persons defined as "Borrowers" in the preamble to this Agreement and all Additional Borrowers. "Borrowing Base" has the meaning described in Section 2.1.3 (Borrowing Base). "Borrowing Base Deficiency" has the meaning described in Section 2.1.3 (Borrowing Base). "Borrowing Base Report" has the meaning described in Section 2.1.4 (Borrowing Base Report). "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in the State are authorized or required to close. "Capital Adequacy Regulation" means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. 8 "Capital Expenditure" means an expenditure (whether payable in cash or other property or accrued as a liability) for Fixed or Capital Assets, including, without limitation, the entering into of a Capital Lease. "Capital Lease" means with respect to any Person any lease of real or personal property, for which the related Lease Obligations have been or should be, in accordance with GAAP consistently applied, capitalized on the balance sheet of that Person. "Cash Equivalents" means (a) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed or insured by the United States Government or any agency thereof, (b) certificates of deposit with maturities of one (1) year or less from the date of acquisition of, or money market accounts maintained with, the Lender, any Affiliate of the Lender, or any other domestic commercial bank having capital and surplus in excess of One Hundred Million Dollars ($100,000,000.00) or such other domestic financial institutions or domestic brokerage houses to the extent disclosed to, and approved by, the Lender and (c) commercial paper of a domestic issuer rated at least either A-1 by Standard & Poor's Corporation (or its successor) or P-1 by Moody's Investors Service, Inc. (or its successor) with maturities of six (6) months or less from the date of acquisition. "Chattel Paper" means a record or records (including, without limitation, electronic chattel paper) that evidence both a monetary obligation and a security interest in specific goods, a security interest in specific goods and software used in the goods, or a lease of specific goods; all Supporting Obligations with respect thereto; any returned, rejected or repossessed goods and software covered by any such record or records and all proceeds (in any form including, without limitation, accounts, contract rights, documents, chattel paper, instruments and general intangibles) of such returned, rejected or repossessed goods; and all -Proceeds of the foregoing. "CIT Collateral" means all equipment and inventory and other tangible personal property of the Company, Astrotech and Johnson Engineering (other than Flight Assets) presently existing or hereafter acquired or created and wherever located, together with all accessions thereto, substitutions and replacements therefor, and Proceeds thereof, including all accounts, chattel paper, instruments and general intangibles constituting Proceeds of such equipment, together with all insurance proceeds of the foregoing, and all books and records of the foregoing, which secure the CIT Loan Obligations. "CIT Loan Obligations" means the loans and other obligations described in that certain Loan and Security Agreement dated July 14, 1997 by and between Astrotech, as Borrower, and CIT Group/Equipment Financing, Inc., as Lender, as the same has been amended prior to the Closing Date, to among other things, add Johnson Engineering as a party thereto, and as the same may be amended from time to time in accordance with this Agreement and all obligations of the Company described in that certain Continuing Guaranty Agreement and that certain Security Agreement, each dated July 14, 1997 from the Company in favor of CIT Group/Equipment Financing, Inc., in each case as the same has been amended prior to the date of this Agreement, and as the same may be amended from time to time in accordance with this Agreement. 9 "Closing Date" means the Business Day, in any event not later than August ___, 2002 on which the Lender shall be satisfied that the conditions precedent set forth in Section 5.1 (Conditions to Initial Advance) have been fulfilled or otherwise waived by the Lender. "Collateral" means all property of each and every Borrower subject from time to time to the Liens of this Agreement, any of the Security Documents and/or any of the other Financing Documents, together with any and Proceeds thereof. "Collateral Account" has the meaning described in Section 2.1.8 (The Collateral Account). "Collateral Disclosure List" has the meaning described in Section 3.3 (Collateral Disclosure List). "Collection" means each check, draft, cash, money, instrument, item, and other remittance in payment or on account of payment of the Accounts or otherwise with respect to any Collateral, including, without limitation, cash proceeds of any returned, rejected or repossessed goods, the sale or lease of which gave rise to an Account, and other proceeds of Collateral; and "Collections" means the collective reference to all of the foregoing. "Compliance Certificate" means a periodic Compliance Certificate described in Section 6.1.1 (Financial Statements). "Commonly Controlled Entity" means an entity, whether or not incorporated, which is under common control with any Borrower within the meaning of Section 414(b) or (c) of the Internal Revenue Code. "Convertible Debt Loan Documents" means any of the documents now or hereafter evidencing or securing the Debentures. "Credit Facility" means the Revolving Credit Facility or the Letter of Credit Facility, as the case may be, and "Credit Facilities" means collectively the Revolving Credit Facility, the Letter of Credit Facility and any and all other credit facilities now or hereafter extended under or secured by this Agreement. "Current Letter of Credit Obligations" has the meaning described in Section 2.2.5 (Payments of Letters of Credit). "Debentures" means the Company's 8% Convertible Subordinated Notes due 2007 in the aggregate principal amount of $63,250,000 issued pursuant to the Purchase Agreement dated as of October 15, 1997, by and among the Company, and Credit Suisse First Boston Corporation, CIBC Wood Gundy Securities Corp. and Oppenheimer & Co., Inc "Debt Service" means as to each Borrower and its Subsidiaries for any period of determination thereof an amount equal to the total of the aggregate amount of all payments of principal and interest with respect to Indebtedness for Borrowed Money of each Borrower and its Subsidiaries scheduled to be due and payable during such period, minus non-cash amortized interest costs for such period; provided, however, interest payments shall be calculated on an accrual basis. 10 "Debt Service Coverage Ratio" means as to each Borrower and its Subsidiaries for the period of any determination the ratio of (a) EBITDA minus cash dividends paid by the Company to (b) Debt Service. "Debt to Worth Ratio" means as to each Borrower and its Subsidiaries for the date of any determination thereof the ratio of (a) Liabilities to (b) the Tangible Net Worth. "Default" means an event which, with the giving of notice or lapse of time, or both, could or would constitute an Event of Default under the provisions of this Agreement. "Documents" means all documents of title or receipts, whether now existing or hereafter acquired or created, and all Proceeds of the foregoing. "EBITDA" means as to each Borrower and its Subsidiaries for any period of determination thereof, the sum of (a) the net profit (or loss) determined in accordance with GAAP consistently applied, plus (b) interest expense and income tax provisions for such period, plus (c) depreciation and amortization of assets for such period, plus (d) non-cash amortized interest costs for such period, plus (e) cash tax refunds, and, minus (e) cash taxes paid for such period. All net profits and losses from Space Media shall be excluded from the calculation of EBITDA. "Eligible Receivable" and "Eligible Receivables" mean, at any time of determination thereof, the unpaid portion of each Account (excluding any and all Accounts that are Excluded Assets) (net of any returns, discounts, claims, credits, charges, accrued rebates or other allowances, offsets, deductions, counterclaims, disputes or other defenses and reduced by the aggregate amount of all reserves, limits and deductions provided for in this definition and elsewhere in this Agreement) in United States Dollars of a Borrower, provided such Account conforms and continues to conform to the following criteria to the satisfaction of the Lender: (a) the Account arose in the ordinary course of a Borrower's business from services performed or products delivered by such Borrower; (b) the Account is a valid, legally enforceable obligation of the Account Debtor and requires no further act on the part of any Person under any circumstances to make the Account payable by the Account Debtor; (c) the Account is based upon an enforceable order or contract, written or oral, for services performed or products delivered, and the same were performed in accordance with such order or contract; (d) if the Account arises from the performance of services, such services have been fully rendered and do not relate to any warranty claim or obligation; 11 (e) the Account is evidenced by an invoice or other documentation in form acceptable to the Lender, dated no later than the date of shipment or performance; (f) the amount shown on the books of a Borrower and on any invoice, certificate, schedule or statement delivered to the Lender is owing to such Borrower and no partial payment has been received unless reflected with that delivery; (g) the Account is not outstanding more than ninety (90) days from the date of the invoice therefor or past due more than sixty (60) days after its due date, which shall not be later than thirty (30) days after the invoice date; (h) the Account is not owing by any Account Debtor for which the Lender has deemed fifty percent (50%) or more of such Account Debtor's other Accounts (or any portion thereof) due to a Borrower, individually, or all of the Borrowers collectively to be non-Eligible Receivables; (i) the Account is not owing by an Account Debtor (other than where a Governmental Authority is the Account Debtor) or a group of affiliated Account Debtors (other than Governmental Authorities) to any Borrower whose then existing Accounts owing to that Borrower individually exceed in aggregate face amount fifteen percent (15%) of that Borrower's total Eligible Receivables; (j) the Account Debtor has not returned, rejected or refused to retain, or otherwise notified the Borrower of any dispute concerning, or claimed nonconformity of, any goods or services from the furnishing or delivery of which the Account arose; (k) other than customary offsets and claims which may arise under Government Contracts, the Account is not subject to any present or contingent (and no facts exist which are known to the Borrower to be the basis for any future) offset, claim, deduction or counterclaim, dispute or defense in law or equity on the part of such Account Debtor, or any claim for credits, allowances, or adjustments by the Account Debtor because of unsatisfactory services, or for any other reason including, without limitation, those arising on account of a breach of any express or implied representation or warranty; (l) the Account Debtor is not a Subsidiary or Affiliate of any Borrower or an employee, officer, director or shareholder of any Borrower or any Subsidiary or Affiliate of any Borrower; (m) the Account Debtor is not incorporated or primarily conducting business or otherwise located in any jurisdiction outside of the United States of America, unless the Account Debtor's obligations with respect to such Account are secured by a letter of credit, guaranty or banker's acceptance having 12 terms and from such issuers and confirmation banks as are acceptable to the Lender in its sole and absolute discretion (which letter of credit, guaranty or banker's acceptance is subject to the perfected Lien of the Lender); (n) as to which none of the following events has occurred and is continuing with respect to the Account Debtor on such Account: death or judicial declaration of incompetency of an Account Debtor who is an individual; the filing by or against the Account Debtor of a request or petition for liquidation, reorganization, arrangement, adjustment of debts, adjudication as a bankrupt, winding-up, or other relief under the bankruptcy, insolvency, or similar laws of the United States, any state or territory thereof, or any foreign jurisdiction, now or hereafter in effect; the making of any general assignment by the Account Debtor for the benefit of creditors; the appointment of a receiver or trustee for the Account Debtor or for any of the assets of the Account Debtor, including, without limitation, the appointment of or taking possession by a "custodian," as defined in the Bankruptcy Code; the institution by or against the Account Debtor of any other type of insolvency proceeding (under the bankruptcy laws of the United States or otherwise) or of any formal or informal proceeding for the dissolution or liquidation of, settlement of claims against, or winding up of affairs of, the Account Debtor; the sale, assignment, or transfer of all or any material part of the assets of the Account Debtor; the nonpayment generally by the Account Debtor of its debts as they become due; or the cessation of the business of the Account Debtor as a going concern; (o) no Borrower is indebted in any manner to the Account Debtor (as creditor, lessor, supplier or otherwise), with the exception of customary offsets and claims which may arise under Government Contracts and customary credits, adjustments and/or discounts given to an Account Debtor by a Borrower in the ordinary course of its business; (p) the Account does not arise from services under or related to any warranty obligation of a Borrower or out of service charges, finance charges or other fees for the time value of money; (q) the Account is not evidenced by chattel paper or an instrument of any kind and is not secured by any letter of credit, unless such chattel paper, instrument or letter of credit is assigned to the Lender pursuant to documents in all respects satisfactory to the Lender; (r) the Account does not arise from an Excluded Asset; (s) the title of the respective Borrower to the Account is absolute and is not subject to any prior assignment, claim, Lien, or security interest, except Permitted Liens; 13 (t) no bond or other undertaking by a guarantor or surety has been or is required to be obtained, supporting the Account and any of the Account Debtor's obligations in respect of the account; (u) each Borrower has the full and unqualified right and power to assign and grant a security interest in, and Lien on, the Account to the Lender as security and collateral for the payment of the Obligations; (v) the Account does not arise out of a contract with, or order from, an Account Debtor that, to the extent such terms are enforceable under applicable law, by its terms, forbids or makes void or unenforceable the assignment or grant of a security interest by the Borrowers to the Lender of the Account arising from such contract or order; (w) the Account is subject to a Lien in favor of the Lender, which Lien is perfected as to the Account by the filing of financing statements and which Lien upon such filing constitutes a first priority security interest and Lien; (x) no part of the Account represents a retainage; (y) the Lender in the good faith exercise of its sole and absolute discretion has not deemed the Account ineligible because of uncertainty as to the creditworthiness of the Account Debtor or because the Lender otherwise considers the collateral value of such Account to the Lender to be impaired or its ability to realize such value to be insecure; (z) the Account does not constitute a final billing or close out billing relating to a completed contract; and (aa) if the Account Debtor is located in a state requiring the filing of a Notice of Business Activities Report or similar report in order to permit a Borrower to seek judicial enforcement in such state of payment of such Account, such Borrower has qualified to do business in such state or has filed a Notice of Business Activities Report or equivalent report for the then current year. In the event of any dispute, under the foregoing criteria, as to whether an account is, or has ceased to be, an Eligible Receivable, the decision of the Lender in the good faith exercise of its sole and absolute discretion shall control. "Enforcement Costs" means all expenses, charges, costs and fees whatsoever (including, without limitation, reasonable outside and allocated in-house counsel attorney's fees and expenses) of any nature whatsoever paid or incurred by or on behalf of the Lender in connection with (a) any or all of the Obligations, this Agreement and/or any of the other Financing Documents, (b) the creation, perfection, collection, maintenance, preservation, defense, protection, realization upon, disposition, sale or enforcement of all or any part of the Collateral, this Agreement or any of the other Financing Documents, including, without limitation, those costs and expenses more specifically enumerated in Section 3.6 (Costs) and/or Section 8.10 14 (Enforcement Costs), and further including, without limitation, amounts paid to lessors, processors, bailees, warehousemen, sureties, judgment creditors and others in possession of or with a Lien against or claimed against the Collateral, and (c) the monitoring, administration, processing and/or servicing of any or all of the Obligations, the Financing Documents, and/or the Collateral. "Equipment" means all equipment, machinery, computers, chattels, tools, parts, machine tools, furniture, furnishings, fixtures and supplies of every nature (other than Excluded Assets), presently existing or hereafter acquired or created and wherever located, whether or not the same shall be deemed to be affixed to real property and all of such types of property leased by any of the Borrowers and all of the Borrowers' rights and interests with respect thereto under such leases (including, without limitation, options to purchase), together with all accessions, additions, fittings, accessories, special tools, and improvements thereto and substitutions therefor and all parts and equipment which may be attached to or which are necessary or beneficial for the operation, use and/or disposition of such personal property, all licenses, warranties, franchises and General Intangibles related thereto or necessary or beneficial for the operation, use and/or disposition of the same, together with all Accounts, Chattel Paper, Instruments and other consideration received by any Borrower on account of the sale, lease or other disposition of all or any part of the foregoing, and together with all rights under or arising out of present or future Documents and contracts relating to the foregoing and all Proceeds of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Event of Default" has the meaning described in ARTICLE VII (Default and Rights and Remedies). "Excluded Assets" means (i) all Flight Assets, (ii) the CIT Collateral, and (iii) the Astrotech Loan Collateral. "Facilities" means the collective reference to the loan, letter of credit, interest rate protection, foreign exchange risk, cash management, and other credit facilities now or hereafter provided to any one or more of the Borrowers by the Lender or any of its Affiliates. "Fees" means the collective reference to each fee payable to the Lender under the terms of this Agreement or under the terms of any of the other Financing Documents. "Financing Documents" means at any time collectively this Agreement, the Notes, the Security Documents, the Letter of Credit Documents, and any other instrument, agreement or document previously, simultaneously or hereafter executed and delivered by any Borrower and/or any other Person, singly or jointly with another Person or Persons, evidencing, securing, guarantying or in connection with this Agreement, any Note, any of the Security Documents, any of the Facilities, and/or any of the Obligations. "Fixed or Capital Assets" of a Person at any date means all assets which would, in accordance with GAAP consistently applied, be classified on the balance sheet of such Person as property, plant or equipment at such date. 15 "Flight Assets" shall mean all hardware and subsystems owned or leased by the Company which are designed or acquired for space flight (including, but not limited, to flight modules, adapter rings, tunnel segments, multi-layer insulation blankets, cargo pallets and associated piece parts) and non-flight equipment supporting such hardware and subsystems (including, but not limited to, mechanical and electrical ground support, and flight training modules and equipment), together with all computer hardware and software and copyrights, patents, trademarks and other intellectual property directly arising or created with respect to such assets. "GAAP" means generally accepted accounting principles in the United States of America in effect from time to time. "General Intangibles" means all general intangibles of every nature, whether presently existing or hereafter acquired or created, and without implying any limitation of the foregoing, further means all books and records, commercial tort claims, other claims (including without limitation all claims for income tax and other refunds), payment intangibles, Supporting Obligations, choses in action, claims, causes of action in tort or equity, contract rights, judgments, customer lists, software, patents, trademarks, licensing agreements, goodwill (including goodwill of any Borrower's business symbolized by and associated with any and all trademarks, trademark licenses, copyrights and/or service marks), royalty payments, licenses, letter-of-credit rights, letters of credit, contractual rights, the right to receive refunds of unearned insurance premiums, rights as lessee under any lease of real or personal property, literary rights, amounts received as an award in or settlement of a suit in damages, deposit accounts, interests in joint ventures, general or limited partnerships, limited liability companies or partnerships, rights in applications for any of the foregoing, books and records in whatever media (paper, electronic or otherwise) recorded or stored, with respect to any or all of the foregoing, all Supporting Obligations with respect to any of the foregoing, and all Equipment and General Intangibles necessary or beneficial to retain, access and/or process the information contained in those books and records, and all -Proceeds of the foregoing. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any department, agency or instrumentality thereof. "Government Contracts" means any contract with the United States or with any state or political subdivision thereof or any department, agency or instrumentality of the United States, or any state or political subdivision thereof. "Hazardous Materials" means (a) any "hazardous waste" as defined by the Resource Conservation and Recovery Act of 1976, as amended from time to time, and regulations promulgated thereunder; (b) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time, and regulations promulgated thereunder; (c) any substance the presence of which on any property now or hereafter owned, acquired or operated by any of the Borrowers is prohibited by any Law similar to those set forth in this definition; and (d) any other substance which by Law requires special handling in its collection, storage, treatment or disposal. 16 "Hazardous Materials Contamination" means the contamination (whether presently existing or occurring after the date of this Agreement) by Hazardous Materials of any property owned, operated or controlled by any of the Borrowers or for which any of the Borrowers has responsibility, including, without limitation, improvements, facilities, soil, ground water, air or other elements on, or of, any property now or hereafter owned, acquired or operated by any of the Borrowers, and any other contamination by Hazardous Materials for which any of the Borrowers is, or is claimed to be, responsible. "Indebtedness" of a Person means at any date the total liabilities of such Person at such time determined in accordance with GAAP consistently applied. "Indebtedness for Borrowed Money" of a Person means at any time the sum at such time of (a) Indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, (b) any obligations of such Person in respect of letters of credit, banker's or other acceptances or similar obligations issued or created for the account of such Person, (c) Lease Obligations of such Person with respect to Capital Leases, (d) all liabilities secured by any Lien on any property owned by such Person, to the extent attached to such Person's interest in such property, even though such Person has not assumed or become personally liable for the payment thereof, (e) obligations of third parties which are being guarantied or indemnified against by such Person or which are secured by the property of such Person; (f) any obligation of such Person under an employee stock ownership plan or other similar employee benefit plan which is in excess of amounts incurred by such Person in the ordinary course of business; and (g) any obligation of such Person or a Commonly Controlled Entity to a Multi-employer Plan, which is in excess of amounts incurred by such Person in the ordinary course of business; but excluding trade and other accounts payable in the ordinary course of business in accordance with customary trade terms and which are not overdue (as determined in accordance with customary trade practices) or which are being disputed in good faith by such Person and for which adequate reserves are being provided on the books of such Person in accordance with GAAP. "Indemnified Parties" has the meaning set forth in Section 8.19 (Indemnification). "Instrument" means a negotiable instrument or any other writing which evidences a right to payment of a monetary obligation and is not itself a security agreement or lease and is of a type that in the ordinary course of business is transferred by delivery with any necessary endorsement or assignment, and all Supporting Obligations with respect to any of the foregoing and all Proceeds with respect to any of the foregoing. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time, and the Income Tax Regulations issued and proposed to be issued thereunder. "Inventory" means all goods of each Borrower (other than Excluded Assets) and all right, title and interest of each Borrower in and to all of its now owned and hereafter acquired goods, merchandise and other personal property furnished under any contract of service or intended for sale or lease, including, without limitation, all raw materials, work-in-process, finished goods and materials and supplies of any kind, nature or description which are used or consumed in any Borrower's business or are or could be expected to be used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise and other 17 licenses, warranties, franchises, general intangibles, personal property and all documents of title or documents relating to the same and all Proceeds of the foregoing. "Investment Property" means a security, whether certificated or uncertificated, security entitlement, securities account, commodity contract or commodity account and all Proceeds of, and Supporting Obligations with respect to, the foregoing. "Item of Payment" means each check, draft, cash, money, instrument, item, and other remittance in payment or on account of payment of the Receivables or otherwise with respect to any Collateral (other than remittances on the Excluded Assets), including, without limitation, cash proceeds of any returned, rejected or repossessed goods, the sale or lease of which gave rise to a Receivable, and other proceeds of Collateral; and "Items of Payment" means the collective reference to all of the foregoing. "Laws" means all ordinances, statutes, rules, regulations, orders, injunctions, writs, or decrees of any Governmental Authority. "Lease Obligations" of a Person means for any period the rental commitments of such Person for such period under leases for real and/or personal property (net of rent from subleases thereof, but including taxes, insurance, maintenance and similar expenses which such Person, as the lessee, is obligated to pay under the terms of said leases, except to the extent that such taxes, insurance, maintenance and similar expenses are payable by sublessees), including rental commitments under Capital Leases. "Letter of Credit" and "Letters of Credit" shall have the meanings described in Section 2.2.1 (Letters of Credit). "Letter of Credit Agreement" means the collective reference to each letter of credit application and agreement substantially in the form of the Lender's then standard form of application for letter of credit or such other form as may be approved by the Lender, executed and delivered by any one or more of the Borrowers in connection with the issuance of a Letter of Credit, as the same may from time to time be amended, restated, supplemented or modified and "Letter of Credit Agreements" means all of the foregoing in effect at any time and from time to time. "Letter of Credit Cash Collateral Account" has the meaning described in Section 2.2.3 (Terms of Letters of Credit). "Letter of Credit Documents" means any and all drafts under or purporting to be under a Letter of Credit, any Letter of Credit Agreement, and any other instrument, document or agreement executed and/or delivered by any one or more of the Borrowers or any other Person under, pursuant to or in connection with a Letter of Credit or any Letter of Credit Agreement. "Letter of Credit Facility" means the facility established by the Lender pursuant to Section 2.2 (Letter of Credit Facility). "Letter of Credit Fee" and "Letter of Credit Fees" have the meanings described in Section 2.2.2 (Letter of Credit Fees). 18 "Letter of Credit Obligations" means all Obligations of any one or more of the Borrowers with respect to the Letters of Credit and the Letter of Credit Agreements. "Letter-of-credit right" means a right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance. "Liabilities" means at any date all liabilities that in accordance with GAAP consistently applied should be classified as liabilities on a consolidated balance sheet of the Borrowers and their respective Subsidiaries. "Lien" means any mortgage, deed of trust, deed to secure debt, grant, pledge, security interest, assignment, encumbrance, judgment, lien, financing statement, hypothecation, provision in any instrument or other document for confession of judgment, cognovit or other similar right or other remedy, claim, charge, control over or interest of any kind in real or personal property securing any indebtedness, duties, obligations, and liabilities owed to, or claimed to be owed to, a Person, all whether perfected or unperfected, avoidable or unavoidable, based on the common law, statute or contract or otherwise, including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction, excluding the precautionary filing of any financing statement by any lessor in a true lease transaction, by any bailor in a true bailment transaction or by any consignor in a true consignment transaction under the Uniform Commercial Code of any jurisdiction or the agreement to give any financing statement by any lessee in a true lease transaction, by any bailee in a true bailment transaction or by any consignee in a true consignment transaction. "Loan" means any advance of the Revolving Credit; "Loans" means multiple advances of the Revolving Credit. "Loan Notice" has the meaning described in Section 2.1.2 (Procedure for Making Advances). "Lockbox" has the meaning described in Section 2.1.8 (The Collateral Account). "Material Adverse Effect" means the occurrence of any event which in the Lender's sole, but reasonable discretion (i) could be expected to be materially adverse to the business, operations, property or financial condition of the Borrowers taken as a whole, (ii) could be expected to materially and adversely affect the ability of the Borrowers taken as a whole to perform their obligations under this Agreement or the other Financing Documents, to which any Borrower is a party, (iii) could be expected to materially and adversely affect the ability of the Borrowers taken as a whole to perform the Obligations, (iv) could be expected to materially and adversely affect the value of, or the ability of the Lender to realize upon, the Collateral. "Maximum Rate" has the meaning described in Section 2.3.6 (Maximum Interest Rate). "Member Interest Pledge Agreement" means that certain pledge, assignment and security agreement dated the date hereof from the Company for the benefit of the Lender, as the same may 19 from time to time be amended, restated, supplemented or otherwise modified, pledging the Company's membership interests in Space Station as collateral for the Obligations. "Monitoring Fee" and "Monitoring Fees" have the meanings described in Section 2.3.4 (Monitoring Fees). "Multi-employer Plan" means a Plan that is a Multi-employer plan as defined in Section 4001(a)(3) of ERISA. "Net Worth" means the consolidated shareholders' equity, defined in accordance with GAAP, of the Borrower and its Subsidiaries. "Note" means any Revolving Credit Note, and "Notes" means collectively the Revolving Credit Note and any other promissory note which may from time to time evidence all or any portion of the Obligations. "Obligations" means all present and future indebtedness, duties, obligations, and liabilities, whether now existing or contemplated or hereafter arising, of any one or more of the Borrowers to the Lender under, arising pursuant to, in connection with and/or on account of the provisions of this Agreement, each Note, each Security Document, and/or any of the other Financing Documents, the Loans, and/or any of the Facilities including, without limitation, the principal of, and interest on, each Note, late charges, the Fees, Enforcement Costs, and prepayment fees (if any), Outstanding Letter of Credit Obligations, Letter of Credit Fees or fees charged with respect to any guaranty of any Letter of Credit; also means all other present and future indebtedness, duties, obligations, and liabilities, whether now existing or contemplated or hereafter arising, of any one or more of the Borrowers to the Lender or its Affiliates of any nature whatsoever including, without limitation, any indebtedness, duties, obligations, and liabilities under or in connection with, any cash management agreements, regardless of whether such indebtedness, duties, obligations, and liabilities be direct, indirect, primary, secondary, joint, several, joint and several, fixed or contingent; and also means any and all renewals, extensions, substitutions, amendments, restatements and rearrangements of any such indebtedness, duties, obligations, and liabilities. "Origination Fee" has the meaning described in Section 2.3.3 (Origination Fee). "Outstanding Letter of Credit Obligations" has the meaning described in Section 2.2.3 (Terms of Letters of Credit). "PBGC" means the Pension Benefit Guaranty Corporation. "Permitted Liens" means: (a) Liens for Taxes which are not delinquent or which the Lender has determined in the good faith exercise of its sole and absolute discretion (i) are being diligently contested in good faith and by appropriate proceedings, and such contest operates to suspend collection of the contested Taxes and enforcement of a Lien, (ii) the respective Borrower or Subsidiary has the financial ability to pay, with all penalties and interest, at all times without a Material Adverse Effect, and (iii) are not, and will not be with appropriate filing, the giving of notice and/or the passage of time, entitled to priority over any Lien of the Lender; (b) deposits or pledges to secure obligations under workers' compensation, social security or similar 20 laws, or under unemployment insurance in the ordinary course of business; (c) Liens securing the Obligations; (d) judgment Liens to the extent the entry of such judgment does not constitute a Default or an Event of Default under the terms of this Agreement or result in the sale or levy of, or execution on, any of the Collateral; (e) Liens on the Excluded Assets; (f) Purchase Money Liens in an aggregate amount at any time, not exceeding Two Hundred Fifty Thousand Dollars ($250,000); (g) materialmen and landlord Liens incurred in the ordinary course of the business of a Borrower, provided such claims are not and will not be with appropriate filings, the giving of notice and/or the passage of time, entitled to priority over any Lien of the Lender; (h) Liens incurred or deposits made in the ordinary course of business to secure the performance of tenders, bids, leases, contracts (other than the repayment of Indebtedness for Borrowed Money), provided that, to the extent any such Liens attach to any of the Collateral, such Liens are at all times subordinated and junior to the Liens in such Collateral in favor of the Lender; and (i) such other Liens, if any, as are set forth on Schedule 4.1.21 attached hereto and made a part hereof. "Permitted Uses" means the payment of expenses incurred in the ordinary course of any Borrower's business, including, the payment of costs, fees and other expenses in connection with this Agreement, and to support the issuance of Letters of Credit. "Person" means and includes an individual, a corporation, a partnership, a joint venture, a limited liability company or partnership, a trust, an unincorporated association, a Governmental Authority, or any other organization or entity. "Plan" means any pension plan that is covered by Title IV of ERISA and in respect of which any Borrower or a Commonly Controlled Entity is an "employer" as defined in Section 3 of ERISA. "Proceeds" has the meaning described in the Uniform Commercial Code as in effect from time to time. "Post-Default Rate" means the Base Rate in effect from time to time, plus four percent (4%) per annum. "Post-Expiration Date Letter of Credit" and "Post-Expiration Date Letters of Credit" have the meanings described in Section 2.2.3 (Terms of Letters of Credit). "Prepayment" means a Revolving Credit Mandatory Prepayment or a Revolving Credit Optional Prepayment, as the case may be, and "Prepayments" mean collectively all Revolving Credit Mandatory Prepayments and all Revolving Credit Optional Prepayments. "Purchase Money Lien" means Liens (a) on Equipment acquired or held by a Borrower incurred for financing the acquisition of the specific equipment, or (b) existing on Equipment when acquired, provided that in all cases such Lien is confined to the Proceeds of such Equipment. "Receivable" means one of each Borrower's now owned and hereafter owned, acquired or created Accounts, Chattel Paper, General Intangibles and Instruments, other than Receivables arising from the sale of the CIT Collateral; and "Receivables" means all of each Borrower's now or hereafter owned, acquired or created Accounts, Chattel Paper, General Intangibles and 21 Instruments, other than Receivables arising from the sale of the CIT Collateral; together with all Proceeds thereof. "Registered Organization" means an organization organized solely under the law of a single state or the United States and as to which the state or the United States must maintain a public record showing the organization to have been organized. "Reportable Event" means any of the events set forth in Section 4043(c) of ERISA or the regulations thereunder. "Responsible Officer" means for each Borrower, its chief executive officer or president or, with respect to financial matters, its chief financial officer. "Revolving Credit" has the meaning described in Section 2.1.1 (Revolving Credit Facility). "Revolving Credit Commitment" means the agreement of the Lender relating to making the Revolving Credit and advances thereunder subject to and in accordance with the provisions of this Agreement. "Revolving Credit Commitment Period" means the period of time from the Closing Date to the Business Day preceding the Revolving Credit Termination Date. "Revolving Credit Committed Amount" has the meaning described in Section 2.1.1 (Revolving Credit Facility). "Revolving Credit Expiration Date" means August __, 2005. "Revolving Credit Facility" means the facility established by the Lender pursuant to Section 2.1 (Revolving Credit Facility). "Revolving Credit Mandatory Prepayment" and "Revolving Credit Mandatory Prepayments" have the meanings described in Section 2.1.6 (Mandatory Prepayments of Revolving Credit). "Revolving Credit Note" has the meaning described in Section 2.1.5 (Revolving Credit Note). "Revolving Credit Optional Prepayment" and "Revolving Credit Optional Prepayments" have the meanings described in Section 2.1.7 (Optional Prepayment of Revolving Credit). "Revolving Credit Termination Date" means the earlier of (a) the Revolving Credit Expiration Date, or (b) the date on which the Revolving Credit Commitment is terminated pursuant to Section 7.2 (Remedies) or otherwise. "Revolving Credit Unused Line Fee" and "Revolving Credit Unused Line Fees" have the meanings described in Section 2.1.10 (Revolving Credit Unused Line Fee). 22 "Revolving Credit" has the meaning described in Section 2.1.1 (Revolving Credit Facility). "Revolving Loan Account" has the meaning described in Section 2.1.9 (Revolving Loan Account). "Security Documents" means collectively any assignment, pledge agreement, security agreement, mortgage, deed of trust, deed to secure debt, financing statement and any similar instrument, document or agreement under or pursuant to which a Lien is now or hereafter granted to, or for the benefit of, the Lender on any real or personal property of any Person to secure all or any portion of the Obligations, all as the same may from time to time be amended, restated, supplemented or otherwise modified. "Space Media" means Space Media, Inc., a Delaware corporation, its successors and assigns. "Space Station" means Space Station Enterprise, LLC, a limited liability company organized under the laws of the State of Delaware, its successors and assigns. "State" means the Commonwealth of Virginia. "Stock Pledge Agreement" means that certain pledge, assignment and security agreement dated the date hereof from the Company for the benefit of the Lender, as the same may from time to time be amended, restated, supplemented or otherwise modified, pledging the stock owned by the Company in Space Media as collateral for the Obligations. "Subordinated Indebtedness" means all Indebtedness, incurred at any time by any one or more of the Borrowers, which is in amounts, subject to repayment terms, and subordinated to the Obligations, as set forth in one or more written agreements, all in form and substance satisfactory to the Lender in its sole and absolute discretion. "Subsidiary" means any operating corporation with principal offices in the United States where fifty one percent (51%) or more of the voting shares of which at the time are owned directly by any Borrower and/or by one or more Subsidiaries of any Borrower. "Supporting Obligation" means a Letter-of-credit right, secondary obligation or obligation of a secondary obligor or that supports the payment or performance of an account, chattel paper, a document, a general intangible, an instrument or investment property. "Tangible Net Worth" means as to each Borrower and its Subsidiaries at any date of determination thereof, the sum at such time of: the Net Worth, less the total of (a) all Assets which would be classified as intangible assets under GAAP consistently applied, (b) applicable reserves, allowances and other similar properly deductible items to the extent such reserves, allowances and other similar properly deductible items have not been previously deducted by the Lender in the calculation of Net Worth, and (c) any revaluation or other write-up in book value of assets subsequent to the date of the most recent financial statements delivered to the Lender. 23 "Taxes" means all taxes and assessments whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character (including all penalties or interest thereon), which at any time may be assessed, levied, confirmed or imposed by any Governmental Authority on any or all of the Borrowers or any of its or their properties or assets or any part thereof or in respect of any of its or their franchises, businesses, income or profits. "Uniform Commercial Code" means, unless otherwise provided in this Agreement, the Uniform Commercial Code as adopted by and in effect from time to time in the State or in any other jurisdiction, as applicable. "United States" means the United States of America and any territory or insular possession of the United States of America. "Wholly Owned Subsidiary" means any domestic United States corporation all the shares of stock of all classes of which (other than directors' qualifying shares) at the time are owned directly or indirectly by a Borrower and/or by one or more Wholly Owned Subsidiaries of a Borrower. Section 1.2 Accounting Terms and Other Definitional Provisions. Unless otherwise defined herein, as used in this Agreement and in any certificate, report or other document made or delivered pursuant hereto, accounting terms not otherwise defined herein, and accounting terms only partly defined herein, to the extent not defined, shall have the respective meanings given to them under GAAP, as consistently applied to the applicable Person on a basis consistent with that used in preparing such Person's audited financial statements for prior years. All terms used herein which are defined by the Uniform Commercial Code shall have the same meanings as assigned to them by the Uniform Commercial Code unless and to the extent varied by this Agreement. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, subsection, schedule and exhibit references are references to articles, sections or subsections of, or schedules or exhibits to, as the case may be, this Agreement unless otherwise specified. As used herein, the singular number shall include the plural, the plural the singular and the use of the masculine, feminine or neuter gender shall include all genders, as the context may require. Reference to any one or more of the Financing Documents shall mean the same as the foregoing may from time to time be amended, restated, substituted, extended, renewed, supplemented or otherwise modified. Reference in this Agreement and the other Financing Documents to the "Borrower", the "Borrowers", "each Borrower" or otherwise with respect to any one or more of the Borrowers shall mean each and every Borrower and any one or more of the Borrowers, jointly and severally, unless a specific Borrower is expressly identified. 24 ARTICLE II THE CREDIT FACILITIES Section 2.1 The Revolving Credit Facility. 2.1.1 Revolving Credit Facility. Subject to and upon the provisions of this Agreement, the Lender establishes a revolving credit facility in favor of the Borrowers. The aggregate of all advances under the Revolving Credit Facility is sometimes referred to in this Agreement collectively as the "Revolving Credit". The principal amount of Five Million Dollars ($5,000,000) is the "Revolving Credit Committed Amount". During the Revolving Credit Commitment Period, the Lender agrees to make advances under the Revolving Credit requested by the Company from time to time provided that after giving effect to the Company's request, the sum of (a) the outstanding principal balance of the Revolving Credit and (b) the Letter of Credit Obligations would not exceed the lesser of (y) the Revolving Credit Committed Amount, or (z) the then most current Borrowing Base. Unless sooner paid, the unpaid Revolving Loan, together with interest accrued and unpaid thereon, and all other Obligations shall be due and payable in full on the Revolving Credit Expiration Date. 2.1.2 Procedure for Making Advances Under the Revolving Credit; Lender Protection Loans. The Borrowers may borrow under the Revolving Credit Facility on any Business Day. Advances under the Revolving Credit shall be deposited to a demand deposit account of the Company with the Lender or shall be otherwise applied as directed by the Company, which direction the Lender may require to be in writing. Not later than 11:00 a.m. (Eastern Time) on the date of the requested borrowing, the Company shall give the Lender oral or written notice (a "Loan Notice") of the amount and (if requested by the Lender) the purpose of the requested borrowing. Any oral Loan Notice shall be confirmed in writing by the Company within three (3) Business Days after the making of the requested advance under the Revolving Credit. Each Loan Notice shall be irrevocable. In addition, each of the Borrowers hereby irrevocably authorizes the Lender at any time and from time to time, without further request from or notice to the Borrowers, to make advances under the Revolving Credit, and to establish, without duplication, reserves against the Borrowing Base, which the Lender, in its sole and absolute discretion, deems necessary or appropriate to protect the interests of the Lender, including, without limitation, advances and reserves under the Revolving Credit made to cover debit balances in the Revolving Loan Account, principal of, and/or interest on, any Loan, the Obligations (including, without limitation, any Letter of Credit Obligations), and/or Enforcement Costs, prior to, on, or after the termination of other advances under this Agreement, regardless of whether the outstanding principal amount of the Revolving Credit that the Lender may advance or reserve hereunder exceeds the Revolving Credit Committed Amount or the Borrowing Base; provided, however, that the Lender agrees to give the Company two (2) Business Days prior notice of any such 25 advances, other than advances for the purposes of covering debit balances in the Revolving Loan Account, principal of, and/or interest on, any Loan, and the payment of any Fees, unless the Lender in its exercise of its reasonable discretion determines that the failure to provide such notice could result in a Material Adverse Effect. 2.1.3 Borrowing Base. As used in this Agreement, the term "Borrowing Base" means at any time, an amount equal to the aggregate of (a) eighty percent (80%) of the amount of Eligible Receivables derived from Government Contracts, plus (b) eighty percent (80%) of Eligible Receivables derived from contracts other than Government Contracts. The Borrowing Base shall be computed based on the Borrowing Base Report most recently delivered to and accepted by the Lender in its sole and absolute discretion. In the event the Borrowers fail to furnish a Borrowing Base Report required by Section 2.1.4 (Borrowing Base Report), or in the event the Lender believes that a Borrowing Base Report is no longer accurate, the Lender may, in its sole and absolute discretion exercised from time to time and without limiting other rights and remedies under this Agreement, suspend the making of or limit advances under the Revolving Credit. The Borrowing Base shall be subject to reduction by amounts credited to the Collateral Account since the date of the most recent Borrowing Base Report and by the amount of any Receivable which was included in the Borrowing Base but which the Lender determines fails to meet the respective criteria applicable from time to time for Eligible Receivables. If at any time the total of the aggregate principal amount of the Revolving Credit and Outstanding Letter of Credit Obligations exceeds the Borrowing Base, a borrowing base deficiency ("Borrowing Base Deficiency") shall exist. Each time a Borrowing Base Deficiency exists, the Borrowers, at the sole and absolute discretion of the Lender exercised from time to time, shall pay the Borrowing Base Deficiency within two Business Days of DEMAND to the Lender. Without implying any limitation on the Lender's discretion with respect to the Borrowing Base, the criteria for Eligible Receivables contained in the definition of Eligible Receivables are in part based upon the business operations of the Borrowers existing on or about the Closing Date and upon information and records furnished to the Lender by the Borrowers. If at any time or from time to time hereafter, the business operations of the Borrowers change or such information and records furnished to the Lender is incorrect or misleading, the Lender in its discretion, may at any time and from time to time during the duration of this Agreement change such criteria or add new criteria. The Lender may communicate such changed or additional criteria to the Borrowers from time to time either orally or in writing. 2.1.4 Borrowing Base Report. At all times as any Obligations are outstanding under this Agreement or under any of the Financing Documents, the Borrowers will furnish to the Lender no less frequently than the tenth (10/th/) day of each month and at such other times as may be requested by the Lender a report of the Borrowing Base (each a "Borrowing Base Report"; collectively, the "Borrowing Base Reports") in the form required from time to time by the Lender, appropriately 26 completed and duly signed. The Borrowers acknowledge that the Lender has no obligation to make any advance of the Revolving Credit Facility until a current Borrowing Base Certificate has been received and approved by the Lender and that the failure to provide a Borrowing Base Certificate on a regular basis may result in a delay in funding any requested advances to the Revolving Credit Facility. The Borrowing Base Report shall be dated as of the last day of the preceding month and shall contain a detailed aging schedule of all Receivables by Account Debtor as of the date of the Borrowing Base Report, the amount and payments on the Receivables, and the calculations of the Borrowing Base, all in such detail, and accompanied by such supporting and other information, as the Lender may from time to time request, including, but not limited to, a report containing a detailed aging of all accounts payable by supplier, in such detail, and accompanied by such supporting information, as the Lender may from time to time reasonably request. Upon the Lender's request and upon the creation of any Receivables, or at such intervals as the Lender may require, the Borrowers will provide the Lender with (a) confirmatory assignment schedules; (b) copies of Account Debtor invoices; and (c) such further schedules, documents and/or information regarding the Receivables as the Lender may reasonably require. The items to be provided under this subsection shall be in form satisfactory to the Lender, and certified as true and correct by a Responsible Officer, and delivered to the Lender from time to time solely for the Lender's convenience in maintaining records of the Collateral. Any Borrower's failure to deliver any of such items to the Lender shall not affect, terminate, modify, or otherwise limit the Liens of the Lender in the Collateral. 2.1.5 Revolving Credit Note. The obligation of the Borrowers to pay the Revolving Credit, with interest, shall be evidenced by a promissory note (as from time to time extended, amended, restated, supplemented or otherwise modified, the "Revolving Credit Note") substantially in the form of EXHIBIT B attached hereto and made a part hereof, with appropriate insertions. The Revolving Credit Note shall be dated as of the Closing Date, shall be payable to the order of the Lender at the times provided in the Revolving Credit Note, and shall be in the principal amount of the Revolving Credit Committed Amount. Each of the Borrowers acknowledges and agrees that, if the outstanding principal balance of the Revolving Credit outstanding from time to time exceeds the face amount of the Revolving Credit Note, the excess shall bear interest at the Post-Default Rate and shall be payable, with accrued interest, within two Business Days of DEMAND. The Revolving Credit Note shall not operate as a novation of any of the Obligations or nullify, discharge, or release any such Obligations or the continuing contractual relationship of the parties hereto in accordance with the provisions of this Agreement. 