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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 Commission file number 0-26450
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ORION NETWORK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-2008654
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2440 Research Boulevard, Suite 400, Rockville, Maryland 20850
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(Address of principal executive offices )
(301-258-8101)
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
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None
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Securities registered pursuant to Section 12 (g) of the Act:
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Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No_
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of shares of Common Stock held by non-affiliates
(based on the February 28, 1997 closing price of these shares) was approximately
$101 million. The Common Stock is traded over-the-counter and quoted through the
NASDAQ National Market.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 15, 1997
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Common Stock, $.01 par value 11,160,099 shares
DOCUMENTS INCORPORATED BY REFERENCE
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Certain information in the Company's definitive Proxy Statement for its 1997
Annual Meeting of Stockholders to be filed within 120 days after the end of the
registrant's fiscal year is incorporated by reference in Part III of this Form
10-K.
ORION NETWORK SYSTEMS, INC.
TABLE OF CONTENTS
PART I
Page
Item 1. Business 1
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 25
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 28
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 55
PART III
Item 10. Directors and Executive Officers of the Registrant 55
Item 11. Executive Compensation 58
Item 12. Security Ownership of Certain Beneficial Owners and
Management 58
Item 13. Certain Relationships and Related Transactions 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K 58
PART I
Item 1. Business.
Statements contained in this Annual Report on Form 10-K regarding Orion's
expectations with respect to Orion 2 and Orion 3, related financing, future
operations and other information, which can be identified by the use of forward
looking terminology, such as "may", "will", "expect", "anticipate", "estimate",
or "continue" or the negative thereof or other variations thereon or comparable
terminology, are forward looking statements. See the "Risk Factors" section of
Orion Network Systems, Inc.'s Registration Statement on Form S-1 (Registration
No. 333-19167), on file at the Securities and Exchange Commission for cautionary
statements identifying important factors with respect to such forward looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from results referred to in forward looking
statements. There can be no assurance that Orion Network Systems, Inc.'s
expectations regarding any of these matters will be fulfilled. See Glossary at
page G-1 at the end of this Annual Report on Form 10-K for certain defined terms
and certain technical terms used herein.
Overview
Orion Network Systems, Inc. ("Orion" or the "Company") is a rapidly growing
provider of satellite-based communications services, focused primarily on (i)
private communications network services, (ii) Internet services and (iii) video
distribution and other satellite transmission services. Orion provides
multinational corporations with private communications networks designed to
carry high speed data, fax, video teleconferencing, voice and other specialized
services. The Orion satellite's ubiquitous coverage reaches all locations within
its footprint, enabling the delivery of high speed data to customers in emerging
markets and remote locations that lack the necessary infrastructure to support
these services. The Company also offers high speed Internet access and
transmission services to companies outside the United States seeking 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 very small
aperature terminals ("VSATs").
The Company commenced operations of Orion 1, a high power Ku-band satellite
in January 1995. As of December 31, 1996, Orion serviced 182 customers through
322 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 December 31, 1996,
Orion's contract backlog was $214.9 million (including $89 million from one
pre-launch customer on Orion 3). Substantially all of Orion's current contracts
with customers are denominated in U.S. dollars. For the three months ended
December 31, 1996, the Company generated revenues of $11.8 million and had a
loss from operations, net loss and EBITDA (as defined below) of $10.1 million,
$7.4 million and $0.5 million, respectively. For the year ended December 31,
1996, the Company generated revenues of $41.8 million and had a loss from
operations, net loss, net cash used in operating activities and EBITDA of $36.4
million, $27.2 million, $21.8 million and $0.6 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.
In July 1996, the Company signed a contract with Matra Marconi Space
for the construction and launch of Orion 2 (which was amended and restated in
January 1997) and in February 1997 commenced construction of that satellite.
Orion 2 will expand the Company's European coverage and extend coverage to
portions of the Commonwealth of Independent States, Latin America and the Middle
East, as shown in more detail in the footprint set forth below under the caption
"Implementation of the Orion Satellite System -- Orion 2". Orion 2 will increase
significantly the Company's pan-European capacity, currently the area of
strongest demand for the Company's services. The Company recently commenced
selling services in certain areas of Latin America. Orion 2 is scheduled to be
launched in the second quarter of 1999.
In January 1997, the Company entered into a satellite procurement contract
with Hughes Space for the construction and launch of Orion 3, construction of
which was commenced in December 1996. Orion 3 will cover broad areas of the Asia
Pacific region including China, Japan, Korea, India, Southeast Asia, Australia,
New Zealand, Eastern Russia and Hawaii, as shown in more detail in the footprint
set forth below under the caption "Implementation of the Orion Satellite System
- -- Orion 3". Orion 3's footprint will provide the Company with the ability to
redistribute
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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.
Recent Developments
On March 26, 1997, Orion acquired German-based Teleport Europe GmbH, a
communications company specializing in private satellite networks for voice and
data services. Orion purchased the shares of Teleport Europe held by the German
companies, Vebacom GmbH and RWE Telliance AG, now known as o.tel.o for
approximately $9 million. Teleport Europe's 1996 revenues were in excess of $14
million. The acquisition expanded Orion's customer base by approximately 55
customers, including some of Germany's leading multinational corporations, and
added over 200 Network Service sites (exclusive of Broadcast Service sites). In
addition, Orion acquired Teleport Europe's licenses and operating agreements to
provide satellite network services in 40 countries, including 17 countries in
which Orion previously did not provide service.
In January 1997, the Company consummated the Merger (as defined below) as
part of a series of transactions which significantly changed the Company. Those
transactions, which are discussed in more detail in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," of
this Annual Report on Form 10-K, are as follows:
(i) the acquisition of all of the limited partnership interests which the
Company did not already own in the Company's operating subsidiary, Orion
Atlantic, that owns the Orion 1 satellite, along with rights to receive
repayment of various advances by Orion Atlantic and various other rights, in an
exchange transaction for 123,172 shares of Series C Preferred Stock (the
"Exchange");
(ii) the acquisition by the Company of the only outstanding minority
interest in the Company's subsidiary Orion Asia Pacific Corporation from British
Aerospace Satellite Investments, Inc., in exchange (the "OAP Acquisition") for
approximately 86,000 shares of the Company's Common Stock;
(iii) a $710 million notes offering, with warrants representing
approximately 2.6% of the outstanding Common Stock of the Company on a fully
diluted basis (the "Bond Offering"), and
(iv) the sale of $60 million of the Company's Convertible Debentures to
British Aerospace Holdings, Inc. and Matra Marconi Space (the "Convertible
Debentures Offering").
The Exchange and the OAP Acquisition resulted in the Company owning 100% of
Orion Atlantic and its other significant subsidiaries and, therefore, a greatly
simplified corporate structure. The Exchange also resulted in a significant
increase in the Company's capital stock outstanding. The net proceeds of the
Bond Offering and Convertible Debentures Offering were used by the Company to
repay the credit facility it entered into in connection with the construction of
the Orion 1 satellite, to pre-fund the first three years of interest payments on
certain of the Notes, and will be used by the Company for the construction and
launch of two additional satellites, Orion 2 and Orion 3.
The Company also recently achieved the following significant milestones
with respect to the expansion of its satellite network, which are discussed in
more detail under the caption "Implementation of the Orion Satellite System." :
(i) Orion commenced construction of Orion 2 in February 1997 under a
satellite procurement contract with Matra Marconi Space for Orion 2. Orion
commenced construction of Orion 3 in December 1996 and entered into a satellite
contract with Hughes Space and Communications International, Inc. for Orion 3 in
January 1997.
(ii)Orion has entered into a contract with DACOM Corp., a Korean
communications company ("DACOM"), under which DACOM will, subject to certain
conditions, lease eight dedicated transponders on Orion 3 for 13 years, in
return for approximately $89 million, payable over a period from December 1996
through seven months following the lease commencement date for the transponders
(which is scheduled to occur by January 1999). Payments are subject to refund
unless Orion 3 commences commercial operation by June 30, 1999.
The Orion Strategy
Orion strategy is to maximize its revenues per satellite transponder
through the delivery of value added services to end users. To quickly establish
a stable base of revenues, Orion sells transponder capacity to video
broadcasters and telecommunications service providers. However, Orion's
long-term strategic focus is on value-added private network 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:
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o Focus on Specialized Communications Needs of Multinational
Organizations
o Bridge to Emerging Markets and Remote Locations
o End-to-End Service
o Global Coverage
o Early Market Entry
o Local Presence
o Ownership of Facilities
Focus on Specialized Communications Needs of Multinational Organizations
Orion targets the needs of multinational businesses and governmental
customers for customized private network communications services. Advantages of
the Company's satellite-based network services include: (i) transmission over
wide areas to multiple dispersed sites including sites in emerging markets; (ii)
interconnectivity among all sites; (iii) wide bandwidth and high data speeds;
(iv) transmission of data, fax, teleconferencing and voice over the same
network; (v) high transmission reliability, quality and security; (vi) Internet
access; and (vii) rapid implementation, both for the initial installation and
for later network modifications. Due to the flexibility of the network, Orion is
able to provide companies with customized solutions to link multiple locations.
Bridge to Emerging Markets and Remote Locations
Orion targets customers doing business in emerging markets and remote
locations of developed markets which often lack the fiber optic and digital
infrastructure required for wide bandwidth, high speed data applications.
Terrestrial transmissions in many emerging markets must often pass through
local, poorly developed network segments before reaching the customer premises,
making it difficult to send and receive high speed data. In contrast, Orion's
satellite system completely avoids such "bottlenecks" in local network segments
by sending and receiving transmissions directly to and from customers, avoiding
the need to interconnect with the local infrastructure. A significant portion of
Orion's private communications network customers transmit high-speed data to and
from locations in Central and Eastern Europe. Orion 2 and Orion 3 will extend
coverage to the Commonwealth of Independent States, Latin America and the Asia
Pacific Region.
End-to-End Service
Orion provides its services directly to and among customer locations using
satellite transmission and VSATs installed at customer premises. Offering
end-to-end services and bypassing terrestrial infrastructure allows Orion to
offer higher reliability and higher quality services than some terrestrial
facilities by bypassing multiple telecommunications service providers and local
networks and avoiding related toll charges. It also permits Orion to install
networks more quickly than many of its competitors, who must deal with multiple
vendors and multiple communications technologies. Orion offers its 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 local ground operators,
and delivers its services using leased satellite capacity. Orion employed this
strategy prior to the commercial operation of the Orion 1 satellite and is
pursuing the same approach with Orion 2 and Orion 3. For example, the Company is
currently providing service in Latin America 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.
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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. Second, the cost to provide bandwidth via satellite does not
increase with the distance between sending and receiving stations. Not only must
terrestrial networks add physical capacity to cover additional distances, they
must also continually reamplify transmission signals. Satellites are well suited
for transmission across large distances, for wide bandwidth and for
point-to-multipoint (broadcast) applications. Finally, since VSATs are
relatively easy to install and/or relocate, high power satellite networks can be
rapidly installed, upgraded and reconfigured. In contrast, installation of fiber
optic cable is expensive, time consuming and requires obtaining rights-of-way.
The current generation of high power Ku-band satellites, such as Orion 1,
is particularly well suited to provide high speed business communications
services in addition to video distribution services. The use of the Ku-band
frequencies (as opposed to the C-band used by older generations of satellites)
offers reduced interference with ground communications. This enables satellites
to use the higher broadcasting power necessary to support small, low-cost VSAT
earth stations and makes it cost effective to transmit to or among numerous
locations.
Data Networking
During the past decade, there has been significant growth in data
networking applications. The data networking market includes a number of types
of services, including leased lines for private networks, public data network
services, managed network services, frame relay and other services such as ATM
(asynchronous transfer mode) and WAN (wide area network) services. Data
networking applications include:
Private network services; intranets. Many companies are utilizing their own
"private" networks to meet their specific communications requirements, including
voice and data communications, business television transmissions, video
teleconferencing, high speed fax and e-mail. Corporate networks offer higher
performance, greater control and security than can be provided through the
public network. Corporations are also taking advantage of intranets to
distribute information within their own companies using Internet technologies.
Data inquiry, collection and retrieval. Hotel and travel reservation
systems and financial enterprises use private communications networks for
database inquiries and retrieval of information stored on computers. Banks use
such networks to verify account balances and connect automatic teller machines
to computers. Retail establishments verify credit standing and gather inventory
information. Other businesses use private communications networks to gather data
from multiple locations and transport it to central locations for analysis.
Internet. Business and consumers rely on the Internet for a growing number
of services, including research, e-mail, data exchange, software and graphics,
financial services and shopping, and even voice communications. These
applications are predicted to continue to expand and diversify in the future as
enabling technologies mature.
Image transmissions. Manufacturing, publishing, research and medical
industries use dedicated communications networks for high-resolution image
transmissions requiring large amounts of bandwidth.
Government networks. Network telecommunications are employed for complex
military and nonmilitary government applications, including administrative and
logistical functions, that require high security and customer network control.
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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.
(ii) Proliferation of bandwidth intensive applications; frame relay.
Companies are relying more heavily on applications such as CAD/CAM and
image transfer that require more bandwidth and result in traffic patterns
that involve bursts of transmissions. In addition, there is increasing
demand for near-instantaneous response time and more reliable data
transport. Frame relay services support these applications and reduce the
cost of fully and partially meshed networks.
(iii) Expansion in Internet and intranet services. The Internet is
becoming a major vehicle for economic and social activity enabling broad,
global access to financial and business information, research material, and
information on leisure, arts and general interest topics. Business uses of
the Internet include communication within and among businesses, electronic
commerce, advertising and merchandising. Internet usage has also led to
increased demand for "intranet" services for corporate applications.
Intranet servers are used for publishing information, processing data and
data-based applications and collaboration among employees, vendors, and
customers.
The significant growth in data networking services has led to rapid growth
in demand for satellite-based networks. Multinational companies are not always
able to implement client/server architectures, install wide bandwidth
applications or employ Internet and intranet solutions in every market due to
underdeveloped terrestrial communications infrastructure. Therefore, a growing
use of VSATs is to provide wide bandwidth capacity to industrial sites in
emerging markets and remote locations. 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 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
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programming has increased the demand for international programming such as
news and sports. Orion is well positioned to take advantage of this growth
due to its high-power Ku-band satellite and trans-Atlantic footprint.
(v) Worldwide deregulation of telecommunications markets. During the
past decade many countries have liberalized their telecommunications
markets in order to permit new competitors to provide facilities and
services. These changes have been particularly apparent in Europe, where
Orion currently has the ability to deliver network service to and among
points in 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 channels with improved transmission quality. CDV
lowers the per-channel cost of delivering programming via
satellite and cable television systems, thereby enabling more
programming options to be provided to smaller markets. The Company
believes that CDV will enable continued growth in the number of
video channels and also accelerate broadcasters' efforts to
distribute their programming internationally. The Company also
believes that CDV will result in higher total revenues per
transponder as more customers can be served per transponder.
However, CDV may also in effect increase the supply of satellite
transponders, causing prices to decline.
Orion Services
Orion provides satellite-based digital communications services comprised
of: (i) private network services for multinational business and governmental
customers, (ii) Internet backbone and access services and (iii) satellite
transmission capacity services, including video distribution services for
broadcasters, news organizations and international carriers. For 1996, 60% of
revenues were derived from the sale of satellite capacity (primarily for video
distribution services). These figures are consistent with the Company's strategy
of building a stable base of revenues through sales of transmission capacity and
then focusing on the delivery of value-added private network services to
end-users.
Private Communications Network Services
International Leased Line Services. Orion's international leased line
services include Digital Link and Digital Channelized Link. Digital Link can be
designed as a "point-to-point" private network service directly connecting
customer locations or as a "point-to-multipoint" service for customers seeking
to transmit communications from a central location to numerous remote sites.
Orion also offers Digital Channelized Link, a multiplexed version of Digital
Link that integrates digitally compressed voice, fax and data traffic into a
single channel. Digital Link and Digital Channelized Link services have been
offered by Orion since 1993. International leased line services have constituted
a majority of Orion's bookings of private communications network services to
date.
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. 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.
6
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 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. 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 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 generally offers
transmission capacity services under long term contracts and also offers
occasional use services for periods of up to a few hundred hours.
Video Services -- Contribution. Orion's video services include
"contribution," the long-distance transport of video signals (usually one or
more television channels) to one location. 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
7
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. 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 offer customers a number of important
features, which provide significant benefits versus competing alternatives.
Bypass terrestrial network and multiple international connection
points. Orion's ability to bypass terrestrial facilities improves service
reliability and quality by reducing potential points of failure and
avoiding "last mile" limitations. In addition, terrestrial bypass allows
Orion to avoid the multiple in-country toll charges of terrestrial
facilities and thereby reduces cost.
Direct end-to-end service to customer sites. Orion provides service
from rooftop to rooftop using VSAT earth stations located on customer
premises. This "end-to-end service" is reliable, rapidly installed, easily
upgraded and avoids the "last mile" limitations of some terrestrial
alternatives.
Ubiquitous coverage. Orion delivers wide bandwidth service to emerging
markets and remote locations where there are no effective terrestrial
alternatives.
One-stop shopping. Orion provides its customers with a single point of
contact for customer care, including service, billing and support.
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.
8
High power Ku-band transmissions, high reception sensitivity. Orion's
high power transmissions allow customers to lower costs by utilizing small,
less expensive earth station equipment. Orion 1's reception sensitivity
allows for effective reception from portable earth stations, an advantage
in satellite news gathering.
Cost-competitive. Orion prices its services to be competitive with both
satellite-based and terrestrial alternatives.
Customers and Backlog
Customers. As of December 31, 1996, Orion had entered into contracts with
182 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.
- --------------------------------------------- ---------------------------------- ----------------------------------
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
Datac Terminal Bar
Global Ukraine TSSA Nask
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
- --------------------------------------------- ---------------------------------- ----------------------------------
More than half of Orion's customers are based in the U.S., but these
customers have a substantial majority of their sites in Western and Eastern
Europe.
Orion has entered into a contract with DACOM Corp., a Korean communications
company which provides international and long distance telephone and leased line
services, international and domestic data communications and value added network
services. Under the contract, DACOM will, subject to certain conditions, lease
eight dedicated transponders on Orion 3 for thirteen years for direct-to-home
television service and other satellite services, for $89 million payable in
installments from December 1996 through seven months following the lease
commencement date of the transponders. DACOM has the right to terminate the
contract before March 31, 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 December 31, 1996, Orion had approximately $214.9 million of
contracts in backlog (including $89 million from the DACOM contract and after
giving effect to the Exchange and related transactions, which resulted in
changes to arrangements with Exchanging Partners that reduced backlog by
approximately $11 million), as compared to approximately $120.6 million at
December 31, 1995. The backlog contracts generally have terms of between three
and four years. Orion presently anticipates that at least $166.3 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 December 31, 1996,
Orion had a VSAT installation backlog of 83 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
9
raise the necessary 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
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.
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").
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 Orion's
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.
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. The Company recently completed such an acquisition, as
discussed above under "Recent Developments".
Direct Sales
Orion has assembled a direct sales force of 30 (as of December 31, 1996)
full-time employees in the United States and Europe to offer its private
communications network and satellite transmission services. Approximately 67% of
the sales force is based in the United States (in Maryland) and approximately
33% 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
former limited partners of the Orion Atlantic Limited Partnership who serve as
sales representatives (and ground operators) are entitled to receive additional
commissions under a "profit sharing" formula based on their overall contribution
to sales, but no amounts have been paid under such formula to date. Orion
expects that unless such sales representatives increase their sales
significantly, payments under the profit sharing arrangement will 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 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.
10
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 the Company enters into a contract with a
customer, it finalizes the design of the customer's network, acquires the
required equipment and arranges for the installation and commissioning of the
network. Upon commencement of service, Orion also monitors the performance of
the networks through its U.S. 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 twenty seven 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 facilities
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 former limited partners of the Orion
Atlantic Limited Partnership who serve as ground operators are entitled to
receive additional fees under a profit sharing formula, but no amounts have been
paid under such formula to date and Orion expects that, unless such ground
operators significantly increase the number of VSATs they maintain on behalf of
Orion for Orion's customers, profit sharing payments will not be material.
Orion's operations will continue to depend significantly on Orion being able to
provide ground operations for private network services using representatives and
distributors throughout the footprint of Orion's satellites. In the event that
its network of ground operators is not maintained and expanded, or fails to
perform as expected, Orion's ability to offer private network services will be
impaired.
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]
11
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.
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.
Implementation of the Orion Satellite System
Orion currently provides its services with Orion 1 and with facilities
leased from other providers covering areas outside the satellite's footprint.
Ultimately the Company will provide these services with three satellites,
together with facilities leased outside of its footprints. Orion 1 provides
coverage of the Northern Atlantic Ocean region. Orion 2 is being designed to
cover the Atlantic Ocean region but with coverage of points further East (into
the Commonwealth of Independent States) and South (into Latin America and
Africa), and Orion 3 is being designed to cover the Asia Pacific region.
The design, construction, launch and in-orbit delivery of a satellite is a
long and capital-intensive process. Satellites comparable to Orion's typically
cost in excess of $200 million (exclusive of development, financing and other
costs) and take two to three years to construct, launch and place in orbit.
Prior to launch, the owner generally must obtain a number of licenses and
approvals, including approval of the host country's national telecommunications
authorities to construct and launch the satellite, coordination and registration
of an orbital slot (of which there are a limited number) through the ITU to
avoid interference with other communications systems and a consultation on
interference with INTELSAT (and EUTELSAT in the case of European satellites).
