-----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, NrPpMPG6s90hr3uycxVeNCWA4MUPPBCLqhRk8+qi0LBFV1J+vT4SjeRG8CpjdpRP qb4oZjCUoKtfgGbdGmlc1A== 0001005150-97-000219.txt : 19970401 0001005150-97-000219.hdr.sgml : 19970401 ACCESSION NUMBER: 0001005150-97-000219 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORION NEWCO SERVICES INC CENTRAL INDEX KEY: 0001029850 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22085 FILM NUMBER: 97571538 BUSINESS ADDRESS: STREET 1: 2440 RESEARCH BLVD SUITE 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 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, 1996 Commission file number 0-26450 ------- 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 -------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of shares of Common Stock held by non-affiliates (based on the February 28, 1997 closing price of these shares) was approximately $101 million. The Common Stock is traded over-the-counter and quoted through the NASDAQ National Market. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at March 15, 1997 - ---------------------------- ----------------------------- Common Stock, $.01 par value 11,160,099 shares DOCUMENTS INCORPORATED BY REFERENCE ------------------------------------- Certain information in the Company's definitive Proxy Statement for its 1997 Annual Meeting of Stockholders to be filed within 120 days after the end of the registrant's fiscal year is incorporated by reference in Part III of this Form 10-K. ORION NETWORK SYSTEMS, INC. TABLE OF CONTENTS
PART I Page Item 1. Business 1 Item 2. Properties 24 Item 3. Legal Proceedings 24 Item 4. Submission of Matters to a Vote of Security Holders 24 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 25 Item 6. Selected Financial Data 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 28 Item 8. Financial Statements and Supplementary Data 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 55 PART III Item 10. Directors and Executive Officers of the Registrant 55 Item 11. Executive Compensation 58 Item 12. Security Ownership of Certain Beneficial Owners and Management 58 Item 13. Certain Relationships and Related Transactions 58 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 58
PART I Item 1. Business. Statements contained in this Annual Report on Form 10-K regarding Orion's expectations with respect to Orion 2 and Orion 3, related financing, future operations and other information, which can be identified by the use of forward looking terminology, such as "may", "will", "expect", "anticipate", "estimate", or "continue" or the negative thereof or other variations thereon or comparable terminology, are forward looking statements. See the "Risk Factors" section of Orion Network Systems, Inc.'s Registration Statement on Form S-1 (Registration No. 333-19167), on file at the Securities and Exchange Commission for cautionary statements identifying important factors with respect to such forward looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from results referred to in forward looking statements. There can be no assurance that Orion Network Systems, Inc.'s expectations regarding any of these matters will be fulfilled. See Glossary at page G-1 at the end of this Annual Report on Form 10-K for certain defined terms and certain technical terms used herein. Overview Orion Network Systems, Inc. ("Orion" or the "Company") is a rapidly growing provider of satellite-based communications services, focused primarily on (i) private communications network services, (ii) Internet services and (iii) video distribution and other satellite transmission services. Orion provides multinational corporations with private communications networks designed to carry high speed data, fax, video teleconferencing, voice and other specialized services. The Orion satellite's ubiquitous coverage reaches all locations within its footprint, enabling the delivery of high speed data to customers in emerging markets and remote locations that lack the necessary infrastructure to support these services. The Company also offers high speed Internet access and transmission services to companies outside the United States seeking to avoid "last mile" terrestrial connections and bypass congested regional Internet network routes. In addition, Orion provides satellite capacity for video distribution, satellite news gathering and other satellite services primarily to broadcasters, news organizations and telecommunications service providers. The Company provides its services directly to customer premises using very small aperature terminals ("VSATs"). The Company commenced operations of Orion 1, a high power Ku-band satellite in January 1995. As of December 31, 1996, Orion serviced 182 customers through 322 points of service. The Company's customers include Amoco Poland Limited, Amway Corporation, AT&T Corp., BBC, British Telecom, CNN, Citibank, N.A., Deere & Co., Global One, GTECH Corporation, Hungarian Broadcasting, News International Limited, RTL Television, Pepsi-Cola International, Sprint Communications, Viacom International Inc., Westinghouse Communications, World Wide Television News and Xerox Corporation, or certain of their subsidiaries. As of December 31, 1996, Orion's contract backlog was $214.9 million (including $89 million from one pre-launch customer on Orion 3). Substantially all of Orion's current contracts with customers are denominated in U.S. dollars. For the three months ended December 31, 1996, the Company generated revenues of $11.8 million and had a loss from operations, net loss and EBITDA (as defined below) of $10.1 million, $7.4 million and $0.5 million, respectively. For the year ended December 31, 1996, the Company generated revenues of $41.8 million and had a loss from operations, net loss, net cash used in operating activities and EBITDA of $36.4 million, $27.2 million, $21.8 million and $0.6 million, respectively. "EBITDA" represents earnings before minority interests, interest income, interest expense, other expense (income), income taxes, depreciation and amortization. EBITDA is commonly used in the communications industry to analyze companies on the basis of operating performance, leverage and liquidity. EBITDA is not intended to represent cash flows for the period and should not be considered as an alternative to cash flows from operating, investing or financing activities as determined in accordance with GAAP. EBITDA is not a measurement under GAAP and may not be comparable to other similarly titled measures of other companies. The Company believes that demand for satellite-based communications services will continue to grow due to (i) the expansion of businesses beyond the limits of wide bandwidth terrestrial infrastructure, (ii) accelerating demand for high speed data services, (iii) growing demand for Internet and intranet services, especially outside the U.S., (iv) increased size and scope of television programming distribution, (v) worldwide deregulation of telecommunications markets and (vi) continuing technological advancements. Satellites are able to provide reliable, high bandwidth services anywhere in their coverage areas, and the Company believes that it is well positioned to satisfy market demand for these services. The Orion Satellite System The Company launched Orion 1, a high power satellite with 34 Ku-band transponders, in November of 1994. Orion 1 provides coverage of 34 European countries, much of the United States and parts of Canada, Mexico and North Africa. Through arrangements with local ground operators, Orion currently has the ability to deliver network services to and among points in 27 European countries, portions of the United States and a limited number of Latin American countries. In July 1996, the Company signed a contract with Matra Marconi Space for the construction and launch of Orion 2 (which was amended and restated in January 1997) and in February 1997 commenced construction of that satellite. Orion 2 will expand the Company's European coverage and extend coverage to portions of the Commonwealth of Independent States, Latin America and the Middle East, as shown in more detail in the footprint set forth below under the caption "Implementation of the Orion Satellite System -- Orion 2". Orion 2 will increase significantly the Company's pan-European capacity, currently the area of strongest demand for the Company's services. The Company recently commenced selling services in certain areas of Latin America. Orion 2 is scheduled to be launched in the second quarter of 1999. In January 1997, the Company entered into a satellite procurement contract with Hughes Space for the construction and launch of Orion 3, construction of which was commenced in December 1996. Orion 3 will cover broad areas of the Asia Pacific region including China, Japan, Korea, India, Southeast Asia, Australia, New Zealand, Eastern Russia and Hawaii, as shown in more detail in the footprint set forth below under the caption "Implementation of the Orion Satellite System - -- Orion 3". Orion 3's footprint will provide the Company with the ability to redistribute 1 programming from the United States via Hawaii to most of the Asia Pacific region. The Company has already taken a number of steps to establish an early market presence in Asia, and has entered into an $89 million lease for eight of Orion 3's 43 transponders. Orion 3 is scheduled to be launched in the fourth quarter of 1998. In the aggregate, the footprints of Orion 1, Orion 2 and Orion 3 will cover over 85% of the world's population. Recent Developments On March 26, 1997, Orion acquired German-based Teleport Europe GmbH, a communications company specializing in private satellite networks for voice and data services. Orion purchased the shares of Teleport Europe held by the German companies, Vebacom GmbH and RWE Telliance AG, now known as o.tel.o for approximately $9 million. Teleport Europe's 1996 revenues were in excess of $14 million. The acquisition expanded Orion's customer base by approximately 55 customers, including some of Germany's leading multinational corporations, and added over 200 Network Service sites (exclusive of Broadcast Service sites). In addition, Orion acquired Teleport Europe's licenses and operating agreements to provide satellite network services in 40 countries, including 17 countries in which Orion previously did not provide service. In January 1997, the Company consummated the Merger (as defined below) as part of a series of transactions which significantly changed the Company. Those transactions, which are discussed in more detail in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K, are as follows: (i) the acquisition of all of the limited partnership interests which the Company did not already own in the Company's operating subsidiary, Orion Atlantic, that owns the Orion 1 satellite, along with rights to receive repayment of various advances by Orion Atlantic and various other rights, in an exchange transaction for 123,172 shares of Series C Preferred Stock (the "Exchange"); (ii) the acquisition by the Company of the only outstanding minority interest in the Company's subsidiary Orion Asia Pacific Corporation from British Aerospace Satellite Investments, Inc., in exchange (the "OAP Acquisition") for approximately 86,000 shares of the Company's Common Stock; (iii) a $710 million notes offering, with warrants representing approximately 2.6% of the outstanding Common Stock of the Company on a fully diluted basis (the "Bond Offering"), and (iv) the sale of $60 million of the Company's Convertible Debentures to British Aerospace Holdings, Inc. and Matra Marconi Space (the "Convertible Debentures Offering"). The Exchange and the OAP Acquisition resulted in the Company owning 100% of Orion Atlantic and its other significant subsidiaries and, therefore, a greatly simplified corporate structure. The Exchange also resulted in a significant increase in the Company's capital stock outstanding. The net proceeds of the Bond Offering and Convertible Debentures Offering were used by the Company to repay the credit facility it entered into in connection with the construction of the Orion 1 satellite, to pre-fund the first three years of interest payments on certain of the Notes, and will be used by the Company for the construction and launch of two additional satellites, Orion 2 and Orion 3. The Company also recently achieved the following significant milestones with respect to the expansion of its satellite network, which are discussed in more detail under the caption "Implementation of the Orion Satellite System." : (i) Orion commenced construction of Orion 2 in February 1997 under a satellite procurement contract with Matra Marconi Space for Orion 2. Orion commenced construction of Orion 3 in December 1996 and entered into a satellite contract with Hughes Space and Communications International, Inc. for Orion 3 in January 1997. (ii)Orion has entered into a contract with DACOM Corp., a Korean communications company ("DACOM"), under which DACOM will, subject to certain conditions, lease eight dedicated transponders on Orion 3 for 13 years, in return for approximately $89 million, payable over a period from December 1996 through seven months following the lease commencement date for the transponders (which is scheduled to occur by January 1999). Payments are subject to refund unless Orion 3 commences commercial operation by June 30, 1999. The Orion Strategy Orion strategy is to maximize its revenues per satellite transponder through the delivery of value added services to end users. To quickly establish a stable base of revenues, Orion sells transponder capacity to video broadcasters and telecommunications service providers. However, Orion's long-term strategic focus is on value-added private network services, which include network design, VSAT installation, support and monitoring, in addition to basic satellite capacity service. The implementation of Orion's strategy is based on the following elements: 2 o Focus on Specialized Communications Needs of Multinational Organizations o Bridge to Emerging Markets and Remote Locations o End-to-End Service o Global Coverage o Early Market Entry o Local Presence o Ownership of Facilities Focus on Specialized Communications Needs of Multinational Organizations Orion targets the needs of multinational businesses and governmental customers for customized private network communications services. Advantages of the Company's satellite-based network services include: (i) transmission over wide areas to multiple dispersed sites including sites in emerging markets; (ii) interconnectivity among all sites; (iii) wide bandwidth and high data speeds; (iv) transmission of data, fax, teleconferencing and voice over the same network; (v) high transmission reliability, quality and security; (vi) Internet access; and (vii) rapid implementation, both for the initial installation and for later network modifications. Due to the flexibility of the network, Orion is able to provide companies with customized solutions to link multiple locations. Bridge to Emerging Markets and Remote Locations Orion targets customers doing business in emerging markets and remote locations of developed markets which often lack the fiber optic and digital infrastructure required for wide bandwidth, high speed data applications. Terrestrial transmissions in many emerging markets must often pass through local, poorly developed network segments before reaching the customer premises, making it difficult to send and receive high speed data. In contrast, Orion's satellite system completely avoids such "bottlenecks" in local network segments by sending and receiving transmissions directly to and from customers, avoiding the need to interconnect with the local infrastructure. A significant portion of Orion's private communications network customers transmit high-speed data to and from locations in Central and Eastern Europe. Orion 2 and Orion 3 will extend coverage to the Commonwealth of Independent States, Latin America and the Asia Pacific Region. End-to-End Service Orion provides its services directly to and among customer locations using satellite transmission and VSATs installed at customer premises. Offering end-to-end services and bypassing terrestrial infrastructure allows Orion to offer higher reliability and higher quality services than some terrestrial facilities by bypassing multiple telecommunications service providers and local networks and avoiding related toll charges. It also permits Orion to install networks more quickly than many of its competitors, who must deal with multiple vendors and multiple communications technologies. Orion offers its customers one-stop shopping. This includes a single point of contact, an all-inclusive contract and consistent quality of service throughout the network. Global Coverage Orion believes that providing global coverage is a competitive advantage in marketing to multinational corporations. Orion 1 covers 34 European countries, much of the U.S. and portions of Canada, Mexico and North Africa. Orion uses capacity leased from other carriers to supplement its network coverage area (such as to areas of Russia and Latin America). Orion estimates that when Orion 2 (with coverage of Europe, Russia, the eastern United States, Latin America, North Africa and the Middle East) and Orion 3 (with coverage of the Asia Pacific region) are deployed, the satellite footprints in the aggregate will cover an area inhabited by over 85% of the world's population. This coverage will enable Orion to offer its customers a single source for service offerings and a greater measure of network quality control than terrestrial alternatives. Early Market Entry Orion develops an early market presence in targeted geographic areas prior to satellite launch in order to build its customer base. To accomplish this, Orion hires sales people, develops relationships with local ground operators, and delivers its services using leased satellite capacity. Orion employed this strategy prior to the commercial operation of the Orion 1 satellite and is pursuing the same approach with Orion 2 and Orion 3. For example, the Company is currently providing service in Latin America and Russia over leased satellite capacity. Local Presence Orion has arrangements with 30 local ground operators covering most countries within the Orion 1 footprint, and is entering into additional arrangements as it offers services in new areas. These ground operators are critical to providing integrated service because they obtain necessary licenses, install and maintain the customers' networks, provide in-country business experience and often facilitate market entry. Ownership of Facilities Orion believes it is strategically important to own its satellite facilities. Orion believes that over the long-term ownership of satellite facilities provides a cost advantage over resellers and other private service providers that must lease satellite capacity to provide services to customers. The Company's satellite ownership enables it to control the quality and reliability of its network solutions, maintain the flexibility to rapidly add capacity, new locations and new features to its customer networks, and respond quickly to customer requests. 