UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 Commission file number 0-22085
ORION NETWORK SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-2008654
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2440 Research Boulevard, Suite 400, Rockville, Maryland 20850
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(Address of principal executive offices)
(301-258-8101)
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
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None
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share Series A 8%
Cumulative Redeemable Preferred Stock, par value $.01 per share Series
B 8% Cumulative Redeemable Preferred Stock, par value $.01 per share
11 1/4% Senior Notes Due 2007
12 1/2% Senior Discount Notes Due 2007
Warrants to Purchase Common Stock, par value $ .01 per share
(Title of Class)
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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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of shares of Common Stock held by non-affiliates
(based on the March 4, 1998 closing price of these shares) was approximately
$281.0 million. The Common Stock is traded over-the-counter and quoted through
the Nasdaq National Market.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 4, 1998
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Common Stock, $.01 par value 18,761,251 shares
DOCUMENTS INCORPORATED BY REFERENCE
None
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ORION NETWORK SYSTEMS, INC.
TABLE OF CONTENTS
PART I
Page
Item 1. Business...................................................... 3
Item 2. Properties....................................................30
Item 3. Legal Proceedings.............................................31
Item 4. Submission of Matters to a Vote of Security Holders...........31
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matter........................................................31
Item 6. Selected Financial Data.......................................33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................35
Item 8. Financial Statements and Supplementary Data...................44
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................70
PART III
Item 10. Directors and Executive Officers of the Registrant............70
Item 11. Executive Compensation........................................75
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................80
Item 13. Certain Relationships and Related Transactions................83
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K......................................................84
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PART I
ITEM 1. BUSINESS.
Statements contained in this Annual Report on Form 10-K regarding Orion's
expectations with respect to the pending acquisition by Loral, Orion 2 and Orion
3, related financing, future operations and other information, which can be
identified by the use of forward looking terminology, such as "may", "will",
"expect", "anticipate", "estimate", or "continue" or the negative thereof or
other variations thereon or comparable terminology, are forward looking
statements. See the "Risk Factors" section of Orion Network Systems, Inc.'s
Registration Statement on Form S-1 (Registration No. 333-19167), on file at the
Securities and Exchange Commission for cautionary statements identifying
important factors with respect to such forward looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from results referred to in forward looking statements. There can be
no assurance that Orion Network Systems, Inc.'s expectations regarding any of
these matters will be fulfilled. See Glossary at page G-1 at the end of this
Annual Report on Form 10-K for certain defined terms and certain technical terms
used herein.
OVERVIEW
Orion Network Systems, Inc. ("Orion" or the "Company") is a rapidly growing
provider of satellite-based communications services, focused primarily on (i)
private communications network services, (ii) Internet services and (iii) video
distribution and other satellite transmission services. Orion provides
multinational corporations with private communications networks designed to
carry high speed data, fax, video teleconferencing, voice and other specialized
services. The Orion satellite's ubiquitous coverage reaches all locations within
its footprint, enabling the delivery of high speed data to customers in emerging
markets and remote locations that lack the necessary infrastructure to support
these services. The Company also offers high speed Internet access and
transmission services to companies outside the United States seeking wide
bandwidth Internet access, while avoiding "last mile" terrestrial connections
and bypassing congested regional Internet network routes. In addition, Orion
provides satellite capacity for video distribution, satellite news gathering and
other satellite services primarily to broadcasters, news organizations and
telecommunications service providers. The Company provides its services directly
to customer premises using very small aperature terminals ("VSATs").
The Company commenced operations of Orion 1, a high power Ku-band satellite
in January 1995. As of December 31, 1997, Orion serviced 301 customers through
682 points of service. The Company's customers include Amoco Poland Limited,
Amway Corporation, AT&T Corp., BBC, British Telecom, CNN, Citibank, N.A., Global
One, GTECH Corporation, News International Limited, RTL Television, Pepsi-Cola
International, Sprint Communications, USA Today, Viacom International Inc.,
Volkswagen, Westinghouse Communications and World Wide Television News and or
certain of their subsidiaries. As of December 31, 1997, Orion's contract backlog
was $269.5 million (including $89 million from one pre-launch customer on Orion
3). Substantially all of Orion's current contracts with customers are
denominated in U.S. dollars. For the three months ended December 31, 1997, the
Company generated revenues of $18.2 million and had a loss from operations, and
net loss of $12.6 million and $27.5 million, respectively. For the year ended
December 31, 1997, the Company generated revenues of $72.7 million and had a
loss from operations, net loss and net cash used in operating activities of
$43.1 million, $105.7 million and, $28.0 million, respectively.
The Company believes that demand for satellite-based communications
services will continue to grow due to (i) the expansion of businesses beyond the
limits of wide bandwidth terrestrial infrastructure, (ii) accelerating demand
for high speed data services, (iii) growing demand for Internet and intranet
services, especially outside the U.S., (iv) increased size and scope of
television programming distribution, (v) worldwide deregulation of
telecommunications markets and (vi) continuing technological advancements.
Satellites are able to provide reliable, high bandwidth services anywhere in
their coverage areas, and the Company believes that it is well positioned to
satisfy market demand for these services.
THE ORION SATELLITE SYSTEM
The Company launched Orion 1, a high power satellite with 34 Ku-band
transponders, in November of 1994. Orion 1 provides coverage of 34 European
countries, much of the United States and parts of Canada, Mexico and North
Africa. Through arrangements with local ground operators, Orion currently has
the ability to deliver network services to and among points in most European
countries, the United States and many Latin American and Asian countries.
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In July 1996, the Company signed a contract with Matra Marconi Space for
the construction and launch of Orion 2 (which was amended and restated in
January 1997) and in February 1997 commenced construction of that satellite.
Orion 2 will expand the Company's European coverage and extend coverage to
portions of the Commonwealth of Independent States, Latin America and the Middle
East, as shown in more detail in the footprint set forth below under the caption
"Implementation of the Orion Satellite System -- Orion 2". Orion 2 will increase
significantly the Company's pan-European capacity, currently the area of
strongest demand for the Company's services. The Company recently commenced
selling services in certain areas of Latin America. Orion 2 is scheduled to be
launched in the second quarter of 1999.
In January 1997, the Company entered into a satellite procurement contract
with Hughes Space for the construction and launch of Orion 3, construction of
which was commenced in December 1996. Orion 3 will cover broad areas of the Asia
Pacific region including China, Japan, Korea, India, Southeast Asia, Australia,
New Zealand, Eastern Russia and Hawaii, as shown in more detail in the footprint
set forth below under the caption "Implementation of the Orion Satellite System
- -- Orion 3". Orion 3's footprint will provide the Company with the ability to
redistribute programming from the United States via Hawaii to most of the Asia
Pacific region. The Company has already taken a number of steps to establish an
early market presence in Asia, and has entered into an $89 million lease for
eight of Orion 3's 43 transponders. Orion 3 is scheduled to be launched in the
fourth quarter of 1998.
In the aggregate, the footprints of Orion 1, Orion 2 and Orion 3 will cover
over 85% of the world's population.
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 (as amended on February 11, 1998,
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.
If the Loral Merger were to close on March 20, 1998, the Determination
Price would be 24.68652 and the Exchange Ratio would be 0.71553.
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A meeting of Orion's shareholders has been scheduled for March 20, 1998 to
vote to approve the Loral Merger. The Company expects the Loral Merger to close
following a favorable shareholder vote, however, there can be no assurance that
the Loral Merger will be consummated. 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 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 and are more
fully described in Registration Statement No. 333-46407 on Form S-4, and have
been filed as exhibits 2.1, 2.2 and 2.3, respectively, and are incorporated
herein by reference. More information on Loral is also available in the
foregoing Registration Statement No. 33-46407.
OTHER RECENT DEVELOPMENTS
On March 26, 1997, Orion acquired German-based Teleport Europe GmbH (now
known as Orion Network Systems-Europe GmbH) ("Orion Europe") a communications
company specializing in private satellite networks for voice and data services.
Orion purchased the shares of Orion Europe held by the German companies, Vebacom
GmbH and RWE Telliance AG, now known as o.tel.o for approximately $9 million.
Orion Europe's 1996 revenues were in excess of $14 million. The acquisition
expanded Orion's customer base by approximately 55 customers, including some of
Germany's leading multinational corporations, and added over 200 Network Service
sites (exclusive of Broadcast Service sites). In addition, Orion acquired Orion
Europe's licenses and operating agreements to provide satellite network services
in 40 countries, including 17 countries in which Orion previously did not
provide service.
In January 1997, the Company consummated the Merger (as defined below) as
part of a series of transactions which significantly changed the Company. Those
transactions, which are discussed in more detail in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," of
this Annual Report on Form 10-K, are as follows:
(i) the acquisition of all of the limited partnership interests which the
Company did not already own in the Company's operating subsidiary, Orion
Atlantic, that owns the Orion 1 satellite, along with rights to receive
repayment of various advances by Orion Atlantic and various other rights, in an
exchange transaction for 123,172 shares of Series C Preferred Stock (the
"Exchange");
(ii) the acquisition by the Company of the only outstanding minority
interest in the Company's subsidiary Orion Network Systems-Asia Pacific, Inc. (
formerly known as Orion Asia Pacific Corporation) from British Aerospace
Satellite Investments, Inc., in exchange (the "OAP Acquisition") for
approximately 86,000 shares of the Company's Common Stock;
(iii) a $710 million notes offering, with warrants representing
approximately 2.6% of the outstanding Common Stock of the Company on a fully
diluted basis (the "Bond Offering"), and
(iv) the sale of $60 million of the Company's Convertible Debentures to
British Aerospace Holdings, Inc. and Matra Marconi Space (the "Convertible
Debentures Offering").
The Exchange and the OAP Acquisition resulted in the Company owning 100% of
Orion Atlantic and its other significant subsidiaries and, therefore, a greatly
simplified corporate structure. The Exchange also resulted in a significant
increase in the Company's capital stock outstanding. The net proceeds of the
Bond Offering and Convertible Debentures Offering were used by the Company to
repay the credit facility it entered into in connection with the construction of
the Orion 1 satellite, to pre-fund the first three years of interest payments on
certain of the Notes, and will be used by the Company for the construction and
launch of two additional satellites, Orion 2 and Orion 3.
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The Company also recently achieved the following significant milestones
with respect to the expansion of its satellite network, which are discussed in
more detail under the caption "Implementation of the Orion Satellite System" :
(i) Orion commenced construction of Orion 2 in February 1997 under a
satellite procurement contract with Matra Marconi Space for Orion 2. Orion
commenced construction of Orion 3 in December 1996 and entered into a satellite
contract with Hughes Space and Communications International, Inc. for Orion 3 in
January 1997.
(ii) 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.
THE ORION STRATEGY
Orion strategy is to maximize its revenues per satellite transponder
through the delivery of value added services to end users. To quickly establish
a stable base of revenues, Orion sells transponder capacity to video
broadcasters and telecommunications service providers. However, Orion's
long-term strategic focus is on value-added private network and Internet access
services, which include network design, VSAT installation, support and
monitoring, in addition to basic satellite capacity service. The implementation
of Orion's strategy is based on the following elements:
o Focus on Specialized Communications Needs of Multinational Organizations
o Bridge to Emerging Markets and Remote Locations
o End-to-End Service
o Global Coverage
o Early Market Entry
o Local Presence
o Ownership of Facilities
Focus on Specialized Communications Needs of Multinational Organizations
Orion targets the needs of multinational businesses and governmental
customers for customized private network communications services. Advantages of
the Company's satellite-based network services include: (i) transmission over
wide areas to multiple dispersed sites including sites in emerging markets; (ii)
interconnectivity among all sites; (iii) wide bandwidth and high data speeds;
(iv) transmission of data, fax, teleconferencing and voice over the same
network; (v) high transmission reliability, quality and security; (vi) Internet
access; and (vii) rapid implementation, both for the initial installation and
for later network modifications. Due to the flexibility of the network, Orion is
able to provide companies with customized solutions to link multiple locations.
Bridge to Emerging Markets and Remote Locations
Orion targets customers doing business in emerging markets and remote
locations of developed markets which often lack the fiber optic and digital
infrastructure required for wide bandwidth, high speed data applications.
Terrestrial transmissions in many emerging markets must often pass through
local, poorly developed network segments before reaching the customer premises,
making it difficult to send and receive high speed data. In contrast, Orion's
satellite system completely avoids such "bottlenecks" in local network segments
by sending and receiving transmissions directly to and from customers, avoiding
the need to interconnect with the local infrastructure. A significant portion of
Orion's private communications network customers transmit high-speed data to and
from locations in Central and Eastern Europe. Orion 2 and Orion 3 will extend
coverage to the Commonwealth of Independent States, Latin America and the Asia
Pacific Region.
End-to-End Service
Orion provides its services directly to and among customer locations using
satellite transmission and VSATs installed at customer premises. Offering
end-to-end services and bypassing terrestrial infrastructure allows Orion to
offer higher reliability and higher quality services than some terrestrial
facilities by bypassing multiple telecommunications service providers and local
networks and avoiding related toll charges. It also permits Orion to install
networks more quickly than many of its competitors, who must deal with multiple
vendors and multiple communications technologies. Orion offers its
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customers one-stop shopping. This includes a single point of contact, an
all-inclusive contract and consistent quality of service throughout the network.
Global Coverage
Orion believes that providing global coverage is a competitive advantage in
marketing to multinational corporations. Orion 1 covers 34 European countries,
much of the U.S. and portions of Canada, Mexico and North Africa. Orion uses
capacity leased from other carriers to supplement its network coverage area
(such as to areas of Russia, Asia and Latin America). Orion estimates that when
Orion 2 (with coverage of Europe, Russia, the eastern United States, Latin
America, North Africa and the Middle East) and Orion 3 (with coverage of the
Asia Pacific region) are deployed, the satellite footprints in the aggregate
will cover an area inhabited by over 85% of the world's population. This
coverage will enable Orion to offer its customers a single source for service
offerings and a greater measure of network quality control than terrestrial
alternatives.
Early Market Entry
Orion develops an early market presence in targeted geographic areas prior
to satellite launch in order to build its customer base. To accomplish this,
Orion hires sales people, develops relationships with local ground operators,
and delivers its services using leased satellite capacity. Orion employed this
strategy prior to the commercial operation of the Orion 1 satellite and is
pursuing the same approach with Orion 2 and Orion 3. For example, the Company is
currently providing service in Latin America, Asia and Russia over leased
satellite capacity.
Local Presence
Orion has arrangements with ocal ground operators covering most countries
within the Orion 1 footprint, and is entering into additional arrangements as it
offers services in new areas. These ground operators are critical to providing
integrated service because they obtain necessary licenses, install and maintain
the customers' networks, provide in-country business experience and often
facilitate market entry.
Ownership of Facilities
Orion believes it is strategically important to own its satellite
facilities. Orion believes that over the long-term ownership of satellite
facilities provides a cost advantage over resellers and other private service
providers that must lease satellite capacity to provide services to customers.
The Company's satellite ownership enables it to control the quality and
reliability of its network solutions, maintain the flexibility to rapidly add
capacity, new locations and new features to its customer networks, and respond
quickly to customer requests.
INDUSTRY OVERVIEW
Fixed communications satellites are generally located in geostationary
orbit approximately 22,300 miles above the earth and blanket large geographic
areas of the earth with signal coverage. Satellites are thus well suited for
transmissions that must reach many locations over vast distances simultaneously
(i.e., point-to-multipoint transmissions), such as the distribution of
television programming to cable operators, television stations and directly to
homes. Satellites can be accessed from virtually any location within the
geographic area they cover. This ubiquitous coverage allows the satellite to
transmit voice and data communications to remote locations and emerging markets
where terrestrial infrastructure is not well developed.
Prior to the late 1970s or early 1980s, most terrestrial infrastructure
consisted of copper wire (and, to a lesser extent, microwave systems), which was
well suited for ordinary telephone service. Today most developed economies
employ fiber optic cables, which provide much wider bandwidth than copper. In
addition, transoceanic cables now link most major industrialized countries.
Fiber optic cables are well suited for carrying large amounts of bulk traffic
between two fixed locations, and unlike copper wire facilities have sufficient
capacity to carry the high speed data communications that comprise an increasing
percentage of communications traffic. However, in many less developed areas,
terrestrial facilities still consist mainly of copper wire. Even in areas with
fiber optic networks, the "last mile" connections to customer premises often
consist of copper wire. As a result, customers with sites in areas which are
underdeveloped or which have not upgraded their "last mile" copper wire to fiber
optic cable often do not have access to the full range of high speed data
communications demanded by many businesses.
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Satellites provide a number of advantages over terrestrial facilities for
many high speed communications services. First, satellites provide ubiquitous
service within their footprint and can deliver service directly to customers'
premises. Satellites enable high speed communications service where there is no
suitable terrestrial alternative available. In addition, satellites can
completely bypass terrestrial network congestion points, "last mile" bottlenecks
and unreliable networks of incumbent service providers to provide advanced
services to locations where conventional terrestrial service is available but
inadequate. Second, the cost to provide bandwidth via satellite does not
increase with the distance between sending and receiving stations. Not only must
terrestrial networks add physical capacity to cover additional distances, they
must also continually reamplify transmission signals. Satellites are well suited
for transmission across large distances, for wide bandwidth and for
point-to-multipoint (broadcast) applications. Finally, since VSATs are
relatively easy to install and/or relocate, high power satellite networks can be
rapidly installed, upgraded and reconfigured. In contrast, installation of fiber
optic cable is expensive, time consuming and requires obtaining rights-of-way.
The current generation of high power Ku-band satellites, such as Orion 1,
is particularly well suited to provide high speed business communications
services in addition to video distribution services. The use of the Ku-band
frequencies (as opposed to the C-band used by older generations of satellites)
offers reduced interference with ground communications. This enables satellites
to use the higher broadcasting power necessary to support small, low-cost VSAT
earth stations and makes it cost effective to transmit to or among numerous
locations.
DATA NETWORKING
During the past decade, there has been significant growth in data
networking applications. The data networking market includes a number of types
of services, including leased lines for private networks, public data network
services, managed network services, frame relay and other services such as ATM
(asynchronous transfer mode) and WAN (wide area network) services. Data
networking applications include:
Private network services; intranets. Many companies are utilizing their own
"private" networks to meet their specific communications requirements, including
voice and data communications, business television transmissions, video
teleconferencing, high speed fax and e-mail. Corporate networks offer higher
performance, greater control and security than can be provided through the
public network. Corporations are also taking advantage of intranets to
distribute information within their own companies using Internet technologies.
Data inquiry, collection and retrieval. Hotel and travel reservation
systems and financial enterprises use private communications networks for
database inquiries and retrieval of information stored on computers. Banks use
such networks to verify account balances and connect automatic teller machines
to computers. Retail establishments verify credit standing and gather inventory
information. Other businesses use private communications networks to gather data
from multiple locations and transport it to central locations for analysis.
Internet. Business and consumers rely on the Internet for a growing number
of services, including research, e-mail, data exchange, software and graphics,
financial services and shopping, and even voice communications. These
applications are predicted to continue to expand and diversify in the future as
enabling technologies mature.
Image transmissions. Manufacturing, publishing, research and medical
industries use dedicated communications networks for high-resolution image
transmissions requiring large amounts of bandwidth.
Government networks. Network telecommunications are employed for complex
military and nonmilitary government applications, including administrative and
logistical functions, that require high security and customer network control.
Orion believes that the demand for international data networking will
continue to grow as a result of (i) the shift to client/server computing, (ii)
the proliferation of bandwidth intensive applications and the development of
protocols such as frame relay to handle these applications, and (iii) use of the
Internet and intranets as part of main-stream corporate communications.
(i) Shift to client/server computing. Businesses are increasingly
shifting from using large host computers and centralized data network
architectures to distributed PC and workstation based platforms. As a
result, businesses require more private network infrastructure to establish
and interconnect local and wide area networks. As businesses expand, the
ability to link multiple locations becomes more important.
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(ii) Proliferation of bandwidth intensive applications; frame relay.
Companies are relying more heavily on applications such as CAD/CAM and
image transfer that require more bandwidth and result in traffic patterns
that involve bursts of transmissions. In addition, there is increasing
demand for near-instantaneous response time and more reliable data
transport. Frame relay services support these applications and reduce the
cost of fully and partially meshed networks.
(iii) Expansion in Internet and intranet services. The Internet is
becoming a major vehicle for economic and social activity enabling broad,
global access to financial and business information, research material, and
information on leisure, arts and general interest topics. Business uses of
the Internet include communication within and among businesses, electronic
commerce, advertising and merchandising. Internet usage has also led to
increased demand for "intranet" services for corporate applications.
Intranet servers are used for publishing information, processing data and
data-based applications and collaboration among employees, vendors, and
customers.
The significant growth in data networking services has led to rapid growth
in demand for satellite-based networks. Multinational companies are not always
able to implement client/server architectures, install wide bandwidth
applications or employ Internet and intranet solutions in every market due to
underdeveloped terrestrial communications infrastructure. Therefore, a growing
use of VSATs is to provide wide bandwidth capacity to industrial sites in
emerging markets and remote locations.
ORION MARKET OPPORTUNITY
The Company believes that demand for satellite-based communications
services will continue to grow because of (i) the expansion of businesses beyond
the limits of wide bandwidth terrestrial infrastructure, (ii) accelerating
demand for high speed data services, (iii) growing demand for Internet and
intranet services, especially outside the U.S., (iv) increased size and scope of
television programming distribution, (v) worldwide deregulation of
telecommunications markets and (vi) continuing technological advancements.
(i) Expansion of business beyond the limits of wide bandwidth
terrestrial infrastructure. Overall growth in the international
telecommunications market reflects the increasingly international nature of
business, the increasing importance of emerging and newly industrialized
economies and the increase in international trade. International businesses
expanding into emerging markets often rely on the incumbent communications
service providers for voice circuits. However, as large organizations
increasingly rely on more sophisticated, high speed communications services
to run their businesses, many of these companies face operational
bottlenecks when attempting to implement more sophisticated communications
networks. These problems are faced both by companies in emerging markets
and companies in developed markets that rely on "last mile" copper
infrastructure to interconnect with a fiber optic network. Satellites
provide wide bandwidth end-to-end service directly connecting customer
premises and bypassing the limitations of terrestrial facilities.
(ii) Accelerating demand for high speed data services. The growth of
graphical user interfaces, the popularity of bandwidth-intensive
applications such as CAD/CAM, the incorporation of high-resolution
electronic images into business processes and video teleconferencing have
necessitated major upgrades of corporate data networks to accommodate the
high data transfer requirements of these applications. Most of these high
speed data services require fiber optic cable or other high bandwidth
connections to the customer premises. Even in developed markets, the "last
mile" connection to the customer premises often consists of copper wire,
which cannot support many high speed data services. Satellites are well
positioned to take advantage of this trend because they provide reliable
high bandwidth service everywhere in their coverage areas, reaching sites
in underdeveloped areas, and bypass "last mile" copper wire facilities that
are unable to support high speed communications.
(iii) Demand for Internet and intranet services. The growth in
Internet and intranet services has further strained corporate network
infrastructures. The utility of Internet services to users is often
constrained by the lack of sufficient bandwidth to support high-resolution
graphical applications and images. Even where infrastructure quality is
high, the rapid growth of the Internet continues to create network
congestion. Users are sometimes unable to use current-generation software
or gain high speed access to the Internet due to the poor quality of their
local terrestrial infrastructure. Satellites have many advantages in
delivering Internet services. Satellite-based networks provide services
directly to customer premises, bypassing terrestrial bottlenecks and
congested Internet routing facilities. In addition, satellite based
networks can be designed to support asymmetric and multicast Internet
traffic much more efficiently than terrestrial networks.
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(iv) Increased size and scope of television programming distribution.
The global television market is experiencing significant growth, both in
terms of the number of broadcasters creating programming and the number of
channels available to viewers. Within the U.S., the number of television
broadcast and cable television program networks grew from three in 1970 to
over 100 in 1993 and to approximately 200 in 1996. U.S. and international
broadcasters are seeking to expand into each others' markets, increasing
the need for satellite transmission capacity. Non-U.S. broadcasters are
using international satellites to distribute domestic programming to U.S.
and other overseas audiences of similar cultural heritage. Furthermore, the
Company believes that as the number of broadcasters and channels increases,
individual competitors will have a greater need for competitive
differentiation which will increase the use of live transmissions and
expand television coverage. Multichannel programming is expanding rapidly
in Eastern Europe, Latin America and Asia. The growth in multichannel
programming has increased the demand for international programming such as
news and sports. Orion is well positioned to take advantage of this growth
due to its high-power Ku-band satellite and trans-Atlantic footprint.
(v) Worldwide deregulation of telecommunications markets. During the
past decade many countries have liberalized their telecommunications
markets in order to permit new competitors to provide facilities and
services. These changes have been particularly apparent in Europe, where
Orion currently has the ability to deliver network service to and among
points in most countries. Deregulation is also creating new competitors to
national telecommunications companies, which represent potential additional
customers for the Company's services.
(vi) Continuing technological advancements. The following recent
technological advances are expected to increase capacity, efficiency and
demand for satellite services:
1. High Power Satellites. The ability of service providers to
deliver high quality services directly to customer premises has
greatly improved with the development of high power satellites.
Older, lower power satellites require large, expensive earth
stations to receive transmissions. Typically these earth stations
were located outside urban areas and required interconnection with
public telephone systems. High power satellites, such as Orion 1,
enable the use of small, inexpensive VSAT earth stations that may
be installed at customer locations, thereby reducing customer
costs and bypassing all terrestrial facilities.
2. Meshed Network Services. Traditional VSAT networks employ a
hub/star architecture anchored by an expensive hub earth station
that controls the network and communicates with each of the VSATs.
Recent advances in VSAT technology have led to the creation of
fully meshed satellite-based networks. These networks offer less
transmission delay than hub/star networks by enabling any network
node to communicate with any other network node directly through
the satellite without having to transmit through a central network
control point.
3. Frame Relay. The Company believes that despite rapid
advances in network services and application software, many
companies hesitated to implement meshed data networks due to high
overhead costs generated by descriptive and routing commands
required to travel with the data traffic. Frame relay technology
reduces the number and complexity of commands needed to send data,
and enables companies to implement more cost-effective meshed
networks. To meet customers' demands for fully meshed frame relay
network services, the Company has developed its VISN service.
4. Compressed Digital Video. CDV technology is designed to
compress up to ten high-quality video channels into the same
bandwidth that previously carried one or two analog channels. This
technology is creating a rapid expansion in the number of
available video channels with improved transmission quality. CDV
lowers the per-channel cost of delivering programming via
satellite and cable television systems, thereby enabling more
programming options to be provided to smaller markets. The Company
believes that CDV will enable continued growth in the number of
video channels and also accelerate broadcasters' efforts to
distribute their programming internationally. The Company also
believes that CDV will result in higher total revenues per
transponder as more customers can be served per transponder.
However, CDV may also in effect increase the supply of satellite
transponders, causing prices to decline.
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ORION SERVICES
Orion provides satellite-based digital communications services comprised
of: (i) private network services for multinational business and governmental
customers, (ii) Internet backbone and access services and (iii) satellite
transmission capacity services, including video distribution services for
broadcasters, news organizations and international carriers. For 1997,
approximately 43% of revenues were derived from the sale of satellite capacity
(primarily for video distribution services). These figures are consistent with
the Company's strategy of building a stable base of revenues through sales of
transmission capacity and then focusing on the delivery of value-added private
network services to end-users.
PRIVATE COMMUNICATIONS NETWORK SERVICEs
International Leased Line Services. Orion's international leased line
services include Digital Link and Digital Channelized Link. Digital Link can be
designed as a "point-to-point" private network service directly connecting
customer locations or as a "point-to-multipoint" service for customers seeking
to transmit communications from a central location to numerous remote sites.
Orion also offers Digital Channelized Link, a multiplexed version of Digital
Link that integrates digitally compressed voice, fax and data traffic into a
single channel. Digital Link and Digital Channelized Link services have been
offered by Orion since 1993. International leased line services have constituted
a majority of Orion's bookings of private communications network services to
date.
International Data Networking Services. Orion's fully-meshed frame relay
based international data networking service, "Virtual Integrated Sky Network"
("VISN"), allows customers to transmit and receive voice, fax and data
communications, including intranet services, among multiple locations
simultaneously. VISN was developed by Orion and is produced by Nortel Dasa (a
joint venture among Northern Telecom, Dornier GmbH, and Daimler Benz Aerospace
AG). The first phase of this service became available to customers commencing in
the third quarter of 1995. Subsequent phases of the service have been introduced
during 1996 and 1997, with further phases expected to be introduced during 1998.
VISN offers customers bandwidth on demand for data, voice and fax and, following
the introduction of in-process and future releases, customers will have the
option to be charged on a "pay per use" basis (e.g., minutes of use for voice
and volume for data). VISN employs TDMA technology, which further increase the
effective bandwidth available for data transmission. The VISN product was
awarded "Best New Transport Technology Product" at the 1995 ComNet New Product
Achievement Awards Competition. Most customers have between four and ten sites,
and generally have minimum data rates with the ability to use substantially
greater bandwidth for bursts of traffic.
INTERNET BACKBONE AND ACCESS SERVICES
The Company believes that the rapid growth of the Internet has created
substantial opportunities for Orion. First, the United States has become the
residence of the majority of the world's Internet content. Companies are looking
for reliable, wide bandwidth connections which bypass congested Internet network
segments. Orion's transatlantic capacity is well suited for companies in Europe,
including International Internet Service providers ("IIPS"), seeking high-speed
access to the U.S. Internet. Second, the Internet has begun to evolve from a
user centered "pull" environment (users requesting information) to a content
provider centered "push" environment (information delivered to users without
concurrent request). Broadly distributed entertainment, information and
advertising via the Internet are well suited for broadcast, point-to-multipoint
communications facilities, such as satellite. By using satellite broadcasts to
transmit the most popular Internet content to regional locations. IISPs can
reduce their costs and relieve network congestion. Finally, Internet data
communications re typically asymmetric. A typical large Internet data
transmission is predicated by a user request that comprises only a few bytes of
traffic. This interaction is inefficient when carried over terrestrial
full-duplex networks, which carry the same capacity in each direction, providing
an inexpensive circuit for user requests and high-speed, reliable and available
capacity for the data that flows back to the user.
Orion's WorldCast service (patent pending) is a satellite based Internet
service for IISPs and other corporate users that supports asymmetric and
multicast traffic. Orion recently consolidated its Internet service offerings
under the WorldCast banner. WorldCast is a flexible network solution that can be
customized to meet the specifications of an IISP or other user of Internet
services. It provides a multicast, burstable TCP/IP network with committed
information rates that can be configured as a pure satellite network with VSATs
or integrated with existing terrestrial networks. Orion customizes an IISP's
Internet connectivity by taking advantage of the asymmetric broadcast
characteristics of the Internet. The WorldCast service includes a Usenet
multicast channel.
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VIDEO DISTRIBUTION AND OTHER SATELLITE TRANSMISSION SERVICES
Orion provides transmission capacity to cable and television programmers,
news and information networks, telecommunications companies and other carriers
for a variety of applications. A majority of Orion's transmission capacity
services consist of video services. The Company generally offers transmission
capacity services under long term contracts and also offers occasional use
services for periods of up to a few hundred hours.
Video Services -- Contribution. Orion's video services include
"contribution," the long-distance transport of video signals (usually one or
more television channels) to one location.
Video Services -- Distribution. Cable and television programmers use
Orion's satellite transmission services for distribution of television
programming to local broadcast stations, cable head-ends, MMDS (multichannel
microwave distribution) systems and SMATV (satellite master antenna television).
