-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IrD910H3CumYYc4U1z94vTw8MeSlrPA5Rac4ZmmJrAZd080gRXvUyrCaVJPh1aNn cLxpzMick02tvAP6kMvrYw== 0001005150-98-000205.txt : 19980323 0001005150-98-000205.hdr.sgml : 19980323 ACCESSION NUMBER: 0001005150-98-000205 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORION NETWORK SYSTEMS INC/NEW/ CENTRAL INDEX KEY: 0001029850 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 522008654 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22085 FILM NUMBER: 98569607 BUSINESS ADDRESS: STREET 1: 2440 RESEARCH BLVD STE 400 CITY: ROCKVILLE STATE: MD ZIP: 20850 BUSINESS PHONE: 3012588101 MAIL ADDRESS: STREET 1: 2440 RESEARCH BLVD STREET 2: SUITE 400 CITY: ROCKVILLE STATE: MD ZIP: 20850 FORMER COMPANY: FORMER CONFORMED NAME: ORION NEWCO SERVICES INC DATE OF NAME CHANGE: 19961231 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 Commission file number 0-22085 ORION NETWORK SYSTEMS, INC. ------------------------------------ (Exact name of registrant as specified in its charter) Delaware 52-2008654 - ---------------------------------- -------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2440 Research Boulevard, Suite 400, Rockville, Maryland 20850 ------------------------------------------------------------- (Address of principal executive offices) (301-258-8101) ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12 (b) of the Act: ------------------------------------------------------------ None ---- Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par value $.01 per share Series A 8% Cumulative Redeemable Preferred Stock, par value $.01 per share Series B 8% Cumulative Redeemable Preferred Stock, par value $.01 per share 11 1/4% Senior Notes Due 2007 12 1/2% Senior Discount Notes Due 2007 Warrants to Purchase Common Stock, par value $ .01 per share (Title of Class) ----------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of shares of Common Stock held by non-affiliates (based on the March 4, 1998 closing price of these shares) was approximately $281.0 million. The Common Stock is traded over-the-counter and quoted through the Nasdaq National Market. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at March 4, 1998 - ---------------------------- ---------------------------- Common Stock, $.01 par value 18,761,251 shares DOCUMENTS INCORPORATED BY REFERENCE None 1 ORION NETWORK SYSTEMS, INC. TABLE OF CONTENTS PART I Page Item 1. Business...................................................... 3 Item 2. Properties....................................................30 Item 3. Legal Proceedings.............................................31 Item 4. Submission of Matters to a Vote of Security Holders...........31 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matter........................................................31 Item 6. Selected Financial Data.......................................33 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................35 Item 8. Financial Statements and Supplementary Data...................44 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................................70 PART III Item 10. Directors and Executive Officers of the Registrant............70 Item 11. Executive Compensation........................................75 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................80 Item 13. Certain Relationships and Related Transactions................83 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................84 2 PART I ITEM 1. BUSINESS. Statements contained in this Annual Report on Form 10-K regarding Orion's expectations with respect to the pending acquisition by Loral, Orion 2 and Orion 3, related financing, future operations and other information, which can be identified by the use of forward looking terminology, such as "may", "will", "expect", "anticipate", "estimate", or "continue" or the negative thereof or other variations thereon or comparable terminology, are forward looking statements. See the "Risk Factors" section of Orion Network Systems, Inc.'s Registration Statement on Form S-1 (Registration No. 333-19167), on file at the Securities and Exchange Commission for cautionary statements identifying important factors with respect to such forward looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from results referred to in forward looking statements. There can be no assurance that Orion Network Systems, Inc.'s expectations regarding any of these matters will be fulfilled. See Glossary at page G-1 at the end of this Annual Report on Form 10-K for certain defined terms and certain technical terms used herein. OVERVIEW Orion Network Systems, Inc. ("Orion" or the "Company") is a rapidly growing provider of satellite-based communications services, focused primarily on (i) private communications network services, (ii) Internet services and (iii) video distribution and other satellite transmission services. Orion provides multinational corporations with private communications networks designed to carry high speed data, fax, video teleconferencing, voice and other specialized services. The Orion satellite's ubiquitous coverage reaches all locations within its footprint, enabling the delivery of high speed data to customers in emerging markets and remote locations that lack the necessary infrastructure to support these services. The Company also offers high speed Internet access and transmission services to companies outside the United States seeking wide bandwidth Internet access, while avoiding "last mile" terrestrial connections and bypassing congested regional Internet network routes. In addition, Orion provides satellite capacity for video distribution, satellite news gathering and other satellite services primarily to broadcasters, news organizations and telecommunications service providers. The Company provides its services directly to customer premises using very small aperature terminals ("VSATs"). The Company commenced operations of Orion 1, a high power Ku-band satellite in January 1995. As of December 31, 1997, Orion serviced 301 customers through 682 points of service. The Company's customers include Amoco Poland Limited, Amway Corporation, AT&T Corp., BBC, British Telecom, CNN, Citibank, N.A., Global One, GTECH Corporation, News International Limited, RTL Television, Pepsi-Cola International, Sprint Communications, USA Today, Viacom International Inc., Volkswagen, Westinghouse Communications and World Wide Television News and or certain of their subsidiaries. As of December 31, 1997, Orion's contract backlog was $269.5 million (including $89 million from one pre-launch customer on Orion 3). Substantially all of Orion's current contracts with customers are denominated in U.S. dollars. For the three months ended December 31, 1997, the Company generated revenues of $18.2 million and had a loss from operations, and net loss of $12.6 million and $27.5 million, respectively. For the year ended December 31, 1997, the Company generated revenues of $72.7 million and had a loss from operations, net loss and net cash used in operating activities of $43.1 million, $105.7 million and, $28.0 million, respectively. The Company believes that demand for satellite-based communications services will continue to grow due to (i) the expansion of businesses beyond the limits of wide bandwidth terrestrial infrastructure, (ii) accelerating demand for high speed data services, (iii) growing demand for Internet and intranet services, especially outside the U.S., (iv) increased size and scope of television programming distribution, (v) worldwide deregulation of telecommunications markets and (vi) continuing technological advancements. Satellites are able to provide reliable, high bandwidth services anywhere in their coverage areas, and the Company believes that it is well positioned to satisfy market demand for these services. THE ORION SATELLITE SYSTEM The Company launched Orion 1, a high power satellite with 34 Ku-band transponders, in November of 1994. Orion 1 provides coverage of 34 European countries, much of the United States and parts of Canada, Mexico and North Africa. Through arrangements with local ground operators, Orion currently has the ability to deliver network services to and among points in most European countries, the United States and many Latin American and Asian countries. 3 In July 1996, the Company signed a contract with Matra Marconi Space for the construction and launch of Orion 2 (which was amended and restated in January 1997) and in February 1997 commenced construction of that satellite. Orion 2 will expand the Company's European coverage and extend coverage to portions of the Commonwealth of Independent States, Latin America and the Middle East, as shown in more detail in the footprint set forth below under the caption "Implementation of the Orion Satellite System -- Orion 2". Orion 2 will increase significantly the Company's pan-European capacity, currently the area of strongest demand for the Company's services. The Company recently commenced selling services in certain areas of Latin America. Orion 2 is scheduled to be launched in the second quarter of 1999. In January 1997, the Company entered into a satellite procurement contract with Hughes Space for the construction and launch of Orion 3, construction of which was commenced in December 1996. Orion 3 will cover broad areas of the Asia Pacific region including China, Japan, Korea, India, Southeast Asia, Australia, New Zealand, Eastern Russia and Hawaii, as shown in more detail in the footprint set forth below under the caption "Implementation of the Orion Satellite System - -- Orion 3". Orion 3's footprint will provide the Company with the ability to redistribute programming from the United States via Hawaii to most of the Asia Pacific region. The Company has already taken a number of steps to establish an early market presence in Asia, and has entered into an $89 million lease for eight of Orion 3's 43 transponders. Orion 3 is scheduled to be launched in the fourth quarter of 1998. In the aggregate, the footprints of Orion 1, Orion 2 and Orion 3 will cover over 85% of the world's population. PENDING ACQUISITION OF THE COMPANY BY LORAL On October 7, 1997, Orion, Loral Space & Communications Ltd. ("Loral") and Loral Satellite Corporation, a wholly-owned subsidiary of Loral ("Merger Sub"), entered into an Agreement and Plan of Merger (as amended on February 11, 1998, the "Merger Agreement"), pursuant to which Merger Sub will merge with and into the Company, with the Company being the surviving corporation and thereby becoming a wholly-owned subsidiary of Loral (the "Loral Merger"). The Merger Agreement provides that (i) each share of Common Stock, excluding treasury shares and shares owned by Loral or its subsidiaries, will be converted into and exchanged for the right to receive the number of fully paid and nonassessable shares of common stock, par value $.01 per share, of Loral ("Loral Common Stock") equal to the Exchange Ratio (as described below), (ii) each share of the Company's Series A 8% Cumulative Redeemable Convertible Preferred Stock (the "Series A Preferred Stock"), Series B 8% Cumulative Redeemable Convertible Preferred Stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Senior Preferred Stock") and Series C Preferred Stock (the Series C Preferred Stock and Senior Preferred Stock are hereinafter referred to as the "Senior Preferred Stock") will be converted into and exchanged for the right to receive the number of fully paid and nonassessable shares of Loral Common Stock equal to the Exchange Ratio multiplied by the number of shares of Common Stock into which such share of Preferred Stock was convertible immediately prior to the Effective Time of the Loral Merger, (iii) each outstanding stock option to purchase shares of Orion Common Stock will be converted into an option to acquire the number of shares of Loral Common Stock equal to the Exchange Ratio multiplied by the number of shares of Common Stock for which such option was exercisable, and (iv) each outstanding warrant to purchase shares of Orion Common Stock will be converted into a warrant to acquire the number of shares of Common Stock equal to the Exchange Ratio multiplied by the number of shares of Company Common Stock for which such warrant was exercisable. Pursuant to the terms of the Merger Agreement, the Exchange Ratio is determined as follows: (i) if the average of the volume-weighted average trading prices of Loral Common Stock for the twenty consecutive trading days on which trading of Loral Common Stock occurs ending the tenth trading day immediately prior to the closing date for the Loral Merger (the "Determination Price") is less than $24.458 but greater than $16.305, the Exchange Ratio is the quotient obtained by dividing $17.50 by the Determination Price, (ii) if the Determination Price is equal to or greater than $24.458, the Exchange Ratio is 0.71553 and (iii) if the Determination Price is equal to or less than $16.305, the Exchange Ratio is 1.07329. If the Loral Merger were to close on March 20, 1998, the Determination Price would be 24.68652 and the Exchange Ratio would be 0.71553. 4 A meeting of Orion's shareholders has been scheduled for March 20, 1998 to vote to approve the Loral Merger. The Company expects the Loral Merger to close following a favorable shareholder vote, however, there can be no assurance that the Loral Merger will be consummated. Although not a condition of the Loral Merger, Orion intends to seek an Internal Revenue Service ruling as to eligibility for a tax-free exchange. In connection with the Merger Agreement, certain principal stockholders of Orion and members of Orion's management have agreed to vote in favor of the Loral Merger and have granted to Loral the right to purchase their securities in Orion for a price equal to the Loral Merger consideration under certain circumstances. The Company expects the Loral Merger to be consummated by the first quarter of 1998. The foregoing descriptions of the Merger Agreement and Principal Stockholder Agreement with Loral do not purport to be complete and are more fully described in Registration Statement No. 333-46407 on Form S-4, and have been filed as exhibits 2.1, 2.2 and 2.3, respectively, and are incorporated herein by reference. More information on Loral is also available in the foregoing Registration Statement No. 33-46407. OTHER RECENT DEVELOPMENTS On March 26, 1997, Orion acquired German-based Teleport Europe GmbH (now known as Orion Network Systems-Europe GmbH) ("Orion Europe") a communications company specializing in private satellite networks for voice and data services. Orion purchased the shares of Orion Europe held by the German companies, Vebacom GmbH and RWE Telliance AG, now known as o.tel.o for approximately $9 million. Orion Europe's 1996 revenues were in excess of $14 million. The acquisition expanded Orion's customer base by approximately 55 customers, including some of Germany's leading multinational corporations, and added over 200 Network Service sites (exclusive of Broadcast Service sites). In addition, Orion acquired Orion Europe's licenses and operating agreements to provide satellite network services in 40 countries, including 17 countries in which Orion previously did not provide service. In January 1997, the Company consummated the Merger (as defined below) as part of a series of transactions which significantly changed the Company. Those transactions, which are discussed in more detail in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K, are as follows: (i) the acquisition of all of the limited partnership interests which the Company did not already own in the Company's operating subsidiary, Orion Atlantic, that owns the Orion 1 satellite, along with rights to receive repayment of various advances by Orion Atlantic and various other rights, in an exchange transaction for 123,172 shares of Series C Preferred Stock (the "Exchange"); (ii) the acquisition by the Company of the only outstanding minority interest in the Company's subsidiary Orion Network Systems-Asia Pacific, Inc. ( formerly known as Orion Asia Pacific Corporation) from British Aerospace Satellite Investments, Inc., in exchange (the "OAP Acquisition") for approximately 86,000 shares of the Company's Common Stock; (iii) a $710 million notes offering, with warrants representing approximately 2.6% of the outstanding Common Stock of the Company on a fully diluted basis (the "Bond Offering"), and (iv) the sale of $60 million of the Company's Convertible Debentures to British Aerospace Holdings, Inc. and Matra Marconi Space (the "Convertible Debentures Offering"). The Exchange and the OAP Acquisition resulted in the Company owning 100% of Orion Atlantic and its other significant subsidiaries and, therefore, a greatly simplified corporate structure. The Exchange also resulted in a significant increase in the Company's capital stock outstanding. The net proceeds of the Bond Offering and Convertible Debentures Offering were used by the Company to repay the credit facility it entered into in connection with the construction of the Orion 1 satellite, to pre-fund the first three years of interest payments on certain of the Notes, and will be used by the Company for the construction and launch of two additional satellites, Orion 2 and Orion 3. 5 The Company also recently achieved the following significant milestones with respect to the expansion of its satellite network, which are discussed in more detail under the caption "Implementation of the Orion Satellite System" : (i) Orion commenced construction of Orion 2 in February 1997 under a satellite procurement contract with Matra Marconi Space for Orion 2. Orion commenced construction of Orion 3 in December 1996 and entered into a satellite contract with Hughes Space and Communications International, Inc. for Orion 3 in January 1997. (ii) Orion has entered into a contract with DACOM Corp., a Korean communications company ("DACOM"), under which DACOM will, subject to certain conditions, lease eight dedicated transponders on Orion 3 for 13 years, in return for approximately $89 million, payable over a period from December 1996 through seven months following the lease commencement date for the transponders (which is scheduled to occur by January 1999). Payments are subject to refund unless Orion 3 commences commercial operation by June 30, 1999. THE ORION STRATEGY Orion strategy is to maximize its revenues per satellite transponder through the delivery of value added services to end users. To quickly establish a stable base of revenues, Orion sells transponder capacity to video broadcasters and telecommunications service providers. However, Orion's long-term strategic focus is on value-added private network and Internet access services, which include network design, VSAT installation, support and monitoring, in addition to basic satellite capacity service. The implementation of Orion's strategy is based on the following elements: o Focus on Specialized Communications Needs of Multinational Organizations o Bridge to Emerging Markets and Remote Locations o End-to-End Service o Global Coverage o Early Market Entry o Local Presence o Ownership of Facilities Focus on Specialized Communications Needs of Multinational Organizations Orion targets the needs of multinational businesses and governmental customers for customized private network communications services. Advantages of the Company's satellite-based network services include: (i) transmission over wide areas to multiple dispersed sites including sites in emerging markets; (ii) interconnectivity among all sites; (iii) wide bandwidth and high data speeds; (iv) transmission of data, fax, teleconferencing and voice over the same network; (v) high transmission reliability, quality and security; (vi) Internet access; and (vii) rapid implementation, both for the initial installation and for later network modifications. Due to the flexibility of the network, Orion is able to provide companies with customized solutions to link multiple locations. Bridge to Emerging Markets and Remote Locations Orion targets customers doing business in emerging markets and remote locations of developed markets which often lack the fiber optic and digital infrastructure required for wide bandwidth, high speed data applications. Terrestrial transmissions in many emerging markets must often pass through local, poorly developed network segments before reaching the customer premises, making it difficult to send and receive high speed data. In contrast, Orion's satellite system completely avoids such "bottlenecks" in local network segments by sending and receiving transmissions directly to and from customers, avoiding the need to interconnect with the local infrastructure. A significant portion of Orion's private communications network customers transmit high-speed data to and from locations in Central and Eastern Europe. Orion 2 and Orion 3 will extend coverage to the Commonwealth of Independent States, Latin America and the Asia Pacific Region. End-to-End Service Orion provides its services directly to and among customer locations using satellite transmission and VSATs installed at customer premises. Offering end-to-end services and bypassing terrestrial infrastructure allows Orion to offer higher reliability and higher quality services than some terrestrial facilities by bypassing multiple telecommunications service providers and local networks and avoiding related toll charges. It also permits Orion to install networks more quickly than many of its competitors, who must deal with multiple vendors and multiple communications technologies. Orion offers its 6 customers one-stop shopping. This includes a single point of contact, an all-inclusive contract and consistent quality of service throughout the network. Global Coverage Orion believes that providing global coverage is a competitive advantage in marketing to multinational corporations. Orion 1 covers 34 European countries, much of the U.S. and portions of Canada, Mexico and North Africa. Orion uses capacity leased from other carriers to supplement its network coverage area (such as to areas of Russia, Asia and Latin America). Orion estimates that when Orion 2 (with coverage of Europe, Russia, the eastern United States, Latin America, North Africa and the Middle East) and Orion 3 (with coverage of the Asia Pacific region) are deployed, the satellite footprints in the aggregate will cover an area inhabited by over 85% of the world's population. This coverage will enable Orion to offer its customers a single source for service offerings and a greater measure of network quality control than terrestrial alternatives. Early Market Entry Orion develops an early market presence in targeted geographic areas prior to satellite launch in order to build its customer base. To accomplish this, Orion hires sales people, develops relationships with local ground operators, and delivers its services using leased satellite capacity. Orion employed this strategy prior to the commercial operation of the Orion 1 satellite and is pursuing the same approach with Orion 2 and Orion 3. For example, the Company is currently providing service in Latin America, Asia and Russia over leased satellite capacity. Local Presence Orion has arrangements with ocal ground operators covering most countries within the Orion 1 footprint, and is entering into additional arrangements as it offers services in new areas. These ground operators are critical to providing integrated service because they obtain necessary licenses, install and maintain the customers' networks, provide in-country business experience and often facilitate market entry. Ownership of Facilities Orion believes it is strategically important to own its satellite facilities. Orion believes that over the long-term ownership of satellite facilities provides a cost advantage over resellers and other private service providers that must lease satellite capacity to provide services to customers. The Company's satellite ownership enables it to control the quality and reliability of its network solutions, maintain the flexibility to rapidly add capacity, new locations and new features to its customer networks, and respond quickly to customer requests. INDUSTRY OVERVIEW Fixed communications satellites are generally located in geostationary orbit approximately 22,300 miles above the earth and blanket large geographic areas of the earth with signal coverage. Satellites are thus well suited for transmissions that must reach many locations over vast distances simultaneously (i.e., point-to-multipoint transmissions), such as the distribution of television programming to cable operators, television stations and directly to homes. Satellites can be accessed from virtually any location within the geographic area they cover. This ubiquitous coverage allows the satellite to transmit voice and data communications to remote locations and emerging markets where terrestrial infrastructure is not well developed. Prior to the late 1970s or early 1980s, most terrestrial infrastructure consisted of copper wire (and, to a lesser extent, microwave systems), which was well suited for ordinary telephone service. Today most developed economies employ fiber optic cables, which provide much wider bandwidth than copper. In addition, transoceanic cables now link most major industrialized countries. Fiber optic cables are well suited for carrying large amounts of bulk traffic between two fixed locations, and unlike copper wire facilities have sufficient capacity to carry the high speed data communications that comprise an increasing percentage of communications traffic. However, in many less developed areas, terrestrial facilities still consist mainly of copper wire. Even in areas with fiber optic networks, the "last mile" connections to customer premises often consist of copper wire. As a result, customers with sites in areas which are underdeveloped or which have not upgraded their "last mile" copper wire to fiber optic cable often do not have access to the full range of high speed data communications demanded by many businesses. 7 Satellites provide a number of advantages over terrestrial facilities for many high speed communications services. First, satellites provide ubiquitous service within their footprint and can deliver service directly to customers' premises. Satellites enable high speed communications service where there is no suitable terrestrial alternative available. In addition, satellites can completely bypass terrestrial network congestion points, "last mile" bottlenecks and unreliable networks of incumbent service providers to provide advanced services to locations where conventional terrestrial service is available but inadequate. Second, the cost to provide bandwidth via satellite does not increase with the distance between sending and receiving stations. Not only must terrestrial networks add physical capacity to cover additional distances, they must also continually reamplify transmission signals. Satellites are well suited for transmission across large distances, for wide bandwidth and for point-to-multipoint (broadcast) applications. Finally, since VSATs are relatively easy to install and/or relocate, high power satellite networks can be rapidly installed, upgraded and reconfigured. In contrast, installation of fiber optic cable is expensive, time consuming and requires obtaining rights-of-way. The current generation of high power Ku-band satellites, such as Orion 1, is particularly well suited to provide high speed business communications services in addition to video distribution services. The use of the Ku-band frequencies (as opposed to the C-band used by older generations of satellites) offers reduced interference with ground communications. This enables satellites to use the higher broadcasting power necessary to support small, low-cost VSAT earth stations and makes it cost effective to transmit to or among numerous locations. DATA NETWORKING During the past decade, there has been significant growth in data networking applications. The data networking market includes a number of types of services, including leased lines for private networks, public data network services, managed network services, frame relay and other services such as ATM (asynchronous transfer mode) and WAN (wide area network) services. Data networking applications include: Private network services; intranets. Many companies are utilizing their own "private" networks to meet their specific communications requirements, including voice and data communications, business television transmissions, video teleconferencing, high speed fax and e-mail. Corporate networks offer higher performance, greater control and security than can be provided through the public network. Corporations are also taking advantage of intranets to distribute information within their own companies using Internet technologies. Data inquiry, collection and retrieval. Hotel and travel reservation systems and financial enterprises use private communications networks for database inquiries and retrieval of information stored on computers. Banks use such networks to verify account balances and connect automatic teller machines to computers. Retail establishments verify credit standing and gather inventory information. Other businesses use private communications networks to gather data from multiple locations and transport it to central locations for analysis. Internet. Business and consumers rely on the Internet for a growing number of services, including research, e-mail, data exchange, software and graphics, financial services and shopping, and even voice communications. These applications are predicted to continue to expand and diversify in the future as enabling technologies mature. Image transmissions. Manufacturing, publishing, research and medical industries use dedicated communications networks for high-resolution image transmissions requiring large amounts of bandwidth. Government networks. Network telecommunications are employed for complex military and nonmilitary government applications, including administrative and logistical functions, that require high security and customer network control. Orion believes that the demand for international data networking will continue to grow as a result of (i) the shift to client/server computing, (ii) the proliferation of bandwidth intensive applications and the development of protocols such as frame relay to handle these applications, and (iii) use of the Internet and intranets as part of main-stream corporate communications. (i) Shift to client/server computing. Businesses are increasingly shifting from using large host computers and centralized data network architectures to distributed PC and workstation based platforms. As a result, businesses require more private network infrastructure to establish and interconnect local and wide area networks. As businesses expand, the ability to link multiple locations becomes more important. 8 (ii) Proliferation of bandwidth intensive applications; frame relay. Companies are relying more heavily on applications such as CAD/CAM and image transfer that require more bandwidth and result in traffic patterns that involve bursts of transmissions. In addition, there is increasing demand for near-instantaneous response time and more reliable data transport. Frame relay services support these applications and reduce the cost of fully and partially meshed networks. (iii) Expansion in Internet and intranet services. The Internet is becoming a major vehicle for economic and social activity enabling broad, global access to financial and business information, research material, and information on leisure, arts and general interest topics. Business uses of the Internet include communication within and among businesses, electronic commerce, advertising and merchandising. Internet usage has also led to increased demand for "intranet" services for corporate applications. Intranet servers are used for publishing information, processing data and data-based applications and collaboration among employees, vendors, and customers. The significant growth in data networking services has led to rapid growth in demand for satellite-based networks. Multinational companies are not always able to implement client/server architectures, install wide bandwidth applications or employ Internet and intranet solutions in every market due to underdeveloped terrestrial communications infrastructure. Therefore, a growing use of VSATs is to provide wide bandwidth capacity to industrial sites in emerging markets and remote locations. ORION MARKET OPPORTUNITY The Company believes that demand for satellite-based communications services will continue to grow because of (i) the expansion of businesses beyond the limits of wide bandwidth terrestrial infrastructure, (ii) accelerating demand for high speed data services, (iii) growing demand for Internet and intranet services, especially outside the U.S., (iv) increased size and scope of television programming distribution, (v) worldwide deregulation of telecommunications markets and (vi) continuing technological advancements. (i) Expansion of business beyond the limits of wide bandwidth terrestrial infrastructure. Overall growth in the international telecommunications market reflects the increasingly international nature of business, the increasing importance of emerging and newly industrialized economies and the increase in international trade. International businesses expanding into emerging markets often rely on the incumbent communications service providers for voice circuits. However, as large organizations increasingly rely on more sophisticated, high speed communications services to run their businesses, many of these companies face operational bottlenecks when attempting to implement more sophisticated communications networks. These problems are faced both by companies in emerging markets and companies in developed markets that rely on "last mile" copper infrastructure to interconnect with a fiber optic network. Satellites provide wide bandwidth end-to-end service directly connecting customer premises and bypassing the limitations of terrestrial facilities. (ii) Accelerating demand for high speed data services. The growth of graphical user interfaces, the popularity of bandwidth-intensive applications such as CAD/CAM, the incorporation of high-resolution electronic images into business processes and video teleconferencing have necessitated major upgrades of corporate data networks to accommodate the high data transfer requirements of these applications. Most of these high speed data services require fiber optic cable or other high bandwidth connections to the customer premises. Even in developed markets, the "last mile" connection to the customer premises often consists of copper wire, which cannot support many high speed data services. Satellites are well positioned to take advantage of this trend because they provide reliable high bandwidth service everywhere in their coverage areas, reaching sites in underdeveloped areas, and bypass "last mile" copper wire facilities that are unable to support high speed communications. (iii) Demand for Internet and intranet services. The growth in Internet and intranet services has further strained corporate network infrastructures. The utility of Internet services to users is often constrained by the lack of sufficient bandwidth to support high-resolution graphical applications and images. Even where infrastructure quality is high, the rapid growth of the Internet continues to create network congestion. Users are sometimes unable to use current-generation software or gain high speed access to the Internet due to the poor quality of their local terrestrial infrastructure. Satellites have many advantages in delivering Internet services. Satellite-based networks provide services directly to customer premises, bypassing terrestrial bottlenecks and congested Internet routing facilities. In addition, satellite based networks can be designed to support asymmetric and multicast Internet traffic much more efficiently than terrestrial networks. 9 (iv) Increased size and scope of television programming distribution. The global television market is experiencing significant growth, both in terms of the number of broadcasters creating programming and the number of channels available to viewers. Within the U.S., the number of television broadcast and cable television program networks grew from three in 1970 to over 100 in 1993 and to approximately 200 in 1996. U.S. and international broadcasters are seeking to expand into each others' markets, increasing the need for satellite transmission capacity. Non-U.S. broadcasters are using international satellites to distribute domestic programming to U.S. and other overseas audiences of similar cultural heritage. Furthermore, the Company believes that as the number of broadcasters and channels increases, individual competitors will have a greater need for competitive differentiation which will increase the use of live transmissions and expand television coverage. Multichannel programming is expanding rapidly in Eastern Europe, Latin America and Asia. The growth in multichannel programming has increased the demand for international programming such as news and sports. Orion is well positioned to take advantage of this growth due to its high-power Ku-band satellite and trans-Atlantic footprint. (v) Worldwide deregulation of telecommunications markets. During the past decade many countries have liberalized their telecommunications markets in order to permit new competitors to provide facilities and services. These changes have been particularly apparent in Europe, where Orion currently has the ability to deliver network service to and among points in most countries. Deregulation is also creating new competitors to national telecommunications companies, which represent potential additional customers for the Company's services. (vi) Continuing technological advancements. The following recent technological advances are expected to increase capacity, efficiency and demand for satellite services: 1. High Power Satellites. The ability of service providers to deliver high quality services directly to customer premises has greatly improved with the development of high power satellites. Older, lower power satellites require large, expensive earth stations to receive transmissions. Typically these earth stations were located outside urban areas and required interconnection with public telephone systems. High power satellites, such as Orion 1, enable the use of small, inexpensive VSAT earth stations that may be installed at customer locations, thereby reducing customer costs and bypassing all terrestrial facilities. 2. Meshed Network Services. Traditional VSAT networks employ a hub/star architecture anchored by an expensive hub earth station that controls the network and communicates with each of the VSATs. Recent advances in VSAT technology have led to the creation of fully meshed satellite-based networks. These networks offer less transmission delay than hub/star networks by enabling any network node to communicate with any other network node directly through the satellite without having to transmit through a central network control point. 3. Frame Relay. The Company believes that despite rapid advances in network services and application software, many companies hesitated to implement meshed data networks due to high overhead costs generated by descriptive and routing commands required to travel with the data traffic. Frame relay technology reduces the number and complexity of commands needed to send data, and enables companies to implement more cost-effective meshed networks. To meet customers' demands for fully meshed frame relay network services, the Company has developed its VISN service. 4. Compressed Digital Video. CDV technology is designed to compress up to ten high-quality video channels into the same bandwidth that previously carried one or two analog channels. This technology is creating a rapid expansion in the number of available video channels with improved transmission quality. CDV lowers the per-channel cost of delivering programming via satellite and cable television systems, thereby enabling more programming options to be provided to smaller markets. The Company believes that CDV will enable continued growth in the number of video channels and also accelerate broadcasters' efforts to distribute their programming internationally. The Company also believes that CDV will result in higher total revenues per transponder as more customers can be served per transponder. However, CDV may also in effect increase the supply of satellite transponders, causing prices to decline. 10 ORION SERVICES Orion provides satellite-based digital communications services comprised of: (i) private network services for multinational business and governmental customers, (ii) Internet backbone and access services and (iii) satellite transmission capacity services, including video distribution services for broadcasters, news organizations and international carriers. For 1997, approximately 43% of revenues were derived from the sale of satellite capacity (primarily for video distribution services). These figures are consistent with the Company's strategy of building a stable base of revenues through sales of transmission capacity and then focusing on the delivery of value-added private network services to end-users. PRIVATE COMMUNICATIONS NETWORK SERVICEs International Leased Line Services. Orion's international leased line services include Digital Link and Digital Channelized Link. Digital Link can be designed as a "point-to-point" private network service directly connecting customer locations or as a "point-to-multipoint" service for customers seeking to transmit communications from a central location to numerous remote sites. Orion also offers Digital Channelized Link, a multiplexed version of Digital Link that integrates digitally compressed voice, fax and data traffic into a single channel. Digital Link and Digital Channelized Link services have been offered by Orion since 1993. International leased line services have constituted a majority of Orion's bookings of private communications network services to date. International Data Networking Services. Orion's fully-meshed frame relay based international data networking service, "Virtual Integrated Sky Network" ("VISN"), allows customers to transmit and receive voice, fax and data communications, including intranet services, among multiple locations simultaneously. VISN was developed by Orion and is produced by Nortel Dasa (a joint venture among Northern Telecom, Dornier GmbH, and Daimler Benz Aerospace AG). The first phase of this service became available to customers commencing in the third quarter of 1995. Subsequent phases of the service have been introduced during 1996 and 1997, with further phases expected to be introduced during 1998. VISN offers customers bandwidth on demand for data, voice and fax and, following the introduction of in-process and future releases, customers will have the option to be charged on a "pay per use" basis (e.g., minutes of use for voice and volume for data). VISN employs TDMA technology, which further increase the effective bandwidth available for data transmission. The VISN product was awarded "Best New Transport Technology Product" at the 1995 ComNet New Product Achievement Awards Competition. Most customers have between four and ten sites, and generally have minimum data rates with the ability to use substantially greater bandwidth for bursts of traffic. INTERNET BACKBONE AND ACCESS SERVICES The Company believes that the rapid growth of the Internet has created substantial opportunities for Orion. First, the United States has become the residence of the majority of the world's Internet content. Companies are looking for reliable, wide bandwidth connections which bypass congested Internet network segments. Orion's transatlantic capacity is well suited for companies in Europe, including International Internet Service providers ("IIPS"), seeking high-speed access to the U.S. Internet. Second, the Internet has begun to evolve from a user centered "pull" environment (users requesting information) to a content provider centered "push" environment (information delivered to users without concurrent request). Broadly distributed entertainment, information and advertising via the Internet are well suited for broadcast, point-to-multipoint communications facilities, such as satellite. By using satellite broadcasts to transmit the most popular Internet content to regional locations. IISPs can reduce their costs and relieve network congestion. Finally, Internet data communications re typically asymmetric. A typical large Internet data transmission is predicated by a user request that comprises only a few bytes of traffic. This interaction is inefficient when carried over terrestrial full-duplex networks, which carry the same capacity in each direction, providing an inexpensive circuit for user requests and high-speed, reliable and available capacity for the data that flows back to the user. Orion's WorldCast service (patent pending) is a satellite based Internet service for IISPs and other corporate users that supports asymmetric and multicast traffic. Orion recently consolidated its Internet service offerings under the WorldCast banner. WorldCast is a flexible network solution that can be customized to meet the specifications of an IISP or other user of Internet services. It provides a multicast, burstable TCP/IP network with committed information rates that can be configured as a pure satellite network with VSATs or integrated with existing terrestrial networks. Orion customizes an IISP's Internet connectivity by taking advantage of the asymmetric broadcast characteristics of the Internet. The WorldCast service includes a Usenet multicast channel. 11 VIDEO DISTRIBUTION AND OTHER SATELLITE TRANSMISSION SERVICES Orion provides transmission capacity to cable and television programmers, news and information networks, telecommunications companies and other carriers for a variety of applications. A majority of Orion's transmission capacity services consist of video services. The Company generally offers transmission capacity services under long term contracts and also offers occasional use services for periods of up to a few hundred hours. Video Services -- Contribution. Orion's video services include "contribution," the long-distance transport of video signals (usually one or more television channels) to one location. Video Services -- Distribution. Cable and television programmers use Orion's satellite transmission services for distribution of television programming to local broadcast stations, cable head-ends, MMDS (multichannel microwave distribution) systems and SMATV (satellite master antenna television). Orion has a joint marketing agreement with NTL, which operates one of the largest video gateways in Europe, located in downtown London. Orion and NTL offer programmers uplink, compression and distribution to cable head-ends throughout the United Kingdom and to locations in Europe. Orion's ability to offer video distribution services is aided by the transponder switching capabilities of Orion 1, which are (and those of Orion 2 and Orion 3 are expected to be) designed to permit programs to be distributed simultaneously throughout the satellite's coverage area. News and Special Events. Orion 1 is used for transmission of special events or remote feeds to international news bureaus from television stations and on-location mobile transmitters. Because Orion's Ku-band technology and VSAT ground segment infrastructure offers high reception sensitivity, the Company is especially effective in transmitting television signals sent from low-powered portable transmitters typically used by news organizations and program distributors. In contrast to video contribution services, news and special events are characterized by occasional use rather than long-term capacity contracts. International Carriers. Orion satellite transmission services are used by international carriers to provide backup for terrestrial lines and to provide communications services to areas with inadequate telecommunications capabilities. These carriers resell Orion's capacity as part of their own services. Capacity Sales. Orion sells bulk capacity to resellers who use Orion's transmission capacity as one component of a customer's end-to-end communications solution. For example, Orion currently sells capacity to a number of firms that resell Orion's capacity to governmental organizations. Orion offers a range of value-added services in conjunction with its video distribution and other satellite transmission services. Such services may include the provision of video uplinking and receiving stations, digital compression equipment and software, transmission monitoring and gateway interconnection services. FEATURES AND BENEFITS Orion's satellite-based services offer customers a number of important features, which provide significant benefits versus competing alternatives. Bypass terrestrial network and multiple international connection points. Orion's ability to bypass terrestrial facilities improves service reliability and quality by reducing potential points of failure and avoiding "last mile" limitations. In addition, terrestrial bypass allows Orion to avoid the multiple in-country toll charges of terrestrial facilities and thereby reduces cost. Direct end-to-end service to customer sites. Orion provides service from rooftop to rooftop using VSAT earth stations located on customer premises. This "end-to-end service" is reliable, rapidly installed, easily upgraded and avoids the "last mile" limitations of some terrestrial alternatives. Ubiquitous coverage. Orion delivers wide bandwidth service to emerging markets and remote locations where there are no effective terrestrial alternatives. One-stop shopping. Orion provides its customers with a single point of contact for customer care, including service, billing and support. 12 Two-way communications for all sites. Orion's meshed network solutions and frame relay services promote network efficiency and allow real-time data transfer among dispersed network points. Well-suited for asymmetric communications traffic. Orion's network solutions can be designed to carry asymmetric traffic efficiently, which increases performance and lowers cost to customers for services such as Internet services. Point to multipoint capability. Orion's ability to broadcast video, data and voice to multiple locations simultaneously enables efficient network design. High power Ku-band transmissions, high reception sensitivity. Orion's high power transmissions allow customers to lower costs by utilizing small, less expensive earth station equipment. Orion 1's reception sensitivity allows for effective reception from portable earth stations, an advantage in satellite news gathering. Cost-competitive. Orion prices its services to be competitive with both satellite-based and terrestrial alternatives. CUSTOMERS AND BACKLOG Customers. As of December 31, 1997, Orion had entered into contracts with 301 customers, principally large multinational corporations, European companies and governmental agencies. These entities come from many different industries, including communications, broadcasting manufacturing, government, banking and finance, energy, lottery, consumer distribution, Internet access services and publishing. Selected customers from each service area are set forth below.
