SCHEDULE 14A INFORMATION
Proxy Statement/Prospectus Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [X]
Check the appropriate box:
[ ] Preliminary Proxy Statement/Prospectus
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(c)(2))
[X] Definitive Proxy Statement/Prospectus
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
ORION NEWCO SERVICES, INC.
(Name of Registrant as Specified In Its Charter)
ORION NETWORK SYSTEMS, INC.
(Name of Person(s) Filing Proxy Statement/Prospectus if other than the
Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2), or
Item 22(a) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
(i) Common Stock, par value $.01 per share, (ii) Series A 8% Cumulative
Redeemable Convertible Preferred Stock and (iii) Series B 8%
Cumulative Redeemable Convertible Preferred Stock
2) Aggregate number of securities to which transaction applies:
(i) 11,097,758 shares of Common Stock, (ii) 13,871 shares of Series A
Preferred Stock and (iii) 4,298 shares of Series B Preferred Stock
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11:
(i) $14.50 per share of Common Stock (average of high and low trading
price on 1/9/97), (ii) $15,820,460 (book value of Series A
Preferred Stock as of 9/30/96) and (iii) $4,718,526 (book value of
Series B Preferred Stock as of 9/30/96)
4) Proposed maximum aggregate value of transaction:
$181,456,477
5) Total fee paid:
$29,346
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount previously paid:
$54,996
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2) Form, Schedule or Registration Statement No.:
Form S-4 Registration Statement No. 333-19795
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3) Filing Party:
Orion Newco Services, Inc.
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4) Date Filed:
January 15, 1996
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<PAGE>
ORION NETWORK SYSTEMS, INC.
2440 RESEARCH BOULEVARD, SUITE 400
ROCKVILLE, MARYLAND 20850
January 15, 1997
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders (the
"Special Meeting") of Orion Network Systems, Inc. ("Orion" or the "Company"), to
be held on Thursday, January 30, 1997 at 9:00 a.m., local time, at 2440 Research
Boulevard, Suite 400, Rockville, Maryland.
As described in the accompanying Proxy Statement/Prospectus, at the Special
Meeting, Orion stockholders will be asked to consider and act upon the following
proposals:
(1) Ratification of the Agreement and Plan of Merger (the "Merger
Agreement"), dated as of January 8, 1997, among Orion, Orion Newco Services,
Inc., a newly formed Delaware corporation with no significant assets or
liabilities and a wholly owned subsidiary of Orion ("Orion Newco"), and Orion
Merger Company, Inc., a newly formed Delaware corporation and a wholly owned
subsidiary of Orion Newco ("Orion Merger Subsidiary"), and the transactions
contemplated thereby.
(2) Approval and adoption of the Section 351 Exchange Agreement and Plan of
Conversion (the "Exchange Agreement"), dated as of June 1996, as amended, among
Orion, Orion Satellite Corporation, a Delaware corporation ("OrionSat") that is
a wholly owned subsidiary of Orion and the sole general partner of International
Private Satellite Partners, L.P., a Delaware limited partnership ("Orion
Atlantic"), and each of the existing limited partners of Orion Atlantic other
than Orion (the "Exchanging Partners," and together with Orion, the "Limited
Partners") and the transactions contemplated thereby.
(3) Approval of the transactions (the "Debenture Investments") contemplated
by the Debenture Purchase Agreement (the "Debenture Agreement"), dated as of
January 13, 1997, among Orion, Orion Newco and each of British Aerospace
Holdings, Inc. (collectively, with British Aerospace Public Limited Company and
its affiliates, "British Aerospace") and Matra Marconi Space UK Limited ("Matra
Marconi Space").
The refinancing of $210 million of existing indebtedness of Orion Atlantic to
release the existing commitments of the Limited Partners and their affiliates
supporting such indebtedness is a condition to the Merger, the Exchange and the
Debenture Investments, as discussed below.
Merger. Pursuant to the Merger Agreement, Orion Merger Subsidiary will be
merged with and into Orion in a tax-free reorganization (the "Merger"). Orion
will be the surviving corporation in the Merger and will become a wholly owned
subsidiary of Orion Newco. In the Merger, each share of Orion's common stock,
par value $.01 per share (the "Orion Common Stock"), Orion's Series A 8%
Cumulative Redeemable Convertible Preferred Stock (the "Orion Series A Preferred
Stock") and Series B 8% Cumulative Redeemable Convertible Preferred Stock (the
"Orion Series B Preferred Stock," and together with the Orion Series A Preferred
Stock, the "Orion Senior Preferred Stock") will be converted, without any action
on the part of the holder thereof, into the right to receive one share of Orion
Newco's common stock, par value $.01 per share (the "Orion Newco Common Stock"),
Orion Newco's Series A 8% Cumulative Redeemable Convertible Preferred Stock (the
"Orion Newco Series A Preferred Stock") and Orion Newco's Series B 8% Cumulative
Redeemable Convertible Preferred Stock (the "Orion Newco Series B Preferred
Stock," and together with the Orion Newco Series A Preferred Stock, the "Orion
Newco Senior Preferred Stock"), respectively. It is expected that approximately
10,974,121 shares of Orion Newco Common Stock, 13,871 shares of Orion Newco
Series A Preferred Stock and 4,298 shares of Orion Newco Series B Preferred
Stock will be issued to the stockholders of Orion in the Merger in exchange for
their shares of Orion Common Stock, Orion Series A Preferred Stock and Orion
Series B Preferred Stock, respectively. Such shares of Orion Newco Series A
Preferred
<PAGE>
Stock and Orion Newco Series B Preferred Stock will be convertible as of the
issuance date into an aggregate of approximately 2,053,255 shares of Orion Newco
Common Stock, or approximately 7.9% of the shares of Orion Newco Common Stock
outstanding on a fully diluted basis, assuming a closing of the Merger as of
January 30, 1997.
Orion Newco will have, after the Merger, a certificate of incorporation,
bylaws, management and capital structure (before the issuance of Orion Newco
Series C Preferred Stock described below) substantially identical in all
material respects to those of Orion. As a result of the Merger, (i) Orion Newco
will become a public holding company owning all of the capital stock of Orion,
which will continue its business and operations, and (ii) the stockholders of
Orion Newco will have substantially the same securities and rights in Orion
Newco that they had in Orion, except that their percentage ownership of Orion
Newco will be diluted as a result of the Exchange (as defined below). Approval
of the Merger Agreement also will constitute the approval of the specific terms
therein and the transactions contemplated thereunder, including the Merger.
Prior to voting on the Merger, Orion stockholders should review carefully the
Merger Agreement, a copy of which is attached to the accompanying Proxy
Statement/Prospectus as Attachment A.
Exchange. Pursuant to the Exchange Agreement, Orion has agreed, among other
things, to have Orion Newco issue shares of Orion Newco's Series C 6% Cumulative
Redeemable Convertible Preferred Stock (the "Orion Newco Series C Preferred
Stock") for the Exchanging Partners' limited partnership interests in Orion
Atlantic and other rights relating thereto (the "Exchange" and together with the
Merger, the "Merger Transactions"). As a result of the Exchange, which will be
consummated concurrently with the Merger, Orion Newco will become the owner of
all the partnership interests in Orion Atlantic (through Orion Newco and Orion
as the sole limited partners and OrionSat as the sole general partner of Orion
Atlantic). In addition, Orion Newco will acquire certain rights currently held
by the Exchanging Partners, including the Exchanging Partners' rights to receive
repayment of various advances (aggregating approximately $37.5 million at
September 30, 1996) made to Orion Atlantic. The 121,988 shares of Orion Newco
Series C Preferred Stock expected to be issued in the Exchange will be
convertible as of the issuance date into approximately 6,970,740 shares of Orion
Newco Common Stock, or approximately 27% of the shares of Orion Newco Common
Stock outstanding on a fully diluted basis, assuming a closing of the Merger
Transactions as of January 30, 1997 (the number of shares could increase if the
closing occurs after that date). As a result of the Exchange, certain of the
Exchanging Partners will be principal stockholders of Orion Newco. Prior to
voting on the Exchange, Orion stockholders should review carefully the Exchange
Agreement, a copy of which is attached to the accompanying Proxy
Statement/Prospectus as Attachment B.
Debenture Investments. Pursuant to the Debenture Agreement, Orion Newco has
agreed, among other things, to issue to British Aerospace and Matra Marconi
Space $50 million and $10 million, respectively, of convertible junior
subordinated debentures (the "Debentures"). The Debentures will mature 15 years
following the date of issuance and will bear interest at rate of 8.75% per annum
to be paid semi-annually in arrears solely in Orion Newco Common Stock at prices
of between $10.21 and $14.00 per share. The Debentures to be issued to British
Aerospace and Matra Marconi Space will be convertible as of the issuance date
into approximately 3,571,429 and 714,286 shares of Orion Newco Common Stock,
respectively, or approximately 13.8% and 2.8% of the shares of Orion Newco
Common Stock outstanding on a fully diluted basis, assuming a closing of the
Debenture Investments as of January 30, 1997. As a result of the Debenture
Investments (and the other transactions, including the Exchange, in which
British Aerospace and an affiliate of Matra Marconi Space are acquiring
securities of Orion Newco), British Aerospace will be the largest stockholder of
Orion Newco on both an actual and a fully diluted basis and Matra Marconi Space
will be one of the principal stockholders of Orion Newco. The consummation of
the Debenture Investments is a condition to the Exchange.
Reasons for Merger Transactions and Debenture Investments. Orion's principal
objective for the Merger Transactions is to simplify Orion's organizational
structure and improve its access to the capital markets. Orion believes that the
Merger Transactions will enable it to: (i) consolidate outside investor
ownership at the Orion Newco level, (ii) improve the speed and efficiency of its
decision making, (iii) provide Orion Newco with 100% ownership of all of its
material subsidiaries, (iv) allow Orion
<PAGE>
Newco to pursue independently its business plans and financings for all of its
satellites, (v) eliminate (in exchange for Orion Newco stock) approximately
$37.5 million of obligations Orion Atlantic owes to the Exchanging Partners and
(vi) increase Orion's overall market capitalization. Orion's principal reason
for the issuance of $50 million of Debentures to British Aerospace is to raise
additional capital for initial payments with respect to the Orion 2 satellite,
of which approximately $49.4 million of payments are due during 1997. The sale
of $10 million of Debentures to Matra Marconi Space will involve a re-investment
by Matra Marconi Space of $10 million of the $13 million of satellite incentive
payments Matra Marconi Space will receive as manufacturer of the Orion 1
satellite upon consummation of the Notes Offering described below.
Access to the capital markets is necessary for Orion to achieve its business
plan to construct and launch two additional satellites, Orion 2 (with coverage
of Europe, Russia, the eastern United States and Latin America) and Orion 3
(with coverage of the Asia Pacific region). With this plan in mind, Orion and
Orion Newco have been pursuing and will continue to pursue the following
transactions:
(i) Notes Offering: a financing consisting of units of senior notes and
common stock warrants (the "Notes Offering") in the amount of approximately
$347 million with expected gross proceeds of approximately $275 million,
excluding approximately $72 million of overfunding of interest due on such
notes. The principal purpose of the Notes Offering is to refinance the
indebtedness of Orion Atlantic outstanding under the existing Credit
Agreement (together with any related documents and agreements, the "Orion 1
Credit Facility") dated December 6, 1991 among Orion Atlantic, the Banks
named therein and Chase Manhattan Bank (National Association), as Agent, and
release the existing commitments of the Limited Partners and their
affiliates under the Communication Satellite Capacity Agreements, the
Contingent Communications Satellite Capacity Agreements and various
guarantees or other commitments supporting the Orion 1 Credit Facility. Such
release is a condition to the Exchange.
(ii) Orion 2 Construction Contract: a satellite procurement contract with
Matra Marconi Space for Orion 2, under which the manufacturer is to proceed
with construction based upon initial payments of $25 million and further
payments through December 1997 limited to approximately $25 million. Orion
expects to commence the construction of Orion 2 immediately following
completion of the Notes Offering.
(iii) Orion 3 Construction Contract: a satellite procurement contract
with Hughes Space and Communications International, Inc. for Orion 3, under
which the manufacturer is to proceed with construction based upon initial
payments through January 31, 1997 of approximately $15 million, with further
payments through March 31, 1998 being limited to $35 million, payable in
approximately equal quarterly installments. The majority of the amounts due
under the contract are payable in the second and third quarters of 1998.
Orion commenced construction of Orion 3 in mid-December 1996 under an
authorization to proceed, and expects to enter into a definitive satellite
contract in January 1997.
In addition to the Merger, the Notes Offering and the Debenture Investments,
the Exchange is indirectly conditioned on, among other things, the acquisition
by Orion of the only outstanding minority interest in Asia Pacific Space and
Communications, Ltd. from British Aerospace for approximately 86,000 shares of
Orion Common Stock, which has occurred or is in the process of occurring. See
information under the captions "Pro Forma Condensed Consolidated Financial
Statements" and "The Merger, the Exchange and the Debenture Investments --
Reasons for the Merger Transactions and the Debenture Investments" in the
accompanying Proxy Statement/Prospectus.
The accompanying Proxy Statement/Prospectus provides a detailed description
of the Merger Transactions and the Debenture Investments, including Orion's
reasons for entering into the Merger Transactions and the Debenture Investments
and the effect of the transactions on Orion and Orion Newco and their
stockholders, and of the business and financial condition of Orion and Orion
Newco. I urge you to read the accompanying Proxy Statement/Prospectus carefully.
The matters to be considered and voted upon at the Special Meeting are of
great importance to your investment and the future of Orion. Your Board of
Directors has carefully reviewed and considered the terms and conditions of the
Merger Transactions and the Debenture Investments and recom-
<PAGE>
mended unanimously (with the British Aerospace Board representative recusing
himself) that stockholders vote for ratification of the Merger Agreement and the
transactions contemplated thereby, for approval and adoption of the Exchange
Agreement and the transactions contemplated thereby, and for approval of the
Debenture Investments. Your Board of Directors also has received the opinion of
its financial advisor, Salomon Brothers Inc, to the effect that the
consideration to be paid by Orion in connection with the Exchange is fair from a
financial point of view to Orion. A copy of that opinion is attached to the
accompanying Proxy Statement/Prospectus as Attachment D.
Each proposal to be considered at the Special Meeting will be voted upon
separately by the Orion stockholders. However, failure by the Orion stockholders
to approve the Exchange Agreement will result in termination of the Merger
Agreement by Orion, Orion Newco and Orion Merger Subsidiary. The Merger is a
condition to the Exchange and is being proposed to enable the Exchange to occur.
If the Merger were to cease to be necessary to consummate the Exchange (which is
not expected to occur), the Board of Directors would cause Orion to proceed with
the Exchange but not the Merger. In such event, Orion (instead of Orion Newco)
would issue shares of Series C 6% Cumulative Redeemable Convertible Preferred
Stock for the Exchanging Partners' limited partnership interests in Orion
Atlantic and other rights relating thereto and Orion (instead of Orion Newco)
would issue the Debentures, but all other aspects of these transactions would
remain the same. Since the rights of stockholders of Orion Newco will be
substantially the same as the rights of stockholders of Orion, Orion believes
that consummation of the Exchange would have the same effect on stockholders
whether or not the Merger occurs. The Merger and the Exchange are conditions to
the Debenture Investments, and waivers of these conditions are not expected to
occur. Repayment of the Orion 1 Credit Facility is a condition to the Exchange
and the Debenture Investments, and this condition is not expected to be waived.
Regardless of your plans for attending in person, it is important that your
shares be represented and voted at the Special Meeting. Accordingly, you are
requested to complete, sign, date and return the enclosed proxy card in the
enclosed postage paid envelope. Signing this proxy will not prevent you from
voting in person should you be able to attend the Special Meeting, but will
assure that your vote is counted if, for any reason, you are unable to attend.
We hope that you can attend the Special Meeting of Stockholders. Your
interest and support in the affairs of Orion Network Systems, Inc. are
appreciated. Sincerely,
W. NEIL BAUER
President and Chief Executive Officer
Rockville, Maryland
January 15, 1997
<PAGE>
ORION NETWORK SYSTEMS, INC.
2440 RESEARCH BOULEVARD, SUITE 400
ROCKVILLE, MARYLAND 20850
(301) 258-8101
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 30, 1997
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the "Special
Meeting") of Orion Network Systems, Inc. ("Orion") will be held on Thursday,
January 30, 1997 at 9:00 a.m., local time, at 2440 Research Boulevard, Suite
400, Rockville, Maryland, to consider and act upon the following proposals:
1. Ratification of the Agreement and Plan of Merger (the "Merger
Agreement"), dated as of January 8, 1997, among Orion, Orion Newco Services,
Inc., a newly formed Delaware corporation with no significant assets or
liabilities and a wholly owned subsidiary of Orion ("Orion Newco"), and
Orion Merger Company, Inc., a newly formed Delaware corporation and a wholly
owned subsidiary of Orion Newco ("Orion Merger Subsidiary"), and the
transactions contemplated thereby. Pursuant to the Merger Agreement, which
was entered into by Orion under Section 251(g) of the Delaware General
Corporation Law, Orion Merger Subsidiary will be merged with and into Orion
(the "Merger"), Orion will become a wholly owned subsidiary of Orion Newco
and each share of Orion capital stock issued and outstanding at the
effective time of the Merger will be converted into the right to receive one
share of substantially identical Orion Newco capital stock.
2. Approval and adoption of the Section 351 Exchange Agreement and Plan
of Conversion (the "Exchange Agreement"), dated as of June 1996, as amended,
among Orion, Orion Satellite Corporation, a Delaware corporation that is a
wholly owned subsidiary of Orion and the sole general partner of
International Private Satellite Partners, L.P., a Delaware limited
partnership ("Orion Atlantic"), and each of the existing limited partners of
Orion Atlantic other than Orion (the "Exchanging Partners"), and the
transactions contemplated thereby. Pursuant to the Exchange Agreement, Orion
Newco will issue shares of Orion Newco's Series C 6% Cumulative Redeemable
Convertible Preferred Stock for the Exchanging Partners' limited partnership
interests in Orion Atlantic and other rights relating thereto (the
"Exchange").
3. Approval of the transactions (the "Debenture Investments")
contemplated by the Debenture Purchase Agreement (the "Debenture
Agreement"), dated as of January 13, 1997, among Orion, Orion Newco and each
of British Aerospace Holdings, Inc. (collectively, with British Aerospace
Public Limited Company and its affiliates, "British Aerospace") and Matra
Marconi Space UK Limited ("Matra Marconi Space"). Pursuant to the Debenture
Agreement, Orion Newco will issue to British Aerospace and Matra Marconi
Space $50 million and $10 million, respectively, of convertible junior
subordinated debentures, convertible as of the issuance date into
approximately 3,571,429 and 714,286 shares of Orion Newco common stock,
respectively, assuming a closing of the Debenture Investments as of January
30, 1997.
4. Transaction of such other business as may properly come before the
Special Meeting or any adjournments or postponement thereof.
The Board of Directors has carefully considered the terms of the Merger
Agreement, the Exchange Agreement and the Debenture Agreement and the respective
transactions contemplated thereby, and believes that the Merger, the Exchange
and the Debenture Investments are in the best interests of Orion and its
stockholders. The Board of Directors has unanimously approved (with the British
Aerospace Board representative recusing himself) the matters being submitted by
Orion for stockholder approval or ratification at the Special Meeting and
recommended that stockholders vote FOR ratification of the Merger Agreement and
the transactions contemplated thereby, FOR approval and adoption of the
<PAGE>
Exchange Agreement and the transactions contemplated thereby, and FOR approval
of the Debenture Investments. Orion anticipates that all members of the Board of
Directors who are Orion stockholders and companies they represent (who held, in
the aggregate, approximately 38% of Orion's voting stock outstanding as of
September 30, 1996) will enter into written agreements to vote for each of the
foregoing proposals to be considered at the Special Meeting.
The Board of Directors has fixed the close of business on December 23, 1996
as the record date for the determination of stockholders entitled to notice of
and to vote at the Special Meeting. Only holders of Orion common stock and Orion
preferred stock of record at the close of business on that date will be entitled
to notice of and to vote at the Special Meeting or any adjournment thereof,
unless a new record date is fixed for any adjourned meeting. A list of Orion's
stockholders entitled to vote at the Special Meeting will be open to the
examination of any stockholder for any purposes germane to the Special Meeting
during ordinary business hours for a period of ten days before the Special
Meeting at Orion's offices.
By Order of the Board of Directors,
RICHARD H. SHAY
Secretary
Rockville, Maryland
January 15, 1997
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN
THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES. YOU MAY, IF YOU WISH, REVOKE YOUR PROXY AT ANY TIME
PRIOR TO THE TIME IT IS VOTED.
<PAGE>
TABLE OF CONTENTS OF
ORION NETWORK SYSTEMS, INC. PROXY STATEMENT/
ORION NEWCO SERVICES, INC. PROSEPCTUS
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AVAILABLE INFORMATION.............................................................................................. 6
SUMMARY............................................................................................................ 7
RISK FACTORS....................................................................................................... 20
Risks Relating to Merger, Exchange and Debenture Investments...................................................... 20
Merger, Exchange and Debenture Investments Dependent on Orion 1 Credit Facility Refinancing...................... 20
Certain Terms of Notes Offering Not Yet Determined............................................................... 20
Risks in Implementation of Merger, Exchange and Debenture Investments............................................ 20
Substantial Change in Ownership of Stock......................................................................... 21
Risks Relating to Holding Company Structure...................................................................... 21
Risks Relating to Orion Newco Series C Preferred Stock and Debentures............................................ 21
Risks Relating to Orion's Business................................................................................ 22
Limited Operations; History of Losses and Negative EBITDA; Expectation of Future Losses.......................... 22
Need for Substantial Additional Capital.......................................................................... 22
Substantial Leverage; Secured Indebtedness....................................................................... 23
Risks of Satellite Loss or Reduced Performance................................................................... 24
Launch of Orion 2 and Orion 3 Subject to Significant Uncertainties............................................... 25
Risks Relating to Potential Lack of Market Acceptance and Demand; Ground Operations.............................. 26
Risks Concerning Ability to Manage Growth........................................................................ 26
Potential Adverse Effects of Competition......................................................................... 26
Approvals Needed; Regulation of Industry......................................................................... 27
Uncertainties Relating to Backlog................................................................................ 28
Technological Changes............................................................................................ 29
Risks of Conducting International Business....................................................................... 29
Dependence of Orion on Key Personnel............................................................................. 29
Risks Relating to Capital Stock .................................................................................. 29
Control of Orion Newco by Principal Stockholders................................................................. 29
Risks Relating to Orion Senior Preferred Stock................................................................... 29
Limitations on Dividends on Orion and Orion Newco Common Stock................................................... 30
Potential Adverse Effect of Shares Eligible for Future Sale...................................................... 30
Anti-Takeover and Other Provisions of the Certificate of Incorporation........................................... 31
THE SPECIAL MEETING................................................................................................ 32
Introduction...................................................................................................... 32
Voting Rights and Related Matters................................................................................. 32
Votes Required.................................................................................................... 32
No Dissenters' Rights............................................................................................. 33
Proxies........................................................................................................... 33
THE MERGER, THE EXCHANGE AND THE DEBENTURE INVESTMENTS............................................................. 34
Background of the Merger Transactions and the Debenture Investments............................................... 34
Reasons for the Merger Transactions and the Debenture Investments................................................. 37
The Merger Agreement.............................................................................................. 38
The Exchange Agreement............................................................................................ 40
Description of the Orion Newco Series C Preferred Stock........................................................... 46
Registration Rights............................................................................................... 48
Certain Transfer Restrictions..................................................................................... 49
The Debenture Investments......................................................................................... 50
Corporate Structure After the Transactions........................................................................ 53
</TABLE>
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Effect of the Exchange on the Capital Structure of Orion Newco.................................................... 54
Recommendation of the Board of Directors of Orion................................................................. 54
Opinion of Orion's Financial Advisor.............................................................................. 54
Approvals......................................................................................................... 58
Fees and Expenses................................................................................................. 58
Certain Federal Income Tax Consequences........................................................................... 58
Security Ownership of Certain Beneficial Owners Prior to and Following the Transactions........................... 61
THE RELATED TRANSACTIONS........................................................................................... 66
The Notes Offering/Orion 1 Credit Facility Refinancing............................................................ 66
OAP Acquisition................................................................................................... 67
INFORMATION ABOUT ORION NEWCO...................................................................................... 68
DESCRIPTION OF ORION NEWCO CAPITAL STOCK........................................................................... 68
Orion Newco Common Stock.......................................................................................... 68
Orion Newco Preferred Stock....................................................................................... 68
Orion Newco Senior Preferred Stock................................................................................ 69
Orion Newco Series C Preferred Stock.............................................................................. 70
Warrants and Options.............................................................................................. 70
Registration Rights............................................................................................... 71
Certain Anti-Takeover Effects..................................................................................... 71
Listing........................................................................................................... 73
Transfer Agent.................................................................................................... 73
ORION NEWCO SHARES ELIGIBLE FOR FUTURE SALE........................................................................ 73
COMPARATIVE RIGHTS OF ORION STOCKHOLDERS AND ORION NEWCO STOCKHOLDERS.............................................. 74
INFORMATION ABOUT ORION'S BUSINESS................................................................................. 75
Overview.......................................................................................................... 75
The Orion Satellite System........................................................................................ 75
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The Orion Strategy................................................................................................. 76
Industry Overview................................................................................................. 78
Data Networking................................................................................................... 79
Orion Market Opportunity.......................................................................................... 80
Orion Services.................................................................................................... 82
Private Communications Network Services.......................................................................... 82
Internet Backbone and Access Services............................................................................ 83
Video Distribution and Other Satellite Transmission Services..................................................... 84
Features and Benefits............................................................................................ 85
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Customers and Backlog............................................................................................. 86
Sales and Marketing............................................................................................... 87
Network Operations; Local Ground Operators........................................................................ 89
Migration Plan for New Markets.................................................................................... 90
Implementation of the Orion Satellite System...................................................................... 91
Orion 1.......................................................................................................... 91
Orion 2.......................................................................................................... 93
Orion 3.......................................................................................................... 94
Orbital Slots..................................................................................................... 96
Insurance......................................................................................................... 98
Competition....................................................................................................... 99
Service Providers................................................................................................ 99
Satellite Capacity............................................................................................... 99
Terrestrial Capacity............................................................................................. 101
</TABLE>
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Regulation........................................................................................................ 101
Regulatory Overview.............................................................................................. 101
Authority to Construct, Launch and Operate Satellites............................................................ 102
Consultation with INTELSAT and EUTELSAT.......................................................................... 102
International Telecommunication Union............................................................................ 102
United States Regulatory Restrictions............................................................................ 103
International Regulation......................................................................................... 104
Human Resources................................................................................................... 104
Legal Proceedings................................................................................................. 104
MANAGEMENT OF ORION AND ORION NEWCO................................................................................ 106
Directors and Executive Officers.................................................................................. 106
Background of Directors and Executive Officers.................................................................... 106
Committees of the Board of Directors.............................................................................. 109
Limits on Liability; Indemnification.............................................................................. 110
Summary Compensation Table........................................................................................ 111
Option Grants in Last Fiscal Year................................................................................. 111
Option Exercises in Last Fiscal Year and Year-end Option Values................................................... 111
Compensation of Directors......................................................................................... 112
Employment Agreements and Termination of Employment and Change in Control Arrangements............................ 112
Compensation Committee Interlocks and Insider Participation....................................................... 112
Stock Option Plans................................................................................................ 112
Other Employee Benefit Plans...................................................................................... 114
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.............................................................. 117
SELECTED CONSOLIDATED FINANCIAL AND OPERATIONAL DATA OF ORION...................................................... 124
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
ORION............................................................................................................. 126
General........................................................................................................... 126
Overview.......................................................................................................... 126
Results of Operations............................................................................................. 127
Liquidity and Capital Resources................................................................................... 130
Taxes............................................................................................................. 132
Effect of Inflation............................................................................................... 133
Effect of Recently Issued Financial Accounting Standards.......................................................... 133
PRICE RANGE OF ORION COMMON STOCK AND DIVIDEND POLICY.............................................................. 134
CERTAIN TRANSACTIONS............................................................................................... 135
FORWARD-LOOKING STATEMENTS......................................................................................... 137
OTHER MATTERS...................................................................................................... 138
LEGAL MATTERS...................................................................................................... 138
EXPERTS............................................................................................................ 138
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF ORION NETWORK SYSTEMS, INC. ......................................... F-1
GLOSSARY........................................................................................................... G-1
ATTACHMENTS
ATTACHMENT A -- AGREEMENT AND PLAN OF MERGER
ATTACHMENT B -- SECTION 351 EXCHANGE AGREEMENT AND PLAN OF CONVERSION
ATTACHMENT C -- FORM OF CERTIFICATE OF DESIGNATIONS FOR ORION NEWCO SERIES C PREFERRED STOCK
ATTACHMENT D -- FAIRNESS OPINION OF SALOMON BROTHERS INC
</TABLE>
iii
<PAGE>
ORION NETWORK SYSTEMS, INC.
2440 RESEARCH BOULEVARD, SUITE 400
ROCKVILLE, MARYLAND 20850
ORION NEWCO SERVICES, INC.
2440 RESEARCH BOULEVARD, SUITE 400
ROCKVILLE, MARYLAND 20850
ORION NETWORK SYSTEMS, INC. PROXY STATEMENT/
ORION NEWCO SERVICES, INC. PROSPECTUS
SPECIAL MEETING OF STOCKHOLDERS
OF ORION NETWORK SYSTEMS, INC.
TO BE HELD ON JANUARY 30, 1997
This Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") is
furnished to stockholders of Orion Network Systems, Inc. ("Orion" or the
"Company") in connection with the solicitation by the Board of Directors of
Orion of proxies to be used at a special meeting of stockholders of Orion (the
"Special Meeting") and at any adjournments thereof. The Special Meeting will be
held on Thursday, January 30, 1997 at 9:00 a.m., local time, at 2440 Research
Boulevard, Suite 400, Rockville, Maryland. This Proxy Statement/Prospectus and
form of proxy are first being sent or given to stockholders on or about January
15, 1997.
At the Special Meeting, Orion stockholders will be asked to consider and act
upon the following proposals:
(1) Ratification of the Agreement and Plan of Merger (the "Merger
Agreement"), dated as of January 8, 1997, among Orion, Orion Newco Services,
Inc., a newly formed Delaware corporation with no significant assets or
liabilities and a wholly owned subsidiary of Orion ("Orion Newco"), and Orion
Merger Company, Inc., a newly formed Delaware corporation and a wholly owned
subsidiary of Orion Newco ("Orion Merger Subsidiary"), and the transactions
contemplated thereby.
(2) Approval and adoption of the Section 351 Exchange Agreement and Plan of
Conversion (the "Exchange Agreement"), dated as of June 1996, as amended, among
Orion, Orion Satellite Corporation, a Delaware corporation ("OrionSat") that is
a wholly owned subsidiary of Orion and the sole general partner of International
Private Satellite Partners, L.P., a Delaware limited partnership ("Orion
Atlantic"), and each of the existing limited partners of Orion Atlantic other
than Orion (the "Exchanging Partners," and together with Orion, the "Limited
Partners") and the transactions contemplated thereby.
(3) Approval of the transactions (the "Debenture Investments") contemplated
by the Debenture Purchase Agreement (the "Debenture Agreement"), dated as of
January 13, 1997, among Orion, Orion Newco and each of British Aerospace
Holdings, Inc. (collectively, with British Aerospace Public Limited Company and
its affiliates, "British Aerospace") and Matra Marconi Space UK Limited ("Matra
Marconi Space").
The refinancing of $210 million of existing indebtedness of Orion Atlantic to
release the existing commitments of the Limited Partners and their affiliates
supporting such indebtedness is a condition to the Merger, the Exchange and the
Debenture Investments, as discussed below.
Merger. Pursuant to the Merger Agreement, which was entered into by Orion
under Section 251(g) of the Delaware General Corporation Law, Orion Merger
Subsidiary will be merged with and into Orion in a tax-free reorganization (the
"Merger"). Orion will be the surviving corporation in the Merger and will become
a wholly owned subsidiary of Orion Newco. In the Merger, each share of Orion's
common stock, par value $.01 per share (the "Orion Common Stock"), Orion's
Series A 8% Cumulative Redeemable Convertible Preferred Stock (the "Orion Series
A Preferred Stock") and Series B 8% Cumulative Redeemable Convertible Preferred
Stock (the "Orion Series B Preferred Stock," and together with the Orion Series
A Preferred Stock, the "Orion Senior Preferred Stock") will be converted,
<PAGE>
without any action on the part of the holder thereof, into the right to receive
one share of Orion Newco's common stock, par value $.01 per share (the "Orion
Newco Common Stock"), Orion Newco's Series A 8% Cumulative Redeemable
Convertible Preferred Stock (the "Orion Newco Series A Preferred Stock") and
Orion Newco's Series B 8% Cumulative Redeemable Convertible Preferred Stock (the
"Orion Newco Series B Preferred Stock," and together with the Orion Newco Series
A Preferred Stock, the "Orion Newco Senior Preferred Stock"), respectively. It
is expected that approximately 10,974,121 shares of Orion Newco Common Stock,
13,871 shares of Orion Newco Series A Preferred Stock and 4,298 shares of Orion
Newco Series B Preferred Stock will be issued to the stockholders of Orion in
the Merger in exchange for their shares of Orion Common Stock, Orion Series A
Preferred Stock and Orion Series B Preferred Stock, respectively. Such shares of
Orion Newco Series A Preferred Stock and Orion Newco Series B Preferred Stock
will be convertible as of the issuance date into an aggregate of approximately
2,053,255 shares of Orion Newco Common Stock, or approximately 7.9% of the
shares of Orion Newco Common Stock outstanding on a fully diluted basis,
assuming a closing of the Merger as of January 30, 1997.
Orion Newco will have, after the Merger, a certificate of incorporation,
bylaws, management and capital structure (before the issuance of Orion Newco
Series C Preferred Stock described below) substantially identical in all
material respects to those of Orion. As a result of the Merger, (i) Orion Newco
will become a public holding company owning all of the capital stock of Orion,
which will continue its business and operations, and (ii) the stockholders of
Orion Newco will have substantially the same securities and rights in Orion
Newco that they had in Orion, except that their percentage ownership of Orion
Newco will be diluted as a result of the Exchange (as defined below). Approval
of the Merger Agreement also shall constitute the approval of the specific terms
therein and the transactions contemplated thereunder, including the Merger.
Prior to voting on the Merger, Orion stockholders should review carefully the
Merger Agreement, a copy of which is attached to this Proxy Statement/Prospectus
as Attachment A.
Exchange. Pursuant to the Exchange Agreement, Orion has agreed, among other
things, to have Orion Newco issue shares of Orion Newco's Series C 6% Cumulative
Redeemable Convertible Preferred Stock (the "Orion Newco Series C Preferred
Stock") for the Exchanging Partners' limited partnership interests in Orion
Atlantic and other rights relating thereto (the "Exchange" and together with the
Merger, the "Merger Transactions"). As a result of the Exchange, which will be
consummated concurrently with the Merger, Orion Newco will become the owner of
all the partnership interests in Orion Atlantic (through Orion Newco and Orion
as the sole limited partners and OrionSat as the sole general partner of Orion
Atlantic). In addition, Orion Newco will acquire certain rights currently held
by the Exchanging Partners, including the Exchanging Partners' rights to receive
repayment of various advances (aggregating approximately $37.5 million at
September 30, 1996) made to Orion Atlantic. The approximately 121,988 shares of
Orion Newco Series C Preferred Stock expected to be issued in the Exchange will
be convertible as of the issuance date into approximately 6,970,740 shares of
Orion Newco Common Stock, or approximately 27% of the shares of Orion Newco
Common Stock outstanding on a fully diluted basis, assuming a closing of the
Merger Transactions as of January 30, 1997 (the number of shares could increase
if the closing occurs after that date). As a result of the Exchange, certain of
the Exchanging Partners will be principal stockholders of Orion Newco. Prior to
voting on the Exchange, Orion stockholders should review carefully the Exchange
Agreement, a copy of which is attached to this Proxy Statement/Prospectus as
Attachment B.
Debenture Investments. Pursuant to the Debenture Agreement, Orion Newco has
agreed, among other things, to issue to British Aerospace and Matra Marconi
Space $50 million and $10 million, respectively, of convertible junior
subordinated debentures (the "Debentures"). The Debentures will mature 15 years
following the date of issuance and will bear interest at a rate of 8.75% per
annum to be paid semi-annually in arrears solely in Orion Newco Common Stock at
prices of between $10.21 and $14.00 per share. The Debentures to be issued to
British Aerospace and Matra Marconi Space will be convertible as of the issuance
date into approximately 3,571,429 and 714,286 shares of Orion Newco Common
Stock, respectively, or approximately 13.8% and 2.8% of the shares of Orion
Newco Common Stock outstanding on a fully diluted basis, assuming a closing of
the Debenture Investments as of January 30, 1997. As a result of the Debenture
Investments (and the other transactions, including the Ex-
2
<PAGE>
change, in which British Aerospace and an affiliate of Matra Marconi Space are
acquiring securities of Orion Newco), British Aerospace will be the largest
stockholder of Orion Newco on both an actual and a fully diluted basis and Matra
Marconi Space will be one of the principal stockholders of Orion Newco. The
consummation of the Debenture Investments is a condition to the Exchange.
Reasons for Merger Transactions and Debenture Investments. Orion's principal
objective for the Merger Transactions is to simplify Orion's organizational
structure and improve its access to the capital markets. Orion believes that the
Merger Transactions will enable it to: (i) consolidate outside investor
ownership at the Orion Newco level, (ii) improve the speed and efficiency of its
decision making, (iii) provide Orion Newco with 100% ownership of all of its
material subsidiaries, (iv) allow Orion Newco to pursue independently its
business plans and financings for all of its satellites, (v) eliminate (in
exchange for Orion Newco stock) approximately $37.5 million of obligations Orion
Atlantic owes to the Exchanging Partners and (vi) increase Orion's overall
market capitalization. Orion's principal reason for the issuance of $50 million
of Debentures to British Aerospace is to raise additional capital for initial
payments with respect to the Orion 2 satellite, of which approximately $49.4
million of payments are due during 1997. The sale of $10 million of Debentures
to Matra Marconi Space will involve a re-investment by Matra Marconi Space of
$10 million of the $13 million of satellite incentive payments Matra Marconi
Space will receive as manufacturer of the Orion 1 satellite upon consummation of
the Notes Offering described below.
Access to the capital markets is necessary for Orion to achieve its business
plan to construct and launch two additional satellites, Orion 2 (with coverage
of Europe, Russia, the eastern United States and Latin America) and Orion 3
(with coverage of the Asia Pacific region). With this plan in mind, Orion and
Orion Newco have been pursuing and will continue to pursue the following
transactions:
(i) Notes Offering: a financing consisting of units of senior notes (the
"Notes") and common stock warrants (the "Notes Offering") in the amount of
approximately $347 million with expected gross proceeds of approximately $275
million, excluding approximately $72 million of overfunding of interest due on
such notes. The principal purpose of the Notes Offering is to refinance (the
"Orion 1 Credit Refinancing") the indebtedness of Orion Atlantic outstanding
under the existing Credit Agreement (together with any related documents and
agreements, the "Orion 1 Credit Facility") dated December 6, 1991 among Orion
Atlantic, the Banks named therein (the "Banks") and Chase Manhattan Bank
(National Association), as Agent ("Chase"), and release the existing commitments
of the Limited Partners and their affiliates under the Communication Satellite
Capacity Agreements, the Contingent Communications Satellite Capacity Agreements
and various guarantees or other commitments supporting the Orion 1 Credit
Facility (collectively, the "Orion 1 Credit Facility Support"). Such release is
a condition to the Exchange.
(ii) Orion 2 Construction Contract: a satellite procurement contract with
Matra Marconi Space for Orion 2 (the "Orion 2 Satellite Contract"), under which
the manufacturer is to proceed with construction based upon initial payments of
$25 million and further payments through December 1997 limited to approximately
$25 million. Orion expects to commence the construction of Orion 2 immediately
following completion of the Notes Offering.
(iii) Orion 3 Construction Contract: a satellite procurement contract with
Hughes Space for Orion 3 (the "Orion 3 Satellite Contract"), under which the
manufacturer is to proceed with construction based upon initial payments through
January 31, 1997 of approximately $15 million, with further payments through
March 31, 1998 being limited to $35 million, payable in approximately equal
quarterly installments. The majority of the amounts due under the contract are
payable in the second and third quarters of 1998. Orion commenced construction
of Orion 3 in mid-December 1996 under an authorization to proceed, and expects
to enter into a definitive satellite contract in January 1997.
In addition to the Merger, the Notes Offering and the Debenture Investments,
the Exchange is indirectly conditioned on, among other things, the acquisition
by Orion of the only outstanding minority interest in Asia Pacific Space and
Communcations, Ltd. ("Orion Asia Pacific") from British Aerospace for
approximately 86,000 shares of Orion Newco Common Stock (the "OAP Acquisition"),
which has occurred or is in the process of occurring. The pro forma financial
information included in this Proxy Statement/Prospectus gives effect to Merger,
the Exchange and the Debenture Investments, and the
3
<PAGE>
transactions on which they are conditioned (the Merger Transactions and the
Debenture Investments collectively with such other transactions, the
"Transactions"), including the Notes Offering, the OAP Acquisition, the
application of the net proceeds of the Notes Offering to effect the Orion 1
Credit Refinancing and repayment of amounts owed to STET, a former Limited
Partner, and the use of the proceeds of the Debenture Investments to make
initial payments on Orion 2 (initial payments on Orion 3 are to be made from
cash on hand). See "Pro Forma Condensed Consolidated Financial Statements," "The
Merger, the Exchange and the Debenture Investments -- Reasons for the Merger
Transactions and the Debenture Investments" and "The Related Transactions."
Each proposal to be considered at the Special Meeting will be voted upon
separately by the Orion stockholders. However, failure by the Orion stockholders
to approve the Exchange Agreement will result in termination of the Merger
Agreement by Orion, Orion Newco and Orion Merger Subsidiary. The Merger is a
condition to the Exchange and is being proposed to enable the Exchange to occur.
If the Merger were to cease to be necessary to consummate the Exchange (which is
not expected to occur), the Board of Directors would cause Orion to proceed with
the Exchange but not the Merger. In such event, Orion (instead of Orion Newco)
would issue shares of Series C 6% Cumulative Redeemable Convertible Preferred
Stock for the Exchanging Partners' limited partnership interests in Orion
Atlantic and other rights relating thereto and Orion (instead of Orion Newco)
would issue the Debentures, but all other aspects of these transactions would
remain the same. Since the rights of stockholders of Orion Newco will be
substantially the same as the rights of stockholders of Orion, Orion believes
that consummation of the Exchange would have the same effect on stockholders
whether or not the Merger occurs. The Merger and the Exchange are conditions to
the Debenture Investments, and waivers of these conditions are not expected to
occur. Repayment of the Orion 1 Credit Facility is a condition to the Exchange
and the Debenture Investments, and this condition is not expected to be waived.
This Proxy Statement/Prospectus provides a detailed description of the Merger
Transactions and the Debenture Investments, including Orion's reasons for
entering into the Merger Transactions and the Debenture Investments and the
effect of the Transactions on Orion and Orion Newco and their stockholders, and
of the business and financial condition of Orion and Orion Newco. This Proxy
Statement/Prospectus also constitutes the prospectus for the shares of Orion
Newco Common Stock, Orion Newco Series A Preferred Stock and Orion Newco Series
B Preferred Stock under the Securities Act of 1933, as amended (the "Securities
Act"). Orion Newco has filed a Registration Statement on Form S-4, of which this
Proxy Statement/Prospectus is a part, with the Securities and Exchange
Commission (the "Commission") with respect to the registration of such shares.
SEE "RISK FACTORS" BEGINNING ON PAGE 20 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY ORION STOCKHOLDERS.
4
<PAGE>
THE SECURITIES TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE BOARD OF DIRECTORS OF ORION HAS RECOMMENDED UNANIMOUSLY (WITH THE BRITISH
AEROSPACE BOARD REPRESENTATIVE RECUSING HIMSELF) THAT STOCKHOLDERS VOTE FOR
RATIFICATION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY,
FOR ADOPTION AND APPROVAL OF THE EXCHANGE AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY, AND FOR APPROVAL OF THE DEBENTURE INVESTMENTS, AS
DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS. ORION ANTICIPATES THAT ALL MEMBERS
OF ITS BOARD OF DIRECTORS WHO ARE ORION STOCKHOLDERS AND COMPANIES THEY
REPRESENT (WHO HELD, IN THE AGGREGATE, APPROXIMATELY 38% OF ORION'S VOTING STOCK
OUTSTANDING AS OF SEPTEMBER 30, 1996) WILL ENTER INTO WRITTEN AGREEMENTS TO VOTE
FOR EACH OF THE FOREGOING PROPOSALS TO BE CONSIDERED AT THE SPECIAL MEETING.
The date of this Proxy Statement/Prospectus is January 15, 1997.
5
<PAGE>
AVAILABLE INFORMATION
Orion is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). In accordance with the Exchange
Act, Orion files proxy statements, reports and other information with the
Commission. This filed material can be inspected and copied at the public
reference facilities maintained by the Commission in Washington, D.C. and at the
Regional Offices of the Commission at 7 World Trade Center, Suite 1300, New
York, NY 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained at prescribed
rates from the Public Reference Room of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. The Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including Orion and Orion Newco. The
Orion Common Stock is quoted on the Nasdaq National Market under the symbol
"ONSI," and such reports, proxy statements and other information concerning
Orion and Orion Newco also can be inspected at the offices of Nasdaq Operations,
1735 K Street, N.W., Washington, D.C. 20006.
Orion Newco has filed with the Commission a registration statement on Form
S-4 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the Orion
Newco Common Stock, Orion Newco Series A Preferred Stock and Orion Newco Series
B Preferred Stock. This Proxy Statement/Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement and
the exhibits filed therewith. Statements contained in this Proxy
Statement/Prospectus relating to the contents of any contract or other document
referred to herein are not necessarily complete, and in each instance reference
is made to the copy of such contact or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
6
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus and/or the Attachments hereto. Reference is made to,
and this Summary is qualified in its entirety by, the more detailed information
contained in this Proxy Statement/Prospectus and such Attachments. Except as
otherwise indicated, information herein concerning the number of shares of Orion
capital stock issued and outstanding prior to completion of the Transactions is
as of December 15, 1996. See "Glossary" beginning at page G-1 for definitions of
certain defined terms and certain technical terms used in this Proxy
Statement/Prospectus.
THE MERGER
The Merger Agreement........ The Agreement and Plan of Merger (the "Merger
Agreement"), dated as of January 8, 1997, among
Orion Network Systems, Inc. ("Orion"), Orion Newco
Services, Inc. ("Orion Newco") and Orion Merger
Company, Inc. ("Orion Merger Subsidiary"),
pursuant to which Orion Merger Subsidiary will be
merged with and into Orion in a tax-free
reorganization, and Orion will become a wholly
owned subsidiary of Orion Newco under Section
251(g) of the Delaware General Corporation Law
(the "Merger"). See "The Merger, the Exchange and
the Debenture Investments -- The Merger Agreement
-- Terms of the Merger Agreement."
Parties to the Merger....... Orion was organized as a Delaware corporation in
1982. Orion's principal executive offices are
located at 2440 Research Boulevard, Suite 400,
Rockville, Maryland 20850 and its telephone number
is (301) 258-8101. See "Information About Orion's
Business."
Orion Newco is a Delaware corporation and a wholly
owned subsidiary of Orion organized in 1996 by
Orion for the purpose of effecting the Merger and
the Exchange. Orion Newco's principal executive
offices are located at 2440 Research Boulevard,
Suite 400, Rockville, Maryland 20850 and its
telephone number is (301) 258-8101. After the
Merger, the certificate of incorporation, bylaws,
management and capital structure (before issuance
of the Orion Newco Series C Preferred Stock) of
Orion Newco will be substantially identical in all
material respects to those of Orion. Orion Newco
has no material assets and has not engaged in any
activities except in connection with the Merger.
See "Information About Orion Newco."
Orion Merger Subsidiary is a Delaware corporation
and a wholly owned subsidiary of Orion Newco
organized in 1996 by Orion for the purpose of
effecting the Merger. Orion Merger Subsidiary has
no material assets and has not engaged in any
activities except in connection with the Merger.
See "The Merger, the Exchange and the Debenture
Investments-- The Merger Agreement -- Terms of the
Merger Agreement."
The Merger -- Structure Orion Merger Subsidiary will be merged with and
into Orion and Orion will become a wholly owned
subsidiary of Orion Newco. Each share of Orion
Common Stock, Orion Series A Preferred Stock and
Orion Series B Preferred Stock outstanding
immediately prior to consummation of the Merger
will be converted,
7
<PAGE>
without any action on the part of the holder
thereof, into the right to receive one newly
issued share of Orion Newco Common Stock, Orion
Newco Series A Preferred Stock and Orion Newco
Series B Preferred Stock, respectively. The Merger
will become effective upon the filing of the
Delaware Merger Certificate (as defined in the
Merger Agreement) with the Delaware Secretary of
State, which is expected to occur following
ratification or approval of the Merger
Transactions and the Debenture Investments by the
requisite vote of the Orion stockholders and the
satisfaction or waiver of the other conditions set
forth in the Merger Agreement and the Exchange
Agreement. See "The Merger, the Exchange and the
Debenture Investments -- The Merger Agreement --
Terms of the Merger Agreement."
Conditions to Consummation of
the Merger................ The respective obligations of each party to effect
the Merger are subject to satisfaction or waiver
of certain conditions set forth in the Merger
Agreement, including, among others: (i) the
ratification of the Merger Agreement by Orion
stockholders, (ii) the receipt of all
authorizations, consents and approvals of any
Governmental Entity (as such term is used in the
Merger Agreement) necessary for consummation of
the Merger, (iii) the effectiveness of the
Registration Statement, (iv) the receipt of an
opinion relating to the tax treatment of the
Merger, (v) the continued accuracy of the
representations and warranties made by each party
in the Merger Agreement and (vi) consummation of
the Exchange concurrently with the Merger. See
"The Merger, the Exchange and the Debenture
Investments -- The Merger Agreement -- Conditions
to Obligations to Effect the Merger."
Board of Directors after the
Merger.................... As provided in the Merger Agreement, upon the
consummation of the Merger, the Board of Directors
of Orion Newco will consist of the current
directors of Orion. See "The Merger, the Exchange
and the Debenture Investments -- The Merger
Agreement -- Terms of the Merger Agreement."
Management after the Merger.. As provided in the Merger Agreement, upon the
consummation of the Merger, the management of
Orion Newco will consist of the current members of
Orion management. See "The Merger, the Exchange
and the Debenture Investments -- The Merger
Agreement -- Terms of the Merger Agreement."
Accounting Treatment........ The Merger will be accounted for as a
reorganization of entities under common control.
As a result, the assets and liabilities
transferred pursuant to the Merger will be
accounted for at historical cost in a manner
similar to a pooling of interests.
Regulatory Approval......... Orion is aware of no governmental approvals
required for consummation of the Merger, other
than compliance with federal securities laws and
state securities or "Blue Sky" laws.
Certain Federal Income Tax
Consequences of the Merger. In the opinion of Ernst & Young LLP, tax advisor
to Orion, Orion stockholders whose stock of Orion
is converted into the
8
<PAGE>
right to receive stock of Orion Newco pursuant to
the Merger (the "Transferors") will qualify for
tax-free treatment pursuant to Sections 354 and
368 of the Internal Revenue Code of 1986, as
amended (the "Code"), assuming certain
requirements, such as continuity of interest, are
met. Provided the conversion qualifies for
tax-free treatment, each Transferor's tax basis in
the shares of Orion Newco capital stock it
receives will be equal to its tax basis in the
Orion stock it transferred to Orion Newco. All
Orion stockholders should consult their own tax
advisors concerning the tax consequences of the
Merger. See "The Merger, the Exchange and the
Debenture Investments -- Certain Federal Income
Tax Consequences."
Consequences of the Merger... Upon the consummation of the Merger, all shares of
Orion Common Stock and Orion Senior Preferred
Stock shall no longer be outstanding and shall
automatically be retired, and each holder of a
certificate representing any shares of Orion
Common Stock and Orion Senior Preferred Stock
shall cease to have any rights with respect
thereto, except the right to receive the shares of
Orion Newco Common Stock and Orion Newco Senior
Preferred Stock to be issued in exchange therefor.
See "The Merger, the Exchange and the Debenture
Investments -- The Merger Agreement -- No Exchange
of Certificates." Effective upon consummation of
the Merger, Orion will be a wholly owned
subsidiary of Orion Newco, Orion will change its
name to Orion Oldco Services, Inc. and, as soon as
practicable thereafter, Orion Newco will change
its name to Orion Network Systems, Inc. Orion
Newco will be a holding company following
consummation of the Merger, Orion will have
limited operations, and subsidiaries of Orion,
particularly Orion Atlantic (as defined below),
will be the principal operating companies within
the consolidated group. The structure of Orion
Newco after the Merger Transactions is set forth
below under the caption "The Merger, the Exchange
and the Debenture Investments -- Corporate
Structure After the Transactions."
THE EXCHANGE
The Exchange Agreement...... The Section 351 Exchange Agreement and Plan of
Conversion (the "Exchange Agreement"), dated as of
June 1996, as amended, among Orion, Orion
Satellite Corporation, a Delaware corporation
("OrionSat") that is a wholly owned subsidiary of
Orion and the sole general partner of
International Private Satellite Partners, L.P., a
Delaware limited partnership ("Orion Atlantic"),
and each of the existing limited partners of Orion
Atlantic other than Orion (the "Exchanging
Partners"). See "The Merger, the Exchange and the
Debenture Investments."
Parties to the Exchange..... The parties to the Exchange are Orion, Orion
Newco, OrionSat and Orion Atlantic (collectively,
the "Orion parties") and the Exchanging Partners.
See "The Merger, the Exchange and the Debenture
Investments -- The Exchange Agreement -- Parties."
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<PAGE>
Structure of the Exchange... Pursuant to the Exchange Agreement, Orion has
agreed, among other things, to have Orion Newco
issue shares of Orion Newco Series C Preferred
Stock for the Exchanging Partners' limited
partnership interests in Orion Atlantic and other
rights relating thereto. In addition, Orion Newco
will acquire certain rights currently held by the
Exchanging Partners, including the Exchanging
Partners' rights to receive repayment of various
advances made to Orion Atlantic aggregating
approximately $37.5 million at September 30, 1996.
As a result of the Exchange, Orion Newco will
become the owner of all the partnership interests
in Orion Atlantic (through Orion Newco and Orion
as the sole limited partners and OrionSat as the
sole general partner of Orion Atlantic). The
approximately 121,988 shares of Orion Newco Series
C Preferred Stock expected to be issued in the
Exchange will be convertible as of the issuance
date into approximately 6,970,740 shares of Orion
Newco Common Stock, or approximately 27% of the
shares of Orion Newco Common Stock outstanding on
a fully diluted basis, assuming a closing of the
Merger Transactions as of January 30, 1997. If the
Merger Transactions close after January 30, 1997,
Orion Newco will be obligated to make certain cash
refunds of payments made by the Exchanging
Partners after that date under various agreements;
if Orion Newco does not have sufficient cash to
make such refunds, the refunds will be made in
shares of Orion Newco Series C Preferred Stock,
and the number of shares issued in the Exchange
will increase. As a result of the Exchange,
certain of the Exchanging Partners will be
principal stockholders of Orion Newco. Orion
Atlantic will remain in existence and maintain its
status as a partnership, with Orion Newco, Orion
and OrionSat (a wholly owned subsidiary of Orion)
as its partners. The structure of Orion Newco
after the Transactions is set forth below under
the caption "The Merger, the Exchange and the
Debenture Investments -- Corporate Structure After
the Transactions."
Orion Newco Series C Preferred
Stock..................... Dividends. Subject to the preferential rights of
the Orion Newco Series A Preferred Stock and Orion
Newco Series B Preferred Stock, the record holders
of Orion Newco Series C Preferred Stock are
entitled to receive dividends at the rate of 6%
per annum, payable exclusively (except in the
event of a liquidation) in Orion Newco Common
Stock. The number of shares of Orion Newco Common
Stock distributable as a dividend on each share of
Orion Newco Series C Preferred Stock is calculated
based on the market price of such common stock
under a formula set forth in the Certificate of
Designations for the Orion Newco Series C
Preferred Stock (the "Certificate of
Designations").
10
<PAGE>
Liquidation. Each share of Orion Newco Series C
Preferred Stock has a liquidation preference of
$1,000 per share (plus all accrued and unpaid
dividends) over the Orion Newco Common Stock and
any series, class or classes of stock ranking
junior to the Orion Newco Series C Preferred
Stock. Voting Rights. The holders of the Orion
Newco Series C Preferred Stock will be entitled to
vote on all matters submitted to the stockholders
of Orion Newco for a vote together with the
holders of Orion Newco Common Stock, Orion Newco
Series A Preferred Stock and Orion Newco Series B
Preferred Stock, voting together as a single
class. Each share of Orion Newco Common Stock will
be entitled to one vote per share and each share
of Orion Newco Senior Preferred Stock and Orion
Newco Series C Preferred Stock (including
fractional shares) will be entitled to one vote
for each whole share of Orion Newco Common Stock
that would be issuable upon conversion of such
share of Orion Newco Senior Preferred Stock and
Orion Newco Series C Preferred Stock,
respectively, at the time the vote is taken.
Conversion. The Orion Newco Series C Preferred
Stock is convertible into Orion Newco Common
Stock, at the option of the holder, at any time
after issuance, at a conversion price of $17.50,
subject to adjustment. Orion Newco may require, by
written notice to all holders of Orion Newco
Series C Preferred Stock, the mandatory conversion
of all of the outstanding Orion Newco Series C
Preferred Stock into Orion Newco Common Stock if
the closing price of the Orion Newco Common Stock
over 20 of the 30 prior trading days is greater
than or equal to the conversion price of $17.50,
subject to adjustment. In each case, all accrued
and unpaid dividends are payable (in Orion Newco
Common Stock) upon conversion. In the case of a
mandatory conversion within two years from the
initial date of issuance of the Orion Newco Series
C Preferred Stock, the number of shares of Orion
Newco Common Stock into which the shares of Orion
Newco Series C Preferred Stock are converted will
be increased by the number of shares of Orion
Newco Common Stock that would be payable if Orion
Newco were immediately to declare and pay all
dividends that in the absence of conversion would
have accrued on such shares of Orion Newco Series
C Preferred Stock over the six-month period
immediately following the date of such mandatory
conversion; provided, however, that the total
dividends, including any additional amounts in
respect of dividends paid as a result of a
mandatory conversion, will not be less than the
amount of dividends that would have accrued on all
outstanding shares of the Orion Newco Series C
Preferred Stock for one full year following the
date of issuance.
11
<PAGE>
Redemption. Orion Newco will be required to redeem
all of the Orion Newco Series C Preferred Stock on
the 25th anniversary of issuance (2022). The Orion
Newco Series C Preferred Stock also is redeemable,
in whole or in part, at the option of Orion Newco,
at any time after the earlier of the second
anniversary of the issuance of the Orion Newco
Series C Preferred Stock, or the effective date of
a Reorganization (as such term is used in the
Certificate of Designations) for an aggregate
redemption price of $1,000 per share (plus all
accrued and unpaid dividends thereon).
See "The Merger, the Exchange and the Debenture
Investments -- Description of the Orion Newco
Series C Preferred Stock."
Conditions to Closing....... Orion and the Exchanging Partners. The closing of
the Exchange Agreement is conditioned upon, among
other things, the satisfaction or waiver by Orion
and the Exchanging Partners of the following
conditions: (i) completion of a refinancing of the
indebtedness of Orion Atlantic outstanding under
the Orion 1 Credit Facility, (ii) the termination
of all agreements between or among the Banks and
Chase, on the one hand, and one or more of Orion
Newco, Orion Atlantic, OrionSat, Orion and the
Exchanging Partners and/or their affiliates on the
other hand, relating to the Orion 1 Credit
Facility or the security or credit support thereof
(the "Bank Agreement Termination"), (iii) the
termination of all obligations under the Orion 1
Credit Facility Support, (iv) the Option
Agreement, dated December 10, 1996, between Orion
Atlantic and Matra Marconi Space being in full
force and effect, Orion Atlantic not being in
default thereunder and Orion Atlantic having made
all payments required to be made thereunder
through the earlier of the closing date of the
Exchange and March 31, 1997, and the Restated
Amendment #10, dated December 10, 1996, to the
Orion 1 Satellite Contract (as defined below),
being in full force and effect, and Orion Atlantic
not being in default thereunder, (v) the formation
of Orion Newco with a certificate of
incorporation, bylaws, capital structure and
management substantially identical in all material
respects to those of Orion, (vi) procurement of
consents needed for the Exchange, (vii)
consummation of the Merger prior to or
concurrently with the Exchange and (viii) receipt
by the Exchanging Partners of an opinion from
Ernst & Young LLP, tax advisor to Orion, to the
effect that the Merger and the Exchange, taken
together, will be a tax-free exchange described in
Code Section 351(a).
Lockheed Martin CLS. The closing of the Exchange
Agreement is conditioned upon the satisfaction or
waiver by Lockheed Martin CLS of the condition
that Lockheed Martin CLS and Matra Marconi Space
enter into a subcontract to the Orion 2 Satellite
Contract relating to the launch of Orion 2.
Orion Parties. The closing of the Exchange
Agreement is conditioned upon the satisfaction or
waiver by the Orion parties of the following
conditions: (i) the ratification or approval by
12
<PAGE>
Orion stockholders of the Merger Transactions,
(ii) the amendment and restatement of the Second
Amended and Restated Partnership Agreement of
Orion Atlantic (the "Partnership Agreement") and
(iii) receipt by Orion Newco of approximately $60
million from the Debenture Investments. See "The
Merger, the Exchange and the Debenture Investments
-- The Exchange Agreement -- Conditions to the
Exchange."
Satisfaction of Conditions. It is presently
anticipated that each of the conditions to the
Exchange would have to be satisfied to consummate
the Exchange (and therefore the Merger). The
Exchanging Partners are not expected to waive any
of the conditions to their obligations to
consummate the Exchange, and the Orion parties do
not intend to waive any of the conditions to their
obligations to consummate the Exchange.
Accounting Treatment......... The Exchange will be accounted for as an
acquisition of minority interest using the
purchase method of accounting. As a result, the
assets and liabilities of Orion Atlantic will be
revalued to fair value to the extent of the
Limited Partners' interests acquired as a result
of the Exchange.
Representations, Warranties,
Covenants and
Indemnification.............. Orion and OrionSat have agreed (and Orion has
agreed to bind Orion Newco pursuant to a separate
indemnity agreement) to indemnify the Exchanging
Partners for certain losses arising out of any
claims relating to the Exchange Agreement, subject
to certain exceptions, limitations and conditions.
See "The Merger, the Exchange and the Debenture
Investments -- The Exchange Agreement -- Certain
Provisions of the Exchange Agreement."
Registration Rights.......... The Exchanging Partners will be granted certain
shelf, demand and "piggyback" registration rights
with respect to the Orion Newco Series C Preferred
Stock to be received by them in the Exchange and
the Orion Newco Common Stock issuable as dividends
thereon or upon the conversion thereof. See "The
Merger, the Exchange and the Debenture Investments
-- Registration Rights."
Transfer Restrictions........ Each of the Exchanging Partners will agree in a
Transfer Restriction Agreement, among other
things, that it will not transfer any shares of
Orion Newco Common Stock issued upon conversion of
shares of Orion Newco Series C Preferred Stock or
as dividends on Orion Newco Series C Preferred
Stock (the "Affected Shares") for 180 days after
the issuance of the Orion Newco Series C Preferred
Stock without the prior written consent of Orion
Newco, unless such a transfer is to an affiliate
or does not involve a public distribution or
public offering or occurs as the result of certain
events set forth in the Transfer Restriction
Agreement, and is conducted as provided in the
Transfer Restriction Agreement. Also, each of the
Exchanging Partners will agree, pursuant to a
Transfer Restriction Agreement, not to transfer
during any 90-day period Affected Shares
13
<PAGE>
that collectively represent more than 25% of the
aggregate number of shares of Orion Newco Common
Stock issuable upon the conversion of the Orion
Newco Series C Preferred Stock received by such
Exchanging Partner pursuant to the Exchange
Agreement or as dividends on the Orion Newco
Series C Preferred Stock, except as provided in
the Transfer Restriction Agreement. See "The
Merger, the Exchange and the Debenture Investments
-- Certain Transfer Restrictions."
Closing After January 30, 1997
If the Exchange closes after January 30, 1997,
Orion Newco will be obligated to make cash
refunds, on or shortly after the closing date, of
payments made by the Exchanging Partners after
that date under the Orion 1 Credit Facility
Support; if Orion Newco does not have sufficient
cash to make such refunds, the refunds will be
made in shares of Orion Newco Series C Preferred
Stock, and the number of shares issued in the
Exchange will increase. If the Notes Offering is
as large or larger than that presently anticipated
by the Company, all payments made by the
Exchanging Partners after January 30, 1997 under
the Orion 1 Credit Facility Support will be
refunded in cash and the number of shares issued
in the Exchange will not increase. See "The
Merger, the Exchange and the Debenture Investments
-- The Exchange Agreement -- Closing After January
30, 1997."
REASONS FOR THE MERGER
TRANSACTIONS AND THE
DEBENTURE INVESTMENTS
Principal Reasons for
Transactions............... Orion's principal objective for the Merger
Transactions is to simplify Orion's organizational
structure and improve its access to the capital
markets. Orion believes that the Merger
Transactions will enable it to: (i) consolidate
outside investor ownership at the Orion Newco
level, (ii) improve the speed and efficiency of
its decision making, (iii) provide Orion Newco
with 100% ownership of all of its material
subsidiaries, (iv) allow Orion Newco to pursue
independently its business plans and financings
for all of its satellites, (v) eliminate (in
exchange for Orion Newco stock) approximately
$37.5 million of obligations Orion Atlantic owes
to the Exchanging Partners and (vi) increase
Orion's overall market capitalization. Orion's
principal reason for the issuance of $50 million
of Debentures to British Aerospace is to raise
additional capital for initial payments with
respect to the Orion 2 satellite, of which
approximately $49.4 million of payments are due
during 1997. The sale of $10 million of Debentures
to Matra Marconi Space will involve a
re-investment by Matra Marconi Space of $10
million of the $13 million of satellite incentive
payments Matra Marconi Space will receive as the
manufacturer of the Orion 1 satellite upon
consummation of the Notes Offering. The
consummation of the Debenture Investments is a
condition to the Exchange.
14
<PAGE>
Related Transactions........ Access to the capital markets is necessary for
Orion to achieve its business plan to construct
and launch two additional satellites, Orion 2
(with coverage of Europe, Russia, the eastern
United States and Latin America) and Orion 3 (with
coverage of the Asia Pacific region). With this
plan in mind, Orion and Orion Newco have been
pursuing and will continue to pursue the following
transactions:
(i) Notes Offering: (i) a Notes Offering in the
amount of approximately $347 million with expected
gross proceeds of approximately $275 million,
excluding approximately $72 million of overfunding
of interest due on such notes. The principal
purpose of the Notes Offering is to refinance the
indebtedness of Orion Atlantic outstanding under
the Orion 1 Credit Facility and release the
existing commitments of the Limited Partners and
their affiliates under the Orion 1 Credit Facility
Support. Such release is a condition to the
Exchange.
(ii) Orion 2 Construction Contract: the Orion 2
Satellite Contract, under which the manufacturer
is to proceed with construction based upon initial
payments of $25 million and further payments
through December 1997 limited to approximately $25
million. Orion expects to commence the
construction of Orion 2 immediately following
completion of the Notes Offering.
(iii) Orion 3 Construction Contract: the Orion 3
Satellite Contract, under which the manufacturer
is to proceed with construction based upon initial
payments through January 31, 1997 aggregating
approximately $15 million, with further payments
through March 31, 1998 being limited to $35
million, payable in approximately equal quarterly
installments. The majority of the amounts due
under the contract are payable in the second and
third quarters of 1998. Orion commenced
construction of Orion 3 in mid-December 1996 under
an authorization to proceed, and expects to enter
into a definitive satellite contract in January
1997.
In addition to the Merger, the Notes Offering and
the Debenture Investments, the Exchange is
indirectly conditioned on, among other things, the
acquisition by Orion of the only outstanding
minority interest in Orion Asia Pacific from
British Aerospace for approximately 86,000 shares
of Orion Newco Common Stock, which has occurred or
is in the process of occurring. The pro forma
financial information included in this Proxy
Statement/Prospectus gives effect to the Merger,
the Exchange and the Debenture Investments and the
transactions on which they are conditioned,
including the Notes Offering, the OAP Acquisition,
the application of the net proceeds of the Notes
Offering to effect the Orion 1 Credit Refinancing
and repayment of amounts owed to STET, a former
Limited Partner, and the use of the proceeds of
the Debenture Investments to make initial payments
on Orion 2 (initial payments on Orion 3 are to be
made from cash on hand). See "Pro Forma Condensed
Consolidated Financial Statements," "The Merger,
the Exchange and the Debenture Investments --
Reasons for
15
<PAGE>
the Merger Transactions and the Debenture
Investments" and "The Related Transactions."
Each proposal to be considered at the Special
Meeting will be voted upon separately by the Orion
stockholders. However, failure by the Orion
stockholders to approve the Exchange Agreement
will result in termination of the Merger Agreement
by Orion, Orion Newco and Orion Merger Subsidiary.
The Merger is a condition to the Exchange and is
being proposed to enable the Exchange to occur. If
the Merger were to cease to be necessary to
consummate the Exchange (which is not expected to
occur), the Board of Directors would cause Orion
to proceed with the Exchange but not the Merger.
In such event, Orion (instead of Orion Newco)
would issue shares of Series C 6% Cumulative
Redeemable Convertible Preferred Stock for the
Exchanging Partners' limited partnership interests
in Orion Atlantic and other rights relating
thereto and Orion (instead of Orion Newco) would
issue the Debentures, but all other aspects of
these transactions would remain the same. Since
the rights of stockholders of Orion Newco will be
substantially the same as the rights of
stockholders of Orion, Orion believes that
consummation of the Exchange would have the same
effect on stockholders whether or not the Merger
occurs. The Merger and the Exchange are conditions
to the Debenture Investments, and waivers of these
conditions are not expected to occur. Repayment of
the Orion 1 Credit Facility is a condition to the
Exchange and the Debenture Investments, and this
condition is not expected to be waived.
SPECIAL MEETING
Date, Time, Place of Meeting. The Special Meeting will be held on Thursday,
January 30, 1997 at 9:00 a.m., local time, at 2440
Research Boulevard, Suite 400, Rockville,
Maryland.
Record Date.................. Only Orion stockholders of record at the close of
business on December 23, 1996 (the "Record Date")
are entitled to notice of and to vote at the
Special Meeting or any adjournment thereof, unless
a new record date is fixed for any adjourned
meeting. See "The Special Meeting -- Voting Rights
and Related Matters."
Purpose of the Special Meeting
At the Special Meeting, Orion stockholders will be
asked to consider and vote upon (i) ratification
of the Merger Agreement and the transactions
contemplated thereby, (ii) approval and adoption
of the Exchange Agreement and the transactions
contemplated thereby and (iii) approval of the
Debenture Investments. See "The Special Meeting --
Voting Rights and Related Matters."
16
<PAGE>
Quorum....................... The holders of a majority of the votes of the
shares of Orion capital stock issued and
outstanding and entitled to vote, present in
person or represented by proxy, treated as a
single class, will be required to constitute a
quorum at the Special Meeting. See "The Special
Meeting -- Voting Rights and Related Matters."
Votes Required............... The affirmative vote of holders of a majority of
the votes of the shares of Orion capital stock
that are entitled to vote and that are present in
person or represented by proxy at the Special
Meeting, treated as a single class, will be
required to approve each proposal to be considered
at the Special Meeting. Orion anticipates that all
members of the Board of Directors who are Orion
stockholders and companies they represent (who
held, in the aggregate, approximately 38% of
Orion's voting stock as of September 30, 1996)
will enter into written agreements to vote for
each such proposal. Each share of Orion Common
Stock will be entitled to one vote per share, and
each share of Orion Series A Preferred Stock and
Orion Series B Preferred Stock (including
fractional shares) will be entitled to one vote
for each whole share of Orion Common Stock that
would be issuable upon conversion of such share of
Orion Series A Preferred Stock and Orion Series B
Preferred Stock, respectively. See "The Special
Meeting -- Voting Rights and Related Matters" and
"-- Votes Required."
Dissenters' Rights........... Orion stockholders have no dissenters' rights in
connection with the matters submitted by Orion for
stockholder ratification or approval at the
Special Meeting. See "The Special Meeting -- No
Dissenters' Rights."
Revocability of Proxies...... An Orion stockholder giving a proxy in the form
accompanying this Proxy Statement/Prospectus has
the power to revoke the proxy prior to its
exercise. A proxy may be revoked by any
stockholder who attends the Special Meeting and
gives notice of the stockholder's intention to
vote in person, without compliance with any other
formalities. In addition, any Orion stockholder
may revoke a proxy at any time before it is voted
by executing and delivering a later dated proxy or
by delivering a written notice to the Secretary of
Orion stating that the proxy is revoked. See "The
Special Meeting -- Proxies."
BOARD RECOMMENDA
-TION...................... The Board of Directors has unanimously approved
(with the British Aerospace Board representative
recusing himself) the terms of the Merger
Agreement, the Exchange Agreement and the
Debenture Agreement and determined that the
Merger, the Exchange and the Debenture Investments
are in the best interest of Orion and its
stockholders. The Board recommends unanimously
(with the British Aerospace Board representative
recusing himself) that stockholders vote FOR
ratification of the Merger Agreement and the
transactions contemplated thereby, FOR approval
and adoption of the Exchange Agreement and the
transactions contemplated thereby, and FOR
approval of the Debenture Investments.
17
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATIONAL DATA
The following table sets forth summary consolidated financial and operational
data of the Company as of and for the years ended December 31, 1994 and 1995 and
for the nine months ended September 30, 1995 and 1996. The data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Orion," the Pro Forma Condensed Consolidated
Financial Statements and the Consolidated Financial Statements of the Company
and the related notes included elsewhere in this Proxy Statement/Prospectus. The
summary consolidated financial data under the captions "Consolidated Statements
of Operations Data" for the years ended December 31, 1994 and 1995, with the
exception of the Pro Forma data, were derived from the audited consolidated
financial statements of the Company. The summary consolidated financial data as
of September 30, 1996, and for the nine months ended September 30, 1995 and
1996, with the exception of the Pro Forma data, are derived from the Company's
unaudited consolidated financial statements. The Pro Forma data are not
necessarily indicative of the results that would have been achieved, nor are
they indicative of the Company's future results.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------- ------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 PRO
1994 1995 1995 PROFORMA(1) 1995 1996 FORMA(1)
----------- ----------- ---------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations
Data:
Revenues.............................. $ 3,415 $ 22,284 $ 22,284 $ 13,947 $ 30,016 $ 30,016
Interest expense...................... 61 24,738 50,637 17,080 20,229 39,521
Net loss(2)........................... (7,965) (26,915) (103,156) (19,985) (19,807) (67,263)
Net loss per common share............. $ (0.86) $ (3.07) $ (12.01) $ (2.42) $ (1.90) $ (6.46)
Shares used in calculating per share
data (3)............................ 9,272,166 9,103,505 9,376,719 8,522,067 10,943,287 11,544,626
----------- ----------- ---------------- ----------- ------------ ------------
Ratio of earnings to fixed charges(4). -- -- -- -- -- --
Other Operating Data:
Number of customers................... 34 109 79 167
Capital expenditures.................. $ 51,103 $ 9,060 $ 3,863 $ 10,266
Customer contract backlog (5)......... $ 39,122 $ 120,612 $ 94,890 $ 134,320 $ 123,000
Points of service (6)................. 57 151 124 304
EBITDA (7)............................ $ (14,014) $ (15,427) $ (15,177) $ 134
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------
ACTUAL PRO FORMA(1)
--------- ------------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............ $ 36,657 $122,339
Restricted cash (8).................. -- 72,000
Total assets......................... 355,977 566,292
Long-term debt (less current
portion)............................. 221,781 425,513
Limited Partners' interest in Orion
Atlantic (9)....................... 19,961 --
Redeemable preferred stock........... 20,539 114,539
Total stockholders' equity........... 6,891 967
Book value per share................. .63 .09
</TABLE>
- ----------
(1) Adjusted to reflect the pro forma effects of the Transactions (see "Pro
Forma Condensed Consolidated Financial Statements"), assuming such events
occurred, in the case of Consolidated Statements of Operations Data, on
January 1, 1995 and, in the case of Consolidated Balance Sheet Data, on
September 30, 1996.
(2) As required by generally accepted accounting principles ("GAAP"), net loss
is presented before the accretion of preferred stock and preferred stock
dividends. For the years ended 1994, 1995 and 1995 (pro forma) and the nine
months ended September 30, 1995, 1996 and 1996 (pro forma), the accretion of
preferred stock and preferred stock dividends are $.6 million, $1.3 million,
$9.8 million, $1.0 million, $1.0 million and $7.3 million, respectively.
(3) Computed on the basis described for net loss per common share in Note 2 to
the Consolidated Financial Statements.
(4) For purposes of the ratio of earnings to fixed charges, earnings consist of
earnings from continuing operations, plus fixed charges, reduced by the
amount of unamortized interest capitalized. Fixed charges consist of
interest on all indebtedness (including commitment fees and amortization of
deferred financing costs) plus the portion of rent expense representing
18
<PAGE>
interest (estimated to be one-third of such expense). For the years ended
December 31, 1994 and 1995, and the nine months ended September 30, 1995 and
1996, earnings were inadequate to cover fixed charges by $35.2 million,
$28.2 million, $21.3 million and $19.8 million, respectively. On a pro forma
basis assuming consummation of the Transactions, earnings would not have
been sufficient to cover fixed charges by $105.4 million and $70.5 million
for the year ended December 31, 1995 and the nine months ended September 30,
1996, respectively. A 0.5% increase in the assumed interest rates on the
Notes would result in pro forma deficiencies of earnings to cover fixed
charges of approximately $107.1 million for the year ended December 31, 1995
and $71.8 million for the nine months ended September 30, 1996.
