UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
Commission file number 000-22085
ORION NETWORK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
Delaware 52-2008654
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization No. ) Identification)
2440 Research Boulevard, Suite 400, Rockville, Maryland 20850
- ------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(301) 258-8101
- --------------------------------------------------------------------------------
(Registrant's telephone number including area code)
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 the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at September 30, 1997
----- ---------------------------------
Common Stock, $.01 par value 11,406,162 shares
<PAGE>
INDEX
ORION NETWORK SYSTEMS, INC.
<TABLE>
<S> <C>
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets---September 30, 1997 and December 31, 1996............. 3
Condensed Consolidated Statements of Operations --- three and nine months ended
September 30, 1997 and 1996................................................................... 5
Condensed Consolidated Statements of Changes in Stockholders' Deficit --- Year ended
December 31, 1996 and nine months ended September 30, 1997.................................... 6
Condensed Consolidated Statements of Cash Flows --- nine months ended
September 30, 1997 and 1996................................................................... 7
Notes to Condensed Consolidated Financial Statements.......................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................................. 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 22
Item 2. Changes in Securities......................................................................... 22
Item 3. Defaults upon Senior Securities............................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 22
Item 5. Other Information............................................................................. 22
Item 6. Exhibits and Reports on Form 8-K.............................................................. 23
Signatures.............................................................................................. 24
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ORION NETWORK SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 82,811,224 $ 42,187,807
Restricted assets 50,064,014 --
Accounts receivable 10,616,434 6,473,316
Prepaid expenses and other current assets 8,075,496 3,583,403
--------- ---------
Total current assets 151,567,168 52,244,526
Restricted and segregated assets, including accrued interest
of approximately $2.6 million 309,733,601 --
Property and equipment at cost:
Land 73,911 73,911
Telecommunications equipment 39,640,596 25,342,528
Furniture and computer equipment 7,662,047 4,849,711
Satellite and related equipment 322,316,778 321,247,346
----------- -----------
369,693,332 351,513,496
Less: accumulated depreciation (66,041,278) (68,224,957)
Satellite construction in progress, including capitalized
interest of $4.5 million 85,161,019 4,560,844
---------- ---------
Net property and equipment 388,813,073 287,849,383
Deferred financing costs, net 22,958,747 12,918,233
Goodwill and other assets, net 28,370,849 5,252,302
---------- ---------
TOTAL ASSETS $901,443,438 $358,264,444
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,014,835 $ 6,411,028
Accrued liabilities 11,029,550 7,653,208
Other current liabilities 7,889,160 5,406,072
Interest payable 11,314,851 8,583,882
Current portion of long-term debt 9,161,559 34,975,060
--------- ----------
Total current liabilities 42,409,955 63,029,250
Long-term debt 790,561,141 218,236,839
Other liabilities 21,849,605 46,402,299
Limited Partners' interest in Orion Atlantic -- 10,130,058
Redeemable preferred stock:
Series A 8% Cumulative Redeemable Convertible Preferred
Stock, $.01 par value, 15,000 shares authorized; 13,845 and
13,871 shares issued and outstanding, plus accrued dividends 16,897,297 16,097,880
Series B 8% Cumulative Redeemable Convertible Preferred Stock, $.01 par
value, 5,000 shares authorized; 4,295 and 4,298
shares issued and outstanding, plus accrued dividends 5,058,832 4,804,486
Series C 6% Cumulative Redeemable Convertible Preferred Stock, $.01 par
value, 150,000 shares authorized; 123,172 and 0
shares issued and outstanding, plus accrued dividends and accretion 95,911,432 --
Stockholders' deficit:
Common stock, $.01 par value, 40,000,000 shares authorized;
11,406,162 and 10,985,150 shares outstanding 116,755 112,447
Capital in excess of par value 101,473,379 86,932,391
Treasury stock, 269,274 and 259,515 shares (91,490) --
Foreign currency translation (742,614) --
Accumulated deficit (172,000,854) (87,481,206)
------------ -----------
Total stockholders' deficit (71,244,824) (436,368)
----------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 901,443,438 $ 358,264,444
================= =================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE $ 17,618,704 $ 12,246,599 $ 54,538,878 $ 30,015,517
OPERATING EXPENSES:
Direct 4,259,824 1,800,065 12,991,843 4,285,834
Sales and marketing 4,819,732 2,753,409 13,381,240 7,792,666
Engineering and technical services 2,691,888 2,143,303 8,094,979 6,333,525
General and administrative 4,990,995 3,871,365 14,750,878 11,469,235
Depreciation and amortization 12,126,705 8,829,170 35,823,029 26,402,947
---------- --------- ---------- ----------
Total operating expenses 28,889,144 19,397,312 85,041,969 56,284,207
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (11,270,440) (7,150,713) (30,503,091) (26,268,690)
OTHER EXPENSE (INCOME):
Interest income (6,123,441) (530,651) (18,253,925) (1,841,868)
Interest expense 22,330,637 6,398,747 62,290,316 20,228,519
Other 32,064 (33,868) 605,295 (48,356)
---------- ---------- ---------- ----------
Total other expense (income) 16,239,260 5,834,228 44,641,686 18,338,295
---------- ---------- ---------- ----------
Loss before extraordinary loss on extinguishment of debt,
minority interest and preacquisition loss of acquired
subsidiary (27,509,700) (12,984,941) (75,144,777) (44,606,985)
Extraordinary loss on extinguishment of debt -- -- (15,763,220) --
Limited Partners' and minority interest in the net loss of
Orion Atlantic and other consolidated entities -- 7,188,636 12,042,978 24,799,698
Preacquisition loss of acquired subsidiary -- -- 626,246 --
---------- ---------- ---------- ----------
NET LOSS (27,509,700) (5,796,305) (78,238,773) (19,807,287)
Preferred stock dividend and accretion, net of forfeitures 2,308,501 265,873 6,280,875 1,006,285
---------- ---------- ---------- ----------
Net loss attributable to common stockholders $ (29,818,201) $ (6,062,178) $ (84,519,648) $ (20,813,572)
============= ============= ============= =============
Net loss per common share $ (2.63) $ (0.55) $ (7.53) $ (1.90)
============= ============= ============= =============
Weighted average common shares outstanding 11,335,347 10,964,945 11,221,618 10,943,287
============= ============= ============= =============
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
5
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- CAPITAL IN