- --------------------------------------------------------------------------------------------------- Private Network Services: AT&T EDS Digital Link/Digital Channelized Amoco GE Americom Link GTECH Hewlett-Packard Chase Manhattan Bank News International Limited Citibank USA TODAY Concert Global Network Westinghouse Private Network Services: Balluff & Co. Pepsi Cola VISN Creditanstalt Price Waterhouse WorldCast Ebone LV Net Teleport Banknet Spectrum Datac Terminal Bar Global Ukraine Global One Video Transmission and Other AsiaNet Hughes Network Systems Black Entertainment Television MCI Bonneville International RTL Television British Telecom Telecom Italia CNN Viacom International Comsat - --------------------------------------- ---------------------------------------------------------------------
Orion has entered into a contract with DACOM Corp., a Korean communications company which provides international and long distance telephone and leased line services, international and domestic data communications and value added network services. Under the contract, DACOM will, subject to certain conditions, lease eight dedicated transponders on Orion 3 for thirteen years for direct-to-home television service and other satellite services, for $89 million payable in installments from December 1996 through seven months following the lease commencement date of the transponders. Payments are subject to refund if Orion 3 has not been successfully launched and commenced commercial operation by June 30, 1999. Although Orion 3 is scheduled to be launched in the fourth quarter of 1998, there can be no assurance that Orion will be able to meet the delivery requirement of this contract. 13 Backlog. At December 31, 1997, Orion had approximately $269.5 million of contracts in backlog (including $89 million from the DACOM contract and after giving effect to the Exchange and related transactions, which resulted in changes to arrangements with Exchanging Partners that reduced backlog by approximately $11 million), as compared to approximately $214.9 million at December 31, 1996. The backlog contracts generally have terms of between three and four years. Orion presently anticipates that at least $206.6 million of its backlog will be realized after 1998. Orion has begun to receive contract renewals under expiring contracts (under some of the earliest contracts, which were entered into in 1993 and 1994). The size of contracts varies significantly, depending on the amount of capacity required to provide service, the geographic location of the network and other services provided. Although many of the Company's customers, especially customers under large and long-term contracts, are large corporations with substantial financial resources, other contracts are with companies that may be subject to other business or financial risks. If customers are unable or unwilling to make required payments, the Company may be required to reduce its backlog figures (which would result in a reduction in future revenues of the Company), and such reductions could be substantial. The Company has recently instituted tighter credit policies, and has taken steps to remove from backlog arrangements with customers who have not taken service or have not made all required payments. The Company's contracts commence and terminate on fixed dates. If the Company is delayed in commencing service or does not provide the required service under any particular contract, as it has occasionally done in the past, it may not be able to recognize all the revenue it initially includes in backlog under that contract. In addition, the current backlog contains some contracts for the useful life of Orion 1; if the useful life of Orion 1 is shorter than expected, some portion of backlog may not be realized unless services satisfactory to the customer can be provided over another satellite. SALES AND MARKETING Orion uses both direct and indirect sales channels. Orion markets its private communications network services and Internet services through direct sales, local representatives and distributors in Europe, the United States, Latin America and Asia, and wholesale arrangements with major carriers, Internet service providers, resellers and systems integrators. Orion markets its video distribution and other satellite transmission services primarily through direct sales. Orion also has established arrangements with local companies in most countries within the Orion 1 footprint to assist Orion with selling efforts and to provide customer support and network maintenance functions in those countries (as discussed below under the caption "Network Operations; Local Ground Operators"). Orion generally will enter into a single contract with customers covering service to a number of countries. Orion offers the business customer a single point-of-contact, a single contract and one price for its entire network, which Orion believes constitutes true "one-stop shopping." Orion prices its services centrally, using a single, easily administered set of pricing procedures for customer networks. Marketing will be critical to Orion's success. However, Orion has limited experience in marketing, having commenced full commercial operations in 1995. Orion's marketing program until recently consisted of direct sales using U.S. and European based sales forces and indirect sales channels, including Limited Partner sales representatives, for sales in Europe. The majority of Orion's contract bookings to date have been generated by its direct sales force. During 1997, Orion significantly increased its direct sales capabilities in Europe, particularly with respect to sales of private communications network services. Sales of Orion's services generally involve a long-term complex sales process, and Orion's bookings have fluctuated significantly. The Company may from time to time enter into joint ventures or acquire businesses which provide it with additional customers or which enhance its marketing capabilities. In the first quarter of 1997, the Company completed such an acquisition, as discussed above under "Other Recent Developments". DIRECT SALES Orion has assembled a direct sales force of 58 (as of December 31, 1997) full-time employees to offer its private communications network and satellite transmission services, primarily in the United States and Europe. Approximately 48% of the sales force is based in the United States and approximately 52% is based in Europe. Orion expects to continue to expand its sales force significantly throughout 1998, in the U.S., Europe, Latin America and Asia. 14 INDIRECT SALES CHANNELS Major Carriers and Other Distributors. Orion has entered into distributor resale arrangements with major carriers, teleport operators, resellers and other companies in the United States and internationally. These distributors typically purchase communications network services from Orion at a wholesale rate for resale to their customers. This represents an important sales channel for the Company, and the Company is focusing on strengthening these relationships. Major carriers employ substantial sales forces and have the advantage of being existing providers to many of Orion's target customers, which makes marketing easier and increases awareness of customer needs. Representatives. Orion has entered into agreements for the marketing of its private communications network services in the United Kingdom, France, Germany, Austria, Italy and other European countries. These agreements call for sales, marketing and customer support services in specified geographical areas, generally on a non-exclusive basis. Generally, the duration of these agreements is three years. Third party sales representatives receive commissions and fees for sales and customer support services, each of which are payable over the life of the customer contracts to which the representative's services relate and which are based upon the revenues derived. Two former limited partners of the Orion Atlantic Limited Partnership who serve as sales representatives (and ground operators) are entitled to receive additional commissions under a "profit sharing" formula based on their overall contribution to sales, but no amounts have been paid under such formula to date. The agreements with these sales representatives terminate in 1998. Orion expects that payments, if any, under the profit sharing arrangement will not be material. Indirect sales channels are supervised by Orion sales managers, who establish marketing strategies with the representatives, establish pricing, lend engineering support, attend certain sales calls, develop marketing materials and sales training tools, coordinate joint efforts in promotional events and provide information about Orion's services. NETWORK OPERATIONS; LOCAL GROUND OPERATORS Orion has a network operations facilities at its corporate headquarters in Rockville, Maryland, and in Hannover Germany supported by arrangements with local companies in most countries within the Orion 1 footprint who assist Orion with selling efforts and perform customer support and network maintenance functions. Orion's relationships with ground operators are critical to providing integrated service because ground operators maintain the customers' networks, provide in-country business experience and often facilitate market entry and licensing. Network Operations. Once the Company enters into a contract with a customer, it finalizes the design of the customer's network, acquires the required equipment and arranges for the installation and commissioning of the network. Upon commencement of service, Orion also monitors the performance of the networks through its U.S. and German based network management centers . The network management centers allow Orion to perform diagnostic procedures on customer networks and to reconfigure networks to alter data speeds, change frequencies and provide additional bandwidth. Ground Operators. Through arrangements with local ground operators, Orion currently has the ability to deliver network services (through Orion 1 or leased capacity on other satellites) to or among points in most European countries, the United States and Mexico (which comprise substantially all of the countries within the coverage area of Orion 1), as well as arrangements to deliver network services in various Latin American and Asian countries. The ground operator agreements call for installation and maintenance of VSATs and other equipment, customer support and other functions in designated geographical areas, generally on a non-exclusive basis. Generally, such ground operations agreements last three years. Orion coordinates ground operations services (including service calls) by its local agents through centralized customer service centers located at Orion's corporate headquarters and at its facilities in Hannover. Orion also provides its ground operators with installation and maintenance training materials and support. Ground operators receive fixed fees for installation, maintenance and other services, which vary depending on the level of services and the geographic area. Certain ground operators receive payments for customer support over the life of the related customer contract, based upon the revenues derived. Two former limited partners of the Orion Atlantic Limited Partnership who serve as ground operators are entitled to receive additional fees under a profit sharing formula, but no amounts have been paid under such formula to date and Orion expects that, unless such ground operators significantly increase the number of VSATs they maintain on behalf of Orion for Orion's customers, profit sharing payments will not be material. Orion's operations will continue to depend significantly on Orion being able to provide ground operations for private network services using representatives and distributors throughout the footprint of Orion's satellites. In the event that its network of ground operators is not maintained and expanded, or fails to perform as expected, Orion's ability to offer private network services will be impaired. 15 MIGRATION PLAN FOR NEW MARKETS Prior to the launch of Orion 1, the Company began providing private communications network services to customers over satellite capacity leased from others. This early market entry strategy has been extended to Latin America and Asia with the commencement of construction of the Orion 2 and Orion 3 satellites. By developing an early market presence, Orion builds its customer base, establishes relationships with ground operators and becomes familiar with the regulations and practices in its new markets prior to launch of its satellites. Upon the launch of Orion 1, Orion migrated its customer base to its own satellite, and Orion expects to pursue the same approach for Orion 2 and Orion 3. In Latin America, the Company has agreements with a ground operators in a number of countries and is currently providing service to customers in Mexico, Colombia and Paraguay over leased capacity. The Company intends to migrate such services to Orion 2 after it commences operations, as Orion did with its Orion 1 satellite. The Company has a direct sales force focused on selling in Latin America, and is pursuing relationships with additional ground operators, distributors and joint venture partners. In Asia, the Company has agreements with ground operators in several countries, and has commenced discussions with such entities in a number of other Asian countries. The Company has begun marketing its services in Asia, both to existing customers with Asian operations and through regional sales offices in Hong Kong and Singapore. The Company expects its marketing for Orion 3 will be assisted by the $89 million pre-construction lease by DACOM, a Korean communications company, of eight of Orion 3's transponders for direct-to-home service and other satellite services. IMPLEMENTATION OF THE ORION SATELLITE SYSTEM Orion currently provides its services with Orion 1 and with facilities leased from other providers covering areas outside the satellite's footprint. Ultimately the Company will provide these services with three satellites, together with facilities leased outside of its footprints. Orion 1 provides coverage of the Northern Atlantic Ocean region. Orion 2 is being designed to cover the Atlantic Ocean region but with coverage of points further East (into the Commonwealth of Independent States) and South (into Latin America and Africa), and Orion 3 is being designed to cover the Asia Pacific region. The design, construction, launch and in-orbit delivery of a satellite is a long and capital-intensive process. Satellites comparable to Orion's typically cost in excess of $200 million (exclusive of development, financing and other costs) and take two to three years to construct, launch and place in orbit. Prior to launch, the owner generally must obtain a number of licenses and approvals, including approval of the host country's national telecommunications authorities to construct and launch the satellite, coordination and registration of an orbital slot (of which there are a limited number) through the ITU to avoid interference with other communications systems and a consultation on interference with INTELSAT (and EUTELSAT in the case of European satellites). Obtaining the necessary consents can involve significant time and expense, and in the case of the United States, requires a showing that the owner has the financial ability to fund the construction and launch of the satellite and to operate for one year. The Company has commenced construction of Orion 3 and Orion 2 prior to receipt of all regulatory approvals. Failure to obtain such approvals prior to launch would have a material adverse effect on the Company. Orion 1 is expected to have an in-orbit useful life of approximately 10.7 years, estimated to end in October 2005, and Orion 2 and Orion 3 are expected to have in-orbit useful lives of 13 years and 15 years, respectively (based upon present design). While there can be no assurances that adequate financing and regulatory approvals will be obtained, Orion plans to launch replacement satellites as its satellites reach the end of their useful lives. ORION 1 Orion 1 was launched in November 1994 and commenced commercial operations in January 1995. Satellite Design and Footprint. Orion 1, which is in geosynchronous orbit at 37.5(Degree) West Longitude, is a high power Ku-band telecommunications satellite that contains 28 transponders of 54 MHz bandwidth and six transponders of 36 MHz bandwidth (although one of these transponders has not operated in accordance with specifications, as described below). The footprint of Orion 1 is shown below (although certain transponders of Orion 1 can be reconfigured to match changing business and telecommunications requirements). 16 INSERT MAP Satellite Construction and Performance. Orion 1 was constructed by Matra Marconi Space's subsidiary MMS Space Systems Limited, one of the major satellite contractors in Europe. Orion 1 was designed both for the delivery of high-speed data and for high-powered digital video transmission to corporate users. In particular, Orion 1 was designed with high reception sensitivity, which enables two-way transmission from and to small earth stations, reducing the equipment and transmission cost to customers. Orion 1 has transatlantic networking capability, which allows users to uplink data in the U.S. or Europe and downlink that transmission simultaneously to the U.S. and Europe. This configuration simplifies customers' transatlantic networking solutions. Orion believes that Orion 1's Ku-band technology and VSAT ground segment infrastructure is among the least expensive, most flexible technologies for interactive satellite transmissions in the North Atlantic market. Like most recent satellites, Orion 1 offers digitally compressed transmission, in addition to analog transmission, which allows the satellite to increase by up to ten-fold its usable bandwidth per transponder, leading to greater revenue per transponder and greater network availability to customers in need of bandwidth on demand. When Orion 1 was delivered into orbit, one of the 36 MHz transponders with coverage of the United States did not perform in accordance with contract specifications. Orion settled the matter with the manufacturer for a one time refund of $2.75 million (which amount was applied as a mandatory prepayment under the existing Orion 1 Credit Facility). In addition, the manufacturer will pay Orion approximately $7,000 per month for the life of the satellite under the warranty to the extent the transponder is not used to generate revenue. Orion believes that the failure of such transponder to perform in accordance with specifications will not have a significant impact on Orion's ability to offer its services. In November 1995, one of Orion 1's components supporting nine transponders of dedicated capacity serving the European portion of the Orion 1 footprint experienced an anomaly that resulted in a temporary service interruption, lasting approximately two hours. Full service to all affected customers was restored using redundant equipment on the satellite. Orion believes, based on the data received to date by Orion from its own investigations and from the manufacturer, and based upon advice from Orion's independent engineering consultant, Telesat Canada, that because the redundant component is functioning fully in accordance with specifications and the performance record of similar components is strong, the anomalous behavior is unlikely to affect the expected performance of the satellite over its useful life. Furthermore, there has been no effect on Orion's ability to provide services to customers. However, in the event that the redundant component fails, Orion 1 would experience a significant loss of usable capacity. In such event, while Orion would be entitled to insurance proceeds of approximately $47 million and could lease replacement capacity and function as a reseller with respect to such capacity (at substantially reduced gross margins), the loss of capacity would have a material adverse effect on Orion. Control of Satellite. Orion uses its tracking, telemetry and command facility in Mt. Jackson, Virginia (the "TT&C facility") to control Orion 1, and has in place backup facilities at its headquarters in Rockville, Maryland. In addition, Orion has a satellite control center at Orion's headquarters in Rockville, Maryland, from which commands can be sent to the satellite, directly, or remotely through the TT&C facility. Orion also has constructed a network management center at its headquarters to monitor the performance of Orion 1 and to perform diagnostic procedures on and to reconfigure its communications networks. Orion leases additional facilities in Europe for backup tracking, telemetry and command and network monitoring functions. 17 ORION 2 Schedule and Footprint. Orion intends to launch Orion 2 in the Atlantic Ocean region to bolster its European capacity and to expand its coverage area in the Commonwealth of Independent States, Latin America and parts of Africa. Orion 2 will be a high power Ku-band communications satellite which will contain approximately 30 transponders of 54 MHz bandwidth. Orion has obtained conditional authorization from the FCC for the orbital slot at 12(Degree) West Longitude for operation of Orion 2. The FCC has commenced the coordination process through the ITU and will commence consultation with INTELSAT upon request from Orion. Orion commenced construction of Orion 2 in February 1997 and expects to launch Orion 2 in mid 1999. [Document contains a map of North America, Latin America, Europe, Africa and Asia showing in shaded areas the proposed coverage footprint of Orion 2] Satellite Construction, Launch and Performance. Matra Marconi Space and MMS Space Systems are the prime contractors for Orion 2 and will use MMS Space Systems' EUROSTAR satellite platform for Orion 2. This platform was previously used for Inmarsat 2, Telecom 2, Hispasat and Orion 1. Lockheed Martin CLS will provide launch services for Orion 2 using the Atlas II A-S launch vehicle. Atlas II A-S, which is larger than the launch vehicle used for the launch of Orion 1, is an expanded version of Atlas II. All 26 of the Atlas II, II A and II A-S launches have been successful. There have been more than 500 Atlas flights since the first research and development launch in 1957. The Orion 2 satellite will be tested extensively prior to launch. Matra Marconi Space is obligated to correct all defects in the satellite or its components discovered prior to the launch. If Orion 2 is launched but fails to meet the specified performance criteria following launch, or fails to arrive at its designated orbit within 180 days of launch, or is completely destroyed or incapable of operation, Orion 2 will be deemed a "constructive total loss." Upon a constructive total loss of Orion 2, Orion would generally be entitled to order from Matra Marconi Space a replacement satellite on substantially the same terms and conditions as set forth in the Orion 2 Satellite Contract, subject to certain pricing adjustments. If Orion 2 is substantially able to perform but fails to meet certain criteria for full acceptance, Orion 2 will be deemed a "partial loss." Upon a partial loss of Orion 2, Orion would be entitled to receive a partial refund based on calculations of Orion 2's performance capabilities. If Orion 2 is not a constructive total loss or partial loss, but does not meet the specified performance requirements at final acceptance or for five years thereafter, Matra Marconi Space may be required to make certain refund payments to Orion up to a maximum of approximately $10 million. Orion's principal remedy in the case of a constructive total loss or partial loss will be under the launch insurance the Company is to obtain. The Orion 2 Satellite Contract provides Orion with an option to purchase a replacement satellite. Under the contract, Orion has an option to purchase a replacement satellite for Orion 2, to be delivered in orbit no later than 21 1/4 months after Orion's exercise of the option. A total or partial loss will involve delays and loss of revenue, which will impair Orion's ability to service its indebtedness, including the Notes, and such insurance will not protect Orion against business interruption, loss or delay of revenues or similar losses and may not fully reimburse the Company for its expenditures. 18 The Orion 2 Satellite Contract provides for incentive payments to encourage early delivery and limited liquidated damages payable in the event of late delivery. The incentive payments would equal $25,000 per day for each day that Orion 2 is delivered prior to the scheduled delivery date. Liquidated damages in the event of a late delivery of Orion 2 also would be calculated on a daily basis, with the aggregate amount not to exceed approximately $12 million. These liquidated damages would be Orion's exclusive remedy for late delivery. Control of Satellite. Orion expects to use the TT&C facility to control Orion 2, and to use its existing network monitoring facilities in Rockville, Maryland and backup facilities in Europe. ORION 3 Schedule and Footprint. Orion intends to launch Orion 3 in the Asia Pacific region. Orion 3 is expected to cover all or portions of China, Japan, Korea, India, Hawaii, Southeast Asia, Australia, New Zealand, and Eastern Russia. Orion 3 is expected to be a high-power satellite with twenty-three 54 MHz and two 27 MHz equivalent Ku-band transponders, ten 36 MHz C-band transponders for use by Orion, and eight Ku-band transponders to be used by DACOM, a large Asian customer, for direct-to-home television services and other satellite services. Orion, through the Republic of the Marshall Islands, has filed the appropriate documentation with the ITU process and is in the process of coordinating the orbital slot at 139(Degree) East Longitude. Orion has commenced, but has not completed the consultation process with INTELSAT with respect to such orbital slot. Orion commenced construction of Orion 3 in December 1996. Orion 3 is scheduled to be launched in the fourth quarter of 1998. The proposed coverage of Orion 3 is shown below. [INSERT COVERAGE MAP] 19 Pre-Construction Customer. Orion has entered into a contract with DACOM Corp., a Korean communications company which provides international and long distance telephone and leased line services, international and domestic data communications and value added network services. Under the contract, DACOM will lease eight dedicated transponders on Orion 3 for 13 years for direct-to-home television service and satellite services, in return for payment of approximately $89 million payable over a period from December 1996 through seven months following the lease commencement date for the transponders. Payments are subject to refund if the successful launch and commencement of commercial operations of Orion 3 has not occurred by June 30, 1999. Although Orion 3 is scheduled to be launched in the fourth quarter of 1998, there can be no assurance that Orion will meet the delivery requirements of this contract. As part of the arrangements with DACOM, Orion granted DACOM a warrant to purchase 50,000 shares of Common Stock at $14 per share. Satellite Construction, Launch and Performance. Orion has selected Hughes Space as the prime contractor for Orion 3 and will use a Hughes Space HS 601 HP satellite platform for Orion 3. Launch services for Orion 3 will be provided using the McDonnell Douglas Delta III launch vehicle. Delta III, which is larger than the launch vehicle used for the launch of Orion 1, is an expanded version of the Delta II launch vehicle which has had 53 successful launches with a failure rate of less than 4%. A launch of a Delta II (on January 17, 1997) resulted in a launch failure. There have been no Delta III flights to date, and the Company expects its launch to be the third Delta III flight based upon information provided by the launch vehicle manufacturer regarding its present flight schedules. Under the Orion 3 Satellite Contract, the Orion 3 satellite will be tested extensively prior to launch. Hughes Space is obligated to correct all defects in the satellite or its components discovered prior to the launch. The risk of loss or damage to Orion 3 passes from Hughes Space to Orion at the time of intentional ignition of Orion 3. After Orion 3 is launched and meets the specified performance criteria following launch, and has not suffered damage caused by any failure or malfunction of the launch vehicle, Hughes Space is required to perform in-orbit testing of Orion 3 to determine whether the transponders meet the specified performance criteria. If the transponders meet the specified performance criteria, Hughes Space is entitled to retain the full satellite performance payments described below. Orion has an option to purchase an additional satellite (which may be used as a replacement satellite) to be launched within 12 to 19 months after Orion exercises such option. Orion must pay a fee if it exercises this option; the size of the fee will depend on whether the additional satellite is required to be delivered in 12, 15 or 19 months. Hughes Space is obligated to furnish the replacement satellite on terms substantially similar to those contained in the Orion 3 Satellite Contract. The Orion 3 Satellite Contract provides for incentive payments to encourage satellite performance and limited liquidated damages payable in the event of late delivery. The incentive payments could total $18 million depending on the satellite's performance, of which $10 million could be payable upon acceptance of the Orion 3 satellite and $8 million is payable over the course of the satellite's operational lifetime. In the event that it is determined during the Orion 3's operational lifetime that a transponder is not successfully operating, Orion is entitled to receive payment refunds under the Orion 3 Satellite Contract. Liquidated damages in the event of a late delivery of Orion 3 also would be calculated on a daily basis, with the aggregate amount not to exceed approximately $6 million. These liquidated damages would be Orion's exclusive remedy for late delivery. Control of Satellite. Orion is in the process of completing a tracking, telemetry and command facility in the United States to control Orion 3 and expects to maintain backup facilities in Korea, pursuant to arrangements with DACOM. 20 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 the Europe, Commonwealth of Independent Hawaii,Southeast Asia, Rockies and Paris of States, Middle East, North Africa and Australia, New Zealand Mexico America and Eastern Russia Expected Launch................. Operational(1) Mid 1999 Fourth Quarter of 1998 Satellite Manufacturer.......... MMS Space Systems Matra Marconi Space Hughes Space (subsidiary of Matra Marconi Space) Transponders(2)................. 34 30 43 Ku-Band(3)...................... 28@0054 MHz 30@0054 MHz 23@0054 MHz 6@0036 MHz 2@0027 MHz 8@0036 MHz (4) C-Band(5)....................... -- -- 10@0036 MHz Usable Bandwidth(6)............. 1728 MHz 1620 MHz 1944 MHz EIRP(7)......................... 47 to 52 dBW 47 to 50 dBW 44 to 52 for Ku-Band; 34 to 38 for C-band returns Total Prime Power(8) ........... 4500 Watts 7000 Watts 8000 Watts Expected End of Useful Life(9).. 2005 2012 2013 Approximate Percentage of World Population Covered by Satellite(10)................... 17.9% 27.0% 57.0%
* All information relating to Orion 2 and Orion 3 is based on currently proposed satellite designs. Particular features of Orion 2 and Orion 3 are subject to change, although changes are not expected to have a material impact on the operating specifications of the satellites. (1) Orion 1 was launched on November 29, 1994 and commenced commercial operations on January 20, 1995. (2) Satellite transponders receive signals up from earth stations and then convert, amplify and transmit the signals back down to other earth stations. (3) Ku-band frequencies are higher than C-band frequencies and are used worldwide for commercial satellite communications. (4) Orion has entered into a contract with DACOM under which Orion will provide eight dedicated transponders on Orion 3 for direct-to-home television service and other satellite services, provided that Orion 3 is delivered in orbit and fully operational by June 30, 1999. (5) C-band frequencies minimize interference from atmospheric conditions such as rain. C-band satellites share frequencies with terrestrial based microwave systems and therefore require more on-ground coordination to avoid interference problems and generally are lower power, requiring the use of large earth stations to receive signals. A portion of Orion 3 is designed to transmit over C-band frequencies since Orion 3 is to cover areas of Asia where satellite signals experience significant interference from rain during several months of the year. (6) Bandwidth is a measure of the transponder resource which determines the information carrying capacity. The actual information carrying capacity of a transponder is determined by a combination of the transponder's bandwidth and radio-frequency ("RF") power. (7) Equivalent isotropic radiated power ("EIRP") is a measure of the RF power of each transponder. Smaller and less expensive earth terminal antennas can be used with higher EIRP transponders. 21 (8) Total prime power is the total amount of power that is required to support all of the communications and electronics functions of the satellite. (9) The expected end of a satellite's in-orbit useful life is based on the period during which the satellite's on board fuel permits proper station keeping maneuvers for the satellite. The information for Orion 1 is based on 1997 fuel level estimates. The information for Orion 2 and Orion 3 is based on their expected launch dates and their expected satellite designs, internal studies, the Orion 2 Satellite Contract and the Orion 3 Satellite Contract. (10) The approximate percentages of world population covered or to be covered by the Orion satellites are not additive. In the aggregate, the footprints of the Orion satellites would cover over 85% of the world's population. ORBITAL SLOTS Orion 1. Orion has been licensed by the FCC and has completed the coordination process with INTELSAT to operate Orion 1 in geostationary orbit at 37.5(Degree) West Longitude. Orion 2. Orion has obtained conditional authorization from the FCC for the construction, launch and operation of Orion 2 at 12(Degree) West Longitude. On behalf of Orion, the FCC has commenced the orbital slot coordination process through the ITU. Orion believes that its use of the 12(Degree) West Longitude slot for Orion 2 is not likely to interfere with proposed uses of adjacent slots filed for by other governments, except for a possible overlap of 75 MHz with one such filing as discussed more fully below under the caption "-- ITU Coordination Process". Orion has commenced consultation with INTELSAT regarding Orion 2, and believes that since there are no INTELSAT satellites located adjacent to the 12(Degree) West Longitude orbital slot, the INTELSAT coordination should be obtained in due course. Orion 3. Orion, through the Republic of the Marshall Islands, has filed the appropriate documentation with the ITU to begin the ITU coordination process for Orion 3 at 139(Degree) East Longitude. Based upon the time of filing by the Republic of the Marshall Islands, Orion believes that the proposed orbital slot for Orion 3 would have effective priority under ITU procedures with respect to the 139(Degree) East Longitude orbital slot, but some proposals for adjacent slots would be entitled to priority over the Company's proposal (through the Republic of the Marshall Islands) with respect to certain frequencies. Orion believes, based upon its monitoring of the other proposals and information in the industry regarding their progress, that none of these entities will launch a satellite prior to launch of Orion 3 to take advantage of such priority. Orion has not commenced the consultation process with INTELSAT with respect to Orion 3, but as in the case of Orion 2 expects to complete the INTELSAT coordination in due course. Other Orbital Slots. Orion has received an authorization from the FCC for a Ku-band satellite in geostationary orbit at 47(Degree) West Longitude, and has coordinated this orbital position with INTELSAT. Orion has filed an application with the FCC to operate a satellite at 126(Degree) East Longitude. The FCC has filed documentation with the ITU to commence the coordination process for this slot. In May 1996, in response to Orion's application, the FCC assigned the U.S. domestic orbital location of 135(Degree) West Longitude to Orion. In November 1996, the FCC granted authorization to Orion to utilize the slot, conditioned on Orion submitting financial qualification information, or documentation justifying a waiver of the financial requirements, within 120 days after the release of the individual order with respect to Orion's application. Orion made its filing on March 19, 1997. The Company has also filed an application with the FCC to amend its license to operate a Ku-band satellite in geostationary orbit at 37.5(degree) West Longitude to include C-band operations at 37.5(degree) West Longitude. In May 1997, the FCC confirmed the assignment of Ka-band orbital locations to applicants proposing to provide geostationary-satellite services. Orion was assigned Ka-band orbital locations at 89(degree) West Longitude, 81(degree) West Longitude, 47(degree) West Longitude, and 126.5(degree) East Longitude. With the relinquishment by AT&T of certain orbital assignments, applicants entered into new negotiations for a further assignment plan. As a result of these negotiations, Orion would receive an additional authorization of 67(degree) West Longitude. In December 1997, the FCC confirmed the previous five Ka-band orbital assignments to Orion and indicated the 67(degree) West Longitude location was now under active consideration. In addition, in November 1997, the FCC commenced a second processing round for Ka-band orbital assignments and Orion filed amended applications seeking Ka-band orbital assignments for the 15(degree) West Longitude and 139(degree) East Longitude locations. No other satellite operator has filed for the 15(degree) West Longitude or 139(degree) East Longitude locations. There can be no assurance that Orion will receive final licenses to operate at these orbital positions, or that the FCC will act favorably on Orion's additional satellite filings. 22 ITU Coordination Process. An international treaty to which the U.S. and the Republic of the Marshall Islands are parties requires coordination of satellite orbital slots through the procedures of the ITU. There are only a limited number of such orbital slots. ITU procedures provide for a priority to attach to proposals that are submitted first for a particular orbital slot and associated frequencies, and provide for protection from interference by satellites in adjacent slots. This priority does not establish legally-binding rights, but at a minimum establishes certain procedural rights and obligations for and with respect to the party that first submits its proposal. Over the past decade, a substantial increase in satellite proposals introduced into the ITU coordination process has caused delays in that process. In addition, many proposals are submitted to the ITU for registration of satellite systems that ultimately are not constructed or launched. As a result, the ITU is investigating ways to improve or streamline the filing process for registration of orbital slots. In the meantime, it has become international practice for operators who propose to use a certain orbital slot to investigate and evaluate whether proposals to launch satellites into the same or a nearby orbital location are likely to result in actual operation, and for operators to negotiate with other countries or operators that propose to use the same or a nearby orbital location. There can be no assurance of the outcome of any objections to this international practice or as to the results of the ITU's investigations. Orion is involved in discussions with certain governments concerning their proposals to use orbital slots. While Orion believes that it can successfully coordinate and resolve any interference concerns regarding the use of the orbital locations and frequency bands proposed for Orion 2 and Orion 3, there can be no assurance that this will be achieved, nor can there be assurance that ITU coordination will be completed by the scheduled launch dates for Orion 2 and Orion 3. In the event that successful coordination cannot be achieved, Orion may have to modify the satellite design for Orion 2 or Orion 3 in order to minimize the extent of any potential interference with other proposed satellites using those orbital locations or frequency bands. Any such modifications may result in certain features of Orion 2 and Orion 3 differing from those described in this Prospectus and may result in limitations on the use of one or more transponders on Orion 2 or Orion 3 or delays in the launch of Orion 2 or Orion 3. In order to achieve successful coordination, Orion may also have to modify the operation of the satellites, or enter into commercial arrangements with operators of other satellites, in order to protect against harmful interference to Orion's operations. If interference occurs with satellites that are in close proximity to Orion 2 and Orion 3, or with satellites that are subsequently launched into locations in close proximity without completing ITU coordination procedures, such interference would have an adverse effect on the proposed use of the satellites and on Orion's business and financial performance. INSURANCE Orion has obtained satellite in-orbit life insurance for Orion 1 covering the period from May 1997 to May 1998 in an amount of approximately $205 million providing protection against partial or total loss of the satellite's communications capability, including loss of transponders, power, fuel, or ability to control the positioning of the satellite. The aggregate premium for in-orbit insurance for Orion 1 is approximately $4.6 million per annum. Orion has obtained launch and in-orbit life insurance for Orion 2 and Orion 3 covering the period from launch to two years after launch in an amount of up to $220 million for Orion 2 and up to $230 million for Orion 3. This coverage provides protection against partial or total loss of the satellite's communications capability, including loss of transponders, power, fuel or ability to control the positioning of the satellite. The aggregate premium for the combined Orion 2 and Orion 3 coverage for the launch plus two year period is estimated to be approximately $72.5 million. Orion has instructed its insurance broker to determine if current market conditions will allow for improvements to the existing Orion 2/Orion 3 policy terms. Launch and in-orbit insurance for its satellites will not protect the Company against business interruption, loss or delay of revenues and similar losses and may not fully reimburse the Company for its expenditures. COMPETITION As a provider of data networking and Internet-related services, Orion competes with a large number of telecommunications service providers and value-added resellers of transmission capacity. As a provider of satellite transmission capacity, Orion competes with other providers of satellite and terrestrial facilities. 