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, 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) Identification No.)
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 April 30, 1997
- ----------------------------- -----------------------------
Common Stock, $.01 par value 11,160,099 shares
INDEX
ORION NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets---March 31, 1997 and
December 31, 1996 3
Condensed Consolidated Statements of Operations---three
months ended March 31, 1997 and 1996 5
Condensed Consolidated Statements of Changes in
Stockholders' Equity 6
Condensed Consolidated Statements of Cash Flows---three
months ended March 31, 1997 and 1996 7
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition an Results of Operations 14
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 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORION NETWORK SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
----------------------- ------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 116,899,430 $ 42,187,807
Restricted cash 45,890,625 --
Accounts receivable 9,743,794 6,473,316
Prepaid expenses and other current assets 5,110,500 3,583,403
----------------------- ------------------
Total current assets 177,644,349 52,244,526
Restricted and segregated cash 328,490,939 --
Property and equipment at cost:
Land 73,911 73,911
Telecommunications equipment 34,583,184 25,342,528
Furniture and computer equipment 6,593,620 4,849,711
Satellite and related equipment 321,911,489 321,247,346
----------------------- ------------------
363,162,204 351,513,496
Less: accumulated depreciation (43,823,595) (68,224,957)
Satellite construction in progress 47,655,627 4,560,844
----------------------- ------------------
Net property and equipment 366,994,236 287,849,383
Deferred financing costs, net 23,713,008 12,918,233
Goodwill and other assets, net 29,555,587 5,252,302
TOTAL ASSETS $ 926,398,119 $ 358,264,444
======================= ==================
See Notes to Condensed Consolidated Financial Statements.
ORION NETWORK SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
March 31, December 31,
1997 1996
----------------- --------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT (Unaudited)
Current liabilities:
Accounts payable $ 7,009,566 $ 6,411,028
Accrued liabilities 9,401,612 7,653,208
Other current liabilities 6,173,220 5,406,072
Interest payable 8,590,997 8,583,882
Current portion of long-term debt 3,462,122 34,975,060
--------------- -------------------
Total current liabilities 34,637,517 63,029,250
Long term debt 783,337,740 218,236,839
Other liabilities 11,545,444 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; 13,861 and
13,871 shares issued and outstanding, plus accrued dividends 16,363,068 16,097,880
Series B 8% Cumulative Redeemable Convertible Preferred
Stock, $.01 par value, 5,000 shares authorized; 4,298
shares issued and outstanding, plus accrued dividends 4,890,446 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 92,399,219 --
Stockholders' deficit:
Common stock, $.01 par value, 40,000,000 shares authorized;
11,419,614 and 11,244,665 issued, 11,160,099 and 10,985,150
outstanding and 259,515 held as treasury shares (at no cost) 114,196 112,447
Capital in excess of par value 98,235,746 86,932,391
Accumulated deficit (115,125,257) (87,481,206)
--------------- -------------------
Total stockholders' deficit (16,775,315) (436,368)
--------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 926,398,119 $ 358,264,444
=============== ==================
See Notes to Condensed Consolidated Financial Statements.