Orion has a joint marketing agreement with NTL, which operates one of the
largest video gateways in Europe, located in downtown London. Orion and NTL
offer programmers uplink, compression and distribution to cable head-ends
throughout the United Kingdom and to locations in Europe. Orion's ability to
offer video distribution services is aided by the transponder switching
capabilities of Orion 1, which are (and those of Orion 2 and Orion 3 are
expected to be) designed to permit programs to be distributed simultaneously
throughout the satellite's coverage area.
News and Special Events. Orion 1 is used for transmission of special events
or remote feeds to international news bureaus from television stations and
on-location mobile transmitters. Because Orion's Ku-band technology and VSAT
ground segment infrastructure offers high reception sensitivity, the Company is
especially effective in transmitting television signals sent from low-powered
portable transmitters typically used by news organizations and program
distributors. In contrast to video contribution services, news and special
events are characterized by occasional use rather than long-term capacity
contracts.
International Carriers. Orion satellite transmission services are used by
international carriers to provide backup for terrestrial lines and to provide
communications services to areas with inadequate telecommunications
capabilities. These carriers resell Orion's capacity as part of their own
services.
Capacity Sales. Orion sells bulk capacity to resellers who use Orion's
transmission capacity as one component of a customer's end-to-end communications
solution. For example, Orion currently sells capacity to a number of firms that
resell Orion's capacity to governmental organizations.
Orion offers a range of value-added services in conjunction with its video
distribution and other satellite transmission services. Such services may
include the provision of video uplinking and receiving stations, digital
compression equipment and software, transmission monitoring and gateway
interconnection services.
FEATURES AND BENEFITS
Orion's satellite-based services offer customers a number of important
features, which provide significant benefits versus competing alternatives.
Bypass terrestrial network and multiple international connection
points. Orion's ability to bypass terrestrial facilities improves service
reliability and quality by reducing potential points of failure and
avoiding "last mile" limitations. In addition, terrestrial bypass allows
Orion to avoid the multiple in-country toll charges of terrestrial
facilities and thereby reduces cost.
Direct end-to-end service to customer sites. Orion provides service
from rooftop to rooftop using VSAT earth stations located on customer
premises. This "end-to-end service" is reliable, rapidly installed, easily
upgraded and avoids the "last mile" limitations of some terrestrial
alternatives.
Ubiquitous coverage. Orion delivers wide bandwidth service to emerging
markets and remote locations where there are no effective terrestrial
alternatives.
One-stop shopping. Orion provides its customers with a single point of
contact for customer care, including service, billing and support.
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Two-way communications for all sites. Orion's meshed network solutions
and frame relay services promote network efficiency and allow real-time
data transfer among dispersed network points.
Well-suited for asymmetric communications traffic. Orion's network
solutions can be designed to carry asymmetric traffic efficiently, which
increases performance and lowers cost to customers for services such as
Internet services.
Point to multipoint capability. Orion's ability to broadcast video,
data and voice to multiple locations simultaneously enables efficient
network design.
High power Ku-band transmissions, high reception sensitivity. Orion's
high power transmissions allow customers to lower costs by utilizing small,
less expensive earth station equipment. Orion 1's reception sensitivity
allows for effective reception from portable earth stations, an advantage
in satellite news gathering.
Cost-competitive. Orion prices its services to be competitive with both
satellite-based and terrestrial alternatives.
CUSTOMERS AND BACKLOG
Customers. As of December 31, 1997, Orion had entered into contracts with
301 customers, principally large multinational corporations, European companies
and governmental agencies. These entities come from many different industries,
including communications, broadcasting manufacturing, government, banking and
finance, energy, lottery, consumer distribution, Internet access services and
publishing. Selected customers from each service area are set forth below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Private Network Services: AT&T EDS
Digital Link/Digital Channelized Amoco GE Americom
Link GTECH Hewlett-Packard
Chase Manhattan Bank News International Limited
Citibank USA TODAY
Concert Global Network Westinghouse
Private Network Services: Balluff & Co. Pepsi Cola
VISN Creditanstalt Price Waterhouse
WorldCast Ebone LV Net Teleport
Banknet Spectrum
Datac Terminal Bar
Global Ukraine Global One
Video Transmission and Other AsiaNet Hughes Network Systems
Black Entertainment
Television MCI
Bonneville International RTL Television
British Telecom Telecom Italia
CNN Viacom International
Comsat
- --------------------------------------- ---------------------------------------------------------------------
</TABLE>
Orion has entered into a contract with DACOM Corp., a Korean communications
company which provides international and long distance telephone and leased line
services, international and domestic data communications and value added network
services. Under the contract, DACOM will, subject to certain conditions, lease
eight dedicated transponders on Orion 3 for thirteen years for direct-to-home
television service and other satellite services, for $89 million payable in
installments from December 1996 through seven months following the lease
commencement date of the transponders. Payments are subject to refund if Orion 3
has not been successfully launched and commenced commercial operation by June
30, 1999. Although Orion 3 is scheduled to be launched in the fourth quarter of
1998, there can be no assurance that Orion will be able to meet the delivery
requirement of this contract.
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Backlog. At December 31, 1997, Orion had approximately $269.5 million of
contracts in backlog (including $89 million from the DACOM contract and after
giving effect to the Exchange and related transactions, which resulted in
changes to arrangements with Exchanging Partners that reduced backlog by
approximately $11 million), as compared to approximately $214.9 million at
December 31, 1996. The backlog contracts generally have terms of between three
and four years. Orion presently anticipates that at least $206.6 million of its
backlog will be realized after 1998. Orion has begun to receive contract
renewals under expiring contracts (under some of the earliest contracts, which
were entered into in 1993 and 1994). The size of contracts varies significantly,
depending on the amount of capacity required to provide service, the geographic
location of the network and other services provided.
Although many of the Company's customers, especially customers under large
and long-term contracts, are large corporations with substantial financial
resources, other contracts are with companies that may be subject to other
business or financial risks. If customers are unable or unwilling to make
required payments, the Company may be required to reduce its backlog figures
(which would result in a reduction in future revenues of the Company), and such
reductions could be substantial. The Company has recently instituted tighter
credit policies, and has taken steps to remove from backlog arrangements with
customers who have not taken service or have not made all required payments. The
Company's contracts commence and terminate on fixed dates. If the Company is
delayed in commencing service or does not provide the required service under any
particular contract, as it has occasionally done in the past, it may not be able
to recognize all the revenue it initially includes in backlog under that
contract. In addition, the current backlog contains some contracts for the
useful life of Orion 1; if the useful life of Orion 1 is shorter than expected,
some portion of backlog may not be realized unless services satisfactory to the
customer can be provided over another satellite.
SALES AND MARKETING
Orion uses both direct and indirect sales channels. Orion markets its
private communications network services and Internet services through direct
sales, local representatives and distributors in Europe, the United States,
Latin America and Asia, and wholesale arrangements with major carriers, Internet
service providers, resellers and systems integrators. Orion markets its video
distribution and other satellite transmission services primarily through direct
sales. Orion also has established arrangements with local companies in most
countries within the Orion 1 footprint to assist Orion with selling efforts and
to provide customer support and network maintenance functions in those countries
(as discussed below under the caption "Network Operations; Local Ground
Operators").
Orion generally will enter into a single contract with customers covering
service to a number of countries. Orion offers the business customer a single
point-of-contact, a single contract and one price for its entire network, which
Orion believes constitutes true "one-stop shopping." Orion prices its services
centrally, using a single, easily administered set of pricing procedures for
customer networks.
Marketing will be critical to Orion's success. However, Orion has limited
experience in marketing, having commenced full commercial operations in 1995.
Orion's marketing program until recently consisted of direct sales using U.S.
and European based sales forces and indirect sales channels, including Limited
Partner sales representatives, for sales in Europe. The majority of Orion's
contract bookings to date have been generated by its direct sales force. During
1997, Orion significantly increased its direct sales capabilities in Europe,
particularly with respect to sales of private communications network services.
Sales of Orion's services generally involve a long-term complex sales process,
and Orion's bookings have fluctuated significantly.
The Company may from time to time enter into joint ventures or acquire
businesses which provide it with additional customers or which enhance its
marketing capabilities. In the first quarter of 1997, the Company completed such
an acquisition, as discussed above under "Other Recent Developments".
DIRECT SALES
Orion has assembled a direct sales force of 58 (as of December 31, 1997)
full-time employees to offer its private communications network and satellite
transmission services, primarily in the United States and Europe. Approximately
48% of the sales force is based in the United States and approximately 52% is
based in Europe. Orion expects to continue to expand its sales force
significantly throughout 1998, in the U.S., Europe, Latin America and Asia.
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INDIRECT SALES CHANNELS
Major Carriers and Other Distributors. Orion has entered into distributor
resale arrangements with major carriers, teleport operators, resellers and other
companies in the United States and internationally. These distributors typically
purchase communications network services from Orion at a wholesale rate for
resale to their customers. This represents an important sales channel for the
Company, and the Company is focusing on strengthening these relationships. Major
carriers employ substantial sales forces and have the advantage of being
existing providers to many of Orion's target customers, which makes marketing
easier and increases awareness of customer needs.
Representatives. Orion has entered into agreements for the marketing of its
private communications network services in the United Kingdom, France, Germany,
Austria, Italy and other European countries. These agreements call for sales,
marketing and customer support services in specified geographical areas,
generally on a non-exclusive basis. Generally, the duration of these agreements
is three years. Third party sales representatives receive commissions and fees
for sales and customer support services, each of which are payable over the life
of the customer contracts to which the representative's services relate and
which are based upon the revenues derived. Two former limited partners of the
Orion Atlantic Limited Partnership who serve as sales representatives (and
ground operators) are entitled to receive additional commissions under a "profit
sharing" formula based on their overall contribution to sales, but no amounts
have been paid under such formula to date. The agreements with these sales
representatives terminate in 1998. Orion expects that payments, if any, under
the profit sharing arrangement will not be material.
Indirect sales channels are supervised by Orion sales managers, who
establish marketing strategies with the representatives, establish pricing, lend
engineering support, attend certain sales calls, develop marketing materials and
sales training tools, coordinate joint efforts in promotional events and provide
information about Orion's services.
NETWORK OPERATIONS; LOCAL GROUND OPERATORS
Orion has a network operations facilities at its corporate headquarters in
Rockville, Maryland, and in Hannover Germany supported by arrangements with
local companies in most countries within the Orion 1 footprint who assist Orion
with selling efforts and perform customer support and network maintenance
functions. Orion's relationships with ground operators are critical to providing
integrated service because ground operators maintain the customers' networks,
provide in-country business experience and often facilitate market entry and
licensing.
Network Operations. Once the Company enters into a contract with a
customer, it finalizes the design of the customer's network, acquires the
required equipment and arranges for the installation and commissioning of the
network. Upon commencement of service, Orion also monitors the performance of
the networks through its U.S. and German based network management centers . The
network management centers allow Orion to perform diagnostic procedures on
customer networks and to reconfigure networks to alter data speeds, change
frequencies and provide additional bandwidth.
Ground Operators. Through arrangements with local ground operators, Orion
currently has the ability to deliver network services (through Orion 1 or leased
capacity on other satellites) to or among points in most European countries, the
United States and Mexico (which comprise substantially all of the countries
within the coverage area of Orion 1), as well as arrangements to deliver network
services in various Latin American and Asian countries. The ground operator
agreements call for installation and maintenance of VSATs and other equipment,
customer support and other functions in designated geographical areas, generally
on a non-exclusive basis. Generally, such ground operations agreements last
three years. Orion coordinates ground operations services (including service
calls) by its local agents through centralized customer service centers located
at Orion's corporate headquarters and at its facilities in Hannover. Orion also
provides its ground operators with installation and maintenance training
materials and support. Ground operators receive fixed fees for installation,
maintenance and other services, which vary depending on the level of services
and the geographic area. Certain ground operators receive payments for customer
support over the life of the related customer contract, based upon the revenues
derived. Two former limited partners of the Orion Atlantic Limited Partnership
who serve as ground operators are entitled to receive additional fees under a
profit sharing formula, but no amounts have been paid under such formula to date
and Orion expects that, unless such ground operators significantly increase the
number of VSATs they maintain on behalf of Orion for Orion's customers, profit
sharing payments will not be material. Orion's operations will continue to
depend significantly on Orion being able to provide ground operations for
private network services using representatives and distributors throughout the
footprint of Orion's satellites. In the event that its network of ground
operators is not maintained and expanded, or fails to perform as expected,
Orion's ability to offer private network services will be impaired.
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MIGRATION PLAN FOR NEW MARKETS
Prior to the launch of Orion 1, the Company began providing private
communications network services to customers over satellite capacity leased from
others. This early market entry strategy has been extended to Latin America and
Asia with the commencement of construction of the Orion 2 and Orion 3
satellites. By developing an early market presence, Orion builds its customer
base, establishes relationships with ground operators and becomes familiar with
the regulations and practices in its new markets prior to launch of its
satellites. Upon the launch of Orion 1, Orion migrated its customer base to its
own satellite, and Orion expects to pursue the same approach for Orion 2 and
Orion 3.
In Latin America, the Company has agreements with a ground operators in a
number of countries and is currently providing service to customers in Mexico,
Colombia and Paraguay over leased capacity. The Company intends to migrate such
services to Orion 2 after it commences operations, as Orion did with its Orion 1
satellite. The Company has a direct sales force focused on selling in Latin
America, and is pursuing relationships with additional ground operators,
distributors and joint venture partners.
In Asia, the Company has agreements with ground operators in several
countries, and has commenced discussions with such entities in a number of other
Asian countries. The Company has begun marketing its services in Asia, both to
existing customers with Asian operations and through regional sales offices in
Hong Kong and Singapore. The Company expects its marketing for Orion 3 will be
assisted by the $89 million pre-construction lease by DACOM, a Korean
communications company, of eight of Orion 3's transponders for direct-to-home
service and other satellite services.
IMPLEMENTATION OF THE ORION SATELLITE SYSTEM
Orion currently provides its services with Orion 1 and with facilities
leased from other providers covering areas outside the satellite's footprint.
Ultimately the Company will provide these services with three satellites,
together with facilities leased outside of its footprints. Orion 1 provides
coverage of the Northern Atlantic Ocean region. Orion 2 is being designed to
cover the Atlantic Ocean region but with coverage of points further East (into
the Commonwealth of Independent States) and South (into Latin America and
Africa), and Orion 3 is being designed to cover the Asia Pacific region.
The design, construction, launch and in-orbit delivery of a satellite is a
long and capital-intensive process. Satellites comparable to Orion's typically
cost in excess of $200 million (exclusive of development, financing and other
costs) and take two to three years to construct, launch and place in orbit.
Prior to launch, the owner generally must obtain a number of licenses and
approvals, including approval of the host country's national telecommunications
authorities to construct and launch the satellite, coordination and registration
of an orbital slot (of which there are a limited number) through the ITU to
avoid interference with other communications systems and a consultation on
interference with INTELSAT (and EUTELSAT in the case of European satellites).
Obtaining the necessary consents can involve significant time and expense, and
in the case of the United States, requires a showing that the owner has the
financial ability to fund the construction and launch of the satellite and to
operate for one year. The Company has commenced construction of Orion 3 and
Orion 2 prior to receipt of all regulatory approvals. Failure to obtain such
approvals prior to launch would have a material adverse effect on the Company.
Orion 1 is expected to have an in-orbit useful life of approximately 10.7 years,
estimated to end in October 2005, and Orion 2 and Orion 3 are expected to have
in-orbit useful lives of 13 years and 15 years, respectively (based upon present
design). While there can be no assurances that adequate financing and regulatory
approvals will be obtained, Orion plans to launch replacement satellites as its
satellites reach the end of their useful lives.
ORION 1
Orion 1 was launched in November 1994 and commenced commercial operations
in January 1995.
Satellite Design and Footprint. Orion 1, which is in geosynchronous orbit
at 37.5(Degree) West Longitude, is a high power Ku-band telecommunications
satellite that contains 28 transponders of 54 MHz bandwidth and six transponders
of 36 MHz bandwidth (although one of these transponders has not operated in
accordance with specifications, as described below). The footprint of Orion 1 is
shown below (although certain transponders of Orion 1 can be reconfigured to
match changing business and telecommunications requirements).
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INSERT MAP
Satellite Construction and Performance. Orion 1 was constructed by Matra
Marconi Space's subsidiary MMS Space Systems Limited, one of the major satellite
contractors in Europe. Orion 1 was designed both for the delivery of high-speed
data and for high-powered digital video transmission to corporate users. In
particular, Orion 1 was designed with high reception sensitivity, which enables
two-way transmission from and to small earth stations, reducing the equipment
and transmission cost to customers. Orion 1 has transatlantic networking
capability, which allows users to uplink data in the U.S. or Europe and downlink
that transmission simultaneously to the U.S. and Europe.
This configuration simplifies customers' transatlantic networking
solutions. Orion believes that Orion 1's Ku-band technology and VSAT ground
segment infrastructure is among the least expensive, most flexible technologies
for interactive satellite transmissions in the North Atlantic market. Like most
recent satellites, Orion 1 offers digitally compressed transmission, in addition
to analog transmission, which allows the satellite to increase by up to ten-fold
its usable bandwidth per transponder, leading to greater revenue per transponder
and greater network availability to customers in need of bandwidth on demand.
When Orion 1 was delivered into orbit, one of the 36 MHz transponders with
coverage of the United States did not perform in accordance with contract
specifications. Orion settled the matter with the manufacturer for a one time
refund of $2.75 million (which amount was applied as a mandatory prepayment
under the existing Orion 1 Credit Facility). In addition, the manufacturer will
pay Orion approximately $7,000 per month for the life of the satellite under the
warranty to the extent the transponder is not used to generate revenue. Orion
believes that the failure of such transponder to perform in accordance with
specifications will not have a significant impact on Orion's ability to offer
its services.
In November 1995, one of Orion 1's components supporting nine transponders
of dedicated capacity serving the European portion of the Orion 1 footprint
experienced an anomaly that resulted in a temporary service interruption,
lasting approximately two hours. Full service to all affected customers was
restored using redundant equipment on the satellite. Orion believes, based on
the data received to date by Orion from its own investigations and from the
manufacturer, and based upon advice from Orion's independent engineering
consultant, Telesat Canada, that because the redundant component is functioning
fully in accordance with specifications and the performance record of similar
components is strong, the anomalous behavior is unlikely to affect the expected
performance of the satellite over its useful life. Furthermore, there has been
no effect on Orion's ability to provide services to customers. However, in the
event that the redundant component fails, Orion 1 would experience a significant
loss of usable capacity. In such event, while Orion would be entitled to
insurance proceeds of approximately $47 million and could lease replacement
capacity and function as a reseller with respect to such capacity (at
substantially reduced gross margins), the loss of capacity would have a material
adverse effect on Orion.
Control of Satellite. Orion uses its tracking, telemetry and command
facility in Mt. Jackson, Virginia (the "TT&C facility") to control Orion 1, and
has in place backup facilities at its headquarters in Rockville, Maryland. In
addition, Orion has a satellite control center at Orion's headquarters in
Rockville, Maryland, from which commands can be sent to the satellite, directly,
or remotely through the TT&C facility. Orion also has constructed a network
management center at its headquarters to monitor the performance of Orion 1 and
to perform diagnostic procedures on and to reconfigure its communications
networks. Orion leases additional facilities in Europe for backup tracking,
telemetry and command and network monitoring functions.
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ORION 2
Schedule and Footprint. 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
2 will be a high power Ku-band communications satellite which will contain
approximately 30 transponders of 54 MHz bandwidth. Orion has obtained
conditional authorization from the FCC for the orbital slot at 12(Degree) West
Longitude for operation of Orion 2. The FCC has commenced the coordination
process through the ITU and will commence consultation with INTELSAT upon
request from Orion. Orion commenced construction of Orion 2 in February 1997 and
expects to launch Orion 2 in mid 1999.
[Document contains a map of North America, Latin America, Europe, Africa and
Asia showing in
shaded areas the proposed coverage footprint of Orion 2]
Satellite Construction, Launch and Performance. Matra Marconi Space and MMS
Space Systems are the prime contractors for Orion 2 and will use MMS Space
Systems' EUROSTAR satellite platform for Orion 2. This platform was previously
used for Inmarsat 2, Telecom 2, Hispasat and Orion 1. Lockheed Martin CLS will
provide launch services for Orion 2 using the Atlas II A-S launch vehicle. Atlas
II A-S, which is larger than the launch vehicle used for the launch of Orion 1,
is an expanded version of Atlas II. All 26 of the Atlas II, II A and II A-S
launches have been successful. There have been more than 500 Atlas flights since
the first research and development launch in 1957.
The Orion 2 satellite will be tested extensively prior to launch. Matra
Marconi Space is obligated to correct all defects in the satellite or its
components discovered prior to the launch. If Orion 2 is launched but fails to
meet the specified performance criteria following launch, or fails to arrive at
its designated orbit within 180 days of launch, or is completely destroyed or
incapable of operation, Orion 2 will be deemed a "constructive total loss." Upon
a constructive total loss of Orion 2, Orion would generally be entitled to order
from Matra Marconi Space a replacement satellite on substantially the same terms
and conditions as set forth in the Orion 2 Satellite Contract, subject to
certain pricing adjustments. If Orion 2 is substantially able to perform but
fails to meet certain criteria for full acceptance, Orion 2 will be deemed a
"partial loss." Upon a partial loss of Orion 2, Orion would be entitled to
receive a partial refund based on calculations of Orion 2's performance
capabilities. If Orion 2 is not a constructive total loss or partial loss, but
does not meet the specified performance requirements at final acceptance or for
five years thereafter, Matra Marconi Space may be required to make certain
refund payments to Orion up to a maximum of approximately $10 million. Orion's
principal remedy in the case of a constructive total loss or partial loss will
be under the launch insurance the Company is to obtain. The Orion 2 Satellite
Contract provides Orion with an option to purchase a replacement satellite.
Under the contract, Orion has an option to purchase a replacement satellite for
Orion 2, to be delivered in orbit no later than 21 1/4 months after Orion's
exercise of the option. A total or partial loss will involve delays and loss of
revenue, which will impair Orion's ability to service its indebtedness,
including the Notes, and such insurance will not protect Orion against business
interruption, loss or delay of revenues or similar losses and may not fully
reimburse the Company for its expenditures.
18
<PAGE>
The Orion 2 Satellite Contract provides for incentive payments to encourage
early delivery and limited liquidated damages payable in the event of late
delivery. The incentive payments would equal $25,000 per day for each day that
Orion 2 is delivered prior to the scheduled delivery date. Liquidated damages in
the event of a late delivery of Orion 2 also would be calculated on a daily
basis, with the aggregate amount not to exceed approximately $12 million. These
liquidated damages would be Orion's exclusive remedy for late delivery.
Control of Satellite. Orion expects to use the TT&C facility to control
Orion 2, and to use its existing network monitoring facilities in Rockville,
Maryland and backup facilities in Europe.
ORION 3
Schedule and Footprint. Orion intends to launch Orion 3 in the Asia Pacific
region. Orion 3 is expected to cover all or portions of China, Japan, Korea,
India, Hawaii, Southeast Asia, Australia, New Zealand, and Eastern Russia. Orion
3 is expected to be a high-power satellite with twenty-three 54 MHz and two 27
MHz equivalent Ku-band transponders, ten 36 MHz C-band transponders for use by
Orion, and eight Ku-band transponders to be used by DACOM, a large Asian
customer, for direct-to-home television services and other satellite services.
Orion, through the Republic of the Marshall Islands, has filed the appropriate
documentation with the ITU process and is in the process of coordinating the
orbital slot at 139(Degree) East Longitude. Orion has commenced, but has not
completed the consultation process with INTELSAT with respect to such orbital
slot. Orion commenced construction of Orion 3 in December 1996. Orion 3 is
scheduled to be launched in the fourth quarter of 1998.
The proposed coverage of Orion 3 is shown below.
[INSERT COVERAGE MAP]
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<PAGE>
Pre-Construction Customer. Orion has entered into a contract with DACOM
Corp., a Korean communications company which provides international and long
distance telephone and leased line services, international and domestic data
communications and value added network services. Under the contract, DACOM will
lease eight dedicated transponders on Orion 3 for 13 years for direct-to-home
television service and satellite services, in return for payment of
approximately $89 million payable over a period from December 1996 through seven
months following the lease commencement date for the transponders. Payments are
subject to refund if the successful launch and commencement of commercial
operations of Orion 3 has not occurred by June 30, 1999. Although Orion 3 is
scheduled to be launched in the fourth quarter of 1998, there can be no
assurance that Orion will meet the delivery requirements of this contract. As
part of the arrangements with DACOM, Orion granted DACOM a warrant to purchase
50,000 shares of Common Stock at $14 per share.
Satellite Construction, Launch and Performance. Orion has selected Hughes
Space as the prime contractor for Orion 3 and will use a Hughes Space HS 601 HP
satellite platform for Orion 3. Launch services for Orion 3 will be provided
using the McDonnell Douglas Delta III launch vehicle. Delta III, which is larger
than the launch vehicle used for the launch of Orion 1, is an expanded version
of the Delta II launch vehicle which has had 53 successful launches with a
failure rate of less than 4%. A launch of a Delta II (on January 17, 1997)
resulted in a launch failure. There have been no Delta III flights to date, and
the Company expects its launch to be the third Delta III flight based upon
information provided by the launch vehicle manufacturer regarding its present
flight schedules.
Under the Orion 3 Satellite Contract, the Orion 3 satellite will be tested
extensively prior to launch. Hughes Space is obligated to correct all defects in
the satellite or its components discovered prior to the launch. The risk of loss
or damage to Orion 3 passes from Hughes Space to Orion at the time of
intentional ignition of Orion 3. After Orion 3 is launched and meets the
specified performance criteria following launch, and has not suffered damage
caused by any failure or malfunction of the launch vehicle, Hughes Space is
required to perform in-orbit testing of Orion 3 to determine whether the
transponders meet the specified performance criteria. If the transponders meet
the specified performance criteria, Hughes Space is entitled to retain the full
satellite performance payments described below.
Orion has an option to purchase an additional satellite (which may be used
as a replacement satellite) to be launched within 12 to 19 months after Orion
exercises such option. Orion must pay a fee if it exercises this option; the
size of the fee will depend on whether the additional satellite is required to
be delivered in 12, 15 or 19 months. Hughes Space is obligated to furnish the
replacement satellite on terms substantially similar to those contained in the
Orion 3 Satellite Contract.
The Orion 3 Satellite Contract provides for incentive payments to encourage
satellite performance and limited liquidated damages payable in the event of
late delivery. The incentive payments could total $18 million depending on the
satellite's performance, of which $10 million could be payable upon acceptance
of the Orion 3 satellite and $8 million is payable over the course of the
satellite's operational lifetime. In the event that it is determined during the
Orion 3's operational lifetime that a transponder is not successfully operating,
Orion is entitled to receive payment refunds under the Orion 3 Satellite
Contract. Liquidated damages in the event of a late delivery of Orion 3 also
would be calculated on a daily basis, with the aggregate amount not to exceed
approximately $6 million. These liquidated damages would be Orion's exclusive
remedy for late delivery.
Control of Satellite. Orion is in the process of completing a tracking,
telemetry and command facility in the United States to control Orion 3 and
expects to maintain backup facilities in Korea, pursuant to arrangements with
DACOM.
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<PAGE>
SUMMARY SATELLITE DATA
<TABLE>
<CAPTION>
ORION 1 ORION 2* ORION 3*
<S> <C> <C> <C>
Region Covered.................. Europe, Southeastern Eastern U.S., Southeastern Canada China, Japan, Korea, India,
Canada, U.S., East of the Europe, Commonwealth of Independent Hawaii,Southeast Asia,
Rockies and Paris of States, Middle East, North Africa and Australia, New Zealand
Mexico America and Eastern Russia
Expected Launch................. Operational(1) Mid 1999 Fourth Quarter of 1998
Satellite Manufacturer.......... MMS Space Systems Matra Marconi Space Hughes Space
(subsidiary of Matra
Marconi Space)
Transponders(2)................. 34 30 43
Ku-Band(3)...................... 28@0054 MHz 30@0054 MHz 23@0054 MHz
6@0036 MHz 2@0027 MHz
8@0036 MHz (4)
C-Band(5)....................... -- -- 10@0036 MHz
Usable Bandwidth(6)............. 1728 MHz 1620 MHz 1944 MHz
EIRP(7)......................... 47 to 52 dBW 47 to 50 dBW 44 to 52
for Ku-Band;
34 to 38
for C-band
returns
Total Prime Power(8) ........... 4500 Watts 7000 Watts 8000 Watts
Expected End of Useful Life(9).. 2005 2012 2013
Approximate Percentage of World
Population Covered by
Satellite(10)................... 17.9% 27.0% 57.0%
</TABLE>
* All information relating to Orion 2 and Orion 3 is based on currently
proposed satellite designs. Particular features of Orion 2 and Orion 3 are
subject to change, although changes are not expected to have a material
impact on the operating specifications of the satellites.
(1) Orion 1 was launched on November 29, 1994 and commenced commercial
operations on January 20, 1995.
(2) Satellite transponders receive signals up from earth stations and then
convert, amplify and transmit the signals back down to other earth
stations.
(3) Ku-band frequencies are higher than C-band frequencies and are used
worldwide for commercial satellite communications.
(4) Orion has entered into a contract with DACOM under which Orion will
provide eight dedicated transponders on Orion 3 for direct-to-home
television service and other satellite services, provided that Orion 3 is
delivered in orbit and fully operational by June 30, 1999.
(5) C-band frequencies minimize interference from atmospheric conditions such
as rain. C-band satellites share frequencies with terrestrial based
microwave systems and therefore require more on-ground coordination to
avoid interference problems and generally are lower power, requiring the
use of large earth stations to receive signals. A portion of Orion 3 is
designed to transmit over C-band frequencies since Orion 3 is to cover
areas of Asia where satellite signals experience significant interference
from rain during several months of the year.
(6) Bandwidth is a measure of the transponder resource which determines the
information carrying capacity. The actual information carrying capacity of
a transponder is determined by a combination of the transponder's
bandwidth and radio-frequency ("RF") power.
(7) Equivalent isotropic radiated power ("EIRP") is a measure of the RF power
of each transponder. Smaller and less expensive earth terminal antennas
can be used with higher EIRP transponders.
21
<PAGE>
(8) Total prime power is the total amount of power that is required to support
all of the communications and electronics functions of the satellite.
(9) The expected end of a satellite's in-orbit useful life is based on the
period during which the satellite's on board fuel permits proper station
keeping maneuvers for the satellite. The information for Orion 1 is based
on 1997 fuel level estimates. The information for Orion 2 and Orion 3 is
based on their expected launch dates and their expected satellite designs,
internal studies, the Orion 2 Satellite Contract and the Orion 3 Satellite
Contract.
(10) The approximate percentages of world population covered or to be covered
by the Orion satellites are not additive. In the aggregate, the footprints
of the Orion satellites would cover over 85% of the world's population.
ORBITAL SLOTS
Orion 1. Orion has been licensed by the FCC and has completed the
coordination process with INTELSAT to operate Orion 1 in geostationary orbit at
37.5(Degree) West Longitude.