NUMBER EXCESS OF PAR
OF SHARES AMOUNT VALUE
--------- ------ ---------------
<S> <C> <C> <C>
Balance at December 31, 1995 11,115,965 $ 111,160 $ 85,485,613
Conversion of preferred stock
to common stock 91,071 911 804,034
Issuance of stock warrants -- -- 300,000
Exercise of stock options and
warrants 37,629 376 342,744
Preferred stock dividend, net of
forfeitures -- -- --
Net loss for 1996 -- -- --
---------- ------- ----------
Balance at December 31, 1996 11,244,665 112,447 86,932,391
Issuance of common stock 11,286 113 142,317
Conversion of preferred stock
to common stock 3,350 34 28,966
Issuance of common stock for
the purchase of APSC 85,715 857 1,199,143
Issuance of common stock for
interest payments 205,229 2,052 2,622,947
Issuance of warrants relating to
Senior Notes and Senior
Discount Notes, net -- -- 9,223,674
Exercise of stock options and
warrants 105,746 1,057 1,167,117
Employee Stock Purchase Plan 19,445 195 156,824
Preferred stock dividend and -- --
accretion, net of forfeitures --
Foreign currency translation -- -- --
Purchase of treasury stock -- -- --
Net loss for the nine months
ended September 30, 1997 -- -- --
---------- ------- ----------
Balance at September 30, 1997
(unaudited) 11,675,436 (1) $ 116,755 $ 101,473,379
============= ========= =============
</TABLE>
<TABLE>
<CAPTION>
FOREIGN TOTAL
ACCUMULATED TREASURY CURRENCY STOCKHOLDERS'
DEFICIT STOCK TRANSLATION EQUITY(DEFICIT)
----------- --------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ (58,916,131) $0 $ 0 $ 26,680,642
Conversion of preferred stock
to common stock -- -- -- 804,945
Issuance of stock warrants -- -- -- 300,000
Exercise of stock options and
warrants -- -- -- 343,120
Preferred stock dividend, net of
forfeitures (1,369,665) -- -- (1,369,665)
Net loss for 1996 (27,195,410) -- -- (27,195,410)
----------- --------- -------- -----------
Balance at December 31, 1996 (87,481,206) 0 0 (436,368)
Issuance of common stock -- -- -- 142,430
Conversion of preferred stock
to common stock -- -- -- 29,000
Issuance of common stock for
the purchase of APSC -- -- -- 1,200,000
Issuance of common stock for
interest payments -- -- -- 2,624,999
Issuance of warrants relating to
Senior Notes and Senior
Discount Notes, net -- -- -- 9,223,674
Exercise of stock options and
warrants -- -- -- 1,168,174
Employee Stock Purchase Plan -- -- -- 157,019
Preferred stock dividend and
accretion, net of forfeitures (6,280,875) -- -- (6,280,875)
Foreign currency translation -- -- (742,614) (742,614)
Purchase of treasury stock -- (91,490) -- (91,490)
Net loss for the nine months
ended September 30, 1997 (78,238,773) -- -- (78,238,773)
----------- --------- --------- -----------
Balance at September 30, 1997
(unaudited) $(172,000,854) $(91,490) $ (742,614) $ (71,244,824)
============= ======== ========== ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- ----------------
(1) Includes 269,274 treasury shares of which 259,515 are carried at no cost.
6
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------------------
1997 1996
---- ----
OPERATING ACTIVITIES (Unaudited) (Unaudited)
<S> <C> <C>
Net loss $ (78,238,773) $ (19,807,287)
Adjustments to reconcile net loss to net cash used in operating activities:
Extraordinary loss on extinguishment of debt 15,763,220 --
Amortization and depreciation 35,823,029 26,402,947
Amortization of deferred financing costs 2,381,556 1,597,941
Provision for bad debts 796,618 524,999
Satellite incentives and accrued interest 2,008,286 1,747,334
Accretion of interest on Senior Discount Notes 22,116,416 --
Accrued interest on restricted funds (2,615,846) --
Accrued interest on Debentures 3,500,000 --
Limited Partners' and minority interest in Orion Atlantic and other
consolidated entities (12,042,978) (24,799,698)
Gain on sale of assets -- (41,054)
Changes in operating assets and liabilities:
Accounts receivable (1,532,969) (1,143,969)
Prepaid expenses and other current assets (3,506,075) (2,443,453)
Other assets (2,742,643) 427,741
Accounts payable and accrued liabilities (3,224,095) (5,818,070)
Other current liabilities 1,888,731 3,279,274
Interest payable 1,848,615 (4,876,714)
--------- ----------
Net cash used in operating activities (17,776,908) (24,950,009)
INVESTING ACTIVITIES
Capital expenditures (11,924,223) (10,266,012)
Restricted assets (357,181,769) --
Satellite construction costs, including capitalized interest (80,600,175) --
Purchase of Teleport Europe, net of cash acquired (8,374,845) --
Deferred revenue 12,250,000 --
FCC license costs (182,708) (117,600)
-------- --------
Net cash used in investing activities (446,013,720) (10,383,612)
FINANCING ACTIVITIES
Limited Partners' capital contributions -- 30,135,000
Debt and equity financing costs (25,959,140) --
Proceeds from issuance of common stock and subscriptions,
net of issuance costs 1,325,160 219,380
Treasury stock purchase (91,490) --
Proceeds from issuance of debt 770,397,000 --
Repayment of senior note payable to banks and notes payable (215,580,900) (25,096,436)
Termination of interest cap agreements (5,287,827) --
Payment of satellite incentive obligations (16,866,717) --
Other (3,522,041) 11,620,711
---------- ----------
Net cash provided by financing activities 504,414,045 16,878,655
Net increase (decrease) in cash and cash equivalents 40,623,417 (18,454,966)
Cash and cash equivalents at beginning of period 42,187,807 55,111,585
---------- ----------
Cash and cash equivalents at end of period $ 82,811,224 $ 36,656,619
============== ===============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------------------
SEPTEMBER 30,
1997 1996
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Transactions not providing or requiring cash:
Property and equipment financed by capital leases $ 18,600 $ --
============= =============
Accrued preferred stock dividend and accretion, net of forfeitures $ 6,280,875 $ 1,108,232
============= =============
Conversion of preferred stock to common stock $ 29,000 $ 804,945
============= =============
Issuance of common stock for employees retirement (401-K) $ 142,430 $ --
============= =============
Issuance of common stock and warrants $ 13,048,673 $ --
============= =============
Issuance of preferred stock $ 94,000,000 $ --
============= =============
Acquisition of Teleport Europe, net of cash acquired:
Working capital deficit, net of cash acquired $ 683,567 $ --
Property and equipment (9,346,584) --
Other, net 288,172 --
Net cash used to acquire Teleport Europe $ (8,374,845) $ --
============= =============
Interest paid during the period, net of amounts capitalized $ 33,709,344 $ 11,436,501
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
8
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BASIS OF PRESENTATION
GENERAL
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included. Operating results for the three and nine months ended September
30, 1997 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997. The balance sheet at December 31, 1996 has
been derived from the audited financial statements that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the 1996 Orion Network Systems, Inc. Annual Report on Form
10-K (and amendment thereto on Form 10-K/A).