4
ORION NETWORK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
March 31,
--------------------------------
1997 1996
------------ ------------
(Unaudited) (Unaudited)
REVENUE $ 20,233,069 $ 7,646,407
OPERATING EXPENSES:
Direct expenses 5,392,020 1,083,631
Sales and marketing 4,126,377 2,182,843
Engineering and technical services 2,657,570 2,104,910
General and administrative 4,807,904 3,509,744
Depreciation and amortization 11,566,579 8,920,612
------------ ------------
Total operating expenses 28,550,450 17,801,740
------------ ------------
LOSS FROM OPERATIONS (8,317,381) (10,155,333)
OTHER EXPENSE (INCOME):
Interest income (3,413,080) (688,722)
Interest expense 17,570,631 7,498,779
Other expense 414,017 19,808
------------ ------------
Total other expense (income) 14,571,568 6,829,865
------------ ------------
Loss before extraordinary loss on
extinguishment of debt, minority interest and
preacquisition loss of acquired subsidiary (22,888,949) (16,985,198)
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 12,042,239 9,733,861
Preacquisition loss of acquired subsidiary 626,246 --
------------ ------------
NET LOSS (25,983,684) (7,251,337)
Preferred stock dividend and accretion, net of
forfeitures 1,660,367 379,482
------------ ------------
Net loss attributable to
common stockholders $(27,644,051) $ (7,630,819)
============ ============
Net loss per common share $ (2.48) $ (0.70)
============ ============
Weighted average common
shares outstanding 11,159,557 10,913,132
============ ============
See Notes to Condensed Consolidated Financial Statements
5
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
----------------------------
Capital in Total
Number of Excess of Accumulated Stockholders'
Shares Amount Par Value Deficit Equity (Deficit)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 11,115,965 111,160 85,485,613 (58,916,131) 26,680,642
Conversion of preferred stock to
common stock 91,071 911 804,034 -- 804,945
Issuance of stock warrants -- -- 300,000 -- 300,000
Exercise of stock options and
warrants 37,629 376 342,744 -- 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 11,244,665 112,447 86,932,391 (87,481,206) (436,368)
Conversion of preferred stock to
common stock 1,176 12 9,988 -- 10,000
Issuance of common stock for purchase
of APSC 85,715 857 1,199,143 -- 1,200,000
Issuance of warrants relating to Senior
Notes and Senior Discount Notes, Net -- -- 9,082,262 -- 9,082,262
Exercise of stock options and
warrants 88,058 880 1,011,962 -- 1,012,842
Preferred stock dividend and
accretion, net of forfeitures -- -- -- (1,660,367) (1,660,367)
Net loss for the three months ended
March 31, 1997 -- -- -- (25,983,684) (25,983,684)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 1997 11,419,614 $ 114,196 $ 98,235,746 $(115,125,257) $(16,775,315)
============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements.
6
ORION NETWORK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
March 31,
---------------------------
1997 1996
------------ ------------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net loss $(25,983,684) $(7,251,337)
Adjustments to reconcile net loss to net cash used in operating activities:
Extraordinary loss on extingishment of debt 15,763,220 --
Amortization and depreciation 10,680,765 8,920,612
Amortization of deferred financing costs 577,549 532,647
Provision for bad debts 200,000 24,900
Satellite incentives and accrued interest 646,274 562,299
Capitalized interest (1,050,335) --
Accretion interest on Senior Discount Notes 5,529,104 --
Accrue interest on Debentures 875,000 --
Limited Partners' and minority interest in Orion
Atlantic and other consolidated entities (12,042,239) (9,733,860)
Changes in operating assets and liabilities:
Accounts receivable (63,711) 642,507
Prepaid expenses and other current assets (541,079) 414,669
Other assets (3,016,738) 35,004
Accounts payable and accrued liabilities (1,003,594) (3,071,450)
Other current liabilities 181,915 2,856,467
Interest payable (239) (3,742,469)
------------ ------------
Net cash used in operating activities (9,247,792) (9,810,011)
INVESTING ACTIVITIES
Capital expenditures (4,013,941) (1,643,269)
Restricted cash (374,381,564) --
Satellite construction costs (42,044,448) --
Purchase of Teleport Europe, net of cash acquired (8,006,680) --
FCC license costs (50,214) (12,286)
------------ ------------
Net cash used in investing activities (428,496,847) (1,655,555)
FINANCING ACTIVITIES
Limited Partners' capital contributions -- 18,044,446
Expenditures on debt and equity financing costs (25,497,717) --
Proceeds from issuance of common stock and subscriptions,
net of issuance costs 1,012,842 47,385
Proceeds from issuance of Debentures 60,000,000 --
Proceeds from issuance of Senior Notes 445,000,000 --
Proceeds from issuance of Senior Discount Notes 265,397,000 --
Repayment of senior note payable to banks (207,714,842) (10,794,487)
Termination of interest cap agreement (5,287,827) --
Payment of satellite incentive obligations (13,358,379) --
Repayment of notes payable (5,925,291) (1,843,140)
Payments on capital lease obligations (219,256) (167,224)
Capacity and other liabilities (950,268) 4,094,548
------------ ------------
Net cash provided by financing activities 512,456,262 9,381,528
7
ORION NETWORK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(CONTINUED)
Three months ended
March 31,
-----------------------------
1997 1996
--------------- ------------
(Unaudited) (Unaudited)
Net increase (decrease) in cash and cash equivalents 74,711,623 (2,084,038)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,187,807 55,111,585
--------------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 116,899,430 53,027,547
=============== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Three months ended
March 31,
-----------------------------
1997 1996
--------------- ------------
(Unaudited) (Unaudited)
Transactions not providing or requiring cash:
Accrued preferred stock dividend and accretion, net of
forfeitures $ 1,660,367 $ 379,482
=============== ==========
Conversion of preferred stock to common stock $ 10,000 $ 698,619
=============== ==========
Issuance of stock options and warrants $ 10,282,262 $ --
=============== ==========
Issuance of preferred stock for acquisition of Orion
Atlantic limited partnership interests $ 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) --
Negative goodwill 267,653 --
Other assets (88,928) --
Non-current liabilities 477,612 --
--------------- ----------
Net cash used to acquire Teleport Europe $ (8,006,680) --
=============== ==========
Interest paid during the period, net of amounts capitalized $ 10,661,415 $1,997,350
=============== ==========
See Notes to Condensed Consolidated Financial Statements.