Orion 2. Orion has obtained conditional authorization from the FCC for the
construction, launch and operation of Orion 2 at 12(Degree) West Longitude. On
behalf of Orion, the FCC has commenced the orbital slot coordination process
through the ITU. Orion believes that its use of the 12(Degree) West Longitude
slot for Orion 2 is not likely to interfere with proposed uses of adjacent slots
filed for by other governments, except for a possible overlap of 75 MHz with one
such filing as discussed more fully below under the caption "-- ITU Coordination
Process". Orion has commenced consultation with INTELSAT regarding Orion 2, and
believes that since there are no INTELSAT satellites located adjacent to the
12(Degree) West Longitude orbital slot, the INTELSAT coordination should be
obtained in due course.
Orion 3. Orion, through the Republic of the Marshall Islands, has filed the
appropriate documentation with the ITU to begin the ITU coordination process for
Orion 3 at 139(Degree) East Longitude. Based upon the time of filing by the
Republic of the Marshall Islands, Orion believes that the proposed orbital slot
for Orion 3 would have effective priority under ITU procedures with respect to
the 139(Degree) East Longitude orbital slot, but some proposals for adjacent
slots would be entitled to priority over the Company's proposal (through the
Republic of the Marshall Islands) with respect to certain frequencies. Orion
believes, based upon its monitoring of the other proposals and information in
the industry regarding their progress, that none of these entities will launch a
satellite prior to launch of Orion 3 to take advantage of such priority. Orion
has not commenced the consultation process with INTELSAT with respect to Orion
3, but as in the case of Orion 2 expects to complete the INTELSAT coordination
in due course.
Other Orbital Slots. Orion has received an authorization from the FCC for a
Ku-band satellite in geostationary orbit at 47(Degree) West Longitude, and has
coordinated this orbital position with INTELSAT. Orion has filed an application
with the FCC to operate a satellite at 126(Degree) East Longitude. The FCC has
filed documentation with the ITU to commence the coordination process for this
slot. In May 1996, in response to Orion's application, the FCC assigned the U.S.
domestic orbital location of 135(Degree) West Longitude to Orion. In November
1996, the FCC granted authorization to Orion to utilize the slot, conditioned on
Orion submitting financial qualification information, or documentation
justifying a waiver of the financial requirements, within 120 days after the
release of the individual order with respect to Orion's application. Orion made
its filing on March 19, 1997. The Company has also filed an application with the
FCC to amend its license to operate a Ku-band satellite in geostationary orbit
at 37.5(degree) West Longitude to include C-band operations at 37.5(degree) West
Longitude.
In May 1997, the FCC confirmed the assignment of Ka-band orbital locations
to applicants proposing to provide geostationary-satellite services. Orion was
assigned Ka-band orbital locations at 89(degree) West Longitude, 81(degree) West
Longitude, 47(degree) West Longitude, and 126.5(degree) East Longitude. With the
relinquishment by AT&T of certain orbital assignments, applicants entered into
new negotiations for a further assignment plan. As a result of these
negotiations, Orion would receive an additional authorization of 67(degree) West
Longitude. In December 1997, the FCC confirmed the previous five Ka-band orbital
assignments to Orion and indicated the 67(degree) West Longitude location was
now under active consideration. In addition, in November 1997, the FCC commenced
a second processing round for Ka-band orbital assignments and Orion filed
amended applications seeking Ka-band orbital assignments for the 15(degree) West
Longitude and 139(degree) East Longitude locations. No other satellite operator
has filed for the 15(degree) West Longitude or 139(degree) East Longitude
locations. There can be no assurance that Orion will receive final licenses to
operate at these orbital positions, or that the FCC will act favorably on
Orion's additional satellite filings.
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<PAGE>
ITU Coordination Process. An international treaty to which the U.S. and the
Republic of the Marshall Islands are parties requires coordination of satellite
orbital slots through the procedures of the ITU. There are only a limited number
of such orbital slots. ITU procedures provide for a priority to attach to
proposals that are submitted first for a particular orbital slot and associated
frequencies, and provide for protection from interference by satellites in
adjacent slots. This priority does not establish legally-binding rights, but at
a minimum establishes certain procedural rights and obligations for and with
respect to the party that first submits its proposal.
Over the past decade, a substantial increase in satellite proposals
introduced into the ITU coordination process has caused delays in that process.
In addition, many proposals are submitted to the ITU for registration of
satellite systems that ultimately are not constructed or launched. As a result,
the ITU is investigating ways to improve or streamline the filing process for
registration of orbital slots. In the meantime, it has become international
practice for operators who propose to use a certain orbital slot to investigate
and evaluate whether proposals to launch satellites into the same or a nearby
orbital location are likely to result in actual operation, and for operators to
negotiate with other countries or operators that propose to use the same or a
nearby orbital location. There can be no assurance of the outcome of any
objections to this international practice or as to the results of the ITU's
investigations.
Orion is involved in discussions with certain governments concerning their
proposals to use orbital slots. While Orion believes that it can successfully
coordinate and resolve any interference concerns regarding the use of the
orbital locations and frequency bands proposed for Orion 2 and Orion 3, there
can be no assurance that this will be achieved, nor can there be assurance that
ITU coordination will be completed by the scheduled launch dates for Orion 2 and
Orion 3.
In the event that successful coordination cannot be achieved, Orion may
have to modify the satellite design for Orion 2 or Orion 3 in order to minimize
the extent of any potential interference with other proposed satellites using
those orbital locations or frequency bands. Any such modifications may result in
certain features of Orion 2 and Orion 3 differing from those described in this
Prospectus and may result in limitations on the use of one or more transponders
on Orion 2 or Orion 3 or delays in the launch of Orion 2 or Orion 3. In order to
achieve successful coordination, Orion may also have to modify the operation of
the satellites, or enter into commercial arrangements with operators of other
satellites, in order to protect against harmful interference to Orion's
operations. If interference occurs with satellites that are in close proximity
to Orion 2 and Orion 3, or with satellites that are subsequently launched into
locations in close proximity without completing ITU coordination procedures,
such interference would have an adverse effect on the proposed use of the
satellites and on Orion's business and financial performance.
INSURANCE
Orion has obtained satellite in-orbit life insurance for Orion 1 covering
the period from May 1997 to May 1998 in an amount of approximately $205 million
providing protection against partial or total loss of the satellite's
communications capability, including loss of transponders, power, fuel, or
ability to control the positioning of the satellite. The aggregate premium for
in-orbit insurance for Orion 1 is approximately $4.6 million per annum. Orion
has obtained launch and in-orbit life insurance for Orion 2 and Orion 3 covering
the period from launch to two years after launch in an amount of up to $220
million for Orion 2 and up to $230 million for Orion 3. This coverage provides
protection against partial or total loss of the satellite's communications
capability, including loss of transponders, power, fuel or ability to control
the positioning of the satellite. The aggregate premium for the combined Orion 2
and Orion 3 coverage for the launch plus two year period is estimated to be
approximately $72.5 million. Orion has instructed its insurance broker to
determine if current market conditions will allow for improvements to the
existing Orion 2/Orion 3 policy terms. Launch and in-orbit insurance for its
satellites will not protect the Company against business interruption, loss or
delay of revenues and similar losses and may not fully reimburse the Company for
its expenditures.
COMPETITION
As a provider of data networking and Internet-related services, Orion
competes with a large number of telecommunications service providers and
value-added resellers of transmission capacity. As a provider of satellite
transmission capacity, Orion competes with other providers of satellite and
terrestrial facilities.
23
<PAGE>
Many of these competitors have significant competitive advantages,
including long-standing customer relationships, close ties with regulatory and
local authorities, control over connections to local telephone networks and have
financial resources, experience, marketing capabilities and name recognition
that are substantially greater than those of Orion. The Company believes that
competition in emerging markets will intensify as incumbent service providers
adapt to a competitive environment and international carriers increase their
presence in these markets. The Company also believes that competition in more
developed markets will intensify as larger carriers consolidate, enhance their
international alliances and increase their focus on data networking. Orion's
ability to compete with these organizations will depend in part on Orion's
ability to price its services at a significant discount to terrestrial service
providers, its marketing effectiveness, its level of customer support and
service and the technical advantages of its systems.
SERVICE PROVIDERS
Orion has encountered strong competition from major established carriers
such as AT&T, MCI, Sprint, British Telecom, Cable & Wireless, Deutsche Telekom,
France Telecom and Kokusai Denshin Denwa, which provide international telephone,
private line and private network services using their national telephone
networks and link to those of other carriers. A number of these carriers have
formed global consortia to provide private network services, including AT&T --
Unisource Services Company (AT&T, PTT Telecom Netherlands, Telia (Sweden), Swiss
Telecom PTT and Telefonica of Spain), Concert (British Telecom and MCI), and
Global One (Sprint, France Telecom and Deutsche Telekom). Other service
providers include Worldcom (which is in the process of acquiring MCI), Infonet,
SITA, Telemedia International, Spaceline, ANT Bosch (acquired by General
Electric), Impsat, and various local resellers of satellite capacity. Finally,
service organizations that purchase satellite capacity, VSAT and other hardware
and install their own networks may be considered competitors of the Company with
respect to their own networks. Although these carriers and service providers are
competitors, some are also Orion's customers. Orion believes that all network
service providers are potential users of Orion's satellite capacity for the
network services they offer their customers.
SATELLITE CAPACITY
Orion provides fixed satellite service and does not intend to compete with
most proposed mobile satellites or low earth orbit systems ("LEO") such as
Globalstar, Iridium or Odyssey (although the Company expects to compete with
Teledesic, a proposed LEO system), or, with the exception of the pre-leased
transponders on Orion 3 to be used for video transmissions, with direct-to-home
satellite systems such as Primestar, DirecTV or EchoStar. Mobile satellite
services are characterized by voice and data transmission to and from mobile
terminals on platforms such as ships or aircraft. Direct-to-home services are
characterized by the transmission of television and entertainment services
directly to consumers. Orion's satellites will compete with trans-Atlantic fixed
satellite systems, European regional and domestic systems and Asian systems.
Existing International and Trans-Atlantic Satellite Systems. The market for
international fixed satellite communications capacity has been dominated by
INTELSAT for thirty years, and INTELSAT can be expected to continue to dominate
this market for the foreseeable future. INTELSAT, a consortium of approximately
140 countries established by international treaty in 1964, owns and operates the
largest fleet of commercial geosynchronous satellites in the world
(approximately 25 satellites, with additional satellites on order). INTELSAT's
satellites have historically been general purpose, lower-power satellites
designed to serve large areas with public telephone service transmitted between
expensive gateway earth stations. INTELSAT generally provides capacity directly
to its signatories who then market such capacity to their customers. The
availability of new services generally is subject to the discretion of each
country's signatory and INTELSAT is required under its charter to set its
pricing in order to achieve a fixed pre-tax return on equity that is established
from time to time by INTELSAT's board of governors. INTELSAT is considering a
restructuring and it is expected that the Intelsat Assembly of Parties will
decide on a new structure for the organization in 1998. Any restructuring of
INTELSAT that increases its marketing flexibility could materially impact
Orion's ability to compete in the market for private satellite delivered
services.
PanAmSat currently operates six satellites, with four satellites providing
coverage in the Atlantic Ocean region, one in the Asia Pacific region and one in
the Indian Ocean region. These satellites primarily provide broadcasting
services, such as television programming and backhaul operations. PAS 3,
launched in January 1996, with coverage of the Atlantic Ocean, competes directly
with Orion 1. It has performance attributes which are generally comparable to
those of Orion 1 and carries 16 Ku-band transponders, of which 8 transponders
are capable of providing service to or within Europe, and 16 C-band
transponders. PanAmSat has announced that it intends to launch two additional
satellites in 1998 .
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<PAGE>
Existing European Regional and Domestic Satellite Systems. In Europe, Orion
competes with certain regional satellites systems and may compete with domestic
satellite systems. Regional and domestic satellite systems generally have
limited ability to serve customers with needs for extensive international
networks. Orion's primary competitor in Europe is the major regional satellite
system operated by EUTELSAT. EUTELSAT, established in 1977, presently comprises
over approximately 45 member countries. EUTELSAT operates ten satellites,
providing telephony, television, radio and data services, and has announced a
plan to launch four new satellites through 1999.
Asian Pacific Region Satellite Systems. Orion believes that
currently-operating satellite systems in the Asia Pacific region generally are
limited in their ability to provide private network and similar services at an
acceptable performance level due to insufficient power, limited Ku-band capacity
and limited geographic coverage. Nevertheless, there is a large number of
satellite systems operating in Asia. The major Asia Pacific regional satellite
systems include the AsiaSat system licensed in Hong Kong (with two satellites in
operation ), the Chinese Apstar system (with three satellites in operation) and
the Indonesian Palapa system (with six satellites in orbit). Japan has licensed
several satellite networks for domestic and international service, including the
JCSat series (five satellites in operation), NTT's two N-Star satellites, and
Space Communications Corporation's Superbird Series (three satellites in
operation). Optus operates four Australian domestic satellites that offer
limited international coverage and plans several follow-on satellites. Korea
operates Koreasat 1 and 2, primarily for domestic service, with plans for a
third satellite that would offer expanded regional service in 1999. Thailand has
licensed the Thaicom system, with two domestic satellites and one regional
satellite in operation. Measat operates a Malaysian system consisting of two
satellites providing DTH service to Malaysia and parts of Asia.
Other Satellite Systems. There are numerous satellites other than the ones
discussed above that compete to some extent with Orion. In addition, the Company
is aware of a substantial number of satellites that are in construction or in
the planning stages, including a number of systems proposing to operate in the
Ka frequency band. Most of these satellites will cover areas within the
footprint of Orion 1 and/or the proposed footprints of Orion 2 and Orion 3. As
these new satellites commence operations, they (other than replacement
satellites not significantly larger than the ones they replace) will
substantially increase the capacity available for sale in the Company's markets.
After a satellite has been successfully delivered in orbit, the variable cost of
transmitting additional data via the satellite is limited. Accordingly, absent a
corresponding increase in demand, this new capacity can be expected to result in
significant additional price reductions. For example, Teledesic Corporation
proposes to operate up to 840 low earth orbit small satellites by 2001 to
provide global satellite services (including voice, data and broadband
transmission services). Although Orion cannot assess to what degree, if any,
these proposed satellites might compete with Orion in the future, Teledesic
could provide significant competition to the Company.
TERRESTRIAL CAPACITY
Orion competes with terrestrial facilities for intra-Europe and
trans-Atlantic capacity.
European Facilities. Orion's services compete with terrestrial
telecommunications delivery services, which are being improved gradually through
the build-out of fiber optic networks and a move from analog to digital
switching. As fiber networks and digital network switching become more
prevalent, the resulting improved and less expensive terrestrial capacity is
increasingly competitive with Orion's services.
Undersea Cable. Undersea fiber optic cable capacity has increased
substantially in recent years. Although Orion believes that undersea cable
capacity is not as well suited as satellite capacity to serve the requirements
of video broadcasters or the demand for multi-point private network services,
fiber optic and coaxial cables are well suited for carrying large amounts of
bulk traffic, such as long distance telephone calls, between two locations.
Operators of undersea fiber optic cable systems typically are joint ventures
among major telecommunications companies. Orion expects strong competition from
these carriers in providing private network services.
REGULATION
REGULATORY OVERVIEW
The international telecommunications environment is highly regulated. As an
operator of privately owned international satellite systems licensed by the
United States, Orion is subject to the regulatory authority of the United States
(primarily the FCC) and the national communications authorities of the countries
in which it provides service. Each of these entities can
25
<PAGE>
potentially impose operational restrictions on Orion. In addition, Orion is
subject to the INTELSAT and EUTELSAT consultation processes. The changing
policies and regulations of the United States and other countries will continue
to affect the international telecommunications industry. Orion cannot predict
the impact that these changes will have on its business or whether the general
deregulatory trend in recent years will continue. Orion believes that continued
deregulation would be beneficial to Orion, but deregulation also could reduce
the limitations facing many of its existing competitors and potential new
competitors.
The operation of Orion 2 and Orion 3 will require a number of regulatory
approvals, including (i) the approvals of the FCC (in the case of Orion 2), (ii)
completion of successful consultations with INTELSAT and, in the case of Orion
2, with EUTELSAT; (iii) satellite "landing" rights in countries that are not
INTELSAT signatories or that require additional approvals to provide satellite
or VSAT services; and (iv) other regulatory approvals. Obtaining the necessary
licenses and approvals involves significant time and expense, and receipt of
such licenses and approvals cannot be assured. Failure to obtain such approvals
would have a material adverse effect on Orion. In addition, Orion is required to
obtain approvals from numerous national local authorities in the ordinary course
of its business in connection with most arrangements for the provision of
services. Within Orion 1's footprint, such approvals generally have not been
difficult for Orion to obtain in a timely manner. However, the failure to obtain
particular approvals has delayed, and in the future may delay, the provision of
services by Orion.
AUTHORITY TO CONSTRUCT, LAUNCH AND OPERATE SATELLITES
Orion 1. In June 1991, Orion received final authorization from the FCC (the
"Orion 1 License") to construct, launch and operate a Ku-band satellite in
geostationary orbit at 37.5(Degree) West Longitude in accordance with the terms,
conditions and technical specifications submitted in its application to the FCC.
The Orion 1 license from the FCC expires in January 2005. Although Orion has no
reason to believe that its licenses will not be renewed (or new licenses
obtained) at the expiration of the license term, there can be no assurance of
renewal.
Orion 2. Orion has obtained conditional authorization from the FCC for the
orbital slot at 12(Degree) West Longitude for operation of Orion 2. The Orion 2
authorization will not become final until Orion completes a consultation with
INTELSAT and demonstration to the FCC of its financial ability to meet the costs
of construction, the launch of its satellite and operating expenses for one year
following launch. Orion has not yet met the required financial qualifications
demonstration to the FCC and intends to do so within 90 days after completion of
INTELSAT consultation. Orion has commenced consultation with INTELSAT. The
application filed with the FCC for Orion 2 contains a technical proposal
different than that currently being coordinated with the ITU, and will need to
be amended. Orion has no reason to believe that the FCC will not approve such
amendment or that the amendment will cause material delay in obtaining final FCC
authority for Orion 2.
Orion 3. Orion is pursuing an orbital slot at 139(Degree) East Longitude
through the Republic of the Marshall Islands. Under an agreement with the
Republic of the Marshall Islands entered into in 1990, the Republic of the
Marshall Islands agreed to file with the ITU all documents necessary to secure
authorization for Orion to operate a satellite in geo-stationary orbit. In
return for the right to utilize any orbital slots secured by the Republic of the
Marshall Islands, Orion must, among other things, (i) commence construction of a
functioning operating center for satellites serving the Pacific Island portion
of the Orion Asia Pacific network at least a year prior to the operation of an
Orion satellite, (ii) train and support certain employees designated by the
Republic of the Marshall Islands at least a year prior to the operation of an
Orion Asia Pacific satellite, and (iii) construct, equip and install (except for
power supply or back-up) four earth stations capable of handling a "T-1" circuit
for operation with the Orion Asia Pacific system prior to the operation of an
Orion Asia Pacific satellite.
CONSULTATION WITH INTELSAT AND EUTELSAT
Orion 1. Prior to receiving final licensing and launch authority for Orion
1, Orion successfully completed its consultation with INTELSAT pursuant to the
INTELSAT Treaty. A similar consultation for Orion 1 was completed with EUTELSAT
in May 1994. Additional consultations or other approvals may be needed in
individual countries for the use of VSATs.
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Orion 2. Orion has recently commenced consultations with INTELSAT. Orion
believes that since there are no INTELSAT satellites located adjacent to the
12(Degree) West Longitude orbital slot, the INTELSAT coordination should be
obtained in due course. Orion intends to commence consultation with EUTELSAT in
the near future through the coordination procedures of the ITU.
Orion 3. Orion has commenced consultations with INTELSAT for Orion 3 and
believes that since there are no INTELSAT satellites located adjacent to the
139(Degree) East Longitude orbital slot, the INTELSAT coordination should be
obtained in due course. There is no requirement to coordinate with EUTELSAT for
the 139(Degree) East Longitude orbital slot.
There can be no assurance that Orion will successfully complete these
consultations.
INTERNATIONAL TELECOMMUNICATION UNION
An international treaty to which the U.S. and the Republic of the Marshall
Islands are parties requires coordination of satellite orbital slots through the
procedures of the ITU. The process for coordinating orbital slots through the
ITU is discussed under the caption "Orbital Slots -- ITU Coordination Process."
Orion 1. After Orion 1 reached its orbital position and commenced
operation, the FCC notified the ITU. This concluded the process for coordination
of the Orion 1 orbital slot.
Orion 2. On behalf of Orion, the FCC has commenced the orbital slot
coordination process through the ITU. Orion believes that its use of the
12(Degree) West longitude slot for Orion 2 is not likely to interfere with
proposed uses of adjacent slots filed for by other governments, except for a
possible overlap of 75 MHz with one proposal as discussed more fully under the
caption "Orbital Slots -- ITU Coordination Process."
Orion 3. Orion, through the Republic of the Marshall Islands, has filed the
appropriate documentation with the ITU to begin the ITU coordination process for
Orion 3 at 139(Degree) East longitude. As discussed more fully under the caption
"Orbital Slots -- ITU Coordination Process," based upon the time of filing by
the Republic of the Marshall Islands, Orion believes that the proposed orbital
slot for Orion 3 would have priority under ITU procedures with respect to the
139(Degree) East longitude orbital slot, but some proposals by other
administrations for adjacent slots would be entitled to effective priority over
the proposal by the Republic of the Marshall Islands with respect to certain
frequencies. Orion believes, based upon its monitoring of the proposals of other
administrations and information in the industry regarding their progress, that
none of these administrations will launch a satellite prior to launch of Orion 3
to take advantage of such priority. Orion also believes that it can complete the
ITU coordination process for Orion 3 at 139(Degree) East Longitude, however,
there can be no assurance that this will be achieved.
UNITED STATES REGULATORY RESTRICTIONS
Orion is subject to regulation under the Communications Act, the FCC's July
1985 Separate Systems decision as modified by subsequent FCC decisions, other
FCC regulations, and the terms of the various orders issued by the FCC with
respect to Orion and its subsidiaries, including the terms of the Orion 1
License. These regulations, orders and authorizations impose various
restrictions on Orion and on other similarly situated companies. Certain
important restrictions are described below.
Use of the Orion 1 Satellite System for U.S. Domestic Services. In January
1996, the FCC eliminated certain distinctions between U.S. licensed domestic
satellites and separate satellite systems. It authorized both sets of U.S.
licensed satellite operators to provide both domestic and international
services. Domestic operators have designed their current satellite facilities
principally for continental U.S. coverage of the United States, and thus may as
a general matter offer only limited competition for international services at
the outset. However, future satellite designs of domestic satellite operators
could be modified to more directly compete in the international market.
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New Orbital Locations. The FCC now requires applicants, at the time of
filing for an orbital position (either domestic arc or international orbital
position), to demonstrate the financial ability to construct, launch and operate
that satellite for a one year period. This new requirement will have no change
in the licensing of Orion's orbital positions at 37.5(Degree) West Longitude,
12(Degree) West Longitude, 47(Degree) West Longitude and 126(Degree) East
Longitude (the orbital slot at 139(Degree) East Longitude is not being pursued
through the FCC and is not subject to the financial showing requirement). To the
extent that Orion is seeking an orbital location through the FCC, Orion will
need to have significant financing on hand at the time of application or obtain
a waiver of the required financial demonstration. There is no assurance that
Orion will be able to obtain such waiver.
Unauthorized Transfer of Control. The Communications Act bars a change in
control of the holder of FCC licenses without prior approval from the FCC. Any
finding that a change of control without prior FCC approval had occurred could
have a significant adverse effect on Orion's ability to implement its business
plan.
INTERNATIONAL REGULATION
Orion will need to comply with the applicable laws and obtain the approval
of the regulatory authority of each country in which it proposes to provide
network services or operate VSATs. The laws and regulatory requirements
regulating access to satellite systems vary from country to country. Some
countries have substantially deregulated satellite communications, making
customer access to Orion services a simple procedure, while other countries
maintain strict monopoly regimes. The application procedure can be
time-consuming and costly, and the terms of licenses vary for different
countries.
Orion provides service using the licenses it obtains or that are obtained
by local ground operators or, in certain cases, through customer-obtained
authorizations. For example, Orion's representatives in the United Kingdom
(Kingston Communications), France (Matra Hachette), and Italy (Telecom Italia)
have licenses in such countries.
Orion is to pursuing a similar strategy in Asia and Latin America. In
addition, Orion will need to comply with the national laws of each country in
which it provides services. Laws with respect to satellite services are
currently unclear in certain jurisdictions, particularly within the Orion 3
footprint. In certain of these jurisdictions, satellite services may only be
provided via domestic satellites. The Company believes that certain of these
restrictions may change and that it can structure its operations to comply with
the remaining restrictions. However, there can be no assurance in this regard.
On February 5, 1998, the World Trade Organization ("WTO") Agreement on
Basic Telecomm Services went into effect liberalizing market access restrictions
globally. Fifty-seven WTO countries, including the U.S., committed to reciprocal
market access opportunities. The Company believes entry into force of the WTO
agreement will better facilitate market access for satellite services, and
signals a positive trend towards global competition.
HUMAN RESOURCES
As of December 31, 1997, Orion and its subsidiaries had 289 full-time
employees. Of its total work force, 7 are part of management, 119 are in
engineering or satellite control operations, 79 are in marketing, sales and
sales support, and 84 are devoted to support and administrative activities.
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FORWARD LOOKING STATEMENTS
Information set forth in this Annual Report on Form 10-K under the captions
"Business" "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Selected Consolidated Financial and Operational Data"
and under other captions contains various "forward looking statements" within
the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934, which statements represent Orion's reasonable
judgment concerning the future and are subject to risks and uncertainties that
could cause Orion's actual operation results and financial position to differ
materially. Such forward looking statements include the following: Orion
expectations regarding the pending acquisition by Loral, Orion's belief and the
judgments of its independent engineering consultant, Telesat Canada, regarding
the expected performance of the Orion 1 satellite over its useful life, and the
effect of such performance on Orion's business; Orion's expectations regarding
the period for construction and launch of Orion 2 and Orion 3; Orion's belief
that it can overcome uncertainties relating to Orion 2 and Orion 3; Orion's
expectations regarding receipt of regulatory approvals, coordination of orbital
slots and avoidance of possible interference; Orion's beliefs regarding existing
and future regulatory requirements, its ability to comply with such requirements
and the effect of such requirements on its business; Orion's beliefs regarding
the competitive advantages of satellites and of Orion's satellites, strategies
and services in particular, both in general and as compared to other providers
of services or transmission capacity and other services presently offered or
which may be offered in the future; Orion's expectations regarding the growth in
telecommunications and the demand for telecommunications services; Orion's
beliefs regarding the demand for or attractiveness of Orion's services; Orion's
beliefs regarding technological advances and their effect on telecommunications
services or demand therefore; Orion's beliefs regarding availability of net
operating loss carryforwards; Orion's beliefs regarding its representatives and
distributors; Orion's belief that any liability that might be incurred by Orion
upon the resolution of certain existing or future legal proceedings not having a
material adverse effect on the consolidated financial condition or results of
operations of Orion; and the adoption of new accounting releases not being
material to its financial condition, or results of operations.
Orion cautions that the above statements are further qualified by important
factors that could cause Orion's actual results to differ materially from those
in the forward looking statements. Such factors include, without limitation, the
following, in each case as presented more fully in Orion's Registration
Statement on Form S-3 (No. 333-40123) on file at the Securities and Exchange
Commission under "Risk Factors" or in Loral's Registration Statement on Form S-4
(No. 333-4640):
Acquisition: No Assurance that Loral Acquisition will be Consummated. The
consummation of the Merger is subject to a number of conditions, including
approval of the Merger Agreement by the Company's stockholders, accuracy of
representations and warranties and compliance with covenants set forth in the
Merger Agreement. It is presently anticipated that each of the conditions to the
Merger would have to be satisfied to consummate the Merger. There can be no
assurance that Orion will obtain all necessary approvals and satisfy all other
conditions to the Merger.
Satellite Loss or Reduced Performance. Satellites are subject to
significant risks, including launch failure, damage that impairs commercial
performance, failure to achieve correct orbital placement during launch, loss of
fuel that reduces satellite life, and satellite in-orbit risks. Although Orion 1
has been successfully launched and is in commercial operation, in November 1995,
one of Orion 1's components supporting nine transponders of dedicated capacity
serving the European portion of the Orion 1 footprint experienced an anomaly.
Orion believes, based on the data received to date by Orion from its own
investigations and from the manufacturer, and based upon advice from Orion's
independent engineering consultant, Telesat Canada, that because the redundant
components is strong, the anomalous behavior is unlikely to affect the expected
performance of the satellite over its useful life. However, in the event that
the currently operating component fails, Orion 1 would experience a significant
loss of usable capacity. Although Orion maintains satellite in-orbit insurance
on Orion 1, any loss in orbit or reduced performance of Orion 1 would have a
material adverse effect on Orion. In addition, no assurance can be given that
the launch of Orion 2 or Orion 3 will be successful. Although various sources of
data permit differing conclusions, Orion is aware of sources indicating that the
historical loss rate for all commercial geosynchronous satellite launches may be
as high as 15%. Launch risks vary based upon the launch vehicle used and recent
performance of that vehicle. In addition, Orion may have to change launch
vehicles and could be subject to delays and higher costs of launch insurance if,
for example, one of its selected vehicles experiences a launch failure with
respect to another satellite. With respect to the risk of launch failure of
Orion satellites, Orion has an option to purchase an additional satellite (which
may be used as a replacement satellite) to be delivered in orbit, in the case of
Orion 3, within 12, 15 or 19 months (at Orion's election) after it exercises the
option, or, in the case of Orion 2, with 21 1/4 months after it exercises the
option.
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Therefore, an unsuccessful launch of Orion 2 or Orion 3 would involve a delay in
revenues for at least one year, and perhaps substantially longer. Significant
loss or delay of revenue from any of the Company's satellites would have a
material adverse effect on the Company.
Limited Insurance for Satellite Launch and Operation. The in-orbit
insurance of Orion 1 and the launch and in-orbit insurance for Orion 2 and Orion
3 will not protect the Company against business interruption, loss or delay of
revenues and similar losses and may not fully reimburse the Company for its
expenditures. In addition, such insurance includes or can be expected to include
certain contract terms, exclusions, deductibles and material change conditions
that are customary in the industry. Accordingly, an unsuccessful launch of Orion
2 or Orion 3 or any significant loss of performance with respect to any of its
satellites would have a material adverse effect on Orion
Limited Life of Satellites. While Orion 1 is expected to have an orbital
life of approximately 10.7 years (through October 2005), and Orion 2 and Orion 3
are expected to have orbital lives of approximately 13 years and 15 years,
respectively, there can be no assurance as to the actual longevity of the
satellites. A number of factors will affect the useful life of each satellite,
including the rate of fuel consumption in achieving correct orbital placement
during launch, the quality of its construction and the durability of its
component parts.
Timing and Cost Uncertainties with Respect to Orion 2 and 3. Orion
presently plans to launch Orion 2 in the second quarter of 1999 and plans to
launch Orion 3 in the fourth quarter of 1998, based upon the construction and
launch schedules set forth in the satellite contracts. To meet these schedules,
Orion must receive certain regulatory approvals and take other necessary steps,
including the possible need of additional financing. Failure to meet the
construction and launch schedules could increase the cost of Orion 2 or Orion 3,
requiring additional financing. Although the Orion 2 satellite contract and the
Orion 3 satellite contract are fixed-price contracts with firm schedules for
construction, delivery and launch, there can be no assurance that increases in
costs due to change orders or delay will not occur. There can be no assurance
that the launch of Orion 2 or Orion 3 will take place as scheduled. A
significant delay in the delivery or launch of Orion 2 or Orion 3 would have a
material adverse effect on Orion.
