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, 1996
Commission file number 0-26450
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ORION NETWORK SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-1271418
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2440 Research Boulevard, Suite 400, Rockville, Maryland 20850
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(Address of principal executive offices) (Zip Code)
(301) 258-8101
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(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, 1996
- ---------------------------- ---------------------------------
Common Stock, $.01 par value 10,973,018 shares
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INDEX
ORION NETWORK SYSTEMS, INC. AND SUBSIDIARIES
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets---September 30, 1996 and
December 31, 1995................................................................. 3
Condensed Consolidated Statements of Operations---three and nine months ended
September 30, 1996 and 1995....................................................... 5
Condensed Consolidated Statements of Cash Flows---nine months ended
September 30, 1996 and 1995....................................................... 6
Notes to Condensed Consolidated Financial Statements.................................. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 14
Item 2. Changes in Securities................................................................. 14
Item 3. Defaults upon Senior Securities....................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders................................... 14
Item 5. Other Information..................................................................... 14
Item 6. Exhibits and Reports on Form 8-K...................................................... 15
Signatures..................................................................................... 16
</TABLE>
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ORION NETWORK SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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<CAPTION>
September 30, December 31,
1996 1995
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ASSETS (Unaudited)
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Current assets:
Cash and cash equivalents $36,656,619 $55,111,585
Accounts receivable 5,808,568 5,189,598
Accrued interest 157,125 129,810
Prepaid expenses and other current assets 5,584,196 3,168,058
------------------- ---------------
Total current assets 48,206,508 63,599,051
Property and equipment at cost:
Land 73,911 73,911
Telecommunications equipment 22,707,786 13,836,841
Furniture and computer equipment 4,598,505 3,395,799
Satellite and related equipment 322,450,415 321,918,549
------------------- ---------------
349,830,617 339,225,100
Less accumulated depreciation (57,914,578) (32,170,865)
------------------- ---------------
Net property and equipment 291,916,039 307,054,235
Deferred financing costs, net 11,208,678 12,894,720
Other assets, net 4,645,948 5,527,221
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TOTAL ASSETS $355,977,173 $389,075,227
=================== ===============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 4,094,026 $ 10,454,723
Accrued liabilities 7,374,884 6,812,223
Other current liabilities 5,402,117 2,111,687
Interest payable 3,128,365 8,005,079
Current portion of long-term debt 33,873,930 28,607,110
------------- -------------
Total current liabilities 53,873,332 55,990,822
Long term debt 221,781,393 250,669,286
Other liabilities 32,878,061 20,698,084
Limited Partners' interest in Orion Atlantic 19,961,032 14,626,338
Minority interest in other consolidated entities 52,984 52,354
Redeemable preferred stock:
Series A 8% Cumulative Redeemable Convertible Preferred Stock, $.01 par
value, 15,000 shares authorized; 13,871 and 14,491 shares
issued and outstanding, plus accrued dividends 15,820,460 15,705,054
Series B 8% Cumulative Redeemable Convertible Preferred Stock,
$.01 par value, 5,000 shares authorized; 4,298 and 4,483 shares
issued and outstanding, plus accrued dividends 4,718,526 4,652,647
Stockholders' equity:
Common stock, $.01 par value, 40,000,000 shares authorized; 11,232,533 and
11,115,965 issued, 10,973,018 and 10,856,450
outstanding and 259,515 held as treasury shares (at no cost) 112,325 111,160
Capital in excess of par value 86,610,720 85,485,613
Accumulated deficit (79,831,650) (58,916,131)
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Total stockholders' equity 6,891,395 26,680,642
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 355,977,173 $ 389,075,227
============= =============
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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<CAPTION>
Three Months ended Nine months ended
September 30, September 30,
---------------------------------- ---------------------------------
1996 1995 1996 1995
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(Unaudited) (Unaudited) (Unaudited) (Unaudited)
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REVENUE $ 12,246,599 $ 6,201,444 $ 30,015,517 $ 13,947,425
OPERATING EXPENSES:
Direct expenses 1,800,065 4,131,374 4,285,834 10,019,683