2.1.6 Mandatory Prepayments of Revolving Credit. The Borrowers shall make the mandatory prepayments (each a "Revolving Credit Mandatory Prepayment" and collectively, the "Revolving Credit Mandatory Prepayments") of the Revolving Credit at any time and from time to time in such amounts requested by the Lender pursuant to Section 2.1.3 (Borrowing Base) in order to cover any Borrowing Base Deficiency. 2.1.7 Optional Prepayments of Revolving Credit. The Borrowers shall have the option at any time and from time to time to prepay (each a "Revolving Credit Optional Prepayment" and collectively the "Revolving Credit 27 Optional Prepayments") advances under the Revolving Credit, in whole or in part without premium or penalty. 2.1.8 The Collateral Account. The Borrowers will deposit, or cause to be deposited, all Items of Payment to a bank account designated by the Lender and from which the Lender alone has power of access and withdrawal (the "Collateral Account"). Each deposit shall be made not later than two (2) Business Days after the date of receipt of the Items of Payment. The Items of Payment shall be deposited in precisely the form received, except for the endorsements of the Borrowers where necessary to permit the collection of any such Items of Payment, each Borrower hereby agreeing to make such endorsement. In the event any Borrower shall fail to do so, the Lender is hereby authorized by each Borrower to make the endorsement in the name of such Borrower. Prior to such a deposit, none of the Borrowers will not commingle any Items of Payment with any of the other funds or property of any other Borrower, but will hold them separate and apart in trust and for the account of the Lender. In addition, if so directed by the Lender, each of the Borrowers shall direct the mailing of all Items of Payment from its Account Debtors to a post-office box designated by the Lender, or to such other additional or replacement post-office boxes pursuant to the request of the Lender from time to time (collectively, the "Lockbox"). The Lender shall have unrestricted and exclusive access to the Lockbox. Each Borrower hereby authorizes the Lender to inspect all Items of Payment, endorse all Items of Payment in the name of each Borrower, and deposit Items of Payment in the Collateral Account. The Lender reserves the right, exercised in its sole and absolute discretion from time to time, to provide to the Collateral Account credit prior to final collection of an Item of Payment and to disallow credit for any Item of Payment which is unsatisfactory to the Lender. However, if the Lender disallows credit for any Item of Payment, the Lender will give the Company notice to that effect and will, upon request, release such Item of Payment to the Company. In the event Items of Payment are returned to the Lender for any reason whatsoever, the Lender may, in the exercise of its discretion from time to time, forward such Items of Payment a second time. Any returned Items of Payment shall be charged back to the Collateral Account, the Revolving Loan Account, or other account, as appropriate. The Lender will apply the whole or any part of the collected funds credited to the Collateral Account against the Revolving Credit (or with respect to Items of Payment which are not proceeds of Accounts or after a Default or Event of Default, against any of the Obligations) or credit such collected funds to the depository account of the Borrowers with the Lender (or an Affiliate of the Lender), the order and method of such application to be in the sole discretion of the Lender, provided, however, that if any collected funds are credited to the Collateral Account at a time when there are no outstanding and unpaid Obligations, the Lender will, on the day the funds are so credited, credit them to the depository account of a Borrower with the Lender (or an Affiliate of the Lender) or to such other account as the Company has specified for the purpose. 28 2.1.9 Revolving Loan Account. The Lender will establish and maintain a loan account on its books (the "Revolving Loan Account") to which the Lender will (a) debit (i) the principal amount of each advance under the Revolving Credit made by the Lender hereunder as of the date made, (ii) the amount of any interest accrued on the Revolving Credit as and when due, and (iii) any other amounts due and payable by the Borrowers to the Lender from time to time under the provisions of this Agreement in connection with the Revolving Credit, including, without limitation, Enforcement Costs, Fees, late charges, and service, collection and audit fees, as and when due and payable, and (b) credit all payments made by the Borrowers to the Lender on account of the Revolving Credit as of the date made including, without limitation, funds credited to the Revolving Loan Account from the Collateral Account. The Lender may debit the Revolving Loan Account for the amount of any Item of Payment that is returned to the Lender unpaid. All credit entries to the Revolving Loan Account are conditional and shall be readjusted as of the date made if final and indefeasible payment is not received by the Lender in cash or solvent credits. The Borrowers hereby promise to pay to the order of the Lender, within two (2) Business Days after DEMAND, an amount equal to the excess, if any, of all debit entries over all credit entries recorded in the Revolving Loan Account under the provisions of this Agreement. Any and all periodic or other statements or reconciliations, and the information contained in those statements or reconciliations, of the Revolving Loan Account shall be final, binding and conclusive upon the Borrowers in all respects, absent manifest error, unless the Lender receives specific written objection thereto from the Borrowers within thirty (30) Business Days after such statement or reconciliation shall have been sent by the Lender. 2.1.10 Revolving Credit Unused Line Fee. The Borrowers shall pay to the Lender a monthly revolving credit facility fee (collectively, the "Revolving Credit Unused Line Fees" and individually, a "Revolving Credit Unused Line Fee") in an amount equal to twenty five basis points (.25%) per annum on the average daily unused and undisbursed portion of the Revolving Credit Committed Amount in effect from time to time accruing during each calendar month. The accrued and unpaid portion of the Revolving Credit Unused Line Fee shall be paid by the Borrowers to the Lender in arrears on the first day of each month, commencing on the first such date following the date hereof, and on the Revolving Credit Termination Date. Section 2.2 The Letter of Credit Facility. 2.2.1 Letters of Credit. Subject to and upon the provisions of this Agreement, and as a part of the Revolving Credit Commitment, any of the Borrowers may, upon the prior approval of the Lender, obtain standby or documentary letters of credit (as the same may from time to time be amended, supplemented or otherwise modified, each a "Letter of Credit" and collectively the "Letters of Credit") from the Lender from time to time from the Closing Date until the Business Day preceding the Revolving Credit Termination Date. None of the Borrowers will be entitled to obtain a Letter of Credit hereunder unless (a) after giving effect to the request, the outstanding principal balance of the Revolving Credit and the Letter of Credit Obligations would not exceed the lesser of (i) the Revolving Credit Committed Amount, or (ii) the most current Borrowing Base and (b) the sum of the aggregate face amount of the then outstanding Letters of Credit 29 (including the face amount of the requested Letter of Credit) does not exceed One Million Dollars ($1,000,000). 2.2.2 Letter of Credit Fees. The Borrowers shall pay to the Lender, a letter of credit fee (each a "Letter of Credit Fee" and collectively the "Letter of Credit Fees") in an amount equal to two percent (2%) per annum of the amount of the Letter of Credit. Such Letter of Credit Fees shall be paid monthly in arrears on the first day of the first month after the opening of the Letter of Credit and on the first day of each month thereafter. In addition, the Borrower shall pay to the Lender any and all additional issuance, negotiation, processing, transfer or other fees to the extent and as and when required by the provisions of any Letter of Credit Agreement; such additional fees are included in and a part of the "Fees" payable by the Borrower under the provisions of this Agreement. Subsequent to an Event of Default, the Letter of Credit Fee shall be increased to the Post-Default Rate on the face amount of each Letter of Credit. 2.2.3 Terms of Letters of Credit; Post-Expiration Date Letters of Credit. Each Letter of Credit shall (a) be opened pursuant to a Letter of Credit Agreement and (b) expire on a date that is the earlier of (i) one (1) year from the date of issuance if a standby letter of credit or one hundred eighty (180) days from the date of issuance if a documentary letter of credit or (ii) the Business Day preceding the Revolving Credit Expiration Date; provided, however, if any Letter of Credit does have an expiration date later than the Business Day preceding the Revolving Credit Termination Date (each a "Post-Expiration Date Letter of Credit" and collectively, the "Post-Expiration Date Letters of Credit"), effective as of the Business Day preceding the Revolving Credit Termination Date and without prior notice to or the consent of the Borrowers, the Lender shall make advances under the Revolving Loan for the account of the Borrowers in the aggregate face amount of all such Letters of Credit. The Lender shall deposit the proceeds of such advances into one or more non-interest bearing accounts with and in the name of the Lender and over which the Lender alone shall have exclusive power of access and withdrawal (collectively, the "Letter of Credit Cash Collateral Account"). The Letter of Credit Cash Collateral Account is to be held by the Lender as additional collateral and security for any Letter of Credit Obligations relating to the Post-Expiration Date Letters of Credit. The Borrowers hereby assign, pledge, grant and set over to the Lender a first priority security interest in, and Lien on, all of the funds on deposit in the Letter of Credit Cash Collateral Account, together with any and all Proceeds and products thereof as additional collateral and security for the Letter of Credit Obligations relating to the Post-Expiration Date Letters of Credit. The Borrowers acknowledge and agree that the Lender shall be entitled to fund any draw or draft on any Post-Expiration Date Letter of Credit from the monies on deposit in the Letter of Credit Cash Collateral Account without notice to or consent of the Borrowers or the Lender. The Borrowers further acknowledge and agree that the Lender's election to fund any draw or draft on any Post-Expiration Date Letter of Credit from the Letter of Credit Cash Collateral shall in no way limit, impair, lessen, reduce, release or otherwise adversely affect the Borrowers' obligation to pay any Letter of Credit Obligations under or relating to the Post-Expiration Date Letters of Credit. At such time as all Post-Expiration Date Letters of Credit have expired and all Letter of Credit Obligations relating to the Post-Expiration Date Letters of Credit have been paid in full, the Lender agrees to apply the amount of any remaining funds on deposit in the Letter of Credit Cash Collateral Account to the then unpaid 30 balance of the Obligations under the Revolving Credit Facility in such order and manner as the Lender shall determine in its sole and absolute discretion in accordance with the provisions of this Agreement, and thereafter to the Company. The aggregate face amount of all Letters of Credit at any one time outstanding and issued by the Lender pursuant to the provisions of this Agreement, including, without limitation, any and all Post-Expiration Date Letters of Credit, plus the amount of any unpaid Letter of Credit Fees accrued or scheduled to accrue thereon, and less the aggregate amount of all drafts issued under or purporting to have been issued under such Letters of Credit that have been paid by the Lender and for which the Lender has been reimbursed by the Borrowers in full in accordance with Section 2.2.5 (Payments of Letters of Credit) and the Letter of Credit Agreements, and for which the Lender has no further obligation or commitment to restore all or any portion of the amounts drawn and reimbursed, is herein called the "Outstanding Letter of Credit Obligations". 2.2.4 Procedures for Letters of Credit. The Borrowers shall give the Lender written notice at least five (5) Business Days prior to the date on which the Borrowers desire the Lender to issue a Letter of Credit. Such notice shall be accompanied by a duly executed Letter of Credit Agreement specifying, among other things: (a) the name and address of the intended beneficiary of the Letter of Credit, (b) the requested face amount of the Letter of Credit, (c) whether the Letter of Credit is to be revocable or irrevocable, (d) the Business Day on which the Letter of Credit is to be opened and the date on which the Letter of Credit is to expire, (e) the terms of payment of any draft or drafts which may be drawn under the Letter of Credit, and (f) any other terms or provisions the Borrowers desire to be contained in the Letter of Credit. Such notice shall also be accompanied by such other information, certificates, confirmations, and other items as the Lender may require to assure that the Letter of Credit is to be issued in accordance with the provisions of this Agreement and a Letter of Credit Agreement. In the event of any conflict between the provisions of this Agreement and the provisions of a Letter of Credit Agreement, the provisions of this Agreement shall prevail and control unless otherwise expressly provided in the Letter of Credit Agreement. Upon (x) receipt of such notice, (y) payment of all Letter of Credit Fees and all other Fees payable in connection with the issuance of such Letter of Credit, and (z) receipt of a duly executed Letter of Credit Agreement, the Lender shall process such notice and Letter of Credit Agreement in accordance with its customary procedures and open such Letter of Credit on the Business Day specified in such notice. 2.2.5 Payments of Letters of Credit. The Borrowers hereby promise to pay to the Lender, ON DEMAND and in United States Dollars, the following which are herein collectively referred to as the "Current Letter of Credit Obligations": (a) the amount which the Lender has paid or will be required to pay under each draft or draw on a Letter of Credit, whether such demand be in advance of the Lender's payment or for reimbursement for such payment; 31 (b) any and all reasonable charges and expenses which the Lender may pay or incur relative to the Letter of Credit and/or such draws or drafts; and (c) interest on the amounts described in (a) and (b) not paid by the Borrowers as and when due and payable under the provisions of (a) (when paid by the Lender) and (b) above from the day the same are due and payable until paid in full at a rate per annum equal to the then current highest rate of interest on the Revolving Loan. In addition, the Borrowers hereby promise to pay any and all other Letter of Credit Obligations as and when due and payable in accordance with the provisions of this Agreement and the Letter of Credit Agreements. The obligation of the Borrowers to pay Current Letter of Credit Obligations and all other Letter of Credit Obligations shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrowers or any other account party may have or have had against the beneficiary of such Letter of Credit, the Lender, or any other Person, including, without limitation, any defense based on the failure of any draft or draw to conform to the terms of such Letter of Credit, any draft or other document proving to be forged, fraudulent or invalid, or the legality, validity, regularity or enforceability of such Letter of Credit, any draft or other documents presented with any draft, any Letter of Credit Agreement, this Agreement, or any of the other Financing Documents, all whether or not the Lender had actual or constructive knowledge of the same, and irrespective of any Collateral, security or guarantee therefore or right of offset with respect thereto and irrespective of any other circumstances whatsoever which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrowers for any Letter of Credit Obligations, in bankruptcy or otherwise; provided, however, that the Borrowers shall not be obligated to reimburse the Lender for any wrongful payment under such Letter of Credit made as a result of the Lender's willful misconduct or gross negligence. The obligation of the Borrowers to pay the Letter of Credit Obligations shall not be conditioned or contingent upon the pursuit by the Lender or any other Person at any time of any right or remedy against any Person which may be or become liable in respect of all or any part of such obligation or against any Collateral, security or guarantee therefore or right of offset with respect thereto. The Letter of Credit Obligations shall continue to be effective, or be reinstated, as the case may be, if at any time payment of all or any portion of the Letter of Credit Obligations is rescinded or must otherwise be restored or returned by the Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Person, or upon or as a result of the appointment of a receiver, intervenor, or conservator of, or trustee or similar officer for, any Person, or any substantial part of such Person's property, all as though such payments had not been made. 2.2.6 Change in Law; Increased Cost. If any change in any law or regulation or in the interpretation thereof by any court or other Governmental Authority charged with the administration thereof shall either (a) impose, modify or deem applicable any reserve, special deposit or similar requirement against Letters of Credit issued by the Lender, or (b) impose on the Lender any other condition regarding this Agreement or any Letter of Credit, and the result of any event referred to in 32 clauses (a) or (b) above shall be to increase the cost to the Lender of issuing, maintaining or extending the Letter of Credit or the cost to the Lender of funding any obligation under or in connection with the Letter of Credit, then, upon demand by the Lender, accompanied by a statement in reasonable detail explaining the nature and calculation of the increased cost, the Borrowers shall immediately pay to the Lender from time to time as specified by the Lender, additional amounts which shall be sufficient to compensate the Lender for such increased cost, together with interest on each such amount from the date demanded until payment in full thereof at a rate per annum equal to the then highest current rate of interest on the Revolving Credit. A certificate as to such increased cost incurred by the Lender, submitted by the Lender to the Borrowers, shall be conclusive, absent manifest error. 2.2.7 General Letter of Credit Provisions. The Borrowers hereby instruct the Lender to pay any draft complying with the terms of any Letter of Credit irrespective of any instructions of the Borrowers to the contrary. The Borrowers assume all risks of the acts and omissions of the beneficiary and other users of any Letter of Credit. The Lender and its respective branches, Affiliates and/or correspondents shall not be responsible for and the Borrowers hereby indemnify and hold the Lender and its branches, Affiliates and/or correspondents harmless from and against all liability, loss and expense (including reasonable attorney's fees and costs) incurred by the Lender and/or its respective branches, Affiliates and/or correspondents relative to and/or as a consequence of (a) any failure by the Borrowers to perform the agreements hereunder and under any Letter of Credit Agreement, (b) any Letter of Credit Agreement, this Agreement, any Letter of Credit and any draft, draw and/or acceptance under or purported to be under any Letter of Credit, (c) any action taken or omitted by the Lender and/or any of its respective branches, Affiliates and/or correspondents at the request of the Borrowers, (d) any failure or inability to perform in accordance with the terms of any Letter of Credit by reason of any control or restriction rightfully or wrongfully exercised by any de facto or de jure Governmental Authority, group or individual asserting or exercising governmental or paramount powers, and/or (e) any consequences arising from causes beyond the control of the Lender and/or any of its respective branches, Affiliates and/or correspondents. Except for willful misconduct, the Lender and its respective branches, Affiliates and/or correspondents, shall not be liable or responsible in any respect for any (a) error, omission, interruption or delay in transmission, dispatch or delivery of any one or more messages or advices in connection with any Letter of Credit, whether transmitted by cable, telegraph, mail or otherwise and despite any cipher or code which may be employed, and/or (b) action, inaction or omission which may be taken or suffered by it or them in good faith or through inadvertence in identifying or failing to identify any beneficiary or otherwise in connection with any Letter of Credit. Any Letter of Credit may be amended, modified or revoked only upon the receipt by the Lender from the Borrowers and the beneficiary (including any transferee and/or assignee of the original beneficiary), of a written consent and request therefore. If any Laws, order of court and/or ruling or regulation of any Governmental Authority of the United States (or any state thereof) and/or any country other than the United States permits a beneficiary under a Letter of Credit to require the Lender and/or any 33 of its respective branches, Affiliates and/or correspondents to pay drafts under or purporting to be under a Letter of Credit after the expiration date of the Letter of Credit, the Borrowers shall reimburse the Lender, as appropriate, for any such payment pursuant to provisions of Section 2.2.6 (Change in Law; Increased Cost). Except as may otherwise be specifically provided in a Letter of Credit or Letter of Credit Agreement, the laws of the State and the Uniform Customs and Practice for Documentary Credits, 1993 Revision, International Chamber of Commerce Publication No. 500 shall govern the Letters of Credit. The Laws, rules, provisions and regulations of the Uniform Customs and Practice for Documentary Credits are hereby incorporated by reference. In the event of a conflict between the Uniform Customs and Practice for Documentary Credits and the laws of the State, the Uniform Customs and Practice for Documentary Credits shall prevail. Section 2.3 General Financing Provisions. 2.3.1 Borrowers' Representatives. The Borrowers hereby represent and warrant to the Lender that each of them will derive benefits, directly and indirectly, from each advance under the Revolving Credit Facility, both in their separate capacity and as a member of the integrated group to which each of the Borrowers belong, and because the successful operation of the integrated group is dependent upon the continued successful performance of the functions of the integrated group as a whole, because (a) the terms of the consolidated financing provided under this Agreement are more favorable than otherwise would be obtainable by the Borrowers individually, and (b) the Borrowers' additional administrative and other costs and reduced flexibility associated with individual financing arrangements which would otherwise be required if obtainable would substantially reduce the value to the Borrowers of the financing. The Borrowers in the discretion of their respective managements are to agree among themselves as to the allocation of the proceeds of each advance made under the Revolving Credit and the benefits of Letters of Credit, provided, however, that the Borrowers shall be deemed to have represented and warranted to the Lender at the time of allocation that each benefit and use of proceeds is a Permitted Use. For administrative convenience, each Borrower hereby irrevocably appoints the Company as the Borrower's attorney-in-fact, with power of substitution (with the prior written consent of the Lender in the exercise of its sole and absolute discretion), in the name of the Company or in the name of any Borrower or otherwise to take any and all actions with respect to the this Agreement, the other Financing Documents, the Obligations and/or the Collateral (including, without limitation, the Proceeds thereof) as the Company may so elect from time to time, including, without limitation, actions to (i) request advances under the Revolving Credit, apply for and direct the benefits of Letters of Credit, and direct the Lender to disburse or credit the proceeds of any advance made under the Revolving Credit directly to an account of the Company, any one or more of the Borrowers or otherwise, which direction shall evidence the making of such advance under the Revolving Credit and shall constitute the acknowledgment by each of the Borrowers of the receipt of the proceeds of such advance under the Revolving Credit and the benefit of such Letter of Credit, (ii) enter into, execute, deliver, amend, modify, restate, substitute, extend and/or renew this Agreement, any Additional Borrower Joinder Supplement, any other Financing Documents, security agreements, mortgages, deposit account agreements, instruments, certificates, waivers, letter of credit applications, 34 releases, documents and agreements from time to time, and (iii) endorse any check or other item of payment in the name of the Borrower or in the name of the Company. The foregoing appointment is coupled with an interest, cannot be revoked without the prior written consent of the Lender, and may be exercised from time to time through the Company's duly authorized officer, officers or other Person or Persons designated by the Company to act from time to time on behalf of the Company. Each of the Borrowers hereby irrevocably authorizes the Lender (in its sole discretion) to make advances under the Revolving Credit and to issue or cause to be issued Letters of Credit for the account of any or all of the Borrowers, to the Company pursuant to the provisions of this Agreement upon the written, oral or telephone request of any one or more of the Persons who is from time to time a Responsible Officer of the Company under the provisions of the most recent certificate of corporate resolutions and/or incumbency of the Company on file with the Lender. The Lender assumes no responsibility or liability for any errors, mistakes, and/or discrepancies (other than those due solely to the Lender's gross negligence or willful misconduct) in the oral, telephonic, written or other transmissions of any instructions, orders, requests and confirmations between the Lender and the Borrowers in connection with the Credit Facilities, any Loan, any Letter of Credit or any other transaction in connection with the provisions of this Agreement. Without implying any limitation on the joint and several nature of the Obligations, the Lender agrees that, notwithstanding any other provision of this Agreement, the Borrowers may create reasonable inter-company indebtedness between or among the Borrowers with respect to the allocation of the benefits and proceeds of the advances and Credit Facilities under this Agreement. The Borrowers agree among themselves, and the Lender consents to that agreement, that each Borrower shall have rights of contribution from all of the other Borrowers to the extent such Borrower incurs Obligations in excess of the proceeds of the Revolving Credit received by, or allocated to purposes for the direct benefit of, such Borrower. All such indebtedness and rights shall be, and are hereby agreed by the Borrowers to be, subordinate in priority and payment to the indefeasible repayment in full in cash of the Obligations, and, unless the Lender agrees in writing otherwise, shall not be exercised or repaid in whole or in part until all of the Obligations have been indefeasibly paid in full in cash. The Borrowers agree that all of such inter-company indebtedness and rights of contribution are part of the Collateral and secure the Obligations. Each Borrower hereby waives all rights of counterclaim, recoupment and offset between or among the Borrowers arising on account of that indebtedness and otherwise. Each Borrower shall not evidence the inter-company indebtedness or rights of contribution by note or other instrument, and shall not secure such indebtedness or rights of contribution with any Lien or security. Notwithstanding anything contained in this Agreement to the contrary, the amount covered by each Borrower under the Obligations (including, without limitation, Section 2.3.11 (Guaranty)) shall be limited to an aggregate amount (after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of any other Borrower in respect of the Obligations) which, together with other amounts owing by such Borrowers to the Lender under the Obligations, is equal to the largest amount that would not be subject to avoidance under the Bankruptcy Code or any applicable provisions of any applicable, comparable state or other Laws. 35 2.3.2 Use of Proceeds of the Revolving Credit. The proceeds of each advance under the Revolving Credit shall be used by the Borrowers for Permitted Uses, and for no other purposes except as may otherwise be agreed by the Lender in writing. The Borrowers shall use the proceeds of the Revolving Credit promptly. 