(5) Backlog represents future revenues under contract. See "Risk Factors --
Risks Relating to Orion's Business -- Uncertainties Relating to Backlog."
(6) Points of service includes installed VSATs and additional transmission
destinations (such as customer premises) that share a VSAT.
(7) "EBITDA" represents earnings before minority interests, interest income,
interest expense, other expense (income), income taxes, depreciation and
amortization. EBITDA is commonly used in the communications industry to
analyze companies on the basis of operating performance, leverage and
liquidity. EBITDA is not intended to represent cash flows for the period and
should not be considered as an alternative to cash flows from operating,
investing or financing activities as determined in accordance with generally
accepted accounting principles ("GAAP"). EBITDA is not a measurement under
GAAP and may not be comparable to other similarly titled measures of other
companies. Other expense (income) includes gains on sale of equipment, less
the write-off of costs relating to the 1995 Financing (as defined below) of
$3.4 million in the fourth quarter of 1995.
(8) Restricted cash represents the estimated $72 million that will be placed in
escrow on the closing date of the Notes Offering to pre-fund the payment of
the first six scheduled payments of interest on the Senior Notes (as defined
below). The actual amount to be placed in escrow and reflected as restricted
cash will depend on the interest rate on the Senior Notes and market
interest rates on government securities on such closing date.
(9) 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 will be acquired by the
Company in the Exchange.
19
<PAGE>
RISK FACTORS
An investment in Orion Newco Common Stock pursuant to the Merger involves a
high degree of risk. In evaluating the Merger Transactions and the Debenture
Investments, Orion stockholders should carefully consider the following factors
as well as other matters discussed in this Proxy Statement/Prospectus.
Statements contained in this Proxy Statement/Prospectus regarding Orion's
expectations with respect to Orion 2 and Orion 3, related financings, 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 and depend on a variety
of factors, including those set forth in this Risk Factors section. See
"Forward-Looking Statements." The discussions set forth below constitute
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 those in such
forward-looking statements. There can be no assurance that Orion's expectations
regarding some or all of these matters will be fulfilled.
RISKS RELATING TO MERGER, EXCHANGE AND DEBENTURE INVESTMENTS
MERGER, EXCHANGE AND DEBENTURE INVESTMENTS DEPENDENT ON ORION 1 CREDIT FACILITY
REFINANCING
The Merger, the Exchange and the Debenture Investments are conditioned on
consummation of the Orion 1 Credit Facility Refinancing. Although Orion has
engaged in discussions with prospective underwriters with respect to the Notes
Offering Orion is pursuing to effectuate the Orion 1 Credit Facility
Refinancing, there can be no assurance that such financing will be consummated.
Orion has been advised by prospective underwriters that the Notes Offering will
be conditioned on, among other things, concurrent completion of the Exchange,
repayment of the Orion 1 Credit Facility with proceeds of the Notes Offering and
consummation of the OAP Acquisition and the Debenture Investments. There can be
no assurance that the conditions to closing the Orion 1 Credit Facility
Refinancing, and accordingly of the Merger, the Exchange and the Debenture
Investments, will be met.
CERTAIN TERMS OF NOTES OFFERING NOT YET DETERMINED
Completion of the Exchange is conditioned, among other things, upon
completion of the Notes Offering. Certain pricing and other terms of the Notes
Offering are not known at the present time, including, without limitation, the
size of the Notes Offering, the interest rate for the Notes and the amount and
terms of the Orion Newco Common Stock warrants to be included in the Notes
Offering, and there can be no assurance that the terms of such transactions will
be favorable to Orion. In addition, Orion will be subject to a number of
restrictions and limitations imposed by the indentures pursuant to which the
Notes will be issued (the "Notes Indentures"). The Notes Indentures are expected
to contain, among other limitations, covenants which will restrict the ability
of the Company and its subsidiaries to: incur additional indebtedness; create
liens; engage in sale-leaseback transactions; pay dividends or make
distributions in respect of their capital stock; make investments or make
certain other restricted payments; sell assets; create restrictions on the
ability of restricted subsidiaries to make certain payments; issue or sell stock
of restricted subsidiaries; enter into transactions with stockholders or
affiliates; and consolidate, merge or sell all or substantially all of their
assets. However, these limitations will be subject to a number of important
qualifications and exceptions.
RISKS IN IMPLEMENTATION OF MERGER, EXCHANGE AND DEBENTURE INVESTMENTS
In order to implement the Merger, the Exchange and the Debenture Investments,
Orion will need to organize Orion Newco to be substantially identical to Orion,
transfer all matters relating to Orion's capital structure to Orion Newco, and
merge with a subsidiary of Orion Newco. These transactions may require receipt
of a number of approvals or waivers, including waivers of rights of the holders
of the Orion Senior Preferred Stock to have their shares repurchased by Orion,
consents or waivers under various contracts that may make a merger by Orion an
event of default and consents to assignment of various contracts regarding
registration rights applicable to Orion capital stock and other matters. There
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can be no assurance that Orion will obtain all necessary approvals or waivers to
implement the Merger, the Exchange and the Debenture Investments, or regarding
the effect of failure to obtain such approvals or waivers.
It is presently anticipated that each of the conditions to the Exchange would
have to be satisfied to consummate the Exchange (and therefore the Merger and
the Debenture Investments). The Exchanging Partners are not expected to waive
any of the conditions to their obligations to consummate the Exchange, and the
Orion parties do not intend to waive any of the conditions to their obligations
to consummate the Exchange, including, without limitation, conditions relating
to financing, procurement agreements or otherwise.
SUBSTANTIAL CHANGE IN OWNERSHIP OF STOCK
The beneficial ownership of Orion's Common Stock will change substantially as
a result of the Exchange and the Debenture Investments. The Exchange will
involve the issuance of Orion Newco Series C Preferred Stock convertible as of
the issuance date into approximately 6,970,740 shares of Orion Newco Common
Stock, or approximately 27% of the shares of Orion Newco Common Stock
outstanding on a fully diluted basis, assuming a closing of the Merger
Transactions as of January 30, 1997. The Debenture Investments will involve the
issuance of $60 million of Debentures convertible as of the issuance date into
approximately 4,285,714 shares of Orion Newco Common Stock, or approximately
16.6% of the shares of Orion Newco Common Stock outstanding on a fully diluted
basis, assuming a closing of the Debenture Investments as of January 30, 1997.
See "The Merger, the Exchange and the Debenture Investments -- Security
Ownership of Certain Beneficial Owners Prior to and Following the Transactions."
Although the Company is not aware of any intent by the Exchanging Partners,
British Aerospace or Matra Marconi Space to seek to control the management and
affairs of the Company, there can be no assurance that they will not seek to do
so. In addition, the increase in outstanding capital stock could adversely
affect prevailing market prices, as discussed below under the caption "Risks
Relating to Capital Stock -- Potential Adverse Effect of Shares Eligible for
Future Sale."
RISKS RELATING TO HOLDING COMPANY STRUCTURE
After the Merger Transactions, the Company will conduct almost all of its
operations through its subsidiaries. Accordingly, the primary source of the
Company's cash will be dividends and other distributions from its subsidiaries.
The subsidiaries' ability to make distributions to the Company will be subject
to their having sufficient funds from their operations legally available for
payment thereof which are not needed to fund their own operations, obligations
or business plans and which are not restricted by agreements with the creditors
of these entities. If the Company's subsidiaries are unwilling or unable to make
distributions to the Company, the Company's growth may be inhibited. The Company
may not be able to obtain debt financing if it cannot compel the subsidiaries to
make distributions to service such debt financing or obtain upstream guarantees
from its subsidiaries with respect to such financing.
RISKS RELATING TO ORION NEWCO SERIES C PREFERRED STOCK AND DEBENTURES
The Company expects to issue $122 million in Orion Newco Series C Preferred
Stock (assuming a closing of the Merger Transactions as of January 30, 1997) and
$60 million of Debentures. Certain rights granted by Orion Newco to holders of
the Orion Newco Series C Preferred Stock and the Debentures could adversely
affect Orion Newco or the rights of holders of Orion Newco Common Stock. In
particular, the holders of Orion Newco Series C Preferred Stock will have
dividend rights, a liquidation preference, rights to vote with the Orion Newco
Common Stock as a single class, rights to mandatory redemption after 25 years
and earlier redemption at the option of Orion Newco, the right to convert such
shares into Orion Newco Common Stock and registration rights, as described more
fully under the caption "The Merger, the Exchange and the Debenture Investments
- -- Description of the Orion Newco Series C Preferred Stock." Holders of the
Debentures will have the right to convert the Debentures into Orion Newco Common
Stock at $14.00 per share (subject to downward adjustment in certain events) and
the right to receive dividends in Orion Newco Common Stock which, in certain
circumstances, could be valued at a price which is lower than the market price
of such stock at the date of such dividends. See "The Merger, the Exchange and
the Debenture Investments -- The Debenture Investments."
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RISKS RELATING TO ORION'S BUSINESS
LIMITED OPERATIONS; HISTORY OF LOSSES AND NEGATIVE EBITDA; EXPECTATION OF FUTURE
LOSSES
From its inception in 1982 through January 20, 1995, when Orion 1 commenced
commercial operations, Orion was a development stage company. Accordingly, Orion
has limited experience operating its business. Orion has experienced net losses
in each fiscal year since its inception, including a net loss of approximately
$26.9 million and negative EBITDA of $15.4 million during 1995, and a net loss
of $19.8 million during the nine months ended September 30, 1996. On a pro forma
basis, giving effect to the Transactions, the Company would have had a net loss
of $103.2 million and $67.3 million for 1995 and the nine months ended September
30, 1996, respectively. The increase in net loss on a pro forma basis is
associated with the depreciation on the step up in the basis of the Orion 1
satellite and amortization of excess cost over fair value resulting from the
acquisition of the Limited Partners' partnership interests in Orion Atlantic,
the net increase to interest expense as a result of the Transactions, and the
elimination of minority interest as a result of the Exchange. See Notes to Pro
Forma Condensed Consolidated Statements of Operations for the year ended
December 31, 1995 and for the nine months ended September 30, 1996. The
implementation of Orion's business plan regarding Orion 2 and Orion 3 will
require substantial additional capital for the construction, launch, insurance,
financing and start-up costs of those satellites. A substantial portion of these
costs may be financed with indebtedness, which would substantially increase
interest costs. The Company's negative cash flow (after payments for capital
expenditures and interest) has been substantial and net losses and negative cash
flows (after payments for capital expenditures and interest) are expected to
increase over the next few years.
NEED FOR SUBSTANTIAL ADDITIONAL CAPITAL
The Company will need a substantial amount of capital over the next three
years (and possibly thereafter) to fund the costs of Orion 2 and Orion 3, the
purchase of VSATs and other capital expenditures and to make various other
payments, such as principal and interest payments with respect to the TT&C
Financing (as defined below), the Notes and any indebtedness incurred to finance
Orion 2 or Orion 3. The Company's cash flows will be inadequate to cover its
cash needs and the Company will seek financing from outside sources. Sources of
additional capital may include public or private debt or equity financings. The
Company is often involved in discussions or negotiations with respect to such
potential financings and, because of its substantial capital needs, may
consummate any such financings at any time. The Company has commenced
construction of Orion 3 and intends to commence construction of Orion 2
immediately after consummation of the Notes Offering, despite the fact that it
does not have any commitment from any outside source to provide such financing.
If the Company is unable to obtain financing from outside sources in the amounts
and at the times needed, it could forfeit payments made on Orion 2 and Orion 3
and its rights to Orion 2 and Orion 3 under the Orion 2 Satellite Contract and
Orion 3 Satellite Contract. Such a forfeiture would have a material adverse
effect on the Company's ability to make payments on its indebtedness and on the
value of the Orion Newco Common Stock.
Expected payments prior to launch under the Orion 2 Satellite Contract and
Orion 3 Satellite Contract and for launch insurance for Orion 2 and Orion 3
aggregate approximately $500 million. Of this amount, $3 million was paid in the
fourth quarter of 1996, and Orion is required to make payments of approximately
$98 million, $350 million and $50 million in 1997, 1998 and 1999, respectively.
These amounts include the Company's estimate regarding the cost of launch
insurance (but not in-orbit insurance, which the Company presently estimates
will cost approximately $5 million to $6 million per annum per satellite), which
estimate is based upon industry figures but not upon discussions with potential
insurers or any commitment to provide insurance. The Company's actual payments
could be substantially higher due to any change orders for the satellites,
higher than expected insurance rates, delays and other factors. In addition, the
Company expects to expend approximately $22 million, $30 million and $34 million
on VSATs and other capital expenditures in 1997, 1998 and 1999, respectively.
However, there can be no assurance that these amounts will not be substantially
higher. The Company believes the costs of VSATs and other capital expenditures
can be financed through capital leases or other secured financing arrangements.
However, the Company has not engaged in material discussions with potential
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lenders and there can be no assurance that such financing can be obtained. The
Company also expects to incur an aggregate of approximately $40 million of
start-up losses and financing costs in connection with Orion 2 and Orion 3.
Under the Orion 1 Satellite Contract, the contractor is entitled to receive
incentive payments based upon the performance of Orion 1 in orbit. These
incentive payments could reach an aggregate of approximately $44 million through
2007, if the transponders on Orion 1 continue to operate in accordance with
specification during that period. As of September 30, 1996, Orion had
obligations with a present value of approximately $21.7 million with respect to
incentive payments. Orion will pay $13 million in satellite incentives
concurrently with the closing of the Notes Offering, of which $10 million will
be re-invested in Orion in the Matra Marconi Investment. Under the Orion 2
Satellite Contract, Orion is obligated to pay $25,000 per day that the satellite
is delivered prior to the scheduled delivery date.
The foregoing estimates do not include any amounts for other possible
financing requirements. The Company may from time to time enter into joint
ventures and make acquisitions of complementary businesses and is often engaged
in discussions or negotiations with regard to such potential joint ventures and
acquisitions. Such joint ventures or acquisitions would need to be financed,
which would increase the Company's need for additional capital. In addition,
Orion intends to replace Orion 1 at the end of its useful life (expected to be
in October 2005). Such replacement likely will require additional financing if
the cash flow from Orion's operations is not sufficient to fund a replacement
satellite.
Orion Newco's ability to raise public equity financing may be limited by the
-----------------------------------------------------------------------------
registration rights it has granted to certain investors. See "Risks Relating to
- --------------------------------------------------------------------------------
Capital Stock -- Potential Adverse Effect of Shares Eligible for Future Sale"
- --------------------------------------------------------------------------------
below.
- -----
SUBSTANTIAL LEVERAGE; SECURED INDEBTEDNESS
As of September 30, 1996, after giving pro forma effect to the Transactions,
Orion would have had approximately $426 million of long-term indebtedness, and
will be highly leveraged. The accretion of original issue discount on the Senior
Discount Notes (as defined below) will substantially increase Orion's
liabilities. The Company also expects to incur substantial additional amounts of
indebtedness. The Company will deposit approximately $72 million in escrow to
pre-fund the first six scheduled payments of interest on the Senior Notes (as
defined below). However, the Company ultimately will need to service the cash
interest expense on a very substantial amount of indebtedness with cash
generated by its operations. For 1995 and the three and nine months ended
September 30, 1996, the Company had EBITDA of $(15.4) million, $1.7 million and
$0.1 million and, on a pro forma basis, giving effect to the Transactions,
interest costs of $50.6 million and $39.5 million for 1995 and the nine months
ended September 30, 1996, respectively. Interest costs will increase
substantially if, as expected, the Company incurs additional indebtedness, as
described above under the caption "Need for Substantial Additional Capital." The
Company does not have a revolving credit facility or other source of readily
available capital.
The level of the Company's indebtedness could have important consequences to
the Company and its stockholders, including the following: (i) the ability of
the Company to obtain any necessary financing in the future for capital
expenditures, working capital, debt service requirements or other purposes may
be limited; (ii) a substantial portion of the Company's cash flow from
operations, if any, must be dedicated to the payment of principal of and
interest on its indebtedness and other obligations and will not be available for
use in the Company's business; (iii) the Company's level of indebtedness could
limit its flexibility in planning for, or reacting to changes in, its business;
(iv) the Company will be more highly leveraged than some of its competitors,
which may place it at a competitive disadvantage; and (v) the Company's high
degree of indebtedness will make it more vulnerable to a default and the
consequences thereof (such as bankruptcy workout) in the event of a downturn in
its business. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Orion -- Liquidity and Capital Resources -- Current
Funding Requirements."
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RISKS OF SATELLITE LOSS OR REDUCED PERFORMANCE
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, and 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. The Delta III launcher to be used for
Orion 3 is new and has no significant launch history. Even though the Delta III
is based upon earlier Delta launch vehicles, the new technology used in Delta
III could affect its launch success rate.
Orion may have to change launch vehicles if, for example, one of its selected
vehicles experiences a launch failure with respect to another satellite. Orion
intends to order certain long lead time parts in order to reduce the amount of
time needed to obtain one replacement satellite. However, an unsuccessful launch
of Orion 2 or Orion 3 would involve a delay in revenues for at least one year,
and perhaps substantially longer. Any loss or delay of revenue from any of the
Company's satellites would have a material adverse effect on its ability to
service its indebtedness and the value of the Orion Newco Common Stock.
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. These transponders
currently generate a majority of Orion's revenues. 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 further effect on Orion'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 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 the Company, on its ability to service its
indebtedness and the value of the Orion Newco Common Stock. See "Information
About Orion's Business -- Implementation of the Orion Satellite System -- Orion
1."
At the time of Orion's 1 delivery from its manufacturer, one of the six 36
MHz transponders covering the United States was not performing in accordance
with contract specifications based on then-available data. To date, Orion has
not used such transponder to provide services under any commercial contract, and
there can be no assurance that such transponder will ever be used. Although
Orion settled the matter with the manufacturer for a one-time refund of
approximately $2.75 million and monthly payments of $7,000, there can be no
assurance that such payments adequately compensated Orion for the loss of such
transponder.
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, its ability to make
payments on its indebtedness and the value of the Orion Newco Common Stock.
Although Orion intends to procure insurance for the construction, launch and
insurance costs of Orion 2 and Orion 3, Orion has
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<PAGE>
not obtained any commitment from insurance underwriters to provide launch
insurance for Orion 2 or Orion 3. There can be no assurance that such insurance
will be available or that the price of such insurance or the terms and
exclusions in the actual insurance policy will be favorable to the Company. A
failure of one of the launch vehicles selected by Orion prior to the launch of
Orion 2 or Orion 3 could substantially increase the cost of launch insurance for
Orion. See "Information About Orion's Business -- Insurance."
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. There is a significant possibility that one or more
transponders on a satellite may cease to function in accordance with
specifications during its estimated useful life and there is no assurance that
service could be restored through redundant transponders. In addition, while
Orion plans to replace each satellite at the end of its useful life, there can
be no assurance that the required financing and regulatory approvals to do so
will be available.
LAUNCH OF ORION 2 AND ORION 3 SUBJECT TO SIGNIFICANT UNCERTAINTIES
Cost Uncertainties. Based on the current designs of and current construction
schedules for Orion 2 and Orion 3, the total costs of Orion 2 and Orion 3,
including construction, launch, launch insurance, financing costs and start-up
expenses, are presently estimated to be approximately $265 million and $275
million, respectively. These costs may increase as a result of changes that may
occur during the construction of the satellites or if the cost of insurance
exceeds the Company's expectations. See "Information About Orion's Business --
Implementation of the Orion Satellite System." There can be no assurance that
the actual costs of these satellites will not be materially greater than these
estimates.
Substantial Financing Requirements. Completion of Orion 2 and Orion 3 will
require substantial additional financing beyond the funds expected to be raised
in the Notes Offering and the British Aerospace Investment. Failure to raise
such financing would have a material adverse effect on Orion, its ability to
make payments on its indebtedness and the value of the Orion Newco Common Stock,
as discussed in more detail above under the caption "Need for Substantial
Additional Capital."
Timing Uncertainties. 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 raise the financing needed for payments to
the satellite manufacturers, receive certain regulatory approvals, finalize the
satellite designs and take other necessary steps. Failure to meet the
construction and launch schedules could increase the cost of Orion 2 or Orion 3,
requiring additional financing, as described above under the caption "Need for
Substantial Additional Capital." 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. See "Information About
Orion's Business -- Implementation of the Orion Satellite System." There can be
no assurance that the launch of Orion 2 or Orion 3 will take place as scheduled.
Delays in launching satellites are quite common, and a significant delay in the
delivery or launch of Orion 2 or Orion 3 also would have a material adverse
effect on Orion's marketing plan for such satellites, its ability to generate
revenue and service its indebtedness and the value of the Orion Newco Common
Stock.
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 will commence construction of Orion 2 prior to completion of the required
consultation with INTELSAT and EUTELSAT, 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
approvals in a timely manner would likely have a material adverse effect on the
Company. See "Approvals Needed; Regulation of Industry" below.
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RISKS RELATING TO POTENTIAL LACK OF MARKET ACCEPTANCE AND DEMAND; GROUND
OPERATIONS
Orion's success will depend in part on the continued growth in demand for
international private network services, which to date have not been a primary
focus of satellite companies, and on Orion's ability to market such services
effectively. Marketing will be critical to Orion's success. However, Orion has
limited experience in marketing, having commenced full commercial operations
only in 1995. Orion's marketing program until recently consisted of direct
sales, using a U.S.-based sales force, and indirect sales channels, including
Limited Partner sales representatives, for sales in Europe. During 1996, certain
of Orion's indirect sales channels in Europe did not meet expectations, and
Orion is seeking to supplement its sales in Europe by significantly increasing
its direct sales capabilities in Europe, particularly with respect to sales of
private network services. However, there can be no assurance that this effort
will be successful. Sales of Orion's services generally involve a long-term,
complex sales process, and new contract bookings will vary from quarter to
quarter. In addition, as an early provider of international network services
using VSATs, Orion is subject to the uncertainties associated with the
development of new services, including uncertainties regarding customer interest
in and acceptance of higher data speed communications, the need to develop and
convince customers of the attractiveness of new applications, and customer
acceptance of the ability of Orion (as a new market entrant) to provide service.
In addition, Orion's operations will continue to depend significantly on Orion's
ability to provide ground operations for private network services using ground
operators 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.
See "Information About Orion's Business -- Network Operations; Local Ground
Operators."
RISKS CONCERNING ABILITY TO MANAGE GROWTH
The Company's future performance will depend, in part, upon its ability to
manage its growth effectively, which will require it to continue to implement
and improve its marketing, operating, financial and accounting systems and to
expand, train and manage its employee base and manage its relationships with its
local ground operators. For example, Orion is in the process of seeking to
integrate a significant number of newly hired direct sales personnel, and
expects the process to continue as it seeks to increase its sales force during
1997. Furthermore, the Company may from time to time enter into joint ventures
and acquire complementary businesses and is often engaged in discussions or
negotiations with regard to such potential joint ventures and acquisitions. Such
joint ventures and acquired businesses would need to be integrated with the
Company, which would place an additional burden on the Company's internal
systems and its ability to manage its employees and its relationships with its
local ground operators. In addition, the Company's ability to attract new orders
is subject to substantial variations from quarter to quarter. If the Company
fails either to expand in accordance with its plans or to manage its growth
effectively, there could be a material adverse effect on its business, growth,
financial condition and results of operations, its ability to service its
indebtedness and the value of the Orion Newco Common Stock.
POTENTIAL ADVERSE EFFECTS OF COMPETITION
The international telecommunications industry is highly competitive. In
providing international telecommunications services, Orion competes with
established satellite and other transmission facilities providers, including
INTELSAT, EUTELSAT, PanAmSat and consortia of major telephone carriers operating
undersea fiber optic cables. In addition, Orion competes with certain
established telephone carriers, such as AT&T, MCI, Sprint, British Telecom,
Cable & Wireless, Deutsche Telekom, France Telecom and Kokusai Denshin Denwa, as
well as resellers of satellite capacity, such as companies similar to Impsat, in
providing private network communications services. Many of these competitors
have significant competitive advantages, including long-standing customer
relationships, close ties with regulatory authorities, control over connections
to local telephone lines and the ability to subsidize competitive services with
revenues from services they provide as a dominant or monopoly carrier, and are
substantially larger than Orion 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,
particularly with respect to private network services, will intensify as domi-
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nant and monopoly long distance providers adapt to a competitive environment and
large carriers increase their presence in these markets. The Company also
believes that competition in more developed markets will intensify as large
carriers consolidate, enhance their international alliances and increase their
focus on private network services. For example, the recently announced merger
involving MCI and British Telecom may substantially increase the ability of the
resulting businesses to provide trans-Atlantic private network services. The
ability of Orion 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 level of customer support and service, and the technical
advantages of its systems.
The services provided by the Company have been subject to decreasing prices
over recent years and this pricing pressure is expected to continue (and may
accelerate) for the foreseeable future. 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. In addition, a large
portion of satellite capacity globally is currently used for video distribution.
As an increasing portion of satellite capacity is used for providing private
network services, prices for these services may decline. Compressed digital
video ("CDV"), which substantially increases transmission capacity per channel,
is beginning to be used for video distribution. As CDV becomes more prevalent,
the supply of effective video capacity could increase significantly, which could
result in lower prices.
The Company is aware of a substantial number of new satellites that are in
construction or in the planning stages. 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 (other than replacement satellites not
significantly larger than the ones they replace) commence operations, they will
substantially increase the capacity available for the provision of services that
compete with the Company's services. 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. Continued price reductions could have a material adverse effect on
Orion's ability to service its indebtedness and on the value of the Orion Newco
Common Stock. See "Information About Orion's Business -- Competition."
APPROVALS NEEDED; REGULATION OF INDUSTRY
Telecommunications Regulatory Policy. Orion is subject to the U.S.
Communications Act of 1934, as amended (the "Communications Act"), and
regulation by the FCC (and, to a limited extent, by the U.S. Department of
Commerce) and by the national and local governments of other countries. The FCC
regulates terms and conditions of communications services, including among other
things changes in control or assignment of licenses. The business prospects of
Orion could be adversely affected by the adoption of new laws, policies or
regulations, or changes in the interpretation or application of existing laws,
policies or regulations, that modify the present regulatory environment or
conditions of the licenses granted by the FCC to Orion.
Additional Regulatory Approvals Needed. The launch and operation of Orion 2
and Orion 3 will require a number of additional regulatory approvals, including
the following: (i) 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. Although the FCC has
conditionally authorized the construction, launch and operation of Orion 2
(subject to completion of an INTELSAT consultation and required showing of
ability to finance the construction, launch and operation for one year of the
satellite, which requirements generally must be satisfied for final FCC
authorization of all FCC satellite licenses), and Orion will apply for certain
other approvals for Orion 2 and Orion 3, the FCC authorization for Orion 2 has
not become final (since Orion has not yet satisfied the conditions) and most of
the other requisite approvals have not yet been obtained. Failure to obtain such
approvals
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would have a material adverse effect on Orion and on its ability to service its
indebtedness and the value of the Orion Newco Common Stock. In addition, Orion
is required to obtain approvals from numerous national and 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, but the failure to
obtain particular approvals has delayed, and in the future may delay, the
provision of services by Orion. 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. 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. See "Information About Orion's Business --
Regulation."
ITU Coordination Process. An international treaty to which the U.S. and the
Republic of the Marshall Islands (through which the Company has applied for the
Orion 3 orbital slot) are parties requires ITU coordination of satellite orbital
slots. Various non-U.S. governments or telecommunications authorities have
commenced coordination procedures pursuant to ITU regulations for proposed
satellites at orbital locations and in frequency bands that are in close
proximity to those proposed for Orion 2 and Orion 3. Existing satellites and any
proposed satellites that are launched prior to Orion 2 and Orion 3 will
effectively have priority over Orion's satellites. Orion's proposed use for
Orion 2 and Orion 3 conflicts to some extent with the use or proposed use of
certain existing or proposed satellites. While Orion believes that it can
successfully coordinate the use of the orbital locations and frequency bands
proposed for Orion 2 and Orion 3, there can be no assurance that coordination
will be achieved. The Company has commenced construction of Orion 3 and will
commence construction of Orion 2 promptly following completion of the Notes
Offering, which will be prior to completion of ITU coordination. There can be no
assurance that ITU coordination will be completed. 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 could increase the cost or delay the
launch of the satellites (if significant changes to the satellite are required)
and may result in limitations on the use of one or more transponders on Orion 2
or Orion 3, which could affect the amount of revenue realized from such
transponders. If interference occurs with satellites that are in close proximity
to Orion 2 or Orion 3, or with satellites that are subsequently launched into
locations in close proximity before completion of 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. Orion cannot
predict the extent of any adverse effect on Orion from any such occurrences. See
"Information About Orion's Business -- Orbital Slots."
UNCERTAINTIES RELATING TO BACKLOG
The Company's current backlog consists of a mix of large and small contracts
for private communications networks and transmission capacity for video and
other satellite transmission services with a variety of customers. 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 business or financial risks
affecting their credit worthiness. 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. In the second quarter of 1996, the Company
determined that one large customer under a long-term contract (accounting for
backlog of approximately $19.9 million) was not likely to raise the financing to
commence its service in the near future, and accordingly the Company no longer
considers such contract part of its backlog. Also in the second quarter of 1996,
the Company removed from its backlog a contract with a customer (accounting for
backlog of approximately $4.5 million) which had ceased paying for the Company's
services. In the fourth quarter of 1996, the
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Company removed $10.4 million from its backlog related to contracts under which
customers failed to use the contracted service or failed to make timely payment.
Orion presently anticipates that at least $86.4 million of its $123 million in
backlog (as of September 30, 1996, after pro forma adjustments for the Exchange)
will be realized after 1997. 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.
TECHNOLOGICAL CHANGES
Although Orion believes that Orion 1 does employ, and Orion 2 and Orion 3
will employ, advanced technologies, the telecommunications industry continues to
experience substantial technological changes. The Company believes that there
are numerous telecommunications companies that are seeking ways to improve the
data transmission capacity of the existing terrestrial infrastructure. There can
be no assurance that such changes will not adversely affect the prospects or
proposed operations or expenses of Orion.
RISKS OF CONDUCTING INTERNATIONAL BUSINESS
The Company's international service contracts are generally denominated in
U.S. dollars, but it is possible that the portion of contracts denominated in
non-U.S. currencies will increase over time. The vast majority of the Company's
costs (including interest and principal of the Notes, other indebtedness and the
costs for VSATs, Orion 2 and Orion 3) are denominated in U.S. dollars.
Accordingly, an increase in the value of U.S. dollars relative to other
currencies could have an adverse effect on the Company. International operations
are also subject to certain risks such as changes in domestic and foreign
government regulations and telecommunication standards, licensing requirements,
tariffs or taxes and other trade barriers and political and economic
instability.
DEPENDENCE OF ORION ON KEY PERSONNEL
Orion's business is dependent on its executive and other officers and other
key personnel. Orion presently does not have employment contracts with, or key
man life insurance covering, such key officers or other personnel. The loss of
key officers or personnel could have an adverse effect on Orion. See "Management
of Orion and Orion Newco."
RISKS RELATING TO CAPITAL STOCK
CONTROL OF ORION NEWCO BY PRINCIPAL STOCKHOLDERS
Executive officers, directors and their affiliates are expected to own
beneficially approximately 8.1 million shares or approximately 40% of the Orion
Newco voting stock that will be outstanding after the Transactions (12.0 million
shares or approximately 46% of the Orion Newco voting stock that will be
outstanding after the Transactions on a fully diluted basis), assuming a closing
of the Transactions as of January 30, 1997. As a result of their stock ownership
and, in the case of stockholders with representation on the Board of Directors,
the incumbency of directors affiliated with them, such stockholders are and will
continue to be in a position to elect the Board of Directors and thereby control
the affairs and management of Orion Newco and Orion.
RISKS RELATING TO ORION SENIOR PREFERRED STOCK
The Company has outstanding approximately $15.8 million (including accrued
dividends) of Orion Series A Preferred Stock and approximately $4.7 million
(including accrued dividends) of Orion Series B Preferred Stock. Because the
rights of the holders of the Orion Newco Senior Preferred Stock, includ-
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ing mandatory redemption or repurchase rights, will be substantially identical
to the rights of the holders of the Orion Senior Preferred Stock, such rights
similarly could adversely affect Orion Newco or the rights of holders of the
Orion Newco Common Stock. Although Orion expects the holders of the Orion Senior
Preferred Stock to agree not to exercise any such mandatory redemption or
repurchase rights under the Orion Newco Senior Preferred Stock while the Notes
or the Debentures are outstanding, such holders have the right to require Orion
to repurchase the shares of Orion Common Stock received as a result of
conversion of the Orion Senior Preferred Stock upon, among other things, certain
mergers, changes of control or sales of substantially all the assets of Orion at
the pro rata interest of the holders of such stock in the consideration received
or, in the case of certain fundamental changes, fair market value; and,
beginning in June 1999, such holders have the right to require Orion to
repurchase Orion Senior Preferred Stock (and any Orion Common Stock received
upon the conversion thereof) at the fair market value (in the case of Orion
Common Stock) or liquidation value, including accrued and unpaid dividends (in
the case of Orion Senior Preferred Stock). In addition, the documents relating
to the Orion Senior Preferred Stock impose certain covenants on Orion, and
failure to comply with those covenants could have an adverse effect on Orion.
See "Description of Orion Newco Capital Stock -- Orion Newco Senior Preferred
Stock."
LIMITATIONS ON DIVIDENDS ON ORION AND ORION NEWCO COMMON STOCK
Orion has never paid any cash dividends on its Orion Common Stock and does
not anticipate paying (or that Orion Newco would pay) cash dividends in the
foreseeable future. Orion is not permitted to pay cash dividends on the Orion
Common Stock as long as the Orion Senior Preferred Stock is outstanding, subject
to certain limited exceptions. The Notes Indentures will effectively prohibit
the payment of cash dividends on the Orion Newco Common Stock for the
foreseeable future. See "Price Range of Orion Common Stock and Dividend Policy."
POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Transactions, there will be approximately 25.9 million
shares of Orion Newco Common Stock outstanding on a fully diluted basis,
assuming a closing of the Transactions as of January 30, 1997. Orion's current
stockholders will initially hold approximately 14.5 million of these shares, all
of which will be freely transferable without restriction or further registration
under the Securities Act, other than the 5.5 million shares held by "affiliates"
of the Company, as that term is defined under the Securities Act. The shares
held by affiliates are expected to be eligible for sale pursuant to Rule 144
under the Securities Act. The Exchanging Partners, as owners of the Orion Newco
Series C Preferred Stock, and British Aerospace and Matra Marconi Space, as
owners of the Debentures, will own the remaining 11.4 million of such shares of
Orion Newco Common Stock, which will be issuable upon conversion of such
securities. All of such remaining shares will be deemed to be "restricted
securities" as that term is defined in Rule 144. However, the Exchanging
Partners, British Aerospace and Matra Marconi Space will be granted certain
shelf, demand and "piggyback" registration rights with respect to the Orion
Newco Common Stock issuable to them upon conversion, pursuant to which (in the
case of the Exchanging Partners) the Company will be required to prepare and
cause to be filed, as soon as practicable after 180 days following consummation
of the Merger Transactions, a "shelf" registration statement which will cover
the registration of certain Eligible Registrable Securities (as defined to
include approximately 25% of the Orion Newco Common Stock issuable to the
Limited Partners upon conversion). The Company will also be required to file
certain additional shelf registration statements for the Exchanging Partners so
that they will be able to sell, each quarter, up to 25% of the Orion Newco
Common Stock issuable to them upon conversion, on a non-cumulative basis, and
certain additional shelf registration statements for British Aerospace and Matra
Marconi Space. No predictions can be made as to the effect, if any, that sales
of Orion Newco Common Stock or the availability of additional shares of Orion
Newco Common Stock for sale by the Exchanging Partners, British Aerospace or
Matra Marconi Space would have on the market price of such securities prevailing
from time to time. Nevertheless, the foregoing could adversely affect the market
prices of the Orion Newco Common Stock and the ability of Orion Newco to raise
equity financing. See "Orion Newco Shares Eligible for Future Sale."
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ANTI-TAKEOVER AND OTHER PROVISIONS OF THE CERTIFICATE OF INCORPORATION
Orion's Certificate of Incorporation includes, and Orion Newco's Certificate
of Incorporation will include, provisions that may discourage or prevent certain
types of transactions involving an actual or potential change in control of
Orion or Orion Newco, respectively, including transactions in which the
stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, the Board of Directors has the authority to
fix the rights and preferences of and issue shares of preferred stock, which may
have the effect of delaying or preventing a change in control of Orion or Orion
Newco without action by the stockholders. The staggered terms of the Company's
Board of Directors could also discourage any potential acquirer. Orion's
Certificate of Incorporation also permits the redemption of stock from
stockholders where necessary to protect Orion's regulatory licenses. Orion
Newco's Certificate of Incorporation will be substantially identical to Orion's
Certificate of Incorporation. See "Description of Orion Newco Capital Stock --
Certain Anti-Takeover Effects." In addition, any change of control of Orion or
Orion Newco is subject to the prior approval of the FCC. See "Information About
Orion's Business -- Regulation -- Unauthorized Transfer of Control."
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THE SPECIAL MEETING
INTRODUCTION
This Proxy Statement/Prospectus is being furnished to the stockholders of
Orion Network Systems, Inc. in connection with the solicitation by the Board of
Directors of Orion of proxies for use at a special meeting of stockholders to be
held on Thursday, January 30, 1997 at 9:00 a.m., local time, at 2440 Research
Boulevard, Suite 400, Rockville, Maryland.
At the Special Meeting, stockholders will be asked to consider and vote upon
proposals (i) to ratify the Merger Agreement and the transactions contemplated
thereby, including the Merger, (ii) to approve and adopt the Exchange Agreement
and the transactions contemplated thereby, including the Exchange, and (iii) to
approve the Debenture Investments. See "The Merger, the Exchange and the
Debenture Investments." Except for procedural matters incident to the conduct of
the Special Meeting, Orion does not know of any matters other than those
described in the Notice of Special Meeting that are to come before the Special
Meeting.
VOTING RIGHTS AND RELATED MATTERS
The shares of Orion capital stock which may be voted at the Special Meeting
consist of shares of Orion Common Stock and shares of Orion Series A Preferred
Stock and Orion Series B Preferred Stock. Each share of Orion Common Stock
eligible to vote entitles its holder to one vote on all matters, each share of
Orion Series A Preferred Stock eligible to vote entitles its holder to 117 votes
on all matters (the number of votes per share determined by dividing the
liquidation preference of the Orion Series A Preferred Stock of $1,000 per share
by the conversion price of $8.50 per share of Orion Common Stock) and each share
of Orion Series B Preferred Stock eligible to vote entitles its holder to 98
votes on all matters (the number of votes per share determined by dividing the
liquidation preference of the Orion Series B Preferred Stock of $1,000 per share
by the conversion price of $10.20 per share of Orion Common Stock).
The close of business on December 23, 1996 has been fixed by the Board of
Directors as the record date for determination of stockholders entitled to
notice of, and to vote at, the Special Meeting. On the record date, 10,974,121
shares of Orion Common Stock were outstanding and eligible to be voted, 13,871
shares of Orion Series A Preferred Stock were outstanding and eligible to be
voted (representing an aggregate of 1,622,907 votes), and 4,298 shares of Orion
Series B Preferred Stock were outstanding and eligible to be voted (representing
an aggregate of 421,204 votes) at the Special Meeting. The foregoing share vote
calculations reflect adjustments arising from the 1-1.36 reverse stock split of
the Orion Common Stock effected in July 1995.
The holders of a majority of the votes of the shares of Orion capital stock
issued and outstanding and entitled to vote, present in person or represented by
proxy, treated as a single class, will be required to constitute a quorum at the
Special Meeting. Under Delaware law, abstentions and broker non-votes are
counted for purposes of determining a quorum.
VOTES REQUIRED
The affirmative vote of holders of a majority of the votes of the shares of
Orion capital stock that are entitled to vote and that are present in person or
represented by proxy at the Special Meeting, treated as a single class, will be
required to approve each proposal to be considered at the Special Meeting. Orion
anticipates that all members of the Board of Directors who are Orion
stockholders and companies they represent (who held, in the aggregate,
approximately 38% of Orion's voting stock as of September 30, 1996) will enter
into written agreements to vote for each such proposal.
Under Delaware law, abstentions, but not broker non-votes, are counted as
shares entitled to vote for purposes of determining whether a proposal has been
approved by the necessary number of votes. Abstentions on a proposal will have
the effect of a vote against such proposal.
The Merger will be effected in accordance with Section 251(g) of the Delaware
General Corpora-
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tion Law, which under certain circumstances permits a Delaware corporation (such
as Orion) to reorganize by merging with or into a wholly owned subsidiary of a
holding company (such as Orion Newco) without the requirement that stockholders
of such Delaware corporation adopt and approve the merger agreement.
Accordingly, although the Merger Agreement and the transactions contemplated
thereby, including the Merger, are being submitted for ratification by Orion's
stockholders at the Special Meeting pursuant to contractual and other
requirements, no vote of Orion's stockholders adopting, approving or authorizing
the Merger Agreement and such transactions is required under Delaware law.
However, the Company does not intend to proceed with the Merger without
obtaining stockholder ratification.
NO DISSENTERS' RIGHTS
Orion stockholders are not entitled under Delaware law to appraisal or
dissenters' rights in connection with the matters submitted by Orion for
stockholder ratification or approval at the Special Meeting.
PROXIES
A proxy may be revoked by any Orion stockholder who attends the Special
Meeting and gives notice of such stockholder's intention to vote in person
without compliance with any other formalities. In addition, any stockholder may
revoke a proxy at any time before it is voted by executing and delivering a
later dated proxy or by delivering a written notice to the Secretary of Orion
stating that the proxy is revoked. At the Special Meeting, stockholders' votes
cast, either in person or by proxy, will be tabulated by persons appointed by
the Board of Directors to act as inspectors of election.
The cost of soliciting proxies in the form enclosed herewith will be borne
entirely by Orion. In addition to the solicitation of proxies by mails, proxies
may be solicited by officers and directors and regular employees of Orion,
without additional remuneration, by personal interviews, telephone, telegraph or
otherwise. Orion may also utilize the services of its transfer agent, Fleet
National Bank, to provide broker search and proxy distribution services at an
estimated cost of $2,000. Copies of solicitation material may be furnished to
brokers, custodians, nominees and other fiduciaries for forwarding to beneficial
owners of shares of Orion Common Stock, and normal handling charges may be paid
for such forwarding service. All executed proxies received before the vote will
be voted in the manner indicated. Executed but unmarked proxies will be voted
FOR each of the proposals relating to the Merger Agreement, the Exchange
Agreement and the Debenture Investments submitted to the stockholders at the
Special Meeting.
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THE MERGER, THE EXCHANGE AND THE DEBENTURE INVESTMENTS
The following discussion summarizes the material aspects of the Merger
Transactions, as set forth in the Merger Agreement and the Exchange Agreement,
and the Debenture Investments, as set forth in the Debenture Agreement. This
discussion is qualified in its entirety by reference to the full text of the
Merger Agreement, the Exchange Agreement and the Debenture Agreement, including
each of the exhibits thereto, the material provisions of which are described in
this Proxy Statement/Prospectus. Copies of the Merger Agreement and the Exchange
Agreement are attached hereto as Attachments A and B, respectively, and a copy
of the Debenture Agreement has been filed as an exhibit to the Registration
Statement of which this Proxy Statement/Prospectus is a part. See "Available
Information."
BACKGROUND OF THE MERGER TRANSACTIONS AND THE DEBENTURE INVESTMENTS
Orion's principal business is the provision of satellite communications for
private communications networks, Internet access 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. During this period, 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 communication
network services, raising additional financing for such services, marketing of
capacity and planning Orion 2 and Orion 3 and refinancing of Orion 1. Subsequent
to the acceptance of Orion Atlantic's first satellite, Orion 1, in January 1995,
Orion's efforts have been primarily focused on building customer relationships,
marketing and sales of network and satellite services, as well as ongoing
planning for the future construction of Orion 2 and Orion 3 and refinancing of
Orion 1.
The Merger, the Exchange and the Debenture Investments arose out of Orion's
plans to refinance Orion Atlantic's existing debt and finance two additional
satellites, Orion 2 (with coverage of Europe, Russia, the eastern United States
and Latin America) and Orion 3 (with coverage of the Asia Pacific region). In
the fall of 1995, Orion Atlantic commenced but ultimately deferred a plan to
raise over $290 million of financing for Orion 2, plus $300 million of senior
secured notes to repay the existing Orion 1 Credit Facility payments, make
certain repayments to the Limited Partners and provide working capital (the
"1995 Financing"). After the decision was made to defer the 1995 Financing,
Orion's management team began the process of selecting and implementing
financing plans that would allow Orion to refinance Orion 1 and to construct,
launch and operate Orion 2 and Orion 3. The objectives of the refinancing would
be to eliminate the credit support obligations of the Limited Partners,
including Orion, under the Orion 1 Credit Facility and to enable the financing
of Orion 2 to proceed. Orion believed that this would improve Orion's short-term
and long-term growth prospects and maximize Orion's stockholders' equity value.
Based on the partnership structure of Orion Atlantic, management worked closely
with the Limited Partners to develop an acceptable financing plan.
On December 6, 1995, at a meeting of the Policy and Planning Review Committee
of Orion Atlantic, Salomon Brothers Inc ("Salomon Brothers") was asked to make a
presentation analyzing the 1995 Financing and recommending financing
alternatives available to Orion. Salomon Brothers was selected based on its
participation in the 1995 Financing and role as lead manager of Orion's initial
public offering, and its resulting familiarity with the business and financial
condition of Orion. Effective April 10, 1996, Salomon Brothers was engaged as
Orion's financial advisor in connection with the Exchange. Salomon Brothers
ultimately rendered an opinion to Orion regarding the fairness to Orion from a
financial point of view of the consideration to be paid by Orion in the
Exchange. See " Opinion of Orion's Financial Advisor" below.
Throughout the months of January and February 1996, management explored
alternative financing plans. On February 13, 1996, a management team met with
representatives of Salomon Brothers in New York City. At that meeting, Salomon
Brothers discussed, among other things, the possible mechanics of an exchange
for the Limited Partners' partnership interests, and the consideration that
would need to be provided to the Limited Partners. On February 23, 1996,
management drafted a memorandum that outlined the structural framework of the
financing plan that ultimately evolved into the Merger Transactions. In the
February 23 memorandum, management reiterated that the prospect of resurrecting
the 1995 Financing appeared doubtful. Members of Orion's Finance Committee
discussed the February 23, 1996 management memorandum by phone on February 27,
1996.
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During the month of March 1996, exploration of alternative financing plans
continued. On March 15, 1996, certain members of the Finance Committee discussed
the valuation of the consideration that would need to be provided to the Limited
Partners in exchange for their limited partnership interests in Orion Atlantic.
On March 19, 1996, at a meeting of Orion's Finance Committee, members discussed
the financing alternatives that would be available to Orion if the exchange of
the Limited Partners' partnership interests was not concluded. Based on these
discussions, the Finance Committee recommended that management pursue a
financing plan that involved an exchange of the Limited Partners' limited
partnership interests in Orion Atlantic for Orion stock. The Finance Committee
also requested management to prepare a valuation of Orion Atlantic that would be
submitted to the Board for approval.
Certain members of the Finance Committee conducted a telephone conference
call on March 25, 1996, to review progress made, and to analyze the relative
merits of the financing plans that had been explored. Participants agreed on the
importance of selecting a financing plan that would achieve an improved Orion
Atlantic corporate governance structure that allowed for quicker and more
flexible decision making. Participants further agreed that this corporate
governance structure could be achieved by fully exchanging Orion stock for the
Limited Partners' partnership interests.
In meetings held on April 9, 1996, management reported to the Finance
Committee that it was refining a financing plan that would eliminate the limited
partner guarantees and exchange securities of Orion for the Limited Partners'
limited partnership interests in Orion Atlantic. Discussions of the terms of the
proposed financing plan continued the next day. Discussions of the terms of the
proposed financing plan continued further at an April 17, 1996 meeting of the
Finance Committee.
In an April 18, 1996 memorandum, management provided the Limited Partners
with a status report on the new financing plan. Management, in the memorandum,
expressed its belief that the new financing plan would satisfy Orion's criteria
for a financing plan, refinancing Orion 1 and financing the construction and
launch of Orion 2.
A meeting of the Finance Committee was held on May 2, 1996, to discuss the
new financing plan. Management presented a document summarizing the basic terms
and conditions of the security proposed to be issued to the Limited Partners in
exchange for their limited partnership interests in Orion Atlantic. Based upon
the meeting, the Finance Committee unanimously approved making a proposal to the
Limited Partners to exchange their interests in Orion Atlantic for securities of
Orion pursuant to the term sheet.
On May 3, 1996, management sent the Limited Partners a memorandum containing
details of the proposed financing plan. In the May 3, 1996 memorandum,
management outlined the terms of the Exchange. As detailed in the memorandum,
management informed the Limited Partners that they had been working to select a
financing strategy that would allow for the refinancing of the Orion 1 Credit
Facility and finance the construction and launch of Orion 2. Management informed
the Limited Partners that they had (based on management's evaluation) selected a
financing plan. The management plan had a number of elements. Initially, in
order to simplify the structure of Orion Atlantic, the Limited Partners' limited
partnership interests in Orion Atlantic and certain obligations owed to the
Limited Partners by Orion Atlantic would be exchanged for a convertible
preferred security of Orion. The security would be convertible into Orion's
common stock. In connection with the exchange, Orion would secure additional
capital by conducting a convertible debt offering. The simplified Orion Atlantic
structure would enhance the marketability of Orion's convertible debt offering.
Proceeds of the convertible debt offering would be used to fund an initial down
payment for the construction and launch of Orion 2 and a portion of the initial
down payment for the construction and launch of Orion 3. Based upon prior
discussions with British Aerospace through its representative on the Orion Board
of Directors and Finance Committee, Orion proposed that $50 million of the
convertible debt offering be purchased by British Aerospace. Vendor financing
would supplement the convertible debt offering proceeds, and go towards meeting
the capital needed to construct and launch Orion 2 (and, if possible, Orion 3).
Concurrently with the convertible debt offering and the arrangement of vendor
financing, Orion would conduct a bond offering designed to raise enough capital
to refinance the Orion 1 Credit Facility, and provide for working capital.
In response to a request by certain Limited Partners, the plan was further
refined. In particular, the Company asked Ernst & Young LLP to review the plan
from a tax perspective and determine whether
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a transaction could be structured that would provide the Limited Partners with
non-recognition treatment (in whole or in part) in connection with an exchange
of their interests in Orion Atlantic for stock. After reviewing management's
plan, Ernst & Young LLP advised management that the structure described herein
would provide (i) the Exchanging Partners with the opportunity to qualify for
nonrecognition treatment under Section 351 of the Code and (ii) the Orion
stockholders with similar nonrecognition treatment under either Section 351 or
Sections 354 and 368(a) of the Code, subject to certain exceptions summarized
below, and provided certain requirements are satisfied. See "Certain Federal
Income Tax Consequences" below.
Following distribution of the May 3, 1996 memorandum detailing the Merger
Transactions to the Limited Partners, management and Orion's counsel proceeded
to negotiate the definitive documentation relating to the Merger Transactions.
On May 20, 1996, counsel to Orion and the Limited Partners met for a negotiation
session, and negotiations continued through approximately the end of June 1996.
The terms of the Merger Transactions, including the exchange ratio, were
determined as a result of arm's- length negotiations between Orion and its
advisors and the Limited Partners and their advisors. One of the conditions to
the Merger Transactions was the purchase of $50 million of the convertible debt
offering by British Aerospace, and British Aerospace expressed its intent to
make such purchase, on the same terms as the portion of the convertible debt
offering to be offered to the public.
During late June and early July 1996, each of the Exchanging Partners (but
not Orion) executed copies of the Exchange Agreement and various exhibits
thereto. The executed counterparts were placed into escrow to be delivered to
Orion, OrionSat or Orion Newco on the date of the Exchange.
During late June and July 1996, Orion worked with its financial advisor,
Salomon Brothers, regarding possible bond and convertible note financings.
Salomon Brothers informed Orion during July that the zero coupon high yield bond
market in the communications sector was experiencing a general downturn and that
it would not be advantageous to seek to raise the financing at that time. Based
on this advice, the Board decided to defer the bond and convertible note
offerings and the Exchange until the market for high yield bonds in the
communications sector had improved sufficiently to allow Orion to raise the
capital it desired.
Between July 1996 and November 1996, Orion management consulted several
investment banks to explore a variety of alternative financing methods and
potential transactions. In November 1996, Orion selected prospective
underwriters for the proposed Notes Offering, and commenced preparations for the
Notes Offering.
Salomon Brothers rendered to the Board of Directors of Orion, at a Board
meeting, its opinion dated December 10, 1996 that, based upon and subject to the
various considerations set forth in the opinion, as of December 10, 1996, the
consideration to be paid by Orion in connection with the Exchange is fair from a
financial point of view to Orion. Management confirmed its view that the Merger
Transactions are in the best interests of Orion and its stockholders. Orion's
Board of Directors, on December 10, 1996, after careful deliberation (with W.
Anthony Rice, a representative of British Aerospace, recusing himself),
unanimously approved the Exchange and the Exchange Agreement (which includes
effecting the Merger). Salomon Brothers delivered its fairness opinion later
that day.
In December 1996 and January 1997, Orion and the Exchanging Partners
conducted negotiations concerning certain changes to the Exchange Agreement,
which were ultimately agreed upon in the First Amendment to the Exchange
Agreement. Such changes included agreement by the Exchanging Partners to an
extension of the termination date for the Exchange Agreement to April 30, 1997,
agreement for the cash refund of payments made by the Exchanging Partners after
January 29, 1997 under the Orion 1 Credit Facility Support (to the extent Orion
Newco has sufficient funds to make such refund after payment of various agreed
items), and substitution of the Debenture Investments for the previously
proposed public offering of convertible debt securities.
Also in December 1996, Orion and British Aerospace commenced negotiations
concerning the terms of the Debenture Investments. Matra Marconi Space agreed to
make the Matra Marconi Investment of $10 million on the same terms as the
British Aerospace Investment. Orion's Board of Directors, on January 3, 1997 and
on January 8, 1997 (with W. Anthony Rice, a representative of British Aero-
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space, recusing himself), unanimously approved the Debenture Investments.
Effective as of January 13, 1997, Orion and British Aerospace and Matra Marconi
Space executed the Debenture Agreement.
REASONS FOR THE MERGER TRANSACTIONS AND THE DEBENTURE INVESTMENTS
Orion believes that the Merger Transactions will simplify Orion's
organizational structure and improve its access to the capital markets. The
Transactions will consolidate outside investor ownership at the holding company
level, Orion Newco, and leave Orion Newco with 100% ownership of all of its
material subsidiaries, including Orion Atlantic. This will promote a streamlined
corporate governance structure that will facilitate improved, quicker decision
making. By eliminating minority interests in the Orion subsidiaries that hold
satellite assets, Orion Newco will be able to pursue independently its business
plans and financings for all of its satellites. The Transactions will further
simplify Orion's structure by eliminating (in exchange for Orion Newco stock)
the obligations Orion Atlantic owes to the Exchanging Partners. As of September
30, 1996, such obligations aggregated approximately $37.5 million. Finally, the
increase in outstanding securities as a result of the Merger Transactions is
expected to increase Orion's overall market capitalization, which Orion believes
will also improve its access to the capital markets.
Orion's principal reason for the issuance of $50 million of Debentures to
British Aerospace is to raise additional capital for initial payments with
respect to Orion 2, of which approximately $49.4 million of payments are due
under the Orion 2 Satellite Contract during 1997. The sale of $10 million of
Debentures to Matra Marconi Space will involve a re-investment by Matra Marconi
Space of $10 million of the $13 million of satellite incentive payments Matra
Marconi Space will receive as the Orion 1 manufacturer upon consummation of the
Notes Offering. The consummation of the Debenture Investments is a condition to
the Exchange.
Access to the capital markets is necessary for Orion to achieve its business
plan to construct and launch two additional satellites, Orion 2 (with coverage
of Europe, Russia, the eastern United States and Latin America) and Orion 3
(with coverage of the Asia Pacific region). With this plan in mind, Orion and
Orion Newco have been pursuing and will continue to pursue the following
transactions:
(i) Notes Offering: the Notes Offering in the amount of approximately $347
million with expected gross proceeds of approximately $275 million, excluding
approximately $72 million of overfunding of interest due on such notes. The
principal purpose of the Notes Offering is to refinance the Orion 1 Credit
Facility and release the existing commitments of the Limited Partners and their
affiliates under the Orion 1 Credit Facility Support. Such release is a
condition to the Exchange.
(ii) Orion 2 Construction Contract: the Orion 2 Satellite Contract with Matra
Marconi Space, under which the manufacturer is to proceed with construction
based upon initial payments of $25 million and further payments through December
1997 limited to approximately $25 million. Orion expects to commence the
construction of Orion 2 immediately following completion of the Notes Offering.
(iii) Orion 3 Construction Contract: the Orion 3 Satellite Contract with
Hughes Space, under which the manufacturer is to proceed with construction based
upon initial payments through January 31, 1997 of approximately $15 million,
with further payments through March 31, 1998 being limited to $35 million,
payable in approximately equal quarterly installments. The majority of the
amounts due under the contract are payable in the second and third quarters of
1998. Orion commenced construction of Orion 3 in mid-December 1996 under an
authorization to proceed, and expects to enter into a definitive satellite
contract in January 1997.
As discussed above under the caption "Background of the Merger Transactions
and the Debenture Investments," Orion believes that it would not be able to
complete these financings in the absence of the Merger, the Exchange and the
Debenture Investments. Orion believes that the construction and launch of Orion
2 and Orion 3 will offer stockholders an opportunity to realize long-term value
through the potential appreciation in the value of Orion's stock (as converted
into Orion Newco stock) due to the increased revenues anticipated to result from
the operation of Orion 2 and Orion 3.
Even if stockholders ratify or approve the Merger Transactions and the
Debenture Investments, and the other conditions to the Merger Transactions and
the Debenture Investments are satisfied, the
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Orion Board of Directors reserves the right, based on its consideration of
market conditions and such other factors as it considers appropriate, to cause
Orion not to consummate the Merger Transactions and the Debenture Investments if
it determines the Merger Transactions and the Debenture Investments are no
longer in the best interests of Orion stockholders.
THE MERGER AGREEMENT
TERMS OF THE MERGER AGREEMENT
Effective as of January 8, 1997, Orion, Orion Newco and Orion Merger
Subsidiary entered into the Merger Agreement, pursuant to which Orion Merger
Subsidiary will be merged with and into Orion, and Orion will become a wholly
owned subsidiary of Orion Newco. At the Effective Time of the Merger (as defined
below), each outstanding share of Orion Common Stock and each share of Orion
Series A Preferred Stock and Orion Series B Preferred Stock will be converted,
without any action on the part of the holder thereof, into the right to receive
one share of Orion Newco Common Stock, Orion Newco Series A Preferred Stock and
Orion Newco Series B Preferred Stock, respectively. It is expected that
approximately 10,974,121 shares of Orion Newco Common Stock, 13,871 shares of
Orion Newco Series A Preferred Stock and 4,298 shares of Orion Newco Series B
Preferred Stock will be issued to the stockholders of Orion in the Merger in
exchange for their shares of Orion Common Stock, Orion Series A Preferred Stock
and Orion Series B Preferred Stock, respectively. Such shares of Orion Newco
Series A Preferred Stock and Orion Newco Series B Preferred Stock will be
convertible as of the issuance date into an aggregate of approximately 2,053,255
shares of Orion Newco Common Stock, or approximately 7.9% of the shares of Orion
Newco Common Stock outstanding on a fully diluted basis, assuming a closing of
the Merger as of January 30, 1997.
The Merger will become effective upon the filing of the Delaware Merger
Certificate (as such term is used in the Merger Agreement) with the Delaware
Secretary of State, which is expected to occur following ratification or
approval of the Merger Transactions and the Debenture Investments by the
requisite vote of the Orion stockholders, and satisfaction or waiver of the
other conditions set forth in the Merger Agreement and the Exchange Agreement
(the "Effective Time of the Merger").
The Merger Agreement provides that Orion Merger Subsidiary will be merged
with and into Orion, and that Orion will be the surviving corporation and will
become a wholly owned subsidiary of Orion Newco. Following the Merger, the
separate existence of Orion Merger Subsidiary will cease. Effective upon
consummation of the Merger, Orion will change its name to Orion Oldco Services,
Inc. and, as soon as practicable thereafter, Orion Newco will change its name to
Orion Network Systems, Inc. The Merger Agreement also provides that the
Certificate of Incorporation and Bylaws of Orion in effect immediately prior to
the Effective Time of the Merger will be the Certificate of Incorporation (with
certain amendments) and Bylaws of the surviving corporation. The officers and
directors of the surviving corporation will consist of the current officers and
directors of Orion. See "Management of Orion and Orion Newco."
At the Effective Time of the Merger, all outstanding stock options, including
those under Orion's 1987 Stock Option Plan and Non-Employee Director Stock
Option Plan (the "Orion Options"), will be assumed by Orion Newco to the fullest
extent permitted by applicable law (such assumed options being referred to
herein as "Orion Newco Assumed Options"). Each Orion Newco Assumed Option will
be subject to the same terms and conditions that were applicable under the
related Orion Option immediately prior to the Effective Time of the Merger.
Orion and Orion Newco have agreed to take all corporate and other actions
necessary to effectuate the assumption of the Orion Options, and Orion has
agreed to use its best efforts prior to the closing of the Merger to obtain any
consents from the holders of Orion Options that may be necessary to effectuate
such assumption, if required by the terms of the Orion Options. Orion Newco also
has agreed to take all corporate and other actions necessary to reserve and make
available sufficient shares of Orion Newco Common Stock for issuance upon
exercise of the Orion Newco Assumed Options.
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At the Effective Time of the Merger, Orion Newco will, to the fullest extent
permitted by applicable law, assume all of Orion's obligations with respect to
each outstanding warrant or other right to purchase shares of Orion Common Stock
upon the same terms and conditions that were applicable under such warrant
immediately prior to the Effective Time of the Merger.
For more information on the specific terms of the Merger Agreement,
stockholders are referred to the full text of the Merger Agreement attached to
this Proxy Statement/Prospectus as Attachment A.
NO EXCHANGE OF CERTIFICATES
At the Effective Time of the Merger, by virtue of the Merger and without any
action on the part of Orion, Orion Merger Subsidiary, Orion Newco, Orion
stockholders or any other person, the shares of Orion Newco capital stock, which
the shares of Orion capital stock respectively will have been converted into the
right to receive, will be represented and evidenced by the same stock
certificates that previously represented and evidenced the Orion capital stock.
CONDITIONS TO OBLIGATIONS TO EFFECT THE MERGER
The respective obligations of each party to the Merger Agreement to effect
the Merger are subject to the satisfaction of the following conditions at or
prior to the closing of the Merger:
(i) the ratification of the Merger Agreement and the transactions
contemplated thereby by the requisite affirmative vote of the holders of the
Orion capital stock and the approval of the Merger Agreement and the
transactions contemplated thereby by the requisite affirmative vote of the
holder of the outstanding Orion Newco Common Stock and the holder of the
outstanding Orion Merger Subsidiary common stock;
(ii) the receipt of all authorizations, consents, orders or approvals of, or
making of all filings with, any Governmental Entity (as such term is used in the
Merger Agreement) necessary for consummation of the Merger;
(iii) the effectiveness of the Registration Statement under the Securities
Act and the absence of any stop order with respect to the Registration Statement
and of any proceedings commenced or threatened by the Commission with respect to
this Proxy Statement/Prospectus;
(iv) the absence of any temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or other
legal restraint or prohibition preventing consummation of the Merger;
(v) the absence of any statute, rule or regulation enacted by any
Governmental Entity that would make consummation of the Merger illegal;
(vi) the receipt of an opinion from Ernst & Young LLP, tax advisor to Orion,
and a determination by the Board of Directors of Orion to the effect that Orion
stockholders do not recognize gain or loss for United States federal income tax
purposes;
(vii) the continued accuracy of the representations and warranties made by
each party in the Merger Agreement; and
(viii) the consummation of the Exchange concurrently with the Merger.
AMENDMENT AND TERMINATION
The Merger Agreement may be amended by Orion, Orion Newco and Orion Merger
Subsidiary at any time before or after ratification or approval of the Merger by
the stockholders of such companies, but after any such stockholder ratification
or approval, no amendment may be made which under Section 251(d) of the Delaware
General Corporation Law would require the approval (or further approval) of
stockholders without obtaining such stockholder approval.
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The Merger Agreement may be terminated at any time prior to the Effective
Time of the Merger, whether before or after ratification or approval, as the
case may be, of the Merger Agreement and related matters by the stockholders of
Orion, Orion Newco and Orion Merger Subsidiary (i) by mutual consent of all of
the parties or (ii) by any party, if any required approval of the stockholders
of Orion, Orion Newco or Orion Merger Subsidiary has not been obtained by April
30, 1997.
ACCOUNTING TREATMENT
The Merger will be accounted for as a reorganization of entities under common
control. As a result, the assets and liabilities transferred pursuant to the
Merger will be accounted for at a historical cost in a manner similar to a
pooling of interests.
THE EXCHANGE AGREEMENT
PARTIES
The Exchange Agreement was entered into by Orion, OrionSat, Orion Atlantic
and the Exchanging Partners effective as of June 1996.
Orion. Orion is a Delaware corporation, the 100% owner of OrionSat, a limited
partner of Orion Atlantic with a 16.66% equity interest, and the holding company
of other subsidiaries, including OrionNet, Inc. Orion owns and operates one of
the first privately owned international satellite communications networks as
well as video distribution and other satellite transmission services. Since its
founding in 1982, Orion's efforts have been focused on the design, construction
and implementation of a global satellite communications system that meets the
expanding telecommunications needs of a multinational business. The consolidated
financial statements of Orion include the financial results of Orion Atlantic
because of OrionSat's control of Orion Atlantic as its sole general partner. See
"Selected Consolidated Financial and Operational Data of Orion."
OrionSat. OrionSat is a wholly owned subsidiary of Orion and is the sole
general partner of Orion Atlantic with a 25% equity interest.
Orion Atlantic. Orion Atlantic, a Delaware limited partnership, owns and
operates the Orion 1 communications satellite. In 1991, Orion and seven of the
world's leading telecommunications and aerospace systems companies formed Orion
Atlantic to finance the construction, launch and operation of two communication
satellites, and to operate a multinational sales and services organization.
Exchanging Partners. The Exchanging Partners are British Aerospace
Communications, Inc. ("BAe"), COM DEV Satellite Communications Limited ("COM
DEV"), Kingston Communications International Limited ("Kingston"), Lockheed
Martin Commercial Launch Services, Inc. ("Lockheed Martin CLS"), MCN Sat US,
Inc. ("Matra"), and Trans-Atlantic Satellite, Inc ("Nissho").
The following sets forth certain information regarding each of the Exchanging
Partners:
BAe is a subsidiary of British Aerospace Public Limited Company (collectively
with its affiliates, "British Aerospace"), which is Europe's leading defense and
aerospace company and one of the leading companies in the world defense and
aerospace market.
COM DEV is 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.
Kingston is a subsidiary of Kingston Communications (Hull) plc, the only
municipally-owned telephone company in the United Kingdom. Kingston Satellite
Services, a joint venture to which Kingston is a party, serves as sales
representative and ground operator for Orion Atlantic in the United Kingdom.
Lockheed Martin CLS was formerly named Martin Marietta Commercial Launch
Services, Inc. Lockheed Martin CLS is a subsidiary of Martin Marietta
Technologies, Inc., a Lockheed Martin company. Lockheed Martin CLS acquired the
assets of General Dynamics Commercial Launch Services
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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 Atlantic as the
launch subcontractor. Lockheed Martin CLS became an Exchanging Partner by
acquiring the limited partnership interest of General Dynamics CLS in the 1994
transaction described above.
Matra is a subsidiary of Matra Hachette ("Matra Hachette"), an aerospace,
defense, industrial and media company and part of the Lagardere Group of France.
Matra Hachette is a sales representative and ground operator for Orion Atlantic
in France. Matra Hachette is one of the parent companies of Matra Marconi Space,
which is the present parent company of MMS Space Systems, the prime contractor
for Orion 1, and is the manufacturer under the Orion 2 Satellite Contract.
Nissho is a subsidiary of Nissho Iwai Corporation, a trading company based in
Japan.
STRUCTURE OF THE EXCHANGE
Orion Newco Formation. Under the Exchange Agreement, the parties to the
Exchange Agreement agreed that Orion would form a new Delaware corporation to be
named Orion Newco Services, Inc. which is substantially identical in all
material respects to Orion. In particular, Orion Newco would have a certificate
of incorporation, bylaws and capital structure substantially identical in all
material respects to those of Orion. Orion became the initial stockholder of
Orion Newco and owns all shares of Orion Newco Common Stock. Pursuant to the
terms of the Exchange Agreement, Orion will take steps necessary to make the
management of Orion Newco identical to the management of Orion. Subject to and
effective upon the consummation of the Merger, the Orion Newco board of
directors will consist of the ten current Orion directors and Orion Newco will
change its name to Orion Network Systems, Inc. The Orion Newco management team
will consist of the current Orion management team. Pursuant to the Exchange
Agreement, Orion will take the steps necessary to adopt, authorize, execute and
file (i) a Certificate of Designations, Rights and Preferences of Series A 8%
Cumulative Redeemable Convertible Preferred Stock of Orion Newco substantially
identical in all material respects to the Orion Series A Preferred Stock and
(ii) a Certificate of Designations, Rights and Preferences of Series B 8%
Cumulative Redeemable Convertible Preferred Stock of Orion Newco substantially
identical in all material respects to the Orion Series B Preferred Stock.
Orion Newco Series C Preferred Stock. Under the Exchange Agreement, the
parties agreed that Orion Newco would adopt, authorize, execute and file a
Certificate of Designations, Rights and Preferences of Series C 6% Cumulative
Redeemable Convertible Preferred Stock establishing the terms and relative
rights of preferences of the Orion Newco Series C Preferred Stock. Assuming that
the Exchange closes as of January 30, 1997, 121,988 shares of the Orion Newco
Series C Preferred Stock would be issued to the Exchanging Partners. If the
Exchange closes after January 30, 1997, Orion Newco will be obligated to make
certain cash refunds of payments made by the Exchanging Partners after that date
under various agreements; if Orion Newco does not have sufficient cash to make
such refunds, the refunds will be made in shares of Orion Newco Series C
Preferred Stock, and the number of shares issued in the Exchange will increase.
See "Closing After January 30, 1997" below. The number of shares of Orion Newco
Series C Preferred Stock to be issued to the respective Exchanging Partners,
pursuant to the Exchange Agreement, will be adjusted proportionately to reflect
any subdivision, stock split, stock dividend, recapitalization, combination or
reverse stock split of Orion capital stock or similar transaction by Orion
between the date of the Exchange Agreement and the consummation of the Exchange.
The Exchanging Partners have agreed to transfer their limited partnership
interests in Orion Atlantic, other rights relating thereto and amounts owed to
them by Orion Atlantic aggregating approximately $37.5 million at September 30,
1996 to Orion in exchange for such shares of the Orion Newco Series C Preferred
Stock.
Agreement to the Merger. In the Exchange Agreement, the parties agreed that
Orion Newco would form a new Delaware corporation to be named Orion Merger
Subsidiary, Inc., and that Orion Newco would be the sole stockholder of Orion
Merger Subsidiary. Further, the parties agreed pursuant to the Exchange
Agreement that Orion Merger Subsidiary would be merged with and into Orion in a
merger in which Orion would be the surviving company and all the assets, rights,
property, liabilities and obligations of Orion
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Merger Subsidiary and Orion would be vested in Orion as the surviving company.
Pursuant to Exchange Agreement, Orion agreed to cause all necessary documents to
effect the Merger to be prepared.
Results of the Exchange. As a result of the Exchange, the consolidated Orion
group will become the owner of all the partnership interests in Orion Atlantic
(through Orion Newco and Orion as the sole limited partners and OrionSat as the
sole general partner of Orion Atlantic). In addition, Orion Newco will receive
the following rights currently held by the Exchanging Partners with respect to
Orion Atlantic: (i) all of the Exchanging Partners' rights and obligations under
the Second Amended and Restated Partnership Agreement of International Private
Satellite Partners, L.P., as amended and restated simultaneously with the
Exchange (the "Partnership Agreement"), including particularly all of their
rights to receive distributions and allocations thereunder, but also all other
rights they may have as limited partners of Orion Atlantic under applicable law;
(ii) all of the rights and obligations held by certain of the Exchanging
Partners under the Refund Agreement, dated December 31, 1994, among Orion
Atlantic, OrionSat, Orion and the certain of the Exchanging Partners (the
"Refund Agreement"), consisting primarily of rights by such Exchanging Partners
to receive an aggregate of $26.7 million of refunds thereunder; (iii) all of the
rights of COM DEV, Kingston, Lockheed Martin CLS and Matra under the Preferred
Participating Unit Agreements, dated as of October 7, 1993, among Orion
Atlantic, OrionSat, and each of Orion, COM DEV, Kingston, Lockheed Martin CLS
and Matra (the "PPU Agreement"), consisting primarily of rights to receive
repayment of $6.6 million advanced thereunder and $4.3 million of interest
accrued on such advances; (iv) all of the Exchanging Partners' rights under the
Preferred Bidders Agreement, effective as of December, 20, 1991, among Orion
Atlantic, OrionSat, Orion and the Exchanging Partners (the "Preferred Bidders
Agreement"), consisting of preferred bidder status with respect to procurement
contracts entered into by Orion Atlantic; and (v) certain of the Exchanging
Partners' rights under other agreements between or among Orion Atlantic and its
Limited Partners, which Orion believes are not material to Orion but the
acquisition of which will result in termination of contractual obligations that
may impose procedural or other burdens on Orion Atlantic.
As a result of the Exchange, Orion Newco will transfer to the Exchanging
Partners the following numbers of shares of Orion Newco Series C Preferred
Stock, assuming a closing as of January 30, 1997 (in each case, which numbers of
shares will be increased pursuant to a formula based upon payments by the
Exchanging Partners under various agreements if the closing occurs after January
30, 1997, except to the extent that such payments are refunded in cash):
EXCHANGING PARTNERS NUMBER OF SHARES
------------------- ----------------
BAe ........................... 50,129
COM DEV ....................... 9,462
Kingston ...................... 11,198
Lockheed Martin CLS ........... 19,534
Matra ......................... 17,727
Nissho ........................ 13,938
The terms of the Orion Newco Series C Preferred Stock are described below
under "Description of the Orion Newco Series C Preferred Stock."
CONDITIONS TO THE EXCHANGE
Orion and the Exchanging Partners. Occurrence of the Exchange is subject,
among other things, to satisfaction or waiver by Orion and the Exchanging
Partners of the following conditions:
(i) Orion Newco, Orion Atlantic, Orion and OrionSat shall have completed
the Orion 1 Credit Facility Refinancing. See "The Related Transactions -- The
Notes Offering/Orion 1 Credit Facility Refinancing."
(ii) Orion Newco, Orion Atlantic, Orion, OrionSat and the Exchanging Partners
shall have caused the termination (the "Bank Agreement Termination"), which is
expected to occur concurrently with the completion of the Orion 1 Credit
Facility Refinancing, of all agreements between or among the Banks and Chase, on
the one hand, and one or more of Orion Newco, Orion Atlantic, OrionSat, Orion
and the
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Exchanging Partners and/or their affiliates on the other hand, relating to the
Orion 1 Credit Facility or the security or credit support thereof. See "The
Related Transactions -- The Notes Offering/Orion 1 Credit Facility Refinancing."
(iii) Orion Newco, Orion Atlantic, Orion, OrionSat and the Exchanging
Partners shall have caused the termination (the "Capacity Agreement
Termination"), which is expected to occur concurrently with the completion of
the Orion 1 Credit Facility Refinancing and the Bank Agreement Termination, of
all support obligations with respect to the Orion 1 Credit Facility. See "The
Related Transactions -- The Notes Offering/Orion 1 Credit Facility Refinancing."
(iv) The Option Agreement, dated December 10, 1996, between Orion Atlantic
and Matra Marconi Space shall be in full force and effect, Orion Atlantic shall
not be in default thereunder and Orion Atlantic shall have made all payments
required to be made thereunder through the earlier of the closing date of the
Exchange and March 31, 1997, and the Restated Amendment #10, dated December 10,
1996, to the Orion 1 Satellite Contract shall be in full force and effect and
Orion Atlantic shall not be in default thereunder. See "Information About
Orion's Business -- Implementation of the Orion Satellite System -- Orion 2."
(v) Consents needed for the Exchange shall have been obtained. See
"Approvals" below.
(vi) Orion Newco shall be incorporated with a certificate of incorporation,
bylaws, capital structure and management substantially identical in all material
respects to those of Orion.
(vii) The Merger shall have occurred, or be occurring concurrently with, the
Exchange.
(viii) The Exchanging Partners shall have received an opinion from Ernst &
Young LLP, tax advisor to Orion, in form and substance reasonably satisfactory
to the Exchanging Partners, to the effect that the Merger and the Exchange,
taken together, will be a tax-free exchange described in Code Section 351(a).
Lockheed Martin CLS. In addition to the conditions noted above under the
caption "Orion and the Exchanging Partners," Lockheed Martin CLS's obligations
under the Exchange Agreement are conditioned upon the satisfaction or waiver by
Lockheed Martin CLS of the condition that Lockheed Martin CLS and Matra Marconi
Space enter into a subcontract to the Orion 2 Satellite Contract relating to the
launch of Orion 2. See "Information About Orion's Business -- Implementation of
the Orion Satellite System -- Orion 2."
Orion Parties. In addition to the conditions noted above under "Orion and the
Exchanging Partners," the Orion parties' obligations under the Exchange
Agreement are conditioned upon the following:
(i) The approval of the stockholders of Orion of the Merger Agreement and the
Exchange Agreement shall have been obtained.
(ii) The Partnership Agreement shall have been amended and restated as of the
date of the Exchange.
(iii) Orion Newco shall have raised approximately $60 million from the
Debenture Investments.