Obtaining the necessary consents can involve significant time and expense, and
in the case of the United States, requires a showing that the owner has the
financial ability to fund the construction and launch of the satellite and to
operate for one year. The Company has commenced construction of Orion 3 and
Orion 2 prior to receipt of all regulatory approvals. Failure to obtain such
approvals prior to launch would have a material adverse effect on the Company.
Orion 1 is expected to have an in-orbit useful life of approximately 10.7 years,
estimated to end in October 2005, and Orion 2 and Orion 3 are expected to have
in-orbit useful lives of 13 years and 15 years, respectively (based upon present
design). While there can be no assurances that adequate financing and regulatory
approvals will be obtained, Orion plans to launch replacement satellites as its
satellites reach the end of their useful lives.
Orion 1
Orion 1 was launched in November 1994 and commenced commercial operations
in January 1995.
Satellite Design and Footprint. Orion 1, which is in geosynchronous orbit
at 37.5(Degree) West Longitude, is a high power Ku-band telecommunications
satellite that contains 28 transponders of 54 MHz bandwidth and six transponders
of 36 MHz bandwidth (although one of these transponders has not operated in
accordance with specifications, as described below). The footprint of Orion 1 is
shown below (although certain transponders of Orion 1 can be reconfigured to
match changing business and telecommunications requirements).
INSERT MAP
12
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 redundant component fails, Orion 1 would experience a significant
loss of usable capacity. In such event, while Orion would be entitled to
insurance proceeds of approximately $47 million and could lease replacement
capacity and function as a reseller with respect to such capacity (at
substantially reduced gross margins), the loss of capacity would have a material
adverse effect on Orion.
Control of Satellite. Orion uses its tracking, telemetry and command
facility in Mt. Jackson, Virginia (the "TT&C facility") to control Orion 1, and
has in place backup facilities at its headquarters in Rockville, Maryland. In
addition, Orion has a satellite control center at Orion's headquarters in
Rockville, Maryland, from which commands can be sent to the satellite, directly,
or remotely through the TT&C facility. Orion also has constructed a network
management center at its headquarters to monitor the performance of Orion 1 and
to perform diagnostic procedures on and to reconfigure its communications
networks. Orion leases additional facilities in Europe for backup tracking,
telemetry and command and network monitoring functions.
Orion 2
Schedule and Footprint. Orion intends to launch Orion 2 in the Atlantic
Ocean region to bolster its European capacity and to expand its coverage area in
the Commonwealth of Independent States, Latin America and parts of Africa. Orion
2 will be a high power Ku-band communications satellite which will contain
approximately 30 transponders of 54 MHz bandwidth. Orion has obtained
conditional authorization from the FCC for the orbital slot at 12(Degree) West
Longitude for operation of Orion 2. The FCC has commenced the coordination
process through the ITU and will commence consultation with INTELSAT upon
request from Orion. Orion commenced construction of Orion 2 in February 1997 and
expects to launch Orion 2 in mid 1999.
[Document contains a map of North America, Latin America, Europe, Africa and
Asia showing in
shaded areas the proposed coverage footprint of Orion 2]
13
Satellite Construction, Launch and Performance. Matra Marconi Space and MMS
Space Systems are the prime contractors for Orion 2 and will use MMS Space
Systems' EUROSTAR satellite platform for Orion 2. This platform was previously
used for Inmarsat 2, Telecom 2, Hispasat and Orion 1. Lockheed Martin CLS will
provide launch services for Orion 2 using the Atlas II A-S launch vehicle. Atlas
II A-S, which is larger than the launch vehicle used for the launch of Orion 1,
is an expanded version of Atlas II. All 26 of the Atlas II, II A and II A-S
launches have been successful. There have been more than 500 Atlas flights since
the first research and development launch in 1957.
The Orion 2 satellite will be tested extensively prior to launch. Matra
Marconi Space is obligated to correct all defects in the satellite or its
components discovered prior to the launch. If Orion 2 is launched but fails to
meet the specified performance criteria following launch, or fails to arrive at
its designated orbit within 180 days of launch, or is completely destroyed or
incapable of operation, Orion 2 will be deemed a "constructive total loss." Upon
a constructive total loss of Orion 2, Orion would generally be entitled to order
from Matra Marconi Space a replacement satellite on substantially the same terms
and conditions as set forth in the Orion 2 Satellite Contract, subject to
certain pricing adjustments. If Orion 2 is substantially able to perform but
fails to meet certain criteria for full acceptance, Orion 2 will be deemed a
"partial loss." Upon a partial loss of Orion 2, Orion would be entitled to
receive a partial refund based on calculations of Orion 2's performance
capabilities. If Orion 2 is not a constructive total loss or partial loss, but
does not meet the specified performance requirements at final acceptance or for
five years thereafter, Matra Marconi Space may be required to make certain
refund payments to Orion up to a maximum of approximately $10 million. Orion's
principal remedy in the case of a constructive total loss or partial loss will
be under the launch insurance the Company is to obtain. The Orion 2 Satellite
Contract provides Orion with an option to purchase a replacement satellite.
Under the contract, Orion has an option to purchase a replacement satellite for
Orion 2, to be delivered in orbit no later than 21 1/4 months after Orion's
exercise of the option. A total or partial loss will involve delays and loss of
revenue, which will impair Orion's ability to service its indebtedness,
including the Notes, and such insurance will not protect Orion against business
interruption, loss or delay of revenues or similar losses and may not fully
reimburse the Company for its expenditures.
The Orion 2 Satellite Contract provides for incentive payments to encourage
early delivery and limited liquidated damages payable in the event of late
delivery. The incentive payments would equal $25,000 per day for each day that
Orion 2 is delivered prior to the scheduled delivery date. Liquidated damages in
the event of a late delivery of Orion 2 also would be calculated on a daily
basis, with the aggregate amount not to exceed approximately $12 million. These
liquidated damages would be Orion's exclusive remedy for late delivery.
Control of Satellite. Orion expects to use the TT&C facility to control
Orion 2, and to use its existing network monitoring facilities in Rockville,
Maryland and backup facilities in Europe.
Orion 3
Schedule and Footprint. Orion intends to launch Orion 3 in the Asia Pacific
region. Orion 3 is expected to cover all or portions of China, Japan, Korea,
India, Hawaii, Southeast Asia, Australia, New Zealand, and Eastern Russia. Orion
3 is expected to be a high-power satellite with twenty-three 54 MHz and two 27
MHz equivalent Ku-band transponders, ten 36 MHz C-band transponders for use by
Orion, and eight Ku-band transponders to be used by DACOM, a large Asian
customer, for direct-to-home television services and other satellite services.
Orion, through the Republic of the Marshall Islands, has filed the appropriate
documentation to begin the ITU process to coordinate an orbital slot at
139(Degree) 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 the fourth
quarter of 1998.
The proposed coverage of Orion 3 is shown below.
[INSERT COVERAGE MAP]
14
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 31, 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
operations of Orion 3 has not occurred by June 30, 1999. Although Orion 3 is
scheduled to be launched in the fourth quarter of 1998, there can be no
assurance that Orion will meet the delivery requirements of this contract. As
part of the arrangements with DACOM, Orion granted DACOM a warrant to purchase
50,000 shares of Common Stock at $14 per share.
Satellite Construction, Launch and Performance. Orion has selected Hughes
Space as the prime contractor for Orion 3 and will use a Hughes Space HS 601 HP
satellite platform for Orion 3. Launch services for Orion 3 will be provided
using the McDonnell Douglas Delta III launch vehicle. Delta III, which is larger
than the launch vehicle used for the launch of Orion 1, is an expanded version
of the Delta II launch vehicle which has had 53 successful launches with a
failure rate of less than 4%. The most recent launch of a Delta II (on January
17, 1997) resulted in a launch failure. There have been no Delta III flights to
date, and the Company expects its launch to be the third Delta III flight based
upon information provided by the launch vehicle manufacturer regarding its
present flight schedules.
Under the Orion 3 Satellite Contract, the Orion 3 satellite will be tested
extensively prior to launch. Hughes Space is obligated to correct all defects in
the satellite or its components discovered prior to the launch. The risk of loss
or damage to Orion 3 passes from Hughes Space to Orion at the time of
intentional ignition of Orion 3. After Orion 3 is launched and meets the
specified performance criteria following launch, and has not suffered damage
caused by any failure or malfunction of the launch vehicle, Hughes Space is
required to perform in-orbit testing of Orion 3 to determine whether the
transponders meet the specified performance criteria. If the transponders meet
the specified performance criteria, Hughes Space is entitled to retain the full
satellite performance payments described below.
Orion has an option to purchase an additional satellite (which may be used
as a replacement satellite) to be launched within 12 to 19 months after Orion
exercises such option. Orion must pay a fee if it exercises this option; the
size of the fee will depend on whether the additional satellite is required to
be delivered in 12, 15 or 19 months. Hughes Space is obligated to furnish the
replacement satellite on terms substantially similar to those contained in the
Orion 3 Satellite Contract.
The Orion 3 Satellite Contract provides for incentive payments to encourage
satellite performance and limited liquidated damages payable in the event of
late delivery. The incentive payments could total $18 million depending on the
satellite's performance, of which $10 million could be payable upon acceptance
of the Orion 3 satellite and $8 million is payable over the course of the
satellite's operational lifetime. In the event that it is determined during the
Orion 3's operational lifetime that a transponder is not successfully operating,
Orion is entitled to receive payment refunds under the Orion 3 Satellite
Contract. Liquidated damages in the event of a late delivery of Orion 3 also
would be calculated on a daily basis, with the aggregate amount not to exceed
approximately $6 million. These liquidated damages would be Orion's exclusive
remedy for late delivery.
Control of Satellite. Orion expects to lease a tracking, telemetry and
command facility in the United States to control Orion 3 and to maintain backup
facilities in Korea, pursuant to arrangements with DACOM.
15
SUMMARY SATELLITE DATA
ORION 1 ORION 2* ORION 3*
------- -------- --------
Region Covered....................... Europe, Southeastern Eastern U.S., Southeastern Canada China, Japan, Korea, India,
Canada, U.S., East of Europe, Commonwealth of Independent Hawaii, Southeast Asia,
the Rockies and Paris States, Middle East, North Africa and Australia, New Zealand
of Mexico America and Eastern Russia
Expected Launch...................... Operational(1) Mid 1999 Fourth Quarter of 1998
Satellite Manufacturer............... MMS Space Systems Matra Marconi Space Hughes Space
(subsidiary of Matra
Marconi Space)
Transponders(2)...................... 34 30 43
Ku-Band(3)........................... 28@0054 MHz 30@0054 MHz 23@0054 MHz
6@0036 MHz 2@0027 MHz
8@0036 MHz (4)
C-Band(5)............................ -- -- 10@0036 MHz
Usable Bandwidth(6).................. 1728 MHz 1620 MHz 1944 MHz
EIRP(7).............................. 47 to 52 dBW 47 to 50 dBW 44 to 52
for Ku-Band;
34 to 38
for C-band
returns
Total Prime Power(8) ................ 4500 Watts 7000 Watts 8000 Watts
Expected End of Useful Life(9)........ 2005 2012 2013
Approximate Percentage of World
Population Covered by
Satellite(10)........................ 17.9% 27.0% 57.0%
* All information relating to Orion 2 and Orion 3 is based on currently
proposed satellite designs. Such designs are not finalized and, therefore,
particular features of Orion 2 and Orion 3 are subject to change, although
changes are not expected to have a material impact on the operating
specifications of the satellites.
(1) Orion 1 was launched on November 29, 1994 and commenced commercial
operations on January 20, 1995.
(2) Satellite transponders receive signals up from earth stations and then
convert, amplify and transmit the signals back down to other earth stations.
(3) Ku-band frequencies are higher than C-band frequencies and are used
worldwide for commercial satellite communications.
(4) Orion has entered into a contract with DACOM under which Orion will
provide eight dedicated transponders on Orion 3 for direct-to-home
television service and other satellite services, provided that Orion 3 is
delivered in orbit and fully operational by June 30, 1999.
(5) C-band frequencies minimize interference from atmospheric conditions such
as rain. C-band satellites share frequencies with terrestrial based
microwave systems and therefore require more on-ground coordination to
avoid interference problems and generally are lower power, requiring the
use of large earth stations to receive signals. A portion of Orion 3 is
designed to transmit over C-band frequencies since Orion 3 is to cover
areas of Asia where satellite signals experience significant interference
from rain during several months of the year.
(6) Bandwidth is a measure of the transponder resource which determines the
information carrying capacity. The actual information carrying capacity of
a transponder is determined by a combination of the transponder's
bandwidth and radio-frequency ("RF") power.
(7) Equivalent isotropic radiated power ("EIRP") is a measure of the RF power
of each transponder. Smaller and less expensive earth terminal antennas
can be used with higher EIRP transponders.
(8) Total prime power is the total amount of power that is required to support
all of the communications and electronics functions of the satellite.
(9) The expected end of a satellite's in-orbit useful life is based on the
period during which the satellite's on board fuel permits proper station
keeping maneuvers for the satellite. The information for Orion 1 is based
on fuel level estimates on February 5, 1996. The information for Orion 2
and Orion 3 is based on their expected launch dates and their expected
satellite designs, internal studies, the Orion 2 Satellite Contract and
the Orion 3 Satellite Contract.
16
(10) The approximate percentages of world population covered or to be covered
by the Orion satellites are not additive. In the aggregate, the footprints
of the Orion satellites would cover over 85% of the world's population.
Orbital Slots
Orion 1. Orion has been licensed by the FCC and has completed the
coordination process with INTELSAT to operate Orion 1 in geostationary orbit at
37.5(Degree) West Longitude.
Orion 2. Orion has obtained conditional authorization from the FCC for the
construction, launch and operation of Orion 2 at 12(Degree) West Longitude. On
behalf of Orion, the FCC has commenced the orbital slot coordination process
through the ITU. Orion believes that its use of the 12(Degree) West Longitude
slot for Orion 2 is not likely to interfere with proposed uses of adjacent slots
filed for by other governments, except for a possible overlap of 75 MHz with one
such filing as discussed more fully below under the caption "-- ITU Coordination
Process". Orion has commenced consultation with INTELSAT regarding Orion 2, and
believes that since there are no INTELSAT satellites located adjacent to the
12(Degree) West Longitude orbital slot, the INTELSAT coordination should be
obtained in due course.
Orion 3. Orion, through the Republic of the Marshall Islands, has filed the
appropriate documentation with the ITU to begin the ITU coordination process for
Orion 3 at 139(Degree) East Longitude. Based upon the time of filing by the
Republic of the Marshall Islands, Orion believes that the proposed orbital slot
for Orion 3 would have effective priority under ITU procedures with respect to
the 139(Degree) East Longitude orbital slot, but some proposals for adjacent
slots would be entitled to priority over the Company's proposal (through the
Republic of the Marshall Islands) with respect to certain frequencies. Orion
believes, based upon its monitoring of the other proposals and information in
the industry regarding their progress, that none of these entities will launch a
satellite prior to launch of Orion 3 to take advantage of such priority. Orion
has not commenced the consultation process with INTELSAT with respect to Orion
3, but as in the case of Orion 2 expects to complete the INTELSAT coordination
in due course.
Other Orbital Slots. Orion has received an authorization from the FCC for a
Ku-band satellite in geostationary orbit at 47(Degree) West Longitude, and has
coordinated this orbital position with INTELSAT. Orion has also filed an
application with the FCC to operate a satellite at 126(Degree) East Longitude.
The FCC has filed documentation with the ITU to commence the coordination
process for this slot. In May 1996, in response to Orion's application, the FCC
assigned the U.S. domestic orbital location of 135(Degree) West Longitude to
Orion. In November 1996, the FCC granted authorization to Orion to utilize the
slot, conditioned on Orion submitting financial qualification information, or
documentation justifying a waiver of the financial requirements, within 120 days
after the release of the individual order with respect to Orion's application.
Orion made its filing on March 19, 1997.
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(Degree) East Longitude and 126.5(Degree) East Longitude, and one at
47(Degree) West Longitude. In February 1997, these companies reached a
consensual Ka-band orbital assignment plan for domestic orbital positions. Orion
received orbital positions during this negotiation at 47(Degree) West Longitude,
81(Degree) West Longitude, 89(Degree) West Longitude, 127(Degree) West
Longitude, 78(Degree) East Longitude and 126.5(Degree) East Longitude. The FCC
is expected to release Ka-band service rules in April 1997. 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 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
17
the use of one or more transponders on Orion 2 or Orion 3 or delays in the
launch of Orion 2 or Orion 3. In order to achieve successful coordination, Orion
may also have to modify the operation of the satellites, or enter into
commercial arrangements with operators of other satellites, in order to protect
against harmful interference to Orion's operations. If interference occurs with
satellites that are in close proximity to Orion 2 and Orion 3, or with
satellites that are subsequently launched into locations in close proximity
without completing ITU coordination procedures, such interference would have an
adverse effect on the proposed use of the satellites and on Orion's business and
financial performance.
Insurance
Orion has obtained satellite in-orbit life insurance for Orion 1 covering
the period from May 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. Present insurance rates range 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 intends to procure satellite in-orbit life insurance for Orion 2
and Orion 3. Launch and in-orbit insurance for its satellites will not protect
the Company against business interruption, loss or delay of revenues and similar
losses and may not fully reimburse the Company for its expenditures.
Competition
As a provider of data networking and Internet-related services, Orion
competes with a large number of telecommunications service providers and
value-added resellers of transmission capacity. As a provider of satellite
transmission capacity, Orion competes with other providers of satellite and
terrestrial facilities.
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.
Satellite Capacity
Orion provides fixed satellite service and does not intend to compete with
most proposed mobile satellites or low earth orbit systems ("LEO") such as
Globalstar, Iridium or Odyssey (although the Company expects to compete with
Teledesic, a proposed LEO system), or, with the exception of the pre-leased
transponders on Orion 3 to be used for video transmissions, with direct-to-home
satellite systems such as Primestar, DirecTV or EchoStar. Mobile satellite
services are characterized by voice and data transmission to and from mobile
terminals on platforms such as ships or aircraft. Direct-to-home services are
characterized by the transmission of television and entertainment services
directly to consumers. Orion's satellites will compete with trans-Atlantic fixed
satellite systems, European regional and domestic systems and Asian systems.
18
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 the
footprint of Orion 1 and/or the proposed footprints of Orion 2 and Orion 3. As
these new satellites commence operations, they (other than replacement
satellites not significantly larger than the ones they replace) will
substantially increase the capacity available for sale in the company's markets.
After a satellite has been successfully delivered in orbit, the variable cost of
transmitting additional data via the satellite is limited. Accordingly, absent a
corresponding increase in demand, this new capacity can be expected to result in
significant additional price reductions. For example, Teledesic Corporation
proposes to operate up to 840 low earth orbit small satellites by 2001 to
provide global satellite services (including voice, data and broadband
transmission services). Although Orion cannot assess to what degree, if any,
these proposed satellites might compete with Orion in the future, Teledesic
could provide significant competition to the Company.
Terrestrial Capacity
Orion competes with terrestrial facilities for intra-Europe and
trans-Atlantic capacity.
European Facilities. Orion's services compete with terrestrial
telecommunications delivery services, which are being improved gradually through
the build-out of fiber optic networks and a move from analog to digital
switching. As fiber networks and digital network switching become more
prevalent, the resulting improved and less expensive terrestrial capacity is
increasingly competitive with Orion's services.
Undersea Cable. Undersea fiber optic cable capacity has increased
substantially in recent years. Although Orion believes that undersea cable
capacity is not as well suited as satellite capacity to serve the requirements
of video broadcasters or the demand for multi-point private network services,
fiber optic and coaxial cables are well suited for carrying large amounts of
bulk traffic, such as long distance telephone calls, between two
19
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. In addition, Orion is required to
obtain approvals from numerous national local authorities in the ordinary course
of its business in connection with most arrangements for the provision of
services. Within Orion 1's footprint, such approvals generally have not been
difficult for Orion to obtain in a timely manner. However, the failure to obtain
particular approvals has delayed, and in the future may delay, the provision of
services by Orion.
Authority to Construct, Launch and Operate Satellites
Orion 1. In June 1991, Orion received final authorization from the FCC (the
"Orion 1 License") to construct, launch and operate a Ku-band satellite in
geostationary orbit at 37.5(Degree) West Longitude in accordance with the terms,
conditions and technical specifications submitted in its application to the FCC.
The Orion 1 license from the FCC expires in January 2005. Although Orion has no
reason to believe that its licenses will not be renewed (or new licenses
obtained) at the expiration of the license term, there can be no assurance of
renewal.
Orion 2. Orion has obtained conditional authorization from the FCC for the
orbital slot at 12(Degree) West Longitude for operation of Orion 2. The Orion 2
authorization will not become final until Orion completes a consultation with
INTELSAT and demonstration to the FCC of its financial ability to meet the costs
of construction, the launch of its satellite and operating expenses for one year
following launch. Orion has not yet met the required financial qualifications
demonstration to the FCC and intends to do so within 90 days after completion of
INTELSAT consultation. Orion recently commenced consultation with INTELSAT. The
application filed with the FCC for Orion 2 contains a technical proposal
different than that currently being coordinated with the ITU, and will need to
be amended. Orion has no reason to believe that the FCC will not approve such
amendment or that the amendment will cause material delay in obtaining final FCC
authority for Orion 2.