Risks of Proceeding with Construction Prior to Obtaining all Regulatory
Approvals for Orion 2 and Orion 3. Orion has commenced construction of Orion 3
and Orion 2 prior to completion of the required consultation with INTELSAT and
EUTELSAT (as defined), receipt of final authority from the FCC (in the case of
Orion 2) and completion of the International Telecommunication Union ("ITU")
coordination process. Failure to obtain one more necessary approval in a timely
manner would likely have a material adverse effect on the Company.
Additional factors that would cause Orion's results to differ materially
from those in the forward looking statements include the following: no
assurances regarding the business plan; Orion's history of losses and
expectation of future losses; Orion's need for additional capital; substantial
leverage and secured indebtedness; potential lack of market acceptance and
demand; ground operations; Orion's ability to manage growth; potential adverse
effects of competition; no assurances regarding approvals needed, current or
future regulation of the telecommunications industry; uncertainties relating to
backlog; no assurances regarding technological changes; risks of conducting
international business; dependence of Orion on key personnel; control of Orion
by principal stockholders; risks relating to senior preferred stock; limits on
paying dividends on Orion common stock; and anti-takeover and other provisions
of the certificate of incorporation, in each case as presented more fully in
Orion's Registration Statement on Form S-3 (No. 333-40123) or in Loral's
Registration Statement on Form S-4 (No. 333-4640) on file at the Securities and
Exchange Commission under "Risk Factors."
ITEM 2. PROPERTIES.
Orion's principal offices comprise approximately 33,000 square feet located
in Rockville, Maryland. These offices house not only Orion's personnel, but also
contain the Company's satellite operations center for Orion 1. The lease
covering these facilities expires in December 1999. In February 1992, Orion sold
its earth station facility at Mount Jackson, Virginia, but retained six acres of
land at that location plus access to certain capacity and facilities. Orion has
leased the land and facilities in Mount Jackson to Orion Atlantic for use as
part of the TT&C Station. Orion also leases approximately 7,300 square feet of
office space in Gaithersburg, Maryland for operations personnel, 2,900 square
feet of office space in Amsterdam, Netherlands also for operations personnel and
approximately 5,000 square feet in London, England for sales and sales support
personnel. Orion's German subsidiary, Orion Network Systems-Europe GmbH, leases
a facility in Hannover, Germany, comprised of approximately 7,400 square meters
of land and 1,800 square meters of office space.
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ITEM 3. 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. On August 12,
1997, the parties entered into a formal settlement agreement. 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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since completion of Orion's initial public offering in August 1995, the
Common Stock has been quoted on the Nasdaq National Market under the trading
symbol "ONSI." As of March 9, 1998, there were approximately 268 stockholders of
record of Orion's Common Stock. The following table summarizes the high and low
closing sale prices of Common Stock by fiscal quarter for 1995, 1996 and 1997 as
reported on the Nasdaq National Market.
QUARTER ENDED: 1995
------------- --------------
September 30 (from August 1) $10 3/4 to $14 1/4
December 31 6 3/4 to 12
Quarter Ended: 1996
------------- --------------
March 31 $ 8 1/4 to $14 3/4
June 30 10 1/4 to 14 1/4
September 30 7 1/4 to 12 1/8
December 31 9 1/2 to 13 5/8
Quarter Ended: 1997
------------- --------------
March 31 $ 8 5/8 to $15
June 30 8 1/2 to 12 1/4
September 30 11 1/8 to 17 1/8
December 31 16 5/8 to 18 1/8
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The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain future earnings, if any, to
finance the growth and development of its business, and therefore the Company
does not anticipate paying cash dividends on its common Stock in the foreseeable
future. The Company is not permitted to pay dividends on the Common Stock as
long as the Company's Preferred Stock is outstanding, subject to certain limited
exceptions. The Company's Series A Preferred Stock which was issued in June 1994
and the Series B Preferred Stock which was issued in June 1995 (pursuant to
options granted in June 1994), accrue dividends at 8% per annum. Accrued
dividends on the Series A and Series B Preferred Stock are payable only in
limited circumstances. Upon conversion of the Series A and Series B Preferred
Stock into Common Stock, either at the option of the holder or in those cases
where the Company has the right to require such conversion, accrued but unpaid
dividends will be canceled. The Series C Preferred Stock which was issued in
January 1997 accrues dividends at 6% per annum. Accrued dividends are payable in
Common Stock. The number of shares of Common Stock distributable as a dividend
on each share of Series C Preferred Stock is calculated based on the market
price of such Common Stock as set forth in the Certificate of Designations for
the Series C Preferred Stock. The Indentures relating to the Company's Senior
Notes and Senior Discount Note restricts the payment by the Company of cash
dividends on its capital stock.
Sales of Unregistered Securities. In January 1997, Orion consummated the
following transactions involving the sale of its unregistered securities.
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,
International Private Satellite Partners, L.P. ("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' rights to
receive repayment of various advances (aggregating approximately $41.6 million
at January 31, 1997). The 123,172 shares of Series C Preferred Stock issued in
the Exchange were 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 in Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," of this Annual
Report on Form 10-K.
On January 8, 1997, the Company acquired the only outstanding minority
interest in the Company's subsidiary Orion Asia Pacific Corporation from British
Aerospace Satellite Investments, Inc. in exchange for approximately 86,000
shares of the Company's Common Stock.
On January 31, 1997, the Company also completed the sale of $60 million of
its convertible junior subordinated debentures (the "Convertible 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 Convertible Debentures and Matra Marconi Space purchased $10
million of the Convertible Debentures. The Convertible Debentures would have
matured in 2012, and bore interest at a rate of 8.75% per annum, paid
semi-annually in arrears solely in Common Stock of the Company. As of March 10,
1998, all of the Convertible Debentures have been converted to approximately 4.3
million shares of common stock. The Convertible Debentures were subordinated to
all other indebtedness of the Company.
The Company registered 5,052,202 shares of Common Stock issuable upon
conversion of (i) the Series C Preferred Stock (other than the Series C
Preferred Stock held by British Aerospace) and (ii) Matra Marconi's Convertible
Debentures on a Registration Statement on Form S-3 (the "Exchanging Partners
Registration Statement"), which Exchanging Partners Registration Statement
became effective on November 19, 1997 (Registration No. 333-40123). As of
January 31, 1998, approximately 3.9 million shares of Common Stock (issuable
upon the conversion of 56,492 shares of the Series C Preferred Stock and Matra
Marconi's Convertible Debentures) had been sold pursuant the Exchanging Partners
Registration Statement.
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British Aerospace has recently converted its Convertible Debentures and
sold the Common Stock issued upon conversion in sales exempt from registration
under the Securities Act.
If the Loral Merger is consummated, the Common Stock will cease to be
publicly traded or quoted on the Nasdaq National Market.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATIONAL DATA (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE DATA).
The following selected consolidated statements of operations and balance
sheet data as of and for the years ended December 31, 1997, 1996, 1995, 1994 and
1993 are derived from the Company's audited consolidated financial statements.
The pro forma consolidated statement of operations data is derived from the
unaudited pro forma condensed consolidated statement of operations. The pro
forma data is not necessarily indicative of the results that would have been
achieved nor are they indicative of the Company's future results. The data
should be read in conjunction with the Consolidated Financial Statements,
related notes and other financial information included herein. From its
inception in 1982 through January 20, 1995, when Orion 1 commenced commercial
operations, Orion was a development stage enterprise. Because of Orion's
exclusive management and control of Orion Atlantic as its sole general partner
(subject to certain rights of approval by the Limited Partners), and Orion's
aggregate 33 1/3% (through November 1995, 41 2/3% from December 1995 through
January 31, 1997, thereafter 100%) partnership interest, the financial
statements of Orion Atlantic are consolidated with the financial statements of
Orion. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Pro Forma Condensed Consolidated Financial Statement"
and the Consolidated Financial Statements and Notes thereto.
In January 1997, the Company consummated the Merger (as defined below) as
part of a series of transactions which significantly changed the Company. Those
transactions, which are discussed in more detail in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," of
this Annual Report on Form 10-K, are as follows:
(i) the acquisition of all of the limited partnership interests which
the Company did not already own in the Company's operating subsidiary, Orion
Atlantic, that owns the Orion 1 satellite, along with rights to receive
repayment of various advances by Orion Atlantic and various other rights, in an
exchange transaction for 123,172 shares of Series C Preferred Stock (the
"Exchange");
(ii) 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., in exchange (the "OAP Acquisition") for
approximately 86,000 shares of the Company's Common Stock;
(iii) a $710 million notes offering, with warrants representing
approximately 2.6% of the outstanding Common Stock of the Company on a fully
diluted basis (the "Bond Offering"), and
(iv) the sale of $60 million of the Company's Convertible Debentures to
British Aerospace Holdings, Inc. and Matra Marconi Space (the "Convertible
Debentures Offering").
The Exchange and the OAP Acquisition resulted in the Company owning 100% of
Orion Atlantic and its other significant subsidiaries and, therefore, a greatly
simplified corporate structure. The Exchange also resulted in a significant
increase in the Company's capital stock outstanding. The net proceeds of the
Bond Offering and Convertible Debentures Offering were used by the Company to
repay the credit facility it entered into in connection with the construction of
the Orion 1 satellite, to pre-fund the first three years of interest payments on
certain of the Notes, and will be used by the Company for the construction and
launch of two additional satellites, Orion 2 and Orion 3.
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<TABLE>
<CAPTION>
1997 PRO
1997 FORMA (1) 1996 1995 1994 1993 (2)
---------- ---------- ---------- --------- ---------- --------
(dollars in thousands except share data)
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 72,741 $ 72,741 $ 41,847 $ 22,284 $ 3,415 $ 2,006
Interest expense 83,769 89,432 27,764 24,738 61 133
Net loss (3) (105,740) (108,099) (27,195) (26,915) (7,965) (7,886)
Net loss per common share-basic and
diluted $ (9.60) $ (9.86) $ (2.62) $ (3.07) $(0.86) (0.85)
Weighted average common shares
outstanding (4) 11,639,711 11,640,504 10,951,823 9,103,505 9,272,166 9,266,445
OTHER OPERATING DATA:
Number of customers 301 182 $ 109 34 10
Capital expenditures $ 113,344 $ 16,376 $ 9,060 $ 51,103 44,130
Customer contract backlog (5) $ 269,548 $ 214,887 120,612 $ 39,122 $ 18,185
Sites (6) 682 322 151 57 --
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 70,009 $ 32,187 55,112 11,219 $ 3,404
Restricted and segregated cash (7) 356,890 10,000 -- -- --
Total assets 896,492 358,264 389,075 340,176 271,522
Long-term debt (less current 790,671 218,237 250,669 230,175 185,294
portion)
Limited Partners' interest in Orion
Atlantic (8) -- 10,130 14,626 62,519 69,909
Redeemable preferred stock 76,734 20,902 20,358 14,555 --
Total stockholders' (deficit) (46,849) (436) 26,681 3,351 8,400
equity
Book value per share (2.99) (.04) 2.46 .49 1.33
</TABLE>
(1) Adjusted to reflect the pro forma effects of the Financings which are
discussed in more detail in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," of this
Annual Report on Form 10-K.
(2) In 1993, Orion Atlantic terminated its commitment to purchase a second
satellite from MMS Space Systems, resulting in a termination charge of
$5 million.
(3) As required by GAAP, net loss is presented before accretion of
preferred stock and preferred stock dividends. For the years ended
December 31, 1997, 1997 (pro forma), 1996, 1995, 1994 and 1993
preferred stock dividends and accretion are $6.0, $6.7, $1.4, $1.3,
$0.6 and $0 million, respectively.
(4) Computed on the basis described for net loss per common share in Note
2 to the Consolidated Financial Statements.
(5) Backlog represents future revenues under contract.
(6) Sites includes installed VSATs and additional transmission
destinations (such as customer premises) that share a VSAT.
(7) Restricted and segregated cash at December 31, 1997 represents (i)
$117.8 million in a pledged account to fund interest payments on the
Senior Notes and (ii) $216.7 million segregated by the Company and used
only to invest in certain high quality short term investments to make
payments for additional satellites and certain related costs and (iii)
$22.4 million held in escrow related to the DACOM agreement. Restricted
and segregated cash at December 31, 1996, includes $10.0 million held
in escrow related to the DACOM agreement.
(8) Represents amounts invested by Limited Partners (net of syndication
costs related to the investments), adjusted for such Limited Partners'
share of net losses. The interests of the Limited Partners were
acquired by the Company in the Exchange.
34
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Orion Network Systems, 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). Orion acquired all the
remaining interests in Orion Atlantic on January 31, 1997 during the Exchange as
described below. The assets and liabilities reported in the consolidated balance
sheet at December 31, 1997 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).
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 (as amended on February 11, 1998,
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.
35
<PAGE>
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.
If the Merger were to close on March 20, 1998, the Determination Price
would be 24.68652 and the Exchange Ratio would be 0.71553.
A meeting of Orion's shareholders has been scheduled for March 20, 1998 to
vote to approve the Loral Merger. The Company expects the Loral Merger to close
following a favorable shareholder vote, however, there can be no assurance that
the Loral Merger will be consummated. 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 and are more
fully described in Registration Statement No. 333-46407 on Form S-4, and have
been filed as exhibits 2.1, 2.2 and 2.3, respectively, and are incorporated
herein by reference. More information on Loral is also available in the
foregoing Registration Statement No. 33-46407.
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 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 $41.6 million at
January 31, 1997). 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 its other significant
subsidiaries and, therefore, a greatly simplified corporate structure.
36
<PAGE>
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 this Annual Report on Form 10-K.
On January 31, 1997, the Company also completed the sale of $60 million of
its convertible junior subordinated debentures (the "Convertible 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 Convertible Debentures and Matra Marconi Space purchased $10
million of the Convertible Debentures (collectively, the "Convertible Debentures
Offering," and together with the Bond Offering, the "Financings"). The
Convertible 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 Convertible Debentures are subordinated to all other
indebtedness of the Company, including the Notes.
The net proceeds of the Bond Offering and Convertible 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 of two additional satellites, Orion 2 and Orion 3.
37
<PAGE>
ACQUISITION OF TELEPORT EUROPE
On March 26, 1997, Orion acquired German-based Teleport Europe GmbH (now
known as Orion Network Systems-Europe GmbH) ("Orion Europe") a communications
company specializing in private satellite networks for voice and data services.
Orion purchased the shares of Orion Europe held by the German companies, Vebacom
GmbH and RWE Telliance AG, now known as o.tel.o for approximately $9 million. In
addition, Orion acquired Orion Europe's licenses and operating agreements to
provide satellite network services in 40 countries, including 17 countries in
which Orion previously did not provide service.
RECENT REGISTRATION
The Company registered 5,052,202 shares of Common Stock issuable upon
conversion of (i) the Series C Preferred Stock (other than the Series C
Preferred Stock held by British Aerospace) and (ii) Matra Marconi's Convertible
Debentures on a Registration Statement on Form S-3 (the "Exchanging Partners
Registration Statement"), which Exchanging Partners Registration Statement
became effective on November 19, 1997 (Registration No. 333-40123). As of
January 31, 1998, approximately 3.9 million shares of Common Stock (issuable
upon the conversion of 56,492 shares of the Series C Preferred Stock and Matra
Marconi's Convertible Debentures) had been sold pursuant the Exchanging Partners
Registration Statement.
British Aerospace has recently converted its Convertible Debentures and
sold the Common Stock issued upon conversion in sales exempt from registration
under the Securities Act.
If the Loral Merger is consummated, the Common Stock will cease to be
publicly traded or quoted on the Nasdaq National Market.
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 for Orion 2. The contract for Orion 2 provides for delivery in
orbit of Orion 2 by June 1999, excluding launch insurance and performance
incentives, for a firm fixed price of $201 million. Orion commenced construction
of Orion 3 in December 1996 and entered into a satellite contract with Hughes
Space and Communications International, Inc. for Orion 3 in January 1997. The
contract for Orion 3 provides for delivery in orbit of Orion 3 by December 1998,
excluding launch insurance, for a firm fixed price of $208 million excluding
launch insurance and performance incentives.
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 substantially offset 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 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.
38
<PAGE>
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, satellite
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); (iii) in-orbit
insurance premiums; and (iv) personnel costs and travel related to TT&C, network
monitoring, network design and similar activities. These costs will increase as
the Company's business grows. Specifically, in-orbit insurance costs will
increase significantly following the launches of Orion 2 and Orion 3. 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 and 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, commenced
a significant expansion of its marketing program in 1997 and expects to continue
this expansion through 1998. 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 1998. Engineering and technical
expenses, consisting principally of personnel costs and travel. General and
administrative expenses consist of personnel costs other than for selling and
engineering, information systems, professional services, and occupancy costs.
These costs will increase generally as the Company's operations expand.
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 (see Note 2 of the Notes
to Consolidated Financial Statements) 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 equity
offerings. Interest costs increased 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
Consolidation of Orion Network Systems - Europe GmbH ("Orion Europe"). The
Company has consolidated the operations of Orion Europe for the year ended
December 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 Orion Europe of $0.6 million has been deducted from the
consolidated statement of operations for the year ended December 31, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Revenue. Total revenue for the year ended December 31, 1997 was $72.7
million including $15.4 million from Orion Europe, compared to $41.8 million for
the same period in 1996, an increase of 74%. Revenues from private
communications network services were $36.8 million in 1997 compared to $17.0
million for the comparable period in 1996, as the number of sites in services
increased to 682 as of December 31, 1997, from 322 at December 31, 1996.
Revenues from video distribution and other satellite transmission services were
$31.4 million for 1997 compared to $24.8 million for the same period in 1996.
OPERATING EXPENSES
Direct expenses. Direct expenses for the year ended December 31, 1997, were
$26.5 million compared to $15.5 million for the same period in 1996. The
increase of 71% was primarily attributable to Orion Europe direct expenses of
$8.3 million, 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.
39
<PAGE>
Sales and marketing expenses. Sales and marketing expenses were $19.4
million, including $1.5 million relating to Orion Europe for the year ended
December 31, 1997, as compared to $11.5 million in the same period of 1996. The
increase of $7.9 million or 69% is primarily 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 service business..
Engineering and technical expenses. Engineering and technical expenses were
$7.8 million in the year ended December 31, 1997, as compared to $5.2 million
for the comparable period in 1996. The increase was primarily due to additional
engineering and technical staff associated with the Orion Europe acquisition.
General and administrative expenses. General and administrative expenses
were $14.0 million for the year ended December 31, 1997, compared to $9.1
million for the period ended December 31, 1996. The increase of $4.9 million, or
54%, for the year ended December 31, 1997 was primarily due to additional
administrative staff associated with the Orion Europe acquisition and outside
services associated with the planned Loral Merger.
Depreciation and amortization. Depreciation expense for the year ended
December 31, 1997, was $48.2 million, an increase of $11.2 million, or 30%, over
the same period 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
Partners' interest in Orion Atlantic and depreciation of ground equipment to
service the expansion of the private network communication service business and
depreciation and amortization relating to Orion Europe.
Interest. Interest income was $24.7 million for the year ended December 31,
1997, compared to $2.3 million for the year ended December 31, 1996. The
increase in interest income ($22.4 million or 974%) during 1997, is primarily a
result of interest earned on the proceeds from the Company's public bond
offering in January 1997. Interest expense was $83.8 million for the year ended
December 31, 1997, compared to $27.8 million for the comparable period in 1996.
The increase in interest expense of $56.0 million in 1997 is attributable to
additional interest resulting from the completion of the Company's financing in
January 1997.
Other. Other expenses were $.5 million for the year ended December 31,
1997, compared to $.02 million for the same period in 1996.
Net loss. The Company incurred a net loss of $105.7 million, compared to a
net loss of $27.2 million for the years ended December 31, 1997 and 1996,
respectively, after deduction of the limited partners' and minority interests'
share in the Company's losses before minority interests' of $12.0 million and
$34.6 million, respectively. Net loss is expected to increase substantially in
subsequent periods as a result of interest expense on the notes issued in
connection with the offering in January 1996 and the elimination of the minority
interests in Orion Atlantic.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Revenue. Total revenue for the year ended December 31, 1996 was $41.8
million, compared to $22.3 million for the same period in 1995, an increase of
87%. Revenues from private communications network services were $17.0 million in
1996 compared to $10.0 million for the comparable period in 1995, as the number
of sites in service increased to 322 as of December 31, 1996, from 151 at
December 31, 1995. Revenues from video distribution and other satellite
transmission services were $24.8 million for 1996 compared to $12.3 million for
the same period in 1995 resulting from a substantial increase in customers for
these services in 1996.
OPERATING EXPENSES
Direct expenses. Direct expenses for the year ended December 31, 1996, were
$15.5 million compared to $17.0 million for the same period in 1995. The
decrease of $1.5 million, or 9%, was primarily attributable to accruals for
satellite incentive obligations owed by Orion to the contractor under the Orion
1 Satellite Contract during the initial satellite deployment period from January
20, 1995 through June 30, 1995. The Company capitalized the present value of the
remaining satellite incentive obligation of approximately $14.8 million,
effective July 1, 1995, as part of the cost of the satellite. As of December 31,
1996, Orion had obligations with a present value of approximately $22.4 million
with respect to satellite incentives.
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<PAGE>
Sales and marketing expenses. Sales and marketing expenses were $11.5
million for the year ended December 31, 1996, as compared to $8.6 million in the
same period of 1995. The increase of $2.9 million, or 34% is primarily
attributable to sales commissions, third party sales representative fees and
ground operator fees associated with the growth in the private communications
network service business.
Engineering and technical expenses. Engineering and technical expenses were
$5.2 million in the year ended December 31, 1996, as compared to $5.6 million
for the comparable period in 1995.
General and administrative expenses. General and administrative expenses
were $9.1 million for the year ended December 31, 1996, compared to $6.6 million
for the period ended December 31, 1995. The increase of $2.5 million, or 38%,
for the year ended December 31, 1996 was primarily due to additional
administrative staff.
Depreciation and amortization. Depreciation and amortization expense for
the year ended December 31, 1996, was $36.9 million, an increase of $5.5
million, or 18%, over the same period in 1995. The increase is primarily a
result from depreciation of VSATs and other ground equipment to service the
expansion of the private network services business and depreciation of the Orion
1 satellite, which was placed in service January 20, 1995.
Interest. Interest income was $2.3 million for the year ended December 31,
1996, compared to $1.9 million for the year ended December 31, 1995. The
increase in interest income ($0.4 million or 21%) during 1996 is primarily a
result of interest earned on increased cash balances from the proceeds of the
Company's initial public offering in August 1995. Interest expense was $27.8
million for the year ended December 31, 1996, compared to $24.7 million for the
comparable period in 1995. The increase in interest expense of $3.1 million in
1996 is attributable to expensing interest (including commitment fees, interest
accretion associated with the Orion 1 satellite incentive obligation and
amortization of deferred financing costs) from the in-service date of Orion 1
and the impact of an interest rate cap agreement in 1996. Prior to the
in-service date of Orion 1, substantially all interest expense was capitalized.
Other. Other expenses were $.02 million for the year ended December 31,
1996, compared to $3.4 million for the same period in 1995. The decrease is
primarily related to costs incurred in connection with Orion Atlantic's plans to
raise financing for Orion 2, which plans were deferred in November 1995.
Net loss. The Company incurred a net loss of $27.2 million, compared to a
net loss of $26.9 million for the years ended December 31, 1996 and 1995,
respectively, after deduction of the limited partners' and minority interests'
share in the Company's losses before minority interests' of $34.6 million and
$46.1 million, respectively. Net loss is expected to increase substantially in
subsequent periods as a result of interest expense on the notes issued in
connection with the offering in January 1996 and the elimination of the minority
interests in Orion Atlantic.
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 (those 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 common shares, of which approximately 3.2
million shares have been sold under the Exchanging Partners Registration
Statement as of January 31, 1998.
41
<PAGE>
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 Convertible Debentures Offering were approximately $59 million. Of the Bond
Offering proceeds, approximately $222 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 December 31, 1997, the Company had cash and
cash equivalents of $70 million and restricted and segregated assets of $357
million including $217 million which was segregated in the financial statements
by the Company to be used to make payments for additional satellites and certain
related costs. The restricted cash consisted of $117.8 million placed in a
pledged account (to pre-fund the first six interest payments on the Senior
Notes). Additionally, included in restricted and segregated assets is $22
million 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 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.
Since the Notes have traded in recent periods at prices above 101% of their
principal amount, the Company does not anticipate that the holders of a material
principal amount of the Notes will accept the offer to repurchase.
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 description of such Notes in the Indentures
and Notes documents, copies of which have been filed as exhibits to this Annual
Report on Form 10-K.
Convertible Debentures. In January 1997, the Company also completed the
sale of $60 million of its convertible junior subordinated debentures to British
Aerospace ($50 million) and Matra Marconi Space ($10 million). The Convertible
Debentures would have matured in 2012, and bore 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
Convertible Debentures (and accrued but unpaid interest) were convertible 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. All of the Convertible Debentures were converted into
approximately 4.3 million shares of common stock between December 1997 and March
1998. The Common Stock issuable upon conversion of Matra Marconi Space's
Convertible Debentures was recently sold pursuant to the Exchanging Partners'
Registration Statement. British Aerospace has recently converted its Convertible
Debentures and sold the Common Stock issued upon conversion in sales exempt from
registration under the Securities Act.
42
<PAGE>
Other Indebtedness and Other Obligations. At December 31, 1997, the Company
had outstanding indebtedness of approximately $6.0 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 December 31, 1997 the Company had obligations of
approximately $6.5 million payable to the manufacturer of Orion 1 through 2007.
Current Funding Requirements. While the Company believes its existing
resources are adequate to fund its needs through 1998, 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 and Segregated Cash.
The in-orbit delivered costs of the Orion 2 and Orion 3 satellites are
expected to aggregate approximately $468 million. In addition to the $93 million
paid in 1997, Orion will need to make payments of approximately $329 million,
$45 million and $.3 million in 1998, 1999 and 2000, respectively. These amounts
include the Company's estimate regarding the cost of launch 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 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.
In connection with the Bond Offering, the Company segregated $407
million of the net proceeds to make payments for additional satellites and
certain related costs (and interest payments on the Senior 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 $85 million at December 31, 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.
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.
TAXES
As of December 31, 1997, Orion had net operating loss carryforwards for
federal tax purposes of approximately $162 million. The ability of Orion to
benefit from net operating losses for federal income tax purposes will depend on
a number of factors, including whether Orion has sufficient income from which to
deduct the losses, limitations that may arise as a result of changes in the
ownership of Orion, including as a result of the Transactions and other factors,
and certain other limitations which may significantly reduce the economic
benefit of those losses to Orion. Due to uncertainty regarding its ability to
realize the benefits of its net deferred tax assets, including such net
operating loss carryforwards, the Company has established a valuation allowance
for the full amount of its net deferred tax assets.
EFFECT OF INFLATION
Orion believes that inflation has not had a material effect on the results
of operations to date.
43
<PAGE>
ITEM 8.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Orion Network Systems, Inc.