The Orion 1 Credit Facility Refinancing, Bank Agreement Termination and
Capacity Agreement Termination are dependent on successful completion of the
Notes Offering, which in turn depends upon market conditions and other factors,
and there can be no assurance that the Notes Offering will occur. Orion believes
that the conditions relating to the Orion 2 Satellite Contract and other
arrangements with Matra Marconi Space have been satisfied, that the conditions
relating to the Lockheed Martin CLS subcontract have been satisfied or waived,
that the Partnership Agreement amendment has been obtained, that binding
commitments to make the Debenture Investments have been entered into, that
consents needed for the Exchange have been or will be obtained, that the Orion
Newco formation conditions have been satisfied, that the Merger will occur
concurrently with the Exchange if ratified by Orion stockholders at the Special
Meeting and that all required opinions from Ernst & Young LLP, tax advisor to
Orion, have been or will be obtained.
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CERTAIN PROVISIONS OF THE EXCHANGE AGREEMENT
The Exchange Agreement contains a number of representations, warranties and
indemnities by Orion and the Exchanging Partners.
o Representations and Warranties. Among other things, each of the Exchanging
Partners has severally represented and warranted to Orion that: (i) such
Exchanging Partner is, and on the date of the Exchange will be, the lawful
owner of the limited partnership interest in Orion Atlantic of such
Exchanging Partner, (ii) such Exchanging Partner has full right and lawful
authority to transfer the limited partnership interest in Orion Atlantic
of such Exchanging Partner pursuant to the Exchange Agreement, (iii) the
Exchange Agreement constitutes a valid and binding obligation of such
Exchanging Partner, enforceable in accordance with its terms, (iv) on the
date of the Exchange, Orion will acquire good, valid and marketable title
to such Exchanging Partner's limited partnership interests in Orion
Atlantic, (v) such Exchanging Partner is an "accredited investor" within
the meaning of Rule 501 under the Securities Act, (vi) the Orion Newco
Series C Preferred Stock being acquired by such Exchanging Partner
pursuant to the Exchange Agreement is for its own account, for investment
and not with a view toward distribution within the meaning of the
Securities Act (subject to the ability of certain of the Exchanging
Partners to transfer a portion of their Orion Newco Series C Preferred
Stock to other Exchanging Partners) and (vii) such Exchanging Partner has
at the time of execution of the Exchange Agreement, and at the time of the
Exchange will have, no present plan or intention to sell or otherwise
dispose of the Orion Newco Series C Preferred Stock being acquired under
the Exchange Agreement or any Orion Newco Common Stock issuable upon the
conversion of such Orion Newco Series C Preferred Stock.
Among other things, Orion has represented and warranted to the Exchanging
Partners that: (i) Orion is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, has full
corporate power and authority to carry on its business as currently
conducted, and has the full legal right, capacity, power and authority
(corporate or otherwise) to execute and deliver the Exchange Agreement and
consummate the transactions contemplated thereby, (ii) the Exchange
Agreement constitutes, and the Registration Rights Agreement (as defined
below) when executed, will constitute a valid and binding obligation of
Orion and Orion Newco, enforceable in accordance with its terms, and that
each document to be executed by Orion or Orion Newco pursuant to the
Exchange Agreement, when executed and delivered in accordance with the
provisions thereof, will be a valid and binding obligation of Orion or
Orion Newco, enforceable in accordance with its terms, (iii) upon
consummation of the transactions contemplated by the Exchange Agreement at
the closing of the Exchange Agreement, the Orion Newco Series C Preferred
Stock will be duly and validly issued, fully paid and nonassessable and no
personal liability will attach to the ownership thereof, and the
Exchanging Partners will acquire the legal, valid and marketable title to
the Orion Newco Series C Preferred Stock, (iv) except as set forth in the
consolidated audited financial statements of Orion as of December 31,
1995, and for the period ended on such date, or included in certain
disclosure materials, there exist no material liabilities (whether
contingent or absolute, matured or unmatured, known or unknown) of Orion
or any subsidiary of Orion and (v) immediately prior to the date of the
Exchange, Orion Newco will have no liabilities (other than de minimis
liabilities relating to Orion Newco's formation, any liabilities or
obligations relating to the Exchange Agreement and any liabilities for
expenses relating to the transactions contemplated by the Exchange
Agreement). Orion also has made several representations regarding tax
filings and payments, maintenance of account books, litigation, filings
with the Commission, transactions with Exchanging Partners and the absence
of certain violations. The representations and warranties of the
Exchanging Partners and Orion contained in the Exchange Agreement survive
the date of the Exchange and any investigation, audit or inspection at any
time made by or on behalf of any party thereto.
o Covenants. The Exchange Agreement contains a number of covenants whereby
Orion and OrionSat, jointly and severally on the one hand, and the
Exchanging Partners, severally and not jointly on the other hand, covenant
and agree with each other, among other things, that: (i) Orion and
OrionSat shall take all measures reasonably necessary or advisable to
secure such consents,
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authorizations and approvals of governmental authorities and of private
persons or entities with respect to the transactions contemplated by the
Exchange Agreement, and the performance of all other obligations of the
parties thereunder, as may be required by any applicable statute or
regulation of the United States or any country, state or other
jurisdiction or by any agreement of any kind whatsoever to which any of
them is a party or by which any of them is bound and which are set forth
in a schedule to the Exchange Agreement, (ii) subject to certain
provisions of the Exchange Agreement, OrionSat and the Exchanging Partners
shall take all measures reasonably necessary or advisable to secure such
consents, authorizations and approvals of governmental authorities and of
private persons or entities with respect to the transactions contemplated
by the Exchange Agreement, and to the performance of all other obligations
of such parties thereunder, as may be required by any applicable statute
or regulation of the United States or any country, state or other
jurisdiction or by any agreement of any kind whatsoever to which any of
them is a party or by which any of them is bound (Orion, OrionSat and the
Exchanging Partners agreeing to (a) cooperate in the filing of all forms,
notifications, reports and information, if any, required or reasonably
deemed advisable pursuant to applicable statutes, rules, regulations or
orders of any governmental or supragovernmental authority in connection
with the transactions contemplated by the Exchange Agreement and (b) use
their respective good faith efforts to cause any applicable waiting
periods thereunder to expire and any objections to the transactions
contemplated by the Exchange Agreement to be withdrawn before the
Exchange) and (iii) Orion shall take all measures reasonably necessary or
advisable to secure all required consents of the stockholders of Orion
(including the consent of holders of Orion Senior Preferred Stock) to the
Merger, the Exchange and any related transactions requiring stockholder
consent.
o Indemnification. In the Exchange Agreement, Orion and OrionSat have agreed
jointly and severally (and Orion agrees to bind Orion Newco pursuant to a
separate indemnity agreement) to indemnify, defend and hold harmless each
of the Exchanging Partners and their respective affiliates, employees,
representatives, agents, officers and directors (collectively, the "EP
Indemnified Persons") from and after the date of the Exchange against and
in respect of all Claims (as defined in the Exchange Agreement) asserted
against, resulting to, imposed upon or incurred by any of the EP
Indemnified Persons (whether such Claims are by, against or relate to
Orion Newco, Orion or OrionSat or any other party, including without
limitation, a governmental entity), directly or indirectly, by reason of
or resulting from any of the following: (i) any of the matters with
respect to which Orion Newco, Orion and OrionSat would be obligated to
indemnify the EP Indemnified Persons under certain provisions of the
Partnership Agreement or (ii) any Claims asserted by one or more of the
Banks or Chase, or their successors or assigns, arising from and after the
date of the Exchange under (x) any of the Capacity Agreements or
guarantees relating thereto which are terminated on or prior to the date
of the Exchange, (y) any agreements or other documents terminated or to be
terminated in connection with the Bank Agreement Termination or (z) the
Exchange Agreement, in each case excluding any Claims arising from or
relating to any breach of any representation of warranty or noncompliance
with any condition or other agreement given or made by any EP Indemnified
Persons under any of the agreements or documents referred to above in this
paragraph or any document furnished by or on behalf of any EP Indemnified
Person pursuant thereto. The obligation and liabilities of Orion Newco,
Orion and OrionSat with respect to their respective indemnities pursuant
to the Exchange Agreement are subject to certain conditions as set forth
in the Exchange Agreement.
CLOSING OF THE EXCHANGE; AMENDMENT AND TERMINATION OF THE EXCHANGE AGREEMENT
If the Merger Agreement is ratified by Orion's stockholders and the other
conditions to completion of the Exchange are satisfied, the Exchange is to occur
at a time and date proposed by Orion not more than ten days after the
satisfaction or waiver of all conditions to completion of the Exchange. No
amendment or modification of the Exchange Agreement will be valid or binding
unless set forth in writing and duly executed and delivered by the party against
whom enforcement of the amendment or modification is sought. The Exchange
Agreement may be terminated at any time before the Exchange takes place under
various circumstances, principally the failure to meet all of the conditions to
completion of the Exchange by a
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specified date (which is currently April 30, 1997), if either Orion and OrionSat
or the Exchanging Partners collectively (as to all Exchanging Partners) or one
or more Exchanging Partners (as to such Exchanging Partners only) give written
notice of termination to the other parties to the Exchange Agreement; provided,
however, that the terminating party is not in breach of any obligations or
agreements under the Exchange Agreement that are causing any of the conditions
precedent to the Exchange not to be satisfied. In the event the Exchange
Agreement is terminated (other than as to less than all the Exchanging
Partners), the Exchange Agreement shall become wholly void and of no effect, and
the parties shall be released from all future obligations thereunder, subject to
certain provisions relating to confidentiality and the payment of expenses which
will remain in effect.
CLOSING AFTER JANUARY 30, 1997
If the Exchange closes after January 30, 1997, Orion Newco will be obligated
to make cash refunds, on or shortly after the closing date, of payments made by
the Exchanging Partners after that date under the Orion 1 Credit Facility
Support; if Orion Newco does not have sufficient cash to make such refunds, the
refunds will be made in shares of Orion Newco Series C Preferred Stock, and the
number of shares issued in the Exchange will increase. The determination whether
Orion Newco has sufficient cash will be made assuming proceeds of the Notes
Offering and the Debenture Investments are applied to the following uses: (i)
repayment of the Orion 1 Credit Facility and various other obligations relating
thereto, (ii) $49.4 million of initial payments under the Orion 2 Satellite
Contract in 1997, (iii) $13 million of incentive payments to Matra Marconi Space
with respect to Orion 1, (iv) $3.5 million of payments to STET upon repayment of
the Orion 1 Credit Facility, (v) an amount for working capital not to exceed $10
million and (vi) certain other costs and expenses not to exceed $14.3 million.
If the amount of gross proceeds of the Notes Offering is as large or larger than
that presently anticipated by the Company, all payments made by the Exchanging
Partners after January 30, 1997 under the Orion 1 Credit Facility Support will
be refunded in cash and the number of shares issued in the Exchange will not
increase.
ACCOUNTING TREATMENT
The Exchange will be accounted for as an acquisition of minority interest
using the purchase method of accounting. As a result, the assets and liabilities
of Orion Atlantic will be revalued to fair value to the extent of the Limited
Partners' interests acquired as a result of the Exchange.
DESCRIPTION OF THE ORION NEWCO SERIES C PREFERRED STOCK
Pursuant to the Exchange Agreement, Orion has agreed that prior to the date
of the Exchange, Orion Newco will have filed a Certificate of Designations,
Rights and Preferences of Series C 6% Cumulative Redeemable Convertible
Preferred Stock with the State of Delaware (the "Certificate of Designations")
establishing the terms and relative rights and preferences of the Orion Newco
Series C Preferred Stock. According to the Certificate of Designations, the
terms of the Orion Newco Series C Preferred Stock are as follows:
Dividends. Subject to the preferential rights of Orion Newco's Series A
Preferred Stock and Orion Newco's Series B Preferred Stock ranking senior to the
Orion Newco Series C Preferred Stock, the record holders of Orion Newco Series C
Preferred Stock will be entitled to receive dividends at the rate of 6% per
annum, payable exclusively (except in the event of a Liquidation, as defined
below) in Orion Newco Common Stock. Dividends will accrue on a daily basis
commencing on the date of issuance of each share of Orion Newco Series C
Preferred Stock at the simple interest rate of 6% per annum of the $1,000 per
share value thereof. The number of shares of Orion Newco Common Stock
distributable in a dividend on each share of Orion Newco Series C Preferred
Stock is calculated based on the market price of such stock under a formula
provided in the Certificate of Designations.
Liquidation rights. Subject to the liquidation rights contained in the
Certificate of Designations, Rights and Preferences for the Orion Newco Series A
Preferred Stock and the Certificate of Designations, Rights and Preferences for
the Orion Newco Series B Preferred Stock, in the event of any liqui-
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dation, dissolution or winding up of Orion Newco (a "Liquidation"), each holder
of Orion Newco Series C Preferred Stock will be entitled to be paid, before any
distribution or payment is made upon the Orion Newco Common Stock or any other
series or class of stock of Orion Newco ranking junior to the Orion Newco Series
C Preferred Stock, an amount in cash equal to the greater of (a) $1,000 per
share (plus an amount equal to all accrued and unpaid dividends) of all shares
of Orion Newco Series C Preferred Stock held by such holder or (b) the amount
which would be distributed with respect to the shares of Orion Newco Common
Stock (including fractional shares for purposes of this calculation) into which
such shares of Orion Newco Series C Preferred Stock are convertible (assuming
conversion of all outstanding Orion Newco Series C Preferred Stock) immediately
prior to the record date for such distribution (or, if there is no such record
date, then the date as of which the holders of Orion Newco Common Stock entitled
to such distribution are determined), and the holders of Orion Newco Series C
Preferred Stock shall not be entitled to any further payment. If upon any such
Liquidation Orion Newco's assets to be distributed among the holders of the
Orion Newco Series C Preferred Stock are insufficient to permit payment to such
holders of the aggregate amount which they are entitled to be paid, then the
entire assets to be distributed shall be distributed ratably among such holders
based upon a value of $1,000 per share (plus all accrued and unpaid dividends)
of the Orion Newco Series C Preferred Stock held by each such holder.
Voting rights. The holders of the Orion Newco Series C Preferred Stock will
be entitled to notice of all stockholders' meetings in accordance with Orion
Newco's bylaws, and except as otherwise required by law, the holders of the
Orion Newco Series C Preferred Stock will be entitled to vote on all matters
submitted to the stockholders for a vote together with the holders of Orion
Newco Common Stock and the holders of Orion Newco Senior Preferred Stock, voting
together as a single class. Each share of Orion Newco Common Stock will be
entitled to one vote per share and each share of the Orion Newco Senior
Preferred Stock and Orion Newco Series C Preferred Stock (including fractional
shares) will be entitled to one vote for each whole share of Orion Newco Common
Stock that would be issuable upon conversion of such share of Orion Newco Senior
Preferred Stock and Orion Newco Series C Preferred Stock, respectively, at the
time the vote is taken.
Redemption. Orion Newco will be required to redeem all of the Orion Newco
Series C Preferred Stock on the 25th anniversary of issuance (2022).
Additionally, at any time after the second anniversary of the date of the
issuance of the Orion Newco Series C Preferred Stock under the Exchange
Agreement, or, if prior to such date, immediately prior to the consummation of
any consolidation, merger or sale in which the successor entity or purchasing
entity is other than Orion Newco, Orion Newco, at its option and to the extent
it has funds legally sufficient therefor, may redeem the shares of Orion Newco
Series C Preferred Stock then outstanding, in whole or in part, for an aggregate
redemption price of $1,000 per share (plus all accrued and unpaid dividends
thereon); provided that, in the event of a partial redemption, Orion Newco must
redeem the shares of Orion Newco Series C Preferred Stock on a pro rata basis.
Optional Conversion to Common Stock. Holders of Orion Newco Series C
Preferred Stock will have the right, at any time, to convert all or a portion of
such shares into a number of shares of Orion Newco Common Stock equal to the sum
of: (a) the number of shares of Orion Newco Common Stock computed by multiplying
the number of shares of Orion Newco Series C Preferred Stock to be converted by
$1,000, and dividing the result by the applicable Conversion Price (as such term
is used in the Certificate of Designations), initially $17.50, subject to
adjustment, plus (b) the number of shares of Orion Newco Common Stock that would
be payable if all accrued but unpaid dividends were declared and paid on the
shares of Orion Newco Series C Preferred Stock to be converted.
Mandatory Conversion to Common Stock. If the closing price of the Orion Newco
Common Stock over 20 of the 30 prior trading days is greater than or equal to
the Conversion Price of $17.50 (subject to adjustment), Orion Newco may require,
by written notice to all holders of Orion Newco Series C Preferred Stock, the
conversion of all of the outstanding Orion Newco Series C Preferred Stock into a
number of shares of Orion Newco Common Stock equal to the sum of: (a) the number
of shares of Orion Newco Common Stock computed by multiplying the number of
shares of Orion Newco Series C Preferred Stock to be converted by $1,000, and
dividing the result by the applicable Conversion Price then in effect, plus (b)
the number of shares of Orion Newco Common Stock that would be payable if all
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accrued but unpaid dividends were declared and paid on the shares of Orion Newco
Series C Preferred Stock to be converted. If Orion Newco will require the
mandatory conversion of the Orion Newco Series C Preferred Stock within two
years from the initial date of issuance of the Orion Newco Series C Preferred
Stock, then the number of shares of Orion Newco Common Stock into which the
shares of Orion Newco Series C Preferred Stock are converted will be increased
by the number of shares of Orion Newco Common Stock that would be payable if
Orion Newco were immediately to declare and pay all dividends that in the
absence of conversion would have accrued on such shares of Orion Newco Series C
Preferred Stock over the six-month period immediately following the date of such
mandatory conversion; provided, however, that the total dividends, including any
additional amounts in respect of dividends paid as a result of a mandatory
conversion, will not be less than the amount of dividends that would have
accrued on all outstanding shares of the Orion Newco Series C Preferred Stock
during one full year following the date of issuance.
For more information regarding the terms of the Orion Newco Series C
Preferred Stock, stockholders are referred to the text of the Certificate of
Designations, the form of which is attached to this Proxy Statement/Prospectus
as Attachment C.
REGISTRATION RIGHTS
The shares of Orion Newco Series C Preferred Stock are not registered under
the Securities Act and are being issued by Orion Newco in reliance on an
exemption from registration. Such shares will be deemed "restricted securities"
within the meaning of Rule 144 under the Securities Act and may not be sold in
the absence of registration under the Securities Act unless an exemption is
available. Concurrently with the Exchange, Orion, Orion Newco and the Exchanging
Partners will enter into a registration rights agreement (the "Registration
Rights Agreement"), which is made in connection with, and conditioned upon the
consummation of, among other things, the Merger and the Exchange. Further,
pursuant to the Registration Rights Agreement, Orion has agreed to cause Orion
Newco to execute and deliver the Registration Rights Agreement or a copy
thereof, at which time Orion Newco will become a party to the Registration
Rights Agreement and be bound (and have all rights and obligations of Orion)
thereunder. In the Registration Rights Agreement, Orion Newco will grant certain
registration rights to the Exchanging Partners, as summarized below.
Shelf Registration Rights. Pursuant to the Registration Rights Agreement,
Orion Newco will prepare and as soon as practicable (but no later than 15 days
after) after 180 days have passed from the date of issuance of the Orion Newco
Series C Preferred Stock (the "Lockup Period"), a "shelf" registration statement
of Orion Newco (the "Initial Shelf Registration Statement") which covers the
registration of any and all the Eligible Registrable Securities (as defined
below) each holder elects to include in the Initial Shelf Registration
Statement. Orion Newco will include in the Initial Shelf Registration Statement
all Eligible Registrable Securities, other than Eligible Registrable Securities
as to which a holder advises Orion Newco in writing, at least 15 days prior to
the expiration of the Lockup Period, that such holder does not wish to have
included in the Initial Shelf Registration. Orion Newco will use all reasonable
efforts to have the Initial Shelf Registration Statement declared effective by
the Commission as soon as practicable after filing. "Eligible Registrable
Securities" includes the shares of the Orion Newco Common Stock or other
securities issued or issuable upon conversion of the Orion Newco Series C
Preferred Stock purchased by the Exchanging Partners pursuant to the Exchange
Agreement or issued as dividends or distributions pursuant to the Certificate of
Designations that a holder is eligible to sell under the terms of the applicable
Transfer Restriction Agreement described below under "Certain Transfer
Restrictions" (which constitute 25% of the aggregate number of shares of Orion
Newco Common Stock issuable upon conversion of the Orion Newco Series C
Preferred Stock received by such Exchanging Partner pursuant to the Exchange
Agreement or as dividends on such Orion Newco Series C Preferred Stock). Such
securities shall cease to be Eligible Registrable Securities when a registration
statement with respect to the registration of such securities shall have been
declared effective under the Securities Act and such securities shall have been
disposed of pursuant to such registration statement.
Under the Registration Rights Agreement, Orion Newco will use all reasonable
efforts to cause to be filed, during each successive period of not less than 60
and not more than 90 days (as determined by Orion Newco, having regard
principally to coordination of such registration with ongoing business mat-
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ters and disclosure requirements) following the effectiveness of the Initial
Registration Statement which terminates on or before the end of the date five
years following the date of the Exchange (each, a "Top-up Period"), an
additional shelf registration statement or, at Orion Newco's option, a
post-effective amendment to any then-effective shelf registration statement (a
"Top-up Shelf Registration Statement") providing for the registration of the
shares of the Eligible Registrable Securities that each holder of Orion Newco
Series C Preferred Stock elects to include in such Top-up Shelf Registration
Statement which have not been registered previously. Orion Newco is required to
use all reasonable efforts to have the Top-up Registration Statement declared
effective by the Commission as soon as practicable after filing.
Demand Registration of Underwritten Offerings. At any time following the
expiration of the Lockup Period, one or more of the holders of the Orion Newco
Series C Preferred Stock may request that Orion Newco effect a registration
under the Securities Act of all of their Eligible Registrable Securities in a
sale of securities to an underwriter or underwriters of securities for
reoffering to the public (an "Underwritten Offering"). Each such request for
registration must involve shares worth at least $17.5 million in market value.
Each request for an Underwritten Offering will specify the approximate number of
shares of Eligible Registrable Securities requested to be registered and the
anticipated per share price range for such offering. Within ten days after
receipt of any such request, Orion Newco will give written notice of such
requested demand registration to all other holders of the Orion Newco Series C
Preferred Stock and, subject to certain restrictions detailed in the
Registration Rights Agreement, will include in any such Underwritten Offering
all Eligible Registrable Securities with respect to which Orion Newco has
received written request for inclusion therein within 15 days after Orion
Newco's notice is given.
Piggyback Registration Rights. If at any time following the expiration of the
Lockup Period, Orion Newco proposes to effect a registration of the Orion Newco
Common Stock (whether for its own account or for the account of others) under
the Securities Act, other than a shelf or demand registration as described above
or a registration of securities in connection with a business acquisition or
combination or an employee benefit plan (a "Piggyback Registration"), Orion
Newco will give written notice to all holders of its intention to effect such a
registration and, subject to certain provisions described in the Registration
Rights Agreement, will include in such registration all Eligible Registrable
Securities with respect to which Orion Newco has received written requests for
inclusion therein within 15 days after the date Orion Newco's notice is given.
Orion Newco will pay any and all Registration Expenses (as such term is used in
the Registration Rights Agreement) incident to the filing of each such
registration statement or otherwise incident to the performance of or compliance
by Orion Newco with the provisions of the Registration Rights Agreement relating
to a such registration.
CERTAIN TRANSFER RESTRICTIONS
Each Exchanging Partner will enter into a Transfer Restriction Agreement
(each, a "Transfer Restriction Agreement") regarding the transfer of the shares
of Orion Newco Common Stock issuable upon conversion of, or as dividends on, the
Orion Newco Series C Preferred Stock. Pursuant to the applicable Transfer
Restriction Agreement, each Exchanging Partner may not directly or indirectly
sell, offer, contract to sell, make any short sale, pledge or otherwise dispose
of ("transfer") any shares of Orion Newco Common Stock issued upon conversion of
shares of Orion Newco Series C Preferred Stock or as dividends on such Orion
Newco Series C Preferred Stock (the "Affected Shares") without the prior written
consent of Orion Newco during the Lockup Period, unless such sale or transfer is
to an "affiliate" (as such term is defined in Rule 144 under the Securities Act)
of the Exchanging Partner and does not involve a public distribution or public
offering or unless any transfer is effected (i) pursuant to a tender or exchange
offer made by or on behalf of Orion Newco or a third party, (ii) in connection
with a merger, consolidation, sale of all or substantially of all of the assets,
recapitalization or similar transaction involving Orion Newco or (iii) pursuant
to a transaction not involving a public distribution or offering registered
under the Securities Act and not made through a broker, dealer or market-maker
pursuant to Rule 144 (including a pledge that meets such requirements);
provided, however, that prior to any transfer of Affected Shares under clause
(iii) above and prior to any transfer of Orion Newco Series C Preferred Stock
(other than under the circumstances set forth in clause (i) or (ii) above, the
transferee shall execute and deliver to Orion Newco a transfer restriction
agreement substantially simi-
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lar to the Transfer Restriction Agreement the transferor originally entered into
and otherwise reasonably satisfactory in form and substance to Orion Newco, in
which such transferee agrees to abide by all of the restrictions set forth in
the original Transfer Restriction Agreement.
Also, pursuant to the applicable Transfer Restriction Agreement, each
Exchanging Partner agrees that it will not transfer during any 90-day period
Affected Shares that collectively represent more than 25% of the aggregate
number of shares of Orion Newco Common Stock issuable upon conversion of the
Orion Newco Series C Preferred Stock received by such Exchanging Partner
pursuant to the Exchange Agreement or as dividends on such Orion Newco Series C
Preferred Stock (the "25% Limit") unless any such transfer is (i) pursuant to an
underwritten, public offering pursuant to a registration statement under the
Securities Act, (ii) pursuant to a tender or exchange offer made by or on behalf
of Orion Newco or a third party, (iii) in connection with a merger,
consolidation, sale of all or substantially all of the assets, recapitalization
or similar transaction involving Orion Newco or (iv) pursuant to a transaction
not involving a public distribution or offering registered under the Securities
Act and is not made through a broker, dealer or market-maker pursuant to Rule
144 (including a pledge that meets such requirements); provided, however, that
prior to any transfer of Affected Shares under clause (iv) above and prior to
any transfer of Orion Newco Series C Preferred Stock other than under the
circumstances set forth in clause (i), (ii) or (iii) above, the transferee shall
execute and deliver to Orion Newco a transfer restriction agreement
substantially similar to the Transfer Restriction Agreement the transferor
originally entered into (omitting the Lockup Period provision noted above). The
25% Limit described above will terminate on the date that is five years after
the date of issuance of the Orion Newco Series C Preferred Stock under the
Exchange Agreement.
THE DEBENTURE INVESTMENTS
The Debenture Investments will involve the sale of $50 million of convertible
junior subordinated debentures (the "Debentures") to British Aerospace (the
"British Aerospace Investment") and the sale of $10 million of Debentures to
Matra Marconi Space (the "Matra Marconi Investment"). Consummation of the
Debenture Investments is a condition to the closing of the Notes Offering.
Terms of Debentures. Under the Debenture Agreement among Orion Newco, British
Aerospace and Matra Marconi Space, the Debentures will mature 15 years following
the date of issuance and will bear interest at a rate of 8.75% per annum to be
paid semi-annually in arrears, commencing August 1, 1997, solely in Orion Newco
Common Stock at prices between $10.21 and $14.00 per share, depending on the
average trading prices of the Orion Newco Common Stock during the applicable
measurement periods. The Debentures (and accrued but unpaid interest) may be
converted in whole or in part into Orion Newco 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 rights to acquire stock) at a price per
share below $14.00, and other events. See "Risk Factors -- Risks Relating to
Merger, Exchange and Debenture Investments -- Risks Relating to Orion Newco
Series C Preferred Stock and Debentures."
Orion Newco may at any time (except during 90 days after a change in control)
redeem all or part (but not less than 25% on any one occasion) of the Debentures
for cash consideration determined by multiplying the number of shares of Orion
Newco Common Stock issuable upon conversion of the Debentures (and upon payment
of accrued but unpaid interest thereon) by the greater of (i) the average
closing price of the Orion Newco Common Stock over the 20 trading days preceding
the redemption or (ii) $17.50 per share. Alternatively, Orion Newco has the
right to arrange for the disposition of the Orion Newco Common Stock issuable
upon the conversion of, or as payment of interest on, the Debentures in a public
or private offering. In such event, the Debenture holders will be entitled to
receive a price per share equal to the greater of (a) at least 95% of the
average closing price of the Orion Newco Common Stock over the 20 trading days
preceding the disposition or (b) $17.50 per share. From and after the time when
less than $50 million of Notes remain outstanding, in the event of a change of
control of Orion Newco (defined as the acquisition by any stockholder of a
majority of the voting securities of Orion Newco), either Orion Newco or any
holder of the Debentures may, within 90 days after such change of control,
require the sale of the Debentures, as converted into Orion Newco Com-
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mon Stock, to Orion Newco for a purchase price equal to the greater of (a) the
price payable in an optional redemption (as described above) and (b) the price
paid to holders of Orion Newco Common Stock in the change of control
transaction. The Notes Indentures are expect to contain a covenant which will
effectively prohibit Orion Newco from honoring such right.
The Debentures will be subordinated to all other indebtedness of the Company,
including the Notes. The Debentures will contain minimal covenants and events of
default so long as $50 million or more of the Notes remain outstanding, but more
extensive covenants and events of default will apply after less than $50 million
of Notes are outstanding. See "The Related Transactions -- The Notes
Offering/Orion 1 Credit Facility Refinancing -- Notes Offering."
In connection with the Debenture Investments, Orion Newco has agreed to
certain provisions relating to any mandatory redemption by it of the Debentures,
the Orion Newco Series C Preferred Stock held by British Aerospace, Matra
Marconi or their respective affiliates or the Orion Newco Common Stock issued to
British Aerospace, Matra Marconi Space or their respective affiliates upon
conversion of the Debentures or the Orion Newco Series C Preferred Stock or as
payment of interest on the Debentures or dividends on the Orion Newco Series C
Preferred Stock. Under its Certificate of Incorporation, Orion Newco has the
right mandatorily to redeem the capital stock of any stockholder to the extent
necessary to prevent the loss or secure the reinstatement of any license or
franchise from any governmental agency. See "Description of Orion Newco Common
Stock -- Certain Anti-Takeover Effects." Orion Newco has agreed in the Debenture
Agreement that in connection with any such redemption of the foregoing
securities held by British Aerospace, Matra Marconi Space or their respective
affiliates, Orion Newco will pay an amount for such securities equal to the
amount it would have paid if it had effected such redemption under the terms of
the Debentures or the Orion Newco Series C Preferred Stock, as the case may be,
which would be more favorable than the price set forth in Orion Newco's
Certificate of Incorporation. Approval of the Debenture Investments by Orion
stockholders also will constitute approval of such provisions in the Debenture
Agreement.
The consummation of the Debenture Investments is conditioned upon the
following: (i) completion of the Exchange; (ii) termination of all obligations
of British Aerospace, Matra Marconi Space and their respective affiliates under
the Orion 1 Credit Facility Support; (iii) receipt by Orion Newco of net
proceeds from the Notes Offering of at least $225 million; (iv) Orion Newco's
payment to each of British Aerospace and Matra Marconi Space of its costs and
expenses; and (v) acquisition by Orion Newco of all of British Aerospace's
interest in Orion Asia Pacific in exchange for approximately 86,000 shares of
Orion Newco Common Stock.
Matra Marconi will apply certain satellite incentive payments owing to it
toward the purchase price of the Debentures. Under the Orion 1 Satellite
Contract, Matra Marconi, as the Orion 1 manufacturer, is entitled to receive
incentive payments based upon the performance of Orion 1 in orbit. As of
September 30, 1996, Orion Atlantic had obligations with a present value of $21.7
million with respect to incentive payments. Orion Newco will pay $13 million in
satellite incentives following completion of the Notes Offering, of which $10
million will be re-invested in Orion Newco by Matra Marconi Space in Debentures.
Registration Rights. The shares of Orion Newco Common Stock issuable upon
conversion of, or as dividends on, the Debentures will have the following
registration rights.
Orion Newco will be obligated to include in the "shelf" registration
statement filed with respect to the Orion Newco Series C Preferred Stock (to be
filed approximately six months after such stock is issued) approximately 360,000
shares of Orion Newco Common Stock issued as payment of interest on the
Debentures or previously issued to British Aerospace pursuant to a warrant or
the OAP Acquisition. Orion Newco also will prepare and, within one year after
the date of issuance of the Debentures, cause to be filed a shelf registration
statement of Orion Newco which covers the registration of any and all shares of
Orion Newco Common Stock issuable upon conversion of the Debentures each holder
elects to include in such shelf registration statement. If not all shares of
Orion Newco Common Stock issuable upon conversion of the Debentures are
registered in the initial shelf registration statement, Orion Newco will be
obligated to file additional shelf registration statements to register such
unregistered shares.
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Any one or more holders of the Debentures may request that Orion Newco effect
a registration under the Securities Act of all or not less $20 million of shares
of Orion Newco Common Stock issuable upon conversion of the Debentures in an
underwritten offering. Matra Marconi Space may request a single such
registration of at least $10 million of such shares of Orion Newco Common Stock.
The number of requests is not limited, but the Company will not be obligated to
effect more than one underwritten offering in any 12-month period, or two such
registrations during the 12-month period in which the Company effects a
registration requested by Matra Marconi Space. Orion Newco will pay any and all
Registration Expenses (as such term is used in the registration rights
agreement) incident to the filing of each registration statement for an
underwritten offering.
If Orion Newco proposes to effect a registration of the Orion Newco Common
Stock (whether for its own account or for the account of others) under the
Securities Act, other than a shelf or demand registration as described above or
a registration of securities in connection with a business acquisition or
combination or an employee benefit plan, Orion Newco will, subject to certain
provisions described in the registration rights agreement, include in such
registration all shares of Orion Newco Common Stock issuable upon conversion of
the Debentures with respect to which Orion Newco has received written requests
for inclusion therein. Orion Newco will pay any and all Registration Expenses
(as such term is used in the registration rights agreement) incident to the
filing of each such registration statement or otherwise incident to the
performance of or compliance by Orion Newco with the provisions of the
registration rights agreement relating to a such registration.
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CORPORATE STRUCTURE AFTER THE TRANSACTIONS
The following diagram illustrates the effects of the Merger, the Exchange
and the other Transactions on the corporate structure of Orion Newco. The
ownership figures are on a fully diluted basis.
<TABLE>
<CAPTION>
Exchanging Partners Existing Orion British Aerospace
(Excluding British Aerospace) Stockholders
<S> <C> <C>
19.8% Ownership 52.7% Ownership 27.5% Ownership
(Series C Preferred Stock, Common Stock (Common Stock, Series A and Series B (Common Stock, Common Stock Warrants,
and $10 million Convertible Debentures Preferred Stock, Common Stock Options Series C Preferred Stock and
held by Matra Marconi Space) and Common Stock Warrants) $50 million Convertible Debentures)
ORION
NEWCO
100%
Ownership
Orion
100% 100% 100% 100% 100%
Ownership Ownership Ownership Ownership Ownership
Collectively
Asia Pacific
Orion Asia Space and
Orion OrionSat OrionNet Pacific Communications
Atlantic
(Owner and operator (To be owner and (Holder of
of Orion 1 and holder operator of Orion 3) arrangements with
of Orion 1 license; Republic of Marshall
to be owner and Islands)
operator of Orion 2)
</TABLE>
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EFFECT OF THE EXCHANGE ON THE CAPITAL STRUCTURE OF ORION NEWCO
As a result of the issuance of 121,988 shares of Orion Newco Series C
Preferred Stock in the Exchange, which is convertible as of the issuance date
into approximately 6,970,740 shares of Orion Newco Common Stock, the number of
shares of Orion Newco Common Stock outstanding on a fully diluted basis will
increase by approximately 78% to approximately 25,860,320 shares, assuming a
closing of the Exchange on January 30, 1997. In addition, as a result of the
issuance, certain of the Exchanging Partners will be principal stockholders of
Orion Newco. See "Security Ownership of Certain Beneficial Owners Prior to and
Following the Transactions" below.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF ORION
The Board of Directors unanimously approved (with the British Aerospace Board
representative recusing himself) the terms of the Merger Agreement, the Exchange
Agreement and the Debenture Agreement and determined that the Merger, the
Exchange and the Debenture Investments are in the best interests of Orion and
its stockholders. The Board unanimously recommends (with the British Aerospace
Board representative recusing himself) that Orion stockholders vote FOR
ratification of the Merger Agreement and the transactions contemplated thereby,
FOR approval and adoption of the Exchange Agreement and the transactions
contemplated thereby, and FOR approval of the Debenture Investments. The Board
believes that the Merger Transactions and the Debenture Investments are in the
best interests of Orion stockholders because they will simplify Orion's
organizational structure and improve Orion's access to the capital markets. The
reasons for the Board's recommendation are discussed more fully under the
captions "Background of the Merger Transactions and the Debenture Investments"
and "Reasons for the Merger Transactions and the Debenture Investments" above.
OPINION OF ORION'S FINANCIAL ADVISOR
Salomon Brothers has rendered to the Board of Directors of Orion its written
opinion dated December 10, 1996 (the "Salomon Brothers Opinion") that, based
upon and subject to the various considerations set forth in the opinion, as of
December 10, 1996, the consideration to be paid by Orion in connection with the
Exchange was fair from a financial point of view to Orion. No limitations were
imposed by the Board of Directors upon Salomon Brothers with respect to the
investigations made or the procedures followed by it in rendering its opinion.
Salomon Brothers was not requested by the Board of Directors to make any
recommendation as to the form or amount of consideration to be paid by Orion
pursuant to the Exchange Agreement, which issues were resolved in arm's-length
negotiations between Orion and the Exchanging Partners. Salomon Brothers was not
asked to express an opinion, and did not express any opinion, with regard to the
Notes Offering, the Orion 1 Credit Refinancing, the Debenture Investments, the
Orion 2 Satellite Contract, the Orion 3 Satellite Contract or the Merger.
The full text of the Salomon Brothers Opinion, which sets forth assumptions
made, matters considered and limitations on the review undertaken, is attached
hereto as Attachment D. Stockholders of Orion are urged to read the opinion
carefully and in its entirety in conjunction with this Proxy
Statement/Prospectus. The Salomon Brothers Opinion addresses only the fairness
of the consideration to be paid in the Exchange from a financial point of view
and does not constitute a recommendation to any stockholder of Orion as to how
such stockholder should vote on the Merger, the Exchange or the Debenture
Investments. The summary of the Salomon Brothers Opinion set forth in this Proxy
Statement/Prospectus is qualified in its entirety by reference to the full text
of such opinion.
In rendering the Salomon Brothers Opinion, Salomon Brothers reviewed certain
publicly available information relating to Orion, as well as certain other
information, including financial projections, provided to Salomon Brothers by
Orion, discussed the past and current operations and financial condition and
prospects of Orion and Orion Atlantic with members of the respective senior
managements of such entities and considered such other information, financial
studies, analyses, investigations and financial, economic, market and trading
criteria which Salomon Brothers deemed relevant.
In rendering its opinion, Salomon Brothers assumed and relied upon the
accuracy and completeness of the information it reviewed for the purpose of such
opinion and did not assume any responsibility for independent verification of
any of such information or for any independent evaluation or appraisal of
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the assets of Orion or Orion Atlantic. With respect to Orion's and Orion
Atlantic's financial projections, Salomon Brothers assumed that they had been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of Orion's or Orion Atlantic's management, as the case may be, as
to the future financial performance of their respective businesses, and while
Salomon Brothers expressed no opinion with respect to such forecasts or the
assumptions on which they were based, Salomon Brothers relied on management's
assumption that the Notes Offering, the Orion 1 Credit Refinancing, the
Debenture Investments, the Orion 2 Satellite Contract and the Orion 3 Satellite
Contract would occur or be executed, each as the case may be, concurrently with
the Exchange. Salomon Brothers assumed that the Exchange would qualify as
tax-free under Section 351 of the Code.
The Salomon Brothers Opinion was necessarily based on economic, market and
other conditions as in effect on, and the information made available to Salomon
Brothers as of, the date of such opinion and did not address Orion's underlying
business decision to effect the Exchange or constitute a recommendation to any
holder of Orion Common Stock concerning the Merger, the Exchange or the
Debenture Investments. The Salomon Brothers Opinion does not imply any
conclusion as to the likely trading range of Orion Newco Common Stock following
the consummation of the Exchange, which may vary depending on, among other
factors, changes in interest rates, dividend rates, market conditions, general
economic conditions and other factors that generally influence the price of
securities.
The following is a summary of the report (the "Salomon Brothers Report")
presented by Salomon Brothers to the Board of Directors of Orion on December 10,
1996, in connection with the rendering of the Salomon Brothers Opinion:
Discounted Cash Flow Analysis. Using an unlevered discounted cash flow
("DCF") methodology, Salomon Brothers examined management's 10-year projections
for each of Orion 1, Orion 2 and Orion 3. Salomon Brothers' DCF analysis relied
on management's assumption that its business plan would be executed, including
that the financings contemplated in such business plan would occur as required.
Salomon Brothers calculated terminal values for each such satellite at the end
of the projection period, assuming its replacement at the end of its usable
life, by reference to the average tax-effected earnings before interest, taxes,
depreciation and amortization ("EBITDA") for the last five-years of the
projection period less the average capital expenditures over the life of a
current specification satellite. Salomon Brothers then used a cash flow
perpetuity approach and assumed a steady nominal growth rate of 3-5% and a
discount rate (equal to Salomon Brothers' estimate of Orion's weighted average
cost of capital ("WACC") once Orion's business reaches maturity) of 11.5% to
calculate terminal values. For reference, Salomon Brothers then converted these
terminal values to implied ranges of EBITDA terminal multiples for Orion 1 of
6.2x to 8.1x, for Orion 2 of 5.7x to 7.5x and for Orion 3 of 5.4x to 7.1x (which
were at the low end of the range of terminal multiple estimates used by
independent equity research analysts for satellite companies with similar
capital spending characteristics). With respect to projected cash flows over the
projection period, Salomon Brothers used discount rates of 15% to 20% through to
the end of the projection period for Orion 1 and discount rates of 17.5% to
22.5% through to the end of the projection period for Orion 2 and Orion 3. These
discount rates were selected primarily based upon ranges cited for satellite
companies' WACC in independent equity analyst research reports for publicly
traded satellite companies. A higher discount rate was selected for Orion 2 and
Orion 3 because these satellites are in an earlier stage of development than
Orion 1. Salomon Brothers also analyzed the implied WACCs for a group of
publicly traded satellite companies based on their respective capital structures
and equity security trading histories. However, due to the limited time period
over which these securities were traded, Salomon Brothers concluded that
reliance on this analysis was inappropriate.
Using its DCF methodology, Salomon Brothers calculated (i) a range of implied
values of $127.2 million to $337.2 million for the Exchanging Partners' equity
interest in Orion Atlantic and (ii) a range of equity values for each current
share of Orion Common Stock of $12.79 to $32.37.
Salomon Brothers also analyzed this DCF valuation in the context of the Orion
Common Stock price as of December 9, 1996, to determine the relationship between
Orion's market capitalization and the theoretical equity value of Orion derived
from the DCF analysis described above. This ratio of market capitalization to
theoretical equity value ranged from 98.7% (assuming low side DCF value) to
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39% (assuming high side DCF value). Applying these ratios to Salomon Brothers'
DCF value range for Orion Atlantic yielded a value range of $125.5 million to
$131.5 million for the Exchanging Partners' 58.3% limited partnership interest
in Orion Atlantic.
Precedent Transaction Analysis. As part of its analysis, Salomon Brothers
reviewed two recent acquisition transactions involving satellite companies: (i)
Orion Atlantic's redemption of STET's interest and Orion's subsequent purchase
of a new interest from Orion Atlantic and (ii) the acquisition by Hughes
Corporation ("Hughes") of PanAmSat. To estimate the value of Orion Atlantic,
Salomon Brothers analyzed the redemption of STET's interest and Orion's
subsequent purchase of a new interest from Orion Atlantic to derive a range of
implied values (i) of Orion Atlantic of $138.1 million to $180.1 million based
upon consideration paid by Orion valued at $11.5 million to $15.0 million for
STET's 8.33% limited partnership interest and (ii) of the Exchanging Partners'
limited partnership interests in Orion Atlantic of $80 million to $104 million
at the time of the transaction. If the additional capital, totaling $47 million,
invested by the Exchanging Partners since the STET redemption is included in
this valuation analysis, the range of implied values of the Exchanging Partners'
limited partnership interests in Orion Atlantic increases to $127 million to
$151 million.
Salomon Brothers also reviewed the Hughes acquisition of PanAmSat and
examined the ratio of firm value (i) to latest twelve months ("LTM") and
projected 3-year forward revenues, (ii) to LTM and projected 3-year forward
EBITDA and (iii) to LTM and projected 3-year forward earnings before interest
and taxes ("EBIT"). Based on these ratios and the limited public information
available with respect to PanAmSat, Salomon Brothers estimated a range of
implied values of the Exchanging Partners' limited partnership interests in
Orion Atlantic of $91 million to $420 million. However, in Salomon Brothers'
judgment, the PanAmSat transaction was not entirely comparable to the Exchange
in most respects, primarily because PanAmSat is a less highly leveraged company
than Orion and is not in a similarly early stage of development. Salomon
Brothers also reviewed several other recently completed merger and acquisition
transactions in the satellite sector, none of which were useful in its analysis.
Public Market Trading Analysis. Salomon Brothers also performed an analysis
in which it compared certain publicly available historical financial and
operating data and market statistics of selected satellite companies (calculated
based on closing stock prices as of December 9, 1996, for the publicly traded
companies, and assuming the midpoint of the filing range for the then-pending
initial public offering for APT Satellite Holdings Limited ("APT Satellite")).
The stock market performance of satellite companies varies significantly
depending on, among other things, stages of development, geographic location and
segments of operation. Accordingly, no company used in the Public Market Trading
Analysis was fully comparable to Orion in most material respects. Salomon
Brothers selected Echostar Communications Corporation ("Echostar"), APT
Satellite and American Mobile Satellite Corporation ("AMSC") as the most
comparable to Orion. Although Echostar and AMSC operate in segments that are
different from those of Orion, they are each in stages of development similar to
that of Orion. Salomon Brothers examined firm value to LTM revenue multiples for
Echostar (8.7x), APT Satellite (12.0x) and AMSC (21.0x) and noted that, based on
these multiples, (i) the total implied equity value of Orion Atlantic was
estimated to range from $120 million to $636 million and (ii) the Exchanging
Partners' limited partnership interests in Orion Atlantic were estimated to
range in value from $70 million to $371 million.
Historical Trading Analysis. As part of its analysis, Salomon Brothers
examined the historical stock market performance of Orion in relation to a
composite index of common stock of selected satellite companies (consisting of
PanAmSat, United States Satellite Broadcasting Company, Inc., Globalstar
Telecommunications Limited, AMSC, Echostar, Asia Satellite Telecommunications
Holdings Limited and P.T. Pasifik Satellit Nusantara) and the Nasdaq Composite
Index and the relationship between price movements thereof over the period from
August 1, 1995 to December 6, 1996. Salomon Brothers observed that for the
entire period the Orion Common Stock underperformed the index of selected
satellite companies and the Nasdaq Composite Index in terms of price
appreciation.
Salomon Brothers also noted that Orion's historical Common Stock price (and
corresponding firm value) could be deconstructed to estimate the amount of value
historically attributed by the public equity market to Orion Atlantic, using the
simplifying assumption that nominal value was attributed to
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Orion 3. On this basis, Salomon Brothers concluded that Orion's historical
Common Stock price range of $6.75 to $14.75 per share could be interpreted as
implying a market valuation for the Exchanging Partners' limited partnership
interests in Orion Atlantic of $47.3 million to $219.0 million.
Convertible Security Valuation. Using options pricing theory and the
discounted present value of probabilistically adjusted dividends, Salomon
Brothers arrived at a range of values for the Orion Newco Series C Preferred
Stock of $83 million to $106 million. This value was based on a range of assumed
prices for Orion Common Stock of $10 to $14 per share at the time of issuance of
the Orion Newco Series C Preferred Stock, the Orion Newco Series C Preferred
Stock's dividend yield, its conversion price and liquidation value, Orion's
share price volatility and the mean expected return on Orion Common Stock, and
reflects the unique characteristics of the Orion Newco Series C Preferred Stock
which distinguish it from conventional convertible preferred stocks. Several of
these parameters required Salomon Brothers to make certain subjective judgments.
The preparation of a fairness opinion is not susceptible to partial analysis
or summary description. Salomon Brothers believes that its analyses and the
summary set forth above must be considered as a whole and that selecting
portions of its analyses and the factors considered by it, without considering
all such analyses and factors, or of the above summary, without considering all
factors and analyses, could create an incomplete view of the processes
underlying the analyses set forth in the Salomon Brothers Opinion and the
Salomon Brothers Report. Salomon Brothers has not indicated that any of the
analyses which it performed had a greater significance than any other. The
ranges of valuations resulting from any particular analysis described above
should not be taken to be the view of Salomon Brothers of the actual value of
Orion and Orion Atlantic. In performing its analyses, Salomon Brothers made
numerous assumptions with respect to industry performance, general business,
financial, market and economic conditions and other matters, many of which are
beyond the control of Orion or Orion Atlantic. The analyses performed by Salomon
Brothers are not necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Such analyses were prepared solely as part of Salomon Brothers'
analysis of the fairness to Orion, from a financial point of view, of the
consideration to be paid in the Exchange. In addition, analyses relating to
value of businesses do not purport to be appraisals or to reflect the prices at
which a business actually might be sold, or the prices at which a company might
actually be sold, or the prices at which securities might trade at the present
time or at any time in the future.
Salomon Brothers is an internationally recognized investment banking firm
that provides financial services in connection with a wide range of business
transactions. As part of its business, Salomon Brothers regularly engages in the
valuation of companies and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities and private placements and for
other purposes. The Board of Directors retained Salomon Brothers based on
Salomon Brothers' expertise in the valuation of companies, as well as its
familiarity with Orion and other satellite companies. Salomon Brothers, in the
ordinary course of its business, may actively trade the securities of Orion for
its own account and for the accounts of customers, and, accordingly, may at any
time hold a long or short position in such securities. Salomon Brothers may
continue to provide investment banking services to Orion Newco in the future.
Salomon Brothers has, in the past, and in return for customary fees, rendered
certain investment banking and financial advisory services to Orion, including
acting as lead underwriter to Orion in connection with its initial public
offering of Orion Common Stock in August 1995. Orion paid Salomon Brothers
$688,490 in connection with Salomon Brothers' participation in the 1995
Financing. This amount consisted principally of reimbursement of costs incurred
by Salomon Brothers.
Pursuant to a letter agreement, dated April 10, 1996, between Orion and
Salomon Brothers, Orion agreed to pay Salomon Brothers the following fees: (i)
$250,000, which was paid upon execution by Orion of such letter agreement; (ii)
$500,000, which was paid upon delivery of the Salomon Brothers Opinion to the
Board of Directors; and (iii) an additional $1,000,000, payable upon the
successful completion of the financing transactions which facilitate
consummation of the Exchange and the construction of Orion 2 and Orion 3. In
addition, Orion agreed to indemnify and hold harmless Salomon Brothers and its
affiliates, their respective directors, officers, agents and employees and each
person, if
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any, controlling Salomon Brothers or any of its affiliates against certain
liabilities and expenses, including liabilities under the federal securities
laws, incurred in connection with its services.
APPROVALS
Orion is aware of no governmental approvals required for consummation of the
Merger, the Exchange and the Debenture Investments, other than compliance with
federal securities laws and state securities or "Blue Sky" laws. The Board of
Directors is seeking stockholder ratification of the Merger Agreement and the
transactions contemplated thereby, including the Merger, stockholder approval of
the Exchange Agreement and the transactions contemplated thereby, including the
Exchange, and stockholder approval of the Debenture Investments. See "The
Special Meeting -- Voting Rights and Related Matters" and "-- Votes Required."
FEES AND EXPENSES
In general, whether or not the Merger Transactions are consummated, each
party to the Merger Agreement and the Exchange Agreement will bear its own costs
and expenses incurred in connection with the Merger Agreement, the Exchange
Agreement and the transactions contemplated thereby, except certain expenses
incurred in connection with the Salomon Brothers Opinion. Orion or Orion Newco
will bear all expenses associated with the Debenture Investments.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Set forth below is a summary of certain federal income tax consequences under
the Internal Revenue Code of 1986, as amended (the "Code"), to Orion
stockholders (the "Transferors") whose common and preferred stock of Orion
("Orion Stock") is converted into common and preferred stock of Orion Newco
("Orion Newco Stock") pursuant to the Merger. The following summary does not
deal with all aspects of federal taxation that might be relevant to particular
Transferors, nor does the summary address any foreign, state, local, estate, or
gift tax aspects. In addition, the summary addresses only those Transferors who
hold their Orion Stock as a capital asset. In view of the individual nature of
tax consequences, Transferors are urged to consult with their own tax advisors
regarding the specific tax consequences to them of the Merger, including the
applicability of federal, state, local and foreign tax laws.
On January 6, 1997, Ernst & Young LLP, tax advisor to Orion, rendered an
opinion ("Tax Opinion") that the Merger Transferors will have the opportunity to
qualify for nonrecognition treatment because the Merger will qualify either as
(i) a reorganization pursuant to Section 368(a) of the Code or (ii) an exchange
satisfying the requirements of Section 351(a) of the Code, provided certain
requirements (discussed below) are met. In rendering its Tax Opinion, Ernst &
Young LLP relied upon certain representations made by Orion, which
representations Ernst & Young LLP has not independently verified, and the Tax
Opinion is further based upon certain limitations summarized below. Moreover,
the Tax Opinion is not binding on the Internal Revenue Service ("IRS") nor does
it preclude the IRS from adopting a contrary position. The Tax Opinion is based
on provisions of the Code, income tax regulations, and administrative rulings
and court decisions existing as of the date of the Tax Opinion. All such
provisions are subject to change which changes may be retroactive. Ernst & Young
LLP is not responsible for notifying Orion or the Merger Transferors of any such
change which may occur subsequent to the date of the Tax Opinion.
Except as otherwise noted, the summary below assumes that the Merger will
qualify either as a reorganization pursuant to Section 368(a) of the Code or as
an exchange satisfying the requirements of Section 351(a) of the Code, based
upon such Tax Opinion. Subject to the limitations and qualifications referred to
herein, the Tax Opinion addresses and is limited to the following federal income
tax consequences for the Merger Transferors:
(a) Transferors will recognize no gain or loss in connection with the
receipt of shares of Orion Newco Stock in exchange for shares of Orion
Stock in the Merger.
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(b) Each Transferor's tax basis in the shares of Orion Newco Stock it
receives will be equal to its tax basis in the Orion Stock it
transferred to Orion Newco.
(c) The holding period for the Merger Transferor's shares of Orion Newco
Stock will include the Merger Transferor's holding period in its Orion
Stock.
Although the summary below addresses certain tax issues in addition to those
noted in (a) through (c) above, Ernst & Young LLP's Tax Opinion does not address
such additional tax issues.
If the Merger does not qualify for tax-free treatment, (a) the Merger
Transferors will recognize gain or loss equal to the difference between the fair
market value on the date of the Merger of the Orion Newco Stock they receive and
their tax basis in the Orion Stock they transfer; (b) the tax basis of the Orion
Newco Stock received by each Transferor will equal the fair market value of that
stock on the date of the Merger; and (c) the holding period for each share of
Orion Newco Stock will begin on the day following the date of the Merger.
Even assuming the Merger qualifies as a tax-free reorganization or exchange,
holders of Orion preferred stock with dividends in arrears might be treated
under Section 305(c) of the Code as recognizing ordinary income (for which a
dividend received deduction may be available to certain corporate holders) as a
consequence of the exchange of their Orion preferred stock for Orion Newco
preferred stock in the Merger, to the extent of the least of (i) the earnings
and profits of Orion Newco (which likely will include the accumulated earnings
and profits of Orion, if any, as of the close of the taxable year in which the
Merger is completed), (ii) the amount of the dividend arrearage with respect to
the Orion preferred stock, or (iii) the amount by which the greater of the fair
market value or liquidation preference of the Orion Newco preferred stock
exceeds the issue price of the Orion preferred stock. However, the recognition
of ordinary income generally applies only to exchanges pursuant to a
"recapitalization." Because the Merger should not constitute a
"recapitalization" within the meaning of Section 368(a)(1)(E) of the Code, and
because Orion does not expect Orion or Orion Newco to have any accumulated or
current earnings and profits for the taxable year in which the Merger occurs,
Orion does not believe the risk of recognizing ordinary income on an exchange of
Orion preferred stock for Orion Newco preferred stock will be significant.
However, there can be no assurance that the IRS or a court considering the
question will not disagree with Orion's determinations.
Holders of Orion preferred stock should also note that, if the redemption
price (including any dividend arrearage on the date of the Merger) of shares of
Orion Newco preferred stock exceeds the issue price of those shares (which
generally will be the fair market value of the Orion Newco preferred stock,
appropriately adjusted to reflect any income recognized by holders under Section
305(c) of the Code in connection with the Merger, as discussed above), the
excess redemption price generally will be taxable to the holders of the Orion
Newco preferred stock as ordinary income (for which a dividend received
deduction may be available to certain corporate holders), to the extent of Orion
Newco's earnings and profits (which, as noted above, likely will include Orion's
accumulated earnings and profits), over the period from the date the Orion Newco
preferred stock is issued to the date the Orion Newco preferred stock is
required (or deemed required) to be redeemed. This could result in the
recognition of ordinary income by Orion Newco preferred stockholders in advance
of their receipt of cash dividends or redemption proceeds.
Holders of Orion preferred stock are urged to consult their own tax advisors
regarding the application of the foregoing rules to their shares of Orion
preferred stock.
Ernst & Young LLP's Tax Opinion that the Merger will qualify as a tax-free
reorganization under Section 368(a) of the Code is based on representations of
Orion that certain requirements are met, including: (i) following the Merger,
Orion will continue to own substantially all its assets and substantially all
the assets of Orion Merger Subsidiary (other than the Orion Newco Stock
distributed in the Merger); (ii) historic stockholders of Orion (i.e., Orion
stockholders who have not acquired their Orion Stock in contemplation of the
Merger) will receive pursuant to the Merger and continue to own (not taking into
account any shares of Orion Newco Stock that are sold or otherwise disposed of
following the Merger pursuant to a plan or intention in existence at the time of
the Merger, such as shares sold in
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<PAGE>
market transactions and shares with respect to which holders have entered into
risk-limiting transactions, such as short sales and hedges, that have
substantially eliminated their potential for appreciation and risk of
depreciation) shares of Orion Newco Stock having a fair market value on the date
of the Merger equal to at least 50% of the total consideration issued to Orion
stockholders in the Merger; and (iii) following the Merger, Orion Newco will own
stock of Orion representing 80% of the voting power of all classes of Orion
voting stock. If one or more of the foregoing requirements is not satisfied, the
Merger may nonetheless qualify for tax-free treatment under Section 351(a) of
the Code, provided shares of Orion Newco Stock issued to the Merger Transferors
and/or Exchanging Partners representing more than 20% of the voting power of all
classes of Orion Newco voting stock (or more than 20% of the total shares of any
class of Orion Newco nonvoting stock issued in the Merger Transactions) are not,
pursuant to a plan or commitment in existence at the time of the Merger, sold or
otherwise disposed of to a person who has not made a significant transfer of
property to Orion Newco pursuant to either the Merger or the Exchange.
Even assuming the Merger qualifies as a tax-free reorganization or exchange
under Section 351(a) of the Code, holders of existing warrants to purchase Orion
Stock may recognize gain or loss in connection with the exchange or conversion
of those warrants for, or into, warrants to purchase Orion Newco Stock. Such
recognition of gain or loss generally can be avoided by exercising the warrants
to purchase Orion Stock prior to the Merger.
Whether or not the Merger qualifies for tax-free treatment, no income or loss
generally will be recognized by holder of a nonqualified option to purchase
Orion Stock granted to the holder in connection with the performance of services
(an "Orion NSO") as a consequence of the conversion of the Orion NSO into a
nonqualified option to purchase Orion Newco Stock (an "Orion Newco NSO").
Rather, a holder of an Orion Newco NSO generally will recognize ordinary income
only when the holder exercises the Orion Newco NSO, which income generally will
equal the spread between the fair market value of the Orion Newco Stock on date
of exercise (determined without regard to any restrictions that will lapse over
time) and the exercise price.
The conversion of qualified incentive stock options ("ISOs") to purchase
Orion Stock into options to purchase Orion Newco Stock will not disqualify the
new options to purchase Orion Newco Stock from ISO status, provided the Merger
qualifies as a tax-free reorganization under Section 368(a) of the Code and the
Orion ISO is not modified other than to permit the holder to exercise the Orion
ISO for Orion Newco Stock. Similarly, shares of Orion stock acquired on exercise
of an Orion ISO will not be the subject of a "disqualifying disposition" merely
because the shares are exchanged pursuant to the Merger for shares of Orion
Newco Stock, provided the Merger qualifies as a tax-free reorganization under
Section 368(a) of the Code. If, however, the Merger does not constitute a
reorganization described in Section 368(a) of the Code, then, regardless of
whether the Merger qualifies as a tax-free exchange under Section 351(a) of the
Code, (i) each Orion ISO will become disqualified and will be treated as an
Orion Newco NSO, and (ii) an exchange of shares of Orion stock acquired on
exercise of an Orion ISO within one year of the date of exercise, or within two
years of the date on which the Orion ISO was granted to the holder, for shares
of Orion Newco Stock will constitute a "disqualifying disposition" in which the
holder will recognize ordinary income equal to the excess fair market value on
the date of the Merger of the Orion Newco Stock received over the price paid by
the holder for his or her Orion Stock on exercise of the Orion ISO.
Pursuant to Section 1032 of the Code, Orion Newco will not recognize any gain
or loss as a result of issuing shares of Orion Newco Stock to the Merger
Transferors or to the Exchanging Partners.
Finally, it should be noted that Orion and its subsidiaries have substantial
net operating loss carryovers ("NOLs") that currently may be used against future
taxable income of the group. Due to prior changes in the ownership of the stock
of Orion, the use of those losses against future taxable income may be subject
to limitations imposed under Section 382 of the Code. Further, the issuance of
the Orion Newco Series C Preferred Stock to Exchanging Partners will contribute
towards (and may likely cause) an ownership change under Section 382(g) of the
Code to occur and thus impose additional limitations on the use of losses
incurred prior to the issuance to offset future taxable income. In general,
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<PAGE>
under Section 382 of the Code, the annual amount of taxable income earned
following a change of more than 50 percent in the ownership of a corporation
that can be offset by NOLs incurred prior to such a change in ownership equals
the product of a rate (published monthly by the IRS) in effect on the date of
the change of ownership times the fair market value of the corporation's stock
outstanding immediately prior to such change in ownership. Depending on the fair
market value of Orion Common Stock, if such an ownership change does occur as a
result of the issuance of the Series C Preferred Stock, the change could extend
the period over which Orion may utilize its NOLs to offset future taxable
income. The future tax benefit of some portion of the NOLs would likely be lost
to the extent an ownership change extends the period over which the NOLs can be
utilized beyond the applicable 15-year carryforward period.
THE SUMMARY SET FORTH ABOVE IS FOR GENERAL INFORMATION PURPOSES ONLY. THE
SUMMARY IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING AND
PROPOSED TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND
COURT DECISIONS AS OF THE DATE OF THIS PROXY STATEMENT/PROSPECTUS, ALL OF WHICH
ARE SUBJECT TO CHANGE. TRANSFERORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
AS TO SPECIFIC TAX CONSEQUENCES TO THEM OF THE EXCHANGE, INCLUDING THE
APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL, AND OTHER APPLICABLE TAX LAWS
AND THE POSSIBLE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS PRIOR TO AND FOLLOWING THE
TRANSACTIONS
The following table sets forth certain information regarding beneficial
ownership of the Orion Common Stock, as of September 30, 1996, and as adjusted
to reflect the beneficial ownership of Orion Newco Common Stock after the
Merger, the Exchange, the Debenture Investments and the other Transactions,
assuming for this purpose that the Transactions close as of January 30, 1997, 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,
(iii) each current executive officer named in the Summary Compensation Table and
(iv) all directors and executive officers as a group
<TABLE>
<CAPTION>
AFTER THE TRANSACTIONS
BEFORE THE TRANSACTIONS AFTER THE TRANSACTIONS ON A FULLY DILUTED BASIS(23)
------------------------------- ------------------------------- ------------------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT OF TOTAL SHARES OF AMOUNT OF TOTAL SHARES OF AMOUNT OF TOTAL SHARES OF
SHARES COMMON STOCK SHARES COMMON STOCK SHARES COMMON STOCK
BENEFICIALLY OUTSTANDING BENEFICIALLY OUTSTANDING BENEFICIALLY OUTSTANDING
OWNED (2) OWNED (2) OWNED (2)
-------------- ---------------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Name and Address of
Beneficial Owner (1)
Exchanging Partners
and Affiliates
British Aerospace Space
Systems, Inc. (3)
British Aerospace
Communications, Inc.
British Aerospace
Holdings, Inc.
13873 Park Center Road
Herndon, VA 22071 598,183 5.4% 7,119,840 40.5% 7,119,840 27.5%
Lockheed Martin Commercial
Launch Services, Inc.
P.O. Box 179
MSM DC-1400
Denver, CO 80201-0179 239,769 2.2 1,355,997 11.2 1,355,977 5.2
</TABLE>
61
<PAGE>
<TABLE>
AFTER THE TRANSACTIONS
BEFORE THE TRANSACTIONS AFTER THE TRANSACTIONS ON A FULLY DILUTED BASIS(23)
------------------------------- ------------------------------- ------------------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT OF TOTAL SHARES OF AMOUNT OF TOTAL SHARES OF AMOUNT OF TOTAL SHARES OF
SHARES COMMON STOCK SHARES COMMON STOCK SHARES COMMON STOCK
BENEFICIALLY OUTSTANDING BENEFICIALLY OUTSTANDING BENEFICIALLY OUTSTANDING
OWNED (2) OWNED (2) OWNED (2)
-------------- ---------------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
MCN Sat US, Inc
Matra Marconi Space
UK Limited
37, Avenue Louis Breuget B.P.1.
78146 Velizy Villacoublay Cedez
France * * 1,727,257 13.6 1,727,257 6.7
Trans-Atlantic Satellite, Inc.
1211 Avenue of the Americas
41st Floor
New York, NY 10036 * * 796,457 6.8 796,457 3.1
Kingston Communications
International Limited
Telephone House
Carr Lane
Kingston-upon-Hull
HU1 3RE
England 43,252 * 683,137 5.9 683,137 2.6
COM DEV Satellite
Communications Limited
150 Sheldon Drive
Cambridge, Ontario
Canada N1R 7H6 18,382 * 559,067 4.9 559,067 2.2
Exchanging Partners
and Affiliates as a group 899,586 8.1 12,241,755 54.5 12,241,755 47.3
John V. Saeman
J.V. Saeman & Co.(4)(5)
Medellion Enterprises, LLC
Suite 570
3200 Cherry Creek South Drive
Denver, CO 80209 1,486,440 13.4 1,486,440 13.4 1,486,440 5.7
CIBC Wood Gundy Ventures, Inc. (4)(6)
425 Lexington Avenue
New York, NY 10017 977,123 8.2 977,123 8.2 977,123 3.8
Cumberland Associates
1114 Avenue of the Americas
New York, NY 10036 815,000 7.4 815,000 7.4 815,000 3.2
Fleet Venture Resources, Inc.(4)(7)
Fleet Equity Partners VI, L.P.
Chisholm Partners II, L.P.
50 Kennedy Plaza
Providence, RI 02903 743,428 6.3 743,428 6.3 743,428 2.9
Dawson-Samberg Capital
Management, Inc.
Pequot General Partners
DS International Partners
Pequot Endowment Partners, L.P.
Dawson-Samberg(8)
354 Pequot Ave.
Southport, CT 06490 637,500 5.8 637,500 4.4 637,500 2.5
Space Systems/Loral, Inc.
3925 Fabian Way
Palo Alto, CA 94303 588,235 5.4 588,235 5.4 588,235 2.3
</TABLE>
62
<PAGE>
<TABLE>
AFTER THE TRANSACTIONS
BEFORE THE TRANSACTIONS AFTER THE TRANSACTIONS ON A FULLY DILUTED BASIS(23)
------------------------------- ------------------------------- -------------------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT OF TOTAL SHARES OF AMOUNT OF TOTAL SHARES OF AMOUNT OF TOTAL SHARES OF
SHARES COMMON STOCK SHARES COMMON STOCK SHARES COMMON STOCK
BENEFICIALLY OUTSTANDING BENEFICIALLY OUTSTANDING BENEFICIALLY OUTSTANDING
OWNED (2) OWNED (2) OWNED (2)
-------------- ---------------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Gustave M. Hauser(4)(9)
712 Fifth Avenue
New York, New York 01910 437,517 4.0 437,517 4.0 437,517 1.7
John G. Puente (4)(10)
2440 Research Blvd., Suite 400
Rockville, MD 20850 432,181 3.9 432,181 3.9 432,181 1.7
Sidney S. Kahn(4)(11)
14 East 60th Street, Suite 500
New York, New York 10022 254,840 2.3 254,840 2.3 254,840 1.0
W. Neil Bauer (4)(12)
2440 Research Blvd., Suite 400
Rockville, MD 20850 133,821 1.2 133,821 1.2 133,821 *
David J. Frear (4)(13)
2440 Research Blvd., Suite 400
Rockville, MD 20850 60,181 * 60,181 * 60,181 *
Richard H. Shay (14)
2440 Research Blvd., Suite 400
Rockville, MD 20850 35,805 * 35,805 * 35,805 *
Warren B. French, Jr. (15)
124 S. Main Street
Edinburg, VA 22824 15,623 * 15,623 * 15,623 *
Richard J. Brekka (16)
CIBC Wood Gundy Ventures, Inc.
425 Lexington Avenue
New York, NY 10017 10,000 * 10,000 * 10,000 *
Barry Horowitz (17)
Mitretek Systems, Inc.
7525 Colshire Drive
McLean, VA 22102 10,000 * 10,000 * 10,000 *
Douglas H. Newman (18)
2440 Research Blvd., Suite 400
Rockville, MD 20850 20,000 * 20,000 * 20,000 *
W. Anthony Rice (19)
British Aerospace
13873 Park Center Road
Herndon, VA 22071 10,000 * 10,000 * 10,000 *
Robert M. Van Degna (20)
Fleet Equity Partners
50 Kennedy Plaza
Providence, RI 02903 10,000 * 10,000 * 10,000 *
Hans Giner (21)
2440 Research Blvd., Suite 400
Rockville, MD 20850 5,000 * 5,000 * 5,000 *
Dennis J. Curtin (22)
2440 Research Blvd., Suite 400
Rockville, MD 20850 26,039 * 26,039 * 26,039 *
All directors and executive officers
as a group (15 persons) 2,947,447 25.6 2,947,447 25.6 2,947,447 11.4
</TABLE>
- ----------
* Less than 1%.
63
<PAGE>
(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 September 30, 1996. 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 Stock Option Plan and the Non-Employee Director Stock Option Plan.
The shares held by the Limited Partners and their affiliates may be deemed
to be beneficially owned by their parent companies, including British
Aerospace Public Limited Company, COM DEV, Limited, Kingston Communications
(Hull) plc, Martin Marietta Technologies, Inc. and Lockheed Martin
Corporation, Matra Hachette and Nissho Iwai Corporation.
(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) Includes 511,678 shares held of record and 86,505 shares issuable upon the
exercise of warrants held by British Aerospace Space Systems, Inc. Such
warrants were exercised subsequent to September 30, 1996.
(4) 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 Newco Common Stock.
(5) The 1,486,440 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
1,411,278 shares of stock beneficially owned by John V. Saeman, 814,005 are
held by J. V. Saeman & Co., a general partnership, of which Mr. Saeman and
his wife are the sole partners, 40,196 are held by JCC, Ltd., a limited
partnership, of which J. V. Saeman & Co. is the general partner, and
535,523 are held by Medallion Enterprises, LLC, a limited liability
company, of which Mr. Saeman and his wife are the sole members. Includes
10,000 shares issuable upon exercise of stock options exercisable within 60
days.
(6) Includes 764,705 shares issuable upon conversion of 6,500 shares of Orion
Series A Preferred Stock and 212,418 shares issuable upon conversion of
2,166.667 shares of Orion Series B Preferred Stock held by CIBC, which
conversion would increase the number of outstanding shares of Orion Common
Stock by 977,123 (8.9%).
(7) Includes 588,234 shares issuable upon conversion of 4,000 shares of Orion
Series A Preferred Stock held by the two Fleet entities (which include, for
purposes of this footnote, Fleet Venture Resources, Inc. and Fleet Equity
Partners, VI, L.P.) and 1,000 shares of Orion Series A Preferred Stock held
by Chisholm, and 130,685 shares issuable upon conversion of 1,333 shares of
Orion Series B Preferred Stock held by Fleet and preferred options held by
Chisholm which are convertible into 24,509 shares of Orion Common Stock.
Such conversion would increase the number of outstanding shares of Orion
Common Stock by 743,428 (6.8%).
(8) Includes 54,100 shares held by Dawson-Samberg Capital Management, Inc.,
235,400 shares held by Pequot General Partners, 204,100 shares held by DS
International Partners and 143,900 shares held by Pequot Endowment
Partners, L.P.
(9) 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 10,000 shares issuable upon exercise of stock options
exercisable within 60 days.
(10) Includes 58,439 shares held of record and 7,351 shares issuable upon the
exercise of options by Mr. Puente's wife. Includes 321,501 shares held of
record, 43,087 shares issuable upon the exercise of stock options, 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. Includes 10,000 shares
issuable upon exercise of stock options exercisable within 60 days.
(11) Includes 29,411 shares issuable upon the exercise of 250 shares of Orion
Series A Preferred Stock and 8,169 shares issuable upon conversion of
83.333 shares of Orion Series B Preferred Stock. Includes 10,000 shares
issuable upon exercise of stock options exercisable within 60 days.
(12) Includes 133,821 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.
(13) Includes 46,321 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.
(14) Includes 18,895 shares issuable upon exercise of stock options exercisable
within 60 days.
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<PAGE>
(15) 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 10,000 shares
issuable upon exercise of stock options exercisable within 60 days.
(16) Mr. Brekka disclaims beneficial ownership of all shares of Orion's capital
stock which are owned by CIBC Wood Gundy. Includes 10,000 shares issuable
upon exercise of stock options exercisable within 60 days.
(17) Includes 10,000 shares issuable upon the exercise of stock options
exercisable within 60 days.
(18) Includes 10,000 shares issuable upon the exercise of stock options
exercisable within 60 days.
(19) Does not include 598,183 shares beneficially owned by British Aerospace
Space Systems, Inc. Mr. Rice, a director of Orion and a director of British
Aerospace Space Systems, Inc., disclaims beneficial ownership of these
shares. Includes 10,000 shares issuable upon exercise of stock options
exercisable within 60 days.
(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 130,685 shares issuable upon
conversion of 1,333 shares of Orion Series B Preferred Stock held by Fleet
and preferred options held by Chisholm which are convertible into 24,509
shares of Orion Common Stock. Such conversion would increase the number of
outstanding shares of Orion Common Stock by 743,428 (6.8%). 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 10,000 shares issuable upon exercise of stock options
exercisable within 60 days.
(21) Includes 5,000 shares issuable upon the exercise of stock options
exercisable within 60 days.
(22) Includes 14,446 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.
(23) 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.
65
<PAGE>
THE RELATED TRANSACTIONS
The following describes certain Transactions whose completion is a condition
to the Merger, the Exchange or the Debenture Investments.
THE NOTES OFFERING/ORION 1 CREDIT FACILITY REFINANCING
Orion 1 Credit Facility Refinancing. The Orion 1 Credit Facility Refinancing
and the release of the Limited Partners' (and their affiliates') Orion 1 Credit
Facility Support Agreements (as defined below) is a condition to the Exchange,
and such release and the Exchange are conditions to the Debenture Investments. A
substantial portion of the funding for the Orion 1 satellite, which constitutes
the principal asset of Orion Atlantic (and, indirectly, of Orion), was provided
under the Orion 1 Credit Facility. Principal and interest payments under the
Orion 1 Credit Facility commenced in July 1995, six months after commencement of
commercial operations of Orion 1. As of September 30, 1996, approximately $210.4
million remained outstanding under the Orion 1 Credit Facility. That facility is
secured by substantially all of the assets of Orion Atlantic. The Orion 1 Credit
Facility also is supported by certain guarantees and other commitments by the
Exchanging Partners and Orion (the "Orion 1 Credit Facility Support
Agreements"), under which the Exchanging Partners and Orion agreed to make
payments to Orion Atlantic, either on a monthly basis or to the extent needed to
meet obligations under the Orion 1 Credit Facility or otherwise, of over $420
million over the seven-year period commencing with commercial operation of Orion
1. Through September 30, 1996, the Exchanging Partners and Orion have paid
approximately $26.7 million to Orion Atlantic under the Orion 1 Credit Facility
Support Agreements.
In connection with the Orion 1 Credit Facility Refinancing, Orion Newco,
Orion Atlantic, Orion, OrionSat and the Exchanging Partners are obligated to
take all measures reasonable necessary or advisable to cause the Bank Agreement
Termination and the Capacity Agreement Termination. However, the Capacity
Agreements of Kingston and Matra (but not the associated Capacity Guarantees)
will remain in full force and effect and the Kingston Capacity Agreement and the
Matra Capacity Agreement will be deemed amended, effective as of the date of the
Exchange, to reduce the amount of capacity subject to such Capacity Agreements.