Sales and marketing 2,753,409 2,098,200 7,792,666 5,914,332
Engineering and technicl services 2,143,303 2,235,423 6,333,525 6,021,853
General and administrative 3,871,365 3,321,532 11,469,235 7,168,165
Depreciation and amortization 8,829,170 7,939,599 26,402,947 22,276,632
------------ ------------ ------------ ------------
Total operating expenses 19,397,312 19,726,128 56,284,207 51,400,665
------------ ------------ ------------ -------------
LOSS FROM OPERATIONS (7,150,713) (13,524,684) (26,268,690) (37,453,240)
OTHER EXPENSE (income)
Interest income (530,651) (617,346) (1,841,868) (1,078,347)
Interest expense 6,398,747 6,285,065 20,228,519 17,080,146
Other expense (income) (33,868) (6,646) (48,356) (43,216)
------------ ------------ ------------ -------------
Total other expense (income) 5,834,228 5,661,073 18,338,295 15,958,583
LOSS BEFORE MINORITY INTEREST (12,984,941) (19,185,757) (44,606,985) (53,411,823)
Limited partners' and minority interest in
the net loss of Orion Atlantic and
other consolidated entities 7,188,636 12,187,276 24,799,698 33,426,738
------------ ------------ ------------ -------------
NET LOSS (5,796,305) (6,998,481) (19,807,287) (19,985,085)
Preferred stock dividend 265,873 370,002 1,006,285 959,646
------------ ------------ ------------ -------------
Net loss attributable to
common stockholders ($ 6,062,178) ($ 7,368,483) ($20,813,572) ($20,944,731)
============ ============ ============ ============
Net loss per common share ($ 0.53) ($ 0.78) ($ 1.81) ($ 2.42)
============ ============ ============ ============
Weighted average common
shares outstanding 10,964,945 9,472,574 10,943,287 8,522,067
============ ============ ============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine months ended
September 30,
-----------------------------------
1996 1995
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(Unaudited) (Unaudited)
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OPERATING ACTIVITIES
Net loss ($19,807,287) ($19,985,085)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization
Amortization of deferred financing costs 26,402,947 22,276,632
Provision for bad debts 1,597,941 1,597,941
Satellite incentives and accrued interest 524,999 671,226
Limited partners' interest in Orion Atlantic 1,747,334 6,463,771
Minority interest in other consolidated entities (24,800,306) (33,454,227)
Gain on sale of assets 608 27,489
Changes in operating assets and liabilities: (41,054) (45,616)
Accounts receivable
Accrued interest (1,143,969) (1,921,320)
Prepaid expenses and accrued liabilities (27,315) --
Other assets (2,416,138) (4,261,808)
Accounts payable and accrued liabilities 427,741 (1,618,912)
Other current liabilities (5,818,070) 745,518
Interest payable 3,279,274 977,374
(4,876,714) (1,883,773)
------------ ------------
Net cash used in operating activities (24,950,009) (30,410,790)
INVESTING ACTIVITIES
Capital expenditures (10,266,012) (3,863,019)
Refund from satellite manufacturer -- 2,750,000
FCC license costs (117,600) (381,337)
------------ ------------
Net cash used in investing activities (10,383,612) (1,494,356)
FINANCING ACTIVITIES
Limited partners' capital contributions 30,135,000 7,600,000
Proceeds from issuance of common stock 219,380 51,616,441
Proceeds from issuance of redeemable preferred stock -- 4,483,001
PPU borrowings -- 2,275,000
Proceeds from issuance of notes payable -- 551,850
Proceeds from senior note payable to banks -- 18,367,134
Repayment of senior note payable to banks (22,768,340) (9,718,049)
Repayment of notes payable (2,328,096) (1,668,818)
Payments on capital lease obligations (559,266) (416,679)
Capacity and other liabilities 12,179,977 10,662,162
Distributions to joint venture minority interest -- (25,904)
------------ ------------
Net cash provided by financing 16,878,655 83,726,138
activities
Net (decrease) / increase in cash and cash equivalents (18,454,966) 51,820,992
Cash and cash equivalents at beginning of period 55,111,585 11,218,831
============ ============
Cash and cash equivalents at end of period $ 36,656,619 $ 63,039,823
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION.
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<CAPTION>
Nine months ended
September 30,
-----------------------------------
1996 1995
---------------- --------------
(Unaudited) (Unaudited)
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Transactions not providing or requiring cash:
Accrued dividend on preferred stock $ 1,108,232 $ 959,646
================ ==============
Conversion of preferred stock to common stock $ 804,945
$ --
================ ==============
Interest paid during the period, net of amounts capitalized $11,436,501 $10,857,800
================ ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BASIS OF PRESENTATION
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 a fair presentation have
been included. Operating results for the three and nine months ended September
30, 1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996. The balance sheet at December 31, 1995 has
been derived from the audited financial statements at 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 1995 Orion Network Systems, Inc. Annual Report on Form
10-K.