2.3.3 Origination Fee. The Borrower shall pay to the Lender on or before the Closing Date the a loan origination fee (the "Origination Fee") in the amount of Thirty Seven Thousand Five Hundred Dollars ($37,500), which fee has been fully earned and is non-refundable, Twenty Thousand Dollars ($20,000) of which has been paid prior to the Closing Date. 2.3.4 Monitoring Fees. The Borrower shall pay to the Lender a monthly monitoring fee in the amount of Five Hundred and Fifty Dollars ($550), plus any and all reasonable out of pocket expenses and travel time incurred by the Lender (collectively, the "Monitoring Fees" and individually a "Monitoring Fee"), which Monitoring Fees shall be payable in arrears on the first Business Day of each month commencing on the first such date following the Closing Date, and continuing until the last such date prior to which all Obligations arising out of, or under, the Credit Facilities then outstanding have been paid in full. 2.3.5 Computation of Interest and Fees. All applicable Fees and interest shall be calculated on the basis of a year of 360 days for the actual number of days elapsed. Any change in the interest rate on any of the Obligations resulting from a change in the Base Rate shall become effective as of the opening of business on the day on which such change in the Base Rate is announced. 2.3.6 Maximum Interest Rate. In no event shall any interest rate provided for hereunder exceed the maximum rate permissible for corporate borrowers under applicable law for loans of the type provided for hereunder (the "Maximum Rate"). If, in any month, any interest rate, absent such limitation, would have exceeded the Maximum Rate, then the interest rate for that month shall be the Maximum Rate, and, if in future months, that interest rate would otherwise be less than the Maximum Rate, then that interest rate shall remain at the Maximum Rate until such time as the amount of interest paid hereunder equals the amount of interest which would have been paid if the same had not been limited by the Maximum Rate. In the event that, upon payment in full of the Obligations, the total amount of interest paid or accrued under the terms of this Agreement is less than the total amount of interest which would, but for this Section, have been paid or accrued if the interest rates otherwise set forth in this Agreement had at all times been in effect, then the Borrowers shall, to the extent permitted by applicable law, pay the Lender, an amount equal to the excess of (a) the lesser of (i) the amount of interest which would have been charged if the Maximum Rate had, at all times, been in effect or (ii) the amount of interest which would have accrued had the interest rates otherwise set forth in this Agreement, at all times, been in effect over (b) the amount of interest actually paid or accrued under this Agreement. In the event that a court determines that the Lender has received interest and other charges hereunder in 36 excess of the Maximum Rate, such excess shall be deemed received on account of, and shall automatically be applied to reduce, the Obligations other than interest, in the inverse order of maturity, and if there are no Obligations outstanding, the Lender shall refund to the Borrowers such excess. 2.3.7 Payments. All payments of the Obligations, including, without limitation, principal, interest, Prepayments, and Fees, shall be paid by the Borrowers without setoff or counterclaim to the Lender (except as otherwise provided herein) at the Lender's office specified in Section 8.1 (Notices) in immediately available funds not later than noon (Eastern Time) on the due date of such payment. All payments received by the Lender after such time shall be deemed to have been received by the Lender for purposes of computing interest and Fees and otherwise as of the next Business Day. Payments shall not be considered received by the Lender until such payments are paid to the Lender in immediately available funds. At its sole discretion, the Lender may charge any deposit account of the Borrowers at the Lender or any Affiliate of the Lender with all or any part of any amount due to the Lender under this Agreement or any of the other Financing Documents to the extent that the Borrowers shall have not otherwise tendered payment to the Lender. 2.3.8 Liens; Setoff. The Borrowers hereby grant to the Lender as additional collateral and security for all of the Obligations a continuing Lien on any and all monies, Investment Property, and other property of the Borrowers and the proceeds thereof, now or hereafter held or received by or in transit to, the Lender, and/or any Affiliate of the Lender, from or for the Borrowers, and also upon any and all deposit accounts (general or special) and credits of the Borrowers, if any, with the Lender or any Affiliate of the Lender, at any time existing, excluding any deposit accounts held by the Borrowers in their capacity as trustee for Persons who are not Borrowers or Affiliates of the Borrowers. Without implying any limitation on any other rights the Lender may have under the Financing Documents or applicable Laws, during the continuance of an Event of Default, the Lender is hereby authorized by the Borrowers at any time and from time to time, without notice to the Borrowers, to set off, appropriate and apply any or all items hereinabove referred to against all Obligations then outstanding (whether or not then due), all in such order and manner as shall be determined by the Lender in its sole and absolute discretion. 2.3.9 Requirements of Law. In the event that the Lender shall have determined in good faith that (a) the adoption of any Capital Adequacy Regulation, or (b) any change in any Capital Adequacy Regulation or application thereof or (c) compliance by the Lender or any corporation controlling the Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any central bank or Governmental Authority, does or shall have the effect of reducing the rate of return on the capital of the Lender or any corporation controlling the Lender, as a consequence of the obligations of the Lender hereunder to a level below that which the Lender or any corporation controlling the Lender would have achieved but for such adoption, change or compliance (taking into consideration the policies of the Lender and the corporation controlling the Lender, with respect to capital adequacy) by an amount deemed by the Lender to be material, then from time to time, after submission by the Lender to the Borrowers of a written 37 request therefor and a statement of the basis for such determination, the Borrowers shall pay to the Lender such additional amount or amounts in order to compensate for such reduction. However, no such amount shall be payable in respect of any such adoption, change or compliance occurring more than ninety (90) days before the request from the Lender and a similar request for similar payments shall have been made by the Lender to other borrowers having offices in the United States. 2.3.10 ACH Transactions. The Company may request and the Lender or its Affiliates may, in their sole and absolute discretion, provide ACH Transactions although the Company is not required to do so. In the event the Company requests Lender or its affiliates to procure ACH Transactions, then the Borrowers agree to jointly and severally indemnify and hold the Lender or its Affiliates harmless from any and all obligations now or hereafter owing to the Lender or its Affiliates in connection with such ACH Transactions. The Borrowers agree to pay the Lender or its affiliates all amounts owing to the Lender or its Affiliates pursuant to ACH Transactions. In the event the Borrowers shall not have paid to the Lender or its Affiliates such amounts, the Lender may cover such amounts by an advance under the Revolving Credit, which advance shall be deemed to have been requested by the Borrowers. The Borrowers acknowledge and agree that the obtaining of ACH Transactions from the Lender or its affiliates (a) is in the sole and absolute discretion of the Lender or its Affiliates and (b) is subject to all rules and regulations of the Lender or its Affiliates. 2.3.11 Guaranty. (a) Each Borrower hereby unconditionally and irrevocably, guarantees to the Lender: (i) the due and punctual payment in full (and not merely the collectibility) by the other Borrowers of the Obligations, including unpaid and accrued interest thereon, in each case when due and payable, all according to the terms of this Agreement, the Notes and the other Financing Documents; (ii) the due and punctual payment in full (and not merely the collectibility) by the other Borrowers of all other sums and charges which may at any time be due and payable in accordance with this Agreement, the Notes or any of the other Financing Documents; (iii) the due and punctual performance by the other Borrowers of all of the other terms, covenants and conditions contained in the Financing Documents; and (iv) all the other Obligations of the other Borrowers. (b) The obligations and liabilities of each Borrower as a guarantor under this Section 2.3.11 shall be absolute and unconditional and joint and several, irrespective of the genuineness, validity, priority, regularity or enforceability of this Agreement, 38 any of the Notes or any of the Financing Documents or any other circumstance which might otherwise constitute a legal or equitable discharge of a surety or guarantor. Each Borrower in its capacity as a guarantor expressly agrees that the Lender may, in its sole and absolute discretion, without notice to or further assent of such Borrower and without in any way releasing, affecting or in any way impairing the joint and several obligations and liabilities of such Borrower as a guarantor hereunder: (i) waive compliance with, or any defaults under, or grant any other indulgences under or with respect to any of the Financing Documents; (ii) modify, amend, change or terminate any provisions of any of the Financing Documents; (iii) grant extensions or renewals of or with respect to the Credit Facilities, the Notes or any of the other Financing Documents; (iv) effect any release, subordination, compromise or settlement in connection with this Agreement, any of the Notes or any of the other Financing Documents; (v) agree to the substitution, exchange, release or other disposition of the Collateral or any part thereof, or any other collateral for the Revolving Credit or to the subordination of any lien or security interest therein; (vi) make advances for the purpose of performing any term, provision or covenant contained in this Agreement, any of the Notes or any of the other Financing Documents with respect to which the Borrowers shall then be in default; (vii) make future advances pursuant to the Financing Agreement or any of the other Financing Documents; (viii) assign, pledge, hypothecate or otherwise transfer the Revolving Credit Commitment, the Obligations, the Notes, any of the other Financing Documents or any interest therein, all as and to the extent permitted by the provisions of this Agreement; (ix) deal in all respects with the other Borrowers as if this Section 2.3.11 were not in effect; (x) effect any release, compromise or settlement with any of the other Borrowers, whether in their capacity as a Borrower or as a guarantor under this Section 2.3.11, or any other guarantor; and 39 (xi) provide debtor-in-possession financing or allow use of cash collateral in proceedings under the Bankruptcy Code, it being expressly agreed by all Borrowers that any such financing and/or use would be part of the Obligations. (c) The obligations and liabilities of each Borrower, as guarantor under this Section 2.3.11, shall be primary, direct and immediate, shall not be subject to any counterclaim, recoupment, set off, reduction or defense based upon any claim that a Borrower may have against any one or more of the other Borrowers, the Lender, and/or any other guarantor and shall not be conditional or contingent upon pursuit or enforcement by the Lender of any remedies it may have against the Borrowers with respect to this Agreement, the Notes or any of the other Financing Documents, whether pursuant to the terms thereof or by operation of law. Without limiting the generality of the foregoing, the Lender shall not be required to make any demand upon any of the Borrowers, or to sell the Collateral or otherwise pursue, enforce or exhaust its remedies against the Borrowers or the Collateral either before, concurrently with or after pursuing or enforcing its rights and remedies hereunder. Any one or more successive or concurrent actions or proceedings may be brought against each Borrower under this Section 2.3.11, either in the same action, if any, brought against any one or more of the Borrowers or in separate actions or proceedings, as often as the Lender may deem expedient or advisable. Without limiting the foregoing, it is specifically understood that any modification, limitation or discharge of any of the liabilities or obligations of any one or more of the Borrowers, any other guarantor or any obligor under any of the Financing Documents, arising out of, or by virtue of, any bankruptcy, arrangement, reorganization or similar proceeding for relief of debtors under federal or state law initiated by or against any one or more of the Borrowers, in their respective capacities as borrowers and guarantors under this Section 2.3.11, or under any of the Financing Documents shall not modify, limit, lessen, reduce, impair, discharge, or otherwise affect the liability of each Borrower under this Section 2.3.11 in any manner whatsoever, and this Section 2.3.11 shall remain and continue in full force and effect. It is the intent and purpose of this Section 2.3.11 that each Borrower shall and does hereby waive all rights and benefits which might accrue to any other guarantor by reason of any such proceeding, and the Borrowers agree that they shall be liable for the full amount of the obligations and liabilities under this Section 2.3.11, regardless of, and irrespective to, any modification, limitation or discharge of the liability of any one or more of the Borrowers, any other guarantor or any obligor under any of the Financing Documents, that may result from any such proceedings. (d) Each Borrower, as guarantor under this Section 2.3.11, hereby unconditionally, jointly and severally, irrevocably and expressly waives: (i) presentment and demand for payment of the Obligations and protest of non-payment; (ii) notice of acceptance of this Section 2.3.11 and of presentment, demand and protest thereof; (iii) notice of any default hereunder or under the Notes or any of the other Financing Documents and notice of all indulgences; 40 (iv) notice of any increase in the amount of any of or all of the indebtedness guaranteed by this Section 2.3.11; (v) demand for observance, performance or enforcement of any of the terms or provisions of this Section 2.3.11, the Notes or any of the other Financing Documents; (vi) all errors and omissions in connection with the Lender's administration of all indebtedness guaranteed by this Section 2.3.11, except errors and omissions resulting from the Lender's acts of willful misconduct or gross negligence; (vii) any right or claim of right to cause a marshalling of the assets of any one or more of the other Borrowers; (viii) any act or omission of the Lender which changes the scope of the risk as guarantor hereunder; and (ix) all other notices and demands otherwise required by law which the Borrower may lawfully waive. ARTICLE III THE COLLATERAL Section 3.1 Debt and Obligations Secured. All property and Liens assigned, pledged or otherwise granted under or in connection with this Agreement (including, without limitation, those under Section 3.2 (Grant of Liens)) or any of the Financing Documents shall secure (a) the payment of all of the Obligations, including, without limitation, any and all Outstanding Letter of Credit Obligations, and (b) the performance, compliance with and observance by the Borrowers of the provisions of this Agreement and all of the other Financing Documents or otherwise under the Obligations. Section 3.2 Grant of Liens. Each of the Borrowers hereby assigns, pledges and grants to the Lender, and agrees that the Lender shall have a perfected and continuing security interest in, and Lien on, all of the Borrowers' Accounts, Inventory, Government Contracts, Chattel Paper, Documents, Instruments, Equipment, Investment Property, and General Intangibles, and all of the Borrowers' deposit accounts with any financial institution with which any of the Borrowers maintains deposits, whether now owned or existing or hereafter acquired or arising, all returned, rejected or repossessed goods, the sale or lease of which shall have given or shall give rise to an Account or Chattel Paper, all insurance policies relating to the foregoing, all books and records in whatever media (paper, electronic or otherwise) recorded or stored, with respect to the foregoing and all Equipment and General Intangibles necessary or beneficial to retain, access and/or process the information contained in those books and records, and all Proceeds and products of the foregoing. Each of the Borrowers further agrees that the Lender shall have in respect thereof all of the rights and remedies of a secured party under the Uniform Commercial Code as well as 41 those provided in this Agreement, under each of the other Financing Documents and under applicable Laws. Section 3.3 Collateral Disclosure List. On or prior to the Closing Date, the Borrowers shall deliver to the Lender a list (the "Collateral Disclosure List") which shall contain such information with respect to each Borrower's business and real and personal property as the Lender may require and shall be certified by a Responsible Officer of each of the Borrowers, all in the form provided to the Borrowers by the Lender. Promptly after demand by the Lender, the Borrowers, as appropriate, shall furnish to the Lender an update of the information contained in the Collateral Disclosure List at any time and from time to time as may be requested by the Lender. Section 3.4 Personal Property. The Borrowers acknowledge and agree that it is the intention of the parties to this Agreement that the Lender shall have a first priority, perfected Lien, in form and substance satisfactory to the Lender and its counsel, on all of the Borrowers' personal property of any kind and nature whatsoever, whether now owned or hereafter acquired, subject only to the Permitted Liens, if any and excluding the Excluded Assets. Section 3.5 Record Searches. As of the Closing Date and thereafter at the time any Financing Document is executed and delivered by the Borrowers pursuant to this Section, the Lender shall have received, in form and substance satisfactory to the Lender, such Lien or record searches with respect to all of the Borrowers and/or any other Person, as appropriate, and the property covered by such Financing Document showing that the Lien of such Financing Document will be a perfected first priority Lien on the property covered by such Financing Document subject only to Permitted Liens or to such other matters as the Lender may approve. Section 3.6 Costs. The Borrowers agree to pay, as part of the Enforcement Costs and to the fullest extent permitted by applicable Laws, on demand all costs, fees and expenses incurred by the Lender in connection with the taking, perfection, preservation, protection and/or release of a Lien on the Collateral. Section 3.7 Release. Upon the indefeasible repayment in full in cash of the Obligations and performance of all Obligations of the Borrowers and all obligations and liabilities of each other Person, other than the Lender, under this Agreement and all other Financing Documents, the termination and/or expiration of the Revolving Credit Commitment and Outstanding Letter of Credit Obligations, upon the Borrowers' request and at the Borrowers' sole cost and expense, the Lender shall release and/or terminate any Financing Document but only if and provided that there is no commitment or obligation (whether or not conditional) of the Lender to re-advance amounts which would be secured thereby and/or no commitment or obligation of the Lender to issue any Letter of Credit or return or restore any payment of any Current Letter of Credit Obligations. 42 Section 3.8 Inconsistent Provisions. In the event that the provisions of any Financing Document directly conflict with any provision of this Agreement, the provisions of this Agreement govern. ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.1 Representations and Warranties. The Borrowers, for themselves and for each other, represent and warrant to the Lender, as follows: 4.1.1 Subsidiaries. The Borrowers have the Subsidiaries listed on the EXHIBIT C attached hereto and made a part hereof and any Additional Borrowers who are parties to this Agreement, and no others, unless such Subsidiaries have been released from liability under this Agreement pursuant to a written agreement by and between the Company and the Lender. Each of the Subsidiaries is a Wholly Owned Subsidiary except as shown on EXHIBIT C, which correctly indicates the nature and amount of each Borrower's ownership interests therein. 4.1.2 Existence. Each Borrower (a) is a Registered Organization under the laws of the jurisdiction stated in the Preamble of this Agreement, (b) is in good standing under the laws of the jurisdiction in which it is organized, (c) has the power to own its property and to carry on its business as now being conducted, and (d) is duly qualified to do business and is in good standing in each jurisdiction in which the character of the properties owned by it therein or in which the transaction of its business makes such qualification necessary. Each Borrower is organized under the laws of only one (1) jurisdiction. 4.1.3 Power and Authority. Each Borrower has full power and authority to execute and deliver this Agreement, and the other Financing Documents to which it is a party, to make the borrowings under this Agreement and to incur and perform the Obligations whether under this Agreement, the other Financing Documents, all of which have been duly authorized by all proper and necessary action. No consent or approval of shareholders or any creditors of any Borrower, and no consent, approval, filing or registration with or notice to any Governmental Authority on the part of any Borrower, is required as a condition to the execution, delivery, validity or enforceability of this Agreement, or any of the other Financing Documents, the performance by any Borrower of the Obligations. 4.1.4 Binding Agreements. This Agreement and the other Financing Documents executed and delivered by the Borrowers have been properly executed and delivered and constitute the valid and legally binding obligations of the Borrowers and are fully enforceable against each of the Borrowers in accordance with their respective terms, subject to bankruptcy, insolvency, 43 reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties, and general principles of equity regardless of whether applied in a proceeding in equity or at law. 4.1.5 No Conflicts. Neither the execution, delivery and performance of the terms of this Agreement or of any of the other Financing Documents executed and delivered by any Borrower nor the consummation of the transactions contemplated by this Agreement will conflict with, violate or be prevented by (a) any Borrower's organizational or governing documents, (b) any existing mortgage, indenture, contract or agreement binding on any Borrower or affecting its property, or (c) any Laws. 4.1.6 No Defaults, Violations. (a) No Default or Event of Default has occurred and is continuing. (b) None of the Borrowers nor any of their respective Subsidiaries is in default under or with respect to any obligation under any existing mortgage, indenture, contract or agreement binding on it or affecting its property in any respect which could result in a Material Adverse Effect. 4.1.7 Compliance with Laws. None of the Borrowers nor any of their respective Subsidiaries is in violation of any applicable Laws (including, without limitation, any Laws relating to employment practices, to environmental, occupational and health standards and controls) or order, writ, injunction, decree or demand of any court, arbitrator, or any Governmental Authority affecting any Borrower or any of its properties, the violation of which, considered in the aggregate, could result in a Material Adverse Effect. 4.1.8 Margin Stock. None of the proceeds of the Revolving Credit will be used, directly or indirectly, by any Borrower or any Subsidiary for the purpose of purchasing or carrying, or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry, any "margin stock" within the meaning of Regulation U (12 CFR Part 221), of the Board of Governors of the Federal Reserve System or for any other purpose which might make the transactions contemplated in this Agreement a "purpose credit" within the meaning of Regulation U, or cause this Agreement to violate any other regulation of the Board of Governors of the Federal Reserve System or the Securities Exchange Act of 1934 or the Small Business Investment Act of 1958, as amended, or any rules or regulations promulgated under any of such statutes. 4.1.9 Investment Company Act; Margin Stock. None of the Borrowers nor any of their respective Subsidiaries is an investment company within the meaning of the Investment Company Act of 1940, as amended, nor is it, directly or indirectly, controlled by or acting on behalf of any Person which is an 44 investment company within the meaning of said Act. None of the Borrowers nor any of their respective Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying "margin stock" within the meaning of Regulation U (12 CFR Part 221), of the Board of Governors of the Federal Reserve System. 