BUSINESS AND OWNERSHIP
Orion Network Systems, Inc. is a holding company with no assets or operations
other than its investments in its subsidiaries. Through the operations of the
following subsidiaries ("Subsidiary Guarantors"), the Company's principal
business is the provision of satellite-based communications services:
<TABLE>
<CAPTION>
Jurisdiction of organization or
Name Incorporation
---- -------------
<S> <C>
Asia Pacific Space and Communications, Ltd. Delaware
International Private Satellite Partners, L.P. Delaware
Orion Network Systems-Asia Pacific, Inc.
(formerly known as Orion Asia Pacific Corporation) Delaware
Orion Network Systems-Europe, Inc.
(formerly known as Orion Atlantic Delaware
Europe, Inc.)
OrionNet Finance Corporation Delaware
OrionNet, Inc. Delaware
Orion Network Services, Inc.
(formerly known as Orion Satellite Corporation) Delaware
Orion Network Systems-Europe GmbH
(formerly known as Teleport Europe GmbH) Federal Republic of Germany
</TABLE>
Each of the Subsidiary Guarantors is a wholly-owned (100%) subsidiary of the
Company. The Subsidiary Guarantors comprise all of the direct and indirect
subsidiaries of the Company (other than inconsequential subsidiaries).
9
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BASIS OF PRESENTATION (CONTINUED)
Separate financial statements of the Subsidiary Guarantors are not presented
because (a) such Subsidiary Guarantors have jointly and severally guaranteed the
Notes on a full and unconditional basis, (b) the aggregate assets, liabilities,
earnings and equity of the Subsidiary Guarantors are substantially equivalent to
the assets, liabilities, earnings and equity of the Company on a consolidated
basis, and (c) management has determined that such information is not material
to investors.
RECENT DEVELOPMENTS
PENDING ACQUISITION OF THE COMPANY BY LORAL
On October 7, 1997, Orion, Loral Space & Communications Ltd. ("Loral") and Loral
Satellite Corporation, a wholly-owned subsidiary of Loral ("Merger Sub"),
entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant
to which Merger Sub will merge with and into the Company, with the Company being
the surviving corporation and thereby becoming a wholly-owned subsidiary of
Loral (the "Loral Merger").
The Merger Agreement provides that (i) each share of Common Stock, excluding
treasury shares and shares owned by Loral or its subsidiaries, will be converted
into and exchanged for the right to receive the number of fully paid and
nonassessable shares of common stock, par value $.01 per share, of Loral ("Loral
Common Stock") equal to the Exchange Ratio (as described below), (ii) each share
of the Company's Series A 8% Cumulative Redeemable Convertible Preferred Stock
(the "Series A Preferred Stock"), Series B 8% Cumulative Redeemable Convertible
Preferred Stock (the "Series B Preferred Stock" and together with the Series A
Preferred Stock, the "Senior Preferred Stock") and Series C Preferred Stock (the
Series C Preferred Stock and Senior Preferred Stock are hereinafter referred to
as the "Senior Preferred Stock") will be converted into and exchanged for the
right to receive the number of fully paid and nonassessable shares of Loral
Common Stock equal to the Exchange Ratio multiplied by the number of shares of
Common Stock into which such share of Preferred Stock was convertible
immediately prior to the Effective Time of the Loral Merger, (iii) each
outstanding stock option to purchase shares of Orion Common Stock will be
converted into an option to acquire the number of shares of Loral Common Stock
equal to the Exchange Ratio multiplied by the number of shares of Common Stock
for which such option was exercisable, and (iv) each outstanding warrant to
purchase shares of Orion Common Stock will be converted into a warrant to
acquire the number of shares of Common Stock equal to the Exchange Ratio
multiplied by the number of shares of Company Common Stock for which such
warrant was exercisable.
Pursuant to the terms of the Merger Agreement, the Exchange Ratio is determined
as follows:
(i) if the average of the volume-weighted average trading prices of Loral
Common Stock for the twenty consecutive trading days on which trading of
Loral Common Stock occurs ending the tenth trading day immediately prior
to the closing date for the Loral Merger (the "Determination Price") is
less than $24.458 but greater than $16.305, the Exchange Ratio is the
quotient obtained by dividing $17.50 by the Determination Price,
(ii) if the Determination Price is equal to or greater than $24.458, the
Exchange Ratio is 0.71553 and
(iii) if the Determination Price is equal to or less than $16.305, the
Exchange Ratio is 1.07329.
10
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BASIS OF PRESENTATION (CONTINUED)
The Loral Merger is subject to a number of conditions, including approval by
Orion's stockholders, approval by the Federal Communications Commission and
other regulatory approvals. Although not a condition of the Loral Merger, Orion
intends to seek an Internal Revenue Service ruling as to eligibility for a
tax-free exchange.
In connection with the Merger Agreement, certain principal stockholders of Orion
and members of Orion's management have agreed to vote in favor of the Loral
Merger and have granted to the Loral the right to purchase their securities in
Orion for a price equal to the Loral Merger consideration under certain
circumstances. The Company expects the Loral Merger to be consummated by the
first quarter of 1998.
The foregoing descriptions of the Merger Agreement and Principal Stockholder
Agreement with Loral do not purport to be complete. The Merger Agreement and
Principal Stockholder Agreement have been filed as exhibits 2.1 and 2.2,
respectively, to Company's Current Report on Form 8-K dated October 9, 1997, and
are incorporated herein by reference.
OTHER RECENT DEVELOPMENTS
In January 1997, Orion consummated a series of transactions that are described
below.
ACQUISITION OF ORION ATLANTIC LIMITED PARTNERSHIP INTERESTS IN THE EXCHANGE
On January 31, 1997, the Company acquired all of the limited partnership
interests which it did not already own in the Company's operating subsidiary,
Orion Atlantic, that owns the Orion 1 satellite. Specifically, the Company
acquired the Orion Atlantic limited partnership interests and other rights
relating thereto held by British Aerospace Communications, Inc., COM DEV
Satellite Communications Limited, Kingston Communications International Limited,
Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate
of Matra Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of Nissho
Iwai Corp. (collectively, the "Exchanging Partners").
Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the
"Exchange Agreement"), the Exchanging Partners exchanged (the "Exchange"), their
Orion Atlantic limited partnership interests for 123,172 shares of a newly
created class of the Company's Series C Preferred Stock. In addition, the
Company acquired certain rights held by certain of the Exchanging Partners to
receive repayment of various advances (aggregating approximately $41.4 million
at December 31, 1996). The 123,172 shares of Series C Preferred Stock issued in
the Exchange are convertible into approximately 7 million shares of the
Company's Common Stock. As a result of the Exchange, certain of the Exchanging
Partners became principal stockholders of the Company. The exchange is described
in greater detail under the caption "The Merger, the Exchange and the Debenture
Investments" in the Company's Registration Statement on Form S-4 (Registration
No. 333-19795).
The Exchange and the acquisition by the Company of the only outstanding minority
interest in the Company's subsidiary Asia Pacific Space and Communications, Ltd.
from British Aerospace Satellite Investments, Inc. on January 8, 1997 (in
exchange for approximately 86,000 shares of the Company's Common Stock) results
in the Company owning 100% of Orion Atlantic and its other significant
subsidiaries and, therefore, a greatly simplified corporate structure.
THE MERGER
The Exchange was conducted on a tax-free basis by means of an Orion Merger
(defined below) that was consummated on January 31, 1997. Pursuant to the
Exchange Agreement, Orion Oldco Services, Inc., formerly known as Orion Network
Systems, Inc. ("Old Orion"), formed the Company as a new Delaware corporation
with a certificate of incorporation, bylaws and capital structure substantially
identical in all material respects with those of
11
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BASIS OF PRESENTATION (CONTINUED)
Old Orion. Also pursuant to the Exchange Agreement, the Company formed a
wholly-owned subsidiary, Orion Merger Company, Inc. ("Orion Merger Subsidiary").
Pursuant to an Agreement and Plan of Merger, Orion Merger Subsidiary was merged
with and into Old Orion, and Old Orion became a wholly-owned subsidiary of the
Company (the "Orion Merger"). On January 31, 1997, the effective time of the
Orion Merger, all of the stockholders of Old Orion received stock in the Company
with substantially identical rights to the Old Orion stock they held prior to
the effective time of the Orion Merger. Following the Orion Merger, the Company
changed its name from Orion Newco Services, Inc. to Orion Network Systems, Inc.
and the Company's wholly-owned subsidiary Orion Network Systems, Inc. changed
its name to Orion Oldco Services, Inc. The Exchange and Orion Merger are
describe in greater detail under the caption "The Merger, the Exchange and
Debenture Investments" in the Company's Registration Statement on Form S-4
(Registration No. 333-19795).
The Company is the successor issuer to Old Orion and filed a Registration
Statement on Form 8-B with the Securities and Exchange Commission on January 31,
1997, to register all the issued and outstanding shares of Common Stock and
preferred stock of the Company. The Company is considered the successor to Old
Orion for purposes of the NASDAQ National Market and the Company's Common Stock
is quoted on the NASDAQ National Market under the trading symbol "ONSI".
FINANCINGS
On January 31, 1997, the Company completed a $710 million bond offering (the
"Bond Offering") comprised of approximately $445 million of Senior Note Units,
each of which consists of one 11.25% Senior Note due 2007 (a "Senior Note") and
one Warrant to purchase 0.8463 shares of Common Stock, par value $.01 per share
("Common Stock") of the Company (a "Senior Note Warrant"), and approximately
$265.4 million of Senior Discount Note Units, each of which consists of one
12.5% Senior Discount Note due 2007 (a "Senior Discount Note," and together with
the Senior Notes, the "Notes") and one Warrant to purchase 0.6628 shares of
Common Stock of the Company (a "Senior Discount Note Warrant, and together with
Senior Note Warrants, the "Warrants"). Interest on the Senior Notes will be
payable semi-annually in cash on January 15 and July 15 of each year, with the
first payment made on July 15, 1997. The Senior Discount Notes will not pay cash
interest prior to July 15, 2002. Thereafter, cash interest will accrue until
maturity at an annual rate of 12.5% payable semi-annually on January 15 and July
15 of each year, commencing July 15, 2002. The exercise price for the Warrants
will be $.01 per share of Common Stock of the Company. The shares of Common
Stock of the Company initially issuable upon exercise of the Warrants represent
approximately 2.62% of the outstanding Common Stock of the Company on a fully
diluted basis as of January 31, 1997. The Bond Offering was underwritten by
Morgan Stanley & Co. Incorporated and Merrill Lynch & Co. The foregoing
description of the Notes is qualified in its entirety by the description of such
Notes in the Indentures and notes documents, copies of which have been filed as
exhibits to the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 31, 1997.
In addition, on January 31, 1997, the Company also completed the sale of $60
million of its convertible junior subordinated debentures (the "Debentures") to
two investors, British Aerospace Holdings, Inc. ("British Aerospace") and Matra
Marconi Space UK Limited ("Matra Marconi Space"). British Aerospace purchased
$50 million of the Debentures and Matra Marconi Space purchased $10 million of
the Debentures (collectively, the "Debentures Offering", and together with the
Bond Offering, the "Financings"). The Debentures will mature in 2012, and will
bear interest at a rate of 8.75% per annum to be paid semi-annually in arrears
solely in Common Stock of the company. The debentures are subordinated to all
other indebtedness of the Company, including the Notes.
12
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BASIS OF PRESENTATION (CONTINUED)
The net proceeds of the Bond Offering and Debentures Offering were used by the
Company to repay the Orion 1 credit facility, pre-fund the first three years of
interest payments on certain of the Notes, and will be used to build and launch
two additional satellites, Orion 2 and Orion 3.
The extraordinary loss on extinguishment of debt of $15.8 million in 1997 is the
result of expensing unamortized deferred financing costs associated with the
Orion 1 credit facility which was refinanced with the proceeds from the Bond
offering and termination of a interest rate cap agreement.
ACQUISITION OF TELEPORT EUROPE GMBH
On March 26, 1997, Orion acquired German-based Teleport Europe GmbH, whose name
was subsequently changed to Orion Network Systems-Europe GmbH ("Orion Europe"),
a communications company specializing in private satellite networks for voice
and data services for $8.9 million. The Company has consolidated the operations
of Orion Europe for the nine months ended September 30, 1997, retroactively to
January 1, 1997. The effect of this consolidation on operations prior to
acquisition was to increase consolidated revenues by approximately $4.1 million,
increase total operating expenses by approximately $4.0 million and other
expenses by approximately $0.7 million. The pre-acquisition loss of Orion Europe
of $0.6 million has been deducted from the consolidated statement of operations
for the nine months ended September 30, 1997.
NOTE B. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Senior notes ($445.0 million, net of
unamortized discount of $5.0 million) $ 440,023,150 $ --
Senior discount notes ($265.4 million, plus
interest accretion of approximately
$22.1 million, net of unamortized
discount of $4.0 million) 283,491,546 --
Convertible debentures 60,000,000 --
Senior notes payable - banks -- 207,714,842
Notes payable - TT&C Facility 6,267,244 6,956,624
Satellite incentive obligations 7,515,315 22,373,746
Notes payable - STET -- 5,550,000
Notes payable - limited partners -- 8,050,000
Other 2,425,445 2,566,687
--------- ---------
Total long-term debt 799,722,700 253,211,899
Less: current portion 9,161,559 34,975,060
--------- ----------
Long-term debt less current portion $ 790,561,141 $ 218,236,839
================= ===============
</TABLE>
13
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE C. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
During the nine months ended September 30, 1997, certain preferred stockholders
exercised their right to convert 29 shares of preferred stock into 3,350 shares
of Common Stock at prices ranging from $8.50 to $10.20 per share.
NOTE D. COMMITMENTS AND CONTINGENCIES
In October 1995, Skydata Corporation ("Skydata"), a former contractor, filed
suit against Orion Atlantic, Orion Satellite Corporation and Orion, in the
United States District Court for the Middle District of Florida, claiming that
certain Orion Atlantic operations using frame relay switches infringe on a
Skydata patent. Skydata's suit sought damages in excess of $10 million and asked
that any damages assessed be trebled. On December 11, 1995, the Orion parties
filed a motion to dismiss the lawsuit on the grounds of lack of jurisdiction and
violation of a mandatory arbitration agreement. In addition, on December 19,
1995, the Orion parties filed a Demand for Arbitration against Skydata with the
American Arbitration Association in Atlanta, Georgia, requesting damages in
excess of $100,000 for breach of contract and declarations, among other things,
that Orion and Orion Atlantic own a royalty-free license to the patent, that the
patent is invalid and unenforceable and that Orion and Orion Atlantic have not
infringed on the patent. On March 5, 1996, the court granted the Company's
motion to dismiss the lawsuit on the basis that Skydata's claims are subject to
arbitration. Skydata appealed the dismissal to the Untied States Court of
Appeals for the Federal Circuit. Skydata also filed a counterclaim in the
Arbitration proceedings asserting a claim for $2 million damages as a result of
the conduct of Orion and its affiliates. On May 15, 1996, the arbitrator granted
the Orion parties' request for an initial hearing on claims relating to the
Orion parties' rights to the patent, including the co-ownership claim and other
contractual claims.
On November 9, 1996, Orion and Skydata executed a letter with respect to the
settlement in full the pending litigation and arbitration. On August 12, 1997,
the parties entered into a formal settlement agreement. As part of the
settlement, the parties released all claims by either side relating in any way
to the patent and/or the pending litigation and arbitration. In addition,
Skydata granted Orion (and its affiliates) an unrestricted, world-wide paid-up
license to make, have made, use or sell products or methods under the patent and
all other corresponding continuation and reissue patents. Orion is to pay
Skydata $437,000 over a period of two years as part of the settlement.
While Orion is party to regulatory proceedings incident to its business, there
are no material legal proceedings pending or, to the knowledge of management,
threatened against Orion or its subsidiaries.
14
<PAGE>
ORION NETWORK SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Orion Network System, Inc.'s ("Orion" or the "Company") principal business is
the provision of satellite communications for private communications networks
and video distribution and other satellite transmission services. From its
inception in 1982 through January 20, 1995, when Orion 1 commenced commercial
operations, Orion was a development stage enterprise. Prior to January 1995,
Orion's efforts were devoted primarily to monitoring the construction, launch
and in-orbit testing of Orion 1, product development, marketing and sales of
interim private communications network services, raising financing and planning
Orion 2 and Orion 3.
Through January 31, 1997, Orion Satellite Corporation (whose name has been
changed to Orion Network Services, Inc.) was the sole general partner in Orion
Atlantic, L.P. ("Orion Atlantic") and had a 41 2/3% equity interest in Orion
Atlantic. As a result of Orion's control of Orion Atlantic, Orion's consolidated
financial statements include the accounts of Orion Atlantic. All of Orion
Atlantic's revenues and expenses are included in Orion's consolidated financial
statements, with appropriate adjustment to reflect the interests of the Limited
Partners in Orion Atlantic's losses prior to the Exchange (as described in Note
A to the Condensed Consolidated Financial Statements). The assets and
liabilities reported in the consolidated balance sheet at December 31, 1996
primarily pertain to Orion Atlantic. Orion's consolidated financial statements
also include the accounts of all other subsidiaries of Orion. See Note A to the
Condensed Consolidated Financial Statements for a discussion of recent
developments.
All subsidiaries of Orion ("Subsidiary Guarantors"), other than inconsequential
subsidiaries, have unconditionally guaranteed the Notes (as defined below) on a
joint and several basis. No restrictions exist on the ability of Subsidiary
Guarantors to pay dividends or make other distributions to Orion, except to the
extent provided by law generally (e.g., adequate capital to pay dividends under
state corporate laws).
ORION 2 AND ORION 3 COMMENCEMENT OF CONSTRUCTION
Orion 2 and Orion 3 Construction Contracts. Orion commenced construction of
Orion 2 in February 1997 under a satellite procurement contract with Matra
Marconi Space. Orion commenced construction of Orion 3 in December 1996 under a
satellite procurement contract with Hughes Space and Communications
International, Inc.
Pre-Construction Lease on Orion 3. Orion has entered into a contract with DACOM
Corp., a Korean communications company ("DACOM"), under which DACOM will,
subject to certain conditions, lease eight dedicated transponders on Orion 3 for
13 years, in return for approximately $89 million, payable over a period from
December 1996 through seven months following the lease commencement date for the
transponders (which is scheduled to occur by January 1999). Payments are subject
to refund unless Orion 3 commences commercial operation by June 30, 1999.
OVERVIEW
Orion's revenues are principally generated under three to five year contracts
for delivery of communications services. Such revenues are derived principally
from recurring monthly fees from its customers, although many contracts include
initial non-recurring installation and other fees. These non-recurring fees
generally are structured to cover the Company's actual costs of installation of
the customer's site-based equipment. The revenues from each contract vary,
depending upon the type of service, amount of capacity, data handling ability of
the network, the number of very small aperture terminals ("VSATs") (which
generally are owned by Orion), value-added services and other factors. Depending
on the complexity of the services to be provided to a customer, the period
between the date of signature of a contract and the commencement of actual
services (and receipt of fees) typically ranges from 30 days to six months.
Substantially all of Orion's contracts are denominated in U.S. dollars, although
some contracts are denominated in pounds sterling, Deutschemarks, Austrian
shillings or French francs. Orion begins to record revenues under its contracts
upon service commencement to the customer.
15
<PAGE>
ORION NETWORK SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The services provided by Orion have been subject to decreasing prices over
recent years and this pricing pressure is expected to continue (and may
accelerate) for the foreseeable future, particularly if, as expected, capacity
continues to increase. Orion will need to increase its volume of sales in order
to compensate for such price reductions. Orion believes that customers will
increase the data speeds in their communications networks to support new
applications, and that such upgrading of customer networks will lead to
increased revenues that will mitigate the effect of price reductions. However,
there can be no assurance that this will occur. Orion expects to continue to
incur net losses and negative cash flow (after payments for capital expenditures
and interest) for the foreseeable future.
Orion's direct cost of services includes principally (i) costs relating to the
installation, maintenance and licensing of VSAT earth stations at its customers'
premises; (ii) satellite lease payments for transponder capacity (generally for
services outside of the Orion 1 footprint); and (iii) associated miscellaneous
expenses. Sales and marketing expenses consist of salaries, sales commissions
(including commissions to third party sales representatives), travel and
promotion expenses. The Company has recently commenced a significant expansion
of its marketing program and expects to continue this expansion through 1997.
