<PAGE>
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 MARCH 31, 1996
Commission file number 0-26450
ORION NETWORK SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-1271418
------------------------------------ -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2440 Research Boulevard, Suite 400, Rockville, Maryland 20850
---------------------------------------------------------- ------------
(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 March 31, 1996
----------------------------- -----------------------------
Common Stock, $.01 par value 10,941,023 shares
<PAGE>
INDEX
ORION NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance sheets
---March 31, 1996 and December 31, 1995.................................3,4
Condensed Consolidated Statements of Operations
---Three months ended March 31, 1996 and 1995.............................5
Condensed Consolidated Statements of Cash Flows
---Three months ended March 31, 1996 and 1995...........................6,7
Notes to Condensed Consolidated Financial Statements---March 31, 1996.....8
Item 2. Management's Discussion and Analysis of Financial Condition and Result
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.................................14
Signatures...............................................................15
2
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Orion Network Systems, Inc.
Condensed Consolidated Balance Sheets
March 31, December 31,
1996 1995
--------------- -------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 53,027,547 $ 55,111,585
Accounts receivable 4,522,191 5,189,598
Notes receivable and accrued interest 195,723 129,810
Prepaid expenses and other current assets 2,687,476 3,168,058
------------- -------------
Total current assets 60,432,937 63,599,051
Property and equipment at cost:
Land 73,911 73,911
Telecommunications equipment 15,044,554 13,836,841
Furniture and computer equipment 3,819,155 3,395,799
Satellite and related equipment 321,982,959 321,918,549
------------- -------------
340,920,579 339,225,100
Less accumulated depreciation (40,872,337) (32,170,865)
------------- -------------
Net property and equipment 300,048,242 307,054,235
Deferred financing costs, net 12,332,706 12,894,720
Other assets, net 5,301,046 5,527,221
------------- -------------
TOTAL ASSETS $ 378,114,931 $ 389,075,227
============= =============
See Notes to Condensed Consolidated Financial Statements.
3
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Orion Network Systems, Inc.
Condensed Consolidated Balance Sheets
(continued)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
Current liabilities:
Accounts payable $ 8,076,833 $ 10,454,723
Accrued liabilities 6,118,711 6,812,223
Other current liabilities 5,006,680 2,111,687
Interest payable 4,262,610 8,005,079
Current portion of long-term debt 30,074,540 28,607,110
------------- -------------
Total current liabilities 53,539,374 55,990,822
Long term debt 236,959,304 250,669,286
Other liabilities 24,792,632 20,698,084
Limited Partners' interest in Orion Atlantic 22,958,349 14,626,338
Minority interest in other consolidated entities 30,929 52,354
Redeemable preferred stock:
Series A 8% Cumulative Redeemable Convertible Preferred Stock, $.01 par
value, 15,000 shares authorized; 13,967 and 14,491 shares
issued and outstanding, plus accrued dividends 15,395,194 15,705,054
Series B 8% Cumulative Redeemable Convertible Preferred Stock,
$.01 par value, 5,000 shares authorized; 4,308 and 4,483 shares
issued and outstanding, plus accrued dividends 4,556,742 4,652,647
Stockholders' equity:
Common stock, $.01 par value, 40,000,000 shares authorized; 11,200,538 and
11,115,965 issued, 10,941,023 and 10,856,450 outstanding 112,005 111,160
Capital in excess of par value 86,317,352 85,485,613
Accumulated deficit (66,546,950) (58,916,131)
------------- -------------
Total stockholders' equity 19,882,407 26,680,642
------------- -------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 378,114,931 $ 389,075,227
============= =============
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
4
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Orion Network Systems, Inc.
Condensed Consolidated Statements of Operations
Three months ended
March 31,
--------------------------------
1996 1995
-------------- --------------
(Unaudited) (Unaudited)
Revenue $ 7,646,407 $ 2,507,746
Operating expenses:
Direct expenses 1,083,631 3,097,107
Sales and marketing 2,182,843 1,680,549
Engineering and technical services 2,104,910 1,659,676
General and administrative 3,509,744 1,498,881
Depreciation and amortization 8,920,612 6,462,229
------------ ------------
Total operating expenses 17,801,740 14,398,442
------------ ------------
Loss from operations (10,155,333) (11,890,696)
Other expense (income)
Interest income (688,722) (235,206)
Interest expense 7,498,779 4,336,684
Other expense (income) 19,808 (13,685)
------------ ------------
Total other expense (income) 6,829,865 4,087,793
------------ ------------
Loss before Minority Interest (16,985,198) (15,978,489)
Limited partners' and minority interest in
the net loss of Orion Atlantic and
other consolidated entities 9,733,861 9,982,744
------------ ------------
Net loss (7,251,337) (5,995,745)
Preferred stock dividend 379,482 286,520
------------ ------------
Net loss attributable to
common stockholders $ (7,630,819) $ (6,282,265)
============ ============
Net loss per common share $ (0.70) $ (0.64)
============ ============
Weighted average common
shares outstanding 10,913,132 9,300,244
============ ============
See Notes to Condensed Consolidated Financial Statements.
5
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Orion Network Systems, Inc.
Condensed Consolidated Statements of Cash Flows
Three months ended
March 31,
-----------------------------
1996 1995
------------ -------------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net loss ($ 7,251,337) ($ 5,995,745)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization and depreciation 8,920,612 6,462,229
Amortization of deferred financing costs 532,647 532,647
Provision for bad debt expense 24,900 127,971
Satellite incentives and accrued interest 562,299 2,320,968
Limited partners' interest in Orion Atlantic (9,712,435) (9,996,317)
Minority interest in other consolidated
entities (21,425) 13,573
Gain on sale of assets (13,684) (13,685)
Changes in operating assets and liabilities:
Accounts receivable 642,507 (399,139)
Interest receivable (65,913) --
Prepaid expenses 480,582 (227,163)
Other assets 48,688 (23,065)
Accounts payable and accrued liabilities (3,071,450) (1,610,934)
Other current liabilities 2,856,467 905,882
Interest payable (3,742,469) (5,941,132)
------------ ------------
Net cash used in operating activities (9,810,011) (13,843,910)
INVESTING ACTIVITIES
Capital expenditures (1,643,269) (2,206,263)
FCC license costs (12,286) (100,136)
------------ ------------
Net cash used in investing activities (1,655,555) (2,306,399)
FINANCING ACTIVITIES
Limited partners' capital contributions 18,044,446 --
Proceeds from issuance of common stock 47,385 50,500
PPU borrowings -- 2,275,000
Proceeds from issuance of notes payable -- 252,785
Proceeds from senior note payable to banks -- 11,967,134
Repayment of senior note payable to banks (10,794,487) --
Repayment of notes payable (1,843,140) (468,554)
Payments on capital lease obligations (167,224) (120,863)
Capacity and other liabilities 4,094,548 4,273,877
Distributions to joint venture minority interest -- (25,804)
------------ ------------
Net cash provided by financing activities 9,381,528 18,204,075
Net increase/(decrease) in cash and cash
equivalents (2,084,038) 2,053,766
Cash and cash equivalents at beginning of period 55,111,585 11,218,831
============ ============
Cash and cash equivalents at end of period $ 53,027,547 $ 13,272,597
============ ============
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
Orion Network Systems, Inc.
Condensed Consolidated Statement of Cash Flow
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION.
Three months ended
March 31,
----------------------------
1996 1995
------------ ------------
(Unaudited) (Unaudited)
Transactions not providing or requiring cash:
Accrued dividend on preferred stock $379,482 $286,520
============ ============
Conversion of preferred stock to common stock $698,619 $ --
============ ============
Interest paid during the period, net of amounts
capitalized $1,997,350 $3,800,310
============ ============
See Notes to Condensed Consolidated Financial Statements.
7
<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 months ended March 31, 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.
The Company has adopted Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the effect of the adoption is not material.
Note B. Other Liabilities
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 March 31, 1996, Orion Atlantic has received $17.5
million (excluding payments from the Company) under the firm capacity agreements
subject to refund.
Note C. Long-Term Debt
Long-term debt consists of the following:
March 31, 1996 December 31, 1995
--------------- -----------------
Senior notes payable---banks $219,688,695 $230,483,182
Notes payable--- TT&C Facility 7,580,020 8,774,266
Satellite incentive obligations 20,564,539 20,002,240
Notes payable---STET 8,000,000 8,000,000
Notes payable---limited partners 8,050,000 8,050,000
Other 3,150,590 3,966,708
------------ ------------
Total long-term debt 267,033,844 279,276,396
Less: current portion 30,074,540 28,607,110
------------ ------------
Long-term debt less current portion $236,959,304 $250,669,286
============ ============
8
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Orion Network Systems, Inc.
Notes to Condensed Consolidated Financial Statements
Note D. Redeemable Preferred Stock and Stockholders' Equity
In the quarter ended March 31,1996, certain preferred stockholders exercised
their right to convert 1,149 shares of preferred stock into 78,766 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 although Skydata's prior demands were for
amounts far lower than the amount now sought in the lawsuit. 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 breech 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 has appealed the
dismissal to the United States Court of Appeals to the Federal Circuit. Skydata
has 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.
The Orion parties believe that they may be entitled to co-ownership of the
patent at issue and, in any event, that there are substantial issues concerning
inventorship, validity and enforceability of the patent as well as certain
non-infringement and contractual defenses. The Orion parties believe that they
have meritorious defenses and intend to assert their position vigorously in the
arbitration proceeding.
9
<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 global satellite communications for
private communications networks and transmission capacity and video distribution
services. 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 March 31, 1996, Orion had an accumulated deficit of $66.5 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 March 31, 1996 pertain to Orion
Atlantic.
Results of Operations
Quarter Ended March 31, 1996 Compared the Quarter Ended March 31, 1995
Revenue and bookings. Total revenue for the three months ended March 31, 1996
was $7.6 million compared to $2.5 million for the three months ended March 31,
1995, an increase of 205%. Revenues from private communications network services
were $3.1 million from 53 customers in the first quarter of 1996 and $0.9
million from 19 customers for the comparable period in 1995, as the number of
customer sites in service increased to 184 from 59. Revenues from transmission
capacity and video distribution services were $4.5 million for the first quarter
of 1996 compared to $1.3 million for the first quarter of 1995 as Orion 1
commenced operations on January 20, 1995.
As of March 31, 1996, Orion had bookings (defined as recurring revenue during
the non-cancelable contract term, plus installation charges) of approximately
$173.3 million compared to $89.1 million as of March 31, 1995. Revenue from
bookings typically is earned over contract terms of three to five years.
10
<PAGE>
Orion Network Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)
Operating Expenses.
Direct expenses. Direct expenses were $1.1 million and $3.1 million in the
quarters ended March 31, 1996 and 1995, respectively. The decrease of $2.0
million, or 65%, was primarily attributable to accruals for satellite incentives
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 $2.2 million in
the quarter ended March 31, 1996, as compared to $1.7 million in the same period
of 1995, an increase of $0.5 million or 30%. The increase is due to the hiring
of additional sales personnel, increased advertising, commissions, promotion and
travel expenses.
Engineering and technical expenses. Engineering and technical expenses were $2.1
million in the quarter ended March 31, 1996, as compared to $1.7 million for the
quarter ended March 31, 1995, an increase of $0.4 million or approximately 27%.
The increase is attributable to increased staffing requirements related to the
control and operation of the satellite, and customer engineering functions in
support of the network services business.
General and administrative expenses. General and administrative expenses were
$3.5 million for the three months ended March 31, 1996, compared to $1.5 million
for the three months ended March 31, 1995. The increase of $2.0 million or 134%
was primarily due to the cost of in-orbit life insurance for Orion 1, which
policy was placed in May 1995.
Depreciation and amortization. Depreciation and amortization expense was $8.9
million in the three months ended March 31, 1996, an increase of $2.4 or 38%, as
compared to $6.5 million for the three months ended March 31, 1995. The increase
is primarily a result from the commencement of depreciation of Orion 1 upon
being placed in service January 20, 1995.
Interest. Interest income was $0.7 million for the three months ended March 31,
1996, compared to $0.2 million for the same period in 1995, an increase of $0.5
million or 193%. The increase in interest income during the first quarter 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, increased from $4.3 million for the three months ended March 31, 1995
to $7.5 million for the three months ended March 31, 1996, an increase of $3.2
million or 73%. The increase in interest expense in the first quarter of 1996 is
attributable to expensing interest (including commitment fees 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 $7.3 million and $6.0 million for
the three months ended March 31, 1996 and 1995, respectively, after deduction of
the limited partners' and minority interests' share in the Company's operating
losses before minority interests' of $17.0 million and $16.0 million.
11
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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
March 31, 1996, Orion had working capital of $6.9 million and the net cash used
in operations for the three months ended March 31, 1996, and 1995 was $9.8
million and $13.8 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
six 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 unrealized loss on this cap as of March 31, 1996 of
approximately $8.0 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 $10.0 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.
12
<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 $324 million as of March 31, 1996.
Amounts outstanding under the Orion 1 credit facility (approximately $219.7
million as of March 31, 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 March 31,
1996, the Company had outstanding indebtedness of approximately $7.6 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 March 31, 1996 the Company had outstanding
approximately $20.6 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
March 31, 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.
13
<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 although Skydata's prior demands were for
amounts far lower than the amount now sought in the lawsuit. 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 breech 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 has appealed the
dismissal to the United States Court of Appeals to the Federal Circuit. Skydata
has 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.
The Orion parties believe that they may be entitled to co-ownership of the
patent at issue and, in any event, that there are substantial issues concerning
inventorship, validity and enforceability of the patent as well as certain
non-infringement and contractual defenses. The Orion parties believe that they
have meritorious defenses and intend to assert their position vigorously in the
arbitration proceeding.
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.
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 March 31, 1996
None
14
<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 signed on its behalf by the
undersigned thereunto duly authorized.
ORION NETWORK SYSTEMS, INC.
------------------------------------
(Registrant)
Date: May 10, 1996
------------------------------------
W. Neil Bauer, President,
Chief Executive Officer and Director
(Principal Executive Officer)
Date: May 10, 1996
------------------------------------
David J. Frear, Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
15
<PAGE>
Exhibit 11.1 --- Statement Re: Computation of Net Loss Per Common Share
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1996 1995
------------- ------------
<S> <C> <C>
Average shares outstanding 10,913,132 6,787,052
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 0 333,455
Common stock issuable upon conversion
of preferred stock issued 0 1,705,882
Common stock issuable upon conversion
of preferred options granted 0 473,855
----------- -----------
Weighted average shares used in calculating per share data 10,913,132 9,300,244
Net loss attributable to common stockholders (7,630,819) (5,995,745)
Net loss per common share ($ 0.70) ($ 0.64)
(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>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 53,027,547
<SECURITIES> 0
<RECEIVABLES> 5,020,343
<ALLOWANCES> 302,429
<INVENTORY> 0
<CURRENT-ASSETS> 60,432,937
<PP&E> 340,920,579
<DEPRECIATION> (40,872,337)
<TOTAL-ASSETS> 378,114,931
<CURRENT-LIABILITIES> 53,539,374
<BONDS> 0
<COMMON> 0
19,951,936
112,005
<OTHER-SE> 19,770,402
<TOTAL-LIABILITY-AND-EQUITY> 378,114,931
<SALES> 153,532
<TOTAL-REVENUES> 7,646,407
<CGS> 122,015
<TOTAL-COSTS> 17,801,740
<OTHER-EXPENSES> 6,829,865
<LOSS-PROVISION> 33,333
<INTEREST-EXPENSE> 6,810,057
<INCOME-PRETAX> (7,251,337)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,251,337)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,251,337)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> (0.70)
<PAGE>