Notes Offering. The Orion 1 Credit Facility Refinancing will be effected with
the proceeds of the Notes Offering. It is presently expected that the Notes
Offering will be in the amount of approximately $347 million with expected gross
proceeds of approximately $275 million (excluding approximately $72 million of
overfunding of interest due on such notes). The possible effects of incurring
substantial additional indebtedness are discussed elsewhere in this Proxy
Statement/Prospectus under the captions "Risk Factors -- Risks Relating to
Orion's Business -- Substantial Leverage; Secured Indebtedness" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Orion -- Liquidity and Capital Resources -- Current Funding
Requirements." Orion Newco is expected to incur substantial additional amounts
of indebtedness over the next few years, as described above under the caption
"Risk Factors -- Risks Relating to Orion's Business -- Need for Additional
Capital."
The Notes Offering is expected to include (i) Senior Notes due 2007 of Orion
Newco ("Senior Notes") sold as a unit with Warrants ("Warrants") to purchase
shares of Orion Newco Common Stock and (ii) Senior Discount Notes due 2007 of
Orion Newco ("Senior Discount Notes" and together with the Senior Notes, the
"Notes") sold as a unit with Warrants to purchase shares of Orion Newco Common
Stock. It is expected that the Notes will be guaranteed by each Restricted
Subsidiary (as defined in the Notes Indentures) of the Company. The Senior Notes
are presently expected to be issued at their principal amount with cash interest
payable on a semi-annual basis. The first six semi-annual interest payments on
the Senior Notes are to be paid from an escrow account funded out of the
proceeds of the Notes Offering. The Senior Discount Notes are presently expected
to be issued at a discount from their principal amount, and no cash interest is
expected to be payable on the Senior Discount Notes for the first five years.
The Notes are presently expected to rank senior in right of payment to all
subordinated indebtedness of the Company and pari passu in right of payment with
all unsecured senior indebtedness of the Company. The Notes are presently
expected to be unsecured (except to the extent of the proceeds in the escrow
account for application to the first six semi-annual interest payments on the
Senior
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Notes). The Notes are presently expected to mature ten years after issuance and
to provide for optional and mandatory redemption.
The Notes are to be issued under Notes Indentures among Orion Newco, its
Restricted Subsidiaries and a trustee which are expected to contain, among other
limitations, covenants which will restrict the ability of the Company and its
subsidiaries to: incur additional indebtedness; create liens; engage in
sale-leaseback transactions; pay dividends or make distributions in respect of
their capital stock; make investments or make certain other restricted payments;
sell assets; create restrictions on the ability of restricted subsidiaries to
make certain payments; issue or sell stock of restricted subsidiaries; enter
into transactions with stockholders or affiliates; and consolidate, merge or
sell all or substantially all of their assets. However, these limitations will
be subject to a number of important qualifications and exceptions.
Each Warrant will entitle the holder thereof to purchase the number of shares
of Orion Newco Common Stock at the exercise prices that will be established at
the time the Warrants are issued. The Warrants are presently expected not to be
exercisable for at least six months, and possibly longer, after the date of
issuance. The Warrants are presently expected to expire on the tenth anniversary
of the date of issuance.
The terms of the Notes and the Warrants as issued may differ in certain
respects from the terms described above. See "Risk Factors -- Risks Relating to
Merger, Exchange and Debenture Investments -- Certain Terms of Notes Offering
Not Yet Determined."
Each of the Exchanging Partners has agreed that Orion Newco may pursue the
Notes Offering to effect the Orion 1 Credit Facility Refinancing. Under the
Exchange Agreement, however, Orion Newco and Orion have reserved the right not
to proceed with the Notes Offering if they determine that it would not be in the
best interests of the stockholders of Orion Newco or Orion (including the
entities who would become stockholders of Orion Newco after the Merger).
OAP ACQUISITION
Orion has acquired or is in the process of acquiring the only outstanding
minority interest in Orion Asia Pacific from an affiliate of British Aerospace
for approximately 86,000 shares of Orion Newco Common Stock. Orion acquired the
remainder of Orion Asia Pacific in December 1992. Orion Asia Pacific holds
rights under an agreement with the Republic of the Marshall Islands pursuant to
which Orion is pursuing an orbital slot for the Orion 3 satellite. Consummation
of the OAP Acquisition is a condition to the British Aerospace Investment.
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INFORMATION ABOUT ORION NEWCO
Orion Newco is a newly formed Delaware corporation. Orion is the initial
stockholder of Orion Newco and owns one share of Orion Newco Common Stock. Orion
Newco is substantially identical in all material respects to Orion. In
particular, Orion Newco has a certificate of incorporation and bylaws
substantially identical in all material respects to those of Orion and a capital
structure substantially identical to that of Orion. For more information,
stockholders are referred to Orion Newco's certificate of incorporation and
bylaws filed as exhibits to the Registration Statement of which this Proxy
Statement/Prospectus is a part.
DESCRIPTION OF ORION NEWCO CAPITAL STOCK
The authorized capital stock of Orion Newco consists of 40,000,000 shares of
Orion Newco Common Stock, par value $.01 per share, and 1,000,000 shares of
preferred stock, par value $.01 per share.
The following summary description of the capital stock of Orion Newco upon
consummation of the Merger Transactions and the Debenture Investments is
qualified in its entirety by reference to the Certificate of Incorporation and
Bylaws of Orion Newco, copies of which are filed as exhibits to the Registration
Statement of which this Proxy Statement/Prospectus is a part.
ORION NEWCO COMMON STOCK
As of December 15, 1996, there were 10,974,121 shares of Orion Common Stock
outstanding, held by approximately 350 stockholders of record.
As described below, the rights and preferences of Orion Newco Common Stock
are substantially identical in all material respects to those of Orion Common
Stock.
Dividends. Subject to preferences that may then be applicable to any then
outstanding preferred stock, holders of Orion Newco Common Stock are entitled to
receive dividends out of funds legally available therefor when, as and if
declared by the Board of Directors. Orion has not paid any cash dividends upon
its Orion Common Stock and does not plan to pay any dividends on such stock for
the foreseeable future. The Notes Indentures will contain covenants that
restrict Orion Newco's ability to pay cash dividends.
Voting Rights. Each holder of Orion Newco Common Stock is entitled to one
vote per share of Orion Newco Common Stock held by such holder on all matters to
be voted upon by the stockholders of Orion Newco. Holders of shares of Orion
Newco Common Stock are not entitled to cumulative voting rights.
Staggered Terms of Directors. Under the provisions of Orion Newco's
Certificate of Incorporation, the members of the Board of Directors are divided
into three classes with the term of one class expiring each year. Accordingly,
only those Directors of a single class can be changed in any one year and it
could take three years to change the entire Board. While Orion Newco believes
that a staggered Board of Directors is in the best interests of Orion Newco and
its stockholders, such requirement may have the effect of protecting management
in retaining its position and discouraging potential acquirors.
Liquidation Rights. All shares of Orion Newco Common Stock have equal rights,
on a share for share basis, to receive pro rata the net assets of Orion Newco
upon liquidation or dissolution after payments to creditors and holders of
preferred stock, if any, then issued and outstanding. There are no redemption or
sinking fund provisions applicable to the Orion Newco Common Stock. All
outstanding shares of Orion Newco Common Stock are, and the shares of Orion
Newco Common Stock offered hereby will be when issued in accordance herewith,
fully paid and non-assessable.
ORION NEWCO PREFERRED STOCK
Orion Newco's Certificate of Incorporation authorizes the Board of Directors
to issue, from time to time and without further stockholder action, one or more
series of preferred stock, and to fix the relative rights and preferences of the
shares, including voting powers, dividend rights, liquidation preferences,
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redemption rights and conversion privileges. Because of its broad discretion
with respect to the creation and issuance of preferred stock without stockholder
approval, the Board of Directors could adversely affect the voting power of the
holders of Orion Newco Common Stock and, by issuing shares of preferred stock
with certain voting, conversion and/or redemption rights, could discourage any
attempt to obtain control of Orion Newco.
ORION NEWCO SENIOR PREFERRED STOCK
As described above under the caption "The Merger, the Exchange and the
Debenture Investments -- The Merger Agreement -- Terms of the Merger Agreement,"
pursuant to the Merger Orion Newco will issue the Orion Newco Series A Preferred
Stock and the Orion Newco Series B Preferred Stock in exchange for an identical
number of shares of Orion Series A Preferred Stock
and Orion Series B Preferred Stock.
Preemptive Rights. The holders of Orion Newco Senior Preferred Stock have a
contractual "preemptive" right to purchase a pro rata portion of any equity
securities sold by Orion Newco in the future on the same terms and conditions as
sold to others, subject to certain exceptions for securities sold or granted to
employees, certain small offerings, existing rights to acquire equity securities
and public offerings of securities under the Securities Act.
Dividends and Conversion. Dividends on the Orion Newco Senior Preferred Stock
accrue at 8% per annum, and are payable as and when declared by the Board. The
Orion Newco Senior Preferred Stock is convertible into Orion Newco Common Stock
at initial prices of $8.50 and $10.20 per share, subject to anti-dilution
adjustments in the case of recapitalizations or issuances of Orion Newco Common
Stock below the conversion price (other than pursuant to Warrants issued in the
Notes Offering). Future issuances of Orion Newco Common Stock below the
conversion price could significantly increase the percentage of Orion Newco's
equity owned by the holders of the Orion Newco Senior Preferred Stock. Upon
conversion of the Orion Newco Senior Preferred Stock, any accrued and unpaid
dividends on the Orion Newco Senior Preferred Stock will be waived.
Liquidation Rights. The Orion Newco Senior Preferred Stock has a liquidation
preference equal to the amount invested, which preference increases to the
extent of any accrued and unpaid dividends.
Voting Rights. Holders of the Orion Newco Senior Preferred Stock are entitled
to vote with holders of the Orion Newco Series C Preferred Stock and the Orion
Newco Common Stock, together as a single class on an as-if-converted basis.
Put Rights. The holders of Orion Newco Senior Preferred Stock have the right
to sell the Orion Newco Common Stock received upon the conversion thereof to
Orion Newco upon, among other things, certain mergers, changes of control or
sales of substantially all the assets of Orion Newco at the pro rata interest of
such holders in the consideration received, in the case of certain fundamental
changes, or fair market value. In the case of mergers in which the consideration
to be received by holders of Orion Newco Common Stock is in a form other than
cash, Orion Newco shall pay the purchase price with a combination of a specified
amount of freely tradable securities, a specified amount of cash, and the
balance with a note payable over two years. The holders of Orion Newco Senior
Preferred Stock (and any Orion Newco Common Stock received upon the conversion
thereof) also have the right to sell such stock (or the common stock issuable
upon conversion thereof) to Orion Newco commencing in June 1999 at the fair
market value of their shares (in the case of Orion Newco Common Stock) or the
liquidation value, including accrued and unpaid dividends (in the case of Orion
Newco Senior Preferred Stock), in accordance with the following schedule:
ON OR AFTER MAY 31, PORTION
------------------- -------
1999................ 33 1/3%
2000................ 66 2/3%
2001................ 100%
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The Company expects the holders of Orion Newco Senior Preferred Stock to
agree to waive exercise of these rights for so long as any Notes or Debentures
remain outstanding. These rights terminate upon the closing of a "Qualified
Public Offering," as discussed below.
Tag Along Rights. Certain principal stockholders of Orion have granted to
CIBC, Fleet and Chisholm the right to have a pro rata portion (based on the
percentage of Orion Newco Common Stock outstanding) of the Orion Newco Common
Stock issuable upon conversion of the Orion Newco Senior Preferred Stock
included in any sales by those principal stockholders which involve more than 5%
of the Orion Newco Common Stock then outstanding.
Termination of Certain Rights Upon Qualified Public Offering. The rights of
the holders of the Orion Newco Senior Preferred Stock relating to sale following
certain mergers, changes of control or sale of substantially all assets, the
rights to sell such stock to Orion Newco commencing in June 1999 or in
connection with certain business combinations at fair market value, the
preemptive rights and certain of the additional investment rights terminate upon
the closing of a "Qualified Public Offering" which is defined as a public
offering of the Orion Newco Common Stock with gross proceeds to Orion Newco of
not less than $30 million and a public offering price per share of not less than
$25.50.
Restrictive Covenants; Representations. The documents relating to the Orion
Newco Senior Preferred Stock impose certain covenants on Orion Newco. The
covenants include limitations on payment of dividends, redemption of junior
securities such as Orion Newco Common Stock, certain issuances of senior
securities (except when the Orion Newco Senior Preferred Stock is able to
acquire an equivalent seniority), expansion into other lines of business or
engaging in certain affiliated transactions. Failure to comply with those
covenants (or failure of representations to be true and complete when made)
could result in an increase in the dividend on the Orion Newco Senior Preferred
Stock not to exceed an annual dividend of 14% and could give the holders of the
Orion Newco Senior Preferred Stock certain rights to sell such stock to Orion
Newco if the non-compliance is material or (in certain cases) continues after
certain cure periods. The Notes Indentures are expected to contain a covenant
which will effectively prohibit such sale to Orion while any Notes are
outstanding. Orion Newco has the right to redeem the Orion Newco Senior
Preferred Stock (subject to limitations contained in the Notes Indentures) at
its liquidation value (plus accrued and unpaid dividends) by paying holders of
Orion Newco Senior Preferred Stock that amount and activating certain warrants
(issued concurrently with the Orion Newco Senior Preferred Stock) to purchase
Orion Newco Common Stock at the conversion price of such Orion Newco Senior
Preferred Stock. These warrants do not become exercisable unless Orion Newco
exercises its right to repurchase the Orion Newco Senior Preferred Stock.
Orion Newco's Right to Force Conversion of Orion Newco Senior Preferred
Stock. Orion Newco may require conversion of the Orion Newco Senior Preferred
Stock (resulting in the cancellation of accrued but unpaid dividends) if it
meets certain public float requirements, the holders of Orion Newco Senior
Preferred Stock are not subject to any agreements restricting the sale of Orion
Newco Common Stock received on conversion and the closing trading price of the
Orion Newco Common Stock for 30 of the 45 trading days preceding notice of the
required conversion has been above (i) $21.24 (if Orion Newco makes the
conversion election prior to June 17, 1997) and (ii) $25.50 (if Orion Newco
makes the conversion election on or after June 17, 1997).
ORION NEWCO SERIES C PREFERRED STOCK
The relative rights and preferences of the Orion Newco Series C Preferred
Stock will be as set forth in the Certificate of Designations, the form of which
is attached to this Proxy Statement/Prospectus as Attachment C, and are
described above under "The Merger, the Exchange and the Debenture Investments --
Description of the Orion Newco Series C Preferred Stock."
WARRANTS AND OPTIONS
As of December 15, 1996, there were warrants and options outstanding to
purchase an aggregate of 1,193,721 shares of Orion Common Stock at exercise
prices ranging from $8.16 to $14.00 per share, with a weighted average exercise
price of $10.31 per share. Holders of Orion Series A Preferred Stock have
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(and holders of Orion Newco Series A Preferred Stock will have) options to
invest an additional approximately $350,000 in similar preferred stock (except
that such similar preferred stock would be convertible at any time into Orion
Newco Common Stock at a price based upon the date when the option is exercised
within a range from $10.20 to $17.00 per share of Orion Newco Common Stock). The
holders of Orion Newco Senior Preferred Stock also hold certain warrants to
purchase Orion Newco Common Stock at the conversion price of such Orion Newco
Senior Preferred Stock. These warrants do not become exercisable unless Orion
Newco exercises its right to repurchase the Orion Newco Senior Preferred Stock.
The warrants and options contain provisions for the adjustment of exercise
prices in certain events, including stock dividends, stock splits,
reorganizations, reclassifications or mergers.
REGISTRATION RIGHTS
Orion Newco Senior Preferred Stock; SS/L. The holders of Orion Newco Senior
Preferred Stock and SS/L (an existing stockholder) are entitled to include their
shares of Orion Newco Common Stock in a registered offering of securities by
Orion Newco (a "piggyback" registration) for its own account or for the account
of its stockholders. If Orion Newco proposes to register any shares of Orion
Newco Common Stock under the Securities Act (other than for an offering
primarily to employees or in connection with a merger or acquisition), the
holder of registration rights may request that Orion include in the registered
offering shares held by such holder or which the holder would receive upon
conversion or exercise. If so requested, Orion Newco must use its best efforts
to include in the registered offering all shares requested, provided, among
other conditions, that the managing underwriter of such offering has the right
to limit or exclude entirely such shares of Orion Newco Common Stock from such
offering. Orion Newco is required to bear all registration and selling expenses,
other than underwriting discounts, selling commissions, applicable stock
transfer taxes, and certain registration fees and expenses, in connection with
such piggyback registrations.
The holders of Orion Newco Senior Preferred Stock have demand rights
(including two "long form" and an unlimited number of "short form"
registrations) to require Orion Newco to register the securities held by them,
subject to certain conditions. Orion Newco is required to bear all registration
and selling expenses, other than underwriting discounts, selling commissions,
applicable stock transfer taxes, and certain registration fees and expenses, in
connection with such demand registrations.
Orion Newco Series C Preferred Stock. The registration rights held by the
holders of the Orion Newco Series C Preferred Stock are described above under
"The Merger, the Exchange and the Debenture Investments-- Registration
Rights."
Any exercise of such registration rights may hinder efforts by Orion Newco
to arrange future financings of Orion Newco and may have an adverse effect on
the market price of the Orion Newco Common Stock. See "Orion Newco Shares
Eligible for Future Sale."
CERTAIN ANTI-TAKEOVER EFFECTS
Orion Newco's Certificate of Incorporation and Bylaws contain certain
provisions that are intended to enhance the likelihood of continuity and
stability in the composition of Orion Newco's Board of Directors and in the
policies formulated by the Board of Directors, and to discourage an unsolicited
takeover of Orion Newco if the Board of Directors determines that such a
takeover is not in the best interest of Orion Newco and its stockholders.
However, these provisions could have the effect of discouraging certain attempts
to acquire Orion Newco or remove incumbent management even if some or a majority
of Orion Newco's stockholders were to deem such an attempt to be in their best
interest, including those attempts that might result in a premium over the
market price for the shares of Orion Newco Common Stock held by stockholders.
Orion Newco is subject to Section 203 of the Delaware General Corporation Law
("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in certain business combinations with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder. In general, Section 203 defines an "interested
stockholder" as any entity or person beneficially owning 15% or more of the
outstanding voting stock of
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the corporation and any entity or person affiliated with or controlling or
controlled by such entity or person. A Delaware corporation may elect not to be
subject to Section 203 by having its stockholders approve an amendment to its
certificate of incorporation or bylaws to such effect. Orion Newco has not made
such an election and, therefore, Section 203 may have an anti-takeover effect
with respect to Orion Newco.
Under the Communications Act, if Orion Newco controlled an FCC radio common
carrier licensee (which it presently does not), the FCC could refuse or revoke
such licensee's license if (i) over 25% of Orion Newco was controlled by foreign
persons or entities and (ii) the FCC found that the public interest would be
served thereby. Because of these provisions, Orion Newco's Certificate of
Incorporation empowers the Board of Directors of Orion Newco to redeem any of
Orion Newco's outstanding capital stock to the extent necessary to prevent the
loss or secure the reinstatement of any license or franchise from any
governmental agency. Such stock may be redeemed at the lesser of (i) fair market
value or (ii) such holder's purchase price (if the stock was purchased within a
year of such redemption). See "Information About Orion's Business -- Regulation"
and "Risk Factors -- Risks Relating to Orion's Business -- Approvals Needed;
Regulation of Industry." In connection with the Debenture Investments, Orion
Newco has agreed to certain additional requirements with respect to the exercise
of this right. See "The Merger, the Exchange and the Debenture Investments --
The Debenture Investments."
Orion Newco's Certificate of Incorporation contains a provision (the "Fair
Price Provision") that requires the approval of the holders of a majority of
Orion Newco's voting stock (other than voting stock held by an Interested
Stockholder (as defined below)) as a condition to a merger or to certain other
business transactions with, or proposed by, a holder of 20% or more of Orion
Newco's voting stock (an "Interested Stockholder"), except in cases (such as the
Debenture Investments) where the Continuing Directors approve the transaction or
certain minimum price criteria and other procedural requirements are met. A
"Continuing Director" is a director who is not an Interested Stockholder or
affiliated with an Interested Stockholder or who was a member of the Board prior
to the time the Interested Stockholder became an Interested Stockholder or whose
nomination or election to the Board of Directors is recommended or approved by a
majority of the Continuing Directors. The minimum price criteria generally
require that, in a transaction in which stockholders are to receive payments,
holders of Orion Newco Common Stock must receive a value equal to the highest
price paid by the Interested Stockholder for Orion Newco Common Stock during the
prior two years, and that such payment be made in cash or in the type of
consideration paid by the Interested Stockholder for the greatest portion of its
shares. Orion Newco's Board of Directors believes that the Fair Price Provision
will help assure that all of Orion Newco's stockholders are treated similarly if
certain kinds of business combinations are effected. However, the Fair Price
Provision may make it more difficult to accomplish certain transactions that are
opposed by the incumbent Board of Directors and that could be beneficial to
stockholders.
Orion Newco's Certificate of Incorporation also requires any person (or
entity) (the "Acquiring Stockholder") who acquires or seeks to acquire shares of
capital stock of the Company that would increase such person's voting power in
Orion Newco above any of three thresholds (20%, 33% or 50%) to send a disclosure
statement to Orion Newco and the other stockholders. The Acquiring Stockholder
must receive the approval of the holders of a majority of the other shares of
Orion Newco before the Acquiring Stockholder can vote the acquired stock. In
addition, if the Acquiring Stockholder has acquired or is acquiring more than
50% of the outstanding capital stock, the other stockholders who vote against
such acquisition are entitled to dissent and obtain for their shares, from Orion
Newco, payment equivalent to the estimated fair value of their shares. The
practical effect of this requirement is to condition the acquisition of control
of Orion Newco on the approval of a majority of the pre-existing disinterested
stockholders.
Orion Newco's Certificate of Incorporation provides that all actions taken
by the stockholders must be taken at an annual or special meeting of
stockholders. Under the Bylaws, special meetings of the stockholders of Orion
Newco may be called only by a majority of the members of the Board of Directors,
the Chairman or stockholders owning in the aggregate at least 35% of the
outstanding shares of capital stock of Orion Newco entitled to vote. Orion Newco
is not obligated to hold more than one
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special meeting called by stockholders during any six-month period. Stockholders
are required to comply with certain advance notice provisions with respect to
any nominations of candidates for election to Orion Newco's Board of Directors
or other proposals submitted for stockholder vote. These provisions may have the
effect of deterring hostile takeovers or delaying changes in control or
management of Orion Newco.
Orion Newco's Certificate of Incorporation and Bylaws provide that the Board
of Directors of Orion Newco is divided into three classes of directors serving
staggered three-year terms. The classification of directors has the effect of
making it more difficult for stockholders to change the composition of the Board
of Directors in a relatively short period of time. The authorized number of
directors may be changed by resolution of the Board of Directors or by the
holders of at least two-thirds of the voting power of all outstanding shares,
and directors may not be removed without cause.
The foregoing provisions of Orion Newco's Certificate of Incorporation and
Bylaws, except for those dealing with the liability of directors, may not be
altered, amended or repealed without the approval of the holders of at least
two-thirds of the voting power of all outstanding shares entitled to vote
thereon and the affirmative vote of the Board of Directors.
LISTING
The Orion Common Stock is, and after the Merger Transactions the Orion Newco
Common Stock will be, quoted on the Nasdaq National Market under the trading
symbol "ONSI."
TRANSFER AGENT
The transfer agent and registrar for the Orion Common Stock is, and after the
Merger Transactions the transfer agent and registrar for the Orion Newco Common
Stock will be, Fleet National Bank.
ORION NEWCO SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Transactions, there will be approximately 25.9 million
shares of Orion Newco Common Stock outstanding on a fully diluted basis,
assuming a closing of the Transactions as of January 30, 1997. Orion's current
stockholders will initially hold approximately 14.5 million of these shares, all
of which will be freely transferable without restriction or further registration
under the Securities Act, other than the 5.5 million shares held by "affiliates"
of Orion Newco, as that term is defined under the Securities Act. The shares
held by affiliates of Orion Newco are expected to be eligible for sale pursuant
to Rule 144 under the Securities Act. In general, under Rule 144 as currently in
effect, a person (or persons whose shares are aggregated), including an
affiliate, who has beneficially owned shares of Orion Newco (or shares of Orion
exchanged for shares of Orion Newco) for at least two years (including the
holding period of any prior owner other than an affiliate) is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Orion Newco Common Stock
(approximately 111,000 shares outstanding immediately after the Transactions) or
(ii) the average weekly trading volume of the Orion Newco Common Stock during
the four calendar weeks preceding such sale, subject to the filing of a Form 144
with respect to such sale and certain other limitations and restrictions. In
addition, a person who is not deemed to have been an affiliate of Orion Newco at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold (or shares of Orion exchanged for such shares) for at
least three years, would be entitled to sell such shares under Rule 144(k)
without regard to the requirements described above.
The Exchanging Partners, as owners of the Orion Newco Series C Preferred
Stock, and British Aerospace and Matra Marconi Space, as owners of the
Debentures, will own the remaining 11.4 million shares of Orion Newco Common
Stock, which will be issuable upon the conversion of such securities. All of
such shares will be deemed to be "restricted securities" as that term is defined
in Rule 144. Moreover, each Exchanging Partner will enter into a Transfer
Restriction Agreement regarding the transfer of the shares of Orion Newco Common
Stock issuable upon conversion of, or as dividends on, the Series C Preferred
Stock. Pursuant to the applicable Transfer Restriction Agreement, each Exchang-
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ing Partner may not transfer any shares of Orion Newco Common Stock issued upon
conversion of shares of Series C Preferred Stock or as dividends on such Series
C Preferred Stock (the "Affected Shares") without the prior written consent of
Orion Newco until the expiration of the Lockup Period (other than certain
transfers to affiliates). Also, pursuant to the applicable Transfer Restriction
Agreement, each Exchanging Partner agrees that it will not transfer during any
90-day period Affected Shares that collectively represent more than 25% of the
aggregate number of shares of Orion Newco Common Stock issuable upon conversion
of the Series C Preferred Stock received by such Exchanging Partner pursuant to
the Exchange Agreement or as dividends on such Series C Preferred Stock (the
"25% Limit") unless any such transfer is (i) pursuant to an underwritten, public
offering pursuant to a registration statement under the Securities Act, (ii)
pursuant to a tender or exchange offer made by or on behalf of the Company or a
third party, (iii) in connection with a merger, consolidation, sale of all or
substantially all of the assets, recapitalization or similar transaction
involving Orion Newco or (iv) pursuant to a transaction not involving a public
distribution or offering registered under the Securities Act and not made
through a broker, dealer or market-maker pursuant to Rule 144 (including a
pledge that meets such requirements); provided, however, that prior to any
transfer of Affected Shares under clause (iv) above and prior to any transfer of
Orion Newco Series C Preferred Stock other than under the circumstances set
forth in clause (i), (ii) or (iii) above, the transferee shall execute and
deliver to Orion Newco a transfer restriction agreement substantially similar to
the Transfer Restriction Agreement the transferor originally entered into
(omitting the Lockup Period provision noted above). The 25% Limit described
above will terminate on the date that is five years after the date of issuance
of the Orion Newco Series C Preferred Stock under the Exchange Agreement. See
"The Merger, the Exchange and the Debenture Investments -- Certain Transfer
Restrictions."
The Exchanging Partners and holders of the Debentures will be granted certain
shelf, demand and "piggyback" registration rights with respect to the Orion
Newco Common Stock issuable upon conversion of the Orion Newco Series C
Preferred Stock or such Debentures, respectively, and the Orion Newco Common
Stock issuable as dividends thereon or interest with respect thereto. See "The
Merger, the Exchange and the Debenture Investments -- Registration Rights" and
"-- The Debenture Investments."
No predictions can be made as to the effect, if any, that sales of Orion
Newco Common Stock or the availability of additional shares of Orion Newco
Common Stock for sale by the Exchanging Partners or other stockholders of Orion
Newco would have on the market price of the Orion Newco Common Stock prevailing
from time to time or on the ability of Orion Newco to raise additional equity
financing. See "The Merger, the Exchange and the Debenture Investments --
Registration Rights," "-- Certain Transfer Restrictions," "-- The Debenture
Investments" and "-- Security Ownership of Certain Beneficial Owners Prior to
and Following the Transactions."
COMPARATIVE RIGHTS OF ORION STOCKHOLDERS AND
ORION NEWCO STOCKHOLDERS
Upon consummation of the Merger, stockholders of Orion will become
stockholders of Orion Newco. There are no material differences between the
rights stockholders of Orion possessed prior to the Merger and the rights such
stockholders will have after the Merger as Orion Newco stockholders.
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INFORMATION ABOUT ORION'S BUSINESS
OVERVIEW
Orion 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 which 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 to avoid "last mile" terrestrial connections and bypass 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
VSATs.
The Company commenced operations of the Orion 1 satellite in January 1995. As
of September 30, 1996, Orion serviced 167 customers through 304 points of
service. The Company's customers include Amoco Poland Limited, Amway
Corporation, AT&T Corp., BBC, British Telecom, CNN, Citibank, N.A., Deere & Co.,
Global One, GTECH Corporation, Hungarian Broadcasting, News International
Limited, RTL Television, Pepsi-Cola International, Sprint Communications, Viacom
International Inc., Westinghouse Communications, World Wide Television News and
Xerox Corporation, or certain of their subsidiaries. As of September 30, 1996,
Orion's contract backlog was $123 million (after pro forma adjustments for the
Exchange). Substantially all of Orion's current contracts with customers are
denominated in U.S. Dollars. For the three months ended September 30, 1996, the
Company generated revenues of $12.2 million and had a loss from operations, net
loss and EBITDA (as defined below) of $(7.2) million, $(5.8) million and $1.7
million, respectively. For the first nine months of 1996, the Company generated
revenues of $30.0 million and had a loss from operations, net loss, net cash
used in operating actives and EBITDA of $(26.3) million, $(19.8) million,
$(25.0) million and $0.1 million, respectively. "EBITDA" represents earnings
before minority interests, interest income, interest expense, other expense
(income), income taxes, depreciation and amortization. EBITDA is commonly used
in the communications industry to analyze companies on the basis of operating
performance, leverage and liquidity. EBITDA is not intended to represent cash
flows for the period and should not be considered as an alternative to cash
flows from operating, investing or financing activities as determined in
accordance with GAAP. EBITDA is not a measurement under GAAP and may not be
comparable to other similarly titled measures of other companies.
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 27 European
countries, portions of the United States and a limited number of Latin American
countries.
The Company has recently signed a contract with Matra Marconi Space for the
construction and launch of Orion 2. 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
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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.
The Company has recently entered into an authorization to proceed with Hughes
Space for the construction and launch of Orion 3 and has commenced construction
of Orion 3. 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. Maps of the footprints of Orion 1, Orion 2
and Orion 3 are set forth below under the caption "Implementation of the Orion
Satellite System."
THE ORION STRATEGY
Orion's 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 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
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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.
[GRAPHIC]
_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 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 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 ground operators, and delivers
its services using leased satellite capacity. Orion employed this
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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 and Russia over leased satellite
capacity.
_LOCAL PRESENCE
Orion has arrangements with 30 local 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. Historically, satellites
were used primarily for international voice and data traffic, using large earth
stations that enabled lower-power satellites to function as "cables in the sky."
The principal drawback to satellite-based voice transmission is the 1/4 of a
second delay caused by the signal traveling to and from the satellite. In the
U.S., Western Europe and Japan, the use of satellites for voice traffic has
decreased since the early 1980s with the growth of fiber optic cable networks.
Geostationary satellites now are used primarily for television distribution.
However, voice and data traffic remains the dominant use of satellites in
developing countries.
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.
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.
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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. Ovum, Ltd. (a
U.K.-based consulting firm) estimates that revenues from the X.25
packet-switched data networking services in Western Europe alone totaled
approximately $2.7 billion in 1996, excluding revenues from such services as
leased lines, frame relay and ATM. 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. The Company expects that demand for frame relay
services will experience rapid growth through the year 2000.
(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. Recent Comsys and Price Waterhouse reports have identified an
installed base of 140,000 to 160,000 VSATs and predict significant worldwide
growth over the next few years.
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
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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.
(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 transatlantic 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 27 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 chan-
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nels 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. See "Risk Factors --
Risks Relating to Orion's Business -- Potential Adverse Effects of
Competition." Although CDV is just beginning to be adopted in the industry,
as of September 30, 1996, approximately 63% of Orion's video customers used
CDV technology.
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. As indicated by the
charts below, 61% of revenues for the nine months ended September 30, 1996 were
derived from the sale of satellite capacity (primarily for video distribution
services). However, 62% of bookings for the nine months ended September 30, 1996
were from private network and Internet services. These figures are consistent
with Orion'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.
Revenues for None Months ended Booking for Nine Months ended
September 30, 1996 September 30, 1996
------------------ ------------------
Internet Related Internet Related
2% 16%
Private Private
Network [GRAPHIC] Network [GRAPHIC]
37% 46%
Video Video
Transmission Transmission
61% 38%
- ----------
* Bookings represent new customer contracts executed during the period. See
"Risk Factors -- Risks Relating to Orion's Business -- Uncertainties
Relating to Backlog."
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.
One customer, a major multinational consumer goods company, required
voice/fax and data connectivity from nine offices in Central and Eastern Europe
to the company's U.S. headquarters, utilizing data speeds of up to 128 Kbps. The
sites are manufacturing centers for the customer's soap and toiletry products
and the customer uses Orion's service for managing inventory and "just-in-time"
order entry.
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The customer was seeking a "one-stop shopping" solution delivered by a single
network service provider. The customer investigated two alternative networking
solutions and selected satellite connectivity provided by Orion over terrestrial
facilities provided by the local PTTs due to superior quality.
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, and subsequent phases of the service have been
introduced during 1996 and are expected to be introduced during 1997, including
the addition of video teleconferencing. 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 will 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.
A VISN customer, Creditanstalt Bankverein, Austria's second largest bank,
needed a voice and data network among all of its branches in Central and Eastern
Europe. Data applications varied from electronic mail to transfer transactions
to its data center in Vienna, along with voice requirements for interoffice
telephone calls and facsimile transmission. Creditanstalt investigated
terrestrial leased line and dial-up services to satisfy its requirements.
Orion's VISN service offered full meshed, frame relay network service which
supports both voice/fax and data transmission simultaneously. Creditanstalt
replaced its terrestrial network with a nine site VISN network using data speeds
of up to 256 Kbps.
_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 Internet Service Providers ("ISPs"), 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, ISPs can reduce their costs and relieve
network congestion. Finally, Internet data communications are 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 both directions. Orion's satellite based solutions can be
designed with different amounts of 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.
Although Orion's Internet services were introduced only in the second quarter
of 1996, sales of such services constituted 16% of new service bookings for the
nine months ended September 30, 1996. Orion offers three Internet-related
services, described below.
ISP Backbone Service. Orion's DirectNet I service is designed for European
ISPs. The service combines a dedicated, high speed point-to-point circuit
between the ISP's points of presence in Europe and the North American Internet
through a dedicated, fully redundant backbone connection. Orion also offers
additional features with its DirectNet I service, including 24-hour network
monitoring, control and support and a 99.5% network availability guarantee and
associated downtime credits. Orion is pursuing requirements or joint venture
arrangements with ISPs in which all of their transatlantic traffic would be
carried over Orion 1 as it develops. For example, Orion has an arrangement with
PSINet Inc. in which
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Orion has agreed to serve as the supplier for PSINet's backbone, connecting
PSINet's various points of presence in Europe to the U.S. Internet backbone.
Orion's ISP customers include, for example, companies such as Global Ukraine, an
ISP based in Kiev. Global Ukraine sought Internet connectivity to the United
States backbone with advanced technical features. Orion now provides Global
Ukraine with a 256 Kbps circuit from the Ukraine to the United States with a
connection into the U.S. Internet at three network access points, providing
route diversity and ensuring fast response time by avoiding points of potential
network congestion. Orion does not expect DirectNet I to generate more than 10%
of its revenues.
Corporate Internet Access. Orion's DirectNet II service is offered to
international corporations requiring high volume data transmission in connection
with World Wide Web browsing and downloading. DirectNet II provides a
point-to-point circuit between the North American Internet and the corporation's
premises. Orion offers large corporations Internet access service by reselling
the Internet access services of several large ISPs, such as DIGEX and UUNet.
Multicast Satellite-Based Internet Services. Orion recently introduced its
WorldCast service which allows ISPs or corporate users to significantly reduce
Internet bandwidth and ground facility costs. The service is based on an
asymmetric architecture which couples wide bandwidth satellite broadcasting with
narrow bandwidth terrestrial links to the Internet. Furthermore, WorldCast can
provide a single channel that is shared among multiple ISPs, which can remove a
significant amount of traffic from ISP terrestrial networks. The Company has
recently taken orders from customers, but is not currently providing any
customers with this service.
_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. Approximately two-thirds of Orion's transmission
capacity services consist of video services. The Company offers transmission
capacity services under long term contracts, with approximately 35% of such
services being under contracts of three years or less, 14% being under contracts
of approximately four to six years in duration and approximately 51% being
delivered under longer term contracts (such percentages being based upon
contract values). The remainder consists principally of 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. Viacom has leased capacity for one
channel on Orion 1 for the purpose of occasional or full time transmission for
video programming from its U.S. facilities to a broadcast facility in London.
From there it can be inserted into programming and rebroadcast in Europe.
Orion's contribution services also include transport of news programming for
RTL, a major commercial broadcast network in Germany. RTL needed to interconnect
its various news bureaus in Germany and the U.S. to transmit news stories to its
headquarters in Cologne. Orion provided 24 MHz of transatlantic transmission
capacity service allowing transmission of RTL's programming in compressed
digital video format.
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.
Orion's video distribution customers include Black Entertainment Television,
Inc. ("BET"), which was seeking a video distribution service for the
distribution of its BET On Jazz International Network, an internationally
distributed programming network dedicated to international Jazz and Blues
artists.
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BET required receipt of its signal at its headquarters in Washington, D.C.,
conversion to a European TV standard, digital compression and uplinking of the
compressed digital video signal for distribution to cable head ends in the
United Kingdom and other sites in Europe.
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. CNN selected Orion's service for its coverage of Bosnia, and Orion
provided service to the European Broadcasting Union for coverage of the Olympics
in Atlanta.
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 offers 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.
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.
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Cost-competitive. Orion prices its services to be competitive with both
satellite-based and terrestrial alternatives.
CUSTOMERS AND BACKLOG
Customers. As of September 30, 1996, Orion had entered into contracts with
167 customers, principally large multinational corporations, European companies
and governmental agencies. These entitles 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.
SELECTED ORION CUSTOMERS
<TABLE>
<S> <C> <C>
Private Network Services: AT&T Deere & Company
Digital Link/Digital Channelized Amoco EDS
Link Amway GE Americom
Chase Manhattan Bank Global One
Citibank News International Limited
Concert Westinghouse
Private Network Services: Balluff & Co. Pepsi Cola
VISN Creditanstalt Price Waterhouse
Internet-related Am. Univ. of Bulgaria LV Net Teleport
Banknet Spectrum
BITS Terminal Bar
Datac TSSA Nask
Global Ukraine
Video Transmission and Other AsiaNet Hughes Network Systems
Black Entertainment Television Hungarian Broadcasting
Bonneville International MCI
British Telecom RTL Television
CNN Telecom Italia
Comsat Viacom International
</TABLE>
More than half of Orion's customers are based in the U.S., but these
customers have a substantial majority of their points of service in Western and
Eastern Europe, as indicated in the chart below.
167 Customers 304 Points of Service
------------- ---------------------
U.S. 52% 21%
Eastern Europe 14% 44%
Western Europe 34% 35%
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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 13 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. DACOM has the right to terminate the
contract before March 1997 (and Orion would retain the $10 million paid) if it
fails to obtain certain approvals. 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.
Backlog. At September 30, 1996, Orion had approximately $123 million of
contracts in backlog (after giving effect to the Exchange and related
transactions, which will result in changes to arrangements with Limited Partners
that reduce backlog by approximately $11 million), as compared to approximately
$95 million at September 30, 1995. The backlog contracts generally have terms of
between three and four years. Orion presently anticipates that at least $86.4
million of its backlog will be realized after 1997. Orion has begun to receive
contract renewals under expiring contracts (under some of the earliest
contracts, which were entered into in 1993). 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. As of
September 30, 1996, Orion had a VSAT installation backlog of 68 units.
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. In
the second quarter of 1996, the Company determined that one large customer under
a long-term contract (accounting for backlog of approximately $19.9 million) was
not likely to raise necessary financing to commence its service in the near
future, and accordingly the Company no longer considers such contracts part of
its backlog. Also in the second quarter of 1996, the Company removed from its
backlog contracts with a customer (accounting for backlog of approximately $4.5
million) which had ceased paying for the Company's services. In the fourth
quarter of 1996, the Company removed $10.4 million from its backlog related to
contracts under which customers failed to use the contracted service or failed
to make timely payment. 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.
See "Risk Factors -- Risks Relating to Orion's Business -- Uncertainties
Relating to Backlog."
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 and the United States, 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").
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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 a U.S.
based sales force 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. Certain of its indirect
sales channels in Europe have not met expectations. Orion has been significantly
increasing its direct sales capabilities in Europe, particularly with respect to
sales of private communications network services. Although Orion believes that
the increase in its European sales capabilities will increase its bookings,
there can be no assurance regarding the timing or amount of such increase. Sales
of Orion's services generally involve a long-term complex sales process, and
Orion's bookings have fluctuated significantly. See "Risk Factors -- Risks
Relating to Orion's Business -- Risks Relating to Potential Lack of Market
Acceptance and Demand; Ground Operations."
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. Although the Company is presently considering one such
possible acquisition, it does not have binding arrangements at the present time.
The Company believes that such acquisition, if consummated, would not have a
material effect on the Company. See "Risk Factors -- Risks Relating to Orion's
Business -- Risks Concerning Ability to Manage Growth."
_DIRECT SALES
As of December 15, 1996, Orion has assembled a direct sales force of 31
full-time employees in the United States and Europe (compared to 26 employees at
June 30, 1996) to offer its private communications network and satellite
transmission services. Approximately 68% of the sales force is based in the
United States (in Maryland) and approximately 32% is based in Europe. Orion
expects to continue to expand its sales force significantly throughout 1997,
both in the U.S. and Europe.
_INDIRECT SALES CHANNELS
Representatives/Distributors. 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. Sales
representatives are supervised by Orion sales managers, who establish marketing
strategies with the representatives, establish pricing, attend certain sales
calls, develop marketing materials and sales training tools, coordinate joint
efforts in promotional events and provide information about Orion's services.
Orion also provides engineering support to its sales representatives. Orion
provides some of these functions to support the sales efforts of its
distributors. Distributors purchase Orion's services at wholesale prices and
resell those services to customers at prices determined by the distributors. Two
Limited Partners 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. Orion expects that unless Limited Partners sales
representatives increase their sales significantly, payments under the profit
sharing arrangement will be not be material.
Major Carriers and Other Wholesalers. 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
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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.
NETWORK OPERATIONS; LOCAL GROUND OPERATORS
Orion has a centralized network operations function at its corporate
headquarters in Rockville, Maryland, 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 obtain necessary licenses, install and maintain
the customers' networks, provide in-country business experience and often
facilitate market entry.
Network Operations. Once Orion 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. based network management center, located at its corporate
headquarters in Rockville, Maryland, and from facilities in Europe. The network
management center allows 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 30 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 27 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 certain other Latin American 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 facil ities in Amsterdam. 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 Limited Partner 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 Limited Partners
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. See "Risk Factors --Risks Relating to Orion's Business -- Risks
Relating to Potential Lack of Market Acceptance and Demand; Ground Operations."
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Set forth below is a map showing the locations of Orion's existing European
ground operators and potential new ground operators.
[Document contains a map of Europe indicating where Orion has ground operators
and where Orion is negotiating the hiring of additional ground operators]
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 is being extended to Latin America and
Asia with the execution of the Orion 2 Satellite Contract and commencement of
construction of Orion 3 in December 1996. 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 a relationship with a ground operator in
Mexico 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 three U.S. based direct sales personnel focused on selling in
Latin America, and is pursuing relationships with other potential ground
operators and joint venture partners.
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In Asia, the Company has assigned two full time personnel to pursue
arrangements with potential ground operators and joint venture partners, and has
commenced discussions with such entities in a number of Asian countries. Orion
has begun the process of identifying potential sales representatives in
countries within the Orion 3 footprint. The Company has also begun discussions
with existing customers who have operations within the Orion 3 footprint and
have expressed an interest in procuring Orion's services in Asia. Orion has
started to identify other potential multinational and Asia-based customers, and
plans to open a regional office in Asia in the second half of 1997. 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.
See "-- Implementation of the Orion Satellite System -- Orion 3 --
Pre-Construction Customer."
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
plans to commence construction of 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. See "Risk Factors -- Risks Relating to
Orion's Business -- Approvals Needed; Regulation of Industry" and "Regulation"
below.
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|SD 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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[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. The redundant equipment
currently generates a majority of Orion's revenues. 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
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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. See "Risk
Factors -- Risks Relating to Orion's Business -- Risks of Satellite Loss or
Reduced Performance."
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.
_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 authori zation from the FCC for the orbital slot at 12|SD 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 currently plans to commence construction of Orion 2
immediately after completion of the Offering and launch Orion 2 late in the
second quarter of 1999. See "-- Satellite Construction, Launch and Performance"
and "Risk Factors -- Risks Relating to Orion's Business -- Launch of Orion 2 and
Orion 3 Subject to Significant Uncertainties."
[INSERT MAP]
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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. For a discussion of the
Company's financing needs with respect to Orion 2, and related risks, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Risk Factors -- Risks
Relating to Orion's Business -- Launch of Orion 2 and Orion 3 Subject to
Significant Uncertainties -- Substantial Financing Requirements."
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. A total or partial loss
will involve delays and loss of revenue, which will impair Orion's ability to
service its indebtedness, 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. See "Insurance" below and
"Risk Factors -- Risks Relating to Orion's Business -- Risks of Satellite Loss
or Reduced Performance -- Limited Insurance for Satellite Launch and Operation."
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.
There can be no assurance that Orion 2 will be launched successfully. See
"Risk Factors -- Risks Relating to Orion's Business -- Launch of Orion 2 and
Orion 3 Subject to Significant Uncertainties."
_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 23 54 MHz and two 27 MHz
equivalent Ku-band transponders, 10 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 to
begin the ITU process to coordinate an orbital slot at 139|SD East longitude.
Orion has not commenced 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
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the fourth quarter of 1998. See "Risk Factors -- Risks Relating to Orion's
Business -- Launch of Orion 2 and Orion 3 Subject to Significant Uncertainties."
For a discussion of Orion's financing needs with respect to Orion 3, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Orion -- Liquidity and Capital Resources" and "Risk Factors --
Risks Relating to Orion's Business -- Need for Substantial Additional Capital"
and "-- Launch of Orion 2 and Orion 3 Subject to Significant Uncertainties --
Substantial Financing Requirements."
The proposed coverage of Orion 3 is shown below.
[MAP]
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. DACOM has the
right to terminate the contract before March 1997 (and Orion would retain the
$10 million paid) if it fails to obtain certain approvals. Payments are subject
to refund if the successful launch and commencement of commercial operation of
Orion 3 has not occurred by June 30, 1999.
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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. See "Risk Factors -- Risks Relating to Orion's Business -- Launch of
Orion 2 and Orion 3 Subject to Significant Uncertainties -- Timing
Uncertainties." As part of the arrangements with DACOM, Orion granted DACOM a
warrant to purchase 50,000 shares of Orion 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 2%. 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. For a discussion of the Company's financing needs with respect
to Orion 3, and related risks, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity" and "Risk Factors --
Risks Relating to Orion's Business -- Launch of Orion 2 and Orion 3 Subject to
Significant Uncertainties -- Substantial Financing Requirements."
Under the proposed 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. See "Insurance" and "Risk
Factors -- Risks Relating to Orion's Business -- Satellite Risks -- Limited
Insurance for Satellite Launch and Operation."
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 expects to lease a tracking, telemetry and
command facility in Asia to control Orion 3 and to maintain backup facilities in
Korea, pursuant to arrangements with DACOM.
There can be no assurance that Orion 3 will be launched successfully. See
"Risk Factors -- Risks Related to Orion's Business -- Launch of Orion 2 and
Orion 3 Subject to Significant Uncertainties."
_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
37.5oSD West longitude.
Orion 2. Orion has obtained conditional authorization from the FCC for the
construction, launch and operation of Orion 2 at 12o 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 12o West longitude
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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 will consult with INTELSAT regarding Orion 2, and believes that
since there are no INTELSAT satellites located adjacent to the 12|SD 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|SD 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|SD
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 possible interference. Orion believes, based
upon its monitoring of the other proposals and information in the industry
regarding their progress, that none of the entities with effective priority over
the Company's proposal (through the Republic of the Marshall Islands) will be
able to 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|SD West longitude, and has
coordinated this orbital position with INTELSAT. Orion has also filed an
application with the FCC to operate a satellite at 126|SD 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|SD 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 presently intends to seek a waiver with respect to this 120 day
requirement, but believes failure to obtain a waiver would not have a material
affect on Orion or its business. Such 120 day requirement does not apply to
authorization previously granted to Orion, such as for the 12|SD West longitude
orbital slot proposed to be used for Orion 2.
In September 1995, Orion filed applications for authority to construct,
launch and operate Ka-band satellites at 78.0|SD East longitude, 93.0|SD West
longitude, and 83.0|SD West longitude, and an amendment to its pending
application to construct, launch and operate a Ku-band satellite at 127|SD West
longitude to add a Ka-band payload. In addition, Orion filed an application to
modify its authority to construct, launch and operate a Ku-band satellite at
47|SD West longitude to include a North/South beam configuration. On November 9,
1995, Orion filed an application for authority to construct, launch and operate
a Ka-band satellite at 12|SD West longitude. In May 1996, the FCC assigned
Ka-band orbital locations for 33 U.S. companies for international orbital
locations, including two assigned to Orion at 78|SD East longitude and 126.5|SD
East longitude, and one at 47|SD West longitude. This orbital assignment plan
was conditioned upon authorization of the domestic portion of the proposed
satellite systems. At approximately the same time the FCC made ITU filings for
these satellites. The FCC order does not license these satellites, and some of
the applications to use the orbital assignments are subject to further FCC
processing. There are ongoing negotiations among the applicants concerning a
consensual Ka-band orbital assignment plan to be submitted to the FCC to resolve
a number of mutually exclusive orbital assignment requests, including Orion's
pending Ka-band application for 93.0|SD West longitude, 83.0|SD West longitude
and 127|SD West longitude. The FCC has indicated that if a consensus cannot be
reached by the applicants, the FCC will itself resolve these orbital conflicts
in the processing of these applications, and such processing will be in
conformity with yet-to-be adopted Ka-band service rules. 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 other satellite
filings.
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
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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. See "Risk Factors
- -- Risks Relating to Orion's Business -- Approvals Needed; Regulation of
Industry."
_INSURANCE
Orion has obtained satellite in-orbit life insurance for Orion 1 covering the
period from May 1996 to May 1997 in an initial amount of approximately $245
million providing protection against partial or total loss of the satellite's
communications capability, including loss of transponders, power or ability to
control the positioning of the satellite. The aggregate premium for in-orbit
insurance for Orion 1 is approximately $6 million per annum.
Orion intends to procure launch insurance for the construction, launch and
insurance costs of Orion 2 and Orion 3. In the past, satellite launch insurance
was generally procured approximately six months prior to launch. Recently, it
has become possible to obtain a commitment from insurance underwriters well
before that time, which fixes the rate and certain terms of launch insurance.
Orion intends shortly to seek such a commitment from insurance underwriters to
provide launch insurance for Orion 2 and Orion 3. Such insurance is expected to
be quite costly, with present insurance rates ranging at or above 16% of the
insured amount, depending upon such factors as the launch history and recent
performance of the launch vehicle to be used and general availability of launch
insurance in the insurance marketplace (although such rates have reached 20% or
higher in the past several years). Such insurance can be expected to include
certain contract terms, exclusions, deductibles and material change conditions
that are customary in the industry. After launch of Orion 2 and Orion 3, the
Company will need to procure satellite in-orbit life insurance for Orion 2 and
Orion 3. There can be no assurance that such insurance will be available or that
the price of such insurance or the terms and exclusions in the actual insurance
policies will be favorable to the Company. Launch and in-orbit insurance for its
satellites will not protect the Company against business interruption, loss or
delay of revenues and similar
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losses and may not fully reimburse the Company for its expenditures.
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 and would impair Orion's ability to service its
indebtedness, including the Notes. See "Risk Factors -- Risks Relating to
Orion's Business -- Risks of Satellite Loss or Reduced Performance -- Limited
Insurance for Satellite Launch and Operation."
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.
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 MFS Worldcom (which acquired IDB Communications Group, Inc.
and Wiltel International, Inc.), Infonet, SITA, Telemedia International,
Spaceline, ANT Bosch (which is being acquired by General Electric), Teleport
Europe, 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. See "Risk Factors -- Risks Relating
to Orion's Business -- Potential Adverse Effects of Competition."
_SATELLITE CAPACITY
Orion provides fixed satellite service and does not intend to compete with
proposed mobile satellites or low earth orbit systems ("LEO") such as
Globalstar, Iridium or Odyssey (although the Company does expect 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, DirectTV 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.
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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 (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 1997. 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 four satellites, with one satellite providing
coverage in each of the Atlantic Ocean region, the Asia Pacific region and
Indian Ocean region (the fourth covers the Atlantic Ocean region but is near the
end of its useful life). 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 four additional
satellites, two in 1997 that will provide coverage of the U.S., Central America
and Mexico, and two that will provide coverage of the Indian and Pacific Ocean
regions, respectively, in 1997 and early 1998. PanAmSat is in the process of
selling a controlling interest to Hughes Electronics Corp., which is the largest
private space-related company in the world. This transaction will enhance
PanAmSat's ability to compete with Orion.
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 seven satellites,
providing telephony, television, radio and data services, and has announced a
plan to launch five new satellites through 1998.
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 and a third planned for launch in 1997), the Chinese Apstar system
(also with two satellites in operation and a third planned for launch near the
end of 1997) and the Indonesian Palapa system (with three satellites in orbit
and plans to launch at least three more satellites through 1999). Japan has
licensed several satellite networks for domestic and international service,
including the JCSat series (three satellites in operation and a fourth planned
for launch in 1997), NTT's two N-Star satellites, and Space Communications
Corporation's Superbird A and B (with a third planned for 1997). 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 in operation, and plans two new satellites
in 1997 offering regional coverage. 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. Most of these satellites will cover areas within
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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 fixed 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. See "Risk Factors -- Risks
Relating to Orion's Business -- Potential Adverse Effects of Competition."
_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
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 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 and on its ability to service its
indebtedness and the value of the Orion Newco Common Stock. 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. See "Risk Factors -- Risks Relating to Orion's
Business -- Approvals Needed; Regulation of Industry."
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_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|SD 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|SD 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. It is required to make such showing within 90 days
after completion of INTELSAT consultation, and accordingly intends to commence
consultation with INTELSAT after it has obtained an additional financing and
believes it can make the required financial showing. 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|SD 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.
Orion 2. Orion has not commenced consultations with INTELSAT or EUTELSAT for
Orion 2, and intends to commence such consultation with INTELSAT for Orion 2
when it is ready to make its financial showing to the FCC, as discussed above.
Orion believes that since there are no INTELSAT or EUTELSAT satellites located
adjacent to the 12|SD West longitude orbital slot, the INTELSAT and EUTELSAT
coordination should be obtained in due course.
Orion 3. Orion has not commenced consultations with INTELSAT for Orion 3, but
Orion believes that since there are no INTELSAT satellites located adjacent to
the 139|SD East longitude orbital slot, the INTELSAT coordination should be
obtained in due course.
_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.
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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|SD
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|SD 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|SD
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 possible interference. Orion
believes, based upon its monitoring of the proposals of other administrations
and information in the industry regarding their progress, that none of the
administrations with effective priority over the proposal by the Republic of the
Marshall Islands will be able to 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|SD 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.
Limited Interconnection with Public Switched Message Networks. Under current
U.S. policies concerning "separate satellite systems," such systems may provide:
(i) all services not interconnected with the public switched network ("PSN");
(ii) emergency restoration services and up to 8,000 64 kbps equivalent circuits
per satellite interconnected with the PSN for common carrier public switched
international services; and (iii) interconnected private line services. Under
applicable FCC orders, Orion has been authorized to provide up to 8,000 64 kbps
equivalent circuits interconnected to the PSN for public switched services. All
U.S. restrictions on the interconnection of public switched networks with
separate satellite systems are expected to terminate in the first quarter of
1997. Orion's networking business is intended to be non-common carrier service,
and accordingly it will not be permitted to provide interconnected switched
services, but will be permitted to sell this capacity to common carriers.
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.
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|SD West, 12|SD West, 47|SD West
longitude and 126|SD East longitude (the orbital slot at 139|SD 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.
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<PAGE>
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), Germany (Nortel Dasa) and
Italy (Telecom Italia) have licenses in such countries. Orion also has obtained
"landing rights" through the INTELSAT treaty (although each INTELSAT signatory
country retains sovereignty over the transmission of satellite signals and
retains the right to object to the use of satellites within its borders). Orion
is now authorized, either directly or through its ground operators, to provide
service in 27 European countries.
Orion expects to pursue 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.
See "Risk Factors -- Risks Relating to Orion's Business -- Approvals Needed;
Regulation of Industry."
HUMAN RESOURCES
As of October 31, 1996, Orion and its subsidiaries had 175 full-time
employees. Of its total work force, six are part of management, 44 are in
engineering or satellite control operations, 75 are in marketing, sales and
sales support, and 50 are devoted to support and administrative activities.
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.
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<PAGE>
On November 9, 1996, Orion and Skydata executed a letter with respect to the
settlement in full the pending litigation and arbitration. As part of the
settlement, the parties are to release all claims by either side relating in any
way to the patent and/or the pending litigation and arbitration. In addition,
Skydata is to grant Orion (and its affiliates) an unrestricted, world-wide
paid-up license to make, have made, use or sell products or methods under the
patent and all other corresponding continuation and reissue patents. Orion is to
pay Skydata $437,000 over a period of two years as part of the settlement. The
parties are in the process of documenting the terms of the settlement in a
formal settlement agreement.
While Orion is party to regulatory proceedings incident to its business,
there are no material legal proceedings pending or, to the knowledge of
management, threatened against Orion or its subsidiaries.
105
<PAGE>
MANAGEMENT OF ORION AND ORION NEWCO
DIRECTORS AND EXECUTIVE OFFICERS
Orion's Board is, and following the Merger Orion Newco's Board will be,
divided into three classes of directors, serving staggered three-year terms. The
directors and executive officers of Orion and their ages and (in the case of
directors) terms as of November 15, 1996 are as follows:
<TABLE>
<CAPTION>
TERM EXPIRES
NAME AGE POSITION WITH ORION (DIRECTORS)
- ---------------------------- ------ ------------------------------------------------- ---------------
<S> <C> <C> <C>
Gustave M. Hauser .......... 67 Chairman, Director 1998
W. Neil Bauer............... 50 President and Chief Executive Officer, Director 1999
(Principal Executive Officer)
David J. Frear.............. 40 Vice President, Chief Financial Officer and
Treasurer (Principal Financial Officer and
Principal Accounting Officer)
Richard H. Shay............. 55 Vice President, Corporate and Legal Affairs, and
Secretary
Denis Curtin................ 57 Senior Vice President, Orion Satellite
Corporation and General Manager, Engineering and
Satellite Operations
Hans C. Giner............... 57 Vice President of Orion and President, Orion
Asia Pacific Corporation
Douglas H. Newman .......... 57 Vice President of Orion and President, Orion
Satellite Corporation
Richard J. Brekka .......... 35 Director 1997
Warren B. French, Jr........ 73 Director 1997
Barry Horowitz.............. 52 Director 1998
Sidney S. Kahn.............. 59 Director 1999
John G. Puente.............. 66 Director 1998
W. Anthony Rice............. 44 Director 1997
John V. Saeman.............. 60 Director 1998
Robert M. Van Degna......... 52 Director 1999
</TABLE>
BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the business experience and the affiliations of
the directors and executive officers of Orion (and, following the Merger, Orion
Newco) 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
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<PAGE>
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 and Treasurer of Orion since January 1994. 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 and a Vice
President since April 1992. 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, OrionSat and General Manager,
Engineering and Satellite Operations. 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 Asia Pacific, 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. Gin|fer 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. Gin|fer 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.
Douglas H. Newman has been President of Orion Satellite Corporation since
October 16, 1995. Mr. Newman was with Sprint International as Vice President and
General Manager Asia-Pacific Division from July 1993 until October 1994. He
served as Vice President World Wide Sales and Marketing for Analog Devices Inc.
from December 1988 to July 1993. Prior to that he was a Vice President of
National Semiconductor Corporation both in Europe and the United States from May
1979 until December 1988. Earlier, he spent 15 years at Texas Instruments Inc.'s
European Semiconductor Division in a variety of management positions in
engineering, marketing and sales.
Richard J. Brekka has been a director of Orion since June 1994. He is a
Managing Director of CIBC Wood Gundy Capital ("CIBC-WG"), the merchant banking
division of Canadian Imperial Bank of Commerce and is a Director and the
President of CIBC Wood Gundy Ventures, Inc., an indirect wholly owned subsidiary
of Canadian Imperial Bank of Commerce. 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.
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<PAGE>
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.
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.
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.
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<PAGE>
Robert M. Van Degna has been a director of Orion since June 1994. He is the
managing general partner of Fleet Equity Partners. Mr. Van Degna joined Fleet
Financial Group in 1971 and has held a variety of lending and management
positions until he organized Fleet Equity Partners 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 11 members (with 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, Puente and Saeman, will hold office until the 1998 annual
meeting of stockholders; Class II Directors, consisting of Messrs. Bauer,
Horowitz, 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 1997 annual meeting of stockholders. 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.
Three directors, Messrs. Rice, Brekka and Van Degna, were elected pursuant to
agreements with each of British Aerospace, CIBC and Fleet, respectively, which
terminated in August 1995 when the Orion Common Stock became publicly traded.
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 and a Nominating Committee.
The Audit Committee is composed of Messrs. Van Degna (chairman), Hauser and
Kahn. The Audit Committee examines and considers matters relating to the
financial affairs of Orion, including reviewing Orion's annual financial
statements, the scope of the independent annual audit and the independent
auditors' letter to management concerning the effectiveness of Orion's internal
financial and accounting controls. From the time Orion became subject to the
Exchange Act through December 31, 1995 (the "1995 Public Company Period"), the
Audit Committee held one meeting.
The Compensation Committee is composed of Messrs. Brekka (chairman), French,
Saeman and Van Degna. The Compensation Committee considers and makes
recommendations to Orion'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
Orion'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 Orion's stock option and grants of stock
options under the stock option plans. During the 1995 Public Company Period, the
Compensation Committee held two meetings. Three of the four members attended
both meetings; Mr. Brekka attended one of the two meetings.
The Executive Committee is composed 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 was formed in July 1996 and has met numerous times with
regard to the Transactions and other matters. Mr. Puente has been actively
engaged as chairman of the Executive Committee in connection with the
Transactions.
The Finance Committee is composed of Messrs. 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 Orion, including matters relating to capital structure and requirements,
financial performance, dividend policy, capital and expense budgets and
significant capital commitments. During the 1995 Public Company Period, the
Finance Committee held ten meetings. Four of the members attended at least eight
of these meetings; Messrs. Rice and Brekka attended fewer than that number.
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<PAGE>
The Nominating Committee is composed of Messrs. French, Puente and Saeman
(chairman). The Nominating Committee recommends to the Board of Directors
qualified candidates for election as directors of Orion and considers
candidates, if any, recommended by stockholders. During the 1995 Public Company
Period, the Nominating Committee held one meeting. Each member of the Nominating
Committee attended this meeting.
LIMITS ON LIABILITY; INDEMNIFICATION
The provisions of Orion Newco's Certificate of Incorporation relating to
limits on liability and indemnification of directors are substantially identical
to the provisions of Orion's Certificate of Incorporation summarized below.
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.
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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 Orion and its subsidiaries for the fiscal years ended December 31,
1996, 1995 and 1994.
<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, ............... 1996 $278,106 $ -- $ -- 110,294
PRESIDENT AND CHIEF ......... 1995 265,000 90,000
EXECUTIVE OFFICER ........... 1994 250,000 100,000 100,684
DAVID J. FREAR, .............. 1996 185,996 -- --
VICE PRESIDENT, TREASURER ... 1995 179,005 40,000 4,570 55,147
AND CHIEF FINANCIAL OFFICER . 1994 170,000 51,000 25,715
DOUGLAS H. NEWMAN ............ 1996 201,206 -- --
VICE PRESIDENT OF ORION ..... 1995 34,618 14,000 50,000
AND PRESIDENT, ORION
SATELLITE
CORPORATION ................. 1994 --
HANS C. GINER ................ 1996 141,638 35,000
VICE PRESIDENT OF ORION AND . 1995 --
PRESIDENT, ORION ASIA PACIFIC
CORPORATION ................. 1994 --
DENIS J. CURTIN, ............. 1996 155,380 5,000
SENIOR VICE PRESIDENT OF .... 1995 151,081 38,000 24,705
ORION SATELLITE CORPORATION . 1994 133,850 35,700
</TABLE>
- ----------
(1) Relocation expenses.
OPTION GRANTS IN LAST FISCAL YEAR
Orion has adopted a 1987 Employee Stock Option Plan (the "1987 Employee Stock
Option Plan"). Under the 1987 Employee Stock Option Plan, options to purchase up
to an aggregate of 1,470,588 shares of Orion Common Stock are available for
grants to employees of Orion. Orion has also adopted a Non-Employee Director
Stock Option Plan. The following table sets forth information concerning grants
of stock options to the named executive officers pursuant to the 1987 Employee
Stock Option Plan during the year ended December 31, 1996.
<TABLE>
<CAPTION>
Potential Realized
Value at Assumed
Annual Rates
of Stock Price
Appreciation
Individual Grants for Option Term
----------------- ------------------
Number of % of Total
Securities Options Exercise or
Underlying Granted to Base Price
Options Employees in Per Share Expiration
Name Granted Fiscal Year ($/Sh)(1) Date 5%($) 10%(4)
---- ------- ----------- --------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
W. Neil Bauer..... -- --
David J. Frear ..... -- --
Douglas H. Newman... -- --
Hans C. Giner ...... 25,000 20% 8.49 01/16/03 (2) 86,386 201,425
10,000 8% 10.78 11/19/03 (2) 43,875 102,302
Denis J. Curtin .... 5,000 4% 10.78 11/19/03 (2) 21,937 51,151
</TABLE>
(1) The option exercise price is equal to one hundred percent of the fair market
value of the Orion Common Stock on the date the option was granted.
(2) The options will vest in equal installments over a five-year period from the
date of grant.
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 1996 by the named executive officers. No named executive officer
exercised any stock options during the fiscal year.
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<PAGE>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS AT
AT DECEMBER 31, 1996 DECEMBER 31, 1996 (1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------- ---------------------------- --------------------------
W. Neil Bauer ...... 97,058/138,235 312,130/279,780
David J. Frear ..... 35,293/60,294 75,659/86,286
Douglas H. Newman... 10,000/40,000 32,050/128,200
Hans C. Giner ...... 0/35,000 0/130,575
Denis J. Curtin .... 31,284/20,661 121,404/40,321
(1) Based on a per share price of $12.875 on December 31, 1996.
COMPENSATION OF DIRECTORS
Prior to January 1996 (Orion having become a publicly traded company during
1995), directors did not receive compensation for serving on the Board of
Directors or its committees but were reimbursed for their expenses for each
Board of Directors or its committee meeting attended. Commencing in January
1996, directors receive annual compensation of $4,000, $1,500 for each Board of
Directors meeting attended, $750 for each committee meeting attended and per
annum grants of stock options to purchase 10,000 shares of Orion Common Stock
under the 1996 Non-Employee Director Stock Option Plan. An initial grant of
options to purchase 10,000 shares of Orion Common Stock under that plan was made
to each non-employee director in January 1996. In addition, an initial grant of
options to purchase 30,000 shares of Orion 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 January
1996 and Mr. Horowitz in March 1996 was equal to the fair market value of Orion
Common Stock on the respective dates the options were granted.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Orion 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 Stock Option Plan
described below.
In his capacity as a consultant to the Company, John G. Puente, a director of
the Company and Chairman of the Executive Committee, is compensated at a rate of
$25,000 per month and has been granted non-incentive stock options to purchase
up to an aggregate of 100,000 shares of Orion Common Stock at an exercise price
of $9.83 per share. Of the options granted to Mr. Puente, 50% are vested and 50%
will vest upon the successful completion during Mr. Puente's tenure as Chairman
of the Executive Committee or within six months thereafter, of the Notes
Offering. All options granted to Mr. Puente will vest immediately upon the sale
or merger of the Company during Mr. Puente's tenure as Chairman of the Executive
Committee or within six months thereafter.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Bauer, the President and Chief Executive Officer of Orion, and Mr.
Puente, then Chairman of Orion, served on the Compensation Committee and
therefore participated in making recommendations to the Board of Directors on
officer compensation matters until June 28, 1995.
STOCK OPTION PLANS
1987 Employee Stock Option Plan. In April 1987, Orion adopted its 1987
Employee Stock Option Plan. Under the 1987 Employee Stock Option Plan, as
amended in March 1995, options to purchase up to an aggregate of 1,470,588
shares of Orion Common Stock may be granted to key employees of Orion and its
subsidiaries. The 1987 Employee Stock Option Plan provides for the grant both of
incentive stock options intended to qualify as such under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and nonstatutory stock
options. The 1987 Employee Stock Option Plan will terminate in May 1997, unless
sooner terminated by the Board of Directors.
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The 1987 Employee Stock Option Plan is administered by the Board, but the
Board has delegated administration to the Compensation Committee, which is
comprised of disinterested directors. Subject to the limitations set forth in
the 1987 Employee Stock Option Plan, the Compensation Committee has the
authority to select the persons to whom grants are to be made, to designate the
number of shares to be covered by each option and whether such option is an
incentive stock option or a nonstatutory stock option, to establish vesting
schedules, to specify the type of consideration to be paid to Orion upon
exercise and, subject to certain restrictions, to specify other terms of the
options. The maximum term of options granted under the 1987 Employee Stock
Option Plan is ten years. The aggregate fair market value of the stock with
respect to which incentive stock options are first exercisable in any calendar
year may not exceed $100,000 per individual. Options granted under the 1987
Employee Stock Option Plan generally are non-transferable and expire either
upon, or 30 days after, the termination of an optionee's employment relationship
with Orion. In general, if an optionee dies or is permanently disabled during
his or her employment by or service to Orion, such person's option may be
exercised up to one year following such death or disability.
Options granted under the 1987 Employee Stock Option Plan to the executive
officers will immediately vest in the event the optionee's employment is
terminated within two years after a "Change in Control" by Orion other than for
"Cause" or by the optionee for "Good Reason" (as such terms are defined in an
applicable resolution of the Board of Directors). "Cause" for termination of
employment is narrowly defined, including only such matters as fraud, a crime
involving moral turpitude, compromising trade secrets, willfully failing to
perform material assigned duties or gross or willful misconduct that causes
substantial harm to Orion. "Good Reason" means a reduction in the optionee's
base salary, except for a reduction of up to 10% due to a reduction in
compensation generally applicable to executive officers of Orion, a substantial
reduction in responsibilities or required relocation. A "Change in Control"
occurs when any person or entity becomes the beneficial owner, directly or
indirectly, of securities representing 51% or more of the combined voting power
of Orion's then outstanding securities (excluding for purposes of such
computation all securities of Orion beneficially owned by such person or entity
as of March 15, 1995).
The exercise price of incentive stock options must equal at least the fair
market value of the Orion Common Stock on the date of grant. The exercise price
of nonstatutory stock options may be less than the fair market value of the
Orion Common Stock on the date of grant. The exercise price of incentive stock
options granted to any person who at the time of grant owns stock possessing
more than 10% of the total combined voting power of all classes of stock must be
at least 110% of the fair market value of such stock on the date of grant and
the term of these options cannot exceed five years.
As of September 30, 1996, Orion had options outstanding under the 1987
Employee Stock Option Plan to purchase an aggregate of 891,776 shares held by 86
persons at a weighted average exercise price of $9.77 per share. The exercise
price of all options granted under the 1987 Employee Stock Option Plan has been
at least equal to the fair market value of the Orion Common Stock on the date of
the grant as determined in good faith by the Board of Directors. As of September
30, 1996, options to purchase 129,755 shares of Orion Common Stock granted
pursuant to the Plan had been exercised. There are 449,057 shares of Orion
Common Stock available for future grants under the Employee Plan.
The 1987 Employee Stock Option Plan may be amended by the Board, subject to
stockholder approval if such approval is then required by applicable law or in
order for the 1987 Employee Stock Option Plan to continue to satisfy the
requirements of Rule 16b-3 under the Exchange Act.
Non-Employee Director Stock Option Plan. In January 1996, Orion adopted its
Non-Employee Director Stock Option Plan ("Non-Employee Director Stock Option
Plan") and up to 380,000 shares of Orion Common Stock are reserved for issuance
thereunder. The stock options granted under the Non-Employee Director Stock
Option Plan are non-incentive options.
Under the terms of the Non-Employee Director Stock Option Plan, each
Non-Employee Director (as defined) generally will receive or have vest options
to purchase 10,000 shares of Orion Common Stock for each year that such
Non-Employee Director serves as a director of Orion. Each current Non-Employee
Director has a vested option to purchase 10,000 shares of Orion Common Stock,
and an
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unvested option to purchase 10,000 shares of Orion Common Stock which will vest
at the next annual meeting of stockholders (expected to be held in May 1997) if
such director remains in office until such date. In addition, Mr. Horowitz, who
became a director on May 20, 1996, has an additional option to purchase 10,000
shares which will vest if he remains in office until the 1998 annual
stockholders meeting. Each current Non-Employee Director will be annually
granted an additional option to purchase 10,000 shares of Orion Common Stock
each year after the annual meeting of stockholders if he or she is then a
Non-Employee Director.
Each new Non-Employee Director whose commencement of service is after March
20, 1996 will be granted an initial option to purchase the number of shares of
Orion Common Stock equal to (i) the number of complete and partial years in the
term to which such Non-Employee Director was elected or appointed, multiplied by
(ii) 10,000. Each Non-Employee Director also will be annually granted an
additional option to purchase 10,000 shares of Orion Common Stock as of each of
(i) the day after the Non-Employee Director's first re-election to the Board of
Directors and (ii) each year after the annual meeting of stockholders if he or
she is then a Non-Employee Director.
Each option will be exercisable from and after the day of the first annual
meeting of stockholders after grant of the option. In the case of an initial
option to purchase of more than 10,000 shares, the option will be exercisable to
the extent of 10,000 shares from and after the day of the first annual meeting
of stockholders after grant of the option, in respect of an additional 10,000
shares from and after the day of the second annual meeting of stockholders after
grant of the option, and (if the option is to purchase of more than 20,000
shares), in respect of an additional 10,000 shares from and after the day of the
third annual meeting of stockholders after grant of the option. Upon the
termination of service of a Non-Employee Director in all capacities as an
employee and/or director of Orion and all of its affiliated companies other than
by reason of the death or permanent and total disability, any option granted to
such Non-Employee Director pursuant to the Non-Employee Director Stock Option
Plan shall terminate to the extent it is not then exercisable. If the
termination of service is by reason of the death or permanent and total
disability of a Non-Employee Director, the options held by such Non-Employee
Director shall be exercisable in respect of all shares subject to such options
for a period of one year from the date of such termination of service or until
expiration of the option, if earlier.
The option exercise price under the Non-Employee Director Stock Option Plan
is equal to 100% of the fair market value of Orion Common Stock on the date the
option is granted. Options granted under the Non-Employee Director Stock Option
Plan expire if not exercised within five years from the date of grant.
Payment for shares purchased under the Non-Employee Director Stock Option
Plan may be made either in cash or cash equivalents, in shares of Orion Common
Stock with a fair market value equal to the option price, or a combination of
cash and shares of Orion Common Stock. The Non-Employee Director Stock Option
Plan also allows for "cashless exercise," in which a licensed broker tenders to
Orion cash equal to the exercise price (plus taxes required to be withheld) at
the time Orion issues the stock certificates.
The Non-Employee Director Stock Option Plan will terminate automatically on
March 20, 2006, unless previously terminated. No termination, suspension or
amendment of the Non-Employee Director Stock Option Plan may, without the
consent of the optionee to whom an option has been granted, adversely affect the
rights of the holder of the option.
Other Stock Options. From time to time, the Board of Directors of Orion may
grant options to purchase shares of Orion Common Stock outside of the 1987
Employee Stock Option Plan and Non-Employee Director Stock Option Plan. As of
November 30, 1996, options to purchase an aggregate of 123,987 shares of Orion
Common Stock were outstanding outside of such plans at an average exercise price
of $8.30. During 1995, 6,463 options granted outside of such plans were
exercised.
OTHER EMPLOYEE BENEFIT PLANS
1997 Employee Stock Purchase Plan. In September 1996, Orion adopted its 1997
Employee Stock Purchase Plan (the "Stock Purchase Plan"). Under the Stock
Purchase Plan, eligible employees may purchase up to an aggregate of 500,000
shares of Orion Common Stock through payroll deductions.
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Eligible employees include all employees except those who have been employed by
Orion for less than three months, those who work less than five months per
calendar year or less than 20 hours per week, and those who would own 5% or more
of the total combined voting power of all classes of Orion's capital stock upon
their participation in the Stock Purchase Plan. The Stock Purchase Plan will
terminate at the sooner of September 2006 or such time as all shares of Orion
Common Stock available under the Stock Purchase Plan have been issued.
The Stock Purchase Plan is administered by the Board, but the Board has
delegated administration to its Human Resources and Compensation Committee.
Employees may commence participation in the Stock Purchase Plan or change their
payroll deduction percentages effective at the beginning of each calendar
quarter. On the last day of each quarter, all funds accumulated in an employee's
account are used to purchase shares of Orion Common Stock at a purchase price
equal to the lesser of 85% of the fair market value of such Orion Common Stock
(i) on the first trading day of the quarter or (ii) on the last trading day of
the quarter, but in no event shall the per-share price be less than the par
value of the Orion Common Stock ($.01). No employee may purchase in any one
calendar year shares of Orion Common Stock having an aggregate fair market value
in excess of $25,000. Orion Common Stock purchased under the Stock Purchase Plan
are entitled to full dividend participation.