Orion 3. Orion is pursuing an orbital slot at 139(Degree) East Longitude
through the Republic of the Marshall Islands. Under an agreement with the
Republic of the Marshall Islands entered into in 1990, the Republic of the
Marshall Islands agreed to file with the ITU all documents necessary to secure
authorization for Orion to operate a satellite in geo-stationary orbit. In
return for the right to utilize any orbital slots secured by the Republic of the
Marshall Islands, Orion must, among other things, (i) commence construction of a
functioning operating center for satellites serving the Pacific Island portion
of the Orion Asia Pacific network at least a year prior to the operation of an
Orion satellite, (ii) train and support certain employees designated by the
Republic of the Marshall Islands at least a year prior to the operation of an
Orion Asia Pacific satellite, and (iii) construct, equip and install (except for
power supply or back-up) four earth stations capable of handling a "T-1" circuit
for operation with the Orion Asia Pacific system prior to the operation of an
Orion Asia Pacific satellite.
Consultation with INTELSAT and EUTELSAT
Orion 1. Prior to receiving final licensing and launch authority for Orion
1, Orion successfully completed its consultation with INTELSAT pursuant to the
INTELSAT Treaty. A similar consultation for Orion 1 was completed with EUTELSAT
in May 1994. Additional consultations or other approvals may be needed in
individual countries for the use of VSATs.
Orion 2. Orion has recently commenced consultations with INTELSAT. Orion
believes that since there are no INTELSAT satellites located adjacent to the
12(Degree) West Longitude orbital slot, the INTELSAT coordination should be
obtained in due course. Orion intends to commence consultation with EUTELSAT in
the near future through the coordination procedures of the ITU.
Orion 3. Orion has not commenced consultations with INTELSAT for Orion 3,
but Orion believes that since there are no INTELSAT satellites located adjacent
to the 139(Degree) East Longitude orbital slot, the INTELSAT coordination should
be obtained in due course. There is no requirement to coordinate with EUTELSAT
for the 139(Degree) East Longitude orbital slot.
There can be no assurance that Orion will successfully complete these
consultations.
20
International Telecommunication Union
An international treaty to which the U.S. and the Republic of the Marshall
Islands are parties requires coordination of satellite orbital slots through the
procedures of the ITU. The process for coordinating orbital slots through the
ITU is discussed under the caption "Orbital Slots -- ITU Coordination Process."
Orion 1. After Orion 1 reached its orbital position and commenced
operation, the FCC notified the ITU. This concluded the process for coordination
of the Orion 1 orbital slot.
Orion 2. On behalf of Orion, the FCC has commenced the orbital slot
coordination process through the ITU. Orion believes that its use of the
12(Degree) West longitude slot for Orion 2 is not likely to interfere with
proposed uses of adjacent slots filed for by other governments, except for a
possible overlap of 75 MHz with one proposal as discussed more fully under the
caption "Orbital Slots -- ITU Coordination Process."
Orion 3. Orion, through the Republic of the Marshall Islands, has filed the
appropriate documentation with the ITU to begin the ITU coordination process for
Orion 3 at 139(Degree) East longitude. As discussed more fully under the caption
"Orbital Slots -- ITU Coordination Process," based upon the time of filing by
the Republic of the Marshall Islands, Orion believes that the proposed orbital
slot for Orion 3 would have priority under ITU procedures with respect to the
139(Degree) East longitude orbital slot, but some proposals by other
administrations for adjacent slots would be entitled to effective priority over
the proposal by the Republic of the Marshall Islands with respect to certain
frequencies. Orion believes, based upon its monitoring of the proposals of other
administrations and information in the industry regarding their progress, that
none of these administrations will launch a satellite prior to launch of Orion 3
to take advantage of such priority. Orion also believes that it can complete the
ITU coordination process for Orion 3 at 139(Degree) East Longitude, however,
there can be no assurance that this will be achieved.
United States Regulatory Restrictions
Orion is subject to regulation under the Communications Act, the FCC's July
1985 Separate Systems decision as modified by subsequent FCC decisions, other
FCC regulations, and the terms of the various orders issued by the FCC with
respect to Orion and its subsidiaries, including the terms of the Orion 1
License. These regulations, orders and authorizations impose various
restrictions on Orion and on other similarly situated companies. Certain
important restrictions are described below.
Use of the Orion 1 Satellite System for U.S. Domestic Services. In January
1996, the FCC eliminated certain distinctions between U.S. licensed domestic
satellites and separate satellite systems. It authorized both sets of U.S.
licensed satellite operators to provide both domestic and international
services. Domestic operators have designed their current satellite facilities
principally for continental U.S. coverage of the United States, and thus may as
a general matter offer only limited competition for international services at
the outset. However, future satellite designs of domestic satellite operators
could be modified to more directly compete in the international market.
New Orbital Locations. The FCC now requires applicants, at the time of
filing for an orbital position (either domestic arc or international orbital
position), to demonstrate the financial ability to construct, launch and operate
that satellite for a one year period. This new requirement will have no change
in the licensing of Orion's orbital positions at 37.5(Degree) West Longitude,
12(Degree) West Longitude, 47(Degree) West Longitude and 126(Degree) East
Longitude (the orbital slot at 139(Degree) East Longitude is not being pursued
through the FCC and is not subject to the financial showing requirement). To the
extent that Orion is seeking an orbital location through the FCC, Orion will
need to have significant financing on hand at the time of application or obtain
a waiver of the required financial demonstration. There is no assurance that
Orion will be able to obtain such waiver.
Unauthorized Transfer of Control. The Communications Act bars a change in
control of the holder of FCC licenses without prior approval from the FCC. Any
finding that a change of control without prior FCC approval had occurred could
have a significant adverse effect on Orion's ability to implement its business
plan.
International Regulation
Orion will need to comply with the applicable laws and obtain the approval
of the regulatory authority of each country in which it proposes to provide
network services or operate VSATs. The laws and regulatory requirements
regulating access to satellite systems vary from country to country. Some
countries have substantially deregulated satellite communications, making
customer access to Orion services a simple procedure, while other countries
maintain strict monopoly regimes. The application procedure can be
time-consuming and costly, and the terms of licenses vary for different
countries.
Orion provides service using the licenses it obtains or that are obtained
by local ground operators or, in certain cases, through customer-obtained
authorizations. For example, Orion's representatives in the United Kingdom
(Kingston Communications), France (Matra Hachette), 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.
21
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.
On February 15, 1997, the World Trade Organization ("WTO") completed
negotiations concerning the regulatory liberalization of basic
telecommunications services. Sixty-nine WTO countries, including the U.S.,
submitted offers. The Company believes completion of this WTO agreement will
better facilitate market access for satellite services, and signals a positive
trend towards global competition.
Human Resources
As of December 31, 1996, Orion and its subsidiaries had 173 full-time
employees. Of its total work force, 6 are part of management, 40 are in
engineering or satellite control operations, 75 are in marketing, sales and
sales support, and 52 are devoted to support and administrative activities.
22
FORWARD LOOKING STATEMENTS
Information set forth in this Annual Report on Form 10-K under the captions
"Business" "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Selected Consolidated Financial and Operational Data"
and under other captions contains various "forward looking statements" within
the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934, which statements represent Orion's reasonable
judgment concerning the future and are subject to risks and uncertainties that
could cause Orion's actual operation results and financial position to differ
materially. Such forward looking statements include the following: Orion's
belief and the judgments of its independent engineering consultant, Telesat
Canada, regarding the expected performance of the Orion 1 satellite over its
useful life, and the effect of such performance on Orion's business; Orion's
expectations regarding the period for construction and launch of Orion 2 and
Orion 3; Orion's belief that it can overcome uncertainties relating to Orion 2
and Orion 3; Orion's expectations regarding receipt of regulatory approvals,
coordination of orbital slots and avoidance of possible interference; Orion's
beliefs regarding existing and future regulatory requirements, its ability to
comply with such requirements and the effect of such requirements on its
business; Orion's beliefs regarding the competitive advantages of satellites and
of Orion's satellites, strategies and services in particular, both in general
and as compared to other providers of services or transmission capacity and
other services presently offered or which may be offered in the future; Orion's
expectations regarding the growth in telecommunications and the demand for
telecommunications services; Orion's beliefs regarding the demand for or
attractiveness of Orion's services; Orion's beliefs regarding technological
advances and their effect on telecommunications services or demand therefore;
Orion's beliefs regarding availability of net operating loss carryforwards;
Orion's beliefs regarding its representatives and distributors; Orion's
intention not to pay any dividend on the 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, the
following, in each case as presented more fully in Orion's Registration
Statement on Form S-1 (No. 333-19167) on file at the Securities and Exchange
Commission under "Risk Factors":
Satellite Loss or Reduced Performance. Satellites are subject to
significant risks, including launch failure, damage that impairs commercial
performance, failure to achieve correct orbital placement during launch, loss of
fuel that reduces satellite life, and satellite in-orbit risks. Although Orion 1
has been successfully launched and is in commercial operation, in November 1995,
one of Orion 1's components supporting nine transponders of dedicated capacity
serving the European portion of the Orion 1 footprint experienced an anomaly.
Orion believes, based on the data received to date by Orion from its own
investigations and from the manufacturer, and based upon advice from Orion's
independent engineering consultant, Telesat Canada, that because the redundant
components is strong, the anomalous behavior is unlikely to affect the expected
performance of the satellite over its useful life. However, in the event that
the currently operating component fails, Orion 1 would experience a significant
loss of usable capacity. Although Orion maintains satellite in-orbit insurance
on Orion 1, any loss in orbit or reduced performance of Orion 1 would have a
material adverse effect on Orion. In addition, no assurance can be given that
the launch of Orion 2 or Orion 3 will be successful. Although various sources of
data permit differing conclusions, Orion is aware of sources indicating that the
historical loss rate for all commercial geosynchronous satellite launches may be
as high as 15%. Launch risks vary based upon the launch vehicle used and recent
performance of that vehicle. In addition, Orion may have to change launch
vehicles and could be subject to delays and higher costs of launch insurance if,
for example, one of its selected vehicles experiences a launch failure with
respect to another satellite. With respect to the risk of launch failure of
Orion satellites, Orion has an option to purchase an additional satellite (which
may be used as a replacement satellite) to be delivered in orbit, in the case of
Orion 3, within 12, 15 or 19 months (at Orion's election) after it exercises the
option, or, in the case of Orion 2, with 21 1/4 months after it exercises the
option. Therefore, an unsuccessful launch of Orion 2 or Orion 3 would involve a
delay in revenues for at least one year, and perhaps substantially longer.
Significant loss or delay of revenue from any of the Company's satellites would
have a material adverse effect on the Company.
Limited Insurance for Satellite Launch and Operation. The in-orbit
insurance of Orion 1 and the launch and in-orbit insurance for Orion 2 and Orion
3 will not protect the Company against business interruption, loss or delay of
revenues and similar losses and may not fully reimburse the Company for its
expenditures. In addition, such insurance includes or can be expected to include
certain contract terms, exclusions, deductibles and material change conditions
that are customary in the industry. Accordingly, an unsuccessful launch of Orion
2 or Orion 3 or any significant loss of performance with respect to any of its
satellites would have a material adverse effect on Orion. Although Orion intends
to procure insurance for the construction, launch and insurance costs of Orion 2
and Orion 3, Orion has 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.
Limited Life of Satellites. While Orion 1 is expected to have an orbital
life of approximately 10.7 years (through October 2005), and Orion 2 and Orion 3
are expected to have orbital lives of approximately 13 years and 15 years,
respectively, there can be no assurance as to the actual longevity of the
satellites. A number of factors will affect the useful life of each satellite,
including the rate of fuel consumption in achieving correct orbital placement
during launch, the quality of its construction and the durability of its
component parts.
Timing and Cost Uncertainties with Respect to Orion 2 and 3. Orion
presently plans to launch Orion 2 in the second quarter of 1999 and plans to
launch Orion 3 in the fourth quarter of 1998, based upon the construction and
launch schedules set forth in the satellite contracts. To meet these schedules,
Orion must receive certain regulatory approvals, finalize the satellite designs
and take other necessary steps, including the possible need of additional
financing. Failure to meet the construction and launch schedules could increase
the cost of Orion 2 or Orion 3, requiring additional financing. Although the
Orion 2 satellite contract and the Orion 3 satellite contract are fixed-price
contracts with firm schedules for construction, delivery and launch, there can
be no assurance that increases in costs due to change orders or delay will not
occur. There can be no assurance that
23
the launch of Orion 2 or Orion 3 will take place as scheduled. A significant
delay in the delivery or launch of Orion 2 or Orion 3 would have a material
adverse effect on Orion.
Risks of Proceeding with Construction Prior to Obtaining all Regulatory
Approvals for Orion 2 and Orion 3. Orion has commenced construction of Orion 3
and Orion 2 prior to completion of the required consultation with INTELSAT and
EUTELSAT (as defined), receipt of final authority from the FCC (in the case of
Orion 2) and completion of the International Telecommunication Union ("ITU")
coordination process. Failure to obtain one more necessary approval in a timely
manner would likely have a material adverse effect on the Company.
Additional factors that would cause Orion's results to differ materially
from those in the forward looking statements include the following: no
assurances regarding the business plan; Orion's history of losses and
expectation of future losses; the substantial financial risks and financing
requirements; substantial leverage and limits on Orion's ability to raise
additional funds; potential adverse effects of competition; no assurances
regarding approvals needed, 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 by principal stockholders; risks relating to senior
preferred stock; limits on paying dividends on Orion common stock; and
anti-takeover and other provisions of the certificate of incorporation, in each
case as presented more fully in Orion's Registration Statement on Form S-1 (No.
333-19167) on file at the Securities and Exchange Commission under "Risk
Factor."
Item 2. Properties.
Orion's principal offices comprise approximately 33,000 square feet located
in Rockville, Maryland. These offices house not only Orion's personnel, but also
contain the Company's satellite operations center for Orion 1. The lease
covering these facilities expires in December 1999. In February 1992, Orion sold
its earth station facility at Mount Jackson, Virginia, but retained six acres of
land at that location plus access to certain capacity and facilities. Orion has
leased the land and facilities in Mount Jackson to Orion Atlantic for use as
part of the TT&C Station. Orion also leases approximately 7,300 square feet of
office space in Gaithersburg, Maryland for operations personnel, 2,900 square
feet of office space in Amsterdam, Netherlands also for operations personnel and
approximately 5,000 square feet in London, England for sales and sales support
personnel.
Item 3. Legal Proceedings.
In October 1995, Skydata Corporation ("Skydata"), a former contractor,
filed suit against Orion Atlantic, Orion Satellite Corporation and Orion, in the
United States District Court for the Middle District of Florida, claiming that
certain Orion Atlantic operations using frame relay switches infringe a Skydata
patent. Skydata's suit sought damages in excess of $10 million and asked that
any damages assessed be trebled. On December 11, 1995, the Orion parties filed a
motion to dismiss the lawsuit on the grounds of lack of jurisdiction and
violation of a mandatory arbitration agreement. In addition, on December 19,
1995, the Orion parties filed a Demand for Arbitration against Skydata with the
American Arbitration Association in Atlanta, Georgia, requesting damages in
excess of $100,000 for breach of contract and declarations, among other things,
that Orion and Orion Atlantic own a royalty-free license to the patent, that the
patent is invalid and unenforceable and that Orion and Orion Atlantic have not
infringed on the patent. On March 5, 1996, the court granted the Company's
motion to dismiss the lawsuit on the basis that Skydata's claims are subject to
arbitration. Skydata appealed the dismissal to the United States Court of
Appeals for the Federal Circuit. Skydata also filed a counterclaim in the
arbitration proceedings asserting a claim for $2 million damages as a result of
the conduct of Orion and its affiliates. On May 15, 1996, the arbitrator granted
the Orion parties' request for an initial hearing on claims relating to the
Orion parties' rights to the patent, including the co-ownership claim and other
contractual claims.
On November 9, 1996, Orion and Skydata executed a letter with respect to
the settlement in full the pending litigation and arbitration. As part of the
settlement, the parties are to release all claims by either side relating in any
way to the patent and/or the pending litigation and arbitration. In addition,
Skydata is to grant Orion (and its affiliates) an unrestricted, world-wide
paid-up license to make, have made, use or sell products or methods under the
patent and all other corresponding continuation and reissue patents. Orion is to
pay Skydata $437,000 over a period of two years as part of the settlement. The
parties are in the process of negotiating the final terms of a formal settlement
agreement.
While Orion is party to regulatory proceedings incident to its business,
there are no material legal proceedings pending or, to the knowledge of
management, threatened against Orion or its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
24
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Since completion of Orion's initial public offering in August 1995, the
Common Stock has been quoted on the NASDAQ National Market under the trading
symbol "ONSI." As of December 15, 1996, there were approximately 350
stockholders of record of Orion's Common Stock. The following table summarizes
the high and low closing sale prices of Common Stock by fiscal quarter for 1995,
1996 and 1997 as reported on the NASDAQ National Market.
Quarter Ended: 1995
September 30 (from August 1) $10 3/4 to $14 1/4
December 31 6 3/4 to 12
Quarter Ended: 1996
March 31 $8 1/4 to $14 3/4
June 30 10 1/4 to 14 1/4
September 30 7 1/4 to 12 1/8
December 31 9 1/2 to 13 5/8
Quarter Ended: 1997
-------------- ----
March 31 (through March 21) $9 1/8 to $15
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain future earnings, if any, to
finance the growth and development of its business, and therefore the Company
does not anticipate paying cash dividends on its common Stock in the foreseeable
future. The Company is not permitted to pay dividends on the Common Stock as
long as the Company's Preferred Stock is outstanding, subject to certain limited
exceptions. The approximately $14.5 million of the Company's Series A Preferred
Stock which was issued in June 1994 and the approximately $4.5 million of
outstanding Series B Preferred Stock which was issued in June 1995 (pursuant to
options granted in June 1994), accrue dividends at 8% per annum. Accrued
dividends on the Series A and Series B Preferred Stock are payable only in
limited circumstances. Upon conversion of the Series A and Series B Preferred
Stock into Common Stock, either at the option of the holder or in those cases
where the Company has the right to require such conversion, accrued but unpaid
dividends will be canceled. The approximately $123 million of the Company's
Series C Preferred Stock which was issued in January 1997 accrues dividends at
6% per annum. Accrued dividends are payable in Common Stock. The number of
shares of Common Stock distributable as a dividend on each share of Series C
Preferred Stock is calculated based on the market price of such Common Stock as
set forth in the Certificate of Designations for the Series C Preferred Stock.
The Indentures relating to the Company's Senior Notes and Senior Discount Note
restricts the payment by the Company of cash dividends on its capital stock.
Recent Sales of Unregistered Securities. In January 1997, Orion consummated
the following transactions involving the sale of its unregistered securities.
On January 31, 1997, the Company acquired all of the limited partnership
interests which it did not already own in the Company's operating subsidiary,
International Private Satellite Partners, L.P. ("Orion Atlantic"), that owns the
Orion 1 satellite. Specifically, the Company acquired the Orion Atlantic limited
partnership interests and other rights relating thereto held by British
Aerospace Communications, Inc., COM DEV Satellite Communications Limited,
Kingston Communications International Limited, Lockheed Martin Commercial Launch
Services, Inc., MCN Sat US, Inc., an affiliate of Matra Hachette, and
Trans-Atlantic Satellite, Inc., an affiliate of Nissho Iwai Corp. (collectively,
the "Exchanging Partners").
Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the
"Exchange Agreement"), the Exchanging Partners exchanged (the "Exchange") their
Orion Atlantic limited partnership interests for 123,172 shares of a newly
created class of the Company's Series C 6% Cumulative Convertible Redeemable
Preferred Stock (the "Series C Preferred Stock"). In addition, the Company
acquired certain rights held by certain of the Exchanging Partners' rights to
receive repayment of various advances (aggregating approximately $41.4 million
at December 31, 1996). The 123,172 shares of Series C Preferred Stock issued in
the Exchange are convertible (as of January 31, 1997) into approximately 7
million shares of the Company's Common Stock. As a result of the Exchange,
certain of the Exchanging Partners became principal stockholders of the Company.
The Exchange is described in greater detail in Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," of this Annual
Report on Form 10-K.
On January 8, 1997, the Company acquired the only outstanding minority
interest in the Company's subsidiary Orion Asia Pacific Corporation from British
Aerospace Satellite Investments, Inc. in exchange for approximately 86,000
shares of the Company's Common Stock.
On January 31, 1997, the Company also completed the sale of $50 million of
its convertible junior subordinated debentures (the "Convertible Debentures") to
two investors, British Aerospace Holdings, Inc. ("British Aerospace") and Matra
Marconi Space UK Limited ("Matra Marconi Space"). British Aerospace purchased
$50 million of the Convertible Debentures and Matra Marconi Space purchased $10
million of the Convertible Debentures (collectively, the "Debenture
Investments". The Convertible Debentures will mature in 2012, and will bear
interest at a rate of 8.75% per annum to be paid semi-annually in arrears solely
in Common Stock of the Company. The Convertible Debentures are subordinated to
all other indebtedness of the Company. The Debenture Investments are described
in greater detail in Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations," of this Annual Report on Form 10-K.
25
Item 6. Selected Consolidated Financial and Operational Data (Dollars in
Thousands, Except Per Share Data).
The following selected consolidated statements of operations and balance
sheet data as of and for the years ended December 31, 1996, 1995, 1994, 1993 and
1992 are derived from the Company's audited consolidated financial statements.