4.1.10 Litigation. Except as otherwise disclosed on Schedule 4.1.10 attached hereto and made a part hereof, there are no proceedings, actions or investigations pending or, so far as any Borrower knows, threatened before or by any court, arbitrator or any Governmental Authority which, in any one case or in the aggregate, if determined adversely to the interests of any Borrower or any Subsidiary, would have a Material Adverse Effect. 4.1.11 Financial Condition. The consolidated financial statements of the Borrowers dated March 31, 2002, are complete and correct and fairly present the financial position of each of the Borrowers and its Subsidiaries and the results of their operations and transactions in their surplus accounts as of the date and for the period referred to therein and have been prepared in accordance with GAAP applied on a consistent basis throughout the period involved. There are no liabilities, direct or indirect, fixed or contingent, of any Borrower or any Subsidiary as of the date of such financial statements that are not reflected therein or in the notes thereto. To the best of each Borrower's knowledge, there has been no material adverse change in the financial condition or operations of any Borrower or any Subsidiary since the date of such financial statements and to the best of each Borrower's knowledge no such adverse change is pending. None of the Borrowers nor any Subsidiary has guaranteed the obligations of, or made any investment in or advances to, any Person, except as permitted under this Agreement or as disclosed in the most recent financial statements delivered by the Company to the Lender. 4.1.12 Full Disclosure. The financial statements referred to in Section 4.1.11 (Financial Condition), the Financing Documents (including, without limitation, this Agreement), and the statements, reports or certificates furnished by any Borrower in connection with the Financing Documents (a) do not contain any untrue statement of a material fact and (b) when taken in their entirety, do not omit any material fact necessary to make the statements contained therein not misleading. There is no fact known to any Borrower which such Borrower has not disclosed to the Lender in writing prior to the date of this Agreement with respect to the transactions contemplated by the Financing Documents which constitutes or could constitute a Material Adverse Effect. 4.1.13 Indebtedness for Borrowed Money. Except for the Obligations and except as set forth in Schedule 4.1.13 attached hereto and made a part hereof, the Borrowers have no Indebtedness for Borrowed Money. The Lender has received photocopies of all promissory notes evidencing any Indebtedness for Borrowed Money set forth in Schedule 4.1.13, together with any and all 45 subordination agreements, other agreements, documents, or instruments securing, evidencing, guarantying or otherwise executed and delivered in connection therewith. 4.1.14 Convertible Debt. None of the Convertible Debt Loan Documents has been amended, supplemented, restated or otherwise modified except as otherwise disclosed to the Lender in writing on or before the effective date of any such amendment, supplement, restatement or other modification. In addition, there does not exist any default or any event which upon notice or lapse of time or both would constitute a default under the terms of any of the Convertible Debt Loan Documents. 4.1.15 Taxes. Each of the Borrowers and its Subsidiaries has filed all returns, reports and forms for Taxes which, to the knowledge of the Borrowers, are required to be filed, and has paid all Taxes as shown on such returns or on any assessment received by it, to the extent that such Taxes have become due, unless and to the extent only that such Taxes, assessments and governmental charges are currently contested in good faith and by appropriate proceedings by a Borrower, such Taxes are not the subject of any Liens other than Permitted Liens, and adequate reserves therefor have been established as required under GAAP. All tax liabilities of the Borrowers were as of the date of audited financial statements referred to in Section 4.1.11 (Financial Condition), and are now, adequately provided for on the books of the Borrowers and its Subsidiaries, as appropriate. To the best of each Borrower's knowledge, no tax liability has been asserted by the Internal Revenue Service or any state or local authority against any Borrower for Taxes in excess of those already paid. 4.1.16 ERISA. With respect to any Plan that is maintained or contributed to by any Borrower and/or by any Commonly Controlled Entity or as to which any of the Borrowers retains material liability: (a) no "accumulated funding deficiency" as defined in Code (S) 412 or ERISA (S) 302 has occurred, whether or not that accumulated funding deficiency has been waived; (b) no Reportable Event has occurred other than events for which reporting has been waived or that are unlikely to result in material liability for any of the Borrowers; (c) no termination of any plan subject to Title IV of ERISA has occurred; (d) neither any Borrower nor any Commonly Controlled Entity has incurred a "complete withdrawal" within the meaning of ERISA (S) 4203 from any Multi-employer Plan that is likely to result in material liability for one or more of the Borrowers; (e) neither any Borrower nor any Commonly Controlled Entity has incurred a "partial withdrawal" within the meaning of ERISA (S) 4205 with respect to any Multi-employer Plan that is likely to result in material liability for one or more of the Borrowers; (f) no Multi-employer Plan to which any Borrower or any Commonly Controlled Entity has an obligation to contribute is to the knowledge of the Borrowers, in "reorganization" within the meaning of ERISA (S) 4241 nor has notice been received by any Borrower or any Commonly Controlled Entity that such a Multi-employer Plan will be placed in "reorganization." 46 4.1.17 Title to Properties. The Borrowers have good and marketable title to all of their respective properties, including, without limitation, the Collateral and the properties and assets reflected in the balance sheets described in Section 4.1.11 (Financial Condition). The Borrowers have legal, enforceable and uncontested rights to use freely such property and assets, subject to Permitted Liens. All of such properties, including, without limitation, the Collateral which were purchased, were in each Borrower's good faith belief purchased for fair consideration and reasonably equivalent value in the ordinary course of business of both the seller and the Borrowers and not, by way of example only, as part of a bulk sale. 4.1.18 Patents, Trademarks, Etc. Each of the Borrowers and its Subsidiaries owns, possesses, or has the right to use all patents, licenses, trademarks, copyrights, permits and franchises necessary to conduct its business as now conducted, without known conflict with the rights of any other Person. Any and all obligations to pay royalties or other charges with respect to such properties and assets are properly reflected on the financial statements described in Section 4.1.11 (Financial Condition). 4.1.19 Employee Relations. Except as disclosed on Schedule 4.1.19 attached hereto and made a part hereof, (a) no Borrower nor any Subsidiary thereof nor any of the Borrower's or Subsidiary's employees is subject to any collective bargaining agreement, (b) no petition for certification or union election is pending with respect to the employees of any Borrower or any Subsidiary and no union or collective bargaining unit has sought such certification or recognition with respect to the employees of a Borrower, (c) there are no strikes, slowdowns, work stoppages or controversies pending or, to the best knowledge of the Borrowers after due inquiry, threatened between any Borrower and its employees, and (d) no Borrower nor any Subsidiary is subject to an employment contract, severance agreement, commission contract or bonus agreement. Hours worked and payments made to the employees of any one or more of the Borrowers have not been in violation of the Fair Labor Standards Act or any other applicable law dealing with such matters. All payments due from any one or more of the Borrowers or for which any claim may be made against a Borrower, on account of wages and employee and retiree health and welfare insurance and other benefits have been paid or accrued as a liability on its books. The consummation of the transactions contemplated by the Financing Agreement or any of the other Financing Documents, will not give rise to a right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which any Borrower is a party or by which it is bound. 4.1.20 Presence of Hazardous Materials or Hazardous Materials Contamination. Except as described on Schedule 4.1.20 and to the best of each Borrower's knowledge, (a) no Hazardous Materials are located on any real property owned, controlled or operated by any Borrower or for which any Borrower is, or is claimed to be, responsible, except for reasonable quantities of Hazardous Materials Used or generated by a Borrower in the ordinary course of its business and stored, used and disposed in accordance with applicable 47 Laws; and (b) no property owned, controlled or operated by any Borrower or for which any Borrower has, or is claimed to have, responsibility has ever been used as a manufacturing, storage, disposal, or dump site for Hazardous Materials nor is affected by Hazardous Materials Contamination at any other property. 4.1.21 Perfection and Priority of Collateral. The Lender has, or upon execution and recording of this Agreement and the Security Documents will have, and will continue to have as security for the Obligations, a valid and perfected Lien on and security interest in all Collateral, free of all other Liens, claims and rights of third parties whatsoever except Permitted Liens, including, without limitation, those described on Schedule 4.1.21 attached hereto and made a part hereof. 4.1.22 Collateral Disclosure List. The information contained in the Collateral Disclosure List is complete and correct. The Collateral Disclosure List completely and accurately identifies (a) the type of entity, the state of its organization and the chief executive office of each Borrower, (b) any and each other place of business of each Borrower, (c) the location of all books and records pertaining to the Collateral, and (d) each location, other than the foregoing, where any of the Collateral is located. 4.1.23 Business Names and Addresses. In the five (5) years preceding the date hereof, no Borrower has changed its name, identity or corporate structure, has conducted business under any name other than its current name, and has conducted its business in any jurisdiction other than those disclosed on the Collateral Disclosure List. 4.1.24 No Suspension or Debarment. Neither any Borrower nor any of their respective directors, officers or employees has received any notice of, or information concerning, any proposed, contemplated or initiated suspension or debarment, be it temporary or permanent, due to an administrative or a statutory basis, of any Borrower by any Governmental Authority. Each Borrower further warrants and represents that no Borrower has defaulted under any Government Contract which default would be a basis of terminating such Government Contract. 4.1.25 Equipment. All Equipment is personalty and no equipment is held by any Borrower on a sale on approval basis. 4.1.26 Accounts. With respect to all Accounts (other than Accounts which are considered part of the Excluded Assets) and to the best of each Borrower's knowledge (a) they are genuine, and in all respects what they purport to be, and are not evidenced by a judgment, an Instrument, or Chattel Paper (unless such judgment has been assigned and such Instrument or Chattel Paper has been endorsed and delivered to the Lender); (b) they represent bona fide transactions completed in accordance with the terms and provisions contained in the invoices, purchase 48 orders and other contracts relating thereto, and the underlying transaction therefor is in accordance with all applicable Laws; (c) the amounts shown on the respective Borrower's books and records, with respect thereto are actually and absolutely owing to that Borrower and are not contingent or subject to reduction for any reason other than regular discounts, credits or adjustments allowed by that Borrower in the ordinary course of its business; (d) no payments have been or shall be made thereon except payments turned over to the Lender by the Borrowers; (e) all Account Debtors thereon have the capacity to contract; and (f) the goods sold, leased or transferred or the services furnished giving rise thereto are not subject to any Liens except the security interest granted to the Lender by this Agreement and Permitted Liens. 4.1.27 Compliance with Eligibility Standards. Each Account included in the calculation of the Borrowing Base as of the date of the applicable Borrowing Base Certificate meets and complies with all of the standards for Eligible Receivables. With respect to those Accounts which the Lender has deemed Eligible Receivables (a) there are no facts, events or occurrences known to the Borrower which in any way impair the validity, collectibility or enforceability thereof or tend to reduce the amount payable thereunder; and (b) there are no proceedings or actions known to any Borrower which are threatened or pending against any Account Debtor which could be expected to result in any material adverse change in the Borrowing Base, in either case not previously disclosed to the Lender. Section 4.2 Survival; Updates of Representations and Warranties. All representations and warranties contained in or made under or in connection with this Agreement and the other Financing Documents shall survive the Closing Date, the making of any advance under the Revolving Credit and extension of credit made hereunder or the issuance of each Letter of Credit, and the incurring of any other Obligations and shall be deemed to have been made at the time of each request for, and again at the time of the making of, each advance under the Revolving Credit, except that the representations and warranties which relate to the financial statements which are referred to in Section 4.1.11 (Financial Condition), shall also be deemed to cover financial statements furnished from time to time to the Lender pursuant to Section 6.1.1 (Financial Statements). ARTICLE V CONDITIONS PRECEDENT Section 5.1 Conditions to the Initial Advance and Initial Letter of Credit. The making of the initial advance under the Revolving Credit and the issuance of the initial Letter of Credit is subject to the fulfillment on or before the Closing Date of the following conditions precedent in a manner satisfactory in form and substance to the Lender and its counsel: 5.1.1 Organizational Documents. The Lender shall have received for each Borrower: 49 (a) a certificate of good standing certified by the Secretary of State, or other appropriate Governmental Authority, of the state of organization of such Borrower; (b) a complete copy of the Borrower's organizational documents; (c) a certificate of qualification to do business for such Borrower certified by the Secretary of State or other Governmental Authority of each jurisdiction in which such Borrower conducts business; (d) a certificate dated as of the Closing Date by the Secretary or an Assistant Secretary of such Borrower covering: (i) true and complete copies of that Borrower's organizational documents and all amendments thereto; (ii) true and complete copies of the resolutions of its Board of Directors authorizing (A) the execution, delivery and performance of the Financing Documents to which it is a party, (B) the borrowings hereunder, and (C) the granting of the Liens contemplated by this Agreement and the Financing Documents to which that Borrower is a party; (iii) the incumbency, authority and signatures of the officers of such Borrower authorized to sign this Agreement and the other Financing Documents to which such Borrower is a party; and (iv) the identity of such Borrower's current directors, common stock holders and other equity holders, as well as their respective percentage ownership interests. 5.1.2 Opinion of Borrowers' Counsel. The Lender shall have received the favorable opinion of counsel for the Borrowers addressed to the Lender in form satisfactory to the Lender. 5.1.3 Consents, Licenses, Approvals, Etc. The Lender shall have received copies of all consents, licenses and approvals, required in connection with the execution, delivery, performance, validity and enforceability of the Financing Documents, and such consents, licenses and approvals shall be in full force and effect. 5.1.4 Note. The Lender shall have received the Revolving Credit Note, conforming to the requirements hereof and executed by a Responsible Officer of each Borrower and attested by a duly authorized representative of each Borrower. 50 5.1.5 Financing Documents and Collateral. Each Borrower shall have executed and delivered the Financing Documents to be executed by it, and shall have delivered original Chattel Paper, Instruments, Investment Property, and related Collateral and all opinions, title insurance, and other documents contemplated by ARTICLE III (The Collateral). 5.1.6 Other Financing Documents. In addition to the Financing Documents to be delivered by the Borrowers, the Lender shall have received the Financing Documents duly executed and delivered by Persons other than the Borrowers. 5.1.7 Other Documents, Etc. The Lender shall have received such other certificates, opinions, documents and instruments confirmatory of or otherwise relating to the transactions contemplated hereby as may have been reasonably requested by the Lender. 5.1.8 Payment of Fees. The Lender shall have received payment of any Fees due on or before the Closing Date. 5.1.9 Collateral Disclosure List. The Company shall have delivered the Collateral Disclosure List required under the provisions of Section 3.3 (Collateral Disclosure List) duly executed by a Responsible Officer of the Company. 5.1.10 Recordings and Filings. Each Borrower shall have: (a) executed and delivered all Financing Documents required to be filed, registered or recorded in order to create, in favor of the Lender, a perfected Lien in the Collateral (subject only to the Permitted Liens) in form and in sufficient number for filing, registration, and recording in each office in each jurisdiction in which such filings, registrations and recordations are required, and (b) delivered such evidence as the Lender deems satisfactory that all necessary filing fees and all recording and other similar fees, and all Taxes and other expenses related to such filings, registrations and recordings will be or have been paid in full. 5.1.11 Insurance Certificate. The Lender shall have received an insurance certificate in accordance with the provisions of Section 6.1.8 (Insurance) and Section 6.1.18 (Insurance With Respect to Equipment and Inventory). 5.1.12 Field Examination. The Lender shall have completed a field examination of each Borrower's business, operations and income, the results of which field examination shall be in all respects acceptable to the Lender in its sole and absolute discretion. 51 5.1.13 Landlord's Waivers. The Lender shall have received a waiver from each landlord of each and every business premise leased by each Borrower and on which (a) any of the Collateral comprised of books and records or (b) any of the Collateral which has a book value in excess of Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate is or may hereafter be located, which landlords' waivers must be reasonably acceptable to the Lender and its counsel in their sole and absolute discretion. 5.1.14 Stock Certificates and Stock Powers. The Lender shall have received all of the original stock certificates of Space Media owned by the Company and fully executed irrevocable stock powers from the Company of all such stock certificates. 5.1.15 Pledge of Membership Interests in Space Station. The Lender shall have received a fully executed pledge, assignment and security interest in the ownership interests of Space Station owned by the Company. 5.1.16 Required Availability under the Revolving Credit Facility. On the Closing Date, the aggregate outstanding principal amount of the Revolving Loan and Outstanding Letter of Credit Obligations shall not exceed an amount equal to (a) the lesser of the Borrowing Base or the Revolving Credit Committed Amount, minus (b) the sum of the amount of the Permitted Uses of the Revolving Loan required to be made on the Closing Date, the amount of the costs relating to the closing of this Agreement (including, without limitation, applicable Fees, recording costs, recording taxes, and the fees and expenses of the Borrowers' and the Lender's professionals), the amount of the Borrowers' trade payables more than thirty (30) days past due, and the amount of One Million Dollars ($1,000,000). Section 5.2 Conditions to all Extensions of Credit and Issuance of Letters of Credit. The making of all advances under the Revolving Credit and issuance of all Letters of Credit is subject to the fulfillment of the following conditions precedent in a manner satisfactory in form and substance to the Lender and its counsel: 5.2.1 Compliance. Each Borrower shall have complied and shall then be in compliance with all terms, covenants, conditions and provisions of this Agreement and the other Financing Documents that are binding upon it. 5.2.2 Borrowing Base. The Borrowers shall have furnished all Borrowing Base Reports required by Section 2.1.4 (Borrowing Base Report), there shall exist no Borrowing Base Deficiency, and as evidence thereof, the Borrowers shall have furnished to the Lender such reports, schedules, certificates, records and other papers as may be requested by the Lender, and the Borrowers shall be in compliance with the provisions of this Agreement both immediately before and immediately after the making of the advance requested. 52 5.2.3 Default. There shall exist no Event of Default or Default hereunder. 5.2.4 Representations and Warranties. The representations and warranties of each of the Borrowers contained among the provisions of this Agreement shall be true and with the same effect as though such representations and warranties had been made at the time of the making of, and of the request for, each advance under the Revolving Credit or the issuance of each Letter of Credit, except that the representations and warranties which relate to financial statements which are referred to in Section 4.1.11 (Financial Condition), shall also be deemed to cover financial statements furnished from time to time to the Lender pursuant to Section 6.1.1 (Financial Statements). 5.2.5 Adverse Change. No adverse change shall have occurred in the condition (financial or otherwise), operations or business of any Borrower that would, in the good faith judgment of the Lender, result in a Material Adverse Effect. 5.2.6 Legal Matters. All legal documents incident to each advance under the Revolving Credit and the issuance of each Letter of Credit shall be reasonably satisfactory to counsel for the Lender. ARTICLE VI COVENANTS OF THE BORROWERS Section 6.1 Affirmative Covenants. So long as any of the Obligations (or the Revolving Credit Commitment therefor) shall be outstanding hereunder, the Borrowers agree jointly and severally with the Lender as follows: 6.1.1 Financial Statements. The Borrowers shall furnish to the Lender: (a) Annual Statements and Certificates. The Borrowers shall furnish to the Lender as soon as available, but in no event more than ninety (90) days after the close of the Borrowers' fiscal years, (i) a copy of the Company's 10-K filed with the Securities and Exchange Commission or if the 10-K is not filed, the Company's annual financial statement in reasonable detail satisfactory to the Lender relating to the Borrowers and their Subsidiaries, prepared in accordance with GAAP and examined and certified by independent certified public accountants satisfactory to the Lender, which financial statement shall include a consolidated and consolidating balance sheet of the Borrowers and their Subsidiaries as of the end of such fiscal year and consolidated and consolidating statements of income, cash flows and changes in shareholders equity of the Borrowers and their Subsidiaries for such fiscal year, and (ii) a Compliance Certificate, in substantially the form attached to this Agreement as EXHIBIT D, containing a detailed computation of each financial covenant in this Agreement which is 53 applicable for the period reported, a certification that no change has occurred to the information contained in the Collateral Disclosure List (except as set forth in any schedule attached to the certification), and a cash flow projection report, each prepared by a Responsible Officer of the Borrowers in a format acceptable to the Lender and (iii) a management letter in the form prepared by the Borrowers' independent certified public accountants. (b) Annual Opinion of Accountant. The Borrowers shall furnish to the Lender as soon as available, but in no event more than ninety (90) days after the close of the Borrowers' fiscal years, an unqualified opinion of the accountant who examined and certified the annual financial statement relating to the Borrowers and their Subsidiaries (i) stating whether anything in such accountant's examination has revealed the occurrence of a Default or an Event of Default hereunder due to the breach of any of the financial covenants set forth in Section 6.1.15 (Financial Covenants), and, if so, stating the facts with respect thereto and (ii) acknowledging that the Lender will rely on the statement and that the Borrowers know of the intended reliance by the Lender. (c) Quarterly Statements and Certificates. The Borrowers shall furnish to the Lender as soon as available, but in no event more than forty five (45) days after the close of the Borrowers' fiscal quarters, the Company's 10-Q as filed with the Securities and Exchange Commission or if such report is not filed, the Borrowers' consolidated and consolidating balance sheets of the Borrowers and its Subsidiaries as of the close of such period, consolidated and consolidating income, cash flows and changes in shareholders equity statements for such period, projected cash flow on a month to month basis and projected income statements, and a Compliance Certificate, in substantially the form attached to this Agreement as EXHIBIT D. (d) Contract Backlog Report. With the quarterly financial statements to be delivered hereunder, reports relating to the Receivables included in any Borrowing Base Report submitted during such quarter setting forth a description of contracts giving rise to such Receivable, the percentage of completion of the work to be performed with respect to such contracts, the amounts billed under such contracts and the amounts remaining to be billed, in form and detail satisfactory to the Lender. (e) Monthly Statements and Certificates. The Borrowers shall furnish to the Lender as soon as available, but in no event more than thirty (30) days after the close of the Borrowers' fiscal months and forty five (45) days after the close of the fiscal months that are the conclusion of a fiscal quarter, (i) consolidated and consolidating balance sheets of the Borrowers and their Subsidiaries as of the close of such period and consolidated and consolidating income statements, all as prepared and certified by a Responsible Officer of the Borrowers and (ii) a detailed computation of each financial covenant in this Agreement which is applicable for the period reported, together with a certification that no change has occurred to the information contained on the Collateral Disclosure List (except as set forth on any schedule attached to the certification), each prepared by a Responsible Officer of or on behalf of each Borrower in a format acceptable to the Lender, and accompanied by a certificate of that officer stating whether any event has occurred which constitutes a Default or an Event of Default hereunder, and, if so, stating the facts with respect thereto. 