We have audited the accompanying consolidated balance sheets of Orion
Network Systems, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Orion Network
Systems, Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Washington, DC
February 20, 1998
44
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 70,008,657 $ 32,187,807
Restricted assets 50,064,014 --
Accounts receivable (less allowance for doubtful accounts
of $734,000 and $100,000 at December 31, 1997 and
1996, respectively) 11,780,972 6,473,316
Prepaid expenses and other current assets 6,846,598 3,583,403
----------- ----------
Total current assets 138,700,241 42,244,526
=========== ==========
Restricted and segregated assets 306,825,961 10,000,000
Property and equipment, at cost:
Land 73,911 73,911
Telecommunications equipment 40,654,418 25,342,528
Furniture and computer equipment 8,626,501 4,849,711
Satellite and related equipment 322,159,088 321,247,346
----------- ----------
371,513,918 351,513,496
Less: accumulated depreciation (77,079,857) (68,224,957)
Satellite construction in progress 106,843,174 4,560,844
----------- ----------
Net property and equipment 401,277,235 287,849,383
Deferred financing costs, net 22,510,041 12,918,233
Other assets, net 27,178,809 5,252,302
----------- ----------
Total assets $ 896,492,287 $ 358,264,444
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
45
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' deficit
Current liabilities:
Accounts payable $ 5,230,567 $ 6,411,028
Accrued liabilities 10,594,952 7,653,208
Other current liabilities 7,129,861 5,406,072
Interest payable 24,771,509 8,583,882
Current portion of long-term debt 6,406,143 34,975,060
------------- -------------
Total current liabilities 54,133,032 63,029,250
Long-term debt 790,670,606 218,236,839
Other liabilities 21,803,582 46,402,299
Limited Partners' interest in Orion Atlantic -- 10,130,058
Commitments and contingencies
Redeemable preferred stock:
Series A 8% Cumulative Redeemable Convertible Preferred
Stock, $.01 par value; 15,000 shares authorized; 6,933 and
13,871 shares issued and outstanding at December 31, 1997 and
1996, respectively, plus accrued dividends 8,613,508 16,097,880
Series B 8% Cumulative Redeemable Convertible Preferred
Stock, $.01 par value; 5,000 shares authorized; 2,059 and
4,298 shares issued and outstanding at December 31, 1997
and 1996, respectively, plus accrued dividends 2,466,755 4,804,486
Series C 6% Cumulative Redeemable Convertible Preferred
Stock, $.01 par value; 150,000 shares authorized; 82,641 and 0
shares issued and outstanding at December 31, 1997 and 1996,
respectively, plus accrued dividends and accretion 65,653,949 --
Stockholders' deficit:
Common stock, $.01 par value; 40,000,000 shares authorized;
15,959,089 and 11,244,665 issued and outstanding at
December 31, 1997 and 1996, respectively 159,591 112,447
Capital in excess of par value 153,294,210 86,932,391
Treasury stock, 269,274 and 259,515 shares (91,490) --
Foreign currency translation adjustment (955,800) --
Accumulated deficit (199,255,656) (87,481,206)
------------- -------------
Total stockholders' deficit (46,849,145) (436,368)
------------- -------------
Total liabilities and stockholders' deficit $ 896,492,287 $ 358,264,444
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
46
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
-------------- --------------- ---------------
<S> <C> <C> <C>
Service revenue $ 72,740,631 $ 41,847,292 $ 22,283,882
Operating expenses:
Direct 26,531,298 15,457,260 16,968,926
Sales and marketing 19,423,372 11,465,040 8,613,399
Engineering and technical services 7,750,208 5,190,619 5,554,690
General and administrative 13,955,718 9,138,973 6,574,202
Depreciation and amortization 48,161,257 36,948,158 31,403,376
-------------- --------------- ---------------
Total operating expenses 115,821,853 78,200,050 69,114,593
-------------- --------------- ---------------
Loss from operations (43,081,222) (36,352,758) (46,830,711)
Other expense (income):
Interest income (24,711,461) (2,313,842) (1,924,822)
Interest expense 83,769,168 27,764,126 24,738,446
Other 507,089 23,649 3,382,506
-------------- --------------- ---------------
Total other expense, net 59,564,796 25,473,933 26,196,130
-------------- --------------- ---------------
Loss before extraordinary loss on extinguishment
of debt, minority interest and preacquisition (102,646,018) (61,826,691) (73,026,841)
loss of acquired subsidiary
Extraordinary loss on extinguishment of debt (15,763,220) -- --
Limited Partners' interest in the net loss
of Orion Atlantic 12,042,978 34,631,281 46,111,663
Preacquisition loss of acquired subsidiary 626,246 -- --
-------------- --------------- ---------------
Net loss (105,740,014) (27,195,410) (26,915,178)
Preferred stock dividend, net of forfeitures 6,034,436 1,369,665 1,329,007
-------------- --------------- ---------------
Net loss attributable to common stockholders $ (111,774,450) $ (28,565,075) $ (28,244,185)
============== =============== ===============
Extraordinary loss per share, net of minority
interest - basic and diluted $ (.56) $ -- $ --
============== =============== ===============
Net loss per common share-basic and diluted $ (9.60) $ (2.62) $ (3.07)
============== =============== ===============
Weighted average common shares outstanding 11,639,711 10,951,823 9,103,505
============== =============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
47
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- CAPITAL IN
NUMBER EXCESS OF ACCUMULATED TREASURY
OF SHARES AMOUNT PAR VALUE DEFICIT STOCK (1)
--------- ------ --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 7,045,523 $ 70,455 $ 33,952,062 $ (30,671,946) $ --
Issuance of common stock 4,002,941 40,030 50,960,330 -- --
Exercise of stock options and
warrants 67,501 675 573,221 -- --
Preferred stock dividend, net of
forfeitures -- -- -- (1,329,007) --
Net loss for 1995 -- -- -- (26,915,178) --
--------- ------------- ------------- -------------- -----------
Balance at December 31, 1995 11,115,965 111,160 85,485,613 (58,916,131) --
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 -- -- -- (1,369,665) --
Net loss for 1996 -- -- -- (27,195,410) --
--------- ------------- ------------- -------------- -----------
Balance at December 31, 1996 11,244,665 112,447 86,932,391 (87,481,206) --
Issuance of common stock 11,286 113 142,317 -- --
Conversion of preferred stock
to common stock 3,351,728 33,517 38,811,976 -- --
Conversion of debentures to
common stock 735,292 7,353 10,284,314 -- --
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 common stock for
preferred stock dividend 120,954 1,210 2,069,252 -- --
payments
Issuance of warrants relating to
Senior Notes and Senior
Discount Notes, net -- -- 9,223,674 -- --
Exercise of stock options and
warrants 176,489 1,765 1,764,295 -- --
Employee stock purchase plan 27,731 277 243,901 -- --
Preferred stock dividend and
accretion, net of forfeitures -- -- -- (6,034,436) --
Foreign currency translation -- -- -- -- --
Purchase of treasury stock -- -- -- -- (91,490)
Net loss for 1997 -- -- -- (105,740,014) --
---------- ------------- ------------- ------------- ----------
Balance at December 31, 1997 15,959,089 $ 159,591 $ 153,294,210 $(199,255,656) $ (91,490)
========== ============= ============= ============= ==========
</TABLE>
<TABLE>
<CAPTION>
FOREIGN TOTAL
CURRENCY STOCKHOLDERS'
TRANSLATION EQUITY (DEFICIT)
----------- ----------------
<S> <C> <C>
Balance at December 31, 1994 $ -- $ 3,350,571
Issuance of common stock -- 51,000,360
Exercise of stock options and 573,896
warrants --
Preferred stock dividend, net of
forfeitures -- (1,329,007)
Net loss for 1995 -- (26,915,178)
---------- --------------
Balance at December 31, 1995 -- 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)
Net loss for 1996 -- (27,195,410)
---------- --------------
Balance at December 31, 1996 -- (436,368)
Issuance of common stock -- 142,430
Conversion of preferred stock
to common stock -- 38,845,493
Conversion of debentures to
common stock -- 10,291,667
Issuance of common stock for
the purchase of APSC -- 1,200,000
Issuance of common stock for
interest payments -- 2,624,999
Issuance of common stock for
preferred stock dividend -- 2,070,462
payments
Issuance of warrants relating to
Senior Notes and Senior
Discount Notes, net -- 9,223,674
Exercise of stock options and
warrants -- 1,766,060
Employee stock purchase plan -- 244,178
Preferred stock dividend and
accretion, net of forfeitures -- (6,034,436)
Foreign currency translation (955,800) (955,800)
Purchase of treasury stock -- (91,490)
Net loss for 1997 -- (105,740,014)
---------- ------------
Balance at December 31, 1997 $ (955,800) $ (46,849,145)
========== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
(1) Includes 269,274 treasury shares of which 259,515 are carried at no cost.
48
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (105,740,014) $ (27,195,410) $ (26,915,178)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary loss on extinguishment of debt 15,763,220 --
Depreciation and amortization 48,161,257 36,948,158 31,403,376
Amortization of deferred financing costs 2,409,787 2,130,588 2,130,588
Provision for bad debts 1,021,618 919,453 277,529
Accretion of interest 34,347,467 2,371,506 5,185,834
Interest earned on restricted assets (18,203,066) -- --
Limited Partners' interest in the net loss of Orion
Atlantic and other minority interest (12,042,978) (34,631,281) (46,089,010)
Gain on sale of assets -- (54,738) (59,301)
Changes in operating assets and liabilities:
Accounts receivable (2,922,508) (2,203,171) (4,915,257)
Prepaid expenses and other current assets (2,277,177) (285,895) (3,147,592)
Other assets (3,639,941) (69,708) (519,773)
Accounts payable and accrued liabilities (2,639,393) (3,621,847) 7,327,377
Other current liabilities 1,543,035 3,298,544 3,670,988
Interest payable 16,180,273 578,803 (885,106)
--------------- --------------- ---------------
Net cash used in operating activities (28,038,420) (21,814,998) (32,535,525)
INVESTING ACTIVITIES
Capital expenditures (11,062,046) (12,625,444) (8,549,799)
Increase in restricted and segregated assets (419,187,388) (10,000,000) --
Release of restricted and segregated assets 90,500,480 -- --
Satellite construction costs, including capitalized
interest (102,282,330) (3,750,231) (510,613)
Advance on DACOM contract, net 12,250,000 9,900,000
Refund from satellite manufacturer -- -- 2,750,000
Purchase of Teleport Europe, net of cash acquired (8,374,845) -- --
Other -- (37,865) (558,817)
--------------- --------------- ---------------
Net cash used in investing activities (438,156,129) (16,513,540) (6,869,229)
FINANCING ACTIVITIES
Limited Partners' capital contributions -- 30,135,000 7,600,000
Redemption of Limited Partner interest -- -- (4,450,000)
Debt and equity financing costs (26,122,220) (2,265,291) --
Proceeds from issuance of redeemable preferred stock -- -- 4,483,001
Proceeds from issuance of common stock, net of issuance
costs 2,152,668 343,120 51,974,436
Treasury stock purchase (91,490) -- --
PPU borrowings -- -- 2,275,000
Proceeds from issuance of debt 770,397,000 -- --
Proceeds from senior notes payable banks and notes payable -- -- 18,918,984
Repayment of senior notes payable to banks and notes payable (216,723,484) (27,802,281) (14,385,015)
Swap termination fee (5,287,827) -- --
Payment of satellite incentives (18,620,886) -- --
Other (1,688,362) 14,994,212 16,881,102
--------------- --------------- ---------------
Net cash provided by financing activities 504,015,339 15,404,760 83,297,508
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents 37,820,850 (22,923,778) 43,892,754
Cash and cash equivalents at beginning of period 32,187,807 55,111,585 11,218,831
--------------- --------------- ---------------
Cash and cash equivalents at end of period $ 70,008,657 $ 32,187,807 $ 55,111,585
=============== =============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
49
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION.
Orion Network Systems, 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 below.
Orion acquired all the remaining interests in Orion Atlantic on January 31, 1997
during the Exchange as described below. Orion's consolidated financial
statements also include the accounts of all other subsidiaries of Orion.
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).
Jurisdiction of Organization
Subsidiary Name or Incorporation
- ------------------------------------------------- -----------------------------
Asia Pacific Space and Communications, Ltd. Delaware
International Private Satellite Partners, L.P.
(doing business as Orion Atlantic, 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 Europe, Inc.) Delaware
Orion Oldco Services, Inc.
(formerly known as Orion Network Systems, Inc.) Delaware
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 subsidiary of the
Company. The Subsidiary Guarantors comprise all of the direct and indirect
subsidiaries of the Company (other than inconsequential subsidiaries).
50
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. ORGANIZATION - (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.
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"). The Company accounted for
this transaction as an acquisition of minority interest, and as a result,
approximately $34.3 million was allocated to the cost of the Orion 1 satellite
and related equipment.
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 $41.6 million at
January 31, 1997). 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 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.
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 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 pay cash
interest prior to January 15, 2002. Thereafter, cash interest will accrue until
maturity at an annual rate of 12.5% payable semi-
51
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. ORGANIZATION - (CONTINUED)
annually on January 15 and July 15 of each year, commencing July 15, 2002. The
exercise price of the Warrants is $.01 per share of Common Stock of the Company.
There were 697,400 Warrants issued in connection with the Notes (See Note 6).
On January 31, 1997, the Company also completed the sale of $60 million of
its convertible junior subordinated debentures (the "Convertible 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 Convertible Debentures and Matra Marconi Space purchased $10
million of the Convertible Debentures (collectively, the "Convertible Debentures
Offering," and together with the Bond Offering, the "Financings"). The
Convertible Debentures mature in 2012, and bear interest at a rate of 8.75% per
annum payable semi-annually in arrears solely in Common Stock of the Company.
The Convertible Debentures are subordinated to all other indebtedness of the
Company, including the Notes.
The net proceeds of the Bond Offering and Convertible 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.
ACQUISITION OF TELEPORT EUROPE
On March 26, 1997, Orion acquired German-based Teleport Europe GmbH (now
known as Orion Network Systems-Europe GmbH) ("Orion Europe") a communications
company specializing in private satellite networks for voice and data services.
Orion purchased the shares of Orion Europe held by the German companies, Vebacom
GmbH and RWE Telliance AG, now known as o.tel.o for approximately $9 million. In
addition, Orion acquired Orion Europe's licenses and operating agreements to
provide satellite network services in 40 countries, including 17 countries in
which Orion previously did not provide service. The net purchase price of Orion
Europe was $8.4 million and was allocated as follows:
Working capital deficit, net of cash acquired $ (.6)
Property and equipment 9.3
Other, net (.3)
--------
$ 8.4
========
The proforma effect on net loss assuming the acquisition took place January
1, 1997 was not material.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY
The consolidated financial statements for the year ended December 31, 1997,
include the accounts of Orion and its wholly-owned subsidiaries and Orion
Financial Partnership (OFP), in which Orion holds a 50% interest. The
consolidated financial statements for the years ended December 31, 1996 and
1995, include the accounts of Orion, its two wholly-owned subsidiaries OrionNet,
Inc. (OrionNet) and Orion Network Services, Inc., its former 83% owned
subsidiary, Asia Pacific Space and Communications Ltd. (Asia Pacific), the OFP,
in which Orion holds a 50% interest, and Orion Atlantic, in which Orion held a
41 2/3% ownership interest. Orion Network Services, Inc. as the general partner
of Orion Atlantic, exercised control of Orion Atlantic through the provisions of
the partnership agreement. All significant intercompany accounts and
transactions have been eliminated. In January 1997, all of the outside interest
in these entities, except for outside interests of OFP, were acquired.
52
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
CASH AND CASH EQUIVALENTS
Orion considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash and cash equivalents
includes cash in banks and short term investments as follows:
DECEMBER 31,
1997 1996
----------- -----------
Cash ............. $ 2,256,356 $ 2,627,477
Money market funds 2,543,600 14,213,484
Commercial paper . 65,208,701 15,346,846
----------- -----------
$70,008,657 $32,187,807
=========== ===========
The commercial paper held at December 31, 1997 matures between January and March
1998.
RESTRICTED AND SEGREGATED ASSETS
Restricted and segregated assets consist of the following:
DECEMBER 31,
------------------------------
1997 1996
------------- -------------
U.S. treasury notes $ 117,800,000 $ --
Commercial paper 216,696,975 --
Time deposits 22,393,000 10,000,000
------------- -------------
Total restricted and segregated assets 356,889,975 10,000,000
Less: current portion (50,064,014) --
------------- -------------
$ 306,825,961 $ 10,000,000
============= =============
Included in restricted and segregated assets is $3.7 million of accrued interest
at December 31, 1997. The current portion represents interest to be paid on the
Senior Notes in 1998. The commercial paper and U.S. treasury discount notes held
at December 31, 1997 mature between January and March 1998 and January 1998 and
January 2000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation expense is
calculated using the straight-line method over their estimated useful lives as
follows:
Satellite and related equipment 10.5 years
Telecommunications equipment ... 2-7 years
Furniture and computer equipment 2-7 years
Costs incurred in connection with the construction and successful
deployment of the Orion 1 satellite and related equipment are capitalized. Such
costs include direct contract cost, allocated indirect costs, launch costs,
launch insurance, construction period interest and the present value of
satellite incentive payments. Similar costs for Orion 2 and Orion 3 are included
in "Satellite construction in progress." Orion began depreciating the Orion 1
satellite over its estimated useful life commencing on the date of operational
delivery in orbit (January 20, 1995).
53
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs related to the Financings include $22.6 million in
fees paid to an investment banker and are being amortized over the period the
debt is expected to be outstanding. Accumulated amortization at December 31,
1997 and 1996 was $2,289,925 and $9,122,000, respectively. Deferred financing
costs of $10.5 million relating to the Orion 1 Credit Facility were expensed in
January 1997 in connection with the Financings and are included in the caption
"Extraordinary loss on extinguishment of debt".
OTHER ASSETS
Other assets consist principally of FCC license application costs,
organization costs and goodwill. The Company amortizes the FCC license
application costs related to Orion 1 over the estimated useful life of the
satellite. Organization costs are amortized over five years. Goodwill is
primarily amortized over the remaining useful life of Orion 1. Accumulated
amortization at December 31, 1997 and 1996 was $6,214,359 and $3,150,000,
respectively.
Other assets, net of amortization at December 31, 1997 and 1996, consist of
the following:
DECEMBER 31,
1997 1996
--------------- ---------------
Goodwill $ 20,331,878 $ 1,412,546
Note receivable 3,038,901 --
FCC license application costs 1,781,097 1,639,054
Other 2,026,933 2,200,702
--------------- ---------------
$ 27,178,809 $ 5,252,302
=============== ===============
FOREIGN CURRENCY TRANSLATION
Results of operations for foreign entities, primarily the Company's Orion
Network Systems-Europe GmbH subsidiary, are translated using average exchange
rates during the period. Assets and liabilities are translated to U.S. dollars
using the exchange rate in effect at the balance sheet date. The resulting
translation adjustments are reflected in stockholders' equity (deficit).
INTEREST RATE MODIFICATION AGREEMENT
Orion entered into an interest-rate swap and cap agreement to modify the
interest characteristics of the Orion 1 Credit Facility from a floating to a
fixed-rate basis. This agreement involved the receipt of floating rate amount in
exchange for fixed-rate interest payments over the life of the agreement without
an exchange of the underlying principal amount. The differential paid or
received was accrued as interest rates changed and was recognized as an
adjustment to interest expense. The fair value of the swap agreement was not
recognized in the financial statements. This agreement was terminated in January
1997 in connection with the Financings discussed in Note 1. No such agreements
were in place at December 31, 1997.
54
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
REVENUE RECOGNITION
Revenue is recognized as earned in the period in which telecommunications
and related services are provided.
The following summarizes the Company's domestic and foreign revenues for
the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues from unaffiliated customers
United States ........................... $30,927,234 $21,261,980 $ 8,528,736
Europe .................................. 37,720,990 14,571,979 8,056,146
Revenues from related parties ............... 4,092,407 6,013,333 5,699,000
----------- ----------- -----------
Total services revenue ...................... $72,740,631 $41,847,292 $22,283,882
=========== =========== ===========
</TABLE>
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future consequences of temporary differences between financial reporting and tax
bases of assets and liabilities using enacted tax rates that will be in effect
when the differences are expected to reverse.
Following is a summary of components of deferred taxes at December 31, 1997
and 1996 (in thousands):
DECEMBER 31,
--------------------
1997 1996
-------- --------
Deferred tax assets:
Net operating loss carryforward ... $ 61,648 $ 29,535
Accrued discount on Senior Discount
Notes ........................... 11,917 --
Amortization of intangibles ....... 2,947 466
Other ............................. 3,385 2,566
-------- --------
79,897 32,567
Deferred tax liabilities:
Depreciation ...................... (16,289) (299)
Other ............................. (741) (124)
-------- --------
(17,030) (423)
-------- --------
Net deferred tax asset ............ 62,867 32,144
Valuation allowance ............... (62,867) (32,144)
-------- --------
Net deferred tax asset, after
valuation allowance ............. $ -- $ --
======== ========
At December 31, 1997, Orion has approximately $162 million in net operating
loss carryforwards which expire at varying dates from 2004 through 2012. The use
of these loss carryforwards may be limited under the Internal Revenue Code as a
result of ownership changes experienced by Orion. Due to uncertainty regarding
its ability to realize the benefits of such net operating loss carryforwards and
other net deferred tax assets, the Company has established a valuation allowance
for the full amount of these net deferred tax assets.
55
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of common
shares outstanding during the period. In 1997, the Financial Accounting
Standards Board issued Statement No. 128, Earnings per Share. Statement 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. The effect of such securities for all periods presented
is anti-dilutive, and therefore has been excluded from the calculation of
diluted earnings per share. The adoption of FASB 128 had no impact on the per
share amounts previously presented.
STATEMENTS OF CASH FLOWS
Non-cash investing and financing activities and supplemental cash flow
information includes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Property and equipment financed by capital leases............. $ -- $ 482,452 $ 2,850,766
Preferred stock dividend, net of forfeitures.................. 6,034,436 1,369,665 1,329,007
Conversion of redeemable preferred stock to common stock...... 38,845,493 804,945 9,000
Conversion of subordinated debentures to common stock......... 10,291,667 -- --
Premium on satellite due to redemption of L.P interest........ -- -- 3,066,925
Redemption of STET interest with notes payable................ -- -- 8,000,000
Reduction in amount due to satellite manufacturer............. -- -- 485,799
Satellite incentive obligation capitalized................... -- -- 14,816,406
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) -- --
Issuance of Series C preferred stock.......................... 94,000,000 -- --
Issuance of common stock for preferred stock dividend......... 2,070,462 -- --
Issuance of common stock and warrants ....................... 13,406,631 300,000 --
Interest paid during the year................................. 35,572,722 20,619,316 11,312,875
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
56
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. ORION ATLANTIC
Orion Atlantic is a Delaware limited partnership formed to provide
international private communications networks and basic transponder capacity and
capacity services (including ancillary ground services) to businesses and
institutions with trans-Atlantic and intra-European needs. The business was
organized by Orion Network Services, the general partner of Orion Atlantic. The
principal purposes of Orion Atlantic was to finance the construction, launch and
operation of up to two telecommunications satellites in geosynchronous orbit
over the Atlantic Ocean and to establish a multinational sales and service
organization. Eight international corporations, including Orion, invested a
total of $90 million in equity as limited partners in Orion Atlantic. Orion
Atlantic through January 1997, was financed by a credit facility which provided
up to $251 million for the first satellite from a syndicate of major
international banks led by Chase Manhattan Bank, N.A. In addition to their
equity investments, the Limited Partners had agreed to lease capacity on the
satellites up to an aggregate $155 million and had entered into additional
contingent capacity lease contracts ("contingent call") up to an aggregate $271
million, as support for repayment of the senior debt. The firm capacity leases
and contingent calls were payable over a seven-year period after the Orion 1
satellite was placed in service. In July 1995, January and July 1996 the Limited
Partners (excluding the Company) paid $7.6 million, $18.0 million and $12.1
million, respectively, pursuant to the contingent calls. As discussed in Note 1,
in January 1997, the Company acquired all of the limited partnership interests
it did not already own in Orion Atlantic.
Orion 1 -- The fixed base price of Orion 1, excluding obligations relating
to satellite performance, aggregated $227 million. In addition to the fixed base
price, the contract required payments in lieu of a further contract price
increase, aggregating approximately $44 million through 2006. Such payments are
due, generally, if 24 out of 34 satellite transponders are operating
satisfactorily. Shortly after acceptance of the satellite in January 1995, the
Company filed a warranty claim with the satellite manufacturer relating to one
transponder that was not performing in accordance with contract specifications.
In August 1995, Orion Atlantic received a one time refund of $2.75 million which
was applied as a mandatory prepayment to the senior notes payable - banks.
The Company believes that since Orion 1 is properly deployed and
operational, based upon industry data and experience, payment of the obligation
mentioned above is highly probable and the Company capitalized the present value
of this obligation of approximately $14.8 million as part of the cost of the
satellite. Payment of amounts due under this obligation were delayed until
payment was permitted under the senior notes payable -- banks. The present value
was estimated by discounting the obligation at 14% over the expected term,
assuming payment of the incentives begins upon expiration of the senior notes
payable -- banks in 2002.
Redemption of STET Partnership Interest; Issuance of New Interest to Orion.
- -- In November 1995 Orion Atlantic redeemed the limited partnership interest
held by STET (the "STET Redemption") for $11.5 million, including $3.5 million
of cash and $8.0 million in 12%, promissory notes due through 1997. STET's firm
and contingent capacity leases remained in place until released by the Banks
under the Orion 1 Credit Facility. STET's existing contractual arrangements with
Orion Atlantic were modified in a number of respects, including (i) a reduction
of approximately $3.5 million in amounts due by Orion Atlantic to Telespazio
S.p.A., an affiliate of STET, over a ten-year period under contracts relating to
the construction of Orion 2, back-up tracking, telemetry and command services
through a facility in Italy and engineering consulting services, (ii) the
establishment of ground operations and distribution agreements between Orion
Atlantic and Telecom Italia, a subsidiary of STET, relating to Italy, and the
granting to Telecom Italia of exclusive marketing rights relating to Italy for a
period ending December 1998 conditioned upon Telecom Italia achieving certain
sales quotas, and (iii) canceling exclusive ground operations and sales
representation agreements between Orion Atlantic and STET (or its affiliates)
relating to Eastern Europe.
Orion Atlantic funded the STET Redemption by selling a new limited
partnership interest to Orion for $8 million (including $3.5 million in cash and
$4.5 million in 12% promissory notes due through 1997). In connection with the
STET redemption, Orion agreed to indemnify Telecom Italia for payments which
were made in July 1995 of $950,000 and which would be made in the future under
its firm and contingent capacity agreements with Orion Atlantic and posted a $10
million letter of credit to support such indemnity. The Company accounted for
this transaction as an acquisition of a minority interest and, as a result,
approximately $3.1 million was allocated to the cost of the Orion 1 satellite
and related equipment.
57
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. ORION ATLANTIC - (CONTINUED)
During 1995, Orion Atlantic entered into agreements with certain Limited
Partners (including the Company) under which the participating Limited Partners
voluntarily gave up their rights to receive capacity under their firm capacity
agreements through January 1996. The participating Limited Partners continued to
make payments for such capacity but have the right to receive refunds from Orion
Atlantic out of cash available after operating costs and payments under the
Credit Facility. At December 31, 1996, Orion Atlantic received $27.7 million
(excluding payments from the Company) under the firm capacity agreements subject
to refund, which amounts are included in "Other liabilities." In addition,
services revenue included $4.1 million, $6.0 million and $5.7 million in 1997,
1996 and 1995 from Limited Partners pursuant to the firm capacity commitments,
not subject to refund. In connection with the Exchange described in Note 1, such
rights were acquired by the Company.
4. COMMITMENTS AND CONTINGENCIES
Orion 1 -- In November 1995, a portion of the Orion 1 satellite experienced
an anomaly that resulted in a temporary service interruption, lasting
approximately two hours, in the dedicated capacity serving the European portion
of Orion Atlantic's services. Full service to all affected customers was
restored using redundant equipment on the satellite. The Company believes, based
on the data and the Telesat Report (issued by Telesat Canada, independent
engineering consultants dated November 14, 1995), that, because the redundant
component is functioning fully in accordance with specifications and the
performance record of similar components is strong, the anomalous behavior is
unlikely to affect the expected performance of the satellite over its useful
life. Furthermore, there has been no effect on the Company's ability to provide
services to customers. However, in the event that the currently operating
component fails, Orion 1 would experience a significant loss of usable capacity.
In such event, while the Company would be entitled to insurance proceeds of
approximately $47 million and could lease replacement capacity and function as a
reseller with respect to such capacity, the loss of capacity would have a
material adverse effect on the Company.
Orion 2 -- In July 1996, the Company signed a contract with Matra Marconi
Space for the construction and launch of Orion 2 (which was amended and restated
in January 1997) and in February 1997 commenced construction of that satellite.
The contract provides for delivery in orbit of Orion 2 by June 1999, for a firm
fixed price of $201 million, excluding launch insurance and incentive payments.
Orion 2 will expand the Company's European coverage and extend coverage to
portions of the Commonwealth of Independent States, Latin America and the Middle
East.
Orion 3 -- In January 1997, the Company entered into a satellite
procurement contract with Hughes Space for the construction and launch of Orion
3, construction of which commenced in December 1996. The contract provides for
delivery in orbit of Orion 3 by December 1998, for a firm fixed price of $208
million, excluding launch insurance and incentive payments. Orion 3 will cover
broad areas of the Asia Pacific region including China, Japan, Korea, Southeast
Asia, Australia, New Zealand, Eastern Russia and Hawaii.
In November 1996, Orion entered into a contract with DACOM Corp. ("DACOM"),
a Korean communications company, under which DACOM will lease eight dedicated
transponders on Orion 3 for 13 years, in return for approximately $89 million,
which is payable over a period from December 1996 through six months following
the lease commencement date for the transponders (which is scheduled to occur by
January 1999). DACOM is to deposit funds with Orion in accordance with a
milestone schedule. As of December 31, 1997, Orion had received $22.25 million
from DACOM. This amount is included in "Other Liabilities". Orion maintains a
$22.25 million letter of credit which will be released on August 1, 1998. Orion
has an obligation to maintain a letter of credit for seven months beginning on
the lease commencement date in the amount of $44.75 million. Prior to launch,
payments are subject to refund pending the successful launch and commencement of
commercial operation of Orion 3. DACOM maintains a $54.75 million letter of
credit securing substantially all of DACOM's remaining payments.
58
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
Litigation -- On November 9, 1996, Orion and Skydata Corporation
("Skydata") executed a letter with respect to the settlement in full of pending
litigation and arbitration related to a patent dispute. As part of the
settlement, 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.
Other -- Orion has entered into operating leases, principally for office
space. Rent expense was $1,312,000, $915,000 and $735,000 during the years ended
December 31, 1997, 1996 and 1995, respectively.
Future minimum lease payments are as follows:
1998 ..... $1,588,800
1999 ..... 1,283,100
2000 ..... 185,100
2001 ..... 93,500
2002 ..... 46,000
Thereafter 552,500
----------
$3,749,000
==========
5. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Senior notes (net of unamortized discount of
$4.9 million) $ 440,099,914 $ --
Senior discount notes (maturity value of $484 million). 292,336,605 --
Convertible junior subordinated debentures........... 50,000,000 --
Senior notes payable to banks.......................... -- 207,714,842
Notes payable - TT&C Facility.......................... 6,021,601 6,956,624
Satellite incentive obligations........................ 6,478,533 22,373,746
Notes payable - STET................................... -- 5,550,000
Notes payable - limited partners....................... -- 8,050,000
Other 2,140,096 2,566,687
--------------- ---------------
Total long-term debt.............................. 797,076,749 253,211,899
Less: current portion.................................. 6,406,143 34,975,060
--------------- ---------------
Long-term debt less current portion............... $ 790,670,606 $ 218,236,839
=============== ===============
</TABLE>
59
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. LONG-TERM DEBT - (CONTINUED)
Total interest (including commitment fees and amortization of deferred
financing costs) incurred for the years ended December 31, 1997, 1996 and 1995
was $91.1, $27.8, and $26.0 million, respectively. Capitalized interest for 1997
was $7.3 million. Aggregate annual maturities of long-term debt consist of the
following (in thousands):
1998 ..... $ 6,406,143
1999 ..... 1,347,198
2000 ..... 1,177,692
2001 ..... 1,252,335
2002 ..... 1,582,997
Thereafter 785,310,384
------------
$797,076,749
============
Senior Notes and Senior Discount Notes -- 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 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 pay cash interest prior to January 15, 2002. Thereafter,
cash interest accrues 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 is $.01 per share of Common Stock of the
Company. The Company made interest payments of $22,806,250 and $25,031,250 in
July 1997 and January 1998 on the Senior Notes. The indentures supporting the
Senior Notes and the Senior Discount Notes 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 liens, certain
asset sales, transaction with affiliates and related parties, and mergers and
consolidations. The Company is in compliance with the requirements of such
indentures.
Convertible Junior Subordinated Debentures -- On January 31, 1997, in
connection with the Financings discussed in Note 1, the Company completed the
sale of $60 million of its convertible junior subordinated debentures (the
"Convertible 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 Convertible Debentures
and Matra Marconi Space purchased $10 million of the Convertible. The
Convertible Debentures mature in 2012, and 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 Convertible Debentures are subordinated to all other indebtedness of the
Company, including the Notes. Matra Marconi Space converted their $10 million of
Convertible Debentures and accrued interest into 735,292 shares of common stock
in December 1997. Subsequent to year end, British Aerospace converted their $50
million of Convertible Debentures and accrued interest into approximately 3.6
million shares of common stock.
Senior Notes Payable to Banks - The senior notes payable to banks
outstanding under a credit facility prior to repayment as described below, bore
interest at 1.75% over the LIBOR. The Company entered into agreements with Chase
Manhattan Bank, N.A. ( "Chase" ) for interest rate hedging arrangements which
fixed the maximum interest rate through November 1995 at 11.54%. Thereafter a
self funding interest rate cap agreement was in place relating to a notional
amount declining
60
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. LONG-TERM DEBT - (CONTINUED)
every six months from $150 million effective November 30, 1995 to $15.6 million
effective March 31, 2001. Under the terms of the cap agreement, when LIBOR
equaled or exceeded 5.5% Orion Atlantic paid Chase a fee equal to 3.3% per annum
of the notional amount and received a payment from Chase in an amount equal to
the difference between the actual LIBOR rate and 5.5% on the notional amount. In
January 1997, the Company used the net proceeds of the Bond Offering and the
Convertible Debenture Offering to repay the Orion 1 Credit Facility and
terminated the hedging arrangement. The loss on termination of the hedging
arrangement of $5.3 million is included in "Extraordinary loss on extinguishment
of debt."
Note Payable -- TT&C Facility -- In June 1995 upon acceptance of the TT&C
Facility, the Company refinanced $9.3 million from General Electric Credit
Corporation as a seven-year term loan, payable monthly. The interest rate is
fixed at 13.5%. The TT&C debt is secured by the TT&C Facility, the Satellite
Control System Contract and Orion Atlantic's leasehold interest in the TT&C
Facility land. The TT&C financing agreement contains customary representations,
warranties and covenants regarding certain activities of the Company.
Satellite Incentive Obligations -- The obligations relating to satellite
performance have been recorded at the present value (discounted at 14%, the
Company's estimated incremental borrowing rate for unsecured financing) of the
required payments commencing at the originally scheduled maturity of the senior
notes payable to banks and continuing through 2006. Under the terms of the
construction contract, payment of the obligation is delayed until such time as
payment is permitted under the senior notes payable to banks. During 1997,
payments aggregating $18.6 million were made pursuant to this obligation.