23 Many of these competitors have significant competitive advantages, including long-standing customer relationships, close ties with regulatory and local authorities, control over connections to local telephone networks and have financial resources, experience, marketing capabilities and name recognition that are substantially greater than those of Orion. The Company believes that competition in emerging markets will intensify as incumbent service providers adapt to a competitive environment and international carriers increase their presence in these markets. The Company also believes that competition in more developed markets will intensify as larger carriers consolidate, enhance their international alliances and increase their focus on data networking. Orion's ability to compete with these organizations will depend in part on Orion's ability to price its services at a significant discount to terrestrial service providers, its marketing effectiveness, its level of customer support and service and the technical advantages of its systems. SERVICE PROVIDERS Orion has encountered strong competition from major established carriers such as AT&T, MCI, Sprint, British Telecom, Cable & Wireless, Deutsche Telekom, France Telecom and Kokusai Denshin Denwa, which provide international telephone, private line and private network services using their national telephone networks and link to those of other carriers. A number of these carriers have formed global consortia to provide private network services, including AT&T -- Unisource Services Company (AT&T, PTT Telecom Netherlands, Telia (Sweden), Swiss Telecom PTT and Telefonica of Spain), Concert (British Telecom and MCI), and Global One (Sprint, France Telecom and Deutsche Telekom). Other service providers include Worldcom (which is in the process of acquiring MCI), Infonet, SITA, Telemedia International, Spaceline, ANT Bosch (acquired by General Electric), Impsat, and various local resellers of satellite capacity. Finally, service organizations that purchase satellite capacity, VSAT and other hardware and install their own networks may be considered competitors of the Company with respect to their own networks. Although these carriers and service providers are competitors, some are also Orion's customers. Orion believes that all network service providers are potential users of Orion's satellite capacity for the network services they offer their customers. SATELLITE CAPACITY Orion provides fixed satellite service and does not intend to compete with most proposed mobile satellites or low earth orbit systems ("LEO") such as Globalstar, Iridium or Odyssey (although the Company expects to compete with Teledesic, a proposed LEO system), or, with the exception of the pre-leased transponders on Orion 3 to be used for video transmissions, with direct-to-home satellite systems such as Primestar, DirecTV or EchoStar. Mobile satellite services are characterized by voice and data transmission to and from mobile terminals on platforms such as ships or aircraft. Direct-to-home services are characterized by the transmission of television and entertainment services directly to consumers. Orion's satellites will compete with trans-Atlantic fixed satellite systems, European regional and domestic systems and Asian systems. Existing International and Trans-Atlantic Satellite Systems. The market for international fixed satellite communications capacity has been dominated by INTELSAT for thirty years, and INTELSAT can be expected to continue to dominate this market for the foreseeable future. INTELSAT, a consortium of approximately 140 countries established by international treaty in 1964, owns and operates the largest fleet of commercial geosynchronous satellites in the world (approximately 25 satellites, with additional satellites on order). INTELSAT's satellites have historically been general purpose, lower-power satellites designed to serve large areas with public telephone service transmitted between expensive gateway earth stations. INTELSAT generally provides capacity directly to its signatories who then market such capacity to their customers. The availability of new services generally is subject to the discretion of each country's signatory and INTELSAT is required under its charter to set its pricing in order to achieve a fixed pre-tax return on equity that is established from time to time by INTELSAT's board of governors. INTELSAT is considering a restructuring and it is expected that the Intelsat Assembly of Parties will decide on a new structure for the organization in 1998. Any restructuring of INTELSAT that increases its marketing flexibility could materially impact Orion's ability to compete in the market for private satellite delivered services. PanAmSat currently operates six satellites, with four satellites providing coverage in the Atlantic Ocean region, one in the Asia Pacific region and one in the Indian Ocean region. These satellites primarily provide broadcasting services, such as television programming and backhaul operations. PAS 3, launched in January 1996, with coverage of the Atlantic Ocean, competes directly with Orion 1. It has performance attributes which are generally comparable to those of Orion 1 and carries 16 Ku-band transponders, of which 8 transponders are capable of providing service to or within Europe, and 16 C-band transponders. PanAmSat has announced that it intends to launch two additional satellites in 1998 . 24 Existing European Regional and Domestic Satellite Systems. In Europe, Orion competes with certain regional satellites systems and may compete with domestic satellite systems. Regional and domestic satellite systems generally have limited ability to serve customers with needs for extensive international networks. Orion's primary competitor in Europe is the major regional satellite system operated by EUTELSAT. EUTELSAT, established in 1977, presently comprises over approximately 45 member countries. EUTELSAT operates ten satellites, providing telephony, television, radio and data services, and has announced a plan to launch four new satellites through 1999. Asian Pacific Region Satellite Systems. Orion believes that currently-operating satellite systems in the Asia Pacific region generally are limited in their ability to provide private network and similar services at an acceptable performance level due to insufficient power, limited Ku-band capacity and limited geographic coverage. Nevertheless, there is a large number of satellite systems operating in Asia. The major Asia Pacific regional satellite systems include the AsiaSat system licensed in Hong Kong (with two satellites in operation ), the Chinese Apstar system (with three satellites in operation) and the Indonesian Palapa system (with six satellites in orbit). Japan has licensed several satellite networks for domestic and international service, including the JCSat series (five satellites in operation), NTT's two N-Star satellites, and Space Communications Corporation's Superbird Series (three satellites in operation). Optus operates four Australian domestic satellites that offer limited international coverage and plans several follow-on satellites. Korea operates Koreasat 1 and 2, primarily for domestic service, with plans for a third satellite that would offer expanded regional service in 1999. Thailand has licensed the Thaicom system, with two domestic satellites and one regional satellite in operation. Measat operates a Malaysian system consisting of two satellites providing DTH service to Malaysia and parts of Asia. Other Satellite Systems. There are numerous satellites other than the ones discussed above that compete to some extent with Orion. In addition, the Company is aware of a substantial number of satellites that are in construction or in the planning stages, including a number of systems proposing to operate in the Ka frequency band. Most of these satellites will cover areas within the footprint of Orion 1 and/or the proposed footprints of Orion 2 and Orion 3. As these new satellites commence operations, they (other than replacement satellites not significantly larger than the ones they replace) will substantially increase the capacity available for sale in the Company's markets. After a satellite has been successfully delivered in orbit, the variable cost of transmitting additional data via the satellite is limited. Accordingly, absent a corresponding increase in demand, this new capacity can be expected to result in significant additional price reductions. For example, Teledesic Corporation proposes to operate up to 840 low earth orbit small satellites by 2001 to provide global satellite services (including voice, data and broadband transmission services). Although Orion cannot assess to what degree, if any, these proposed satellites might compete with Orion in the future, Teledesic could provide significant competition to the Company. TERRESTRIAL CAPACITY Orion competes with terrestrial facilities for intra-Europe and trans-Atlantic capacity. European Facilities. Orion's services compete with terrestrial telecommunications delivery services, which are being improved gradually through the build-out of fiber optic networks and a move from analog to digital switching. As fiber networks and digital network switching become more prevalent, the resulting improved and less expensive terrestrial capacity is increasingly competitive with Orion's services. Undersea Cable. Undersea fiber optic cable capacity has increased substantially in recent years. Although Orion believes that undersea cable capacity is not as well suited as satellite capacity to serve the requirements of video broadcasters or the demand for multi-point private network services, fiber optic and coaxial cables are well suited for carrying large amounts of bulk traffic, such as long distance telephone calls, between two locations. Operators of undersea fiber optic cable systems typically are joint ventures among major telecommunications companies. Orion expects strong competition from these carriers in providing private network services. REGULATION REGULATORY OVERVIEW The international telecommunications environment is highly regulated. As an operator of privately owned international satellite systems licensed by the United States, Orion is subject to the regulatory authority of the United States (primarily the FCC) and the national communications authorities of the countries in which it provides service. Each of these entities can 25 potentially impose operational restrictions on Orion. In addition, Orion is subject to the INTELSAT and EUTELSAT consultation processes. The changing policies and regulations of the United States and other countries will continue to affect the international telecommunications industry. Orion cannot predict the impact that these changes will have on its business or whether the general deregulatory trend in recent years will continue. Orion believes that continued deregulation would be beneficial to Orion, but deregulation also could reduce the limitations facing many of its existing competitors and potential new competitors. The operation of Orion 2 and Orion 3 will require a number of regulatory approvals, including (i) the approvals of the FCC (in the case of Orion 2), (ii) completion of successful consultations with INTELSAT and, in the case of Orion 2, with EUTELSAT; (iii) satellite "landing" rights in countries that are not INTELSAT signatories or that require additional approvals to provide satellite or VSAT services; and (iv) other regulatory approvals. Obtaining the necessary licenses and approvals involves significant time and expense, and receipt of such licenses and approvals cannot be assured. Failure to obtain such approvals would have a material adverse effect on Orion. In addition, Orion is required to obtain approvals from numerous national local authorities in the ordinary course of its business in connection with most arrangements for the provision of services. Within Orion 1's footprint, such approvals generally have not been difficult for Orion to obtain in a timely manner. However, the failure to obtain particular approvals has delayed, and in the future may delay, the provision of services by Orion. AUTHORITY TO CONSTRUCT, LAUNCH AND OPERATE SATELLITES Orion 1. In June 1991, Orion received final authorization from the FCC (the "Orion 1 License") to construct, launch and operate a Ku-band satellite in geostationary orbit at 37.5(Degree) West Longitude in accordance with the terms, conditions and technical specifications submitted in its application to the FCC. The Orion 1 license from the FCC expires in January 2005. Although Orion has no reason to believe that its licenses will not be renewed (or new licenses obtained) at the expiration of the license term, there can be no assurance of renewal. Orion 2. Orion has obtained conditional authorization from the FCC for the orbital slot at 12(Degree) West Longitude for operation of Orion 2. The Orion 2 authorization will not become final until Orion completes a consultation with INTELSAT and demonstration to the FCC of its financial ability to meet the costs of construction, the launch of its satellite and operating expenses for one year following launch. Orion has not yet met the required financial qualifications demonstration to the FCC and intends to do so within 90 days after completion of INTELSAT consultation. Orion has commenced consultation with INTELSAT. The application filed with the FCC for Orion 2 contains a technical proposal different than that currently being coordinated with the ITU, and will need to be amended. Orion has no reason to believe that the FCC will not approve such amendment or that the amendment will cause material delay in obtaining final FCC authority for Orion 2. Orion 3. Orion is pursuing an orbital slot at 139(Degree) East Longitude through the Republic of the Marshall Islands. Under an agreement with the Republic of the Marshall Islands entered into in 1990, the Republic of the Marshall Islands agreed to file with the ITU all documents necessary to secure authorization for Orion to operate a satellite in geo-stationary orbit. In return for the right to utilize any orbital slots secured by the Republic of the Marshall Islands, Orion must, among other things, (i) commence construction of a functioning operating center for satellites serving the Pacific Island portion of the Orion Asia Pacific network at least a year prior to the operation of an Orion satellite, (ii) train and support certain employees designated by the Republic of the Marshall Islands at least a year prior to the operation of an Orion Asia Pacific satellite, and (iii) construct, equip and install (except for power supply or back-up) four earth stations capable of handling a "T-1" circuit for operation with the Orion Asia Pacific system prior to the operation of an Orion Asia Pacific satellite. CONSULTATION WITH INTELSAT AND EUTELSAT Orion 1. Prior to receiving final licensing and launch authority for Orion 1, Orion successfully completed its consultation with INTELSAT pursuant to the INTELSAT Treaty. A similar consultation for Orion 1 was completed with EUTELSAT in May 1994. Additional consultations or other approvals may be needed in individual countries for the use of VSATs. 26 Orion 2. Orion has recently commenced consultations with INTELSAT. Orion believes that since there are no INTELSAT satellites located adjacent to the 12(Degree) West Longitude orbital slot, the INTELSAT coordination should be obtained in due course. Orion intends to commence consultation with EUTELSAT in the near future through the coordination procedures of the ITU. Orion 3. Orion has commenced consultations with INTELSAT for Orion 3 and believes that since there are no INTELSAT satellites located adjacent to the 139(Degree) East Longitude orbital slot, the INTELSAT coordination should be obtained in due course. There is no requirement to coordinate with EUTELSAT for the 139(Degree) East Longitude orbital slot. There can be no assurance that Orion will successfully complete these consultations. INTERNATIONAL TELECOMMUNICATION UNION An international treaty to which the U.S. and the Republic of the Marshall Islands are parties requires coordination of satellite orbital slots through the procedures of the ITU. The process for coordinating orbital slots through the ITU is discussed under the caption "Orbital Slots -- ITU Coordination Process." Orion 1. After Orion 1 reached its orbital position and commenced operation, the FCC notified the ITU. This concluded the process for coordination of the Orion 1 orbital slot. Orion 2. On behalf of Orion, the FCC has commenced the orbital slot coordination process through the ITU. Orion believes that its use of the 12(Degree) West longitude slot for Orion 2 is not likely to interfere with proposed uses of adjacent slots filed for by other governments, except for a possible overlap of 75 MHz with one proposal as discussed more fully under the caption "Orbital Slots -- ITU Coordination Process." Orion 3. Orion, through the Republic of the Marshall Islands, has filed the appropriate documentation with the ITU to begin the ITU coordination process for Orion 3 at 139(Degree) East longitude. As discussed more fully under the caption "Orbital Slots -- ITU Coordination Process," based upon the time of filing by the Republic of the Marshall Islands, Orion believes that the proposed orbital slot for Orion 3 would have priority under ITU procedures with respect to the 139(Degree) East longitude orbital slot, but some proposals by other administrations for adjacent slots would be entitled to effective priority over the proposal by the Republic of the Marshall Islands with respect to certain frequencies. Orion believes, based upon its monitoring of the proposals of other administrations and information in the industry regarding their progress, that none of these administrations will launch a satellite prior to launch of Orion 3 to take advantage of such priority. Orion also believes that it can complete the ITU coordination process for Orion 3 at 139(Degree) East Longitude, however, there can be no assurance that this will be achieved. UNITED STATES REGULATORY RESTRICTIONS Orion is subject to regulation under the Communications Act, the FCC's July 1985 Separate Systems decision as modified by subsequent FCC decisions, other FCC regulations, and the terms of the various orders issued by the FCC with respect to Orion and its subsidiaries, including the terms of the Orion 1 License. These regulations, orders and authorizations impose various restrictions on Orion and on other similarly situated companies. Certain important restrictions are described below. Use of the Orion 1 Satellite System for U.S. Domestic Services. In January 1996, the FCC eliminated certain distinctions between U.S. licensed domestic satellites and separate satellite systems. It authorized both sets of U.S. licensed satellite operators to provide both domestic and international services. Domestic operators have designed their current satellite facilities principally for continental U.S. coverage of the United States, and thus may as a general matter offer only limited competition for international services at the outset. However, future satellite designs of domestic satellite operators could be modified to more directly compete in the international market. 27 New Orbital Locations. The FCC now requires applicants, at the time of filing for an orbital position (either domestic arc or international orbital position), to demonstrate the financial ability to construct, launch and operate that satellite for a one year period. This new requirement will have no change in the licensing of Orion's orbital positions at 37.5(Degree) West Longitude, 12(Degree) West Longitude, 47(Degree) West Longitude and 126(Degree) East Longitude (the orbital slot at 139(Degree) East Longitude is not being pursued through the FCC and is not subject to the financial showing requirement). To the extent that Orion is seeking an orbital location through the FCC, Orion will need to have significant financing on hand at the time of application or obtain a waiver of the required financial demonstration. There is no assurance that Orion will be able to obtain such waiver. Unauthorized Transfer of Control. The Communications Act bars a change in control of the holder of FCC licenses without prior approval from the FCC. Any finding that a change of control without prior FCC approval had occurred could have a significant adverse effect on Orion's ability to implement its business plan. INTERNATIONAL REGULATION Orion will need to comply with the applicable laws and obtain the approval of the regulatory authority of each country in which it proposes to provide network services or operate VSATs. The laws and regulatory requirements regulating access to satellite systems vary from country to country. Some countries have substantially deregulated satellite communications, making customer access to Orion services a simple procedure, while other countries maintain strict monopoly regimes. The application procedure can be time-consuming and costly, and the terms of licenses vary for different countries. Orion provides service using the licenses it obtains or that are obtained by local ground operators or, in certain cases, through customer-obtained authorizations. For example, Orion's representatives in the United Kingdom (Kingston Communications), France (Matra Hachette), and Italy (Telecom Italia) have licenses in such countries. Orion is to pursuing a similar strategy in Asia and Latin America. In addition, Orion will need to comply with the national laws of each country in which it provides services. Laws with respect to satellite services are currently unclear in certain jurisdictions, particularly within the Orion 3 footprint. In certain of these jurisdictions, satellite services may only be provided via domestic satellites. The Company believes that certain of these restrictions may change and that it can structure its operations to comply with the remaining restrictions. However, there can be no assurance in this regard. On February 5, 1998, the World Trade Organization ("WTO") Agreement on Basic Telecomm Services went into effect liberalizing market access restrictions globally. Fifty-seven WTO countries, including the U.S., committed to reciprocal market access opportunities. The Company believes entry into force of the WTO agreement will better facilitate market access for satellite services, and signals a positive trend towards global competition. HUMAN RESOURCES As of December 31, 1997, Orion and its subsidiaries had 289 full-time employees. Of its total work force, 7 are part of management, 119 are in engineering or satellite control operations, 79 are in marketing, sales and sales support, and 84 are devoted to support and administrative activities. 28 FORWARD LOOKING STATEMENTS Information set forth in this Annual Report on Form 10-K under the captions "Business" "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Consolidated Financial and Operational Data" and under other captions contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, which statements represent Orion's reasonable judgment concerning the future and are subject to risks and uncertainties that could cause Orion's actual operation results and financial position to differ materially. Such forward looking statements include the following: Orion expectations regarding the pending acquisition by Loral, Orion's belief and the judgments of its independent engineering consultant, Telesat Canada, regarding the expected performance of the Orion 1 satellite over its useful life, and the effect of such performance on Orion's business; Orion's expectations regarding the period for construction and launch of Orion 2 and Orion 3; Orion's belief that it can overcome uncertainties relating to Orion 2 and Orion 3; Orion's expectations regarding receipt of regulatory approvals, coordination of orbital slots and avoidance of possible interference; Orion's beliefs regarding existing and future regulatory requirements, its ability to comply with such requirements and the effect of such requirements on its business; Orion's beliefs regarding the competitive advantages of satellites and of Orion's satellites, strategies and services in particular, both in general and as compared to other providers of services or transmission capacity and other services presently offered or which may be offered in the future; Orion's expectations regarding the growth in telecommunications and the demand for telecommunications services; Orion's beliefs regarding the demand for or attractiveness of Orion's services; Orion's beliefs regarding technological advances and their effect on telecommunications services or demand therefore; Orion's beliefs regarding availability of net operating loss carryforwards; Orion's beliefs regarding its representatives and distributors; Orion's belief that any liability that might be incurred by Orion upon the resolution of certain existing or future legal proceedings not having a material adverse effect on the consolidated financial condition or results of operations of Orion; and the adoption of new accounting releases not being material to its financial condition, or results of operations. Orion cautions that the above statements are further qualified by important factors that could cause Orion's actual results to differ materially from those in the forward looking statements. Such factors include, without limitation, the following, in each case as presented more fully in Orion's Registration Statement on Form S-3 (No. 333-40123) on file at the Securities and Exchange Commission under "Risk Factors" or in Loral's Registration Statement on Form S-4 (No. 333-4640): Acquisition: No Assurance that Loral Acquisition will be Consummated. The consummation of the Merger is subject to a number of conditions, including approval of the Merger Agreement by the Company's stockholders, accuracy of representations and warranties and compliance with covenants set forth in the Merger Agreement. It is presently anticipated that each of the conditions to the Merger would have to be satisfied to consummate the Merger. There can be no assurance that Orion will obtain all necessary approvals and satisfy all other conditions to the Merger. Satellite Loss or Reduced Performance. Satellites are subject to significant risks, including launch failure, damage that impairs commercial performance, failure to achieve correct orbital placement during launch, loss of fuel that reduces satellite life, and satellite in-orbit risks. Although Orion 1 has been successfully launched and is in commercial operation, in November 1995, one of Orion 1's components supporting nine transponders of dedicated capacity serving the European portion of the Orion 1 footprint experienced an anomaly. Orion believes, based on the data received to date by Orion from its own investigations and from the manufacturer, and based upon advice from Orion's independent engineering consultant, Telesat Canada, that because the redundant components is strong, the anomalous behavior is unlikely to affect the expected performance of the satellite over its useful life. However, in the event that the currently operating component fails, Orion 1 would experience a significant loss of usable capacity. Although Orion maintains satellite in-orbit insurance on Orion 1, any loss in orbit or reduced performance of Orion 1 would have a material adverse effect on Orion. In addition, no assurance can be given that the launch of Orion 2 or Orion 3 will be successful. Although various sources of data permit differing conclusions, Orion is aware of sources indicating that the historical loss rate for all commercial geosynchronous satellite launches may be as high as 15%. Launch risks vary based upon the launch vehicle used and recent performance of that vehicle. In addition, Orion may have to change launch vehicles and could be subject to delays and higher costs of launch insurance if, for example, one of its selected vehicles experiences a launch failure with respect to another satellite. With respect to the risk of launch failure of Orion satellites, Orion has an option to purchase an additional satellite (which may be used as a replacement satellite) to be delivered in orbit, in the case of Orion 3, within 12, 15 or 19 months (at Orion's election) after it exercises the option, or, in the case of Orion 2, with 21 1/4 months after it exercises the option. 29 Therefore, an unsuccessful launch of Orion 2 or Orion 3 would involve a delay in revenues for at least one year, and perhaps substantially longer. Significant loss or delay of revenue from any of the Company's satellites would have a material adverse effect on the Company. Limited Insurance for Satellite Launch and Operation. The in-orbit insurance of Orion 1 and the launch and in-orbit insurance for Orion 2 and Orion 3 will not protect the Company against business interruption, loss or delay of revenues and similar losses and may not fully reimburse the Company for its expenditures. In addition, such insurance includes or can be expected to include certain contract terms, exclusions, deductibles and material change conditions that are customary in the industry. Accordingly, an unsuccessful launch of Orion 2 or Orion 3 or any significant loss of performance with respect to any of its satellites would have a material adverse effect on Orion Limited Life of Satellites. While Orion 1 is expected to have an orbital life of approximately 10.7 years (through October 2005), and Orion 2 and Orion 3 are expected to have orbital lives of approximately 13 years and 15 years, respectively, there can be no assurance as to the actual longevity of the satellites. A number of factors will affect the useful life of each satellite, including the rate of fuel consumption in achieving correct orbital placement during launch, the quality of its construction and the durability of its component parts. Timing and Cost Uncertainties with Respect to Orion 2 and 3. Orion presently plans to launch Orion 2 in the second quarter of 1999 and plans to launch Orion 3 in the fourth quarter of 1998, based upon the construction and launch schedules set forth in the satellite contracts. To meet these schedules, Orion must receive certain regulatory approvals and take other necessary steps, including the possible need of additional financing. Failure to meet the construction and launch schedules could increase the cost of Orion 2 or Orion 3, requiring additional financing. Although the Orion 2 satellite contract and the Orion 3 satellite contract are fixed-price contracts with firm schedules for construction, delivery and launch, there can be no assurance that increases in costs due to change orders or delay will not occur. There can be no assurance that the launch of Orion 2 or Orion 3 will take place as scheduled. A significant delay in the delivery or launch of Orion 2 or Orion 3 would have a material adverse effect on Orion. Risks of Proceeding with Construction Prior to Obtaining all Regulatory Approvals for Orion 2 and Orion 3. Orion has commenced construction of Orion 3 and Orion 2 prior to completion of the required consultation with INTELSAT and EUTELSAT (as defined), receipt of final authority from the FCC (in the case of Orion 2) and completion of the International Telecommunication Union ("ITU") coordination process. Failure to obtain one more necessary approval in a timely manner would likely have a material adverse effect on the Company. Additional factors that would cause Orion's results to differ materially from those in the forward looking statements include the following: no assurances regarding the business plan; Orion's history of losses and expectation of future losses; Orion's need for additional capital; substantial leverage and secured indebtedness; potential lack of market acceptance and demand; ground operations; Orion's ability to manage growth; potential adverse effects of competition; no assurances regarding approvals needed, current or future regulation of the telecommunications industry; uncertainties relating to backlog; no assurances regarding technological changes; risks of conducting international business; dependence of Orion on key personnel; control of Orion by principal stockholders; risks relating to senior preferred stock; limits on paying dividends on Orion common stock; and anti-takeover and other provisions of the certificate of incorporation, in each case as presented more fully in Orion's Registration Statement on Form S-3 (No. 333-40123) or in Loral's Registration Statement on Form S-4 (No. 333-4640) on file at the Securities and Exchange Commission under "Risk Factors." ITEM 2. PROPERTIES. Orion's principal offices comprise approximately 33,000 square feet located in Rockville, Maryland. These offices house not only Orion's personnel, but also contain the Company's satellite operations center for Orion 1. The lease covering these facilities expires in December 1999. In February 1992, Orion sold its earth station facility at Mount Jackson, Virginia, but retained six acres of land at that location plus access to certain capacity and facilities. Orion has leased the land and facilities in Mount Jackson to Orion Atlantic for use as part of the TT&C Station. Orion also leases approximately 7,300 square feet of office space in Gaithersburg, Maryland for operations personnel, 2,900 square feet of office space in Amsterdam, Netherlands also for operations personnel and approximately 5,000 square feet in London, England for sales and sales support personnel. Orion's German subsidiary, Orion Network Systems-Europe GmbH, leases a facility in Hannover, Germany, comprised of approximately 7,400 square meters of land and 1,800 square meters of office space. 30 ITEM 3. LEGAL PROCEEDINGS. In October 1995, Skydata Corporation ("Skydata"), a former contractor, filed suit against Orion Atlantic, Orion Satellite Corporation and Orion, in the United States District Court for the Middle District of Florida, claiming that certain Orion Atlantic operations using frame relay switches infringe a Skydata patent. Skydata's suit sought damages in excess of $10 million and asked that any damages assessed be trebled. On December 11, 1995, the Orion parties filed a motion to dismiss the lawsuit on the grounds of lack of jurisdiction and violation of a mandatory arbitration agreement. In addition, on December 19, 1995, the Orion parties filed a Demand for Arbitration against Skydata with the American Arbitration Association in Atlanta, Georgia, requesting damages in excess of $100,000 for breach of contract and declarations, among other things, that Orion and Orion Atlantic own a royalty-free license to the patent, that the patent is invalid and unenforceable and that Orion and Orion Atlantic have not infringed on the patent. On March 5, 1996, the court granted the Company's motion to dismiss the lawsuit on the basis that Skydata's claims are subject to arbitration. Skydata appealed the dismissal to the United States Court of Appeals for the Federal Circuit. Skydata also filed a counterclaim in the arbitration proceedings asserting a claim for $2 million damages as a result of the conduct of Orion and its affiliates. On May 15, 1996, the arbitrator granted the Orion parties' request for an initial hearing on claims relating to the Orion parties' rights to the patent, including the co-ownership claim and other contractual claims. On November 9, 1996, Orion and Skydata executed a letter with respect to the settlement in full the pending litigation and arbitration. On August 12, 1997, the parties entered into a formal settlement agreement. As part of the settlement, the parties are to release all claims by either side relating in any way to the patent and/or the pending litigation and arbitration. In addition, Skydata is to grant Orion (and its affiliates) an unrestricted, world-wide paid-up license to make, have made, use or sell products or methods under the patent and all other corresponding continuation and reissue patents. Orion is to pay Skydata $437,000 over a period of two years as part of the settlement. While Orion is party to regulatory proceedings incident to its business, there are no material legal proceedings pending or, to the knowledge of management, threatened against Orion or its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Since completion of Orion's initial public offering in August 1995, the Common Stock has been quoted on the Nasdaq National Market under the trading symbol "ONSI." As of March 9, 1998, there were approximately 268 stockholders of record of Orion's Common Stock. The following table summarizes the high and low closing sale prices of Common Stock by fiscal quarter for 1995, 1996 and 1997 as reported on the Nasdaq National Market. QUARTER ENDED: 1995 ------------- -------------- September 30 (from August 1) $10 3/4 to $14 1/4 December 31 6 3/4 to 12 Quarter Ended: 1996 ------------- -------------- March 31 $ 8 1/4 to $14 3/4 June 30 10 1/4 to 14 1/4 September 30 7 1/4 to 12 1/8 December 31 9 1/2 to 13 5/8 Quarter Ended: 1997 ------------- -------------- March 31 $ 8 5/8 to $15 June 30 8 1/2 to 12 1/4 September 30 11 1/8 to 17 1/8 December 31 16 5/8 to 18 1/8 31 The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain future earnings, if any, to finance the growth and development of its business, and therefore the Company does not anticipate paying cash dividends on its common Stock in the foreseeable future. The Company is not permitted to pay dividends on the Common Stock as long as the Company's Preferred Stock is outstanding, subject to certain limited exceptions. The Company's Series A Preferred Stock which was issued in June 1994 and the Series B Preferred Stock which was issued in June 1995 (pursuant to options granted in June 1994), accrue dividends at 8% per annum. Accrued dividends on the Series A and Series B Preferred Stock are payable only in limited circumstances. Upon conversion of the Series A and Series B Preferred Stock into Common Stock, either at the option of the holder or in those cases where the Company has the right to require such conversion, accrued but unpaid dividends will be canceled. The Series C Preferred Stock which was issued in January 1997 accrues dividends at 6% per annum. Accrued dividends are payable in Common Stock. The number of shares of Common Stock distributable as a dividend on each share of Series C Preferred Stock is calculated based on the market price of such Common Stock as set forth in the Certificate of Designations for the Series C Preferred Stock. The Indentures relating to the Company's Senior Notes and Senior Discount Note restricts the payment by the Company of cash dividends on its capital stock. Sales of Unregistered Securities. In January 1997, Orion consummated the following transactions involving the sale of its unregistered securities. On January 31, 1997, the Company acquired all of the limited partnership interests which it did not already own in the Company's operating subsidiary, International Private Satellite Partners, L.P. ("Orion Atlantic"), that owns the Orion 1 satellite. Specifically, the Company acquired the Orion Atlantic limited partnership interests and other rights relating thereto held by British Aerospace Communications, Inc., COM DEV Satellite Communications Limited, Kingston Communications International Limited, Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate of Matra Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of Nissho Iwai Corp. (collectively, the "Exchanging Partners"). Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the "Exchange Agreement"), the Exchanging Partners exchanged (the "Exchange") their Orion Atlantic limited partnership interests for 123,172 shares of a newly created class of the Company's Series C 6% Cumulative Convertible Redeemable Preferred Stock (the "Series C Preferred Stock"). In addition, the Company acquired certain rights held by certain of the Exchanging Partners' rights to receive repayment of various advances (aggregating approximately $41.6 million at January 31, 1997). The 123,172 shares of Series C Preferred Stock issued in the Exchange were convertible (as of January 31, 1997) into approximately 7 million shares of the Company's Common Stock. As a result of the Exchange, certain of the Exchanging Partners became principal stockholders of the Company. The Exchange is described in greater detail in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K. On January 8, 1997, the Company acquired the only outstanding minority interest in the Company's subsidiary Orion Asia Pacific Corporation from British Aerospace Satellite Investments, Inc. in exchange for approximately 86,000 shares of the Company's Common Stock. On January 31, 1997, the Company also completed the sale of $60 million of its convertible junior subordinated debentures (the "Convertible Debentures") to two investors, British Aerospace Holdings, Inc. ("British Aerospace") and Matra Marconi Space UK Limited ("Matra Marconi Space"). British Aerospace purchased $50 million of the Convertible Debentures and Matra Marconi Space purchased $10 million of the Convertible Debentures. The Convertible Debentures would have matured in 2012, and bore interest at a rate of 8.75% per annum, paid semi-annually in arrears solely in Common Stock of the Company. As of March 10, 1998, all of the Convertible Debentures have been converted to approximately 4.3 million shares of common stock. The Convertible Debentures were subordinated to all other indebtedness of the Company. The Company registered 5,052,202 shares of Common Stock issuable upon conversion of (i) the Series C Preferred Stock (other than the Series C Preferred Stock held by British Aerospace) and (ii) Matra Marconi's Convertible Debentures on a Registration Statement on Form S-3 (the "Exchanging Partners Registration Statement"), which Exchanging Partners Registration Statement became effective on November 19, 1997 (Registration No. 333-40123). As of January 31, 1998, approximately 3.9 million shares of Common Stock (issuable upon the conversion of 56,492 shares of the Series C Preferred Stock and Matra Marconi's Convertible Debentures) had been sold pursuant the Exchanging Partners Registration Statement. 32 British Aerospace has recently converted its Convertible Debentures and sold the Common Stock issued upon conversion in sales exempt from registration under the Securities Act. If the Loral Merger is consummated, the Common Stock will cease to be publicly traded or quoted on the Nasdaq National Market. ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATIONAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA). The following selected consolidated statements of operations and balance sheet data as of and for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 are derived from the Company's audited consolidated financial statements. The pro forma consolidated statement of operations data is derived from the unaudited pro forma condensed consolidated statement of operations. The pro forma data is not necessarily indicative of the results that would have been achieved nor are they indicative of the Company's future results. The data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein. From its inception in 1982 through January 20, 1995, when Orion 1 commenced commercial operations, Orion was a development stage enterprise. Because of Orion's exclusive management and control of Orion Atlantic as its sole general partner (subject to certain rights of approval by the Limited Partners), and Orion's aggregate 33 1/3% (through November 1995, 41 2/3% from December 1995 through January 31, 1997, thereafter 100%) partnership interest, the financial statements of Orion Atlantic are consolidated with the financial statements of Orion. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Pro Forma Condensed Consolidated Financial Statement" and the Consolidated Financial Statements and Notes thereto. In January 1997, the Company consummated the Merger (as defined below) as part of a series of transactions which significantly changed the Company. Those transactions, which are discussed in more detail in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K, are as follows: (i) the acquisition of all of the limited partnership interests which the Company did not already own in the Company's operating subsidiary, Orion Atlantic, that owns the Orion 1 satellite, along with rights to receive repayment of various advances by Orion Atlantic and various other rights, in an exchange transaction for 123,172 shares of Series C Preferred Stock (the "Exchange"); (ii) the acquisition by the Company of the only outstanding minority interest in the Company's subsidiary Orion Asia Pacific Corporation from British Aerospace Satellite Investments, Inc., in exchange (the "OAP Acquisition") for approximately 86,000 shares of the Company's Common Stock; (iii) a $710 million notes offering, with warrants representing approximately 2.6% of the outstanding Common Stock of the Company on a fully diluted basis (the "Bond Offering"), and (iv) the sale of $60 million of the Company's Convertible Debentures to British Aerospace Holdings, Inc. and Matra Marconi Space (the "Convertible Debentures Offering"). The Exchange and the OAP Acquisition resulted in the Company owning 100% of Orion Atlantic and its other significant subsidiaries and, therefore, a greatly simplified corporate structure. The Exchange also resulted in a significant increase in the Company's capital stock outstanding. The net proceeds of the Bond Offering and Convertible Debentures Offering were used by the Company to repay the credit facility it entered into in connection with the construction of the Orion 1 satellite, to pre-fund the first three years of interest payments on certain of the Notes, and will be used by the Company for the construction and launch of two additional satellites, Orion 2 and Orion 3. 33