Net loss per common share is based on the weighted average number of common
shares outstanding during the period. Pursuant to the requirements of the
Securities and Exchange Commission, common stock issued and stock issuable
relating to convertible preferred stock, warrants and options granted within one
year of filing the registration statement, are treated as outstanding for all
periods prior to the second quarter of 1995.
NOTE B. OTHER LIABILITIES
International Private Satellite Partners, L.P. (d/b/a Orion Atlantic), in which
Orion and its subsidiary, OrionSat, have an aggregate 41.66% ownership interest,
has entered into refund agreements with certain limited partners (including the
Company) under which the participating limited partners have voluntarily given
up their rights to receive capacity under their firm capacity agreements. The
participating limited partners may withdraw from these refund agreements and
exercise their right to receive transmission capacity on Orion 1 in exchange for
continuing payments under their firm capacity agreements, upon 30 days notice,
following January 1996. The participating limited partners would continue to
make payments for such capacity but would have the right to receive refunds from
Orion Atlantic out of cash available after operating costs and payments under
the senior secured notes payable--banks. Through September 30, 1996, Orion
Atlantic has received $24.3 million (excluding payments from the Company) under
the firm capacity agreements subject to refund.
NOTE C. LONG-TERM DEBT
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Long-term debt consists of the following:
September 30, 1996 December 31, 1995
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Senior notes payable---banks $ 207,714,842 $ 230,483,182
Notes payable--- TT&C Facility 7,171,429 8,774,266
Satellite incentive obligations 21,749,574 20,002,240
Notes payable---STET 8,000,000 8,000,000
Notes payable---limited partners 8,050,000 8,050,000
Other 2,969,478 3,966,708
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Total long-term debt 255,655,323 279,276,396
Less: current portion (33,873,930) (28,607,110)
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Long-term debt less current portion $ 221,781,393 $ 250,669,286
============= =============
</TABLE>
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE D. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
In the nine months ended September 30,1996, certain preferred stockholders
exercised their right to convert 805 shares of preferred stock into 91,071
shares of common stock at prices ranging from $8.50 to $10.20 per share.
NOTE E. 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 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 owns 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 United States Court of
Appeals to 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. This initial hearing was scheduled to take place in November
1996. On November 9, 1996, Orion and Skydata agreed to settle in full the
pending litigation and arbitration. As part of the settlement, the parties have
agreed to release all claims by either side relating in any way to the patent
and/or the pending litigation and arbitration. In addition, Skydata has agreed
to grant Orion (and its affiliates) an unrestricted 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 has agreed to pay Skydata
$437,000 over a period of two years as part of the settlement. The parties have
agreed to document the terms of the settlement in a formal settlement agreement.
While Orion is party to regulatory proceedings incident to the business of
Orion, there are no other material legal proceedings pending or, to the
knowledge of management, threatened against Orion or its subsidiaries.
<PAGE>
ORION NETWORK SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
From its inception in 1982 through January 20, 1995, when Orion 1 commenced
commercial operations, Orion was a development stage enterprise. Orion's
principal business is the provision of private network communication services to
multinational businesses and video communications for television and other
distribution. Revenues from inception through December 31, 1994, totaling $8.5
million, were generated primarily from sales of private network services using
leased satellite capacity. Orion incurred net losses in each year through 1995,
and Orion anticipates that it will continue to incur net losses at least through
1999. As of September 30, 1996, Orion had an accumulated deficit of $79.8
million.
Prior to acceptance of Orion's first satellite in 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 additional financing for such services,
marketing of capacity and planning Orion 2 and Orion 3. Subsequent to
acceptance, Orion's efforts have been primarily focused on building customer
relationships, marketing and sales of network and satellite services, as well as
planning for the future construction of Orion 2 and Orion 3.
As a result of OrionSat's control of Orion Atlantic, the Company's consolidated
financial statements include the accounts of Orion Atlantic, in which Orion and
its subsidiary, OrionSat, have an aggregate 41.66% ownership interest. 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 of Orion Atlantic other than Orion in Orion Atlantic's
income or loss. Substantially all of the assets and liabilities reported in the
condensed consolidated balance sheet as of September 30, 1996 pertain to Orion
Atlantic.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1996 Compared the Quarter Ended September 30, 1995
Revenue and bookings. Total revenue for the three and nine months ended
September 30, 1996 was $12.2 million and $30.0 million, compared to $6.2 million
and $13.9 million for the same periods in 1995, an increase of 97% and 116%,
respectively. Revenues from private communications network services were $4.5
million for the third quarter of 1996 and $2.0 million for the comparable period
in 1995, as the number of customer sites in service increased to 260 from 123.