Due to the complexity of the Company's services, and the continued expansion of
sales personnel, sales and marketing expense is expected to continue to increase
significantly during 1997. Engineering and technical expenses, consisting
principally of personnel costs and travel, relate to tracking, telemetry and
command ("TT&C"), network monitoring, network design and similar activities. The
Company constructed its TT&C facilities to control two satellites. As a result,
the Company anticipates a slight increase in costs with Orion 2 and a more
substantial increase in costs with Orion 3, which will require separate TT&C
facilities. General and administrative expenses consist of in-orbit insurance
premiums, personnel costs other than for sales, marketing and engineering,
professional services, and occupancy costs. These costs will increase generally
as the Company's operations expand. Specifically, in-orbit insurance costs will
increase significantly following the launches of Orion 2 and Orion 3.
Depreciation and amortization expenses result mainly from the depreciation of
the Orion 1 satellite, VSATs and the related equipment to service the expansion
of the private network communication services business as well as the
amortization of goodwill and will increase substantially after the launch of
Orion 2 and Orion 3. Interest income is primarily the result of interest earned
on the proceeds from Orion's private and public financings. Interest costs have
increased substantially as a result of the financings completed January 31,
1997. Orion's costs (other than sales commissions) generally do not vary
substantially with the amount of revenue from the Orion 1 satellite.
RESULTS OF OPERATIONS
Three and Nine Month Periods Ended September 30, 1997 Compared to the Three and
Nine Month Periods Ended September 30, 1996.
Consolidation of Teleport Europe GmbH. On March 26, 1997, Orion acquired
German-based Teleport Europe GmbH (a communications company specializing in
private satellite networks for voice and data services), whose name was
subsequently changed to Orion Network Systems-Europe GmbH ("Orion Europe"). The
Company has consolidated the operations of Orion Europe for the nine months
ended September 30, 1997, retroactively to January 1, 1997. The effect of this
consolidation on operations prior to acquisition was to increase consolidated
revenues by approximately $4.1 million, increase total operating expenses by
approximately $4.0 million and other expenses by approximately $0.7 million. The
preacquisition loss of Orion Europe of $0.6 million has been deducted from the
consolidated statement of operations for the nine months ended September 30,
1997.
16
<PAGE>
ORION NETWORK SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Revenue and bookings. Total revenue for the three and nine months ended
September 30, 1997 was $17.6 and $54.5 million, compared to $12.2 and $30.0
million for the same periods in 1996, an increase of 44% and 82%, respectively.
Revenues from private communications network services were $9.1 and $26.5
million for the third quarter and year to date and $4.5 and $11.4 million for
the comparable periods in 1996, as the number of customer sites in service
increased approximately 109%. Revenues from video communications services and
transponder capacity leasing were $8.4 and $23.6 million for the third quarter
and year to date compared to $7.5 and $18.2 million for the comparable periods
in 1996. Revenues for the nine months ended September 30, 1997, included $4.4
million of equipment sales of which $3.8 million was associated with a
sales-type lease to an existing customer.
At September 30, 1997, Orion had a customer contract backlog (representing
future revenues under contract) of approximately $254.1 million compared to
$134.3 million at September 30, 1996, an increase of 89%. Revenue from customer
contract backlog is typically earned over contract terms of three to five years.
OPERATING EXPENSES
Direct expenses. Direct expenses for the three and nine months ended September
30, 1997 were $4.3 million and $13.0 million as compared to $1.8 million and
$4.3 million for the same periods in 1996. The increase of $2.5 million or 139%
for the three months ended September 30, 1997 resulted primarily from
incremental Internet support costs and additional leased space segment costs
outside the Orion 1 footprint, principally for the acquisition of Orion Europe.
The increase of $8.7 million, or approximately 202%, for the nine months ended
September 30, 1997, were primarily attributable to the cost of equipment
associated with a sales-type equipment lease to an existing customer, leased
space segment, site maintenance and other operational costs associated with the
increased sites in service for the period.
Sales and marketing expenses. Sales and marketing expenses were $4.8 million and
$13.4 million respectively, for the three and nine months ended September 30,
1997, as compared to $2.8 million and $7.8 million for the same periods in 1996.
The increase of $2.0 million or 71% and $5.6 million or 72% for the three and
nine months ended September 30, 1997, are related to compensation costs for the
Company's significant expansion of its sales force, as well as additional costs
for the expanded marketing program during 1997. This expansion includes
additional commissions, consulting and advertising associated with the growth in
private communications network services business. The Company expects sales and
marketing expenses to continue to rise through the remainder of 1997.
Engineering and technical services expenses. Engineering and technical services
expenses were $2.7 million and $8.1 million for the three and nine months ended
September 30, 1997, as compared to $2.1 million and $6.3 million for the
comparable periods in 1996. The increase of $0.6 million or 29% and $1.8 million
or 29%, respectively for the three and nine months ended September 30, 1997 is
related to additional engineering and technical staff associated with the Orion
Europe acquisition.
General and administrative expenses. General and administrative expenses were
$5.0 million and $14.8 million for the three and nine months ended September 30,
1997, compared to $3.9 million and $11.5 million for the same periods in 1996.
The increase of $1.1 or 28% and $3.3 million or 29% for the three and nine
months ended September 30, 1997, was primarily due to additional administrative
staff associated with the Orion Europe acquisition, outside services and other
expenses.
17
<PAGE>
ORION NETWORK SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Depreciation and amortization. Depreciation and amortization expenses for the
three and nine months ended September 30, 1997 were $12.1 million and $35.8
million, an increase of $3.3 million or 38%, and $9.4 million or 36%
respectively, over the same periods in 1996. The increase is primarily a result
of depreciation on the step up in basis on the Orion 1 satellite, the
amortization of excess cost over fair value of net assets acquired from the
acquisition of the Limited Partner's interest in Orion Atlantic and depreciation
of ground equipment to service the expansion of the private network
communication services business.
Interest. Interest income was $6.1 million and $18.3 million for the three and
nine months ended September 30, 1997, compared to $0.5 million and $1.8 million,
an increase of $5.6 million and $16.5 million for the same periods in 1996. The
increase in interest income during the first nine months of 1997 is primarily a
result of interest earned on the proceeds from the Company's public Bond
Offering in January 1997. Interest expense, net of capitalized interest of $4.5
million in the nine months ended September 30, 1997, was $22.3 million and $62.3
million for the three and nine months ended September 30, 1997, and $6.4 million
and $20.2 million for the comparable periods in 1996. The increase in interest
expense of $42.1 million in the first nine months of 1997 is attributable to
additional interest resulting from the completion of the Company's financings in
January 1997.
Extraordinary loss on extinguishment of debt. The extraordinary loss on
extinguishment of debt of $15.8 million in 1997 is the result of expensing
unamortized deferred financing costs of the Orion 1 credit facility which was
repaid with the proceeds from the Company's recent Bond Offering and termination
of an interest rate cap agreement.