1997 PRO 1997 FORMA (1) 1996 1995 1994 1993 (2) ---------- ---------- ---------- --------- ---------- -------- (dollars in thousands except share data) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues $ 72,741 $ 72,741 $ 41,847 $ 22,284 $ 3,415 $ 2,006 Interest expense 83,769 89,432 27,764 24,738 61 133 Net loss (3) (105,740) (108,099) (27,195) (26,915) (7,965) (7,886) Net loss per common share-basic and diluted $ (9.60) $ (9.86) $ (2.62) $ (3.07) $(0.86) (0.85) Weighted average common shares outstanding (4) 11,639,711 11,640,504 10,951,823 9,103,505 9,272,166 9,266,445 OTHER OPERATING DATA: Number of customers 301 182 $ 109 34 10 Capital expenditures $ 113,344 $ 16,376 $ 9,060 $ 51,103 44,130 Customer contract backlog (5) $ 269,548 $ 214,887 120,612 $ 39,122 $ 18,185 Sites (6) 682 322 151 57 -- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents $ 70,009 $ 32,187 55,112 11,219 $ 3,404 Restricted and segregated cash (7) 356,890 10,000 -- -- -- Total assets 896,492 358,264 389,075 340,176 271,522 Long-term debt (less current 790,671 218,237 250,669 230,175 185,294 portion) Limited Partners' interest in Orion Atlantic (8) -- 10,130 14,626 62,519 69,909 Redeemable preferred stock 76,734 20,902 20,358 14,555 -- Total stockholders' (deficit) (46,849) (436) 26,681 3,351 8,400 equity Book value per share (2.99) (.04) 2.46 .49 1.33
(1) Adjusted to reflect the pro forma effects of the Financings which are discussed in more detail in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K. (2) In 1993, Orion Atlantic terminated its commitment to purchase a second satellite from MMS Space Systems, resulting in a termination charge of $5 million. (3) As required by GAAP, net loss is presented before accretion of preferred stock and preferred stock dividends. For the years ended December 31, 1997, 1997 (pro forma), 1996, 1995, 1994 and 1993 preferred stock dividends and accretion are $6.0, $6.7, $1.4, $1.3, $0.6 and $0 million, respectively. (4) Computed on the basis described for net loss per common share in Note 2 to the Consolidated Financial Statements. (5) Backlog represents future revenues under contract. (6) Sites includes installed VSATs and additional transmission destinations (such as customer premises) that share a VSAT. (7) Restricted and segregated cash at December 31, 1997 represents (i) $117.8 million in a pledged account to fund interest payments on the Senior Notes and (ii) $216.7 million segregated by the Company and used only to invest in certain high quality short term investments to make payments for additional satellites and certain related costs and (iii) $22.4 million held in escrow related to the DACOM agreement. Restricted and segregated cash at December 31, 1996, includes $10.0 million held in escrow related to the DACOM agreement. (8) Represents amounts invested by Limited Partners (net of syndication costs related to the investments), adjusted for such Limited Partners' share of net losses. The interests of the Limited Partners were acquired by the Company in the Exchange. 34 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Orion Network Systems, Inc's ("Orion" or the "Company") principal business is the provision of satellite communications for private communications networks and video distribution and other satellite transmission services. From its inception in 1982 through January 20, 1995, when Orion 1 commenced commercial operations, Orion was a development stage enterprise. Prior to January 1995, Orion's efforts were devoted primarily to monitoring the construction, launch and in-orbit testing of Orion 1, product development, marketing and sales of interim private communications network services, raising financing and planning Orion 2 and Orion 3. Through January 31, 1997, Orion Satellite Corporation (whose name has been changed to Orion Network Services, Inc.) was the sole general partner in Orion Atlantic L.P. ("Orion Atlantic") and had a 41 2/3% equity interest in Orion Atlantic. As a result of Orion's control of Orion Atlantic, Orion's consolidated financial statements include the accounts of Orion Atlantic. All of Orion Atlantic's revenues and expenses are included in Orion's consolidated financial statements, with appropriate adjustment to reflect the interests of the Limited Partners in Orion Atlantic's losses prior to the Exchange (as described in Note A to the Condensed Consolidated Financial Statements). Orion acquired all the remaining interests in Orion Atlantic on January 31, 1997 during the Exchange as described below. The assets and liabilities reported in the consolidated balance sheet at December 31, 1997 primarily pertain to Orion Atlantic. Orion's consolidated financial statements also include the accounts of all other subsidiaries of Orion. See Note A to the Condensed Consolidated Financial Statements for a discussion of recent developments. All subsidiaries of Orion ("Subsidiary Guarantors"), other than inconsequential subsidiaries, have unconditionally guaranteed the Notes (as defined below) on a joint and several basis. No restrictions exist on the ability of Subsidiary Guarantors to pay dividends or make other distributions to Orion, except to the extent provided by law generally (e.g., adequate capital to pay dividends under state corporate laws). RECENT DEVELOPMENTS PENDING ACQUISITION OF THE COMPANY BY LORAL On October 7, 1997, Orion, Loral Space & Communications Ltd. ("Loral") and Loral Satellite Corporation, a wholly-owned subsidiary of Loral ("Merger Sub"), entered into an Agreement and Plan of Merger (as amended on February 11, 1998, the "Merger Agreement"), pursuant to which Merger Sub will merge with and into the Company, with the Company being the surviving corporation and thereby becoming a wholly-owned subsidiary of Loral (the "Loral Merger"). The Merger Agreement provides that (i) each share of Common Stock, excluding treasury shares and shares owned by Loral or its subsidiaries, will be converted into and exchanged for the right to receive the number of fully paid and nonassessable shares of common stock, par value $.01 per share, of Loral ("Loral Common Stock") equal to the Exchange Ratio (as described below), (ii) each share of the Company's Series A 8% Cumulative Redeemable Convertible Preferred Stock (the "Series A Preferred Stock"), Series B 8% Cumulative Redeemable Convertible Preferred Stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Senior Preferred Stock") and Series C Preferred Stock (the Series C Preferred Stock and Senior Preferred Stock are hereinafter referred to as the "Senior Preferred Stock") will be converted into and exchanged for the right to receive the number of fully paid and nonassessable shares of Loral Common Stock equal to the Exchange Ratio multiplied by the number of shares of Common Stock into which such share of Preferred Stock was convertible immediately prior to the Effective Time of the Loral Merger, (iii) each outstanding stock option to purchase shares of Orion Common Stock will be converted into an option to acquire the number of shares of Loral Common Stock equal to the Exchange Ratio multiplied by the number of shares of Common Stock for which such option was exercisable, and (iv) each outstanding warrant to purchase shares of Orion Common Stock will be converted into a warrant to acquire the number of shares of Common Stock equal to the Exchange Ratio multiplied by the number of shares of Company Common Stock for which such warrant was exercisable. 35 Pursuant to the terms of the Merger Agreement, the Exchange Ratio is determined as follows: (i) if the average of the volume-weighted average trading prices of Loral Common Stock for the twenty consecutive trading days on which trading of Loral Common Stock occurs ending the tenth trading day immediately prior to the closing date for the Loral Merger (the "Determination Price") is less than $24.458 but greater than $16.305, the Exchange Ratio is the quotient obtained by dividing $17.50 by the Determination Price, (ii) if the Determination Price is equal to or greater than $24.458, the Exchange Ratio is 0.71553 and (iii) if the Determination Price is equal to or less than $16.305, the Exchange Ratio is 1.07329. If the Merger were to close on March 20, 1998, the Determination Price would be 24.68652 and the Exchange Ratio would be 0.71553. A meeting of Orion's shareholders has been scheduled for March 20, 1998 to vote to approve the Loral Merger. The Company expects the Loral Merger to close following a favorable shareholder vote, however, there can be no assurance that the Loral Merger will be consummated. Although not a condition of the Loral Merger, Orion intends to seek an Internal Revenue Service ruling as to eligibility for a tax-free exchange. In connection with the Merger Agreement, certain principal stockholders of Orion and members of Orion's management have agreed to vote in favor of the Loral Merger and have granted to the Loral the right to purchase their securities in Orion for a price equal to the Loral Merger consideration under certain circumstances. The Company expects the Loral Merger to be consummated by the first quarter of 1998. The foregoing descriptions of the Merger Agreement and Principal Stockholder Agreement with Loral do not purport to be complete and are more fully described in Registration Statement No. 333-46407 on Form S-4, and have been filed as exhibits 2.1, 2.2 and 2.3, respectively, and are incorporated herein by reference. More information on Loral is also available in the foregoing Registration Statement No. 33-46407. OTHER RECENT DEVELOPMENTS In January 1997, Orion consummated a series of transactions that are described below. ACQUISITION OF ORION ATLANTIC LIMITED PARTNERSHIP INTERESTS IN THE EXCHANGE On January 31, 1997, the Company acquired all of the limited partnership interests which it did not already own in the Company's operating subsidiary, Orion Atlantic, that owns the Orion 1 satellite. Specifically, the Company acquired the Orion Atlantic limited partnership interests and other rights relating thereto held by British Aerospace Communications, Inc., COM DEV Satellite Communications Limited, Kingston Communications International Limited, Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate of Matra Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of Nissho Iwai Corp. (collectively, the "Exchanging Partners"). Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the "Exchange Agreement"), the Exchanging Partners exchanged (the "Exchange"), their Orion Atlantic limited partnership interests for 123,172 shares of a newly created class of the Company's Series C 6% Cumulative Convertible Redeemable Preferred Stock (the "Series C Preferred Stock"). In addition, the Company acquired certain rights held by certain of the Exchanging Partners' to receive repayment of various advances (aggregating approximately $41.6 million at January 31, 1997). The 123,172 shares of Series C Preferred Stock issued in the Exchange are convertible into approximately 7 million shares of the Company's Common Stock. As a result of the Exchange, certain of the Exchanging Partners became principal stockholders of the Company. The Exchange is described in greater detail under the caption "The Merger, the Exchange and the Debenture Investments" in the Company's Registration Statement on Form S-4 (Registration No. 333-19795). The Exchange and the acquisition by the Company of the only outstanding minority interest in the Company's subsidiary Orion Asia Pacific Corporation from British Aerospace Satellite Investments, Inc. on January 8, 1997 (in exchange for approximately 86,000 shares of the Company's Common Stock) results in the Company owning 100% of Orion Atlantic and its other significant subsidiaries and, therefore, a greatly simplified corporate structure. 36 THE MERGER The Exchange was conducted on a tax-free basis by means of a Merger (defined below) that was consummated on January 31, 1997. Pursuant to the Exchange Agreement, Orion Oldco Services, Inc., formerly known as Orion Network Systems, Inc. ("Old Orion"), formed the Company as a new Delaware corporation with a certificate of incorporation, bylaws and capital structure substantially identical in all material respects with those of Old Orion. Also pursuant to the Exchange Agreement, the Company formed a wholly owned subsidiary, Orion Merger Company, Inc. ("Orion Merger Subsidiary"). Pursuant to an Agreement and Plan of Merger, Orion Merger Subsidiary was merged with and into Old Orion, and Old Orion became a wholly owned subsidiary of the Company (the "Merger"). On January 31, 1997, the effective time of the Merger, all of the stockholders of Old Orion received stock in the Company with substantially identical rights to the Old Orion stock they held prior to the effective time of the Merger. Following the Merger, the Company changed its name from Orion Newco Services, Inc. to Orion Network Systems, Inc. and the Company's wholly owned subsidiary Orion Network Systems, Inc. changed its name to Orion Oldco Services, Inc. The Exchange and Merger are described in greater detail under the caption "The Merger, the Exchange and the Debenture Investments" in the Company's Registration Statement on Form S-4 (Registration No. 333-19795). The Company is the successor issuer to Old Orion and filed a Registration Statement on Form 8-B with the Securities and Exchange Commission on January 31, 1997, to register all the issued and outstanding shares of Common Stock and preferred stock of the Company. The Company is considered the successor to Old Orion for purposes of the Nasdaq National Market and the Company's Common Stock is quoted on the Nasdaq National Market under the trading symbol "ONSI." FINANCINGS On January 31, 1997, the Company completed a $710 million bond offering (the "Bond Offering") comprised of approximately $445 million of Senior Note Units, each of which consists of one 11.25% Senior Note due 2007 (a "Senior Note") and one Warrant to purchase 0.8463 shares of common stock, par value $.01 per share ("Common Stock") of the Company (a "Senior Note Warrant"), and approximately $265.4 million of Senior Discount Note Units, each of which consists of one 12.5% Senior Discount Note due 2007 (a "Senior Discount Note," and together with the Senior Notes, the "Notes") and one Warrant to purchase 0.6628 shares of Common Stock of the Company (a "Senior Discount Note Warrant, and together with the Senior Note Warrants, the "Warrants"). Interest on the Senior Notes will be payable semi-annually in cash on January 15 and July 15 of each year, commencing July 15, 1997. The Senior Discount Notes will not pay cash interest prior to January 15, 2002. Thereafter, cash interest will accrue until maturity at an annual rate of 12.5% payable semi-annually on January 15 and July 15 of each year, commencing July 15, 2002. The exercise price for the Warrants will be $.01 per share of Common Stock of the Company. The shares of Common Stock of the Company initially issuable upon exercise of the Warrants represent approximately 2.62% of the outstanding Common Stock of the Company on a fully diluted basis as of January 31, 1997. The Bond Offering was underwritten by Morgan Stanley & Co. Incorporated and Merrill Lynch & Co. The foregoing description of the Notes is qualified in its entirety by the description of such Notes in the Indentures and Notes documents, copies of which have been filed as exhibits to this Annual Report on Form 10-K. On January 31, 1997, the Company also completed the sale of $60 million of its convertible junior subordinated debentures (the "Convertible Debentures") to two investors, British Aerospace Holdings, Inc. ("British Aerospace") and Matra Marconi Space UK Limited ("Matra Marconi Space"). British Aerospace purchased $50 million of the Convertible Debentures and Matra Marconi Space purchased $10 million of the Convertible Debentures (collectively, the "Convertible Debentures Offering," and together with the Bond Offering, the "Financings"). The Convertible Debentures will mature in 2012, and will bear interest at a rate of 8.75% per annum to be paid semi-annually in arrears solely in Common Stock of the Company. The Convertible Debentures are subordinated to all other indebtedness of the Company, including the Notes. The net proceeds of the Bond Offering and Convertible Debentures Offering were used by the Company to repay the Orion 1 Credit Facility, pre-fund the first three years of interest payments on certain of the Notes, and will be used to build and launch of two additional satellites, Orion 2 and Orion 3. 37 ACQUISITION OF TELEPORT EUROPE On March 26, 1997, Orion acquired German-based Teleport Europe GmbH (now known as Orion Network Systems-Europe GmbH) ("Orion Europe") a communications company specializing in private satellite networks for voice and data services. Orion purchased the shares of Orion Europe held by the German companies, Vebacom GmbH and RWE Telliance AG, now known as o.tel.o for approximately $9 million. In addition, Orion acquired Orion Europe's licenses and operating agreements to provide satellite network services in 40 countries, including 17 countries in which Orion previously did not provide service. RECENT REGISTRATION The Company registered 5,052,202 shares of Common Stock issuable upon conversion of (i) the Series C Preferred Stock (other than the Series C Preferred Stock held by British Aerospace) and (ii) Matra Marconi's Convertible Debentures on a Registration Statement on Form S-3 (the "Exchanging Partners Registration Statement"), which Exchanging Partners Registration Statement became effective on November 19, 1997 (Registration No. 333-40123). As of January 31, 1998, approximately 3.9 million shares of Common Stock (issuable upon the conversion of 56,492 shares of the Series C Preferred Stock and Matra Marconi's Convertible Debentures) had been sold pursuant the Exchanging Partners Registration Statement. British Aerospace has recently converted its Convertible Debentures and sold the Common Stock issued upon conversion in sales exempt from registration under the Securities Act. If the Loral Merger is consummated, the Common Stock will cease to be publicly traded or quoted on the Nasdaq National Market. ORION 2 AND ORION 3 COMMENCEMENT OF CONSTRUCTION Orion 2 and Orion 3 Construction Contracts. Orion commenced construction of Orion 2 in February 1997 under a satellite procurement contract with Matra Marconi Space for Orion 2. The contract for Orion 2 provides for delivery in orbit of Orion 2 by June 1999, excluding launch insurance and performance incentives, for a firm fixed price of $201 million. Orion commenced construction of Orion 3 in December 1996 and entered into a satellite contract with Hughes Space and Communications International, Inc. for Orion 3 in January 1997. The contract for Orion 3 provides for delivery in orbit of Orion 3 by December 1998, excluding launch insurance, for a firm fixed price of $208 million excluding launch insurance and performance incentives. Pre-Construction Lease on Orion 3. Orion has entered into a contract with DACOM Corp., a Korean communications company ("DACOM"), under which DACOM will, subject to certain conditions, lease eight dedicated transponders on Orion 3 for 13 years, in return for approximately $89 million, payable over a period from December 1996 through seven months following the lease commencement date for the transponders (which is scheduled to occur by January 1999). Payments are subject to refund unless Orion 3 commences commercial operation by June 30, 1999. OVERVIEW Orion's revenues are principally generated under three to five year contracts for delivery of communications services. Such revenues are derived principally from recurring monthly fees from its customers, although many contracts include initial non-recurring installation and other fees. These non-recurring fees generally are structured to substantially offset the Company's actual costs of installation of the customer's site-based equipment. The revenues from each contract vary, depending upon the type of service, amount of capacity, data handling ability of the network, the number of VSATs (which generally are owned by Orion), value-added services and other factors. Depending on the complexity of the services to be provided to a customer, the period between the date of signature of a contract and the commencement of actual services (and receipt of fees) typically ranges from 30 days to six months. Substantially all of Orion's contracts are denominated in U.S. dollars, although some contracts are denominated in pounds sterling, deutschemarks, Austrian shillings or French francs. Orion begins to record revenues under its contracts upon service commencement to the customer. 38 The services provided by Orion have been subject to decreasing prices over recent years and this pricing pressure is expected to continue (and may accelerate) for the foreseeable future, particularly if, as expected, satellite capacity continues to increase. Orion will need to increase its volume of sales in order to compensate for such price reductions. Orion believes that customers will increase the data speeds in their communications networks to support new applications, and that such upgrading of customer networks will lead to increased revenues that will mitigate the effect of price reductions. However, there can be no assurance that this will occur. Orion expects to continue to incur net losses and negative cash flow (after payments for capital expenditures and interest) for the foreseeable future. Orion's direct cost of services includes principally (i) costs relating to the installation, maintenance and licensing of VSAT earth stations at its customers' premises; (ii) satellite lease payments for transponder capacity (generally for services outside of the Orion 1 footprint); (iii) in-orbit insurance premiums; and (iv) personnel costs and travel related to TT&C, network monitoring, network design and similar activities. These costs will increase as the Company's business grows. Specifically, in-orbit insurance costs will increase significantly following the launches of Orion 2 and Orion 3. The Company constructed its TT&C facilities to control two satellites. As a result, the Company anticipates a slight increase in costs with Orion 2 and a more substantial increase in costs with Orion 3, which will require separate TT&C facilities and associated miscellaneous expenses. Sales and marketing expenses consist of salaries, sales commissions (including commissions to third party sales representatives), travel and promotional expenses. The Company, commenced a significant expansion of its marketing program in 1997 and expects to continue this expansion through 1998. Due to the complexity of the Company's services, and the continued expansion of sales personnel, sales and marketing expense is expected to increase significantly during 1998. Engineering and technical expenses, consisting principally of personnel costs and travel. General and administrative expenses consist of personnel costs other than for selling and engineering, information systems, professional services, and occupancy costs. These costs will increase generally as the Company's operations expand. Depreciation and amortization expenses result mainly from the depreciation of the Orion 1 satellite, VSATs and the related equipment to service the expansion of the private network communication services business (see Note 2 of the Notes to Consolidated Financial Statements) and will increase substantially after the launch of Orion 2 and Orion 3. Interest income is primarily the result of interest earned on the proceeds from Orion's private and public equity offerings. Interest costs increased substantially as a result of the bond offering completed January 31, 1997. Orion's costs (other than sales commissions) generally do not vary substantially with the amount of revenue from the Orion 1 satellite. RESULTS OF OPERATIONS Consolidation of Orion Network Systems - Europe GmbH ("Orion Europe"). The Company has consolidated the operations of Orion Europe for the year ended December 31, 1997, retroactively to January 1, 1997. The effect of this consolidation on operations prior to acquisition was to increase consolidated revenues by approximately $4.1 million, increase total operating expenses by approximately $4.0 million and other expenses by approximately $0.7 million. The preacquisition loss of Orion Europe of $0.6 million has been deducted from the consolidated statement of operations for the year ended December 31, 1997. YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 Revenue. Total revenue for the year ended December 31, 1997 was $72.7 million including $15.4 million from Orion Europe, compared to $41.8 million for the same period in 1996, an increase of 74%. Revenues from private communications network services were $36.8 million in 1997 compared to $17.0 million for the comparable period in 1996, as the number of sites in services increased to 682 as of December 31, 1997, from 322 at December 31, 1996. Revenues from video distribution and other satellite transmission services were $31.4 million for 1997 compared to $24.8 million for the same period in 1996. OPERATING EXPENSES Direct expenses. Direct expenses for the year ended December 31, 1997, were $26.5 million compared to $15.5 million for the same period in 1996. The increase of 71% was primarily attributable to Orion Europe direct expenses of $8.3 million, the cost of equipment associated with a sales-type equipment lease to an existing customer, leased space segment, site maintenance and other operational costs associated with the increased sites in service for the period. 39 Sales and marketing expenses. Sales and marketing expenses were $19.4 million, including $1.5 million relating to Orion Europe for the year ended December 31, 1997, as compared to $11.5 million in the same period of 1996. The increase of $7.9 million or 69% is primarily compensation costs for the Company's significant expansion of its sales force, as well as additional costs for the expanded marketing program during 1997. This expansion includes additional commissions, consulting and advertising associated with the growth in private communications network service business.. Engineering and technical expenses. Engineering and technical expenses were $7.8 million in the year ended December 31, 1997, as compared to $5.2 million for the comparable period in 1996. The increase was primarily due to additional engineering and technical staff associated with the Orion Europe acquisition. General and administrative expenses. General and administrative expenses were $14.0 million for the year ended December 31, 1997, compared to $9.1 million for the period ended December 31, 1996. The increase of $4.9 million, or 54%, for the year ended December 31, 1997 was primarily due to additional administrative staff associated with the Orion Europe acquisition and outside services associated with the planned Loral Merger. Depreciation and amortization. Depreciation expense for the year ended December 31, 1997, was $48.2 million, an increase of $11.2 million, or 30%, over the same period in 1996. The increase is primarily a result of depreciation on the step up in basis on the Orion 1 Satellite, the amortization of excess cost over fair value of net assets acquired from the acquisition of the Limited Partners' interest in Orion Atlantic and depreciation of ground equipment to service the expansion of the private network communication service business and depreciation and amortization relating to Orion Europe. Interest. Interest income was $24.7 million for the year ended December 31, 1997, compared to $2.3 million for the year ended December 31, 1996. The increase in interest income ($22.4 million or 974%) during 1997, is primarily a result of interest earned on the proceeds from the Company's public bond offering in January 1997. Interest expense was $83.8 million for the year ended December 31, 1997, compared to $27.8 million for the comparable period in 1996. The increase in interest expense of $56.0 million in 1997 is attributable to additional interest resulting from the completion of the Company's financing in January 1997. Other. Other expenses were $.5 million for the year ended December 31, 1997, compared to $.02 million for the same period in 1996. Net loss. The Company incurred a net loss of $105.7 million, compared to a net loss of $27.2 million for the years ended December 31, 1997 and 1996, respectively, after deduction of the limited partners' and minority interests' share in the Company's losses before minority interests' of $12.0 million and $34.6 million, respectively. Net loss is expected to increase substantially in subsequent periods as a result of interest expense on the notes issued in connection with the offering in January 1996 and the elimination of the minority interests in Orion Atlantic. YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 Revenue. Total revenue for the year ended December 31, 1996 was $41.8 million, compared to $22.3 million for the same period in 1995, an increase of 87%. Revenues from private communications network services were $17.0 million in 1996 compared to $10.0 million for the comparable period in 1995, as the number of sites in service increased to 322 as of December 31, 1996, from 151 at December 31, 1995. Revenues from video distribution and other satellite transmission services were $24.8 million for 1996 compared to $12.3 million for the same period in 1995 resulting from a substantial increase in customers for these services in 1996. OPERATING EXPENSES Direct expenses. Direct expenses for the year ended December 31, 1996, were $15.5 million compared to $17.0 million for the same period in 1995. The decrease of $1.5 million, or 9%, was primarily attributable to accruals for satellite incentive obligations owed by Orion to the contractor under the Orion 1 Satellite Contract during the initial satellite deployment period from January 20, 1995 through June 30, 1995. The Company capitalized the present value of the remaining satellite incentive obligation of approximately $14.8 million, effective July 1, 1995, as part of the cost of the satellite. As of December 31, 1996, Orion had obligations with a present value of approximately $22.4 million with respect to satellite incentives. 40 Sales and marketing expenses. Sales and marketing expenses were $11.5 million for the year ended December 31, 1996, as compared to $8.6 million in the same period of 1995. The increase of $2.9 million, or 34% is primarily attributable to sales commissions, third party sales representative fees and ground operator fees associated with the growth in the private communications network service business. Engineering and technical expenses. Engineering and technical expenses were $5.2 million in the year ended December 31, 1996, as compared to $5.6 million for the comparable period in 1995. General and administrative expenses. General and administrative expenses were $9.1 million for the year ended December 31, 1996, compared to $6.6 million for the period ended December 31, 1995. The increase of $2.5 million, or 38%, for the year ended December 31, 1996 was primarily due to additional administrative staff. Depreciation and amortization. Depreciation and amortization expense for the year ended December 31, 1996, was $36.9 million, an increase of $5.5 million, or 18%, over the same period in 1995. The increase is primarily a result from depreciation of VSATs and other ground equipment to service the expansion of the private network services business and depreciation of the Orion 1 satellite, which was placed in service January 20, 1995. Interest. Interest income was $2.3 million for the year ended December 31, 1996, compared to $1.9 million for the year ended December 31, 1995. The increase in interest income ($0.4 million or 21%) during 1996 is primarily a result of interest earned on increased cash balances from the proceeds of the Company's initial public offering in August 1995. Interest expense was $27.8 million for the year ended December 31, 1996, compared to $24.7 million for the comparable period in 1995. The increase in interest expense of $3.1 million in 1996 is attributable to expensing interest (including commitment fees, interest accretion associated with the Orion 1 satellite incentive obligation and amortization of deferred financing costs) from the in-service date of Orion 1 and the impact of an interest rate cap agreement in 1996. Prior to the in-service date of Orion 1, substantially all interest expense was capitalized. Other. Other expenses were $.02 million for the year ended December 31, 1996, compared to $3.4 million for the same period in 1995. The decrease is primarily related to costs incurred in connection with Orion Atlantic's plans to raise financing for Orion 2, which plans were deferred in November 1995. Net loss. The Company incurred a net loss of $27.2 million, compared to a net loss of $26.9 million for the years ended December 31, 1996 and 1995, respectively, after deduction of the limited partners' and minority interests' share in the Company's losses before minority interests' of $34.6 million and $46.1 million, respectively. Net loss is expected to increase substantially in subsequent periods as a result of interest expense on the notes issued in connection with the offering in January 1996 and the elimination of the minority interests in Orion Atlantic. LIQUIDITY AND CAPITAL RESOURCES Prior Funding. Orion has required significant capital for operating and investing activities in the development of its business, and will continue to need to expend significant additional capital in the future to develop fully its global satellite communications system. The Company's funding for its operations through January 1997 had been provided primarily by the sale of equity securities, including the completion of its initial public offering in August 1995 which generated proceeds to the Company of approximately $52 million (net of underwriting discounts), bank loans, vendor financing, lease arrangements and short-term loans from its investors. Funding for the construction and launch of the Orion 1 satellite and related facilities was fully committed through $90 million of equity from the limited partners of Orion Atlantic, an aggregate of $251 million under a secured bank credit facility and approximately $11 million under other debt facilities, dedicated primarily to the construction of the TT&C facility, which is being used to control Orion 1. The Orion 1 Credit Facility was refinanced in January 1997 with the proceeds from the Bond Offering, and concurrently with the Bond Offering, Orion acquired all of the limited partnership interests (those which it did not already own) in Orion Atlantic in exchange for 123,172 shares of Series C Convertible Preferred Stock representing approximately 7 million underlying common shares, of which approximately 3.2 million shares have been sold under the Exchanging Partners Registration Statement as of January 31, 1998. 