8
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 a fair presentation have
been included. Operating results for the three months ended March 31, 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 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 1996
Orion Network Systems, Inc. Annual Report on Form 10-K.
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 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 6% Cumulative Convertible Redeemable
Preferred Stock (the "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 Orion Asia Pacific Corporation 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 it's other significant subsidiaries
and, therefore, a greatly simplified corporate structure.
9
ORION NETWORK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BASIS OF PRESENTATION (CONTINUED)
THE MERGER
The Exchange was conducted on a tax-free basis by means of a 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 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 "Merger"). On January
31, 1997, the effective time of the 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 Merger. Following the
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
Merger are 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 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
the 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, commencing
July 15, 1997. The Senior Discount Notes will not pay 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 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.
10
ORION NETWORK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BASIS OF PRESENTATION (CONTINUED)
FINANCINGS (CONTINUED)
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.
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 for the three
months ended March 31, 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 ("Teleport
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 Teleport Europe for the three months ended March 31, 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
Teleport Europe of $0.6 million has been deducted from the consolidated
statement of operations for the three months ended March 31, 1997.
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:
Jurisdiction of
organization or
Name Incorporation
- ---- ----------------
Asia Pacific Space and
Communications, Ltd. Delaware
International Private
Satellite Partners, L.P. Delaware
Orion Asia Pacific
Corporation Delaware
Orion Atlantic Europe, Inc. Delaware
11
ORION NETWORK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BASIS OF PRESENTATION (CONTINUED)
BUSINESS AND OWNERSHIP (CONTINUED)
OrionNet Finance
Corporation Delaware
OrionNet, Inc. Delaware
Orion Satellite
Corporation Delaware
Teleport Europe GmbH Federal Republic of Germany
Each of the Subsidiary Guarantors is a wholly (100%) owned subsidiary of the
Company. The Subsidiary Guarantors comprise all of the direct and indirect
subsidiaries of the Company (other than inconsequential subsidiaries).
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
NOTE B. LONG-TERM DEBT
Long-term debt consists of the following:
March 31, 1997 December 31, 1996
-------------- ------------------
Senior notes ($445.0 million,
net of unamortized discount
of $5.2 million) $ 439,825,447 $ --
Senior discount notes ($265.4
million, net of unamortized
discount of $4.4 million) 266,518,381 --
Convertible debentures 59,750,000 --
Senior notes payable--banks -- 207,714,842
Notes payable--TT&C Facility 6,734,493 6,956,624
Satellite incentive obligations 9,661,641 22,373,746
Notes payable--STET 1,373,949 5,550,000
Notes payable--limited partners -- 8,050,000
Other 2,935,951 2,566,687
-------------- ------------------
Total long-term debt 786,799,862 253,211,899
Less: current portion 3,462,122 34,975,060
-------------- ------------------
Long-term debt less current portion $ 783,337,740 $ 218,236,839
=============== ==================
12
ORION NETWORK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE C. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
During the three months ended March 31, 1997, certain preferred stockholders
exercised their right to convert 10 shares of preferred stock into 1,176 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 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 United 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. As part of the
settlement, the parties are to release all claims by either side relating in any
way to the patent and/or the pending litigation and arbitration. In addition,
Skydata is to grant 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. The
parties are in the process of negotiating the final terms of a formal settlement
agreement.
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.
13
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 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
during 1996, 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 defined below). 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 Recent Developments below.
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 the 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).
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 6% Cumulative Convertible Redeemable
Preferred Stock (the "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 (as of January 31, 1997) 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).
14
ORION NETWORK SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
The Exchange and the acquisition by the Company of the only outstanding minority
interest in the Company's subsidiary Orion Asia Pacific Corporation 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 a 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 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 "Merger"). On January
31, 1997, the effective time of the 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 Merger. Following the
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
Merger are 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 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
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 the 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, commencing July
15, 1997. The Senior Discount Notes will not pay 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 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.
15
ORION NETWORK SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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.
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. Orion intends to launch Orion 2
in the Atlantic Ocean region to bolster its European capacity and to expand its
coverage area in the Commonwealth of Independent States, Latin America and parts
of Africa. Orion 3 will be launched into the Asia Pacific region and is expected
to cover all or portions of China, Japan, Korea, India, Hawaii, Southeast Asia,
Australia, New Zeland and Eastern Russia.
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 four 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.
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.
16
ORION NETWORK SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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
promotional 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 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 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 will increase substantially as a result of the
bond offering 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 Months Ended March 31, 1997 Compared to the Three Months Ended March 31,
1996.
Consolidation of Teleport Europe GmbH. On March 26, 1997, Orion acquired
German-based Teleport Europe GmbH ("Teleport Europe"), a communications company
specializing in private satellite networks for voice and data services. The
Company has consolidated the operations of Teleport Europe for the three months
ended March 31, 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 Teleport Europe of $0.6 million has been deducted from
the consolidated statement of operations for the three months ended March 31,
1997.
Revenue and bookings. Total revenue for the three months ended March 31, 1997
was $20.2 million, compared to $7.6 million for the same period in 1996, an
increase of 165 percent. Revenues from private communications network services
were $7.9 million for the first quarter of 1997 and $2.9 million for the
comparable period in 1996, as the number of customer sites in service increased
approximately 200 percent. Revenues from video communications services and
transponder capacity leasing were $8.2 million for the first quarter of 1997
compared to $4.5 million for the first quarter of 1996. Revenues for the three
months ended March 31, 1997, included $4.1 million of equipment sales of which
$3.8 million was associated with a sales-type lease to an existing customer,
compared to $0.2 million for the same period in 1996.
At March 31, 1997, Orion had a customer contract backlog (representing future
revenues under contract) of approximately $244 million compared to $135 million
at March 31, 1996. Revenue from customer contract backlog is typically earned
over contract terms of three to five years.
17
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 months ended March 31, 1997, were
$5.4 million compared to $1.1 million for the same period in 1996. The increase
of $4.3 million, or approximately 391 percent, for the three months ended March
31,1997, were primarily attributable to the cost of equipment associated with a
sales-type equipment lease to an existing customer, 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 $4.1 million for
the three months ended March 31, 1997, as compared to $2.2 million for the same
period in 1996, an increase of $1.9 million or 86 percent. The increase is
related to additional sales salaries and commissions, consulting and advertising
associated with the growth in private communications network service business.
Engineering and technical services expenses. Engineering and technical services
expenses were $2.7 million for the three months ended March 31, 1997, as
compared to $2.1 million for the comparable period in 1996. The increase of $0.6
million or 29 percent is related to additional engineering and technical staff
associated with the Teleport Europe acquisition.
General and administrative expenses. General and administrative expenses were
$4.8 million for the three months ended March 31, 1997, compared to $3.5 million
for the same period in 1996. The increase of $1.3 million or 37 percent for the
three months ended March 31, 1997 was primarily due to outside services and
other expenses.
Depreciation and amortization. Depreciation and amortization expense for the
three months ended March 31, 1997, were $11.6 million, an increase of $2.7
million or 30 percent, over the same period in 1996. The increase is primarily a
result from depreciation of ground equipment to service the expansion of the
private network communication services business.
Interest. Interest income was $3.4 million for the three months ended March 31,
1997, compared to $0.7 million, an increase of $2.7 million or 386 percent for
the period. The increase in interest income during the first three 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 $1.1 million, was $17.6 million for the three months ended March 31,
1997 and $7.5 million for the comparable period in 1996. The increase in
interest expense of $10.1 million in the first three months of 1997 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. Prior to the in-service date
of Orion 1, substantially all interest expense was capitalized.
Extraordinary loss on extinguishment of debt. The extraordinary loss on
extinguishment of debt of $15.8 million for the three months ended March 31,
1997 is the result of expensing unamortized deferred financing costs of the
Orion 1 credit facility which was refinanced with the proceeds from the
Company's recent Bond Offering and termination of a interest rate cap agreement.
Net loss. The Company incurred net losses of $26.0 million and $7.3 million for
the three months ended March 31, 1997 and 1996, respectively, after deduction of
the limited partners' and minority interests' share in the Company's losses of
$12.0 million and $9.7 million, respectively and elimination of the
preacquisition loss of Teleport Europe of $0.6 million from the consolidated
statement of operations for the three months ended March 31, 1997.
18
ORION NETWORK SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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 refinanced 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 owing to STET, a former limited
partner of Orion Atlantic. As of March 31, 1997 the Company had cash and cash
equivalents of $117 million and restricted and segregated cash of $374 million
including $240 million which was segregated by the Company to be used to make
payments for additional satellites and certain related costs. The restricted
cash consisted of $134 million placed in a pledged account (to pre-fund the
first six interest payments on the senior notes).
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 of 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.
19
ORION NETWORK SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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 and 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 closing price of the Common 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 March 31, 1997, the Company had
outstanding indebtedness of approximately $6.7 million under a seven year term
loan provided by General Electric Capital Corporation ("GECC") for the TT&C
facility, which is secured by the TT&C facility and various assets relating
thereto. Additionally, at March 31, 1997 the Company had obligations of
approximately $9.7 payable to the manufacturer of Orion 1 through 2007, and $1.4
million payable to a former partner in Orion Atlantic through 1997.
20
ORION NETWORK SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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, and 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 $500 million. In addition to the $42 million incurred
through the first quarter of 1997, Orion will need to make payments of
approximately $45 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 $105 million at March 31, 1997 The Company anticipates that its
existing cash balances, payments under the DACOM contract and future cash flows
are likely to be sufficient to meet its capital requirements. 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.
The balance of the Company's funding requirements are dependent upon its growth
and cash flow from operations. TThe Company cannot predict whether itsthe
Company's existing resources and cash flows will be adequate to cover its future
cash needs. and there can be no assurance that such resources and cash flows
will be adequate. 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, or 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
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 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 United 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. As part of the
settlement, the parties are to release all claims by either side relating in any
way to the patent and/or the pending litigation and arbitration. In addition,
Skydata is to grant 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. The
parties are in the process of negotiating the final terms of a formal settlement
agreement.
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
(a) A Special Meeting of the Stockholders of the Company was held on January
30, 1997.
(b) Not applicable.
(c) The results of the voting at the Special Meeting of the Stockholders
was as follows:
1. Ratification of the Merger Agreement:
For: 7,865,750
Against: 7,200
Abstain: 47,984
22
ORION NETWORK SYSTEMS, INC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(CONTINUED)
(2) Approval and adoption of the Exchange Agreement:
For: 7,865,000
Against: 7,950
Abstain: 47,984
(3) Approval of the transactions contemplated by the Debenture
Purchase Agreement:
For: 7,865,750
Against: 7,200
Abstain: 47,984
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, 1997:
The Company filed a Current Report on Form 8-K dated January 31, 1997,
reporting consummation of the Exchange. The Company also filed a Current
Report on Form 8-K dated March 26, 1997, reporting consummation of the
acquisition of Teleport Europe.
23
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: May 15, 1997 /s/ W. Neil Bauer
---------------------------------------
W. Neil Bauer, President,
Chief Executive Officer and Director
(Principal Executive Officer)
Date: May 15, 1997 /s/ David J. Frear
---------------------------------------
David J. Frear, Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
24