The pro forma consolidated statements of operations and balance sheet data are
derived from the unaudited pro forma condensed consolidated financial
statements. The pro forma data is not necessarily indicative of the results that
would have been achieved nor are they indicative of the Company's future
results. The data should be read in conjunction with the Consolidated Financial
Statements, related notes and other financial information included herein. From
its inception in 1982 through January 20, 1995, when Orion 1 commenced
commercial operations, Orion was a development stage enterprise. Because of
Orion's exclusive management and control of Orion Atlantic as its sole general
partner (subject to certain rights of approval by the Limited Partners), and
Orion's aggregate 33 1/3% (through November 1995, 41 2/3% from December 1995
through January 31, 1997) partnership interest, the financial statements of
Orion Atlantic are consolidated with the financial statements of Orion. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Pro Forma Condensed Consolidated Financial Statements" and the
Consolidated Financial Statements and Notes thereto.
In January 1997, the Company consummated the Merger (as defined below) as
part of a series of transactions which significantly changed the Company. Those
transactions, which are discussed in more detail in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," of
this Annual Report on Form 10-K, are as follows:
(i) the acquisition of all of the limited partnership interests which the
Company did not already own in the Company's operating subsidiary, Orion
Atlantic, that owns the Orion 1 satellite, along with rights to receive
repayment of various advances by Orion Atlantic and various other rights, in an
exchange transaction for 123,172 shares of Series C Preferred Stock (the
"Exchange");
(ii) the acquisition by the Company of the only outstanding minority
interest in the Company's subsidiary Orion Asia Pacific Corporation from British
Aerospace Satellite Investments, Inc., in exchange (the "OAP Acquisition") for
approximately 86,000 shares of the Company's Common Stock;
(iii) a $710 million notes offering, with warrants representing
approximately 2.6% of the outstanding Common Stock of the Company on a fully
diluted basis (the "Bond Offering"), and
(iv)the sale of $60 million of the Company's Convertible Debentures to
British Aerospace Holdings, Inc. and Matra Marconi Space (the "Convertible
Debentures Offering").
The Exchange and the OAP Acquisition resulted in the Company owning 100% of
Orion Atlantic and its other significant subsidiaries and, therefore, a greatly
simplified corporate structure. The Exchange also resulted in a significant
increase in the Company's capital stock outstanding. The net proceeds of the
Bond Offering and Convertible Debentures Offering were used by the Company to
repay the credit facility it entered into in connection with the construction of
the Orion 1 satellite, to pre-fund the first three years of interest payments on
certain of the Notes, and will be used by the Company for the construction and
launch of two additional satellites, Orion 2 and Orion 3.
Pro forma
1996 (1) 1996 1995 1994 1993 (2) 1992
------------- -------------- -------------- -------------- ------------- -------------
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues $ 41,847 $ 41,847 $ 22,284 $ 3,415 $ 2,006 $ 1,403
Interest expense 94,838 27,764 24,738 61 133 180
Net loss (3) (133,630) (27,195) (26,915) (7,965) (7,886) (3,295)
Net loss per common share (12.71) (2.62) (3.07) (0.86) (0.85) (0.40)
Weighted average common shares
outstanding (4) 11,247,062 10,951,823 9,103,505 9,272,166 9,266,445 8,232,548
OTHER OPERATING DATA:
Number of customers 182 182 109 34 10 5
Capital expenditures $ 12,625 $ 12,625 $ 9,060 $ 51,103 $ 44,130 $ 78,429
Customer contract backlog (5) $ 214,887 $ 214,887 $ 120,612 $ 39,122 $ 18,185 $ 9,402
Sites (6) 322 322 151 57 -- --
EBITDA (7) $ 595 $ 595 $ (15,427) $ (14,014) $ (9,069) $ (6,243)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 139,664 $ 42,188 $ 55,112 $ 11,219 $ 3,404 $ 7,668
Restricted and segregated cash (8) 406,937 -- -- -- -- --
Total assets 928,594 358,264 389,075 340,176 271,522 204,975
Long-term debt (less current portion) 779,283 218,237 250,669 230,175 185,294 106,821
Limited Partners' interest in Orion
Atlantic (9) -- 10,130 14,626 62,519 69,909 77,753
Redeemable preferred stock 111,902 20,902 20,358 14,555 -- --
Total stockholders' (deficit) equity 2,151 (436) 26,681 3,351 8,400 14,478
Book value per share
.19 (.04) 2.46 .49 1.33 2.36
26
(1) Adjusted to reflect the pro forma effects of the Transactions (see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Recent Developments"), assuming such events
occurred, in the case of the Consolidated Statements of Operations
Data, on January 1, 1996 and, in the case of the Consolidated Balance
Sheet Data, on December 31, 1996.
(2) In 1993, Orion Atlantic terminated its commitment to purchase a second
satellite from MMS Space Systems, resulting in a termination charge of
$5 million.
(3) As required by GAAP, net loss is presented before accretion of
preferred stock and preferred stock dividends. For the years ended
December 31, 1996, 1996 (pro forma) 1995, 1994, 1993 and 1992
preferred stock dividends and accretion are $1.4, $9.3, $1.3, $0.6, $0
and $0 million, respectively.
(4) Computed on the basis described for net loss per common share in Note
2 to the Consolidated Financial Statements.
(5) Backlog represents future revenues under contract.
(6) Sites includes installed VSATs and additional transmission
destinations (such as customer premises) that share a VSAT.
(7) "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. 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 Attempted Financing of $3.4 million in the fourth quarter of
1995.
(8) Restricted and segregated cash represents (i) $134 million that has
been placed in a pledged account to fund the payment of the first six
scheduled payments of interest on the Senior Notes. and (ii) $273
million that will be segregated by the Company and used only to invest
in certain high quality short term investments to make payments for
additional satellites and certain related costs.
(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 were
acquired by the Company in the Exchange.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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.
During 1996, OrionSat was the sole general partner in Orion Atlantic and
Orion had a 41 2/3% equity interest in Orion Atlantic. As a result of Orion's
control of Orion Atlantic during 1996, Orion's consolidated financial statements
include the accounts of Orion Atlantic. All of Orion Atlantic's revenues and
expenses are included in Orion's consolidated financial statements, with
appropriate adjustment to reflect the interests of the Limited Partners in Orion
Atlantic's losses prior to the Exchange. The assets and liabilities reported in
the consolidated balance sheets at December 31, 1996 and December 31, 1995
primarily pertain to Orion Atlantic.
RECENT DEVELOPMENTS
In January 1997, Orion consummated a series of transactions that are
described below.
ACQUISITION OF ORION ATLANTIC LIMITED PARTNERSHIP INTERESTS IN THE EXCHANGE
On January 31, 1997, the Company acquired all of the limited partnership
interests which it did not already own in the Company's operating subsidiary,
Orion Atlantic, that owns the Orion 1 satellite. Specifically, the Company
acquired the Orion Atlantic limited partnership interests and other rights
relating thereto held by British Aerospace Communications, Inc., COM DEV
Satellite Communications Limited, Kingston Communications International Limited,
Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate
of Matra Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of Nissho
Iwai Corp. (collectively, the "Exchanging Partners").
Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the
"Exchange Agreement"), the Exchanging Partners exchanged (the "Exchange"), their
Orion Atlantic limited partnership interests for 123,172 shares of a newly
created class of the Company's Series C 6% Cumulative Convertible Redeemable
Preferred Stock (the "Series C Preferred Stock"). In addition, the Company
acquired certain rights held by certain of the Exchanging Partners' to receive
repayment of various advances (aggregating approximately $41.4 million at
December 31, 1996). The 123,172 shares of Series C Preferred Stock issued in the
Exchange are convertible (as of January 31, 1997) into approximately 7 million
shares of the Company's Common Stock. As a result of the Exchange, certain of
the Exchanging Partners became principal stockholders of the Company. The
Exchange is described in greater detail under the caption "The Merger, the
Exchange and the Debenture Investments" in the Company's Registration Statement
on Form S-4 (Registration No. 333-19795).
The Exchange and the acquisition by the Company of the only outstanding
minority interest in the Company's subsidiary Orion Asia Pacific Corporation
from British Aerospace Satellite Investments, Inc. on January 8, 1997 (in
exchange for approximately 86,000 shares of the Company's Common Stock) results
in the Company owning 100% of Orion Atlantic and its other significant
subsidiaries and, therefore, a greatly simplified corporate structure.
THE MERGER
The Exchange was conducted on a tax-free basis by means of a Merger
(defined below) that was consummated on January 31, 1997. Pursuant to the
Exchange Agreement, Orion Oldco Services, Inc., formerly known as Orion Network
Systems, Inc. ("Old Orion"), formed the Company as a new Delaware corporation
with a certificate of incorporation, bylaws and capital structure substantially
identical in all material respects with those of Old Orion. Also pursuant to the
Exchange Agreement, the Company formed a wholly owned subsidiary, Orion Merger
Company, Inc. ("Orion Merger Subsidiary"). Pursuant to an Agreement and Plan of
Merger, Orion Merger Subsidiary was merged with and into Old Orion, and Old
Orion became a wholly owned subsidiary of the Company (the "Merger"). On January
31, 1997, the effective time of the Merger, all of the stockholders of Old Orion
received stock in the Company with substantially identical rights to the Old
Orion stock they held prior to the effective time of the Merger. Following the
Merger, the Company changed its name from Orion Newco Services, Inc. to Orion
Network Systems, Inc. and the Company's wholly owned subsidiary Orion Network
Systems, Inc. changed its name to Orion Oldco Services, Inc. The Exchange and
Merger are described in greater detail under the caption "The Merger, the
Exchange and the Debenture Investments" in the Company's Registration Statement
on Form S-4 (Registration No. 333-19795).
The Company is the successor issuer to Old Orion and filed a Registration
Statement on Form 8-B with the Securities and Exchange Commission on January 31,
1997, to register all the issued and outstanding shares of Common Stock and
preferred stock of the Company. The Company is considered the successor to Old
Orion for purposes of the NASDAQ National Market and the Company's Common Stock
is quoted on the NASDAQ National Market under the trading symbol "ONSI."
28
FINANCINGS
On January 31, 1997, the Company completed a $710 million bond offering
(the "Bond Offering") comprised of approximately $445 million of Senior Note
Units, each of which consists of one 11.25% Senior Note due 2007 (a "Senior
Note") and one Warrant to purchase 0.8463 shares of common stock, par value $.01
per share ("Common Stock") of the Company (a "Senior Note Warrant"), and
approximately $265.4 million of Senior Discount Note Units, each of which
consists of one 12.5% Senior Discount Note due 2007 (a "Senior Discount Note,"
and together with the Senior Notes, the "Notes") and one Warrant to purchase
0.6628 shares of Common Stock of the Company (a "Senior Discount Note Warrant,
and together with the Senior Note Warrants, the "Warrants"). Interest on the
Senior Notes will be payable semi-annually in cash on January 15 and July 15 of
each year, commencing July 15, 1997. The Senior Discount Notes will not pay cash
interest prior to January 15, 2002. Thereafter, cash interest will accrue until
maturity at an annual rate of 12.5% payable semi-annually on January 15 and July
15 of each year, commencing July 15, 2002. The exercise price for the Warrants
will be $.01 per share of Common Stock of the Company. The shares of Common
Stock of the Company initially issuable upon exercise of the Warrants represent
approximately 2.62% of the outstanding Common Stock of the Company on a fully
diluted basis as of January 31, 1997. The Bond Offering was underwritten by
Morgan Stanley & Co. Incorporated and Merrill Lynch & Co. The foregoing
description of the Notes is qualified in its entirety by the description of such
Notes in the Indentures and Notes documents, copies of which have been filed as
exhibits to this Annual Report on Form 10-K.
On January 31, 1997, the Company also completed the sale of $60 million of
its convertible junior subordinated debentures (the "Convertible Debentures") to
two investors, British Aerospace Holdings, Inc. ("British Aerospace") and Matra
Marconi Space UK Limited ("Matra Marconi Space"). British Aerospace purchased
$50 million of the Convertible Debentures and Matra Marconi Space purchased $10
million of the Convertible Debentures (collectively, the "Convertible Debentures
Offering," and together with the Bond Offering, the "Financings"). The
Convertible Debentures will mature in 2012, and will bear interest at a rate of
8.75% per annum to be paid semi-annually in arrears solely in Common Stock of
the Company. The Convertible Debentures are subordinated to all other
indebtedness of the Company, including the Notes.
The net proceeds of the Bond Offering and Convertible Debentures Offering
were used by the Company to repay the Orion 1 credit facility, pre-fund the
first three years of interest payments on certain of the Notes, and will be used
to build and launch of two additional satellites, Orion 2 and Orion 3.
ORION 2 AND ORION 3 COMMENCEMENT OF CONSTRUCTION
Orion 2 and Orion 3 Construction Contracts. Orion commenced construction of
Orion 2 in February 1997 under a satellite procurement contract with Matra
Marconi Space for Orion 2. The contract for Orion 2 provides for delivery in
orbit of Orion 2 by June 1999, excluding launch insurance, for a firm fixed
price of $201 million. Orion commenced construction of Orion 3 in December 1996
and entered into a satellite contract with Hughes Space and Communications
International, Inc. for Orion 3 in January 1997. The contract for Orion 3
provides for delivery in orbit of Orion 3 by December 1998, excluding launch
insurance, for a firm fixed price of $208 million.
Pre-Construction Lease on Orion 3. Orion has entered into a contract with
DACOM Corp., a Korean communications company ("DACOM"), under which DACOM will,
subject to certain conditions, lease eight dedicated transponders on Orion 3 for
13 years, in return for approximately $89 million, payable over a period from
December 1996 through seven months following the lease commencement date for the
transponders (which is scheduled to occur by January 1999). Payments are subject
to refund unless Orion 3 commences commercial operation by June 30, 1999.
OVERVIEW
Orion's revenues are principally generated under three to four year
contracts for delivery of communications services. Such revenues are derived
principally from recurring monthly fees from its customers, although many
contracts include initial non-recurring installation and other fees. These
non-recurring fees generally are structured to cover the Company's actual costs
of installation of the customer's site-based equipment. The revenues from each
contract vary, depending upon the type of service, amount of capacity, data
handling ability of the network, the number of VSATs (which generally are owned
by Orion), value-added services and other factors. Depending on the complexity
of the services to be provided to a customer, the period between the date of
signature of a contract and the commencement of actual services (and receipt of
fees) typically ranges from 30 days to six months. Substantially all of Orion's
contracts are denominated in U.S. dollars, although some contracts are
denominated in pounds sterling, deutschemarks, Austrian shillings or French
francs. Orion begins to record revenues under its contracts upon service
commencement to the customer.
The services provided by Orion have been subject to decreasing prices over
recent years and this pricing pressure is expected to continue (and may
accelerate) for the foreseeable future, particularly if, as expected, capacity
continues to increase. Orion will need to increase its volume of sales in order
to compensate for such price reductions. Orion believes that customers will
increase the data speeds in their communications networks to support new
applications, and that such upgrading of customer networks will lead to
increased revenues that will mitigate the effect of price reductions. However,
there can be no assurance that this will occur. Orion expects to continue to
incur increasing net losses and negative cash flow (after payments for capital
expenditures and interest) for the foreseeable future.
29
Orion's direct cost of services includes principally (i) costs relating to
the installation, maintenance and licensing of VSAT earth stations at its
customers' premises; (ii) satellite lease payments for transponder capacity
(generally for services outside of the Orion 1 footprint); and (iii) associated
miscellaneous expenses. Sales and marketing expenses consist of salaries, sales
commissions (including commissions to third party sales representatives), travel
and promotional expenses. The Company has recently commenced a significant
expansion of its marketing program and expects to continue this expansion
through 1997. Due to the complexity of the Company's services, and the continued
expansion of sales personnel, sales and marketing expense is expected to
increase significantly during 1997. Engineering and technical expenses,
consisting principally of personnel costs and travel, relate to 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 bond
offering completed January 31, 1997, and will increase again after additional
financing for Orion 2 and Orion 3 is obtained. 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
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Revenue. Total revenue for the year ended December 31, 1996 was $41.8
million, compared to $22.3 million for the same period in 1995, an increase of
87%. Revenues from private communications network services were $17.0 million in
1996 compared to $10.0 million for the comparable period in 1995, as the number
of sites in service increased to 322 as of December 31, 1996, from 151 at
December 31, 1995. Revenues from video distribution and other satellite
transmission services were $24.8 million for 1996 compared to $12.3 million for
the same period in 1995 resulting from a substantial increase in customers for
these services in 1996.
OPERATING EXPENSES
Direct expenses. Direct expenses for the year ended December 31, 1996, were
$6.0 million compared to $10.5 million for the same period in 1995. The decrease
of $4.5 million, or 43%, was primarily attributable to accruals for satellite
incentive obligations owed by Orion to the contractor under the Orion 1
Satellite Contract during the initial satellite deployment period from January
20, 1995 through June 30, 1995. The Company capitalized the present value of the
remaining satellite incentive obligation of approximately $14.8 million,
effective July 1, 1995, as part of the cost of the satellite. As of December 31,
1996, Orion had obligations with a present value of approximately $22.4 million
with respect to satellite incentives.
Sales and marketing expenses. Sales and marketing expenses were $11.5
million for the year ended December 31, 1996, as compared to $8.6 million in the
same period of 1995. The increase of $2.9 million, or 34% is primarily
attributable to sales commissions, third party sales representative fees and
ground operator fees associated with the growth in the private communications
network service business.
Engineering and technical expenses. Engineering and technical expenses were
$8.7 million in the year ended December 31, 1996, as compared to $8.5 million
for the comparable period in 1995. The increase was due to customer engineering
functions in support of the growth in private communications network service
business.
General and administrative expenses. General and administrative expenses
were $15.1 million for the year ended December 31, 1996, compared to $10.1
million for the period ended December 31, 1995. The increase of $5.0 million, or
50%, for the year ended December 31, 1996 was 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 year ended December 31, 1996, was $36.9 million, an increase of $5.5
million, or 18%, over the same period in 1995. The increase is primarily a
result from depreciation of VSATs and other ground equipment to service the
expansion of the private network services business and depreciation of the Orion
1 satellite, which was placed in service January 20, 1995.
Interest. Interest income was $2.3 million for the year ended December 31,
1996, compared to $1.9 million for the year ended December 31, 1995. The
increase in interest income ($0.4 million or 21%) during 1996 is primarily a
result of interest earned on increased cash balances from the proceeds of the
Company's initial public offering in August 1995. Interest expense was $27.8
million for the year ended December 31, 1996, compared to $24.7 million for the
comparable period in 1995. The increase in interest expense of $3.1 million in
1996 is attributable to expensing interest (including commitment fees, interest
accretion associated with the Orion 1 satellite incentive obligation and
amortization of deferred financing costs) from the in-service date of Orion 1
and the impact of an interest rate cap agreement in 1996. Prior to the
in-service date of Orion 1, substantially all interest expense was capitalized.
30
Other. Other expenses were $.02 million for the year ended December 31,
1996, compared to $3.4 million for the same period in 1995. The decrease is
primarily related to costs incurred in connection with Orion Atlantic's plans to
raise financing for Orion 2, which plans were deferred in November 1995.
Net loss. The Company incurred a net loss of $27.2 million, compared to a
net loss of $26.9 million for the years ended December 31, 1996 and 1995,
respectively, after deduction of the limited partners' and minority interests'
share in the Company's losses before minority interests' of $34.6 million and
$46.1 million, respectively. Net loss is expected to increase substantially in
subsequent periods as a result of interest expense on the notes issued in
connection with the offering in January 1996 and the elimination of the minority
interests in Orion Atlantic.
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 151 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
Prior Funding. Orion has required significant capital for operating and
investing activities in the development of its business, and will continue to
need to expend significant additional capital in the future to develop fully its
global satellite communications system. The Company's funding for its operations
through January 1997 had been provided primarily by the sale of equity
securities, including the completion of its initial public offering in August
1995 which generated proceeds to the Company of approximately $52 million (net
of underwriting discounts), bank loans, vendor financing, lease arrangements and
short-term loans from its investors. Funding for the construction and launch of
the Orion 1 satellite and related facilities was fully committed through $90
million of equity from the limited partners of Orion Atlantic, an aggregate of
$251 million under a secured bank credit facility and approximately $11 million
under other debt facilities, dedicated primarily to the construction of the TT&C
facility, which is being used to control Orion 1. The Orion 1 credit facility
was refinanced in January 1997 with the proceeds from the Bond Offering, and
concurrently with the Bond Offering, Orion acquired all of the limited
partnership interests (those which it did not already own) in Orion Atlantic in
exchange for 123,172 shares of Series C Convertible Preferred Stock representing
approximately 7 million underlying common shares.
31
Existing Capital Resources. The net proceeds of the January 1997 Bond
Offering to the Company were approximately $684 million, and the net proceeds of
the Convertible Debentures Offering were approximately $59 million. Of the Bond
Offering proceeds, approximately $223 million was used for repayment of the
Orion 1 credit facility (including payment of accrued interest and hedge
breakage costs), approximately $24 million was used to make certain initial
payments for the Orion 2 satellite contract, approximately $13 million was used
to pay accrued satellite incentive fees under the Orion 1 satellite contract and
approximately $4 million was used to pay amounts owing to STET, a former limited
partner of Orion Atlantic. On a pro forma basis, after giving effect to the Bond
Offering, the Convertible Debentures Offering and other related transactions as
of December 31, 1996, the Company had cash and cash equivalents of $140 million
and restricted and segregated cash of $407 million including $273 million which
was segregated in the financial statements by the Company to be used to make
payments for additional satellites and certain related costs. The restricted
cash consisted of $134 million placed in a pledged account (to pre-fund the
first six interest payments on the Senior Notes).