54 (f) Annual Budget and Projections. The Borrowers shall furnish to the Lender as soon as available, but in no event later than July 31st of each fiscal year a consolidated and consolidating budget and pro forma financial statements on a month-to-month basis for the following fiscal year, which financial statements shall include at a minimum, a balance sheet, income statements and statement of cash flows. (g) Additional Reports and Information. The Borrowers shall furnish to the Lender promptly, such additional information, reports or statements as the Lender may from time to time reasonably request. 6.1.2 Reports to SEC and to Stockholders. The Borrowers will furnish to the Lender, promptly upon the filing or making thereof, at least one (l) copy of all financial statements, reports, notices and proxy statements sent by any Borrower to its stockholders, and of all regular and other reports filed by any Borrower with any securities exchange or with the Securities and Exchange Commission. 6.1.3 Recordkeeping, Rights of Inspection, Field Examination, Etc. (a) Each of the Borrowers shall, and shall cause each of its Subsidiaries to, maintain (i) a standard system of accounting in accordance with GAAP, and (ii) proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its properties, business and activities. (b) Each of the Borrowers shall, and shall cause each of its Subsidiaries to, permit authorized representatives of the Lender to visit and inspect the properties of the Borrowers and its Subsidiaries, to review, audit, check and inspect the Collateral at any time during normal business hours, with or after a Default without notice, to review, audit, check and inspect the Borrowers' other books of record at any time with or without notice and to make abstracts and photocopies thereof, and to discuss the affairs, finances and accounts of the Borrowers and their Subsidiaries, with the officers, directors, employees and other representatives of the Borrowers and their Subsidiaries and their respective accountants, all at such times during normal business hours and other reasonable times and as often as the Lender may reasonably request. (c) Each of the Borrowers hereby irrevocably authorizes and directs all accountants and auditors employed by any of the Borrowers and/or any of their Subsidiaries at any time prior to the repayment in full of the Obligations to exhibit and deliver to the Lender copies of any and all of the financial statements, trial balances, management letters, or other accounting records of any nature of any or all of the Borrowers and/or any or all of their respective Subsidiaries in the accountant's or auditor's possession, and to disclose to the Lender any information they may have concerning the financial status and business operations of any or all of the Borrowers and/or any or all of their respective Subsidiaries. Further, each of the Borrowers hereby authorizes all Governmental Authorities to furnish to the Lender copies of reports or examinations relating to any and all of the Borrowers and/or any or all Subsidiaries, whether made by the Borrowers or otherwise. The Lender acknowledges and agrees to the extent certain information is "classified" or the Borrowers are otherwise prohibited by Law from 55 disclosing such information to the Lender, that the Borrowers shall not be obligated to release such information to the Lender. (d) Any and all reasonable costs and expenses incurred by, or on behalf of, the Lender in connection with the conduct of any of the foregoing, including, without limitation, travel (other than first class air travel), lodging, meals, and other reasonable expenses for each auditor employed by the Lender for inspections of the Collateral and the Borrowers' operations, shall be part of the Enforcement Costs and shall be payable to the Lender upon demand. The Borrowers acknowledge and agree that such expenses may include, but shall not be limited to, any and all reasonable out-of-pocket costs and expenses of the Lender's employees and agents in, and when, traveling to any of the Borrowers' facilities. 6.1.4 Existence. Each of the Borrowers shall maintain, and cause each of its Subsidiaries to maintain, its existence in good standing in the jurisdiction in which it is organized and in each other jurisdiction where it is required to register or qualify to do business if the failure to do so in such other jurisdiction could have a Material Adverse Effect. 6.1.5 Compliance with Laws. Each of the Borrowers shall comply, and cause each of its Subsidiaries to comply, with all applicable Laws and observe the valid requirements of Governmental Authorities, the noncompliance with or the nonobservance of which could be expected to have a Material Adverse Effect. 6.1.6 Preservation of Properties. Each of the Borrowers will, and will cause each of its Subsidiaries to, at all times (a) maintain, preserve, protect and keep its properties, whether owned or leased, in good operating condition, working order and repair (ordinary wear and tear excepted), and from time to time will make all proper repairs, maintenance, replacements, additions and improvements thereto needed to maintain such properties in good operating condition, working order and repair, unless such properties are no longer necessary or useful in the conduct of such Borrower's business as determined by its management, but provided, however that such Borrower's failure to maintain such property could not give rise to any material liability, and (b) do or cause to be done all things necessary to preserve and to keep in full force and effect its material franchises, leases of real and personal property, trade names, patents, trademarks and permits which are necessary for the orderly continuance of its business. 6.1.7 Line of Business. Each of the Borrowers will continue to engage substantially only in the business of providing commercial space applications and other incidental businesses. 6.1.8 Insurance. Each of the Borrowers will, and will cause each of its Subsidiaries to, at all times maintain with "A" or better rated insurance companies such insurance as is required by applicable Laws and such other insurance, in such amounts, of such types and against such risks, 56 hazards, liabilities, casualties and contingencies as are usually insured against in the same geographic areas by business entities engaged in the same or similar business. Without limiting the generality of the foregoing, each of the Borrowers will, and will cause each of its Subsidiaries to, keep adequately insured all of its property against loss or damage resulting from fire or other risks insured against by extended coverage and maintain public liability insurance against claims for personal injury, death or property damage occurring upon, in or about any properties occupied or controlled by it, or arising in any manner out of the businesses carried on by it, all in such amounts not less than the Lender shall reasonably determine from time to time. The Lender agrees that with respect to any assets of the Borrowers and each of their Subsidiaries which are Excluded Assets that unless such assets become subject to Liens in favor of the Lender, the Lender will rely on the determination of any other Person having a Lien on such assets or if no such Person exists, the Lender will rely on the Company in the exercise of its reasonable discretion, to determine the appropriate amount and types of insurance. Each of the Borrowers shall deliver to the Lender on the Closing Date (and thereafter on each date there is a material change in the insurance coverage) a certificate of a Responsible Officer of the Borrowers containing a detailed list of the insurance then in effect and stating the names of the insurance companies, the types, the amounts and rates of the insurance, dates of the expiration thereof and the properties and risks covered thereby. Within thirty (30) days after notice in writing from the Lender, the Borrowers will obtain such additional insurance as the Lender may reasonably request. 6.1.9 Taxes. Except to the extent that the validity or amount thereof is being contested in good faith and by appropriate proceedings, each of the Borrowers will, and will cause each of its Subsidiaries, to pay and discharge all Taxes prior to the date when any interest or penalty would accrue for the nonpayment thereof. Each of the Borrowers shall furnish to the Lender at such times as the Lender may require proof satisfactory to the Lender of the making of payments or deposits required by applicable Laws including, without limitation, payments or deposits with respect to amounts withheld by any of the Borrowers from wages and salaries of employees and amounts contributed by any of the Borrowers on account of federal and other income or wage taxes and amounts due under the Federal Insurance Contributions Act, as amended. 6.1.10 ERISA. Each Borrower will, and will cause each of its Commonly Controlled Entities to, comply with the funding requirements of ERISA with respect to Plans for its respective employees. No Borrower will permit with respect to any Plan (a) any prohibited transaction or transactions under ERISA or the Internal Revenue Code, which results, or may result, in any material liability of the Borrower, or (b) any Reportable Event if, upon termination of the plan or plans with respect to which one or more such Reportable Events shall have occurred, there is or would be any material liability of the Borrower to the PBGC. Upon the Lender's request, each Borrower will deliver to the Lender a copy of the most recent actuarial report, financial statements and annual report completed with respect to any Plan. 6.1.11 Government Contracts. The Company shall promptly notify the Lender of the execution of any Government Contract with a remaining value in excess of Two Million Dollars ($2,000,000) and 57 shall in accordance with Section 3.2 execute any instruments and take any steps necessary or prudent in order that all moneys due and to become due under any Government Contracts with a remaining value in excess of Two Million Dollars ($2,000,000) and a duration in excess of six months shall be assigned to the Lender and notice thereof given to the Government under the Federal Assignment of Claims Act of 1940 (31 U.S.C. (S) 3727 and 41 U.S.C. (S) 15) or any other similar applicable law (the "Act"). In addition, the Lender shall have the right at any time to require that all monies due or to become due under any Government Contracts be assigned to the Lender pursuant to the Act. 6.1.12 Notification of Events of Default and Adverse Developments. Each of the Borrowers shall promptly notify the Lender upon obtaining knowledge of the occurrence of: (a) any Event of Default; (b) any Default; (c) any litigation instituted or, to its knowledge, threatened against any of the Borrowers or any of their Subsidiaries and of the entry of any judgment or Lien (other than any Permitted Liens) against any of the assets or properties of any of the Borrowers or any Subsidiary where the claims against any Borrower or any Subsidiary exceed One Hundred Thousand Dollars ($100,000) and are not covered by insurance; (d) any event, development or circumstance whereby the financial statements furnished hereunder fail in any material respect to present fairly, in accordance with GAAP, the financial condition and operational results of any of the Borrowers or any of their respective Subsidiaries; (e) any judicial, administrative or arbitral proceeding pending against any of the Borrowers or any of their respective Subsidiaries and any judicial or administrative proceeding known by any of the Borrowers to be threatened against any Borrower or any Subsidiary which, if adversely decided, could result in a Material Adverse Effect; (f) the receipt by any of the Borrowers or any Subsidiary of any notice, claim or demand from any Governmental Authority which alleges that any of the Borrowers or any Subsidiary is in violation of any of the terms of, or has failed to comply with any applicable Laws regulating its operation and business, including, but not limited to, the Occupational Safety and Health Act and the Environmental Protection Act; (g) any default under any Government Contract or any event which if not corrected could give rise to a default under any Government Contract or a termination for convenience; and 58 (h) any other development in the business or affairs of any of the Borrowers or any of their respective Subsidiaries which could be expected to have a Material Adverse Effect; in each case describing in detail satisfactory to the Lender the nature thereof and the action the Borrowers propose to take with respect thereto. 6.1.13 Hazardous Materials; Contamination. Each of the Borrowers agrees to: (a) give notice to the Lender immediately upon acquiring knowledge of the presence of any Hazardous Materials or any Hazardous Materials Contamination on any property owned, operated or controlled by any Borrower or for which any Borrower is, or is claimed to be, responsible (provided that such notice shall not be required for Hazardous Materials placed or stored on such property in accordance with applicable Laws in the ordinary course (including, without limitation, quantity) of a Borrower's line of business expressly described in this Agreement or otherwise previously disclosed to the Lender in writing), with a full description thereof; (b) promptly comply with any Laws requiring the removal, treatment or disposal of Hazardous Materials or Hazardous Materials Contamination and provide the Lender with satisfactory evidence of such compliance; provided, however, that the Borrowers may challenge the applicability of any such requirement or appeal the imposition of any such requirement, within the time period allowed under such Laws, provided that during any such challenge or appeal, the existence of any such Hazardous Materials or Hazardous Materials Contamination do not and will not with appropriate filings, the giving of notice and/or the passage of time, result in any Lien against any of the Collateral or could otherwise result in a Material Adverse Effect; (c) provide the Lender, within thirty (30) days after a demand by the Lender, with a bond, letter of credit or similar financial assurance evidencing to the Lender's satisfaction that the necessary funds are available to pay the cost of removing, treating, and disposing of such Hazardous Materials or Hazardous Materials Contamination and discharging any Lien which may be established as a result thereof on any property owned, operated or controlled by any Borrower or for which any Borrower is, or is claimed to be, responsible; and (d) as part of the Obligations, defend, indemnify and hold harmless the Lender and its agents, employees, trustees, successors and assigns from any and all claims which may now or in the future (whether before or after the termination of this Agreement) be asserted as a result of the presence of any Hazardous Materials or any Hazardous Materials Contamination on any property owned, operated or controlled by any Borrower for which any Borrower is, or is claimed to be, responsible. Each Borrower acknowledges and agrees that this indemnification shall survive the termination of this Agreement and the 59 Revolving Credit Commitment and the payment and performance of all of the other Obligations. (e) The Company has advised the Lender of certain photo processing and other related operations being performed at its location at 12130 State Highway 3, Houston, Texas and 555 Forge River Road, Suite 150, Webster, Texas, and the Lender agrees that based on such information, it will not require a bond, letter of credit or similar financial assurance at this time under section (c) above. 6.1.14 Disclosure of Significant Transactions. Each of the Borrowers shall deliver to the Lender a written notice describing in detail each transaction by it involving the purchase, sale, lease, or other acquisition or loss or casualty to or disposition of an interest in Fixed or Capital Assets (other than Excluded Assets) which exceeds Two Hundred Fifty Thousand Dollars ($250,000.00), said notices to be delivered to the Lender within thirty (30) days of the occurrence of each such transaction. 6.1.15 Financial Covenants. (a) Tangible Net Worth. The Company and its Subsidiaries, on a consolidated basis, will at all times maintain, tested as of the end of each fiscal quarter, a Tangible Net Worth of not less than $63,000,000 as of June 30, 2002 plus, commencing as of September 30, 2002, an amount equal to fifty percent (50%) of the consolidated net income (without regard to any loss) of the Company and its Subsidiaries from the most recently ended fiscal quarter, rounded down to the nearest $100,000. (b) Debt to Worth Ratio. The Company and its Subsidiaries, on a consolidated basis, will at all times maintain, tested as of the end of each calendar month, a Debt to Worth Ratio so that it is not more than 3.0 to 1.0; provided, however, commencing as of the end of the first calendar month of fiscal year 2004 and at all times thereafter, the Company and its Subsidiaries, on a consolidated basis will maintain a Debt to Worth Ratio of not more than 2.0 to 1.0. (c) Debt Service Coverage Ratio. The Company and its Subsidiaries will maintain, on a consolidated basis and tested as of the last day of each of the Company's fiscal quarters, a ratio of EBITDA to Debt Service of not less than the following amounts at the following times (each quarter tested on a stand-alone basis): 60 Period Ratio ------ ----- June 30, 2002 1.25 to 1.0 September 30, 2002 1.00 to 1.0 December 31, 2002 1.10 to 1.0 March 31, 2003 1.25 to 1.0 June 30, 2003 1.50 to 1.0 September 30, 2003 and thereafter 1.75 to 1.0 (d) Internally Funded Capital Expenditures. Capital Expenditures which are funded by the Company or any Borrower (taken as a whole) will not exceed the following amounts at the following times: Period Amount ------ ------ July 31, 2001 through June 30, 2002 $1,300,000 Fiscal Year 2003 and each fiscal year thereafter $1,500,000 6.1.16 Collection of Receivables. Until such time as the Lender shall notify the Borrowers of the revocation of such privilege, the Borrowers shall at their own expense have the privilege for the account of, and in trust for, the Lender of collecting their Receivables and receiving in respect thereto all Items of Payment and shall otherwise completely service all of the Receivables including (a) the billing, posting and maintaining of complete records applicable thereto, (b) the taking of such action with respect to the Receivables as the Lender may request or in the absence of such request, as each of the Borrowers may deem advisable; and (c) the granting, in the ordinary course of business, to any Account Debtor, of any rebate, refund or adjustment to which the Account Debtor may be lawfully entitled, and may accept, in connection therewith, the return of goods, the sale or lease of which shall have given rise to a Receivable and may take such other actions relating to the settling of any Account Debtor's claim as may be commercially reasonable. The Lender may, at its option, at any time or from time to time after and during the continuance of an Event of Default hereunder, revoke the collection privilege given in this Agreement to any one or more of the Borrowers by either giving notice of its assignment of, and Lien on the Collateral to the Account Debtors or giving notice of such revocation to the Borrowers. The Lender shall not have any duty to, and the Borrowers hereby release the Lender from all claims of loss or damage caused by the delay or failure to collect or enforce any of the Receivables or to preserve any rights against any other party with an interest in the Collateral. The Lender shall be entitled at any time and from time to time to confirm and verify Receivables. 6.1.17 Assignments of Receivables. Each Borrower will promptly, upon request, execute and deliver to the Lender written assignments, in form and content acceptable to the Lender, of specific Receivables or groups of Receivables; provided, however, the Lien and/or security interest granted to the Lender under this Agreement shall not be limited in any way to or by the inclusion or exclusion of Receivables within such assignments. Receivables so assigned shall secure payment of the Obligations and are not sold to the Lender whether or not any assignment thereof, 61 which is separate from this Agreement, is in form absolute. The Borrowers agree that neither any assignment to the Lender nor any other provision contained in this Agreement or any of the other Financing Documents shall impose on the Lender any obligation or liability of any of the Borrowers with respect to that which is assigned and the Borrowers hereby agree jointly and severally to indemnify the Lender and hold the Lender harmless from any and all claims, actions, suits, losses, damages, costs, expenses, fees, obligations and liabilities brought by Persons other than the Borrowers or their Affiliates or Subsidiaries which may be incurred by or imposed upon the Lender by virtue of the assignment of and Lien on any Borrower's rights, title and interest in, to, and under the Collateral. 6.1.18 Insurance With Respect to Equipment. The Borrowers will (a) maintain hazard insurance with fire and extended coverage and naming the Lender as an additional insured with loss payable to the Lender as its respective interest may appear on the Equipment in an amount at least equal to the lesser amount of the outstanding principal amount of the Obligations or the fair market value of the Equipment (but in any event sufficient to avoid any co-insurance obligations) and with a specific endorsement to each such insurance policy pursuant to which the insurer agrees to give the Lender at least thirty (30) days written notice before any alteration or cancellation of such insurance policy and that no act or default of any of the Borrowers shall affect the right of the Lender to recover under such policy in the event of loss or damage; (b) file with the Lender, upon its request, a detailed list of the insurance then in effect and stating the names of the insurance companies, the amounts and rates of the insurance, dates of the expiration thereof and the properties and risks covered thereby; and (c) within thirty (30) days after notice in writing from the Lender, obtain such additional insurance as the Lender may reasonably request. 6.1.19 Maintenance of the Collateral. The Borrowers will cause the Lender to have at all times a valid and perfected Lien on and security interest in all Collateral, free of all other Liens, claims and rights of third parties whatsoever except Permitted Liens, including, without limitation, those described on Schedule 4.1.21 attached hereto and made a part hereof. In addition, the Borrowers will maintain the Collateral in good working order, saving and excepting ordinary wear and tear, and will not permit anything to be done to the Collateral which may materially impair the value thereof. The Lender, or an agent designated by the Lender, shall be permitted to enter the premises of each of the Borrowers and their Subsidiaries and examine, audit and inspect the Collateral at any reasonable time and from time to time without notice. The Lender shall not have any duty to, and the Borrowers hereby release the Lender from all claims of loss or damage caused by the delay or failure to collect or enforce any of the Receivables or to, preserve any rights against any other party with an interest in the Collateral. 6.1.20 Equipment. The Borrowers shall (a) maintain all Equipment as personalty, and (b) shall hold no Equipment on a sale on approval basis. 62 6.1.21 Defense of Title and Further Assurances. At their expense, the Borrowers will defend the title to the Collateral (and any part thereof), and will immediately execute, acknowledge and deliver any renewal, affidavit, deed, assignment, continuation statement, security agreement, certificate or other document which the Lender may require in order to perfect, preserve, maintain, continue, protect and/or extend the Lien or security interest granted to the Lender under this Agreement, under any of the other Financing Documents and the first priority of that Lien, subject only to the Permitted Liens. The Borrowers hereby authorize the filing of any financing statement or continuation statement required under the Uniform Commercial Code. The Borrowers will from time to time do whatever the Lender may require by way of obtaining, executing, delivering, and/or filing financing statements, landlords' or mortgagees' waivers, notices of assignment and other notices and amendments and renewals thereof and the Borrowers will take any and all steps and observe such formalities as the Lender may require, in order to create and maintain a valid Lien upon, pledge of, or paramount security interest in, the Collateral, subject to the Permitted Liens. The Borrowers shall pay to the Lender on demand all taxes, costs and expenses incurred by the Lender in connection with the preparation, execution, recording and filing of any such document or instrument. To the extent that the proceeds of any of the Accounts or Receivables of the Borrowers are expected to become subject to the control of, or in the possession of, a party other than the Borrowers or the Lender, the Borrowers shall cause all such parties to execute and deliver on the Closing Date security documents, or other documents as requested by the Lender and as may be necessary to evidence and/or perfect the security interest of the Lender in those proceeds. Each Borrower hereby irrevocably appoints the Lender as the Borrower's attorney-in-fact, with power of substitution, in the name of the Lender or in the name of the Borrower or otherwise, for the use and benefit of the Lender, but at the cost and expense of the Borrowers and without notice to the Borrowers, to execute and deliver any and all of the instruments and other documents and take any action which the Lender may require pursuant the foregoing provisions of this Section 6.1.21. 6.1.22 Business Names; Locations. Each Borrower will notify and cause each of the Subsidiaries to notify the Lender not less than thirty (30) days prior to (a) any change in the name under which the Borrower or the applicable Subsidiary conducts its business, (b) any change of the location of the chief executive office of the applicable Borrower or Subsidiary, and (c) the opening of any new place of business or the closing of any existing place of business, and any change in the location of the places where the Collateral, or any part thereof, or the books and records, or any part thereof, are kept (provided that, if any such change or opening is pending within thirty (30) days at the time an Additional Borrower becomes an Additional Borrower, such Additional Borrower will instead give such notice to the Lender at that time). 6.1.23 Use of Premises and Equipment. The Borrowers agree that until the Obligations are fully paid and the Revolving Credit Commitment has been terminated or have expired, the Lender (a) after and during the continuance of an Event of Default, may use any of the Borrowers' owned or leased lifts, hoists, trucks and other facilities or equipment for handling or removing the Collateral; and (b) shall have, and is hereby granted, a right of ingress and egress to the places where the 63 Collateral is located, and may proceed over and through any of the Borrowers' owned or leased property. 