41 Existing Capital Resources. The net proceeds of the January 1997 Bond Offering to the Company were approximately $684 million, and the net proceeds of the Convertible Debentures Offering were approximately $59 million. Of the Bond Offering proceeds, approximately $222 million was used for repayment of the Orion 1 Credit Facility (including payment of accrued interest and hedge breakage costs), approximately $24 million was used to make certain initial payments for the Orion 2 Satellite Contract, approximately $13 million was used to pay accrued satellite incentive fees under the Orion 1 satellite contract and approximately $4 million was used to pay amounts owing to STET, a former limited partner of Orion Atlantic. As of December 31, 1997, the Company had cash and cash equivalents of $70 million and restricted and segregated assets of $357 million including $217 million which was segregated in the financial statements by the Company to be used to make payments for additional satellites and certain related costs. The restricted cash consisted of $117.8 million placed in a pledged account (to pre-fund the first six interest payments on the Senior Notes). Additionally, included in restricted and segregated assets is $22 million subject to refund pending the successful launch and commencement of commercial operation of Orion 3 as required by the DACOM agreement. Existing Indebtedness Notes. In the Bond Offering, Orion issued approximately $445 million of 11.25% Senior Notes due 2007 and approximately $484 million principal amount at maturity ($265.4 million initial value) of 12.5% Senior Discount Notes due 2007. Interest on the Senior Notes is payable semi-annually in cash on January 15 and July 15 of each year, commencing July 15, 1997. The Senior Discount Notes do not accrue cash interest prior to January 15, 2002. Thereafter, cash interest will accrue until maturity at an annual rate of 12.5% payable semi-annually on January 15 and July 15 of each year, commencing July 15, 2002. The Notes have the benefit of Guarantees issued by each of the material subsidiaries of the Company. The Senior Notes initially are secured by the securities purchased with the $134 million held in a pledged account until the Company makes the first six scheduled interest payments on the Senior Notes and thereafter the Senior Notes will be unsecured. The Senior Discount Notes are unsecured. The Notes are redeemable, at the Company's option, in whole or in part, at any time on or after January 15, 2002 at specified redemption prices. In the event of a change of control (as defined in the indentures relating to the Notes), the Company will be obligated to make an offer to purchase all outstanding Notes at a purchase price equal to 101% of their principal or accreted value, plus accrued and unpaid interest thereon to the repurchase date. Since the Notes have traded in recent periods at prices above 101% of their principal amount, the Company does not anticipate that the holders of a material principal amount of the Notes will accept the offer to repurchase. The indebtedness evidenced by the Notes ranks pari passu in right of payment with all existing and future unsubordinated indebtedness of the Company and the guarantors, respectively, and senior in right of payment to all existing and future subordinated indebtedness of the Company and the guarantors. The indentures relating to the Notes (the "Indentures") contain certain covenants which, among other things, restrict distributions to stockholders of the Company, the repurchase of equity interests in the Company and the making of certain other investments and restricted payments, the incurrence of additional indebtedness by the Company and its restricted subsidiaries, the creation of certain liens, certain asset sales, transactions with affiliates and related parties, and mergers and consolidations. The foregoing description of the Notes is qualified in its entirety by the description of such Notes in the Indentures and Notes documents, copies of which have been filed as exhibits to this Annual Report on Form 10-K. Convertible Debentures. In January 1997, the Company also completed the sale of $60 million of its convertible junior subordinated debentures to British Aerospace ($50 million) and Matra Marconi Space ($10 million). The Convertible Debentures would have matured in 2012, and bore interest at a rate of 8.75% per annum to be paid semi-annually in arrears solely in Common Stock of the Company at prices of between $10.21 and $14.00 per share, depending on the average trading prices of the Common Stock during the applicable measurement period. The Convertible Debentures (and accrued but unpaid interest) were convertible in whole or in part into Common Stock at any time at an initial conversion rate of $14.00 per share, as adjusted for stock splits or other recapitalizations, certain dividends or issuances of stock to all stockholders, issuances of stock (or certain rights to acquire stock) at a price per share below $14.00, and other events. All of the Convertible Debentures were converted into approximately 4.3 million shares of common stock between December 1997 and March 1998. The Common Stock issuable upon conversion of Matra Marconi Space's Convertible Debentures was recently sold pursuant to the Exchanging Partners' Registration Statement. British Aerospace has recently converted its Convertible Debentures and sold the Common Stock issued upon conversion in sales exempt from registration under the Securities Act. 42 Other Indebtedness and Other Obligations. At December 31, 1997, the Company had outstanding indebtedness of approximately $6.0 million under a seven year term loan provided by General Electric Capital Corporation ("GECC") for the TT&C facility, which is secured by the TT&C facility and various assets relating thereto. Additionally, at December 31, 1997 the Company had obligations of approximately $6.5 million payable to the manufacturer of Orion 1 through 2007. Current Funding Requirements. While the Company believes its existing resources are adequate to fund its needs through 1998, based upon its current expectations for growth, the Company anticipates it will have substantial funding requirements over the next three years to fund the costs of Orion 2 and Orion 3, the purchase of VSATs, other capital expenditures and other capital needs. Interest charges on the Senior Notes over the next three years are fully provided for by Restricted and Segregated Cash. The in-orbit delivered costs of the Orion 2 and Orion 3 satellites are expected to aggregate approximately $468 million. In addition to the $93 million paid in 1997, Orion will need to make payments of approximately $329 million, $45 million and $.3 million in 1998, 1999 and 2000, respectively. These amounts include the Company's estimate regarding the cost of launch insurance. The contracts for Orion 2 and Orion 3 provide firm fixed prices for the construction and launch of those satellites and provides for penalties in event of late delivery by the manufacturer, however, the Company's actual payments could be substantially higher due to any change orders for the satellites, insurance rates, delays and other factors. In connection with the Bond Offering, the Company segregated $407 million of the net proceeds to make payments for additional satellites and certain related costs (and interest payments on the Senior Notes). The Company also can use a portion of its working capital for such costs if it chooses to do so. The Company had working capital of $85 million at December 31, 1997. However, there can be no assurance that cost increases for Orion 2 and/or Orion 3 due to change orders, insurance rates or construction delays, among other factors may not increase the Company's capital requirements or that the Company's growth may vary from its expectations resulting in changes in its cash requirements or expected cash. The balance of the Company's funding requirements are dependent upon its growth and cash flow from operations. The Company cannot predict whether its existing resources and cash flows will be adequate to cover its future cash needs. If existing resources and cash flows are not sufficient to cover the Company's future cash needs, the Company will need to raise additional financing. The Company does not have a revolving credit facility or other source of readily available capital. Sources of additional capital may include public or private debt, equity financings or strategic investments. To the extent that the Company seeks to raise additional debt financing, the Indentures limit the amount of such additional debt (under a variety of provisions contained in such Indentures) and prohibit the Company from using Orion 1, Orion 2 or Orion 3 as collateral for indebtedness for money borrowed. If the Company requires additional financing and is unable to obtain such financing from outside sources in the amounts and at the times needed, there would be a material adverse effect on the Company. TAXES As of December 31, 1997, Orion had net operating loss carryforwards for federal tax purposes of approximately $162 million. The ability of Orion to benefit from net operating losses for federal income tax purposes will depend on a number of factors, including whether Orion has sufficient income from which to deduct the losses, limitations that may arise as a result of changes in the ownership of Orion, including as a result of the Transactions and other factors, and certain other limitations which may significantly reduce the economic benefit of those losses to Orion. Due to uncertainty regarding its ability to realize the benefits of its net deferred tax assets, including such net operating loss carryforwards, the Company has established a valuation allowance for the full amount of its net deferred tax assets. EFFECT OF INFLATION Orion believes that inflation has not had a material effect on the results of operations to date. 43 ITEM 8. REPORT OF INDEPENDENT AUDITORS The Board of Directors Orion Network Systems, Inc. We have audited the accompanying consolidated balance sheets of Orion Network Systems, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Orion Network Systems, Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /S/ ERNST & YOUNG LLP Washington, DC February 20, 1998 44 ORION NETWORK SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 1997 1996 ----------- ---------- ASSETS Current assets: Cash and cash equivalents $ 70,008,657 $ 32,187,807 Restricted assets 50,064,014 -- Accounts receivable (less allowance for doubtful accounts of $734,000 and $100,000 at December 31, 1997 and 1996, respectively) 11,780,972 6,473,316 Prepaid expenses and other current assets 6,846,598 3,583,403 ----------- ---------- Total current assets 138,700,241 42,244,526 =========== ========== Restricted and segregated assets 306,825,961 10,000,000 Property and equipment, at cost: Land 73,911 73,911 Telecommunications equipment 40,654,418 25,342,528 Furniture and computer equipment 8,626,501 4,849,711 Satellite and related equipment 322,159,088 321,247,346 ----------- ---------- 371,513,918 351,513,496 Less: accumulated depreciation (77,079,857) (68,224,957) Satellite construction in progress 106,843,174 4,560,844 ----------- ---------- Net property and equipment 401,277,235 287,849,383 Deferred financing costs, net 22,510,041 12,918,233 Other assets, net 27,178,809 5,252,302 ----------- ---------- Total assets $ 896,492,287 $ 358,264,444 =============== ===============
See Notes to Consolidated Financial Statements. 45 ORION NETWORK SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ LIABILITIES AND STOCKHOLDERS' deficit Current liabilities: Accounts payable $ 5,230,567 $ 6,411,028 Accrued liabilities 10,594,952 7,653,208 Other current liabilities 7,129,861 5,406,072 Interest payable 24,771,509 8,583,882 Current portion of long-term debt 6,406,143 34,975,060 ------------- ------------- Total current liabilities 54,133,032 63,029,250 Long-term debt 790,670,606 218,236,839 Other liabilities 21,803,582 46,402,299 Limited Partners' interest in Orion Atlantic -- 10,130,058 Commitments and contingencies Redeemable preferred stock: Series A 8% Cumulative Redeemable Convertible Preferred Stock, $.01 par value; 15,000 shares authorized; 6,933 and 13,871 shares issued and outstanding at December 31, 1997 and 1996, respectively, plus accrued dividends 8,613,508 16,097,880 Series B 8% Cumulative Redeemable Convertible Preferred Stock, $.01 par value; 5,000 shares authorized; 2,059 and 4,298 shares issued and outstanding at December 31, 1997 and 1996, respectively, plus accrued dividends 2,466,755 4,804,486 Series C 6% Cumulative Redeemable Convertible Preferred Stock, $.01 par value; 150,000 shares authorized; 82,641 and 0 shares issued and outstanding at December 31, 1997 and 1996, respectively, plus accrued dividends and accretion 65,653,949 -- Stockholders' deficit: Common stock, $.01 par value; 40,000,000 shares authorized; 15,959,089 and 11,244,665 issued and outstanding at December 31, 1997 and 1996, respectively 159,591 112,447 Capital in excess of par value 153,294,210 86,932,391 Treasury stock, 269,274 and 259,515 shares (91,490) -- Foreign currency translation adjustment (955,800) -- Accumulated deficit (199,255,656) (87,481,206) ------------- ------------- Total stockholders' deficit (46,849,145) (436,368) ------------- ------------- Total liabilities and stockholders' deficit $ 896,492,287 $ 358,264,444 ============= =============
See Notes to Consolidated Financial Statements. 46 ORION NETWORK SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 -------------- --------------- --------------- Service revenue $ 72,740,631 $ 41,847,292 $ 22,283,882 Operating expenses: Direct 26,531,298 15,457,260 16,968,926 Sales and marketing 19,423,372 11,465,040 8,613,399 Engineering and technical services 7,750,208 5,190,619 5,554,690 General and administrative 13,955,718 9,138,973 6,574,202 Depreciation and amortization 48,161,257 36,948,158 31,403,376 -------------- --------------- --------------- Total operating expenses 115,821,853 78,200,050 69,114,593 -------------- --------------- --------------- Loss from operations (43,081,222) (36,352,758) (46,830,711) Other expense (income): Interest income (24,711,461) (2,313,842) (1,924,822) Interest expense 83,769,168 27,764,126 24,738,446 Other 507,089 23,649 3,382,506 -------------- --------------- --------------- Total other expense, net 59,564,796 25,473,933 26,196,130 -------------- --------------- --------------- Loss before extraordinary loss on extinguishment of debt, minority interest and preacquisition (102,646,018) (61,826,691) (73,026,841) loss of acquired subsidiary Extraordinary loss on extinguishment of debt (15,763,220) -- -- Limited Partners' interest in the net loss of Orion Atlantic 12,042,978 34,631,281 46,111,663 Preacquisition loss of acquired subsidiary 626,246 -- -- -------------- --------------- --------------- Net loss (105,740,014) (27,195,410) (26,915,178) Preferred stock dividend, net of forfeitures 6,034,436 1,369,665 1,329,007 -------------- --------------- --------------- Net loss attributable to common stockholders $ (111,774,450) $ (28,565,075) $ (28,244,185) ============== =============== =============== Extraordinary loss per share, net of minority interest - basic and diluted $ (.56) $ -- $ -- ============== =============== =============== Net loss per common share-basic and diluted $ (9.60) $ (2.62) $ (3.07) ============== =============== =============== Weighted average common shares outstanding 11,639,711 10,951,823 9,103,505 ============== =============== ===============
See Notes to Consolidated Financial Statements. 47 ORION NETWORK SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK -------------------------- CAPITAL IN NUMBER EXCESS OF ACCUMULATED TREASURY OF SHARES AMOUNT PAR VALUE DEFICIT STOCK (1) --------- ------ --------- ------- --------- Balance at December 31, 1994 7,045,523 $ 70,455 $ 33,952,062 $ (30,671,946) $ -- Issuance of common stock 4,002,941 40,030 50,960,330 -- -- Exercise of stock options and warrants 67,501 675 573,221 -- -- Preferred stock dividend, net of forfeitures -- -- -- (1,329,007) -- Net loss for 1995 -- -- -- (26,915,178) -- --------- ------------- ------------- -------------- ----------- Balance at December 31, 1995 11,115,965 111,160 85,485,613 (58,916,131) -- Conversion of preferred stock to common stock 91,071 911 804,034 -- -- Issuance of stock warrants -- -- 300,000 -- -- Exercise of stock options and warrants 37,629 376 342,744 -- -- Preferred stock dividend, net of forfeitures -- -- -- (1,369,665) -- Net loss for 1996 -- -- -- (27,195,410) -- --------- ------------- ------------- -------------- ----------- Balance at December 31, 1996 11,244,665 112,447 86,932,391 (87,481,206) -- Issuance of common stock 11,286 113 142,317 -- -- Conversion of preferred stock to common stock 3,351,728 33,517 38,811,976 -- -- Conversion of debentures to common stock 735,292 7,353 10,284,314 -- -- Issuance of common stock for the purchase of APSC 85,715 857 1,199,143 -- -- Issuance of common stock for interest payments 205,229 2,052 2,622,947 -- -- Issuance of common stock for preferred stock dividend 120,954 1,210 2,069,252 -- -- payments Issuance of warrants relating to Senior Notes and Senior Discount Notes, net -- -- 9,223,674 -- -- Exercise of stock options and warrants 176,489 1,765 1,764,295 -- -- Employee stock purchase plan 27,731 277 243,901 -- -- Preferred stock dividend and accretion, net of forfeitures -- -- -- (6,034,436) -- Foreign currency translation -- -- -- -- -- Purchase of treasury stock -- -- -- -- (91,490) Net loss for 1997 -- -- -- (105,740,014) -- ---------- ------------- ------------- ------------- ---------- Balance at December 31, 1997 15,959,089 $ 159,591 $ 153,294,210 $(199,255,656) $ (91,490) ========== ============= ============= ============= ==========
FOREIGN TOTAL CURRENCY STOCKHOLDERS' TRANSLATION EQUITY (DEFICIT) ----------- ---------------- Balance at December 31, 1994 $ -- $ 3,350,571 Issuance of common stock -- 51,000,360 Exercise of stock options and 573,896 warrants -- Preferred stock dividend, net of forfeitures -- (1,329,007) Net loss for 1995 -- (26,915,178) ---------- -------------- Balance at December 31, 1995 -- 26,680,642 Conversion of preferred stock to common stock -- 804,945 Issuance of stock warrants -- 300,000 Exercise of stock options and warrants -- 343,120 Preferred stock dividend, net of forfeitures -- (1,369,665) Net loss for 1996 -- (27,195,410) ---------- -------------- Balance at December 31, 1996 -- (436,368) Issuance of common stock -- 142,430 Conversion of preferred stock to common stock -- 38,845,493 Conversion of debentures to common stock -- 10,291,667 Issuance of common stock for the purchase of APSC -- 1,200,000 Issuance of common stock for interest payments -- 2,624,999 Issuance of common stock for preferred stock dividend -- 2,070,462 payments Issuance of warrants relating to Senior Notes and Senior Discount Notes, net -- 9,223,674 Exercise of stock options and warrants -- 1,766,060 Employee stock purchase plan -- 244,178 Preferred stock dividend and accretion, net of forfeitures -- (6,034,436) Foreign currency translation (955,800) (955,800) Purchase of treasury stock -- (91,490) Net loss for 1997 -- (105,740,014) ---------- ------------ Balance at December 31, 1997 $ (955,800) $ (46,849,145) ========== ==============
See Notes to Consolidated Financial Statements. (1) Includes 269,274 treasury shares of which 259,515 are carried at no cost. 48 ORION NETWORK SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 1997 1996 1995 --------------- --------------- --------------- OPERATING ACTIVITIES Net loss $ (105,740,014) $ (27,195,410) $ (26,915,178) Adjustments to reconcile net loss to net cash used in operating activities: Extraordinary loss on extinguishment of debt 15,763,220 -- Depreciation and amortization 48,161,257 36,948,158 31,403,376 Amortization of deferred financing costs 2,409,787 2,130,588 2,130,588 Provision for bad debts 1,021,618 919,453 277,529 Accretion of interest 34,347,467 2,371,506 5,185,834 Interest earned on restricted assets (18,203,066) -- -- Limited Partners' interest in the net loss of Orion Atlantic and other minority interest (12,042,978) (34,631,281) (46,089,010) Gain on sale of assets -- (54,738) (59,301) Changes in operating assets and liabilities: Accounts receivable (2,922,508) (2,203,171) (4,915,257) Prepaid expenses and other current assets (2,277,177) (285,895) (3,147,592) Other assets (3,639,941) (69,708) (519,773) Accounts payable and accrued liabilities (2,639,393) (3,621,847) 7,327,377 Other current liabilities 1,543,035 3,298,544 3,670,988 Interest payable 16,180,273 578,803 (885,106) --------------- --------------- --------------- Net cash used in operating activities (28,038,420) (21,814,998) (32,535,525) INVESTING ACTIVITIES Capital expenditures (11,062,046) (12,625,444) (8,549,799) Increase in restricted and segregated assets (419,187,388) (10,000,000) -- Release of restricted and segregated assets 90,500,480 -- -- Satellite construction costs, including capitalized interest (102,282,330) (3,750,231) (510,613) Advance on DACOM contract, net 12,250,000 9,900,000 Refund from satellite manufacturer -- -- 2,750,000 Purchase of Teleport Europe, net of cash acquired (8,374,845) -- -- Other -- (37,865) (558,817) --------------- --------------- --------------- Net cash used in investing activities (438,156,129) (16,513,540) (6,869,229) FINANCING ACTIVITIES Limited Partners' capital contributions -- 30,135,000 7,600,000 Redemption of Limited Partner interest -- -- (4,450,000) Debt and equity financing costs (26,122,220) (2,265,291) -- Proceeds from issuance of redeemable preferred stock -- -- 4,483,001 Proceeds from issuance of common stock, net of issuance costs 2,152,668 343,120 51,974,436 Treasury stock purchase (91,490) -- -- PPU borrowings -- -- 2,275,000 Proceeds from issuance of debt 770,397,000 -- -- Proceeds from senior notes payable banks and notes payable -- -- 18,918,984 Repayment of senior notes payable to banks and notes payable (216,723,484) (27,802,281) (14,385,015) Swap termination fee (5,287,827) -- -- Payment of satellite incentives (18,620,886) -- -- Other (1,688,362) 14,994,212 16,881,102 --------------- --------------- --------------- Net cash provided by financing activities 504,015,339 15,404,760 83,297,508 --------------- --------------- --------------- Net increase (decrease) in cash and cash equivalents 37,820,850 (22,923,778) 43,892,754 Cash and cash equivalents at beginning of period 32,187,807 55,111,585 11,218,831 --------------- --------------- --------------- Cash and cash equivalents at end of period $ 70,008,657 $ 32,187,807 $ 55,111,585 =============== =============== ===============
See Notes to Consolidated Financial Statements. 49 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION. Orion Network Systems, Inc.'s ("Orion" or the "Company") principal business is the provision of satellite communications for private communications networks and video distribution and other satellite transmission services. From its inception in 1982 through January 20, 1995, when Orion 1 commenced commercial operations, Orion was a development stage enterprise. Prior to January 1995, Orion's efforts were devoted primarily to monitoring the construction, launch and in-orbit testing of Orion 1, product development, marketing and sales of interim private communications network services, raising financing and planning Orion 2 and Orion 3. Through January 31, 1997, Orion Satellite Corporation (whose name has been changed to Orion Network Services, Inc.) was the sole general partner in Orion Atlantic L.P. ("Orion Atlantic") and had a 41 2/3% equity interest in Orion Atlantic. As a result of Orion's control of Orion Atlantic, Orion's consolidated financial statements include the accounts of Orion Atlantic. All of Orion Atlantic's revenues and expenses are included in Orion's consolidated financial statements, with appropriate adjustment to reflect the interests of the Limited Partners in Orion Atlantic's losses prior to the Exchange as described below. Orion acquired all the remaining interests in Orion Atlantic on January 31, 1997 during the Exchange as described below. Orion's consolidated financial statements also include the accounts of all other subsidiaries of Orion. All subsidiaries of Orion ("Subsidiary Guarantors"), other than inconsequential subsidiaries, have unconditionally guaranteed the Notes (as defined below) on a joint and several basis. No restrictions exist on the ability of Subsidiary Guarantors to pay dividends or make other distributions to Orion, except to the extent provided by law generally (e.g., adequate capital to pay dividends under state corporate laws). Jurisdiction of Organization Subsidiary Name or Incorporation - ------------------------------------------------- ----------------------------- Asia Pacific Space and Communications, Ltd. Delaware International Private Satellite Partners, L.P. (doing business as Orion Atlantic, L.P.) Delaware Orion Network Systems-Asia Pacific, Inc. (formerly known as Orion Asia Pacific Corporation) Delaware Orion Network Systems-Europe, Inc. (formerly known as Orion Atlantic Europe, Inc.) Delaware Orion Oldco Services, Inc. (formerly known as Orion Network Systems, Inc.) Delaware OrionNet Finance Corporation Delaware OrionNet, Inc. Delaware Orion Network Services, Inc. (formerly known as Orion Satellite Corporation) Delaware Orion Network Systems-Europe GmbH (formerly known as Teleport Europe GmbH) Federal Republic of Germany Each of the Subsidiary Guarantors is a wholly owned subsidiary of the Company. The Subsidiary Guarantors comprise all of the direct and indirect subsidiaries of the Company (other than inconsequential subsidiaries). 50 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 1. ORGANIZATION - (CONTINUED) Separate financial statements of the Subsidiary Guarantors are not presented because (a) such Subsidiary Guarantors have jointly and severally guaranteed the Notes on a full and unconditional basis, (b) the aggregate assets, liabilities, earnings and equity of the Subsidiary Guarantors are substantially equivalent to the assets, liabilities, earnings and equity of the Company on a consolidated basis and (c) management has determined that such information is not material to investors. In January 1997, Orion consummated a series of transactions that are described below. ACQUISITION OF ORION ATLANTIC LIMITED PARTNERSHIP INTERESTS IN THE EXCHANGE On January 31, 1997, the Company acquired all of the limited partnership interests which it did not already own in the Company's operating subsidiary, Orion Atlantic, that owns the Orion 1 satellite. Specifically, the Company acquired the Orion Atlantic limited partnership interests and other rights relating thereto held by British Aerospace Communications, Inc., COM DEV Satellite Communications Limited, Kingston Communications International Limited, Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate of Matra Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of Nissho Iwai Corp. (collectively, the "Exchanging Partners"). The Company accounted for this transaction as an acquisition of minority interest, and as a result, approximately $34.3 million was allocated to the cost of the Orion 1 satellite and related equipment. Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the "Exchange Agreement"), the Exchanging Partners exchanged (the "Exchange") their Orion Atlantic limited partnership interests for 123,172 shares of a newly created class of the Company's Series C 6% Cumulative Convertible Redeemable Preferred Stock (the "Series C Preferred Stock"). In addition, the Company acquired certain rights held by certain of the Exchanging Partners' to receive repayment of various advances (aggregating approximately $41.6 million at January 31, 1997). The 123,172 shares of Series C Preferred Stock issued in the Exchange are convertible into approximately 7 million shares of the Company's Common Stock. As a result of the Exchange, certain of the Exchanging Partners became principal stockholders of the Company. THE MERGER The Exchange was conducted on a tax-free basis by means of a Merger (defined below) that was consummated on January 31, 1997. Pursuant to the Exchange Agreement, Orion Oldco Services, Inc., formerly known as Orion Network Systems, Inc. ("Old Orion"), formed the Company as a new Delaware corporation with a certificate of incorporation, bylaws and capital structure substantially identical in all material respects with those of Old Orion. Also pursuant to the Exchange Agreement, the Company formed a wholly owned subsidiary, Orion Merger Company, Inc. ("Orion Merger Subsidiary"). Pursuant to an Agreement and Plan of Merger, Orion Merger Subsidiary was merged with and into Old Orion, and Old Orion became a wholly owned subsidiary of the Company (the "Merger"). On January 31, 1997, the effective time of the Merger, all of the stockholders of Old Orion received stock in the Company with substantially identical rights to the Old Orion stock they held prior to the effective time of the Merger. Following the Merger, the Company changed its name from Orion Newco Services, Inc. to Orion Network Systems, Inc. and the Company's wholly owned subsidiary, Orion Network Systems, Inc. , changed its name to Orion Oldco Services, Inc. FINANCINGS On January 31, 1997, the Company completed a $710 million bond offering (the "Bond Offering") comprised of approximately $445 million of Senior Note Units, each of which consists of one 11.25% Senior Note due 2007 (a "Senior Note") and one Warrant to purchase 0.8463 shares of common stock, par value $.01 per share ("Common Stock") of the Company (a "Senior Note Warrant"), and approximately $265.4 million of Senior Discount Note Units, each of which consists of one 12.5% Senior Discount Note due 2007 (a "Senior Discount Note," and together with the Senior Notes, the "Notes") and one Warrant to purchase 0.6628 shares of Common Stock of the Company (a "Senior Discount Note Warrant, and together with the Senior Note Warrants, the "Warrants"). Interest on the Senior Notes is payable semi-annually in cash on January 15 and July 15 of each year, commencing July 15, 1997. The Senior Discount Notes do not pay cash interest prior to January 15, 2002. Thereafter, cash interest will accrue until maturity at an annual rate of 12.5% payable semi- 51 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 1. ORGANIZATION - (CONTINUED) annually on January 15 and July 15 of each year, commencing July 15, 2002. The exercise price of the Warrants is $.01 per share of Common Stock of the Company. There were 697,400 Warrants issued in connection with the Notes (See Note 6). On January 31, 1997, the Company also completed the sale of $60 million of its convertible junior subordinated debentures (the "Convertible Debentures") to two investors, British Aerospace Holdings, Inc. ("British Aerospace") and Matra Marconi Space UK Limited ("Matra Marconi Space"). British Aerospace purchased $50 million of the Convertible Debentures and Matra Marconi Space purchased $10 million of the Convertible Debentures (collectively, the "Convertible Debentures Offering," and together with the Bond Offering, the "Financings"). The Convertible Debentures mature in 2012, and bear interest at a rate of 8.75% per annum payable semi-annually in arrears solely in Common Stock of the Company. The Convertible Debentures are subordinated to all other indebtedness of the Company, including the Notes. The net proceeds of the Bond Offering and Convertible Debentures Offering were used by the Company to repay the Orion 1 Credit Facility, pre-fund the first three years of interest payments on certain of the Notes, and will be used to build and launch two additional satellites, Orion 2 and Orion 3. ACQUISITION OF TELEPORT EUROPE On March 26, 1997, Orion acquired German-based Teleport Europe GmbH (now known as Orion Network Systems-Europe GmbH) ("Orion Europe") a communications company specializing in private satellite networks for voice and data services. Orion purchased the shares of Orion Europe held by the German companies, Vebacom GmbH and RWE Telliance AG, now known as o.tel.o for approximately $9 million. In addition, Orion acquired Orion Europe's licenses and operating agreements to provide satellite network services in 40 countries, including 17 countries in which Orion previously did not provide service. The net purchase price of Orion Europe was $8.4 million and was allocated as follows: Working capital deficit, net of cash acquired $ (.6) Property and equipment 9.3 Other, net (.3) -------- $ 8.4 ======== The proforma effect on net loss assuming the acquisition took place January 1, 1997 was not material. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION POLICY The consolidated financial statements for the year ended December 31, 1997, include the accounts of Orion and its wholly-owned subsidiaries and Orion Financial Partnership (OFP), in which Orion holds a 50% interest. The consolidated financial statements for the years ended December 31, 1996 and 1995, include the accounts of Orion, its two wholly-owned subsidiaries OrionNet, Inc. (OrionNet) and Orion Network Services, Inc., its former 83% owned subsidiary, Asia Pacific Space and Communications Ltd. (Asia Pacific), the OFP, in which Orion holds a 50% interest, and Orion Atlantic, in which Orion held a 41 2/3% ownership interest. Orion Network Services, Inc. as the general partner of Orion Atlantic, exercised control of Orion Atlantic through the provisions of the partnership agreement. All significant intercompany accounts and transactions have been eliminated. In January 1997, all of the outside interest in these entities, except for outside interests of OFP, were acquired. 52 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) CASH AND CASH EQUIVALENTS Orion considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents includes cash in banks and short term investments as follows: DECEMBER 31, 1997 1996 ----------- ----------- Cash ............. $ 2,256,356 $ 2,627,477 Money market funds 2,543,600 14,213,484 Commercial paper . 65,208,701 15,346,846 ----------- ----------- $70,008,657 $32,187,807 =========== =========== The commercial paper held at December 31, 1997 matures between January and March 1998. RESTRICTED AND SEGREGATED ASSETS Restricted and segregated assets consist of the following: DECEMBER 31, ------------------------------ 1997 1996 ------------- ------------- U.S. treasury notes $ 117,800,000 $ -- Commercial paper 216,696,975 -- Time deposits 22,393,000 10,000,000 ------------- ------------- Total restricted and segregated assets 356,889,975 10,000,000 Less: current portion (50,064,014) -- ------------- ------------- $ 306,825,961 $ 10,000,000 ============= ============= Included in restricted and segregated assets is $3.7 million of accrued interest at December 31, 1997. The current portion represents interest to be paid on the Senior Notes in 1998. The commercial paper and U.S. treasury discount notes held at December 31, 1997 mature between January and March 1998 and January 1998 and January 2000, respectively. PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation expense is calculated using the straight-line method over their estimated useful lives as follows: Satellite and related equipment 10.5 years Telecommunications equipment ... 2-7 years Furniture and computer equipment 2-7 years Costs incurred in connection with the construction and successful deployment of the Orion 1 satellite and related equipment are capitalized. Such costs include direct contract cost, allocated indirect costs, launch costs, launch insurance, construction period interest and the present value of satellite incentive payments. Similar costs for Orion 2 and Orion 3 are included in "Satellite construction in progress." Orion began depreciating the Orion 1 satellite over its estimated useful life commencing on the date of operational delivery in orbit (January 20, 1995). 53 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) DEFERRED FINANCING COSTS Deferred financing costs related to the Financings include $22.6 million in fees paid to an investment banker and are being amortized over the period the debt is expected to be outstanding. Accumulated amortization at December 31, 1997 and 1996 was $2,289,925 and $9,122,000, respectively. Deferred financing costs of $10.5 million relating to the Orion 1 Credit Facility were expensed in January 1997 in connection with the Financings and are included in the caption "Extraordinary loss on extinguishment of debt". OTHER ASSETS Other assets consist principally of FCC license application costs, organization costs and goodwill. The Company amortizes the FCC license application costs related to Orion 1 over the estimated useful life of the satellite. Organization costs are amortized over five years. Goodwill is primarily amortized over the remaining useful life of Orion 1. Accumulated amortization at December 31, 1997 and 1996 was $6,214,359 and $3,150,000, respectively. Other assets, net of amortization at December 31, 1997 and 1996, consist of the following: DECEMBER 31, 1997 1996 --------------- --------------- Goodwill $ 20,331,878 $ 1,412,546 Note receivable 3,038,901 -- FCC license application costs 1,781,097 1,639,054 Other 2,026,933 2,200,702 --------------- --------------- $ 27,178,809 $ 5,252,302 =============== =============== FOREIGN CURRENCY TRANSLATION Results of operations for foreign entities, primarily the Company's Orion Network Systems-Europe GmbH subsidiary, are translated using average exchange rates during the period. Assets and liabilities are translated to U.S. dollars using the exchange rate in effect at the balance sheet date. The resulting translation adjustments are reflected in stockholders' equity (deficit). INTEREST RATE MODIFICATION AGREEMENT Orion entered into an interest-rate swap and cap agreement to modify the interest characteristics of the Orion 1 Credit Facility from a floating to a fixed-rate basis. This agreement involved the receipt of floating rate amount in exchange for fixed-rate interest payments over the life of the agreement without an exchange of the underlying principal amount. The differential paid or received was accrued as interest rates changed and was recognized as an adjustment to interest expense. The fair value of the swap agreement was not recognized in the financial statements. This agreement was terminated in January 1997 in connection with the Financings discussed in Note 1. No such agreements were in place at December 31, 1997. 54 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) REVENUE RECOGNITION Revenue is recognized as earned in the period in which telecommunications and related services are provided. The following summarizes the Company's domestic and foreign revenues for the years ended December 31, 1997, 1996 and 1995:
YEAR ENDED DECEMBER 31, --------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Revenues from unaffiliated customers United States ........................... $30,927,234 $21,261,980 $ 8,528,736 Europe .................................. 37,720,990 14,571,979 8,056,146 Revenues from related parties ............... 4,092,407 6,013,333 5,699,000 ----------- ----------- ----------- Total services revenue ...................... $72,740,631 $41,847,292 $22,283,882 =========== =========== ===========
INCOME TAXES The Company recognizes deferred tax assets and liabilities for the expected future consequences of temporary differences between financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect when the differences are expected to reverse. Following is a summary of components of deferred taxes at December 31, 1997 and 1996 (in thousands): DECEMBER 31, -------------------- 1997 1996 -------- -------- Deferred tax assets: Net operating loss carryforward ... $ 61,648 $ 29,535 Accrued discount on Senior Discount Notes ........................... 11,917 -- Amortization of intangibles ....... 2,947 466 Other ............................. 3,385 2,566 -------- -------- 79,897 32,567 Deferred tax liabilities: Depreciation ...................... (16,289) (299) Other ............................. (741) (124) -------- -------- (17,030) (423) -------- -------- Net deferred tax asset ............ 62,867 32,144 Valuation allowance ............... (62,867) (32,144) -------- -------- Net deferred tax asset, after valuation allowance ............. $ -- $ -- ======== ======== At December 31, 1997, Orion has approximately $162 million in net operating loss carryforwards which expire at varying dates from 2004 through 2012. The use of these loss carryforwards may be limited under the Internal Revenue Code as a result of ownership changes experienced by Orion. Due to uncertainty regarding its ability to realize the benefits of such net operating loss carryforwards and other net deferred tax assets, the Company has established a valuation allowance for the full amount of these net deferred tax assets. 55 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) NET LOSS PER COMMON SHARE Net loss per common share is based on the weighted average number of common shares outstanding during the period. In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. The effect of such securities for all periods presented is anti-dilutive, and therefore has been excluded from the calculation of diluted earnings per share. The adoption of FASB 128 had no impact on the per share amounts previously presented. STATEMENTS OF CASH FLOWS Non-cash investing and financing activities and supplemental cash flow information includes:
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1997 1996 1995 -------------- -------------- -------------- Property and equipment financed by capital leases............. $ -- $ 482,452 $ 2,850,766 Preferred stock dividend, net of forfeitures.................. 6,034,436 1,369,665 1,329,007 Conversion of redeemable preferred stock to common stock...... 38,845,493 804,945 9,000 Conversion of subordinated debentures to common stock......... 10,291,667 -- -- Premium on satellite due to redemption of L.P interest........ -- -- 3,066,925 Redemption of STET interest with notes payable................ -- -- 8,000,000 Reduction in amount due to satellite manufacturer............. -- -- 485,799 Satellite incentive obligation capitalized................... -- -- 14,816,406 Acquisition of Teleport Europe, net of cash acquired: Working capital deficit, net of cash acquired............... 683,567 -- -- Property and equipment...................................... (9,346,584) -- -- Other, net.................................................. 288,172 -- -- -------------- -------------- -------------- Net cash used to acquire Teleport Europe...................... (8,374,845) -- -- Issuance of Series C preferred stock.......................... 94,000,000 -- -- Issuance of common stock for preferred stock dividend......... 2,070,462 -- -- Issuance of common stock and warrants ....................... 13,406,631 300,000 -- Interest paid during the year................................. 35,572,722 20,619,316 11,312,875