An employee's participation in the Stock Purchase Plan terminates in the
event the employee voluntarily terminates such participation, ceases to be
employed by Orion or ceases to be eligible to participate in the Stock Purchase
Plan, or in the event the Board elects to terminate the Stock Purchase Plan. An
employee who retires, is laid off, takes a leave of absence, dies or suffers a
disability may directly or, in the case of death, through the employee's estate
withdraw any payroll deductions remaining in the employee's account, receive
that number of shares of Orion Common Stock which may be purchased with the
amount then credited to the employees account, or make up any deficiency
resulting from missed payroll deductions through an immediate cash payment.
Participation in the Stock Purchase Plan may resume at the beginning of the next
quarter if the employee again becomes eligible to participate.
The Stock Purchase Plan is not subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), nor is it qualified under Section
401(a) of the Code. As of November 15, 1996, no shares of Orion Common Stock
have been purchased or issued under the Stock Purchase Plan.
1997 401(k) Profit Sharing Plan. In September 1996, Orion adopted its 1997
401(k) Profit Sharing Plan (the "401(k) Plan"). Under the 401(k) Plan, eligible
employees may elect to have a portion of their pay deducted for investment in a
variety of mutual funds that invest in equity and debt securities and a money
market account. In addition, Orion may in its discretion make matching
contributions in the form of cash or in the equivalent amount of Orion Common
Stock, and may make profit sharing contributions. Up to 100,000 shares of Orion
Common Stock are issuable as matching contributions under the 401(k) Plan. The
401(k) Plan will continue indefinitely unless terminated by Orion at any time in
its discretion. Orion may also suspend matching and profit sharing contributions
at any time in its sole discretion.
The 401(k) Plan is administered under a written trust agreement between Orion
and certain trustees (the "401(k) Trustees"). The 401(k) Trustees oversee the
investment of employee contributions, and Orion administers all other matters in
connection with the day-to-day operation of the 401(k) Plan. Eligible employees
may elect to deduct up to $9,500 of their compensation on a pre-tax basis in a
given calendar year. The 401(k) Trustees have discretion to select among these
investment media, or employees may direct the 401(k) Trustees to invest their
payroll deductions in accordance with specific instructions. At its discretion,
Orion may match all or part of employee payroll deductions in cash or the
equivalent amount of Orion Common Stock. In addition, Orion may also make
additional profit sharing contributions in its discretion by distributing a
certain percentage of its profits to employees pro rata based on the ratio of an
employee's compensation to the total compensation of all 401(k) Plan
participants. Orion is responsible for directing the investment of any matching
or profit sharing contributions it makes to employee accounts.
An employee's payroll deductions (and any rollover contributions into the
401(k) Plan) and earnings thereon are always 100% vested and non-forfeitable.
Matching and profit sharing contributions become 100% vested and non-forfeitable
for any employee who attains age 65, dies, or becomes dis-
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abled while working for Orion. An employee whose employment terminates for any
other reason will be 0% vested in any matching and profit sharing contribution
which the employee has received if the employee has less than two years of
service with Orion and 100% vested in such matching and profit sharing
contributions if the employee has two or more years of service. The 401(k) Plan
allows employees to begin receiving benefits upon age 65 or upon becoming
disabled while employed by Orion. Employees may also withdraw from their account
in the event of certain defined hardships, and may borrow between $1,000 and the
lesser of $50,000 or 50% of the vested amounts in their accounts at the 401(k)
Trustee's discretion. An employee's participation in the 401(k) Plan will
terminate in the event of voluntary termination by the employee, termination of
the employee's employment or eligibility, or Orion's election to terminate the
401(k) Plan.
The 401(k) Plan is qualified under Section 401(a) of the Code and as a
qualified cash or deferred compensation arrangement under Section 401(k) of the
Code. The 401(k) Plan is also subject to certain provisions of ERISA,
principally Title I, relating to protection of employee benefit rights, and to
the provisions of the Code relating to retirement plans. As of November 15,
1996, no shares of Orion Common Stock or other cash matching or profit sharing
contributions have been distributed under the 401(k) Plan.
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PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As discussed more fully under the caption "The Merger, the Exchange and the
Debenture Investments," pursuant to the Merger, each share of Orion Common
Stock, Orion Series A Preferred Stock and Orion Series B Preferred Stock will be
converted into the right to receive one share of Orion Newco Common Stock, Orion
Newco Series A Preferred Stock and Orion Newco Series B Preferred Stock,
respectively. In addition, pursuant to the Exchange, Orion Newco will issue
shares of Orion Newco Series C Preferred Stock for the Exchanging Partners'
limited partnership interests in Orion Atlantic, a consolidated subsidiary of
Orion, as a result of which, among other things, Orion Newco and its
subsidiaries (including Orion) will become the owner of all the partnership
interests in Orion Atlantic. Orion Newco will also acquire approximately $37.5
million of Orion Atlantic's obligations to the Exchanging Partners.
The Merger will be accounted for as a reorganization of entities under common
control. As a result, the assets and liabilities transferred pursuant to the
Merger will be accounted for at historical cost in a manner similar to a pooling
of interests. The Exchange will be accounted for as an acquisition of minority
interests using purchase accounting. As a result, the assets and liabilities of
Orion Atlantic will be revalued to fair value to the extent of the Exchanging
Partners' interests acquired as a result of the Exchange. The determination of
the fair value of the Orion Newco Series C Preferred Stock has been based on a
fairness opinion issued by Salomon Brothers dated December 10, 1996 (see "The
Merger, the Exchange and the Debenture Investments -- Opinion of Orion's
Financial Advisor"). Such value has been allocated to Orion Atlantic's assets
and liabilities based on the estimate of fair market value of the Orion 1
satellite as of December 1, 1996 of $304 million provided in an appraisal dated
December 20, 1996 from Ascent Communications Advisors, L.P., and management's
best estimate of fair value for other assets and liabilities of Orion Atlantic.
In addition to the Merger, the Exchange and the Debenture Investments, the
pro forma condensed consolidated balance sheet at September 30, 1996 gives
effect to the following transactions, which are, directly or indirectly,
conditions precedent to the Merger, the Exchange and the Debenture Investments
as described above, as if they took place on that date: (i) the Notes Offering
(including the use of the net proceeds therefrom to repay indebtedness under the
Orion 1 Credit Facility and to prefund the first six scheduled interest payments
and to pay interest rate hedge breakage costs associated with the Orion 1 Credit
Facility), (ii) the British Aerospace Investment, with gross proceeds of $50
million (and the application of $1 million of the proceeds thereof to make
interest payments under the Orion 2 Satellite Contract), (iii) the satisfaction
of $13 million owed to Matra Marconi Space through the Matra Marconi Investment
of $10 million and $3 million of cash, (iv) the acquisition by Orion of British
Aerospace's 17% ownership of Orion Asia Pacific for approximately 86,000 shares
of Orion Common Stock, (v) payments of approximately $3.9 million, including
accrued interest, owed to STET, a former Limited Partner, and (vi) the write-off
of deferred financing fees (such transactions collectively with the Merger and
the Exchange, the "Transactions"). The pro forma condensed consolidated
statements of operations for the year ended December 31, 1995 and the nine
months ended September 30, 1996 have been prepared as if the Transactions took
place on January 1, 1995. The unaudited pro forma condensed consolidated
financial statements do not purport to present the actual financial position or
results of operations of the Company had the Transactions in fact occurred on
the dates specified, nor are they indicative of the results of operations that
may be achieved in the future. The unaudited pro forma condensed consolidated
financial statements are based on the assumptions and adjustments further
described herein.
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ORION NETWORK SYSTEMS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL DEBIT CREDIT PRO FORMA
-------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........... $ 36,656,619 $260,125,000 (1) $216,280,254 (2) $122,338,532
48,750,000 (3) 3,050,000 (4)
3,862,833 (5)
Accounts receivable................. 5,808,568 5,808,568
Accrued interest.................... 157,125 157,125
Prepaid expenses and other.......... 5,584,196 5,584,196
-------------- ---------------- ---------------- ---------------
Total current assets................ 48,206,508 308,875,000 223,193,087 133,888,421
Property and equipment: ............
Land................................ 73,911 73,911
Telecommunications.................. 22,707,786 22,707,786
Furniture and computer.............. 4,598,505 4,598,505
Satellite and related............... 322,450,415 1,000,000 (3) 27,751,744 (6) 323,466,583
27,767,912 (6)
-------------- ---------------- ---------------- ---------------
349,830,617 28,767,912 27,751,744 350,846,785
Less accumulated depreciation ...... (57,914,578) 27,751,744 (6) (30,162,834)
-------------- ---------------- ---------------- ---------------
Net property and equipment.......... 291,916,039 56,519,656 27,751,744 320,683,951
Deferred financing costs............ 11,208,678 14,875,000 (1) 11,208,678 (2) 15,175,000
250,000 (3)
50,000 (4)
Restricted cash .................... 72,000,000 (1) 72,000,000
Other assets........................ 4,645,948 1,200,000 (3) 24,544,477
18,698,529 (6)
-------------- ---------------- ---------------- ---------------
Total assets........................ $355,977,173 $472,468,185 $262,153,509 $566,291,849
============== ================ ================ ===============
Current liabilities: ...............
Accounts payable.................... $ 4,094,026 $ 4,094,026
Accrued liabilities................. 7,374,884 7,374,884
Other current liabilities........... 5,402,117 5,402,117
Interest payable.................... 3,128,365 $ 3,038,858 (2,5) 89,507
Current portion of long term debt .. 33,873,930 27,496,124 (2) 6,377,806
-------------- ---------------- ---------------- ---------------
Total current liabilities........... 53,873,322 30,534,982 23,338,340
Long term debt...................... 221,781,393 180,218,718 (2) $347,000,000 (1) 425,512,675
13,000,000 (4) 10,000,000 (4)
3,500,000 (5) 50,000,000 (3)
6,550,000 (6)
Other liabilities................... 32,878,061 30,995,875 (6) 1,882,186
Minority interest Orion Atlantic ... 19,961,032 9,974,466 (2) --
9,986,566 (6)
Minority interests in other
entities............................ 52,984 52,984
Redeemable preferred stock: .......
Series A........................... 15,820,460 15,820,460
Series B........................... 4,718,526 4,718,526
Series C........................... 94,000,000 (6) 94,000,000
Stockholders' equity: ..............
Common stock........................ 112,325 857 (3) 113,182
Capital in excess of par............ 86,508,773 1,199,143 (3) 87,707,916
Accumulated deficit................. (79,729,703) 7,124,717 (2) (86,854,420)
-------------- ---------------- ---------------- ---------------
Total stockholders' equity.......... 6,891,395 7,124,717 1,200,000 966,678
-------------- ---------------- ---------------- ---------------
Total liabilities and equity ....... $355,977,173 $291,885,324 $502,200,000 $566,291,849
============== ================ ================ ===============
</TABLE>
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ORION NETWORK SYSTEMS, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
1. To reflect the estimated proceeds from the Notes Offering of $332 million,
net of estimated financing costs of approximately $15 million. Of the $347
million of gross proceeds from the Notes Offering, $222 million has been
allocated to the Senior Notes and $125 million to the Senior Discount Notes.
No value has been allocated to capital in excess of par value to reflect the
issuance of the Orion Newco Common Stock warrants (the "Warrants"), because
such value cannot be determined until completion of the Notes Offering. The
Senior Notes and Senior Discount Notes are assumed to bear interest at
11.875% and 13.125% per annum, respectively, and are due in 2007. No
assurance can be given that the value allocated to the Warrants is
indicative of the price at which the Warrants may actually trade. Of such
proceeds, approximately $72 million will be placed in an escrow account to
fund the first six scheduled interest payments on the Senior Notes. Such
amount has been reflected as restricted cash. The actual amount placed in
escrow will depend on the interest rate on the Senior Notes and on market
interest rates on the closing date of the Notes Offering.
2. To reflect the repayment of $207.7 million plus accrued interest of $2.7
million (as of September 30, 1996) under the Orion 1 Credit Facility, the
write-off of unamortized deferred financing costs of $11.2 million and
interest rate hedge breakage costs of $5.9 million, and the pro rata
allocation of such costs to the minority interests of Orion Atlantic. At
January 30, 1997, the aggregate principal and interest outstanding under the
Orion 1 Credit Facility is estimated to be approximately $222 million.
3. To reflect (i) the estimated proceeds from the British Aerospace Investment
of $49.8 million, net of estimated financing costs of $.2 million, (ii) the
initial down payment of $1 million to Matra Marconi Space to begin
construction of Orion 2 and (iii) the acquisition by Orion of British
Aerospace's 17% common stock interest in Orion Asia Pacific, a consolidated
subsidiary (for approximately $1.2 million in Orion Common Stock), which
will be completed in connection with the Transactions.
4. To record the payment of accrued satellite incentive obligations to Matra
Hachette of $13 million, Matra's Marconi Space's corresponding reinvestment
of $10 million in Debentures, and financing costs of $50,000.
5. To reflect the repayment of $3.5 million of promissory notes and $0.4
million of accrued interest (as of September 30, 1996) thereon to STET, a
former limited partner, required to be paid as a result of the Exchange. See
"Certain Transactions."
6. To reflect the effects of the Exchange Agreement, including the acquisition
by Orion of certain obligations to the Exchanging Partners aggregating
approximately $37.5 million, through the exchange of the Exchanging
Partners' partnership interests in Orion Atlantic for Orion Newco Series C
Preferred Stock. The Orion Newco Series C Preferred Stock has been valued at
approximately $94 million based on a fairness opinion prepared by Salomon
Brothers dated December 10, 1996 using an underlying Orion Common Stock
price of $12 per share (see "The Merger, the Exchange and the Debenture
Investments -- Opinion of Orion's Financial Advisor"). Such amount has been
allocated to the obligations acquired and the 58.7% interest of Orion
Atlantic previously held by the Exchanging Partners. Such allocation results
in a step up in basis of approximately $46.5 million, of which $27.8 million
had been allocated to the Orion 1 satellite based on an appraisal prepared
by Ascent Communications Advisors, L.P. estimating the fair value of the
Orion 1 satellite to be $304 million. The remaining step up of $18.7 million
has been allocated to costs in excess of fair value of net assets acquired
and is included in Other Assets in the accompanying Pro Forma Condensed
Consolidated Business Sheet. Accumulated depreciation of $27.8 million
relating to the portion of the satellite revalued to fair value has been
offset against the basis of the satellite.
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ORION NETWORK SYSTEMS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL DEBIT CREDIT PRO FORMA
--------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Revenues ................................ $ 30,015,517 $ 30,015,517
Operating expenses: .....................
Direct................................... 4,285,834 4,285,834
Sales and marketing...................... 7,792,666 7,792,666
Engineering and technical services ...... 6,333,525 6,333,525
General and administrative............... 11,469,235 11,469,235
Depreciation and amortization............ 26,402,947 $ 3,362,919 (1) 29,765,866
--------------- ---------------- --------- ----------------
Total.................................... 56,284,207 3,362,919 59,647,126
--------------- ---------------- --------- ----------------
Loss from operations..................... (26,268,690) 3,362,919 (29,631,609)
Other expense (income): .................
Interest income.......................... (1,841,868) (1,841,868)
Interest expense......................... 20,228,519 19,292,733 (2) 39,521,252
Other.................................... (48,356) (48,356)
--------------- ---------------- --------- ----------------
Total other expense (income)............. 18,338,295 19,292,733 37,631,028
--------------- ---------------- --------- ----------------
Loss before minority interest............ (44,606,985) 22,655,652 (67,262,637)
Minority interest........................ 24,799,698 24,799,698 (3) --
--------------- ---------------- --------- ----------------
Net loss................................. (19,807,287) 47,455,350 (67,262,637)
Preferred stock dividend and accretion .. 1,006,285 6,329,100 (4) 7,335,385
--------------- ---------------- --------- ----------------
Net loss attributable to common
shareholders............................. $(20,813,572) $53,784,450 $ (74,598,022)
=============== ================ ========= ================
Net loss per common share................ $ (1.90) $ (6.46)
=============== ================
Weighted average common shares
outstanding.............................. 10,943,287 11,544,626 (5)
=============== ================
</TABLE>
120
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
1. To reflect depreciation on the step up in basis on the Orion 1 satellite of
$2.0 million and the amortization of excess cost over fair value of net
assets acquired of $1.3 million resulting from the acquisition of the
Limited Partners' partnership interests in Orion Atlantic over the estimated
useful life of the satellite of 10.5 years.
2. To reflect the adjustment to interest as follows:
<TABLE>
<CAPTION>
<S> <C>
Reduction in Orion 1 Credit Facility interest expense................................ $(12,096,466)
Reduction in Orion 1 Credit Facility interest rate cap expense....................... (1,067,500)
Reduction in amortization of deferred financing costs on the Orion 1 Credit
Facility............................................................................. (1,597,941)
Interest expense on Senior Notes..................................................... 19,771,875
Interest expense on Senior Discount Notes............................................ 14,266,277
Interest expense on Debentures, net of amounts capitalized related to construction
of Orion 2 of $3.2 million......................................................... 695,625
Interest expense from amortization of deferred financing costs on new borrowings .... 1,115,625
Reduction in interest expense relating to repayment of other obligations to Limited
Partners ......................................................................... (1,794,762)
---------------
Net increase in pro forma interest expense.......................................... $ 19,292,733
===============
</TABLE>
The Senior Notes and Senior Discount Notes are assumed to bear interest at a
rate of 11.875% and 13.125%, respectively, per annum. A change in the
interest rate on the Notes of 0.5% would result in a change of $1.3 million
in interest expense for the nine months ended September 30, 1996. The amount
of pro forma interest expense with respect to the Notes does not give the
effect to any allocation of the gross proceeds of the Notes Offering between
the Notes and Warrants. Because a portion of the gross proceeds will be
allocated to the Warrants, the discount on the Notes resulting therefrom
will be accreted into interest expense (using the interest method) over the
term of the Notes.
3. Elimination of minority interest as a result of the Exchange.
4. To record the dividend requirement on the Orion Newco Series C Preferred
Stock issued as a result of the Exchange as well as pro rata accretion to
redemption value over a 25 year-period.
5. Pro forma weighted average shares outstanding for the nine months ended
September 30, 1996 consist of:
<TABLE>
<CAPTION>
<S> <C>
Historical weighted average shares outstanding................................ 10,943,287
Pro forma issuance of shares to British Aerospace and Matra Marconi Space for
interest on $60 million Debentures ......................................... 515,625
Pro forma issuance of shares to British Aerospace for purchase of 17%
minority interest in Orion Asia Pacific .................................... 85,714
------------
Total pro forma weighted average shares outstanding........................... 11,544,626
============
</TABLE>
121
<PAGE>
ORION NETWORK SYSTEMS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL DEBIT CREDIT PRO FORMA
--------------- ---------------- --------- ---------------
<S> <C> <C> <C> <C>
Revenues.............................. $ 22,283,882 $ 22,283,882
Operating expenses: ..................
Direct................................ 10,485,745 10,485,745
Sales and marketing................... 8,613,399 8,613,399
Engineering and technical services ... 8,539,644 8,539,644
General and administration............ 10,072,429 10,072,429
Depreciation and amortization......... 31,403,376 $ 4,253,528 (1) 35,656,904
--------------- ---------------- --------- ---------------
Total................................. 69,114,593 4,253,528 73,368,121
--------------- ---------------- --------- ---------------
Loss from operations.................. (46,830,711) 4,253,528 (51,084,239)
Other expense (income): ..............
Interest income....................... (1,924,822) (1,924,822)
Interest expense...................... 24,738,446 25,898,354 (2) 50,636,800
Other................................. 3,359,853 3,359,853
--------------- ---------------- --------- ---------------
Total other expense (income).......... 26,173,477 25,898,354 52,071,831
--------------- ---------------- --------- ---------------
Loss before minority interest......... (73,004,188) 30,151,882 (103,156,070)
Minority interest..................... 46,089,010 46,089,010 (3) --
--------------- ---------------- --------- ---------------
Net loss.............................. (26,915,178) 76,240,892 (103,156,070)
Preferred stock dividend and
accretion............................. 1,329,007 8,438,800 (4) 9,767,807
--------------- ---------------- --------- ---------------
Net loss attributable to common
shareholders.......................... $(28,244,185) $84,679,692 $ (112,923,877)
=============== ================ ========= ===============
Net loss per common share............. $ (3.07) $ (12.01)
=============== ===============
Weighted average common shares
outstanding........................... 9,103,505 9,376,719 (5)
=============== ===============
</TABLE>
122
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
1. To reflect depreciation on the step up in basis on the Orion 1 satellite of
$2.5 million and the amortization of excess cost over fair value of net
assets acquired of $1.7 million resulting from the acquisition of the
Exchanging Partners' partnership interests in Orion Atlantic over the
estimated useful life of the satellite of 10.5 years.
2. To reflect the adjustment to interest expense as follows:
<TABLE>
<CAPTION>
<S> <C>
Reduction in Orion 1 Credit Facility interest expense.......................................... $(17,437,104)
Reduction in Orion 1 Credit Facility interest rate cap expense................................. (426,250)
Reduction in amortization of deferred financing costs on the Orion 1 Credit Facility .......... (2,012,222)
Interest expense on Senior Notes .............................................................. 26,362,500
Interest expense on Senior Discount Notes...................................................... 16,824,834
Interest expense on Debentures net of amounts capitalized related to construction of Orion 2
of $2.3 million.............................................................................. 2,993,219
Interest expense from amortization of deferred financing costs on new borrowings .............. 1,487,500
Reduction in interest expense relating to repayment of other obligations to Limited
Partners .................................................................................... (1,894,123)
--------------
Net increase in pro forma interest expense..................................................... $ 25,898,354
==============
</TABLE>
The Senior Notes and Senior Discount Notes are assumed to bear interest at a
rate of 11.875% and 13.125%, respectively, per annum. A change in the
interest rate on the Notes of 0.5% would result in a change of $1.7 million
in interest expense for the year ended December 31, 1995. The amount of pro
forma interest expense with respect to the Notes does not give effect to any
allocation of the gross proceeds of the Notes Offering between the Notes and
Warrants. Because a portion of the gross proceeds will be allocated to the
Warrants, the discount on the Notes resulting therefrom will be accreted
into interest expense (using the interest method) over the term of the
Notes.
3. Elimination of minority interest as a result of the Exchange.
4. To record the dividend requirement on the Orion Newco Series C Preferred
Stock issued as a result of the Exchange as well as pro rata accretion to
redemption value over a 25-year period.
5. Pro forma weighted average shares outstanding for the year ended December
31, 1995 consist of:
<TABLE>
<CAPTION>
<S> <C>
Historical weighted average shares outstanding............................................... 9,103,505
Pro forma issuance of shares to British Aerospace and Matra Marconi Space for interest on
$60 million Debentures..................................................................... 187,500
Pro forma issuance of shares to British Aerospace for purchase of 17% minority interest in
Orion Asia Pacific......................................................................... 85,714
-----------
Total pro forma weighted average shares outstanding.......................................... 9,376,719
===========
</TABLE>
123
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATIONAL DATA OF ORION
(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, 1991, 1992, 1993, 1994 and
1995 are derived from the Company's audited consolidated financial statements.
The selected consolidated statements of operations and balance sheet data as of
September 30, 1996 and for the nine months ended September 30, 1995 and 1996 are
derived from the unaudited consolidated financial statements of the Company and,
in the opinion of the Company, include all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of such information.
Operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be achieved for the year ending
December 31, 1996. The pro forma consolidated statements of operations and
balance sheet data are derived from the unaudited Pro Forma Condensed
Consolidated Financial Statements included herein. The pro forma data are 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 Pro Forma Condensed Consolidated Financial Statements and
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 the present) 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 of Orion," "Pro Forma Condensed Consolidated Financial
Statements" and the Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1995 PRO
1991 1992 1993 (1) 1994 1995 FORMA(2)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenues....................$ 648 $ 1,403 $ 2,006 $ 3,415 $ 22,284 $ 22,284
Interest expense............ 456 180 133 61 24,738 50,637
Net loss(3)................. (2,573) (3,295) (7,886) (7,965) (26,915) (103,156)
Net loss per common share ..$ (0.35) $ (0.40) $ (0.85) $ (0.86) $ (3.07) $ (12.01)
Shares used in calculating
per share data(4)......... 7,318,147 8,232,548 9,266,445 9,272,166 9,103,505 9,376,719
Ratio of earnings to fixed
charges(5)................ -- -- -- -- -- --
Other Operating Data: ......
Number of customers......... 3 5 10 34 109
Capital expenditures........$ 44,036 $ 78,429 $ 44,130 $ 51,103 $ 9,060
Customer contract backlog(6)$ 4,572 $ 9,402 $ 18,185 $ 39,122 $ 120,612
Points of Service(7)........ -- 57 151
EBITDA (8)..................$ (1,852) $ (6,243) $ (9,069) $ (14,014) $ (15,427)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
1996 PRO
1995 1996 FORMA(2)
----------- ----------- -----------
<S> <C> <C> <C>
Consolidated Statements of
Operations Data: $ 13,947 $ 30,016 $ 30,016
Revenues.................... 17,080 20,229 39,521
Interest expense............ (19,985) (19,807) (67,263)
Net loss(3)................. $ (2.42) $ (1.90) $ (6.46)
Net loss per common share ..
Shares used in calculating 8,522,067 10,943,287 11,544,626
per share data(4).........
Ratio of earnings to fixed -- -- --
charges(5)................
Other Operating Data: ...... 79 167
Number of customers......... $ 3,863 $ 10,266
Capital expenditures........ $ 94,890 $ 134,320 $ 123,000
Customer contract backlog(6) 124 304
Points of Service(7)........ $ (15,177) $ 134
EBITDA (8)..................
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------
PRO
ACTUAL FORMA(2)
--------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents ...... $ 26,507 $ 7,668 $ 3,404 $ 11,219 $ 55,112 $ 36,657 $122,339
Restricted cash(9).............. -- -- -- -- -- -- 72,000
Total assets.................... 106,712 204,975 271,522 340,176 389,075 355,977 566,292
Long-term debt (less current
portion)...................... 1,073 106,821 185,294 230,175 250,669 221,781 425,513
Limited Partners' interest in
Orion Atlantic(10)............ 77,683 77,753 69,909 62,519 14,626 19,961 --
Redeemable preferred stock ..... -- -- -- 14,555 20,358 20,539 114,539
Total stockholders' equity
(deficit)..................... 2,559 14,478 8,400 3,351 26,681 6,891 967
Book value per share ........... .44 2.26 1.26 .49 2.46 .63 .09
</TABLE>
- ----------
(1) In 1993, Orion Atlantic terminated its commitment to purchase a second
satellite from MMS Space Systems, resulting in a termination charge of $5
million. See Note 3 to the Consolidated Financial Statements.
124
<PAGE>
(2) Adjusted to reflect the pro forma effects of the Transactions (see "Pro
Forma Condensed Consolidated Financial Statements"), assuming such events
occurred, in the case of the Consolidated Statements of Operations Data, on
January 1, 1995 and, in the case of the Consolidated Balance Sheet Data, on
September 30, 1996.
(3) As required by GAAP, net loss is presented before the accretion of preferred
stock and preferred stock dividends. For the years ended December 31, 1991,
1992, 1993, 1994, 1995 and 1995 (pro forma) and the nine months ended
September 30, 1995, 1996 and 1996 (pro forma), the accretion of preferred
stock and preferred stock dividends are $0, $0, $0, $.6 million, $1.3
million, $9.8 million, $1.0 million, $1.0 million and $7.3 million,
respectively. See Note 2 to the Consolidated Financial Statements.
(4) Computed on the basis described for net loss per common share in Note 2 to
the Consolidated Financial Statements.
(5) For purposes of the ratio of earnings to fixed charges, earnings consist of
earnings from continuing operations, plus fixed charges reduced by the
amount of unamortized interest capitalized. Fixed charges consist of
interest on all indebtedness (including commitment fees and amortization of
deferred financing costs) plus the portion of rent expense representing
interest (estimated to be one-third of such expense). For the years ended
December 31, 1991, 1992, 1993, 1994 and 1995, and the nine months ended
September 30, 1995 and 1996, earnings were inadequate to cover fixed charges
by $2.6 million, $8.8 million, $24.0 million, $35.2 million, $28.2 million,
$21.3 million and $19.8 million, respectively. On a pro forma basis assuming
consummation of the Transactions, earnings would not have been sufficient to
cover fixed charges by $105.4 million and $70.5 million for the year ended
December 31, 1995 and the nine months ended September 30, 1996,
respectively. A 0.5% increase in the assumed interest rates on the Notes
would result in pro forma deficiencies of earnings to cover fixed charges of
approximately $107.1 million for the year ended December 31, 1995 and $71.8
million for the nine months ended September 30, 1996.
(6) Backlog represents future revenues under contract. See "Risk Factors --
Risks Relating to Orion's Business -- Uncertainties Relating to Backlog."
(7) Points of service includes installed VSATs and additional transmission
destinations (such as customer premises) that share a VSAT.
(8) "EBITDA" represents earnings before minority interests, interest income,
interest expense, net of other expense (income), income taxes, depreciation
and amortization. EBITDA is commonly used in the communications industry to
analyze companies on the basis of operating performance, leverage and
liquidity. EBITDA is not intended to represent cash flows for the period and
should not be considered as an alternative to cash flows from operating,
investing or financing activities as determined in accordance with GAAP.
EBITDA is not a measurement under GAAP and may not be comparable to other
similarly titled measures of other companies. Other expense (income)
includes gains on sale of equipment less costs of $5 million in 1993
associated with the termination of the Company's commitment to purchase a
second satellite and the write-off of costs relating to the 1995 Financing
of $3.4 million in the fourth quarter of 1995.
(9) Restricted cash represents the estimated $72 million that will be placed in
escrow on the closing date of the Notes Offering to fund the payment of the
first six scheduled payments of interest on the Senior Notes. The actual
amount to be placed in escrow and reflected as restricted cash will depend
on the interest rate on the Senior Notes and interest rates on government
securities on such closing date.
(10)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 will be acquired by the
Company in the Exchange.
125
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ORION
GENERAL
Orion's 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.
OrionSat is the sole general partner in Orion Atlantic and Orion has a 41 2/3
% equity interest in Orion Atlantic. Orion will become the 100% owner of Orion
Atlantic upon consummation of the Exchange.
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. The assets and
liabilities reported in the consolidated balance sheets at September 30, 1996,
December 31, 1995 and December 31, 1994 primarily pertain to Orion Atlantic.
OVERVIEW
Orion's revenues are principally generated under three to four year contracts
for delivery of communications services. Such revenues, substantially all of
which are generated through Orion Atlantic, are derived principally from
recurring monthly fees from its customers, although many contracts include
initial non-recurring installation and other fees. These non-recurring fees
generally are structured to cover the Company's actual costs of installation of
the customer's site-based equipment. The revenues from each contract vary,
depending upon the type of service, amount of capacity, data handling ability of
the network, the number of 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. See "Risk Factors -- Risks Relating to Orion's Business -- Risks of
Conducting International Business." Orion begins to record revenues under its
contracts upon service commencement to the customer.
The services provided by Orion have been subject to decreasing prices over
recent years and this pricing pressure is expected to continue (and may
accelerate) for the foreseeable future, particularly if, as expected, capacity
continues to increase. Orion will need to increase its volume of sales in order
to compensate for such price reductions. Orion believes that customers will
increase the data speeds in their communications networks to support new
applications, and that such upgrading of customer networks will lead to
increased revenues that will mitigate the effect of price reductions. See "Risk
Factors -- Risks Relating to Orion's Business -- Potential Adverse Effects of
Competition." Orion expects to continue to incur increasing net losses and
negative cash flow (after payments for capital expenditures and interest) for
the foreseeable future.
Orion's direct cost of services includes principally (i) costs relating to
the installation, maintenance and licensing of VSAT earth stations at its
customers' premises; (ii) satellite lease payments for transponder capacity
(generally for services outside of the Orion 1 footprint); and (iii) associated
miscellaneous expenses. Sales and marketing expenses consist of salaries, sales
commissions (including commissions to third party sales representatives), travel
and promotional expenses. The Company has recently commenced a significant
expansion of its marketing program and expects to continue this expansion
through 1997. Due to the complexity of the Company's services, and the expected
turnover of
126
<PAGE>
new sales personnel, sales and marketing expense is expected to increase
significantly during 1997. Engineering and technical expenses, consisting
principally of personnel costs and travel, relate to TT&C, network monitoring,
network design and similar activities. The Company constructed its TT&C
facilities to control two satellites. As a result, the Company anticipates a
slight increase in costs with Orion 2 and a more substantial increase in costs
with Orion 3, which will require separate TT&C facilities. General and
administrative expenses consist of in-orbit insurance premiums, personnel costs
other than for selling and engineering, information systems, professional
services, and occupancy costs. These costs will increase generally as the
Company's operations expand. Specifically, in-orbit insurance costs will
increase significantly following the launches of Orion 2 and Orion 3.
Depreciation and amortization expenses result mainly from the depreciation of
the Orion 1 satellite, VSATs and the related equipment to service the expansion
of the private network communication services business (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 will increase substantially as a result of the Notes
Offering and will increase again after additional financing for Orion 2 and
Orion 3 is obtained. Interest expenses are associated with Orion's credit
facilities used to fund the construction and launch of Orion 1 and the related
tracking, telemetry and control facility. Such financing will be required
substantially in advance of the anticipated revenues from Orion 2 or Orion 3.
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
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1995
Revenue. Total revenue for the nine months ended September 30, 1996 was $30.0
million, compared to $13.9 million for the same period in 1995, an increase of
116%, resulting from increased volume of sales. Revenues from private
communications network services were $11.6 million for the first nine months of
1996 compared to $4.8 million for the comparable period in 1995, as the number
of points of service increased to 304 as of September 30, 1996 from 124 at
September 30, 1995. Revenues from video distribution and other satellite
transmission services were $18.2 million for the first nine months of 1996
compared to $8.4 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 nine months ended September 30,
1996, were $4.3 million compared to $10.0 million for the same period in 1995.
The decrease of $5.7 million, or 57%, 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 September
30, 1996, Orion had obligations with a present value of approximately $21.7
million with respect to satellite incentives.
Sales and marketing expenses. Sales and marketing expenses were $7.8 million
for the nine months ended September 30, 1996, as compared to $5.9 million in the
same period of 1995. The increase of $1.9 million, or 32% 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
$6.3 million in the nine months ended September 30, 1996, as compared to $6.0
million for the comparable period in 1995. The increase was due to customer
engineering functions in support of network services.
General and administrative expenses. General and administrative expenses were
$11.5 million for the nine months ended September 30, 1996, compared to $7.2
million for the period ended September 30, 1995. The increase of $4.3 million,
or 60%, for the nine months ended September 30, 1996 was
127
<PAGE>
primarily due to the inclusion of the cost of in-orbit life insurance for the
entire period during 1996. The policy became effective in May 1995.
Depreciation and amortization. Depreciation and amortization expense for the
nine months ended September 30, 1996 was $26.4 million, an increase of $4.1
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 communication services business and
depreciation of the Orion 1 satellite which was placed in service January 20,
1995.
Interest. Interest income was $1.8 million for the nine months ended
September 30, 1996, compared to $1.1 million for the nine months ended September
30, 1995. The increase in interest income ($0.7 million or 64%) during the first
three quarters of 1996 is primarily a result of interest earned on the proceeds
from the Company's initial public offering in August 1995. Interest expense, net
of capitalized interest, was $20.2 million for the nine months ended September
30, 1996, compared to $17.1 million for the comparable period in 1995. The
increase in interest expense of $3.1 million in the first three quarters of 1996
is attributable to expensing interest (including commitment fees, interest
accretion associated with the Orion 1 satellite incentive obligation and
amortization of deferred financing costs) from the in-service date of Orion 1
and the impact of an interest rate cap agreement in 1996. Prior to the
in-service date of Orion 1, substantially all interest expense was capitalized.
Interest expense will substantially increase as a result of the Notes Offering.
Net Loss. The Company incurred a net loss of $19.8 million, compared to a net
loss of $20.0 million for the nine months ended September 30, 1996 and 1995,
respectively, after deduction of the limited partners' and minority interests'
share in the Company's losses before minority interests' of $24.8 million and
$33.4 million, respectively. Net loss is expected to increase substantially in
subsequent periods as a result of interest expense on the Notes and elimination
of the minority interests in Orion Atlantic.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Revenue. Services revenue for 1995 was $22.3 million compared to $3.4 million
for 1994. Revenues from private communications network services were $10.0
million from 72 customers in 1995 and $3.4 million from 18 customers in 1994, as
the number of sites in service increased to 143 from 53. Revenues from
transmission capacity and video distribution services were $12.3 million during
1995. There were no revenues from these services during 1994, as Orion 1
commenced operations on January 20, 1995.
OPERATING EXPENSES
Direct expenses. Direct expenses were $10.5 million and $3.5 million in 1995
and 1994, respectively. The increase of $7.0 million, or 199%, was primarily
attributable to accruals for satellite incentives during 1995, which were not
applicable prior to launch in November 1994, costs associated with equipment
sales ($2.5 million in 1995, $0 in 1994), and installation and maintenance costs
in connection with higher volumes of customer sites placed in service during
1995 ($1.3 million in 1995, $0.5 million in 1994). These increases were
partially offset by a reduction in leased transponder capacity costs as
customers were transferred from leased capacity to Orion 1. No equipment sales
occurred during 1994.
Sales and marketing expenses. Sales and marketing expenses were $8.6 million
in 1995, as compared to $5.9 million in 1994, an increase of $2.7 million or
47%. The increase is due to the hiring of additional sales personnel, increased
advertising and promotion expenses associated with increased sales and equipment
sales commissions.
Engineering and technical expenses. Engineering and technical expenses were
$8.5 million in 1995, as compared to $3.0 million for 1994, an increase of $5.5
million or approximately 184%. The increase is attributable to increased
staffing requirements related to control and operation of the satellite, and
customer engineering functions in support of the expansion of the network
services business.
General and administrative expenses. General and administrative expenses were
$10.1 million for 1995 compared to $5.1 million for 1994. The increase of $5.0
million or 99% was primarily due to the cost of in-orbit insurance for Orion 1,
beginning in May 1995, and other costs associated with Orion's commencement of
full commercial operations.
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Depreciation and amortization. Depreciation and amortization was $31.4
million in 1995, an increase of $29.7 million, as compared to $1.7 million for
1994. The increase primarily resulted from the commencement of depreciation of
Orion 1 upon being placed in service January 20, 1995.
Interest. Interest income was $1.9 million for 1995, compared to $0.4 million
for the prior year. The increase in interest income during 1995 is primarily a
result of interest earned on proceeds from Orion's initial public offering in
August 1995. Interest expense, net of capitalized interest, increased from $0.06
million for 1994 to $24.7 million for 1995. The increase in interest expense in
1995 is attributable to expensing interest (including commitment fees and
amortization of deferred financing costs) from the in-service date of Orion 1.
Prior to that date, substantially all interest expense was capitalized as part
of the cost of Orion 1.
Other. Other expenses of $3.4 million for the year-ended December 31, 1995
are 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 $26.9 million and $8.0 million
for 1995 and 1994, respectively, after deduction of the Limited Partners' and
minority interests' share in the Company's results of operations of $46.1
million and $7.4 million, respectively.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenue. Services revenue for the year ended December 31, 1994 was $3.4
million compared to $2.0 million for the year ended December 31, 1993. The
increased revenue reflects an increase in the number of private network
customers from 12 in 1993 to 18 in 1994.
OPERATING EXPENSES
Direct expenses. Direct expenses were $3.5 million and $2.6 million in the
years ended December 31, 1994 and 1993, respectively. Direct expenses increased
$0.9 million or 32% which was primarily attributable to the increased revenue
generated by private network services.
Sales and marketing expenses. Sales and marketing expenses were $5.9 million
in the year ended December 31, 1994, as compared to $1.9 million in 1993
primarily due to the Company's increased selling efforts in private network
services.
Engineering and technical expenses. Engineering and technical expenses were
$3.0 million in the year ended December 31, 1994, as compared to $1.8 million
for the year ended December 31, 1993. Engineering and technical services
increased $1.2 million due to the increased support requirements of private
network services.
General and administrative expenses. General and administrative expenses were
$5.1 million for the year ended December 31, 1994 compared to $4.7 for the year
ended December 31, 1993. Orion Atlantic entered into interest rate hedging
arrangements which fixed the maximum interest rate through November 1995 at
11.54%. Thereafter, an interest cap agreement is in place relating to a notional
amount declining every nine months from $150 million effective November 30,
1993. General and administrative expenses increased $0.4 million principally due
to the increased staffing requirements of the Company's management team in
anticipation of higher operating levels.
Interest. During the year ended December 31, 1994, Orion incurred $27.0
million of interest costs (including commitment fees and amortization of
deferred financing costs) compared to $16.3 for the comparable period in 1993,
substantially all of which was capitalized. The increase in interest is
attributable to additional borrowings related to the construction of Orion 1 and
subordinated borrowings beginning in late 1993 from the Limited Partners to fund
the development of the Orion Atlantic network services business.
Other. Other income was $0.05 million in the year ended December 31, 1994,
compared to expense of $4.9 million for the year ended December 31, 1993. The
increase in other income is related to the April 1993 termination by Orion
Atlantic of its commitment to purchase a second satellite from Space
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Systems (due to a reassessment of the satellite design and target markets) which
resulted in the forfeiture of $5.0 million which was then expensed as a
termination charge.
Net loss. The Company incurred net losses of $8.0 million and $7.9 million
for the years ended December 31, 1994 and 1993, respectively, after deducting
the Limited Partners' and minority interests' share in Orion's results of
operations of $7.4 million and $7.8 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Funding to date. Orion has required significant capital for operating and
investing activities in the development of its business, and will need
significant additional capital in the future to develop fully its global
satellite communications system. The Company's funding has been provided
primarily by the sale of equity securities, including the completion of its
initial public offering in August 1995 which generated proceeds to the Company
of approximately $52 million (net of underwriting discounts), bank loans, vendor
financing, lease arrangements and short-term loans from its investors. As of
September 30, 1996, Orion had a working capital deficiency of $5.7 million and
the net cash used in operations for the nine months ended September 30, 1995 and
1996, was $30.4 million and $25.0 million, respectively.
Funding for the construction and launch of the Orion 1 satellite and related
facilities was fully committed through $90 million of equity from the limited
partners of Orion Atlantic, an aggregate of $251 million under the Orion 1
Credit Facility and approximately $11 million under other debt facilities,
dedicated primarily to the construction of the TT&C facility, which is being
used to control Orion 1.
Amounts outstanding under the Orion 1 Credit Facility bear interest at 1.75%
over the LIBOR rate (7.68% at December 31, 1995). Orion Atlantic has entered
into agreements with Chase Manhattan Bank,(National Association) ("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
is in place relating to a notional amount declining every six months from $150
million effective November 30, 1995 to $15.6 million effective March 31, 2001.
Under the terms of the cap agreement, when LIBOR equals or exceeds 5.5%, Orion
Atlantic pays Chase a fee equal to 3.3% per annum of the notional amount and
receives a payment from Chase in an amount equal to the difference between the
actual LIBOR rate and 5.5% on the notional amount. There was an unrealized loss
on this cap as of September 30, 1996 of approximately $5.9 million. On the
closing date of the Notes Offering, the Company will pay its then outstanding
obligation under this facility, including costs to break the interest cap
agreement.
In the event of a deficiency in cash flow required to service the Orion 1
Credit Facility, the Limited Partners of Orion Atlantic, including the Company,
would be obligated to make additional payments toward such deficiency under the
terms of their contingent satellite capacity commitment agreements. Such
agreements would be terminated as a result of the Exchange.
Existing Obligations. The following is a description of Orion's existing
obligations, a substantial portion of which are to be paid with the proceeds of
the Notes Offering; however, no assurance can be given that the Notes Offering
will be completed.
Orion Atlantic began repayment of the term loans under the Orion 1 Credit
Facility in 1995. Sales of services to customers and certain capacity
commitments of the Limited Partners are expected to provide the cash to meet
Orion Atlantic's loan repayment obligations. The Company and the other Limited
Partners of Orion Atlantic have agreed to lease capacity on Orion 1, subject to
obligations of Orion Atlantic under the refund agreement (defined below) to
refund lease payments, and have entered into additional contingent capacity
lease contracts as support for payment of the senior bank debt of Orion
Atlantic. The Company's obligations under these firm and contingent capacity
arrangements are $2.5 million and $4.3 million, respectively, per year for seven
years, and the Company is obligated to indemnify STET (a former limited partner
whose partnership interest in Orion Atlantic was purchased by Orion Atlantic)
against certain payments made by STET under its firm and contingent capacity
leases. This indemnity could increase Orion's obligations to make payments in
the event of cash deficits of Orion Atlantic to $8.6 million per year, and could
require Orion for a term of four years commenc-
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ing in January 1998 to make payments to Orion Atlantic of up to approximately
$2.5 million per year. The Company maintains a $10 million letter of credit
supporting this indemnification obligation.
Amounts outstanding under the Orion 1 Credit Facility (approximately $210.4
million, including interest, as of September 30, 1996) are secured by the assets
of Orion Atlantic, the partnership interests of the partners in Orion Atlantic
and the stock of OrionSat, and are due in graduated installments through 2002.
Among other customary covenants and requirements, the Orion 1 Credit Facility
includes significant restrictions on the distribution of any funds from Orion
Atlantic to the partners. Distributions can only be made if Orion Atlantic has
sufficient revenues to cover operating costs and debt service. Orion's capacity
commitments and the Orion 1 Credit Facility are required to be refinanced in
connection with the Exchange. See "The Related Transactions -- The Notes
Offering/Orion 1 Credit Facility Refinancing."
At September 30, 1996, the Company had outstanding indebtedness of
approximately $7.2 million under a seven year term loan provided by General
Electric Capital Corporation ("GECC") for the TT&C facility, which is secured by
the TT&C facility and various assets relating thereto. Additionally, at
September 30, 1996, the Company had obligations with a present value of $21.7
million, which are payable to the manufacturer of Orion 1 through 2006 (of which
$13 million will be paid in cash on the Closing Date, $10 million of which will
be reinvested in the Debentures), and $8.0 million payable to a former partner
in Orion Atlantic through 1997. Of this $8.0 million, approximately $3.5 million
(plus interest of approximately $500,000 as of January 30, 1997) will be paid
with proceeds of the Notes Offering. Also at September 30, 1996, the Company had
outstanding approximately $8.1 million of subordinated debt under a facility of
up to $10.5 million from certain Limited Partners (excluding the Company) for
Orion Atlantic's network services. See Note 5 to Consolidated Financial
Statements for additional discussion of Orion's long-term debt. Orion will be
acquiring the Limited Partners' interests in such obligations in the Exchange.
Current Funding Requirements. The Company will need a substantial amount of
capital over the next three years (and possibly thereafter) to fund the costs of
Orion 2 and Orion 3, the purchase of VSATs and other capital expenditures and to
make various other payments, such as principal and interest payments with
respect to the TT&C Financing, and any indebtedness incurred to finance Orion 2
or Orion 3. The Company's cash flows will be inadequate to cover its cash needs,
and the Company will seek financing from outside sources. The Company does not
have a revolving credit facility or other source of readily available capital.
Sources of additional capital may include public or private debt or equity
financings. The Company is often involved in discussions or negotiations with
respect to such potential financings and, because of its substantial capital
needs, may consummate any such financing at any time. The Company has commenced
construction of Orion 3 and intends to commence construction of Orion 2
immediately after consummation of the Notes Offering, despite the fact that it
does not have any commitment from any outside source to provide such financing.
If the Company is unable to obtain financing from outside sources in the amounts
and at the times needed, it could forfeit payments made on Orion 2 and Orion 3
and its rights to Orion 2 and Orion 3 under the Orion 2 Satellite Contract and
Orion 3 Satellite Contract and there would be a material adverse effect on the
Company's ability to make payments on the Notes and the value of the Orion Newco
Common Stock.
Expected payments prior to launch under the Orion 2 Satellite Contract and
Orion 3 Satellite Contract and for launch insurance for Orion 2 and Orion 3
aggregate approximately $500 million. In addition to the $3 million paid in the
fourth quarter of 1996, Orion will need to make payments of approximately $98
million, $350 million and $50 million in 1997, 1998 and 1999, respectively.
These amounts include the Company's estimate regarding the cost of launch
insurance (but not in-orbit insurance, which the Company presently estimates
will cost approximately $5 million to $6 million per annum per satellite),
although the Company has not had material discussions with potential insurers
and has not received any commitment to provide insurance. The Company's actual
payments could be substantially higher due to any change orders for the
satellites, insurance rates, delays and other factors. In addition, the Company
expects to expend approximately $22 million, $30 million and $34 million on
VSATs and other capital expenditures in 1997, 1998 and 1999, respectively. The
Company believes these VSAT and other capital expenditures can be financed
through capital leases or other secured financing arrange-
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ments. However, the Company has not engaged in material discussions with
potential lenders and there can be no assurance that such financing can be
obtained.
Under the Orion 1 Satellite Contract, the contractor is entitled to receive
incentive payments based upon the performance of Orion 1 in orbit. These
incentive payments could reach an aggregate of approximately $44 million through
2007, if the transponders on Orion 1 continue to operate in accordance with
specification during that period. As of September 30, 1996, Orion had
obligations with a present value of approximately $21.7 million with respect to
incentive payments. Orion will pay $13 million in satellite incentives following
completion of the Notes Offering, of which $10 million will be re-invested in
Debentures of Orion Newco in the Matra Marconi Investment.
The foregoing estimates do not include any amounts for other possible
financing requirements. The Company may from time to time enter into joint
ventures and make acquisitions of complementary businesses and is often engaged
in discussions or negotiations with regard to such potential joint ventures and
acquisitions. Such joint ventures or acquisitions would need to be financed,
which would increase the Company's need for additional capital. In addition,
Orion intends to replace Orion 1 at the end of its useful life (expected to be
in October 2005). Such replacement likely will require additional financing if
the cash flow from Orion's operations is not sufficient to fund a replacement
satellite. See "Risk Factors -- Risks Relating to Orion's Business --Need for
Substantial Additional Capital" and " -- Launch of Orion 2 and Orion 3 Subject
to Significant Uncertainties -- Substantial Financing Requirements; Risks of
Commencing Construction Prior to Completing Financing."
As of September 30, 1996, after giving pro forma effect to the Transactions,
Orion would have had approximately $426 million of long-term indebtedness. The
accretion of original issue discount, if any, on the Senior Discount Notes will
increase the amount of Orion's indebtedness. As indicated above, Orion's
financing plan requires a total of $480 million of additional financing to fully
fund the construction, launch and insurance of Orion 2 and Orion 3 and
associated financing and start-up costs, and Orion presently expects that a
significant portion of such additional financing will be in the form of
additional indebtedness. Such additional indebtedness would increase Orion's
long-term indebtedness. See "Risk Factors -- Risks Relating to Orion's Business
- --Substantial Leverage; Secured Indebtedness."
The level of the Company's indebtedness could have important consequences to
its stockholders, including the following: (i) the ability of the Company to
obtain any necessary financing in the future for working capital, capital
expenditures, debt service requirements or other purposes may be limited; (ii) a
substantial portion of the Company's cash flow from operations, if any, must be
dedicated to the payment of principal of and interest on its indebtedness and
other obligations and will not be available for other purposes; (iii) the
Company's level of indebtedness could limit its flexibility in planning for, or
reacting to changes in, its business; (iv) the Company will be more highly
leveraged than some of its competitors, which may place it at a competitive
disadvantage; and (v) the Company's high degree of indebtedness will make it
more vulnerable to a default and the consequences thereof (such as bankruptcy
workout) in the event of a downturn in its business.
Because of its substantial needs for additional financing, Orion may attempt
to raise additional funds substantially earlier than the date it needs such
funds, depending on the conditions of the capital markets from time to time,
including during 1997. If the Merger and the Exchange are consummated, Orion
will be entitled to incur additional indebtedness at any time, including prior
to the date such funds are needed, without obtaining any further stockholder
approval. If Orion raises such funds prior to the date such funds are needed, it
will (in addition to the risks and costs associated with increased leverage)
incur substantial interest cost for periods when such funds are not deployed in
its business.
TAXES
As of December 31, 1995, Orion had net operating loss carryforwards for
federal tax purposes of approximately $51.2 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,
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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
such net operating loss carryforwards, the Company has established a valuation
allowance for the full amount of its net operating loss carryforwards. Of
Orion's net operating losses, approximately $31.2 million was incurred by Orion
Atlantic and allocated to Orion. Orion Atlantic is structured as a partnership
for U.S. income tax purposes. As a result, Orion Atlantic itself generally
should not be subject to federal income taxation. Instead, the partners of Orion
Atlantic, including Orion and OrionSat, will separately report their allocable
shares of Orion Atlantic's net income, loss, gain, deductions, and credits, as
determined under the allocation provisions of the Partnership Agreement. Orion
Atlantic may, however, be subject to income tax on a portion of its income in
certain states and other countries in which it has operations. Under the
Partnership Agreement, the first $20 million of any losses was allocated to
OrionSat, and any losses in excess of that amount generally have been allocated
to the partners, including Orion and OrionSat, in proportion to their respective
percentage interests. Subsequent to consummation of the Exchange, all losses
will be allocated to Orion.
EFFECT OF INFLATION
Orion believes that inflation has not had a material effect on the results of
operations to date.
EFFECT OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. Orion adopted Statement No. 121 in
the first quarter of 1996. The effect of adoption was not material to its
financial condition or results of operations.
In October 1995, the FASB issued Statement No. 123, Accounting for Stock
Based Compensation, which is effective for awards after January 1, 1996. Orion
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
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 Orion's awards, no compensation
expense is recognized.
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PRICE RANGE OF ORION COMMON STOCK AND DIVIDEND POLICY
Since completion of Orion's initial public offering in August 1995, the Orion
Common Stock has been quoted on the Nasdaq National Market under the trading
symbol "ONSI." As of December 15, 1996, there were approximately 350
stockholders of record of Orion Common Stock. The following table summarizes the
high and low closing sale prices of the Orion Common Stock by fiscal quarter for
1995, 1996 and 1997 as reported on the Nasdaq National Market.
QUARTER ENDED: 1995
--------------------------------- -------------
August 1 through September 30 ... $10 3/4 TO $14 1/4
December 3....................... 16 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 12 7/8
QUARTER ENDED: 1997
--------------------------------- -------------
March 31 (through January 14)...... $12 1/2 to $15
On December 13, 1996, the date preceding public announcement of the Merger
Transactions, the last reported sale price of the Orion Common Stock, as
reported on the Nasdaq National Market, was $12 5/8 .
Orion has never paid any cash dividends on the Orion Common Stock and the
Board of Directors of Orion currently does not anticipate paying cash dividends
in the foreseeable future on shares of Orion Common Stock. The terms of the
Orion 1 Credit Facility, which regulate cash distributions to Orion Atlantic's
partners, including Orion, and agreements relating to the Orion Senior Preferred
Stock limit Orion's ability to pay cash dividends on the Orion Common Stock. The
Notes Indentures are expected to contain covenants restricting the payment of
cash dividends by Orion Newco for the foreseeable future. See "The Related
Transactions -- The Notes Offering/Orion 1 Credit Facility Refinancing -- Notes
Offering."
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CERTAIN TRANSACTIONS
The following is a summary of certain transactions among Orion, directors,
officers and certain stockholders of Orion, and related persons. Orion believes
that each of such transactions was on terms no less favorable to Orion than
reasonably could have been obtained in arm's-length transactions with
independent third parties. Orion has a policy requiring that any material
transactions between Orion and persons or entities affiliated with officers,
directors or principal stockholders of Orion be on terms no less favorable to
Orion than reasonably could be obtained in arm's-length transactions with
independent third parties. Orion's policy is to conduct an appropriate review of
all related party transactions and to have the Audit Committee or a comparable
body review potential conflict of interest situations.
Orion is a party to numerous agreements with one or more Exchanging Partners,
most of which were entered into in December 1991, including the partnership
agreement of Orion Atlantic, firm and contingent capacity leases (most of which
will be terminated in connection with the Exchange), the Orion 1 Satellite
Contract, the Orion 2 Satellite Contract, agreements with STET or its affiliates
concerning the TT&C facility, representative agent agreements and agreements to
make loans or advances to Orion (which will be terminated as part of the
Exchange). See "The Merger, the Exchange and the Debenture Investments -- The
Exchange Agreement."
Orion entered into the Orion 1 Satellite Contract with British Aerospace, an
affiliate of a principal stockholder of Orion and of which Mr. Rice, a director
of Orion, is a Group Treasurer. Under the terms of the Orion 1 Satellite
Contract, Orion has paid an aggregate of $43.4 million in 1991, $72 million in
1992 (plus a $5 million payment upon termination for convenience by Orion of a
second satellite), $26 million in 1993, $89.8 million in 1994 and $0.3 million
in 1995. As of September 30, 1996, Orion Atlantic had obligations of $15 million
to Matra Marconi Space with respect to incentive payments under the Orion 1
Satellite Contract, of which $13 million will be paid on the closing date of the
Exchange. Of this amount, $10 million will be re-invested in Orion by Matra
Marconi Space in the Matra Marconi Investment. See "The Merger, the Exchange and
the Debenture Investments -- The Debenture Investments." The balance of the
outstanding obligations are payable 18 months following commencement of
construction under the Orion 2 Satellite Contract, and subsequent payments of up
to $29.4 million may become payable thereafter, depending on satellite
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Orion -- Liquidity and Capital Resources."
Orion has engaged certain Exchanging Partners as representative agents for
sales and ground operations. A joint venture between two Exchanging Partners
(Kingston Communications and British Aerospace) serves as a ground operations
representative in the United Kingdom, and the affiliate of another Exchanging
Partner (Matra Hachette) serves as a ground operations representative in France.
Orion expects to pay these Exchanging Partners an aggregate of $1.6 million in
1996 as commissions and other fees (including for ground operations and, in the
case of the Kingston Communications/British Aerospace joint venture, satellite
capacity, equipment leasing and other charges), and paid these Exchanging
Partners $1.9 million in 1995 and $1.9 million in 1994 for these services. See
"Information About Orion's Business -- Sales and Marketing" and "-- Network
Operations; Local Ground Operators."
In December 1991, Orion issued 259,515 shares of Orion Common Stock at a
value of $11.56 per share to British Aerospace Space Systems, Inc. in
consideration of British Aerospace Space Systems, Inc.'s agreement to guarantee
Orion's obligations under a $10 million letter of credit (see Note 4 to
Consolidated Financial Statements). The shares were reconveyed to Orion and are
held in treasury at a value of $0. The shares are pledged as security for
British Aerospace Space Systems, Inc. in the event it is required to fund
amounts under its guarantee and Orion does not provide reimbursement. These
arrangements will be terminated upon the closing of the Transactions.
In December 1993, Orion issued an aggregate of 178,097 shares of Orion Common
Stock as part of a private placement of Orion Common Stock to certain of its
directors and affiliates of those directors at a purchase price of $10.20 per
share. The terms of such issuance permitted the purchas-
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ers to receive the benefit of any lower price at which Orion Common Stock
subsequently was issued in a private placement or to receive any other security
subsequently issued in a private placement. In June 1994, when Orion issued
shares of Orion Common Stock as part of a private placement of Orion Common
Stock to a limited number of institutions and other investors (including 64,705
shares to affiliates of directors) at a purchase price of $8.50 per share, Orion
issued 100,326 additional shares to the directors and affiliates of Directors
who purchased Orion Common Stock in December 1993. In addition, after Orion
issued Orion Series A Preferred Stock (along with warrants and options to make
an additional investment) to CIBC, Fleet and Chisholm (each as defined below) in
June 1994, the directors and affiliates of directors who purchased Orion Common
Stock in December 1993 each exercised their right to receive Orion Series A
Preferred Stock (along with warrants and options to make an additional
investment) in exchange for the Orion Common Stock previously acquired, and
Orion issued an aggregate of $3,000,000 of Orion Series A Preferred Stock to
such persons and entities.
In April 1994, Orion entered into an agreement with Space Systems/Loral
("SS/L") whereby SS/L agreed to purchase 588,235 shares of Orion Common Stock
for an aggregate purchase price of $5,000,000.
In June 1994, CIBC Wood Gundy Ventures, Inc. ("CIBC"), Fleet Venture
Resources, Inc. ("Fleet") and Chisholm Partners, II, L.P. ("Chisholm") purchased
$11.5 million in Orion Series A Preferred Stock. For a description of the Orion
Series A Preferred Stock, see "Description of Orion Newco Capital Stock -- Orion
Newco Preferred Stock." In connection with the transaction, CIBC and Fleet each
were granted the right to elect one member of Orion's Board of Directors. These
rights terminated as a result of the Company's initial public offering.
In June 1994, CIBC, Inc. (an affiliate of CIBC) became a $25,000,000 lender
under the Orion 1 Credit Facility.
In June 1995, CIBC, Fleet and certain directors and affiliates of directors
who purchased Orion Series A Preferred Stock in June 1994 purchased
approximately $4.2 million of Orion Series B Preferred Stock. This purchase was
pursuant to an option granted in June 1994. The Orion Series B Preferred Stock
has rights, designations and preferences substantially similar to those of the
Orion Series A Preferred Stock, and is subject to similar covenants, except that
the Orion Series B Preferred Stock is convertible into Orion Common Stock at an
initial price of $10.20 per share, subject to certain anti-dilution adjustments.
For a description of the Orion Series B Preferred Stock, see "Description of
Orion Newco Capital Stock -- Orion Newco Preferred Stock.
In November 1995, Orion Atlantic redeemed the limited partnership interest
previously held by STET for an aggregate of approximately $11.5 million (the
"STET Redemption"), including $3.5 million in cash and $8 million in promissory
notes, $3.5 million (plus accrued interest of approximately $400,000) of which
will be paid on the closing date of the Exchange. As part of the STET
Redemption, Telecom Italia, a subsidiary of STET, entered into a representative
agreement and distributor arrangement with Orion providing for sales, marketing,
customer support and ground operations services in Italy. 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 promissory
notes), $3.5 million (plus accrued interest of approximately $400,000) of which
will be paid on the closing date of the Exchange). Orion Atlantic also entered
into amendments to existing contracts with STET that were expected to result in
a cash savings by the Company of approximately $3.5 million over a ten-year
period. In connection with the STET Redemption, Orion agreed to indemnify
Telecom Italia for payments which would be made under its firm and contingent
capacity agreements with Orion Atlantic. Such indemnity will be discontinued on
the closing date of the Exchange.
In July 1996, Matra Marconi Space, the parent company of MMS Space Systems,
the prime contractor for Orion 1, entered into the Orion 2 Satellite Contract
with Orion regarding construction of Orion 2, which contract was amended in
December 1996. Certain terms of the Orion 2 Satellite Contract are described
above under the caption "Information About Orion's Business -- Implementation of
the Orion Satellite System -- Orion 2." Matra Hachette, one of the parent
companies of Matra Marconi
136
<PAGE>
Space, will be a more than 5% beneficial owner of Orion Common Stock after the
Exchange and the Merger. See "The Merger, the Exchange and the Debenture
Investments."
Effective as of June 1996, Orion and the Exchanging Partners entered into the
Exchange Agreement. In December 1996 and January 1997, the Exchanging Partners
agreed to extend to April 30, 1997 the termination date for the Exchange. See
"The Merger, the Exchange and the Debenture Investments -- The Exchange
Agreement."
Effective as of January 13, 1997, Orion, Orion Newco and each of British
Aerospace and Matra Marconi Space entered into the Debenture Agreement. The net
proceeds of the Debenture Investments, which will occur concurrently with the
Notes Offering, are estimated to be approximately $59 million. Such net proceeds
are expected to be used for initial payments to the manufacturers under the
Orion 2 Satellite Contract.
FORWARD-LOOKING STATEMENTS
Information set forth in this Proxy Statement/Prospectus under the captions
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Orion" and "Selected Consolidated Financial and
Operational Data of Orion" and under other captions contains various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Such statements represent Orion's
reasonable judgment concerning the future and are subject to risks and
uncertainties that could cause Orion's actual operating results and financial
position to differ materially. Such forward-looking statements include the
following: Orion's belief that the Merger Transactions will enhance the ability
of the Company to raise additional financing; Orion's belief that a change in
the operational structure of Orion Atlantic would reduce certain potential
conflicts of interest and operating concerns that may be inherent in the current
partnership structure of Orion Atlantic; Orion's projections regarding the
continuation of operating losses and net cash flow deficits; 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 therefor;
Orion's beliefs regarding availability of net operating loss carryforwards;
Orion's beliefs regarding its representatives and distributors; Orion's belief
regarding transactions or existing management structures being in the best
interests of Orion and its stockholders; the description of the Merger, the
Exchange and the Debenture Investments under the caption "Certain Transactions"
as being on terms no less favorable to Orion than reasonably could have been
obtained in arm's-length transactions with independent third parties; Orion's
intention not to pay any cash dividends on the Orion Common Stock in the
foreseeable future; 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,
those set forth in this Proxy Statement/Prospectus under "Risk Factors" and the
following: the Merger, the Exchange and the Debenture Investments are dependent
on the Orion 1 Credit Facility Refinancing, and there being no assurance that
these financings or the Merger, the Ex-
137
<PAGE>
change and the Debenture Investments can be consummated; the terms of financings
not being known and there being no assurance that such terms will not be
unfavorable to Orion; there being no assurance that Orion will obtain all
necessary approvals or waivers to implement the Merger, the Exchange and the
Debenture Investments, or regarding the effect of failure to obtain such
approvals or waivers; there being no assurance as to the effect of issuance of
Orion Newco Series C Preferred Stock on the market for Orion Newco Common Stock;
no assurances regarding the business plan; Orion's history of losses and
expectation of future losses; the substantial financial risks and financing
requirements; substantial leverage and limits on Orion's ability to raise
additional funds; risks of satellite loss or reduced performance; launch of
Orion 2 and Orion 3 being subject to significant uncertainties; risks relating
to Orion's business plan; potential adverse effects of competition; no
assurances regarding approvals needed or current or future regulation of the
telecommunications industry; no assurances regarding technological changes;
risks of conducting international business; dependence of Orion on key
personnel; control of Orion Newco by principal stockholders; risks relating to
senior preferred stock; limits on paying cash dividends on Orion Common Stock;
and anti-takeover and other provisions of the certificate of incorporation. See
"Risk Factors."
OTHER MATTERS
The Board of Directors of Orion does not know of any matter to be brought
before the Special Meeting other than as described in the Notice of Special
Meeting accompanying this Proxy Statement/Prospectus. If any other matter comes
before the Special Meeting, it is the intention of the persons named in the
accompanying proxy to vote the proxy in accordance with their best judgment with
respect to such other matter.
LEGAL MATTERS
Certain legal matters with respect to the Merger Transactions and the
securities offered hereby will be passed upon for Orion and Orion Newco by Hogan
& Hartson L.L.P., Washington, D.C.
EXPERTS
The consolidated financial statements of Orion Network Systems, Inc. at
December 31, 1995 and 1994, and for each of the three years in the period ended
December 31, 1995, included in the Proxy Statement of Orion Network Systems,
Inc., which is referred to and made a part of this Prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing
138
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors............................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Stockholders'......... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
<PAGE>
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, 1995 and 1994, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Washington, DC
February 9, 1996
F-2
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------
1994 1995 1996
--------------- --------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Assets (Note 3)
Current assets:
Cash and cash equivalents .................................................. $11,218,831 $55,111,585 $36,656,619
Accounts receivable (less allowance for doubtful accounts $278,000 at
December 31, 1995 and $328,000 at September 30, 1996) ..................... 551,870 5,189,598 5,808,568
Notes receivable and accrued interest ...................................... -- 129,810 157,125
Prepaid expenses and other current assets................................... 150,276 3,168,058 5,584,196
------------ ------------ ------------
Total current assets......................................................... 11,920,977 63,599,051 48,206,508
Property and equipment, at cost:
Land ...................................................................... 73,911 73,911 73,911
Telecommunications equipment .............................................. 4,231,380 13,836,841 22,707,786
Furniture and computer equipment .......................................... 1,833,169 3,395,799 4,598,505
Satellite and related equipment ........................................... 303,486,227 321,918,549 322,450,415
------------ ------------ ------------
309,624,687 339,225,100 349,830,617
Less: accumulated depreciation ............................................ (1,628,958) (32,170,865) (57,914,578)
------------ ------------ ------------
Net property and equipment .................................................. 307,995,729 307,054,235 291,916,039
Deferred financing costs, net ............................................... 15,551,956 12,894,720 11,208,678
Other assets, net ........................................................... 4,706,876 5,527,221 4,645,948
------------ ------------ ------------
Total assets ................................................................ $340,175,538 $389,075,227 $355,977,173
============ ============ ============
Liabilities and stockholders' equity
Current liabilities: ........................................................
Accounts payable .......................................................... $1,154,344 $10,454,723 $4,094,026
Accrued liabilities ....................................................... 5,522,220 6,812,223 7,374,884
Other current liabilities ................................................. -- 2,111,687 5,402,117
Interest payable .......................................................... 7,734,764 8,005,079 3,128,365
Current portion of long-term debt (Note 5) ................................ 12,015,663 28,607,110 33,873,930
------------ ------------ ------------
Total current liabilities ................................................... 26,426,991 55,990,822 53,873,322
Long-term debt (Note 5) ..................................................... 230,175,483 250,669,286 221,781,393
Other liabilities ........................................................... 3,091,074 20,698,084 32,878,061
Limited Partners' interest in Orion Atlantic (Notes 1 and 3) ................ 62,519,087 14,626,338 19,961,032
Minority interest in other consolidated entities ............................ 57,639 52,354 52,984
Commitments and contingencies (Note 4) ......................................
Series A 8% Cumulative Redeemable Convertible Preferred Stock, .............
$.01 par value; 15,000 shares authorized; 13,871, 14,491 and 14,500
shares issued and outstanding at September 30, 1996 and December 31, 1995
and 1994, respectively, plus accrued dividends (Note 6) .................. 14,554,693 15,705,054 15,820,460
Series B 8% Cumulative Redeemable Convertible Preferred Stock,
$.01 par value; 5,000 shares authorized; 4,298 and 4,483 shares issued and
outstanding at September 30, 1996 and December 31, 1995, plus accrued
dividends (Note 6) ....................................................... -- 4,652,647 4,718,526
Stockholders' equity (Notes 4 and 6): ......................................
Common stock, $.01 par value; 40,000,000 shares authorized; 11,232,533,
11,115,965 and 7,045,523 issued, 10,973,018, 10,856,450 and 6,786,008
outstanding at September 30, 1996 and December 31, 1995 and 1994,
respectively, less 259,515 held as treasury shares (at no cost) ........... 70,455 111,160 112,325
Capital in excess of par value ............................................. 33,952,062 85,485,613 86,508,773
Accumulated deficit ........................................................ (30,671,946) (58,916,131) (79,729,703)
------------ ------------ ------------
Total stockholders' equity .................................................. 3,350,571 26,680,642 6,891,395
------------ ------------ ------------
Total liabilities and stockholders' equity .................................. $340,175,538 $389,075,227 $355,977,173
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- --------------------------------
1993 1994 1995 1995 1996
--------------- --------------- --------------- --------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Services revenue .......................... $ 2,006,021 $ 3,415,053 $ 22,283,882 $ 13,947,425 $ 30,015,517
Operating expenses: .......................
Direct 2,648,306 3,503,037 10,485,745 10,019,683 4,285,834
Sales and marketing ...................... 1,920,578 5,863,823 8,613,399 5,914,332 7,792,666
Engineering and technical services........ 1,775,261 3,004,144 8,539,644 6,021,853 6,333,525
General and administrative................ 4,731,322 5,058,201 10,072,429 7,168,165 11,469,235
Depreciation and amortization............. 1,752,103 1,716,019 31,403,376 22,276,632 26,402,947
--------------- --------------- --------------- --------------- ----------------
Total operating expenses................. 12,827,570 19,145,224 69,114,593 51,400,665 56,284,207
--------------- --------------- --------------- --------------- ----------------
Loss from operations....................... (10,821,549) (15,730,171) (46,830,711) (37,453,240) (26,268,690)
Other expense (income):
Interest income........................... (181,707) (413,435) (1,924,822) (1,078,347) (1,841,868)
Interest expense.......................... 132,869 60,559 24,738,446 17,080,146 20,228,519
Other..................................... 4,949,722 (54,737) 3,359,853 (43,216) (48,356)
--------------- --------------- --------------- --------------- ----------------
Total other expense (income)............. 4,900,884 (407,613) 26,173,477 15,958,583 18,338,295
--------------- --------------- --------------- --------------- ----------------
Loss before minority interest.............. (15,722,433) (15,322,558) (73,004,188) (53,411,823) (44,606,985)
Limited Partners' and minority interest in
the net loss of Orion Atlantic and other
consolidated entities .................... 7,836,362 7,357,640 46,089,010 33,426,738 24,799,698
--------------- --------------- --------------- --------------- ----------------
Net loss................................... (7,886,071) (7,964,918) (26,915,178) (19,985,085) (19,807,287)
Preferred stock dividend .................. -- 626,400 1,329,007 959,646 1,006,285
--------------- --------------- --------------- --------------- ----------------
Net loss attributable to common
stockholders.............................. $ (7,886,071) $ (8,591,318) $(28,244,185) $(20,944,731) $(20,813,572)
=============== =============== =============== =============== ================
Net loss per common share.................. $ (0.85) $ (0.86) $ (3.07) $ (2.42) $ (1.90)
=============== =============== =============== =============== ================
Weighted average common shares
outstanding............................... 9,266,445 9,272,166 9,103,505 8,522,067 10,943,287
=============== =============== =============== =============== ================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------
CAPITAL IN TOTAL TOTAL
NUMBER OF EXCESS OF ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT PAR VALUE DEFICIT EQUITY
------------- ----------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992................. 6,405,732 $ 64,057 $28,608,812 $(14,194,557) $ 14,478,312
Issuance of common stock (Note 6)........... 178,097 1,781 1,804,564 -- 1,806,345
Exercise of stock options................... 165 2 998 -- 1,000
Net loss for 1993........................... -- -- -- (7,886,071) (7,886,071)
---------- -------- ----------- ------------ ------------
Balance at December 31, 1993................. 6,583,994 65,840 30,414,374 (22,080,628) 8,399,586
Issuance of common stock.................... 782,503 7,825 6,326,028 -- 6,333,853
Exercise of stock options................... 31,967 319 208,131 -- 208,450
Conversion of common stock to redeemable
preferred stock (Note 6)................... (352,941) (3,529) (2,996,471) -- (3,000,000)
Accrued dividend on preferred stock......... -- -- -- (626,400) (626,400)
Net loss for 1994........................... -- -- -- (7,964,918) (7,964,918)
---------- -------- ----------- ------------ ------------
Balance at December 31, 1994................. 7,045,523 70,455 33,952,062 (30,671,946) 3,350,571
Issuance of common stock.................... 4,002,941 40,030 50,960,330 -- 51,000,360
Exercise of stock options and warrants...... 67,501 675 573,221 -- 573,896
Accrued dividend on preferred stock......... -- -- -- (1,329,007) (1,329,007)
Net loss for 1995........................... -- -- -- (26,915,178) (26,915,178)
---------- -------- ----------- ------------ ------------
Balance at December 31, 1995................. 11,115,965 111,160 85,485,613 (58,916,131) 26,680,642
Conversion of preferred to common........... 91,071 910 804,034 -- 804,944
Exercise of stock options and warrants...... 25,497 255 219,126 -- 219,381
Accrued dividend on preferred stock......... -- -- -- (1,006,285) (1,006,285)
Net loss for the nine months ended September
30, 1996................................... -- -- -- (19,807,287) (19,807,287)
---------- -------- ----------- ------------ ------------
Balance at September 30, 1996 (unaudited) .. 11,232,533 $112,325 $86,508,773 $(79,729,703) $ 6,891,395
========== ======== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss ..................................... $ (7,886,071) $ (7,964,918) $(26,915,178) $(19,985,085) $(19,807,287)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ............... 1,798,526 1,713,117 31,403,376 22,276,632 26,402,947
Amortization of deferred financing costs .... -- -- 2,130,588 1,597,941 1,597,941
Provision for bad debts ..................... -- -- 277,529 671,226 524,999
Satellite incentives and accrued interest ... -- -- 5,185,834 6,463,771 1,747,334
Limited Partners' interest in Orion Atlantic (7,843,860) (7,390,331) (46,109,627) (33,454,227) (24,800,306)
Minority interest in other consolidated
entities ................................... 7,496 37,627 20,617 27,489 608
Gain on sale of assets ...................... (50,278) (54,737) (59,301) (45,616) (41,054)
Changes in operating assets and liabilities:
Accounts receivable ........................ 63,075 (426,281) (4,915,257) (1,921,320) (1,143,969)
Accrued interest ........................... -- -- (129,810) -- (27,315)
Prepaid expenses and other current assets .. 197,025 159,030 (3,017,782) (4,261,808) (2,416,138)
Other assets ............................... (279,902) 321,443 (519,773) (1,618,912) 427,741
Accounts payable and accrued liabilities ... 3,125,830 535,092 7,327,377 745,518 (5,818,070)
Other current liabilities .................. -- -- 3,670,988 977,374 3,279,274
Interest payable ........................... -- -- (885,106) (1,883,773) (4,876,714)
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities ........ (10,868,159) (13,069,958) (32,535,525) (30,410,790) (24,950,009)
Investing activities
Capital expenditures ......................... (44,130,325) (51,103,006) (9,060,412) (3,863,019) (10,266,012)
Cost of business acquisition ................. (2,721) -- -- -- --
Refund from satellite manufacturer ........... -- -- 2,750,000 2,750,000 --
FCC license costs ............................ (93,545) (96,030) (558,817) (381,337) (117,600)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities ........ (44,226,591) (51,199,036) (6,869,229) (1,494,356) (10,383,612)
Financing activities
Limited Partners|Al capital contributions .... -- 4,000,000 7,600,000 7,600,000 30,135,000
Redemption of limited partner interest ....... -- -- (4,450,000) -- --
Expenditures on equity financing costs ....... (31,773) (409,181) -- -- --
Proceeds from issuance of redeemable preferred
stock ........................................ -- 10,928,293 4,483,001 51,616,441 219,380
Proceeds from issuance of common stock and
subscriptions, net of issuance costs ......... 1,807,345 6,542,303 51,974,436 4,483,001 --
PPU borrowings ............................... 1,400,000 4,375,000 2,275,000 2,275,000 --
Proceeds from issuance of notes payable ...... 2,146,625 8,136,191 551,850 551,850 --
Proceeds from senior notes payable to banks .. 45,604,063 36,685,505 18,367,134 18,367,134 --
Repayment of senior notes payable to banks ... -- -- (12,468,049) (9,718,049) (22,768,340)
Repayment of notes payable ................... (46,320) -- (1,916,966) (1,668,818) (2,328,096)
Payments on capital lease obligations ........ -- (252,823) (576,727) (416,679) (559,266)
Capacity and other liabilities ............... -- 2,101,168 17,483,733 10,662,162 12,179,977
Distributions to joint venture minority
interest .................................... (49,073) (22,873) (25,904) (25,904) --
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities .... 50,830,867 72,083,583 83,297,508 83,726,138 16,878,655
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ................................. (4,263,883) 7,814,589 43,892,754 51,820,992 (18,454,966)
Cash and cash equivalents at beginning of
period ...................................... 7,668,125 3,404,242 11,218,831 11,218,831 55,111,585
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period ... $ 3,404,242 $ 11,218,831 $ 55,111,585 $ 63,039,823 $ 36,656,619
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1996 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION
Orion Network Systems, Inc. (Orion) was incorporated in the State of Delaware
on October 26, 1982 (inception) under the name Orion Satellite Corporation, and
in January 1988, changed its name to Orion Network Systems, Inc. Orion has
developed and operates an international satellite communications system for use
in private communications networks to multinational businesses and transmission
capacity for video and other program distribution services. Orion's first
satellite (Orion 1) was successfully launched on November 29, 1994. Orion took
delivery of the Orion 1 satellite on January 20, 1995. As a result, Orion is no
longer considered a development stage enterprise effective January 1995. For
periods prior to January 1995, Orion was in the development stage.