Revenues from video communications services and transponder capacity leasing
were $7.5 million for the third quarter of 1996 compared to $3.7 million for the
third quarter of 1995.
As of September 30, 1996, Orion had bookings (defined as recurring revenue
during the non-cancelable contract term, plus installation charges) of
approximately $195.1 million compared to $117.4 million as of September 30,
1995. Revenue from bookings typically is earned over contract terms of three to
five years.
<PAGE>
ORION NETWORK SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
OPERATING EXPENSES.
Direct expenses. Direct expenses for the three and nine months ended September
30, 1996, were $1.8 million and $4.3 million compared to $4.1 million and $10.0
million for the same periods in 1995. The decrease of $2.3 million, or 56%, for
the quarter and $5.7 million, or 57%, for the nine month period was primarily
attributable to accruals for satellite incentive obligations during the initial
satellite deployment period from January 20, 1995 through June 30, 1995. The
Company capitalized the present value of the remaining satellite incentive
obligation of approximately $14.8 million, effective July 1, 1995, as part of
the cost of the satellite.
Sales and marketing expenses. Sales and marketing expenses were $2.8 million and
$7.8 million respectively, for the three and nine months ended September 30,
1996, as compared to $2.1 million and $5.9 million in the same periods of 1995.
Sales and marketing expenses increased $0.7 million or 33% for the quarter and
increased $1.9 million or 32% year to date over the three and nine months ended
September 30, 1995. The increases are primarily attributable to sales
commissions, third party sales representative fees and ground operator fees
associated with the growth in private communications network service business.
Engineering and technical expenses. Engineering and technical expenses were $2.1
million and $6.3 million in the three and nine months ended September 30, 1996,
as compared to $2.2 million and $6.0 million for the comparable periods in 1995.
General and administrative expenses. General and administrative expenses were
$3.9 million and $11.5 million for the three and nine months ended September 30,
1996, compared to $3.3 million and $7.2 million for the same periods ended
September 30, 1995. The increase of $4.3 million or 60% for the nine months
ended September 30, 1996, was primarily due to the inclusion of in-orbit life
insurance for the entire period during 1996. The policy was effective in May
1995.
Depreciation and amortization. Depreciation and amortization expense for the
three and nine months ended September 30, 1996, was $8.8 million and $26.4
million, an increase of $0.9 or 11% and $4.1 or 18% respectively, over the same
periods in 1995. The increase primarily a results from depreciation of ground
equipment to service the expansion of the private network communication services
business and the Orion 1 satellite which was placed in service January 20, 1995.
Interest. Interest income was $0.5 million and $1.8 million for the three and
nine months ended September 30, 1996, compared to $0.6 million and $1.1 million,
an increase of $0.7 million or 64% for the nine months ended September 30, 1995.
The increase in interest income during the first three quarters of 1996 is
primarily a result of interest earned on the proceeds from the Company's initial
public offering in August 1995. Interest expense, net of capitalized interest,
was $6.4 million and $20.2 million for the three and nine months ended September
30, 1996 and $6.3 million and $17.1 million for the comparable periods in 1995.
The increase in interest expense of $3.1 million in the first three quarters of
1996 is attributable to expensing interest (including commitment fees, interest
accretion associated with the Orion 1 satellite incentive obligation and
amortization of deferred financing costs) from the in-service date of Orion 1
and the impact of the interest rate cap agreement in the period ended March 31,
1996. Prior to the in-service date of Orion 1, substantially all interest
expense was capitalized.
Net Loss. The Company incurred net losses of $5.8 million and $19.8 million,
$7.0 million and $20.0 million for the three and nine months ended September 30,
1996 and 1995, respectively, after deduction of the limited partners' and
minority interests' share in the Company's operating losses before minority
interests' of $7.2 , $24.8, $12.2 and $33.4 million, respectively.
<PAGE>
ORION NETWORK SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Funding to date. Orion has required significant capital for operating and
investing activities in the development of its business, and management expects
a need for significant additional capital in the future to develop fully its
global satellite communications system. The Company's funding has 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. As
of September 30, 1996, Orion had a working capital deficiency of $5.6 million
and the net cash used in operations for the nine months ended September 30, 1996
and 1995, was $25.0 million and $30.4 million, respectively.
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 the Orion 1
credit facility and approximately $11 million under other debt facilities,
principally related to the construction of the TT&C Facility.