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current year presentation. 56 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 3. ORION ATLANTIC Orion Atlantic is a Delaware limited partnership formed to provide international private communications networks and basic transponder capacity and capacity services (including ancillary ground services) to businesses and institutions with trans-Atlantic and intra-European needs. The business was organized by Orion Network Services, the general partner of Orion Atlantic. The principal purposes of Orion Atlantic was to finance the construction, launch and operation of up to two telecommunications satellites in geosynchronous orbit over the Atlantic Ocean and to establish a multinational sales and service organization. Eight international corporations, including Orion, invested a total of $90 million in equity as limited partners in Orion Atlantic. Orion Atlantic through January 1997, was financed by a credit facility which provided up to $251 million for the first satellite from a syndicate of major international banks led by Chase Manhattan Bank, N.A. In addition to their equity investments, the Limited Partners had agreed to lease capacity on the satellites up to an aggregate $155 million and had entered into additional contingent capacity lease contracts ("contingent call") up to an aggregate $271 million, as support for repayment of the senior debt. The firm capacity leases and contingent calls were payable over a seven-year period after the Orion 1 satellite was placed in service. In July 1995, January and July 1996 the Limited Partners (excluding the Company) paid $7.6 million, $18.0 million and $12.1 million, respectively, pursuant to the contingent calls. As discussed in Note 1, in January 1997, the Company acquired all of the limited partnership interests it did not already own in Orion Atlantic. Orion 1 -- The fixed base price of Orion 1, excluding obligations relating to satellite performance, aggregated $227 million. In addition to the fixed base price, the contract required payments in lieu of a further contract price increase, aggregating approximately $44 million through 2006. Such payments are due, generally, if 24 out of 34 satellite transponders are operating satisfactorily. Shortly after acceptance of the satellite in January 1995, the Company filed a warranty claim with the satellite manufacturer relating to one transponder that was not performing in accordance with contract specifications. In August 1995, Orion Atlantic received a one time refund of $2.75 million which was applied as a mandatory prepayment to the senior notes payable - banks. The Company believes that since Orion 1 is properly deployed and operational, based upon industry data and experience, payment of the obligation mentioned above is highly probable and the Company capitalized the present value of this obligation of approximately $14.8 million as part of the cost of the satellite. Payment of amounts due under this obligation were delayed until payment was permitted under the senior notes payable -- banks. The present value was estimated by discounting the obligation at 14% over the expected term, assuming payment of the incentives begins upon expiration of the senior notes payable -- banks in 2002. Redemption of STET Partnership Interest; Issuance of New Interest to Orion. - -- In November 1995 Orion Atlantic redeemed the limited partnership interest held by STET (the "STET Redemption") for $11.5 million, including $3.5 million of cash and $8.0 million in 12%, promissory notes due through 1997. STET's firm and contingent capacity leases remained in place until released by the Banks under the Orion 1 Credit Facility. STET's existing contractual arrangements with Orion Atlantic were modified in a number of respects, including (i) a reduction of approximately $3.5 million in amounts due by Orion Atlantic to Telespazio S.p.A., an affiliate of STET, over a ten-year period under contracts relating to the construction of Orion 2, back-up tracking, telemetry and command services through a facility in Italy and engineering consulting services, (ii) the establishment of ground operations and distribution agreements between Orion Atlantic and Telecom Italia, a subsidiary of STET, relating to Italy, and the granting to Telecom Italia of exclusive marketing rights relating to Italy for a period ending December 1998 conditioned upon Telecom Italia achieving certain sales quotas, and (iii) canceling exclusive ground operations and sales representation agreements between Orion Atlantic and STET (or its affiliates) relating to Eastern Europe. Orion Atlantic funded the STET Redemption by selling a new limited partnership interest to Orion for $8 million (including $3.5 million in cash and $4.5 million in 12% promissory notes due through 1997). In connection with the STET redemption, Orion agreed to indemnify Telecom Italia for payments which were made in July 1995 of $950,000 and which would be made in the future under its firm and contingent capacity agreements with Orion Atlantic and posted a $10 million letter of credit to support such indemnity. The Company accounted for this transaction as an acquisition of a minority interest and, as a result, approximately $3.1 million was allocated to the cost of the Orion 1 satellite and related equipment. 57 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 3. ORION ATLANTIC - (CONTINUED) During 1995, Orion Atlantic entered into agreements with certain Limited Partners (including the Company) under which the participating Limited Partners voluntarily gave up their rights to receive capacity under their firm capacity agreements through January 1996. The participating Limited Partners continued to make payments for such capacity but have the right to receive refunds from Orion Atlantic out of cash available after operating costs and payments under the Credit Facility. At December 31, 1996, Orion Atlantic received $27.7 million (excluding payments from the Company) under the firm capacity agreements subject to refund, which amounts are included in "Other liabilities." In addition, services revenue included $4.1 million, $6.0 million and $5.7 million in 1997, 1996 and 1995 from Limited Partners pursuant to the firm capacity commitments, not subject to refund. In connection with the Exchange described in Note 1, such rights were acquired by the Company. 4. COMMITMENTS AND CONTINGENCIES Orion 1 -- In November 1995, a portion of the Orion 1 satellite experienced an anomaly that resulted in a temporary service interruption, lasting approximately two hours, in the dedicated capacity serving the European portion of Orion Atlantic's services. Full service to all affected customers was restored using redundant equipment on the satellite. The Company believes, based on the data and the Telesat Report (issued by Telesat Canada, independent engineering consultants dated November 14, 1995), that, because the redundant component is functioning fully in accordance with specifications and the performance record of similar components is strong, the anomalous behavior is unlikely to affect the expected performance of the satellite over its useful life. Furthermore, there has been no effect on the Company's ability to provide services to customers. However, in the event that the currently operating component fails, Orion 1 would experience a significant loss of usable capacity. In such event, while the Company would be entitled to insurance proceeds of approximately $47 million and could lease replacement capacity and function as a reseller with respect to such capacity, the loss of capacity would have a material adverse effect on the Company. Orion 2 -- In July 1996, the Company signed a contract with Matra Marconi Space for the construction and launch of Orion 2 (which was amended and restated in January 1997) and in February 1997 commenced construction of that satellite. The contract provides for delivery in orbit of Orion 2 by June 1999, for a firm fixed price of $201 million, excluding launch insurance and incentive payments. Orion 2 will expand the Company's European coverage and extend coverage to portions of the Commonwealth of Independent States, Latin America and the Middle East. Orion 3 -- In January 1997, the Company entered into a satellite procurement contract with Hughes Space for the construction and launch of Orion 3, construction of which commenced in December 1996. The contract provides for delivery in orbit of Orion 3 by December 1998, for a firm fixed price of $208 million, excluding launch insurance and incentive payments. Orion 3 will cover broad areas of the Asia Pacific region including China, Japan, Korea, Southeast Asia, Australia, New Zealand, Eastern Russia and Hawaii. In November 1996, Orion entered into a contract with DACOM Corp. ("DACOM"), a Korean communications company, under which DACOM will lease eight dedicated transponders on Orion 3 for 13 years, in return for approximately $89 million, which is payable over a period from December 1996 through six months following the lease commencement date for the transponders (which is scheduled to occur by January 1999). DACOM is to deposit funds with Orion in accordance with a milestone schedule. As of December 31, 1997, Orion had received $22.25 million from DACOM. This amount is included in "Other Liabilities". Orion maintains a $22.25 million letter of credit which will be released on August 1, 1998. Orion has an obligation to maintain a letter of credit for seven months beginning on the lease commencement date in the amount of $44.75 million. Prior to launch, payments are subject to refund pending the successful launch and commencement of commercial operation of Orion 3. DACOM maintains a $54.75 million letter of credit securing substantially all of DACOM's remaining payments. 58 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 4. COMMITMENTS AND CONTINGENCIES - (CONTINUED) Litigation -- On November 9, 1996, Orion and Skydata Corporation ("Skydata") executed a letter with respect to the settlement in full of pending litigation and arbitration related to a patent dispute. As part of the settlement, Skydata granted Orion (and its affiliates) an unrestricted, world-wide paid-up license to make, have made, use or sell products or methods under the patent and all other corresponding continuation and reissue patents. Orion is to pay Skydata $437,000 over a period of two years as part of the settlement. Other -- Orion has entered into operating leases, principally for office space. Rent expense was $1,312,000, $915,000 and $735,000 during the years ended December 31, 1997, 1996 and 1995, respectively. Future minimum lease payments are as follows: 1998 ..... $1,588,800 1999 ..... 1,283,100 2000 ..... 185,100 2001 ..... 93,500 2002 ..... 46,000 Thereafter 552,500 ---------- $3,749,000 ========== 5. LONG-TERM DEBT Long-term debt at December 31, 1997 and 1996 consists of the following:
DECEMBER 31, -------------------------------- 1997 1996 --------------- --------------- Senior notes (net of unamortized discount of $4.9 million) $ 440,099,914 $ -- Senior discount notes (maturity value of $484 million). 292,336,605 -- Convertible junior subordinated debentures........... 50,000,000 -- Senior notes payable to banks.......................... -- 207,714,842 Notes payable - TT&C Facility.......................... 6,021,601 6,956,624 Satellite incentive obligations........................ 6,478,533 22,373,746 Notes payable - STET................................... -- 5,550,000 Notes payable - limited partners....................... -- 8,050,000 Other 2,140,096 2,566,687 --------------- --------------- Total long-term debt.............................. 797,076,749 253,211,899 Less: current portion.................................. 6,406,143 34,975,060 --------------- --------------- Long-term debt less current portion............... $ 790,670,606 $ 218,236,839 =============== ===============
59 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 5. LONG-TERM DEBT - (CONTINUED) Total interest (including commitment fees and amortization of deferred financing costs) incurred for the years ended December 31, 1997, 1996 and 1995 was $91.1, $27.8, and $26.0 million, respectively. Capitalized interest for 1997 was $7.3 million. Aggregate annual maturities of long-term debt consist of the following (in thousands): 1998 ..... $ 6,406,143 1999 ..... 1,347,198 2000 ..... 1,177,692 2001 ..... 1,252,335 2002 ..... 1,582,997 Thereafter 785,310,384 ------------ $797,076,749 ============ Senior Notes and Senior Discount Notes -- On January 31, 1997, the Company completed a $710 million bond offering (the "Bond Offering") comprised of approximately $445 million of Senior Note Units, each of which consists of one 11.25% Senior Note due 2007 (a "Senior Note") and one Warrant to purchase 0.8463 shares of common stock, par value $.01 per share ("Common Stock") of the Company (a "Senior Note Warrant"), and approximately $265.4 million of Senior Discount Note Units, each of which consists of one 12.5% Senior Discount Note due 2007 (a "Senior Discount Note," and together with the Senior Notes, the "Notes") and one Warrant to purchase 0.6628 shares of Common Stock of the Company (a "Senior Discount Note Warrant and together with the Senior Note Warrants, the "Warrants"). Interest on the Senior Notes is payable semi-annually in cash on January 15 and July 15 of each year, commencing July 15, 1997. The Senior Discount Notes do not pay cash interest prior to January 15, 2002. Thereafter, cash interest accrues until maturity at an annual rate of 12.5% payable semi-annually on January 15, and July 15 of each year, commencing July 15, 2002. The exercise price for the Warrants is $.01 per share of Common Stock of the Company. The Company made interest payments of $22,806,250 and $25,031,250 in July 1997 and January 1998 on the Senior Notes. The indentures supporting the Senior Notes and the Senior Discount Notes contain certain covenants which, among other things, restrict distributions to stockholders of the Company, the repurchase of equity interests in the Company and the making of certain other investments and restricted payments, the incurrence of additional indebtedness by the Company and its restricted subsidiaries , the creation of liens, certain asset sales, transaction with affiliates and related parties, and mergers and consolidations. The Company is in compliance with the requirements of such indentures. Convertible Junior Subordinated Debentures -- On January 31, 1997, in connection with the Financings discussed in Note 1, the Company completed the sale of $60 million of its convertible junior subordinated debentures (the "Convertible Debentures") to two investors, British Aerospace Holdings, Inc. ("British Aerospace") and Matra Marconi Space UK Limited ("Matra Marconi Space"). British Aerospace purchased $50 million of the Convertible Debentures and Matra Marconi Space purchased $10 million of the Convertible. The Convertible Debentures mature in 2012, and bear interest at a rate of 8.75% per annum to be paid semi-annually in arrears solely in Common Stock of the Company. The Convertible Debentures are subordinated to all other indebtedness of the Company, including the Notes. Matra Marconi Space converted their $10 million of Convertible Debentures and accrued interest into 735,292 shares of common stock in December 1997. Subsequent to year end, British Aerospace converted their $50 million of Convertible Debentures and accrued interest into approximately 3.6 million shares of common stock. Senior Notes Payable to Banks - The senior notes payable to banks outstanding under a credit facility prior to repayment as described below, bore interest at 1.75% over the LIBOR. The Company entered into agreements with Chase Manhattan Bank, N.A. ( "Chase" ) for interest rate hedging arrangements which fixed the maximum interest rate through November 1995 at 11.54%. Thereafter a self funding interest rate cap agreement was in place relating to a notional amount declining 60 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 5. LONG-TERM DEBT - (CONTINUED) every six months from $150 million effective November 30, 1995 to $15.6 million effective March 31, 2001. Under the terms of the cap agreement, when LIBOR equaled or exceeded 5.5% Orion Atlantic paid Chase a fee equal to 3.3% per annum of the notional amount and received a payment from Chase in an amount equal to the difference between the actual LIBOR rate and 5.5% on the notional amount. In January 1997, the Company used the net proceeds of the Bond Offering and the Convertible Debenture Offering to repay the Orion 1 Credit Facility and terminated the hedging arrangement. The loss on termination of the hedging arrangement of $5.3 million is included in "Extraordinary loss on extinguishment of debt." Note Payable -- TT&C Facility -- In June 1995 upon acceptance of the TT&C Facility, the Company refinanced $9.3 million from General Electric Credit Corporation as a seven-year term loan, payable monthly. The interest rate is fixed at 13.5%. The TT&C debt is secured by the TT&C Facility, the Satellite Control System Contract and Orion Atlantic's leasehold interest in the TT&C Facility land. The TT&C financing agreement contains customary representations, warranties and covenants regarding certain activities of the Company. Satellite Incentive Obligations -- The obligations relating to satellite performance have been recorded at the present value (discounted at 14%, the Company's estimated incremental borrowing rate for unsecured financing) of the required payments commencing at the originally scheduled maturity of the senior notes payable to banks and continuing through 2006. Under the terms of the construction contract, payment of the obligation is delayed until such time as payment is permitted under the senior notes payable to banks. During 1997, payments aggregating $18.6 million were made pursuant to this obligation. Notes Payable -- STET -- In connection with the STET Redemption, the Company issued $8 million of promissory notes bearing interest at 12% per annum. Payments were due as follows: $2.5 million plus accrued interest paid on December 31, 1996; $3.5 million plus accrued interest on the earlier of December 31, 1997 or the refinancing of the senior notes payable to banks; and the remaining $2.0 million in monthly installments of $0.2 million plus accrued interest beginning January 1997. At December 31, 1997, the $8 million promissory notes issued in connection with the STET Redemption have been repaid. Notes Payable -- Limited Partners -- In January 1997, the Company issued Series C Convertible Preferred Stock in exchange for the Preferred Participation Units (PPUs) aggregating $8.1 million due to certain former Limited Partners for development of Orion Atlantic's network services business. Holders of PPUs earned interest on aggregate amounts drawn at the rate of 30% per annum. Interest payable at December 31, 1996 was $5.9 million and is included in "Other liabilities". 6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY The Company has authorized 1,000,000 shares of $0.01 par value preferred stock. Redeemable Preferred Stock In June 1994, Orion issued 11,500 shares of Series A 8% Cumulative Redeemable Convertible Preferred Stock at $1,000 per share and granted an option to purchase an additional 3,833 shares of similar preferred stock at $1,000 per share. Dividends on preferred stock accrue at 8% per year and are payable as and when declared. Orion may redeem the preferred stock at the amount invested plus accrued and unpaid dividends. Upon such a redemption, the preferred stockholders would receive a warrant to acquire at $8.50 per share the number of shares of common stock into which the preferred stock was convertible. The 11,500 shares issued are convertible into 1,352,941 shares of common stock ($8.50 per share). Upon conversion any accrued and unpaid dividends are forfeited. Orion may require conversion of the preferred stock if certain conditions are met. After Orion issued preferred stock (along with warrants and options to make an additional investment) in June 1994, the Directors and affiliates of Directors who purchased common stock in December 1993 and the institutions and other investors who purchased common stock in June 1994 each exercised its right to receive 61 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED) preferred stock (along with warrants and options to make an additional investment) in exchange for the common stock previously acquired and Orion issued an aggregate of 3,000 shares of Series A Preferred Stock and related options for 1,000 shares to such persons and entities. The 3,000 shares issued are convertible into 352,941 shares of common stock ($8.50 per share). Through December 31, 1997, 7,567 shares of preferred stock were converted into 890,235 shares of common stock. The remaining 6,933 shares outstanding are convertible into 815,647 shares of common stock at December 31, 1997. The preferred stock has a liquidation preference equal to the amount invested plus accrued and unpaid dividends. Preferred stockholders are entitled to vote on an as-converted basis and have the right to put the stock to Orion upon a merger, change of control or sale of substantially all assets at the greater of liquidation value or fair value. The put expires upon the completion of a qualified public equity offering, as defined. If the preferred stock is not previously redeemed or converted to common stock, the preferred stockholders also have the right to put the stock to Orion as follows: 33 1/3% beginning in June 1999; 66 2/3% beginning in June 2000; and 100% beginning in June 2001. In June 1995, certain Directors, affiliates of Directors, and certain holders of Series A Preferred Stock purchased 4,483 shares of Series B Preferred Stock for approximately $4.5 million. This purchase was pursuant to an option granted in June 1995 to purchase $1 of preferred stock similar to the Series A Preferred Stock for each $3 of Series A Preferred Stock purchased in June 1994, except that such similar preferred stock would be convertible at any time with Common Stock at a price within a range of $10.20 to $17.00 per share of common stock based upon when the option is exercised. The Series B Preferred Stock has rights, designations and preferences substantially similar to those of the Series A Preferred Stock, and is subject to similar covenants, except that the Series B Preferred Stock is convertible into 439,510 shares of Common Stock at an initial price of $10.20 per share, subject to certain anti-dilution adjustments, and purchases of Series B Preferred Stock did not result in the purchaser receiving any rights to purchase additional preferred stock. Through December 31, 1997, 2,424 shares of preferred stock were converted into 237,647 shares of common stock. The remaining 2,059 shares outstanding are convertible into 201,862 shares of common stock at December 31, 1997. In January 1997, Orion issued 123,172 shares of Series C Cumulative Redeemable Preferred Stock to British Aerospace Communications, Inc., COM DEV Satellite Communications Limited, Kingston Communications International Limited, Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., and Trans-Atlantic Satellite, Inc. in exchange for their Orion Atlantic partnership interests. Dividends on the preferred stock accrue at 6% per year and are distributable in the Company's common stock calculated based on the market price of such stock under a formula provided in the Certificate of Designations. The shares are convertible into approximately 7 million shares ($17.50 per share) of the Company's common stock. Through December 31, 1997, 40,531 shares of preferred stock, including dividends, were converted into approximately 2.4 million shares of common stock. Series C Cumulative Preferred Stock is recorded net of deferred offering costs of approximately $3.3 million. The Series C Cumulative Preferred Stock is subject to mandatory redemption at par value in 25 years. The difference between in carrying value and par value is being accreted over such period. The preferred stock has a liquidation preference equal to the amount invested plus accrued and unpaid dividends. Preferred stockholders are entitled to vote on an as-converted basis and have the right to put the stock to Orion upon a merger, change of control or sale of substantially all assets at the greater of liquidation value or fair value. Stockholders' Equity 1987 Employee Stock Option Plan - Under the 1987 Employee Stock Option Plan, 1,470,588 shares of common stock are reserved for issuance upon exercise of options granted. Shares of common stock may generally be purchased under this plan at prices not less than the fair market value, as determined by the Board of Directors, on the date the option is granted. 62 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED) Stock options outstanding at December 31:
1997 1996 1995 -------------- --------------- --------------- Range of exercise price........... $ 8.16 - 12.29 $ 8.16 - 12.24 $ 5.44 - 12.24 Outstanding at beginning of year 911,663 971,469 804,056 Granted during year............... 400,670 122,750 380,069 Exercised......................... (81,383) (37,629) (60,928) Canceled (56,640) (144,927) (151,728) -------------- --------------- --------------- Outstanding at end of year........ 1,174,310 911,663 971,469 ============== =============== ===============
In November 1993, stock options for 95,588 shares of common stock were granted to key executives which may be exercised only upon the achievement of certain business and financial objectives. At December 31, 1995, the executives had earned the right to exercise 40,441 of these options based on the achievement of such objectives. The remaining options were canceled during 1996. Stock options vest annually over a one to five-year period. All options are exercisable up to seven years from the date of grant. The Company's 1987 Employee Stock Option Plan expired in 1997. No further shares are available for grant under this plan. There were 506,803 and 429,265 options exercisable at December 31, 1997 and 1996, respectively. In July 1996, the Company granted, subject to shareholder approval, the Chairman of the Executive Committee 100,000 options at $9.83 per share. These options vested as follows, 50,000 on January 17, 1997 and 50,000 upon successful completion of either a refinancing of the Orion 1 satellite, financing for construction, launch and insurance for Orion 2 or Orion 3 or a substantial acquisition or relationship with a strategic partner. These requirements were met in January 1997. Non-Employee Director Stock Option Plan -- In 1996, Orion adopted a non-employee director stock option plan. Under this plan, 380,000 shares of common stock are reserved for issuance. During 1997, there were 80,000 options granted pursuant to this plan at $9.60 per share. At December 31, 1997, aggregate options outstanding pursuant to this plan totaled 270,000, of which, 180,000 were exercisable at prices ranging from $8.49 to $12.53 per share. 1997 Employee Stock Option Plan - In 1997, Orion adopted a second stock option plan. Under this plan, as amended, 1,300,000 shares of common stock are reserved for issuance upon exercise of options granted. Shares of common stock may be purchased under this plan at prices not less than the fair value as determined by the Board of Directors, on the date the option is granted. Compensation expense relating to these plans was not significant. 63 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED) Stock options outstanding at December 31: 1997 Range of exercise price ........ $9.30 - 17.06 ============= Outstanding at beginning of year -- Granted during year ............ 556,000 Exercised ...................... -- Canceled ....................... (4,000) ------------- Outstanding at end of year ..... 552,000 ============= There were 62,500 options exercisable at December 31, 1997. The Company has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock based award programs, because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") which is effective for awards after January 1, 1996 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of the employee award equals the market price of the underlying stock on the date of grant, as has been the case historically with the Company's awards, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its stock options under the fair value method of that statement. The fair value of these options was estimated at the date of the grant using a Black-Scholes valuation model with the following assumptions: 1997 1996 1995 --------- --------- --------- Risk-free interest rate............. 6.5% 6.5% 6.5% Expected dividend yield............. 0.0% 0.0% 0.0% Expected life of option............. 6.5 YEARS 5.8 years 5.8 years Volatility of the Company's stock... 69% 68% 68% For purposes of adjusted pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. The effect of applying SFAS 123 on pro forma net loss is not necessarily representative of the effects on reported net loss for future years due to, among other things, (1) the vesting period of the stock options and the (2) fair value of additional stock options in future years. The Company's adjusted pro forma information for the years ended December 31, are as follows: 1997 1996 1995 --------- ----------- ---------- (Net loss in thousands) Adjusted pro forma net loss ........... $(110,703) $ (28,031) $ (27,306) ========= =========== ========== Adjusted pro forma net loss per share$ $(10.03) $ (2.68) $ (3.11) ========= =========== ========== 64 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED) 401(k) Profit Sharing Plan -- In September 1996, Orion amended the 401(k) profit sharing plan. Under this plan, 100,000 shares of common stock are reserved for issuance as the Company's discretionary match of employee contributions. The Company's matching contributions may be made in either cash or in the equivalent amount of the Company's common stock. During 1997, the Company issued 11,286 shares for the 1996 plan year. Stock Purchase Plan -- In September 1996, Orion adopted an employee stock purchase plan. Under this plan, 500,000 shares of common stock are reserved for issuance. Shares of common stock are purchased under this plan through payroll deduction. The purchase price of each share of common stock purchased under the plan will be 85% of the fair market value of the common stock on the measurement date. During 1997, the Company issued 27,731 shares pursuant to the Plan. Stock Warrants - In November 1996, Orion granted 50,000 warrants to DACOM to purchase shares of common stock at $14 per share. The warrants are exercisable for a six month period beginning six months after the commencement date, as defined in the Joint Investment Agreement, and ending one year after the commencement date and will terminate at that time or at any time the Joint Investment Agreement is terminated. The fair value of the warrants at the date of issue was $300,000 and was estimated using a Black Scholes valuation model. Warrants outstanding at December 31:
1997 1996 1995 ------------- ------------- ------------- Range of exercise price .............. $0.01 - 14.00 $9.79 - 14.00 $9.79 - 12.79 ============= ============= ============= Outstanding at beginning of year ..... 142,115 553,768 735,769 Granted during year .................. 697,400 50,000 -- Exercised ............................ (96,159) -- -- Canceled ............................. (2,806) (461,653) (182,001) ------------- ------------- ------------- Outstanding at end of year ........... 740,550 142,115 553,768 ============= ============= =============
There were 690,550 and 92,115 warrants exercisable at December 31, 1997 and 1996, respectively. The holders of preferred stock also hold warrants to purchase 1,017,509 shares of common stock at the conversion price of such preferred stock. These warrants do not become exercisable unless Orion exercises its right to repurchase the preferred stock at the liquidation value, plus accrued and unpaid dividends. In January 1997, the Company issued Senior Note Warrants and Senior Discount Note Warrants to acquire 376,608 and 320,792 shares of common stock, respectively at $.01 per share in connection with the Bond Offering. The warrants were not exercisable prior to six months after the closing date of the Bond Offering and became separately transferable from the Notes six months from date of issuance. The estimated fair value of the warrants aggregating $9.6 million was allocated $5.2 million to Senior Notes and $4.4 million to Senior Discount Notes as debt discount. At December 31, 1997, 6,850 warrants were converted into 5,797 shares of common stock. Shares Reserved for Issuance - The Company has 14,036,809 shares of common stock at December 31, 1997 reserved for issuance upon conversion of debentures and preferred stock, exercise of outstanding stock options and warrants, and common stock issued under the stock purchase and 401(k) profit sharing plans. 65 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 7. FAIR VALUES OF FINANCIAL INSTRUMENTS Other than amounts due under the Senior Notes and Senior Discount Notes, Orion believes that the carrying amount reported in the balance sheet of its other financial assets and liabilities approximates their fair value at December 31, 1997. The fair value of the Company's Senior Notes and Senior Discount was estimated to be approximately $511.8 million and $377.5 million, respectively. Based upon the conversion value at December 31, 1997 of the underlying common stock, the fair value of the Company's redeemable preferred stock was approximately $102.8 million. 8. PENDING ACQUISITION OF THE COMPANY BY LORAL On October 7, 1997, Orion, Loral Space & Communications Ltd. ("Loral") and Loral Satellite Corporation, a wholly-owned subsidiary of Loral ("Merger Sub"), entered into an Agreement and Plan of Merger (as amended on February 11, 1998, the "Merger Agreement"), pursuant to which Merger Sub will merge with and into the Company, with the Company being the surviving corporation and thereby becoming a wholly-owned subsidiary of Loral (the "Loral Merger"). The Merger Agreement provides that (i) each share of Common Stock, excluding treasury shares and shares owned by Loral or its subsidiaries, will be converted into and exchanged for the right to receive the number of fully paid and nonassessable shares of common stock, par value $.01 per share, of Loral ("Loral Common Stock") equal to the Exchange Ratio (as described below), (ii) each share of the Company's Series A 8% Cumulative Redeemable Convertible Preferred Stock (the "Series A Preferred Stock"), Series B 8% Cumulative Redeemable Convertible Preferred Stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Senior Preferred Stock") and Series C Preferred Stock (the Series C Preferred Stock and Senior Preferred Stock are hereinafter referred to as the "Senior Preferred Stock") will be converted into and exchanged for the right to receive the number of fully paid and nonassessable shares of Loral Common Stock equal to the Exchange Ratio multiplied by the number of shares of Common Stock into which such share of Preferred Stock was convertible immediately prior to the Effective Time of the Loral Merger, (iii) each outstanding stock option to purchase shares of Orion Common Stock will be converted into an option to acquire the number of shares of Loral Common Stock equal to the Exchange Ratio multiplied by the number of shares of Common Stock for which such option was exercisable, and (iv) each outstanding warrant to purchase shares of Orion Common Stock will be converted into a warrant to acquire the number of shares of Loral Common Stock equal to the Exchange Ratio multiplied by the number of shares of Common Stock for which such warrant was exercisable. Pursuant to the terms of the Merger Agreement, the Exchange Ratio is determined as follows: (i) if the average of the volume-weighted average trading prices of Loral Common Stock for the twenty consecutive trading days on which trading of Loral Common Stock occurs ending the tenth trading day immediately prior to the closing date for the Loral Merger (the "Determination Price") is less than $24.458 but greater than $16.305, the Exchange Ratio is the quotient obtained by dividing $17.50 by the Determination Price, (ii) if the Determination Price is equal to or greater than $24.458, the Exchange Ratio is 0.71553 and (iii) if the Determination Price is equal to or less than $16.305, the Exchange Ratio is 1.07329. A meeting of Orion's shareholders has been scheduled for March 20, 1998 to vote to approve the Loral Merger. The Company expects the Loral Merger to close following a favorable shareholder vote, however, there can be no assurance that the Loral Merger will be consummated. Although not a condition of the Loral Merger, Orion intends to seek an Internal Revenue Service ruling as to eligibility for a tax-free exchange. In the event the Loral Merger is completed, the Company will be obligated to make an offer to purchase all outstanding Senior and Senior Discount Notes (the "Notes") at a purchase price equal to 101% of their principal or accreted value, plus accrued and unpaid interest therein to the repurchase date. Since the Notes have traded in recent periods at prices above 101% of their principal amount, the Company does not anticipate that the holders of a material principal amount of the Notes will accept the repurchase offer. 66 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. PENDING ACQUISITION OF THE COMPANY BY LORAL - (CONTINUED) In connection with the Merger Agreement, certain principal stockholders of Orion and members of Orion's management have agreed to vote in favor of the Loral Merger and have granted to Loral the right to purchase their securities in Orion for a price equal to the Loral Merger consideration under certain circumstances. 9. CONDENSED FINANCIAL INFORMATION OF ORION Presented below are condensed balance sheets of Orion (parent company only basis) at December 31, 1997 and 1996. All material contingencies, obligations and guarantees of Orion have been separately disclosed in the preceding notes to the financial statements.
CONDENSED BALANCE SHEETS OF ORION NETWORK SYSTEMS, INC. DECEMBER 31, ------------------------------ 1997 1996 ------------- ------------- ASSETS Current assets: Cash and cash equivalents ...................... $ -- $ 26,564,562 Restricted assets .............................. 50,064,014 -- Receivable from Orion Atlantic ................. -- 253,088 Other current assets ........................... -- 766,784 ------------- ------------- Total current assets ...................... 50,064,014 27,584,434 Restricted and segregated assets ................. 284,432,961 -- Investment in and advances to subsidiaries ....... 460,571,744 (12,088,208) Other assets ..................................... 42,021,096 10,590,071 ------------- ------------- Total assets .............................. $ 837,089,815 $ 26,086,297 ============= ============= LIABILITIES AND STOCKHOLDERS' deficit Current liabilities: Notes and interest payable to Orion Atlantic ... $ -- $ 2,327,427 Interest payable ........................... ... 24,768,229 -- Accounts payable and accrued liabilities ....... -- 2,828,616 ------------- ------------- Total current liabilities ................. 24,768,229 5,156,043 Long term debt ................................... 782,436,519 7,053 Other liabilities ................................ -- 457,203 Redeemable preferred stock ....................... 76,734,212 20,902,366 Stockholders' deficit ............................ (46,849,145) (436,368) ------------- ------------- Total liabilities and stockholders' deficit $ 837,089,815 $ 26,086,297 ============= =============
67 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 9. CONDENSED FINANCIAL INFORMATION OF ORION - (CONTINUED) CONDENSED STATEMENTS OF OPERATIONS OF ORION NETWORK SYSTEMS, INC.
YEAR ENDED DECEMBER 31, 1997 1996 1995 --------------- --------------- --------------- Services revenue..................................... $ -- $ 34,000 $ -- Operating expenses and other income: General and administrative........................ 2,170,102 3,832,286 3,171,305 Interest expense (income), net.................... 57,069,304 (1,883,719) (1,834,589) --------------- --------------- --------------- Total operating expenses and other income......... 59,239,406 1,948,567 1,336,716 Equity in net losses of subsidiaries................. 46,500,608 25,280,843 25,578,462 --------------- --------------- --------------- Net loss............................................. $ (105,740,014) $ (27,195,410) $ (26,915,178) =============== =============== ===============
CONDENSED STATEMENTS OF CASH FLOWS OF ORION NETWORK SYSTEMS, INC.
YEAR ENDED DECEMBER 31, 1997 1996 1995 --------------- -------------- -------------- NET CASH USED IN OPERATIONS................................ $ (22,806,250) $ (4,046,446) $ (4,107,237) INVESTING ACTIVITIES: Advances to subsidiaries................................. (407,092,800) (15,528,710) (8,664,024) Capital expenditures..................................... (504,729) (597,698) Increase in restricted and segregated assets ............ (406,937,388) -- -- Release of restricted and segregated assets ............. 90,500,480 -- -- --------------- -------------- -------------- Net cash used in investing activities.................... (723,529,708) (16,033,439) (9,261,722) FINANCING ACTIVITIES: Proceeds from issuance of debt, net 744,274,780 -- -- Proceeds from issuance of redeemable preferred stock..... -- -- 4,483,001 Proceeds from issuance of common stock................... 2,152,668 343,120 51,974,436 PPU funding.............................................. -- -- (455,000) Repayment of notes payable............................... -- (2,496,300) (37,792) Purchase of treasury stock .............................. (91,490) -- -- --------------- --------------- --------------- Net cash (used in) provided by financing activities...... 746,335,958 (2,153,180) 55,964,645 ----------- ---------- ---------- Net (decrease) increase in cash and cash equivalents..... -- (22,233,065) 42,595,686 Cash and cash equivalents at beginning of year............. -- 48,797,627 6,201,941 --------------- -------------- -------------- Cash and cash equivalents at end of year................... $ -- $ 26,564,562 $ 48,797,627 =============== ============== ==============
Basis of presentation -- In these parent company-only condensed financial statements, Orion's investment in subsidiaries is stated at cost less equity in the losses of subsidiaries since date of inception or acquisition. Orion Network Systems, Inc. is presented for 1997 and Orion Oldco Services, Inc. is presented for 1996 and 1995, as a result of the Exchange, the Merger and the financings consummated January 31, 1997 all described in Note 1 of the Consolidated Financial Statements. 68 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 10. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) The following pro forma condensed consolidated statement of operations gives effect, as of January 1, 1997, to the Exchange, the Merger and the Financings consummated on January 31, 1997, all as described in Note 1 to the Consolidated Financial Statements and related transactions. The unaudited pro forma condensed consolidated statement of operations does not purport to present the actual results of operations of the Company had the Transactions in fact occurred on the date specified, nor is it indicative of the results of operations that may be achieved in the future. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 ----------------- (In thousands) Service revenue ........................................... $ 72,741 Operating expenses ........................................ 116,239 Other expense (income) .................................... 64,601 ----------- Net loss .................................................. (108,099) Preferred stock dividend and accretion, net of forfeitures (6,687) ----------- Net loss attributable to common stockholders .............. (114,786) =========== Net loss per common share ................................. (9.86) ===========
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 1997 and 1996 (in thousands except per share data):
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------------- ----------- -------------- ------------- 1997 Revenues...................... $ 20,233 $ 16,687 $ 17,619 $ 18,202 Loss from operations.......... (8,317) (10,915) (11,270) (12,579) Net loss...................... (25,984) (24,745) (27,510) (27,501) Net loss per share............ (2.48) (2.42) (2.63) (2.11) 1996 Revenues...................... $ 7,646 $ 10,123 $ 12,247 $ 11,831 Loss from operations.......... (10,155) (8,963) (7,151) (10,084) Net loss...................... (7,251) (6,760) (5,796) (7,388) Net loss per share............ (0.70) (0.65) (0.55) (0.72)
69 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND FINANCIAL DISCLOSURES. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following are the current Directors and Executive Officers of the Company. Upon closing of the Loral Merger, all Directors of the Company will resign and new Directors will be appointed by Loral.