Notes Payable -- STET -- In connection with the STET Redemption, the
Company issued $8 million of promissory notes bearing interest at 12% per annum.
Payments were due as follows: $2.5 million plus accrued interest paid on
December 31, 1996; $3.5 million plus accrued interest on the earlier of December
31, 1997 or the refinancing of the senior notes payable to banks; and the
remaining $2.0 million in monthly installments of $0.2 million plus accrued
interest beginning January 1997. At December 31, 1997, the $8 million promissory
notes issued in connection with the STET Redemption have been repaid.
Notes Payable -- Limited Partners -- In January 1997, the Company issued
Series C Convertible Preferred Stock in exchange for the Preferred Participation
Units (PPUs) aggregating $8.1 million due to certain former Limited Partners for
development of Orion Atlantic's network services business. Holders of PPUs
earned interest on aggregate amounts drawn at the rate of 30% per annum.
Interest payable at December 31, 1996 was $5.9 million and is included in "Other
liabilities".
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
The Company has authorized 1,000,000 shares of $0.01 par value preferred
stock.
Redeemable Preferred Stock
In June 1994, Orion issued 11,500 shares of Series A 8% Cumulative
Redeemable Convertible Preferred Stock at $1,000 per share and granted an option
to purchase an additional 3,833 shares of similar preferred stock at $1,000 per
share. Dividends on preferred stock accrue at 8% per year and are payable as and
when declared. Orion may redeem the preferred stock at the amount invested plus
accrued and unpaid dividends. Upon such a redemption, the preferred stockholders
would receive a warrant to acquire at $8.50 per share the number of shares of
common stock into which the preferred stock was convertible. The 11,500 shares
issued are convertible into 1,352,941 shares of common stock ($8.50 per share).
Upon conversion any accrued and unpaid dividends are forfeited. Orion may
require conversion of the preferred stock if certain conditions are met. After
Orion issued preferred stock (along with warrants and options to make an
additional investment) in June 1994, the Directors and affiliates of Directors
who purchased common stock in December 1993 and the institutions and other
investors who purchased common stock in June 1994 each exercised its right to
receive
61
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED)
preferred stock (along with warrants and options to make an additional
investment) in exchange for the common stock previously acquired and Orion
issued an aggregate of 3,000 shares of Series A Preferred Stock and related
options for 1,000 shares to such persons and entities. The 3,000 shares issued
are convertible into 352,941 shares of common stock ($8.50 per share). Through
December 31, 1997, 7,567 shares of preferred stock were converted into 890,235
shares of common stock. The remaining 6,933 shares outstanding are convertible
into 815,647 shares of common stock at December 31, 1997.
The preferred stock has a liquidation preference equal to the amount
invested plus accrued and unpaid dividends. Preferred stockholders are entitled
to vote on an as-converted basis and have the right to put the stock to Orion
upon a merger, change of control or sale of substantially all assets at the
greater of liquidation value or fair value. The put expires upon the completion
of a qualified public equity offering, as defined. If the preferred stock is not
previously redeemed or converted to common stock, the preferred stockholders
also have the right to put the stock to Orion as follows: 33 1/3% beginning in
June 1999; 66 2/3% beginning in June 2000; and 100% beginning in June 2001.
In June 1995, certain Directors, affiliates of Directors, and certain
holders of Series A Preferred Stock purchased 4,483 shares of Series B Preferred
Stock for approximately $4.5 million. This purchase was pursuant to an option
granted in June 1995 to purchase $1 of preferred stock similar to the Series A
Preferred Stock for each $3 of Series A Preferred Stock purchased in June 1994,
except that such similar preferred stock would be convertible at any time with
Common Stock at a price within a range of $10.20 to $17.00 per share of common
stock based upon when the option is exercised. The Series B Preferred Stock has
rights, designations and preferences substantially similar to those of the
Series A Preferred Stock, and is subject to similar covenants, except that the
Series B Preferred Stock is convertible into 439,510 shares of Common Stock at
an initial price of $10.20 per share, subject to certain anti-dilution
adjustments, and purchases of Series B Preferred Stock did not result in the
purchaser receiving any rights to purchase additional preferred stock. Through
December 31, 1997, 2,424 shares of preferred stock were converted into 237,647
shares of common stock. The remaining 2,059 shares outstanding are convertible
into 201,862 shares of common stock at December 31, 1997.
In January 1997, Orion issued 123,172 shares of Series C Cumulative
Redeemable Preferred Stock to British Aerospace Communications, Inc., COM DEV
Satellite Communications Limited, Kingston Communications International Limited,
Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., and
Trans-Atlantic Satellite, Inc. in exchange for their Orion Atlantic partnership
interests. Dividends on the preferred stock accrue at 6% per year and are
distributable in the Company's common stock calculated based on the market price
of such stock under a formula provided in the Certificate of Designations. The
shares are convertible into approximately 7 million shares ($17.50 per share) of
the Company's common stock. Through December 31, 1997, 40,531 shares of
preferred stock, including dividends, were converted into approximately 2.4
million shares of common stock. Series C Cumulative Preferred Stock is recorded
net of deferred offering costs of approximately $3.3 million. The Series C
Cumulative Preferred Stock is subject to mandatory redemption at par value in 25
years. The difference between in carrying value and par value is being accreted
over such period.
The preferred stock has a liquidation preference equal to the amount
invested plus accrued and unpaid dividends. Preferred stockholders are entitled
to vote on an as-converted basis and have the right to put the stock to Orion
upon a merger, change of control or sale of substantially all assets at the
greater of liquidation value or fair value.
Stockholders' Equity
1987 Employee Stock Option Plan - Under the 1987 Employee Stock Option
Plan, 1,470,588 shares of common stock are reserved for issuance upon exercise
of options granted. Shares of common stock may generally be purchased under this
plan at prices not less than the fair market value, as determined by the Board
of Directors, on the date the option is granted.
62
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED)
Stock options outstanding at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- --------------- ---------------
<S> <C> <C> <C>
Range of exercise price........... $ 8.16 - 12.29 $ 8.16 - 12.24 $ 5.44 - 12.24
Outstanding at beginning of year 911,663 971,469 804,056
Granted during year............... 400,670 122,750 380,069
Exercised......................... (81,383) (37,629) (60,928)
Canceled (56,640) (144,927) (151,728)
-------------- --------------- ---------------
Outstanding at end of year........ 1,174,310 911,663 971,469
============== =============== ===============
</TABLE>
In November 1993, stock options for 95,588 shares of common stock were
granted to key executives which may be exercised only upon the achievement of
certain business and financial objectives. At December 31, 1995, the executives
had earned the right to exercise 40,441 of these options based on the
achievement of such objectives. The remaining options were canceled during 1996.
Stock options vest annually over a one to five-year period. All options are
exercisable up to seven years from the date of grant. The Company's 1987
Employee Stock Option Plan expired in 1997. No further shares are available for
grant under this plan. There were 506,803 and 429,265 options exercisable at
December 31, 1997 and 1996, respectively.
In July 1996, the Company granted, subject to shareholder approval, the
Chairman of the Executive Committee 100,000 options at $9.83 per share. These
options vested as follows, 50,000 on January 17, 1997 and 50,000 upon successful
completion of either a refinancing of the Orion 1 satellite, financing for
construction, launch and insurance for Orion 2 or Orion 3 or a substantial
acquisition or relationship with a strategic partner. These requirements were
met in January 1997.
Non-Employee Director Stock Option Plan -- In 1996, Orion adopted a
non-employee director stock option plan. Under this plan, 380,000 shares of
common stock are reserved for issuance. During 1997, there were 80,000 options
granted pursuant to this plan at $9.60 per share. At December 31, 1997,
aggregate options outstanding pursuant to this plan totaled 270,000, of which,
180,000 were exercisable at prices ranging from $8.49 to $12.53 per share.
1997 Employee Stock Option Plan - In 1997, Orion adopted a second stock
option plan. Under this plan, as amended, 1,300,000 shares of common stock are
reserved for issuance upon exercise of options granted. Shares of common stock
may be purchased under this plan at prices not less than the fair value as
determined by the Board of Directors, on the date the option is granted.
Compensation expense relating to these plans was not significant.
63
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED)
Stock options outstanding at December 31:
1997
Range of exercise price ........ $9.30 - 17.06
=============
Outstanding at beginning of year --
Granted during year ............ 556,000
Exercised ...................... --
Canceled ....................... (4,000)
-------------
Outstanding at end of year ..... 552,000
=============
There were 62,500 options exercisable at December 31, 1997.
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for its employee stock based award
programs, because the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") which
is effective for awards after January 1, 1996 requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, when the exercise price of the employee award equals the market price of
the underlying stock on the date of grant, as has been the case historically
with the Company's awards, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its stock options under the fair value method of that statement. The fair
value of these options was estimated at the date of the grant using a
Black-Scholes valuation model with the following assumptions:
1997 1996 1995
--------- --------- ---------
Risk-free interest rate............. 6.5% 6.5% 6.5%
Expected dividend yield............. 0.0% 0.0% 0.0%
Expected life of option............. 6.5 YEARS 5.8 years 5.8 years
Volatility of the Company's stock... 69% 68% 68%
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the option's vesting period. The effect
of applying SFAS 123 on pro forma net loss is not necessarily representative of
the effects on reported net loss for future years due to, among other things,
(1) the vesting period of the stock options and the (2) fair value of additional
stock options in future years. The Company's adjusted pro forma information for
the years ended December 31, are as follows:
1997 1996 1995
--------- ----------- ----------
(Net loss in thousands)
Adjusted pro forma net loss ........... $(110,703) $ (28,031) $ (27,306)
========= =========== ==========
Adjusted pro forma net loss per share$ $(10.03) $ (2.68) $ (3.11)
========= =========== ==========
64
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED)
401(k) Profit Sharing Plan -- In September 1996, Orion amended the 401(k)
profit sharing plan. Under this plan, 100,000 shares of common stock are
reserved for issuance as the Company's discretionary match of employee
contributions. The Company's matching contributions may be made in either cash
or in the equivalent amount of the Company's common stock. During 1997, the
Company issued 11,286 shares for the 1996 plan year.
Stock Purchase Plan -- In September 1996, Orion adopted an employee stock
purchase plan. Under this plan, 500,000 shares of common stock are reserved for
issuance. Shares of common stock are purchased under this plan through payroll
deduction. The purchase price of each share of common stock purchased under the
plan will be 85% of the fair market value of the common stock on the measurement
date. During 1997, the Company issued 27,731 shares pursuant to the Plan.
Stock Warrants - In November 1996, Orion granted 50,000 warrants to DACOM
to purchase shares of common stock at $14 per share. The warrants are
exercisable for a six month period beginning six months after the commencement
date, as defined in the Joint Investment Agreement, and ending one year after
the commencement date and will terminate at that time or at any time the Joint
Investment Agreement is terminated. The fair value of the warrants at the date
of issue was $300,000 and was estimated using a Black Scholes valuation model.
Warrants outstanding at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Range of exercise price .............. $0.01 - 14.00 $9.79 - 14.00 $9.79 - 12.79
============= ============= =============
Outstanding at beginning of year ..... 142,115 553,768 735,769
Granted during year .................. 697,400 50,000 --
Exercised ............................ (96,159) -- --
Canceled ............................. (2,806) (461,653) (182,001)
------------- ------------- -------------
Outstanding at end of year ........... 740,550 142,115 553,768
============= ============= =============
</TABLE>
There were 690,550 and 92,115 warrants exercisable at December 31, 1997 and
1996, respectively.
The holders of preferred stock also hold warrants to purchase 1,017,509
shares of common stock at the conversion price of such preferred stock. These
warrants do not become exercisable unless Orion exercises its right to
repurchase the preferred stock at the liquidation value, plus accrued and unpaid
dividends.
In January 1997, the Company issued Senior Note Warrants and Senior
Discount Note Warrants to acquire 376,608 and 320,792 shares of common stock,
respectively at $.01 per share in connection with the Bond Offering. The
warrants were not exercisable prior to six months after the closing date of the
Bond Offering and became separately transferable from the Notes six months from
date of issuance. The estimated fair value of the warrants aggregating $9.6
million was allocated $5.2 million to Senior Notes and $4.4 million to Senior
Discount Notes as debt discount. At December 31, 1997, 6,850 warrants were
converted into 5,797 shares of common stock.
Shares Reserved for Issuance - The Company has 14,036,809 shares of common
stock at December 31, 1997 reserved for issuance upon conversion of debentures
and preferred stock, exercise of outstanding stock options and warrants, and
common stock issued under the stock purchase and 401(k) profit sharing plans.
65
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. FAIR VALUES OF FINANCIAL INSTRUMENTS
Other than amounts due under the Senior Notes and Senior Discount Notes,
Orion believes that the carrying amount reported in the balance sheet of its
other financial assets and liabilities approximates their fair value at December
31, 1997. The fair value of the Company's Senior Notes and Senior Discount was
estimated to be approximately $511.8 million and $377.5 million, respectively.
Based upon the conversion value at December 31, 1997 of the underlying common
stock, the fair value of the Company's redeemable preferred stock was
approximately $102.8 million.
8. 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 (as amended on February 11, 1998,
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 Loral Common Stock equal to
the Exchange Ratio multiplied by the number of shares of 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.
A meeting of Orion's shareholders has been scheduled for March 20, 1998 to
vote to approve the Loral Merger. The Company expects the Loral Merger to close
following a favorable shareholder vote, however, there can be no assurance that
the Loral Merger will be consummated. 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 the event the Loral Merger is completed, the Company will be obligated
to make an offer to purchase all outstanding Senior and Senior Discount Notes
(the "Notes") at a purchase price equal to 101% of their principal or accreted
value, plus accrued and unpaid interest therein to the repurchase date. Since
the Notes have traded in recent periods at prices above 101% of their principal
amount, the Company does not anticipate that the holders of a material principal
amount of the Notes will accept the repurchase offer.
66
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. PENDING ACQUISITION OF THE COMPANY BY LORAL - (CONTINUED)
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 Loral the right to purchase their securities in
Orion for a price equal to the Loral Merger consideration under certain
circumstances.
9. CONDENSED FINANCIAL INFORMATION OF ORION
Presented below are condensed balance sheets of Orion (parent company only
basis) at December 31, 1997 and 1996. All material contingencies, obligations
and guarantees of Orion have been separately disclosed in the preceding notes to
the financial statements.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS OF ORION NETWORK SYSTEMS, INC.
DECEMBER 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................... $ -- $ 26,564,562
Restricted assets .............................. 50,064,014 --
Receivable from Orion Atlantic ................. -- 253,088
Other current assets ........................... -- 766,784
------------- -------------
Total current assets ...................... 50,064,014 27,584,434
Restricted and segregated assets ................. 284,432,961 --
Investment in and advances to subsidiaries ....... 460,571,744 (12,088,208)
Other assets ..................................... 42,021,096 10,590,071
------------- -------------
Total assets .............................. $ 837,089,815 $ 26,086,297
============= =============
LIABILITIES AND STOCKHOLDERS' deficit
Current liabilities:
Notes and interest payable to Orion Atlantic ... $ -- $ 2,327,427
Interest payable ........................... ... 24,768,229 --
Accounts payable and accrued liabilities ....... -- 2,828,616
------------- -------------
Total current liabilities ................. 24,768,229 5,156,043
Long term debt ................................... 782,436,519 7,053
Other liabilities ................................ -- 457,203
Redeemable preferred stock ....................... 76,734,212 20,902,366
Stockholders' deficit ............................ (46,849,145) (436,368)
------------- -------------
Total liabilities and stockholders' deficit $ 837,089,815 $ 26,086,297
============= =============
</TABLE>
67
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. CONDENSED FINANCIAL INFORMATION OF ORION - (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS OF ORION NETWORK SYSTEMS, INC.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Services revenue..................................... $ -- $ 34,000 $ --
Operating expenses and other income:
General and administrative........................ 2,170,102 3,832,286 3,171,305
Interest expense (income), net.................... 57,069,304 (1,883,719) (1,834,589)
--------------- --------------- ---------------
Total operating expenses and other income......... 59,239,406 1,948,567 1,336,716
Equity in net losses of subsidiaries................. 46,500,608 25,280,843 25,578,462
--------------- --------------- ---------------
Net loss............................................. $ (105,740,014) $ (27,195,410) $ (26,915,178)
=============== =============== ===============
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS OF ORION NETWORK SYSTEMS, INC.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------- -------------- --------------
<S> <C> <C> <C>
NET CASH USED IN OPERATIONS................................ $ (22,806,250) $ (4,046,446) $ (4,107,237)
INVESTING ACTIVITIES:
Advances to subsidiaries................................. (407,092,800) (15,528,710) (8,664,024)
Capital expenditures..................................... (504,729) (597,698)
Increase in restricted and segregated assets ............ (406,937,388) -- --
Release of restricted and segregated assets ............. 90,500,480 -- --
--------------- -------------- --------------
Net cash used in investing activities.................... (723,529,708) (16,033,439) (9,261,722)
FINANCING ACTIVITIES:
Proceeds from issuance of debt, net 744,274,780 -- --
Proceeds from issuance of redeemable preferred stock..... -- -- 4,483,001
Proceeds from issuance of common stock................... 2,152,668 343,120 51,974,436
PPU funding.............................................. -- -- (455,000)
Repayment of notes payable............................... -- (2,496,300) (37,792)
Purchase of treasury stock .............................. (91,490) -- --
--------------- --------------- ---------------
Net cash (used in) provided by financing activities...... 746,335,958 (2,153,180) 55,964,645
----------- ---------- ----------
Net (decrease) increase in cash and cash equivalents..... -- (22,233,065) 42,595,686
Cash and cash equivalents at beginning of year............. -- 48,797,627 6,201,941
--------------- -------------- --------------
Cash and cash equivalents at end of year................... $ -- $ 26,564,562 $ 48,797,627
=============== ============== ==============
</TABLE>
Basis of presentation -- In these parent company-only condensed financial
statements, Orion's investment in subsidiaries is stated at cost less equity in
the losses of subsidiaries since date of inception or acquisition. Orion Network
Systems, Inc. is presented for 1997 and Orion Oldco Services, Inc. is presented
for 1996 and 1995, as a result of the Exchange, the Merger and the financings
consummated January 31, 1997 all described in Note 1 of the Consolidated
Financial Statements.
68
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
The following pro forma condensed consolidated statement of operations
gives effect, as of January 1, 1997, to the Exchange, the Merger and the
Financings consummated on January 31, 1997, all as described in Note 1 to the
Consolidated Financial Statements and related transactions.
The unaudited pro forma condensed consolidated statement of operations does
not purport to present the actual results of operations of the Company had the
Transactions in fact occurred on the date specified, nor is it indicative of the
results of operations that may be achieved in the future.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(In thousands)
<S> <C>
Service revenue ........................................... $ 72,741
Operating expenses ........................................ 116,239
Other expense (income) .................................... 64,601
-----------
Net loss .................................................. (108,099)
Preferred stock dividend and accretion, net of forfeitures (6,687)
-----------
Net loss attributable to common stockholders .............. (114,786)
===========
Net loss per common share ................................. (9.86)
===========
</TABLE>
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1997 and 1996 (in thousands except per share data):
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
1997
Revenues...................... $ 20,233 $ 16,687 $ 17,619 $ 18,202
Loss from operations.......... (8,317) (10,915) (11,270) (12,579)
Net loss...................... (25,984) (24,745) (27,510) (27,501)
Net loss per share............ (2.48) (2.42) (2.63) (2.11)
1996
Revenues...................... $ 7,646 $ 10,123 $ 12,247 $ 11,831
Loss from operations.......... (10,155) (8,963) (7,151) (10,084)
Net loss...................... (7,251) (6,760) (5,796) (7,388)
Net loss per share............ (0.70) (0.65) (0.55) (0.72)
</TABLE>
69
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the current Directors and Executive Officers of the
Company. Upon closing of the Loral Merger, all Directors of the Company will
resign and new Directors will be appointed by Loral.
<TABLE>
<CAPTION>
TERM EXPIRES
- ---------------------- ------- ----------------------------------------------- ------------------
NAME AGE POSITION WITH ORION (DIRECTORS)
<S> <C> <C>
- -----------------------
Gustave M. Hauser..... 69 Chairman, Director 1998
W. Neil Bauer......... 51 President and Chief Executive Officer 1999
Director (Principal Executive Officer)
David J. Frear........ 41 Senior Vice President, Chief Financial Officer --
and Treasurer (Principal Financial Officer
and Principal Accounting Officer)
Richard H. Shay....... 57 Senior Vice President, Law and Administration --
and Secretary
Denis Curtin.......... 59 Senior Vice President and General Manager, --
Engineering, Operations and Technology
Han C. Giner.......... 59 Vice President of Orion and President, --
Orion Network Systems-Asia Pacific, Inc.
Richard J. Brekka..... 37 Director 2000
Warren B. French, Jr.. 74 Director 2000
Barry Horowitz........ 54 Director 1998
Sidney S. Kahn........ 61 Director 1999
John G. Puente........ 68 Director 1998
W. Anthony Rice....... 46 Director 2000
John V. Saeman........ 62 Director 1998
Robert M. Van Degna... 54 Director 1999
</TABLE>
70
<PAGE>
BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the business experience and the affiliations of
the directors and executive officers of Orion is set forth below.
Gustave M. Hauser has been Chairman of Orion since January 1996 and has
been a director of Orion since December 1982. Since 1983, he has been Chairman
and Chief Executive Officer of Hauser Communications, Inc., an investment and
operating firm specializing in cable television and other electronic
communications. From 1973 to 1983 he served as Chairman and Chief Executive
Officer of Warner-Amex Cable Communications, Inc. (formerly Warner Cable
Communications, Inc.), a major multiple system operator of cable television
systems and originator of satellite delivered video programming. He is a trustee
of the Museum of Television and Radio. He is a past Vice Chairman of the
National Cable Television Association, and from 1970 to 1977 he served, by
appointment of the President of the United States, as a director of the Overseas
Private Investment Corporation.
W. Neil Bauer has been President of Orion since March 1993, and has been
Chief Executive Officer and a director since September 1993. From 1989 to
February 1993, Mr. Bauer was employed by GE American Communications, Inc., where
he served as Senior Vice President and General Manager of Commercial Operations.
Prior to 1989, Mr. Bauer was Chief Financial Officer of GE American
Communications, Inc. and later head of commercial sales. He held several key
financial planning positions at GE/RCA from 1984 through 1986 focused on
operational and business analysis of diverse business units including all
communications units. From 1974-1983, he was employed by RCA Global
Communications, an international record carrier. During this period, he held
several financial and operational positions and was responsible for financial
and business planning.
David J. Frear has been Vice President and Chief Financial Officer of Orion
since November 1993, Treasurer of Orion since January 1994 and Senior Vice
President since the second quarter of 1997. From September 1990 through April
1993, Mr. Frear served as Vice President and Chief Financial Officer of Millicom
Incorporated, an international telecommunications service company. From January
1988 to September 1990, Mr. Frear held various positions in the investment
banking department at Bear, Stearns & Co. Inc. Mr. Frear received his CPA in
1979.
Richard H. Shay has been Secretary of Orion since January 1993, a Vice
President from April 1992 until becoming Senior Vice President in the second
quarter of 1997. From July 1981 until September 1985, Mr. Shay served as Chief
Counsel to the National Telecommunications and Information Administration
("NTIA") of the U.S. Department of Commerce and then as Deputy General Counsel
to the Department, where he was responsible for the legal matters of the
Department's agencies. In his capacity as Chief Counsel to NTIA, Mr. Shay also
served as Acting Director of its Office of International Policy, served on the
official U.S. delegation to the 1982 Nairobi Plenipotentiary Conference of the
ITU and was involved in preparation for the 1983 ITU Direct Broadcast Satellite
World Administrative Radio Conference.
Denis J. Curtin is Senior Vice President and General Manager, Engineering,
Operations and Technology. He joined the Company in September 1988 as Vice
President, Engineering. He previously was Senior Director of Satellite
Engineering of COMSAT's Systems Division. While at COMSAT, Dr. Curtin served for
over 21 years in the systems engineering, program and engineering management of
both domestic and international satellite systems. He has an MS in Physics, a
Ph.D. in Mechanical Engineering, and has published numerous papers on solar cell
and solar array technology, is the editor of the Trends in Satellite
Communications and is a Fellow of the American Institute of Astronautics and
Aeronautics.
Hans C. Giner became President of Orion Network Systems-Asia Pacific, Inc.,
Orion's subsidiary devoted to pursuing construction and launch of a satellite
covering the Asia Pacific region, in the fourth quarter of 1995 and a Vice
President of Orion in the first quarter of 1996. Mr. Giner served as a
consultant to Orion from October 1995 through January 1996 relating to similar
matters. Prior thereto, he held senior positions in the satellite and
telecommunications industries for more than 20 years. Most recently, from April
1994 through September 1995 he served as President of Stellar One Corporation, a
high-tech company designing, manufacturing and distributing technologies for
telecommunications groups, particularly local telephone and cable television
companies. Prior to that, from November 1987 through March 1994, Mr. Giner held
several positions for, and ultimately served as president and CEO of Millisat
Holdings, Inc., a member of the Millicom Group, with worldwide responsibility
for development of media and telecommunications properties, including broadcast,
cable and wireless television.
71
<PAGE>
Richard J. Brekka has been a director of Orion since June 1994. He is a
Managing Partner of MWI and Partners and a Senior Managing Director of Dolphin
Communications. He was a Managing Director of CIBC Wood Gundy Capital
("CIBC-WG"), the merchant banking division of Canadian Imperial Bank of Commerce
("CIBC") and was a Director and the President of CIBC Wood Gundy Ventures, Inc.,
an indirect wholly owned subsidiary of CIBC until June 1997. Mr. Brekka joined
CIBC-WG in February 1992. Prior to joining CIBC-WG, Mr. Brekka was an officer of
Chase Manhattan Bank's merchant banking group from February 1988 until February
1992.
Warren B. French, Jr. has been a director of Orion since August 1988. He
was President and a director of Shenandoah Telephone Company of Edinburg,
Virginia from 1973 to 1988 and President and a director of Shenandoah
Telecommunications Company, the parent company of Shenandoah Telephone Company,
from 1981 to 1988. From 1988 through 1995, he was Chairman and a director of
Shenandoah Telecommunications Company. He is a past Chairman of the United
States Telephone Association and is a former director of First National
Corporation, and of Hungarian Telephone and Cable Corp.
Barry Horowitz has been a director of Orion since May 1996. He is President
and Chief Executive Officer of Mitretek Systems, Inc. Mitretek works with
federal, state and local governments as well as other non-profit public interest
organizations on technology-based research and development programs. Mitretek
was incorporated in December 1995 as a result of a restructuring with The MITRE
Corporation. Principal capabilities are related to information and environmental
system technologies. In addition, Dr. Horowitz is President and Chief Executive
Officer of Concept 5 Technologies, Inc., a subsidiary of Mitretek, which
provides technical services to commercial clients, with its initial focus on the
financial community. Prior to the restructuring and since 1969, Dr. Horowitz
served MITRE in several capacities, including Trustee and President and CEO.
Sidney S. Kahn has been a director of Orion since July 1987. He is
presently a private investor. From 1977 to December 1989, he was Senior Vice
President of E.F. Hutton Company, Inc., a wholly owned subsidiary of the E.F.
Hutton Group, Inc. He is also a director of Delia's, Inc.
John G. Puente has been a director since 1984. Mr. Puente was Chairman of
Orion from April 1987 through January 1996, and since July, 1996 has been
serving as a consultant to the Company and chairman of the Company's Executive
Committee. He served as Chief Executive Officer of Orion from April 1987 through
September 1993. He was a director and, from 1978 to April 1987, served as Senior
Vice President, Executive Vice President or Vice Chairman of M/A-COM, Inc., a
diversified telecommunications and manufacturing company. He was a founder of
SouthernNet, Inc., a fiber optic long distance communications company and one of
the two companies that merged to form Telecom USA, Inc. (which was later
acquired by MCI), serving as a director of SouthernNet from July 1984 until
August 1987, and Chairman of the Board of SouthernNet from July 1984 until
December 1986. During his tenure as Chairman of the Board of SouthernNet, Mr.
Puente was instrumental in the founding of the National Telecommunications
Network, a national consortium of long distance fiber optic communications
companies, and was its first chairman. In 1972, Mr. Puente was a founder of DCC,
Inc., of which he became Chairman and CEO. In 1978, DCC, Inc. was acquired by
Microwave Associates to form M/A-COM, Inc.; DCC, Inc., subsequently was acquired
by Hughes Aircraft Company and became Hughes Network Systems, Inc. Mr. Puente
also played a prominent role in the early development of the communications
satellite industry, holding technical and executive positions in COMSAT and
American Satellite Corporation. He is also a director of Primus
Telecommunications, Inc.
W. Anthony Rice has been a director of Orion since January 1994. Mr. Rice
is Chief Executive Officer of British Aerospace Asset Management, the business
unit responsible for all of the company's activities in respect of commercial
aircraft leasing and financing. Previously, he served as Group Treasurer of
British Aerospace Public Limited Company from 1991 until the end of 1995.
British Aerospace is Europe's leading defense and aerospace company.
John V. Saeman has been a director of Orion since December 1982. He is an
owner of Medallion Enterprises LLC, a private investment firm located in Denver,
Colorado. Mr. Saeman was Vice Chairman and Chief Executive Officer of Daniels &
Associates, Inc. and its related entities in the telecommunications field from
1980 to 1988. He is former director as well as past Chairman of Cable Satellite
Public Affairs Network (C-Span) as well as a former director and past Chairman
of the National Cable Television Association. Mr. Saeman was a director of
Celerex Corporation and is a director of Nordstrom National Credit Bank. Celerex
Corporation filed a petition for reorganization under Chapter 11 of the United
States Bankruptcy Code in 1995.
72
<PAGE>
Robert M. Van Degna has been a director of Orion since June 1994. He is the
managing general partner of Fleet Equity Partners ("Fleet"). Mr. Van Degna
joined Fleet Financial Group in 1971 and has held a variety of lending and
management positions until he organized Fleet in 1982 and became its managing
general partner. Mr. Van Degna also serves as a director of ACC Corporation and
Preferred Networks, Inc.
Orion's Certificate of Incorporation and Bylaws provide that the Board of
Directors of Orion, which presently consists of eleven 11 members (including one
vacancy), shall consist of that number of directors determined by resolution of
the Board of Directors. The Certificate of Incorporation provides that the Board
of Directors shall be divided into three classes, each consisting of
approximately one-third of the total number of directors. Class I Directors,
consisting of Messrs. Hauser, Horowitz, Puente and Saeman, will hold office
until the 1998 annual meeting of stockholders; Class II Directors, consisting of
Messrs. Bauer, Kahn and Van Degna will hold office until the 1999 annual meeting
of stockholders; and Class III Directors consisting of Messrs. Brekka, Rice and
French will hold office until the 2000 annual meeting of stockholders. Upon
closing of the Loral Merger, Orion's Board of Directors would no longer be
divided into classes. There are no family relationships among any of the
directors or officers of Orion. Executive Officers serve at the discretion of
the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Committee on Auditing, Corporate
Responsibility and Ethics (the "Audit Committee"), a Committee on Human
Resources and Compensation (the "Compensation Committee"), an Executive
Committee, a Finance Committee, a Nominating Committee and a Pricing Committee.
The Audit Committee is comprised of Messrs. Van Degna (chairman), Hauser
and Kahn. The Audit Committee examines and considers matters relating to the
financial affairs of the Company, including reviewing the Company's annual
financial statements, the scope of the independent annual audit and the
independent auditors' letter to management concerning the effectiveness of the
Company's internal financial and accounting controls. During the year ended
December 31, 1997, the Audit Committee held one meeting. All three members
attended the meeting.
The Compensation Committee is comprised of Messrs. Brekka (chairman),
French and Van Degna. The Compensation Committee considers and makes
recommendations to the Company's Board of Directors with respect to programs for
human resource development and management organization and succession, approves
changes in senior executive compensation, considers and makes recommendations to
the Company's Board of Directors with respect to compensation matters and
policies and employee benefit and incentive plans and exercises authority
granted to it to administer such plans and administers the Company's stock
option and grants of stock options under the stock option plans. During the year
ended December 31, 1997, the Compensation Committee held six meetings. Two of
the three members attended at least five meetings; Mr. Van Degna attended two of
the six meetings.
The Executive Committee is comprised of Messrs. Hauser, Kahn, Puente
(chairman), Saeman and Van Degna. The Executive Committee provides strategic
direction with respect to financing, strategic partners, acquisitions and market
focus, subject to approval by the Board of Directors of all significant actions.
The Executive Committee met numerous times during the year ended December 31,
1997.
The Finance Committee is comprised of Messrs. Bauer, Brekka, Hauser, Kahn
(chairman), Puente, Rice and Saeman. The Finance Committee considers and makes
recommendations to the Board of Directors with respect to the financial affairs
of the Company, including matters relating to capital structure and
requirements, financial performance, dividend policy, capital and expense
budgets and significant capital commitments. During the year ended December 31,
1997, the Finance Committee did not meet.
The Nominating Committee is comprised of Messrs. French, Puente, Rice and
Saeman (chairman). The Nominating Committee recommends to the Board of Directors
qualified candidates for election as directors of the Company and considers
candidates, if any, recommended by shareholders. During the year ended December
31, 1997, the Nominating Committee did not meet.
73
<PAGE>
The Pricing Committee is comprised of Messrs. Hauser, Kahn and Puente. The
Pricing Committee was formed for the purpose of considering and approving the
pricing of the Senior Notes and Senior Discount Notes offered in the Bond
Offering. During the year ended December 31, 1997, the Pricing Committee held
one meeting. All three members attended the meeting.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Act"), requires the Company's officers and directors and other persons who own
more than ten percent of the Company's Common Stock to file reports with the
Securities and Exchange Commission about their beneficial ownership of the
Company's Common Stock.
Based solely on a review of copies of Forms 3, 4 and 5 furnished to it
during the last fiscal year, the Company is aware only of the following reports
submitted on an untimely basis. A Form 4 for Sidney S. Kahn, a Director of the
Company, was filed late with respect to two transactions. There also was a
failure to timely file a Form 4 on behalf of John G. Puente, a Director of the
Company, with respect to one transaction.
LIMITS ON LIABILITY; INDEMNIFICATION
Orion's Certificate of Incorporation provides that Orion's directors will
not be liable for monetary damages for breach of the directors' fiduciary duty
of care to Orion and its stockholders. This provision in the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of
non-monetary relief would remain available under Delaware law. In accordance
with the requirements of Delaware law, Orion's directors remain subject to
liability for monetary damages (i) for any breach of their duty of loyalty to
Orion or its stockholders, (ii) for acts or omissions not in good faith or
involving intentional misconduct or knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law for approval of an unlawful
dividend or an unlawful stock purchase or redemption and (iv) for any
transaction from which the director derived an improper personal benefit. This
provision also does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
Orion's Certificate of Incorporation also provides that, except as
expressly prohibited by law, Orion shall indemnify any person who was or is a
party (or threatened to be made a party) to any threatened, pending or completed
action, suit or proceeding by reason of the fact that such person is or was a
director or officer of Orion (or is or was serving at the request of Orion as a
director or officer of another enterprise), against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if such person acted in good faith and a manner such person
reasonably believed to be in or not opposed to the best interests of Orion, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. Such indemnification shall not be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to Orion unless (and only to the extent that) the Delaware
Court of Chancery or the court in which such action or suit was brought
determines that, in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity.
Following the closing of the Loral Merger, it is expected that Orion's
Certificate of Incorporation will be amended and/or restated.
74
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of total compensation, including
bonuses, paid to the Chief Executive Officer and the four other most highly paid
executive officers (the "named executive officers") for services in all
capacities to the Company and its subsidiaries for the fiscal years ended
December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
AWARDS PAYOUTS
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND COMPEN- STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION ($)(1) AWARD(S)($) SARS(#) PAYOUTS SATION($)
------------------ ---- --------- -------- ------------- ----------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
W. Neil Bauer............... 1997 $292,736 $100,000 75,000
Executive Officer 1996 278,106 100,000
President and Chief 1995 265,000 90,000 110,294
Executive Officer
David J. Frear.............. 1997 205,047 63,000 250,000
Sr. Vice President, Treasurer 1996 185,996 90,000
and Chief Financial Officer 1995 179,005 40,000 4,570 55,147
Hans C. Giner............... 1997 162,920 38,000 40,000
Vice President of the Company 1996 141,638 35,000 35,000
and President, Orion Network 1995 -- --
Systems-Asia Pacific, Inc.
Denis J. Curtin,............ 1997 200,548 45,000 43,000
Senior Vice President and 1996 155,380 40,000 5,000
General Manager Engineering, 1995 151,081 38,000 24,705
Operations and Technology
John J. Albert.............. 1997 235,000 2040
Sr. Vice President and General1996 250,706 15,000
Manager, Marketing and 1995 175,664 18,000 14,705
Satellite Services
</TABLE>
(1) Relocation expenses.
OPTION GRANTS IN LAST FISCAL YEAR
During 1997, the Company adopted the Orion Network Systems, Inc. 1997 Stock
Option Plan (the "1997 Employee Stock Option Plan"). Under the 1997 Employee
Stock Option Plan, options to purchase up to an aggregate of 1,300,000 shares of
Common Stock are available for grants to employees of the Company. Under the
Company's 1987 Employee Stock Option Plan (the "1987 Stock Option Plan"), which
expired in 1997, options to purchase up to an aggregate of 400,670 shares of
Common Stock were granted during the year ended December 31, 1997. The Company
has also adopted a Non-Employee Director Stock Option Plan (the "Non-Employee
Director Stock Option Plan"). Under the Non-Employee Director Stock Option Plan,
options to purchase up to 380,000 shares have been or will be granted
automatically to non-employee directors of the Company. The following table sets
forth information concerning grants of stock options to the named executive
officers pursuant to the 1997 Employee Stock Option Plan and the 1987 Employee
Stock Option Plan during the year ended December 31, 1997.
75
<PAGE>
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------
POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE PER EXPIRATION
NAME GRANTED FISCAL YEAR SHARE($/SH)(1) DATE 5%($) 10%($)
- ---- -------------- ---------------- ----------------- ------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
W. Neil Bauer 75,000 7.9 10.00 3/12/04 305,325 711,538
David J. Frear 125,000 13.2 10.00 3/12/04 508,876 1,185,896
125,000 13.2 9.60 4/24/04 488,521 1,138,460
Hans C. Giner 40,000 4.2 11.51 7/16/04 187,429 436,789
Denis J. Curtin 40,000 4.2 10.00 3/12/04 162,840 379,487
3,000 0.3 11.51 7/16/04 14,057 32,759
John J. Albert 40,000 4.2 11.51 7/16/04 187,429 436,789
</TABLE>
(1) A grant of 75,000 options to Mr. Bauer , 125,000 options to Mr. Frear and
40,000 options to Mr. Curtin each had exercise prices of ninety percent
(93%) of the fair market value of the Common Stock on the date the option
was granted. An additional grant of 125,000 options to Mr. Frear had an
exercise price of sixty-two (62%) of the fair market value of the Common
Stock on the date the option was granted. With respect to the remaining
option grants, the option exercise price is equal to one hundred percent
(100%) of the fair market value of the Common Stock on the date the option
was granted.
(2) The options will vest in equal installments over a three year period from
the date of grant; provided, however, that options granted to Mr. Frear
will immediately vest upon a change of control of the Company.
OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The following table sets forth the value of all unexercised options held at
year-end 1997 by the named executive officers. No named executive officer
exercised any stock options during the fiscal year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FY-END DECEMBER 31, 1997(1)
----------------------------- --------------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------------------------- --------------------------------
<S> <C> <C>
W. Neil Bauer............................ 149,998/160,295 1,083,736/1,042,541
David J. Frear........................... 119,115/226,472 799,873/1,549,568
Hans C. Giner............................ 7,000/68,000 55,865/448,060
Denis J. Curtin.......................... 38,755/55,823 307,720/373,329
John J. Albert........................... 20,587/52,500 132,565/296,163
</TABLE>
- ----------------
(1) Based on a per share price of $17.125 on December 31, 1997.
76
<PAGE>
COMPENSATION OF DIRECTORS
For the year ended December 31, 1997, directors received annual
compensation of $4,000, $1,500 for each Board of Directors meeting attended,
$750 for each committee meeting attended (other than with respect to Executive
Committee meetings for which no compensation was given) and per annum grants of
stock options to purchase 10,000 shares of Common Stock under the Non-Employee
Director Stock Option Plan. A grant of options to purchase 10,000 shares of
Common Stock was made to each non-employee director in May 1997. An initial
grant of options to purchase 30,000 shares of Common Stock under that plan was
made to Barry Horowitz, a director, upon his election in March 1996. The option
exercise price of the options granted to each non-employee director in May 1997
and Mr. Horowitz in March 1996 was equal to the fair market value of Common
Stock on the respective dates the options were granted.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
The Company has not entered into any employment agreements or any
termination of employment or change in control arrangements with any of its
officers, except for certain change in control vesting provisions in the 1987
Employee Stock Option Plan, the 1997 Employee Stock Option Plan and the options
granted to David J. Frear, Senior Vice President, Chief Financial Officer and
Treasurer, under those Options Plans.
In his capacity as consultant to the Company, John G. Puente, a director of
the Company and Chairman of the Executive Committee, was compensated at a rate
of $25,000 per month for the period September 1996 through September 1997 and
has been granted non-incentive stock options, which grant was approved by
Orion's stockholders in May 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None.
HUMAN RESOURCES AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Committee on Human Resources and Compensation of the Board (the
"Compensation Committee") is responsible for the oversight and administration of
executive compensation and for administration of the Company's 1997 Employee
Stock Purchase Plan and 1987 Employee Stock Option Plan, as amended. The
Compensation Committee believes that the actions of each executive officer have
the potential to impact the short-term and long-term profitability of the
Company and considers the impact of each executive officer's performance in
designing and administering the executive compensation program. In making
compensation decisions, the Compensation Committee has, from time to time,
received information and advice regarding the compensation practices of other
companies in the satellite communications or related industries.
PHILOSOPHY AND OBJECTIVES FOR EXECUTIVE COMPENSATION. The purpose of the
Company's executive compensation program is to: (i) attract, motivate and retain
key executives responsible for the success of the Company as a whole; (ii)
increase shareholder value; (iii) increase the overall performance of the
Company; and (iv) increase the performance of the individual executive.
EXECUTIVE COMPENSATION POLICIES. The Compensation Committee's executive
compensation policies are designed to provide competitive levels of compensation
that integrate compensation with the Company's short-term and long-term
performance goals, reward above-average corporate performance, recognize
individual initiative and achievements, and assist the Company in attracting and
retaining qualified executives. Target levels of the executive officers' overall
compensation are determined subjectively and are intended to be consistent with
the Compensation Committee's perception of the salaries of similarly situated
senior executives in the satellite communications or related industries.
Particular factors which the Compensation Committee believes important to
assessing the Company's performance are growth in revenues and the number of
customer contracts, completion of financing or other major transactions,
implementation of the Company's global satellite network and, on a longer term
basis, growth in stockholder value measured by stock price.
The Company's executive compensation structure is comprised of base salary,
annual cash performance bonuses, long-term compensation in the form of stock
option grants, and various benefits, including medical, pension and stock
purchase plans generally available to all employees of the Company.
77
<PAGE>
Base Salary. In establishing appropriate levels of base salary, the
Compensation Committee considered the perceived base salary levels of senior
executives at other satellite communications or related companies and the
particular officer's overall contributions to Orion during the past year and
previously. Base salaries for fiscal 1997 generally were intended to be the same
as the perceived levels of similarly sized companies in the satellite services
industry. During fiscal 1997, the President and Chief Executive Officer's base
salary was $294,008, representing an approximately 5 percent increase from his
1996 base salary.
The Compensation Committee considered a number of factors in approving this
increase, including prior base salary increases, the senior executive's
increased experience and responsibility, his general performance during the
prior year, the Company's increased size and the Compensation Committee's
perception as to what salary he could command in other similarly sized companies
in the satellite communications or related industries. During fiscal 1997, the
Compensation Committee approved base salary increases for the Named Executive
Officers of between approximately 5 and 14 percent, based on the factors
described above.
Annual Performance Bonuses. Since 1994, a significant portion of
compensation for executives has consisted of cash bonuses. In the early part of
each fiscal year, the Compensation Committee has reviewed with the President and
Chief Executive Officer and approved, with any modifications it deems
appropriate, the annual performance bonus range for each senior executive for
that year. Generally, these bonuses have ranged up to approximately 40 percent
of such senior executive's base salary. The actual amount of a bonus grant is
determined subjectively at the end of each fiscal year, based on such factors as
the perceived value to the Company of the individual's achievement and the
amount of effort involved in such achievement, the salary level of the
individual and the performance of the Company. For 1997, the Compensation
Committee granted the President and Chief Executive Officer a performance bonus
of $100,000, representing 34 percent of his annual base salary (compared to his
potential bonus of 40 percent of his base salary). The Compensation Committee
also awarded bonuses to the Named Executive Officers, other than the President
and Chief Executive Officer, totaled approximately 27 percent of such
executives' annual base salary, as compared to opportunities totaling
approximately 35 percent.
Stock Option Grants. The Company believes that stock option grants provide
meaningful long-term incentives because they reward the enhancement of
stockholder value. The number of stock options granted to each senior executive
is determined subjectively, principally at the time such executive is hired by
the Company, based on a number of factors, including the individual's
anticipated degree of responsibility, salary level and stock option awards by
other similarly sized satellite communications or related companies. Stock
option grants by the Compensation Committee generally are made under the
Company's 1997 Employee Stock Option Plan at the prevailing market value and
will have value only if the Company's stock price increases. Grants made by the
Compensation Committee generally vest in equal annual amounts over three or five
years; executives must be employed by the Company at the time of vesting in
order to exercise the options.
During fiscal 1997, the Compensation Committee granted named executives
officers options exercisable for an aggregate of 658,000 shares of the Company's
common stock, at an average exercise price of $10.55 in connection with such
executive officers' performance. Factors considered in making such awards
include, the general level of such executive's performance, salary level, stock
and option holdings and recent noteworthy achievements.
Respectfully submitted,
HUMAN RESOURCES AND COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS
Richard J. Brekka (Chairman)
Warren B. French, Jr.
Robert M. Van Degna
78
<PAGE>
STOCK PERFORMANCE CHART
The following line graph sets forth comparative information regarding the
Company's cumulative stockholder return on its Common Stock over the year ended
December 31, 1997. Total stockholder return is measured by dividing total
dividends (assuming dividend reinvestment) plus share price change for a period
by the share price at the beginning of the measurement period. The Company's
cumulative stockholder return based on an investment of $100 at the beginning of
the year ended December 31, 1997 is compared to the cumulative total return of
the NASDAQ Market Index and an index comprised of public companies whose
securities have been trading publicly during the year ended December 31, 1997
and which report under the standard industrial classification code 3663 (five
companies excluding Orion) (the "Peer Group Index").
COMPARISON OF CUMULATIVE TOTAL
RETURN AMONG ORION NETWORK SYSTEMS, INC.,
NASDAQ MARKET INDEX AND PEER GROUP INDEX
FOR THE YEAR ENDED DECEMBER 31, 1997
[OBJECT OMITTED]
79
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Orion's Common Stock, as of January 15, 1998, by (i) each
stockholder known by Orion to be the beneficial owner of more than five percent
of the outstanding Orion Common Stock, (ii) each Director of Orion and each
named executive officer (see "Executive Compensation - Summary Compensation
Table") of Orion, and (iv) all Directors and named executive officers as a
group.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND TOTAL SHARES OF PERCENT OF
NATURE OF COMMON STOCK TOTAL SHARES OF
BENEFICIAL OUTSTANDING COMMON STOCK
OWNERSHIP (1) (2) FULLY DILUTED BASIS (6) OUTSTANDING ON A
- ------------- --- ----------------------- ----------------
<S> <C> <C> <C>
British Aerospace....................................... 7,650,226 32.9 26.9
Holdings, Inc. (3)(4)
15000 Conference Center Drive, Suite 200
Chantilly, VA 20151
CIBC Wood Gundy Ventures, Inc........................... 977,123 5.9 3.4
425 Lexington Avenue
New York, NY 10017
W. Neil Bauer, President and Chief...................... 215,340 1.3 *
Executive Officer (6)(7)
2440 Research Blvd., Suite 400
Rockville, MD 20850
Richard J. Brekka, Director (8)........................ 20,000 * *
712 Fifth Avenue.
Suite 8D
New York, NY 10019
Denis J. Curtin, Senior Vice President,................. 68,252 * *
and General Manager, Engineering, Operations
and Technology (20)
2440 Research Blvd., Suite 400
Rockville, MD 20850
David J. Frear, Senior Vice President, Chief............ 179,660 1.0 *
Financial Officer and Treasurer (6)(9)
2440 Research Blvd., Suite 400
Rockville, MD 20850
Warren B. French, Jr., Director (10)................... 25,623 * *
124 S. Main Street
Edinburg, VA 22824
Hans Giner, President, Orion
Network Systems-Asia Pacific, Inc. (11)................ 12,000 * *
2440 Research Blvd., Suite 400
Rockville, MD 20850
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND TOTAL SHARES OF PERCENT OF
NATURE OF COMMON STOCK TOTAL SHARES OF
BENEFICIAL OUTSTANDING COMMON STOCK
OWNERSHIP (1) (2) FULLY DILUTED BASIS (6) OUTSTANDING ON A
- ------------- --- ----------------------- ----------------
<S> <C> <C> <C>
Gustave M. Hauser, Chairman, Director (3)(6)(12)....... 547,517 3.2 1.9
712 Fifth Avenue
New York, NY 01910
Barry Horowitz, Director (13).......................... 20,000 * *
Mitretek Systems, Inc.
7525 Colshire Drive
McLean, VA 22102
Sidney S. Kahn, Director (3)(6)(14).................... 235,429 1.4 *
14 East 60th Street, Suite 500
New York, NY 10022
John G. Puente, Director (3)(6)(15).................... 519,181 3.1 1.8
2440 Research Blvd., Suite 400
Rockville, MD 20850
W. Anthony Rice, Director (16)........................ 20,000 * *
British Aerospace Public Limited Company
Warwick House, PO Box 87
Farnborough Aerospace Centre, Farnborough
Hants, GU146YU
John V. Saeman, Director............................... 1,492,833 8.9 5.2
J.V. Saeman & Co. (3)(6)(17)
Medallion Enterprises, LLC
Suite 570
3200 Cherry Creek South Drive
Denver, CO 80209
Richard H. Shay, Senior Vice President,................ 55,392 * *
Law and Administration, Secretary (18)
2440 Research Blvd., Suite 400
Rockville, MD 20850
Robert M. Van Degna, Director (20).................... 20,000 * *
Fleet Equity Partners
50 Kennedy Plaza
Providence, RI 02903
All directors and named executive officers
as a group (14 persons) 3,427,633 19.3 12.1
</TABLE>
- -----------------
1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be a "beneficial owner" of a security if he or she has or shares the power
to vote or direct the voting of such security or the power to dispose or
direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has the right to
acquire beneficial ownership within 60 days from January 15, 1998. More
than one person may be deemed to be a beneficial owner of the same
securities. All persons shown in the table above have sole voting and
investment power, except as otherwise indicated. This table includes shares
of Orion Common Stock subject to outstanding options granted pursuant to
Orion's 1997 Employee Stock Option Plan, 1987 Employee Stock Option Plan
and Non-Employee Director Stock Option Plan.
2) For the purpose of computing the percentage ownership of each beneficial
owner, any securities which were not outstanding but which were subject to
options, warrants, rights or conversion privileges held by such beneficial
owner exercisable within 60 days were deemed to be outstanding in
determining the percentage owned by such person, but were not deemed
outstanding in determining the percentage owned by any other person.
3) Stockholders who are parties to the Principal Stockholder Agreement.
4) Includes 3,007,770 shares issuable upon conversion of 52,636 shares of
Orion Series C Preferred Stock and 3,571,429 shares issuable upon
conversion of $50 million of Convertible Debentures.
5) The percentage ownership of each beneficial owner calculated on a fully
diluted basis assumes conversion or exercise of all derivative securities,
including options, warrants, rights or conversion privileges.
81
<PAGE>
6) Does not include shares issuable upon exercise of warrants which are
exercisable only in the event that the Orion Senior Preferred Stock is
redeemed by Orion prior to its conversion into Orion Common Stock.
7) Includes 211,763 shares issuable upon the exercise of stock options held by
Mr. Bauer exercisable within 60 days. Does not include 10,220 shares held
of record, 1,882 shares issuable upon the conversion of 16 shares of Orion
Series A Preferred Stock and 522 shares issuable upon conversion of 5.333
shares of Orion Series B Preferred Stock purchased in June 1995 held by Mr.
Bauer's wife. Mr. Bauer disclaims beneficial ownership of these shares.
8) Includes 20,000 shares issuable upon exercise of stock options exercisable
within 60 days.
9) Includes 171,812 shares issuable upon the exercise of stock options
exercisable within 60 days and 1,176 shares issuable upon conversion of 10
shares of Orion Series A Preferred Stock and 326 shares issuable upon
conversion of 3.333 shares of Orion Series B Preferred Stock.
10) Does not include 172,520 shares held of record, 29,412 shares issuable upon
the conversion of 250 shares of Orion Series A Preferred Stock or 8,170
shares issuable upon conversion of 83.334 shares of Orion Series B
Preferred Stock held by Shenandoah Telecommunications Company, of which Mr.
French is the former Chairman and presently a consultant. Mr. French
disclaims beneficial ownership of these shares. Includes 20,000 shares
issuable upon exercise of stock options exercisable within 60 days.
11) Includes 12,000 shares issuable upon the exercise of stock options
exercisable within 60 days.
12) Includes 58,823 shares issuable upon the conversion of 500 shares of Orion
Series A Preferred Stock and 16,339 shares issuable upon conversion of
166.667 shares of Orion Series B Preferred Stock held by Mr. Hauser and his
wife. Includes 120,000 shares issuable upon exercise of stock options
exercisable within 60 days.
13) Includes 20,000 shares issuable upon the exercise of stock options
exercisable within 60 days.
14) Includes 8,169 shares issuable upon conversion of 83.333 shares of Orion
Series B Preferred Stock. Includes 20,000 shares issuable upon exercise of
stock options exercisable within 60 days.
15) Includes 153,087 shares issuable upon the exercise of stock options
exercisable within 60 days, 1,411 shares issuable upon the conversion of 12
shares of Orion Series A Preferred Stock and 392 shares issuable upon
conversion of 4 shares of Orion Series B Preferred Stock held by Mr.
Puente.
16) Does not include 7,650,226 shares beneficially owned by British Aerospace
Holdings, Inc. Mr. Rice, a director of Orion and a director of British
Aerospace Holdings, Inc., disclaims beneficial ownership of these shares.
Includes 20,000 shares issuable upon exercise of stock options exercisable
within 60 days.
17) The 1,492,833 shares of Orion Common Stock beneficially owned by John V.
Saeman include 58,823 shares issuable upon conversion of 500 shares of
Orion Series A Preferred Stock, and 16,339 shares issuable upon conversion
of 166.667 shares of Orion Series B Preferred Stock. Of the remaining
1,417,671 shares of stock beneficially owned by John V. Saeman, 796,398 are
held by J. V. Saeman & Co., a general partnership, of which Mr. Saeman and
his wife are the sole partners, 44,196 are held by JCC, Ltd., a limited
partnership, of which J. V. Saeman & Co. is the general partner, and
545,523 are held by Medallion Enterprises, LLC, a limited liability
company, of which Mr. Saeman and his wife are the sole members. Includes
20,000 shares issuable upon exercise of stock options exercisable within 60
days.
18) Includes 37,544 shares issuable upon exercise of stock options exercisable
within 60 days.
19) Includes 55,030 shares issuable upon the exercise of stock options
exercisable within 60 days, and 705 shares issuable upon the conversion of
6 shares of Orion Series A Preferred Stock and 196 shares issuable upon
conversion of 2 shares of Orion Series B Preferred Stock.
20) Excludes 588,234 shares issuable upon conversion of 4,000 shares of Orion
Series A Preferred Stock held by Fleet and 1,000 shares of Orion Series A
Preferred Stock held by Chisholm, and 130,718 shares issuable upon
conversion of 1,333.333 shares of Orion Series B Preferred Stock held by
Fleet. Mr. Van Degna, a director of Orion, is the chairman and chief
executive officer of each of the managing general partners of Fleet Equity
Partners VI, L.P., the chairman and chief executive officer of Fleet
Venture Resources, Inc. and the chairman and chief executive officer of the
corporation that is the general partner of the partnership that is the
general partner of Chisholm Partners II, L.P. Mr. Van Degna disclaims
beneficial ownership of these shares. Includes 20,000 shares issuable upon
exercise of stock options exercisable within 60 days.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of certain transactions and relationships among
the Company and its associated entities, and among the directors, executive
officers and stockholders of the Company and its associated entities during the
fiscal year ended December 31, 1997.
In January 1997, the Company acquired the outstanding minority interest in
the Company's subsidiary Orion Asia Pacific Corporation from British Aerospace
Satellite Investments, Inc. ("British Aerospace Satellite") in exchange for
approximately 86,000 shares of Common Stock). British Aerospace Satellite is an
affiliate of British Aerospace Communications, Inc. ("British Aerospace"), the
beneficial owner of more than 5% of the Company's Common Stock.
In January 1997, the Company sold $60 million of its convertible junior
subordinated debentures (the "Convertible Debentures") to two investors, British
Aerospace Holdings, Inc., an affiliate of British Aerospace, and Matra Marconi
Space. British Aerospace Holdings, Inc. purchased $50 million of the Convertible
Debentures and Matra Marconi Space purchased $10 million of the Debentures.
British Aerospace beneficially owns more than 5% of the Company's Common Stock.
In January 1997, the Company acquired the limited partnership interests in
International Satellite Partners, L.P, a wholly owned subsidiary of the Company
("Orion Atlantic"), and other rights relating thereto held by British Aerospace,
COM DEV Satellite Communications Limited, Kingston Communications International
Limited ("Kingston"), 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"). The
Exchanging Partners exchanged their Orion Atlantic limited partnership interests
for 123,172 shares of Series C Preferred Stock (the "Exchange"). With the
exception of COM DEV Satellite Communications Limited, the Exchanging Partners
each beneficially owned more than 5% of the Company's Common Stock as a result
of the Exchange.
The Company registered 5,052,202 shares of Common Stock issuable upon
conversion of (i) the Series C Preferred Stock (other than the Series C
Preferred Stock held by British Aerospace) and (ii) Matra Marconi's Convertible
Debentures on a Registration Statement on Form S-3 (the "Exchanging Partners
Registration Statement"), which Exchanging Partners Registration Statement
became effective on November 19, 1997 (Registration No. 333-40123). As of
January 31, 1998, approximately 3.9 million shares of Common Stock (issuable
upon the conversion of 56,492 shares of the Series C Preferred Stock) and Matra
Marconi's Convertible Debentures had been sold pursuant the Exchanging Partners
Registration Statement.
British Aerospace has recently converted its Convertible Debentures and
sold the Common Stock issued upon conversion in sales exempt from registration
under the Securities Act.
In January 1997, the Company paid $13 million to Matra Marconi Space as
incentive payments under the Orion 1 satellite contract of which $10 million was
used by Matra Marconi Space to purchase $10 million of the Debentures. Matra
Hachette, one of the parent companies of Matra Marconi Space, beneficially owns
more than 5% of the Company's Common Stock.
In January 1997, a wholly owned subsidiary of the Company was merged with
and into Orion Oldco, the predecessor of the Company, as a result of which Orion
Oldco become a wholly owned subsidiary of the Company (the "Merger"). In the
Merger, all stockholders of Orion Oldco converted their shares of Orion Oldco's
common stock and preferred stock into an identical number of shares the
Company's Common Stock and Preferred Stock.
On December 31, 1997, Orion's Board of Directors adopted the following,
subject to stockholder approval at the special meeting of stockholders scheduled
for March 20, 1998 (i) amendments to the Non-Employee Director Stock Option Plan
and certain options granted thereunder to provide for early vesting of
approximately 90,000 options and conversion of options granted under the plan in
connection with the Loral Merger, (ii) amendments to the Stock Option Agreement,
dated as of July 17, 1996, by and between Orion and John G. Puente, a director
and Chairman of the Executive Committee of Orion's Board of Directors, and the
100,000 options granted thereunder to provide for conversion of such options in
connection with the Loral Merger and (iii) amendments to the Stock Option
Agreement, dated as of March 12, 1997, by and between Orion and Gustave M.
Hauser, a director and Chairman of Orion's Board of Directors, and the 100,000
options granted thereunder to provide for conversion of such options in
connection with the Loral Merger.
83
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) and (2) List of Financial Statements and Financial Statement
Schedules
The following consolidated financial statements of Orion Network Systems,
Inc. are included in Item 8:
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Operations - Years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity (Deficit) -
Years ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements - December 31, 1997
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
84
<PAGE>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
2.1 Agreement and Plan of Merger, dated as of October 7, 1997, by and among
Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral
Satellite Corporation. (Incorporated by reference to exhibit number 2.1
in Current Report on Form 8-K dated October 9, 1997).
2.2 Principal Stockholder Agreement among Orion Network Systems, Inc., Loral
Space & Communications Ltd., Loral Satellite Corporation and the
stockholders that are signatories thereto, dated as of October 7, 1997.
(Incorporated by reference to exhibit number 2.2 in Current Report on
Form 8-K dated October 9, 1997).
2.3 Amendment No. 1 Agreement and Plan of Merger, dated as of February 11,
1998, by and among Orion Network Systems, Inc., Loral Space &
Communications Ltd. and Loral Satellite Corporation. (Incorporated by
reference to exhibit number 2.2 in Registration Statement No. 333-46407
on Form S-4).
2.4 Amendment No. 1 to Principal Stockholder Agreement among Orion Network
Systems, Inc., Loral Space & Communications Ltd., Loral Satellite
Corporation and the stockholders that are signatories thereto, dated as
of December 1, 1997.
3.1 Restated Certificate of Incorporation of Orion Network Systems, Inc.
(Incorporated by reference to exhibit number 3.1 in Registration
Statement on Form 8-B filed with the Commission on January 31, 1997).
3.2 Amended and Restated Bylaws of Orion Network Systems, Inc. (Incorporated
by reference to exhibit number 3.2 in Registration Statement on Form 8-B
filed with the Commission on January 31, 1997).
3.3 Certificate of Incorporation of Orion Network Systems, Inc.
(Incorporated by reference to exhibit number 3.1 in Registration
Statement No. 33-80518 on Form S-1).