Amounts outstanding under the Orion 1 credit facility bear interest of LIBOR +
1.75%. Orion Atlantic entered into interest rate hedging arrangements which
fixed the maximum interest rate through November 1995 at 11.54%. Thereafter, an
interest cap agreement is in place relating to a notional amount declining every
nine months from $150 million effective November 30, 1995 to $15.6 million
effective March 31, 2001. Under the terms of the cap agreement, when LIBOR
equals or exceeds 5.5% Orion Atlantic pays the bank a fee equal to 3.3% per
annum of the notional amount and receives a payment from the bank in an amount
equal to the difference between the actual LIBOR rate and 5.5% on the notional
amount. There was an unrealized loss on this cap as of September 30, 1996 of
approximately $9.7 million.
Current Funding Requirements. Management estimates that, based upon its current
expectations for growth, Orion (exclusive of the substantial funding
requirements for Orion 2 and Orion 3) will require aggregate funding of
approximately $5.5 million through the end of 1996. Orion expects that its
requirements will be met through existing cash balances and expected proceeds
from the exercise of certain outstanding options and warrants to purchase shares
of common stock.
In the event of a deficiency in cash flow required to service the Orion 1 credit
facility, the limited partners of Orion Atlantic, including the Company, would
be obligated to make additional payments toward such deficiency under the terms
of their contingent satellite capacity commitment agreements.
To pursue the construction, launch and operation of Orion 2 and Orion 3, Orion
will need to arrange an estimated $600 million in funding. The Company is
currently exploring various alternatives relating to the aggregate unfunded
financing requirements for Orion 2 and Orion 3. There can be no assurance that
the Company will be successful in arranging the required financing or, if
successful, that such financing will be on terms favorable to the Company.
In 1995, Orion Atlantic commenced but ultimately deferred a plan to raise over
$290 million of financing for Orion 2, plus $300 million of senior secured notes
to repay the existing Orion 1 credit facility, make certain repayments to
limited partners of Orion Atlantic and provide working capital. The Company may
recommence this financing plan, but there can be no assurance as to the timing
or terms and conditions of such financing, or as to whether such financing can
be completed on acceptable terms.
<PAGE>
ORION NETWORK SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company intends to use a portion of the net proceeds of its August 1995
initial public offering, debt and vendor financing, and possibly investments by
strategic partners and future equity financings to finance Orion 3. The Company
does not yet have commitments for the additional financing required for Orion 3.
It is the Company's present intention to commence construction of Orion 3 (to
the extent permitted by the then satellite contract for Orion 3, the
authorizations to construct, launch and operate Orion 3 and applicable laws and
regulations) following the execution of a definitive satellite contract. The
Company believes that a portion of the approximately $52 million of proceeds
from its August 1995 initial public offering and vendor financing under the
satellite contract will provide the funding for the first year of construction.
If the remaining financing is not raised when needed, the Company likely would
incur various financial or other penalties under its satellite contract.
Although the amount of such penalties cannot be determined at the present time,
such penalties could be material.
Existing Obligations. Orion Atlantic began repayment of the term loans under the
Orion 1 credit facility in 1995. Sales of services to customers and certain
capacity commitments of the limited partners are expected to provide the cash to
meet Orion Atlantic's loan repayment obligations. The Company and the other
limited partners of Orion Atlantic have agreed to lease capacity on Orion 1,
subject to obligations of Orion Atlantic under the refund agreement (defined
below) to refund lease payments, and have entered into additional contingent
capacity lease contracts as support for payment of the senior bank debt of Orion
Atlantic. The Company's obligations under these firm and contingent capacity
arrangements are $2.5 million and $4.3 million, respectively, per year for seven
years, and the Company is obligated to indemnify STET (a former limited partner
whose partnership interest in Orion Atlantic was purchased by Orion Atlantic)
against certain payments made by STET under its firm and contingent capacity
leases. This indemnity could increase Orion's obligations to make payments in
the event of cash deficits of Orion Atlantic to $8.6 million per year, and could
require Orion for a term of four years commencing in January 1998 to make
payments to Orion Atlantic of up to approximately $2.5 million per year. The
Company maintains a $10 million letter of credit supporting this indemnification
obligation.
As the general partner of Orion Atlantic, OrionSat could be required to satisfy
all obligations of Orion Atlantic, including all debt incurred, in the event
that (i) the limited partners fail to satisfy their obligations under the
capacity leases or; (ii) the amounts received under the capacity leases and from
third party sales are insufficient to satisfy Orion Atlantic's obligations. The
obligations of Orion Atlantic exceed $325 million as of September 30, 1996.