6.1.24 Protection of Collateral. The Borrowers agree that the Lender may at any time following an Event of Default take such steps as the Lender deems reasonably necessary to protect the interest of the Lender in, and to preserve the Collateral, including, the hiring of such security guards or the placing of other security protection measures as the Lender deems appropriate, may employ and maintain at any of the Borrowers' premises a custodian who shall have full authority to do all acts necessary to protect the interests of the Lender in the Collateral and may lease warehouse facilities to which the Lender may move all or any part of the Collateral to the extent commercially reasonable. The Borrowers agree to cooperate fully with the Lender's efforts to preserve the Collateral and will take such actions to preserve the Collateral as the Lender may reasonably direct. All of the Lender's expenses of preserving the Collateral, including any reasonable expenses relating to the compensation and bonding of a custodian, shall be part of the Enforcement Costs. Section 6.2 Negative Covenants. So long as any of the Obligations or the Revolving Credit Commitment therefor shall be outstanding hereunder, the Borrowers agree with the Lender that without the prior written consent of the Lender: 6.2.1 Capital Structure, Merger, Acquisition or Sale of Assets. None of the Borrowers will alter or amend its capital structure, authorize any additional class of equity, issue any stock or equity of any class, except as permitted under Sections 6.2.2 (Subsidiaries) 6.2.4 (Purchase or Redemption of Stock) and 6.2.7 (Stock of Subsidiaries) windup or dissolve itself (or suffer any liquidation or dissolution) or acquire all or substantially all the assets of any Person, or sell, lease or otherwise dispose of any of its assets (except Inventory disposed of in the ordinary course of business prior to an Event of Default), except that the foregoing shall not prohibit or require the Lender's consent for (a) any Subsidiary's merger into or transfer of assets to a Borrower, or consolidation with or transfer of assets to any other Subsidiary of a Borrower; (b) the disposition prior to a Default of tangible property included in the Collateral, which, in each case, a Borrower determines in good faith to be obsolete; (c) the creation of any Subsidiaries to the extent the new Subsidiary shall have joined this Agreement as an Additional Borrower pursuant to Section 8.20 (Joinder of Additional Borrowers); (d) the conversion of the Debentures into common stock in accordance with their terms; or (e) any Wholly-Owned Subsidiary of any Additional Borrower may be merged into or consolidated with such Additional Borrower in which such Subsidiary is not the surviving corporation or entity. None of the Borrowers will enter into any merger or consolidation or amalgamation without the Lender's prior consent, which consent will not be unreasonably withheld, but which consent will be based on such conditions as the Lender deems appropriate in its sole but reasonable discretion. None of the Borrowers nor any of the Subsidiaries will directly or indirectly enter into any arrangement to sell or transfer all or any substantial part of its fixed assets (other than the Flight Assets on terms and conditions acceptable to the Lender) and thereupon or within one year thereafter rent or lease the assets so sold or transferred. Any 64 consent of the Lender to the disposition of any assets may be conditioned on a specified use of the proceeds of disposition. 6.2.2 Subsidiaries. None of the Borrowers will create or acquire any Subsidiaries other than the Subsidiaries identified on the Collateral Disclosure List or those which join this Agreement as an Additional Borrower pursuant to Section 8.20 (Joinder of Additional Borrowers), provided that such Subsidiary and the Borrowers, as applicable, shall grant and cause to be perfected first priority Liens to the Lender in the assets held by such Subsidiary, subject only to Permitted Liens. 6.2.3 Issuance of Stock. None of the Borrowers will issue, or grant any option or right to purchase, any of its capital stock, except as permitted under Sections 6.2.1 (Capital Merger, etc.), 6.2.4 (Purchase or Redemption of Stock, etc.) or Section 6.2.6 (Investments, Loans, etc.), and except that the foregoing shall not prohibit or require the Lender's consent for: (a) the issuance of stock under any Borrower's employee stock purchase plan as approved by such Borrower's board of directors; or (b) the issuance of stock options to employees, officers and directors of any Borrower as approved by such Borrower's board of directors. 6.2.4 Purchase or Redemption of Stock, Dividend Restrictions. None of the Borrowers will purchase, redeem or otherwise acquire any shares of its capital stock or warrants now or hereafter outstanding, declare or pay any dividends thereon (other than stock dividends), apply any of its property or assets to the purchase, redemption or other retirement of, set apart any sum for the payment of any dividends on, or for the purchase, redemption, or other retirement of, make any distribution by reduction of capital or otherwise in respect of, any shares of any class of capital stock of any Borrower, or any warrants, permit any Subsidiary to purchase or acquire any shares of any class of capital stock of, or warrants issued by, any Borrower, make any distribution to stockholders or set aside any funds for any such purpose, prepay, purchase or redeem any Indebtedness for Borrowed Money other than the Obligations, provided, however, if at the time there is no Default or Event of Default and, after giving effect to the proposed dividends, no Default or Event of Default will occur, (a) a Borrower may declare and deliver dividends and make distributions payable solely in common stock of such Borrower; (b) a Borrower may purchase or otherwise acquire shares of its capital stock by exchange for or out of the proceeds received from a substantially concurrent issue of new shares of its capital stock, and (c) a Borrower may declare and pay cash dividends; provided that no Borrower shall declare or pay any dividends permitted under this Section 6.2.4 until the Lender has received written notice from such Borrower at least ten (10) Business Days in advance of declaring or paying any such dividend and has also received such other information as the Lender may have requested in order to verify the amount of the proposed dividends and to determine that all of the conditions precedent to the making of the requested dividends have been satisfied. 65 6.2.5 Indebtedness. None of the Borrowers will create, incur, assume or suffer to exist any Indebtedness for Borrowed Money, except: (a) the Obligations; (b) current accounts payable arising in the ordinary course; (c) Indebtedness secured by Permitted Liens; (d) Subordinated Indebtedness; (e) Indebtedness of the Borrowers and their Subsidiaries existing on the date hereof and reflected on the financial statements furnished pursuant to Section 4.1.11 (Financial Condition); (f) the Debentures; (g) Indebtedness arising through any extension, renewal or refinancing of any other Indebtedness listed in subsections (a)-(e) above, provided that no collateral of a class other than that which currently secures such Indebtedness may be pledged to secure any such Indebtedness and further provided that the principal amount thereof does not exceed such Indebtedness being extended, renewed or refinanced; (h) Indebtedness of any Wholly Owned Subsidiary to another Wholly Owned Subsidiary or to a Borrower or Indebtedness of any Borrower to another Borrower; (i) Indebtedness of Astrotech arising under the Astrotech Loan; and (j) Other Indebtedness not otherwise permitted hereunder, not exceeding Five Hundred Thousand Dollars ($500,000) in the aggregate outstanding at any time, provided no Default or Event of Defaults exists at the time or as a result of the incurrence of such Indebtedness. 6.2.6 Investments, Loans and Other Transactions. Except as otherwise provided in this Agreement, none of the Borrowers will (a) make, assume, acquire or continue to hold any investment in any real property (unless used in connection with its business and treated as a Fixed or Capital Asset of any Borrower) or any Person, whether by stock purchase, capital contribution, acquisition of indebtedness of such Person or otherwise (including, without limitation, investments in any joint venture or partnership), (b) guaranty or otherwise become contingently liable for the Indebtedness or obligations of any Person, or (c) make any loans or advances, or otherwise extend credit to any Person, except for: 66 (i) any advance to an officer or employee of any Borrower or any Subsidiary for travel or other business expenses in the ordinary course of business, provided that the aggregate amount of all such advances by all of the Borrowers and their Subsidiaries (taken as a whole) outstanding at any time shall not exceed Ten Thousand Dollars ($10,000); (ii) the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (iii) any investment in Cash Equivalents, which are pledged to the Lender as collateral and security for the Obligations; (iv) trade credit extended to customers in the ordinary course of business; (v) advances (including sums outstanding as of the date hereof) in an amount not to exceed $325,000 to Space Media and advances (including sums outstanding as of the date hereof) in an amount not to exceed $10,000 to Space Station; (vi) investments, guaranties and contingent liabilities existing on the date of this Agreement and set forth in Schedule 6.2.6 hereof; (vii) as otherwise permitted in Section 6.2.5 (Indebtedness); and (viii) investments in membership interests in Space Station. 6.2.7 Stock of Subsidiaries. None of the Borrowers will sell or otherwise dispose of any shares of capital stock of any Subsidiary (except in connection with the merger or consolidation of a Wholly Owned Subsidiary into any of the Borrowers or another Wholly Owned Subsidiary of any of the Borrowers or with the dissolution of any Subsidiary) or permit any Subsidiary to issue any additional shares of its capital stock except pro rata to its stockholders. 6.2.8 Subordinated Indebtedness. None of the Borrowers will, or will permit any Subsidiary to make: (a) any payment of principal of, or interest on, any of the Subordinated Indebtedness, if a Default or an Event of Default then exists hereunder or would result from such payment; 67 (b) any payment of the principal or interest due on the Subordinated Indebtedness as a result of acceleration thereunder or a mandatory prepayment thereunder; (c) any amendment or modification of or supplement to the documents evidencing or securing the Subordinated Indebtedness, other than amendments or modifications that change terms which are not material; and (d) payment of principal or interest on the Subordinated Indebtedness other than when due (without giving effect to any acceleration of maturity or mandatory prepayment). 6.2.9 Liens. Each Borrower agrees that it (a) will not create, incur, assume or suffer to exist any Lien upon any of its properties or assets, including the Flight Assets (other than Liens on any real property owned by any Borrower), whether now owned or hereafter acquired, or permit any Subsidiary so to do, except for Liens securing the Obligations and Permitted Liens, (b) will not agree to, assume or suffer to exist any provision in any instrument or other document for confession of judgment, cognovit or other similar right or remedy (except as existing in any instrument or other document as of the Closing Date or if existing in such instrument or other documents in any extension, renewal or refinancing of such instrument or other documents as permitted under Section 6.2.5 (Indebtedness), (c) will not allow or suffer to exist any Permitted Liens to be superior to Liens securing the Obligations, (d) will not enter into any contracts for the consignment of goods, will not execute or suffer the filing of any financing statements or the posting of any signs giving notice of consignments, and will not, as a material part of its business, engage in the sale of goods belonging to others, and (e) will not allow or suffer to exist the failure of any Lien described in the Security Documents to attach to, and/or remain at all times perfected on, any of the property described in the Security Documents. 6.2.10 Transactions with Affiliates. None of the Borrowers or any of their Subsidiaries will enter into or participate in any transaction with any Affiliate or, with the officers, directors, employees and other representatives of any Borrower and/or any Subsidiary, except in the ordinary course of business, or as otherwise permitted in this Agreement. 6.2.11 Debenture. None of the Borrowers will, or will permit any Subsidiary to make: (a) any amendment or modification of or supplement to the Convertible Debt Loan Documents, other than amendments or modifications that change terms which are not material; and (b) payment of principal or interest on the Debenture other than when due (without giving effect to any acceleration of maturity or mandatory prepayment). 68 6.2.12 ERISA Compliance. None of the Borrowers or any Commonly Controlled Entity shall: (a) engage in or permit any "prohibited transaction" (as defined in ERISA); (b) cause any "accumulated funding deficiency" as defined in ERISA and/or the Internal Revenue Code; (c) terminate any pension plan in a manner which could result in the imposition of a lien on the property of any Borrower pursuant to ERISA; or (d) incur a complete or partial withdrawal with respect to any Multi-employer Plan. 6.2.13 Prohibition on Hazardous Materials. None of the Borrowers shall place, manufacture or store or permit to be placed, manufactured or stored any Hazardous Materials on any property owned, operated or controlled by any Borrower or for which any Borrower is responsible other than Hazardous Materials placed or stored on such property in accordance with applicable Laws in the ordinary course of a Borrower's business expressly described in this Agreement. 6.2.14 Method of Accounting; Fiscal Year. Each Borrower agrees that: (a) it shall not change the method of accounting employed in the preparation of any financial statements furnished to the Lender under the provisions of Section 6.1.1 (Financial Statements), unless required to conform to GAAP or on the advice of the Borrowers' accountants, and on the condition that the Borrowers' accountants shall furnish such information as the Lender may request to reconcile the changes with the Borrowers' prior financial statements (b) it will not change its fiscal year from a year ending on June 30/th/. 6.2.15 Compensation. None of the Borrowers or any Subsidiary will pay any bonuses, fees, compensation, commissions, salaries, drawing accounts, or other payments (cash and non-cash), whether direct or indirect, to any stockholders of any Borrower or any Subsidiary, or any Affiliate of any Borrower or any Subsidiary, other than (i) reasonable compensation for actual services rendered by stockholders in their capacity as officers or employees, (ii) dividends otherwise permitted under this Agreement, (iii) severance arrangements as provided for in employment contracts in existence as of the Closing Date or approved in the future by the Lender, (iv) in connection with any indemnifications provided for in any Borrower's charter documents, (v) any payments required by law or by court order in settlement of benefits disputes, or (vi) in any contract permitted under this Agreement. 6.2.16 Transfer of Collateral. None of the Borrowers nor any of their Subsidiaries will transfer, or permit the transfer, to another location of any of the Collateral or the books and records related to any of the Collateral, except in accordance with Section 6.1.19 (Maintenance of the Collateral). 69 6.2.17 Disposition of Collateral. None of the Borrowers will sell, discount, allow credits or allowances, transfer, assign, extend the time for payment on, convey, lease, assign, transfer or otherwise dispose of the Collateral, except, prior to an Event of Default, dispositions expressly permitted elsewhere in this Agreement, the sale of Inventory in the ordinary course of business, and the sale of unnecessary or obsolete Equipment, but only if the proceeds of the sale of such Equipment are (a) used to purchase similar Equipment to replace the unnecessary or obsolete Equipment or (b) immediately turned over to the Lender for application to the Obligations in accordance with the provisions of this Agreement. ARTICLE VII DEFAULT AND RIGHTS AND REMEDIES Section 7.1 Events of Default. The occurrence of any one or more of the following events shall constitute an "Event of Default" under the provisions of this Agreement: 7.1.1 Failure to Pay. The failure of the Borrowers to pay any of the Obligations as and when due and payable in accordance with the provisions of this Agreement, the Notes and/or any of the other Financing Documents and which failure remains uncured for two (2) Business Days. 7.1.2 Breach of Representations and Warranties. Any representation or warranty made in this Agreement or in any report, statement, schedule, certificate, opinion (including any opinion of counsel for the Borrowers), financial statement or other document furnished in connection with this Agreement, any of the other Financing Documents, or the Obligations, shall prove to have been false or misleading when made (or, if applicable, when reaffirmed) in any material respect. 7.1.3 Failure to Comply with Specific Covenants. The failure of the Borrowers to perform, observe or comply with any covenant, condition or agreement contained in Sections 6.1.1 (Financial Statements), 6.1.2 (Reports to SEC, etc.), 6.1.3 (Recordkeeping, etc.), 6.1.8 (Insurance), 6.1.9 (Taxes), 6.1.15 (Financial Covenants), 6.1.16 (Collection of Receivables) or in Section 6.2 (Negative Covenants). 7.1.4 Other Covenants The failure of the Borrowers to perform, observe or comply with any covenant, condition or agreement contained in this Agreement, other than those set forth in Sections 7.1.1 (Failure to Pay), 7.1.2 (Breach of Representations, etc.), or 7.1.3 (Failure to Comply with Specific Covenants) provided, that if such failure is capable of cure, then such failure shall constitute an Event of Default if such failure is not cured within ten (10) days after notice is given to the Company in accordance with Section 8.1 (Notices), provided however, that if the Borrowers have commenced and are at all times diligently seeking a cure of such Default, 70 but is unable to complete such cure within such ten (10) day period, the Borrower shall have an additional twenty (20) days to complete such cure, provided the Borrowers are at all times diligently seeking a cure. 7.1.5 Default Under Other Financing Documents or Obligations. A default shall occur under any of the Financing Documents other than this Agreement or under any other Obligations, and such default is not cured within any applicable grace period provided therein. 7.1.6 Receiver; Bankruptcy. Any Borrower or any Subsidiary shall (a) apply for or consent to the appointment of a receiver, trustee or liquidator of itself or any of its property, (b) admit in writing its inability to pay its debts as they mature, (c) make a general assignment for the benefit of creditors, (d) be adjudicated a bankrupt or insolvent, (e) file a voluntary petition in bankruptcy or a petition or an answer seeking or consenting to reorganization or an arrangement with creditors or to take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or an answer admitting the material allegations of a petition filed against it in any proceeding under any such law, or take corporate action for the purposes of effecting any of the foregoing, (f) by any act indicate its consent to, approval of or acquiescence in any such proceeding or the appointment of any receiver of or trustee for any of its property, or suffer any such receivership, trusteeship or proceeding to continue undischarged for a period of sixty (60) days, or (g) by any act indicate its consent to, approval of or acquiescence in any order, judgment or decree by any court of competent jurisdiction or any Governmental Authority enjoining or otherwise prohibiting the operation of a material portion of any Borrower's or any Subsidiary's business or the use or disposition of a material portion of any Borrower's or any Subsidiary's assets. 7.1.7 Involuntary Bankruptcy, etc. (a) An order for relief shall be entered in any involuntary case brought against any Borrower or any Subsidiary under the Bankruptcy Code, or (b) any such case shall be commenced against any Borrower or any Subsidiary and shall not be dismissed within sixty (60) days after the filing of the petition, or (c) an order, judgment or decree under any other Law is entered by any court of competent jurisdiction or by any other Governmental Authority on the application of a Governmental Authority or of a Person other than any Borrower or any Subsidiary (i) adjudicating any Borrower, or any Subsidiary bankrupt or insolvent, or (ii) appointing a receiver, trustee or liquidator of any Borrower or of any Subsidiary, or of a material portion of any Borrower's or any Subsidiary's assets, or (iii) enjoining, prohibiting or otherwise limiting the operation of a material portion of any Borrower's or any Subsidiary's business or the use or disposition of a material portion of any Borrower's or any Subsidiary's assets, and such order, judgment or decree continues unstayed and in effect for a period of thirty (30) days from the date entered. 7.1.8 Judgment. Unless adequately insured in the opinion of the Lender, the entry of a final judgment for the payment of money involving more than One Hundred Thousand ($100,000) 71 against any Borrower or any Subsidiary, and the failure by such Borrower or such Subsidiary to discharge the same, or cause it to be discharged, within thirty (30) days from the date of the order, decree or process under which or pursuant to which such judgment was entered, or to secure a stay of execution pending appeal of such judgment. 7.1.9 Execution; Attachment. Any execution or attachment shall be levied against the Collateral, or any part thereof, and such execution or attachment shall not be set aside, discharged or stayed within thirty (30) days after the same shall have been levied. 7.1.10 Default Under Other Borrowings. Default shall be made by any of the Borrowers with respect to any Indebtedness for Borrowed Money in connection with an Indebtedness in an amount in excess of Five Hundred Thousand Dollars ($500,000) (other than the Revolving Credit) if such Indebtedness for Borrowed Money is accelerated in consequence of such event of default or if demand for payment of such Indebtedness for Borrowed Money is made. 7.1.11 Challenge to Agreements. Any Borrower shall challenge the validity and binding effect of any provision of any of the Financing Documents or shall state its intention to make such a challenge of any of the Financing Documents or any of the Financing Documents shall for any reason (except to the extent permitted by its express terms) cease to be effective or to create a valid and perfected first priority Lien (except for Permitted Liens) on, or security interest in, any of the Collateral purported to be covered thereby. 7.1.12 Material Adverse Effect. The Lender, in its sole discretion, determines in good faith that an event has occurred or a condition has arisen that could result in a Material Adverse Effect and gives the Company notice to that effect 7.1.13 Liquidation, Termination, Dissolution, Change in Management, etc. Any Borrower shall liquidate, dissolve or terminate its existence or any change in the identity of the President, Chief Financial Officer or Chief Executive Officer of any Borrower or control of any Borrower without the prior written consent of the Lender. 7.1.14 Contract Default, Debarment or Suspension. Default shall be made under any Government Contract, or any Government Contract is terminated for default by any Governmental Authority for any reason whatsoever, or if the Borrower is debarred or suspended, whether temporarily or permanently, by any Governmental Authority, unless within fifteen (15) days of when any Borrower has knowledge or should have knowledge of such default, debarment, or suspension, the Lender agrees in writing to extend, waive or suspend the effects of this provision. 72 Section 7.2 Remedies. Upon the occurrence and during the continuance of any Event of Default, the Lender may, in the exercise of its sole and absolute discretion from time to time, at any time thereafter exercise any one or more of the following rights, powers or remedies. 7.2.1 Acceleration. The Lender may, after oral notice to the Company, declare any or all of the Obligations to be immediately due and payable, notwithstanding anything contained in this Agreement or in any of the other Financing Documents to the contrary, without presentment, demand, protest, notice of protest or of dishonor, or other notice of any kind, all of which the Borrowers hereby waive. 7.2.2 Further Advances. The Lender may from time to time without notice to the Borrowers suspend, terminate or limit any further advances, loans or other extensions of credit under the Revolving Credit Commitment, under this Agreement and/or under any of the other Financing Documents. Further, upon the occurrence of an Event of Default or Default specified in Section 7.1.6 (Receiver; Bankruptcy) or Section 7.1.7 (Involuntary Bankruptcy, etc.), the Revolving Credit Commitment and any agreement in any of the Financing Documents to provide additional credit and/or issue Letters of Credit shall immediately and automatically terminate and the unpaid principal amount of the Notes (with accrued interest thereon) and all other Obligations then outstanding, shall immediately become due and payable without further action of any kind and without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Borrowers. 