3.4 Bylaws of Orion Network Systems, Inc. (Incorporated by reference to
exhibit number 3.2 in Registration Statement No. 33-80518 on Form S-1)
3.5 Certificate of Incorporation of Orion Satellite Corporation.
(Incorporated by reference to Exhibit number 3.5 to Registration
Statement No. 333-19167 on Form S-1).
3.6 Bylaws of Orion Satellite Corporation. (Incorporated by reference to
Exhibit number 3.6 to Registration Statement No. 333-19167 on Form S-1).
3.7 Certificate of Limited Partnership of International Private Satellite
Partners, L.P. Incorporated by reference to Exhibit number 3.7 to
Registration Statement No. 333-19167 on Form S-1).
3.8 Form of Third Amended and Restated Agreement of Limited Partnership of
International Private Satellite Partners, L.P. (Incorporated by
reference to Exhibit number 3.8 to Registration Statement No. 333-19167
on Form S-1).
3.9 Certificate of Incorporation of OrionNet, Inc. (Incorporated by
reference to Exhibit number 3.9 to Registration Statement No. 333-19167
on Form S-1).
3.10 Bylaws of OrionNet, Inc. (Incorporated by reference to Exhibit number
3.10 to Registration Statement No. 333-19167 on Form S-1).
Certificate of Incorporation of Orion Network Systems-Asia Pacific, Inc.
(formerly known as Orion Asia Pacific Corporation) (Incorporated by reference to
Exhibit number 3.11 to Registration Statement No. 333-19167 on Form S-1).
85
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EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
3.12 Bylaws of Orion Network Systems-Asia Pacific, Inc. (formerly known as
Orion Asia Pacific Corporation) (Incorporated by reference to Exhibit
number 3.12 to Registration Statement No. 333-19167 on Form S-1).
3.13 Certificate of Incorporation of OrionNet Finance Corporation.
(Incorporated by reference to Exhibit number 3.13 to Registration
Statement No. 333-19167 on Form S-1).
3.14 Bylaws of Orion Net Finance Corporation. (Incorporated by reference to
Exhibit number 3.14 to Registration Statement No. 333-19167 on Form
S-1).
3.15 Certificate of Incorporation of Asia Pacific Space and Communications,
Ltd. (Incorporated by reference to Exhibit number 3.15 to Registration
Statement No. 333-19167 on Form S-1).
3.16 Bylaws of Asia Pacific Space and Communications, Ltd. (Incorporated by
reference to Exhibit number 3.16 to Registration Statement No. 333-19167
on Form S-1).
3.17 Certificate of Incorporation of Orion Network Systems-Europe, Inc.
(formerly known as Orion Atlantic Europe, Inc.) (Incorporated by
reference to Exhibit number 3.17 to Registration Statement No. 333-19167
on Form S-1).
3.18 Bylaws of Orion Network Systems-Europe, Inc. (formerly known as Orion
Atlantic Europe, Inc.) (Incorporated by reference to Exhibit number 3.18
to Registration Statement No. 333-19167 on Form S-1).
4.1 Form of Senior Note Indenture and Form of Note included therein.
(Incorporated by reference to Exhibit number 4.1 to Registration
Statement No. 333-19167 on Form S-1).
4.2 Form of Senior Discount Note Indenture and Form of Note included
therein. (Incorporated by reference to Exhibit number 4.2 to
Registration Statement No. 333-19167 on Form S-1).
4.3 Form of Collateral Pledge and Security Agreement. (Incorporated by
reference to Exhibit number 4.3 to Registration Statement No. 333-19167
on Form S-1).
4.4 INTENTIONALLY OMITTED
4.5 Form of Warrant Agreement, by and between Orion and Bankers Trust
Company, and Form of Warrant included therein. (Incorporated by
reference to Exhibit number 4.5 to Registration Statement No. 333-19167
on Form S-1).
4.6 Forms of Warrant issued by Orion. (Incorporated by reference to exhibit
number 4.1 in Registration Statement No. 33-80518 on Form S-1).
4.7 Forms of Warrant issued by Orion to holders of Preferred Stock.
(Incorporated by reference to exhibit number 4.2 in Registration
Statement No. 33-80518 on Form S-1).
4.8 Forms of Certificate of Designation of Series A 8% Cumulative Redeemable
Convertible Preferred Stock, Series B 8% Cumulative Redeemable
Convertible Preferred Stock and Series C 6% Cumulative Redeemable
Convertible Preferred Stock of Orion. (Incorporated by reference to
exhibit number 4.3 in Registration Statement No. 333-19795 on Form 8-B
filed with the Commission on January 31, 1997).
4.9 Forms of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock certificates of Orion. (Incorporated by reference to
exhibit number 4.4 in Registration Statement No. 333-19795 on Form S-4).
86
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EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
4.10 Form of Common Stock Certificate of Orion. (Incorporated by reference to
exhibit number 4.5 in Registration Statement No. 333-19795 on Form S-4).
4.11 Form of Warrant issued to DACOM Corp. (Incorporated by reference to
exhibit number 4.6 in Registration Statement No. 333-19795 on Form S-4).
4.12 Debenture Purchase Agreement, dated January 13, 1997, with British
Aerospace and Matra Marconi Space. (Incorporated by reference to exhibit
number 4.7 in Registration Statement No. 333-19795 on Form S-4 of Orion
Newco Services, Inc.), as amended as of January 31, 1997 (Incorporated
by reference to exhibit 10.4 in Current Report on Form 8-K dated
February 14, 1997).
10.1 Second Amended and Restated Purchase Agreement, dated September 26, 1991
("Satellite Contract") by and between OrionServ and British Aerospace
PLC and the First Amendment, dated as of September 15, 1992, Second
Amendment, dated as of November 9, 1992, Third Amendment, dated as of
March 12, 1993, Fourth Amendment, dated as of April 15, 1993, Fifth
Amendment, dated as of September 22, 1993, Sixth Amendment, dated as of
April 6, 1994, Seventh Amendment, dated as of August 9, 1994, Eighth
Amendment, dated as of December 8, 1994, and Amendment No. 9 dated
October 24, 1995, thereto. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR
PORTIONS OF THESE DOCUMENTS.] (Incorporated by reference to exhibits
number 10.13 and 10.14 in Registration Statement No. 33-80518 on Form
S-1).
10.2 Restated Amendment No. 10 dated December 10, 1996, between Orion
Atlantic and Matra Marconi Space to the Second Amended and Restated
Purchase Agreement, dated September 16, 1991 by and between OrionServ
and British Aerospace PLC (which contract and prior exhibits thereto
were incorporated by reference as exhibit number 10.1). (Incorporated by
reference to exhibit number 10.2 in Registration Statement No. 333-19795
on Form S-4).
10.3 INTENTIONALLY OMITTED
10.4 INTENTIONALLY OMITTED
10.5 Contract for a Satellite Control System, dated December 7, 1992, by and
between Orion Atlantic, Telespazio S.p.A. and Martin Marietta
Corporation. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF
THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.31 in
Registration Statement No. 33-80518 on Form S-1).
10.6 Credit Agreement, dated as of November 23, 1993, by and between Orion
Atlantic, OrionServ and General Electric Capital Corporation (`GECC').
[CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.]
(Incorporated by reference to exhibit number 10.32 in Registration
Statement No. 33-80518 on Form S-1).
10.7 Security Agreement, dated as of November 23, 1993, by and between Orion
Atlantic, OrionServ and GECC. ("Incorporated by reference to exhibit
number 10.33 in Registration Statement No. 33-80518 on Form S-1).
10.8 Assignment and Security Agreement, dated as of November 23, 1993, by and
between Orion Atlantic, OrionServ and GECC. (Incorporated by reference
to exhibit number 10.34 in Registration Statement No. 33-80518 on Form
S-1).
87
<PAGE>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.9 Consent and Agreement, dated as of November 23, 1993, by and between
Orion Atlantic, Martin Marietta Corporation and GECC. (Incorporated by
reference to exhibit number 10.35 in Registration Statement No. 33-80518
on Form S-1).
10.10 Deed of Trust, dated as of November 23, 1993, by and between Orion
Atlantic, W. Allen Ames, Jr. and Michael J. Schwel, as Trustees, and
GECC. (Incorporated by reference to exhibit number 10.37 in Registration
Statement No. 33-80518 on Form S-1).
10.11 Lease Agreement, dated as of November 23, 1993, by and between OrionNet,
Inc. and Orion Atlantic, as amended by an Amendment, dated January 3,
1995. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THESE
DOCUMENTS. (Incorporated by reference to exhibit number 10.38 in
Registration Statement No. 33-80518 on Form S-1).
10.12 Note for Interim Loans, dated as of November 23, 1993, by and between
Orion Atlantic and GECC. (Incorporated by reference to exhibit number
10.42 in Registration Statement No. 33-80518 on Form S-1).
10.13 Sales Representation Agreement and Ground Operations Service Agreement,
each dated as of May 1, 1994 and June 03, 1994, by and between each of
OrionNet, Inc. and Kingston Communications, respectively, and Orion
Atlantic, as amended by side agreements, dated May 1, 1994, July 12,
1994, and February 1, 1995. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR
PORTIONS OF THESE DOCUMENTS.] (Incorporated by reference to exhibit
number 10.43 in Registration Statement No. 33-80518 on Form S-1).
10.14 Lease Agreement, dated as of October 2, 1992, by and between OrionNet
and Research Grove Associates, as amended by Amendment No. 1 dated March
26, 1993. Amendment No. 2 dated August 23, 1993, and Amendment No. 3
dated December 20, 1993. (Incorporated by reference to exhibit number
10.39 in Registration Statement No. 33-80518 on Form S-1).
10.15 Sales Representation Agreement and Ground Operations Service Agreement,
dated as of June 30, 1995, by and between MCN Sat Service, S.A. and
Orion Atlantic. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF
THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.69 in
Orion's Registration Statement No. 33-80518 on Form S-1).
10.16 INTENTIONALLY OMITTED
10.17 INTENTIONALLY OMITTED
10.18 INTENTIONALLY OMITTED
10.19 Orion 2 Spacecraft Purchase Contract, dated January 29, 1997 between
Orion Atlantic and Matra Marconi Space. [CONFIDENTIAL TREATMENT HAS BEEN
GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to
exhibit number 10.19 in Current Report on Form 10-K dated March 31,
1997).
10.20 Orion's Amended and Restated 1987 Stock Option Plan as amended.
(Incorporated by reference to exhibit number 10.23 in Registration
Statement No. 33-80518 on Form S-1).
10.21 INTENTIONALLY OMITTED
10.22 INTENTIONALLY OMITTED
88
<PAGE>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.23 INTENTIONALLY OMITTED
10.24 INTENTIONALLY OMITTED
10.25 INTENTIONALLY OMITTED
10.26 INTENTIONALLY OMITTED
10.27 INTENTIONALLY OMITTED
10.28 INTENTIONALLY OMITTED
10.29 INTENTIONALLY OMITTED
10.30 Stock Purchase Agreement, dated as of April 29, 1994, by and between the
Company and SS/L. (Incorporated by reference to exhibit number 10.53 in
Registration Statement No. 33-80518 on Form S-1).
10.31 Registration Rights Agreement, dated as of April 29, 1994, by and
between the Company and SS/L. (Incorporated by reference to exhibit
number 10.54 in Registration Statement No. 33-80518 on Form S-1).
10.32 Purchase Agreement, dated as of June 17, 1994, by and between the
Company, CIBC, Fleet and Chisholm. (Incorporated by reference to exhibit
number 10.55 in Registration Statement No. 33-80518 on Form S-1).
10.33 Stockholders Agreement, dated as of June 17, 1994, by and between the
Company, CIBC, Fleet, Chisholm and certain principal stockholders of the
Company. (Incorporated by reference to exhibit number 10.56 in
Registration Statement No. 33-80518 on Form S-1).
10.34 Registration Rights Agreement, dated as of June 17, 1994, by and between
the Company, CIBC, Fleet and Chisholm. (Incorporated by reference to
exhibit number 10.57 in Registration Statement No. 33-80518 on Form
S-1).
10.35 Purchase Agreement, dated as of June 16, 1995, by and among the Company,
CIBC, Fleet and an affiliate of Fleet. (Incorporated by reference to
exhibit number 10.58 in Registration Statement No. 33-80518 on Form
S-1).
10.36 Definitive Agreement, dated April 26, 1990, by and between Orion Asia
Pacific and Republic of the Marshall Islands and Stock Option Agreement
related thereto. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS
OF THESE DOCUMENTS.] (Incorporated by reference to exhibit number 10.60
in Registration Statement No. 33-80518 on Form S-1).
10.37 Amended and Restated Option Agreement, dated January, 29, 1997, by and
between Orion Atlantic and Matra Marconi Space and First Amendment,
dated February 13, 1997, thereto. [CONFIDENTIAL TREATMENT HAS BEEN
GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to
exhibit number 10.37 in Current Report on Form 10-K dated March 31,
1997).
10.38 INTENTIONALLY OMITTED
10.39 TT&C Earth Station Agreement, dated as of November 11, 1996, by and
between Orion Asia Pacific and DACOM Corp. [CONFIDENTIAL TREATMENT HAS
BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference
to exhibit number 10.39 in Registration Statement No. 333-19795 on Form
S-4).
89
<PAGE>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.40 Joint Investment Agreement, dated as of November 11, 1996, by and
between Orion Asia Pacific and DACOM Corp. [CONFIDENTIAL TREATMENT HAS
BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference
to exhibit number 10.40 in Registration Statement No. 333-19795 on Form
S-4).
10.41 Orion Network Systems, Inc. Employee Stock Purchase Plan. (Incorporated
by reference to exhibit number 4.4 in Registration Statement No.
333-19021 on Form S-8).
10.42 Orion Network Systems, Inc. 401(k) Profit Sharing Plan. (Incorporated by
reference to exhibit number 4.5 in Registration Statement No. 333-19021
on Form S-8).
10.43 Orion Network Systems, Inc. Non-Employee Director Stock Option Plan.
(Incorporated by reference to exhibit number 10.43 in Registration
Statement No. 333-19795 on Form S-4).
10.44 Exchange Agreement dated June 1996 among Orion Network Systems, Orion
Atlantic, OrionServ and the Limited Partners. (Incorporated by reference
to exhibit 10 in Current Report on Form 8-K dated December 20, 1996).
10.45 First Amendment to Exchange Agreement dated December 1996 among Orion
Network Systems, Orion Atlantic, OrionServ and the Limited Partners.
(Incorporated by reference to exhibit number 10.45 in Registration
Statement No. 333-19795 on Form S-4).
10.46 Redemption Agreement dated November 21, 1995, by and between STET and
Orion Atlantic, the promissory notes delivered thereunder and Instrument
of Redemption relating thereto. (Incorporated by reference to exhibit
number 10.1 in Current Report on Form 8-K dated November 21, 1995).
10.47 IPSP-Telecom Italia Agreement dated November 21, 1995, by and between
Telecom Italia and Orion Atlantic. [CONFIDENTIAL TREATMENT HAS BEEN
GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to
exhibit number 10.2 in Current Report on Form 8-K dated November 21,
1995).
10.48 Indemnity Agreement dated November 21, 1995, by and among Telecom
Italia, Orion Atlantic, Orion and STET. (Incorporated by reference to
exhibit number 10.3 in Current Report on Form 8-K dated November 21,
1995).
10.49 Subscription Agreement dated November 21, 1995, by and between Orion and
Orion Atlantic, and the Promissory note delivered thereunder.
(Incorporated by reference to exhibit number 10.5 in Current Report on
Form 8-K dated November 21, 1995).
10.50 INTENTIONALLY OMITTED
10.51 Registration Rights Agreement, dated January 13, 1997, by and among
Orion Newco Services, Inc., British Aerospace Holdings, Inc. and Matra
Marconi Space. (Incorporated by reference to Exhibit number 10.51 to
Registration Statement No. 333-19795 on form S-4).
10.52 Orion 3 Spacecraft Purchase Contract, dated January 15, 1997, by and
among Hughes Space and Communications International, Inc., Orion Asia
Pacific Corporation and Orion Network Systems. [CONFIDENTIAL TREATMENT
HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.]. (Incorporated by
reference to Exhibit number 10.52 to Registration Statement No.
333-19167 on Form S-1).
90
<PAGE>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.53 Letter Agreement, effective as of May 20/21, 1997, by and between Orion
Network Systems, Inc. and Morgan Stanley & Co. ++
10.54 Orion Network Systems, Inc. 1997 Stock Option Plan (Incorporated by
reference to Exhibit number 4.4 in Registration Statement No. 333-32457
on Form S-8)
- ----------
(b) Reports on Form 8-K filed in the fourth quarter of 1997:
Current Report on Form 8-K dated October 8, 1997 reporting execution of
the Merger Agreement.
(c) Exhibits
None.
(d) Financial Statement Schedule
None.
91
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, 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: March___, 1998 /s/ W. Neil Bauer
W. Neil Bauer, President
-------------------------------------------
Chief Executive Office and Director
(Principal Executive Office)
Date: March ___, 1998 /s/ David, J. Frear
David J. Frear, Vice President
-------------------------------------------
Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Gustave M. Hauser /s/ John V. Saeman
--------------------- ------------------
Gustave M. Hauser John V. Saeman
Chairman, Director Director
/s/ John G. Puente /s/ Richard J. Brekka
------------------ ---------------------
John G. Puente Richard J. Brekka
Director Director
/s/ Warren B. French, Jr. /s/ Sidney S. Kahn
------------------------- ------------------
Warren B. French, Jr. Sidney S. Kahn
Director Director
/s/ W. Anthony Rice /s/ Robert M. Van Degna
------------------- -----------------------
W. Anthony Rice Robert M. Van Degna
Director Director
/s/ Barry Horowitz
------------------
Barry Horowitz
Director
<PAGE>
GLOSSARY
ORION, THE EXCHANGING PARTNERS AND CERTAIN CREDITORS:
BANKS............................ A syndicate of international banks that are
parties to the Orion 1 Credit Facility.
BRITISH AEROSPACE................ British Aerospace Public Limited Company,
one of the world's leading aerospace
organizations, and its affiliates, including
its subsidiary British Aerospace
Communications, Inc., a Limited Partner.
Kingston Satellite Services, a joint venture
between Kingston Communications and British
Aerospace, serves as sales representative
and ground operator for Orion in the United
Kingdom.
COM DEV.......................... COM DEV Satellite Communications Limited, a
Limited Partner and a subsidiary of COM DEV,
Limited. COM DEV, Limited is also a supplier
of value-added satellite communications
services, products for wireless personal
communications and satellite remote sensing
data.
GECC............................. General Electric Capital Corporation, the
lender for the TT&C Financing.
KINGSTON COMMUNICATIONS.......... Kingston Communications International
Limited, a Limited Partner and a subsidiary
of Kingston Communications (Hull) plc, the
only municipally-owned telephone company in
the United Kingdom. Kingston Satellite
Services, a joint venture between Kingston
Communications and British Aerospace, serves
as sales representative and ground operator
for Orion in the United Kingdom.
LIMITED PARTNERS................. The limited partners in Orion Atlantic,
including British Aerospace Communications,
Inc., COM DEV, Kingston Communications,
Lockheed Martin CLS, MCN Sat US, Inc. and
Trans-Atlantic Satellite, Inc.
LOCKHEED MARTIN.................. Lockheed Martin Corporation, a major
manufacturer of aerospace and military
equipment, and the ultimate parent company
of Lockheed Martin CLS, a Limited Partner
and the launch subcontractor under the Orion
1 Satellite Contract. Lockheed Martin CLS
acquired the assets of General Dynamics
Commercial Launch Services through a
transfer of assets from Martin Marietta
Corporation, which in turn acquired these
and other assets (including the Atlas family
of launch vehicles) from General Dynamics
Corporation in 1994.
LOCKHEED MARTIN CLS.............. Lockheed Martin Commercial Launch Services,
Inc., a Limited Partner and a subsidiary of
Martin Marietta Technologies, Inc., a
Lockheed Martin company. Lockheed Martin CLS
acquired the assets of General Dynamics
Commercial Launch Services through a
transfer of assets from Martin Marietta
Corporation, which in turn acquired these
and other assets (including the Atlas family
of launch vehicles) from General Dynamics
Corporation in 1994. Lockheed Martin CLS is
a commercial launch services provider and
provided launch services to Orion as the
launch subcontractor under the Orion 1
Satellite Contract. Lockheed Martin CLS
became a Limited Partner by acquiring the
limited partnership interest of General
Dynamics CLS in the 1994 transaction
described above.
MATRA HACHETTE................... Matra Hachette, an aerospace, defense,
industrial and media company and part of the
Lagardere Groupe of France, and the parent
company of MCN Sat US, Inc., a Limited
Partner. Matra Hachette is one of the parent
companies of Matra Marconi Space which is
the parent company of MMS Space Systems, the
prime contractor for Orion 1, and the
manufacturer under the Orion 2 Satellite
Contract.
93
<PAGE>
GLOSSARY (CONTINUED)
NISSHO IWAI CORP................. Nissho Iwai Corporation, is a trading
company in Japan, and the parent company of
Trans-Atlantic Satellite, Inc., a Limited
Partner.
ORION............................ (1) the combined operations of Orion Network
Systems, Inc., a Delaware corporation, and
its subsidiaries (collectively, the
"Operating Company"), prior to the date of
the merger of a newly formed subsidiary
("Merger Sub") of Orion Newco Services,
Inc., a recently formed Delaware corporation
("Orion Newco"), into the Operating Company
(the "Merger") and (2) Orion and its
subsidiaries, including the Operating
Company, after the Merger.
ORION 1 CREDIT FACILITY.......... A facility of up to $251 million of senior
debt provided to finance Orion 1, which will
be repaid with proceeds of the Offering.
ORION ASIA PACIFIC............... Asia Pacific Space and Communications, Ltd.,
a Delaware corporation. Orion acquired 83%
of the stock of such company in December
1992 and has acquired the remaining 17%,
which was held by British Aerospace, in
exchange for approximately 86,000 shares of
Common Stock in the OAP Acquisition.
ORION ATLANTIC................... International Private Satellite Partners,
L.P., a Delaware limited partnership of
which OrionServ is the general partner,
which owns Orion 1.
ORIONNET......................... OrionNet, Inc., a Delaware corporation and
wholly owned subsidiary of Orion.
ORIONSERV........................ Orion Network Services, Inc. (formerly known
as Orion Satellite Corporation), a Delaware
corporation and wholly owned subsidiary of
Orion.
PARTNERSHIP AGREEMENT............ The limited partnership agreement of Orion
Atlantic, which includes the terms and
conditions governing the partnership
arrangements among the Partners.
STET............................. STET-Societa Finanziaria Telefonica-per
Azioni is a former Limited Partner and the
parent company of Telecom Italia, the
Italian PTT.
STET REDEMPTION.................. The redemption on November 21, 1995 by Orion
Atlantic of the limited partnership interest
held by STET and modification of STET's
previously existing contractual arrangements
with Orion Atlantic.
TT&C FINANCING................... A facility of up to $11 million provided by
GECC for Orion's TT&C facility that was
converted to a seven-year term loan on June
1, 1995 and which had an outstanding balance
of $7.2 million as of September 30, 1996.
SATELLITE CONSTRUCTION AND SATELLITE COMMUNICATIONS:
BANDWIDTH....................... The relative range of frequencies that can
be passed through a transmission medium
without distortion. The greater the
bandwidth, the greater the information
carrying capacity. Bandwidth is measured in
Hertz.
C-BAND........................... Certain high frequency radio frequency bands
between 3,400 to 6,725 MHz used by
communications satellites.
94
<PAGE>
GLOSSARY (CONTINUED)
CONSTRUCTIVE TOTAL LOSS......... If a satellite is completely destroyed or
incapable of operation (except for certain
failures due to circumstances beyond the
control of the manufacturer) during a
specified number of days after launch.
FOOTPRINT ....................... Signal coverage area for a satellite.
HERTZ............................ The unit for measuring the frequency with
which an electromagnetic signal cycles
through the zero-value state between the
lowest and highest states. One Hertz
(abbreviated as Hz) equals one cycle per
second; kHz (kiloHertz) stands for thousands
of Hertz; MHz (megaHertz) stands for
millions of Hertz.
HUGHES SPACE..................... Hughes Space and Communications
International, Inc., the manufacturer under
the Orion 3 Satellite Contract. Hughes Space
is a subsidiary of Hughes Aircraft Company,
which is a subsidiary of General Motors
Corporation.
KU-BAND.......................... Certain high frequency radio frequency bands
between 10,700 to 14,500 MHz permitting the
use of smaller antennae than the older
C-band technology.
MATRA MARCONI SPACE.............. Matra Marconi Space UK Limited, the parent
company of MMS Space Systems and a
subsidiary of Matra Marconi Space NV, and
the manufacturer under the Orion 2 Satellite
Contract. Matra Marconi Space NV is owned by
Matra Hachette (51 percent) and General
Electric Co. of Britain (49 percent).
ORION 1.......................... The high-power Ku-band communications
satellite operated over the Atlantic Ocean
by Orion.
ORION 1 SATELLITE CONTRACT....... The fixed price turnkey contract originally
entered into between British Aerospace and
Orion Atlantic for the design, construction,
launch and delivery in orbit of Orion 1.
British Aerospace assigned its rights under
the contract to MMS Space Systems, which was
subsequently purchased by Matra Marconi
Space NV and renamed MMS Space Systems
Limited. British Aerospace remains liable to
Orion for the performance of the contract
but performance has been assigned to MMS
Space Systems and the Company understands
that MMS Space Systems and Matra Marconi
Space NV have fully indemnified British
Aerospace against liabilities thereunder.
ORION 2.......................... The high-power Ku-band communications
satellite to be operated over the Atlantic
Ocean by Orion.
ORION 2 SATELLITE CONTRACT....... The spacecraft purchase agreement between
Orion and Matra Marconi Space for
construction and launch of Orion 2.
ORION 3.......................... The high-power Ku-band communications
satellite to be operated by Orion in the
Asia Pacific region.
ORION 3 SATELLITE CONTRACT....... The spacecraft purchase agreement between
Orion Asia Pacific, a wholly owned
subsidiary of Orion, and Hughes Space for
construction and launch of Orion 3.
SPACE SYSTEMS OR MMS SPACE
SYSTEMS........................ MMS Space Systems Limited, a former
subsidiary of British Aerospace which was
sold to Matra Marconi Space NV, in 1994. MMS
Space Systems served as the prime contractor
under the Orion 1 Satellite Contract.
TRANSPONDER...................... The part of a satellite which is used for
the reception of communication signals from,
and the frequency conversion, amplification
and transmission of communication signals
to, earth.
95
<PAGE>
GLOSSARY (CONTINUED)
TT&C STATION..................... A satellite control system, which includes a
satellite control center and a tracking,
telemetry and command station complex at Mt.
Jackson, Virginia.
VSAT............................. Very small aperture terminal earth stations
that can be installed on rooftops or
elsewhere at customer locations, with
antennas as small as 0.8 meters but ranging
in sizes up to 2.4 meters in diameter.
REGULATION AND COMPETITION:
COMMUNICATIONS ACT............... The U.S. Communications Act of 1934, as
amended.
EUTELSAT......................... European regional satellite facilities
consortium owned by approximately 40
European countries.
FCC.............................. The United States Federal Communications
Commission.
INTELSAT......................... International Telecommunications Satellite
Organization, an international satellite
facilities consortium owned by approximately
140 government and privately owned
telecommunications companies.
ITU ............................ International Telecommunication Union, an
international body formed by treaty that is
responsible for coordinating and registering
orbital slots to satellites.
ORION 1 LICENSE.................. The license granted to Orion by the FCC to
construct, launch and operate Orion 1, at
designated orbital location 37.5(Degree)
West longitude over the Atlantic Ocean.
PANAMSAT......................... PanAmSat Corporation, a publicly traded U.S.
company providing trans-Atlantic satellite
service and services to Latin America, the
Pacific Ocean region, and the Indian Ocean
region, using a satellite system separate
from INTELSAT.
PTT.............................. Postal, telephone and telegraph
organization, ordinarily a government-owned
communications monopoly.
96
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C>
Average shares outstanding 11,639,711 10,951,823 8,476,126
Adjustments for issuance of common stock and other
instruments within one year of the initial filing of the
registration statement:
Common stock issued
Common stock options granted 82,445
Common stock issuable upon conversion
of preferred stock issued 426,470
Common stock issuable upon conversion
of preferred options granted 118,464
--------------- --------------- ----------------
Weighted average shares used in calculating per share data 11,639,711 10,951,823 9,103,505
Net loss attributable to common stockholders (111,774,450) (28,565,075) (26,915,178) (a)
Net loss per common share (9.60) (2.62) ($3.07)
</TABLE>
(a) Assuming conversion of preferred stock and options and the add back of
preferred stock dividend for the period ended March 31, 1995.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of our report dated February 20, 1998, with respect to the
consolidated financial statements of Orion Network Systems, Inc. included in
this Annual Report (Form 10-K) for the year ended December 31, 1997:
Post-Effective Amendment No. 1 to the Registration Statement (Form S-8 No.
33-97444) pertaining to the Orion Network Systems, Inc. Amended and
Restated 1987 Stock Option Plan;
Post-Effective Amendment No. 1 to the Registration Statement (Form S-8 No.
333-19021) pertaining to the Orion Network Systems, Inc. Employee Stock
Purchase Plan and the Orion Network Systems, Inc. 401(k) Profit Sharing
Plan;
Registration Statement (Form S-8 No. 333-24213) pertaining to the Orion
Network Systems, Inc. Non-Employee Director Stock Option Plan;
Registration Statement (Form S-8 No. 333-32457) pertaining to the Orion
Network Systems, Inc. 1997 Stock Option Plan;
Post-Effective Amendment No. 1 to the Registration Statement (Form S-1 No.
333-19167) on Form S-3 pertaining to the Warrants;
Registration Statement (Form S-3 No. 333-40123) pertaining to the
registration of 5,052,202 shares of common stock dated November 13, 1997;
and
Proxy Statement of Orion Network Systems, Inc. that is made a part of the
Registration Statement (Form S-4 No. 333-46407) and related Prospectus of
Loral Space & Communications Ltd. dated February 17, 1998
/s/ Ernst & Young LLP
Washington D.C.
March 18, 1998
<TABLE> <S> <C>
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(Replace this text with the legend)
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<NAME> Orion Network Systems, Inc.
<MULTIPLIER> 1,000
<CURRENCY> US Dollar
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 70,009
<SECURITIES> 0
<RECEIVABLES> 11,781
<ALLOWANCES> 734
<INVENTORY> 0
<CURRENT-ASSETS> 138,700
<PP&E> 371,514
<DEPRECIATION> (77,080)
<TOTAL-ASSETS> 896,492
<CURRENT-LIABILITIES> 54,133
<BONDS> 0
0
76,734
<COMMON> 160
<OTHER-SE> (47,009)
<TOTAL-LIABILITY-AND-EQUITY> 896,492
<SALES> 4,455
<TOTAL-REVENUES> 72,741
<CGS> 1,824
<TOTAL-COSTS> 115,822
<OTHER-EXPENSES> 59,565
<LOSS-PROVISION> 1,022
<INTEREST-EXPENSE> 83,769
<INCOME-PRETAX> (105,740)
<INCOME-TAX> 0
<INCOME-CONTINUING> (105,740)
<DISCONTINUED> 0
<EXTRAORDINARY> (15,763)
<CHANGES> 0
<NET-INCOME> (105,740)
<EPS-PRIMARY> (9.60)
<EPS-DILUTED> (9.60)
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