3 Industry Overview Fixed communications satellites are generally located in geostationary orbit approximately 22,300 miles above the earth and blanket large geographic areas of the earth with signal coverage. Satellites are thus well suited for transmissions that must reach many locations over vast distances simultaneously (i.e., point-to-multipoint transmissions), such as the distribution of television programming to cable operators, television stations and directly to homes. Satellites can be accessed from virtually any location within the geographic area they cover. This ubiquitous coverage allows the satellite to transmit voice and data communications to remote locations and emerging markets where terrestrial infrastructure is not well developed. Historically, satellites were used primarily for international voice and data traffic, using large earth stations that enabled lower-power satellites to function as "cables in the sky". The principal drawback to satellite-based voice transmission is the 1/4 of a second delay caused by the signal traveling to and from the satellite. In the U.S., Western Europe and Japan, the use of satellites for voice traffic has decreased since the early 1980s with the growth of fiber optic cable networks. Geostationary satellites now are used primarily for television distribution. However, voice and data traffic remains the dominant use of satellites in developing countries. Prior to the late 1970s or early 1980s, most terrestrial infrastructure consisted of copper wire (and, to a lesser extent, microwave systems), which was well suited for ordinary telephone service. Today most developed economies employ fiber optic cables, which provide much wider bandwidth than copper. In addition, transoceanic cables now link most major industrialized countries. Fiber optic cables are well suited for carrying large amounts of bulk traffic between two fixed locations, and unlike copper wire facilities have sufficient capacity to carry the high speed data communications that comprise an increasing percentage of communications traffic. However, in many less developed areas, terrestrial facilities still consist mainly of copper wire. Even in areas with fiber optic networks, the "last mile" connections to customer premises often consist of copper wire. As a result, customers with sites in areas which are underdeveloped or which have not upgraded their "last mile" copper wire to fiber optic cable often do not have access to the full range of high speed data communications demanded by many businesses. Satellites provide a number of advantages over terrestrial facilities for many high speed communications services. First, satellites provide ubiquitous service within their footprint and can deliver service directly to customers' premises. Satellites enable high speed communications service where there is no suitable terrestrial alternative available. In addition, satellites can completely bypass terrestrial network congestion points, "last mile" bottlenecks and unreliable networks of incumbent service providers to provide advanced services to locations where conventional terrestrial service is available but inadequate. Second, the cost to provide bandwidth via satellite does not increase with the distance between sending and receiving stations. Not only must terrestrial networks add physical capacity to cover additional distances, they must also continually reamplify transmission signals. Satellites are well suited for transmission across large distances, for wide bandwidth and for point-to-multipoint (broadcast) applications. Finally, since VSATs are relatively easy to install and/or relocate, high power satellite networks can be rapidly installed, upgraded and reconfigured. In contrast, installation of fiber optic cable is expensive, time consuming and requires obtaining rights-of-way. The current generation of high power Ku-band satellites, such as Orion 1, is particularly well suited to provide high speed business communications services in addition to video distribution services. The use of the Ku-band frequencies (as opposed to the C-band used by older generations of satellites) offers reduced interference with ground communications. This enables satellites to use the higher broadcasting power necessary to support small, low-cost VSAT earth stations and makes it cost effective to transmit to or among numerous locations. Data Networking During the past decade, there has been significant growth in data networking applications. The data networking market includes a number of types of services, including leased lines for private networks, public data network services, managed network services, frame relay and other services such as ATM (asynchronous transfer mode) and WAN (wide area network) services. Data networking applications include: Private network services; intranets. Many companies are utilizing their own "private" networks to meet their specific communications requirements, including voice and data communications, business television transmissions, video teleconferencing, high speed fax and e-mail. Corporate networks offer higher performance, greater control and security than can be provided through the public network. Corporations are also taking advantage of intranets to distribute information within their own companies using Internet technologies. Data inquiry, collection and retrieval. Hotel and travel reservation systems and financial enterprises use private communications networks for database inquiries and retrieval of information stored on computers. Banks use such networks to verify account balances and connect automatic teller machines to computers. Retail establishments verify credit standing and gather inventory information. Other businesses use private communications networks to gather data from multiple locations and transport it to central locations for analysis. Internet. Business and consumers rely on the Internet for a growing number of services, including research, e-mail, data exchange, software and graphics, financial services and shopping, and even voice communications. These applications are predicted to continue to expand and diversify in the future as enabling technologies mature. Image transmissions. Manufacturing, publishing, research and medical industries use dedicated communications networks for high-resolution image transmissions requiring large amounts of bandwidth. Government networks. Network telecommunications are employed for complex military and nonmilitary government applications, including administrative and logistical functions, that require high security and customer network control. 4 Orion believes that the demand for international data networking will continue to grow as a result of (i) the shift to client/server computing, (ii) the proliferation of bandwidth intensive applications and the development of protocols such as frame relay to handle these applications, and (iii) use of the Internet and intranets as part of main-stream corporate communications. (i) Shift to client/server computing. Businesses are increasingly shifting from using large host computers and centralized data network architectures to distributed PC and workstation based platforms. As a result, businesses require more private network infrastructure to establish and interconnect local and wide area networks. As businesses expand, the ability to link multiple locations becomes more important. (ii) Proliferation of bandwidth intensive applications; frame relay. Companies are relying more heavily on applications such as CAD/CAM and image transfer that require more bandwidth and result in traffic patterns that involve bursts of transmissions. In addition, there is increasing demand for near-instantaneous response time and more reliable data transport. Frame relay services support these applications and reduce the cost of fully and partially meshed networks. (iii) Expansion in Internet and intranet services. The Internet is becoming a major vehicle for economic and social activity enabling broad, global access to financial and business information, research material, and information on leisure, arts and general interest topics. Business uses of the Internet include communication within and among businesses, electronic commerce, advertising and merchandising. Internet usage has also led to increased demand for "intranet" services for corporate applications. Intranet servers are used for publishing information, processing data and data-based applications and collaboration among employees, vendors, and customers. The significant growth in data networking services has led to rapid growth in demand for satellite-based networks. Multinational companies are not always able to implement client/server architectures, install wide bandwidth applications or employ Internet and intranet solutions in every market due to underdeveloped terrestrial communications infrastructure. Therefore, a growing use of VSATs is to provide wide bandwidth capacity to industrial sites in emerging markets and remote locations. Recent Comsys and Price Waterhouse reports have identified an installed base of 140,000 to 160,000 VSATs and predict significant worldwide growth over the next few years. Orion Market Opportunity The Company believes that demand for satellite-based communications services will continue to grow because of (i) the expansion of businesses beyond the limits of wide bandwidth terrestrial infrastructure, (ii) accelerating demand for high speed data services, (iii) growing demand for Internet and intranet services, especially outside the U.S., (iv) increased size and scope of television programming distribution, (v) worldwide deregulation of telecommunications markets and (vi) continuing technological advancements. (i) Expansion of business beyond the limits of wide bandwidth terrestrial infrastructure. Overall growth in the international telecommunications market reflects the increasingly international nature of business, the increasing importance of emerging and newly industrialized economies and the increase in international trade. International businesses expanding into emerging markets often rely on the incumbent communications service providers for voice circuits. However, as large organizations increasingly rely on more sophisticated, high speed communications services to run their businesses, many of these companies face operational bottlenecks when attempting to implement more sophisticated communications networks. These problems are faced both by companies in emerging markets and companies in developed markets that rely on "last mile" copper infrastructure to interconnect with a fiber optic network. Satellites provide wide bandwidth end-to-end service directly connecting customer premises and bypassing the limitations of terrestrial facilities. (ii) Accelerating demand for high speed data services. The growth of graphical user interfaces, the popularity of bandwidth-intensive applications such as CAD/CAM, the incorporation of high-resolution electronic images into business processes and video teleconferencing have necessitated major upgrades of corporate data networks to accommodate the high data transfer requirements of these applications. Most of these high speed data services require fiber optic cable or other high bandwidth connections to the customer premises. Even in developed markets, the "last mile" connection to the customer premises often consists of copper wire, which cannot support many high speed data services. Satellites are well positioned to take advantage of this trend because they provide reliable high bandwidth service everywhere in their coverage areas, reaching sites in underdeveloped areas, and bypass "last mile" copper wire facilities that are unable to support high speed communications. (iii) Demand for Internet and intranet services. The growth in Internet and intranet services has further strained corporate network infrastructures. The utility of Internet services to users is often constrained by the lack of sufficient bandwidth to support high-resolution graphical applications and images. Even where infrastructure quality is high, the rapid growth of the Internet continues to create network congestion. Users are sometimes unable to use current-generation software or gain high speed access to the Internet due to the poor quality of their local terrestrial infrastructure. Satellites have many advantages in delivering Internet services. Satellite-based networks provide services directly to customer premises, bypassing terrestrial bottlenecks and congested Internet routing facilities. In addition, satellite based networks can be designed to support asymmetric and multicast Internet traffic much more efficiently than terrestrial networks. (iv) Increased size and scope of television programming distribution. The global television market is experiencing significant growth, both in terms of the number of broadcasters creating programming and the number of channels available to viewers. Within the U.S., the number of television broadcast and cable television program networks grew from three in 1970 to over 100 in 1993 and to approximately 200 in 1996. U.S. and international broadcasters are seeking to expand into each others' markets, increasing the need for satellite transmission capacity. Non-U.S. broadcasters are using international satellites to distribute domestic programming to U.S. and other overseas audiences of similar cultural heritage. Furthermore, the Company believes that as the number of broadcasters and channels increases, individual competitors will have a greater need for competitive differentiation which will increase the use of live transmissions and expand television coverage. Multichannel programming is expanding rapidly in Eastern Europe, Latin America and Asia. The growth in multichannel 5 programming has increased the demand for international programming such as news and sports. Orion is well positioned to take advantage of this growth due to its high-power Ku-band satellite and trans-Atlantic footprint. (v) Worldwide deregulation of telecommunications markets. During the past decade many countries have liberalized their telecommunications markets in order to permit new competitors to provide facilities and services. These changes have been particularly apparent in Europe, where Orion currently has the ability to deliver network service to and among points in 27 countries. Deregulation is also creating new competitors to national telecommunications companies, which represent potential additional customers for the Company's services. (vi) Continuing technological advancements. The following recent technological advances are expected to increase capacity, efficiency and demand for satellite services: 1. High Power Satellites. The ability of service providers to deliver high quality services directly to customer premises has greatly improved with the development of high power satellites. Older, lower power satellites require large, expensive earth stations to receive transmissions. Typically these earth stations were located outside urban areas and required interconnection with public telephone systems. High power satellites, such as Orion 1, enable the use of small, inexpensive VSAT earth stations that may be installed at customer locations, thereby reducing customer costs and bypassing all terrestrial facilities. 2. Meshed Network Services. Traditional VSAT networks employ a hub/star architecture anchored by an expensive hub earth station that controls the network and communicates with each of the VSATs. Recent advances in VSAT technology have led to the creation of fully meshed satellite-based networks. These networks offer less transmission delay than hub/star networks by enabling any network node to communicate with any other network node directly through the satellite without having to transmit through a central network control point. 3. Frame Relay. The Company believes that despite rapid advances in network services and application software, many companies hesitated to implement meshed data networks due to high overhead costs generated by descriptive and routing commands required to travel with the data traffic. Frame relay technology reduces the number and complexity of commands needed to send data, and enables companies to implement more cost-effective meshed networks. To meet customers' demands for fully meshed frame relay network services, the Company has developed its VISN service. 4. Compressed Digital Video. CDV technology is designed to compress up to ten high-quality video channels into the same bandwidth that previously carried one or two analog channels. This technology is creating a rapid expansion in the number of available video channels with improved transmission quality. CDV lowers the per-channel cost of delivering programming via satellite and cable television systems, thereby enabling more programming options to be provided to smaller markets. The Company believes that CDV will enable continued growth in the number of video channels and also accelerate broadcasters' efforts to distribute their programming internationally. The Company also believes that CDV will result in higher total revenues per transponder as more customers can be served per transponder. However, CDV may also in effect increase the supply of satellite transponders, causing prices to decline. Orion Services Orion provides satellite-based digital communications services comprised of: (i) private network services for multinational business and governmental customers, (ii) Internet backbone and access services and (iii) satellite transmission capacity services, including video distribution services for broadcasters, news organizations and international carriers. For 1996, 60% of revenues were derived from the sale of satellite capacity (primarily for video distribution services). These figures are consistent with the Company's strategy of building a stable base of revenues through sales of transmission capacity and then focusing on the delivery of value-added private network services to end-users. Private Communications Network Services International Leased Line Services. Orion's international leased line services include Digital Link and Digital Channelized Link. Digital Link can be designed as a "point-to-point" private network service directly connecting customer locations or as a "point-to-multipoint" service for customers seeking to transmit communications from a central location to numerous remote sites. Orion also offers Digital Channelized Link, a multiplexed version of Digital Link that integrates digitally compressed voice, fax and data traffic into a single channel. Digital Link and Digital Channelized Link services have been offered by Orion since 1993. International leased line services have constituted a majority of Orion's bookings of private communications network services to date. One customer, a major multinational consumer goods company, required voice/fax and data connectivity from nine offices in Central and Eastern Europe to the company's U.S. headquarters, utilizing data speeds of up to 128 Kbps. The sites are manufacturing centers for the customer's soap and toiletry products and the customer uses Orion's service for managing inventory and "just-in-time" order entry. The customer was seeking a "one-stop shopping" solution delivered by a single network service provider. The customer investigated two alternative networking solutions and selected satellite connectivity provided by Orion over terrestrial facilities provided by the local PTTs due to superior quality. 6 International Data Networking Services. Orion's fully-meshed frame relay based international data networking service, "Virtual Integrated Sky Network" ("VISN"), allows customers to transmit and receive voice, fax and data communications, including intranet services, among multiple locations simultaneously. VISN was developed by Orion and is produced by Nortel Dasa (a joint venture among Northern Telecom, Dornier GmbH, and Daimler Benz Aerospace AG). The first phase of this service became available to customers commencing in the third quarter of 1995, and subsequent phases of the service have been introduced during 1996 and are expected to be introduced during 1997, including the addition of video teleconferencing. VISN offers customers bandwidth on demand for data, voice and fax and, following the introduction of in-process and future releases, customers will have the option to be charged on a "pay per use" basis (e.g., minutes of use for voice and volume for data). VISN employs TDMA technology, which further increase the effective bandwidth available for data transmission. The VISN product was awarded "Best New Transport Technology Product" at the 1995 ComNet New Product Achievement Awards Competition. Most customers have between four and ten sites, and generally have minimum data rates with the ability to use substantially greater bandwidth for bursts of traffic. A VISN customer, Creditanstalt Bankverein, Austria's second largest bank, needed a voice and data network among all of its branches in Central and Eastern Europe. Data applications varied from electronic mail to transfer transactions to its data center in Vienna, along with voice requirements for interoffice telephone calls and facsimile transmission. Creditanstalt investigated terrestrial leased line and dial-up services to satisfy its requirements. Orion's VISN service offered full meshed, frame relay network service which supports both voice/fax and data transmission simultaneously. Creditanstalt replaced its terrestrial network with a nine site VISN network using data speeds of up to 256 Kbps. Internet Backbone and Access Services The Company believes that the rapid growth of the Internet has created substantial opportunities for Orion. First, the United States has become the residence of the majority of the world's Internet content. Companies are looking for reliable, wide bandwidth connections which bypass congested Internet network segments. Orion's transatlantic capacity is well suited for companies in Europe, including Internet Service Providers ("ISPs"), seeking high-speed access to the U.S. Internet. Second, the Internet has begun to evolve from a user centered "pull" environment (users requesting information) to a content provider centered "push" environment (information delivered to users without concurrent request). Broadly distributed entertainment, information and advertising via the Internet are well suited for broadcast, point-to-multipoint communications facilities, such as satellite. By using satellite broadcasts to transmit the most popular Internet content to regional locations, ISPs can reduce their costs and relieve network congestion. Finally, Internet data communications are typically asymmetric. A typical, large Internet data transmission is predicated by a user request that comprises only a few bytes of traffic. This interaction is inefficient when carried over terrestrial full-duplex networks, which carry the same capacity in both directions. Orion's satellite based solutions can be designed with different amounts of capacity in each direction, providing an inexpensive circuit for user requests and high-speed, reliable and available capacity for the data that flows back to the user. Orion offers three Internet-related services, described below. ISP Backbone Service. Orion's DirectNet I service is designed for European ISPs. The service combines a dedicated, high speed point-to-point circuit between the ISP's points of presence in Europe and the North American Internet through a dedicated, fully redundant backbone connection. Orion also offers additional features with its DirectNet I service, including 24-hour network monitoring, control and support and a 99.5% network availability guarantee and associated downtime credits. Orion is pursuing requirements or joint venture arrangements with ISPs in which all of their transatlantic traffic would be carried over Orion 1 as it develops. For example, Orion has an arrangement with PSINet, Inc. in which Orion has agreed to serve as the supplier for PSINet's backbone, connecting PSINet's various points of presence in Europe to the U.S. Internet backbone. Orion's ISP customers include, for example, companies such as Global Ukraine, an ISP based in Kiev. Global Ukraine sought Internet connectivity to the United States backbone with advanced technical features. Orion now provides Global Ukraine with a 256 Kbps circuit from the Ukraine to the United States with a connection into the U.S. Internet at three network access points, providing route diversity and ensuring fast response time by avoiding points of potential network congestion. Orion does not expect DirectNet I to generate more than 10% of its revenues. Corporate Internet Access. Orion's DirectNet II service is offered to international corporations requiring high volume data transmission in connection with World Wide Web browsing and downloading. DirectNet II provides a point-to-point circuit between the North American Internet and the corporation's premises. Orion offers large corporations Internet access service by reselling the Internet access services of several large ISPs, such as DIGEX and UUNet. Multicast Satellite-Based Internet Services. Orion recently introduced its WorldCast service which allows ISPs or corporate users to significantly reduce Internet bandwidth and ground facility costs. The service is based on an asymmetric architecture which couples wide bandwidth satellite broadcasting with narrow bandwidth terrestrial links to the Internet. Furthermore, WorldCast can provide a single channel that is shared among multiple ISPs, which can remove a significant amount of traffic from ISP terrestrial networks. The Company has recently taken orders from customers, but is not currently providing any customers with this service. Video Distribution and Other Satellite Transmission Services Orion provides transmission capacity to cable and television programmers, news and information networks, telecommunications companies and other carriers for a variety of applications. Approximately two-thirds of Orion's transmission capacity services consist of video services. The Company generally offers transmission capacity services under long term contracts and also offers occasional use services for periods of up to a few hundred hours. Video Services -- Contribution. Orion's video services include "contribution," the long-distance transport of video signals (usually one or more television channels) to one location. Viacom has leased capacity for one channel on Orion 1 for the purpose of occasional or full time transmission for video programming from its U.S. facilities to a broadcast facility in London. From there it can be inserted into programming and rebroadcast in 7 Europe. Orion's contribution services also include transport of news programming for RTL, a major commercial broadcast network in Germany. RTL needed to interconnect its various news bureaus in Germany and the U.S. to transmit news stories to its headquarters in Cologne. Orion provided 24 MHz of transatlantic transmission capacity service allowing transmission of RTL's programming in compressed digital video format. Video Services -- Distribution. Cable and television programmers use Orion's satellite transmission services for distribution of television programming to local broadcast stations, cable head-ends, MMDS (multichannel microwave distribution) systems and SMATV (satellite master antenna television). Orion has a joint marketing agreement with NTL, which operates one of the largest video gateways in Europe, located in downtown London. Orion and NTL offer programmers uplink, compression and distribution to cable head-ends throughout the United Kingdom and to locations in Europe. Orion's ability to offer video distribution services is aided by the transponder switching capabilities of Orion 1, which are (and those of Orion 2 and Orion 3 are expected to be) designed to permit programs to be distributed simultaneously throughout the satellite's coverage area. Orion's video distribution customers include Black Entertainment Television, Inc. ("BET"), which was seeking a video distribution service for the distribution of its BET On Jazz International Network, an internationally distributed programming network dedicated to international Jazz and Blues artists. BET required receipt of its signal at its headquarters in Washington, D.C., conversion to a European TV standard, digital compression and uplinking of the compressed digital video signal for distribution to cable head ends in the United Kingdom and other sites in Europe. News and Special Events. Orion 1 is used for transmission of special events or remote feeds to international news bureaus from television stations and on-location mobile transmitters. Because Orion's Ku-band technology and VSAT ground segment infrastructure offers high reception sensitivity, the Company is especially effective in transmitting television signals sent from low-powered portable transmitters typically used by news organizations and program distributors. In contrast to video contribution services, news and special events are characterized by occasional use rather than long-term capacity contracts. CNN selected Orion's service for its coverage of Bosnia, and Orion provided service to the European Broadcasting Union for coverage of the Olympics in Atlanta. International Carriers. Orion satellite transmission services are used by international carriers to provide backup for terrestrial lines and to provide communications services to areas with inadequate telecommunications capabilities. These carriers resell Orion's capacity as part of their own services. Capacity Sales. Orion sells bulk capacity to resellers who use Orion's transmission capacity as one component of a customer's end-to-end communications solution. For example, Orion currently sells capacity to a number of firms that resell Orion's capacity to governmental organizations. Orion offers a range of value-added services in conjunction with its video distribution and other satellite transmission services. Such services may include the provision of video uplinking and receiving stations, digital compression equipment and software, transmission monitoring and gateway interconnection services. Features and Benefits Orion's satellite-based services offer customers a number of important features, which provide significant benefits versus competing alternatives. Bypass terrestrial network and multiple international connection points. Orion's ability to bypass terrestrial facilities improves service reliability and quality by reducing potential points of failure and avoiding "last mile" limitations. In addition, terrestrial bypass allows Orion to avoid the multiple in-country toll charges of terrestrial facilities and thereby reduces cost. Direct end-to-end service to customer sites. Orion provides service from rooftop to rooftop using VSAT earth stations located on customer premises. This "end-to-end service" is reliable, rapidly installed, easily upgraded and avoids the "last mile" limitations of some terrestrial alternatives. Ubiquitous coverage. Orion delivers wide bandwidth service to emerging markets and remote locations where there are no effective terrestrial alternatives. One-stop shopping. Orion provides its customers with a single point of contact for customer care, including service, billing and support. Two-way communications for all sites. Orion's meshed network solutions and frame relay services promote network efficiency and allow real-time data transfer among dispersed network points. Well-suited for asymmetric communications traffic. Orion's network solutions can be designed to carry asymmetric traffic efficiently, which increases performance and lowers cost to customers for services such as Internet services. Point to multipoint capability. Orion's ability to broadcast video, data and voice to multiple locations simultaneously enables efficient network design. 8 High power Ku-band transmissions, high reception sensitivity. Orion's high power transmissions allow customers to lower costs by utilizing small, less expensive earth station equipment. Orion 1's reception sensitivity allows for effective reception from portable earth stations, an advantage in satellite news gathering. Cost-competitive. Orion prices its services to be competitive with both satellite-based and terrestrial alternatives. Customers and Backlog Customers. As of December 31, 1996, Orion had entered into contracts with 182 customers, principally large multinational corporations, European companies and governmental agencies. These entitles come from many different industries, including communications, broadcasting manufacturing, government, banking and finance, energy, lottery, consumer distribution, Internet access services and publishing. Selected customers from each service area are set forth below.
- --------------------------------------------- ---------------------------------- ---------------------------------- Private Network Services: AT&T Deere & Company Digital Link/Digital Channelized Amoco EDS Link Amway GE Americom Chase Manhattan Bank Global One Citibank News International Limited Concert Westinghouse Private Network Services: Balluff & Co. Pepsi Cola VISN Creditanstalt Price Waterhouse Internet-related Am. Univ. of Bulgaria LV Net Teleport Banknet Spectrum Datac Terminal Bar Global Ukraine TSSA Nask Video Transmission and Other AsiaNet Hughes Network Systems Black Entertainment Television Hungarian Broadcasting Bonneville International MCI British Telecom RTL Television CNN Telecom Italia Comsat Viacom International - --------------------------------------------- ---------------------------------- ----------------------------------
More than half of Orion's customers are based in the U.S., but these customers have a substantial majority of their sites in Western and Eastern Europe. Orion has entered into a contract with DACOM Corp., a Korean communications company which provides international and long distance telephone and leased line services, international and domestic data communications and value added network services. Under the contract, DACOM will, subject to certain conditions, lease eight dedicated transponders on Orion 3 for thirteen years for direct-to-home television service and other satellite services, for $89 million payable in installments from December 1996 through seven months following the lease commencement date of the transponders. DACOM has the right to terminate the contract before March 31, 1997 (and Orion would retain the $10 million paid) if it fails to obtain certain approvals. Payments are subject to refund if Orion 3 has not been successfully launched and commenced commercial operation by June 30, 1999. Although Orion 3 is scheduled to be launched in the fourth quarter of 1998, there can be no assurance that Orion will be able to meet the delivery requirement of this contract. Backlog. At December 31, 1996, Orion had approximately $214.9 million of contracts in backlog (including $89 million from the DACOM contract and after giving effect to the Exchange and related transactions, which resulted in changes to arrangements with Exchanging Partners that reduced backlog by approximately $11 million), as compared to approximately $120.6 million at December 31, 1995. The backlog contracts generally have terms of between three and four years. Orion presently anticipates that at least $166.3 million of its backlog will be realized after 1997. Orion has begun to receive contract renewals under expiring contracts (under some of the earliest contracts, which were entered into in 1993). The size of contracts varies significantly, depending on the amount of capacity required to provide service, the geographic location of the network and other services provided. As of December 31, 1996, Orion had a VSAT installation backlog of 83 units. Although many of the Company's customers, especially customers under large and long-term contracts, are large corporations with substantial financial resources, other contracts are with companies that may be subject to other business or financial risks. If customers are unable or unwilling to make required payments, the Company may be required to reduce its backlog figures (which would result in a reduction in future revenues of the Company), and such reductions could be substantial. The Company has recently instituted tighter credit policies, and has taken steps to remove from backlog arrangements with customers who have not taken service or have not made all required payments. In the second quarter of 1996, the Company determined that one large customer under a long-term contract (accounting for backlog of approximately $19.9 million) was not likely to 9 raise the necessary financing to commence its service in the near future, and accordingly the Company no longer considers such contract part of its backlog. Also in the second quarter of 1996, the Company removed from its backlog contracts with a customer (accounting for backlog of approximately $4.5 million) which had ceased paying for the Company's services. In the fourth quarter of 1996, the Company removed $10.4 million from its backlog related to contracts under which customers failed to use the contracted service or failed to make timely payment. The Company's contracts commence and terminate on fixed dates. If the Company is delayed in commencing service or does not provide the required service under any particular contract, as it has occasionally done in the past, it may not be able to recognize all the revenue it initially includes in backlog under that contract. In addition, the current backlog contains some contracts for the useful life of Orion 1; if the useful life of Orion 1 is shorter than expected, some portion of backlog may not be realized unless services satisfactory to the customer can be provided over another satellite. Sales and Marketing Orion uses both direct and indirect sales channels. Orion markets its private communications network services and Internet services through direct sales, local representatives and distributors in Europe and the United States, and wholesale arrangements with major carriers, Internet service providers, resellers and systems integrators. Orion markets its video distribution and other satellite transmission services primarily through direct sales. Orion also has established arrangements with local companies in most countries within the Orion 1 footprint to assist Orion with selling efforts and to provide customer support and network maintenance functions in those countries (as discussed below under the caption "Network Operations; Local Ground Operators"). Orion generally will enter into a single contract with customers covering service to a number of countries. Orion offers the business customer a single point-of-contact, a single contract and one price for its entire network, which Orion believes constitutes true "one-stop shopping." Orion prices its services centrally, using a single, easily administered set of pricing procedures for customer networks. Marketing will be critical to Orion's success. However, Orion has limited experience in marketing, having commenced full commercial operations in 1995. Orion's marketing program until recently consisted of direct sales using a U.S. based sales force and indirect sales channels, including Limited Partner sales representatives, for sales in Europe. The majority of Orion's contract bookings to date have been generated by its direct sales force. Certain of Orion's indirect sales channels in Europe have not met expectations. Orion has been significantly increasing its direct sales capabilities in Europe, particularly with respect to sales of private communications network services. Although Orion believes that the increase in its European sales capabilities will increase its bookings, there can be no assurance regarding the timing or amount of such increase. Sales of Orion's services generally involve a long-term complex sales process, and Orion's bookings have fluctuated significantly. The Company may from time to time enter into joint ventures or acquire businesses which provide it with additional customers or which enhance its marketing capabilities. The Company recently completed such an acquisition, as discussed above under "Recent Developments". Direct Sales Orion has assembled a direct sales force of 30 (as of December 31, 1996) full-time employees in the United States and Europe to offer its private communications network and satellite transmission services. Approximately 67% of the sales force is based in the United States (in Maryland) and approximately 33% is based in Europe. Orion expects to continue to expand its sales force significantly throughout 1997, both in the U.S. and Europe. Indirect Sales Channels Representatives/Distributors. Orion has entered into agreements for the marketing of its private communications network services in the United Kingdom, France, Germany, Austria, Italy and other European countries. These agreements call for sales, marketing and customer support services in specified geographical areas, generally on a non-exclusive basis. Generally, the duration of these agreements is three years. Third party sales representatives receive commissions and fees for sales and customer support services, each of which are payable over the life of the customer contracts to which the representative's services relate and which are based upon the revenues derived. Sales representatives are supervised by Orion sales managers, who establish marketing strategies with the representatives, establish pricing, attend certain sales calls, develop marketing materials and sales training tools, coordinate joint efforts in promotional events and provide information about Orion's services. Orion also provides engineering support to its sales representatives. Orion provides some of these functions to support the sales efforts of its distributors. Distributors purchase Orion's services at wholesale prices and resell those services to customers at prices determined by the distributors. Two former limited partners of the Orion Atlantic Limited Partnership who serve as sales representatives (and ground operators) are entitled to receive additional commissions under a "profit sharing" formula based on their overall contribution to sales, but no amounts have been paid under such formula to date. Orion expects that unless such sales representatives increase their sales significantly, payments under the profit sharing arrangement will not be material. Major Carriers and Other Wholesalers. Orion has entered into distributor resale arrangements with major carriers, teleport operators, resellers and other companies in the United States and internationally. These distributors typically purchase communications network services from Orion at a wholesale rate for resale to their customers. This represents an important sales channel for the Company, and the Company is focusing on strengthening these relationships. Major carriers employ substantial sales forces and have the advantage of being existing providers to many of Orion's target customers, which makes marketing easier and increases awareness of customer needs. 10 Network Operations; Local Ground Operators Orion has a centralized network operations function at its corporate headquarters in Rockville, Maryland, supported by arrangements with local companies in most countries within the Orion 1 footprint who assist Orion with selling efforts and perform customer support and network maintenance functions. Orion's relationships with ground operators are critical to providing integrated service because ground operators obtain necessary licenses, install and maintain the customers' networks, provide in-country business experience and often facilitate market entry. Network Operations. Once the Company enters into a contract with a customer, it finalizes the design of the customer's network, acquires the required equipment and arranges for the installation and commissioning of the network. Upon commencement of service, Orion also monitors the performance of the networks through its U.S. based network management center, located at its corporate headquarters in Rockville, Maryland, and from facilities in Europe. The network management center allows Orion to perform diagnostic procedures on customer networks and to reconfigure networks to alter data speeds, change frequencies and provide additional bandwidth. Ground Operators. Through arrangements with 30 local ground operators, Orion currently has the ability to deliver network services (through Orion 1 or leased capacity on other satellites) to or among points in twenty seven European countries, the United States and Mexico (which comprise substantially all of the countries within the coverage area of Orion 1), as well as arrangements to deliver network services in certain other Latin American countries. The ground operator agreements call for installation and maintenance of VSATs and other equipment, customer support and other functions in designated geographical areas, generally on a non-exclusive basis. Generally, such ground operations agreements last three years. Orion coordinates ground operations services (including service calls) by its local agents through centralized customer service centers located at Orion's corporate headquarters and at its facilities in Amsterdam. Orion also provides its ground operators with installation and maintenance training materials and support. Ground operators receive fixed fees for installation, maintenance and other services, which vary depending on the level of services and the geographic area. Certain ground operators receive payments for customer support over the life of the related customer contract, based upon the revenues derived. Two former limited partners of the Orion Atlantic Limited Partnership who serve as ground operators are entitled to receive additional fees under a profit sharing formula, but no amounts have been paid under such formula to date and Orion expects that, unless such ground operators significantly increase the number of VSATs they maintain on behalf of Orion for Orion's customers, profit sharing payments will not be material. Orion's operations will continue to depend significantly on Orion being able to provide ground operations for private network services using representatives and distributors throughout the footprint of Orion's satellites. In the event that its network of ground operators is not maintained and expanded, or fails to perform as expected, Orion's ability to offer private network services will be impaired. Set forth below is a map showing the locations of Orion's existing European ground operators and potential new ground operators. [Document contains a map of Europe indicating where Orion has ground operators and where Orion is negotiating the hiring of additional ground operators] 11 Migration Plan for New Markets Prior to the launch of Orion 1, the Company began providing private communications network services to customers over satellite capacity leased from others. This early market entry strategy is being extended to Latin America and Asia with the execution of the Orion 2 Satellite Contract and commencement of construction of Orion 3 in December 1996. By developing an early market presence, Orion builds its customer base, establishes relationships with ground operators and becomes familiar with the regulations and practices in its new markets prior to launch of its satellites. Upon the launch of Orion 1, Orion migrated its customer base to its own satellite, and Orion expects to pursue the same approach for Orion 2 and Orion 3. In Latin America, the Company has a relationship with a ground operator in Mexico and is currently providing service to customers in Mexico, Colombia and Paraguay over leased capacity. The Company intends to migrate such services to Orion 2 after it commences operations, as Orion did with its Orion 1 satellite. The Company has three U.S-based direct sales personnel focused on selling in Latin America, and is pursuing relationships with other potential ground operators and joint venture partners. In Asia, the Company has assigned two full time personnel to pursue arrangements with potential ground operators and joint venture partners, and has commenced discussions with such entities in a number of Asian countries. Orion has begun the process of identifying potential sales representatives in countries within the Orion 3 footprint. The Company has also begun discussions with existing customers who have operations within the Orion 3 footprint and have expressed an interest in procuring Orion's services in Asia. Orion has started to identify other potential multinational and Asia-based customers, and plans to open a regional office in Asia in the second half of 1997. The Company expects its marketing for Orion 3 will be assisted by the $89 million pre-construction lease by DACOM, a Korean communications company, of eight of Orion 3's transponders for direct-to-home service and other satellite services. Implementation of the Orion Satellite System Orion currently provides its services with Orion 1 and with facilities leased from other providers covering areas outside the satellite's footprint. Ultimately the Company will provide these services with three satellites, together with facilities leased outside of its footprints. Orion 1 provides coverage of the Northern Atlantic Ocean region. Orion 2 is being designed to cover the Atlantic Ocean region but with coverage of points further East (into the Commonwealth of Independent States) and South (into Latin America and Africa), and Orion 3 is being designed to cover the Asia Pacific region. The design, construction, launch and in-orbit delivery of a satellite is a long and capital-intensive process. Satellites comparable to Orion's typically cost in excess of $200 million (exclusive of development, financing and other costs) and take two to three years to construct, launch and place in orbit. Prior to launch, the owner generally must obtain a number of licenses and approvals, including approval of the host country's national telecommunications authorities to construct and launch the satellite, coordination and registration of an orbital slot (of which there are a limited number) through the ITU to avoid interference with other communications systems and a consultation on interference with INTELSAT (and EUTELSAT in the case of European satellites). Obtaining the necessary consents can involve significant time and expense, and in the case of the United States, requires a showing that the owner has the financial ability to fund the construction and launch of the satellite and to operate for one year. The Company has commenced construction of Orion 3 and Orion 2 prior to receipt of all regulatory approvals. Failure to obtain such approvals prior to launch would have a material adverse effect on the Company. Orion 1 is expected to have an in-orbit useful life of approximately 10.7 years, estimated to end in October 2005, and Orion 2 and Orion 3 are expected to have in-orbit useful lives of 13 years and 15 years, respectively (based upon present design). While there can be no assurances that adequate financing and regulatory approvals will be obtained, Orion plans to launch replacement satellites as its satellites reach the end of their useful lives. Orion 1 Orion 1 was launched in November 1994 and commenced commercial operations in January 1995. Satellite Design and Footprint. Orion 1, which is in geosynchronous orbit at 37.5(Degree) West Longitude, is a high power Ku-band telecommunications satellite that contains 28 transponders of 54 MHz bandwidth and six transponders of 36 MHz bandwidth (although one of these transponders has not operated in accordance with specifications, as described below). The footprint of Orion 1 is shown below (although certain transponders of Orion 1 can be reconfigured to match changing business and telecommunications requirements). INSERT MAP 12 Satellite Construction and Performance. Orion 1 was constructed by Matra Marconi Space's subsidiary MMS Space Systems Limited, one of the major satellite contractors in Europe. Orion 1 was designed both for the delivery of high-speed data and for high-powered digital video transmission to corporate users. In particular, Orion 1 was designed with high reception sensitivity, which enables two-way transmission from and to small earth stations, reducing the equipment and transmission cost to customers. Orion 1 has transatlantic networking capability, which allows users to uplink data in the U.S. or Europe and downlink that transmission simultaneously to the U.S. and Europe. This configuration simplifies customers' transatlantic networking solutions. Orion believes that Orion 1's Ku-band technology and VSAT ground segment infrastructure is among the least expensive, most flexible technologies for interactive satellite transmissions in the North Atlantic market. Like most recent satellites, Orion 1 offers digitally compressed transmission, in addition to analog transmission, which allows the satellite to increase by up to ten-fold its usable bandwidth per transponder, leading to greater revenue per transponder and greater network availability to customers in need of bandwidth on demand. When Orion 1 was delivered into orbit, one of the 36 MHz transponders with coverage of the United States did not perform in accordance with contract specifications. Orion settled the matter with the manufacturer for a one time refund of $2.75 million (which amount was applied as a mandatory prepayment under the existing Orion 1 Credit Facility). In addition, the manufacturer will pay Orion approximately $7,000 per month for the life of the satellite under the warranty to the extent the transponder is not used to generate revenue. Orion believes that the failure of such transponder to perform in accordance with specifications will not have a significant impact on Orion's ability to offer its services. In November 1995, one of Orion 1's components supporting nine transponders of dedicated capacity serving the European portion of the Orion 1 footprint experienced an anomaly that resulted in a temporary service interruption, lasting approximately two hours. Full service to all affected customers was restored using redundant equipment on the satellite. The redundant equipment currently generates a majority of Orion's revenues. Orion believes, based on the data received to date by Orion from its own investigations and from the manufacturer, and based upon advice from Orion's independent engineering consultant, Telesat Canada, that because the redundant component is functioning fully in accordance with specifications and the performance record of similar components is strong, the anomalous behavior is unlikely to affect the expected performance of the satellite over its useful life. Furthermore, there has been no effect on Orion's ability to provide services to customers. However, in the event that the redundant component fails, Orion 1 would experience a significant loss of usable capacity. In such event, while Orion would be entitled to insurance proceeds of approximately $47 million and could lease replacement capacity and function as a reseller with respect to such capacity (at substantially reduced gross margins), the loss of capacity would have a material adverse effect on Orion. Control of Satellite. Orion uses its tracking, telemetry and command facility in Mt. Jackson, Virginia (the "TT&C facility") to control Orion 1, and has in place backup facilities at its headquarters in Rockville, Maryland. In addition, Orion has a satellite control center at Orion's headquarters in Rockville, Maryland, from which commands can be sent to the satellite, directly, or remotely through the TT&C facility. Orion also has constructed a network management center at its headquarters to monitor the performance of Orion 1 and to perform diagnostic procedures on and to reconfigure its communications networks. Orion leases additional facilities in Europe for backup tracking, telemetry and command and network monitoring functions. Orion 2 Schedule and Footprint. Orion intends to launch Orion 2 in the Atlantic Ocean region to bolster its European capacity and to expand its coverage area in the Commonwealth of Independent States, Latin America and parts of Africa. Orion 2 will be a high power Ku-band communications satellite which will contain approximately 30 transponders of 54 MHz bandwidth. Orion has obtained conditional authorization from the FCC for the orbital slot at 12(Degree) West Longitude for operation of Orion 2. The FCC has commenced the coordination process through the ITU and will commence consultation with INTELSAT upon request from Orion. Orion commenced construction of Orion 2 in February 1997 and expects to launch Orion 2 in mid 1999. [Document contains a map of North America, Latin America, Europe, Africa and Asia showing in shaded areas the proposed coverage footprint of Orion 2] 13 Satellite Construction, Launch and Performance. Matra Marconi Space and MMS Space Systems are the prime contractors for Orion 2 and will use MMS Space Systems' EUROSTAR satellite platform for Orion 2. This platform was previously used for Inmarsat 2, Telecom 2, Hispasat and Orion 1. Lockheed Martin CLS will provide launch services for Orion 2 using the Atlas II A-S launch vehicle. Atlas II A-S, which is larger than the launch vehicle used for the launch of Orion 1, is an expanded version of Atlas II. All 26 of the Atlas II, II A and II A-S launches have been successful. There have been more than 500 Atlas flights since the first research and development launch in 1957. The Orion 2 satellite will be tested extensively prior to launch. Matra Marconi Space is obligated to correct all defects in the satellite or its components discovered prior to the launch. If Orion 2 is launched but fails to meet the specified performance criteria following launch, or fails to arrive at its designated orbit within 180 days of launch, or is completely destroyed or incapable of operation, Orion 2 will be deemed a "constructive total loss." Upon a constructive total loss of Orion 2, Orion would generally be entitled to order from Matra Marconi Space a replacement satellite on substantially the same terms and conditions as set forth in the Orion 2 Satellite Contract, subject to certain pricing adjustments. If Orion 2 is substantially able to perform but fails to meet certain criteria for full acceptance, Orion 2 will be deemed a "partial loss." Upon a partial loss of Orion 2, Orion would be entitled to receive a partial refund based on calculations of Orion 2's performance capabilities. If Orion 2 is not a constructive total loss or partial loss, but does not meet the specified performance requirements at final acceptance or for five years thereafter, Matra Marconi Space may be required to make certain refund payments to Orion up to a maximum of approximately $10 million. Orion's principal remedy in the case of a constructive total loss or partial loss will be under the launch insurance the Company is to obtain. The Orion 2 Satellite Contract provides Orion with an option to purchase a replacement satellite. Under the contract, Orion has an option to purchase a replacement satellite for Orion 2, to be delivered in orbit no later than 21 1/4 months after Orion's exercise of the option. A total or partial loss will involve delays and loss of revenue, which will impair Orion's ability to service its indebtedness, including the Notes, and such insurance will not protect Orion against business interruption, loss or delay of revenues or similar losses and may not fully reimburse the Company for its expenditures. The Orion 2 Satellite Contract provides for incentive payments to encourage early delivery and limited liquidated damages payable in the event of late delivery. The incentive payments would equal $25,000 per day for each day that Orion 2 is delivered prior to the scheduled delivery date. Liquidated damages in the event of a late delivery of Orion 2 also would be calculated on a daily basis, with the aggregate amount not to exceed approximately $12 million. These liquidated damages would be Orion's exclusive remedy for late delivery. Control of Satellite. Orion expects to use the TT&C facility to control Orion 2, and to use its existing network monitoring facilities in Rockville, Maryland and backup facilities in Europe. Orion 3 Schedule and Footprint. Orion intends to launch Orion 3 in the Asia Pacific region. Orion 3 is expected to cover all or portions of China, Japan, Korea, India, Hawaii, Southeast Asia, Australia, New Zealand, and Eastern Russia. Orion 3 is expected to be a high-power satellite with twenty-three 54 MHz and two 27 MHz equivalent Ku-band transponders, ten 36 MHz C-band transponders for use by Orion, and eight Ku-band transponders to be used by DACOM, a large Asian customer, for direct-to-home television services and other satellite services. Orion, through the Republic of the Marshall Islands, has filed the appropriate documentation to begin the ITU process to coordinate an orbital slot at 139(Degree) East Longitude. Orion has not commenced the consultation process with INTELSAT with respect to such orbital slot. Orion commenced construction of Orion 3 in December 1996. Orion 3 is scheduled to be launched in the fourth quarter of 1998. The proposed coverage of Orion 3 is shown below. [INSERT COVERAGE MAP] 14 Pre-Construction Customer. Orion has entered into a contract with DACOM Corp., a Korean communications company which provides international and long distance telephone and leased line services, international and domestic data communications and value added network services. Under the contract, DACOM will lease eight dedicated transponders on Orion 3 for 13 years for direct-to-home television service and satellite services, in return for payment of approximately $89 million payable over a period from December 1996 through seven months following the lease commencement date for the transponders. DACOM has the right to terminate the contract before March 31, 1997 (and Orion would retain the $10 million paid) if it fails to obtain certain approvals. Payments are subject to refund if the successful launch and commencement of commercial operations of Orion 3 has not occurred by June 30, 1999. Although Orion 3 is scheduled to be launched in the fourth quarter of 1998, there can be no assurance that Orion will meet the delivery requirements of this contract. As part of the arrangements with DACOM, Orion granted DACOM a warrant to purchase 50,000 shares of Common Stock at $14 per share. Satellite Construction, Launch and Performance. Orion has selected Hughes Space as the prime contractor for Orion 3 and will use a Hughes Space HS 601 HP satellite platform for Orion 3. Launch services for Orion 3 will be provided using the McDonnell Douglas Delta III launch vehicle. Delta III, which is larger than the launch vehicle used for the launch of Orion 1, is an expanded version of the Delta II launch vehicle which has had 53 successful launches with a failure rate of less than 4%. The most recent launch of a Delta II (on January 17, 1997) resulted in a launch failure. There have been no Delta III flights to date, and the Company expects its launch to be the third Delta III flight based upon information provided by the launch vehicle manufacturer regarding its present flight schedules. Under the Orion 3 Satellite Contract, the Orion 3 satellite will be tested extensively prior to launch. Hughes Space is obligated to correct all defects in the satellite or its components discovered prior to the launch. The risk of loss or damage to Orion 3 passes from Hughes Space to Orion at the time of intentional ignition of Orion 3. After Orion 3 is launched and meets the specified performance criteria following launch, and has not suffered damage caused by any failure or malfunction of the launch vehicle, Hughes Space is required to perform in-orbit testing of Orion 3 to determine whether the transponders meet the specified performance criteria. If the transponders meet the specified performance criteria, Hughes Space is entitled to retain the full satellite performance payments described below. Orion has an option to purchase an additional satellite (which may be used as a replacement satellite) to be launched within 12 to 19 months after Orion exercises such option. Orion must pay a fee if it exercises this option; the size of the fee will depend on whether the additional satellite is required to be delivered in 12, 15 or 19 months. Hughes Space is obligated to furnish the replacement satellite on terms substantially similar to those contained in the Orion 3 Satellite Contract. The Orion 3 Satellite Contract provides for incentive payments to encourage satellite performance and limited liquidated damages payable in the event of late delivery. The incentive payments could total $18 million depending on the satellite's performance, of which $10 million could be payable upon acceptance of the Orion 3 satellite and $8 million is payable over the course of the satellite's operational lifetime. In the event that it is determined during the Orion 3's operational lifetime that a transponder is not successfully operating, Orion is entitled to receive payment refunds under the Orion 3 Satellite Contract. Liquidated damages in the event of a late delivery of Orion 3 also would be calculated on a daily basis, with the aggregate amount not to exceed approximately $6 million. These liquidated damages would be Orion's exclusive remedy for late delivery. Control of Satellite. Orion expects to lease a tracking, telemetry and command facility in the United States to control Orion 3 and to maintain backup facilities in Korea, pursuant to arrangements with DACOM. 15 SUMMARY SATELLITE DATA
ORION 1 ORION 2* ORION 3* ------- -------- -------- Region Covered....................... Europe, Southeastern Eastern U.S., Southeastern Canada China, Japan, Korea, India, Canada, U.S., East of Europe, Commonwealth of Independent Hawaii, Southeast Asia, the Rockies and Paris States, Middle East, North Africa and Australia, New Zealand of Mexico America and Eastern Russia Expected Launch...................... Operational(1) Mid 1999 Fourth Quarter of 1998 Satellite Manufacturer............... MMS Space Systems Matra Marconi Space Hughes Space (subsidiary of Matra Marconi Space) Transponders(2)...................... 34 30 43 Ku-Band(3)........................... 28@0054 MHz 30@0054 MHz 23@0054 MHz 6@0036 MHz 2@0027 MHz 8@0036 MHz (4) C-Band(5)............................ -- -- 10@0036 MHz Usable Bandwidth(6).................. 1728 MHz 1620 MHz 1944 MHz EIRP(7).............................. 47 to 52 dBW 47 to 50 dBW 44 to 52 for Ku-Band; 34 to 38 for C-band returns Total Prime Power(8) ................ 4500 Watts 7000 Watts 8000 Watts Expected End of Useful Life(9)........ 2005 2012 2013 Approximate Percentage of World Population Covered by Satellite(10)........................ 17.9% 27.0% 57.0%
* All information relating to Orion 2 and Orion 3 is based on currently proposed satellite designs. Such designs are not finalized and, therefore, particular features of Orion 2 and Orion 3 are subject to change, although changes are not expected to have a material impact on the operating specifications of the satellites. (1) Orion 1 was launched on November 29, 1994 and commenced commercial operations on January 20, 1995. (2) Satellite transponders receive signals up from earth stations and then convert, amplify and transmit the signals back down to other earth stations. (3) Ku-band frequencies are higher than C-band frequencies and are used worldwide for commercial satellite communications. (4) Orion has entered into a contract with DACOM under which Orion will provide eight dedicated transponders on Orion 3 for direct-to-home television service and other satellite services, provided that Orion 3 is delivered in orbit and fully operational by June 30, 1999. (5) C-band frequencies minimize interference from atmospheric conditions such as rain. C-band satellites share frequencies with terrestrial based microwave systems and therefore require more on-ground coordination to avoid interference problems and generally are lower power, requiring the use of large earth stations to receive signals. A portion of Orion 3 is designed to transmit over C-band frequencies since Orion 3 is to cover areas of Asia where satellite signals experience significant interference from rain during several months of the year. (6) Bandwidth is a measure of the transponder resource which determines the information carrying capacity. The actual information carrying capacity of a transponder is determined by a combination of the transponder's bandwidth and radio-frequency ("RF") power. (7) Equivalent isotropic radiated power ("EIRP") is a measure of the RF power of each transponder. Smaller and less expensive earth terminal antennas can be used with higher EIRP transponders. (8) Total prime power is the total amount of power that is required to support all of the communications and electronics functions of the satellite. (9) The expected end of a satellite's in-orbit useful life is based on the period during which the satellite's on board fuel permits proper station keeping maneuvers for the satellite. The information for Orion 1 is based on fuel level estimates on February 5, 1996. The information for Orion 2 and Orion 3 is based on their expected launch dates and their expected satellite designs, internal studies, the Orion 2 Satellite Contract and the Orion 3 Satellite Contract. 16 (10) The approximate percentages of world population covered or to be covered by the Orion satellites are not additive. In the aggregate, the footprints of the Orion satellites would cover over 85% of the world's population. Orbital Slots Orion 1. Orion has been licensed by the FCC and has completed the coordination process with INTELSAT to operate Orion 1 in geostationary orbit at 37.5(Degree) West Longitude. Orion 2. Orion has obtained conditional authorization from the FCC for the construction, launch and operation of Orion 2 at 12(Degree) West Longitude. On behalf of Orion, the FCC has commenced the orbital slot coordination process through the ITU. Orion believes that its use of the 12(Degree) West Longitude slot for Orion 2 is not likely to interfere with proposed uses of adjacent slots filed for by other governments, except for a possible overlap of 75 MHz with one such filing as discussed more fully below under the caption "-- ITU Coordination Process". Orion has commenced consultation with INTELSAT regarding Orion 2, and believes that since there are no INTELSAT satellites located adjacent to the 12(Degree) West Longitude orbital slot, the INTELSAT coordination should be obtained in due course. Orion 3. Orion, through the Republic of the Marshall Islands, has filed the appropriate documentation with the ITU to begin the ITU coordination process for Orion 3 at 139(Degree) East Longitude. Based upon the time of filing by the Republic of the Marshall Islands, Orion believes that the proposed orbital slot for Orion 3 would have effective priority under ITU procedures with respect to the 139(Degree) East Longitude orbital slot, but some proposals for adjacent slots would be entitled to priority over the Company's proposal (through the Republic of the Marshall Islands) with respect to certain frequencies. Orion believes, based upon its monitoring of the other proposals and information in the industry regarding their progress, that none of these entities will launch a satellite prior to launch of Orion 3 to take advantage of such priority. Orion has not commenced the consultation process with INTELSAT with respect to Orion 3, but as in the case of Orion 2 expects to complete the INTELSAT coordination in due course. Other Orbital Slots. Orion has received an authorization from the FCC for a Ku-band satellite in geostationary orbit at 47(Degree) West Longitude, and has coordinated this orbital position with INTELSAT. Orion has also filed an application with the FCC to operate a satellite at 126(Degree) East Longitude. The FCC has filed documentation with the ITU to commence the coordination process for this slot. In May 1996, in response to Orion's application, the FCC assigned the U.S. domestic orbital location of 135(Degree) West Longitude to Orion. In November 1996, the FCC granted authorization to Orion to utilize the slot, conditioned on Orion submitting financial qualification information, or documentation justifying a waiver of the financial requirements, within 120 days after the release of the individual order with respect to Orion's application. Orion made its filing on March 19, 1997. In May 1996, the FCC assigned Ka-band orbital locations for 33 U.S. companies for international orbital locations, including two assigned to Orion at 78(Degree) East Longitude and 126.5(Degree) East Longitude, and one at 47(Degree) West Longitude. In February 1997, these companies reached a consensual Ka-band orbital assignment plan for domestic orbital positions. Orion received orbital positions during this negotiation at 47(Degree) West Longitude, 81(Degree) West Longitude, 89(Degree) West Longitude, 127(Degree) West Longitude, 78(Degree) East Longitude and 126.5(Degree) East Longitude. The FCC is expected to release Ka-band service rules in April 1997. There can be no assurance that Orion will receive final licenses to operate at these orbital positions, or that the FCC will act favorably on Orion's other satellite filings. ITU Coordination Process. An international treaty to which the U.S. and the Republic of the Marshall Islands are parties requires coordination of satellite orbital slots through the procedures of the ITU. There are only a limited number of such orbital slots. ITU procedures provide for a priority to attach to proposals that are submitted first for a particular orbital slot and associated frequencies, and provide for protection from interference by satellites in adjacent slots. This priority does not establish legally-binding rights, but at a minimum establishes certain procedural rights and obligations for and with respect to the party that first submits its proposal. Over the past decade, a substantial increase in satellite proposals introduced into the ITU coordination process has caused delays in that process. In addition, many proposals are submitted to the ITU for registration of satellite systems that ultimately are not constructed or launched. As a result, the ITU is investigating ways to improve or streamline the filing process for registration of orbital slots. In the meantime, it has become international practice for operators who propose to use a certain orbital slot to investigate and evaluate whether proposals to launch satellites into the same or a nearby orbital location are likely to result in actual operation, and for operators to negotiate with other countries or operators that propose to use the same or a nearby orbital location. There can be no assurance of the outcome of any objections to this international practice or as to the results of the ITU's investigations. Orion is involved in discussions with certain governments concerning their proposals to use orbital slots. While Orion believes that it can successfully coordinate and resolve any interference concerns regarding the use of the orbital locations and frequency bands proposed for Orion 2 and Orion 3, there can be no assurance that this will be achieved, nor can there be assurance that ITU coordination will be completed by the scheduled launch dates for Orion 2 and Orion 3. In the event that successful coordination cannot be achieved, Orion may have to modify the satellite design for Orion 2 or Orion 3 in order to minimize the extent of any potential interference with other proposed satellites using those orbital locations or frequency bands. Any such modifications may result in certain features of Orion 2 and Orion 3 differing from those described in this Prospectus and may result in limitations on 17 the use of one or more transponders on Orion 2 or Orion 3 or delays in the launch of Orion 2 or Orion 3. In order to achieve successful coordination, Orion may also have to modify the operation of the satellites, or enter into commercial arrangements with operators of other satellites, in order to protect against harmful interference to Orion's operations. If interference occurs with satellites that are in close proximity to Orion 2 and Orion 3, or with satellites that are subsequently launched into locations in close proximity without completing ITU coordination procedures, such interference would have an adverse effect on the proposed use of the satellites and on Orion's business and financial performance. Insurance Orion has obtained satellite in-orbit life insurance for Orion 1 covering the period from May 1996 to May 1997 in an initial amount of approximately $245 million providing protection against partial or total loss of the satellite's communications capability, including loss of transponders, power or ability to control the positioning of the satellite. The aggregate premium for in-orbit insurance for Orion 1 is approximately $6 million per annum. Orion intends to procure launch insurance for the construction, launch and insurance costs of Orion 2 and Orion 3. In the past, satellite launch insurance was generally procured approximately six months prior to launch. Recently, it has become possible to obtain a commitment from insurance underwriters well before that time, which fixes the rate and certain terms of launch insurance. Orion intends shortly to seek such a commitment from insurance underwriters to provide launch insurance for Orion 2 and Orion 3. Present insurance rates range at or above 16% of the insured amount, depending upon such factors as the launch history and recent performance of the launch vehicle to be used and general availability of launch insurance in the insurance marketplace (although such rates have reached 20% or higher in the past several years). Such insurance can be expected to include certain contract terms, exclusions, deductibles and material change conditions that are customary in the industry. After launch of Orion 2 and Orion 3, the Company intends to procure satellite in-orbit life insurance for Orion 2 and Orion 3. Launch and in-orbit insurance for its satellites will not protect the Company against business interruption, loss or delay of revenues and similar losses and may not fully reimburse the Company for its expenditures. Competition As a provider of data networking and Internet-related services, Orion competes with a large number of telecommunications service providers and value-added resellers of transmission capacity. As a provider of satellite transmission capacity, Orion competes with other providers of satellite and terrestrial facilities. Many of these competitors have significant competitive advantages, including long-standing customer relationships, close ties with regulatory and local authorities, control over connections to local telephone networks and have financial resources, experience, marketing capabilities and name recognition that are substantially greater than those of Orion. The Company believes that competition in emerging markets will intensify as incumbent service providers adapt to a competitive environment and international carriers increase their presence in these markets. The Company also believes that competition in more developed markets will intensify as larger carriers consolidate, enhance their international alliances and increase their focus on data networking. Orion's ability to compete with these organizations will depend in part on Orion's ability to price its services at a significant discount to terrestrial service providers, its marketing effectiveness, its level of customer support and service and the technical advantages of its systems. Service Providers Orion has encountered strong competition from major established carriers such as AT&T, MCI, Sprint, British Telecom, Cable & Wireless, Deutsche Telekom, France Telecom and Kokusai Denshin Denwa, which provide international telephone, private line and private network services using their national telephone networks and link to those of other carriers. A number of these carriers have formed global consortia to provide private network services, including AT&T -- Unisource Services Company (AT&T, PTT Telecom Netherlands, Telia (Sweden), Swiss Telecom PTT and Telefonica of Spain), Concert (British Telecom and MCI), and Global One (Sprint, France Telecom and Deutsche Telekom). Other service providers include MFS Worldcom (which acquired IDB Communications Group, Inc. and Wiltel International, Inc.), Infonet, SITA, Telemedia International, Spaceline, ANT Bosch (which is being acquired by General Electric), Teleport Europe, Impsat, and various local resellers of satellite capacity. Finally, service organizations that purchase satellite capacity, VSAT and other hardware and install their own networks may be considered competitors of the Company with respect to their own networks. Although these carriers and service providers are competitors, some are also Orion's customers. Orion believes that all network service providers are potential users of Orion's satellite capacity for the network services they offer their customers. Satellite Capacity Orion provides fixed satellite service and does not intend to compete with most proposed mobile satellites or low earth orbit systems ("LEO") such as Globalstar, Iridium or Odyssey (although the Company expects to compete with Teledesic, a proposed LEO system), or, with the exception of the pre-leased transponders on Orion 3 to be used for video transmissions, with direct-to-home satellite systems such as Primestar, DirecTV or EchoStar. Mobile satellite services are characterized by voice and data transmission to and from mobile terminals on platforms such as ships or aircraft. Direct-to-home services are characterized by the transmission of television and entertainment services directly to consumers. Orion's satellites will compete with trans-Atlantic fixed satellite systems, European regional and domestic systems and Asian systems. 18 Existing International and Trans-Atlantic Satellite Systems. The market for international fixed satellite communications capacity has been dominated by INTELSAT for thirty years, and INTELSAT can be expected to continue to dominate this market for the foreseeable future. INTELSAT, a consortium of approximately 140 countries established by international treaty in 1964, owns and operates the largest fleet of commercial geosynchronous satellites in the world (25 satellites, with additional satellites on order). INTELSAT's satellites have historically been general purpose, lower-power satellites designed to serve large areas with public telephone service transmitted between expensive gateway earth stations. INTELSAT generally provides capacity directly to its signatories who then market such capacity to their customers. The availability of new services generally is subject to the discretion of each country's signatory and INTELSAT is required under its charter to set its pricing in order to achieve a fixed pre-tax return on equity that is established from time to time by INTELSAT's board of governors. INTELSAT is considering a restructuring and it is expected that the Intelsat Assembly of Parties will decide on a new structure for the organization in 1997. Any restructuring of INTELSAT that increases its marketing flexibility could materially impact Orion's ability to compete in the market for private satellite delivered services. PanAmSat currently operates four satellites, with one satellite providing coverage in each of the Atlantic Ocean region, the Asia Pacific region and Indian Ocean region (the fourth covers the Atlantic Ocean region but is near the end of its useful life). These satellites primarily provide broadcasting services, such as television programming and backhaul operations. PAS 3, launched in January 1996, with coverage of the Atlantic Ocean, competes directly with Orion 1. It has performance attributes which are generally comparable to those of Orion 1 and carries 16 Ku-band transponders, of which 8 transponders are capable of providing service to or within Europe, and 16 C-band transponders. PanAmSat has announced that it intends to launch four additional satellites, two in 1997 that will provide coverage of the U.S., Central America and Mexico, and two that will provide coverage of the Indian and Pacific Ocean regions, respectively, in 1997 and early 1998. PanAmSat is in the process of selling a controlling interest to Hughes Electronics Corp., which is the largest private space-related company in the world. This transaction will enhance PanAmSat's ability to compete with Orion. Existing European Regional and Domestic Satellite Systems. In Europe, Orion competes with certain regional satellites systems and may compete with domestic satellite systems. Regional and domestic satellite systems generally have limited ability to serve customers with needs for extensive international networks. Orion's primary competitor in Europe is the major regional satellite system operated by EUTELSAT. EUTELSAT, established in 1977, presently comprises over approximately 45 member countries. EUTELSAT operates seven satellites, providing telephony, television, radio and data services, and has announced a plan to launch five new satellites through 1998. Asian Pacific Region Satellite Systems. Orion believes that currently-operating satellite systems in the Asia Pacific region generally are limited in their ability to provide private network and similar services at an acceptable performance level due to insufficient power, limited Ku-band capacity and limited geographic coverage. Nevertheless, there is a large number of satellite systems operating in Asia. The major Asia Pacific regional satellite systems include the AsiaSat system licensed in Hong Kong (with two satellites in operation and a third planned for launch in 1997), the Chinese Apstar system (also with two satellites in operation and a third planned for launch near the end of 1997) and the Indonesian Palapa system (with three satellites in orbit and plans to launch at least three more satellites through 1999). Japan has licensed several satellite networks for domestic and international service, including the JCSat series (three satellites in operation and a fourth planned for launch in 1997), NTT's two N-Star satellites, and Space Communications Corporation's Superbird A and B (with a third planned for 1997). Optus operates four Australian domestic satellites that offer limited international coverage and plans several follow-on satellites. Korea operates Koreasat 1 and 2, primarily for domestic service, with plans for a third satellite that would offer expanded regional service in 1999. Thailand has licensed the Thaicom system, with two domestic satellites in operation, and plans two new satellites in 1997 offering regional coverage. Measat operates a Malaysian system consisting of two satellites providing DTH service to Malaysia and parts of Asia. Other Satellite Systems. There are numerous satellites other than the ones discussed above that compete to some extent with Orion. In addition, the Company is aware of a substantial number of satellites that are in construction or in the planning stages. Most of these satellites will cover areas within the footprint of Orion 1 and/or the proposed footprints of Orion 2 and Orion 3. As these new satellites commence operations, they (other than replacement satellites not significantly larger than the ones they replace) will substantially increase the capacity available for sale in the company's markets. After a satellite has been successfully delivered in orbit, the variable cost of transmitting additional data via the satellite is limited. Accordingly, absent a corresponding increase in demand, this new capacity can be expected to result in significant additional price reductions. For example, Teledesic Corporation proposes to operate up to 840 low earth orbit small satellites by 2001 to provide global satellite services (including voice, data and broadband transmission services). Although Orion cannot assess to what degree, if any, these proposed satellites might compete with Orion in the future, Teledesic could provide significant competition to the Company. Terrestrial Capacity Orion competes with terrestrial facilities for intra-Europe and trans-Atlantic capacity. European Facilities. Orion's services compete with terrestrial telecommunications delivery services, which are being improved gradually through the build-out of fiber optic networks and a move from analog to digital switching. As fiber networks and digital network switching become more prevalent, the resulting improved and less expensive terrestrial capacity is increasingly competitive with Orion's services. Undersea Cable. Undersea fiber optic cable capacity has increased substantially in recent years. Although Orion believes that undersea cable capacity is not as well suited as satellite capacity to serve the requirements of video broadcasters or the demand for multi-point private network services, fiber optic and coaxial cables are well suited for carrying large amounts of bulk traffic, such as long distance telephone calls, between two 19 locations. Operators of undersea fiber optic cable systems typically are joint ventures among major telecommunications companies. Orion expects strong competition from these carriers in providing private network services. Regulation Regulatory Overview The international telecommunications environment is highly regulated. As an operator of privately owned international satellite systems licensed by the United States, Orion is subject to the regulatory authority of the United States (primarily the FCC) and the national communications authorities of the countries in which it provides service. Each of these entities can potentially impose operational restrictions on Orion. In addition, Orion is subject to the INTELSAT and EUTELSAT consultation processes. The changing policies and regulations of the United States and other countries will continue to affect the international telecommunications industry. Orion cannot predict the impact that these changes will have on its business or whether the general deregulatory trend in recent years will continue. Orion believes that continued deregulation would be beneficial to Orion, but deregulation also could reduce the limitations facing many of its existing competitors and potential new competitors. The operation of Orion 2 and Orion 3 will require a number of regulatory approvals, including (i) the approvals of the FCC (in the case of Orion 2), (ii) completion of successful consultations with INTELSAT and, in the case of Orion 2, with EUTELSAT; (iii) satellite "landing" rights in countries that are not INTELSAT signatories or that require additional approvals to provide satellite or VSAT services; and (iv) other regulatory approvals. Obtaining the necessary licenses and approvals involves significant time and expense, and receipt of such licenses and approvals cannot be assured. Failure to obtain such approvals would have a material adverse effect on Orion. In addition, Orion is required to obtain approvals from numerous national local authorities in the ordinary course of its business in connection with most arrangements for the provision of services. Within Orion 1's footprint, such approvals generally have not been difficult for Orion to obtain in a timely manner. However, the failure to obtain particular approvals has delayed, and in the future may delay, the provision of services by Orion. Authority to Construct, Launch and Operate Satellites Orion 1. In June 1991, Orion received final authorization from the FCC (the "Orion 1 License") to construct, launch and operate a Ku-band satellite in geostationary orbit at 37.5(Degree) West Longitude in accordance with the terms, conditions and technical specifications submitted in its application to the FCC. The Orion 1 license from the FCC expires in January 2005. Although Orion has no reason to believe that its licenses will not be renewed (or new licenses obtained) at the expiration of the license term, there can be no assurance of renewal. Orion 2. Orion has obtained conditional authorization from the FCC for the orbital slot at 12(Degree) West Longitude for operation of Orion 2. The Orion 2 authorization will not become final until Orion completes a consultation with INTELSAT and demonstration to the FCC of its financial ability to meet the costs of construction, the launch of its satellite and operating expenses for one year following launch. Orion has not yet met the required financial qualifications demonstration to the FCC and intends to do so within 90 days after completion of INTELSAT consultation. Orion recently commenced consultation with INTELSAT. The application filed with the FCC for Orion 2 contains a technical proposal different than that currently being coordinated with the ITU, and will need to be amended. Orion has no reason to believe that the FCC will not approve such amendment or that the amendment will cause material delay in obtaining final FCC authority for Orion 2. Orion 3. Orion is pursuing an orbital slot at 139(Degree) East Longitude through the Republic of the Marshall Islands. Under an agreement with the Republic of the Marshall Islands entered into in 1990, the Republic of the Marshall Islands agreed to file with the ITU all documents necessary to secure authorization for Orion to operate a satellite in geo-stationary orbit. In return for the right to utilize any orbital slots secured by the Republic of the Marshall Islands, Orion must, among other things, (i) commence construction of a functioning operating center for satellites serving the Pacific Island portion of the Orion Asia Pacific network at least a year prior to the operation of an Orion satellite, (ii) train and support certain employees designated by the Republic of the Marshall Islands at least a year prior to the operation of an Orion Asia Pacific satellite, and (iii) construct, equip and install (except for power supply or back-up) four earth stations capable of handling a "T-1" circuit for operation with the Orion Asia Pacific system prior to the operation of an Orion Asia Pacific satellite. Consultation with INTELSAT and EUTELSAT Orion 1. Prior to receiving final licensing and launch authority for Orion 1, Orion successfully completed its consultation with INTELSAT pursuant to the INTELSAT Treaty. A similar consultation for Orion 1 was completed with EUTELSAT in May 1994. Additional consultations or other approvals may be needed in individual countries for the use of VSATs. Orion 2. Orion has recently commenced consultations with INTELSAT. Orion believes that since there are no INTELSAT satellites located adjacent to the 12(Degree) West Longitude orbital slot, the INTELSAT coordination should be obtained in due course. Orion intends to commence consultation with EUTELSAT in the near future through the coordination procedures of the ITU. Orion 3. Orion has not commenced consultations with INTELSAT for Orion 3, but Orion believes that since there are no INTELSAT satellites located adjacent to the 139(Degree) East Longitude orbital slot, the INTELSAT coordination should be obtained in due course. There is no requirement to coordinate with EUTELSAT for the 139(Degree) East Longitude orbital slot. There can be no assurance that Orion will successfully complete these consultations. 20 International Telecommunication Union An international treaty to which the U.S. and the Republic of the Marshall Islands are parties requires coordination of satellite orbital slots through the procedures of the ITU. The process for coordinating orbital slots through the ITU is discussed under the caption "Orbital Slots -- ITU Coordination Process." Orion 1. After Orion 1 reached its orbital position and commenced operation, the FCC notified the ITU. This concluded the process for coordination of the Orion 1 orbital slot. Orion 2. On behalf of Orion, the FCC has commenced the orbital slot coordination process through the ITU. Orion believes that its use of the 12(Degree) West longitude slot for Orion 2 is not likely to interfere with proposed uses of adjacent slots filed for by other governments, except for a possible overlap of 75 MHz with one proposal as discussed more fully under the caption "Orbital Slots -- ITU Coordination Process." Orion 3. Orion, through the Republic of the Marshall Islands, has filed the appropriate documentation with the ITU to begin the ITU coordination process for Orion 3 at 139(Degree) East longitude. As discussed more fully under the caption "Orbital Slots -- ITU Coordination Process," based upon the time of filing by the Republic of the Marshall Islands, Orion believes that the proposed orbital slot for Orion 3 would have priority under ITU procedures with respect to the 139(Degree) East longitude orbital slot, but some proposals by other administrations for adjacent slots would be entitled to effective priority over the proposal by the Republic of the Marshall Islands with respect to certain frequencies. Orion believes, based upon its monitoring of the proposals of other administrations and information in the industry regarding their progress, that none of these administrations will launch a satellite prior to launch of Orion 3 to take advantage of such priority. Orion also believes that it can complete the ITU coordination process for Orion 3 at 139(Degree) East Longitude, however, there can be no assurance that this will be achieved. United States Regulatory Restrictions Orion is subject to regulation under the Communications Act, the FCC's July 1985 Separate Systems decision as modified by subsequent FCC decisions, other FCC regulations, and the terms of the various orders issued by the FCC with respect to Orion and its subsidiaries, including the terms of the Orion 1 License. These regulations, orders and authorizations impose various restrictions on Orion and on other similarly situated companies. Certain important restrictions are described below. Use of the Orion 1 Satellite System for U.S. Domestic Services. In January 1996, the FCC eliminated certain distinctions between U.S. licensed domestic satellites and separate satellite systems. It authorized both sets of U.S. licensed satellite operators to provide both domestic and international services. Domestic operators have designed their current satellite facilities principally for continental U.S. coverage of the United States, and thus may as a general matter offer only limited competition for international services at the outset. However, future satellite designs of domestic satellite operators could be modified to more directly compete in the international market. New Orbital Locations. The FCC now requires applicants, at the time of filing for an orbital position (either domestic arc or international orbital position), to demonstrate the financial ability to construct, launch and operate that satellite for a one year period. This new requirement will have no change in the licensing of Orion's orbital positions at 37.5(Degree) West Longitude, 12(Degree) West Longitude, 47(Degree) West Longitude and 126(Degree) East Longitude (the orbital slot at 139(Degree) East Longitude is not being pursued through the FCC and is not subject to the financial showing requirement). To the extent that Orion is seeking an orbital location through the FCC, Orion will need to have significant financing on hand at the time of application or obtain a waiver of the required financial demonstration. There is no assurance that Orion will be able to obtain such waiver. Unauthorized Transfer of Control. The Communications Act bars a change in control of the holder of FCC licenses without prior approval from the FCC. Any finding that a change of control without prior FCC approval had occurred could have a significant adverse effect on Orion's ability to implement its business plan. International Regulation Orion will need to comply with the applicable laws and obtain the approval of the regulatory authority of each country in which it proposes to provide network services or operate VSATs. The laws and regulatory requirements regulating access to satellite systems vary from country to country. Some countries have substantially deregulated satellite communications, making customer access to Orion services a simple procedure, while other countries maintain strict monopoly regimes. The application procedure can be time-consuming and costly, and the terms of licenses vary for different countries. Orion provides service using the licenses it obtains or that are obtained by local ground operators or, in certain cases, through customer-obtained authorizations. For example, Orion's representatives in the United Kingdom (Kingston Communications), France (Matra Hachette), Germany (Nortel Dasa) and Italy (Telecom Italia) have licenses in such countries. Orion also has obtained "landing rights" through the INTELSAT treaty (although each INTELSAT signatory country retains sovereignty over the transmission of satellite signals and retains the right to object to the use of satellites within its borders). Orion is now authorized, either directly or through its ground operators, to provide service in 27 European countries. 21 Orion expects to pursue a similar strategy in Asia and Latin America. In addition, Orion will need to comply with the national laws of each country in which it provides services. Laws with respect to satellite services are currently unclear in certain jurisdictions, particularly within the Orion 3 footprint. In certain of these jurisdictions, satellite services may only be provided via domestic satellites. The Company believes that certain of these restrictions may change and that it can structure its operations to comply with the remaining restrictions. However, there can be no assurance in this regard. On February 15, 1997, the World Trade Organization ("WTO") completed negotiations concerning the regulatory liberalization of basic telecommunications services. Sixty-nine WTO countries, including the U.S., submitted offers. The Company believes completion of this WTO agreement will better facilitate market access for satellite services, and signals a positive trend towards global competition. Human Resources As of December 31, 1996, Orion and its subsidiaries had 173 full-time employees. Of its total work force, 6 are part of management, 40 are in engineering or satellite control operations, 75 are in marketing, sales and sales support, and 52 are devoted to support and administrative activities. 22 FORWARD LOOKING STATEMENTS Information set forth in this Annual Report on Form 10-K under the captions "Business" "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Consolidated Financial and Operational Data" and under other captions contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, which statements represent Orion's reasonable judgment concerning the future and are subject to risks and uncertainties that could cause Orion's actual operation results and financial position to differ materially. Such forward looking statements include the following: Orion's belief and the judgments of its independent engineering consultant, Telesat Canada, regarding the expected performance of the Orion 1 satellite over its useful life, and the effect of such performance on Orion's business; Orion's expectations regarding the period for construction and launch of Orion 2 and Orion 3; Orion's belief that it can overcome uncertainties relating to Orion 2 and Orion 3; Orion's expectations regarding receipt of regulatory approvals, coordination of orbital slots and avoidance of possible interference; Orion's beliefs regarding existing and future regulatory requirements, its ability to comply with such requirements and the effect of such requirements on its business; Orion's beliefs regarding the competitive advantages of satellites and of Orion's satellites, strategies and services in particular, both in general and as compared to other providers of services or transmission capacity and other services presently offered or which may be offered in the future; Orion's expectations regarding the growth in telecommunications and the demand for telecommunications services; Orion's beliefs regarding the demand for or attractiveness of Orion's services; Orion's beliefs regarding technological advances and their effect on telecommunications services or demand therefore; Orion's beliefs regarding availability of net operating loss carryforwards; Orion's beliefs regarding its representatives and distributors; Orion's intention not to pay any dividend on the Common Stock in the foreseeable future; Orion's belief that any liability that might be incurred by Orion upon the resolution of certain existing or future legal proceedings not having a material adverse effect on the consolidated financial condition or results of operations of Orion; and the adoption of new accounting releases not being material to its financial condition, or results of operations. Orion cautions that the above statements are further qualified by important factors that could cause Orion's actual results to differ materially from those in the forward looking statements. Such factors include, without limitation, the following, in each case as presented more fully in Orion's Registration Statement on Form S-1 (No. 333-19167) on file at the Securities and Exchange Commission under "Risk Factors": Satellite Loss or Reduced Performance. Satellites are subject to significant risks, including launch failure, damage that impairs commercial performance, failure to achieve correct orbital placement during launch, loss of fuel that reduces satellite life, and satellite in-orbit risks. Although Orion 1 has been successfully launched and is in commercial operation, in November 1995, one of Orion 1's components supporting nine transponders of dedicated capacity serving the European portion of the Orion 1 footprint experienced an anomaly. Orion believes, based on the data received to date by Orion from its own investigations and from the manufacturer, and based upon advice from Orion's independent engineering consultant, Telesat Canada, that because the redundant components is strong, the anomalous behavior is unlikely to affect the expected performance of the satellite over its useful life. However, in the event that the currently operating component fails, Orion 1 would experience a significant loss of usable capacity. Although Orion maintains satellite in-orbit insurance on Orion 1, any loss in orbit or reduced performance of Orion 1 would have a material adverse effect on Orion. In addition, no assurance can be given that the launch of Orion 2 or Orion 3 will be successful. Although various sources of data permit differing conclusions, Orion is aware of sources indicating that the historical loss rate for all commercial geosynchronous satellite launches may be as high as 15%. Launch risks vary based upon the launch vehicle used and recent performance of that vehicle. In addition, Orion may have to change launch vehicles and could be subject to delays and higher costs of launch insurance if, for example, one of its selected vehicles experiences a launch failure with respect to another satellite. With respect to the risk of launch failure of Orion satellites, Orion has an option to purchase an additional satellite (which may be used as a replacement satellite) to be delivered in orbit, in the case of Orion 3, within 12, 15 or 19 months (at Orion's election) after it exercises the option, or, in the case of Orion 2, with 21 1/4 months after it exercises the option. Therefore, an unsuccessful launch of Orion 2 or Orion 3 would involve a delay in revenues for at least one year, and perhaps substantially longer. Significant loss or delay of revenue from any of the Company's satellites would have a material adverse effect on the Company. Limited Insurance for Satellite Launch and Operation. The in-orbit insurance of Orion 1 and the launch and in-orbit insurance for Orion 2 and Orion 3 will not protect the Company against business interruption, loss or delay of revenues and similar losses and may not fully reimburse the Company for its expenditures. In addition, such insurance includes or can be expected to include certain contract terms, exclusions, deductibles and material change conditions that are customary in the industry. Accordingly, an unsuccessful launch of Orion 2 or Orion 3 or any significant loss of performance with respect to any of its satellites would have a material adverse effect on Orion. Although Orion intends to procure insurance for the construction, launch and insurance costs of Orion 2 and Orion 3, Orion has not obtained any commitment from insurance underwriters to provide launch insurance for Orion 2 or Orion 3. There can be no assurance that such insurance will be available or that the price of such insurance or the terms and exclusions in the actual insurance policy will be favorable to the Company. Limited Life of Satellites. While Orion 1 is expected to have an orbital life of approximately 10.7 years (through October 2005), and Orion 2 and Orion 3 are expected to have orbital lives of approximately 13 years and 15 years, respectively, there can be no assurance as to the actual longevity of the satellites. A number of factors will affect the useful life of each satellite, including the rate of fuel consumption in achieving correct orbital placement during launch, the quality of its construction and the durability of its component parts. Timing and Cost Uncertainties with Respect to Orion 2 and 3. Orion presently plans to launch Orion 2 in the second quarter of 1999 and plans to launch Orion 3 in the fourth quarter of 1998, based upon the construction and launch schedules set forth in the satellite contracts. To meet these schedules, Orion must receive certain regulatory approvals, finalize the satellite designs and take other necessary steps, including the possible need of additional financing. Failure to meet the construction and launch schedules could increase the cost of Orion 2 or Orion 3, requiring additional financing. Although the Orion 2 satellite contract and the Orion 3 satellite contract are fixed-price contracts with firm schedules for construction, delivery and launch, there can be no assurance that increases in costs due to change orders or delay will not occur. There can be no assurance that 23 the launch of Orion 2 or Orion 3 will take place as scheduled. A significant delay in the delivery or launch of Orion 2 or Orion 3 would have a material adverse effect on Orion. Risks of Proceeding with Construction Prior to Obtaining all Regulatory Approvals for Orion 2 and Orion 3. Orion has commenced construction of Orion 3 and Orion 2 prior to completion of the required consultation with INTELSAT and EUTELSAT (as defined), receipt of final authority from the FCC (in the case of Orion 2) and completion of the International Telecommunication Union ("ITU") coordination process. Failure to obtain one more necessary approval in a timely manner would likely have a material adverse effect on the Company. Additional factors that would cause Orion's results to differ materially from those in the forward looking statements include the following: no assurances regarding the business plan; Orion's history of losses and expectation of future losses; the substantial financial risks and financing requirements; substantial leverage and limits on Orion's ability to raise additional funds; potential adverse effects of competition; no assurances regarding approvals needed, current or future regulation of the telecommunications industry; no assurances regarding technological changes; risks of conducting international business; dependence of Orion on key personnel; control of Orion by principal stockholders; risks relating to senior preferred stock; limits on paying dividends on Orion common stock; and anti-takeover and other provisions of the certificate of incorporation, in each case as presented more fully in Orion's Registration Statement on Form S-1 (No. 333-19167) on file at the Securities and Exchange Commission under "Risk Factor." Item 2. Properties. Orion's principal offices comprise approximately 33,000 square feet located in Rockville, Maryland. These offices house not only Orion's personnel, but also contain the Company's satellite operations center for Orion 1. The lease covering these facilities expires in December 1999. In February 1992, Orion sold its earth station facility at Mount Jackson, Virginia, but retained six acres of land at that location plus access to certain capacity and facilities. Orion has leased the land and facilities in Mount Jackson to Orion Atlantic for use as part of the TT&C Station. Orion also leases approximately 7,300 square feet of office space in Gaithersburg, Maryland for operations personnel, 2,900 square feet of office space in Amsterdam, Netherlands also for operations personnel and approximately 5,000 square feet in London, England for sales and sales support personnel. Item 3. Legal Proceedings. In October 1995, Skydata Corporation ("Skydata"), a former contractor, filed suit against Orion Atlantic, Orion Satellite Corporation and Orion, in the United States District Court for the Middle District of Florida, claiming that certain Orion Atlantic operations using frame relay switches infringe a Skydata patent. Skydata's suit sought damages in excess of $10 million and asked that any damages assessed be trebled. On December 11, 1995, the Orion parties filed a motion to dismiss the lawsuit on the grounds of lack of jurisdiction and violation of a mandatory arbitration agreement. In addition, on December 19, 1995, the Orion parties filed a Demand for Arbitration against Skydata with the American Arbitration Association in Atlanta, Georgia, requesting damages in excess of $100,000 for breach of contract and declarations, among other things, that Orion and Orion Atlantic own a royalty-free license to the patent, that the patent is invalid and unenforceable and that Orion and Orion Atlantic have not infringed on the patent. On March 5, 1996, the court granted the Company's motion to dismiss the lawsuit on the basis that Skydata's claims are subject to arbitration. Skydata appealed the dismissal to the United States Court of Appeals for the Federal Circuit. Skydata also filed a counterclaim in the arbitration proceedings asserting a claim for $2 million damages as a result of the conduct of Orion and its affiliates. On May 15, 1996, the arbitrator granted the Orion parties' request for an initial hearing on claims relating to the Orion parties' rights to the patent, including the co-ownership claim and other contractual claims. On November 9, 1996, Orion and Skydata executed a letter with respect to the settlement in full the pending litigation and arbitration. As part of the settlement, the parties are to release all claims by either side relating in any way to the patent and/or the pending litigation and arbitration. In addition, Skydata is to grant Orion (and its affiliates) an unrestricted, world-wide paid-up license to make, have made, use or sell products or methods under the patent and all other corresponding continuation and reissue patents. Orion is to pay Skydata $437,000 over a period of two years as part of the settlement. The parties are in the process of negotiating the final terms of a formal settlement agreement. While Orion is party to regulatory proceedings incident to its business, there are no material legal proceedings pending or, to the knowledge of management, threatened against Orion or its subsidiaries. Item 4. Submission of Matters to a Vote of Security Holders. None. 24 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Since completion of Orion's initial public offering in August 1995, the Common Stock has been quoted on the NASDAQ National Market under the trading symbol "ONSI." As of December 15, 1996, there were approximately 350 stockholders of record of Orion's Common Stock. The following table summarizes the high and low closing sale prices of Common Stock by fiscal quarter for 1995, 1996 and 1997 as reported on the NASDAQ National Market. Quarter Ended: 1995 September 30 (from August 1) $10 3/4 to $14 1/4 December 31 6 3/4 to 12 Quarter Ended: 1996 March 31 $8 1/4 to $14 3/4 June 30 10 1/4 to 14 1/4 September 30 7 1/4 to 12 1/8 December 31 9 1/2 to 13 5/8 Quarter Ended: 1997 -------------- ---- March 31 (through March 21) $9 1/8 to $15 The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain future earnings, if any, to finance the growth and development of its business, and therefore the Company does not anticipate paying cash dividends on its common Stock in the foreseeable future. The Company is not permitted to pay dividends on the Common Stock as long as the Company's Preferred Stock is outstanding, subject to certain limited exceptions. The approximately $14.5 million of the Company's Series A Preferred Stock which was issued in June 1994 and the approximately $4.5 million of outstanding Series B Preferred Stock which was issued in June 1995 (pursuant to options granted in June 1994), accrue dividends at 8% per annum. Accrued dividends on the Series A and Series B Preferred Stock are payable only in limited circumstances. Upon conversion of the Series A and Series B Preferred Stock into Common Stock, either at the option of the holder or in those cases where the Company has the right to require such conversion, accrued but unpaid dividends will be canceled. The approximately $123 million of the Company's Series C Preferred Stock which was issued in January 1997 accrues dividends at 6% per annum. Accrued dividends are payable in Common Stock. The number of shares of Common Stock distributable as a dividend on each share of Series C Preferred Stock is calculated based on the market price of such Common Stock as set forth in the Certificate of Designations for the Series C Preferred Stock. The Indentures relating to the Company's Senior Notes and Senior Discount Note restricts the payment by the Company of cash dividends on its capital stock. Recent Sales of Unregistered Securities. In January 1997, Orion consummated the following transactions involving the sale of its unregistered securities. On January 31, 1997, the Company acquired all of the limited partnership interests which it did not already own in the Company's operating subsidiary, International Private Satellite Partners, L.P. ("Orion Atlantic"), that owns the Orion 1 satellite. Specifically, the Company acquired the Orion Atlantic limited partnership interests and other rights relating thereto held by British Aerospace Communications, Inc., COM DEV Satellite Communications Limited, Kingston Communications International Limited, Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate of Matra Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of Nissho Iwai Corp. (collectively, the "Exchanging Partners"). Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the "Exchange Agreement"), the Exchanging Partners exchanged (the "Exchange") their Orion Atlantic limited partnership interests for 123,172 shares of a newly created class of the Company's Series C 6% Cumulative Convertible Redeemable Preferred Stock (the "Series C Preferred Stock"). In addition, the Company acquired certain rights held by certain of the Exchanging Partners' rights to receive repayment of various advances (aggregating approximately $41.4 million at December 31, 1996). The 123,172 shares of Series C Preferred Stock issued in the Exchange are convertible (as of January 31, 1997) into approximately 7 million shares of the Company's Common Stock. As a result of the Exchange, certain of the Exchanging Partners became principal stockholders of the Company. The Exchange is described in greater detail in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K. On January 8, 1997, the Company acquired the only outstanding minority interest in the Company's subsidiary Orion Asia Pacific Corporation from British Aerospace Satellite Investments, Inc. in exchange for approximately 86,000 shares of the Company's Common Stock. On January 31, 1997, the Company also completed the sale of $50 million of its convertible junior subordinated debentures (the "Convertible Debentures") to two investors, British Aerospace Holdings, Inc. ("British Aerospace") and Matra Marconi Space UK Limited ("Matra Marconi Space"). British Aerospace purchased $50 million of the Convertible Debentures and Matra Marconi Space purchased $10 million of the Convertible Debentures (collectively, the "Debenture Investments". The Convertible Debentures will mature in 2012, and will bear interest at a rate of 8.75% per annum to be paid semi-annually in arrears solely in Common Stock of the Company. The Convertible Debentures are subordinated to all other indebtedness of the Company. The Debenture Investments are described in greater detail in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K. 25 Item 6. Selected Consolidated Financial and Operational Data (Dollars in Thousands, Except Per Share Data). The following selected consolidated statements of operations and balance sheet data as of and for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 are derived from the Company's audited consolidated financial statements. The pro forma consolidated statements of operations and balance sheet data are derived from the unaudited pro forma condensed consolidated financial statements. The pro forma data is not necessarily indicative of the results that would have been achieved nor are they indicative of the Company's future results. The data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein. From its inception in 1982 through January 20, 1995, when Orion 1 commenced commercial operations, Orion was a development stage enterprise. Because of Orion's exclusive management and control of Orion Atlantic as its sole general partner (subject to certain rights of approval by the Limited Partners), and Orion's aggregate 33 1/3% (through November 1995, 41 2/3% from December 1995 through January 31, 1997) partnership interest, the financial statements of Orion Atlantic are consolidated with the financial statements of Orion. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Pro Forma Condensed Consolidated Financial Statements" and the Consolidated Financial Statements and Notes thereto. In January 1997, the Company consummated the Merger (as defined below) as part of a series of transactions which significantly changed the Company. Those transactions, which are discussed in more detail in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K, are as follows: (i) the acquisition of all of the limited partnership interests which the Company did not already own in the Company's operating subsidiary, Orion Atlantic, that owns the Orion 1 satellite, along with rights to receive repayment of various advances by Orion Atlantic and various other rights, in an exchange transaction for 123,172 shares of Series C Preferred Stock (the "Exchange"); (ii) the acquisition by the Company of the only outstanding minority interest in the Company's subsidiary Orion Asia Pacific Corporation from British Aerospace Satellite Investments, Inc., in exchange (the "OAP Acquisition") for approximately 86,000 shares of the Company's Common Stock; (iii) a $710 million notes offering, with warrants representing approximately 2.6% of the outstanding Common Stock of the Company on a fully diluted basis (the "Bond Offering"), and (iv)the sale of $60 million of the Company's Convertible Debentures to British Aerospace Holdings, Inc. and Matra Marconi Space (the "Convertible Debentures Offering"). The Exchange and the OAP Acquisition resulted in the Company owning 100% of Orion Atlantic and its other significant subsidiaries and, therefore, a greatly simplified corporate structure. The Exchange also resulted in a significant increase in the Company's capital stock outstanding. The net proceeds of the Bond Offering and Convertible Debentures Offering were used by the Company to repay the credit facility it entered into in connection with the construction of the Orion 1 satellite, to pre-fund the first three years of interest payments on certain of the Notes, and will be used by the Company for the construction and launch of two additional satellites, Orion 2 and Orion 3.
Pro forma 1996 (1) 1996 1995 1994 1993 (2) 1992 ------------- -------------- -------------- -------------- ------------- ------------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues $ 41,847 $ 41,847 $ 22,284 $ 3,415 $ 2,006 $ 1,403 Interest expense 94,838 27,764 24,738 61 133 180 Net loss (3) (133,630) (27,195) (26,915) (7,965) (7,886) (3,295) Net loss per common share (12.71) (2.62) (3.07) (0.86) (0.85) (0.40) Weighted average common shares outstanding (4) 11,247,062 10,951,823 9,103,505 9,272,166 9,266,445 8,232,548 OTHER OPERATING DATA: Number of customers 182 182 109 34 10 5 Capital expenditures $ 12,625 $ 12,625 $ 9,060 $ 51,103 $ 44,130 $ 78,429 Customer contract backlog (5) $ 214,887 $ 214,887 $ 120,612 $ 39,122 $ 18,185 $ 9,402 Sites (6) 322 322 151 57 -- -- EBITDA (7) $ 595 $ 595 $ (15,427) $ (14,014) $ (9,069) $ (6,243) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents $ 139,664 $ 42,188 $ 55,112 $ 11,219 $ 3,404 $ 7,668 Restricted and segregated cash (8) 406,937 -- -- -- -- -- Total assets 928,594 358,264 389,075 340,176 271,522 204,975 Long-term debt (less current portion) 779,283 218,237 250,669 230,175 185,294 106,821 Limited Partners' interest in Orion Atlantic (9) -- 10,130 14,626 62,519 69,909 77,753 Redeemable preferred stock 111,902 20,902 20,358 14,555 -- -- Total stockholders' (deficit) equity 2,151 (436) 26,681 3,351 8,400 14,478 Book value per share .19 (.04) 2.46 .49 1.33 2.36
26 (1) Adjusted to reflect the pro forma effects of the Transactions (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments"), assuming such events occurred, in the case of the Consolidated Statements of Operations Data, on January 1, 1996 and, in the case of the Consolidated Balance Sheet Data, on December 31, 1996. (2) In 1993, Orion Atlantic terminated its commitment to purchase a second satellite from MMS Space Systems, resulting in a termination charge of $5 million. (3) As required by GAAP, net loss is presented before accretion of preferred stock and preferred stock dividends. For the years ended December 31, 1996, 1996 (pro forma) 1995, 1994, 1993 and 1992 preferred stock dividends and accretion are $1.4, $9.3, $1.3, $0.6, $0 and $0 million, respectively. (4) Computed on the basis described for net loss per common share in Note 2 to the Consolidated Financial Statements. (5) Backlog represents future revenues under contract. (6) Sites includes installed VSATs and additional transmission destinations (such as customer premises) that share a VSAT. (7) "EBITDA" represents earnings before minority interests, interest income, interest expense, other expense (income), income taxes, depreciation and amortization. EBITDA is commonly used in the communications industry to analyze companies on the basis of operating performance, leverage and liquidity. EBITDA is not intended to represent cash flows for the period and should not be considered as an alternative to cash flows from operating, investing or financing activities as determined in accordance with GAAP. EBITDA is not a measurement under GAAP and may not be comparable to other similarly titled measures of other companies. Other expense (income) includes gains on sale of equipment, less costs of $5 million in 1993 associated with the termination of the Company's commitment to purchase a second satellite and the write-off of costs relating to the 1995 Attempted Financing of $3.4 million in the fourth quarter of 1995. (8) Restricted and segregated cash represents (i) $134 million that has been placed in a pledged account to fund the payment of the first six scheduled payments of interest on the Senior Notes. and (ii) $273 million that will be segregated by the Company and used only to invest in certain high quality short term investments to make payments for additional satellites and certain related costs. (9) Represents amounts invested by Limited Partners (net of syndication costs related to the investments), adjusted for such Limited Partners' share of net losses. The interests of the Limited Partners were acquired by the Company in the Exchange. 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Orion's principal business is the provision of satellite communications for private communications networks and video distribution and other satellite transmission services. From its inception in 1982 through January 20, 1995, when Orion 1 commenced commercial operations, Orion was a development stage enterprise. Prior to January 1995, Orion's efforts were devoted primarily to monitoring the construction, launch and in-orbit testing of Orion 1, product development, marketing and sales of interim private communications network services, raising financing and planning Orion 2 and Orion 3. During 1996, OrionSat was the sole general partner in Orion Atlantic and Orion had a 41 2/3% equity interest in Orion Atlantic. As a result of Orion's control of Orion Atlantic during 1996, Orion's consolidated financial statements include the accounts of Orion Atlantic. All of Orion Atlantic's revenues and expenses are included in Orion's consolidated financial statements, with appropriate adjustment to reflect the interests of the Limited Partners in Orion Atlantic's losses prior to the Exchange. The assets and liabilities reported in the consolidated balance sheets at December 31, 1996 and December 31, 1995 primarily pertain to Orion Atlantic. RECENT DEVELOPMENTS In January 1997, Orion consummated a series of transactions that are described below. ACQUISITION OF ORION ATLANTIC LIMITED PARTNERSHIP INTERESTS IN THE EXCHANGE On January 31, 1997, the Company acquired all of the limited partnership interests which it did not already own in the Company's operating subsidiary, Orion Atlantic, that owns the Orion 1 satellite. Specifically, the Company acquired the Orion Atlantic limited partnership interests and other rights relating thereto held by British Aerospace Communications, Inc., COM DEV Satellite Communications Limited, Kingston Communications International Limited, Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate of Matra Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of Nissho Iwai Corp. (collectively, the "Exchanging Partners"). Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the "Exchange Agreement"), the Exchanging Partners exchanged (the "Exchange"), their Orion Atlantic limited partnership interests for 123,172 shares of a newly created class of the Company's Series C 6% Cumulative Convertible Redeemable Preferred Stock (the "Series C Preferred Stock"). In addition, the Company acquired certain rights held by certain of the Exchanging Partners' to receive repayment of various advances (aggregating approximately $41.4 million at December 31, 1996). The 123,172 shares of Series C Preferred Stock issued in the Exchange are convertible (as of January 31, 1997) into approximately 7 million shares of the Company's Common Stock. As a result of the Exchange, certain of the Exchanging Partners became principal stockholders of the Company. The Exchange is described in greater detail under the caption "The Merger, the Exchange and the Debenture Investments" in the Company's Registration Statement on Form S-4 (Registration No. 333-19795). The Exchange and the acquisition by the Company of the only outstanding minority interest in the Company's subsidiary Orion Asia Pacific Corporation from British Aerospace Satellite Investments, Inc. on January 8, 1997 (in exchange for approximately 86,000 shares of the Company's Common Stock) results in the Company owning 100% of Orion Atlantic and its other significant subsidiaries and, therefore, a greatly simplified corporate structure. THE MERGER The Exchange was conducted on a tax-free basis by means of a Merger (defined below) that was consummated on January 31, 1997. Pursuant to the Exchange Agreement, Orion Oldco Services, Inc., formerly known as Orion Network Systems, Inc. ("Old Orion"), formed the Company as a new Delaware corporation with a certificate of incorporation, bylaws and capital structure substantially identical in all material respects with those of Old Orion. Also pursuant to the Exchange Agreement, the Company formed a wholly owned subsidiary, Orion Merger Company, Inc. ("Orion Merger Subsidiary"). Pursuant to an Agreement and Plan of Merger, Orion Merger Subsidiary was merged with and into Old Orion, and Old Orion became a wholly owned subsidiary of the Company (the "Merger"). On January 31, 1997, the effective time of the Merger, all of the stockholders of Old Orion received stock in the Company with substantially identical rights to the Old Orion stock they held prior to the effective time of the Merger. Following the Merger, the Company changed its name from Orion Newco Services, Inc. to Orion Network Systems, Inc. and the Company's wholly owned subsidiary Orion Network Systems, Inc. changed its name to Orion Oldco Services, Inc. The Exchange and Merger are described in greater detail under the caption "The Merger, the Exchange and the Debenture Investments" in the Company's Registration Statement on Form S-4 (Registration No. 333-19795). The Company is the successor issuer to Old Orion and filed a Registration Statement on Form 8-B with the Securities and Exchange Commission on January 31, 1997, to register all the issued and outstanding shares of Common Stock and preferred stock of the Company. The Company is considered the successor to Old Orion for purposes of the NASDAQ National Market and the Company's Common Stock is quoted on the NASDAQ National Market under the trading symbol "ONSI." 28 FINANCINGS On January 31, 1997, the Company completed a $710 million bond offering (the "Bond Offering") comprised of approximately $445 million of Senior Note Units, each of which consists of one 11.25% Senior Note due 2007 (a "Senior Note") and one Warrant to purchase 0.8463 shares of common stock, par value $.01 per share ("Common Stock") of the Company (a "Senior Note Warrant"), and approximately $265.4 million of Senior Discount Note Units, each of which consists of one 12.5% Senior Discount Note due 2007 (a "Senior Discount Note," and together with the Senior Notes, the "Notes") and one Warrant to purchase 0.6628 shares of Common Stock of the Company (a "Senior Discount Note Warrant, and together with the Senior Note Warrants, the "Warrants"). Interest on the Senior Notes will be payable semi-annually in cash on January 15 and July 15 of each year, commencing July 15, 1997. The Senior Discount Notes will not pay cash interest prior to January 15, 2002. Thereafter, cash interest will accrue until maturity at an annual rate of 12.5% payable semi-annually on January 15 and July 15 of each year, commencing July 15, 2002. The exercise price for the Warrants will be $.01 per share of Common Stock of the Company. The shares of Common Stock of the Company initially issuable upon exercise of the Warrants represent approximately 2.62% of the outstanding Common Stock of the Company on a fully diluted basis as of January 31, 1997. The Bond Offering was underwritten by Morgan Stanley & Co. Incorporated and Merrill Lynch & Co. The foregoing description of the Notes is qualified in its entirety by the description of such Notes in the Indentures and Notes documents, copies of which have been filed as exhibits to this Annual Report on Form 10-K. On January 31, 1997, the Company also completed the sale of $60 million of its convertible junior subordinated debentures (the "Convertible Debentures") to two investors, British Aerospace Holdings, Inc. ("British Aerospace") and Matra Marconi Space UK Limited ("Matra Marconi Space"). British Aerospace purchased $50 million of the Convertible Debentures and Matra Marconi Space purchased $10 million of the Convertible Debentures (collectively, the "Convertible Debentures Offering," and together with the Bond Offering, the "Financings"). The Convertible Debentures will mature in 2012, and will bear interest at a rate of 8.75% per annum to be paid semi-annually in arrears solely in Common Stock of the Company. The Convertible Debentures are subordinated to all other indebtedness of the Company, including the Notes. The net proceeds of the Bond Offering and Convertible Debentures Offering were used by the Company to repay the Orion 1 credit facility, pre-fund the first three years of interest payments on certain of the Notes, and will be used to build and launch of two additional satellites, Orion 2 and Orion 3. ORION 2 AND ORION 3 COMMENCEMENT OF CONSTRUCTION Orion 2 and Orion 3 Construction Contracts. Orion commenced construction of Orion 2 in February 1997 under a satellite procurement contract with Matra Marconi Space for Orion 2. The contract for Orion 2 provides for delivery in orbit of Orion 2 by June 1999, excluding launch insurance, for a firm fixed price of $201 million. Orion commenced construction of Orion 3 in December 1996 and entered into a satellite contract with Hughes Space and Communications International, Inc. for Orion 3 in January 1997. The contract for Orion 3 provides for delivery in orbit of Orion 3 by December 1998, excluding launch insurance, for a firm fixed price of $208 million. Pre-Construction Lease on Orion 3. Orion has entered into a contract with DACOM Corp., a Korean communications company ("DACOM"), under which DACOM will, subject to certain conditions, lease eight dedicated transponders on Orion 3 for 13 years, in return for approximately $89 million, payable over a period from December 1996 through seven months following the lease commencement date for the transponders (which is scheduled to occur by January 1999). Payments are subject to refund unless Orion 3 commences commercial operation by June 30, 1999. OVERVIEW Orion's revenues are principally generated under three to four year contracts for delivery of communications services. Such revenues are derived principally from recurring monthly fees from its customers, although many contracts include initial non-recurring installation and other fees. These non-recurring fees generally are structured to cover the Company's actual costs of installation of the customer's site-based equipment. The revenues from each contract vary, depending upon the type of service, amount of capacity, data handling ability of the network, the number of VSATs (which generally are owned by Orion), value-added services and other factors. Depending on the complexity of the services to be provided to a customer, the period between the date of signature of a contract and the commencement of actual services (and receipt of fees) typically ranges from 30 days to six months. Substantially all of Orion's contracts are denominated in U.S. dollars, although some contracts are denominated in pounds sterling, deutschemarks, Austrian shillings or French francs. Orion begins to record revenues under its contracts upon service commencement to the customer. The services provided by Orion have been subject to decreasing prices over recent years and this pricing pressure is expected to continue (and may accelerate) for the foreseeable future, particularly if, as expected, capacity continues to increase. Orion will need to increase its volume of sales in order to compensate for such price reductions. Orion believes that customers will increase the data speeds in their communications networks to support new applications, and that such upgrading of customer networks will lead to increased revenues that will mitigate the effect of price reductions. However, there can be no assurance that this will occur. Orion expects to continue to incur increasing net losses and negative cash flow (after payments for capital expenditures and interest) for the foreseeable future. 29 Orion's direct cost of services includes principally (i) costs relating to the installation, maintenance and licensing of VSAT earth stations at its customers' premises; (ii) satellite lease payments for transponder capacity (generally for services outside of the Orion 1 footprint); and (iii) associated miscellaneous expenses. Sales and marketing expenses consist of salaries, sales commissions (including commissions to third party sales representatives), travel and promotional expenses. The Company has recently commenced a significant expansion of its marketing program and expects to continue this expansion through 1997. Due to the complexity of the Company's services, and the continued expansion of sales personnel, sales and marketing expense is expected to increase significantly during 1997. Engineering and technical expenses, consisting principally of personnel costs and travel, relate to TT&C, network monitoring, network design and similar activities. The Company constructed its TT&C facilities to control two satellites. As a result, the Company anticipates a slight increase in costs with Orion 2 and a more substantial increase in costs with Orion 3, which will require separate TT&C facilities. General and administrative expenses consist of in-orbit insurance premiums, personnel costs other than for selling and engineering, information systems, professional services, and occupancy costs. These costs will increase generally as the Company's operations expand. Specifically, in-orbit insurance costs will increase significantly following the launches of Orion 2 and Orion 3. Depreciation and amortization expenses result mainly from the depreciation of the Orion 1 satellite, VSATs and the related equipment to service the expansion of the private network communication services business (see Note 2 of the Notes to Consolidated Financial Statements) and will increase substantially after the launch of Orion 2 and Orion 3. Interest income is primarily the result of interest earned on the proceeds from Orion's private and public equity offerings. Interest costs will increase substantially as a result of the bond offering completed January 31, 1997, and will increase again after additional financing for Orion 2 and Orion 3 is obtained. Such financing will be required substantially in advance of the anticipated revenues from Orion 2 or Orion 3. Orion's costs (other than sales commissions) generally do not vary substantially with the amount of revenue from the Orion 1 satellite. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 Revenue. Total revenue for the year ended December 31, 1996 was $41.8 million, compared to $22.3 million for the same period in 1995, an increase of 87%. Revenues from private communications network services were $17.0 million in 1996 compared to $10.0 million for the comparable period in 1995, as the number of sites in service increased to 322 as of December 31, 1996, from 151 at December 31, 1995. Revenues from video distribution and other satellite transmission services were $24.8 million for 1996 compared to $12.3 million for the same period in 1995 resulting from a substantial increase in customers for these services in 1996. OPERATING EXPENSES Direct expenses. Direct expenses for the year ended December 31, 1996, were $6.0 million compared to $10.5 million for the same period in 1995. The decrease of $4.5 million, or 43%, was primarily attributable to accruals for satellite incentive obligations owed by Orion to the contractor under the Orion 1 Satellite Contract during the initial satellite deployment period from January 20, 1995 through June 30, 1995. The Company capitalized the present value of the remaining satellite incentive obligation of approximately $14.8 million, effective July 1, 1995, as part of the cost of the satellite. As of December 31, 1996, Orion had obligations with a present value of approximately $22.4 million with respect to satellite incentives. Sales and marketing expenses. Sales and marketing expenses were $11.5 million for the year ended December 31, 1996, as compared to $8.6 million in the same period of 1995. The increase of $2.9 million, or 34% is primarily attributable to sales commissions, third party sales representative fees and ground operator fees associated with the growth in the private communications network service business. Engineering and technical expenses. Engineering and technical expenses were $8.7 million in the year ended December 31, 1996, as compared to $8.5 million for the comparable period in 1995. The increase was due to customer engineering functions in support of the growth in private communications network service business. General and administrative expenses. General and administrative expenses were $15.1 million for the year ended December 31, 1996, compared to $10.1 million for the period ended December 31, 1995. The increase of $5.0 million, or 50%, for the year ended December 31, 1996 was primarily due to the inclusion of the cost of in-orbit life insurance for the entire period during 1996. The policy became effective in May 1995. Depreciation and amortization. Depreciation and amortization expense for the year ended December 31, 1996, was $36.9 million, an increase of $5.5 million, or 18%, over the same period in 1995. The increase is primarily a result from depreciation of VSATs and other ground equipment to service the expansion of the private network services business and depreciation of the Orion 1 satellite, which was placed in service January 20, 1995. Interest. Interest income was $2.3 million for the year ended December 31, 1996, compared to $1.9 million for the year ended December 31, 1995. The increase in interest income ($0.4 million or 21%) during 1996 is primarily a result of interest earned on increased cash balances from the proceeds of the Company's initial public offering in August 1995. Interest expense was $27.8 million for the year ended December 31, 1996, compared to $24.7 million for the comparable period in 1995. The increase in interest expense of $3.1 million in 1996 is attributable to expensing interest (including commitment fees, interest accretion associated with the Orion 1 satellite incentive obligation and amortization of deferred financing costs) from the in-service date of Orion 1 and the impact of an interest rate cap agreement in 1996. Prior to the in-service date of Orion 1, substantially all interest expense was capitalized. 30 Other. Other expenses were $.02 million for the year ended December 31, 1996, compared to $3.4 million for the same period in 1995. The decrease is primarily related to costs incurred in connection with Orion Atlantic's plans to raise financing for Orion 2, which plans were deferred in November 1995. Net loss. The Company incurred a net loss of $27.2 million, compared to a net loss of $26.9 million for the years ended December 31, 1996 and 1995, respectively, after deduction of the limited partners' and minority interests' share in the Company's losses before minority interests' of $34.6 million and $46.1 million, respectively. Net loss is expected to increase substantially in subsequent periods as a result of interest expense on the notes issued in connection with the offering in January 1996 and the elimination of the minority interests in Orion Atlantic. YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 Revenue. Services revenue for 1995 was $22.3 million compared to $3.4 million for 1994. Revenues from private communications network services were $10.0 million from 72 customers in 1995 and $3.4 million from 18 customers in 1994, as the number of sites in service increased to 151 from 53. Revenues from transmission capacity and video distribution services were $12.3 million during 1995. There were no revenues from these services during 1994, as Orion 1 commenced operations on January 20, 1995. OPERATING EXPENSES Direct expenses. Direct expenses were $10.5 million and $3.5 million in 1995 and 1994, respectively. The increase of $7.0 million, or 199%, was primarily attributable to accruals for satellite incentives during 1995, which were not applicable prior to launch in November 1994, costs associated with equipment sales ($2.5 million in 1995, $0 in 1994), and installation and maintenance costs in connection with higher volumes of customer sites placed in service during 1995 ($1.3 million in 1995, $0.5 million in 1994). These increases were partially offset by a reduction in leased transponder capacity costs as customers were transferred from leased capacity to Orion 1. No equipment sales occurred during 1994. