-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KIMY2SFg2n61zv1PIiZKjElQIdNxZy12aF3EqFmF/Ag0JXsNRr8BxNr5RFvu8g7S hthnXxdJIpsOCRC1YvKiwQ== 0001005150-97-000951.txt : 19971117 0001005150-97-000951.hdr.sgml : 19971117 ACCESSION NUMBER: 0001005150-97-000951 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORION NETWORK SYSTEMS INC/NEW/ CENTRAL INDEX KEY: 0001029850 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 522008654 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22085 FILM NUMBER: 97721468 BUSINESS ADDRESS: STREET 1: 2440 RESEARCH BLVD STE 400 CITY: ROCKVILLE STATE: MD ZIP: 20850 BUSINESS PHONE: 3012588101 MAIL ADDRESS: STREET 1: 2440 RESEARCH BLVD STREET 2: SUITE 400 CITY: ROCKVILLE STATE: MD ZIP: 20850 FORMER COMPANY: FORMER CONFORMED NAME: ORION NEWCO SERVICES INC DATE OF NAME CHANGE: 19961231 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 Commission file number 000-22085 ORION NETWORK SYSTEMS, INC. (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- Delaware 52-2008654 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization No. ) Identification) 2440 Research Boulevard, Suite 400, Rockville, Maryland 20850 - ------------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (301) 258-8101 - -------------------------------------------------------------------------------- (Registrant's telephone number including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at September 30, 1997 ----- --------------------------------- Common Stock, $.01 par value 11,406,162 shares INDEX ORION NETWORK SYSTEMS, INC. PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets---September 30, 1997 and December 31, 1996............. 3 Condensed Consolidated Statements of Operations --- three and nine months ended September 30, 1997 and 1996................................................................... 5 Condensed Consolidated Statements of Changes in Stockholders' Deficit --- Year ended December 31, 1996 and nine months ended September 30, 1997.................................... 6 Condensed Consolidated Statements of Cash Flows --- nine months ended September 30, 1997 and 1996................................................................... 7 Notes to Condensed Consolidated Financial Statements.......................................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................................. 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................................. 22 Item 2. Changes in Securities......................................................................... 22 Item 3. Defaults upon Senior Securities............................................................... 22 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 22 Item 5. Other Information............................................................................. 22 Item 6. Exhibits and Reports on Form 8-K.............................................................. 23 Signatures.............................................................................................. 24
2 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS ORION NETWORK SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------ ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 82,811,224 $ 42,187,807 Restricted assets 50,064,014 -- Accounts receivable 10,616,434 6,473,316 Prepaid expenses and other current assets 8,075,496 3,583,403 --------- --------- Total current assets 151,567,168 52,244,526 Restricted and segregated assets, including accrued interest of approximately $2.6 million 309,733,601 -- Property and equipment at cost: Land 73,911 73,911 Telecommunications equipment 39,640,596 25,342,528 Furniture and computer equipment 7,662,047 4,849,711 Satellite and related equipment 322,316,778 321,247,346 ----------- ----------- 369,693,332 351,513,496 Less: accumulated depreciation (66,041,278) (68,224,957) Satellite construction in progress, including capitalized interest of $4.5 million 85,161,019 4,560,844 ---------- --------- Net property and equipment 388,813,073 287,849,383 Deferred financing costs, net 22,958,747 12,918,233 Goodwill and other assets, net 28,370,849 5,252,302 ---------- --------- TOTAL ASSETS $901,443,438 $358,264,444 ============ ============
See Notes to Condensed Consolidated Financial Statements. 3 ORION NETWORK SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 3,014,835 $ 6,411,028 Accrued liabilities 11,029,550 7,653,208 Other current liabilities 7,889,160 5,406,072 Interest payable 11,314,851 8,583,882 Current portion of long-term debt 9,161,559 34,975,060 --------- ---------- Total current liabilities 42,409,955 63,029,250 Long-term debt 790,561,141 218,236,839 Other liabilities 21,849,605 46,402,299 Limited Partners' interest in Orion Atlantic -- 10,130,058 Redeemable preferred stock: Series A 8% Cumulative Redeemable Convertible Preferred Stock, $.01 par value, 15,000 shares authorized; 13,845 and 13,871 shares issued and outstanding, plus accrued dividends 16,897,297 16,097,880 Series B 8% Cumulative Redeemable Convertible Preferred Stock, $.01 par value, 5,000 shares authorized; 4,295 and 4,298 shares issued and outstanding, plus accrued dividends 5,058,832 4,804,486 Series C 6% Cumulative Redeemable Convertible Preferred Stock, $.01 par value, 150,000 shares authorized; 123,172 and 0 shares issued and outstanding, plus accrued dividends and accretion 95,911,432 -- Stockholders' deficit: Common stock, $.01 par value, 40,000,000 shares authorized; 11,406,162 and 10,985,150 shares outstanding 116,755 112,447 Capital in excess of par value 101,473,379 86,932,391 Treasury stock, 269,274 and 259,515 shares (91,490) -- Foreign currency translation (742,614) -- Accumulated deficit (172,000,854) (87,481,206) ------------ ----------- Total stockholders' deficit (71,244,824) (436,368) ----------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 901,443,438 $ 358,264,444 ================= =================
See Notes to Condensed Consolidated Financial Statements. 4 ORION NETWORK SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- (Unaudited) (Unaudited) (Unaudited) (Unaudited) REVENUE $ 17,618,704 $ 12,246,599 $ 54,538,878 $ 30,015,517 OPERATING EXPENSES: Direct 4,259,824 1,800,065 12,991,843 4,285,834 Sales and marketing 4,819,732 2,753,409 13,381,240 7,792,666 Engineering and technical services 2,691,888 2,143,303 8,094,979 6,333,525 General and administrative 4,990,995 3,871,365 14,750,878 11,469,235 Depreciation and amortization 12,126,705 8,829,170 35,823,029 26,402,947 ---------- --------- ---------- ---------- Total operating expenses 28,889,144 19,397,312 85,041,969 56,284,207 ---------- ---------- ---------- ---------- LOSS FROM OPERATIONS (11,270,440) (7,150,713) (30,503,091) (26,268,690) OTHER EXPENSE (INCOME): Interest income (6,123,441) (530,651) (18,253,925) (1,841,868) Interest expense 22,330,637 6,398,747 62,290,316 20,228,519 Other 32,064 (33,868) 605,295 (48,356) ---------- ---------- ---------- ---------- Total other expense (income) 16,239,260 5,834,228 44,641,686 18,338,295 ---------- ---------- ---------- ---------- Loss before extraordinary loss on extinguishment of debt, minority interest and preacquisition loss of acquired subsidiary (27,509,700) (12,984,941) (75,144,777) (44,606,985) Extraordinary loss on extinguishment of debt -- -- (15,763,220) -- Limited Partners' and minority interest in the net loss of Orion Atlantic and other consolidated entities -- 7,188,636 12,042,978 24,799,698 Preacquisition loss of acquired subsidiary -- -- 626,246 -- ---------- ---------- ---------- ---------- NET LOSS (27,509,700) (5,796,305) (78,238,773) (19,807,287) Preferred stock dividend and accretion, net of forfeitures 2,308,501 265,873 6,280,875 1,006,285 ---------- ---------- ---------- ---------- Net loss attributable to common stockholders $ (29,818,201) $ (6,062,178) $ (84,519,648) $ (20,813,572) ============= ============= ============= ============= Net loss per common share $ (2.63) $ (0.55) $ (7.53) $ (1.90) ============= ============= ============= ============= Weighted average common shares outstanding 11,335,347 10,964,945 11,221,618 10,943,287 ============= ============= ============= ============= See Notes to Condensed Consolidated Financial Statements.
5 ORION NETWORK SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
COMMON STOCK ---------------------- CAPITAL IN NUMBER EXCESS OF PAR OF SHARES AMOUNT VALUE --------- ------ --------------- Balance at December 31, 1995 11,115,965 $ 111,160 $ 85,485,613 Conversion of preferred stock to common stock 91,071 911 804,034 Issuance of stock warrants -- -- 300,000 Exercise of stock options and warrants 37,629 376 342,744 Preferred stock dividend, net of forfeitures -- -- -- Net loss for 1996 -- -- -- ---------- ------- ---------- Balance at December 31, 1996 11,244,665 112,447 86,932,391 Issuance of common stock 11,286 113 142,317 Conversion of preferred stock to common stock 3,350 34 28,966 Issuance of common stock for the purchase of APSC 85,715 857 1,199,143 Issuance of common stock for interest payments 205,229 2,052 2,622,947 Issuance of warrants relating to Senior Notes and Senior Discount Notes, net -- -- 9,223,674 Exercise of stock options and warrants 105,746 1,057 1,167,117 Employee Stock Purchase Plan 19,445 195 156,824 Preferred stock dividend and -- -- accretion, net of forfeitures -- Foreign currency translation -- -- -- Purchase of treasury stock -- -- -- Net loss for the nine months ended September 30, 1997 -- -- -- ---------- ------- ---------- Balance at September 30, 1997 (unaudited) 11,675,436 (1) $ 116,755 $ 101,473,379 ============= ========= =============
FOREIGN TOTAL ACCUMULATED TREASURY CURRENCY STOCKHOLDERS' DEFICIT STOCK TRANSLATION EQUITY(DEFICIT) ----------- --------- ----------- --------------- Balance at December 31, 1995 $ (58,916,131) $0 $ 0 $ 26,680,642 Conversion of preferred stock to common stock -- -- -- 804,945 Issuance of stock warrants -- -- -- 300,000 Exercise of stock options and warrants -- -- -- 343,120 Preferred stock dividend, net of forfeitures (1,369,665) -- -- (1,369,665) Net loss for 1996 (27,195,410) -- -- (27,195,410) ----------- --------- -------- ----------- Balance at December 31, 1996 (87,481,206) 0 0 (436,368) Issuance of common stock -- -- -- 142,430 Conversion of preferred stock to common stock -- -- -- 29,000 Issuance of common stock for the purchase of APSC -- -- -- 1,200,000 Issuance of common stock for interest payments -- -- -- 2,624,999 Issuance of warrants relating to Senior Notes and Senior Discount Notes, net -- -- -- 9,223,674 Exercise of stock options and warrants -- -- -- 1,168,174 Employee Stock Purchase Plan -- -- -- 157,019 Preferred stock dividend and accretion, net of forfeitures (6,280,875) -- -- (6,280,875) Foreign currency translation -- -- (742,614) (742,614) Purchase of treasury stock -- (91,490) -- (91,490) Net loss for the nine months ended September 30, 1997 (78,238,773) -- -- (78,238,773) ----------- --------- --------- ----------- Balance at September 30, 1997 (unaudited) $(172,000,854) $(91,490) $ (742,614) $ (71,244,824) ============= ======== ========== ==============
See Notes to Condensed Consolidated Financial Statements. - ---------------- (1) Includes 269,274 treasury shares of which 259,515 are carried at no cost. 6 ORION NETWORK SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------- 1997 1996 ---- ---- OPERATING ACTIVITIES (Unaudited) (Unaudited) Net loss $ (78,238,773) $ (19,807,287) Adjustments to reconcile net loss to net cash used in operating activities: Extraordinary loss on extinguishment of debt 15,763,220 -- Amortization and depreciation 35,823,029 26,402,947 Amortization of deferred financing costs 2,381,556 1,597,941 Provision for bad debts 796,618 524,999 Satellite incentives and accrued interest 2,008,286 1,747,334 Accretion of interest on Senior Discount Notes 22,116,416 -- Accrued interest on restricted funds (2,615,846) -- Accrued interest on Debentures 3,500,000 -- Limited Partners' and minority interest in Orion Atlantic and other consolidated entities (12,042,978) (24,799,698) Gain on sale of assets -- (41,054) Changes in operating assets and liabilities: Accounts receivable (1,532,969) (1,143,969) Prepaid expenses and other current assets (3,506,075) (2,443,453) Other assets (2,742,643) 427,741 Accounts payable and accrued liabilities (3,224,095) (5,818,070) Other current liabilities 1,888,731 3,279,274 Interest payable 1,848,615 (4,876,714) --------- ---------- Net cash used in operating activities (17,776,908) (24,950,009) INVESTING ACTIVITIES Capital expenditures (11,924,223) (10,266,012) Restricted assets (357,181,769) -- Satellite construction costs, including capitalized interest (80,600,175) -- Purchase of Teleport Europe, net of cash acquired (8,374,845) -- Deferred revenue 12,250,000 -- FCC license costs (182,708) (117,600) -------- -------- Net cash used in investing activities (446,013,720) (10,383,612) FINANCING ACTIVITIES Limited Partners' capital contributions -- 30,135,000 Debt and equity financing costs (25,959,140) -- Proceeds from issuance of common stock and subscriptions, net of issuance costs 1,325,160 219,380 Treasury stock purchase (91,490) -- Proceeds from issuance of debt 770,397,000 -- Repayment of senior note payable to banks and notes payable (215,580,900) (25,096,436) Termination of interest cap agreements (5,287,827) -- Payment of satellite incentive obligations (16,866,717) -- Other (3,522,041) 11,620,711 ---------- ---------- Net cash provided by financing activities 504,414,045 16,878,655 Net increase (decrease) in cash and cash equivalents 40,623,417 (18,454,966) Cash and cash equivalents at beginning of period 42,187,807 55,111,585 ---------- ---------- Cash and cash equivalents at end of period $ 82,811,224 $ 36,656,619 ============== ===============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 7 ORION NETWORK SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NINE MONTHS ENDED ------------------------------------------ SEPTEMBER 30, 1997 1996 ---- ---- (Unaudited) (Unaudited) Transactions not providing or requiring cash: Property and equipment financed by capital leases $ 18,600 $ -- ============= ============= Accrued preferred stock dividend and accretion, net of forfeitures $ 6,280,875 $ 1,108,232 ============= ============= Conversion of preferred stock to common stock $ 29,000 $ 804,945 ============= ============= Issuance of common stock for employees retirement (401-K) $ 142,430 $ -- ============= ============= Issuance of common stock and warrants $ 13,048,673 $ -- ============= ============= Issuance of preferred stock $ 94,000,000 $ -- ============= ============= Acquisition of Teleport Europe, net of cash acquired: Working capital deficit, net of cash acquired $ 683,567 $ -- Property and equipment (9,346,584) -- Other, net 288,172 -- Net cash used to acquire Teleport Europe $ (8,374,845) $ -- ============= ============= Interest paid during the period, net of amounts capitalized $ 33,709,344 $ 11,436,501 ============= =============
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 fair presentation have been included. Operating results for the three and nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. The balance sheet at December 31, 1996 has been derived from the audited financial statements that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the 1996 Orion Network Systems, Inc. Annual Report on Form 10-K (and amendment thereto on Form 10-K/A). BUSINESS AND OWNERSHIP Orion Network Systems, Inc. is a holding company with no assets or operations other than its investments in its subsidiaries. Through the operations of the following subsidiaries ("Subsidiary Guarantors"), the Company's principal business is the provision of satellite-based communications services:
Jurisdiction of organization or Name Incorporation ---- ------------- Asia Pacific Space and Communications, Ltd. Delaware International Private Satellite Partners, L.P. Delaware Orion Network Systems-Asia Pacific, Inc. (formerly known as Orion Asia Pacific Corporation) Delaware Orion Network Systems-Europe, Inc. (formerly known as Orion Atlantic Delaware Europe, Inc.) OrionNet Finance Corporation Delaware OrionNet, Inc. Delaware Orion Network Services, Inc. (formerly known as Orion Satellite Corporation) Delaware Orion Network Systems-Europe GmbH (formerly known as Teleport Europe GmbH) Federal Republic of Germany
Each of the Subsidiary Guarantors is a wholly-owned (100%) subsidiary of the Company. The Subsidiary Guarantors comprise all of the direct and indirect subsidiaries of the Company (other than inconsequential subsidiaries). 9 ORION NETWORK SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A. BASIS OF PRESENTATION (CONTINUED) Separate financial statements of the Subsidiary Guarantors are not presented because (a) such Subsidiary Guarantors have jointly and severally guaranteed the Notes on a full and unconditional basis, (b) the aggregate assets, liabilities, earnings and equity of the Subsidiary Guarantors are substantially equivalent to the assets, liabilities, earnings and equity of the Company on a consolidated basis, and (c) management has determined that such information is not material to investors. RECENT DEVELOPMENTS PENDING ACQUISITION OF THE COMPANY BY LORAL On October 7, 1997, Orion, Loral Space & Communications Ltd. ("Loral") and Loral Satellite Corporation, a wholly-owned subsidiary of Loral ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Merger Sub will merge with and into the Company, with the Company being the surviving corporation and thereby becoming a wholly-owned subsidiary of Loral (the "Loral Merger"). The Merger Agreement provides that (i) each share of Common Stock, excluding treasury shares and shares owned by Loral or its subsidiaries, will be converted into and exchanged for the right to receive the number of fully paid and nonassessable shares of common stock, par value $.01 per share, of Loral ("Loral Common Stock") equal to the Exchange Ratio (as described below), (ii) each share of the Company's Series A 8% Cumulative Redeemable Convertible Preferred Stock (the "Series A Preferred Stock"), Series B 8% Cumulative Redeemable Convertible Preferred Stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Senior Preferred Stock") and Series C Preferred Stock (the Series C Preferred Stock and Senior Preferred Stock are hereinafter referred to as the "Senior Preferred Stock") will be converted into and exchanged for the right to receive the number of fully paid and nonassessable shares of Loral Common Stock equal to the Exchange Ratio multiplied by the number of shares of Common Stock into which such share of Preferred Stock was convertible immediately prior to the Effective Time of the Loral Merger, (iii) each outstanding stock option to purchase shares of Orion Common Stock will be converted into an option to acquire the number of shares of Loral Common Stock equal to the Exchange Ratio multiplied by the number of shares of Common Stock for which such option was exercisable, and (iv) each outstanding warrant to purchase shares of Orion Common Stock will be converted into a warrant to acquire the number of shares of Common Stock equal to the Exchange Ratio multiplied by the number of shares of Company Common Stock for which such warrant was exercisable. Pursuant to the terms of the Merger Agreement, the Exchange Ratio is determined as follows: (i) if the average of the volume-weighted average trading prices of Loral Common Stock for the twenty consecutive trading days on which trading of Loral Common Stock occurs ending the tenth trading day immediately prior to the closing date for the Loral Merger (the "Determination Price") is less than $24.458 but greater than $16.305, the Exchange Ratio is the quotient obtained by dividing $17.50 by the Determination Price, (ii) if the Determination Price is equal to or greater than $24.458, the Exchange Ratio is 0.71553 and (iii) if the Determination Price is equal to or less than $16.305, the Exchange Ratio is 1.07329. 10 ORION NETWORK SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A. BASIS OF PRESENTATION (CONTINUED) The Loral Merger is subject to a number of conditions, including approval by Orion's stockholders, approval by the Federal Communications Commission and other regulatory approvals. Although not a condition of the Loral Merger, Orion intends to seek an Internal Revenue Service ruling as to eligibility for a tax-free exchange. In connection with the Merger Agreement, certain principal stockholders of Orion and members of Orion's management have agreed to vote in favor of the Loral Merger and have granted to the Loral the right to purchase their securities in Orion for a price equal to the Loral Merger consideration under certain circumstances. The Company expects the Loral Merger to be consummated by the first quarter of 1998. The foregoing descriptions of the Merger Agreement and Principal Stockholder Agreement with Loral do not purport to be complete. The Merger Agreement and Principal Stockholder Agreement have been filed as exhibits 2.1 and 2.2, respectively, to Company's Current Report on Form 8-K dated October 9, 1997, and are incorporated herein by reference. OTHER RECENT DEVELOPMENTS In January 1997, Orion consummated a series of transactions that are described below. ACQUISITION OF ORION ATLANTIC LIMITED PARTNERSHIP INTERESTS IN THE EXCHANGE On January 31, 1997, the Company acquired all of the limited partnership interests which it did not already own in the Company's operating subsidiary, Orion Atlantic, that owns the Orion 1 satellite. Specifically, the Company acquired the Orion Atlantic limited partnership interests and other rights relating thereto held by British Aerospace Communications, Inc., COM DEV Satellite Communications Limited, Kingston Communications International Limited, Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate of Matra Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of Nissho Iwai Corp. (collectively, the "Exchanging Partners"). Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the "Exchange Agreement"), the Exchanging Partners exchanged (the "Exchange"), their Orion Atlantic limited partnership interests for 123,172 shares of a newly created class of the Company's Series C Preferred Stock. In addition, the Company acquired certain rights held by certain of the Exchanging Partners to receive repayment of various advances (aggregating approximately $41.4 million at December 31, 1996). The 123,172 shares of Series C Preferred Stock issued in the Exchange are convertible into approximately 7 million shares of the Company's Common Stock. As a result of the Exchange, certain of the Exchanging Partners became principal stockholders of the Company. The exchange is described in greater detail under the caption "The Merger, the Exchange and the Debenture Investments" in the Company's Registration Statement on Form S-4 (Registration No. 333-19795). The Exchange and the acquisition by the Company of the only outstanding minority interest in the Company's subsidiary Asia Pacific Space and Communications, Ltd. from British Aerospace Satellite Investments, Inc. on January 8, 1997 (in exchange for approximately 86,000 shares of the Company's Common Stock) results in the Company owning 100% of Orion Atlantic and its other significant subsidiaries and, therefore, a greatly simplified corporate structure. THE MERGER The Exchange was conducted on a tax-free basis by means of an Orion Merger (defined below) that was consummated on January 31, 1997. Pursuant to the Exchange Agreement, Orion Oldco Services, Inc., formerly known as Orion Network Systems, Inc. ("Old Orion"), formed the Company as a new Delaware corporation with a certificate of incorporation, bylaws and capital structure substantially identical in all material respects with those of 11 ORION NETWORK SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A. BASIS OF PRESENTATION (CONTINUED) Old Orion. Also pursuant to the Exchange Agreement, the Company formed a wholly-owned subsidiary, Orion Merger Company, Inc. ("Orion Merger Subsidiary"). Pursuant to an Agreement and Plan of Merger, Orion Merger Subsidiary was merged with and into Old Orion, and Old Orion became a wholly-owned subsidiary of the Company (the "Orion Merger"). On January 31, 1997, the effective time of the Orion Merger, all of the stockholders of Old Orion received stock in the Company with substantially identical rights to the Old Orion stock they held prior to the effective time of the Orion Merger. Following the Orion Merger, the Company changed its name from Orion Newco Services, Inc. to Orion Network Systems, Inc. and the Company's wholly-owned subsidiary Orion Network Systems, Inc. changed its name to Orion Oldco Services, Inc. The Exchange and Orion Merger are describe in greater detail under the caption "The Merger, the Exchange and Debenture Investments" in the Company's Registration Statement on Form S-4 (Registration No. 333-19795). The Company is the successor issuer to Old Orion and filed a Registration Statement on Form 8-B with the Securities and Exchange Commission on January 31, 1997, to register all the issued and outstanding shares of Common Stock and preferred stock of the Company. The Company is considered the successor to Old Orion for purposes of the NASDAQ National Market and the Company's Common Stock is quoted on the NASDAQ National Market under the trading symbol "ONSI". FINANCINGS On January 31, 1997, the Company completed a $710 million bond offering (the "Bond Offering") comprised of approximately $445 million of Senior Note Units, each of which consists of one 11.25% Senior Note due 2007 (a "Senior Note") and one Warrant to purchase 0.8463 shares of Common Stock, par value $.01 per share ("Common Stock") of the Company (a "Senior Note Warrant"), and approximately $265.4 million of Senior Discount Note Units, each of which consists of one 12.5% Senior Discount Note due 2007 (a "Senior Discount Note," and together with the Senior Notes, the "Notes") and one Warrant to purchase 0.6628 shares of Common Stock of the Company (a "Senior Discount Note Warrant, and together with Senior Note Warrants, the "Warrants"). Interest on the Senior Notes will be payable semi-annually in cash on January 15 and July 15 of each year, with the first payment made on July 15, 1997. The Senior Discount Notes will not pay cash interest prior to July 15, 2002. Thereafter, cash interest will accrue until maturity at an annual rate of 12.5% payable semi-annually on January 15 and July 15 of each year, commencing July 15, 2002. The exercise price for the Warrants will be $.01 per share of Common Stock of the Company. The shares of Common Stock of the Company initially issuable upon exercise of the Warrants represent approximately 2.62% of the outstanding Common Stock of the Company on a fully diluted basis as of January 31, 1997. The Bond Offering was underwritten by Morgan Stanley & Co. Incorporated and Merrill Lynch & Co. The foregoing description of the Notes is qualified in its entirety by the description of such Notes in the Indentures and notes documents, copies of which have been filed as exhibits to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 1997. In addition, on January 31, 1997, the Company also completed the sale of $60 million of its convertible junior subordinated debentures (the "Debentures") to two investors, British Aerospace Holdings, Inc. ("British Aerospace") and Matra Marconi Space UK Limited ("Matra Marconi Space"). British Aerospace purchased $50 million of the Debentures and Matra Marconi Space purchased $10 million of the Debentures (collectively, the "Debentures Offering", and together with the Bond Offering, the "Financings"). The Debentures will mature in 2012, and will bear interest at a rate of 8.75% per annum to be paid semi-annually in arrears solely in Common Stock of the company. The debentures are subordinated to all other indebtedness of the Company, including the Notes. 12 ORION NETWORK SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A. BASIS OF PRESENTATION (CONTINUED) The net proceeds of the Bond Offering and Debentures Offering were used by the Company to repay the Orion 1 credit facility, pre-fund the first three years of interest payments on certain of the Notes, and will be used to build and launch two additional satellites, Orion 2 and Orion 3. The extraordinary loss on extinguishment of debt of $15.8 million in 1997 is the result of expensing unamortized deferred financing costs associated with the Orion 1 credit facility which was refinanced with the proceeds from the Bond offering and termination of a interest rate cap agreement. ACQUISITION OF TELEPORT EUROPE GMBH On March 26, 1997, Orion acquired German-based Teleport Europe GmbH, whose name was subsequently changed to Orion Network Systems-Europe GmbH ("Orion Europe"), a communications company specializing in private satellite networks for voice and data services for $8.9 million. The Company has consolidated the operations of Orion Europe for the nine months ended September 30, 1997, retroactively to January 1, 1997. The effect of this consolidation on operations prior to acquisition was to increase consolidated revenues by approximately $4.1 million, increase total operating expenses by approximately $4.0 million and other expenses by approximately $0.7 million. The pre-acquisition loss of Orion Europe of $0.6 million has been deducted from the consolidated statement of operations for the nine months ended September 30, 1997. NOTE B. LONG-TERM DEBT Long-term debt consists of the following:
SEPTEMBER 30, DECEMBER 31, 1997 1996 ---- ---- Senior notes ($445.0 million, net of unamortized discount of $5.0 million) $ 440,023,150 $ -- Senior discount notes ($265.4 million, plus interest accretion of approximately $22.1 million, net of unamortized discount of $4.0 million) 283,491,546 -- Convertible debentures 60,000,000 -- Senior notes payable - banks -- 207,714,842 Notes payable - TT&C Facility 6,267,244 6,956,624 Satellite incentive obligations 7,515,315 22,373,746 Notes payable - STET -- 5,550,000 Notes payable - limited partners -- 8,050,000 Other 2,425,445 2,566,687 --------- --------- Total long-term debt 799,722,700 253,211,899 Less: current portion 9,161,559 34,975,060 --------- ---------- Long-term debt less current portion $ 790,561,141 $ 218,236,839 ================= ===============
13 ORION NETWORK SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE C. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY During the nine months ended September 30, 1997, certain preferred stockholders exercised their right to convert 29 shares of preferred stock into 3,350 shares of Common Stock at prices ranging from $8.50 to $10.20 per share. NOTE D. COMMITMENTS AND CONTINGENCIES In October 1995, Skydata Corporation ("Skydata"), a former contractor, filed suit against Orion Atlantic, Orion Satellite Corporation and Orion, in the United States District Court for the Middle District of Florida, claiming that certain Orion Atlantic operations using frame relay switches infringe on a Skydata patent. Skydata's suit sought damages in excess of $10 million and asked that any damages assessed be trebled. On December 11, 1995, the Orion parties filed a motion to dismiss the lawsuit on the grounds of lack of jurisdiction and violation of a mandatory arbitration agreement. In addition, on December 19, 1995, the Orion parties filed a Demand for Arbitration against Skydata with the American Arbitration Association in Atlanta, Georgia, requesting damages in excess of $100,000 for breach of contract and declarations, among other things, that Orion and Orion Atlantic own a royalty-free license to the patent, that the patent is invalid and unenforceable and that Orion and Orion Atlantic have not infringed on the patent. On March 5, 1996, the court granted the Company's motion to dismiss the lawsuit on the basis that Skydata's claims are subject to arbitration. Skydata appealed the dismissal to the Untied States Court of Appeals for the Federal Circuit. Skydata also filed a counterclaim in the Arbitration proceedings asserting a claim for $2 million damages as a result of the conduct of Orion and its affiliates. On May 15, 1996, the arbitrator granted the Orion parties' request for an initial hearing on claims relating to the Orion parties' rights to the patent, including the co-ownership claim and other contractual claims. On November 9, 1996, Orion and Skydata executed a letter with respect to the settlement in full the pending litigation and arbitration. On August 12, 1997, the parties entered into a formal settlement agreement. As part of the settlement, the parties released all claims by either side relating in any way to the patent and/or the pending litigation and arbitration. In addition, Skydata granted Orion (and its affiliates) an unrestricted, world-wide paid-up license to make, have made, use or sell products or methods under the patent and all other corresponding continuation and reissue patents. Orion is to pay Skydata $437,000 over a period of two years as part of the settlement. While Orion is party to regulatory proceedings incident to its business, there are no material legal proceedings pending or, to the knowledge of management, threatened against Orion or its subsidiaries. 14 ORION NETWORK SYSTEMS, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Orion Network System, Inc.'s ("Orion" or the "Company") principal business is the provision of satellite communications for private communications networks and video distribution and other satellite transmission services. From its inception in 1982 through January 20, 1995, when Orion 1 commenced commercial operations, Orion was a development stage enterprise. Prior to January 1995, Orion's efforts were devoted primarily to monitoring the construction, launch and in-orbit testing of Orion 1, product development, marketing and sales of interim private communications network services, raising financing and planning Orion 2 and Orion 3. Through January 31, 1997, Orion Satellite Corporation (whose name has been changed to Orion Network Services, Inc.) was the sole general partner in Orion Atlantic, L.P. ("Orion Atlantic") and had a 41 2/3% equity interest in Orion Atlantic. As a result of Orion's control of Orion Atlantic, Orion's consolidated financial statements include the accounts of Orion Atlantic. All of Orion Atlantic's revenues and expenses are included in Orion's consolidated financial statements, with appropriate adjustment to reflect the interests of the Limited Partners in Orion Atlantic's losses prior to the Exchange (as described in Note A to the Condensed Consolidated Financial Statements). The assets and liabilities reported in the consolidated balance sheet at December 31, 1996 primarily pertain to Orion Atlantic. Orion's consolidated financial statements also include the accounts of all other subsidiaries of Orion. See Note A to the Condensed Consolidated Financial Statements for a discussion of recent developments. All subsidiaries of Orion ("Subsidiary Guarantors"), other than inconsequential subsidiaries, have unconditionally guaranteed the Notes (as defined below) on a joint and several basis. No restrictions exist on the ability of Subsidiary Guarantors to pay dividends or make other distributions to Orion, except to the extent provided by law generally (e.g., adequate capital to pay dividends under state corporate laws). ORION 2 AND ORION 3 COMMENCEMENT OF CONSTRUCTION Orion 2 and Orion 3 Construction Contracts. Orion commenced construction of Orion 2 in February 1997 under a satellite procurement contract with Matra Marconi Space. Orion commenced construction of Orion 3 in December 1996 under a satellite procurement contract with Hughes Space and Communications International, Inc. Pre-Construction Lease on Orion 3. Orion has entered into a contract with DACOM Corp., a Korean communications company ("DACOM"), under which DACOM will, subject to certain conditions, lease eight dedicated transponders on Orion 3 for 13 years, in return for approximately $89 million, payable over a period from December 1996 through seven months following the lease commencement date for the transponders (which is scheduled to occur by January 1999). Payments are subject to refund unless Orion 3 commences commercial operation by June 30, 1999. OVERVIEW Orion's revenues are principally generated under three to five year contracts for delivery of communications services. Such revenues are derived principally from recurring monthly fees from its customers, although many contracts include initial non-recurring installation and other fees. These non-recurring fees generally are structured to cover the Company's actual costs of installation of the customer's site-based equipment. The revenues from each contract vary, depending upon the type of service, amount of capacity, data handling ability of the network, the number of very small aperture terminals ("VSATs") (which generally are owned by Orion), value-added services and other factors. Depending on the complexity of the services to be provided to a customer, the period between the date of signature of a contract and the commencement of actual services (and receipt of fees) typically ranges from 30 days to six months. Substantially all of Orion's contracts are denominated in U.S. dollars, although some contracts are denominated in pounds sterling, Deutschemarks, Austrian shillings or French francs. Orion begins to record revenues under its contracts upon service commencement to the customer. 15 ORION NETWORK SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The services provided by Orion have been subject to decreasing prices over recent years and this pricing pressure is expected to continue (and may accelerate) for the foreseeable future, particularly if, as expected, capacity continues to increase. Orion will need to increase its volume of sales in order to compensate for such price reductions. Orion believes that customers will increase the data speeds in their communications networks to support new applications, and that such upgrading of customer networks will lead to increased revenues that will mitigate the effect of price reductions. However, there can be no assurance that this will occur. Orion expects to continue to incur net losses and negative cash flow (after payments for capital expenditures and interest) for the foreseeable future. Orion's direct cost of services includes principally (i) costs relating to the installation, maintenance and licensing of VSAT earth stations at its customers' premises; (ii) satellite lease payments for transponder capacity (generally for services outside of the Orion 1 footprint); and (iii) associated miscellaneous expenses. Sales and marketing expenses consist of salaries, sales commissions (including commissions to third party sales representatives), travel and promotion expenses. The Company has recently commenced a significant expansion of its marketing program and expects to continue this expansion through 1997. Due to the complexity of the Company's services, and the continued expansion of sales personnel, sales and marketing expense is expected to continue to increase significantly during 1997. Engineering and technical expenses, consisting principally of personnel costs and travel, relate to tracking, telemetry and command ("TT&C"), network monitoring, network design and similar activities. The Company constructed its TT&C facilities to control two satellites. As a result, the Company anticipates a slight increase in costs with Orion 2 and a more substantial increase in costs with Orion 3, which will require separate TT&C facilities. General and administrative expenses consist of in-orbit insurance premiums, personnel costs other than for sales, marketing and engineering, professional services, and occupancy costs. These costs will increase generally as the Company's operations expand. Specifically, in-orbit insurance costs will increase significantly following the launches of Orion 2 and Orion 3. Depreciation and amortization expenses result mainly from the depreciation of the Orion 1 satellite, VSATs and the related equipment to service the expansion of the private network communication services business as well as the amortization of goodwill and will increase substantially after the launch of Orion 2 and Orion 3. Interest income is primarily the result of interest earned on the proceeds from Orion's private and public financings. Interest costs have increased substantially as a result of the financings completed January 31, 1997. Orion's costs (other than sales commissions) generally do not vary substantially with the amount of revenue from the Orion 1 satellite. RESULTS OF OPERATIONS Three and Nine Month Periods Ended September 30, 1997 Compared to the Three and Nine Month Periods Ended September 30, 1996. Consolidation of Teleport Europe GmbH. On March 26, 1997, Orion acquired German-based Teleport Europe GmbH (a communications company specializing in private satellite networks for voice and data services), whose name was subsequently changed to Orion Network Systems-Europe GmbH ("Orion Europe"). The Company has consolidated the operations of Orion Europe for the nine months ended September 30, 1997, retroactively to January 1, 1997. The effect of this consolidation on operations prior to acquisition was to increase consolidated revenues by approximately $4.1 million, increase total operating expenses by approximately $4.0 million and other expenses by approximately $0.7 million. The preacquisition loss of Orion Europe of $0.6 million has been deducted from the consolidated statement of operations for the nine months ended September 30, 1997. 16 ORION NETWORK SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Revenue and bookings. Total revenue for the three and nine months ended September 30, 1997 was $17.6 and $54.5 million, compared to $12.2 and $30.0 million for the same periods in 1996, an increase of 44% and 82%, respectively. Revenues from private communications network services were $9.1 and $26.5 million for the third quarter and year to date and $4.5 and $11.4 million for the comparable periods in 1996, as the number of customer sites in service increased approximately 109%. Revenues from video communications services and transponder capacity leasing were $8.4 and $23.6 million for the third quarter and year to date compared to $7.5 and $18.2 million for the comparable periods in 1996. Revenues for the nine months ended September 30, 1997, included $4.4 million of equipment sales of which $3.8 million was associated with a sales-type lease to an existing customer. At September 30, 1997, Orion had a customer contract backlog (representing future revenues under contract) of approximately $254.1 million compared to $134.3 million at September 30, 1996, an increase of 89%. Revenue from customer contract backlog is typically earned over contract terms of three to five years. OPERATING EXPENSES Direct expenses. Direct expenses for the three and nine months ended September 30, 1997 were $4.3 million and $13.0 million as compared to $1.8 million and $4.3 million for the same periods in 1996. The increase of $2.5 million or 139% for the three months ended September 30, 1997 resulted primarily from incremental Internet support costs and additional leased space segment costs outside the Orion 1 footprint, principally for the acquisition of Orion Europe. The increase of $8.7 million, or approximately 202%, for the nine months ended September 30, 1997, were primarily attributable to the cost of equipment associated with a sales-type equipment lease to an existing customer, leased space segment, site maintenance and other operational costs associated with the increased sites in service for the period. Sales and marketing expenses. Sales and marketing expenses were $4.8 million and $13.4 million respectively, for the three and nine months ended September 30, 1997, as compared to $2.8 million and $7.8 million for the same periods in 1996. The increase of $2.0 million or 71% and $5.6 million or 72% for the three and nine months ended September 30, 1997, are related to compensation costs for the Company's significant expansion of its sales force, as well as additional costs for the expanded marketing program during 1997. This expansion includes additional commissions, consulting and advertising associated with the growth in private communications network services business. The Company expects sales and marketing expenses to continue to rise through the remainder of 1997. Engineering and technical services expenses. Engineering and technical services expenses were $2.7 million and $8.1 million for the three and nine months ended September 30, 1997, as compared to $2.1 million and $6.3 million for the comparable periods in 1996. The increase of $0.6 million or 29% and $1.8 million or 29%, respectively for the three and nine months ended September 30, 1997 is related to additional engineering and technical staff associated with the Orion Europe acquisition. General and administrative expenses. General and administrative expenses were $5.0 million and $14.8 million for the three and nine months ended September 30, 1997, compared to $3.9 million and $11.5 million for the same periods in 1996. The increase of $1.1 or 28% and $3.3 million or 29% for the three and nine months ended September 30, 1997, was primarily due to additional administrative staff associated with the Orion Europe acquisition, outside services and other expenses. 17 ORION NETWORK SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Depreciation and amortization. Depreciation and amortization expenses for the three and nine months ended September 30, 1997 were $12.1 million and $35.8 million, an increase of $3.3 million or 38%, and $9.4 million or 36% respectively, over the same periods in 1996. The increase is primarily a result of depreciation on the step up in basis on the Orion 1 satellite, the amortization of excess cost over fair value of net assets acquired from the acquisition of the Limited Partner's interest in Orion Atlantic and depreciation of ground equipment to service the expansion of the private network communication services business. Interest. Interest income was $6.1 million and $18.3 million for the three and nine months ended September 30, 1997, compared to $0.5 million and $1.8 million, an increase of $5.6 million and $16.5 million for the same periods in 1996. The increase in interest income during the first nine months of 1997 is primarily a result of interest earned on the proceeds from the Company's public Bond Offering in January 1997. Interest expense, net of capitalized interest of $4.5 million in the nine months ended September 30, 1997, was $22.3 million and $62.3 million for the three and nine months ended September 30, 1997, and $6.4 million and $20.2 million for the comparable periods in 1996. The increase in interest expense of $42.1 million in the first nine months of 1997 is attributable to additional interest resulting from the completion of the Company's financings in January 1997. Extraordinary loss on extinguishment of debt. The extraordinary loss on extinguishment of debt of $15.8 million in 1997 is the result of expensing unamortized deferred financing costs of the Orion 1 credit facility which was repaid with the proceeds from the Company's recent Bond Offering and termination of an interest rate cap agreement. Net loss. The Company incurred net losses of $27.5 million and $78.2 million, $5.8 million and $19.8 million for the three and nine months ended September 30, 1997 and 1996, respectively, after deduction of the limited partners' and minority interests' share in the Company's losses of $0 million and $12.0 million, $7.2 million and $24.8 million, respectively, and elimination of the preacquisition loss of Teleport Europe of $.6 million from the consolidated statement of operations for the nine months ended September 30, 1997. LIQUIDITY AND CAPITAL RESOURCES PRIOR FUNDING. Orion has required significant capital for operating and investing activities in the development of its business, and will continue to need to expend significant additional capital in the future to develop fully its global satellite communications system. The Company's funding for its operations through January 1997 had been provided primarily by the sale of equity securities, including the completion of its initial public offering in August 1995 which generated proceeds to the Company of approximately $52 million (net of underwriting discounts), bank loans, vendor financing, lease arrangements and short-term loans from its investors. Funding for the construction and launch of the Orion 1 satellite and related facilities was fully committed through $90 million of equity from the limited partners of Orion Atlantic, an aggregate of $251 million under a secured bank credit facility and approximately $11 million under other debt facilities, dedicated primarily to the construction of the TT&C facility, which is being used to control Orion 1. The Orion 1 credit facility was repaid in January 1997 with the proceeds from the Bond Offering and concurrently with the Bond Offering, Orion acquired all of the limited partnership interests (which it did not already own) in Orion Atlantic in exchange for 123,172 shares of Series C Convertible Preferred Stock representing approximately 7 million underlying shares of Common Stock. EXISTING CAPITAL RESOURCES. The net proceeds of the January 1997 Bond Offering to the Company were approximately $684 million, and the net proceeds of the Debentures Offering were approximately $59 million. Of the Bond Offering proceeds, approximately $223 million was used for repayment of the Orion 1 credit facility (including payment of accrued interest and hedge breakage costs), approximately $24 million was used to make certain initial payments for the Orion 2 satellite contract, approximately $13 million was used to pay accrued satellite incentive fees under the Orion 1 satellite contract and approximately $4 million was used to pay amounts 18 ORION NETWORK SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) owing to STET, a former limited partner of Orion Atlantic. As of September 30, 1997, the Company had cash and cash equivalents of $83 million and restricted and segregated assets $360 million, including $244 million which was segregated by the Company to be used to make payments for additional satellites and certain related costs. The restricted and segregated cash included $113 million plus accrued interest of $2.6 million placed in a pledged account (to pre-fund the first six interest payments on the senior notes). Additionally, included in cash and cash equivalents, is $22.5 million held in escrow and subject to refund pending the successful launch and commencement of commercial operation of Orion 3 as required by the DACOM agreement. EXISTING INDEBTEDNESS NOTES. In the Bond Offering, Orion issued approximately $445 million of 11.25% Senior Notes due 2007 and approximately $484 million principal amount at maturity ($265.4 million initial accreted value) of 12.5% Senior Discount Notes due 2007. Interest on the Senior Notes is payable semi-annually in cash on January 15 and July 15 of each year, commencing July 15, 1997. The Senior Discount Notes do not accrue cash interest prior to January 15, 2002. Thereafter, cash interest will accrue until maturity at an annual rate of 12.5% payable semi-annually on January 15 and July 15 of each year, commencing July 15, 2002. The Notes have the benefit of guarantees issued by each of the material subsidiaries of the Company. The Senior Notes initially are secured by the securities purchased with the $134 million held in a pledged account until the Company makes the first six scheduled interest payments on the Senior Notes and thereafter the Senior Notes will be unsecured. The Senior Discount Notes are unsecured. The Notes are redeemable, at the Company's option, in whole or in part, at any time on or after January 15, 2002 at specified redemption prices. In the event of a change in control (as defined in the indentures relating to the Notes), the Company will be obligated to make an offer to purchase all outstanding Notes at a purchase price equal to 101% of their principal or accreted value, plus accrued and unpaid interest thereon to the repurchase date. The indebtedness evidenced by the Notes ranks pari passu in right of payment with all existing and future unsubordinated indebtedness of the Company and the guarantors, respectively, and senior in right of payment to all existing and future subordinated indebtedness of the Company and the guarantors. The indentures relating to the Notes (the "Indentures") contain certain covenants which, among other things, restrict distributions to stockholders of the Company, the repurchase of equity interests in the Company and the making of certain other investments and restricted payments, the incurrence of additional indebtedness by the Company and its restricted subsidiaries, the creation of certain liens, certain asset sales, transactions with affiliates and related parties, and mergers consolidations. The foregoing description of the notes is qualified in its entirety by the terms of such Notes contained in the Indentures and Notes documents. DEBENTURES. In January 1997, the Company also completed the sale of $60 million of its Debentures to British Aerospace ($50 million) and Matra Marconi Space ($10 million). The Debentures will mature in 2012, and will bear interest at a rate of 8.75% per annum to be paid semi-annually in arrears solely in Common Stock of the Company at prices of between $10.21 and $14.00 per share, depending on the average trading prices of the Common Stock during the applicable measurement period. The Debentures (and accrued but unpaid interest) may be converted in whole or in part into Common Stock at any time at an initial conversion rate of $14.00 per share, as adjusted for stock splits or other recapitalizations, certain dividends or issuances of stock to all stockholders, issuances of stock (or certain rights to acquire stock) at a price per share below $14.00 and other events. Orion may at any time (except during 90 days after a change in control) redeem all or part (but not less than 25% on any one occasion) of the Debentures for cash consideration determined by multiplying the number of shares of Common Stock issuable upon conversion of the Debentures by the greater of (i) the average price of the Common 19 ORION NETWORK SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Stock over the 20 trading days preceding the redemption or (ii) $17.50 per share. Alternatively, Orion, in its sole discretion, may effect the sale through a public or private offering of the Common Stock underlying the Debentures or received as payment of dividends on, the Debentures. In such event, the holders of the Debentures will be entitled to receive a price per share equal to the greater of (a) at least 95% of the average closing price of the Common Stock over the preceding 20 trading days or (b) $17.50 per share. From and after the time when less than $50 million of Notes remain outstanding, in the event of a change of control of Orion (defined as the acquisition by any stockholder of a majority of the voting securities of Orion), either Orion or any holder of the Debentures may, within 90 days after such change of control, require the sale of the Debentures, as converted into Common Stock, to Orion for a purchase price equal to the greater of (a) the price payable in an optional redemption (as described above) and (b) the price paid to holders of Common Stock in the change of control transaction. The Indentures for the Notes contain a covenant which will effectively prohibit Orion from honoring such right. The Debentures are subordinated to all other indebtedness of the Company, including the Notes. The Debentures contain minimal covenants and events of default so long as $50 million or more of the Notes remain outstanding, but a more extensive set of covenants and events of default will apply after less than $50 million of Notes are outstanding. OTHER INDEBTEDNESS AND OTHER OBLIGATIONS. At September 30, 1997, the Company had outstanding indebtedness of approximately $6.3 million under a seven year term loan provided by General Electric Capital Corporation ("GECC") for the TT&C facility and various assets relating thereto. Additionally, at September 30, 1997 the Company had obligations of approximately $7.5 million payable to the manufacturer of Orion 1 through 2007. Current Funding Requirements. Based upon its current expectations for growth, the Company anticipates it will have substantial funding requirements over the next three years to fund the costs of Orion 2 and Orion 3, the purchase of VSATs, other capital expenditures and other capital needs. Interest charges on the Senior Notes over the next three years are fully provided for by restricted cash. The in-orbit delivered costs of the Orion 2 and Orion 3 satellites are expected to aggregate approximately $540 million. In addition to the $76 million incurred through the third quarter of 1997, Orion will need to make payments of approximately $17 million, $350 million and $50 million in 1997, 1998 and 1999, respectively. These amounts include the Company's estimate regarding the cost of launch insurance, although the Company has not had material discussions with potential insurers and has not received any commitment to provide insurance. The contracts for Orion 2 and Orion 3 provide firm fixed prices for the construction and launch of those satellites and provides for penalties in the event of late delivery by the manufacturer, however, the Company's actual payments could be substantially higher due to any change orders for the satellites, insurance rates, delays and other factors. The Company anticipates that its existing cash balances and payments under the DACOM contract will be sufficient to meet substantially all of its capital requirements for the delivery in orbit of Orion 2 and Orion 3. In connection with the Bond Offering, the Company segregated $273 million of the net proceeds to make payments for additional satellites and certain related costs (or to pay interest and principal on the Notes). The Company also can use a portion of its working capital for such costs if it chooses to do so. The Company had working capital of $109.2 million at September 30, 1997. However, there can be no assurance that cost increases for Orion 2 and/or Orion 3 due to change orders, insurance rates or construction delays, among other factors may not increase the Company's capital requirements or that the Company's growth may vary from its expectations resulting in changes in its cash requirements or expected cash. 20 ORION NETWORK SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The balance of the Company's funding requirements are dependent upon its growth and cash flow from operations. The Company cannot predict whether its existing resources and cash flows will be adequate to cover its future cash needs. If existing resources and cash flows are not sufficient to cover the Company's future cash needs, the Company will need to raise additional financing. The Company does not have a revolving credit facility or other source of readily available capital. Sources of additional capital may include public or private debt, equity financings or strategic investments. To the extent that the Company seeks to raise additional debt financing, the Indentures limit the amount of such additional debt (under a variety of provisions contained in such Indentures) and prohibit the Company from using Orion 1, Orion 2 or Orion 3 as collateral for indebtedness for money borrowed. If the Company requires additional financing and is unable to obtain such financing from outside sources in the amounts and at the times needed, there would be a material adverse effect on the Company. EFFECTIVE OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact of Statement No. 128 on the calculation of primary or fully diluted earnings per share for these quarters is not expected to be material. 21 ORION NETWORK SYSTEMS, INC. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In October 1995, Skydata Corporation ("Skydata"), a former contractor, filed suit against Orion Atlantic, Orion Satellite Corporation and Orion, in the United States District Court for the Middle District of Florida, claiming that certain Orion Atlantic operations using frame relay switches infringe on a Skydata patent. Skydata's suit sought damages in excess of $10 million and asked that any damages assessed be trebled. On December 11, 1995, the Orion parties filed a motion to dismiss the lawsuit on the grounds of lack of jurisdiction and violation of a mandatory arbitration agreement. In addition, on December 19, 1995, the Orion parties filed a Demand for Arbitration against Skydata with the American Arbitration Association in Atlanta, Georgia, requesting damages in excess of $100,000 for breach of contract and declarations, among other things, that Orion and Orion Atlantic own a royalty-free license to the patent, that the patent is invalid and unenforceable and that Orion and Orion Atlantic have not infringed on the patent. On March 5, 1996, the court granted the Company's motion to dismiss the lawsuit on the basis that Skydata's claims are subject to arbitration. Skydata appealed the dismissal to the Untied States Court of Appeals for the Federal Circuit. Skydata also filed a counterclaim in the Arbitration proceedings asserting a claim for $2 million damages as a result of the conduct of Orion and its affiliates. On May 15, 1996, the arbitrator granted the Orion parties' request for an initial hearing on claims relating to the Orion parties' rights to the patent, including the co-ownership claim and other contractual claims. On November 9, 1996, Orion and Skydata executed a letter with respect to the settlement in full the pending litigation and arbitration. On August 12, 1997, the parties entered into a formal settlement agreement. As part of the settlement, the parties released all claims by either side relating in any way to the patent and/or the pending litigation and arbitration. In addition, Skydata granted Orion (and its affiliates) an unrestricted, world-wide paid-up license to make, have made, use or sell products or methods under the patent and all other corresponding continuation and reissue patents. Orion is to pay Skydata $437,000 over a period of two years as part of the settlement. While Orion is party to regulatory proceedings incident to its business, there are no material legal proceedings pending or, to the knowledge of management, threatened against Orion or its subsidiaries. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None. 22 ORION NETWORK SYSTEMS, INC. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K: 11.1 Statement regarding: Computation of Net Loss Per Common Share 27 Financial Data Schedule (b) Reports on Form 8-K during the nine months ended September 30, 1997. Current Report on Form 8-K dated January 31, 1997, reporting consummation of the Exchange. Current Report on Form 8-K dated March 26, 1997, reporting consummation of the acquisition of Teleport Europe. Current Report on Form 8-K dated October 9, 1997, reporting execution of the Merger Agreement with Loral. 23 ORION NETWORK SYSTEMS, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ORION NETWORK SYSTEMS, INC. (Registrant) Date: November 12, 1997 /s/ W. Neil Bauer ----------------------------------------- W. Neil Bauer, President Chief Executive Officer and Director (Principal Executive Officer) Date: November 12, 1997 /s/ David J. Frear ----------------------------------------- David J. Frear, Senior Vice President Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) 24 EX-11.1 2 EXHIBIT 11.1 Exhibit 11.1 --- Statement Re: Computation of Net Loss Per Common Share
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER -------------------------------- -------------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Average shares outstanding 11,335,347 10,964,945 11,221,618 10,943,287 Net loss attributable to common stockholde (29,818,201) (6,062,178) (84,519,648) (20,813,572) Net loss per common share ($2.63) ($0.55) ($7.53) ($1.90)
EX-27 3 FDS --
5 0001029850 Orion Network Systems, Inc. 1,000 US Dollar 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 82,811 0 10,616 540 0 151,567 369,693 (66,041) 901,443 42,410 0 0 117,868 117 (71,362) 901,443 4,362 54,539 1,813 85,042 44,642 797 44,036 (78,239) 0 (78,239) 0 15,763 0 (78,239) (7.53) (7.73)
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