Net loss. The Company incurred net losses of $27.5 million and $78.2 million,
$5.8 million and $19.8 million for the three and nine months ended September 30,
1997 and 1996, respectively, after deduction of the limited partners' and
minority interests' share in the Company's losses of $0 million and $12.0
million, $7.2 million and $24.8 million, respectively, and elimination of the
preacquisition loss of Teleport Europe of $.6 million from the consolidated
statement of operations for the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
PRIOR FUNDING. Orion has required significant capital for operating and
investing activities in the development of its business, and will continue to
need to expend significant additional capital in the future to develop fully its
global satellite communications system. The Company's funding for its operations
through January 1997 had been provided primarily by the sale of equity
securities, including the completion of its initial public offering in August
1995 which generated proceeds to the Company of approximately $52 million (net
of underwriting discounts), bank loans, vendor financing, lease arrangements and
short-term loans from its investors. Funding for the construction and launch of
the Orion 1 satellite and related facilities was fully committed through $90
million of equity from the limited partners of Orion Atlantic, an aggregate of
$251 million under a secured bank credit facility and approximately $11 million
under other debt facilities, dedicated primarily to the construction of the TT&C
facility, which is being used to control Orion 1. The Orion 1 credit facility
was repaid in January 1997 with the proceeds from the Bond Offering and
concurrently with the Bond Offering, Orion acquired all of the limited
partnership interests (which it did not already own) in Orion Atlantic in
exchange for 123,172 shares of Series C Convertible Preferred Stock representing
approximately 7 million underlying shares of Common Stock.
EXISTING CAPITAL RESOURCES. The net proceeds of the January 1997 Bond Offering
to the Company were approximately $684 million, and the net proceeds of the
Debentures Offering were approximately $59 million. Of the Bond Offering
proceeds, approximately $223 million was used for repayment of the Orion 1
credit facility (including payment of accrued interest and hedge breakage
costs), approximately $24 million was used to make certain initial payments for
the Orion 2 satellite contract, approximately $13 million was used to pay
accrued satellite incentive fees under the Orion 1 satellite contract and
approximately $4 million was used to pay amounts
18
<PAGE>
ORION NETWORK SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
owing to STET, a former limited partner of Orion Atlantic. As of September 30,
1997, the Company had cash and cash equivalents of $83 million and restricted
and segregated assets $360 million, including $244 million which was segregated
by the Company to be used to make payments for additional satellites and certain
related costs. The restricted and segregated cash included $113 million plus
accrued interest of $2.6 million placed in a pledged account (to pre-fund the
first six interest payments on the senior notes). Additionally, included in cash
and cash equivalents, is $22.5 million held in escrow and subject to refund
pending the successful launch and commencement of commercial operation of Orion
3 as required by the DACOM agreement.
EXISTING INDEBTEDNESS
NOTES. In the Bond Offering, Orion issued approximately $445 million of 11.25%
Senior Notes due 2007 and approximately $484 million principal amount at
maturity ($265.4 million initial accreted value) of 12.5% Senior Discount Notes
due 2007. Interest on the Senior Notes is payable semi-annually in cash on
January 15 and July 15 of each year, commencing July 15, 1997. The Senior
Discount Notes do not accrue cash interest prior to January 15, 2002.
Thereafter, cash interest will accrue until maturity at an annual rate of 12.5%
payable semi-annually on January 15 and July 15 of each year, commencing July
15, 2002.
The Notes have the benefit of guarantees issued by each of the material
subsidiaries of the Company. The Senior Notes initially are secured by the
securities purchased with the $134 million held in a pledged account until the
Company makes the first six scheduled interest payments on the Senior Notes and
thereafter the Senior Notes will be unsecured. The Senior Discount Notes are
unsecured. The Notes are redeemable, at the Company's option, in whole or in
part, at any time on or after January 15, 2002 at specified redemption prices.
In the event of a change in control (as defined in the indentures relating to
the Notes), the Company will be obligated to make an offer to purchase all
outstanding Notes at a purchase price equal to 101% of their principal or
accreted value, plus accrued and unpaid interest thereon to the repurchase date.
The indebtedness evidenced by the Notes ranks pari passu in right of payment
with all existing and future unsubordinated indebtedness of the Company and the
guarantors, respectively, and senior in right of payment to all existing and
future subordinated indebtedness of the Company and the guarantors. The
indentures relating to the Notes (the "Indentures") contain certain covenants
which, among other things, restrict distributions to stockholders of the
Company, the repurchase of equity interests in the Company and the making of
certain other investments and restricted payments, the incurrence of additional
indebtedness by the Company and its restricted subsidiaries, the creation of
certain liens, certain asset sales, transactions with affiliates and related
parties, and mergers consolidations. The foregoing description of the notes is
qualified in its entirety by the terms of such Notes contained in the Indentures
and Notes documents.
DEBENTURES. In January 1997, the Company also completed the sale of $60 million
of its Debentures to British Aerospace ($50 million) and Matra Marconi Space
($10 million). The Debentures will mature in 2012, and will bear interest at a
rate of 8.75% per annum to be paid semi-annually in arrears solely in Common
Stock of the Company at prices of between $10.21 and $14.00 per share, depending
on the average trading prices of the Common Stock during the applicable
measurement period. The Debentures (and accrued but unpaid interest) may be
converted in whole or in part into Common Stock at any time at an initial
conversion rate of $14.00 per share, as adjusted for stock splits or other
recapitalizations, certain dividends or issuances of stock to all stockholders,
issuances of stock (or certain rights to acquire stock) at a price per share
below $14.00 and other events.
Orion may at any time (except during 90 days after a change in control) redeem
all or part (but not less than 25% on any one occasion) of the Debentures for
cash consideration determined by multiplying the number of shares of Common
Stock issuable upon conversion of the Debentures by the greater of (i) the
average price of the Common
19
<PAGE>
ORION NETWORK SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Stock over the 20 trading days preceding the redemption or (ii) $17.50 per
share. Alternatively, Orion, in its sole discretion, may effect the sale through
a public or private offering of the Common Stock underlying the Debentures or
received as payment of dividends on, the Debentures. In such event, the holders
of the Debentures will be entitled to receive a price per share equal to the
greater of (a) at least 95% of the average closing price of the Common Stock
over the preceding 20 trading days or (b) $17.50 per share. From and after the
time when less than $50 million of Notes remain outstanding, in the event of a
change of control of Orion (defined as the acquisition by any stockholder of a
majority of the voting securities of Orion), either Orion or any holder of the
Debentures may, within 90 days after such change of control, require the sale of
the Debentures, as converted into Common Stock, to Orion for a purchase price
equal to the greater of (a) the price payable in an optional redemption (as
described above) and (b) the price paid to holders of Common Stock in the change
of control transaction. The Indentures for the Notes contain a covenant which
will effectively prohibit Orion from honoring such right.