7.2.3 Uniform Commercial Code. The Lender shall have all of the rights and remedies of a secured party under the applicable Uniform Commercial Code and other applicable Laws. Upon demand by the Lender, the Borrowers shall assemble the Collateral and make it available to the Lender, at a place designated by the Lender. The Lender or its agents may without notice from time to time enter upon any Borrower's premises to take possession of the Collateral, to remove it, to render it unusable, to process it or otherwise prepare it for sale, or to sell or otherwise dispose of it. Any written notice of the sale, disposition or other intended action by the Lender with respect to the Collateral which is sent by regular mail, postage prepaid, to the Borrowers at the address set forth in Section 8.1 (Notices), or such other address of the Borrowers which may from time to time be shown on the Lender's records, at least ten (10) days prior to such sale, disposition or other action, shall constitute commercially reasonable notice to the Borrowers. The Lender may alternatively or additionally give such notice in any other commercially reasonable manner. Nothing in this Agreement shall require the Lender to give any notice not required by applicable Laws. If any consent, approval, or authorization of any state, municipal or other Governmental Authority or of any other Person or of any Person having any interest therein, should be necessary to effectuate any sale or other disposition of the Collateral, the Borrowers 73 agree to execute all such applications and other instruments, and to take all other action, as may be required in connection with securing any such consent, approval or authorization. The Borrowers recognize that the Lender may be unable to effect a public sale of all or a part of the Collateral consisting of Investment Property by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and other applicable Federal and state Laws. The Lender may, therefore, in its discretion, take such steps as it may deem appropriate to comply with such Laws and may, for example, at any sale of the Collateral consisting of securities restrict the prospective bidders or purchasers as to their number, nature of business and investment intention, including, without limitation, a requirement that the Persons making such purchases represent and agree to the satisfaction of the Lender that they are purchasing such securities for their account, for investment, and not with a view to the distribution or resale of any thereof. The Borrowers covenant and agree to do or cause to be done promptly all such acts and things as the Lender may request from time to time and as may be necessary to offer and/or sell the securities or any part thereof in a manner which is valid and binding and in conformance with all applicable Laws. Upon any such sale or disposition, the Lender shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral consisting of securities so sold. 7.2.4 Specific Rights With Regard to Collateral. In addition to all other rights and remedies provided hereunder or as shall exist at law or in equity from time to time, the Lender may (but shall be under no obligation to), without notice to any of the Borrowers, and each Borrower hereby irrevocably appoints the Lender as its attorney-in-fact, with power of substitution, in the name of the Lender and/or in the name of any or all of the Borrowers or otherwise, for the use and benefit of the Lender, but at the cost and expense of the Borrowers and without notice to the Borrowers: (a) request any Account Debtor obligated on any of the Accounts to make payments thereon directly to the Lender, with the Lender taking control of the Proceeds thereof; (b) compromise, extend or renew any of the Collateral or deal with the same as it may deem advisable; (c) make exchanges, substitutions or surrenders of all or any part of the Collateral; (d) copy, transcribe, or remove from any place of business of any Borrower or any Subsidiary all books, records, ledger sheets, correspondence, invoices and documents, relating to or evidencing any of the Collateral or without cost or expense to the Lender, make such use of any Borrower's or any Subsidiary's place(s) of business as may be reasonably necessary to administer, control and collect the Collateral; (e) demand, collect, receipt for and give renewals, extensions, discharges and releases of any of the Collateral; 74 (f) institute and prosecute legal and equitable proceedings to enforce collection of, or realize upon, any of the Collateral; (g) settle, renew, extend, compromise, compound, exchange or adjust claims in respect of any of the Collateral or any legal proceedings brought in respect thereof; (h) endorse or sign the name of any Borrower upon any items of payment, certificates of title, instruments, securities, stock powers, documents, documents of title, financing statements, assignments, notices or other writing relating to or part of the Collateral and on any proof of claim in bankruptcy against an Account Debtor; (i) notify the Post Office authorities to change the address for the delivery of mail to the Borrowers to such address or Post Office Box as the Lender may designate and receive and open all mail addressed to any of the Borrowers; and (j) take any other action necessary or beneficial to realize upon or dispose of the Collateral or to carry out the terms of this Agreement. 7.2.5 Application of Proceeds. Any proceeds of sale or other disposition of the Collateral will be applied by the Lender to the payment of any and all Enforcement Costs, and any balance of such proceeds will be applied to the Obligations in such order and manner as the Lender may from time to time in its sole and absolute discretion determine. If the sale or other disposition of the Collateral fails to fully satisfy the Obligations, the Borrowers shall remain liable to the Lender for any deficiency. 7.2.6 Performance by Lender. If the Borrowers shall fail to pay the Obligations or otherwise fail to perform, observe or comply with any of the conditions, covenants, terms, stipulations or agreements contained in this Agreement or any of the other Financing Documents, the Lender without notice to or demand upon the Borrowers and without waiving or releasing any of the Obligations or any Default or Event of Default, may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of the Borrowers, and may enter upon the premises of the Borrowers for that purpose and take all such action thereon as the Lender may consider necessary or appropriate for such purpose and each of the Borrowers hereby irrevocably appoints the Lender as its attorney-in-fact to do so, with power of substitution, in the name of the Lender, in the name of any or all of the Borrowers or otherwise, for the use and benefit of the Lender, but at the cost and expense of the Borrowers and without notice to the Borrowers. All sums so paid or advanced by the Lender together with interest thereon from the date of payment, advance or incurring until paid in full at the Post-Default Rate and all costs and expenses, shall be deemed part of the Enforcement Costs, shall be 75 paid by the Borrowers to the Lender on demand, and shall constitute and become a part of the Obligations. 7.2.7 Other Remedies. The Lender may from time to time proceed to protect or enforce the rights of the Lender by an action or actions at law or in equity or by any other appropriate proceeding, whether for the specific performance of any of the covenants contained in this Agreement or in any of the other Financing Documents, or for an injunction against the violation of any of the terms of this Agreement or any of the other Financing Documents, or in aid of the exercise or execution of any right, remedy or power granted in this Agreement, the Financing Documents, and/or applicable Laws. The Lender is authorized to offset and apply to all or any part of the Obligations all moneys, credits and other property of any nature whatsoever of any or all of the Borrowers now or at any time hereafter in the possession of, in transit to or from, under the control or custody of, or on deposit with, the Lender or any Affiliate of the Lender. ARTICLE VIII MISCELLANEOUS Section 8.1 Notices. All notices, requests and demands to or upon the parties to this Agreement shall be in writing and shall be deemed to have been given or made when delivered by hand on a Business Day, or two (2) days after the date when deposited in the mail, postage prepaid by registered or certified mail, return receipt requested, or when sent by overnight courier, on the Business Day next following the day on which the notice is delivered to such overnight courier, addressed as follows: Borrowers: c/o Spacehab, Incorporated Spacehab, Inc. 300 D Street, SW, Suite 801 Washington, D. C. 20024 Attention: Julia Pulzone Lender: Riggs Bank N.A. 808 17/th/ Street, NW, 10/th/ Floor Washington, D.C. 20006 Attn: Douglas T. Brown By written notice, each party to this Agreement may change the address to which notice is given to that party, provided that such changed notice shall include a street address to which notices may be delivered by overnight courier in the ordinary course on any Business Day. Section 8.2 Amendments; Waivers. 8.2.1 In General. This Agreement and the other Financing Documents may not be amended, modified, or changed in any respect except by an agreement in writing signed by the Lender and the Borrowers. No waiver of any provision of this Agreement or of any of the other Financing 76 Documents, nor consent to any departure by the Borrowers therefrom, shall in any event be effective unless the same shall be in writing signed by the Lender. No course of dealing between the Borrowers and the Lender and no act or failure to act from time to time on the part of the Lender shall constitute a waiver, amendment or modification of any provision of this Agreement or any of the other Financing Documents or any right or remedy under this Agreement, under any of the other Financing Documents or under applicable Laws. Section 8.3 Cumulative Remedies. The rights, powers and remedies provided in this Agreement and in the other Financing Documents are cumulative, may be exercised concurrently or separately, may be exercised from time to time and in such order as the Lender shall determine, subject to the provisions of this Agreement, and are in addition to, and not exclusive of, rights, powers and remedies provided by existing or future applicable Laws. In order to entitle the Lender to exercise any remedy reserved to it in this Agreement, it shall not be necessary to give any notice, other than such notice as may be expressly required in this Agreement. Section 8.4 Severability. In case one or more provisions, or part thereof, contained in this Agreement or in the other Financing Documents shall be invalid, illegal or unenforceable in any respect under any Law, then without need for any further agreement, notice or action: (a) the validity, legality and enforceability of the remaining provisions shall remain effective and binding on the parties thereto and shall not be affected or impaired thereby; (b) the obligation to be fulfilled shall be reduced to the limit of such validity; (c) if such provision or part thereof pertains to repayment of the Obligations, then, at the sole and absolute discretion of the Lender, all of the Obligations of the Borrowers to the Lender shall become immediately due and payable; and (d) if the affected provision or part thereof does not pertain to repayment of the Obligations, but operates or would prospectively operate to invalidate this Agreement in whole or in part, then such provision or part thereof only shall be void, and the remainder of this Agreement shall remain operative and in full force and effect. Section 8.5 Assignments by Lender. The Lender may, without notice to or consent of the Borrowers, assign to any Person (an "Assignee") all of the Lender's Revolving Credit Commitment. The Lender and its Assignee shall notify the Borrowers in writing of the date on which the assignment is to be effective (the "Adjustment Date"). On or before the Adjustment Date, the assigning Lender, the Borrowers and the respective Assignee shall execute and deliver a written assignment agreement in a form acceptable to the Lender, which shall constitute an amendment to this Agreement to the extent 77 necessary to reflect such assignment. Upon the request of any assigning Lender following an assignment made in accordance with this Section 8.5, the Borrowers shall issue new Notes to the assigning Lender and its Assignee reflecting such assignment, in exchange for the existing Notes held by the assigning Lender. In addition, the Lender may at any time pledge all or any portion of the Lender's rights under this Agreement, the Revolving Credit Commitment or any of the Obligations to a Federal Reserve Bank. Section 8.6 Participations by Lender. The Lender may at any time sell to one or more financial institutions participating interests in any of the Lender's Obligations or Revolving Credit Commitment; provided, however, that (a) no such participation shall relieve the Lender from its obligations under this Agreement or under any of the other Financing Documents to which it is a party, (b) the Lender shall remain solely responsible for the performance of its obligations under this Agreement and under all of the other Financing Documents to which it is a party, and (c) the Borrowers shall continue to deal solely and directly with the Lender in connection with the Lender's rights and obligations under this Agreement and the other Financing Documents. Section 8.7 Disclosure of Information by Lender. In connection with any sale, transfer, assignment or participation by the Lender in accordance with Section 8.5 (Assignments by Lender) or Section 8.6 (Participations by Lender), the Lender shall have the right to disclose to any actual or potential purchaser, assignee, transferee or participant, provided the foregoing agree to maintain the confidentiality of such material, all financial records, information, reports, financial statements and documents obtained in connection with this Agreement and/or any of the other Financing Documents or otherwise. Section 8.8 Successors and Assigns. This Agreement and all other Financing Documents shall be binding upon and inure to the benefit of the Borrowers and the Lender and their respective successors and assigns, except that the Borrowers shall not have the right to assign their rights hereunder or any interest herein without the prior written consent of the Lender. Section 8.9 Continuing Agreements. All covenants, agreements, representations and warranties made by the Borrowers in this Agreement, in any of the other Financing Documents, and in any certificate delivered pursuant hereto or thereto shall survive the making by the Lender of the Revolving Credit and the execution and delivery of the Notes, shall be binding upon the Borrowers regardless of how long before or after the date hereof any of the Obligations were or are incurred, and shall continue in full force and effect so long as any of the Obligations are outstanding and unpaid. From time to time upon the Lender's request, and also as a condition of the release of any one or more of the Security Documents, the Borrowers and other Persons obligated with respect to the Obligations shall provide the Lender with such acknowledgments and agreements as the Lender may require, to the effect that there exists no defenses, rights of setoff or recoupment, claims, counterclaims, actions or causes of action of any kind or nature whatsoever against the Lender and/or any of its 78 agents and others, or to the extent there are, the same are waived and released, including, without limitation, acknowledgements as to all of the matters set forth in Section 2.3.12 of this Agreement,. Section 8.10 Enforcement Costs. The Borrowers agree to pay to the Lender on demand all Enforcement Costs, together with interest thereon from the date incurred or advanced until paid in full at a per annum rate of interest equal at all times to the Post-Default Rate. Enforcement Costs shall be due and payable on demand. The provisions of this Section shall survive the execution and delivery of this Agreement, the repayment of the other Obligations and shall survive the termination of this Agreement. Section 8.11 Applicable Law; Jurisdiction. 8.11.1 Applicable Law. Borrowers acknowledge and agree that the Financing Documents, including, this Agreement, shall be governed by the Laws of the State, as if each of the Financing Documents and this Agreement had each been executed, delivered, administered and performed solely within the State even though for the convenience and at the request of the Borrowers, one or more of the Financing Documents may be executed elsewhere. The Lender acknowledges, however, that remedies under certain of the Financing Documents that relate to property outside the State may be subject to the laws of the state in which the property is located. 8.11.2 Submission to Jurisdiction. The Borrowers irrevocably submit to the jurisdiction of any state or federal court sitting in the State over any suit, action or proceeding arising out of or relating to this Agreement or any of the other Financing Documents. Each of the Borrowers irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment in any such suit, action or proceeding brought in any such court shall be conclusive and binding upon the Borrowers and may be enforced in any court in which the Borrowers are subject to jurisdiction, by a suit upon such judgment, provided that service of process is effected upon the Borrowers in one of the manners specified in this Section or as otherwise permitted by applicable Laws. 8.11.3 Appointment of Agent for Service of Process. The Borrowers hereby irrevocably designate and appoint Julia Pulzone, c/o Spacehab, Incorporated, 300 D Street, SW, Suite 801, Washington, DC 20024, as the Borrowers' authorized agent to receive on the Borrowers' behalf service of any and all process that may be served in any suit, action or proceeding of the nature referred to in this Section in any state or federal court sitting in the State. If such agent shall cease so to act, the Borrowers shall irrevocably designate and appoint without delay another such agent in the State satisfactory to the Lender and shall promptly deliver to the Lender evidence in writing of such other agent's acceptance of such appointment and its agreement that such appointment shall be irrevocable. 79 8.11.4 Service of Process. Each of the Borrowers hereby consents to process being served in any suit, action or proceeding of the nature referred to in this Section by (a) the mailing of a copy thereof by registered or certified mail, postage prepaid, return receipt requested, to the Borrower at the Borrower's address designated in or pursuant to Section 8.1 (Notices), and (b) serving a copy thereof upon the agent, if any, designated and appointed by the Borrower as the Borrower's agent for service of process by or pursuant to this Section. The Borrowers irrevocably agree that such service (y) shall be deemed in every respect effective service of process upon the Borrowers in any such suit, action or proceeding, and (z) shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon the Borrowers. Nothing in this Section shall affect the right of the Lender to serve process in any manner otherwise permitted by law or limit the right of the Lender otherwise to bring proceedings against the Borrowers in the courts of any jurisdiction or jurisdictions. Section 8.12 Duplicate Originals and Counterparts. This Agreement may be executed in any number of duplicate originals or counterparts, each of such duplicate originals or counterparts shall be deemed to be an original and all taken together shall constitute but one and the same instrument. Section 8.13 Headings. The headings in this Agreement are included herein for convenience only, shall not constitute a part of this Agreement for any other purpose, and shall not be deemed to affect the meaning or construction of any of the provisions hereof. Section 8.14 No Agency. Nothing herein contained shall be construed to constitute the Borrowers as the agent of the Lender for any purpose whatsoever or to permit the Borrowers to pledge any of the credit of the Lender. The Lender shall not be responsible or liable for any shortage, discrepancy, damage, loss or destruction of any part of the Collateral wherever the same may be located and regardless of the cause thereof other than Collateral in its possession. The Lender shall not, by anything herein or in any of the Financing Documents or otherwise, assume any of the Borrowers' obligations under any contract or agreement assigned to the Lender, and the Lender shall not be responsible in any way for the performance by the Borrowers of any of the terms and conditions thereof. Section 8.15 Date of Payment. Should the principal of or interest on the Notes become due and payable on other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and in the case of principal, interest shall be payable thereon at the rate per annum specified in the Notes during such extension. Section 8.16 Entire Agreement. This Agreement is intended by the Lender and the Borrowers to be a complete, exclusive and final expression of the agreements contained herein. Neither the Lender nor the Borrowers shall hereafter have any rights under any prior agreements pertaining to the matters addressed by 80 this Agreement but shall look solely to this Agreement for definition and determination of all of their respective rights, liabilities and responsibilities under this Agreement. Section 8.17 Waiver of Trial by Jury. EACH OF THE BORROWERS AND THE LENDER HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH THE BORROWER AND THE LENDER MAY BE PARTIES, ARISING OUT OF OR IN ANY WAY PERTAINING TO (A) THIS AGREEMENT, (B) ANY OF THE FINANCING DOCUMENTS, OR (C) THE COLLATERAL. THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS AGREEMENT. This waiver is knowingly, willingly and voluntarily made by the Borrowers and the Lender, and the Borrowers and the Lender hereby represent that no representations of fact or opinion have been made by any individual to induce this waiver of trial by jury or to in any way modify or nullify its effect. The Borrowers and the Lender further represent that they have been represented in the signing of this Agreement and in the making of this waiver by independent legal counsel, selected of their own free will, and that they have had the opportunity to discuss this waiver with counsel. Section 8.18 Liability of the Lender. The Borrowers hereby agree that the Lender shall not be chargeable for any negligence, mistake, act or omission of any accountant, examiner, agency or attorney employed by the Lender in making examinations, investigations or collections, or otherwise in perfecting, maintaining, protecting or realizing upon any lien or security interest or any other interest in the Collateral or other security for the Obligations. By inspecting the Collateral or any other properties of the Borrowers or by accepting or approving anything required to be observed, performed or fulfilled by the Borrowers or to be given to the Lender pursuant to this Agreement or any of the other Financing Documents, the Lender shall not be deemed to have warranted or represented the condition, sufficiency, legality, effectiveness or legal effect of the same, and such acceptance or approval shall not constitute any warranty or representation with respect thereto by the Lender. Section 8.19 Indemnification. The Borrowers agree to indemnify and hold harmless, Lender, the respective parent and Affiliates of the Lender and the respective parent's and Affiliates' officers, directors, shareholders, employees and agents (each an "Indemnified Party," and collectively, the "Indemnified Parties"), from and against any and all claims, liabilities, losses, damages, costs and expenses (whether or not such Indemnified Party is a party to any litigation), including without limitation, reasonable attorney's fees and costs and costs of investigation, document production, attendance at depositions or other discovery, incurred by any Indemnified Party with respect to, arising out of or as a consequence of (a) this Agreement or any of the other Financing Documents, including without limitation, any failure of the Borrowers to pay when due (at maturity, by acceleration or otherwise) any principal, interest, fee or any other amount due under 81 this Agreement or the other Financing Documents, or any other Event of Default; (b) the use by the Borrowers of any proceeds advanced hereunder; (c) the transactions contemplated hereunder; or (d) any claim, demand, action or cause of action being asserted against (i) the Borrowers or any of their Affiliates by any other Person, or (ii) any Indemnified Party by the Borrowers in connection with the transactions contemplated hereunder. Notwithstanding anything herein or elsewhere to the contrary, the Borrowers shall not be obligated to indemnify or hold harmless any Indemnified Party from any liability, loss or damage resulting from the gross negligence, willful misconduct or unlawful actions of such Indemnified Party. Any amount payable to the Lender under this Section will bear interest at the Post- Default Rate from the due date until paid. Section 8.20 Joinder of Additional Borrowers. Any Additional Borrower which is required to join this Agreement as an Additional Borrower pursuant to Section 6.2.2 (Subsidiaries) shall execute and deliver to the Lender (a) an Additional Borrower Joinder Supplement in substantially the form attached hereto as EXHIBIT A pursuant to which it shall join as a Borrower each of the documents to which the Borrowers are parties and (b) all documents necessary to grant and perfect a first lien security interest to the Lender in all Collateral held by such Additional Borrower, subject only to Permitted Liens. The Company shall at its expense deliver such Additional Borrower Joinder Supplement, and related documents, including, without limitation, Uniform Commercial Code financing statements, lien searches, and resolutions, to the Lender within fifteen (15) days after the date of the filing of such Additional Borrower's articles of incorporation if the Additional Borrower is a corporation, the date of the filing of its certificate of limited partnership if it is a limited partnership or the date of its organization if it is an entity other than a limited partnership or corporation. IN WITNESS WHEREOF, each of the parties hereto have executed and delivered this Agreement under their respective seals as of the day and year first written above. WITNESS OR ATTEST: SPACEHAB, INCORPORATED _________________________ By: /s/ Julia A. Pulzone (Seal) -------------------- Name: Julia A. Pulzone Title: Chief Financial Officer WITNESS OR ATTEST JOHNSON ENGINEERING CORPORATION _________________________ By: /s/ Julia A. Pulzone (Seal) -------------------- Name: Julia A. Pulzone Title: Chief Financial Officer 82 WITNESS OR ATTEST: ASTROTECH SPACE OPERATIONS, INC. _________________________ By: /s/ Julia A. Pulzone (Seal) -------------------- Name: Julia A. Pulzone Title: Chief Financial Officer WITNESS: RIGGS BANK N. A. _________________________ By: /s/ Douglas T. Brown (Seal) -------------------- Douglas T. Brown Group Vice President 83 EX-21 4 dex21.txt EXHIBIT 21 EXHIBIT 21 SPACEHAB, INCORPORATED AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF NAME OF SUBSIDIARY INCORPORATION BUSINESS NAME - ------------------ ------------- ------------- Astrotech Space Operations, Inc. Delaware Astrotech Johnson Engineering Corporation Colorado Johnson Engineering Space Media, Inc. Delaware Space Media Space Store, LLC Delaware Space Store Astrotech Florida Holdings, Inc. Florida Astrotech Florida Holdings
EX-23.1 5 dex231.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Nos. 333-3634, 333-3636, 333-3638, 333-36779, 333-43159, and 333-43181) on Form S-8 and the Registration Statement (No. 333-43221) on Form S-3 of SPACEHAB, Incorporated and subsidiaries of our report dated August 23, 2002, with respect to the consolidated financial statements of SPACEHAB, Incorporated and subsidiaries included in this Annual Report (Form 10-K) for the year ended June 30, 2002. /s/ Ernst & Young LLP McLean, Virginia September 10, 2002 EX-23.2 6 dex232.txt EXHIBIT 23.2 Exhibit 23.2 Accountants' Consent The Board of Directors SPACEHAB, Incorporated and Subsidiaries: We consent to the incorporation by reference in the registration statement (No. 333-43221) on Form S-3 and the registration statements (Nos. 333-3634, 333-3636, 333-3638, 333-36779, 333-43159, and 333-43181) on S-8 of Spacehab, Incorporated of our report dated August 31, 2000, relating to the consolidated statements of operations, stockholders' equity, and cash flows of SPACEHAB, Incorporated and subsidiaries for the year ended June 30, 2000, which report appears in the June 30, 2002, annual report on Form 10-K of Spacehab, Incorporated. /s/ KPMG LLP McLean, Virginia September 13, 2002 EX-99.1 7 dex991.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the Annual Report of SPACEHAB, Incorporated, a Washington corporation (the "Company"), on Form 10K for the year ending June 30, 2002 as filed with the Securities and Exchange Commission (the "Report"), I, Dr. Shelley A. Harrison, Chief Executive Officer of the Company, certify, pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. (S) 1350), that to my knowledge: (1) The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Dr. Shelley A. Harrison - --------------------------- Dr. Shelley A. Harrison Chief Executive Officer September 16, 2002 EX-99.2 8 dex992.txt EXHIBIT 99.2 EXHIBIT 99.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the Annual Report of SPACEHAB, Incorporated, a Washington corporation (the "Company"), on Form 10K for the year ending June 30, 2002 as filed with the Securities and Exchange Commission (the "Report"), I, Julia A. Pulzone, Chief Financial Officer of the Company, certify, pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. (S) 1350), that to my knowledge: (1) The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Julia A. Pulzone - --------------------------- Julia A. Pulzone Chief Financial Officer September 16, 2002 -----END PRIVACY-ENHANCED MESSAGE-----