Amounts outstanding under the Orion 1 credit facility (approximately $210.4
million as of September 30, 1996) are secured by the assets of Orion Atlantic,
the partnership interests of the partners in Orion Atlantic and the stock of
OrionSat. Among other customary covenants and requirements, the Orion 1 credit
facility includes significant restrictions on the distribution of any funds from
Orion Atlantic to the partners. Distributions can only be made if Orion Atlantic
has sufficient revenues to cover operating costs and debt service. At September
30, 1996, the Company had outstanding indebtedness of approximately $7.2 million
under a seven year term loan provided by General Electric Capital Corporation
for the TT&C Facility, which is secured by the TT&C Facility and various assets
relating thereto. Additionally, at September 30, 1996 the Company had
outstanding approximately $21.1 million payable to the manufacturer of Orion 1
through 2006 and $8.0 million to a former partner in Orion Atlantic through
1997. Also at September 30, 1996, the Company had outstanding approximately $8.1
million of subordinated debt under a facility of up to $10.5 million from
certain limited partners (excluding the Company) for Orion Atlantic's network
services.
<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 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 owns 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 United States Court of
Appeals to 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. This initial hearing was scheduled to take place in November
1996. On November 9, 1996, Orion and Skydata agreed to settle in full the
pending litigation and arbitration. As part of the settlement, the parties have
agreed to release all claims by either side relating in any way to the patent
and/or the pending litigation and arbitration. In addition, Skydata has agreed
to grant Orion (and its affiliates) an unrestricted 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 has agreed to pay Skydata
$437,000 over a period of two years as part of the settlement. The parties have
agreed to document the terms of the settlement in a formal settlement agreement.
While Orion is party to regulatory proceedings incident to the business of
Orion, there are no other 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.
<PAGE>
ORION NETWORK SYSTEMS, INC.
Part II. OTHER INFORMATION (continued)
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 three months ended September 30,
1996:
None.
<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 8, 1996
-------------------------------
W. Neil Bauer, President,
Chief Executive Officer and Director
(Principal Executive Officer)
Date: November 8, 1996
------------------------------------
David J. Frear, Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Exhibit 11.1 --- Statement Re: Computation of Net Loss Per Common Share
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ -----------------------------
1996 1995 1996 1995
------------------------------ ----------------------------
<S> <C> <C> <C> <C>
Average shares outstanding 10,964,945 9,472,574 10,943,287 7,684,336
Adjustments for issuance of common stock and other instruments
within one year of the initial filing of the registration
statement:
Common stock issued
Common stock options granted -- -- -- 111,152
Common stock issuable upon conversion
of preferred stock issued -- -- -- 568,627
Common stock issuable upon conversion
of preferred options granted -- -- -- 157,952
------------ ------------ ------------ ------------
Weighted average shares used in calculating per share data 10,964,945 9,472,574 10,943,287 8,522,067
============ ============ ============ ============
Net loss attributable to common stockholders $ (5,796,305) $ (7,368,483) $(19,807,287) $(20,658,211)(a)
============ ============ ============ ============
Net loss per common share $ (0.53) $ (0.78) $ (1.81) $ (2.42)
============ ============ ============ ============
</TABLE>
(a) Adjusted to add back the preferred stock dividend based upon
assumed conversion of preferred stock to common stock issued
within one year of filing for an initial public offering.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 36,656,619
<SECURITIES> 0
<RECEIVABLES> 5,808,568
<ALLOWANCES> 327,596
<INVENTORY> 0
<CURRENT-ASSETS> 48,206,508
<PP&E> 349,830,617
<DEPRECIATION> (57,914,578)
<TOTAL-ASSETS> 355,977,173
<CURRENT-LIABILITIES> 53,873,322
<BONDS> 0
0
20,538,986
<COMMON> 112,325
<OTHER-SE> 6,779,070
<TOTAL-LIABILITY-AND-EQUITY> 355,977,173
<SALES> 369,148
<TOTAL-REVENUES> 30,015,517
<CGS> 155,116
<TOTAL-COSTS> 56,284,207
<OTHER-EXPENSES> 18,338,295
<LOSS-PROVISION> 524,999
<INTEREST-EXPENSE> 18,386,651
<INCOME-PRETAX> (19,807,287)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,807,287)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,807,287)
<EPS-PRIMARY> (1.81)
<EPS-DILUTED> (1.81)
</TABLE>