Existing Indebtedness
Notes. In the Bond Offering, Orion issued approximately $445 million of
11.25% Senior Notes due 2007 and approximately $484 million principal amount at
maturity ($265.4 million initial accreted value) of 12.5% Senior Discount Notes
due 2007. Interest on the Senior Notes is payable semi-annually in cash on
January 15 and July 15 of each year, commencing July 15, 1997. The Senior
Discount Notes do not accrue cash interest prior to January 15, 2002.
Thereafter, cash interest will accrue until maturity at an annual rate of 12.5%
payable semi-annually on January 15 and July 15 of each year, commencing July
15, 2002.
The Notes have the benefit of Guarantees issued by each of the material
subsidiaries of the Company. The Senior Notes initially are secured by the
securities purchased with the $134 million held in a pledged account until the
Company makes the first six scheduled interest payments on the Senior Notes and
thereafter the Senior Notes will be unsecured. The Senior Discount Notes are
unsecured. The Notes are redeemable, at the Company's option, in whole or in
part, at any time on or after January 15, 2002 at specified redemption prices.
In the event of a change of control (as defined in the indentures relating to
the Notes), the Company will be obligated to make an offer to purchase all
outstanding Notes at a purchase price equal to 101% of their principal or
accreted value, plus accrued and unpaid interest thereon to the repurchase date.
The indebtedness evidenced by the Notes ranks pari passu in right of
payment with all existing and future unsubordinated indebtedness of the Company
and the guarantors, respectively, and senior in right of payment to all existing
and future subordinated indebtedness of the Company and the guarantors. The
indentures relating to the Notes (the "Indentures") contain certain covenants
which, among other things, restrict distributions to stockholders of the
Company, the repurchase of equity interests in the Company and the making of
certain other investments and restricted payments, the incurrence of additional
indebtedness by the Company and its restricted subsidiaries, the creation of
certain liens, certain asset sales, transactions with affiliates and related
parties, and mergers and consolidations. The foregoing description of the Notes
is qualified in its entirety by the description of such Notes in the Indentures
and Notes documents, copies of which have been filed as exhibits to this Annual
Report on Form 10-K.
Convertible Debentures. In January 1997, the Company also completed the
sale of $60 million of its convertible junior subordinated debentures to British
Aerospace ($50 million) and Matra Marconi Space ($10 million). The Convertible
Debentures will mature in 2012, and will bear interest at a rate of 8.75% per
annum to be paid semi-annually in arrears solely in Common Stock of the Company
at prices of between $10.21 and $14.00 per share, depending on the average
trading prices of the Common Stock during the applicable measurement period. The
Convertible Debentures (and accrued but unpaid interest) may be converted in
whole or in part into Common Stock at any time at an initial conversion rate of
$14.00 per share, as adjusted for stock splits or other recapitalizations,
certain dividends or issuances of stock to all stockholders, issuances of stock
(or certain rights to acquire stock) at a price per share below $14.00, and
other events.
Orion may at any time (except during 90 days after a change in control)
redeem all or part (but not less than 25% on any one occasion) of the
Convertible Debentures for cash consideration determined by multiplying the
number of shares of Common Stock issuable upon conversion of the Convertible
Debentures by the greater of (i) the average closing price of the Common Stock
over the 20 trading days preceding the redemption or (ii) $17.50 per share.
Alternatively, Orion, in its sole discretion, may effect the sale through a
public or private offering, of the Common Stock underlying the Convertible
Debentures or received as payment of dividends on, the Convertible Debentures.
In such event, the holders of the Convertible Debentures will be entitled to
receive a price per share equal to the greater of (a) at least 95% of the
average closing price of the Common Stock over the preceding 20 trading days or
(b) $17.50 per share. From and after the time when less than $50 million of
Notes remain outstanding, in the event of a change of control of Orion (defined
as the acquisition by any stockholder of a majority of the voting securities of
Orion), either Orion or any holder of the Convertible Debentures may, within 90
days after such change of control, require the sale of the Convertible
Debentures, as converted into Common Stock, to Orion for a purchase price equal
to the greater of (a) the price payable in an optional redemption (as described
above) and (b) the price paid to holders of Common Stock in the change of
control transaction. The Indentures for the Notes contain a covenant which will
effectively prohibit Orion from honoring such right.
The Convertible Debentures are subordinated to all other indebtedness
of the Company, including the Notes. The Convertible Debentures contain minimal
covenants and events of default so long as $50 million or more of the Notes
remain outstanding, but a more extensive set of covenants and events of default
will apply after less than $50 million of Notes are outstanding.
Other Indebtedness and Other Obligations. At December 31, 1996, the
Company had outstanding indebtedness of approximately $7.0 million under a seven
year term loan provided by General Electric Capital Corporation ("GECC") for the
TT&C facility, which is secured by the TT&C facility and various assets relating
thereto. Additionally, at December 31, 1996 the Company had obligations of
approximately $44 million, with a present value of $22.4 million, payable to the
manufacturer of Orion 1 through 2007 (of which $13 million was paid in January
1997 upon
32
the completion of the Bond Offering), and $8 million payable to a former partner
in Orion Atlantic through 1997 (of which approximately $5 million, plus interest
of approximately $1.7 million was paid in cash in January 1997 upon the closing
of the Bond Offering).
Current Funding Requirements. Based upon its current expectations for
growth, the Company anticipates it will have substantial funding requirements
over the next three years to fund the costs of Orion 2 and Orion 3, the purchase
of VSATs, other capital expenditures and other capital needs. Interest charges
on the Senior Notes over the next three years are fully provided for by
Restricted Cash.
The in-orbit delivered costs of the Orion 2 and Orion 3 satellites are
expected to aggregate approximately $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 ($37.3 million of which had already been paid as of
March 1, 1997), $350 million and $50 million in 1997, 1998 and 1999,
respectively. These amounts include the Company's estimate regarding the cost of
launch insurance, although the Company has not had material discussions with
potential insurers and has not received any commitment to provide insurance. The
contracts for Orion 2 and Orion 3 provide firm fixed prices for the construction
and launch of those satellites and provides for penalties in event of late
delivery by the manufacturer, however, the Company's actual payments could be
substantially higher due to any change orders for the satellites, insurance
rates, delays and other factors.
The Company anticipates that its existing cash balances and payments
under the DACOM contract will be sufficient to meet substantially all of its
capital requirements for the delivery in orbit of Orion 2 and Orion 3. In
connection with the Bond Offering, the Company segregated $273 million of the
net proceeds to make payments for additional satellites and certain related
costs (or to pay interest and principal on the Notes). The Company also can use
a portion of its working capital for such costs if it chooses to do so. The
Company had working capital of $126 million at December 31, 1996 (after giving
effect to the Transactions). However, there can be no assurance that cost
increases for Orion 2 and/or Orion 3 due to change orders, insurance rates or
construction delays, among other factors may not increase the Company's capital
requirements or that the Company's growth may vary from its expectations
resulting in changes in its cash requirements or expected cash.
The balance of the Company's funding requirements are dependent upon its
growth and cash flow from operations. The Company cannot predict whether its
existing resources and cash flows will be adequate to cover its future cash
needs. If existing resources and cash flows are not sufficient to cover the
Company's future cash needs, the Company will need to raise additional
financing. The Company does not have a revolving credit facility or other source
of readily available capital. Sources of additional capital may include public
or private debt, equity financings or strategic investments. To the extent that
the company seeks to raise additional debt financing, the Indentures limit the
amount of such additional debt (under a variety of provisions contained in such
Indentures) and prohibit the Company from using Orion 1, Orion 2 or Orion 3 as
collateral for indebtedness for money borrowed. If the Company requires
additional financing and is unable to obtain financing from outside sources in
the amounts and at the times needed, there would be a material adverse effect on
the Company.
TAXES
As of December 31, 1996, Orion had net operating loss carryforwards for
federal tax purposes of approximately $77.7 million. The ability of Orion to
benefit from net operating losses for federal income tax purposes will depend on
a number of factors, including whether Orion has sufficient income from which to
deduct the losses, limitations that may arise as a result of changes in the
ownership of Orion, including as a result of the Transactions and other factors,
and certain other limitations which may significantly reduce the economic
benefit of those losses to Orion. Due to uncertainty regarding its ability to
realize the benefits of 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 $58.9 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.
33
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.
34
ITEM 8. REPORT OF INDEPENDENT AUDITORS.
The Board of Directors
Orion Network Systems, Inc.
We have audited the accompanying consolidated balance sheets of Orion
Network Systems, Inc. as of December 31, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Washington, DC
March 7, 1997
35
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1996 1995
-------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 42,187,807 $ 55,111,585
Accounts receivable (less allowance for doubtful accounts of
$100,000 and $278,000 at December 31, 1996 and 1995, respectively) 6,473,316 5,189,598
Notes receivable and accrued interest 78,969 129,810
Prepaid expenses and other current assets 3,504,434 3,168,058
-------------- -------------
Total current assets 52,244,526 63,599,051
Property and equipment, at cost:
Land 73,911 73,911
Telecommunications equipment 25,342,528 13,836,841
Furniture and computer equipment 4,849,711 3,395,799
Satellite and related equipment 321,247,346 321,407,936
-------------- -------------
351,513,496 338,714,487
Less: accumulated depreciation (68,224,957) (32,170,865)
Satellite construction in progress 4,560,844 510,613
-------------- -------------
Net property and equipment 287,849,383 307,054,235
Deferred financing costs, net 12,918,233 12,894,720
Other assets, net 5,252,302 5,527,221
-------------- -------------
Total assets $ 358,264,444 $ 389,075,227
============== =============
Liabilities and stockholders' equity (deficit) Current liabilities:
Accounts payable $ 6,411,028 $ 10,454,723
Accrued liabilities 7,653,208 6,812,223
Other current liabilities 5,406,072 2,111,687
Interest payable 8,583,882 8,005,079
Current portion of long-term debt 34,975,060 28,607,110
-------------- -------------
Total current liabilities 63,029,250 55,990,822
Long-term debt 218,236,839 250,669,286
Other liabilities 46,348,291 20,698,084
Limited Partners' interest in Orion Atlantic 10,130,058 14,626,338
Minority interest in other consolidated entities 54,008 52,354
Commitments and contingencies (Note 4)
Series A 8% Cumulative Redeemable Convertible Preferred Stock,
$.01 par value; 15,000 shares authorized; 13,871 and 14,491
shares issued and outstanding at December 31, 1996 and 1995,
respectively, plus accrued dividends 16,097,880 15,705,054
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 December 31, 1996 and 1995,
respectively, plus accrued dividends 4,804,486 4,652,647
Stockholders' equity (deficit):
Common stock, $.01 par value; 40,000,000 shares authorized;
11,244,665 and 11,115,965 issued, 10,985,150 and 10,856,450 out-
standing at December 31, 1996 and 1995, respectively, less
259,515 held as treasury shares (at no cost) 112,447 111,160
Capital in excess of par value 86,932,391 85,485,613
Accumulated deficit (87,481,206) (58,916,131)
-------------- -------------
Total stockholders' equity (deficit) (436,368) 26,680,642
-------------- -------------
Total liabilities and stockholders' equity (deficit) $ 358,264,444 $ 389,075,227
============== =============
See notes to consolidated financial statements.
36
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
-------------------------------------------------------
1996 1995 1994
------------------ --------------- ------------------
Service revenue $ 41,847,292 $ 22,283,882 $ 3,415,053
Operating expenses:
Direct 6,024,109 10,485,745 3,503,037
Sales and marketing 11,465,040 8,613,399 5,863,823
Engineering and technical services 8,672,943 8,539,644 3,004,144
General and administrative 15,089,800 10,072,429 5,058,201
Depreciation and amortization 36,948,158 31,403,376 1,716,019
------------------ --------------- ------------------
Total operating expenses 78,200,050 69,114,593 19,145,224
------------------ --------------- ------------------
Loss from operations (36,352,758) (46,830,711) (15,730,171)
Other expense (income):
Interest income (2,313,842) (1,924,822) (413,435)
Interest expense 27,764,126 24,738,446 60,559
Other 22,018 3,359,853 (54,737)
------------------ --------------- ------------------
Total other expense (income) 25,472,302 26,173,477 (407,613)
------------------ --------------- ------------------
Loss before minority interest (61,825,060) (73,004,188) (15,322,558)
Limited Partners' and minority interest in
the net loss of Orion Atlantic and other
consolidated entities 34,629,650 46,089,010 7,357,640
------------------ --------------- ------------------
Net loss (27,195,410) (26,915,178) (7,964,918)
Preferred stock dividend, net of forfeitures 1,369,665 1,329,007 626,400
------------------ --------------- ------------------
Net loss attributable to common stockholders $ (28,565,075) $ (28,244,185) $ (8,591,318)
================== =============== ==================
Net loss per common share $ (2.62) $ (3.07) $ (0.86)
================== =============== ==================
Weighted average common shares outstanding 10,951,823 9,103,505 9,272,166
================== =============== ==================
See notes to consolidated financial statements.
37
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
------------------------------ Capital in Total
Number of Excess of Accumulated Stockholders'
Shares Amount Par Value Deficit Equity (Deficit)
-------------- -------------- ------------- ------------- ----------------
Balance at December 31, 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 (352,941) (3,529) (2,996,471) -- (3,000,000)
Preferred stock dividend, net of
forfeitures -- -- -- (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
Preferred stock dividend, net of
forfeitures -- -- -- (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 stock to
common stock 91,071 911 804,034 -- 804,945
Issuance of stock warrants -- -- 300,000 -- 300,000
Exercise of stock options and warrants 37,629 376 342,744 -- 343,120
Preferred stock dividend, net of -- -- -- (1,369,665) (1,369,665)
forfeitures
Net loss for 1996 -- -- -- (27,195,410) (27,195,410)
-------------- -------------- ------------- ------------- ----------------
Balance at December 31, 1996 11,244,665 $ 112,447 $ 86,932,391 $ (87,481,206) $ (436,368)
============== ============== ============= ============= ================
See notes to consolidated financial statements.
38
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-------------------------------------------------------------
1996 1995 1994
---------------- ---------------- -----------------
Operating activities
Net loss $ (27,195,410) $ (26,915,178) $ (7,964,918)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 36,948,158 31,403,376 1,713,117
Amortization of deferred financing costs 2,130,588 2,130,588 --
Provision for bad debts 919,453 277,529 --
Satellite incentives and accrued interest 2,371,506 5,185,834 --
Limited Partners' and minority interest in the net loss
of Orion Atlantic and other consolidated entities (34,629,650) (46,089,010) (7,352,704)
Gain on sale of assets (54,738) (59,301) (54,737)
Changes in operating assets and liabilities:
Accounts receivable (2,203,171) (4,915,257) (426,281)
Accrued interest 50,481 (129,810) --
Prepaid expenses and other current assets (336,376) (3,017,782) 159,030
Other assets (69,708) (519,773) 321,443
Accounts payable and accrued liabilities (3,621,847) 7,327,377 535,092
Other current liabilities 3,296,913 3,670,988 --
Interest payable 578,803 (885,106) --
---------------- ---------------- -----------------
Net cash used in operating activities (21,814,998) (32,535,525) (13,069,958)
Investing activities
Capital expenditures (12,625,444) (8,549,799) (3,432,286)
Deferred revenue, net 9,900,000 -- --
Satellite construction costs (3,750,231) (510,613) (47,670,720)
Refund from satellite manufacturer -- 2,750,000 --
FCC license costs (37,865) (558,817) (96,030)
---------------- ---------------- -----------------
Net cash used in investing activities (6,513,540) (6,869,229) (51,199,036)
Financing activities
Limited Partners capital contributions 30,135,000 7,600,000 4,000,000
Redemption of limited partner interest -- (4,450,000) --
Expenditures on debt and equity financing costs (2,265,291) -- (409,181)
Proceeds from issuance of redeemable preferred stock -- 4,483,001 10,928,293
Proceeds from issuance of common stock and
subscriptions, net of issuance costs 343,120 51,974,436 6,542,303
PPU borrowings -- 2,275,000 4,375,000
Proceeds from issuance of notes payable -- 551,850 8,136,191
Proceeds from senior notes payable to banks -- 18,367,134 36,685,505
Payments of senior notes payable to banks (22,768,340) (12,468,049) --
Payments of notes payable (5,033,941) (1,916,966) --
Payments on capital lease obligations (755,995) (576,727) (252,823)
Capacity and other liabilities 15,750,207 17,483,733 2,101,168
Distributions to joint venture minority interest -- (25,904) (22,873)
---------------- ---------------- -----------------
Net cash provided by financing activities 15,404,760 83,297,508 72,083,583
---------------- ---------------- -----------------
Net (decrease) increase in cash and cash equivalents (12,923,778) 43,892,754 7,814,589
Cash and cash equivalents at beginning of period 55,111,585 11,218,831 3,404,242
---------------- ---------------- -----------------
Cash and cash equivalents at end of period $ 42,187,807 $ 55,111,585 $ 11,218,831
================ ================ =================
See notes to consolidated financial statements.
39
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 has been financed by private and public equity and debt from individual
and corporate investors. 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. 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.
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), the
Orion Financial Partnership, in which Orion holds a 50% interest, and Orion
Atlantic, in which Orion holds, at December 31, 1996, a 41 2/3% ownership
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.
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,
----------------------------------
1996 1995
-------------- -----------------
Cash....................... $ 2,627,477 $ 3,091,277
Money market funds......... 14,213,484 6,018,925
Commercial paper........... 25,346,846 34,612,175
FHLMC discount notes....... -- 11,389,208
-------------- -----------------
$ 42,187,807 $ 55,111,585
============== =================
The commercial paper held at December 31, 1996 matures between January and March
1997.
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 Orion 1 satellite and related equipment are capitalized. Such
costs include direct contract cost, allocated indirect costs, launch costs,
launch insurance, construction period interest and the present value of
satellite incentive payments. Similar costs for Orion 2 and Orion 3 are included
in "Satellite construction in progress". Orion began depreciating the Orion 1
satellite over its estimated useful life commencing on the date of operational
delivery in orbit (January 20, 1995).
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.
40
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs related to 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 December 31, 1996 and
1995 was $9,122,000 and $6,991,000, 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 that was postponed in
November 1995 have been charged to "Other" expense.
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 over the estimated useful
life of the satellite. Organization costs and goodwill are amortized over five
and ten years respectively. Accumulated amortization at December 31, 1996 and
1995 was $3,150,000 and $3,069,000, respectively.
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.
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
the year ended December 31, 1996 and 1995:
Year ended December 31,
-------------------------------
1996 1995
-------------- ----------------
Revenues from unaffiliated customers
United States....................... $ 21,261,980 $ 8,528,736
Europe.............................. 14,571,979 8,056,146
Revenues from related parties........... 6,013,333 5,699,000
-------------- ----------------
Total services revenue.................. $ 41,847,292 $ 22,283,882
============== ================
41
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future consequences of temporary differences between financial reporting and tax
bases of assets and liabilities using enacted tax rates that will be in effect
when the difference is expected to reverse.
Following is a summary of the components of the net deferred tax asset at
December 31, 1996 and 1995 (in thousands):
December 31,
1996 1995
---------------- ----------------
Tax benefit of temporary differences:
Net operating loss carryforward $ 29,535 $ 19,463
Orion Atlantic losses.......... 182 1,237
Other.......................... 2,427 1,056
---------------- ----------------
Total.......................... 32,144 21,756
Valuation allowance............ (32,144) (21,756)
---------------- ----------------
Net deferred tax asset......... $ -- $ --
================ ================
At December 31, 1996, Orion has approximately $77.7 million in net
operating loss carryforwards which expire at varying dates from 2004 through
2011. 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.
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.
STATEMENTS OF CASH FLOWS
Non-cash investing and financing activities and supplemental cash flow
information includes:
December 31, 1996
--------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
Satellite construction costs financed by notes payable $ -- $ -- $ 7,862,050
Conversion of common stock to redeemable
preferred stock....................................
Property and equipment financed by capital leases.... 482,452 2,850,766 94,323
Preferred stock dividend, net of forfeitures......... 1,369,665 1,329,007 626,400
Conversion of preferred stock to common stock........ 804,945 9,000 --
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 20,619,316 11,312,875 45,051
capitalized..........................................
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
42
ORION NETWORK SYSTEMS, INC. -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ORION ATLANTIC
Orion Atlantic is a Delaware limited partnership formed to provide
international private communications networks and basic transponder capacity and
capacity services (including ancillary ground services) to businesses and
institutions with trans-Atlantic and intra-European needs. The business was
organized by OrionSat, the general partner of Orion Atlantic. The principal
purposes of Orion Atlantic were to finance the construction, launch and
operation of up to two telecommunications satellites in geosynchronous orbit
over the Atlantic Ocean and to establish a multinational sales and service
organization. Eight international corporations, including Orion, invested a
total of $90 million in equity as limited partners in Orion Atlantic. Orion
Atlantic 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 the
contingent calls.
Satellite Construction Contract --The fixed base price of Orion 1,
excluding obligations relating to satellite performance, aggregated $227
million. In addition to the fixed base price, the contract requires payments in
lieu of a further contract price increase, aggregating approximately $44 million
through 2006. Such payments are due, generally, if 24 out of 34 satellite
transponders are operating satisfactorily. Shortly after acceptance of the
satellite in January 1995, the Company filed a warranty claim with the satellite
manufacturer relating to one transponder that was not performing in accordance
with contract specifications. In August 1995, Orion Atlantic received a one time
refund of $2.75 million which was applied as a mandatory prepayment to the
senior notes payable - banks.
The Company believes that since Orion 1 is properly deployed and
operational, based upon industry data and experience, payment of the obligation
mentioned above is highly probable and the Company 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. 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.
Condensed balance sheet information for Orion Atlantic at December 31, 1996
and 1995 is as follows:
December 31,
----------------------------------
1996 1995
--------------- ----------------
Assets
Current assets........................... $ 14,959,986 $ 14,085,169
Property and equipment, net.............. 285,006,166 303,889,894
Deferred financing costs and other....... 12,773,951 16,051,517
--------------- ----------------
Total assets........................ $ 312,740,103 $ 334,026,580
=============== ================
Liabilities and partnership capital
Current liabilities...................... $ 59,139,777 $ 52,883,250
Long-term debt and other liabilities..... 274,732,228 284,110,104
Partnership capital subject to redemption -- --
Partnership (deficit) capital............ (19,081,902) 1,533,226
Less: Orion Network Systems, Inc. note.. (2,050,000) (4,500,000)
--------------- ----------------
Total liabilities and partnership
capital......................... $ 312,740,103 $ 334,026,580
================ ===============
43
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. -- In November 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 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 was allocated to the cost of the satellite and
related equipment.
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, 1996 and 1995,
Orion Atlantic has received $27.7 million and $14.1 million (excluding payments
from the Company) under the firm capacity agreements subject to refund, which
amounts are included in "Other liabilities." In addition, services revenue
included $6.0 million and $5.7 million in 1996 and 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 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 not outstanding at December 1997 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.
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 -- July 1996, the Company signed a contract with Matra
Marconi Space for the construction and launch of Orion 2 (which was amended and
restated in January 1997) and in February 1997 commenced construction of that
satellite. The contract provides for delivery in orbit of Orion 2 by June 1999,
for a firm fixed price of $201 million, excluding launch insurance. Orion 2 will
expand the Company's European coverage and extend coverage to portions of the
Commonwealth of Independent States, Latin American and the Middle East.
Orion 3 -- In January 1997, the Company entered into a satellite
procurement contract with Hughes Space for the construction and launch of Orion
3, construction of which commenced in December 1996. The contract provides for
delivery in orbit of Orion 3 by December 1998, for a firm fixed price of $208
million, excluding launch insurance. Orion 3 will cover broad areas of the Asia
Pacific region including China, Japan, Korea, Southeast Asia, Australia, New
Zealand, Eastern Russia and Hawaii.
44
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. In December 1996, Orion received a $10 million deposit and
such amount is included in "Other liabilities". Orion maintains a $10 million
letter of credit which increases as DACOM makes additional deposits. DACOM 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.
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.
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. 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 final terms in a formal settlement
agreement.
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 $915,000, $735,000 and $668,000 during the years ended
December 31, 1996, 1995, and 1994, respectively.
Future minimum lease payments are as follows:
1997...................... $ 1,073,582
1998...................... 969,302
1999...................... 989,640
2000...................... 13,694
------------
$ 3,046,218
============
45
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
See Note 9 for discussion of significant financing transactions that were
consummated on January 31, 1997.
Long-term debt at December 31, 1996 and 1995, consists of the following:
December 31,
-----------------------------
1996 1995
------------ --------------
Senior notes payable - banks............ $207,714,842 $ 230,483,182
Note payable - TT&C Facility............ 6,956,624 8,774,266
Satellite incentive obligation.......... 22,373,746 20,002,240
Notes payable - STET.................... 5,550,000 8,000,000
Note payable - Limited Partners......... 8,050,000 8,050,000
Other .................................. 2,566,687 3,966,708
------------ --------------
Total long-term debt.................... 253,211,899 279,276,396
Less: current portion................... 34,975,060 28,607,110
------------ --------------
Long-term debt less current portion..... $218,236,839 $ 250,669,286
============ ==============
Total interest (including commitment fees and amortization of deferred financing
costs) incurred for the years ended December 31, 1996, 1995 and 1994 was $27.8,
$26.0, and $27.0 million, respectively. Substantially all of the interest
incurred in 1994 was capitalized and $1.3 million was capitalized in 1995.
Aggregate annual maturities of long-term debt consist of the following (in
thousands):
1997.................. $ 34,964
1998.................. 34,422
1999.................. 46,914
2000.................. 43,619
2001.................. 47,317
Thereafter............ 45,976
---------------
$ 253,212
===============
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, 1996, 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 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 (7.6% at December 31, 1996). 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 at December
31, 1996 and 1995 of approximately $6.4 million and $4.6 million relating to
this arrangement.
46
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG TERM DEBT (CONTINUED)
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 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 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, 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 paid
on December 31, 1996; $3.5 million plus accrued interest on the earlier of
December 31, 1997 or the refinancing of the senior notes payable to banks; and
the remaining $2.0 million in monthly installments of $0.2 million plus accrued
interest beginning January 1997.
Notes Payable -- Limited Partners -- In 1993, Orion Atlantic received
commitments for Preferred Participation Units (PPUs) aggregating $9.6 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. Interest payable at December 31, 1996 and 1995 is $5.9 million
and $3.5 million and is included in "Other liabilities".
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
See Note 9 for discussion of significant equity transactions that were
consummated on January 31, 1997.
The Company has authorized 1,000,000 shares of $0.01 par value preferred
stock.
Redeemable Preferred Stock
In June 1994, Orion issued 11,500 shares of Series A 8% Cumulative
Redeemable Convertible Preferred Stock at $1,000 per share and granted an option
to purchase an additional 3,833 shares of similar preferred stock at $1,000 per
share. Dividends on preferred stock accrue at 8% per year and are payable as and
when declared. Orion may redeem the preferred stock at the amount invested plus
accrued and unpaid dividends. Upon such a redemption, the preferred stockholders
would receive a warrant to acquire at $8.50 per share the number of shares of
common stock into which the preferred stock was convertible. The 11,500 shares
issued are convertible into 1,352,941 shares of common stock ($8.50 per share).
Upon conversion any accrued and unpaid dividends are forfeited. Orion may
require conversion of the preferred stock beginning in June 1996 if certain
conditions are met. After Orion issued preferred stock (along with warrants and
options to make an additional investment) in June 1994, the Directors and
affiliates of Directors who purchased common stock in December 1993 and the
institutions and other investors who purchased common stock in June 1994 each
exercised its right to receive preferred stock (along with warrants and options
to make an additional investment) in exchange for the common stock previously
acquired and Orion issued an aggregate of 3,000 shares of Series A Preferred
Stock and related options for 1,000 shares to such persons and entities. The
3,000 shares issued are convertible into 352,941 shares of common stock ($8.50
per share). Through December 31, 1996, 629 shares of preferred stock were
converted into 74,000 shares of common stock. The remaining 13,871 shares issued
are convertible into 1,631,882 shares of common stock and the preferred stock
underlying the options are convertible into 25,894 shares of common stock.
47
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
The preferred stock has a liquidation preference equal to the amount
invested plus accrued and unpaid dividends. Preferred stockholders are entitled
to vote on an as-converted basis and have the right to put the stock to Orion
upon a merger, change of control or sale of substantially all assets at the
greater of liquidation value or fair value. The put expires upon the completion
of a qualified public equity offering, as defined. If the preferred stock is not
previously redeemed or converted to common stock, the preferred stockholders
also have the right to put the stock to Orion as follows: 33 1/3% beginning in
June 1999; 66 2/3% beginning in June 2000; and 100% beginning in June 2001.
In June 1995, certain Directors, affiliates of Directors, and certain
holders of Series A Preferred Stock purchased 4,483 shares of Series B Preferred
Stock for approximately $4.5 million. This purchase was pursuant to an option
granted in June 1995 to purchase $1 of preferred stock similar to the Series A
Preferred Stock for each $3 of Series A Preferred Stock purchased in June 1994,
except that such similar preferred stock would be convertible at any time with
Common Stock at a price within a range of $10.20 to $17.00 per share of common
stock based upon when the option is exercised. The Series B Preferred Stock has
rights, designations and preferences substantially similar to those of the
Series A Preferred Stock, and is subject to similar covenants, except that the
Series B Preferred Stock is convertible into 439,510 shares of Common Stock at
an initial price of $10.20 per share, subject to certain anti-dilution
adjustments, and purchases of Series B Preferred Stock did not result in the
purchaser receiving any rights to purchase additional preferred stock. Through
December 31, 1996, 185 shares of preferred stock were converted into 18,137
shares of common stock.
Stockholders' Equity
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:
1996 1995 1994
--------------- --------------- ----------------
Range of exercise price........... $ 8.16 - 12.24 $ 5.44 - 12.24 $ 5.44 - 12.24
--------------- --------------- ----------------
Outstanding of beginning of year 971,469 804,056 871,464
Granted during year............... 122,750 380,069 37,867
Exercised......................... (37,629) (60,928) (31,967)
Canceled ......................... (144,927) (151,728) (73,308)
--------------- --------------- ----------------
Outstanding at end of year........ 911,663 971,469 804,056
=============== =============== ================
In November 1993, stock options for 95,588 shares of common stock were
granted to key executives which may be exercised only upon the achievement of
certain business and financial objectives. At December 31,1995, the executives
had earned the right to exercise 40,441 of these options based on the
achievement of such objectives. The remaining options were canceled during 1996.
Stock options vest annually over a one to five-year period. All options are
exercisable up to seven years from the date of grant. There are 558,925 shares
available to be granted under the plan. As of December 31, 1996 and 1995,
429,265 and 356,226, respectively, qualified and nonqualified options were
exercisable.
In July 1996, the Company granted, subject to shareholder approval, the
Chairman of the Executive Committee 100,000 options at $9.83 per share. These
options vest as follows, 50,000 on January 17, 1997 and 50,000 upon successful
completion of either a refinancing of the Orion 1 satellite, financing for
construction, launch and insurance for Orion 2 or Orion 3 or completes a
substantial acquisition or relationship with a strategic partner. These
requirements were met in January 1997.
Non-Employee Director Stock Option Plan -- In 1996, Orion adopted a
non-employee director stock option plan. Under this plan, 380,000 shares of
common stock are reserved for issuance. During 1996, there were 190,000 options
granted pursuant to this plan at $8.49 to $12.53 per share.
48
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (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" ("SFAS 123") which
is effective for awards after January 1, 1996 requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, when the exercise price of the employee award equals the market price of
the underlying stock on the date of grant, as has been the case historically
with the Company's awards, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its stock options under the fair value method of that statement. The fair
value of these options was estimated at the date of the grant using a
Black-Scholes valuation model with the following assumptions: risk free interest
rate of 6.5%, dividend yield of 0%, volatility factor of the expected market
price of the Company's common stock of 68% and a weighted-average expected life
of the option of 5.8 years. For purposes of pro forma disclosure, the estimated
fair value of the options is amortized to expense over the options' vesting
period. For the years ended December 31, 1996 and 1995, the Company's pro forma
net loss and net loss per share would have been $28.0 million or $2.68 per
share, and $27.3 million or $3.11 per share, respectively.
401(k) Profit Sharing Plan -- In September 1996, Orion amended the 401(k)
profit sharing plan. Under this plan, 100,000 shares of common stock are
reserved for issuance as the Company's discretionary match of employee
contributions. The Company's matching contributions may be made in either cash
or in the equivalent amount of the Company's common stock.
Stock Purchase Plan -- In September 1996, Orion adopted an employee stock
purchase plan. Under this plan, 500,000 shares of common stock are reserved for
issuance. Shares of common stock purchased under this plan through payroll
deduction. The purchase price of each share of common stock purchased under the
plan will be 85% of the fair market value of the common stock on the measurement
date.
Stock Warrants -- In November 1996, Orion granted 50,000 warrants to DACOM
to purchase shares of common stock at $14 per share. The warrants are
exercisable for a six month period beginning six months after the commencement
date, as defined in the Joint Investment Agreement, and ending one year after
the commencement date and will terminate at that time or at any time the Joint
Investment Agreement is terminated. The fair value of the warrant at the date of
issue was $300,000 and was estimated using a Black-Scholes valuation model.
Stock warrants outstanding at December 31, 1996 and 1995 were 142,115 and
553,768, respectively. Outstanding warrants are exercisable at $9.79 to $14 per
share. Warrants totaling 461,653 expired during the year ended December 31,
1996. In January 1997, British Aerospace exercised 86,505 warrants to purchase
shares of common stock at $11.56 per share.
The holders of preferred stock also hold warrants to purchase 1,631,882
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.
Reserve for Issuance - The Company has 24,125,482 shares of common stock at
December 31, 1996 reserved for issuance upon conversion of preferred stock,
exercise of outstanding stock options and warrants, and common stock issued
under the stock purchase and 401(k) profit sharing plans.
7. 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, 1996 and 1995
was estimated to be $214.1 million and $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 $6.4 million and
$4.6 million, respectively. 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.
49
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CONDENSED FINANCIAL INFORMATION OF ORION
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, 1996 and 1995 and condensed statements of operations and cash flows
for the years ended December 31, 1996, 1995 and 1994. All material
contingencies, obligations and guarantees of Orion have been separately
disclosed in the preceding notes to the financial statements.
CONDENSED BALANCE SHEETS OF ORION NETWORK SYSTEMS, INC.
December 31,
1996 1995
--------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents................................... $ 26,564,562 $ 48,797,627
Receivable from Orion Atlantic.............................. 253,088 1,217,169
Other current assets........................................ 766,784 611,391
--------------- ----------------
Total current assets................................... 27,584,434 50,626,187
Investment in and advances to subsidiaries:
OrionNet.................................................... 8,331,248 5,993,628
OrionSat.................................................... (35,336,290) (20,496,009)
Asia Pacific................................................ 1,397,588 1,634,048
Orion Asia Pacific.......................................... 4,324,426 --
Orion Atlantic.............................................. 9,194,820 10,585,573
Other assets.................................................. 10,590,071 6,256,742
--------------- ----------------
Total assets........................................... $ 26,086,297 $ 54,600,169
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes and interest payable to Orion Atlantic................ $ 2,327,427 $ 2,482,667
Accounts payable and accrued liabilities.................... 2,828,616 2,361,291
--------------- ----------------
Total current liabilities.............................. 5,156,043 4,843,958
Notes and interest payable to Orion Atlantic.................. -- 2,077,327
Other liabilities............................................. 464,256 640,541
Redeemable preferred stock.................................... 20,902,366 20,357,701
Stockholders' equity (deficit)................................ (436,368) 26,680,642
--------------- ----------------
Total liabilities and stockholders' equity............. $ 26,086,297 $ 54,600,169
=============== ================
50
ORION NETWORK SYSTEMS, INC. -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CONDENSED FINANCIAL INFORMATION OF ORION (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS OF ORION NETWORK SYSTEMS, INC.
Year ended December 31,
------------------------------------------------------------
1996 1995 1994
--------------- --------------- ----------------
Services revenue..................................... $ 34,000 $ -- $ --
Operating expenses and other income:
General and administrative........................ 3,832,286 3,171,305 2,487,201
Interest income, net.............................. (1,883,719) (1,834,589) (243,152)
--------------- --------------- ----------------
Total operating expenses and other income......... 1,948,567 1,336,716 2,244,049
Equity in net losses of subsidiaries................. 25,280,843 25,578,462 5,720,869
Net loss............................................. $ (27,195,410) $ (26,915,178) $ (7,964,918)
=============== =============== ================
CONDENSED STATEMENTS OF CASH FLOWS OF ORION NETWORK SYSTEMS, INC.
Year ended December 31,
1996 1995 1994
---------------- ---------------- ---------------
Net cash used in operations...................... $ (4,046,446) $ (4,107,237) $ (2,709,307)
Investing activities:............................
Advances to subsidiaries....................... (6,918,710) (3,264,024) (2,973,264)
Investment in Orion Atlantic................... (8,610,000) (5,400,000) --
Capital expenditures........................... (504,729) (597,698) (771,890)
---------------- ---------------- ---------------
Net cash used in investing activities.......... (16,033,439) (9,261,722) (3,745,154)
Financing activities:
Proceeds from issuance of redeemable preferred stock -- 4,483,001 10,928,293
Proceeds from issuance of common stock......... 343,120 51,974,436 6,542,303
PPU funding.................................... -- (455,000) (765,000)
Repayment of notes payable..................... (2,496,300) (37,792) (5,648,535)
---------------- ---------------- ---------------
Net cash (used in) provided by financing activities (2,153,180) 55,964,645 11,057,061
---------------- ---------------- ---------------
Net (decrease) increase in cash and cash equivalents (22,233,065) 42,595,686 4,602,600
Cash and cash equivalents at beginning of year... 48,797,627 6,201,941 1,599,341
---------------- ---------------- ---------------
Cash and cash equivalents at end of year......... $ 26,564,562 $ 48,797,627 $ 6,201,941
================ ================ ===============
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.
51
ORION NETWORK SYSTEMS, INC. -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS (UNAUDITED)
THE EXCHANGE
On January 31, 1997, the Company acquired all of the limited partnership
interests which it did not already own in Orion Atlantic. Specifically, the
Company acquired the Orion Atlantic limited partnership interests and other
rights relating thereto held by British Aerospace Communications, Inc., COM DEV
Satellite Communications Limited, Kingston Communications International Limited,
Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate
of Matra Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of Nissho
Iwai Corp. (collectively, the "Exchanging Partners").
Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the
"Exchange Agreement"), the Exchanging Partners exchanged (the "Exchange") their
Orion Atlantic limited partnership interests for 123,172 shares of a newly
created class of the Company's Series C 6% Cumulative Convertible Redeemable
Preferred Stock (the "Series C Preferred Stock"). In addition, the Company
acquired certain rights held by certain of the Exchanging partners, including
certain of the Exchanging Partners' rights to receive repayment of various
advances. The 123,172 shares of Series C Preferred Stock issued in the Exchange
are convertible (as of January 31, 1997) into approximately 7 million shares of
the Company's common stock. As a result of the Exchange, certain of the
Exchanging Partners became principal stockholders of the Company.
The Exchange and the acquisition by the Company of the only outstanding
minority interest in the Company's subsidiary Orion Asia Pacific Corporation
from British Aerospace Satellite Investments, Inc. on January 8, 1997 (in
exchange for approximately 86,000 shares of the Company's Common Stock) results
in the Company owning 100% of all its significant subsidiaries and, therefore, a
greatly simplified corporate structure.
THE MERGER
The Exchange was conducted on a tax-free basis by means of a Merger
(defined below) that was consummated on January 31, 1997. Pursuant to the
Exchange Agreement, Orion Oldco Services, Inc., formerly known as Orion Network
Systems, Inc. ("Old Orion"), formed the Company as a new Delaware corporation
with a certificate of incorporation, bylaws and capital structure substantially
identical in all material respects with those of Old Orion. Also pursuant to the
Exchange Agreement, the Company formed a wholly owned subsidiary, Orion Merger
Company, Inc. ("Orion Merger Subsidiary"). Pursuant to an Agreement and Plan of
Merger, Orion Merger Subsidiary was merged with and into Old Orion, and Old
Orion became a wholly owned subsidiary of the Company (the "Merger"). On January
31, 1997, the effective time of the Merger, all of the stockholders of Old Orion
received stock in the Company with substantially identical rights to the Old
Orion stock they held prior to the effective time of the Merger. Following the
Merger, the Company changed its name from Orion Newco Services, Inc. to Orion
Network Systems, Inc. and the Company's wholly owned subsidiary Orion Network
Systems, Inc. changed its name to Orion Oldco Services, Inc.
THE FINANCINGS
On January 31, 1997, the Company completed a $710 million bond offering
(the "Offering") comprised of approximately $445 million of Senior Note Units,
each of which consists of one 11.25% Senior Note due 2007 (a "Senior Note") and
one Warrant to purchase 0.8463 shares of common stock, par value $ .01 per share
("Common Stock") of the Company (a "Senior Note Warrant"), and approximately
$265.4 million of Senior Discount Note Units, each of which consists of one
12.5% Senior Discount Note due 2007 (a "Senior Discount Note," and together with
the Senior Notes, the "Notes") and one Warrant to purchase 0.6628 shares of
Common Stock of the Company (a "Senior Discount Note Warrant," and together with
the Senior Note Warrants, the "Warrants"). Interest on the Senior Notes will be
payable semi-annually in cash on January 15 and July 15 of each year, commencing
July 15, 1997. The Senior Discount Notes will not pay cash interest prior to
January 15, 2002. Thereafter, cash interest will accrue until maturity at an
annual rate of 12.5% payable semi-annually on January 15 and July 15 of each
year, commencing July 15, 2002. The exercise price for the Warrants is $ .01 per
share of Common Stock of the Company. The shares of Common Stock of the Company
initially issuable upon exercise of the Warrants represent approximately 2.62%
of the outstanding Common Stock of the Company on a fully diluted basis as of
January 31, 1997.
The net proceeds of the Offering to the Company were approximately $684
million. Other than $134 million placed in a pledged account to pre-fund the
first six interest payments on the Senior Notes, the net proceeds from the
Offering were used by the Company to repay the Orion 1 credit facility and may
be used to build and launch additional satellites, including the Orion 2 and
Orion 3 satellites.
On January 31, 1997, the Company also completed the sale of $60 million of
its convertible junior subordinated debentures (the "Convertible Debentures") to
two investors, British Aerospace Holdings, Inc. ("British Aerospace") and Matra
Marconi Space UK Limited ("Matra Marconi Space") purchased $50 million and $10
million of the Convertible Debentures, respectively (collectively, the
"Convertible Debenture Investments," and together with the Offering, the
"Financings"). The Convertible Debentures will mature in 2012, and will bear
interest at a rate of 8.75% per annum to be paid semi-annually in arrears solely
in common stock of the Company. The Convertible Debentures are subordinated to
all other indebtedness of the Company, including the Notes.
52
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma condensed consolidated financial statements give
effect, as of December 31, 1996, as to the Balance Sheet, and January 1, 1996,
as to the Statement of Operations, to the Exchange, the Merger and the
Financings consummated on January 31, 1997, all as described above. In addition,
the pro forma condensed consolidated financial statements give effect to the
following transactions, which were, directly or indirectly, conditions precedent
to, or result from, the Exchange, the Merger and the Financings as described
above: (i) the use of the net proceeds from the Financings to repay indebtedness
under the Orion 1 Credit Facility, 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 acquisition by Orion of British Aerospace's
17% ownership of Orion Asia Pacific for approximately 86,000 shares of common
stock, (iii) payments of approximately $4.0 million, including accrued interest,
owed to STET, a former limited partner of Orion Atlantic, and (iv) the write-off
of deferred financing fees (such transactions collectively with the Merger, the
Exchange, and the Financings, the "Transactions").
The unaudited pro forma condensed consolidated financial statements do not
purport to present the actual financial position or results or 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.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS, EXCEPT SHARE AMOUNTS, IN 000'S)
DECEMBER 31, 1996
-------------------
Assets
Current assets................................................ $ 149,720
Property and equipment, net................................... 320,707
Restricted and segregated cash................................ 406,937
Deferred financing costs, net................................. 25,865
Other assets, net............................................. 25,365
-------------------
Total assets.................................................. $ 928,594
===================
Liabilities and stockholders' equity
Current liabilities........................................... $ 23,730
Long-term debt................................................ 779,283
Other liabilities............................................. 11,528
Limited Partners' interest in Orion Atlantic.................. --
Redeemable preferred stock.................................... 111,902
Stockholders' equity.......................................... 2,151
-------------------
Total liabilities and stockholders' equity.................... $ 928,594
===================
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED
DECEMBER 31, 1996
-------------------
Services revenue.............................................. $ 41,847
Operating expenses............................................ 82,931
Other expense (income)........................................ 92,546
Net loss...................................................... (133,630)
Preferred stock dividend and accretion, net of forfeitures.... 9,273
-------------------
Net loss attributable to common stockholders.................. $ (142,903)
===================
Net loss per common share..................................... $ (12.71)
===================
Weighted average common shares outstanding.................... 11,247,062
===================
53
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
TELEPORT EUROPE ACQUISITION
On March 26, 1997, Orion acquired German-based Teleport Europe GmbH, a
communications company specializing in private satellite networks for voice and
data services. Orion purchased the shares of Teleport Europe held by the German
companies, Vebacom GmbH and RWE Telliance AG, now known as o.tel.o for
approximately $9 million.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1996 and 1995:
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------- --------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996
Revenues...................... $ 7,646 $ 10,123 $ 12,247 $ 11,831
Loss from operations.......... (10,155) (8,963) (7,151) (10,084)
Loss before minority interest. (16,985) (14,637) (12,985) (17,218)
Net loss...................... (7,251) (6,760) (5,796) (7,388)
Net loss per share............ (0.70) (0.65) (0.55) (0.72)
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)
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
TERM EXPIRES
NAME AGE POSITION WITH ORION (DIRECTORS)
- ---------------------- ------- ----------------------------------------------- ------------------
Gustave M. Hauser..... 68 Chairman, Director 1998
W. Neil Bauer......... 50 President and Chief Executive Officer. 1999
Director (Principal Executive Officer)
David J. Frear........ 40 Vice President, Chief Financial Officer --
and Treasurer (Principal Financial Officer
and Principal Accounting Officer)
Richard H. Shay....... 56 Vice President, Corporate and Legal Affairs, --
and Secretary
Denis Curtin.......... 58 Senior Vice President, Orion Satellite --
Corporation and General Manager,
Engineering and Satellite Operations
Han C. Giner.......... 58 Vice President of Orion and President, --
Orion Asia Pacific Corporation, Vice President
of Orion
Richard J. Brekka..... 36 Director 1997
Warren B. French, Jr.. 73 Director 1997
Barry Horowitz........ 53 Director 1998
Sidney S. Kahn........ 60 Director 1999
John G. Puente........ 67 Director 1998
W. Anthony Rice....... 45 Director 1997
John V. Saeman........ 61 Director 1998
Robert M. Van Degna... 53 Director 1999
55
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the business experience and the affiliations of
the directors and executive officers of Orion is set forth below.
Gustave M. Hauser has been Chairman of Orion since January 1996 and has
been a director of Orion since December 1982. Since 1983, he has been Chairman
and Chief Executive Officer of Hauser Communications, Inc., an investment and
operating firm specializing in cable television and other electronic
communications. From 1973 to 1983 he served as Chairman and Chief Executive
Officer of Warner-Amex Cable Communications, Inc. (formerly Warner Cable
Communications, Inc.), a major multiple system operator of cable television
systems and originator of satellite delivered video programming. He is a trustee
of the Museum of Television and Radio. He is a past Vice Chairman of the
National Cable Television Association, and from 1970 to 1977 he served, by
appointment of the President of the United States, as a director of the Overseas
Private Investment Corporation.
W. Neil Bauer has been President of Orion since March 1993, and has been
Chief Executive Officer and a director since September 1993. From 1989 to
February 1993, Mr. Bauer was employed by GE American Communications, Inc., where
he served as Senior Vice President and General Manager of Commercial Operations.
Prior to 1989, Mr. Bauer was Chief Financial Officer of GE American
Communications, Inc. and later head of commercial sales. He held several key
financial planning positions at GE/RCA from 1984 through 1986 focused on
operational and business analysis of diverse business units including all
communications units. From 1974-1983, he was employed by RCA Global
Communications, an international record carrier. During this period, he held
several financial and operational positions and was responsible for financial
and business planning.
David J. Frear has been Vice President and Chief Financial Officer of Orion
since November 1993 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 Corporation, Orion's
subsidiary devoted to pursuing construction and launch of a satellite covering
the Asia Pacific region, in the fourth quarter of 1995 and a Vice President of
Orion in the first quarter of 1996. Mr. Giner served as a consultant to Orion
from October 1995 through January 1996 relating to similar matters. Prior
thereto, he held senior positions in the satellite and telecommunications
industries for more than 20 years. Most recently, from April 1994 through
September 1995 he served as President of Stellar One Corporation, a high-tech
company designing, manufacturing and distributing technologies for
telecommunications groups, particularly local telephone and cable television
companies. Prior to that, from November 1987 through March 1994, Mr. Giner held
several positions for, and ultimately served as president and CEO of Millisat
Holdings, Inc., a member of the Millicom Group, with worldwide responsibility
for development of media and telecommunications properties, including broadcast,
cable and wireless television.
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 ("CIBC") and is a Director and
the President of CIBC Wood Gundy Ventures, Inc., an indirect wholly owned
subsidiary of CIBC . Mr. Brekka joined CIBC-WG in February 1992. Prior to
joining CIBC-WG, Mr. Brekka was an officer of Chase Manhattan Bank's merchant
banking group from February 1988 until February 1992.
Warren B. French, Jr. has been a director of Orion since August 1988. He
was President and a director of Shenandoah Telephone Company of Edinburg,
Virginia from 1973 to 1988 and President and a director of Shenandoah
Telecommunications Company, the parent company of Shenandoah Telephone Company,
from 1981 to 1988. From 1988 through 1995, he was Chairman and a director of
Shenandoah Telecommunications Company. He is a past Chairman of the United
States Telephone Association and is a former director of First National
Corporation. Mr. French is a director of Hungarian Telephone and Cable Corp.
Barry Horowitz has been a director of Orion since May 1996. He is President
and Chief Executive Officer of Mitretek Systems, Inc. Mitretek works with
federal, state and local governments as well as other non-profit public interest
organizations on technology-based research and development programs. Mitretek
was incorporated in December 1995 as a result of a restructuring with The MITRE
Corporation. Principal
56
capabilities are related to information and environmental system technologies.
In addition, Dr. Horowitz is President and Chief Executive Officer of Concept 5
Technologies, Inc., a subsidiary of Mitretek, which provides technical services
to commercial clients, with its initial focus on the financial community. Prior
to the restructuring and since 1969, Dr. Horowitz served MITRE in several
capacities, including Trustee and President and CEO.
Sidney S. Kahn has been a director of Orion since July 1987. He is
presently a private investor. From 1977 to December 1989, he was Senior Vice
President of E.F. Hutton Company, Inc., a wholly owned subsidiary of the E.F.
Hutton Group, Inc. He is also a director of Delia's, Inc.
John G. Puente has been a director since 1984. Mr. Puente was Chairman of
Orion from April 1987 through January 1996, and since July, 1996 has been
serving as a consultant to the Company and chairman of the Company's Executive
Committee. He served as Chief Executive Officer of Orion from April 1987 through
September 1993. He was a director and, from 1978 to April 1987, served as Senior
Vice President, Executive Vice President or Vice Chairman of M/A-COM, Inc., a
diversified telecommunications and manufacturing company. He was a founder of
SouthernNet, Inc., a fiber optic long distance communications company and one of
the two companies that merged to form Telecom USA, Inc. (which was later
acquired by MCI), serving as a director of SouthernNet from July 1984 until
August 1987, and Chairman of the Board of SouthernNet from July 1984 until
December 1986. During his tenure as Chairman of the Board of SouthernNet, Mr.
Puente was instrumental in the founding of the National Telecommunications
Network, a national consortium of long distance fiber optic communications
companies, and was its first chairman. In 1972, Mr. Puente was a founder of DCC,
Inc., of which he became Chairman and CEO. In 1978, DCC, Inc. was acquired by
Microwave Associates to form M/A-COM, Inc.; DCC, Inc., subsequently was acquired
by Hughes Aircraft Company and became Hughes Network Systems, Inc. Mr. Puente
also played a prominent role in the early development of the communications
satellite industry, holding technical and executive positions in COMSAT and
American Satellite Corporation. He is also a director of Primus
Telecommunications, Inc.
W. Anthony Rice has been a director of Orion since January 1994. Mr. Rice
is Chief Executive Officer of British Aerospace Asset Management, the business
unit responsible for all of the company's activities in respect of commercial
aircraft leasing and financing. Previously, he served as Group Treasurer of
British Aerospace Public Limited Company from 1991 until the end of 1995.
British Aerospace is Europe's leading defense and aerospace company.
John V. Saeman has been a director of Orion since December 1982. He is an
owner of Medallion Enterprises LLC, a private investment firm located in Denver,
Colorado. Mr. Saeman was Vice Chairman and Chief Executive Officer of Daniels &
Associates, Inc. and its related entities in the telecommunications field from
1980 to 1988. He is former director as well as past Chairman of Cable Satellite
Public Affairs Network (C-Span) as well as a former director and past Chairman
of the National Cable Television Association. Mr. Saeman was a director of
Celerex Corporation and is a director of Nordstrom National Credit Bank. Celerex
Corporation filed a petition for reorganization under Chapter 11 of the United
States Bankruptcy Code in 1995.
Robert M. Van Degna has been a director of Orion since June 1994. He is the
managing general partner of Fleet Equity Partners ("Fleet"). Mr. Van Degna
joined Fleet Financial Group in 1971 and has held a variety of lending and
management positions until he organized Fleet in 1982 and became its managing
general partner. Mr. Van Degna also serves as a director of ACC Corporation and
Preferred Networks, Inc.
Orion's Certificate of Incorporation and Bylaws provide that the Board of
Directors of Orion, which presently consists of eleven 11 members (including one
vacancy), shall consist of that number of directors determined by resolution of
the Board of Directors. The Certificate of Incorporation provides that the Board
of Directors shall be divided into three classes, each consisting of
approximately one-third of the total number of directors. Class I Directors,
consisting of Messrs. Hauser, Horowitz, Puente and Saeman, will hold office
until the 1998 annual meeting of stockholders; Class II Directors, consisting of
Messrs. Bauer, Kahn and Van Degna will hold office until the 1999 annual meeting
of stockholders; and Class III Directors consisting of Messrs. Brekka, Rice and
French will hold office until the 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 Common Stock became publicly traded.
COMMITTEES OF THE BOARD OF DIRECTORS
Orion's Committee on Audit, Corporate Responsibility and Ethics (the
"Audit Committee") is composed of Messrs. Van Degna, (Chairman), Hauser and
Kahn, all of whom are non-management Directors. The Company also has a committee
on Human Resources and Compensation (the ("Compensation Committee"), which is
composed of Messrs. Brekka (Chairman), French and Van Degna, an Executive
Committee composed of Messrs. Puente (Chairman), Hauser, Kahn, Saeman and Van
Degna, a Finance Committee composed of Messrs. Kahn (Chairman), Hauser, Saeman,
Brekka, Rice and Puente and a Nominating Committee composed of Messrs. Saeman
(Chairman), French and Puente. The information under the caption "Board
Committees" in the Company's definitive proxy statement to be filed for its
Annual Meeting of Stockholders to be held on May 22, 1997 (the "Proxy
Statement") is hereby incorporated herein by reference. The Proxy Statement is
being prepared and will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A, and furnished to the Company's Stockholders, on or
about April 15, 1997.
LIMITS ON LIABILITY; INDEMNIFICATION
Orion's Certificate of Incorporation provides that Orion's directors will
not be liable for monetary damages for breach of the directors' fiduciary duty
of care to Orion and its stockholders. This provision in the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of
non-monetary relief would remain available under Delaware law. In
57
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.
ITEMS 11, 12 AND 13.
The information called for by Part III (Items 11, 12 and 13) is
incorporated herein by reference from the material included under the captions
"Nominees for Election," "Executive Officers," "Executive Compensation and Other
Information" (but excluding the Human Resources and Compensation Committee
Report on Executive Compensation), "Security Ownership of Certain Beneficial
Owners", "Security Ownership of Management," and "Compensation Committee
Interlocks and Insider Participation in the Proxy Statement. The Proxy Statement
is being prepared and will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A, and furnished to the Company's Stockholders, on or
about April 15, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) and (2) List of Financial Statements and Financial Statement
Schedules
The following consolidated financial statements of Orion Network Systems,
Inc. are included in Item 8:
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Operations - Years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows - Years ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements - December 31, 1996
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
58
Exhibit
Number Description
1.1 Form of Underwriting Agreement. (Incorporated by reference to exhibit number 1.1 in Registration
Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)*
3.1 Restated Certificate of Incorporation of Orion Newco Services, Inc. (Incorporated by reference to exhibit
number 3.1 in Registration Statement on Form 8-B of Orion Newco Services, Inc. filed with the Commission
on January 31, 1997)*
3.2 Amended and Restated Bylaws of Orion Newco Services, Inc. (Incorporated by reference to exhibit number
3.2 in Registration Statement on Form 8-B of Orion Newco Services, Inc. filed with the Commission on
January 31, 1997)*
3.3 Certificate of Incorporation of Orion Network Systems, Inc. (Incorporated by reference to exhibit number
3.1 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)*
3.4 Bylaws of Orion Network Systems, Inc. (Incorporated by reference to exhibit number 3.2 in Registration
Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)*
3.5 Certificate of Incorporation of Orion Satellite Corporation. (Incorporated by reference to exhibit number
3.5 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)*
3.6 Bylaws of Orion Satellite Corporation. (Incorporated by reference to exhibit number 3.6 in Registration
Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)*
3.7 Certificate of Limited Partnership of International Private Satellite Partners, L.P. (Incorporated by
reference to exhibit number 3.7 in Registration Statement No. 333-19167 on Form S-1 of Orion Network
Systems, Inc.)*
3.8 Form of Third Amended and Restated Agreement of Limited Partnership of International Private Satellite
Partners, L.P. (Incorporated by reference to exhibit number 3.8 in Registration Statement No. 333-19167
on Form S-1 of Orion Network Systems, Inc.)*
3.9 Certificate of Incorporation of OrionNet, Inc. (Incorporated by reference to exhibit number 3.9 in
Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)*
3.10 Bylaws of OrionNet, Inc. (Incorporated by reference to exhibit number 3.10 in Registration Statement No.
333-19167 on Form S-1 of Orion Network Systems, Inc.)*
3.11 Certificate of Incorporation of Orion Asia Pacific Corporation. (Incorporated by reference to exhibit
number 3.11 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)*
3.12 Bylaws of Orion Asia Pacific Corporation. (Incorporated by reference to exhibit number 3.12 in
Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)*
3.13 Certificate of Incorporation OrionNet Finance Corporation. (Incorporated by reference to exhibit number
3.13 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)*
3.14 Bylaws of Orion Net Finance Corporation. (Incorporated by reference to exhibit number 3.14 in
Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)*
3.15 Certificate of Incorporation of Asia Pacific Space and Communications, Ltd. (Incorporated by reference to
exhibit number 3.15 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)*
3.16 Bylaws of Asia Pacific Space and Communications, Ltd. (Incorporated by reference to exhibit number 3.16
in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)*
3.17 Certificate of Incorporation of Orion Atlantic Europe, Inc. (Incorporated by reference to exhibit number
3.17 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)*
3.18 Bylaws of Orion Atlantic Europe, Inc. (Incorporated by reference to exhibit number 3.18 in Registration
Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)*
59
Exhibit
Number Description
4.1 Form of Senior Note Indenture and Form of Note included therein. (Incorporated by reference to exhibit
number 4.1 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)*
4.2 Form of Senior Discount Note Indenture and Form of Note included therein. (Incorporated by reference to
exhibit number 4.2 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)*
4.3 Form of Collateral Pledge and Security Agreement. (Incorporated by reference to exhibit number 4.3 in
Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)*
4.4 INTENTIONALLY OMITTED
4.5 Form of Warrant Agreement, by and between Orion and Bankers Trust Company, and Form of Warrant included
therein. (Incorporated by reference to exhibit number 4.5 in Registration Statement No. 333-19167 on Form
S-1 of Orion Network Systems, Inc.)*
4.6 Forms of Warrant issued by Orion. (Incorporated by reference to exhibit number 4.1 in Registration
Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)*
4.7 Forms of Warrant issued by Orion to holders of Preferred Stock. (Incorporated by reference to exhibit
number 4.2 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)*
4.8 Forms of Certificates of Designation of Series A 8% Cumulative Redeemable Convertible Preferred Stock,
Series B 8% Cumulative Redeemable Convertible Preferred Stock and Series C 6% Cumulative Redeemable
Convertible Preferred Stock of Orion. (Incorporated by reference to exhibit number 4.3 in Registration
Statement No. 333-19795 on Form 8-B of Orion Newco Services, Inc. filed with the Commission on January
31, 1997.)*
4.9 Forms of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock certificates of
Orion. (Incorporated by reference to exhibit number 4.4 in Registration Statement No. 333-19795 on From
S-4 of Orion Newco Services, Inc.)*
4.10 Form of Common Stock Certificate of Orion. (Incorporated by reference to exhibit number 4.5 in
Registration Statement No. 333-19795 on Form S-4 of Orion Newco Services, Inc.)*
4.11 Form of Warrant issued to DACOM Corp. (Incorporated by reference to exhibit number 4.6 in Registration
Statement No. 333-19795 on Form S-4 of Orion Newco Services, Inc.)*
4.12 Debenture Purchase Agreement, dated January 13, 1997, with British Aerospace and Matra Marconi Space
(Incorporated by reference to exhibit number 4.7 in Registration Statement No. 333-19795 on Form S-4 of
Orion Newco Services, Inc.), as amended as of January 31, 1997 (Incorporated by reference to exhibit 10.4
in Current Report on Form 8-K dated February 14, 1997 of Orion Network Systems, Inc.)*
10.1 Second Amended and Restated Purchase Agreement, dated September 26, 1991 ("Satellite Contract") by and
between OrionSat and British Aerospace PLC and the First Amendment, dated as of September 15, 1992, Second
Amendment, dated as of November 9, 1992, Third Amendment, dated as of March 12, 1993, Fourth Amendment,
dated as of April 15, 1993, Fifth Amendment, dated as of September 22, 1993, Sixth Amendment, dated as of
April 6, 1994, Seventh Amendment, dated as of August 9, 1994, Eighth Amendment, dated as of December 8,
1994, and Amendment No. 9 dated October 24, 1995, thereto. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR
PORTIONS OF THESE DOCUMENTS.] (Incorporated by reference to exhibits number 10.13 and 10.14 in Registration
Statement No. 33-80518 on Form S-1 on Orion Network Systems, Inc.)*
10.2 Restated Amendment No. 10 dated December 10, 1996, between Orion Atlantic and Matra Marconi Space to the
Second Amended and Restated Purchase Agreement, dated September 16, 1991 by and between OrionSat and
British Aerospace PLC (which contract and prior exhibits thereto were incorporated by reference as
exhibit number 10.1). (Incorporated by reference to exhibit number 10.2 in Registration Statement No.
333-19795 on Form S-4 of Orion Newco Services, Inc.)*
60
Exhibit
Number Description
10.3 Ground Support System Agreement, dated as of August 2, 1991, by and between Orion Atlantic and Telespazio
S.p.A. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by
reference to exhibit number 10.25 in Registration Statement No. 33-80518 on Form S-1 of Orion Network
Systems, Inc.)*
10.4 Italian Facility and Services Agreement, dated as of August 2, 1991, by and between OrionSat and
Telespazio S.p.A. as amended by the amendment thereto, dated March 19, 1994. [CONFIDENTIAL TREATMENT HAS
BEEN GRANTED FOR PORTIONS OF THESE DOCUMENTS]. (Incorporated by reference to exhibit number 10.26 in
Registration statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)*
10.5 Contract for a Satellite Control System, dated December 7, 1992, by and between Orion Atlantic,
Telespazio S.p.A. and Martin Marietta Corporation. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS
OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.31 in Registration Statement No.
33-80518 on Form S-1 of Orion Network Systems, Inc.)*
10.6 Credit Agreement, dated as of November 23, 1993, by and between Orion Atlantic, OrionSat and General
Electric Capital Corporation ("GECC"). [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS
DOCUMENT.] (Incorporated by reference to exhibit number 10.32 in Registration Statement No. 33-80518 on
Form S-1 of Orion Network Systems, Inc.)*
10.7 Security Agreement, dated as of November 23, 1993, by and between Orion Atlantic, OrionSat and GECC.
(Incorporated by reference to exhibit number 10.33 in Registration Statement No. 33-80518 on Form S-1 of
Orion Network Systems, Inc.)*
10.8 Assignment and Security Agreement, dated as of November 23, 1993, by and between Orion Atlantic, OrionSat
and GECC. (Incorporated by reference to exhibit number 10.34 in Registration Statement No. 33-80518 on
Form S-1 of Orion Network Systems, Inc.)*
10.9 Consent and Agreement, dated as of November 23, 1993, by and between Orion Atlantic, Martin Marietta
Corporation and GECC. (Incorporated by reference to exhibit number 10.35 in Registration Statement No.
33-80518 on Form S-1 of Orion Network Systems, Inc.)*
10.10 Deed of Trust, dated as of November 23, 1993, by and between Orion Atlantic, W. Allen Ames, Jr. And
Michael J. Schwel, as Trustees, and GECC. (Incorporated by reference to exhibit number 10.37 in
Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)*
10.11 Lease Agreement, dated as of November 23, 1993, by and between OrionNet, Inc. and Orion Atlantic, as
amended by an Amendment, dated January 3, 1995. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF
THESE DOCUMENTS.] (Incorporated by reference to exhibit number 10.38 in Registration Statement No. 33-80518
on Form S-1 of Orion Network Systems, Inc.)*
10.12 Note for Interim Loans, dated as of November 23, 1993, by and between Orion Atlantic and GECC.
(Incorporated by reference to exhibit number 10.42 in Registration Statement No. 33-80518 on Form S-1 of
Orion Network Systems, Inc.)*
10.13 Sales Representation Agreement and Ground Operations Service Agreement, each dated as of May 1, 1994 and
June 03, 1994, by and between each of OrionNet, Inc. and Kingston Communications, respectively, and Orion
Atlantic, as amended by side agreements, dated May 1, 1994, July 12, 1994, and February 1, 1995.
[CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THESE DOCUMENTS.] (Incorporated by reference to
exhibit number 10.43 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)*
10.14 Lease Agreement, dated as of October 2, 1992, by and between OrionNet and Research Grove Associates, as
amended by Amendment No. 1 dated March 26, 1993. Amendment No. 2 dated August 23, 1993, and Amendment
No. 3 dated December 20, 1993. (Incorporated by reference to exhibit number 10.39 in Registration
Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)*
61
Exhibit
Number Description
10.15 Sales Representation Agreement and Ground Operations Service Agreement, dated as of June 30, 1995, by and
between MCN Sat Service, S.A. and Orion Atlantic [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF
THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.69 in Orion's Registration Statement No.
33-80518 on Form S-1).*
10.16 Volume Purchase Agreement, dated January 18, 1995, by and between the Company and Dornier GmbH.
[CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to
exhibit number 10.66 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)*
10.17 Product Development, License and Marketing Agreement, dated January 18, 1995, by and between the Company
and Dornier GmbH. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated
by reference to exhibit number 10.65 in Orion's Registration Statement No. 33-80518 on Form S-1.)*
10.18 Sales Representation Agreement, dated as of June 8, 1995, by and between Nortel Dasa Network Systems GmbH
& Co. KG and Orion Atlantic. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.]
(Incorporated by reference to exhibit number 10.70 in Registration Statement No. 33-80518 on Form S-1 of
Orion Network Systems, Inc.)*
10.19 Orion 2 Spacecraft Purchase Contract, dated January 29, 1997 between Orion Atlantic and Matra Marconi
Space. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS DOCUMENT. THE CONFIDENTIAL
PORTIONS HAVE BEEN REDACTED AND FILED SEPARATELY WITH THE COMMISSION.]
10.20 Orion's Amended and Restated 1987 Stock Option Plan as amended. (Incorporated by reference to exhibit
number 10.23 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)*
10.21 Purchase Contract, dated December 4, 1991, by and between OrionNet, Inc., Shenandoah Valley Leasing Company
and MCI Telecommunications Corporation. {CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTION OF THIS
DOCUMENT.] (Incorporated by reference to exhibit number 10.30 in Registration Statement No. 33-80518 on
Form S-1 of Orion Network Systems, Inc.)* 10.22 Amended and Restated Partnership Agreement of Orion
Financial Partnership, dated as of April 15, 1994, by and between OrionNet and Computer Leasing Inc.
("CLI"). (Incorporated by reference to exhibit number 10.44 in Registration Statement No. 33-80518 on Form
S-1 of Orion Network Systems, Inc.)*
10.23 Continuing Guaranty, dated as of April 15, 1994, of the Company of obligations of OrionNet Finance
Corporation. (Incorporated by reference to exhibit number 10.45 in Registration Statement No. 33-80518 on
Form S-1 of Orion Network Systems, Inc.)*
10.24 Release of Continuing Guaranty, dated as of December 29, 1994, by the Orion Financial Partnership.
(Incorporated by reference to exhibit number 10.46 in Registration Statement No. 33-80518 on Form S-1 of
Orion Network Systems, Inc.)*
10.25 Confirmation of Continuing Guaranty, dated as of December 29, 1994, of the Company of the obligation of
OFC. (Incorporated by reference to exhibit number 10.47 in Registration Statement No. 33-80518 on Form
S-1 of Orion Network Systems, Inc.)*
10.26 Continuing Guarantee, dated as of December 29, 1994, by Lessor Capital Funding Limited Partnership in
favor of Orion Financial Partnership, (Incorporated by reference to exhibit number 10.48 in Registration
Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)*
10.27 Master Lease Agreement, dated as of April 15, 1994, by and between OrionNet and Orion Financial
Partnership. (Incorporated by reference to exhibit number 10.49 in Registration Statement No. 33-80518 on
Form S-1 of Orion Network Systems, Inc.)*
62
Exhibit
Number Description
10.28 Collateral Assignment and Pledge and Security Agreement, dated April 22, 1994, by and between CLI and
Orion Financial Partnership. (Incorporated by reference to exhibit number 10.50 in Registration Statement
No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)*
10.29 Purchase Agreement, dated as of April 22, 1994, by and between OrionNet and Orion Financial Partnership.
(Incorporated by reference to exhibit number 10.51 in Registration Statement No. 33-80518 on Form S-1 of
Orion Network Systems, Inc.)*
10.30 Stock Purchase Agreement, dated as of April 29, 1994, by and between the Company and SS/L. (Incorporated
by reference to exhibit number 10.53 in Registration Statement No. 33-80518 on Form S-1 of Orion Network
Systems, Inc.)*
10.31 Registration Rights Agreement, dated as of April 29, 1994, by and between the Company and SS/L.
(Incorporated by reference to exhibit number 10.54 in Registration Statement No. 33-80518 on Form S-1 of
Orion Network Systems, Inc.)*
10.32 Purchase Agreement, dated as of June 17, 1994, by and between the Company, CIBC, Fleet and Chisholm.
(Incorporated by reference to exhibit number 10.55 in Registration Statement No. 33-80518 on Form S-1 of
Orion Network Systems, Inc.)*
10.33 Stockholders Agreement, dated as of June 17, 1994, by and between the Company, CIBC, Fleet, Chisholm and
certain principal stockholders of the Company. (Incorporated by reference to exhibit number 10.56 in
Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)*
10.34 Registration Rights Agreement, dated as of June 17, 1994, by and between the Company CIBC, Fleet and
Chisholm. (Incorporated by reference to exhibit number 10.57 in Registration Statement No. 33-80518 on
Form S-1 of Orion Network Systems, Inc.)*
10.35 Purchase Agreement, dated as of June 19, 1995, by and among the Company, CIBC, Fleet and an affiliate of
Fleet. (Incorporated by reference to exhibit number 10.58 in Registration Statement No. 33-80518 on Form
S-1 of Orion Network Systems, Inc.)*
10.36 Definitive Agreement, dated April 26, 1990, by and between Orion Asia Pacific and Republic of the
Marshall Islands and Stock Option Agreement related thereto. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR
PORTIONS OF THESE DOCUMENTS.] (Incorporated by reference to exhibit number 10.60 in Registration
Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)*
10.37 Amended and Restated Option Agreement, dated January 29, 1997, by and between Orion Atlantic and Matra
Marconi Space and First Amendment, dated February 13, 1997, thereto. [CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED FOR PORTIONS OF THESE DOCUMENTS. THE CONFIDENTIAL PORTIONS HAVE BEEN REDACTED AND FILED
SEPARATELY WITH THE COMMISSION.]
10.38 INTENTIONALLY OMITTED
10.39 TT&C Earth Station Agreement, dated as of November 11, 1996, by and between Orion Asia Pacific and DACOM
Corp. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference
to exhibit number 10.39 in Registration Statement No. 333-19795 on Form S-4 of Orion Newco Services,
Inc.)*
10.40 Joint Investment Agreement, dated as of November 11, 1996, by and between Orion Asia Pacific and DACOM
Corp. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference
to exhibit number 10.40 in Registration Statement No. 333-19795 on Form S-4 of Orion Newco Services,
Inc.)*
10.41 Orion Network Systems, Inc. Employee Stock Purchase Plan. (Incorporated by reference to exhibit number
4.4 in Registration Statement No. 333-19021 on Form S-8 of Orion Network Systems, Inc.)*
10.42 Orion Network Systems, Inc. 401(k) Profit Sharing Plan (Incorporated by reference to exhibit number 4.5
in Registration Statement No. 333-19021 on Form S-8 of Orion Network Systems, Inc.)*
63
Exhibit
Number Description
10.43 Orion Network Systems, Inc. Non-Employee Director Stock Option Plan. (Incorporated by reference to
exhibit number 10.43 in Registration Statement No. 333-19795 on Form S-4 of Orion Newco Services, Inc.)*
10.44 Exchange Agreement dated June 1996 among Orion Network Systems, Orion Atlantic, OrionSat and the Limited
Partners (Incorporated by reference to exhibit 10 in Current Report on Form 8-K dated December 20, 1996,
of Orion Network Systems, Inc..)*
10.45 First Amendment to Exchange Agreement dated December 1996 among Orion Network Systems, Orion Atlantic,
OrionSat and the Limited Partners. (Incorporated by reference to exhibit number 10.45 in Registration
Statement No. 333-19795 on Form S-4 of Orion Newco Services, Inc.)*
10.46 Redemption Agreement dated November 21, 1995, by and between STET and Orion Atlantic, the promissory
notes delivered thereunder and Instrument of Redemption relating thereto. (Incorporated by reference to
exhibit number 10.1 in Current Report on Form 8-K dated November 21, 1995 of Orion Network Systems, Inc.)*
10.47 IPSP-Telecom Italia Agreement dated November 21, 1995, by and between Telecom Italia and Orion Atlantic.
[CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to
exhibit number 10.2 in Current Report on Form 8-K dated November 21, 1995 of Orion Network Systems, Inc.)*
10.48 Indemnity Agreement dated November 21, 1995, by and among Telecom Italia, Orion Atlantic, Orion and STET.
(Incorporated by reference to exhibit number 10.3 in Current Report on Form 8-K dated November 21, 1995
of Orion Network Systems, Inc.)*
10.49 Subscription Agreement dated November 21, 1995, by and between Orion and Orion Atlantic, and the
Promissory note delivered thereunder. (Incorporated by reference to exhibit number 10.5 in Current Report
on Form 8-K dated November 21, 1995 of Orion Network Systems, Inc.)*
10.50 First Amendment to the Italian Facility and Services Agreement dated November 21, 1995, by and between
Orion Atlantic and Nuova Telespazio. (Incorporated by reference to exhibit number 10.7 in Current Report
on Form 8-K dated November 21, 1995 of Orion Network Systems, Inc.)*
10.51 Registration Rights Agreement, dated January 13, 1997, by and among Orion Newco Services, Inc., British
Aerospace Holdings, Inc. and Matra Marconi Space. (Incorporated by reference to exhibit number 10.51 in
Registration Statement No. 333-19795 on form S-4 of Orion Newco Services. Inc.)*
10.52 Orion 3 Spacecraft Purchase Contract, dated January 15, 1997, by and among Hughes Space and
Communications International, Inc., Orion Asia Pacific Corporation and Orion Network Systems.
[CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.]*
12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
21.1 List of subsidiaries of Orion. (Incorporated by references to exhibit number 21.1 in Registration
Statement on Form 8-B of Orion Newco Services, Inc. filed with the Commission on January 31, 1997.)*
23.1 Consent of Ernst & Young LLP
* Exhibits incorporated by reference.
64
(b) Reports on Form 8-K filed in the fourth quarter of 1996:
Current Report on Form 8-K dated December 20, 1996 reporting
execution of the Exchange Agreement.. The Company also filed a Current Report on
Form 8-K on February 14, 1997 reporting consummation of the Exchange.
(c) Exhibits
None.
(d) Financial Statement Schedule
None.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Orion Network Systems, Inc.
---------------------------------------------------
(Registrant)
Date: March___, 1997 /s/ W. Neil Bauer
---------------------------------------------------
W. Neil Bauer, President
Chief Executive Office and Director
(Principal Executive Office)
Date: March ___, 1997 /s/ David, J. Frear
---------------------------------------------------
David J. Frear, Vice President
Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Gustave M. Hauser /s/ John V. Saeman
- ----------------------------------------------------- ----------------------------------------------------
Gustave M. Hauser John V. Saeman
Chairman, Director Director
/s/ John G. Puente /s/ Richard J. Brekka
- ----------------------------------------------------- ----------------------------------------------------
John G. Puente Richard J. Brekka
Director Director
/s/ Warren B. French, Jr. /s/ Sidney S. Kahn
- ----------------------------------------------------- ----------------------------------------------------
Warren B. French, Jr. Sidney S. Kahn
Director Director
/s/ W. Anthony Rice /s/ Robert M. Van Degna
- ----------------------------------------------------- ----------------------------------------------------
W. Anthony Rice Robert M. Van Degna
Director Director
/s/ Barry Horowitz
----------------------------------------------------
Barry Horowitz
Director
66
GLOSSARY
ORION, THE EXCHANGING PARTNERS AND CERTAIN CREDITORS:
Banks............................ A syndicate of international banks that are parties to the Orion 1 Credit Facility.
British Aerospace................ British Aerospace Public Limited Company, one of the world's leading aerospace organizations,
and its affiliates, including its subsidiary British Aerospace Communications, Inc., a Limited
Partner. Kingston Satellite Services, a joint venture between Kingston Communications and
British Aerospace, serves as sales representative and ground operator for Orion in the United
Kingdom.
COM DEV.......................... COM DEV Satellite Communications Limited, a Limited Partner and a subsidiary of COM DEV,
Limited. COM DEV, Limited is also a supplier of value-added satellite communications services,
products for wireless personal communications and satellite remote sensing data.
GECC............................. General Electric Capital Corporation, the lender for the TT&C Financing.
Kingston Communications.......... Kingston Communications International Limited, a Limited Partner and a subsidiary of Kingston
Communications (Hull) plc, the only municipally-owned telephone company in the United Kingdom.
Kingston Satellite Services, a joint venture between Kingston Communications and British
Aerospace, serves as sales representative and ground operator for Orion in the United Kingdom.
Limited Partners................. The limited partners in Orion Atlantic, including British Aerospace Communications, Inc., COM
DEV, Kingston Communications, Lockheed Martin CLS, MCN Sat US, Inc. and Trans-Atlantic
Satellite, Inc.
Lockheed Martin.................. Lockheed Martin Corporation, a major manufacturer of aerospace and military equipment, and the
ultimate parent company of Lockheed Martin CLS, a Limited Partner and the launch subcontractor
under the Orion 1 Satellite Contract. Lockheed Martin CLS acquired the assets of General
Dynamics Commercial Launch Services through a transfer of assets from Martin Marietta
Corporation, which in turn acquired these and other assets (including the Atlas family of
launch vehicles) from General Dynamics Corporation in 1994.
Lockheed Martin CLS.............. Lockheed Martin Commercial Launch Services, Inc., a Limited Partner and a subsidiary of Martin
Marietta Technologies, Inc., a Lockheed Martin company. Lockheed Martin CLS acquired the assets
of General Dynamics Commercial Launch Services through a transfer of assets from Martin
Marietta Corporation, which in turn acquired these and other assets (including the Atlas family
of launch vehicles) from General Dynamics Corporation in 1994. Lockheed Martin CLS is a
commercial launch services provider and provided launch services to Orion as the launch
subcontractor under the Orion 1 Satellite Contract. Lockheed Martin CLS became a Limited
Partner by acquiring the limited partnership interest of General Dynamics CLS in the 1994
transaction described above.
Matra Hachette................... Matra Hachette, an aerospace, defense, industrial and media company and part of the Lagardere
Groupe of France, and the parent company of MCN Sat US, Inc., a Limited Partner. Matra Hachette
is one of the parent companies of Matra Marconi Space which is the parent company of MMS Space
Systems, the prime contractor for Orion 1, and the manufacturer under the Orion 2 Satellite
Contract.
Nissho Iwai Corp................. Nissho Iwai Corporation, is a trading company in Japan, and the parent company of
Trans-Atlantic Satellite, Inc., a Limited Partner.
Orion............................ (1) the combined operations of Orion Network Systems, Inc., a Delaware corporation, and its
subsidiaries (collectively, the "Operating Company"), prior to the date of the merger of a
newly formed subsidiary ("Merger Sub") of Orion Newco Services, Inc., a recently formed
Delaware corporation ("Orion Newco"), into the Operating Company (the
"Merger") and (2) Orion and its subsidiaries, including the Operating Company, after the
Merger.
Orion 1 Credit Facility.......... A facility of up to $251 million of senior debt provided to finance Orion 1, which will be
repaid with proceeds of the Offering.
Orion Asia Pacific............... Asia Pacific Space and Communications, Ltd., a Delaware corporation. Orion acquired 83% of the
stock of such company in December 1992 and has acquired the remaining 17%, which was held by
British Aerospace, in exchange for approximately 86,000 shares of Common Stock in the OAP
Acquisition.
Orion Atlantic................... International Private Satellite Partners, L.P., a Delaware limited partnership of which
OrionSat is the general partner, which owns Orion 1.
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GLOSSARY (continued)
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.
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.
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GLOSSARY (continued)
Orion 3.......................... The high-power Ku-band communications satellite to be operated by Orion in the Asia Pacific
region.
Orion 3 Satellite Contract....... The spacecraft purchase agreement between Orion Asia Pacific, a wholly owned subsidiary of
Orion, and Hughes Space for construction and launch of Orion 3.
Space Systems or MMS Space
Systems........................ MMS Space Systems Limited, a former subsidiary of British Aerospace which was sold to Matra
Marconi Space NV, in 1994. MMS Space Systems served as the prime contractor under the Orion 1
Satellite Contract.
Transponder...................... The part of a satellite which is used for the reception of communication signals from, and the
frequency conversion, amplification and transmission of communication signals to, earth.
TT&C Station..................... A satellite control system, which includes a satellite control center and a tracking, telemetry
and command station complex at Mt. Jackson, Virginia.
VSAT............................. Very small aperture terminal earth stations that can be installed on rooftops or elsewhere at
customer locations, with antennas as small as 0.8 meters but ranging in sizes up to 2.4 meters
in diameter.
REGULATION AND COMPETITION:
Communications Act............... The U.S. Communications Act of 1934, as amended.
EUTELSAT......................... European regional satellite facilities consortium owned by approximately 40 European countries.
FCC............................. The United States Federal Communications Commission.
INTELSAT......................... International Telecommunications Satellite Organization, an international satellite facilities
consortium owned by approximately 140 government and privately owned telecommunications
companies.
ITU ............................ International Telecommunication Union, an international body formed by treaty that is
responsible for coordinating and registering orbital slots to satellites.
Orion 1 License.................. The license granted to Orion by the FCC to construct, launch and operate Orion 1, at designated
orbital location 37.5(Degree) West longitude over the Atlantic Ocean.
PanAmSat......................... PanAmSat Corporation, a publicly traded U.S. company providing trans-Atlantic satellite service
and services to Latin America, the Pacific Ocean region, and the Indian Ocean region, using a
satellite system separate from INTELSAT.
PTT ............................ Postal, telephone and telegraph organization, ordinarily a government-owned communications
monopoly.
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