Since 1989, management has been involved primarily in developing Orion's
partnership, International Private Satellite Partners, L.P. (Orion Atlantic), in
order to raise the necessary capital to finance the construction and launch of
up to two telecommunications satellites in geosynchronous orbit over the
Atlantic Ocean and to establish a multinational sales and service organization.
Orion has been financed by equity and debt from individual and corporate
investors. British Aerospace PLC or its affiliates (BAe) and Lockheed Martin
Corporation or its affiliates (Lockheed Martin) are stockholders of Orion,
limited partners in Orion Atlantic and were significant contractors in the
construction and launch of the satellite system.
In June 1991, Orion, through a wholly-owned subsidiary, Orion Satellite
Corporation (OrionSat), received a license from the Federal Communications
Commission (FCC) authorizing it to construct, launch and operate a satellite
system comprised of two satellites to provide international telecommunications
services. Pursuant to an application by OrionSat, the license was transferred to
Orion Atlantic on April 19, 1994, by order of the FCC. In December 1991, the
initial phase of the partnership financing plan was concluded by a closing on
equity commitments in the form of limited partnership interests aggregating $90
million and execution of a credit agreement related to senior debt commitments
for up to $251 million (see further discussion in Note 3). Also in December
1991, notice to proceed with the construction contract for the first satellite
was given to BAe, the prime contractor.
OrionSat is the sole general partner in Orion Atlantic and received a 25%
equity interest as of the initial closing for, among other things, its
contribution of certain rights and interests under its FCC license, certain
contract rights, and other tangible and intangible assets. Orion participates as
a limited partner with a 16 2/3% equity interest and participates fully in the
obligations and rights of the limited partnership. The aggregate ownership
interest by Orion and its subsidiaries in Orion Atlantic is 41 2/3% (see Note
3).
In August 1995, the Company completed its initial public offering of common
stock by selling 4,000,000 common shares at $14 per share. Proceeds to the
Company, net of underwriting discount, aggregated approximately $52.25 million.
In July 1995, in connection with the planned initial public offering, the
shareholders approved a 1 for 1.36 reverse stock split. All references in the
consolidated financial statements with regard to shares, per share amounts and
share prices have been adjusted for the reverse stock split.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of Orion, its two
wholly-owned subsidiaries OrionNet, Inc. (OrionNet) and OrionSat, its 83% owned
subsidiary, Asia Pacific Space and Communications Ltd. (Asia Pacific) (see Note
7), the Orion Financial Partnership, in which Orion holds a 50% interest, and
Orion Atlantic, in which Orion holds, at December 31, 1995, a 41 2/3% ownership
F-7
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
interest. Management control and direction of Orion Atlantic by OrionSat is a
requirement of the FCC in order for Orion Atlantic to continue to hold the
license authority received in June 1991. OrionSat, as the general partner of
Orion Atlantic, exercises such control through the provisions of the partnership
agreement. The amount reflected in the balance sheet as "Limited Partners'
interest in Orion Atlantic" represents amounts invested by entities other than
Orion (net of syndication costs related to the investments) adjusted for those
Limited Partners' share of operating results. All significant intercompany
accounts and transactions have been eliminated.
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.
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, 1995
-----------------
Cash ................... $ 3,091,277
Money market funds .... 6,018,925
FHLMC discount notes ... 11,389,208
Commercial paper ...... 34,612,175
-----------
$55,111,585
===========
The FHLMC discount notes and commercial paper mature between January and
March 1996.
STATEMENT OF CASH FLOWS
Non-cash investing and financing activities and supplemental cash flow
information includes:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
-------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Satellite construction costs financed by notes
payable ....................................... $27,517,175 $ 7,862,050 $ -- $ -- $ --
Conversion of common stock to redeemable
preferred stock ............................... -- 3,000,000 -- -- --
Property and equipment financed by capital leases -- 94,323 4,350,766 -- --
Accrued dividend on preferred stock ............. -- 626,400 1,329,007 959,646 1,006,285
Conversion of preferred stock to common stock ... -- -- 9,000 -- 804,944
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 -- --
Interest paid during the year, net of amounts
capitalized ................................... 37,983 45,051 11,312,875 10,857,800 11,436,301
</TABLE>
F-8
<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. Pursuant to the requirements of the
Securities and Exchange Commission, common stock issued and stock issuable
relating to convertible preferred stock, warrants and options granted within one
year of filing the registration statement relating to the Company's initial
public offering of common stock were treated as outstanding for all periods
prior to the second quarter of 1995.
INTERIM FINANCIAL STATEMENTS
The accompanying financial statements as of September 30, 1996 and for the
nine months ended September 30, 1995 and 1996 are unaudited but include all
adjustments, consisting only of normal recurring accruals, which Orion considers
necessary for a fair presentation of financial position and operating results
for those interim periods. The operating results for the nine months ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization are
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 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. Orion began depreciating the satellite over its estimated useful life
commencing on the date of operational delivery in orbit (January 20, 1995).
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. The effect of adoption was not material.
DEFERRED FINANCING COSTS
Deferred financing costs related to obtaining debt and Orion's share of
equity financing for Orion Atlantic are amortized over the period the debt is
expected to be outstanding. Accumulated amortization at September 30, 1996,
December 31, 1995 and 1994 was $8,589,000, $6,990,000 and $4,860,000
respectively. Amortization through January 1995 was capitalized as part of the
cost of the satellite. Costs of approximately $3.4 million relating to a debt
offering which was postponed in November 1995 have been charged to other
expense.
F-9
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
OTHER ASSETS
Other assets consist principally of FCC license application costs,
organization costs and goodwill. The Company began amortizing FCC license
application costs related to Orion 1 in January 1995 and will continue to
amortize these costs over the estimated useful life of the satellite.
Organization costs and goodwill are amortized over five and ten years
respectively. Accumulated amortization at September 30, 1996, December 31, 1995
and 1994 was $3,535,000, $3,069,000 and $1,934,000, respectively.
REVENUE RECOGNITION
Orion's revenue results from providing telecommunications and related
services. Revenue is recognized as earned in the period in which services are
provided.
The following summarizes the Company's domestic and foreign revenues for
1995:
Revenues from unaffiliated customers.....
United States........................... $ 8,528,736
Europe.................................. 8,056,146
Revenues from related parties ............ 5,699,000
-----------
Total services revenue.................... $22,283,882
===========
INTEREST RATE MODIFICATION AGREEMENTS
Orion may, from time to time, enter into interest-rate swap and cap
agreements to modify the interest characteristics of its outstanding debt from a
floating to a fixed-rate basis. These agreements involve the receipt of floating
rate amounts in an exchange for fixed-rate interest payments over the life of
the agreement without an exchange of the underlying principal amount. The
differential to be paid or received is accrued as interest rates change and
recognized as an adjustment to interest expense related to the debt. The related
amount payable to or receivable from counterparties is included in interest
payable. The fair values of the swap agreements are not recognized in the
financial statements. (See Notes 5 and 8)
INCOME TAXES
The Company adopted the provisions of FASB Statement No. 109, "Accounting for
Income Taxes" effective January 1, 1993, and as a result, uses the liability
method of accounting for income taxes. There was no cumulative effect to this
accounting charge. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
F-10
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
Following is a summary of the components of the net deferred tax asset at
December 31, 1995 and 1994 (in thousands):
Tax benefit of temporary differences:
DECEMBER 31,
-----------------------
1994 1995
----------- -----------
Net operating loss carryforwards $ 12,480 $ 19,463
Orion Atlantic losses ........... (2,040) 1,237
Other ........................... 830 1,056
----------- -----------
Total ........................... 11,270 21,756
Valuation allowance ............. (11,270) (21,756)
----------- -----------
Net deferred tax asset .......... $ -- $ --
=========== ===========
At December 31, 1995, Orion has approximately $51,219,000 in net operating
loss carryforwards which expire at varying dates from 2004 through 2010. 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,
the Company has established a valuation allowance for the full amount of its net
operating loss carryforwards.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
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 OrionSat, the general partner of Orion Atlantic. The principal
purposes of Orion Atlantic are 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.
OrionSat was granted final authority by the FCC on June 27, 1991 to construct,
launch and operate an international communications satellite system, including
two orbital slots at 37.5|SD W.L. and 47|SD W.L. OrionSat, the general partner
of Orion Atlantic, entered into an agreement with Orion Atlantic and its limited
partners on December 20, 1991, to convey the FCC license to Orion Atlantic.
OrionSat filed an application to transfer the satellite authorization to Orion
Atlantic in December 1992; the transfer was granted by the FCC on April 19,
1994. Effective January 20, 1995, Orion Atlantic is no longer considered a
development stage enterprise. For periods prior to January 1995, Orion Atlantic
was considered a development stage enterprise.
Eight international corporations, including Orion, invested a total of $90
million in equity as limited partners in Orion Atlantic. Orion Atlantic also has
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 have agreed to lease
capacity on the satellites up to an aggregate $155 million and have 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 are payable over a seven-year period after
the first satellite is 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 these contingent calls.
F-11
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. ORION ATLANTIC-(CONTINUED)
Satellite Construction Contract -- In December 1991, the contract for
construction, launch services, and launch and commissioning insurance for two
communications satellites went into effect with OrionSat's rights and
obligations under the contract being assigned to Orion Atlantic. During 1993,
Orion Atlantic terminated its commitment to purchase the second satellite and,
as a result, incurred a $5 million termination charge. Such amount is included
in other income (expense) in the accompanying Statements of Operations. The
satellite was constructed by MMS Space Systems, Limited ("MMS Space Systems").
The fixed base price of the total contract, excluding obligations relating to
satellite performance, aggregated $227 million and has been fully paid at
December 31, 1995. In addition to the fixed base price, the contract requires
payments to be made, 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 did not appear
to be 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 (See Note 5).
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 has 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 are delayed until
payment is permitted under the senior notes payable -- banks (See Note 5). 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.
Partnership and Limited Partners -- OrionSat has the primary responsibility
for the control, management and operations of Orion Atlantic. Under the
partnership agreement, the limited partners have rights of approval for a
limited number of matters, e.g., terms for acceptance of new partners,
significant budget modifications, and certain borrowings.
The financing and legal structure of Orion Atlantic restricts the use of
partnership resources to the purposes of constructing, launching and operating
the satellite system. Cash will be distributable by Orion Atlantic to the
partners in the future only after sufficient operating revenues have been
generated to pay satellite system operating costs and debt service. Orion and
OrionSat will share pro rata with the partners in $28 million of the first $100
million of cash available for distribution to the partners as a return of
capital. Thereafter, operating cash flow is distributable based on ownership
interests.
Condensed balance sheet information for Orion Atlantic at December 31, 1995
and 1994 follows:
1994 1995
------------- -------------
Assets
Current assets ........................... $ 5,664,469 $ 14,085,169
Property and equipment, net .............. 306,088,340 303,889,894
Deferred financing costs and other ....... 17,473,547 16,051,517
------------- -------------
Total assets.............................. $ 329,226,356 $334,026,580
============= =============
Liabilities and partnership capital
Current liabilities....................... $ 27,024,035 $ 52,883,250
Long-term debt and other liabilities .... 234,909,566 284,110,104
Partnership capital subject to redemption 10,000,000 --
Partnership capital ...................... 57,292,755 1,533,226
Less: Orion Network Systems, Inc. note .. -- (4,500,000
------------- -------------
Total liabilities and partnership capital $ 329,226,356 $334,026,580
============= =============
F-12
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. ORION ATLANTIC-(CONTINUED)
Redemption of STET Partnership Interest; Issuance of New Interest to Orion.
- -- On November 21, 1995 Orion Atlantic redeemed the limited partnership interest
held by STET (the "STET Redemption"). Such redemption was 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 will remain in place
until released by the Banks under the Orion 1 Credit Facility. STET's existing
contractual arrangements with Orion Atlantic have been 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 has accounted
for this transaction as an acquisition of a minority interest and, as a result,
approximately $3.1 million has been allocated to the cost of the satellite and
related equipment.
Other Transactions Involving Limited Partners -- Certain Limited Partners
were also subcontractors under the satellite construction contract. Orion
Atlantic also has contracted with Limited Partners or their affiliates for
certain consulting, post-launch support services and other services related to
developing the business. Approximately $5.0 million has been incurred under
these agreements, all of which was capitalized.
During 1995, Orion Atlantic entered into agreements with certain Limited
Partners (including the Company) under which the participating Limited Partners
would voluntarily give up their rights to receive capacity under their firm
capacity agreements through January 1996. The participating Limited Partners
would continue to make payments for such capacity but would have the right to
receive refunds from Orion Atlantic out of cash available after operating costs
and payments under the Credit Facility. Through December 31, 1995, Orion
Atlantic has received $14.1 million (excluding payments from the Company) under
the firm capacity agreements subject to refund, which amount is included in the
balance sheet caption "Other liabilities." In addition, services revenue
included $5.7 million in 1995 from Limited Partners pursuant to the firm
capacity commitments, not subject to refund.
4. COMMITMENTS AND CONTINGENCIES
Obligations with Respect to Orion Atlantic -- Orion presently has certain
significant obligations to Orion Atlantic and the Limited Partners, including
commitments under satellite capacity agreements between Orion and Orion
Atlantic, under which Orion will be liable to pay Orion Atlantic approximately
$2.5 million per year for seven years for satellite capacity and is contingently
liable for up to an additional $4.3 million per year for up to seven years if
Orion Atlantic experiences cash flow deficits commencing when Orion Atlantic's
first satellite begins commercial operations; and reimbursement (jointly and
severally with OrionSat) with respect to a $10 million letter of credit provided
by OrionSat to a limited partner, which is secured by 259,515 shares of Orion's
common stock held in treasury and cash distributions that Orion and OrionSat may
receive with respect to their partnership interests in Orion Atlantic.
F-13
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. COMMITMENTS AND CONTINGENCIES-(CONTINUED)
Orion 1 satellite -- 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. The nine affected transponders account for
a majority of Orion Atlantic's present revenues. Full service to all affected
customers was restored using redundant equipment on the satellite. Orion
Atlantic 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 Orion
Atlantic'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 Orion Atlantic would be entitled
to insurance proceeds of approximately $50 million and could lease replacement
capacity and function as a reseller with respect to such capacity (at reduced
levels of profitability), the loss of capacity would have a material adverse
effect on Orion and on Orion Atlantic.
Orion 2 satellite -- In connection with the proposed financing of Orion 2, a
subsidiary of Orion Atlantic entered into a satellite construction contract for
Orion 2 with MMS Space Systems, subject to completion of proposed financing.
Depending upon the timing and terms and conditions of the financing for Orion 2
and the then satellite design, the Company may seek to renew this satellite
contract with MMS Space Systems. There can be no assurance that the terms of a
new satellite contract will resemble those of the satellite contract with MMS
Space Systems. The Company expects to use Orion Atlantic's Tracking, Telemetry
and Control (TT&C) facility to control Orion 2 (although authorizations will be
needed).
Eutelsat Lease -- In January 1993, Orion Atlantic entered into a lease, which
expired in December 1994, with one of its limited partners under which Orion
Atlantic leased one-half of a transponder on a EUTELSAT satellite for use in
providing private network services prior to the operational delivery of Orion 1.
The lease required quarterly payments of $481,000 of which $855,000 was deferred
by the limited partner until March 1995. Rent under this lease totaled $1.9
million in 1994 and $1.8 million in 1993.
Litigation -- 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. See Note 11.
While Orion is party to regulatory proceedings incident to the business of
Orion, there are no other material legal proceedings pending or, to the
knowledge of management, threatened against Orion or its subsidiaries.
Other -- Orion has entered into operating leases, principally for office
space. Rent expense was $735,000, $668,000 and $661,000 during 1995, 1994, and
1993, respectively.
F-14
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. COMMITMENTS AND CONTINGENCIES-(CONTINUED)
Future minimum lease payments are as follows:
1996.................. $ 774,357
1997.................. 793,716
1998.................. 887,138
1999.................. 907,477
----------
$3,362,688
==========
5. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-------------------------------
1994 1995
--------------- ---------------
Senior notes payable -- banks .... $224,584,097 $230,483,182
Note payable -- TT&C Facility .... 9,348,730 8,774,266
Satellite incentive obligation .... -- 20,002,240
Notes payable -- STET.............. -- 8,000,000
Notes payable -- Limited Partners . 5,775,000 8,050,000
Other.............................. 2,483,319 3,966,708
--------------- ---------------
Total long-term debt ............. 242,191,146 279,276,396
Less: current portion ............. 12,015,663 28,607,110
--------------- ---------------
Long-term debt less current
portion.......................... $230,175,483 $250,669,286
=============== ===============
Total interest (including commitment fees and amortization of deferred financing
costs) incurred for the years ended December 31, 1995, 1994 and 1993 was $26.0,
$27.0, and $16.3 million, respectively. Substantially all of the interest
incurred in 1994 and 1993 has been capitalized, while approximately $1.3 million
of interest was capitalized in 1995.
Aggregate annual maturities of long-term debt consist of the following (in
thousands):
1996.................. $ 28,607
1997.................. 34,917
1998.................. 34,358
1999.................. 46,853
2000.................. 43,590
Thereafter ........... 90,951
---------
$279,276
=========
Senior Notes Payable to Banks -- In December 1991, OrionSat, on behalf of
Orion Atlantic, executed a credit agreement for up to $400 million of senior
debt from an international banking syndicate. Amounts advanced under the credit
facility are secured by the assets of Orion Atlantic and are due over seven
years in graduated installments beginning July 31, 1995. The credit agreement
prohibits the extension of credit by Orion Atlantic to any affiliate of the
partnership, as defined. Accordingly, Orion Atlantic may not loan or advance
funds to the Company or its affiliates. The credit agreement also restricts
distributions to the partners. At December 31, 1995, none of Orion Atlantic's
capital was available for distribution. The credit facility has a number of
other customary covenants and requirements, including the Banks' approval of
significant changes to the construction contract and increases in
F-15
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. LONG-TERM DEBT-(CONTINUED)
budgeted costs. The Banks also have full recourse to OrionSat as general
partner, and Orion has pledged its investment in the common stock of OrionSat
and its limited partner ownership interest to the Banks.
Amounts outstanding under the credit facility bear interest at 1.75% over the
LIBOR (7.68% at December 31, 1995). Orion Atlantic has 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 is in place relating to a
notional amount declining every six months from $150 million effective November
30, 1995 to $15.6 million effective March 31, 2001. Under the terms of the cap
agreement, when LIBOR equals or exceeds 5.5% Orion Atlantic pays Chase a fee
equal to 3.3% per annum of the notional amount and receives a payment from Chase
in an amount equal to the difference between the actual LIBOR rate and 5.5% on
the notional amount. There was an unrealized loss as of December 31, 1995 of
approximately $4.6 million relating to these arrangements. Commitment fees of
0.5% of the unused Credit Facility are payable semiannually.
Note Payable -- TT&C Facility -- Orion Atlantic entered into a financing
arrangement with General Electric Capital Corporation ("GECC") to finance the
Tracking Telemetry and Control (TT&C) Facility. The TT&C arrangement calls for a
note payable, the maximum amount of which is $11 million of which up to $8.9
million is for payment to Lockheed Martin under the Satellite Control System
Contract, with the remaining balance available to be drawn to finance the cost
of launch insurance required for the benefit of GECC. In June 1995, Orion
Atlantic accepted the TT&C Facility and Orion Atlantic refinanced $9.3 million
from GECC as a seven-year term loan, payable monthly. Orion Atlantic made a
mandatory prepayment of $1 million in January 1996. The interest rate is fixed
at a 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 similar representations, warranties and
covenants to those in the senior notes.
Satellite incentive obligation -- The obligations relating to satellite
performance (see Note 3) 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 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.
Notes Payable -- STET -- In connection with the STET Redemption (see Note 3),
the Company issued STET $8 million of promissory notes which bear interest at
12% per annum. Payments are due as follows: $2.5 million plus accrued interest
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.
Notes Payable -- Limited Partners -- In 1993, Orion Atlantic received
commitments for Preferred Participation Units (PPUs) aggregating $9.5 million
from certain Limited Partners (including $1.5 million from Orion Network
Systems) for development of Orion Atlantic's network services business.
Holders of PPUs earn interest on aggregate amounts drawn at the rate of 30%
per annum, of which 6% is paid and the remainder accrued, but not paid until
July 1, 1995, at which time interest and principal payments due are subordinated
to operating requirements and senior notes debt service but are payable prior to
distributions to Limited Partners. Principal amounts drawn are payable on
February 1, 1999. Principal amounts may be prepaid without penalty on or after
January 1, 1996.
F-16
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 would be waived. Orion may
require conversion of the preferred stock beginning in June 1996 if certain
conditions are met.
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.
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 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, of which 9 shares
of preferred stock were converted into 1,058 shares of common stock. The
remaining 2,991 shares issued are convertible into 351,882 shares of common
stock and the preferred stock underlying the options are convertible into 98,039
shares of common stock.
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.
Stockholders' Equity
In December 1993, 178,097 shares of Common Stock were issued at $10.20 per
share to new and existing shareholders.
In May 1994, Orion issued 588,235 shares of common stock at $8.50 per share
to Space Systems Loral pursuant to a stock purchase agreement.
In May 1994, 19,424 shares of common stock were issued at $10.20 per share to
new and existing shareholders.
F-17
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'-(CONTINUED)
In June 1994, Orion issued an aggregate of 174,844 shares of common stock to
a limited number of institutions and other investors at a purchase price of
$8.50 per share.
The December 1993 and June 1994 common stock purchases were subsequently
converted to redeemable preferred stock.
Stock Options -- In 1987, Orion adopted a stock option plan. Under this plan,
as amended, 1,470,588 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 market value, as determined by the Board
of Directors, on the date the option is granted. The Board of Directors also has
granted nonqualified options to purchase 53,341 shares of common stock outside
the plan described at prices ranging from $5.44 to $12.24 per share.
Stock options outstanding at December 31:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Range of exercise price ......... $5.44 - 15.00 $5.44 - 12.24 $5.44 - 12.24
------------- ------------- -------------
Outstanding at beginning of year 555,581 871,464 804,056
Granted during year ............. 374,448 37,867 380,069
Exercised ....................... (165) (31,967) (60,928)
Canceled ........................ (58,400) (73,308) (151,728)
------------- ------------- -------------
Outstanding at end of year ..... 871,464 804,056 971,469
============= ============= =============
</TABLE>
In November 1993, 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. In 1995 and 1994, these executives earned the
right to exercise 11,029 and 29,410 of these options based on the achievement of
such objectives.
The options vest annually over a one to five-year period. All options are
exercisable up to seven years from the date of grant. There are approximately
499,119 shares available to be granted under the plan. As of December 31, 1995,
356,226 qualified and nonqualified options were exercisable.
Stock Warrants -- Orion issued stock warrants to a financial advisor in 1991
entitling the financial advisor to purchase 43,049 shares of common stock at a
price of $11.56 a share. Also, in 1991, as an inducement to Chase to provide
partnership bridge equity if required, Orion issued stock warrants entitling
Chase to purchase up to 73,529 shares of common stock at $11.56 per share. These
warrants expire in 1996.
Finally, as an inducement to two limited partners to incur satellite capacity
obligations required by the senior debt lender, Orion issued warrants for the
purchase of an aggregate 129,757 shares of common stock at $11.56 per share.
These warrants expire in 1996. See Note 11.
Warrants have been issued, in conjunction with loans to Orion by certain
stockholders and members of executive management (since repaid or converted to
common stock), to acquire 483,823 shares of Orion's common stock at $11.56 to
$12.92 per share through 1997. The exercise price of these warrants was equal to
or above the fair value of the stock at the time of issuance; accordingly, no
value was allocated to the warrants. Total warrants outstanding were 553,768 at
December 31, 1995 and 735,769 at December 31, 1994 and 1993.
The holders of preferred stock also hold warrants to purchase 1,704,824
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.
F-18
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'-(CONTINUED)
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" 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.
7. INVESTMENT IN ASIA PACIFIC
In January 1990, Orion entered into an arrangement with Asia Pacific whereby
each company exchanged into escrow common shares having a market value of
$500,000. In this exchange, Orion received 250,000 shares of Asia Pacific common
stock representing at that time an 11% ownership interest, for which it issued
51,061 shares of common stock at a value of $9.79 per share to Asia Pacific. The
assigned value of the Asia Pacific shares received of $500,000 was recorded as a
reduction to stockholders' equity. In 1992, the Board of Directors of Orion
authorized the acquisition of up to 100% of Asia Pacific's outstanding common
stock. As a result of this new agreement, the January 1990 transaction was
rescinded and the shares held in escrow were returned to the respective
companies. The acquisition of an 83% interest in Asia Pacific was finalized and
executed in December 1992, resulting in the exchange of 289,147 shares of
Orion's common stock for 2,089,392 shares of Asia Pacific common stock. The
acquisition was accounted for as a purchase.
Asia Pacific is a development stage enterprise.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
Other than amounts due under the senior notes payable to banks, Orion
believes that the carrying amount reported in the balance sheet of its other
financial assets and liabilities approximates their fair value. The fair value
of Orion Atlantic's senior notes payable to banks at December 31, 1995 is
estimated to be $235.1 million based on the principal balance outstanding, net
of the estimated fair value of the interest rate modification agreement, which
approximates an implicit loss of $4.6 million. Credit risk exists if the
counterparty is not able to make the required payments to Orion under these
agreements. Orion believes the risk to be remote.
F-19
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
9. CONDENSED FINANCIAL INFORMATION OF ORION
As described in Notes 3 and 5, the net assets, credit facilities and other
resources of Orion Atlantic are restricted to the construction and operation of
the satellite system. Presented below are condensed balance sheets of Orion
(parent company only basis) at December 31, 1995 and 1994 and condensed
statements of operations and cash flows for the years ended December 31, 1995,
1994 and 1993. All material contingencies, obligations and guarantees of Orion
have been separately disclosed in the preceding notes to the financial
statements.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
------------ -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ........................ $ 6,201,941 $ 48,797,627
Receivable from Orion Atlantic ................... 2,071,547 1,217,169
Other current assets ............................. 215,985 611,391
------------ -------------
Total current assets............................. 8,489,473 50,626,187
Investment in and advances to subsidiaries:
OrionNet.......................................... 2,477,943 5,993,628
OrionSat.......................................... (2,793,608) (20,496,009)
Asia Pacific ..................................... 1,870,508 1,634,048
Orion Atlantic ................................... 7,800,544 10,585,573
Other assets....................................... 1,710,080 6,256,742
------------ -------------
Total assets....................................... $19,554,940 $ 54,600,169
============ =============
Liabilities and stockholders' equity
Current liabilities: ..............................
Notes and interest payable to Orion Atlantic ..... $ -- $ 2,482,667
Accounts payable and accrued liabilities.......... 860,191 2,361,291
------------ -------------
Total current liabilities........................ 860,191 4,843,958
Notes and interest payable to Orion Atlantic ...... -- 2,077,327
Other liabilities.................................. 789,485 640,542
Redeemable preferred stock......................... 14,554,693 20,357,701
Stockholders' equity............................... 3,350,571 26,680,642
------------ -------------
Total stockholders' equity......................... $19,554,940 $ 54,600,169
============ =============
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS OF ORION NETWORK SYSTEMS, INC.
1993 1994 1995
------------ ------------ -------------
Services revenue.................... $ -- $ -- $ --
Costs and expenses: ................
General and administrative.......... 2,855,646 2,487,201 4,204,011
Interest expense (income)........... 197,673 (243,152) (1,834,589)
------------ ------------ -------------
Total costs and expenses............ 3,053,319 2,244,049 2,369,422
Equity in net losses of
subsidiaries........................ 4,832,752 5,720,869 24,545,756
------------ ------------ -------------
Net loss............................ $(7,886,071) $(7,964,918) $(26,915,178)
============ ============ =============
F-20
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
9. CONDENSED FINANCIAL INFORMATION OF ORION-(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS OF ORION NETWORK SYSTEMS, INC.
<TABLE>
<CAPTION>
1993 1994 1995
--------------- --------------- --------------
<S> <C> <C> <C>
Net cash used in operations.......................... $(2,319,221) $(2,709,307) $(4,107,237)
Investing activities:
Advances to subsidiaries............................ (1,115,662) (2,973,264) (3,264,024)
Investment in Orion Atlantic........................ -- -- (5,400,000)
Capital expenditures................................ (106,835) (771,890) (597,698)
Acquisition of Asia Pacific......................... (2,721) -- --
--------------- --------------- --------------
(1,225,218) (3,745,154) (9,261,722)
Financing activities:
Proceeds from issuance of redeemable preferred stock -- 10,928,293 4,483,001
Proceeds from issuance of common stock............... 1,807,345 6,542,303 51,974,436
PPU funding.......................................... (280,000) (765,000) (455,000)
Proceeds from issuance of notes payable.............. 326,511 -- --
Repayment of notes payable........................... (46,318) (5,648,535) (37,792)
--------------- --------------- --------------
1,807,538 11,057,061 55,964,645
--------------- --------------- --------------
Net increase (decrease) in cash ..................... (1,736,901) 4,602,600 42,595,686
Cash and cash equivalents at beginning of year ..... 3,336,242 1,599,341 6,201,941
--------------- --------------- --------------
Cash and cash equivalents at end of year ............ $ 1,599,341 $ 6,201,941 $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.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years-ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- --------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995
Revenues ................... $ 2,508 $ 5,238 $ 6,201 $ 8,336
Loss from operations........ (11,891) (12,038) (13,525) (9,377)
Loss before minority
interest................... (15,978) (18,248) (19,186) (19,592)
Net loss.................... (5,996) (6,991) (6,998) (6,930)
Net loss per share.......... (0.64) (0.75) (0.78) (0.67)
1994
Revenues ................... $ 616 $ 718 $ 896 $ 1,185
Loss from operations........ (3,211) (4,233) (3,651) (4,636)
Loss before minority
interest................... (3,190) (4,044) (3,638) (4,451)
Net loss.................... (1,786) (1,928) (2,217) (2,034)
Net loss per share.......... (0.19) (0.21) (0.24) (0.22)
</TABLE>
F-21
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
11. SUBSEQUENT EVENTS (UNAUDITED)
In July 1996, Orion entered into an Exchange Agreement (the "Exchange
Agreement") with the Limited Partners that hold 58 1/3% of the partnership
interests in Orion Atlantic. Pursuant to the Exchange Agreement, Orion will
acquire all of the interests held by the Limited Partners, as well as
approximately $38 million of Orion Atlantic indebtedness to Limited Partners in
exchange for a newly issued series of redeemable convertible preferred stock in
Orion and the release of certain credit support obligations of the Limited
Partners. The Exchange Agreement is conditioned upon a number of events
including, among other things, shareholder approval, the British Aerospace and
Matra Marconi Space debenture investments, the acquisition of the minority
interest of Asia Pacific held by British Aerospace, and the refinancing of the
Orion 1 Credit Facility, all as described below.
Orion intends to enter into an agreement with an affiliate of British
Aerospace to acquire their 17% outstanding minority interest in Asia Pacific for
approximately 86,000 shares of Orion Common Stock.
Orion has entered into a Memorandum of Agreement, effective December 6, 1996,
for procurement of Orion 2 spacecraft with Matra Marconi Space with an aggregate
contract value of $200.8 million, excluding launch insurance. On December 13,
1996, OAP entered into an Authorization to Proceed Agreement with Hughes Space
and Communications International for the procurement of Orion 3 spacecraft with
an aggregate contract value, subject to execution of a definitive agreement, of
$208 million, excluding launch insurance. Construction of Orion 3 commenced in
mid-December 1996.
The Company intends to file a Registration Statement with the Securities and
Exchange Commission pursuant to which the Company will offer to sell an
aggregate of $222 million of Units consisting of Senior Notes, due 2007 and
warrants to purchase common stock, and an aggregate of $125 million of Units
consisting of Senior Discount Notes due 2007 and warrants to purchase common
stock (the "Offering"). The proceeds from this offering are intended to be used
primarily to refinance the Orion 1 Credit Facility. Concurrently with the
Offering, British Aerospace and Matra Marconi Space have committed to purchase
$50 million and $10 million of convertible junior subordinated debentures,
respectively. Such debentures are expected to bear interest at 8.75% payable
semiannually in Orion common stock (valued at up to $14.00 per share) until
maturity in 2012. The Offering is conditioned on consummation of the Exchange,
repayment of the Orion 1 Credit Facility with proceeds of the Offering and the
British Aerospace and Matra Marconi Space debenture investments; the Exchange is
conditioned on, among other things, the Orion 2 Satellite Contract, which has
been entered into, and approval of the Orion stockholders, expected to occur
prior to the pricing of the Offering; and the British Aerospace debenture
investment is conditioned on Orion's acquisition of the remaining minority
interest in Asia Pacific, which has occurred or is in the process of occurring.
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. It has the right to terminate the contract at any time prior
to March 31, 1997, upon which termination Orion would be entitled to retain all
deposited funds. Prior to launch, payments will be held in escrow and are
subject to refund pending the successful launch and commencement of commercial
operation of Orion 3. In November 1996, Orion granted an option to Dacom to
purchase 50,000 shares of common stock at a price of $14.00 per share. The
warrant is 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 commencement date and will terminate at that time or at any time the
Joint Investment Agreement is terminated.
F-22
<PAGE>
ORION NETWORK SYSTEMS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
11. SUBSEQUENT EVENTS (UNUADITED)-(CONTINUED)
In January 1997, Orion issued an aggregate of approximately 86,500 shares of
Common Stock to British Aerospace, one of the Company's principal stockholders
which has a representative on the Company's Board of Directors. Such issuance
was pursuant to the exercise of a warrant granted in December 1991 in connection
with the formation of Orion Atlantic.
Litigation. In connection with the Skydata suit discussed in Note 4, 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. This initial hearing was
scheduled to take place in November 1996. On November 9, 1996, Orion and Skydata
executed a letter to settle in full the pending litigation and arbitration. As
part of the settlement, the parties are to release all claims by either side
relating in any way to the patent and/or the pending litigation and arbitration.
In addition, Skydata is to grant Orion (and its affiliates) an unrestricted
paid-up license to make, have made, use or sell products or methods under the
patent and all other corresponding continuation and reissue patents. Orion is to
pay Skydata $437,000 over a period of two years as part of the settlement. The
parties are in the process of documenting the terms of the settlement in a
formal settlement agreement.
F-23
<PAGE>
GLOSSARY
ORION, ITS PARTNERS AND 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.
G-1
<PAGE>
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.
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 Notes 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 or will acquire the remaining 17%, which
is 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 OrionSat is
the general partner, which owns Orion 1.
OrionNet ................... OrionNet, Inc., a Delaware corporation and wholly
owned subsidiary of Orion.
OrionSat ................... Orion Satellite Corporation, a Delaware
corporation and wholly owned subsidiary of Orion.
Partners ................... The partners in Orion Atlantic, consisting of
OrionSat, as the general partner, and the Limited
Partners (including 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
G-2
<PAGE>
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.
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.
G-3
<PAGE>
Orion 3 Satellite Contract . The proposed 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.
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 130
government and privately owned telecommunications
companies. References to INTELSAT are intended to
include the signatories thereof unless the context
otherwise requires.
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|SD West longitude
over the Atlantic Ocean.
PanAmSat ................... Pan American Satellite 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.
G-4
<PAGE>
ATTACHMENT A
AGREEMENT AND PLAN OF MERGER
OF
ORION MERGER COMPANY, INC. ("SUB")
WITH AND INTO
ORION NETWORK SYSTEMS, INC. ("ONS"),
AMONG SUB, ONS, AND
ORION NEWCO SERVICES, INC.
<PAGE>
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made and entered into
as of the 8th day of January, 1997, by and among ORION NETWORK SYSTEMS, INC., a
Delaware corporation ("ONS," or, with regard to the period upon and after the
Effective Time of the Merger (as hereinafter defined), the "Surviving
Corporation"), ORION NEWCO SERVICES, INC., a Delaware corporation ("Newco"),
which is a direct wholly-owned subsidiary of ONS, and ORION MERGER COMPANY,
INC., a Delaware corporation ("Sub"), which is a direct wholly-owned subsidiary
of Newco and an indirect wholly-owned subsidiary of ONS (ONS and Sub,
collectively, the "Constituent Corporations," and each, a "Constituent
Corporation").
R E C I T A L S
A. WHEREAS, ONS is a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "DGCL"), and is authorized to
issue a total of Forty-One Million (41,000,000) shares of stock, in two (2)
classes, the first class consisting of Forty Million (40,000,000) shares of
common stock, $.01 par value per share (the "ONS Common Stock"), of which, as of
December 15, 1996, Ten Million Nine Hundred Seventy-Four Thousand One Hundred
and Twenty-One (10,974,121) shares are issued and outstanding (such shares or,
as the context may require, such lesser or greater number of shares of ONS
Common Stock issued and outstanding immediately prior to the Effective Time of
the Merger, the "Outstanding ONS Common Shares") (with, as of December 15, 1996,
an additional Three Million One Hundred Ninety-Six Thousand Nine Hundred and
Seventy-Six (3,196,976) shares of ONS Common Stock being issuable upon
conversion of the Outstanding ONS Series A Preferred Shares (as hereinafter
defined) and the Outstanding ONS Series B Preferred Shares (as hereinafter
defined) and upon the exercise of rights under the ONS Options (as hereinafter
defined) and the ONS Warrants (as hereinafter defined)) and Two Hundred
Fifty-Nine Thousand Five Hundred and Fifteen (259,515) shares are issued but not
outstanding (such shares or, as the context may require, such lesser or greater
number of shares of ONS Common Stock as may be issued but not outstanding
immediately prior to the Effective Time of the Merger, the "Treasury ONS Common
Shares"), and the second class consisting of One Million (1,000,000) shares of
preferred stock, $.01 par value per share (the "ONS Preferred Stock"), of which
Fifteen Thousand (15,000) shares constitute a series of ONS Preferred Stock
having the designation "Series A 8% Cumulative Redeemable Convertible Preferred
Stock" (the "ONS Series A Preferred Stock") (of which shares of ONS Series A
Preferred Stock Thirteen Thousand Eight Hundred and Seventy-One (13,871) are
issued and outstanding as of December 15, 1996 (such shares or, as the context
may require, such lesser or greater number of shares of ONS Series A Preferred
Stock as may be issued and outstanding immediately prior to the Effective Time
of the Merger, the "Outstanding ONS Series A Preferred Shares")), and of which
Five Thousand (5,000) shares constitute a series of ONS Preferred Stock having
the designation "Series B 8% Cumulative Redeemable Convertible Preferred Stock"
(the "ONS Series B Preferred Stock") (of which shares of ONS Series B Preferred
Stock Four Thousand Two Hundred and Ninety-Eight (4,298) are issued and
outstanding as December 15, 1996 (such shares or, as the context may require,
such lesser or greater number of shares of ONS Series B Preferred Stock as may
be issued and outstanding immediately prior to the Effective Time of the Merger,
the "Outstanding ONS Series B Preferred Shares," and together with the
Outstanding ONS Series A Preferred Shares, the "Outstanding ONS Preferred
Shares")).
B. WHEREAS, Sub is a corporation organized and existing under the DGCL, and
is authorized to issue a total of One Thousand (1,000) shares, in a single class
of common stock, $.01 par value per share (the "Sub Common Stock"), of which, as
of the date hereof, one (1) share is issued and outstanding (the "Outstanding
Sub Common Share") (as of the date hereof, Newco holding of record the
Outstanding Sub Common Share) and no shares are issued but not outstanding.
C. WHEREAS, Newco is a corporation organized and existing under the DGCL, and
is authorized to issue a total of Forty-One Million (41,000,000) shares of
stock, in two (2) classes, the first class consisting of Forty Million
(40,000,000) shares of common stock, $.01 par value per share (the "Newco Common
Stock"), of which, as of the date hereof, one (1) share is issued and
outstanding (the "Outstanding Newco Common Share") (as of the date hereof, ONS
holding of record the Outstanding Newco Common Share) and no shares are issued
but not outstanding, and the second class consisting of One
A-2
<PAGE>
Million (1,000,000) shares of preferred stock, $.01 par value per share (the
"Newco Preferred Stock"), of which Fifteen Thousand (15,000) shares constitute
or, prior to and at the Effective Time of the Merger will constitute, a series
of Newco Preferred Stock, substantially identical to the ONS Series A Preferred
Stock, having the designation "Series A 8% Cumulative Redeemable Convertible
Preferred Stock" (the "Newco Series A Preferred Stock") (none of which shares of
Newco Series A Preferred Stock are issued and outstanding as of the date
hereof), and of which Five Thousand (5,000) shares constitute or, prior to and
at the Effective Time of the Merger will constitute, a series of Newco Preferred
Stock, substantially identical to the ONS Series B Preferred Stock, having the
designation "Series B 8% Cumulative Redeemable Convertible Preferred Stock" (the
"Newco Series B Preferred Stock") (none of which shares of Newco Series B
Preferred Stock are issued and outstanding as of the date hereof).
D. WHEREAS, the respective Boards of Directors of ONS, Sub, and Newco have
determined that it is advisable and in the best interests of each of ONS, Sub,
and Newco and their respective stockholders that Sub be merged with and into ONS
in accordance with the terms and conditions of this Agreement (the "Merger"),
and accordingly the Board of Directors of each of ONS, Sub, and Newco has
adopted, approved, and authorized this Agreement and the Merger.
E. WHEREAS, it is contemplated that the Merger will be effected in accordance
with Section 251(g) of the DGCL, and it is expected that Ernst & Young LLP
("Ernst & Young"), tax advisor to ONS, will render an opinion (the "Tax
Opinion") that the holders of shares of ONS stock which are converted in the
Merger into the right to receive shares of Newco stock will have the opportunity
to qualify for nonrecognition treatment because the Merger will qualify either
as (a) a reorganization pursuant to Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), or (b) an exchange satisfying the requirements
of Section 351(a) of the Code.
F. WHEREAS, ONS, Orion Satellite Corporation, a Delaware corporation, and
each of the existing limited partners (other than ONS) (the "Exchanging
Partners") of International Private Satellite Partners, L.P., a Delaware limited
partnership ("Orion Atlantic"), have entered into a Section 351 Exchange
Agreement and Plan of Conversion, dated as of June 1996 (as amended, the
"Exchange Agreement"), pursuant to which ONS has agreed, among other things, to
have Newco issue shares of a series of Newco Preferred Stock that, after the
Effective Time of the Merger, will be provided for and have the designation
"Series C 6% Cumulative Redeemable Convertible Preferred Stock" (the "Newco
Series C Preferred Stock"), in exchange for the Exchanging Partners' respective
limited partnership interests in Orion Atlantic and other rights relating
thereto (the "Exchange").
NOW, THEREFORE, in consideration of the premises, the mutual agreements,
promises, covenants, representations, warranties, acknowledgments, and other
terms, conditions, and provisions set forth herein, and other good and valuable
consideration, the sufficiency and receipt of which are hereby acknowledged, the
parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger; Filing and Effective Time. Subject to and in accordance with
the terms and conditions of this Agreement and the DGCL, this Agreement or in
lieu thereof a certificate of merger regarding the Merger of Sub with and into
ONS (as the case may be, the "Delaware Merger Certificate") shall be executed,
acknowledged, and filed with the Secretary of State of the State of Delaware
(the "Delaware Secretary of State") by the Surviving Corporation at or as soon
as practicable after the Closing (as hereinafter defined). The Merger shall
become effective upon such filing of the Delaware Merger Certificate (the
"Effective Time of the Merger").
1.2 Closing. Subject to and in accordance with the terms and conditions of
this Agreement, the closing of the Merger (the "Closing") shall take place as
soon as practicable after satisfaction of the latest to occur of the conditions
set forth in Article V hereof (the "Closing Date"), at the offices of Hogan &
Hartson L.L.P., Columbia Square, 555 13th Street, N.W., Washington, D.C. 20004,
unless another date or place is agreed to in writing by the parties hereto.
A-3
<PAGE>
1.3 Effect of the Merger. Upon the Effective Time of the Merger, the separate
existence of Sub shall cease and Sub shall be merged with and into ONS. ONS
shall survive the Merger, and the separate corporate existence of ONS as the
Surviving Corporation shall continue unaffected and unimpaired by the Merger.
Upon and after the Effective Time of the Merger, the rights, privileges, powers,
and franchises of each of the Constituent Corporations, and all property
belonging to each of such Constituent Corporations, shall be vested in the
Surviving Corporation, but all rights of creditors and all liens upon any
property of any of the Constituent Corporations shall be preserved unimpaired,
and all debts, liabilities, and duties of the respective Constituent
Corporations shall thenceforth attach to the Surviving Corporation, and may be
enforced against it to the same extent as if such debts, liabilities, and duties
had been incurred or contracted by the Surviving Corporation, all as more fully
provided under the DGCL.
1.4 Certificate of Incorporation of the Surviving Corporation. The
Certificate of Incorporation of ONS as in effect immediately prior to the
Effective Time of the Merger (the "ONS Charter") shall be the certificate of
incorporation of the Surviving Corporation (the "Surviving Corporation
Charter"), except that the following amendments thereto are to be effected by
the Merger upon the Effective Time of the Merger:
(a) the Surviving Corporation Charter is to be amended by striking
Article FIRST thereof in its entirety and inserting in lieu thereof the
following:
"FIRST: The name of the Corporation is Orion Oldco Services, Inc.
(hereinafter called the 'Corporation').";
(b) the Surviving Corporation Charter is to be amended by adding and
inserting, immediately following Article THIRTEENTH thereof, a new Article
FOURTEENTH thereof, to read in its entirety as follows:
"FOURTEENTH: Any act or transaction by or involving the Corporation that
requires for its adoption under the General Corporation Law of the State of
Delaware (the "DGCL") or this Certificate of Incorporation the approval of
the stockholders of the Corporation shall, pursuant to subsection (g) of
Section 251 of the DGCL, require, in addition, the approval of the
stockholders of Orion Newco Services, Inc., a Delaware corporation (the name
of which is expected to be changed to 'Orion Network Systems, Inc.'), or any
successor thereto by merger, by the same vote as is required by the DGCL
and/or by this Certificate of Incorporation."; and
(c) the Surviving Corporation Charter is to be amended by the Surviving
Corporation's certification, hereby made effective upon the Effective Time of
the Merger, in accordance with Section 243 of the DGCL (the "Paragraph (c)
Certification"), that: (i) that certain "Certificate of Designations, Rights
and Preferences of Series A 8% Cumulative Redeemable Convertible Preferred
Stock" of ONS, filed with the Delaware Secretary of State on June 17, 1994
(the "Series A Certificate of Designations") prohibits the reissuance, as
part of such series of Preferred Stock of the Surviving Corporation, of
shares of Series A Preferred Stock of the Surviving Corporation that have
been retired; and (ii) a number of shares of Series A Preferred Stock of the
Surviving Corporation equal to the number of Outstanding ONS Series A
Preferred Shares immediately prior to the Effective Time of the Merger have
been retired; and
(d) the Surviving Corporation Charter is to be amended to increase and
restore to 15,000 the number of shares of Series A Preferred Stock that the
Surviving Corporation is authorized to issue (such number of authorized
shares of Series A Preferred Stock of the Surviving Corporation having been
reduced by the Paragraph (c) Certification, in accordance with the Series A
Certificate of Designations and Section 243 of the DGCL, as a result of the
aforesaid retirement of shares of Series A Preferred Stock of the Surviving
Corporation), by striking the number (which is less than 15,000) that appears
in the one (1) paragraph resolution appearing at the top of the second page
of the Series A Certificate of Designations (the "Series A Resolution") (to
the extent that the number "15,000" in the Series A Resolution shall have
been amended and changed to such lesser number by virtue of the Paragraph (c)
Certification), and inserting the number "15,000" in lieu thereof; and
A-4
<PAGE>
(e) the Surviving Corporation Charter is to be amended by the Surviving
Corporation's certification, hereby made effective upon the Effective Time of
the Merger, in accordance with Section 243 of the DGCL (the "Paragraph (e)
Certification"), that: (i) that certain "Certificate of Designations, Rights
and Preferences of Series B 8% Cumulative Redeemable Convertible Preferred
Stock" of ONS, filed with the Delaware Secretary of State on June 16, 1995
(the "Series B Certificate of Designations") prohibits the reissuance, as
part of such series of Preferred Stock of the Surviving Corporation, of
shares of Series B Preferred Stock of the Surviving Corporation that have
been retired; and (ii) a number of shares of Series B Preferred Stock of the
Surviving Corporation equal to the number of Outstanding ONS Series B
Preferred Shares immediately prior to the Effective Time of the Merger have
been retired; and
(f) the Surviving Corporation Charter is to be amended to increase and
restore to 5,000 the number of shares of Series B Preferred Stock that the
Surviving Corporation is authorized to issue (such number of authorized
shares of Series B Preferred Stock of the Surviving Corporation having been
reduced by the Paragraph (e) Certification, in accordance with the Series B
Certificate of Designations and Section 243 of the DGCL, as a result of the
aforesaid retirement of shares of Series B Preferred Stock of the Surviving
Corporation), by striking the number (which is less than 5,000) that appears
in the one (1) paragraph resolution beginning at the bottom of the first page
of the Series B Certificate of Designations and carrying over to the second
page thereof (the "Series B Resolution") (to the extent that the number
"5,000" in the Series B Resolution shall have been amended and changed to
such lesser number by virtue of the Paragraph (e) Certification), and
inserting the number "5,000" in lieu thereof.
The Surviving Corporation Charter, as so amended, shall be the certificate of
incorporation of the Surviving Corporation upon and after the Effective Time of
the Merger, unless and until duly amended, altered, changed, repealed, and/or
supplemented in accordance with the DGCL (which power and right to amend, alter,
change, repeal, and/or supplement, at any time and from time to time after the
Effective Time of the Merger, are hereby expressly reserved).
1.5 Bylaws of the Surviving Corporation. The bylaws of ONS as in effect
immediately prior to the Effective Time of the Merger (the "ONS Bylaws") shall
be and continue in full force and effect as the bylaws of the Surviving
Corporation upon and after the Effective Time of the Merger, unless and until
duly amended, altered, changed, repealed, and/or supplemented in accordance with
the DGCL (which power and right to amend, alter, change, repeal, and/or
supplement, at any time and from time to time after the Effective Time of the
Merger, are hereby expressly reserved).
1.6 Directors of the Surviving Corporation. The respective numbers of members
constituting the whole Board of Directors of ONS and each class thereof
immediately prior to the Effective Time of the Merger shall be and continue as
the respective numbers of members constituting the whole Board of Directors of
the Surviving Corporation and each class thereof upon and after the Effective
Time of the Merger, unless and until duly increased or decreased in accordance
with the DGCL (which power and right to increase or decrease, at any time and
from time to time after the Effective Time of the Merger, are hereby expressly
reserved). Each person serving as a member of a particular class of the Board of
Directors of ONS (the "ONS Board") immediately prior to the Effective Time of
the Merger shall be and continue as a member of the same class of the Board of
Directors of the Surviving Corporation upon and after the Effective Time of the
Merger, until such person's successor is elected and qualified or until such
person's earlier death, resignation, disqualification, or removal (which power
and right to remove are hereby expressly reserved).
1.7 Officers of the Surviving Corporation. Each person serving as an officer
of ONS immediately prior to the Effective Time of the Merger shall be and
continue as an officer of the Surviving Corporation, holding the same office or
offices, upon and after the Effective Time of the Merger, until such person's
successor is appointed and qualified or until such person's earlier death,
resignation, disqualification, or removal (which power and right to remove are
hereby expressly reserved).
1.8 Further Assurances. At any time and from time to time upon and after the
Effective Time of the Merger, as and when required or deemed desirable by the
Surviving Corporation or its successors or assigns, there shall be executed,
acknowledged, certified, sealed, delivered, filed, and/or recorded, in the
A-5
<PAGE>
name and on behalf of any and each Constituent Corporation, such deeds,
contracts, consents, certificates, notices, and other documents and instruments,
and there shall be done or taken or caused to be done or taken, in the name and
on behalf of any and each Constituent Corporation, such further and other things
and actions as shall be appropriate, necessary, or convenient to acknowledge,
vest, effect, perfect, conform of record, or otherwise confirm the Surviving
Corporation's (or its successors' or assigns') right, title, and interest in and
to, and possession of, all the property, interests, assets, rights, privileges,
immunities, powers, franchises, and authority of each Constituent Corporation
held immediately prior to the Effective Time of the Merger, and otherwise to
carry out and effect the intent and purposes of this Agreement and the Merger.
The officers and directors of the Surviving Corporation (or its successors or
assigns), and each of them, upon and after the Effective Time of the Merger, are
and shall be fully authorized, in the name and on behalf of each Constituent
Corporation, to do and take and cause to be done and taken any and all such
things and actions, and to execute, acknowledge, certify, seal, deliver, file,
and/or record any and all such deeds, contracts, consents, certificates,
notices, and other documents and instruments.
ARTICLE II
EFFECT OF THE MERGER ON
THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS
2.1 Effect on Capital Stock. Upon and as of the Effective Time of the Merger,
by virtue of the Merger and without any action on the part of the holders of the
respective shares:
(a) Conversion of ONS Shares.
(i) Each of the Outstanding ONS Common Shares and each of the
Treasury ONS Common Shares shall be changed and converted into the right
to receive one (1) validly issued, fully paid, and nonassessable share of
Newco Common Stock (such right to be exercised and deemed to have been
exercised by the respective holders of such Outstanding ONS Common Shares
and by ONS as to the Treasury ONS Common Shares, and such shares of Newco
Common Stock to be issued and deemed to have been issued by Newco,
automatically and immediately upon and as of the Effective Time of the
Merger); such Outstanding ONS Common Shares shall no longer be
outstanding and such Outstanding ONS Common Shares and such Treasury ONS
Common Shares automatically shall be retired as permitted under the DGCL
and resume the status of authorized and unissued shares of Common Stock
of the Surviving Corporation; the capital of the Surviving Corporation
shall be reduced as permitted under the DGCL by an amount equal to the
capital theretofore represented by such Outstanding ONS Common Shares and
such Treasury ONS Common Shares; and the capital of Newco in respect of
such shares of Newco Common Stock shall be determined at an amount equal
to the aggregate par value thereof as permitted under the DGCL.
(ii) Each of the Outstanding ONS Series A Preferred Shares shall be
changed and converted into the right to receive one (1) validly issued,
fully paid, and nonassessable share of Newco Series A Preferred Stock
(such right to be exercised and deemed to have been exercised by the
respective holders of such Outstanding ONS Series A Preferred Shares, and
such shares of Newco Series A Preferred Stock to be issued and deemed to
have been issued by Newco, automatically and immediately upon and as of
the Effective Time of the Merger; with rights to accrued, accumulated,
and unpaid dividends on each Outstanding ONS Series A Preferred Share
(the "Series A Accumulated Dividends") being preserved, unimpaired,
unchanged, and unaffected by such conversion and the Merger, such Series
A Accumulated Dividends carrying over and pertaining to and being
accrued, accumulated, and unpaid dividends on each such share of Newco
Series A Preferred Stock, and each such share of Newco Series A Preferred
Stock carrying and having such Series A Accumulated Dividends as accrued,
accumulated, and unpaid dividends thereon, notwithstanding that such
dividends shall have accrued and accumulated from a date prior to the
issuance of such shares of Newco Series A Preferred Stock); such
Outstanding ONS Series A Preferred Shares shall no longer be outstanding
and automatically shall be retired as permitted under the DGCL and resume
the status of autho-
A-6
<PAGE>
rized and unissued shares of Preferred Stock of the Surviving
Corporation; the capital of the Surviving Corporation shall be reduced as
permitted under the DGCL by an amount equal to the capital theretofore
represented by such Outstanding ONS Series A Preferred Shares; and the
capital of Newco in respect of such shares of Newco Series A Preferred
Stock shall be determined at an amount equal to the aggregate par value
thereof as permitted under the DGCL.
(iii) Each of the Outstanding ONS Series B Preferred Shares shall be
changed and converted into the right to receive one (1) validly issued,
fully paid, and nonassessable share of Newco Series B Preferred Stock
(such right to be exercised and deemed to have been exercised by the
respective holders of such Outstanding ONS Series B Preferred Shares, and
such shares of Newco Series B Preferred Stock to be issued and deemed to
have been issued by Newco, automatically and immediately upon and as of
the Effective Time of the Merger; with rights to accrued, accumulated,
and unpaid dividends on each Outstanding ONS Series B Preferred Share
(the "Series B Accumulated Dividends") being preserved, unimpaired,
unchanged, and unaffected by such conversion and the Merger, such Series
B Accumulated Dividends carrying over and pertaining to and being
accrued, accumulated, and unpaid dividends on each such share of Newco
Series B Preferred Stock, and each such share of Newco Series B Preferred
Stock carrying and having such Series B Accumulated Dividends as accrued,
accumulated, and unpaid dividends thereon, notwithstanding that such
dividends shall have accrued and accumulated from a date prior to the
issuance of such shares of Newco Series B Preferred Stock); such
Outstanding ONS Series B Preferred Shares shall no longer be outstanding
and automatically shall be retired as permitted under the DGCL and resume
the status of authorized and unissued shares of Preferred Stock of the
Surviving Corporation; the capital of the Surviving Corporation shall be
reduced as permitted under the DGCL by an amount equal to the capital
theretofore represented by such Outstanding ONS Series B Preferred
Shares; and the capital of Newco in respect of such shares of Newco
Series B Preferred Stock shall be determined at an amount equal to the
aggregate par value thereof as permitted under the DGCL.
(iv) Fractional Outstanding ONS Shares and fractional Treasury ONS
Common Shares shall be changed and converted into the right to receive
fractional shares of Newco stock at the same ratio (1:1) as whole
Outstanding ONS Shares and whole Treasury ONS Common Shares and shall
otherwise be treated the same as such whole shares for purposes hereof
("Outstanding ONS Shares" meaning all of the Outstanding ONS Common
Shares and all of the Outstanding ONS Preferred Shares, collectively).
(b) Conversion of Sub Shares. The Outstanding Sub Common Share shall be
changed and converted into a number of validly issued, fully paid, and
nonassessable shares of Common Stock of the Surviving Corporation which is
equal to the number of Outstanding ONS Common Shares immediately prior to the
Effective Time of the Merger, a number of validly issued, fully paid, and
nonassessable shares of Series A Preferred Stock of the Surviving Corporation
which is equal to the number of Outstanding ONS Series A Preferred Shares
immediately prior to the Effective Time of the Merger, and a number of
validly issued, fully paid, and nonassessable shares of Series B Preferred
Stock of the Surviving Corporation which is equal to the number of
Outstanding ONS Series B Preferred Shares immediately prior to the Effective
Time of the Merger (such shares of Common Stock of the Surviving Corporation,
such shares of Series A Preferred Stock of the Surviving Corporation, and
such shares of Series B Preferred Stock of the Surviving Corporation to be
issued and deemed to have been issued by the Surviving Corporation
automatically and immediately upon and as of the Effective Time of the
Merger); the capital of the Surviving Corporation in respect of such shares
of Common Stock of the Surviving Corporation, such shares of Series A
Preferred Stock of the Surviving Corporation, and such shares of Series B
Preferred Stock of the Surviving Corporation shall be determined at an amount
equal to the aggregate par value thereof as permitted under the DGCL and such
Outstanding Sub Common Share shall no longer be outstanding and automatically
shall be canceled and cease to exist.
A-7
<PAGE>
2.2 Notification of Transfer Agent. Prior to the Closing Date, Newco and ONS
shall notify their respective transfer agents of the conversions of shares of
ONS stock and of shares of Sub stock pursuant to Section 2.1.
2.3 Stock Certificates. Upon and as of the Effective Time of the Merger, by
virtue of the Merger and without any action on the part of either of the
Constituent Corporations or Newco, the holders of the respective shares, or any
other person:
(a) Newco. The shares of Newco Common Stock and the shares of Newco
Preferred Stock, which the Outstanding ONS Shares and the Treasury ONS Common
Shares, respectively, shall have been converted into the right to receive,
shall be represented and evidenced by the same stock certificates that
previously represented and evidenced such Outstanding ONS Shares and such
Treasury ONS Common Shares; and
(b) ONS. The holder of the certificate that immediately prior to the
Effective Time of the Merger evidenced the Outstanding Sub Common Share (the
"Sub Common Stock Certificate") may, at such holder's option, surrender the
same to the Surviving Corporation for cancellation, and such holder shall be
entitled to receive from the Surviving Corporation in exchange therefor
certificates representing and evidencing the number of shares of Common Stock
of the Surviving Corporation, the number of shares of Series A Preferred
Stock of the Surviving Corporation, and the number of shares of Series B
Preferred Stock of the Surviving Corporation into which such holder's
Outstanding Sub Common Share shall have been converted, and, until
surrendered, the Sub Common Stock Certificate shall represent and evidence
the number of shares of Common Stock of the Surviving Corporation, the number
of shares of Series A Preferred Stock of the Surviving Corporation, and the
number of shares of Series B Preferred Stock of the Surviving Corporation
into which the Outstanding Sub Common Share theretofore represented and
evidenced thereby shall have been converted.
ARTICLE III
ADDITIONAL AGREEMENTS
3.1 Directors and Officers of Newco Upon the Effective Time of the Merger.
(a) Directors. As of the Effective Time of the Merger: (i) the whole
Board of Directors of Newco shall be divided into the same number of classes
into which the whole Board of Directors of ONS shall be divided immediately
prior to the Effective Time of the Merger; (ii) the respective numbers of
members constituting the whole Board of Directors of Newco and each class
thereof shall be equal to the respective numbers of members constituting the
whole Board of Directors of ONS and each class thereof immediately prior to
the Effective Time of the Merger; and (iii) the Board of Directors of Newco
(the "Newco Board") and each class thereof shall consist of the persons
serving as members of the ONS Board and the corresponding classes thereof
immediately prior to the Effective Time of the Merger. To that end, effective
immediately prior to the Effective Time of the Merger, to the extent
necessary to give effect to the intent of the preceding sentence: (i) the
whole Board of Directors of Newco shall be divided into the same number of
classes into which the whole Board of Directors of ONS is then divided; (ii)
the respective numbers of members constituting the whole Board of Directors
of Newco and each class thereof shall be increased or decreased, as the case
may be, to numbers equal to the respective numbers of members then
constituting the whole Board of Directors of ONS and each class thereof; and
(iii) each person then serving as a member of the Newco Board shall be
removed, and each person then serving as a member of a class of the ONS Board
shall be elected as a member of the corresponding class of the Newco Board,
to serve as such until such person's successor is elected and qualified or
until such person's earlier death, resignation, disqualification, or removal
(which power and right to remove are hereby expressly reserved).
(b) Officers. As of the Effective Time of the Merger, the officers of
Newco shall be the persons serving as officers of ONS immediately prior to
the Effective Time of the Merger. To that end, effective immediately prior to
the Effective Time of the Merger, to the extent necessary to give
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effect to the intent of the preceding sentence, each person then serving as
an officer of Newco shall be removed, and each person then serving as an
officer of ONS shall be appointed as an officer of Newco, to hold one (1) or
more offices of Newco corresponding to the one (1) or more offices of ONS
then held, until such person's successor is appointed and qualified or until
such person's earlier death, resignation, disqualification, or removal (which
power and right to remove are hereby expressly reserved).
3.2 Newco Certificate of Incorporation.
(a) Newco Charter. As of the Effective Time of the Merger, the
certificate of incorporation of Newco shall contain provisions identical to
the ONS Charter (the "Newco Charter"). To that end, prior to the Effective
Time of the Merger, to the extent permissible and to the extent necessary to
give effect to the intent of the preceding sentence, the certificate of
incorporation of Newco, as the same theretofore may have been amended,
altered, changed, repealed, and/or supplemented, shall be duly amended,
altered, changed, repealed, and/or supplemented, in accordance with the DGCL,
and (subject to paragraph (b) of this Section) such Newco Charter, as so
altered, changed, repealed, and/or supplemented, shall be and remain the
certificate of incorporation of Newco upon and after the Effective Time of
the Merger, unless and until duly amended, altered, changed, repealed, and/or
supplemented in accordance with the DGCL (which power and right to amend,
alter, change, repeal, and/or supplement, at any time and from time to time
after the Effective Time of the Merger, are hereby expressly reserved).
(b) Name Change; Newco Series C Preferred Stock. The Newco Charter shall
be amended and supplemented (which amendment shall be adopted, approved, and
declared advisable by the Newco Board and adopted and approved by ONS in its
capacity as the sole stockholder of Newco prior to the Effective Time of the
Merger, and which supplement shall be adopted and approved by the Newco Board
prior to the Effective Time of the Merger, and which amendment and supplement
are hereby adopted, approved, and declared advisable):
(i) immediately following the Effective Time of the Merger, to change
the name of Newco to "Orion Network Systems, Inc.," by striking Article
FIRST thereof in its entirety and inserting in lieu thereof the
following:
"FIRST: The name of the Corporation is Orion Network Systems, Inc.
(hereinafter called the 'Corporation')."; and
(ii) as soon as practicable following the Effective Time of the
Merger, to provide for the Newco Series C Preferred Stock.
3.3 Newco Bylaws. As of the Effective Time of the Merger, the bylaws of Newco
shall contain provisions identical to the ONS Bylaws (the "Newco Bylaws"). To
that end, prior to the Effective Time of the Merger, to the extent necessary to
give effect to the intent of the preceding sentence, the bylaws of Newco, as the
same theretofore may have been amended, altered, changed, repealed, and/or
supplemented, shall be duly amended, altered, changed, repealed, and/or
supplemented, in accordance with the DGCL, and such Newco Bylaws as so amended,
altered, changed, repealed, and/or supplemented, shall be and remain the bylaws
of Newco upon and after the Effective Time of the Merger, unless and until duly
amended, altered, changed, repealed, and/or supplemented in accordance with the
DGCL (which power and right to amend, alter, change, repeal, and/or supplement,
at any time and from time to time after the Effective Time of the Merger, are
hereby expressly reserved).
3.4 Consent. Each of ONS, Sub, and Newco shall promptly apply for or
otherwise seek, and use its best efforts to obtain, all consents and approvals
required to be obtained by it for consummation of the Merger.
3.5 ONS Stockholder Meeting; Sub Stockholder Written Consent. ONS shall call
a special meeting of its stockholders (the "ONS Special Meeting") to be held as
promptly as practicable after the date hereof for the purpose of voting upon,
among other things, ratification of this Agreement (the parties understanding
and acknowledging that it is contemplated that the Merger will be effected in
accordance with
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Section 251(g) of the DGCL and that no vote of ONS stockholders adopting,
approving, or authorizing this Agreement or the Merger will be required under
the DGCL). Newco, in its capacity as the sole stockholder of Sub, as promptly as
practicable after the date hereof, shall execute and deliver to Sub a written
consent in lieu of a stockholder meeting adopting, approving, and authorizing
this Agreement, in accordance with Section 228 of the DGCL.
3.6 Employee and Director ONS Stock Options. Upon and as of the Effective
Time of the Merger and in connection with the Merger, to the fullest extent
permitted by applicable law, Newco shall assume all of ONS's obligations, and
ONS shall have no further obligations, with respect to any then-outstanding
option to acquire shares of ONS Common Stock issued under ONS's 1987 Employee
Stock Option Plan and Non-Employee Director Stock Option Plan that theretofore
shall not have expired or been duly exercised by the holders thereof (each, if
any, an "ONS Option"), and the due exercise of rights under any such option
shall entitle the holder thereof to acquire, upon the same terms and conditions
that were applicable under the corresponding ONS Option, a number of shares of
Newco Common Stock identical to the number of shares of ONS Common Stock that
were subject to such corresponding ONS Option (a "Newco Option"). ONS and Newco
agree to take all corporate and other action as shall be necessary to effectuate
the foregoing, and ONS shall use its best efforts to obtain, if required, prior
to the Closing Date, such consent of each holder of an ONS Option as shall be
necessary to effectuate the foregoing. Newco shall take all corporate and other
action necessary to reserve and make available for issuance upon the due
exercise of rights under the Newco Options a sufficient number of shares of
Newco Common Stock, and as soon as practicable following the Effective Time of
the Merger shall provide to the record holders of the Newco Options appropriate
notice of such holder's rights thereunder.
3.7 Warrants. Upon and as of the Effective Time of the Merger and in
connection with the Merger, to the fullest extent permitted by applicable law,
Newco shall assume all of ONS's obligations, and ONS shall have no further
obligations, with respect to any then-outstanding warrant or other right to
purchase shares of ONS Common Stock that theretofore shall not have expired or
been duly exercised by the holder thereof (each, if any, an "ONS Warrant"), and
the due exercise of rights under any such warrant or other right shall entitle
the holder thereof to acquire, upon the same terms and conditions that were
applicable under the corresponding ONS Warrant, a number of shares of Newco
Common Stock identical to the number of shares of ONS Common Stock that were
subject to such corresponding ONS Warrant (a "Newco Warrant"). ONS and Newco
agree to take all corporate and other action as shall be necessary to effectuate
the foregoing, and ONS shall use its best efforts to obtain, if required, prior
to the Closing Date, such consents of the holders of ONS Warrants as shall be
necessary to effectuate the foregoing. Newco shall take all corporate and other
action necessary to reserve and make available for issuance upon the exercise of
rights under the Newco Warrants a sufficient number of shares of Newco Common
Stock, and as soon as practicable following the Effective Time of the Merger
shall provide to the record holders of the Newco Warrants appropriate notice of
such holders' rights thereunder.
3.8 Outstanding Newco Common Share. Upon and as of the Effective Time of the
Merger, ONS shall surrender to Newco the certificate representing the
Outstanding Newco Common Share, and the Outstanding Newco Common Share
automatically shall be retired as permitted under the DGCL and resume the status
of an authorized and unissued share of Newco Common Stock, and the capital of
Newco shall be reduced as permitted under the DGCL by an amount equal to the par
value thereof.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of ONS. ONS hereby represents and
warrants:
(a) Organization. It is duly organized, validly existing, and in good
standing as a corporation under the laws of the State of Delaware.
(b) Power and Authority. It has corporate power and authority to enter
into, execute, deliver, and perform its obligations under this Agreement.
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(c) Capital Stock. The numbers of authorized shares of ONS Common Stock,
ONS Preferred Stock, ONS Series A Preferred Stock, and ONS Series B Preferred
Stock, the numbers of Outstanding ONS Common Shares, Outstanding ONS Series A
Preferred Shares, and Outstanding ONS Series B Preferred Shares, and the
number of Treasury ONS Common Shares are as set forth in paragraph A of the
Recitals to this Agreement.
4.2 Representations and Warranties of Sub. Sub hereby represents and
warrants:
(a) Organization. It is duly organized, validly existing, and in good
standing as a corporation under the laws of the State of Delaware.
(b) Power and Authority. It has corporate power and authority to enter
into, execute, deliver, and (subject to stockholder approval) perform its
obligations under this Agreement.
(c) Capital Stock. The number of authorized shares of Sub Common Stock,
the number of Outstanding Sub Common Shares, and the number of shares of Sub
Common Stock issued but not outstanding, are as set forth in paragraph B of
the Recitals to this Agreement.
4.3 Representations and Warranties of Newco. Newco hereby represents and
warrants:
(a) Organization. It is duly organized, validly existing, and in good
standing as a corporation under the laws of the State of Delaware.
(b) Power and Authority. It has corporate power and authority to enter
into, execute, deliver, and (subject to stockholder approval) perform its
obligations under this Agreement.
(c) Capital Stock. The numbers of authorized shares of Newco Common
Stock, Newco Preferred Stock, Newco Series A Preferred Stock, and Newco
Series B Preferred Stock, the numbers of Outstanding Newco Common Shares,
outstanding shares of Newco Series A Preferred Stock, and outstanding shares
of Newco Series B Preferred Stock, and the number of shares of Newco Common
Stock issued but not outstanding, are, or prior to the Effective Time of the
Merger will be, as set forth in paragraph C of the Recitals to this
Agreement.
ARTICLE V
CONDITIONS PRECEDENT
5.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party under this Agreement shall be subject to
the satisfaction at or prior to the Closing of the following conditions:
(a) Stockholder Approvals. This Agreement shall have been approved and
adopted or ratified, as the case may be, by the affirmative vote or written
consent, as appropriate and as the case may be, of the holders of: (i) at
least a majority of the votes of the Outstanding ONS Shares present in person
or represented by proxy at the ONS Special Meeting and entitled to be voted
hereon, voting together as a single class, with each Outstanding ONS Common
Share entitled to one (1) vote and each Outstanding ONS Preferred Share
entitled to one (1) vote for each whole share of ONS Common Stock issuable
upon conversion of such Outstanding ONS Preferred Share as of the applicable
date; (ii) the Outstanding Sub Common Share; and (iii) the Outstanding Newco
Common Share.
(b) Governmental Approvals. All authorizations, consents, orders, or
approvals of, or declarations or filings with, or expiration of waiting
periods imposed by, any administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign (a
"Governmental Entity"), necessary for the consummation of the transactions
contemplated by this Agreement, including, but not limited to, such
requirements under applicable state securities laws and the Securities
Exchange Act of 1934, as amended, shall have occurred or been filed or
obtained, other than filings relating to the Merger or affecting Newco's
ownership of ONS or any of its subsidiaries or any of their properties.
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(c) Form S-4. The Registration Statement on Form S-4 covering the
registration of the Newco Common Stock, the Newco Series A Preferred Stock,
and the Newco Series B Preferred Stock shall have become effective under the
Securities Act of 1933, as amended, and shall not be the subject of any stop
order or proceedings seeking a stop order, and the Proxy Statement/
Prospectus furnished to ONS stockholders regarding this Agreement, the
Exchange Agreement, and the transactions contemplated hereby and thereby
shall not at the Effective Time of the Merger be subject to any proceedings
commenced or threatened by the Securities and Exchange Commission.
(d) Legal Action. No temporary restraining order, preliminary or
permanent injunction, or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition (an "Injunction")
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by any Governmental Entity seeking any of the foregoing be
pending. In the event an Injunction shall have been issued, each party agrees
to use its reasonable diligent efforts to have the Injunction lifted.
(e) Statutes. No statute, rule, or regulation shall have been enacted by
any Governmental Entity that would make the consummation of the Merger
illegal.
(f) Tax Opinion; ONS Board Determination. Ernst & Young shall have issued
the Tax Opinion and the ONS Board shall not have altered or rescinded its
determination that ONS stockholders do not recognize gain or loss for United
States federal income tax purposes.
(g) Representations and Warranties. Each of the representations and
warranties made by each party herein shall remain true, complete, and
accurate at the Closing Date as if made on and as of the Closing Date.
(h) The Exchange. The Exchange shall have occurred or be occurring
concurrently with the Merger.
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
6.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time of the Merger, whether before or after approval or ratification,
as the case may be, by the stockholders of ONS, Sub, and Newco of this
Agreement, the Merger, the Exchange Agreement, the Exchange, or matters
presented in connection herewith or therewith:
(a) by mutual written consent of the parties; or
(b) by any party if any required approval of the stockholders of ONS,
Sub, or Newco shall not have been obtained by April 30, 1997.
When action is taken to terminate this Agreement pursuant to this Section, it
shall be necessary for such action to be authorized by the Board of Directors of
the party taking such action and for such party then to notify in writing the
other parties of such action.
6.2 Event of Termination. In the event of termination of this Agreement as
provided in Section 6.1 hereof, this Agreement shall forthwith become void and
there shall be no liability or obligation on the part of any party or its
officers or directors to the other parties.
6.3 Expenses. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expense.
6.4 Amendment. This Agreement may be amended by the parties hereto, by action
taken by their respective Boards of Directors, at any time before or after
ratification or approval, as the case may be, by the stockholders of ONS, Sub,
or Newco of this Agreement, the Merger, the Exchange Agreement, the Exchange, or
matters presented in connection herewith or therewith, but after any such
stockholder approval, no amendment shall be made which under Section 251(d) of
the DGCL would require the approval (or further approval) of stockholders
without obtaining such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
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ARTICLE VII
GENERAL PROVISIONS
7.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or mailed by
registered or certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) If to Newco or Sub, to
Orion Newco Services, Inc.
2440 Research Boulevard
Suite 400
Rockville, Maryland 20850
(b) If to ONS, to
Orion Network Systems, Inc.