The Debentures are subordinated to all other indebtedness of the Company,
including the Notes. The Debentures contain minimal covenants and events of
default so long as $50 million or more of the Notes remain outstanding, but a
more extensive set of covenants and events of default will apply after less than
$50 million of Notes are outstanding.
OTHER INDEBTEDNESS AND OTHER OBLIGATIONS. At September 30, 1997, the Company had
outstanding indebtedness of approximately $6.3 million under a seven year term
loan provided by General Electric Capital Corporation ("GECC") for the TT&C
facility and various assets relating thereto. Additionally, at September 30,
1997 the Company had obligations of approximately $7.5 million payable to the
manufacturer of Orion 1 through 2007.
Current Funding Requirements. Based upon its current expectations for growth,
the Company anticipates it will have substantial funding requirements over the
next three years to fund the costs of Orion 2 and Orion 3, the purchase of
VSATs, other capital expenditures and other capital needs. Interest charges on
the Senior Notes over the next three years are fully provided for by restricted
cash.
The in-orbit delivered costs of the Orion 2 and Orion 3 satellites are expected
to aggregate approximately $540 million. In addition to the $76 million incurred
through the third quarter of 1997, Orion will need to make payments of
approximately $17 million, $350 million and $50 million in 1997, 1998 and 1999,
respectively. These amounts include the Company's estimate regarding the cost of
launch insurance, although the Company has not had material discussions with
potential insurers and has not received any commitment to provide insurance. The
contracts for Orion 2 and Orion 3 provide firm fixed prices for the construction
and launch of those satellites and provides for penalties in the event of late
delivery by the manufacturer, however, the Company's actual payments could be
substantially higher due to any change orders for the satellites, insurance
rates, delays and other factors.
The Company anticipates that its existing cash balances and payments under the
DACOM contract will be sufficient to meet substantially all of its capital
requirements for the delivery in orbit of Orion 2 and Orion 3. In connection
with the Bond Offering, the Company segregated $273 million of the net proceeds
to make payments for additional satellites and certain related costs (or to pay
interest and principal on the Notes). The Company also can use a portion of its
working capital for such costs if it chooses to do so. The Company had working
capital of $109.2 million at September 30, 1997. However, there can be no
assurance that cost increases for Orion 2 and/or Orion 3 due to change orders,
insurance rates or construction delays, among other factors may not increase the
Company's capital requirements or that the Company's growth may vary from its
expectations resulting in changes in its cash requirements or expected cash.
20
<PAGE>
ORION NETWORK SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The balance of the Company's funding requirements are dependent upon its growth
and cash flow from operations. The Company cannot predict whether its existing
resources and cash flows will be adequate to cover its future cash needs. If
existing resources and cash flows are not sufficient to cover the Company's
future cash needs, the Company will need to raise additional financing. The
Company does not have a revolving credit facility or other source of readily
available capital. Sources of additional capital may include public or private
debt, equity financings or strategic investments. To the extent that the Company
seeks to raise additional debt financing, the Indentures limit the amount of
such additional debt (under a variety of provisions contained in such
Indentures) and prohibit the Company from using Orion 1, Orion 2 or Orion 3 as
collateral for indebtedness for money borrowed. If the Company requires
additional financing and is unable to obtain such financing from outside sources
in the amounts and at the times needed, there would be a material adverse effect
on the Company.
EFFECTIVE OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of Statement No. 128 on the
calculation of primary or fully diluted earnings per share for these quarters is
not expected to be material.
21
<PAGE>
ORION NETWORK SYSTEMS, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1995, Skydata Corporation ("Skydata"), a former contractor, filed
suit against Orion Atlantic, Orion Satellite Corporation and Orion, in the
United States District Court for the Middle District of Florida, claiming that
certain Orion Atlantic operations using frame relay switches infringe on a
Skydata patent. Skydata's suit sought damages in excess of $10 million and asked
that any damages assessed be trebled. On December 11, 1995, the Orion parties
filed a motion to dismiss the lawsuit on the grounds of lack of jurisdiction and
violation of a mandatory arbitration agreement. In addition, on December 19,
1995, the Orion parties filed a Demand for Arbitration against Skydata with the
American Arbitration Association in Atlanta, Georgia, requesting damages in
excess of $100,000 for breach of contract and declarations, among other things,
that Orion and Orion Atlantic own a royalty-free license to the patent, that the
patent is invalid and unenforceable and that Orion and Orion Atlantic have not
infringed on the patent. On March 5, 1996, the court granted the Company's
motion to dismiss the lawsuit on the basis that Skydata's claims are subject to
arbitration. Skydata appealed the dismissal to the Untied States Court of
Appeals for the Federal Circuit. Skydata also filed a counterclaim in the
Arbitration proceedings asserting a claim for $2 million damages as a result of
the conduct of Orion and its affiliates. On May 15, 1996, the arbitrator granted
the Orion parties' request for an initial hearing on claims relating to the
Orion parties' rights to the patent, including the co-ownership claim and other
contractual claims.
On November 9, 1996, Orion and Skydata executed a letter with respect to the
settlement in full the pending litigation and arbitration. On August 12, 1997,
the parties entered into a formal settlement agreement. As part of the
settlement, the parties released all claims by either side relating in any way
to the patent and/or the pending litigation and arbitration. In addition,
Skydata granted Orion (and its affiliates) an unrestricted, world-wide paid-up
license to make, have made, use or sell products or methods under the patent and
all other corresponding continuation and reissue patents. Orion is to pay
Skydata $437,000 over a period of two years as part of the settlement.
While Orion is party to regulatory proceedings incident to its business, there
are no material legal proceedings pending or, to the knowledge of management,
threatened against Orion or its subsidiaries.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
22
<PAGE>
ORION NETWORK SYSTEMS, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
11.1 Statement regarding: Computation of Net Loss Per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K during the nine months ended September 30, 1997.
Current Report on Form 8-K dated January 31, 1997, reporting consummation of the
Exchange. Current Report on Form 8-K dated March 26, 1997, reporting
consummation of the acquisition of Teleport Europe. Current Report on Form 8-K
dated October 9, 1997, reporting execution of the Merger Agreement with Loral.
23
<PAGE>
ORION NETWORK SYSTEMS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORION NETWORK SYSTEMS, INC.
(Registrant)
Date: November 12, 1997 /s/ W. Neil Bauer
-----------------------------------------
W. Neil Bauer, President
Chief Executive Officer and Director
(Principal Executive Officer)
Date: November 12, 1997 /s/ David J. Frear
-----------------------------------------
David J. Frear, Senior Vice President
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
24
Exhibit 11.1 --- Statement Re: Computation of Net Loss Per Common Share
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER
-------------------------------- --------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average shares outstanding 11,335,347 10,964,945 11,221,618 10,943,287
Net loss attributable to common stockholde (29,818,201) (6,062,178) (84,519,648) (20,813,572)
Net loss per common share ($2.63) ($0.55) ($7.53) ($1.90)
</TABLE>
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<NAME> Orion Network Systems, Inc.
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