TERM EXPIRES - ---------------------- ------- ----------------------------------------------- ------------------ NAME AGE POSITION WITH ORION (DIRECTORS) - ----------------------- Gustave M. Hauser..... 69 Chairman, Director 1998 W. Neil Bauer......... 51 President and Chief Executive Officer 1999 Director (Principal Executive Officer) David J. Frear........ 41 Senior Vice President, Chief Financial Officer -- and Treasurer (Principal Financial Officer and Principal Accounting Officer) Richard H. Shay....... 57 Senior Vice President, Law and Administration -- and Secretary Denis Curtin.......... 59 Senior Vice President and General Manager, -- Engineering, Operations and Technology Han C. Giner.......... 59 Vice President of Orion and President, -- Orion Network Systems-Asia Pacific, Inc. Richard J. Brekka..... 37 Director 2000 Warren B. French, Jr.. 74 Director 2000 Barry Horowitz........ 54 Director 1998 Sidney S. Kahn........ 61 Director 1999 John G. Puente........ 68 Director 1998 W. Anthony Rice....... 46 Director 2000 John V. Saeman........ 62 Director 1998 Robert M. Van Degna... 54 Director 1999
70 BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS Information with respect to the business experience and the affiliations of the directors and executive officers of Orion is set forth below. Gustave M. Hauser has been Chairman of Orion since January 1996 and has been a director of Orion since December 1982. Since 1983, he has been Chairman and Chief Executive Officer of Hauser Communications, Inc., an investment and operating firm specializing in cable television and other electronic communications. From 1973 to 1983 he served as Chairman and Chief Executive Officer of Warner-Amex Cable Communications, Inc. (formerly Warner Cable Communications, Inc.), a major multiple system operator of cable television systems and originator of satellite delivered video programming. He is a trustee of the Museum of Television and Radio. He is a past Vice Chairman of the National Cable Television Association, and from 1970 to 1977 he served, by appointment of the President of the United States, as a director of the Overseas Private Investment Corporation. W. Neil Bauer has been President of Orion since March 1993, and has been Chief Executive Officer and a director since September 1993. From 1989 to February 1993, Mr. Bauer was employed by GE American Communications, Inc., where he served as Senior Vice President and General Manager of Commercial Operations. Prior to 1989, Mr. Bauer was Chief Financial Officer of GE American Communications, Inc. and later head of commercial sales. He held several key financial planning positions at GE/RCA from 1984 through 1986 focused on operational and business analysis of diverse business units including all communications units. From 1974-1983, he was employed by RCA Global Communications, an international record carrier. During this period, he held several financial and operational positions and was responsible for financial and business planning. David J. Frear has been Vice President and Chief Financial Officer of Orion since November 1993, Treasurer of Orion since January 1994 and Senior Vice President since the second quarter of 1997. From September 1990 through April 1993, Mr. Frear served as Vice President and Chief Financial Officer of Millicom Incorporated, an international telecommunications service company. From January 1988 to September 1990, Mr. Frear held various positions in the investment banking department at Bear, Stearns & Co. Inc. Mr. Frear received his CPA in 1979. Richard H. Shay has been Secretary of Orion since January 1993, a Vice President from April 1992 until becoming Senior Vice President in the second quarter of 1997. From July 1981 until September 1985, Mr. Shay served as Chief Counsel to the National Telecommunications and Information Administration ("NTIA") of the U.S. Department of Commerce and then as Deputy General Counsel to the Department, where he was responsible for the legal matters of the Department's agencies. In his capacity as Chief Counsel to NTIA, Mr. Shay also served as Acting Director of its Office of International Policy, served on the official U.S. delegation to the 1982 Nairobi Plenipotentiary Conference of the ITU and was involved in preparation for the 1983 ITU Direct Broadcast Satellite World Administrative Radio Conference. Denis J. Curtin is Senior Vice President and General Manager, Engineering, Operations and Technology. He joined the Company in September 1988 as Vice President, Engineering. He previously was Senior Director of Satellite Engineering of COMSAT's Systems Division. While at COMSAT, Dr. Curtin served for over 21 years in the systems engineering, program and engineering management of both domestic and international satellite systems. He has an MS in Physics, a Ph.D. in Mechanical Engineering, and has published numerous papers on solar cell and solar array technology, is the editor of the Trends in Satellite Communications and is a Fellow of the American Institute of Astronautics and Aeronautics. Hans C. Giner became President of Orion Network Systems-Asia Pacific, Inc., Orion's subsidiary devoted to pursuing construction and launch of a satellite covering the Asia Pacific region, in the fourth quarter of 1995 and a Vice President of Orion in the first quarter of 1996. Mr. Giner served as a consultant to Orion from October 1995 through January 1996 relating to similar matters. Prior thereto, he held senior positions in the satellite and telecommunications industries for more than 20 years. Most recently, from April 1994 through September 1995 he served as President of Stellar One Corporation, a high-tech company designing, manufacturing and distributing technologies for telecommunications groups, particularly local telephone and cable television companies. Prior to that, from November 1987 through March 1994, Mr. Giner held several positions for, and ultimately served as president and CEO of Millisat Holdings, Inc., a member of the Millicom Group, with worldwide responsibility for development of media and telecommunications properties, including broadcast, cable and wireless television. 71 Richard J. Brekka has been a director of Orion since June 1994. He is a Managing Partner of MWI and Partners and a Senior Managing Director of Dolphin Communications. He was a Managing Director of CIBC Wood Gundy Capital ("CIBC-WG"), the merchant banking division of Canadian Imperial Bank of Commerce ("CIBC") and was a Director and the President of CIBC Wood Gundy Ventures, Inc., an indirect wholly owned subsidiary of CIBC until June 1997. Mr. Brekka joined CIBC-WG in February 1992. Prior to joining CIBC-WG, Mr. Brekka was an officer of Chase Manhattan Bank's merchant banking group from February 1988 until February 1992. Warren B. French, Jr. has been a director of Orion since August 1988. He was President and a director of Shenandoah Telephone Company of Edinburg, Virginia from 1973 to 1988 and President and a director of Shenandoah Telecommunications Company, the parent company of Shenandoah Telephone Company, from 1981 to 1988. From 1988 through 1995, he was Chairman and a director of Shenandoah Telecommunications Company. He is a past Chairman of the United States Telephone Association and is a former director of First National Corporation, and of Hungarian Telephone and Cable Corp. Barry Horowitz has been a director of Orion since May 1996. He is President and Chief Executive Officer of Mitretek Systems, Inc. Mitretek works with federal, state and local governments as well as other non-profit public interest organizations on technology-based research and development programs. Mitretek was incorporated in December 1995 as a result of a restructuring with The MITRE Corporation. Principal capabilities are related to information and environmental system technologies. In addition, Dr. Horowitz is President and Chief Executive Officer of Concept 5 Technologies, Inc., a subsidiary of Mitretek, which provides technical services to commercial clients, with its initial focus on the financial community. Prior to the restructuring and since 1969, Dr. Horowitz served MITRE in several capacities, including Trustee and President and CEO. Sidney S. Kahn has been a director of Orion since July 1987. He is presently a private investor. From 1977 to December 1989, he was Senior Vice President of E.F. Hutton Company, Inc., a wholly owned subsidiary of the E.F. Hutton Group, Inc. He is also a director of Delia's, Inc. John G. Puente has been a director since 1984. Mr. Puente was Chairman of Orion from April 1987 through January 1996, and since July, 1996 has been serving as a consultant to the Company and chairman of the Company's Executive Committee. He served as Chief Executive Officer of Orion from April 1987 through September 1993. He was a director and, from 1978 to April 1987, served as Senior Vice President, Executive Vice President or Vice Chairman of M/A-COM, Inc., a diversified telecommunications and manufacturing company. He was a founder of SouthernNet, Inc., a fiber optic long distance communications company and one of the two companies that merged to form Telecom USA, Inc. (which was later acquired by MCI), serving as a director of SouthernNet from July 1984 until August 1987, and Chairman of the Board of SouthernNet from July 1984 until December 1986. During his tenure as Chairman of the Board of SouthernNet, Mr. Puente was instrumental in the founding of the National Telecommunications Network, a national consortium of long distance fiber optic communications companies, and was its first chairman. In 1972, Mr. Puente was a founder of DCC, Inc., of which he became Chairman and CEO. In 1978, DCC, Inc. was acquired by Microwave Associates to form M/A-COM, Inc.; DCC, Inc., subsequently was acquired by Hughes Aircraft Company and became Hughes Network Systems, Inc. Mr. Puente also played a prominent role in the early development of the communications satellite industry, holding technical and executive positions in COMSAT and American Satellite Corporation. He is also a director of Primus Telecommunications, Inc. W. Anthony Rice has been a director of Orion since January 1994. Mr. Rice is Chief Executive Officer of British Aerospace Asset Management, the business unit responsible for all of the company's activities in respect of commercial aircraft leasing and financing. Previously, he served as Group Treasurer of British Aerospace Public Limited Company from 1991 until the end of 1995. British Aerospace is Europe's leading defense and aerospace company. John V. Saeman has been a director of Orion since December 1982. He is an owner of Medallion Enterprises LLC, a private investment firm located in Denver, Colorado. Mr. Saeman was Vice Chairman and Chief Executive Officer of Daniels & Associates, Inc. and its related entities in the telecommunications field from 1980 to 1988. He is former director as well as past Chairman of Cable Satellite Public Affairs Network (C-Span) as well as a former director and past Chairman of the National Cable Television Association. Mr. Saeman was a director of Celerex Corporation and is a director of Nordstrom National Credit Bank. Celerex Corporation filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code in 1995. 72 Robert M. Van Degna has been a director of Orion since June 1994. He is the managing general partner of Fleet Equity Partners ("Fleet"). Mr. Van Degna joined Fleet Financial Group in 1971 and has held a variety of lending and management positions until he organized Fleet in 1982 and became its managing general partner. Mr. Van Degna also serves as a director of ACC Corporation and Preferred Networks, Inc. Orion's Certificate of Incorporation and Bylaws provide that the Board of Directors of Orion, which presently consists of eleven 11 members (including one vacancy), shall consist of that number of directors determined by resolution of the Board of Directors. The Certificate of Incorporation provides that the Board of Directors shall be divided into three classes, each consisting of approximately one-third of the total number of directors. Class I Directors, consisting of Messrs. Hauser, Horowitz, Puente and Saeman, will hold office until the 1998 annual meeting of stockholders; Class II Directors, consisting of Messrs. Bauer, Kahn and Van Degna will hold office until the 1999 annual meeting of stockholders; and Class III Directors consisting of Messrs. Brekka, Rice and French will hold office until the 2000 annual meeting of stockholders. Upon closing of the Loral Merger, Orion's Board of Directors would no longer be divided into classes. There are no family relationships among any of the directors or officers of Orion. Executive Officers serve at the discretion of the Board of Directors. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has established a Committee on Auditing, Corporate Responsibility and Ethics (the "Audit Committee"), a Committee on Human Resources and Compensation (the "Compensation Committee"), an Executive Committee, a Finance Committee, a Nominating Committee and a Pricing Committee. The Audit Committee is comprised of Messrs. Van Degna (chairman), Hauser and Kahn. The Audit Committee examines and considers matters relating to the financial affairs of the Company, including reviewing the Company's annual financial statements, the scope of the independent annual audit and the independent auditors' letter to management concerning the effectiveness of the Company's internal financial and accounting controls. During the year ended December 31, 1997, the Audit Committee held one meeting. All three members attended the meeting. The Compensation Committee is comprised of Messrs. Brekka (chairman), French and Van Degna. The Compensation Committee considers and makes recommendations to the Company's Board of Directors with respect to programs for human resource development and management organization and succession, approves changes in senior executive compensation, considers and makes recommendations to the Company's Board of Directors with respect to compensation matters and policies and employee benefit and incentive plans and exercises authority granted to it to administer such plans and administers the Company's stock option and grants of stock options under the stock option plans. During the year ended December 31, 1997, the Compensation Committee held six meetings. Two of the three members attended at least five meetings; Mr. Van Degna attended two of the six meetings. The Executive Committee is comprised of Messrs. Hauser, Kahn, Puente (chairman), Saeman and Van Degna. The Executive Committee provides strategic direction with respect to financing, strategic partners, acquisitions and market focus, subject to approval by the Board of Directors of all significant actions. The Executive Committee met numerous times during the year ended December 31, 1997. The Finance Committee is comprised of Messrs. Bauer, Brekka, Hauser, Kahn (chairman), Puente, Rice and Saeman. The Finance Committee considers and makes recommendations to the Board of Directors with respect to the financial affairs of the Company, including matters relating to capital structure and requirements, financial performance, dividend policy, capital and expense budgets and significant capital commitments. During the year ended December 31, 1997, the Finance Committee did not meet. The Nominating Committee is comprised of Messrs. French, Puente, Rice and Saeman (chairman). The Nominating Committee recommends to the Board of Directors qualified candidates for election as directors of the Company and considers candidates, if any, recommended by shareholders. During the year ended December 31, 1997, the Nominating Committee did not meet. 73 The Pricing Committee is comprised of Messrs. Hauser, Kahn and Puente. The Pricing Committee was formed for the purpose of considering and approving the pricing of the Senior Notes and Senior Discount Notes offered in the Bond Offering. During the year ended December 31, 1997, the Pricing Committee held one meeting. All three members attended the meeting. COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Act"), requires the Company's officers and directors and other persons who own more than ten percent of the Company's Common Stock to file reports with the Securities and Exchange Commission about their beneficial ownership of the Company's Common Stock. Based solely on a review of copies of Forms 3, 4 and 5 furnished to it during the last fiscal year, the Company is aware only of the following reports submitted on an untimely basis. A Form 4 for Sidney S. Kahn, a Director of the Company, was filed late with respect to two transactions. There also was a failure to timely file a Form 4 on behalf of John G. Puente, a Director of the Company, with respect to one transaction. LIMITS ON LIABILITY; INDEMNIFICATION Orion's Certificate of Incorporation provides that Orion's directors will not be liable for monetary damages for breach of the directors' fiduciary duty of care to Orion and its stockholders. This provision in the Certificate of Incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as an injunction or other forms of non-monetary relief would remain available under Delaware law. In accordance with the requirements of Delaware law, Orion's directors remain subject to liability for monetary damages (i) for any breach of their duty of loyalty to Orion or its stockholders, (ii) for acts or omissions not in good faith or involving intentional misconduct or knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law for approval of an unlawful dividend or an unlawful stock purchase or redemption and (iv) for any transaction from which the director derived an improper personal benefit. This provision also does not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. Orion's Certificate of Incorporation also provides that, except as expressly prohibited by law, Orion shall indemnify any person who was or is a party (or threatened to be made a party) to any threatened, pending or completed action, suit or proceeding by reason of the fact that such person is or was a director or officer of Orion (or is or was serving at the request of Orion as a director or officer of another enterprise), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and a manner such person reasonably believed to be in or not opposed to the best interests of Orion, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Such indemnification shall not be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to Orion unless (and only to the extent that) the Delaware Court of Chancery or the court in which such action or suit was brought determines that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity. Following the closing of the Loral Merger, it is expected that Orion's Certificate of Incorporation will be amended and/or restated. 74 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth a summary of total compensation, including bonuses, paid to the Chief Executive Officer and the four other most highly paid executive officers (the "named executive officers") for services in all capacities to the Company and its subsidiaries for the fiscal years ended December 31, 1997, 1996, and 1995.
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS PAYOUTS OTHER SECURITIES ANNUAL RESTRICTED UNDERLYING ALL OTHER NAME AND COMPEN- STOCK OPTIONS/ LTIP COMPEN- PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION ($)(1) AWARD(S)($) SARS(#) PAYOUTS SATION($) ------------------ ---- --------- -------- ------------- ----------- ------- ------- --------- W. Neil Bauer............... 1997 $292,736 $100,000 75,000 Executive Officer 1996 278,106 100,000 President and Chief 1995 265,000 90,000 110,294 Executive Officer David J. Frear.............. 1997 205,047 63,000 250,000 Sr. Vice President, Treasurer 1996 185,996 90,000 and Chief Financial Officer 1995 179,005 40,000 4,570 55,147 Hans C. Giner............... 1997 162,920 38,000 40,000 Vice President of the Company 1996 141,638 35,000 35,000 and President, Orion Network 1995 -- -- Systems-Asia Pacific, Inc. Denis J. Curtin,............ 1997 200,548 45,000 43,000 Senior Vice President and 1996 155,380 40,000 5,000 General Manager Engineering, 1995 151,081 38,000 24,705 Operations and Technology John J. Albert.............. 1997 235,000 2040 Sr. Vice President and General1996 250,706 15,000 Manager, Marketing and 1995 175,664 18,000 14,705 Satellite Services
(1) Relocation expenses. OPTION GRANTS IN LAST FISCAL YEAR During 1997, the Company adopted the Orion Network Systems, Inc. 1997 Stock Option Plan (the "1997 Employee Stock Option Plan"). Under the 1997 Employee Stock Option Plan, options to purchase up to an aggregate of 1,300,000 shares of Common Stock are available for grants to employees of the Company. Under the Company's 1987 Employee Stock Option Plan (the "1987 Stock Option Plan"), which expired in 1997, options to purchase up to an aggregate of 400,670 shares of Common Stock were granted during the year ended December 31, 1997. The Company has also adopted a Non-Employee Director Stock Option Plan (the "Non-Employee Director Stock Option Plan"). Under the Non-Employee Director Stock Option Plan, options to purchase up to 380,000 shares have been or will be granted automatically to non-employee directors of the Company. The following table sets forth information concerning grants of stock options to the named executive officers pursuant to the 1997 Employee Stock Option Plan and the 1987 Employee Stock Option Plan during the year ended December 31, 1997. 75
INDIVIDUAL GRANTS ------------------------------------------------------------------------- POTENTIAL REALIZED VALUE AT ASSUMED ANNUAL RATES OF NUMBER OF % OF TOTAL STOCK PRICE SECURITIES OPTIONS APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OR OPTION TERM OPTIONS EMPLOYEES IN BASE PRICE PER EXPIRATION NAME GRANTED FISCAL YEAR SHARE($/SH)(1) DATE 5%($) 10%($) - ---- -------------- ---------------- ----------------- ------------- --------------------- W. Neil Bauer 75,000 7.9 10.00 3/12/04 305,325 711,538 David J. Frear 125,000 13.2 10.00 3/12/04 508,876 1,185,896 125,000 13.2 9.60 4/24/04 488,521 1,138,460 Hans C. Giner 40,000 4.2 11.51 7/16/04 187,429 436,789 Denis J. Curtin 40,000 4.2 10.00 3/12/04 162,840 379,487 3,000 0.3 11.51 7/16/04 14,057 32,759 John J. Albert 40,000 4.2 11.51 7/16/04 187,429 436,789
(1) A grant of 75,000 options to Mr. Bauer , 125,000 options to Mr. Frear and 40,000 options to Mr. Curtin each had exercise prices of ninety percent (93%) of the fair market value of the Common Stock on the date the option was granted. An additional grant of 125,000 options to Mr. Frear had an exercise price of sixty-two (62%) of the fair market value of the Common Stock on the date the option was granted. With respect to the remaining option grants, the option exercise price is equal to one hundred percent (100%) of the fair market value of the Common Stock on the date the option was granted. (2) The options will vest in equal installments over a three year period from the date of grant; provided, however, that options granted to Mr. Frear will immediately vest upon a change of control of the Company. OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES The following table sets forth the value of all unexercised options held at year-end 1997 by the named executive officers. No named executive officer exercised any stock options during the fiscal year.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FY-END DECEMBER 31, 1997(1) ----------------------------- -------------------------------- NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---- ----------------------------- -------------------------------- W. Neil Bauer............................ 149,998/160,295 1,083,736/1,042,541 David J. Frear........................... 119,115/226,472 799,873/1,549,568 Hans C. Giner............................ 7,000/68,000 55,865/448,060 Denis J. Curtin.......................... 38,755/55,823 307,720/373,329 John J. Albert........................... 20,587/52,500 132,565/296,163
- ---------------- (1) Based on a per share price of $17.125 on December 31, 1997. 76 COMPENSATION OF DIRECTORS For the year ended December 31, 1997, directors received annual compensation of $4,000, $1,500 for each Board of Directors meeting attended, $750 for each committee meeting attended (other than with respect to Executive Committee meetings for which no compensation was given) and per annum grants of stock options to purchase 10,000 shares of Common Stock under the Non-Employee Director Stock Option Plan. A grant of options to purchase 10,000 shares of Common Stock was made to each non-employee director in May 1997. An initial grant of options to purchase 30,000 shares of Common Stock under that plan was made to Barry Horowitz, a director, upon his election in March 1996. The option exercise price of the options granted to each non-employee director in May 1997 and Mr. Horowitz in March 1996 was equal to the fair market value of Common Stock on the respective dates the options were granted. EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS The Company has not entered into any employment agreements or any termination of employment or change in control arrangements with any of its officers, except for certain change in control vesting provisions in the 1987 Employee Stock Option Plan, the 1997 Employee Stock Option Plan and the options granted to David J. Frear, Senior Vice President, Chief Financial Officer and Treasurer, under those Options Plans. In his capacity as consultant to the Company, John G. Puente, a director of the Company and Chairman of the Executive Committee, was compensated at a rate of $25,000 per month for the period September 1996 through September 1997 and has been granted non-incentive stock options, which grant was approved by Orion's stockholders in May 1997. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None. HUMAN RESOURCES AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Committee on Human Resources and Compensation of the Board (the "Compensation Committee") is responsible for the oversight and administration of executive compensation and for administration of the Company's 1997 Employee Stock Purchase Plan and 1987 Employee Stock Option Plan, as amended. The Compensation Committee believes that the actions of each executive officer have the potential to impact the short-term and long-term profitability of the Company and considers the impact of each executive officer's performance in designing and administering the executive compensation program. In making compensation decisions, the Compensation Committee has, from time to time, received information and advice regarding the compensation practices of other companies in the satellite communications or related industries. PHILOSOPHY AND OBJECTIVES FOR EXECUTIVE COMPENSATION. The purpose of the Company's executive compensation program is to: (i) attract, motivate and retain key executives responsible for the success of the Company as a whole; (ii) increase shareholder value; (iii) increase the overall performance of the Company; and (iv) increase the performance of the individual executive. EXECUTIVE COMPENSATION POLICIES. The Compensation Committee's executive compensation policies are designed to provide competitive levels of compensation that integrate compensation with the Company's short-term and long-term performance goals, reward above-average corporate performance, recognize individual initiative and achievements, and assist the Company in attracting and retaining qualified executives. Target levels of the executive officers' overall compensation are determined subjectively and are intended to be consistent with the Compensation Committee's perception of the salaries of similarly situated senior executives in the satellite communications or related industries. Particular factors which the Compensation Committee believes important to assessing the Company's performance are growth in revenues and the number of customer contracts, completion of financing or other major transactions, implementation of the Company's global satellite network and, on a longer term basis, growth in stockholder value measured by stock price. The Company's executive compensation structure is comprised of base salary, annual cash performance bonuses, long-term compensation in the form of stock option grants, and various benefits, including medical, pension and stock purchase plans generally available to all employees of the Company. 77 Base Salary. In establishing appropriate levels of base salary, the Compensation Committee considered the perceived base salary levels of senior executives at other satellite communications or related companies and the particular officer's overall contributions to Orion during the past year and previously. Base salaries for fiscal 1997 generally were intended to be the same as the perceived levels of similarly sized companies in the satellite services industry. During fiscal 1997, the President and Chief Executive Officer's base salary was $294,008, representing an approximately 5 percent increase from his 1996 base salary. The Compensation Committee considered a number of factors in approving this increase, including prior base salary increases, the senior executive's increased experience and responsibility, his general performance during the prior year, the Company's increased size and the Compensation Committee's perception as to what salary he could command in other similarly sized companies in the satellite communications or related industries. During fiscal 1997, the Compensation Committee approved base salary increases for the Named Executive Officers of between approximately 5 and 14 percent, based on the factors described above. Annual Performance Bonuses. Since 1994, a significant portion of compensation for executives has consisted of cash bonuses. In the early part of each fiscal year, the Compensation Committee has reviewed with the President and Chief Executive Officer and approved, with any modifications it deems appropriate, the annual performance bonus range for each senior executive for that year. Generally, these bonuses have ranged up to approximately 40 percent of such senior executive's base salary. The actual amount of a bonus grant is determined subjectively at the end of each fiscal year, based on such factors as the perceived value to the Company of the individual's achievement and the amount of effort involved in such achievement, the salary level of the individual and the performance of the Company. For 1997, the Compensation Committee granted the President and Chief Executive Officer a performance bonus of $100,000, representing 34 percent of his annual base salary (compared to his potential bonus of 40 percent of his base salary). The Compensation Committee also awarded bonuses to the Named Executive Officers, other than the President and Chief Executive Officer, totaled approximately 27 percent of such executives' annual base salary, as compared to opportunities totaling approximately 35 percent. Stock Option Grants. The Company believes that stock option grants provide meaningful long-term incentives because they reward the enhancement of stockholder value. The number of stock options granted to each senior executive is determined subjectively, principally at the time such executive is hired by the Company, based on a number of factors, including the individual's anticipated degree of responsibility, salary level and stock option awards by other similarly sized satellite communications or related companies. Stock option grants by the Compensation Committee generally are made under the Company's 1997 Employee Stock Option Plan at the prevailing market value and will have value only if the Company's stock price increases. Grants made by the Compensation Committee generally vest in equal annual amounts over three or five years; executives must be employed by the Company at the time of vesting in order to exercise the options. During fiscal 1997, the Compensation Committee granted named executives officers options exercisable for an aggregate of 658,000 shares of the Company's common stock, at an average exercise price of $10.55 in connection with such executive officers' performance. Factors considered in making such awards include, the general level of such executive's performance, salary level, stock and option holdings and recent noteworthy achievements. Respectfully submitted, HUMAN RESOURCES AND COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS Richard J. Brekka (Chairman) Warren B. French, Jr. Robert M. Van Degna 78 STOCK PERFORMANCE CHART The following line graph sets forth comparative information regarding the Company's cumulative stockholder return on its Common Stock over the year ended December 31, 1997. Total stockholder return is measured by dividing total dividends (assuming dividend reinvestment) plus share price change for a period by the share price at the beginning of the measurement period. The Company's cumulative stockholder return based on an investment of $100 at the beginning of the year ended December 31, 1997 is compared to the cumulative total return of the NASDAQ Market Index and an index comprised of public companies whose securities have been trading publicly during the year ended December 31, 1997 and which report under the standard industrial classification code 3663 (five companies excluding Orion) (the "Peer Group Index"). COMPARISON OF CUMULATIVE TOTAL RETURN AMONG ORION NETWORK SYSTEMS, INC., NASDAQ MARKET INDEX AND PEER GROUP INDEX FOR THE YEAR ENDED DECEMBER 31, 1997 [OBJECT OMITTED] 79 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of Orion's Common Stock, as of January 15, 1998, by (i) each stockholder known by Orion to be the beneficial owner of more than five percent of the outstanding Orion Common Stock, (ii) each Director of Orion and each named executive officer (see "Executive Compensation - Summary Compensation Table") of Orion, and (iv) all Directors and named executive officers as a group.