2440 Research Boulevard
Suite 400
Rockville, Maryland 20850
7.2 Severability. If any term or other provision of this Agreement is
invalid, illegal, or incapable of being enforced by any rule of law or public
policy, all other terms, conditions, and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal, or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated hereby are fulfilled to the extent possible.
7.3 Entire Agreement. This Agreement, including the Exhibits attached hereto
(if any), constitutes the entire agreement among the parties regarding the
subject matter hereof, and supersedes all prior agreements and undertakings,
both written and oral, among the parties or any of them regarding such subject
matter.
7.4 Assignment. This Agreement shall not be assigned by operation of law or
otherwise.
7.5 Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto, and nothing in this Agreement,
except as otherwise expressly provided herein, is intended to or shall confer
upon any other person any right, benefit, or remedy of any nature whatsoever
under or by reason of this Agreement.
7.6 Counterparts. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same Agreement, and shall become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties, it being understood that all parties need
not sign the same counterpart.
7.7 Governing Law. This Agreement shall be governed in all respects,
including validity, interpretation, and effect, by the laws of the State of
Delaware (without reference to conflict of laws rules thereof).
7.8 Agreement. Upon and after the Effective Time of the Merger, an executed
counterpart of this Agreement shall be on file at an office of the Surviving
Corporation, located at 2440 Research Boulevard, Suite 400, Rockville, Maryland
20850, and a copy of this Agreement shall be furnished by the Surviving
Corporation, on request and without cost, to any stockholder of any Constituent
Corporation.
7.9 Certificates of Secretaries. The Certificates of the respective
Secretaries of the parties to be attached hereto are hereby incorporated by
reference and shall be deemed on and part of this Agreement.
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IN WITNESS WHEREOF, Newco, Sub and ONS have caused this Agreement to be
executed, acknowledged, and delivered by their respective officers thereunto
duly authorized, all as of the date first written above.
ORION NEWCO SERVICES, INC.
By: /s/ W. Neil Bauer
----------------------------------------------
Name: W. Neil Bauer
----------------------------------------------
Title: President and Chief Executive Officer
----------------------------------------------
ORION MERGER COMPANY, INC.
By: /s/ W. Neil Bauer
----------------------------------------------
Name: W. Neil Bauer
----------------------------------------------
Title: President and Chief Executive Officer
----------------------------------------------
ORION NETWORK SYSTEMS, INC.
By: /s/ W. Neil Bauer
----------------------------------------------
Name: W. Neil Bauer
----------------------------------------------
Title: President and Chief Executive Officer
----------------------------------------------
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<PAGE>
CERTIFICATE OF THE SECRETARY OF
ORION MERGER COMPANY, INC., A DELAWARE CORPORATION
The undersigned, the Secretary of Orion Merger Company, Inc., a Delaware
corporation ("Sub"), does hereby certify that the foregoing Plan and Agreement
of Merger (the "Agreement") of Sub with and into Orion Network Systems, Inc., a
Delaware corporation ("ONS"), by and among Sub, ONS, and Orion Newco Services,
Inc., a Delaware corporation ("Newco"), after first having been duly adopted and
approved by the Board of Directors of Sub and executed and acknowledged by Sub
in accordance with Section 251 of the General Corporation Law of the State of
Delaware (the "DGCL"), has been duly approved and adopted by the sole
stockholder of Sub entitled to vote thereon in accordance with Section 251 of
the DGCL, as of ___________1997, by written consent in accordance with Section
228 of the DGCL.
This Certificate shall be attached to and deemed on and a part of the
Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the
day of , 1997.
-----------------------------
Signature
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<PAGE>
CERTIFICATE OF THE SECRETARY OF
ORION NETWORK SYSTEMS, INC., A DELAWARE CORPORATION
The undersigned, the Secretary of Orion Network Systems, Inc., a Delaware
corporation ("ONS"), does hereby certify that the foregoing Plan and Agreement
of Merger (the "Agreement") of Orion Merger Company, Inc., a Delaware
corporation ("Sub"), with and into ONS, by and among Sub, ONS, and Orion Newco
Services, Inc., a Delaware corporation ("Newco"), has been duly adopted and
approved by the Board of Directors of ONS on 1997, pursuant to subsection
(g) of Section 251 of the General Corporation Law of the State of Delaware (the
"DGCL"), and that the conditions specified in the first sentence of said
subsection (g) of Section 251 of the DGCL have been satisfied.
This Certificate shall be attached to and deemed on and a part of the
Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the
day of , 1997.
------------------------------
Signature
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<PAGE>
CERTIFICATE OF THE SECRETARY OF
ORION NEWCO SERVICES, INC., A DELAWARE CORPORATION
The undersigned, the Secretary of Orion Newco Services, Inc., a Delaware
corporation ("Newco"), does hereby certify that the foregoing Plan and Agreement
of Merger (the "Agreement") of Orion Merger Company, Inc., a Delaware
corporation ("Sub"), with and into Orion Network Systems, Inc., a Delaware
corporation ("ONS"), by and among Sub, ONS, and Newco, after first having been
duly adopted and approved by the Board of Directors of Newco and executed and
acknowledged by Newco, has been duly approved and adopted by the sole
stockholder of Newco entitled to vote thereon, as of , 1997.
This Certificate shall be attached to and deemed on and a part of the
Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the
day of , 1997.
------------------------------
Signature
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<PAGE>
ATTACHMENT B
SECTION 351 EXCHANGE AGREEMENT AND PLAN OF CONVERSION
AMONG
INTERNATIONAL PRIVATE SATELLITE PARTNERS, L.P.
ORION NETWORK SYSTEMS, INC.,
ORION SATELLITE CORPORATION,
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.
DATED AS OF
JUNE ___ 1996
<PAGE>
SECTION 351 EXCHANGE AGREEMENT AND PLAN OF CONVERSION
THIS SECTION 351 EXCHANGE AGREEMENT AND PLAN OF CONVERSION (this "Agreement")
is entered into as of June 1996, between and among International Private
Satellite Partners, L.P., a Delaware limited partnership ("Orion Atlantic");
Orion Network Systems, Inc., a Delaware corporation ("ONS"); Orion Satellite
Corporation, a Delaware corporation ("OrionSat"); and each of the following
entities that executes and delivers a signature page hereto on or before July
12, 1996: British Aerospace Communications, Inc., a Delaware corporation
("BAe"), COM DEV Satellite Communications Limited, a Canadian corporation ("COM
DEV"), Kingston Communications International Limited, a company incorporated
under the laws of England ("Kingston"), Lockheed Martin Commercial Launch
Services, Inc., a Delaware corporation ("Lockheed Martin"), MCN Sat US, Inc., a
Delaware corporation ("MCN Sat"), and Trans Atlantic Satellite, Inc., a Delaware
corporation ("TA Sat") (collectively, the "Exchanging Partners").
WHEREAS, ONS and the Exchanging Partners (collectively, the "Limited
Partners") collectively own limited partnership interests in Orion Atlantic;
WHEREAS, OrionSat is the sole general partner of Orion Atlantic;
WHEREAS, ONS and the Exchanging Partners desire to (i) form a new Delaware
corporation to be named Orion Newco Services, Inc. ("Newco") substantially
identical in all material respects (including with respect to certificate of
incorporation, bylaws, capital structure, and similar matters) to ONS in the
Newco Formation (as defined below); (ii) have a newly created subsidiary of
Newco merge into ONS in a transaction in which all capital stock of ONS is
exchanged for equivalent capital stock (common or preferred, as applicable, with
the same relative rights and preferences) of Newco, and in which ONS becomes a
wholly owned subsidiary of Newco in the Merger (as defined below); and (iii)
have the Exchanging Partners transfer their limited partnership interests in
Orion Atlantic to Newco in exchange for shares of a newly created class of
Series C 6% Cumulative Convertible Redeemable Preferred Stock of Newco (the
"Newco Preferred Stock") on the terms and conditions set forth herein in the
Exchange (as defined below), all pursuant to Section 351 of the Internal Revenue
Code of 1986, as amended (the "Code"); and
WHEREAS, in connection with the transactions described in the prior
paragraph, the Credit Facility Refinancing, Bond Offering, Bank Agreement
Termination, Capacity Agreement Termination and Convertible Subordinated
Debenture Offering (as defined below) will be pursued. The transactions
contemplated by this Agreement are believed to be necessary to accomplish the
Credit Facility Refinancing, Bond Offering, Bank Agreement Termination, Capacity
Agreement Termination and Convertible Subordinated Debenture Offering, and all
parties hereto, including the Exchanging Partners, which will be the
stockholders of Newco immediately after completion of the Exchange, believe that
they will benefit substantially from the Credit Facility Refinancing, Bond
Offering, Bank Agreement Termination, Capacity Agreement Termination and
Convertible Subordinated Debenture Offering.
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants
and agreements hereinafter set forth, the parties hereto hereby agree as
follows:
1. DEFINITIONS
For all purposes of this Agreement, certain capitalized terms specified in
Exhibit A shall have the meanings set forth in that Exhibit A, except as
otherwise expressly provided.
2. NEWCO FORMATION
2.1 FORMATION OF NEW CORPORATION
The parties hereto shall form a new Delaware corporation to be named Orion
Newco Services, Inc. which is substantially identical in all material respects
to ONS (the "Newco Formation"). In particular, Newco shall have a certificate of
incorporation and bylaws substantially identical in all material respects to
those of ONS (modified to reflect the different name and Newco being a newly
formed corporation).
B-2
<PAGE>
Pursuant to the certificate of incorporation of Newco, the board of directors of
Newco shall duly adopt, authorize, execute and file Certificates of
Designations, Rights and Preferences of Series A 8% Cumulative Redeemable
Convertible Preferred Stock of Newco substantially identical in all material
respects to the ONS Series A Preferred Stock (as defined below) and of Series B
8% Cumulative Redeemable Convertible Preferred Stock of Newco substantially
identical in all material respects to the ONS Series B Preferred Stock (as
defined below).
2.2 INITIAL OWNERSHIP OF NEWCO
ONS shall be the initial stockholder of Newco, and shall own one share of
Newco common stock.
2.3 REPLICATION OF ONS MANAGEMENT
ONS shall take the steps necessary to make the management of Newco identical
to the management of ONS, including with respect to directors and officers.
2.4 NEWCO FORMATION DOCUMENTS
ONS shall cause all necessary documents (the "Newco Formation Documents") to
effect the Newco Formation and other matters referred to in Sections 2.1, 2.2
and 2.3 to be prepared and circulated to the Exchanging Partners for review and
comment. The Exchanging Partners agree to submit any comments on the Newco
Formation Documents, consistent with the requirement that Newco be substantially
identical in all material respects to ONS, within 10 Business Days after all
Exchanging Partners have received the initial drafts of such documents and
within five Business Days after receipt of subsequent drafts. ONS shall cause
final drafts of the Newco Formation Documents to be prepared, consistent with
the requirement that Newco be substantially identical in all material respects
to ONS, and circulated to the Exchanging Partners. The Exchanging Partners shall
have a period of five Business Days after all Exchanging Partners have received
such final drafts to raise any objections to the contents of such documents,
consistent with the requirement that Newco be substantially identical in all
material respects to ONS, and the parties shall negotiate in good faith to
resolve any such objections. The resolution of any such objections shall be
reflected in the Newco Formation Documents, and such documents shall be
finalized and implemented. ONS shall cause the Newco Formation Documents, as
finalized and implemented, to be circulated to the Exchanging Partners. If the
finalized Newco Formation Documents are not consistent with the requirement that
Newco be substantially identical in all material respects to ONS and any
discrepancies are not reasonably acceptable to the Exchanging Partners, each of
the Exchanging Partners shall have the right to terminate this Agreement
pursuant to the final paragraph of Section 13.1. If all of the Exchanging
Partners shall not have terminated this Agreement pursuant to the final
paragraph of Section 13.1 within a period of five Business Days after all
Exchanging partners have received such finalized and implemented Newco Formation
Documents, the "Newco Finalization Date" shall be deemed to have occurred on the
last day of such period.
3. EXCHANGE OF INTERESTS
3.1 NEWCO PREFERRED STOCK
Newco shall duly adopt, authorize, execute and file the Certificate of
Designations, Rights and Preferences of Series C 6% Cumulative Redeemable
Convertible Preferred Stock establishing the terms and relative rights and
preferences of such series of Newco Preferred Stock in the form set forth as
Exhibit B to this Agreement (the "Certificate of Designations") and authorize
the issuance and sale to the Exchanging Partners of the aggregate number of
shares of Newco Preferred Stock to be issued to the Exchanging Partners
hereunder (and Newco shall authorize the issuance and sale of such additional
shares of Newco Preferred Stock in an amount equal to the aggregate of the
Adjustment Amounts referred to in Section 3.2(c) hereof). The Certificate of
Designations shall be in full force and effect under the laws of the State of
Delaware as of the Closing Date.
B-3
<PAGE>
3.2 TERMS OF EXCHANGE
On the basis of the representations, warranties and agreements contained
herein, and subject to the terms and conditions hereof, each of the Exchanging
Partners hereby agrees to transfer to Newco at the Closing all of its limited
partnership interests in Orion Atlantic (individually, an "LP Interest" and
collectively the "LP Interests") and other rights relating thereto as specified
below ("Other LP Rights") in exchange for shares of Newco Preferred Stock
(collectively, the "Exchange"), as follows:
(a) Transfers by the Exchanging Partners to Newco.
(i) If BAe is an Exchanging Partner, BAe agrees to transfer to Newco
at the Closing its 25.00% LP Interest; all of its rights and obligations
under the Partnership Agreement, including all of its rights to receive
distributions and allocations thereunder, and all other rights it may
have as a limited partner of Orion Atlantic under applicable law; all of
its rights and obligations under the Refund Agreement, including all of
its rights to receive refunds thereunder; all of its rights and
obligations under the Consent and Agreement, including all of its rights
to transfer LP Interests thereunder; all of its rights and obligations
under the Preferred Bidders Agreement; all of its rights under the Option
Agreement; all of its rights under the Subscription Agreement; and all of
its rights and obligations under the Agreement of Principles
(collectively, the "BAe Exchange Assets").
(ii) If COM DEV is an Exchanging Partner, COM DEV agrees to transfer
to Newco at the Closing its 4.17% LP Interest; all of its rights and
obligations under the Partnership Agreement, including all of its rights
to receive distributions and allocations thereunder, and all other rights
it may have as a limited partner of Orion Atlantic under applicable law;
all of its rights and obligations under the Refund Agreement, including
all of its rights to receive refunds thereunder; all of its rights and
obligations under the PPU Agreement, including all of its rights to
receive repayment of amounts advanced thereunder and interest accrued on
such advances; all of its rights and obligations under the Preferred
Bidders Agreement; all of its rights under the Option Agreement; all of
its rights under the Subscription Agreement; and all of its rights and
obligations under the Agreement of Principles (collectively, the "COM DEV
Exchange Assets").
(iii) If Kingston is an Exchanging Partner, Kingston agrees to
transfer to Newco at the Closing its 4.17% LP Interest; all of its rights
and obligations under the Partnership Agreement, including all of its
rights to receive distributions and allocations thereunder, and all other
rights it may have as a limited partner of Orion Atlantic under
applicable law; all of its rights and obligations under the PPU
Agreement, including all of its rights to receive repayment of amounts
advanced thereunder and interest accrued on such advances, other than
interest paid to Kingston under Section 3.2(d); all of its rights and
obligations under the Preferred Bidders Agreement; all of its rights
under the Option Agreement; all of its rights under the Subscription
Agreement; and all of its rights and obligations under the Agreement of
Principles (collectively, the "Kingston Exchange Assets"). The Kingston
Sales Representative Agreements shall remain in full force without any
modifications being effected by this Agreement, and Orion Atlantic,
OrionSat and Kingston agree that even after the Closing and the transfer
of the Kingston LP Interest to Newco, Kingston shall continue to be
treated as if it were a limited partner of Orion Atlantic for purposes of
payment of the Override Commissions under the Kingston Sales
Representative Agreements only.
(iv) If Lockheed Martin is an Exchanging Partner, Lockheed Martin
agrees to transfer to Newco at the Closing its 8.33% LP Interest; all of
its rights and obligations under the Partnership Agreement, including all
of its rights to receive distributions and allocations thereunder, and
all other rights it may have as a limited partner of Orion Atlantic under
applicable law; all of its rights and obligations under the Refund
Agreement, including all of its rights to receive refunds thereunder; all
of its rights and obligations under the PPU Agreement, including all of
its rights to receive repayment of amounts advanced thereunder and
interest accrued on such advances; all of its rights and obligations
under the Preferred Bidders Agreement; all of its
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rights under the Option Agreement; all of its rights under the
Subscription Agreement; and all of its rights and obligations under the
Agreement of Principles (collectively, the "Lockheed Martin Exchange
Assets").
(v) If MCN Sat is an Exchanging Partner, MCN Sat agrees to transfer
(or cause to be transferred) to Newco at the Closing its 8.33% LP
Interest; all of its rights and obligations under the Partnership
Agreement, including all of its rights to receive distributions and
allocations thereunder, and all other rights it may have as a limited
partner of Orion Atlantic under applicable law; all of the rights and
obligations of its Affiliate, MCN Sat Service S.A., under the Refund
Agreement, including all of such Affiliate|Als rights to receive refunds
thereunder; all of its rights and obligations under the PPU Agreement,
including all of its rights to receive repayment of amounts advanced
thereunder and interest accrued on such advances; all of its rights and
obligations under the Preferred Bidders Agreement; all of its rights
under the Option Agreement; all of its rights under the Subscription
Agreement; and all of its rights and obligations under the Agreement of
Principles (collectively, the "MCN Sat Exchange Assets"). (All references
herein to rights or obligations of MCN Sat shall include those which may
still be retained by MMB, the transferor of MCN Sat|Als LP Interest.) The
MCN Sat Sales Representative Agreements shall remain in full force
without any modifications being effected by this Agreement, and Orion
Atlantic, OrionSat and MCN Sat agree that even after the Closing and the
transfer of the MCN Sat LP Interest to Newco, MCN Sat shall continue to
be treated as if it were a limited partner of Orion Atlantic for purposes
of payment of the Override Commissions under the MCN Sat Sales
Representative Agreements only.
(vi) If TA Sat is an Exchanging Partner, TA Sat shall transfer to
Newco at the Closing its 8.33% LP Interest; all of its rights and
obligations under the Partnership Agreement, including all of its rights
to receive distributions and allocations thereunder, and all other rights
it may have as a limited partner of Orion Atlantic under applicable law;
all of its rights and obligations under the Refund Agreement, including
all of its rights to receive refunds thereunder; all of its rights and
obligations under the Preferred Bidders Agreement; all of its rights
under the Option Agreement; all of its rights under the Subscription
Agreement; and all of its rights and obligations under the Agreement of
Principles (collectively, the "TA Sat Exchange Assets").
(b) Transfers by Newco to the Exchanging Partners.
(i) If BAe is an Exchanging Partner, Newco shall transfer to BAe at
the Closing, in exchange for the BAe Exchange Assets, 43,953 shares of
Newco Preferred Stock, plus its respective Adjustment Amount, calculated
as set forth in Section 3.2(c).
(ii) If COM DEV is an Exchanging Partner, Newco shall transfer to COM
DEV at the Closing, in exchange for the COM DEV Exchange Assets, 8,302
shares of Newco Preferred Stock, plus its respective Adjustment Amount,
calculated as set forth in Section 3.2(c).
(iii) If Kingston is an Exchanging Partner, Newco shall transfer to
Kingston at the Closing, in exchange for the Kingston Exchange Assets,
10,222 shares of Newco Preferred Stock, plus its respective Adjustment
Amount, calculated as set forth in Section 3.2(c) and PPU Interest Shares
calculated as set forth in Section 3.2(d).
(iv) If Lockheed Martin is an Exchanging Partner, Newco shall
transfer to Lockheed Martin at the Closing, in exchange for the Lockheed
Martin Exchange Assets, 17,143 shares of Newco Preferred Stock, plus its
respective Adjustment Amount, calculated as set forth in Section 3.2(c).
(v) If MCN Sat is an Exchanging Partner, Newco shall transfer to MCN
Sat at the Closing, in exchange for the MCN Sat Exchange Assets, 15,746
shares of Newco Preferred Stock, plus its respective Adjustment Amount,
calculated as set forth in Section 3.2(c).
(vi) If TA Sat is an Exchanging Partner, Newco shall transfer to TA
Sat at the Closing, in exchange for the TA Sat Exchange Assets, 12,426
shares of Newco Preferred Stock, plus its respective Adjustment Amount,
calculated as set forth in Section 3.2(c).
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The number of shares of Newco Preferred Stock specified in this Section
3.2(b), in Sections 3.2(c) and 3.2(d) shall be adjusted proportionately to
reflect any subdivision, stock split, stock dividend, recapitalization,
combination or reverse stock split of ONS capital stock or similar transaction
by ONS between the date hereof and the Closing Date.
(c) Adjustment Amounts.
The numbers of shares of Newco Preferred Stock to be issued to the respective
Exchanging Partners as listed in Section 3.2(b) shall be increased by the
Adjustment Amount for such Exchanging Partner, calculated as set forth below.
The "Adjustment Amount" for an Exchanging Partner shall equal (i) the sum of (A)
the amounts paid by such Exchanging Partner for obligations (or an Affiliate of
such Exchanging Partner) pursuant to the Capacity Agreement (as defined below)
and which is subject to being refunded under the Refund Agreement, and by such
Exchanging Partner pursuant to the Contingent Capacity Agreement (as defined
below), in each case to which such Exchanging Partner (or an Affiliate of such
Exchanging Partner) is a party, during the period from July 1, 1996 through the
Closing Date (the "Adjustment Period"), plus (B) the amount of interest accrued
with respect to funds advanced by such Exchanging Partner (or an Affiliate of
such Exchanging Partner) other than Kingston (or an Affiliate of Kingston)
pursuant to the PPU Agreement during the Adjustment Period, minus (ii) the
product of the number of days in the Adjustment Period multiplied by the Tax
Adjustment Factor for such Exchanging Partner, divided by (iii) $1,000. To the
extent that amounts are due or payable from an Exchanging Partner or Affiliate
under its Capacity Agreement or Contingent Capacity Agreement during the
Adjustment Period, but are not actually paid prior to the Closing Date, such
amounts shall not be included in clause (i)(A) of this paragraph. Similarly, to
the extent that amounts are paid by an Exchanging Partner or Affiliate under its
Capacity Agreement or Contingent Capacity Agreement during the Adjustment Period
for obligations of such Exchanging Partner arising after the Closing, such
amount shall be refunded to the Exchanging Partner at the Closing. Nothing in
this paragraph shall affect the obligations of any Exchanging Partner to make
any payment under its Capacity Agreement or Contingent Capacity Agreement during
the Adjustment Period or otherwise, or affect the amount of interest accruing
under the PPU Agreement.
(d) Kingston Investment in PPU Interest Shares.
Notwithstanding the exchange of Kingston Exchange Assets pursuant to Sections
3.2(a)(iii) and 3.2(b)(iii), at the Closing Orion Atlantic shall pay to Kingston
in cash the total interest accrued until Closing with respect to funds advanced
by Kingston pursuant to the PPU Agreement (the "Total Accrued PPU Interest").
Kingston shall at the Closing invest an amount equal to the Total Accrued PPU
Interest in shares of Newco Preferred Stock (the "PPU Interest Shares"). Since
the amount to be paid to Kingston under this paragraph is the same as the amount
to be invested by Kingston, Orion Atlantic shall pay the Total Accrued PPU
Interest directly to Newco at the Closing. The total number of shares of Newco
Preferred Stock to be issued to Kingston for its investment under this paragraph
shall equal (i) the Total Accrued PPU Interest, minus (ii) the product of the
number of days in the Adjustment Period multiplied by the Tax Adjustment Factor
for such Exchanging Partner (to the extent Tax Adjustment Factor was not fully
applied in (c) above), divided by (iii) $1,000.
3.3 ALLOCATION OF NEWCO PREFERRED STOCK
The Newco Preferred Stock to be issued to each Exchanging Partner at the
Closing shall be allocated among such Exchanging Partner|Als Exchange Assets as
follows: first, to the rights under the PPU Agreement, including rights to
receive repayment of amounts advanced thereunder and interest accrued on such
advances, and the rights under the Refund Agreement, including rights to receive
refunds thereunder, until such Exchanging Partner has received Newco Preferred
Stock with a fair market value equal to such rights; and second, to such
Exchanging Partner|Als LP Interest and other Exchange Assets.
4. MERGER
4.1 FORMATION OF SUBSIDIARY OF NEWCO
Newco shall form a new Delaware corporation to be named Orion Merger Company,
Inc. ("Merger Sub"), and Newco shall be the sole stockholder of Merger Sub.
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4.2 TERMS OF MERGER
On the basis of the representations, warranties and agreements contained in a
merger agreement, and subject to the terms and conditions hereof, at the Closing
Merger Sub shall be merged into ONS pursuant to the Delaware General Corporation
Law in a merger in which ONS shall be the surviving company and all of the
assets, rights, property, liabilities and obligations of Merger Sub and ONS
shall be vested in ONS as the surviving company (the "Merger"). Pursuant to the
Merger, holders of all of the capital stock of ONS shall receive, as
consideration for their capital stock of ONS, an identical number of shares of
substantially identical capital stock (common or preferred, as applicable, with
the same relative rights and preferences) of Newco.
4.3 TRANSFER OF CERTAIN CONTRACTS
In connection with the Merger, all contracts and agreements relating to
capital stock of ONS in effect at the Closing shall be replaced with contracts
and agreements substantially equivalent in all material respects relating to the
capital stock of Newco, including without limitation, all options, warrants and
other rights to purchase capital stock and all contracts relating to
registration rights, voting of shares, transfer of shares and similar matters.
4.4 MERGER DOCUMENTS
ONS shall cause all necessary documents (the "Merger Documents") to effect
the Merger and other matters referred to in Section 4 to be prepared and
circulated to the Exchanging Partners for review and comment. The Exchanging
Partners agree to submit any comments on the Merger Documents within 10 Business
Days after receipt of the initial drafts of such documents and within five
Business Days after receipt of subsequent drafts. ONS shall cause final drafts
of the Merger Documents to be prepared and circulated to the Exchanging
Partners. The Exchanging Partners shall have a period of five Business Days
after receipt of such final drafts to raise any objections to the contents of
such documents, and the parties shall negotiate in good faith to resolve any
such objections. The resolution of any such objections shall be reflected in the
Merger Documents, and such documents shall be put in final form for execution at
the Closing.
5. ADDITIONAL UNDERTAKINGS AND COVENANTS
ONS and OrionSat, jointly and severally on the one hand, and the Exchanging
Partners, severally and not jointly on the other hand, hereby covenant and agree
with each other as follows:
5.1 CONSENTS AND APPROVALS
ONS and OrionSat shall take all measures reasonably necessary or advisable to
secure such consents, authorizations and approvals of governmental authorities
and of private persons or entities with respect to the transactions contemplated
by this Agreement, and to the performance of all other obligations of such
parties hereunder, as may be required by any applicable statute or regulation of
the United States or any country, state or other jurisdiction or by any
agreement of any kind whatsoever to which any of them is a party or by which any
of them is bound and which are set forth on Schedule 7.3. Notwithstanding
Sections 6.4 and 7.3, subsequent to the execution of this Agreement and prior to
the Closing Date, ONS, OrionSat and the Exchanging Partners shall take all
measures reasonably necessary or advisable to secure such consents,
authorizations and approvals of governmental authorities and of private persons
or entities with respect to the transactions contemplated by this Agreement, and
to the performance of all other obligations of such parties hereunder, as may be
required by any applicable statute or regulation of the United States or any
country, state or other jurisdiction or by any agreement of any kind whatsoever
to which any of them is a party or by which any of them is bound. ONS, OrionSat
and the Exchanging Partners shall (a) cooperate in the filing of all forms,
notifications, reports and information, if any, required or reasonably deemed
advisable pursuant to applicable statutes, rules, regulations or orders of any
governmental or supragovernmental authority in connection with the transactions
contemplated by this Agreement and (b) use their respective good faith efforts
to cause any
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applicable waiting periods thereunder to expire and any objections to the
transactions contemplated hereby to be withdrawn before the Closing.
5.2 APPROVAL BY STOCKHOLDERS OF ONS
In addition to the consents and approvals referred to in Section 5.1 above,
ONS shall take all measures reasonably necessary or advisable to secure all
required consents of the stockholders of ONS (including the consent of holders
of ONS|Al preferred stock) to the Merger, the Exchange and any related
transactions requiring stockholder consent (collectively, with any required
consent of ONS|Al preferred stockholders, the "ONS Stockholder Consent"). The
parties acknowledge that in order to obtain the ONS Stockholder Consent, ONS
will need to file a merger proxy statement with the United States Securities and
Exchange Commission ("SEC"), revise the merger proxy statement in response to
comments from the SEC, obtain approval of the SEC of the final version of the
merger proxy statement before it is mailed to ONS stockholders, call a meeting
of stockholders of ONS for approximately 30 days after such merger proxy
statement is mailed to ONS stockholders and obtain the requisite stockholder
vote at the meeting (such merger proxy statement, including all amendments
thereto is referred to herein as the "Merger Proxy Statement"). The Exchanging
Partners shall cooperate with ONS in preparing and filing the Merger Proxy
Statement with the SEC and in obtaining SEC clearance of the Merger Proxy
Statement, including supplying information on each Exchanging Partner which is
reasonably necessary or advisable for ONS to include in the Merger Proxy
Statement or to be provided to any government agency or authority pursuant to
applicable statutes, rules, regulations or orders of any governmental or
supragovernmental authority in connection with the Merger and other transactions
contemplated by this Agreement; provided, however, that none of the Exchanging
Partners shall be required to supply any confidential or proprietary
information. ONS shall use its good faith efforts to cause the ONS Stockholder
Consent to be obtained expeditiously and any objections of ONS Stockholders to
the Merger and other transactions contemplated hereby to be withdrawn before the
Closing.
5.3 REFINANCING OF CREDIT FACILITY; CANCELLATION OF CAPACITY AGREEMENTS
It is presently contemplated that Newco, Orion Atlantic, ONS and OrionSat
will, as of the Closing Date, complete a refinancing (the "Credit Facility
Refinancing") of the indebtedness of Orion Atlantic outstanding under the Credit
Agreement (the "Credit Facility") dated December 6, 1991 among Orion Atlantic,
the Banks named therein (the "Lenders") and The Chase Manhattan Bank (National
Association), as Agent ("Chase") using proceeds of an underwritten offering of
notes or debentures of Newco to the public (a "Bond Offering"). The Credit
Facility Refinancing is to effect the Capacity Agreement Termination and release
of the Capacity Guarantees, as discussed (and defined) below in this Section
5.3. ONS shall use its good faith efforts to cause Newco to complete a Bond
Offering on reasonable commercial terms. Notwithstanding the foregoing, the
parties acknowledge and agree that the terms of a Bond Offering are likely to be
determined in large part by the requirements of prospective investors in that
Bond Offering, and that Newco and ONS reserve the right not to proceed with a
Bond Offering if they determine that such Bond Offering would not be in the best
interest of the stockholders of Newco or the stockholders of ONS (who would
become stockholders of Newco in the Merger) generally, including the entities
who would be becoming stockholders of Newco pursuant to the Exchange). ONS
agrees to inform the Exchanging Partners periodically and in a timely fashion of
the progress of the Bond Offering, including the terms being proposed by the
underwriters thereof, and the Exchanging Partners may advise ONS of their views
regarding the terms of the Bond Offering. Newco is to use the proceeds of the
Bond Offering first for the Credit Facility Refinancing (including costs of such
transaction and the costs of terminating the interest rate protection agreements
entered into in connection with the Credit Facility), and if any proceeds
remain, then for financing of a second satellite with coverage of the Atlantic
Ocean region and Europe ("Orion 2") or for working capital.
In connection with the Credit Facility Refinancing, Newco, Orion Atlantic,
ONS, OrionSat and the Exchanging Partners shall take all measures reasonably
necessary or advisable to cause the termination (the "Bank Agreement
Termination"), concurrently with the completion of the Credit Facility
Refinancing, of all agreements between or among the Lenders and Chase, on the
one hand, and one or more of Newco, Orion Atlantic, OrionSat, ONS and the
Exchanging Partners and/or their affiliates on the other
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hand, relating to the Credit Facility or the security or credit support thereof,
including without limitation, in the case of each Exchanging Partner and/or
their affiliates, a Consent and Agreement, an Assignment and Security Agreement
and a Guarantee Agreement (the "Credit Facility Documents"). However, the
previous sentence will not oblige the Exchanging Partners to incur any liability
in connection with the Bank Agreement Termination.
In connection with the Credit Facility Refinancing and the Bank Agreement
Termination, Newco, Orion Atlantic, ONS, OrionSat and the Exchanging Partners
shall take all measures reasonably necessary or advisable to cause the
termination (the "Capacity Agreement Termination"), concurrently with the
completion of the Credit Facility Refinancing and the Bank Agreement
Termination, of all obligations under the Communications Satellite Capacity
Agreements and the Contingent Communications Satellite Capacity Agreements
between Orion Atlantic and each of the Exchanging Partners and/or their
affiliates (the "Capacity Agreements" and the "Contingent Capacity Agreements,"
respectively) arising from and after the Capacity Agreement Termination, and all
guarantees or other credit support of such obligations ("Capacity Guarantees");
provided, however, that (i) the Capacity Agreements of Kingston and MCN Sat
Service S.A. (but not the associated Capacity Guarantees) shall remain in full
force and effect, (ii) the Kingston Capacity Agreement shall be deemed amended,
effective as of the Closing (and Kingston and Orion Atlantic shall execute and
deliver such written documents evidencing such amendment as either may
reasonably request), to reduce to 17 MHz the amount of capacity subject to the
Kingston Capacity Agreement (of which 8 MHz shall be the capacity presently used
by Kingston under the Kingston Capacity Agreement and of which 9 MHz shall be
the capacity presently used by Kingston under one of the BAe Capacity
Agreements), with an option (subject to availability) to increase the amount of
capacity subject to the Kingston Capacity Agreement for use by Kingston in
providing its network service products, but not for resale, up to a maximum of
27 MHz at the same rate and on the same terms and conditions as set forth in the
Kingston Capacity Agreement, but (to the extent easily effected technically)
without any obligation to take such capacity in 9 MHz units or any other
pre-determined denomination, and (iii) the MCN Sat Service S.A. Capacity
Agreement shall be deemed amended, effective as of the Closing (and MCN Sat
Service S.A. and Orion Atlantic shall execute and deliver such written documents
evidencing such amendment as either may reasonably request), to reduce to 18 MHz
the amount of capacity subject thereto.
5.4 AMENDMENT AND RESTATEMENT OF PARTNERSHIP AGREEMENT
The Partnership Agreement shall be amended and restated as of the Closing
Date to read in its entirety as set forth in Exhibit C (the "Third Amended and
Restated Partnership Agreement"), and each of ONS, OrionSat and the Exchanging
Partners agree to execute, and deliver at the Closing, counterparts to the Third
Amended and Restated Partnership Agreement.
5.5 REGISTRATION RIGHTS
Concurrently with the Closing, Newco and each of the Exchanging Partners
shall execute and deliver a Registration Rights Agreement in the form set forth
as Exhibit D (the "Registrations Rights Agreement").
5.6 ACCESS; INVESTIGATIONS BY THE EXCHANGING PARTNERS
ONS shall, through the Closing Date, provide to representatives of the
Exchanging Partners reasonable access to the offices, books, agreements and
records of ONS and its Subsidiaries and Newco, and furnish to representatives of
the Exchanging Partners such financial and operational data and other
information with respect to the business and assets of ONS and its Subsidiaries
and Newco as the Exchanging Partners may reasonably request. The Exchanging
Partners agree at all times through the Closing Date to use reasonable efforts,
at least as stringent as those employed by them with respect to their own
confidential information, (a) to keep confidential all such information that is
identified as being of a confidential nature, (b) not to use such confidential
information on their own behalf, except in connection with the transactions
contemplated hereby, or on behalf of any other person, firm or entity, and (c)
not to disclose such confidential information to any third party (other than to
the Exchanging
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Partners' various counsel, accountants and other consultants in connection with
the transactions contemplated hereby) without ONS|Al advance written
authorization; provided, however, that the Exchanging Partners shall have no
such obligations with respect to confidential information that (i) was lawfully
obtained by them not subject to restrictions of confidentiality; (ii) is a
matter of public knowledge; or (iii) has been or is hereafter publicly disclosed
other than by or through the Exchanging Partners. In the event this Agreement is
terminated, the Exchanging Partners will return to ONS all documents and other
materials furnished to any one or more of the Exchanging Partners relating to
the transactions contemplated hereunder, whether obtained before or after the
execution of this Agreement. In the event of a breach or threatened breach by
the Exchanging Partners of the provisions of this Section 5.6 ONS shall be
entitled to an injunction restraining such Exchanging Partners from disclosing,
in whole or in part, such information. The Exchanging Partners investigation of
the financial and operating data, assets, real property and other information
with respect to the business and assets of ONS and its Subsidiaries and Newco
shall in no way affect the obligations of ONS with respect to the agreements,
representations, warranties, covenants and indemnification provisions set forth
in this Agreement.
5.7 WAIVER OF RIGHT OF FIRST REFUSAL UNDER THE PARTNERSHIP AGREEMENT
Pursuant to Section 13.09(b) of the Partnership Agreement, ONS, OrionSat and
each of the Exchanging Partners hereby amend the Partnership Agreement, as of
the date hereof, to the extent necessary to cause Section 10.04 thereof, which
section contains the partners|Al right of first refusal with respect to the sale
of limited partnership interests of Orion Atlantic, not to apply to the Exchange
or any of the transactions referred to in this Agreement, and hereby waives any
rights it may have under Section 10.04 of the Partnership Agreement, with
respect to the Exchange or any of the transactions referred to in this
Agreement.
5.8 CONVERTIBLE SUBORDINATED DEBENTURES
It is presently contemplated that Newco will, as of the Closing Date,
complete an offering (the "Convertible Subordinated Debenture Offering") of
approximately $100 million of convertible subordinated debentures of Newco
("Convertible Subordinated Debentures"). ONS shall use its good faith efforts to
cause Newco to complete the Convertible Subordinated Debenture Offering.
Notwithstanding the foregoing, the parties acknowledge and agree that the terms
of a Convertible Subordinated Debenture Offering are likely to be determined in
large part by the requirements of prospective investors in Convertible
Subordinated Debenture Offering, and that Newco and ONS reserve the right not to
proceed with a Convertible Subordinated Debenture Offering if they determine
that such Convertible Subordinated Debenture Offering would not be in the best
interest of the stockholders of Newco or the stockholders of ONS (who would
become stockholders of Newco in the Merger) generally, including the entities
who would be becoming stockholders of Newco pursuant to the Exchange). ONS
agrees to inform the Exchanging Partners periodically and in a timely fashion of
the progress of the Convertible Subordinated Debenture Offering, including the
terms being proposed by the underwriters or placement agents thereof, and the
Exchanging Partners may advise ONS of their views regarding the terms of the
Convertible Subordinated Debenture Offering. ONS intends for Newco to use
BAe|Als $50 million expected payment for Convertible Subordinated Debentures and
an additional $10 million of the proceeds of the offering for the financing of
Orion 2. While not intended to be legally binding, BAe hereby confirms that it
intends to purchase from Newco $50 million of Convertible Subordinated
Debentures on substantially the same terms as the remainder of the offering of
the Convertible Subordinated Debentures.
5.9 AGREEMENT REGARDING TRANSFER
Concurrent with the Closing, each Exchanging Partner will enter into an
agreement, in the form set forth as Exhibit E hereto, regarding the transfer of
the shares of Newco Common Stock issuable upon conversion of the Newco Preferred
Stock.
5.10 RELEASE OF CLAIMS
Concurrently with the Closing, each of the parties hereto agrees to release
and forever discharge each of the other parties hereto and each of their
Affiliates from and after the Closing, from and against any and all rights,
causes of action, claims, suits, obligations, liabilities, and demands
whatsoever (other
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than those arising from fraud or misrepresentation), in law or in equity,
whether presently known or unknown, to the fullest extent permitted by law by
reason of, related to, or arising out of any one or more of the agreements
referred to in Section 3.2 hereof (other than this Agreement).
5.11 LEGEND, REMOVAL
Each certificate or instrument representing Newco Preferred Stock (or Newco
Common Stock received upon the conversion thereof or as dividends thereon) shall
be imprinted with a legend to the effect that the securities have not been
registered under the Securities Act and may not be transferred or sold except
pursuant to an effective registration under the Securities Act and applicable
state securities laws or an available exemption from such registration. In
connection with the transfer of any Newco Preferred Stock (or Newco Common Stock
received upon the conversion thereof or as dividends thereon) other than
pursuant to an effective registration statement filed by ONS, the holder thereof
shall deliver written notice to Newco describing in reasonable detail the
transfer or proposed transfer, together with an opinion of counsel which (to
Newco's reasonable satisfaction) is knowledgeable in securities law matters to
the effect that such transfer of such securities may be effected without
registration of such securities under the Securities Act. Upon issuance of such
opinion (to the extent it relates to Newco Preferred Stock) or acceptance of
such opinion by Newco|Als transfer agent (to the extent it relates to Newco
Common Stock), Newco shall promptly upon such contemplated transfer deliver or
caused to be delivered new certificates for such securities which do not bear
the Securities Act legend referred to above in this paragraph. If any Newco
Preferred Stock (or Newco Common Stock received upon the conversion thereof or
as dividends thereon) becomes eligible for sale pursuant to Rule 144(k), Newco
shall, upon the request of the holder of such securities (together with the
opinion referred to above in this paragraph, which shall state that the
provisions of Rule 144(k) have been complied with), remove the legend referred
to above in this paragraph from the certificates for such securities.
5.12 TAX-FREE STATUS
No party hereto shall, nor shall any party hereto permit any of its
affiliates to, take any action, or omit to take any required action, that would,
or would be reasonably likely to, adversely affect the qualification of the
Merger and the Exchange, taken together, as a tax-free transaction described in
Code Section 351(a). Each party hereto shall, for all tax purposes, treat the
Merger and the Exchange, taken together, as a tax-free transaction described in
Code Section 351(a).
6. REPRESENTATIONS AND WARRANTIES OF EXCHANGING PARTNERS
Each of the Exchanging Partners hereby severally represents and warrants to
ONS as follows (provided that the representations and warranties in Section 6.8
are made solely by Lockheed Martin):
6.1 TITLE TO LP INTERESTS; OTHER LP RIGHTS
Such Exchanging Partner is, and on the Closing Date will be, the lawful owner
of the LP Interest of such Exchanging Partner, and such Exchanging Partner (or
such Exchanging Partner|Als Affiliate, as the case may be), is and on the
Closing Date will be, the lawful owner of such Exchanging Partner|Als (or
Affiliate|Als) Other LP Rights, as listed in Section 3.2. Except as set forth
below, such Exchanging Partner has, and on the Closing Date such Exchanging
Partner will have, good, valid and marketable title, free and clear of all
Encumbrances, to the LP Interest of such Exchanging Partner, and such Exchanging
Partner (or such Exchanging Partner|Als Affiliate, as the case may be), has, and
on the Closing Date will have, good, valid and marketable title, free and clear
of all Encumbrances, to such Exchanging Partner|Als (or Affiliate|Als) Other LP
Rights, as listed in Section 3.2, in each case with full right and lawful
authority to transfer the LP Interest and Other LP Rights to Newco pursuant to
this Agreement. Notwithstanding the foregoing, the parties acknowledge that the
LP Interests and certain of the Other LP Rights are pledged to the Lenders under
the Credit Facility Documentation, and that the LP Interests are pledged to
Orion Atlantic under the respective Contingent Capacity Agreements.
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6.2 ORGANIZATION AND STANDING; CAPACITY
Such Exchanging Partner is a corporation duly organized, validly existing and
in good standing under the laws of its respective jurisdiction, and has the full
corporate power and authority to carry on its business as currently conducted.
Each Exchanging Partner has full legal right, capacity, power and authority
(corporate or otherwise) to execute and deliver this Agreement and to consummate
the transactions contemplated hereby.
6.3 AUTHORIZATION
The execution, delivery and performance by the Exchanging Partner of this
Agreement and all other documents contemplated hereby, the fulfillment of and
the compliance with the respective terms and provisions hereof and thereof, and
the consummation of the transactions contemplated hereby and thereby have been
duly authorized by the Board of Directors of such Exchanging Partner (which
authorization has not been modified or rescinded and is in full force and
effect), and will not: (a) conflict with, or materially violate any provision
of, any law having applicability to such Exchanging Partner or any of its
Affiliates which is a party to any agreement with or relating to Orion Atlantic
or any term or provision of the articles of incorporation or organization, or
bylaws or operating agreement of such Exchanging Partner or any of such
Affiliates, as applicable; or (b) conflict with, or result in any material
breach of, or constitute a material default under, any agreement to which such
Exchanging Partner or any of such Affiliates is a party or by which such
Exchanging Partner or any of such Affiliates may be bound.
6.4 RESTRICTIONS AND CONSENTS
Except for certain approvals which may be required by the Japanese government
if TA Sat becomes an Exchanging Partner, there are no agreements, laws or other
restrictions of any kind to which such Exchanging Partner is party or subject
that would prevent or restrict the execution, delivery or performance of this
Agreement.
6.5 BINDING OBLIGATION
This Agreement constitutes a valid and binding obligation of such Exchanging
Partner, enforceable in accordance with its terms. Each document to be executed
by such Exchanging Partner pursuant hereto, when executed and delivered in
accordance with the provisions hereof, will be a valid and binding obligation of
such Exchanging Partner, enforceable in accordance with its terms.
6.6 TRANSFER OF TITLE
At the Closing, Newco will acquire good, valid and marketable title to such
Exchanging Partner|Als LP Interest and such Exchanging Partner|Als Other LP
Rights, free and clear of all Encumbrances, other than those imposed by the
terms of the Partnership Agreement and restrictions on resale contained in
federal and state securities laws.
6.7 ACCREDITED INVESTORS
Each Exchanging Partner and any Affiliate of such Exchanging Partner who will
be receiving Newco Preferred Stock is an "accredited investor" as such term is
defined in Rule 501 of the Securities Act.
6.8 NAME CHANGE OF LOCKHEED MARTIN
Lockheed Martin only hereby represents and warrants that it was formerly
named Martin Marietta Commercial Launch Services, Inc., that it is a limited
partner of Orion Atlantic and a party to the agreements referred to in Section
3.2(a)(iv) and that it has provided evidence of its name change to the other
parties hereto.
7. REPRESENTATIONS AND WARRANTIES OF ONS
ONS hereby represents and warrants to the Exchanging Partners as follows:
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7.1 ORGANIZATION AND STANDING
ONS is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware, and has the full corporate power and
authority to carry on its business as currently conducted. ONS has the full
legal right, capacity, power and authority (corporate or otherwise) to execute
and deliver this Agreement and the other documents called for herein and to
consummate the transactions contemplated hereby. ONS is qualified as a foreign
corporation in the State of Maryland, and in every other jurisdiction in which
the failure to so qualify would have a Material Adverse Effect.
7.2 AUTHORIZATION
The execution, delivery and performance by ONS of this Agreement and the
other documents contemplated hereby, the fulfillment of and the compliance with
the respective terms and provisions hereof and thereof, and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
the Board of Directors of ONS (which authorization has not been modified or
rescinded and is in full force and effect), and will not: (a) conflict with, or
materially violate any provision of, any law having applicability to ONS or any
of its Affiliates or any term or provision of the articles of incorporation or
organization, or bylaws or operating agreement of ONS, as applicable; or (b)
conflict with, or result in any material breach of, or constitute a material
default under, any agreement to which ONS or any of its Affiliates is a party or
by which ONS or any of its Affiliates may be bound.
7.3 RESTRICTIONS AND CONSENTS
Except for certain approvals which are set forth on Schedule 7.3, which ONS
will use its reasonable efforts to obtain prior to Closing, there are no
agreements, laws or other restrictions of any kind to which ONS is party or
subject that would prevent or restrict the execution, delivery or performance of
this Agreement. ONS has no reason to believe, as of the date hereof, that any of
the conclusions reached in the memorandum from ONS|Als communications counsel
previously circulated to the Exchanging Partners and attached hereto as Exhibit
K indicating that the Exchange will not constitute a change of control of ONS
that would require the consent of the U.S. Federal Communications Commission
("FCC"), or otherwise require the consent of that Commission, are incorrect in
any material respect and will promptly notify each Exchanging Partner if ONS
becomes aware of any reason why any such conclusions may become incorrect. If,
notwithstanding such memorandum, such FCC consent is required, ONS will use its
reasonable good faith efforts to obtain such consent prior to Closing.
7.4 BINDING OBLIGATION
This Agreement constitutes, and the Registration Rights Agreement when
executed will constitute, valid and binding obligations of ONS and Newco, as the
case may be, enforceable in accordance with its terms. Each document to be
executed by ONS or Newco pursuant hereto, when executed and delivered in
accordance with the provisions hereof, will be a valid and binding obligation of
ONS or Newco, enforceable in accordance with its terms.
7.5 ISSUANCE OF SHARES
Upon consummation of the transactions contemplated by this Agreement at
Closing, the Newco Preferred Stock will be duly and validly issued, fully paid
and nonassessable and no personal liability attaches to the ownership thereof,
and the Exchanging Partners will acquire the legal, valid and marketable title
to the Newco Preferred Stock, free and clear of all Encumbrances, except as set
forth in this Agreement.
7.6 CAPITALIZATION
As of the date hereof, the authorized capital stock of ONS consists of
40,000,000 shares of ONS Common Stock and 1,000,000 shares of preferred stock,
par value $.01 per share, of which 10,945,133 shares of ONS Common Stock, 13,961
shares of ONS Series A Preferred Stock and 4,211,001 shares of ONS Series B
Preferred Stock are duly authorized and validly issued and outstanding, fully
paid and
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nonassessable. ONS has no other class of stock authorized or outstanding.
Options and warrants to purchase 1,396,851 shares of ONS Common Stock are
outstanding on the date hereof, and when such options are exercised and the
prescribed exercise price paid, the shares of ONS Common Stock issued with
respect to such options will be duly authorized, validly issued, fully paid and
nonassessable. Options to purchase 350.666 shares of ONS preferred stock are
outstanding on the date hereof, the terms of which are to be substantially
identical to the ONS Series A Preferred Stock and the ONS Series B Preferred
Stock other than the conversion price. Except as set forth above, or in the
certificates of designations of the ONS Series A Preferred Stock and ONS Series
B Preferred Stock, as of the date hereof there are no existing options, warrants
or rights to purchase or otherwise acquire from ONS capital stock of ONS of any
class, no outstanding securities of ONS that are convertible into shares of
capital stock of ONS of any class, and no options, warrants or rights to
purchase from ONS any such convertible securities, and ONS has no outstanding
contractual or other obligation to repurchase, redeem or otherwise acquire any
outstanding shares of its capital stock. Upon the issuance of Newco Common Stock
upon the conversion of the Newco Preferred Stock in accordance with the
Certificate of Designations, such Newco Common Stock will be duly and validly
issued, fully paid and non-assessable and no personal liability will attach to
the ownership thereof. As of the Closing Date, Newco will have reserved out of
its authorized but unissued shares of Newco Common Stock, solely for issue upon
such conversion, the number of shares necessary for such purpose. As of the
Closing Date, Newco will have sufficient authorized capital stock (including
Newco Preferred Stock) to meet its obligations hereunder. The issued and
outstanding shares of ONS capital stock have not been, and the Newco Preferred
Stock to be issued to the Exchanging Partners hereunder (and Newco Common Stock
issuable upon the conversion thereof) will not be, issued in violation of any
preemptive or other rights of any person, whether arising by statute, under the
Certificate of Incorporation or By-Laws of Newco or in any other manner.
7.7 NO LIABILITIES
Except as set forth in the consolidated audited financial statements of ONS
as of December 31, 1995, and for the period ended on such date (the "Current
Financial Statements"), or included in the Disclosure Materials, there exist no
material liabilities (whether contingent or absolute, matured or unmatured,
known or unknown) of ONS or any Subsidiary. Immediately prior to the Closing,
Newco will have no liabilities (other than de minimis liabilities relating to
Newco|Als formation, any liabilities or obligations relating to transactions
contemplated by this Agreement, and any liabilities for expenses relating to the
Credit Facility Refinancing, Bond Offering, Bank Agreement Termination, Capacity
Agreement Termination and Convertible Subordinated Debenture Offering).
7.8 TAXES
ONS and each Subsidiary has filed or has caused to be filed (or has obtained
extensions with respect to) all material federal, state and local tax returns
which are required to be filed and has paid in full or accrued all material
federal, state and local taxes, estimated taxes, interest, penalties,
assessments and deficiencies assessed in connection with such returns. Neither
ONS nor any Subsidiary is a party to any pending action or proceeding, and to
the knowledge of ONS there is no action or proceeding threatened, by any
governmental authority for assessment or collection of taxes, and no unresolved
claim for assessment or collection of taxes has been asserted against ONS or any
Subsidiary, which would have a Material Adverse Effect.
7.9 SUBSIDIARIES
Schedule 7.9 hereto sets forth the name of each Subsidiary and ONS|Al
ownership in such entity. Each Subsidiary is a corporation, or partnership, duly
organized, validly existing and in good standing under the laws of its state of
incorporation or organization, and each has the full corporate power and
authority to carry on its business as it is now being conducted. Each Subsidiary
is qualified in every jurisdiction in which the failure to so qualify would have
a Material Adverse Effect.
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7.10 BOOKS AND RECORDS
The books of account, stock record, minute books and other records of ONS and
its Subsidiaries have been maintained in accordance with good business
practices, and the matters contained therein are appropriately and accurately
reflected in the Current Financial Statements.
7.11 LITIGATION
Except as set forth in the Disclosure Materials and Schedule 7.11 regarding
the Skydata matter, there are no material claims, actions, suits, proceedings or
investigations pending or, to the knowledge of ONS, threatened or anticipated
against, affecting or involving ONS or any Subsidiary or the transactions
contemplated by this Agreement, at law or in equity, or before any court,
arbitrator or governmental authority, domestic or foreign. Neither ONS nor any
Subsidiary is operating under, subject to or in default with respect to any
order, judgment, injunction or decree of any court, arbitrator or governmental
authority, domestic or foreign that would have a Material Adverse Effect, except
for orders of the Federal Communications Commission pertaining to the authority
of ONS to conduct its operations, and with respect to such orders ONS is in full
compliance.
7.12 SEC FILINGS
Since August 1, 1995, all reports, proxy statements and registration
statements required to be filed by ONS with the SEC pursuant to the Securities
Act, and the Securities and Exchange Act of 1934, as amended (the "1934 Act"),
have been timely filed with the SEC and complied in all material respects with
the requirements of the Securities Act, the 1934 Act and the rules and
regulations under the Securities Act and 1934 Act, and none of such reports,
proxy statements or registration statements contained as of their respective
dates any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. In addition, the Merger Proxy Statement insofar as it relates to
ONS, as of the date of mailing of the Merger Proxy Statement by ONS to its
stockholders and as of the date of the ONS stockholders meeting to which such
Merger Proxy Statement relates, (i) will comply in all material respects with
the provisions of the 1934 Act and the rules and regulations thereunder and (ii)
except with respect to any information relating to the Exchanging Partners
provided to ONS by the Exchanging Partners in writing specifically for use in
the Merger Proxy Statement, will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
7.13 TRANSACTIONS WITH EXCHANGING PARTNERS
Neither ONS nor any of its Affiliates currently is a party to any transaction
or agreement with any of the Exchanging Partners or their Affiliates relating to
the Exchange, other than this Agreement and the agreements contemplated hereby,
that has not been disclosed to each of the Exchanging Partners or otherwise
publicly disclosed by ONS.
7.14 ABSENCE OF VIOLATIONS
Neither ONS nor any of its Subsidiaries is in default under, nor has it
breached, any material term or material provision of its Certificate of
Incorporation or By-laws or any Material Contract. ONS and its Subsidiaries have
complied with and are in full compliance with all Laws, where the failure to so
comply would have a Material Adverse Effect.
8. RESTRICTED SECURITIES
Each Exchanging Partner hereby severally represents, warrants and covenants
to ONS as follows:
8.1 NO REGISTRATION UNDER THE SECURITIES ACT
Such Exchanging Partner understands that the Newco Preferred Stock to be
acquired by it under this Agreement, and the Newco Common Stock issuable upon
the conversion thereof, have not been registered under the Securities Act, in
reliance upon exemptions contained in the Securities Act or
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interpretations thereof, and cannot be offered for sale, sold or otherwise
transferred unless subsequently so registered or qualify for exemption from
registration under the Securities Act. The Newco Preferred Stock, and the Newco
Common Stock issuable upon the conversion thereof, will not be offered for sale,
sold or otherwise transferred by such Exchanging Partner without either
registration or exemption from registration under the Securities Act.
8.2 ACQUISITION FOR INVESTMENT
The Newco Preferred Stock being acquired under this Agreement by such
Exchanging Partner is being acquired in good faith solely for such Exchanging
Partner|Als own account, for investment and not with a view toward distribution
within the meaning of the Securities Act. Such Exchanging Partner has, and at
the time of Closing such Exchanging Partner will have, no present plan or
intention to sell or otherwise dispose of the Newco Preferred Stock being
acquired under this Agreement or any Newco Common Stock issuable upon the
conversion of such Newco Preferred Stock; provided, however, that such
Exchanging Partner may decide, from time to time, to sell some or all of such
stock based upon a change in the investment policy of such Exchanging Partner
and provided further, that this provision shall not restrict MCN Sat from
transferring a portion of its Newco Preferred Stock to BAe.
8.3 EVALUATION OF MERITS AND RISKS OF INVESTMENT
Such Exchanging Partner has such knowledge and experience in financial and
business matters that such Exchanging Partner is capable of evaluating the
merits and risks of its investment in the Newco Preferred Stock being acquired
hereunder. Such Exchanging Partner understands and is able to bear any economic
risks associated with such investment (including, without limitation, the
necessity of holding the Newco Preferred Stock for an indefinite period of time,
inasmuch as the Newco Preferred Stock have not been registered under the
Securities Act).
8.4 REVIEW OF DOCUMENTS
Such Exchanging Partner and its advisers, if any, have received, and have had
a reasonable opportunity to review, the following documents (collectively, the
"Disclosure Materials"): (i) Annual Report on Form 10-K for ONS for the fiscal
year ended December 31, 1995; (ii) Quarterly Report on Form 10-Q for ONS for the
fiscal quarter ended March 31, 1996; (iii) Proxy Statement of ONS relating to
the Annual Meeting of Stockholders to be held on May 23, 1996; and (iv) Risk
Factors Relating to Orion and Description of Capital Stock of Orion.
8.5 OPPORTUNITY TO REQUEST INFORMATION
Such Exchanging Partner and its advisers, if any, have had a reasonable
opportunity to ask questions of and receive information and answers from a
person or persons acting on behalf of ONS concerning the transactions
contemplated by this Agreement and all such questions have been answered and all
such information has been provided to their full satisfaction. If this Agreement
is not terminated on or before the Newco Finalization Date, such Exchanging
Partner and its advisers, if any, as of the Newco Finalization Date, will have
had a reasonable opportunity to ask questions of and receive information and
answers from a person or persons acting on behalf of Newco concerning the
transactions contemplated by this Agreement and all such questions will have
been answered and all such information will have been provided to their full
satisfaction. In making their investment, the Exchanging Partners will be
relying solely on their review of the Disclosure Materials (other than any
projections included therein, which are not being relied upon), the
representations and warranties set forth herein, the Newco Formation Documents
and the Merger Documents, and the documents made available for inspection and
the answers to questions referred to in this Section 8.5.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE EXCHANGING PARTNERS
The obligations of each of the Exchanging Partners (and of Lockheed Martin,
in the case of the condition in Section 9.8) under this Agreement are subject to
the fulfillment, at or prior to the Closing, of each of the following conditions
(other than those in Section 9.8, which are a condition only to the
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obligations of Lockheed Martin), and failure to satisfy any such condition shall
excuse and discharge all obligations of each of the Exchanging Partners (and of
Lockheed Martin only, in the case of failure of the condition in Section 9.8) to
carry out the provisions of this Agreement, unless such failure is agreed to in
writing by each of the Exchanging Partners (and of Lockheed Martin only, in the
case of the condition in Section 9.8):
9.1 REPRESENTATIONS AND WARRANTIES
The representations and warranties made by ONS in this Agreement shall be
true and complete in all material respects when made, and on and as of the
Closing Date as though such representations and warranties were made on and as
of such date.
9.2 PERFORMANCE
ONS and OrionSat shall have performed and complied in all material respects
with all agreements and covenants required by this Agreement to be performed or
complied with by ONS and/or OrionSat prior to the Closing Date.
9.3 DOCUMENTS AT CLOSING
All documents required to be furnished by Newco, ONS and OrionSat to the
Exchanging Partners prior to or at the Closing shall have been so furnished.
9.4 REFINANCING OF CREDIT FACILITY, CANCELLATION OF CAPACITY AGREEMENTS
The Credit Facility Refinancing and Capacity Agreement Termination shall have
been completed, other than any actions to be taken by such Exchanging Partner,
and the documents effecting the Capacity Agreement Termination shall be
substantially in the form of Exhibit H hereto or otherwise in form and substance
reasonably satisfactory to each Exchanging Partner. Evidence of the completion
of the Capacity Agreement Termination and Credit Facility Refinancing shall be
the execution of Exhibit H by Chase and the unconditional delivery of the same
at Closing.
9.5 CONSENTS
ONS and OrionSat shall have received all material consents, authorizations
and approvals of governmental, supragovernmental and private parties listed on
Schedule 7.3 which are required to be obtained in order to consummate the
transactions contemplated hereby.
9.6 REGISTRATION
The Registration Rights Agreement shall have been executed and delivered by
Newco.
9.7 SATELLITE CONTRACT
ONS or one of its affiliates shall have entered into a satellite procurement
contract (the "Orion 2 Satellite Contract") with Matra Marconi Space or an
affiliate thereof ("Matra Marconi Space") for the construction and launch of
Orion 2, ONS or one of its affiliates shall have given Matra Marconi Space
notice to proceed under such contract and Amendment No. 10 between Matra Marconi
Space and Orion Atlantic to the Second Amended and Restated Contract, dated
September 26, 1991, as amended shall have become effective and Orion Atlantic
shall not be in default under such Amendment No.
10.
9.8 LAUNCH SUB CONTRACT
Lockheed Martin and Matra Marconi Space shall have entered into a subcontract
to the Orion 2 Satellite Contract relating to the launch of Orion 2.
9.9 NEWCO FORMATION
The Newco Formation Documents shall be consistent with the requirement that
Newco be substantially identical in all material respects to ONS, or any
discrepancies shall be reasonably acceptable to the Exchanging Partners
(provided, however, that such condition shall be deemed to have been satisfied,
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and shall terminate, and be of no further force and effect, if this Agreement
shall not have been terminated on or before the Newco Finalization Date); and
the Newco Formation shall have occurred in accordance with Section 2.
9.10 MERGER
The Merger shall have occurred, or shall occur concurrently with the Closing,
in accordance with Section 4.
9.11 TAX OPINION
The Exchanging Partners shall have received an opinion from Ernst & Young,
LLP, tax advisors to Newco, in form and substance reasonably satisfactory to the
Exchanging Partners, dated the Closing Date, which opinion may be based on
appropriate representations of the parties hereto, in form and substance
reasonably satisfactory to such tax advisors, to the effect that the Merger and
the Exchange, taken together, will be a tax-free exchange described in Code
Section 351(a).
10. CONDITIONS PRECEDENT TO OBLIGATIONS OF ONS AND ORIONSAT
The obligations of ONS and OrionSat under this Agreement are subject to the
fulfillment, at or prior to the Closing, of each of the following conditions,
and failure to satisfy any such condition shall excuse and discharge all
obligations of ONS and OrionSat to carry out the provisions of this Agreement,
unless such failure is agreed to in writing by ONS and OrionSat:
10.1 REPRESENTATIONS AND WARRANTIES
The representations and warranties made by the Exchanging Partners in this
Agreement shall be true and complete in all material respects when made, and on
and as of the Closing Date as though such representations and warranties were
made on and as of such date, except for any changes expressly permitted by this
Agreement.
10.2 PERFORMANCE
The Exchanging Partners shall have performed and complied with all material
agreements and covenants required by this Agreement to be performed or complied
with prior to the Closing Date.
10.3 DOCUMENTS AT CLOSING
All documents required to be furnished by the Exchanging Partners to ONS and
OrionSat prior to or at the Closing shall have been so furnished.
10.4 CONSENTS
The Exchanging Partners shall have received all material consents,
authorizations and approvals of governmental, supragovernmental and private
parties which are required to be obtained in order to consummate the
transactions contemplated hereby.
10.5 REFINANCING OF CREDIT FACILITY, CANCELLATION OF CAPACITY AGREEMENTS
The Credit Facility Refinancing, Bank Agreement Termination and Capacity
Agreement Termination shall have been completed, other than any actions to be
taken by ONS and OrionSat.
10.6 PARTNERSHIP AGREEMENT AMENDMENT
The Partnership Agreement shall have been amended as contemplated by Section
5.4, other than due to any actions to be taken by ONS and OrionSat.
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10.7 CONSENTS OF THE ONS STOCKHOLDERS
The ONS Stockholder Consent has been obtained for the Merger, the Exchange
and any related transactions requiring stockholder consent.
10.8 COMPLETION OF FINANCING FOR A SECOND SATELLITE
Newco shall have raised at least $100 million from the sale of Convertible
Subordinated Debentures, not including any amounts representing or in
satisfaction of any amounts due by ONS or Orion Atlantic to any Exchanging
Partner or Affiliate thereof, and BAe shall have purchased at least $50 million
of Convertible Subordinated Debentures from Newco.
10.9 SATELLITE CONTRACT
ONS or one of its affiliates shall have entered into the Orion 2 Satellite
Contract with Matra Marconi Space for the construction and launch of Orion 2.
10.10 NEWCO FORMATION
The Newco Formation shall have occurred in accordance with Section 2.
10.11 MERGER
The Merger shall have occurred, or be occurring concurrently with the
Closing, in accordance with Section 4; and no ONS stockholder (or former
stockholder of ONS, if the Merger already shall have occurred) shall have
delivered to ONS a written notice of such stockholder|Als (or former
stockholder|Als) intention, or otherwise indicated an intention, to dissent to
the Merger or otherwise seek to exercise any right to sell to ONS, or obtain
payment from ONS for, such stockholder|Als stock in ONS in lieu of such stock
being converted in the Merger to stock of Newco.
11.0 CLOSING
11.1 CLOSINGS
(a) Deposit into Escrow
Simultaneously with execution and delivery of this Agreement, the Exchanging
Partners are entering into an Escrow Agreement in the form attached as Exhibit J
and depositing into escrow with one counsel selected by the Exchanging Partners
(which may be counsel representing one or more of the Exchanging Partners in
other capacities), acting as escrow agent, executed copies of each of the
documents to be delivered by the Exchanging Partners to Newco, ONS or OrionSat
at the Closing. Each of the parties hereto agrees to abide by the terms of such
Escrow Agreement.
(b) Closing
Subject to the terms and conditions of this Agreement, the Closing shall take
place at the offices of Hogan & Hartson L.L.P., 555 Thirteenth Street, N.W.,
Washington, D.C. 20004 on the Closing Date.
11.2 DELIVERIES BY THE EXCHANGING PARTNERS
At or prior to the Closing, the Exchanging Partners shall deliver to Newco,
ONS or OrionSat, as applicable, the following:
(a) documents of transfer of partnership interests and substitution of
limited partners with respect to the LP Interests being transferred to Newco
pursuant to Section 2, in the form attached as Exhibit F;
(b) documents transferring the rights included in the Other LP Rights, in
the form attached as Exhibit G.
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(c) counterparts to the Third Amended and Restated Partnership Agreement
duly executed by each of the Exchanging Partners;
(d) a certified copy of the resolutions adopted by the Board of Directors
of each of the Exchanging Partners authorizing the transactions contemplated
by this Agreement; and
(e) such other documents as Newco, ONS or OrionSat may reasonably
request, including without limitation certificates of the officers of the
Exchanging Partners as to the matters set forth in Sections 10.1 and 10.2.
11.3 DELIVERIES BY ONS AND NEWCO
At or prior to the Closing, Newco, ONS or OrionSat, as applicable, shall
deliver to the Exchanging Partners the following:
(a) certificates representing the Newco Preferred Stock being issued to
the Exchanging Partners pursuant to Section 2;
(b) the Registration Rights Agreement, duly executed by Newco;
(c) evidence in the form of the documents included as Exhibit H hereto,
duly executed and delivered by all parties thereto other than Exchanging
Partners, that the Capacity Termination Agreement has been effected and that
the Capacity Guarantees have been terminated in their entirety;
(d) a certified copy of the resolutions adopted by the Boards of
Directors of Newco, ONS and OrionSat authorizing the transactions
contemplated by this Agreement;
(e) evidence of receipt of the ONS Stockholder Consent;
(f) good standing certificates as of a date not more than fifteen days
prior to the Closing Date issued by the Secretary of State of the State of
Delaware with respect to Newco, ONS and OrionSat;
(g) opinion(s) of counsel to Newco and ONS, dated the Closing Date and
addressed to the Exchanging Partners, substantially to the effect set forth
on Exhibit I;
(h) an agreement by Newco to be bound by the indemnity provisions of
Section 12 (the "Newco Indemnity"); and
(i) such other documents as the Exchanging Partners may reasonably
request, including without limitation certificates of the officers of Newco
and ONS as to the matters set forth in Sections 9.1 and 9.2.
11.4 ORDER OF EFFECTIVENESS
Of the documents being delivered by the Exchanging Partners at the Closing,
the counterparts to the Third Amended and Restated Partnership Agreement duly
executed by each of the Exchanging Partners shall be deemed delivered first, and
upon signature by ONS and OrionSat the Third Amended and Restated Partnership
Agreement shall be deemed in full force and effect, prior to delivery of the (i)
documents of transfer of partnership interests and substitution of limited
partners with respect to the LP Interests being transferred to Newco pursuant to
Section 2, in the form attached as Exhibit F, and (ii) documents transferring
the rights included in the Other LP Rights, in the form attached as Exhibit G.
12. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION; REMEDIES
12.1 SURVIVAL OF REPRESENTATIONS
All representations, warranties, covenants, indemnities and other agreements
made by any party to this Agreement herein or pursuant hereto shall also be
deemed made on and as of the Closing Date as though such representations,
warranties, covenants, indemnities and other agreements were made on
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<PAGE>
and as of such date, and all such representations, warranties, covenants,
indemnities and other agreements shall survive the Closing and any
investigation, audit or inspection at any time made by or on behalf of any party
hereto, including the review of the Disclosure Materials under Section 8.4.
12.2 AGREEMENT OF NEWCO, ONS AND ORIONSAT TO INDEMNIFY
Subject to the conditions and provisions of this Section 12.2, ONS and
OrionSat jointly and severally shall (and Newco shall, pursuant to the Newco
Indemnity) jointly and severally indemnify, defend and hold harmless each of the
EP Indemnified Persons from and after the Closing Date against and in respect of
all Claims asserted against, resulting to, imposed upon or incurred by any of
the EP Indemnified Persons (whether such Claims are by, against or relate to
Newco, ONS or OrionSat or any other party, including, without limitation, a
governmental entity), directly or indirectly, by reason of or resulting from any
of the following:
(i) any of the matters with respect to which they would be obligated
to indemnify the EP Indemnified Persons under Section 7.09(e) of the
Partnership Agreement and which arose before or after the Closing Date,
notwithstanding the Exchanging Partners ceasing to be limited partners of
Orion Atlantic as of the Closing Date; or
(ii) any Claims asserted by one or more of the Lenders or Chase, or
their successors or assigns, arising from and after the Closing Date
under (A) any of the Capacity Agreements, Contingent Capacity Agreements
or Capacity Guarantees which are terminated on or prior to the Closing
Date, (B) any agreements or other documents terminated or to be
terminated in connection with the Bank Agreement Termination, or (C) this
Agreement, in each case excluding any Claims arising from or relating to
any breach of any representation or warranty, or noncompliance with any
conditions or other agreements, given or made by any EP Indemnified
Person under any of the agreements or documents referred to above in this
paragraph or any document furnished by or on behalf of any EP Indemnified
Person pursuant thereto.
12.3 CONDITIONS OF INDEMNIFICATION.
The obligations and liabilities of Newco, ONS and OrionSat with respect to
their respective indemnities pursuant to the Newco Indemnity and Section 12.2,
resulting from any Claims, shall be subject to the following terms and
conditions:
12.3.1. The party seeking indemnification (the "Indemnified Party") must give
the other party or parties, as the case may be (the "Indemnifying Party"),
notice of any such Claims promptly after the Indemnified Party receives notice
thereof; provided that the failure to give such notice shall not affect the
rights of the Indemnified Party hereunder except to the extent that the
Indemnifying Party shall have suffered actual damage by reason of such failure.
12.3.2. The Indemnifying Party shall have the right to undertake, by counsel
or other representatives of its own choosing, the defense of such Claims at the
Indemnifying Party|Als risk and expense.
12.3.3. In the event that the Indemnifying Party shall elect not to undertake
such defense, or, within a reasonable time after notice from the Indemnified
Party of any such Claims, shall fail to defend, the Indemnified Party (upon
further written notice to the Indemnifying Party) shall have the right to
undertake the defense, compromise or settlement of such Claims, by counsel or
other representatives of its own choosing, on behalf of and for the account and
risk of the Indemnifying Party (subject to the right of the Indemnifying Party
to assume defense of such Claims at any time prior to settlement, compromise or
final determination thereof). In such event, the Indemnifying Party shall pay to
the Indemnified Party, in addition to the other sums required to be paid
hereunder, the costs and expenses incurred by the Indemnified Party in
connection with such defense, compromise or settlement as and when such costs
and expenses are so incurred.
12.3.4. Anything in this Section 12.3 to the contrary notwithstanding, (a) if
there is a reasonable probability that Claims may materially and adversely
affect the Indemnified Party other than as a result of money damages or other
money payments, the Indemnified Party shall have the right, at its own cost
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<PAGE>
and expense, to participate in the defense, compromise or settlement of the
Claims, (b) the Indemnifying Party shall not, without the Indemnified Party|Als
written consent, settle or compromise any Claims or consent to entry of any
judgment which does not include as an unconditional term thereof the giving by
the claimant or the plaintiff to the Indemnified Party of a release from all
liability in respect of such Claims in form and substance satisfactory to the
Indemnified Party, and (c) in the event that the Indemnifying Party undertakes
defense of any Claims, the Indemnified Party, by counsel or other representative
of its own choosing and at its sole cost and expense, shall have the right to
consult with the Indemnifying Party and its counsel or other representatives
concerning such Claims and the Indemnifying Party and the Indemnified Party and
their respective counsel or other representatives shall cooperate with respect
to such Claims and (d) in the event that the Indemnifying Party undertakes
defense of any Claims, the Indemnifying Party shall have an obligation to keep
the Indemnified Party informed of the status of the defense of such Claims and
furnish the Indemnified Party with all documents, instruments and information
that the Indemnified party shall reasonably request in connection therewith.
12.4 SPECIFIC PERFORMANCE; NO CONSEQUENTIAL DAMAGES
In addition to any other remedies which the parties hereto may have at law or
in equity, the parties hereto hereby acknowledge that the LP Interests, the
Other LP Rights and the Newco Preferred Stock are unique, and that the harm to
Newco, ONS and OrionSat, and the Exchanging Partners resulting from breaches by
the other parties of their respective obligations cannot be adequately
compensated by damages. Accordingly, the parties hereto agree that each party
shall have the right to have all obligations, undertakings, agreements,
covenants and other provisions of this Agreement specifically performed by the
other parties, and that the parties hereto shall have the right to obtain an
order or decree of such specific performance in any of the courts of the United
States or of any state or other political subdivision thereof. Notwithstanding
any other provision of this Agreement to the contrary, in no event shall
remedies for breach of this Agreement include a party|Als incidental or
consequential damages.
13. TERMINATION
13.1 TERMINATION
This Agreement may be terminated at any time before the Closing Date under
any one or more of the following circumstances:
(a) by the mutual written consent of the parties hereto; or
(b) by ONS and OrionSat or by the Exchanging Partners collectively or (as
to a particular Exchanging Partner), by such Exchanging Partner, by written
notice of termination to the other parties hereto, if the Closing has not
occurred by January 30, 1997; provided, however, that the terminating party
is not in breach of any obligations or agreements hereunder that are causing
any of the conditions precedent to Closing not to be satisfied.
In addition, following circulation by ONS to the Exchanging Partners of the
finalized and implemented Newco Formation Documents, if the finalized and
implemented Newco Formation Documents are not consistent with the requirement
that Newco be substantially identical in all material respects to ONS, and any
discrepancies are not reasonably acceptable to such Exchanging Partner(s), then
this Agreement may be terminated at any time on or before the Newco Finalization
Date by the Exchanging Partners collectively or (as to a particular Exchanging
Partner), by such Exchanging Partner, by written notice of termination to the
other parties hereto on or before the close of business on the Newco
Finalization Date.
13.2 EFFECT OF TERMINATION
In the event this Agreement is terminated as provided in this Section 13
(other than as to less than all the Exchanging Partners), this Agreement shall
forthwith become wholly void and of no effect, and the parties shall be released
from all future obligations hereunder; provided, however, that the obligations
of the Exchanging Partners as to confidentiality provided in Section 5.6, and
the provisions of
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Section 14.3 relating to the payment of expenses, shall not be extinguished but
shall survive such termination; provided, further, however, that no party shall
be relieved from its liabilities for breach of representations, warranties,
obligations or agreements prior to termination of this Agreement. The parties
hereto shall have any and all remedies to enforce such obligations provided at
law or in equity (including, without limitation, specific performance).
14. MISCELLANEOUS
14.1 ADDITIONAL ACTIONS AND DOCUMENTS
Each of the parties hereto hereby agrees to take or cause to be taken such
further actions, to execute, deliver and file or cause to be executed, delivered
and filed such further documents, and will obtain such consents, as may be
necessary or as may be reasonably requested in order to fully effectuate the
purposes, terms and conditions of this Agreement.
14.2 BROKER|AlS FEES OR LIABILITIES
The fees and expenses of Salomon Brothers shall be borne by ONS. Except for
such fees and expenses, each party agrees to indemnify, defend and hold harmless
each of the other parties from and against any and all claims asserted against
such parties for any unpaid liability to any broker, finder or agent for any
brokerage fees, finders' fees or commissions, with respect to the transactions
contemplated by this Agreement.
14.3 EXPENSES
Subject to the provisions of Section 14.2, each party hereto shall pay its
own expenses incident to this Agreement and the transactions contemplated
hereunder.
14.4 ASSIGNMENT
The Exchanging Partners shall have the right to assign their respective
rights under the Agreement, in whole or in part, to any of their respective
Affiliates or to designate any of their respective Affiliates to receive
directly the Newco Preferred Stock to be acquired hereunder (in each case, to
the extent permitted by applicable law). ONS, OrionSat and Orion Atlantic shall
have the right to assign their rights under the Agreement, in whole or in part,
to any of their respective Affiliates (to the extent permitted by applicable
law). In no event shall the assignment by ONS, OrionSat, or any Exchanging
Partner of its respective rights under this Agreement, whether before or after
the Closing, release ONS, OrionSat, or any Exchanging Partner from its
respective liabilities and obligations hereunder.
14.5 ENTIRE AGREEMENT; AMENDMENT
This Agreement, including the Schedules, Exhibits and other documents
referred to herein or furnished pursuant hereto constitute the entire agreement
among the parties hereto with respect to the transactions contemplated herein
and therein, and supersede all prior oral or written agreements, commitments or
understandings with respect to the matters provided for herein and therein. No
amendment or modification of this Agreement shall be valid or binding unless set
forth in writing and duly executed and delivered by the party against whom
enforcement of the amendment or modification is sought.
14.6 WAIVER
No delay or failure on the part of any party hereto in exercising any right,
power or privilege under this Agreement or under any other documents furnished
in connection with or pursuant to this Agreement shall impair any such right,
power or privilege or be construed as a waiver of any default or any
acquiescence therein. No single or partial exercise of any such right, power or
privilege shall preclude the further exercise of such right, power or privilege,
or the exercise of any other right, power or
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<PAGE>
privilege. No waiver shall be valid against any party hereto unless made in
writing and signed by the party against whom enforcement of such waiver is
sought and then only to the extent expressly specified therein.
14.7 CONSENT TO JURISDICTION
This Agreement and the duties and obligations of ONS, OrionSat, the
Exchanging Partners hereunder and under each of the documents referred to herein
shall be enforceable against any of ONS, OrionSat, or one or more of the
Exchanging Partners, as the case may be, in the courts of the United States and
of the States of Maryland and Delaware. For such purpose, ONS, OrionSat and each
of the Exchanging Partners hereby irrevocably submit to the non-exclusive
jurisdiction of such courts, and agrees that all claims in respect of this
Agreement and such other documents may be heard and determined in any of such
courts.
14.8 SEVERABILITY
If any part of any provision of this Agreement or any other agreement or
document given pursuant to or in connection with this Agreement shall be invalid
or unenforceable in any respect, such part shall be ineffective to the extent of
such invalidity or unenforceability only, without in any way affecting the
remaining parts of such provision or the remaining provisions of this Agreement.
14.9 GOVERNING LAW
This Agreement, the rights and obligations of the parties hereto, and any
claims or disputes relating thereto, shall be governed by and construed in
accordance with the laws of the State of Delaware (excluding the choice of law
rules thereof).
14.10 NOTICES
All notices, demands, requests, or other communications which may be or are
required to be given, served, or sent by any party to any other party pursuant
to this Agreement shall be in writing and shall be hand delivered, sent by
overnight courier or mailed by first-class, registered or certified mail, return
receipt requested, postage prepaid, or transmitted by telegram, telecopy or
telex, addressed as follows:
(i) If to Orion Atlantic, ONS or OrionSat:
2440 Research Boulevard
Suite 400
Rockville, Maryland 20817
Attn: Richard H. Shay, Esq.
(ii)If to the Exchanging Partners, to each of the
following who is an Exchanging Partner:
British Aerospace Holding, Inc.
22070 Broderick Drive
Sterling, Virginia 20166
Attn: Charles Gaba
COM DEV Satellite Communications Limited
155 Sheldon Drive
Cambridge, Ontario
Canada N1R 7H6
Attn: David Belbeck
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<PAGE>
Kingston Communications International Limited
Telephone House
Carr Lane
Kingston-upon-Hull
HU1 3RE England
Attn: John Bailey
Lockheed Martin Commercial Launch Services, Inc.
Attention: Chester Wheeler
Lockheed Martin Commercial
Launch Services, Inc.
P.O. Box 179
MSM DC-1400
Denver, Colorado 80201-0179
MCN Sat US, Inc.
37, Avenue Louis Breguet B.P.1
78146 V|felizy Villacoublay Cedex
France
Attn: Claude Goumy
Trans-Atlantic Satellite, Inc.
1211 Avenue of the Americas
41st Floor
New York, NY 10036
Attn: Ken Mori
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be hand delivered,
sent, mailed, telecopied or telexed in the manner described above, or which
shall be delivered to a telegraph company, shall be deemed sufficiently given,
served, sent, received or delivered for all purposes at such time as it is
delivered to the addressee (with the return receipt, the delivery receipt, or
(with respect to a telecopy or telex) the answerback being deemed conclusive,
but not exclusive, evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
14.11 HEADINGS
Section headings contained in this Agreement are inserted for convenience of
reference only, shall not be deemed to be a part of this Agreement for any
purpose, and shall not in any way define or affect the meaning, construction or
scope of any of the provisions hereof.
14.12 EXECUTION IN COUNTERPARTS
To facilitate execution, this Agreement may be executed in as many
counterparts as may be required. It shall not be necessary that the signatures
of, or on behalf of, each party, or that the signatures of all persons required
to bind any party, appear on each counterpart; but it shall be sufficient that
the signature of, or on behalf of, each party, or that the signatures of the
persons required to bind any party, appear on one or more of the counterparts.
All counterparts shall collectively constitute a single agreement. It shall not
be necessary in making proof of this Agreement to produce or account for more
than a number of counterparts containing the respective signatures of, or on
behalf of, all of the parties hereto.
14.13 LIMITATION ON BENEFITS
The covenants, undertakings and agreements set forth in this Agreement shall
be solely for the benefit of, and shall be enforceable only by, the parties
hereto and their respective successors, heirs, executors, administrators, legal
representatives and permitted assigns, except that (i) the agreements set
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<PAGE>
forth in Section 10 also shall be for the benefit of, and enforceable by, EP
Indemnified Persons and their respective successors, heirs, executors,
administrators, legal representatives or permitted assigns, and (ii) agreements
relating to Affiliates of the Exchanging Partners named or referred to
specifically herein also shall be for the benefit of, enforceable by and (to the
extent permitted by law) enforceable against such Affiliates and their
respective successors, heirs, executors, administrators, legal representatives
or permitted assigns.
14.14 BINDING EFFECT
Subject to any provisions hereof restricting assignment, this Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors, heirs, executors, administrators, legal representatives
and assigns.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, or
have caused this Agreement to be duly executed on their behalf, as of the day
and year first above written.
INTERNATIONAL PRIVATE
SATELLITE PARTNERS, L.P.
By: Orion Satellite Corporation, its gen-
eral partner
By: /s/
-----------------------------------------
ORION NETWORK SYSTEMS, INC.
By: /s/
-----------------------------------------
ORION SATELLITE CORPORATION
By: /s/
-----------------------------------------
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<PAGE>
BRITISH AEROSPACE
COMMUNICATIONS, INC.
By: /s/
-----------------------------------------
COM DEV SATELLITE COMMUNICATIONS LIMITED
By: /s/
-----------------------------------------
KINGSTON COMMUNICATIONS
INTERNATIONAL LIMITED
By: /s/
-----------------------------------------
LOCKHEED MARTIN COMMERCIAL
LAUNCH SERVICES, INC.
By: /s/
-----------------------------------------
MCN SAT US, INC.
By: /s/
-----------------------------------------
TRANS-ATLANTIC SATELLITE, INC.
By: /s/
-----------------------------------------
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<PAGE>
EXHIBIT A
TO EXCHANGE
AGREEMENT
DEFINITIONS
"Affiliate" means: (a) with respect to a person, any member of such person's
family; (b) with respect to an entity, any officer, director, stockholder,
partner or investor of or in such entity or of or in any Affiliate of such
entity; and (c) with respect to a person or entity, any person or entity which
directly or indirectly, through one or more intermediaries, Controls, is
Controlled by, or is under common Control with such person or entity.
"Agreement" means the Exchange Agreement, including each of the Schedules and
Exhibits hereto.
"Agreement of Principles" means the Agreement of Principles dated as of April
2, 1992, among Orion Atlantic, OrionSat, ONS and the Exchanging Partners.
"BAe" means British Aerospace Communications, Inc., a Delaware corporation.
"Business Day" means any day on which commercial banks in New York City are
not required or authorized to close.
"Certificate of Designations" means the Certificate of Designations, Rights
and Preferences establishing the terms and relative rights and preferences of
the Newco Preferred Stock in substantially the form set forth as Exhibit B to
this Agreement.
"Claims" means all demands, claims, actions or causes of action, assessments,
losses, damages (including, without limitation, diminution in value),
liabilities, costs and expenses, including, without limitation, interest,
penalties and attorneys' fees and disbursements.
"Closing" means the closing of the exchange of interests pursuant to the
Agreement.
"Closing Date" means such time and date as shall be as proposed by ONS not
more than ten days after satisfaction or waiver of all the conditions specified
in Sections 9 and 10.
"COM DEV" means COM DEV Satellite Communications Limited, a Canadian
corporation.
"Consent and Agreement" means the Consent and Agreement effective as of
December 20, 1991, among Orion Atlantic, OrionSat, ONS and the Exchanging
Partners.
"Control" means possession, directly or indirectly, of power to direct or
cause the direction of management or policies (whether through ownership of
voting securities, by agreement or otherwise).
"Encumbrance" means any mortgage, lien, pledge, encumbrance, security
interest, deed of trust, option, encroachment, reservation, order, decree,
judgment, condition, restriction, charge, agreement, claim or equity of any
kind.
"EP Indemnified Persons|Al means the Exchanging Partners and their respective
Affiliates, employees, representatives, agents, officers and directors.
"Exhibit" means an exhibit attached to the Agreement.
"Exchange Act" means the Exchange Act of 1934, as amended.
"Kingston" means Kingston Communications International Limited, a company
organized under the laws of England.
"Kingston Sales Representative Agreements" means the Sales Representative
Agreement dated as of June 30, 1994, between Orion Atlantic and a Kingston
Affiliate, Kingston Satellite Systems Limited, as amended, and the Ground
Operations Agreement dated as of June 30, 1994, between Orion Atlantic and
Kingston, as amended.
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<PAGE>
"Laws" means all foreign, federal, state and local statutes, laws,
ordinances, regulations, rules, resolutions, orders, determinations, writs,
injunctions, awards (including, without limitation, awards of any arbitrator),
judgments and decrees applicable to the specified persons or entities and to the
businesses and assets thereof (including, without limitation, Laws relating to
securities registration and regulation; the sale, leasing, ownership or
management of real property; employment practices, terms and conditions, and
wages and hours; building standards, land use and zoning; safety, health and
fire prevention; and environmental protection).
"Limited Partner" means ONS and the Exchanging Partners as limited partners
of Orion Atlantic.
"LP Interest" means a limited partnership interest in Orion Atlantic.
"Lockheed Martin" means Lockheed Martin Commercial Launch Services, Inc., a
Delaware corporation.
"Material Adverse Effect" means a material adverse effect on the business,
results of operations, liabilities, properties, assets or financial condition of
ONS and its Subsidiaries, taken as a whole, or a material adverse effect on the
transactions contemplated by this Agreement.
"Material Contract" means any contract, instrument, commitment or arrangement
of ONS which ONS would be required to file with the SEC as an exhibit to a
registration statement on Form S-1 pursuant to Item 601(b)(10) of Regulation S-K
under the Securities Act.
"MCN Sat" means MCN Sat US, Inc., a Delaware corporation.
"MCN Sat Sales Representative Agreements" means the Sales Representative
Agreement dated as of June 30, 1995 between Orion Atlantic and MCN Sat Service,
S.A., as amended, and the Ground Operations Agreement dated as of June 30, 1995
between Orion Atlantic and MCN Sat Service, S.A., as amended.
"Newco Common Stock" means shares of common stock, par value $.01 per share,
of Newco.
"Newco Preferred Stock" means shares of Series C 6% Cumulative Redeemable
Convertible Preferred Stock of Newco, par value $.01 per share, having the
rights and preferences set forth in the Certificate of Designations.
"ONS" means ONS Network Systems, Inc., a Delaware corporation.
"ONS Common Stock" means shares of common stock, par value $.01 per share, of
ONS.
"ONS Series A Preferred Stock" means the Series A 8% Cumulative Redeemable
Convertible Preferred Stock of ONS.
"ONS Series B Preferred Stock" means the Series B 8% Cumulative Redeemable
Convertible Preferred Stock of ONS.
"Orion Atlantic" means International Private Satellite Partners, L.P., a
Delaware limited partnership.
"Option Agreements" means the applicable Option Agreement effective as of
December 20, 1991, among Orion Atlantic, OrionSat and each of the Exchanging
Partners.
"OrionSat" means Orion Satellite Corporation, a Delaware corporation.
"Partnership Agreement" means the Second Amended and Restated Agreement of
Limited Partnership of International Private Satellite Partners, L.P., as
amended.
"PPU Agreement" means the Preferred Participating Unit Agreements dated as of
October 7, 1993, among Orion Atlantic, OrionSat, and each of ONS, COM DEV,
Kingston, Lockheed Martin and MCN Sat.
"Preferred Bidder Agreement" means the Preferred Bidder Agreement effective
as of December 20, 1991, among Orion Atlantic, OrionSat, ONS and the Exchanging
Partners.
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<PAGE>
"Refund Agreement" means the Refund Agreement, dated December 31, 1994, among
Orion Atlantic, OrionSat, ONS and certain of the Exchanging Partners.
"SEC" means the U.S. Securities and Exchange Commission.
"Section" means a Section (or a subsection) of the Agreement.
"Securities Act" means the Securities Act of 1933, as amended, and all laws
promulgated pursuant thereto or in connection therewith.
"Subscription Agreement" means the Subscription Agreements effective as of
December 20, 1991, between Orion Atlantic and each of the Exchanging Partners.
"Subsidiary" means, with respect to any Person, any corporation, partnership,
association or other business entity of which (i) if a corporation, a majority
of the total voting power of shares of stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
that Person or one or more of the other Subsidiaries of that Person or a
combination thereof, or (ii) if a partnership, association or other business
entity, a majority of the partnership or other similar ownership interest
thereof is at the time owned or controlled, directly or indirectly, by any
Person or one or more Subsidiaries of that person or a combination thereof. For
purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a partnership, association or other business entity if
such Person or Persons shall be allocated a majority of partnership, association
or other business entity gains or losses or shall be or control a general
partner of such partnership, association or other business entity. Without
limiting the foregoing, International Private Satellite Partners, L.P., a
Delaware limited partnership, shall be deemed to be a Subsidiary of the
Corporation for so long as the Corporation or any of its other Subsidiaries is
the general partner thereof.
"TA Sat" means Trans-Atlantic Satellite, Inc., a Delaware corporation.
"Tax Adjustment Factor" means, with respect to (i) BAe, $11,634; (ii) COM
DEV, $1,940; (iii) Kingston, $1,940; (iv) Lockheed Martin, $3,878; (v) MCN Sat,
$3,878; and (vi) TA Sat, $3,878.
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<PAGE>
FIRST AMENDMENT TO SECTION 351 EXCHANGE AGREEMENT
AND PLAN OF CONVERSION
THIS FIRST AMENDMENT TO SECTION 351 EXCHANGE AGREEMENT AND PLAN OF CONVERSION
(this "Amendment") is entered into as of December 1996, by and among
International Private Satellite Partners, L.P., a Delaware limited partnership
("Orion Atlantic"); Orion Network Systems, Inc., a Delaware corporation ("ONS");
Orion Satellite Corporation, a Delaware corporation ("OrionSat"); and each of
the following entities: British Aerospace Communications, Inc., a Delaware
corporation, COM DEV Satellite Communications Limited, a Canadian corporation,
Kingston Communications International Limited, a company incorporated under the
laws of England, Lockheed Martin Commercial Launch Services, Inc., a Delaware
corporation, MCN Sat US, Inc., a Delaware corporation, and Trans Atlantic
Satellite, Inc., a Delaware corporation (collectively, the "Exchanging
Partners") under the Section 351 Exchange Agreement and Plan of Conversion,
dated as of June __, 1996, between and among Orion Atlantic, ONS, OrionSat and
the Exchanging Partners (the "Exchange Agreement").
WHEREAS, Orion Atlantic, ONS and OrionSat are currently pursuing and will
continue to pursue certain financing transactions that were contemplated by the
Exchange Agreement, and the parties hereto desire to amend the Exchange
Agreement to extend potentially the termination date to provide for the
possibility that such financings will not be completed by January 30, 1997 and
to refund certain payments.
NOW, THEREFORE, for and in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties hereto agree as
follows:
1. CLOSING TERMINATION DATE EXTENSION
The first paragraph of Section 13.1(b) of the Exchange Agreement is hereby
amended to read in its entirety as follows:
(b) by ONS and OrionSat or by the Exchanging Partners collectively or (as
to a particular Exchanging Partner), by such Exchanging Partner, by written
notice of termination to the other parties hereto, if the Closing has not
occurred by April 30, 1997 (the "Closing Termination Date"); provided,
however, that the terminating party is not in breach of any obligations or
agreements hereunder that are causing any of the conditions precedent to
Closing not to be satisfied.
2. REFUND OF CERTAIN PAYMENTS
Section 3.2(c) of the Exchange Agreement is hereby amended by adding, at the
end thereof, the following:
Notwithstanding the foregoing provisions of this Section 3.2(c), to the
extent that amounts are paid by one or more Exchanging Partners (or Affiliates
of such Exchanging Partners) (i) pursuant to the Capacity Agreements and which
are subject to being refunded under the Refund Agreement ("Firm Capacity
Payments") during the Adjustment Period for obligations of such Exchanging
Partners (or Affiliates) arising after January 29, 1997 and prior to the Closing
Date, and (ii) pursuant to the Contingent Capacity Agreements ("Contingent
Capacity Payments") during the Adjustment Period for obligations of such
Exchanging Partners (or Affiliates) arising after the date hereof and prior to
the Closing Date (collectively, "Payments Subject to Refund"), then if (and only
if) ONS or Newco completes a Bond Offering prior to the Closing Termination
Date,
(x) to the extent that the gross proceeds from the Bond Offering
(excluding any amounts required to be set aside or pledged for the purpose of
pre-funding interest payments) for ONS or Newco, plus the gross proceeds from
the sale of Convertible Subordinated Debentures to BAe and Matra Marconi
Space UK Limited ("Matra Marconi Space") or their Affiliates, exceeds the sum
of (1) the amounts necessary to effect the Credit Facility Refinancing and
all other obligations relating thereto or arising therefrom, including
without limitation all principal and accrued interest due with respect to the
Credit Facility and all breakage fees and costs arising from termination of
the interest
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<PAGE>
rate hedge relating to the Credit Facility, (2) $49.4 million, representing
the proposed initial payments to be made by ONS or Newco under the Orion 2
Satellite Contract and related Orion 2 Option Agreement, (3) $13 million,
representing the incentive payments that will be payable to Matra Marconi
Space or its Affiliates with respect to Orion 1 upon or immediately following
the Credit Facility Refinancing, (4) $3.5 million, representing the amounts
that will be payable to STET upon or immediately following the Credit
Facility Refinancing, (5) an amount reasonably determined by ONS or Newco to
be necessary working capital for ONS or Newco to conduct operations following
the Bond Offering and other transactions (not to exceed $10 million), and (6)
the costs and expenses of the Bond Offering, the Convertible Subordinated
Debenture financings and related transactions (not to exceed $14.3 million),
the excess (the "Available Funds") shall be used to refund the amounts of the
Payments Subject to Refund to the respective Exchanging Partners at the
Closing (or, if such excess is not sufficient to refund all of the Payments
Subject to Refund to the respective Exchanging Partners, the Available Funds
shall be used first to refund Contingent Capacity Payments to the extent of
such Available Funds, and second to refund Firm Capacity Payments to the
extent of any remaining Available Funds, in each case with partial refunds to
be made pro rata among the Exchanging Partners in proportion to their
respective applicable Payments Subject to Refund), and amounts so refunded
shall not be included in clause (i)(A) of this Section 3.2(c); and
(y) any portions of the Payments Subject to Refund not so refunded to the
respective Exchanging Partners at the Closing shall be included in clause
(i)(A) of this Section 3.2(c) as part of the Adjustment Amounts of such
Exchanging Partners.
The refund of Available Funds shall be made at or within three business days
after the Closing. ONS and Newco shall deliver to the Exchanging Partners
simultaneously with such refund a certificate of their respective chief
financial officers setting forth in reasonable detail all calculations or
computations required or contemplated by this Section 3.2(c), including the
amount and application of the Available Funds. ONS and Newco shall provide
promptly, to any Exchanging Partner requesting the same, such additional detail
supporting such calculations and computations and such back-up or supporting
documentation as such Exchanging Partner may reasonably request.
3. TAX ADJUSTMENT
Section 3.2(c)(ii) of the Exchange Agreement is hereby amended to read in its
entirety as follows:
(ii) the product of the number of days in the Adjustment Period
through and including (but not beyond) January 29, 1997 multiplied by the
Tax Adjustment Factor for such Exchanging Partner, divided by
4. SALE OF CONVERTIBLE SUBORDINATED DEBENTURES
Notwithstanding the provisions of Section 5.8 of the Exchange Agreement
contemplating that Newco will, as of the Closing Date, complete a Convertible
Subordinated Debenture Offering of approximately $125 million, it is presently
intended that the Convertible Subordinated Debenture Offering consist only of
purchases of $50 million of Convertible Subordinated Debentures by BAe and $10
million of Convertible Subordinated Debentures by Matra Marconi Space, or
Affiliates thereof. Accordingly, all references in the Exchange Agreement to the
Convertible Subordinated Debenture Offering shall refer only to the $60 million
of Convertible Subordinated Debentures to be purchased by BAe and Matra Marconi
Space, or Affiliates thereof. While not intended to be legally binding, BAe
hereby reconfirms that it or its Affiliates intend to purchase from Newco $50
million of Convertible Subordinated Debentures on terms being negotiated between
BAe and ONS, and MCN Sat hereby confirms that Matra Marconi Space or its
Affiliates intends to purchase from Newco $10 million of Convertible
Subordinated Debentures on terms substantially the same as those ultimately
agreed upon by BAe and ONS for the BAe investment. Section 10.8 of the Exchange
Agreement is hereby amended to read in its entirety as follows:Newco shall have
raised at least $60 million from the sale of Convertible Subordi-
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<PAGE>
nated Debentures, including the sale of $50 million of Convertible Subordinated
Debentures to BAe or its Affiliates and the sale of $10 million of Convertible
Subordinated Debentures to Matra Marconi Space or its Affiliates.
5. ELIMINATION OF KINGSTON INVESTMENT IN PPU INTEREST SHARES
Section 3.2(d) of the Exchange Agreement is hereby amended to delete such
Section in its entirety; Section 3.2(a)(iii) of the Exchange Agreement is hereby
amended to delete the language "other than interest paid to Kingston under
Section 3.2(d)" in its entirety; Section 3.2(b)(iii) of the Exchange Agreement
is hereby amended to delete the language "and PPU Interest Shares calculated as
set forth in Section 3.2(d)" in its entirety; the last paragraph of Section
3.2(b) of the Exchange Agreement is hereby amended to replace the language
"Section 3.2(b), in Sections 3.2(c) and 3.2(d)" with the language "Section
3.2(b) and in Section 3.2(c); and Section 3.2(c) of the Exchange Agreement is
hereby amended to delete the language "other than Kingston (or an Affiliate of
Kingston)" in its entirety.
6. ORION 2 SATELLITE CONTRACT
Section 9.7 of the Exchange Agreement shall be amended to read in its
entirety as follows:
The Option Agreement, dated December 10, 1996, between Orion Atlantic and
Matra Marconi Space ("Orion 2 Option Agreement"), shall be in full force and
effect; Orion Atlantic shall not be in default thereunder; and Orion Atlantic
shall have made all payments required to be made thereunder through the earlier
of the Closing Date and March 31, 1997. Restated Amendment #10, dated December
10, 1996, to the Second Amended and Restated Purchase Contract, dated as of
September 26, 1991, between Orion Atlantic and Matra Marconi Space, as amended,
shall be in full force and effect, and Orion Atlantic shall not be in default
thereunder.
7. MISCELLANEOUS
7(a) Defined Terms
Capitalized terms used in this Amendment and not otherwise defined in this
Amendment shall have the meanings provided for in the Exchange Agreement.
7(b)Governing Law
This Amendment, the rights and obligations of the parties hereto, and any
claims or disputes relating thereto, shall be governed by and construed in
accordance with the same laws as govern the Exchange Agreement.
7(c)Counterparts
To facilitate execution, this Amendment may be executed in as many
counterparts as may be required; and it shall not be necessary that the
signatures of, or on behalf of, each party, or that the signatures of all
persons required to bind any party, appear on each counterpart; but it shall be
sufficient that the signature of, or on behalf of, each party, or that the
signatures of the persons required to bind any party, appear on one or more of
the counterparts. All counterparts shall collectively constitute a single
agreement. It shall not be necessary in making proof of this Amendment to
produce or account for more than a number of counterparts containing the
respective signatures of, or on behalf of, all of the parties hereto.
7(d) Facsimile Execution
To facilitate execution, this Amendment may be executed through the use of
facsimile transmission, and a counterpart of this Amendment that contains the
facsimile signature of a party, which counterpart has been transmitted by
facsimile transmission to each of the other parties hereto at such facsimile
numbers as such other parties shall request, shall constitute an executed
counterpart of this Amendment.
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<PAGE>
7(e) Ratification
The Exchange Agreement, as amended and modified by this First Amendment, is
in all respects ratified and confirmed and the terms, covenants and agreements
thereof shall be and remain in full force and effect. The parties executing this
First Amendment agree that the Exchange Agreement, as amended and modified by
this First Amendment, shall be remain valid and binding upon such parties,
notwithstanding the failure of one or more Exchanging Partners to execute this
First Amendment and notwithstanding any such non-executing Exchanging Partner
seeking to terminate the Exchange Agreement as to such non-executing Exchanging
Partner under Section 13.1(b) of the Exchange Agreement after January 30, 1997
and before April 30, 1997.
7(f) Effectiveness of the Amendment
This First Amendment to Section 351 Exchange Agreement and Plan of Conversion
is being made pursuant to Section 14.5 of the Exchange Agreement which provides
that an amendment to the Exchange Agreement shall be valid and binding when set
forth in writing and duly executed and delivered by the party against whom
enforcement of the amendment is sought. The parties executing this First
Amendment agree that this First Amendment shall be valid and binding upon such
parties, notwithstanding the failure of one or more Exchanging Partners to
execute this First Amendment.
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment, or
have caused this Amendment to be duly executed on their behalf, as of the day
and year first hereinabove set forth.INTERNATIONAL PRIVATE SATELLITE PARTNERS,
L.P.
INTERNATIONAL PRIVATE
SATELLITE PARTNERS, L.P.
By: Orion Satellite Corporation, its general
partner
By: /s/
-----------------------------------------
ORION NETWORK SYSTEMS, INC.
By: /s/
-----------------------------------------
ORION SATELLITE CORPORATION
By: /s/
-----------------------------------------
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<PAGE>
BRITISH AEROSPACE
COMMUNICATIONS, INC.
By: /s/
-----------------------------------------
COM DEV SATELLITE COMMUNICATIONS
LIMITED
By: /s/
-----------------------------------------
KINGSTON COMMUNICATIONS
INTERNATIONAL LIMITED
By: /s/
-----------------------------------------
LOCKHEED MARTIN COMMERCIAL
LAUNCH SERVICES, INC.
By: /s/
-----------------------------------------
MCN SAT US, INC.
By: /s/
-----------------------------------------
TRANS-ATLANTIC SATELLITE, INC.
By: /s/
-----------------------------------------
B-36
<PAGE>
ATTACHMENT C
FORM OF
CERTIFICATE OF DESIGNATIONS,
RIGHTS AND PREFERENCES
OF
SERIES C 6% CUMULATIVE REDEEMABLE
CONVERTIBLE PREFERRED STOCK
OF
ORION NEWCO SERVICES, INC.
--------------------------
PURSUANT TO SECTION 151
OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
--------------------------
The undersigned DOES HEREBY CERTIFY that, pursuant to the authority contained
in Article FOURTH of the Certificate of Incorporation of Orion Newco Services,
Inc., a Delaware corporation (the "Corporation"), and in accordance with Section
151 of the General Corporation Law of the State of Delaware, the Board of
Directors of the Corporation has authorized the creation of a series of
Preferred Stock of the Corporation having the designation Series C 6% Cumulative
Redeemable Convertible Preferred Stock and having the powers, rights and
preferences, and the qualifications, limitations and restrictions thereof, as
are set forth in Exhibit A hereto and made a part hereof and that the following
resolution was duly adopted by the Board of Directors of the Corporation:
RESOLVED, that a series of authorized Preferred Stock, par value $0.01
per share, of the Corporation be, and it hereby is, created; that the
shares of such series shall be, and they hereby are, designated as
"Series C 6% Cumulative Redeemable Convertible Preferred Stock;" that the
number of shares constituting such series shall be, and it hereby is,
fixed at _______,000; and that the powers, rights and preferences and the
qualifications, limitations and restrictions thereof, of the shares of
such series are as set forth in Exhibit A attached hereto and made a part
hereof.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunto affixed and this Certificate to be signed by its President and Chief
Executive Officer and attested to by its Vice President, Corporate and Legal
Affairs, and Secretary this day of , 1997.
ORION NEWCO SERVICES, INC.
By:
---------------------------------------
[SEAL] Name: W. Neil Bauer
Title: President/Chief Executive
Officer
ATTEST:
- -----------------------------------------
Name: Richard H. Shay, Esq.
Title: Vice President, Corporate and
Legal Affairs/Secretary
<PAGE>
SERIES C 6% CUMULATIVE REDEEMABLE
CONVERTIBLE PREFERRED STOCK
The following sections set forth the powers, rights and preferences, and the
qualifications, limitations and restrictions thereof, of the Corporation's
Series C 6% Cumulative Redeemable Convertible Preferred Stock. Capitalized terms
used herein are defined in Section 10 below.
Section 1. Dividends.
1A. General Obligation. Subject to the preferential rights of Series A
Preferred Stock or Series B Preferred Stock ranking senior to the Preferred
Stock, the record holders of Preferred Stock shall be entitled to receive
dividends, when, as and if declared by the Corporation's board of directors (the
"Board") and to the extent permitted under the General Corporation Law of
Delaware, as amended, as provided in this Section 1, subject to paragraph 1F.
Dividends shall accrue on a daily basis commencing on the Date of Issuance of
each Preferred Share at the simple interest rate of 6% per annum of the
Liquidation Value thereof, and shall be payable as provided in paragraph 1B.
Dividends shall cease accruing upon the earliest to occur of (i) the date on
which the Liquidation Value of such Preferred Share is paid, (ii) the date on
which such Preferred Share is converted into shares of Common Stock hereunder,
or (iii) the Maturity Date. Such dividends shall accrue whether or not they have
been declared and whether or not there are net profits, surplus or other funds
of the Corporation legally available for the payment of dividends.
1B. Payment of Dividends. Subject to the provisions of paragraph 1A and
paragraph 1F, dividends shall be payable, in arrears, following each Dividend
Reference Date within twenty days after such Dividend Reference Date. The amount
of the dividend on each share of Preferred Stock payable following each Dividend
Reference Date shall equal the aggregate amount of all accrued and unpaid
dividends on such share of Preferred Stock from the Prior Dividend Date (or, in
the case of the first dividend paid with respect to such share, the Date of
Issuance of such Preferred Share) through such Dividend Reference Date. To the
extent any dividend is not paid within twenty days after a Dividend Reference
Date, all dividends which have accrued and remain unpaid on each outstanding
Preferred Share through such Dividend Reference Date shall be accumulated and
shall remain accumulated dividends with respect to such Preferred Share until
the date paid. No interest, dividend or sum of money in lieu of interest, shall
be payable in respect of any dividend payment or payments that may be accrued
and unpaid.
1C. Distribution of Partial Dividend Payments. Except in connection with
redemptions or repurchases pursuant to paragraph 3A or 3B below, if at any time
the Corporation pays less than the total amount of dividends then accrued with
respect to the Preferred Stock such payment shall be distributed ratably among
the holders thereof based upon the aggregate accrued but unpaid dividends on the
Preferred Shares held by each such holder and such payment shall be applied
first to dividends which have accrued on such Preferred Shares during the period
since the latest preceding Dividend Reference Date and second to reduce any
previously accumulated dividends with respect to such Preferred Shares.
1D. Payment of Dividends in Common Stock. Except as specifically provided
herein, the Corporation shall pay all dividends with respect to the Preferred
Stock (including, in the case of a redemption, any amount equal to accrued and
unpaid dividends constituting a portion of the Redemption Price) in fully paid
and non-assessable shares of Common Stock. The number of shares of Common Stock
distributable in a dividend on each share of Preferred Stock shall be equal to
the quotient obtained by dividing (a) the amount of such dividend, as determined
under paragraph 1B, by (b) the higher of (i) the Market Price of the Common
Stock on the Dividend Reference Date immediately preceding the dividend payment
and (ii) the Series A/B Dilution Price. When the Corporation pays a dividend to
the holders of Preferred Stock, the Corporation shall provide each holder of
Preferred Stock with a calculation of the aggregate number of shares of Common
Stock payable in such dividend, including the computation of the Market Price.
If any fractional interest in a share of Common Stock would, except for the
provisions of this sentence, be deliverable upon payment of any dividend in
shares of Common Stock, the Corporation, in lieu of delivering the fractional
share therefor, shall pay an amount to the holder thereof equal to the Market
Price of such fractional interest, calculated as set forth above in this
paragraph 1D.
C-2
<PAGE>
1E. Dividends on Junior Securities. The Corporation shall not declare and pay
any dividends on Junior Securities unless all accrued and unpaid dividends on
the Preferred Stock have been paid in full.
1F. Certain Withholding Provisions. Notwithstanding any other provision of
Section 1, and without limiting the generality of the Board's power and
authority with respect to the declaration and payment of dividends, the Board
shall have and may exercise the power and authority to provide that the receipt
by each record holder of Preferred Shares entitled thereto of any dividend paid
by the Corporation as declared on the issued and outstanding Preferred Shares
shall be subject to the condition (the "Tax Payment Condition") that the
Corporation receive, at or prior to the time for payment of such dividend (the
"Payment Time"), from or on behalf of such record holder, payment in full of the
taxes, fees, duties, assessments, or other amounts, if any (the "Tax"), that the
Corporation is required under applicable law to pay or withhold in connection
with the declaration and payment to such record holder of such dividend. If the
Tax Payment Condition applies and has been satisfied, or has been duly waived by
the Corporation, at or prior to the Payment Time, at the Payment Time the
Corporation shall pay such dividend to such record holder. If the Tax Payment
Condition applies but has not been satisfied, and has not been duly waived by
the Corporation, at or prior to the Payment Time, at the Payment Time the
Corporation shall pay the dividend to which such record holder is entitled by
irrevocably depositing and setting aside such dividend with the Secretary of the
Corporation as escrow holder (the "Escrow Holder"). Upon the Escrow Holder's
receipt, from or on behalf of such record holder, of payment in full of the Tax,
plus any interest, penalty, or additional amount to be paid or withheld as a
result of the passage of time from and after the Payment Time (the "Escrow
Termination Time"), the Escrow Holder shall release such dividend to such record
holder and shall release such Tax, and such additional amount if any, to the
Corporation. If such dividend is paid in shares of Common Stock and is not
received at or prior to the Payment Time by the record holder of Preferred
Shares entitled to payment thereof, then (notwithstanding any provision hereof
to the contrary) until the Escrow Termination Time (and only until such time,
whether or not the dividend has been released by the Escrow Holder), such record
holder shall not be entitled to vote such shares of Common Stock for any
purpose, to receive payment of dividends or other distributions on such shares
of Common Stock, or to exercise any other rights or privileges in respect of
such shares of Common Stock, and the Escrow Holder shall have no right to vote
such shares of Common Stock or to exercise any other right or privilege in
respect thereof (whether in accordance with the wishes or directions of such
record holder or otherwise), but the Escrow Holder shall receive and hold in
escrow until the Escrow Termination Time together with such shares of Common
Stock any dividends paid or other distributions made on such shares of Common
Stock and at the Escrow Termination Time shall release such dividends paid or
other distributions made on such shares of Common Stock, if any, along with such
shares of Common Stock.
Section 2. Liquidation.
Subject to the provisions of Section 2 of each of the Series A Certificate
and the Series B Certificate: upon any Liquidation, each holder of Preferred
Stock shall be entitled to be paid, before any distribution or payment is made
upon any Junior Securities, an amount in cash equal to the greater of (a) the
aggregate Liquidation Value (plus an amount equal to all accrued and unpaid
dividends) of all shares of Preferred Stock held by such holder or (b) the
amount which would be distributed with respect to the shares of Common Stock
(including fractional shares for purposes of this calculation) into which such
shares of Preferred Stock are convertible (assuming conversion of all
outstanding Preferred Stock) immediately prior to the record date for such
distribution (or, if there is no such record date, then the date as of which the
holders of Common Stock entitled to such distribution are determined), and the
holders of Preferred Stock shall not be entitled to any further payment; and if
upon any such Liquidation the Corporation's assets to be distributed among the
holders of the Preferred Stock are insufficient to permit payment to such
holders of the aggregate amount which they are entitled to be paid, then the
entire assets to be distributed shall be distributed ratably among such holders
based upon the aggregate Liquidation Value (plus all accrued and unpaid
dividends) of the Preferred Shares held by each such holder. Prior to such
Liquidation, the Corporation shall (to the extent permitted by law) declare for
payment all accrued and unpaid dividends with respect to the Preferred Stock,
which dividends shall be payable in cash notwithstanding the provisions of
paragraph 1D. (Payment of the greater of the amounts specified in clauses (a)
and (b) of this Section 2 in respect of such Preferred Shares shall constitute
C-3
<PAGE>
payment of such declared dividends.) The Corporation shall mail written notice
of such Liquidation, not less than 60 days prior to the payment date stated
therein, to each record holder of Preferred Stock.
Section 3. Redemptions.
3A. Redemption at the Maturity Date. At the Maturity Date the Corporation
shall redeem all of the Preferred Shares then outstanding for a price equal to
the Redemption Price. The Corporation shall pay the Redemption Price for the
Preferred Shares within thirty (30) days after the Maturity Date (or such later
date upon which the certificates evidencing the Preferred Shares are surrendered
to the Corporation).
3B. Redemption at the Option of the Corporation. At any time after the
Initial Redemption Date, or, if prior to the Initial Redemption Date,
immediately prior to the consummation of any consolidation, merger or sale in
which the successor entity or purchasing entity is other than the Corporation,
to the extent that it has funds legally sufficient therefor, the Corporation may
redeem all or, subject to the last sentence of this paragraph, a portion of the
Preferred Shares then outstanding for the Redemption Price. The number of
Preferred Shares to be redeemed from each holder thereof in a partial redemption
pursuant to this paragraph 3B shall be the number of Preferred Shares determined
by multiplying the total number of Preferred Shares to be redeemed by a
fraction, the numerator of which shall be the total Redemption Price of
Preferred Shares then held by such holder and the denominator of which shall be
the aggregate Redemption Price of Preferred Shares then outstanding.
3C. Redemption Payment. For each Preferred Share which is to be redeemed, the
Corporation shall be obligated to pay the Redemption Price to the holder thereof
on the Redemption Date or such later date upon which occurs the surrender by
such holder at the Corporation's principal office of the certificate
representing such Preferred Share. Subject to the provisions of paragraph 4C of
the Series A Certificate and paragraph 4C of the Series B Certificate, if the
funds of the Corporation legally available for payment of the cash portion of
the Redemption Price of Preferred Shares on any Redemption Date are insufficient
to pay the cash portion of the Redemption Price for the total number of
Preferred Shares to be redeemed on such date, those funds which are legally
available shall be used to redeem the maximum possible number of such Preferred
Shares ratably among the holders of the Preferred Shares to be redeemed based
upon the aggregate Redemption Price of the Preferred Shares held by each such
holder and the remaining Preferred Shares called for redemption will remain
outstanding; and at any time thereafter when additional funds of the Corporation
are legally available for the redemption of Preferred Shares, such funds shall
immediately be used to redeem the balance of the Preferred Shares which the
Corporation has become obligated to redeem on any Redemption Date but which it
has not redeemed. Payment of the Redemption Price in respect of such Preferred
Shares shall extinguish all rights to dividends that are accrued and unpaid as
of the Redemption Date with respect to the Preferred Shares which are redeemed
on such Redemption Date.
3D. Notice of Redemption. The Corporation shall mail written notice of each
redemption of any Preferred Stock to each record holder of Preferred Stock not
more than 60 nor less than 30 days prior to the date on which such redemption is
to be made specifying (a) the number of shares of Preferred Stock to be redeemed
by the Corporation and (b) the Redemption Date. Upon mailing any such notice of
redemption, the Corporation shall become obligated to redeem the total number of
Preferred Shares specified in such notice at the time of redemption specified
therein and upon the surrender on or before such time of the certificates
representing such Preferred Shares. If one or more holders of Preferred Shares
being redeemed shall fail to surrender the certificates representing such
Preferred Shares by the Redemption Date, the Corporation shall pay the
Redemption Price by irrevocably depositing or setting aside the required amount
to be paid promptly upon surrender of such certificates. Such deposit or set
aside shall be deemed payment of the Redemption Price to the holder for whom it
is deposited or set aside. In case fewer than the total number of Preferred
Shares represented by any certificate are redeemed, a new certificate
representing the number of unredeemed Preferred Shares shall be issued to the
holder thereof without cost to such holder within three Business Days after
surrender of the certificate representing the redeemed Preferred Shares.
C-4
<PAGE>
3E. Dividends after Redemption Date. No Preferred Share that is redeemed is
entitled to any dividends accruing after the Redemption Date. On the Redemption
Date of any Preferred Share, all rights of the holder of such Preferred Share
shall cease, and such Preferred Share shall be deemed to be no longer
outstanding.
3F. Redeemed or Otherwise Acquired Preferred Shares. Any Preferred Shares
which are redeemed, converted or otherwise acquired by the Corporation thereupon
shall be retired. All such shares shall upon their retirement become authorized
but unissued shares of preferred stock of the Corporation and may not be
reissued as Preferred Stock but may be reissued as part of a new series of
preferred stock to be created by resolution or resolutions of the board of
directors, subject to the conditions or restrictions on issuance set forth in
the certificate of incorporation of the Corporation.
Section 4. Voting Rights.
The holders of the Preferred Stock shall be entitled to notice of all
stockholders meetings in accordance with the Corporation's bylaws, and except as
otherwise required by law, the holders of the Preferred Stock shall be entitled
to vote on all matters submitted to the stockholders for a vote together with
the holders of the Common Stock voting together as a single class with each
share of Common Stock entitled to one vote per share, and each Preferred Share
(including fractional shares) entitled to one vote for each whole share of
Common Stock that would be issuable upon conversion of such Preferred Share at
the time the vote is taken.
Section 5. Conversion.
5A. Conversion Procedure.
(i) At any time and from time to time after the issuance thereof, any
holder of Preferred Stock may convert all or any of the Preferred Shares
(including any fraction of a Preferred Share) held by such holder into a
number of shares of Common Stock equal to the sum of: (a) the number of
shares of Common Stock computed by multiplying the number of Preferred
Shares to be converted by the Liquidation Value of a Preferred Share, and
dividing the result by the Conversion Price then in effect, plus (b) the
number of shares of Common Stock that would be payable if all accrued but
unpaid dividends were declared and paid on the Preferred Shares to be
converted. For purposes of determining the amount of dividends payable or
that would be payable with respect to a conversion under Section 5, the
date for determining the Market Price shall be the Business Day
immediately preceding the date on which conversion is deemed to have been
effected.
(ii) Each conversion of Preferred Stock shall be deemed to have been
effected as of the close of business on the date on which the certificate
or certificates representing the Preferred Shares to be converted have
been surrendered at the principal office of the Corporation, together
with written notice of the holder's desire to convert such Preferred
Shares. At such time as such conversion has been effected, the rights of
the holder of such Preferred Shares as such holder shall cease, and the
Person or Persons in whose name or names any certificate or certificates
for shares of Common Stock are to be issued upon such conversion shall be
deemed to have become the holder or holders of record of the shares of
Common Stock represented thereby, which Common Stock shall be deemed to
have been issued as of such time. Issuance of Common Stock by the
Corporation to effect any conversion shall extinguish all rights to
dividends that are accrued and unpaid as of the date on which conversion
is to be made with respect to the Preferred Shares which are to be
converted on such date.
(iii) The conversion rights of any Preferred Share subject to
redemption hereunder shall terminate on the Redemption Date for such
Preferred Share unless the Corporation has failed to pay to the holder
thereof the Redemption Price thereof.
(iv) Notwithstanding any other provision hereof, if a conversion of
any Preferred Shares is to be made in connection with a Public Offering
or prior to a redemption, such conversion may, at the election of the
holder of such Preferred Shares, be conditioned upon the consummation of
the Public Offering or the redemption occurring on or before a specified
date, in which case
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<PAGE>
such conversion shall not be deemed to be effective until the
consummation of the Public Offering or unless the redemption occurs on or
before the specified date.
(v) As soon as possible after a conversion has been effected (but in
any event within three Business Days in the case of subparagraph (a)
below), the Corporation shall deliver to the converting holder:
(a) a certificate or certificates representing the number of shares of
Common Stock issuable by reason of such conversion in such name or names and
such denomination or denominations as the converting holder has specified;
(b) payment of the amount payable under subparagraph (viii) below with
respect to such conversion; and
(c) a certificate representing any Preferred Shares which were
represented by the certificate or certificates delivered to the Corporation
in connection with such conversion but which were not converted.
(vi) The issuance of certificates for shares of Common Stock upon
conversion of Preferred Stock shall be made without charge to the holders
of such Preferred Stock for any issuance tax in respect thereof or other
cost incurred by the Corporation in connection with such conversion and
the related issuance of shares of Common Stock.
(vii) The Corporation shall not close its books against the transfer
of Preferred Stock or of Common Stock issued or issuable upon conversion
of Preferred Stock in any manner which interferes with the timely
conversion of Preferred Stock. The Corporation shall assist and cooperate
(but the Corporation shall not be required to expend substantial efforts
or funds) with any holder of Preferred Shares required to make any
governmental filings or obtain any governmental approval prior to or in
connection with any conversion of Preferred Shares hereunder (including,
without limitation, making any filings required to be made by the
Corporation).
(viii) If any fractional interest in a share of Common Stock would,
except for the provisions of this subparagraph, be deliverable upon any
conversion of shares of a holder's Preferred Stock, the Corporation, in
lieu of delivering the fractional share therefor, shall pay an amount to
the holder thereof equal to the Market Price of such fractional interest
as of the Business Day immediately preceding the date of conversion.
(ix) The Corporation shall at all times reserve and keep available
out of its authorized but unissued shares of Common Stock, solely for the
purpose of issuance upon the conversion of the Preferred Stock, not less
than the number of shares of Common Stock issuable upon the conversion of
all outstanding Preferred Stock which may then be exercised. All shares
of Common Stock which are so issuable shall, when issued, be duly and
validly issued, fully paid and nonassessable and free from all taxes,
liens and charges. The Corporation shall take all such actions as may be
necessary to ensure that all such shares of Common Stock may be so issued
without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of
Common Stock may be listed (except for official notice of issuance which
shall be immediately delivered by the Corporation upon each such
issuance).
5B. Subdivision or Combination of Common Stock. If the Corporation at any
time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) the outstanding shares of one or more classes of Common Stock into a
greater number of shares, the Conversion Price (and the Trigger Price and Series
A/B Dilution Price) in effect immediately prior to such subdivision shall be
proportionately reduced, and if the Corporation at any time combines (by reverse
stock split or otherwise) the outstanding shares of one or more classes of
Common Stock into a smaller number of shares, the Conversion Price (and the
Trigger Price and Series A/B Dilution Price) in effect immediately prior to such
combination shall be proportionately increased.
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5C. Reorganization, Reclassification, Consolidation, Merger or Sale. In
connection with any Reorganization, (i) the holders of Preferred Stock shall
thereafter have the right to acquire and receive, in lieu of or in addition to
(as the case may be) the shares of Common Stock immediately theretofore
acquirable and receivable upon the conversion of such holder's Preferred Stock,
such shares of stock, securities, cash or other assets (or, if not practicably
attainable, the reasonable equivalent thereof) as such holder would have
received in connection with such Reorganization if such holder had converted its
Preferred Stock immediately prior to such Reorganization, and (ii) dividends and
amounts in respect of dividends hereunder payable in shares of Common Stock
prior to such Reorganization shall be payable, in lieu of each share of Common
Stock, in such shares of stock, securities, cash or other assets (or reasonable
equivalent thereof) as the holder of one share of Common Stock received in
connection with such Reorganization. The Corporation shall make appropriate
provisions to ensure that the requirements of the previous sentence are
effected. In each such case, the Corporation shall also make appropriate
provisions to ensure that the provisions of this Section 5 and Sections 6 and 7
shall thereafter be applicable to the Preferred Stock.
5D. Notices.
(i) Immediately upon any adjustment of the Conversion Price, the
Corporation shall give written notice thereof to all holders of Preferred
Stock, setting forth in reasonable detail and certifying the calculation
of such adjustment.
(ii) The Corporation shall give written notice to all holders of
Preferred Stock at least 20 days prior to the date on which the
Corporation closes its books or fixes a record date (a) with respect to
any dividend or distribution upon Common Stock, (b) with respect to any
pro rata subscription offer to holders of Common Stock or (c) for
determining rights to vote with respect to any Liquidation or
Reorganization.
5E. Mandatory Conversion. The Corporation may require, by written notice to
all holders of Preferred Stock, the conversion of all of the outstanding
Preferred Stock into a number of shares of Common Stock equal to the sum of: (a)
the number of shares of Common Stock computed by multiplying the number of
Preferred Shares to be converted by the Liquidation Value of a Preferred Share,
and dividing the result by the applicable Conversion Price then in effect, plus
(b) the number of shares of Common Stock that would be payable if all accrued
but unpaid dividends were declared and paid on the Preferred Shares to be
converted; provided that the Closing Price of the Common Stock (adjusted
proportionately for stock dividends, stock splits, combinations, and similar
changes in the Common Stock occurring after the Closing) on at least twenty (20)
of the thirty (30) latest trading days preceding the date of the Corporation's
notice has been greater than or equal to the Conversion Price. If the
Corporation shall require the conversion of the Preferred Stock under this
Section 5E within two years from the Initial Date of Issuance, then the number
of shares of Common Stock into which the shares of Preferred Stock are converted
shall be increased by the number of shares of Common Stock that would be payable
if the Corporation were immediately to declare and pay all dividends that in the
absence of conversion would have accrued on such shares of Preferred Stock over
the six-month period immediately following the date of conversion; provided,
however, that the total dividends and amounts in respect of dividends paid on
the Preferred Stock after the Date of Issuance thereof, including any additional
amounts in respect of dividends paid as a result of a required conversion under
this Section 5E, shall not be less than the amount of dividends that would have
accrued on all outstanding shares of the Preferred Stock for one full year
following the Initial Date of Issuance.
Any conversion of shares of Preferred Stock under this Paragraph 5E shall be
effected and be deemed to have been effected as of the close of business on the
date on which the Corporation provides written notice of such conversion to the
holders of such shares of Preferred Stock (the "Mandatory Conversion Time"), and
as of the Mandatory Conversion Time, the rights of the holders of the converted
shares of Preferred Stock, as such, shall cease and terminate, such converted
shares of Preferred Stock shall be retired in accordance with paragraph 3F, the
shares of Common Stock into which such shares of Preferred Stock are converted
shall be issued and deemed to have been issued, the certificate(s) that
theretofore represented shares of Preferred Stock thereafter shall represent the
number of shares of Common Stock into which the shares of Preferred Stock
theretofore represented thereby shall
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have been converted, and the holder of any such certificate, upon the surrender
thereof to the Corporation, shall be entitled to receive from the Corporation a
new certificate representing the number of shares of Common Stock into which the
shares of Preferred Stock theretofore represented thereby shall have been
converted.
5F. Effect on Conversion Price of Certain Events.
(i) General. In order to prevent dilution of the conversion rights
granted under this Section 5, the Conversion Price shall be subject to
adjustment from time to time pursuant to this paragraph 5F.
(ii) Adjustment of Conversion Price. If and whenever on or after the
Date of Issuance the Corporation issues or sells, or in accordance with
this paragraph 5F is deemed to have issued or sold, other than in an
Excluded Issuance, any share of Common Stock for a consideration per
share less than the Trigger Price in effect immediately prior to such
time (a "Dilutive Event"), then forthwith upon such issue or sale in the
Dilutive Event the Conversion Price shall be reduced by multiplying the
Conversion Price in effect immediately before the Dilutive Event by a
fraction, the numerator of which is the number of shares of Common Stock
that are Outstanding on an As-Converted Basis (as defined below)
immediately before the Dilutive Event plus the number of shares of Common
Stock that could be purchased at the Trigger Price at the time of the
Dilutive Event for the aggregate consideration paid or payable upon the
sale or issuance of Common Stock in the Dilutive Event, and the
denominator of which is the number of shares of Common Stock that are
Outstanding on an As-Converted Basis immediately before the Dilutive
Event plus the number of shares that are acquired or to be acquired upon
the sale or issuance of the Common Stock in the Dilutive Event. For
purposes of this paragraph 5F(ii), "Outstanding on an As-Converted Basis"
immediately before the Dilutive Event means the sum of (i) all Common
Stock issued and outstanding immediately before the Dilutive Event plus
(ii) all Common Stock issuable upon the exercise of Options or conversion
of Convertible Securities outstanding immediately before the Dilutive
Event (other than Preferred Stock).
(iii) Issuance of Rights or Options. If the Corporation in any manner
grants any Options and the price per share for which shares of Common
Stock are issuable upon the exercise of any such Option is less than the
Trigger Price in effect immediately prior to the time of the granting of
such Option, then such shares of Common Stock shall be deemed to have
been issued and sold by the Corporation at the time of the granting of
such Options for such price per share and the Conversion Price shall be
adjusted in accordance with paragraph 5F(ii) above. For purposes of this
paragraph, the "price per share" for which shares of Common Stock are
issuable upon the exercise of any Option shall be equal to the sum of the
amounts of consideration (if any) received or receivable by the
Corporation with respect to such shares of Common Stock upon the granting
of the Option and upon exercise of the Option. No further adjustment of
the Conversion Price shall be made upon the actual issue of such Common
Stock upon the exercise of such Options.
(iv) Issuance of Convertible Securities. If the Corporation in any
manner issues or sells any Convertible Security (or Options to purchase
any Convertible Security) and the price per share for shares of Common
Stock that are issuable upon conversion or exchange thereof is less than
the Trigger Price in effect immediately prior to the time of such issue
or sale (or the granting of such Option), then such shares of Common
Stock shall be deemed to have been issued and sold by the Corporation at
the time of the issuance or sale of such Convertible Securities (or the
granting of such Option) for such price per share and the Conversion
Price shall be adjusted in accordance with paragraph 5F(ii) above. For
the purposes of this paragraph, the "price per share" for which shares of
Common Stock are issuable upon conversion or exchange of any Convertible
Security (or exercise of any Option therefor) shall be equal to the sum
of the amounts of consideration (if any) received or receivable by the
Corporation upon the issuance of the Convertible Security (or such
Option) and upon the conversion or exchange of such Convertible Security
(or exercise of such Option). No further adjustment of the Conversion
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Price shall be made upon the actual issue of such Common Stock upon conversion
or exchange of any Convertible Security, and if any such issue or sale of such
Convertible Security is made upon exercise of any Options for which adjustments
of the Conversion Price had been or are to be made pursuant to other provisions
of this Section 5, no further adjustment of the Conversion Price shall be made
by reason of such issue or sale.
(v) Change in Option Price or Conversion Rate. If the purchase price
provided for in any Option, the additional consideration (if any) payable
upon the issue, conversion or exchange of any Convertible Security, or
the rate at which any Convertible Security is convertible into or
exchangeable for Common Stock change at any time, any Conversion Price
previously adjusted with respect to such Option or Convertible Security
and in effect at the time of such change shall be readjusted to the
Conversion Price which would have been in effect at such time had such
Option or Convertible Security originally provided for such changed
purchase price, additional consideration or changed conversion rate, as
the case may be, at the time initially granted, issued or sold.
(vi) Treatment of Expired Options and Unexercised Convertible
Securities. Upon the expiration of any Option or the termination of any
right to convert or exchange any Convertible Security without the
exercise of any such Option or right, any Conversion Price then in effect
hereunder shall be adjusted to the Conversion Price which would have been
in effect at the time of such expiration or termination had such Option
or Convertible Security, to the extent outstanding immediately prior to
such expiration or termination, never been issued.
(vii) Calculation of Consideration Received. If any Common Stock,
Option or Convertible Security is issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor shall be
deemed to be the amount received by the Corporation therefor. In case any
Common Stock, Options or Convertible Securities are issued or sold for a
consideration other than cash, the amount of the consideration other than
cash received by the Corporation shall be the fair value of such
consideration, except where such consideration consists of securities, in
which case the amount of consideration received by the Corporation shall
be the Market Price thereof as of the date of receipt. If any Common
Stock, Option or Convertible Security is issued to the owners of the
non-surviving entity in connection with any merger in which the
Corporation is the surviving corporation, the amount of consideration
therefor shall be deemed to be the fair value of such portion of the
assets and business of the non-surviving entity as is attributable to
such Common Stock, Options or Convertible Securities, as the case may be.
The fair value of any consideration other than cash and securities shall
be as determined in good faith by the Board of Directors of the
Corporation.
(viii) Integrated Transactions. In case any Option is issued in
connection with the issue or sale of other securities of the Corporation,
together comprising one integrated transaction in which no specific
consideration is allocated to such Option by the parties thereto, the
Option shall be deemed to have been issued for a consideration of $.01.
(ix) Treasury Shares. For purposes of calculating under this
paragraph 5F the number of shares of Common Stock outstanding at any
given time, the number of shares of Common Stock outstanding at such time
does not include shares owned or held by or for the account of the
Corporation or any subsidiary thereof, and the disposition of any shares
so owned or held shall be considered an issue or sale of Common Stock.
(x) De Minimis Adjustments. Notwithstanding any other provisions of
this Section 5, the Corporation shall not be required to make any
adjustment of the Conversion Price unless such adjustment would require
an increase or decrease of at least one percent (1%) in the Conversion
Price as then in effect. Any lesser adjustment shall be carried forward
and shall be made no later than the time of, and together with, the next
subsequent adjustment which, together with any adjustment or adjustments
so carried forward, shall amount to an increase or decrease of at least
one percent (1%) of the Conversion Price as then in effect. If any action
would require adjustment of the Conversion Price pursuant to more than
one subparagraph of this
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paragraph 5F, only one adjustment shall be made as determined in good
faith by the Board of Directors of the Corporation.
Section 6. Liquidating Dividends.
If the Corporation declares or pays a Liquidating Dividend upon the Common
Stock, then the Corporation shall pay to the holders of Preferred Stock at the
time of payment thereof the Liquidating Dividend which would have been paid to
such holders had such Preferred Stock been converted immediately prior to the
record date fixed for determining the stockholders entitled to receive payment
of such Liquidating Dividend, or, if no record date is fixed, the date as of
which the record holders of Common Stock entitled to such dividends are to be
determined.
Section 7. Purchase Rights.
If at any time the Corporation grants, issues or sells any Purchase Rights
pro rata to the record holders of any class of Common Stock, then each holder of
Preferred Stock shall be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder would have
acquired if such holder had held the number of shares of Common Stock acquirable
upon conversion of such holder's Preferred Shares immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights.
Section 8. Registration of Transfer.
The Corporation shall keep at its principal office a register for the
registration of issuances and transfers of Preferred Stock. Upon the surrender
of any certificate representing Preferred Stock at such place, the Corporation
shall, at the request of the record holder of such certificate, execute and
deliver (at the Corporation's expense) a new certificate or certificates in
exchange therefor representing in the aggregate the number of Preferred Shares
represented by the surrendered certificate. Each such new certificate shall be
registered in such name and shall represent such number of Preferred Shares as
is requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate, and dividends
shall accrue on the Preferred Stock represented by such new certificate from the
date to which dividends have been fully paid on such Preferred Stock represented
by the surrendered certificate.
Section 9. Replacement.
Upon receipt of evidence reasonably satisfactory to the Corporation (an
affidavit of the registered holder shall be satisfactory) of the ownership and
the loss, theft, destruction or mutilation of any certificate evidencing
Preferred Shares, and in the case of any such loss, theft or destruction, upon
receipt of indemnity reasonably satisfactory to the Corporation (provided that
if the holder is a financial institution or other institutional investor, its
own agreement shall be satisfactory), or, in the case of any such mutilation
upon surrender of such certificate, the Corporation shall (at its expense)
execute and deliver in lieu of such certificate a new certificate of like kind
representing the number of Preferred Shares represented by such lost, stolen,
destroyed or mutilated certificate and dated the date of such lost, stolen,
destroyed or mutilated certificate, and dividends shall accrue on the Preferred
Stock represented by such new certificate from the date to which dividends have
been fully paid on the Preferred Shares represented by such lost, stolen,
destroyed or mutilated certificate.
Section 10. Definitions.
"Bond Offering" means an underwritten offering of notes or debentures of the
Corporation to the public, with or without Options, primarily for the purpose of
refinancing the indebtedness of International Private Satellite Partners, L.P.
("Orion Atlantic") outstanding under the Credit Agreement dated December 6, 1991
among Orion Atlantic, the Banks named therein and The Chase Manhattan Bank
(National Association), as Agent.
"Business Day" means a day on which banks are generally open for business in
New York City.
"Closing" means ______ ___, 1997.
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"Closing Price" of each share of Common Stock or other security means the
composite closing price of the sales of the Common Stock or such other security
on all securities exchanges on which such security may at the time be listed (as
reported in The Wall Street Journal), or, if there has been no sale on any such
exchange on any day, the average of the highest bid and lowest asked prices of
the Common Stock or such other security on all such exchanges at the end of such
day, or, if such security is not so listed, the closing price (or last price, if
applicable) of sales of the Common Stock or such other security in the Nasdaq
National Market (as reported in The Wall Street Journal) on such day, or if such
security is not quoted in the Nasdaq National Market but is traded
over-the-counter, the average of the highest bid and lowest asked prices on such
day in the over-the-counter market as reported by the National Quotation Bureau
Incorporated, or any similar successor organization.
"Common Stock" means, collectively, the Corporation's common stock, par value
$0.01 per share, and any capital stock of any class of the Corporation hereafter
authorized which is not limited to a fixed sum or percentage of par or stated
value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any Liquidation of the
Corporation; and if there is a change such that the securities issuable upon
conversion of the Preferred Stock are issued by an entity other than the
Corporation or there is a change in the class of securities so issuable, then
the term "Common Stock" shall mean one share of the security issuable upon
conversion of the Preferred Stock if such security is issuable in shares, or
shall mean the smallest unit in which such security is issuable if such security
is not issuable in shares.
"Conversion Price" shall mean, with respect to any Series C Share, $17.50
(subject to adjustment as provided in Section 5 for events occurring after its
Date of Issuance).
"Convertible Securities" means any stock or other securities of the
Corporation convertible into or exchangeable for Common Stock.
"Convertible Subordinated Debenture Offering" means an offering of
convertible subordinated debentures of the Corporation to the public, which
debentures would be convertible into Common Stock.
"Corporation" means Orion Newco Services, Inc., a Delaware corporation.
"Date of Issuance," with respect to any Preferred Share, means the date on
which the Corporation initially issues such Preferred Share, regardless of the
number of times transfer of such Preferred Share is made on the stock records
maintained by or for the Corporation and regardless of the number of
certificates which may be issued to evidence such Preferred Share.
"Dividend Reference Date" mean [___________] of each year, commencing
__________, 1997, and each of the following: (i) the date on which the
Liquidation Value of such Preferred Share is paid, (ii) the date on which such
Preferred Share is converted into shares of Common Stock hereunder, and (iii)
the Maturity Date.
"Excluded Issuance" means the issue or sale of (i) shares of Common Stock in
respect of any transaction described in paragraph 5B (including without
limitation any stock split, stock dividend or recapitalization), (ii) shares of
Common Stock by the Corporation pursuant to the exercise of Options and
Convertible Securities outstanding immediately prior to the Closing at exercise
prices that are greater than or equal to the respective exercise prices in
effect as of Closing (as adjusted pursuant to the terms of such securities to
give effect to stock dividends or stock splits or a combination of shares in
connection with a recapitalization, merger, consolidation or other
reorganization occurring after the Closing), (iii) up to an aggregate of 150,000
shares of Common Stock by the Corporation for any purpose, (iv) Options to
acquire Common Stock by the Corporation pursuant to a resolution of, or a stock
option plan approved by a resolution of, the Board of Directors of the
Corporation (or the compensation committee thereof) to the Corporation's
employees or directors, (v) shares of Common Stock, Options or Convertible
Securities (or shares of Common Stock pursuant to the exercise of Options and
Convertible Securities) as part of or in connection with a Bond Offering or a
Convertible Subordinated Debenture Offering.
"Initial Date of Issuance" means the Date of Issuance of the first share of
Preferred Stock to be issued.
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"Initial Redemption Date" means the earlier of (i) the close of business on
______, 1999. [two years from the Date of Issuance] or (ii) the effective date
of a Reorganization.
"Junior Securities" means Common Stock and any other capital stock or other
equity securities issued by the Corporation, whether currently existing or
hereafter authorized or issued (other than Series A Preferred or Series B
Preferred or any other series of preferred stock of the Corporation issued
pursuant to an option granted to purchasers of Series A Preferred in connection
with the initial issuances of Series A Preferred by the Corporation).
"Liquidation" means the liquidation, dissolution or winding up of the
Corporation; provided, however, that neither the consolidation or merger of the
Corporation into or with any other entity or entities, nor the sale or transfer
by the Corporation of all or any part of its assets, nor the reduction of the
capital stock of the Corporation, shall be deemed to be a liquidation,
dissolution or winding up of the Corporation.
"Liquidating Dividend" means a dividend upon the Common Stock payable
otherwise than in cash out of legally available funds (determined in accordance
with generally accepted accounting principles, consistently applied) except for
a stock dividend payable in shares of Common Stock.
"Liquidation Value" of any Preferred Share shall be equal to $1,000.
"Market Price" of each share of Common Stock or other security means, with
respect to a specified date, the Closing Price of such share or other security,
averaged over a period of the 20 consecutive Business Days prior to such date.
If during this period such security is not listed on any securities exchange,
quoted in the Nasdaq National Market, or quoted in the over-the-counter market,
the Market Price will be the fair value of such shares of Common Stock or
security determined by agreement between the Corporation and the holders of a
majority of the outstanding Preferred Shares. If such parties are unable to
reach agreement within a reasonable period of time, the fair value of such
security shall be determined by an independent appraiser experienced in valuing
such type of consideration jointly selected by the Corporation and the holders
of a majority of the outstanding Preferred Shares. The determination of such
appraiser shall be final and binding upon the parties, and the fees and expenses
of such appraiser shall be borne by the Corporation.
"Maturity Date" means the close of business on ______ __, 2022. [25 years
from the Date of Issuance]
"Options" means any options, warrants or rights to subscribe for or to
purchase Common Stock or any Convertible Securities.
"Person" means an individual, a partnership, a corporation, an association, a
joint stock company, a limited liability company, a trust, a joint venture, an
unincorporated organization and a governmental entity or any department, agency
or political subdivision thereof.
"Preferred Share" means a share of Series C Preferred.
"Preferred Stock" means the Series C Preferred.
"Prior Dividend Date" means, with respect to a Dividend Reference Date, the
previous Dividend Reference Date following which dividends were paid on shares
of Preferred Stock hereunder (or, if there is no such previous Dividend
Reference Date, the Date of Issuance).
"Public Offering" means any offering by the Corporation of its equity
securities to the public pursuant to an effective registration statement under
the Securities Act of 1933, as then in effect, or any comparable statement under
any similar federal statute then in force; provided, that "Public Offering"
shall not include an offering made in connection with a business acquisition or
combination or an employee benefit plan.
"Purchase Rights" means any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property.
"Redemption Date" means the date on which the Redemption Price of a Preferred
Share is paid to the holder thereof.
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"Redemption Price" means the Liquidation Value of such Preferred Share,
payable in cash, plus an amount equal to all accrued and unpaid dividends
thereon, payable in shares of Common Stock pursuant to paragraph 1D.
"Reorganization" means any recapitalization, reorganization,
reclassification, consolidation, merger, sale of all or substantially all of the
Corporation's assets to another Person or other transaction which is effected in
such a manner that holders of Common Stock are entitled to receive (either
directly or upon subsequent liquidation) stock, securities or assets with
respect to or in exchange for Common Stock.
"Series A Certificate" means the Certificate of Designations, Rights and
Preferences for the Series A Preferred.
"Series B Certificate" means the Certificate of Designations, Rights and
Preferences for the Series B Preferred.
"Series A Preferred" means the Corporation's Series A 8% Cumulative
Redeemable Convertible Preferred Stock, par value $.01 per share.
"Series B Preferred" means the Corporation's Series B 8% Cumulative
Redeemable Convertible Preferred Stock, par value $.01 per share.
"Series C Preferred" means the Corporation's Series C 6% Cumulative
Redeemable Convertible Preferred Stock, par value $.01 per share.
"Series A/B Dilution Price" means, at any time, the conversion price for the
Series B Preferred as then in effect under the Series B Certificate.
"Series A Share" means a share of Series A Preferred.
"Series B Share" means a share of Series B Preferred.
"Series C Share" means a share of Series C Preferred.
"Trigger Price" shall mean, with respect to any Series C Share, $14.00
(subject to adjustment as provided in Section 5B for events occurring after its
Date of Issuance).
Section 11. Amendment and Waiver.
No amendment, modification or waiver shall be binding or effective with
respect to any provision hereof without the prior affirmative vote or written
consent of the holders of a majority of the Preferred Shares outstanding at the
time such action is taken; provided, however, that without the prior affirmative
vote or written consent of each holder individually holding at least 51% of the
Preferred Stock then outstanding, no such action shall change (i) the rate at
which or the manner in which dividends on the Preferred Stock accrue or the form
of consideration in which such dividends are payable or the times at which such
dividends become payable or the amount payable on redemption of the Preferred
Stock or the times at which redemption of Preferred Stock is to occur, (ii) any
Conversion Price of the Preferred Stock or the number of shares or class of
stock into which the Preferred Stock is convertible, (iii) the priority of
payment of dividends to the Preferred Stock, (iv) the Liquidation Value, (v) the
voting rights of the Preferred Stock, (vi) the rights of the Preferred Stock
upon a reorganization, (vii) the provisions for mandatory conversion of the
Preferred Stock, (viii) the rights of holders of the Preferred Stock to acquire
Purchase Rights, or (ix) the percentage required to approve any change in this
Section 11.
Section 12. Notices.
Except as otherwise expressly provided hereunder, all notices referred to
herein shall be in writing and shall be delivered by registered or certified
mail, return receipt requested and postage prepaid, or by reputable overnight
courier service, charges prepaid, and shall be deemed to have been given when so
mailed or sent (i) to the Corporation, at its principal executive offices and
(ii) to any stockholder, at such holder's address as it appears in the stock
records of the Corporation (unless otherwise indicated by any such holder).
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ATTACHMENT D
SALOMON BROTHERS
December 10, 1996
Orion Network Systems, Inc.
2440 Research Boulevard
Suite 400
Rockville, MD 20850
Dear Sirs:
You have requested our opinion, as investment bankers, as to the fairness,
from a financial point of view, to Orion Network Systems, Inc. ("Orion"), of the
consideration to be paid by Orion in connection with the Exchange (as defined
below). Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the
"Exchange Agreement") with Orion Satellite Corporation, a Delaware corporation
that is a wholly owned subsidiary of Orion ("OrionSat") and the sole general
partner of International Private Satellite Partners, L.P., a Delaware limited
partnership ("Orion Atlantic"), and each of the existing limited partners of
Orion Atlantic other than Orion (the "Exchanging Partners"), Orion has agreed,
among other things, to have Orion Newco Services, Inc., a newly formed Delaware
corporation with a certificate of incorporation, bylaws, capital structure
(before the issuance of the Newco Preferred Stock defined below) and management
substantially identical in all material respects to those of Orion ("Orion
Newco"), issue 121,988 shares of Orion Newco|Als Series C 6% Cumulative
Redeemable Convertible Preferred Stock (the "Newco Preferred Stock") in exchange
for the Exchanging Partners|Al limited partnership interests in Orion Atlantic
and other rights relating thereto (the "Exchange"). The Exchange is intended to
qualify as tax-free under Section 351 of the Internal Revenue Code of 1986, as
amended. As a result of the Exchange, Orion Newco will become the owner of all
the partnership interests in Orion Atlantic (through Orion Newco and Orion as
limited partners and OrionSat as the sole general partner of Orion Atlantic). In
addition, Orion Newco will acquire certain rights currently held by the
Exchanging Partners, including rights to receive repayment of various advances
(aggregating approximately $37.6 million at September 30, 1996) made to Orion
Atlantic. The 121,988 shares of Newco Preferred Stock expected to be issued in
the Exchange will be convertible into approximately 6.9971 million (assuming a
closing of the Exchange as of January 30, 1997; the number of shares will
increase if the closing occurs after that date) shares of common stock, par
value $.01 per share, of Orion Newco ("Orion Newco Common Stock").
We understand that concurrently with, and as a condition to, the consummation
of the Exchange, (i) Orion Newco intends to consummate financings (the
"Financings") consisting of (a) notes and warrants with expected net proceeds of
approximately $250 million to refinance the indebtedness of Orion Atlantic
outstanding under the existing Credit Agreement dated December 6, 1991 among
Orion Atlantic, the banks named therein and Chase Manhattan Bank (National
Association), as agent (the "Orion 1 Credit Facility"), and to release Orion|Als
and the Exchanging Limited Partners|Al (including their respective affiliates)
existing commitments and guarantees supporting the Orion 1 Credit Facility, (b)
the issuance and sale of approximately $50 million of Orion Newco|Als
convertible subordinated debentures to British Aerospace Public Limited Company,
an affiliate of one of the Exchanging Partners and (c) the execution by Orion or
one of its affiliates of an amendment to the satellite procurement contract with
Matra Marconi Space U.K. Limited for the Orion 2 satellite, which was entered
into in July 1996 and is expected to include an agreement by the manufacturer to
commence construction of the Orion 2 satellite based upon a $40 million initial
payment, and (ii) a wholly-owned subsidiary of Orion Newco will be merged with
and into Orion in a tax-free reorganization (the "Merger"). We have not been
asked to express an opinion, and we do not express any opinion, with regard to
the Financings or the Merger.
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to Orion, as well as certain other
information, including financial projections, provided to us by Orion. We have
discussed the past and current operations and financial condition and prospects
D-1
<PAGE>
of Orion and Orion Atlantic with members of the respective senior management of
such entities. We have also considered such other information, financial
studies, analyses, investigations and financial, economic, market and trading
criteria which we deemed relevant.
We have assumed and relied on the accuracy and completeness of the
information reviewed by us for the purpose of this opinion and we have not
assumed any responsibility for independent verification of such information or
for any independent evaluation or appraisal of the assets of Orion or Orion
Atlantic. With respect to Orion|Als and Orion Atlantic|Als financial
projections, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of Orion|Als and
Orion Atlantic|Als management, as the case may be, as to the future financial
performance of such entity, and while we express no opinion with respect to such
forecasts or the assumptions on which they are based, we have relied on
management|Als assumption that the Financings will occur concurrently with the
Exchange.
Our opinion is necessarily based upon business, market, economic and other
conditions as they exist on, and can be evaluated as of, the date of this letter
and does not address Orion|Als underlying business decision to effect the
Exchange or constitute a recommendation to any holder of Orion common stock as
to how such holder should vote with respect to the Merger or the Exchange. Our
opinion as expressed below does not imply any conclusion as to the likely
trading range for the Orion Newco Common Stock following the consummation of the
Exchange, which may vary depending on, among other factors, changes in interest
rates, dividend rates, market conditions, general economic conditions and other
factors that generally influence the price of securities.
We have acted as financial advisor to the Board of Directors of Orion in
connection with the Exchange and will receive a fee for our services, part of
which was paid upon execution by Orion of the engagement agreement with respect
to the Exchange, part of which is payable upon the initial submission of this
opinion and the remainder of which is payable upon consummation of the
Financings. In the ordinary course of our business, we actively trade the
securities of Orion for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of the date hereof, the consideration to be paid in the
Exchange is fair, from a financial point of view, to Orion.
Very truly yours,
SALOMON BROTHERS INC
D-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Rockville, State of Maryland, on the 14th day of January, 1997.
ORION NEWCO SERVICES, INC.
By: /s/ David J. Frear
------------------------------------------
David J. Frear
Vice President
Pursuant to the requirements of the Securities Act of 1933, as amended,
Amendment No. 1 to this Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------ ------------------------------------- ---------------------
<S> <C> <C>
/s/ W. Neil Bauer* President and Director January 14, 1997
- ------------------------ (Principal Executive Officer)
W. Neil Bauer
/s/ David J. Frear* Vice President, Chief Financial January 14, 1997
- ------------------------ Officer and Director
David J. Frear (Principal Financial Officer and
Principal Accounting Officer)
/s/ Richard H. Shay* Secretary and Director January 14, 1997
- ------------------------
Richard H. Shay
</TABLE>
*By: /s/ David J. Frear
-------------------
David J. Frear
Attorney in Fact
II-8