PERCENT OF AMOUNT AND TOTAL SHARES OF PERCENT OF NATURE OF COMMON STOCK TOTAL SHARES OF BENEFICIAL OUTSTANDING COMMON STOCK OWNERSHIP (1) (2) FULLY DILUTED BASIS (6) OUTSTANDING ON A - ------------- --- ----------------------- ---------------- British Aerospace....................................... 7,650,226 32.9 26.9 Holdings, Inc. (3)(4) 15000 Conference Center Drive, Suite 200 Chantilly, VA 20151 CIBC Wood Gundy Ventures, Inc........................... 977,123 5.9 3.4 425 Lexington Avenue New York, NY 10017 W. Neil Bauer, President and Chief...................... 215,340 1.3 * Executive Officer (6)(7) 2440 Research Blvd., Suite 400 Rockville, MD 20850 Richard J. Brekka, Director (8)........................ 20,000 * * 712 Fifth Avenue. Suite 8D New York, NY 10019 Denis J. Curtin, Senior Vice President,................. 68,252 * * and General Manager, Engineering, Operations and Technology (20) 2440 Research Blvd., Suite 400 Rockville, MD 20850 David J. Frear, Senior Vice President, Chief............ 179,660 1.0 * Financial Officer and Treasurer (6)(9) 2440 Research Blvd., Suite 400 Rockville, MD 20850 Warren B. French, Jr., Director (10)................... 25,623 * * 124 S. Main Street Edinburg, VA 22824 Hans Giner, President, Orion Network Systems-Asia Pacific, Inc. (11)................ 12,000 * * 2440 Research Blvd., Suite 400 Rockville, MD 20850
80
PERCENT OF AMOUNT AND TOTAL SHARES OF PERCENT OF NATURE OF COMMON STOCK TOTAL SHARES OF BENEFICIAL OUTSTANDING COMMON STOCK OWNERSHIP (1) (2) FULLY DILUTED BASIS (6) OUTSTANDING ON A - ------------- --- ----------------------- ---------------- Gustave M. Hauser, Chairman, Director (3)(6)(12)....... 547,517 3.2 1.9 712 Fifth Avenue New York, NY 01910 Barry Horowitz, Director (13).......................... 20,000 * * Mitretek Systems, Inc. 7525 Colshire Drive McLean, VA 22102 Sidney S. Kahn, Director (3)(6)(14).................... 235,429 1.4 * 14 East 60th Street, Suite 500 New York, NY 10022 John G. Puente, Director (3)(6)(15).................... 519,181 3.1 1.8 2440 Research Blvd., Suite 400 Rockville, MD 20850 W. Anthony Rice, Director (16)........................ 20,000 * * British Aerospace Public Limited Company Warwick House, PO Box 87 Farnborough Aerospace Centre, Farnborough Hants, GU146YU John V. Saeman, Director............................... 1,492,833 8.9 5.2 J.V. Saeman & Co. (3)(6)(17) Medallion Enterprises, LLC Suite 570 3200 Cherry Creek South Drive Denver, CO 80209 Richard H. Shay, Senior Vice President,................ 55,392 * * Law and Administration, Secretary (18) 2440 Research Blvd., Suite 400 Rockville, MD 20850 Robert M. Van Degna, Director (20).................... 20,000 * * Fleet Equity Partners 50 Kennedy Plaza Providence, RI 02903 All directors and named executive officers as a group (14 persons) 3,427,633 19.3 12.1
- ----------------- 1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to be a "beneficial owner" of a security if he or she has or shares the power to vote or direct the voting of such security or the power to dispose or direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has the right to acquire beneficial ownership within 60 days from January 15, 1998. More than one person may be deemed to be a beneficial owner of the same securities. All persons shown in the table above have sole voting and investment power, except as otherwise indicated. This table includes shares of Orion Common Stock subject to outstanding options granted pursuant to Orion's 1997 Employee Stock Option Plan, 1987 Employee Stock Option Plan and Non-Employee Director Stock Option Plan. 2) For the purpose of computing the percentage ownership of each beneficial owner, any securities which were not outstanding but which were subject to options, warrants, rights or conversion privileges held by such beneficial owner exercisable within 60 days were deemed to be outstanding in determining the percentage owned by such person, but were not deemed outstanding in determining the percentage owned by any other person. 3) Stockholders who are parties to the Principal Stockholder Agreement. 4) Includes 3,007,770 shares issuable upon conversion of 52,636 shares of Orion Series C Preferred Stock and 3,571,429 shares issuable upon conversion of $50 million of Convertible Debentures. 5) The percentage ownership of each beneficial owner calculated on a fully diluted basis assumes conversion or exercise of all derivative securities, including options, warrants, rights or conversion privileges. 81 6) Does not include shares issuable upon exercise of warrants which are exercisable only in the event that the Orion Senior Preferred Stock is redeemed by Orion prior to its conversion into Orion Common Stock. 7) Includes 211,763 shares issuable upon the exercise of stock options held by Mr. Bauer exercisable within 60 days. Does not include 10,220 shares held of record, 1,882 shares issuable upon the conversion of 16 shares of Orion Series A Preferred Stock and 522 shares issuable upon conversion of 5.333 shares of Orion Series B Preferred Stock purchased in June 1995 held by Mr. Bauer's wife. Mr. Bauer disclaims beneficial ownership of these shares. 8) Includes 20,000 shares issuable upon exercise of stock options exercisable within 60 days. 9) Includes 171,812 shares issuable upon the exercise of stock options exercisable within 60 days and 1,176 shares issuable upon conversion of 10 shares of Orion Series A Preferred Stock and 326 shares issuable upon conversion of 3.333 shares of Orion Series B Preferred Stock. 10) Does not include 172,520 shares held of record, 29,412 shares issuable upon the conversion of 250 shares of Orion Series A Preferred Stock or 8,170 shares issuable upon conversion of 83.334 shares of Orion Series B Preferred Stock held by Shenandoah Telecommunications Company, of which Mr. French is the former Chairman and presently a consultant. Mr. French disclaims beneficial ownership of these shares. Includes 20,000 shares issuable upon exercise of stock options exercisable within 60 days. 11) Includes 12,000 shares issuable upon the exercise of stock options exercisable within 60 days. 12) Includes 58,823 shares issuable upon the conversion of 500 shares of Orion Series A Preferred Stock and 16,339 shares issuable upon conversion of 166.667 shares of Orion Series B Preferred Stock held by Mr. Hauser and his wife. Includes 120,000 shares issuable upon exercise of stock options exercisable within 60 days. 13) Includes 20,000 shares issuable upon the exercise of stock options exercisable within 60 days. 14) Includes 8,169 shares issuable upon conversion of 83.333 shares of Orion Series B Preferred Stock. Includes 20,000 shares issuable upon exercise of stock options exercisable within 60 days. 15) Includes 153,087 shares issuable upon the exercise of stock options exercisable within 60 days, 1,411 shares issuable upon the conversion of 12 shares of Orion Series A Preferred Stock and 392 shares issuable upon conversion of 4 shares of Orion Series B Preferred Stock held by Mr. Puente. 16) Does not include 7,650,226 shares beneficially owned by British Aerospace Holdings, Inc. Mr. Rice, a director of Orion and a director of British Aerospace Holdings, Inc., disclaims beneficial ownership of these shares. Includes 20,000 shares issuable upon exercise of stock options exercisable within 60 days. 17) The 1,492,833 shares of Orion Common Stock beneficially owned by John V. Saeman include 58,823 shares issuable upon conversion of 500 shares of Orion Series A Preferred Stock, and 16,339 shares issuable upon conversion of 166.667 shares of Orion Series B Preferred Stock. Of the remaining 1,417,671 shares of stock beneficially owned by John V. Saeman, 796,398 are held by J. V. Saeman & Co., a general partnership, of which Mr. Saeman and his wife are the sole partners, 44,196 are held by JCC, Ltd., a limited partnership, of which J. V. Saeman & Co. is the general partner, and 545,523 are held by Medallion Enterprises, LLC, a limited liability company, of which Mr. Saeman and his wife are the sole members. Includes 20,000 shares issuable upon exercise of stock options exercisable within 60 days. 18) Includes 37,544 shares issuable upon exercise of stock options exercisable within 60 days. 19) Includes 55,030 shares issuable upon the exercise of stock options exercisable within 60 days, and 705 shares issuable upon the conversion of 6 shares of Orion Series A Preferred Stock and 196 shares issuable upon conversion of 2 shares of Orion Series B Preferred Stock. 20) Excludes 588,234 shares issuable upon conversion of 4,000 shares of Orion Series A Preferred Stock held by Fleet and 1,000 shares of Orion Series A Preferred Stock held by Chisholm, and 130,718 shares issuable upon conversion of 1,333.333 shares of Orion Series B Preferred Stock held by Fleet. Mr. Van Degna, a director of Orion, is the chairman and chief executive officer of each of the managing general partners of Fleet Equity Partners VI, L.P., the chairman and chief executive officer of Fleet Venture Resources, Inc. and the chairman and chief executive officer of the corporation that is the general partner of the partnership that is the general partner of Chisholm Partners II, L.P. Mr. Van Degna disclaims beneficial ownership of these shares. Includes 20,000 shares issuable upon exercise of stock options exercisable within 60 days. 82 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following is a summary of certain transactions and relationships among the Company and its associated entities, and among the directors, executive officers and stockholders of the Company and its associated entities during the fiscal year ended December 31, 1997. In January 1997, the Company acquired the outstanding minority interest in the Company's subsidiary Orion Asia Pacific Corporation from British Aerospace Satellite Investments, Inc. ("British Aerospace Satellite") in exchange for approximately 86,000 shares of Common Stock). British Aerospace Satellite is an affiliate of British Aerospace Communications, Inc. ("British Aerospace"), the beneficial owner of more than 5% of the Company's Common Stock. In January 1997, the Company sold $60 million of its convertible junior subordinated debentures (the "Convertible Debentures") to two investors, British Aerospace Holdings, Inc., an affiliate of British Aerospace, and Matra Marconi Space. British Aerospace Holdings, Inc. purchased $50 million of the Convertible Debentures and Matra Marconi Space purchased $10 million of the Debentures. British Aerospace beneficially owns more than 5% of the Company's Common Stock. In January 1997, the Company acquired the limited partnership interests in International Satellite Partners, L.P, a wholly owned subsidiary of the Company ("Orion Atlantic"), and other rights relating thereto held by British Aerospace, COM DEV Satellite Communications Limited, Kingston Communications International Limited ("Kingston"), Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate of Matra Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of Nissho Iwai Corp (collectively, the "Exchanging Partners"). The Exchanging Partners exchanged their Orion Atlantic limited partnership interests for 123,172 shares of Series C Preferred Stock (the "Exchange"). With the exception of COM DEV Satellite Communications Limited, the Exchanging Partners each beneficially owned more than 5% of the Company's Common Stock as a result of the Exchange. The Company registered 5,052,202 shares of Common Stock issuable upon conversion of (i) the Series C Preferred Stock (other than the Series C Preferred Stock held by British Aerospace) and (ii) Matra Marconi's Convertible Debentures on a Registration Statement on Form S-3 (the "Exchanging Partners Registration Statement"), which Exchanging Partners Registration Statement became effective on November 19, 1997 (Registration No. 333-40123). As of January 31, 1998, approximately 3.9 million shares of Common Stock (issuable upon the conversion of 56,492 shares of the Series C Preferred Stock) and Matra Marconi's Convertible Debentures had been sold pursuant the Exchanging Partners Registration Statement. British Aerospace has recently converted its Convertible Debentures and sold the Common Stock issued upon conversion in sales exempt from registration under the Securities Act. In January 1997, the Company paid $13 million to Matra Marconi Space as incentive payments under the Orion 1 satellite contract of which $10 million was used by Matra Marconi Space to purchase $10 million of the Debentures. Matra Hachette, one of the parent companies of Matra Marconi Space, beneficially owns more than 5% of the Company's Common Stock. In January 1997, a wholly owned subsidiary of the Company was merged with and into Orion Oldco, the predecessor of the Company, as a result of which Orion Oldco become a wholly owned subsidiary of the Company (the "Merger"). In the Merger, all stockholders of Orion Oldco converted their shares of Orion Oldco's common stock and preferred stock into an identical number of shares the Company's Common Stock and Preferred Stock. On December 31, 1997, Orion's Board of Directors adopted the following, subject to stockholder approval at the special meeting of stockholders scheduled for March 20, 1998 (i) amendments to the Non-Employee Director Stock Option Plan and certain options granted thereunder to provide for early vesting of approximately 90,000 options and conversion of options granted under the plan in connection with the Loral Merger, (ii) amendments to the Stock Option Agreement, dated as of July 17, 1996, by and between Orion and John G. Puente, a director and Chairman of the Executive Committee of Orion's Board of Directors, and the 100,000 options granted thereunder to provide for conversion of such options in connection with the Loral Merger and (iii) amendments to the Stock Option Agreement, dated as of March 12, 1997, by and between Orion and Gustave M. Hauser, a director and Chairman of Orion's Board of Directors, and the 100,000 options granted thereunder to provide for conversion of such options in connection with the Loral Merger. 83 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) (1) and (2) List of Financial Statements and Financial Statement Schedules The following consolidated financial statements of Orion Network Systems, Inc. are included in Item 8: Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Operations - Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity (Deficit) - Years ended December 31, 1997, 1996, and 1995 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements - December 31, 1997 All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 84 EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 2.1 Agreement and Plan of Merger, dated as of October 7, 1997, by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation. (Incorporated by reference to exhibit number 2.1 in Current Report on Form 8-K dated October 9, 1997). 2.2 Principal Stockholder Agreement among Orion Network Systems, Inc., Loral Space & Communications Ltd., Loral Satellite Corporation and the stockholders that are signatories thereto, dated as of October 7, 1997. (Incorporated by reference to exhibit number 2.2 in Current Report on Form 8-K dated October 9, 1997). 2.3 Amendment No. 1 Agreement and Plan of Merger, dated as of February 11, 1998, by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation. (Incorporated by reference to exhibit number 2.2 in Registration Statement No. 333-46407 on Form S-4). 2.4 Amendment No. 1 to Principal Stockholder Agreement among Orion Network Systems, Inc., Loral Space & Communications Ltd., Loral Satellite Corporation and the stockholders that are signatories thereto, dated as of December 1, 1997. 3.1 Restated Certificate of Incorporation of Orion Network Systems, Inc. (Incorporated by reference to exhibit number 3.1 in Registration Statement on Form 8-B filed with the Commission on January 31, 1997). 3.2 Amended and Restated Bylaws of Orion Network Systems, Inc. (Incorporated by reference to exhibit number 3.2 in Registration Statement on Form 8-B filed with the Commission on January 31, 1997). 3.3 Certificate of Incorporation of Orion Network Systems, Inc. (Incorporated by reference to exhibit number 3.1 in Registration Statement No. 33-80518 on Form S-1). 3.4 Bylaws of Orion Network Systems, Inc. (Incorporated by reference to exhibit number 3.2 in Registration Statement No. 33-80518 on Form S-1) 3.5 Certificate of Incorporation of Orion Satellite Corporation. (Incorporated by reference to Exhibit number 3.5 to Registration Statement No. 333-19167 on Form S-1). 3.6 Bylaws of Orion Satellite Corporation. (Incorporated by reference to Exhibit number 3.6 to Registration Statement No. 333-19167 on Form S-1). 3.7 Certificate of Limited Partnership of International Private Satellite Partners, L.P. Incorporated by reference to Exhibit number 3.7 to Registration Statement No. 333-19167 on Form S-1). 3.8 Form of Third Amended and Restated Agreement of Limited Partnership of International Private Satellite Partners, L.P. (Incorporated by reference to Exhibit number 3.8 to Registration Statement No. 333-19167 on Form S-1). 3.9 Certificate of Incorporation of OrionNet, Inc. (Incorporated by reference to Exhibit number 3.9 to Registration Statement No. 333-19167 on Form S-1). 3.10 Bylaws of OrionNet, Inc. (Incorporated by reference to Exhibit number 3.10 to Registration Statement No. 333-19167 on Form S-1). Certificate of Incorporation of Orion Network Systems-Asia Pacific, Inc. (formerly known as Orion Asia Pacific Corporation) (Incorporated by reference to Exhibit number 3.11 to Registration Statement No. 333-19167 on Form S-1). 85 EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 3.12 Bylaws of Orion Network Systems-Asia Pacific, Inc. (formerly known as Orion Asia Pacific Corporation) (Incorporated by reference to Exhibit number 3.12 to Registration Statement No. 333-19167 on Form S-1). 3.13 Certificate of Incorporation of OrionNet Finance Corporation. (Incorporated by reference to Exhibit number 3.13 to Registration Statement No. 333-19167 on Form S-1). 3.14 Bylaws of Orion Net Finance Corporation. (Incorporated by reference to Exhibit number 3.14 to Registration Statement No. 333-19167 on Form S-1). 3.15 Certificate of Incorporation of Asia Pacific Space and Communications, Ltd. (Incorporated by reference to Exhibit number 3.15 to Registration Statement No. 333-19167 on Form S-1). 3.16 Bylaws of Asia Pacific Space and Communications, Ltd. (Incorporated by reference to Exhibit number 3.16 to Registration Statement No. 333-19167 on Form S-1). 3.17 Certificate of Incorporation of Orion Network Systems-Europe, Inc. (formerly known as Orion Atlantic Europe, Inc.) (Incorporated by reference to Exhibit number 3.17 to Registration Statement No. 333-19167 on Form S-1). 3.18 Bylaws of Orion Network Systems-Europe, Inc. (formerly known as Orion Atlantic Europe, Inc.) (Incorporated by reference to Exhibit number 3.18 to Registration Statement No. 333-19167 on Form S-1). 4.1 Form of Senior Note Indenture and Form of Note included therein. (Incorporated by reference to Exhibit number 4.1 to Registration Statement No. 333-19167 on Form S-1). 4.2 Form of Senior Discount Note Indenture and Form of Note included therein. (Incorporated by reference to Exhibit number 4.2 to Registration Statement No. 333-19167 on Form S-1). 4.3 Form of Collateral Pledge and Security Agreement. (Incorporated by reference to Exhibit number 4.3 to Registration Statement No. 333-19167 on Form S-1). 4.4 INTENTIONALLY OMITTED 4.5 Form of Warrant Agreement, by and between Orion and Bankers Trust Company, and Form of Warrant included therein. (Incorporated by reference to Exhibit number 4.5 to Registration Statement No. 333-19167 on Form S-1). 4.6 Forms of Warrant issued by Orion. (Incorporated by reference to exhibit number 4.1 in Registration Statement No. 33-80518 on Form S-1). 4.7 Forms of Warrant issued by Orion to holders of Preferred Stock. (Incorporated by reference to exhibit number 4.2 in Registration Statement No. 33-80518 on Form S-1). 4.8 Forms of Certificate of Designation of Series A 8% Cumulative Redeemable Convertible Preferred Stock, Series B 8% Cumulative Redeemable Convertible Preferred Stock and Series C 6% Cumulative Redeemable Convertible Preferred Stock of Orion. (Incorporated by reference to exhibit number 4.3 in Registration Statement No. 333-19795 on Form 8-B filed with the Commission on January 31, 1997). 4.9 Forms of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock certificates of Orion. (Incorporated by reference to exhibit number 4.4 in Registration Statement No. 333-19795 on Form S-4). 86 EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 4.10 Form of Common Stock Certificate of Orion. (Incorporated by reference to exhibit number 4.5 in Registration Statement No. 333-19795 on Form S-4). 4.11 Form of Warrant issued to DACOM Corp. (Incorporated by reference to exhibit number 4.6 in Registration Statement No. 333-19795 on Form S-4). 4.12 Debenture Purchase Agreement, dated January 13, 1997, with British Aerospace and Matra Marconi Space. (Incorporated by reference to exhibit number 4.7 in Registration Statement No. 333-19795 on Form S-4 of Orion Newco Services, Inc.), as amended as of January 31, 1997 (Incorporated by reference to exhibit 10.4 in Current Report on Form 8-K dated February 14, 1997). 10.1 Second Amended and Restated Purchase Agreement, dated September 26, 1991 ("Satellite Contract") by and between OrionServ and British Aerospace PLC and the First Amendment, dated as of September 15, 1992, Second Amendment, dated as of November 9, 1992, Third Amendment, dated as of March 12, 1993, Fourth Amendment, dated as of April 15, 1993, Fifth Amendment, dated as of September 22, 1993, Sixth Amendment, dated as of April 6, 1994, Seventh Amendment, dated as of August 9, 1994, Eighth Amendment, dated as of December 8, 1994, and Amendment No. 9 dated October 24, 1995, thereto. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THESE DOCUMENTS.] (Incorporated by reference to exhibits number 10.13 and 10.14 in Registration Statement No. 33-80518 on Form S-1). 10.2 Restated Amendment No. 10 dated December 10, 1996, between Orion Atlantic and Matra Marconi Space to the Second Amended and Restated Purchase Agreement, dated September 16, 1991 by and between OrionServ and British Aerospace PLC (which contract and prior exhibits thereto were incorporated by reference as exhibit number 10.1). (Incorporated by reference to exhibit number 10.2 in Registration Statement No. 333-19795 on Form S-4). 10.3 INTENTIONALLY OMITTED 10.4 INTENTIONALLY OMITTED 10.5 Contract for a Satellite Control System, dated December 7, 1992, by and between Orion Atlantic, Telespazio S.p.A. and Martin Marietta Corporation. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.31 in Registration Statement No. 33-80518 on Form S-1). 10.6 Credit Agreement, dated as of November 23, 1993, by and between Orion Atlantic, OrionServ and General Electric Capital Corporation (`GECC'). [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.32 in Registration Statement No. 33-80518 on Form S-1). 10.7 Security Agreement, dated as of November 23, 1993, by and between Orion Atlantic, OrionServ and GECC. ("Incorporated by reference to exhibit number 10.33 in Registration Statement No. 33-80518 on Form S-1). 10.8 Assignment and Security Agreement, dated as of November 23, 1993, by and between Orion Atlantic, OrionServ and GECC. (Incorporated by reference to exhibit number 10.34 in Registration Statement No. 33-80518 on Form S-1). 87 EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 10.9 Consent and Agreement, dated as of November 23, 1993, by and between Orion Atlantic, Martin Marietta Corporation and GECC. (Incorporated by reference to exhibit number 10.35 in Registration Statement No. 33-80518 on Form S-1). 10.10 Deed of Trust, dated as of November 23, 1993, by and between Orion Atlantic, W. Allen Ames, Jr. and Michael J. Schwel, as Trustees, and GECC. (Incorporated by reference to exhibit number 10.37 in Registration Statement No. 33-80518 on Form S-1). 10.11 Lease Agreement, dated as of November 23, 1993, by and between OrionNet, Inc. and Orion Atlantic, as amended by an Amendment, dated January 3, 1995. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THESE DOCUMENTS. (Incorporated by reference to exhibit number 10.38 in Registration Statement No. 33-80518 on Form S-1). 10.12 Note for Interim Loans, dated as of November 23, 1993, by and between Orion Atlantic and GECC. (Incorporated by reference to exhibit number 10.42 in Registration Statement No. 33-80518 on Form S-1). 10.13 Sales Representation Agreement and Ground Operations Service Agreement, each dated as of May 1, 1994 and June 03, 1994, by and between each of OrionNet, Inc. and Kingston Communications, respectively, and Orion Atlantic, as amended by side agreements, dated May 1, 1994, July 12, 1994, and February 1, 1995. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THESE DOCUMENTS.] (Incorporated by reference to exhibit number 10.43 in Registration Statement No. 33-80518 on Form S-1). 10.14 Lease Agreement, dated as of October 2, 1992, by and between OrionNet and Research Grove Associates, as amended by Amendment No. 1 dated March 26, 1993. Amendment No. 2 dated August 23, 1993, and Amendment No. 3 dated December 20, 1993. (Incorporated by reference to exhibit number 10.39 in Registration Statement No. 33-80518 on Form S-1). 10.15 Sales Representation Agreement and Ground Operations Service Agreement, dated as of June 30, 1995, by and between MCN Sat Service, S.A. and Orion Atlantic. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.69 in Orion's Registration Statement No. 33-80518 on Form S-1). 10.16 INTENTIONALLY OMITTED 10.17 INTENTIONALLY OMITTED 10.18 INTENTIONALLY OMITTED 10.19 Orion 2 Spacecraft Purchase Contract, dated January 29, 1997 between Orion Atlantic and Matra Marconi Space. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.19 in Current Report on Form 10-K dated March 31, 1997). 10.20 Orion's Amended and Restated 1987 Stock Option Plan as amended. (Incorporated by reference to exhibit number 10.23 in Registration Statement No. 33-80518 on Form S-1). 10.21 INTENTIONALLY OMITTED 10.22 INTENTIONALLY OMITTED 88 EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 10.23 INTENTIONALLY OMITTED 10.24 INTENTIONALLY OMITTED 10.25 INTENTIONALLY OMITTED 10.26 INTENTIONALLY OMITTED 10.27 INTENTIONALLY OMITTED 10.28 INTENTIONALLY OMITTED 10.29 INTENTIONALLY OMITTED 10.30 Stock Purchase Agreement, dated as of April 29, 1994, by and between the Company and SS/L. (Incorporated by reference to exhibit number 10.53 in Registration Statement No. 33-80518 on Form S-1). 10.31 Registration Rights Agreement, dated as of April 29, 1994, by and between the Company and SS/L. (Incorporated by reference to exhibit number 10.54 in Registration Statement No. 33-80518 on Form S-1). 10.32 Purchase Agreement, dated as of June 17, 1994, by and between the Company, CIBC, Fleet and Chisholm. (Incorporated by reference to exhibit number 10.55 in Registration Statement No. 33-80518 on Form S-1). 10.33 Stockholders Agreement, dated as of June 17, 1994, by and between the Company, CIBC, Fleet, Chisholm and certain principal stockholders of the Company. (Incorporated by reference to exhibit number 10.56 in Registration Statement No. 33-80518 on Form S-1). 10.34 Registration Rights Agreement, dated as of June 17, 1994, by and between the Company, CIBC, Fleet and Chisholm. (Incorporated by reference to exhibit number 10.57 in Registration Statement No. 33-80518 on Form S-1). 10.35 Purchase Agreement, dated as of June 16, 1995, by and among the Company, CIBC, Fleet and an affiliate of Fleet. (Incorporated by reference to exhibit number 10.58 in Registration Statement No. 33-80518 on Form S-1). 10.36 Definitive Agreement, dated April 26, 1990, by and between Orion Asia Pacific and Republic of the Marshall Islands and Stock Option Agreement related thereto. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THESE DOCUMENTS.] (Incorporated by reference to exhibit number 10.60 in Registration Statement No. 33-80518 on Form S-1). 10.37 Amended and Restated Option Agreement, dated January, 29, 1997, by and between Orion Atlantic and Matra Marconi Space and First Amendment, dated February 13, 1997, thereto. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.37 in Current Report on Form 10-K dated March 31, 1997). 10.38 INTENTIONALLY OMITTED 10.39 TT&C Earth Station Agreement, dated as of November 11, 1996, by and between Orion Asia Pacific and DACOM Corp. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.39 in Registration Statement No. 333-19795 on Form S-4). 89 EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 10.40 Joint Investment Agreement, dated as of November 11, 1996, by and between Orion Asia Pacific and DACOM Corp. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.40 in Registration Statement No. 333-19795 on Form S-4). 10.41 Orion Network Systems, Inc. Employee Stock Purchase Plan. (Incorporated by reference to exhibit number 4.4 in Registration Statement No. 333-19021 on Form S-8). 10.42 Orion Network Systems, Inc. 401(k) Profit Sharing Plan. (Incorporated by reference to exhibit number 4.5 in Registration Statement No. 333-19021 on Form S-8). 10.43 Orion Network Systems, Inc. Non-Employee Director Stock Option Plan. (Incorporated by reference to exhibit number 10.43 in Registration Statement No. 333-19795 on Form S-4). 10.44 Exchange Agreement dated June 1996 among Orion Network Systems, Orion Atlantic, OrionServ and the Limited Partners. (Incorporated by reference to exhibit 10 in Current Report on Form 8-K dated December 20, 1996). 10.45 First Amendment to Exchange Agreement dated December 1996 among Orion Network Systems, Orion Atlantic, OrionServ and the Limited Partners. (Incorporated by reference to exhibit number 10.45 in Registration Statement No. 333-19795 on Form S-4). 10.46 Redemption Agreement dated November 21, 1995, by and between STET and Orion Atlantic, the promissory notes delivered thereunder and Instrument of Redemption relating thereto. (Incorporated by reference to exhibit number 10.1 in Current Report on Form 8-K dated November 21, 1995). 10.47 IPSP-Telecom Italia Agreement dated November 21, 1995, by and between Telecom Italia and Orion Atlantic. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.2 in Current Report on Form 8-K dated November 21, 1995). 10.48 Indemnity Agreement dated November 21, 1995, by and among Telecom Italia, Orion Atlantic, Orion and STET. (Incorporated by reference to exhibit number 10.3 in Current Report on Form 8-K dated November 21, 1995). 10.49 Subscription Agreement dated November 21, 1995, by and between Orion and Orion Atlantic, and the Promissory note delivered thereunder. (Incorporated by reference to exhibit number 10.5 in Current Report on Form 8-K dated November 21, 1995). 10.50 INTENTIONALLY OMITTED 10.51 Registration Rights Agreement, dated January 13, 1997, by and among Orion Newco Services, Inc., British Aerospace Holdings, Inc. and Matra Marconi Space. (Incorporated by reference to Exhibit number 10.51 to Registration Statement No. 333-19795 on form S-4). 10.52 Orion 3 Spacecraft Purchase Contract, dated January 15, 1997, by and among Hughes Space and Communications International, Inc., Orion Asia Pacific Corporation and Orion Network Systems. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.]. (Incorporated by reference to Exhibit number 10.52 to Registration Statement No. 333-19167 on Form S-1). 90 EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 10.53 Letter Agreement, effective as of May 20/21, 1997, by and between Orion Network Systems, Inc. and Morgan Stanley & Co. ++ 10.54 Orion Network Systems, Inc. 1997 Stock Option Plan (Incorporated by reference to Exhibit number 4.4 in Registration Statement No. 333-32457 on Form S-8) - ---------- (b) Reports on Form 8-K filed in the fourth quarter of 1997: Current Report on Form 8-K dated October 8, 1997 reporting execution of the Merger Agreement. (c) Exhibits None. (d) Financial Statement Schedule None. 91 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Orion Network Systems, Inc. (Registrant) Date: March___, 1998 /s/ W. Neil Bauer W. Neil Bauer, President ------------------------------------------- Chief Executive Office and Director (Principal Executive Office) Date: March ___, 1998 /s/ David, J. Frear David J. Frear, Vice President ------------------------------------------- Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Gustave M. Hauser /s/ John V. Saeman --------------------- ------------------ Gustave M. Hauser John V. Saeman Chairman, Director Director /s/ John G. Puente /s/ Richard J. Brekka ------------------ --------------------- John G. Puente Richard J. Brekka Director Director /s/ Warren B. French, Jr. /s/ Sidney S. Kahn ------------------------- ------------------ Warren B. French, Jr. Sidney S. Kahn Director Director /s/ W. Anthony Rice /s/ Robert M. Van Degna ------------------- ----------------------- W. Anthony Rice Robert M. Van Degna Director Director /s/ Barry Horowitz ------------------ Barry Horowitz Director GLOSSARY ORION, THE EXCHANGING PARTNERS AND CERTAIN CREDITORS: BANKS............................ A syndicate of international banks that are parties to the Orion 1 Credit Facility. BRITISH AEROSPACE................ British Aerospace Public Limited Company, one of the world's leading aerospace organizations, and its affiliates, including its subsidiary British Aerospace Communications, Inc., a Limited Partner. Kingston Satellite Services, a joint venture between Kingston Communications and British Aerospace, serves as sales representative and ground operator for Orion in the United Kingdom. COM DEV.......................... COM DEV Satellite Communications Limited, a Limited Partner and a subsidiary of COM DEV, Limited. COM DEV, Limited is also a supplier of value-added satellite communications services, products for wireless personal communications and satellite remote sensing data. GECC............................. General Electric Capital Corporation, the lender for the TT&C Financing. KINGSTON COMMUNICATIONS.......... Kingston Communications International Limited, a Limited Partner and a subsidiary of Kingston Communications (Hull) plc, the only municipally-owned telephone company in the United Kingdom. Kingston Satellite Services, a joint venture between Kingston Communications and British Aerospace, serves as sales representative and ground operator for Orion in the United Kingdom. LIMITED PARTNERS................. The limited partners in Orion Atlantic, including British Aerospace Communications, Inc., COM DEV, Kingston Communications, Lockheed Martin CLS, MCN Sat US, Inc. and Trans-Atlantic Satellite, Inc. LOCKHEED MARTIN.................. Lockheed Martin Corporation, a major manufacturer of aerospace and military equipment, and the ultimate parent company of Lockheed Martin CLS, a Limited Partner and the launch subcontractor under the Orion 1 Satellite Contract. Lockheed Martin CLS acquired the assets of General Dynamics Commercial Launch Services through a transfer of assets from Martin Marietta Corporation, which in turn acquired these and other assets (including the Atlas family of launch vehicles) from General Dynamics Corporation in 1994. LOCKHEED MARTIN CLS.............. Lockheed Martin Commercial Launch Services, Inc., a Limited Partner and a subsidiary of Martin Marietta Technologies, Inc., a Lockheed Martin company. Lockheed Martin CLS acquired the assets of General Dynamics Commercial Launch Services through a transfer of assets from Martin Marietta Corporation, which in turn acquired these and other assets (including the Atlas family of launch vehicles) from General Dynamics Corporation in 1994. Lockheed Martin CLS is a commercial launch services provider and provided launch services to Orion as the launch subcontractor under the Orion 1 Satellite Contract. Lockheed Martin CLS became a Limited Partner by acquiring the limited partnership interest of General Dynamics CLS in the 1994 transaction described above. MATRA HACHETTE................... Matra Hachette, an aerospace, defense, industrial and media company and part of the Lagardere Groupe of France, and the parent company of MCN Sat US, Inc., a Limited Partner. Matra Hachette is one of the parent companies of Matra Marconi Space which is the parent company of MMS Space Systems, the prime contractor for Orion 1, and the manufacturer under the Orion 2 Satellite Contract. 93 GLOSSARY (CONTINUED) NISSHO IWAI CORP................. Nissho Iwai Corporation, is a trading company in Japan, and the parent company of Trans-Atlantic Satellite, Inc., a Limited Partner. ORION............................ (1) the combined operations of Orion Network Systems, Inc., a Delaware corporation, and its subsidiaries (collectively, the "Operating Company"), prior to the date of the merger of a newly formed subsidiary ("Merger Sub") of Orion Newco Services, Inc., a recently formed Delaware corporation ("Orion Newco"), into the Operating Company (the "Merger") and (2) Orion and its subsidiaries, including the Operating Company, after the Merger. ORION 1 CREDIT FACILITY.......... A facility of up to $251 million of senior debt provided to finance Orion 1, which will be repaid with proceeds of the Offering. ORION ASIA PACIFIC............... Asia Pacific Space and Communications, Ltd., a Delaware corporation. Orion acquired 83% of the stock of such company in December 1992 and has acquired the remaining 17%, which was held by British Aerospace, in exchange for approximately 86,000 shares of Common Stock in the OAP Acquisition. ORION ATLANTIC................... International Private Satellite Partners, L.P., a Delaware limited partnership of which OrionServ is the general partner, which owns Orion 1. ORIONNET......................... OrionNet, Inc., a Delaware corporation and wholly owned subsidiary of Orion. ORIONSERV........................ Orion Network Services, Inc. (formerly known as Orion Satellite Corporation), a Delaware corporation and wholly owned subsidiary of Orion. PARTNERSHIP AGREEMENT............ The limited partnership agreement of Orion Atlantic, which includes the terms and conditions governing the partnership arrangements among the Partners. STET............................. STET-Societa Finanziaria Telefonica-per Azioni is a former Limited Partner and the parent company of Telecom Italia, the Italian PTT. STET REDEMPTION.................. The redemption on November 21, 1995 by Orion Atlantic of the limited partnership interest held by STET and modification of STET's previously existing contractual arrangements with Orion Atlantic. TT&C FINANCING................... A facility of up to $11 million provided by GECC for Orion's TT&C facility that was converted to a seven-year term loan on June 1, 1995 and which had an outstanding balance of $7.2 million as of September 30, 1996. SATELLITE CONSTRUCTION AND SATELLITE COMMUNICATIONS: BANDWIDTH....................... The relative range of frequencies that can be passed through a transmission medium without distortion. The greater the bandwidth, the greater the information carrying capacity. Bandwidth is measured in Hertz. C-BAND........................... Certain high frequency radio frequency bands between 3,400 to 6,725 MHz used by communications satellites. 94 GLOSSARY (CONTINUED) CONSTRUCTIVE TOTAL LOSS......... If a satellite is completely destroyed or incapable of operation (except for certain failures due to circumstances beyond the control of the manufacturer) during a specified number of days after launch. FOOTPRINT ....................... Signal coverage area for a satellite. HERTZ............................ The unit for measuring the frequency with which an electromagnetic signal cycles through the zero-value state between the lowest and highest states. One Hertz (abbreviated as Hz) equals one cycle per second; kHz (kiloHertz) stands for thousands of Hertz; MHz (megaHertz) stands for millions of Hertz. HUGHES SPACE..................... Hughes Space and Communications International, Inc., the manufacturer under the Orion 3 Satellite Contract. Hughes Space is a subsidiary of Hughes Aircraft Company, which is a subsidiary of General Motors Corporation. KU-BAND.......................... Certain high frequency radio frequency bands between 10,700 to 14,500 MHz permitting the use of smaller antennae than the older C-band technology. MATRA MARCONI SPACE.............. Matra Marconi Space UK Limited, the parent company of MMS Space Systems and a subsidiary of Matra Marconi Space NV, and the manufacturer under the Orion 2 Satellite Contract. Matra Marconi Space NV is owned by Matra Hachette (51 percent) and General Electric Co. of Britain (49 percent). ORION 1.......................... The high-power Ku-band communications satellite operated over the Atlantic Ocean by Orion. ORION 1 SATELLITE CONTRACT....... The fixed price turnkey contract originally entered into between British Aerospace and Orion Atlantic for the design, construction, launch and delivery in orbit of Orion 1. British Aerospace assigned its rights under the contract to MMS Space Systems, which was subsequently purchased by Matra Marconi Space NV and renamed MMS Space Systems Limited. British Aerospace remains liable to Orion for the performance of the contract but performance has been assigned to MMS Space Systems and the Company understands that MMS Space Systems and Matra Marconi Space NV have fully indemnified British Aerospace against liabilities thereunder. ORION 2.......................... The high-power Ku-band communications satellite to be operated over the Atlantic Ocean by Orion. ORION 2 SATELLITE CONTRACT....... The spacecraft purchase agreement between Orion and Matra Marconi Space for construction and launch of Orion 2. ORION 3.......................... The high-power Ku-band communications satellite to be operated by Orion in the Asia Pacific region. ORION 3 SATELLITE CONTRACT....... The spacecraft purchase agreement between Orion Asia Pacific, a wholly owned subsidiary of Orion, and Hughes Space for construction and launch of Orion 3. SPACE SYSTEMS OR MMS SPACE SYSTEMS........................ MMS Space Systems Limited, a former subsidiary of British Aerospace which was sold to Matra Marconi Space NV, in 1994. MMS Space Systems served as the prime contractor under the Orion 1 Satellite Contract. TRANSPONDER...................... The part of a satellite which is used for the reception of communication signals from, and the frequency conversion, amplification and transmission of communication signals to, earth. 95 GLOSSARY (CONTINUED) TT&C STATION..................... A satellite control system, which includes a satellite control center and a tracking, telemetry and command station complex at Mt. Jackson, Virginia. VSAT............................. Very small aperture terminal earth stations that can be installed on rooftops or elsewhere at customer locations, with antennas as small as 0.8 meters but ranging in sizes up to 2.4 meters in diameter. REGULATION AND COMPETITION: COMMUNICATIONS ACT............... The U.S. Communications Act of 1934, as amended. EUTELSAT......................... European regional satellite facilities consortium owned by approximately 40 European countries. FCC.............................. The United States Federal Communications Commission. INTELSAT......................... International Telecommunications Satellite Organization, an international satellite facilities consortium owned by approximately 140 government and privately owned telecommunications companies. ITU ............................ International Telecommunication Union, an international body formed by treaty that is responsible for coordinating and registering orbital slots to satellites. ORION 1 LICENSE.................. The license granted to Orion by the FCC to construct, launch and operate Orion 1, at designated orbital location 37.5(Degree) West longitude over the Atlantic Ocean. PANAMSAT......................... PanAmSat Corporation, a publicly traded U.S. company providing trans-Atlantic satellite service and services to Latin America, the Pacific Ocean region, and the Indian Ocean region, using a satellite system separate from INTELSAT. PTT.............................. Postal, telephone and telegraph organization, ordinarily a government-owned communications monopoly. 96 EX-11.1 2 EXHIBIT 11.1
Year Ended December 31, ------------------------------------------------------------- 1997 1996 1995 ------------------------------------------------------------- Average shares outstanding 11,639,711 10,951,823 8,476,126 Adjustments for issuance of common stock and other instruments within one year of the initial filing of the registration statement: Common stock issued Common stock options granted 82,445 Common stock issuable upon conversion of preferred stock issued 426,470 Common stock issuable upon conversion of preferred options granted 118,464 --------------- --------------- ---------------- Weighted average shares used in calculating per share data 11,639,711 10,951,823 9,103,505 Net loss attributable to common stockholders (111,774,450) (28,565,075) (26,915,178) (a) Net loss per common share (9.60) (2.62) ($3.07)
(a) Assuming conversion of preferred stock and options and the add back of preferred stock dividend for the period ended March 31, 1995. EX-23.1 3 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements of our report dated February 20, 1998, with respect to the consolidated financial statements of Orion Network Systems, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1997: Post-Effective Amendment No. 1 to the Registration Statement (Form S-8 No. 33-97444) pertaining to the Orion Network Systems, Inc. Amended and Restated 1987 Stock Option Plan; Post-Effective Amendment No. 1 to the Registration Statement (Form S-8 No. 333-19021) pertaining to the Orion Network Systems, Inc. Employee Stock Purchase Plan and the Orion Network Systems, Inc. 401(k) Profit Sharing Plan; Registration Statement (Form S-8 No. 333-24213) pertaining to the Orion Network Systems, Inc. Non-Employee Director Stock Option Plan; Registration Statement (Form S-8 No. 333-32457) pertaining to the Orion Network Systems, Inc. 1997 Stock Option Plan; Post-Effective Amendment No. 1 to the Registration Statement (Form S-1 No. 333-19167) on Form S-3 pertaining to the Warrants; Registration Statement (Form S-3 No. 333-40123) pertaining to the registration of 5,052,202 shares of common stock dated November 13, 1997; and Proxy Statement of Orion Network Systems, Inc. that is made a part of the Registration Statement (Form S-4 No. 333-46407) and related Prospectus of Loral Space & Communications Ltd. dated February 17, 1998 /s/ Ernst & Young LLP Washington D.C. March 18, 1998 EX-27 4 FDS --
5 (Replace this text with the legend) 0001029850 Orion Network Systems, Inc. 1,000 US Dollar 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 70,009 0 11,781 734 0 138,700 371,514 (77,080) 896,492 54,133 0 0 76,734 160 (47,009) 896,492 4,455 72,741 1,824 115,822 59,565 1,022 83,769 (105,740) 0 (105,740) 0 (15,763) 0 (105,740) (9.60) (9.60)
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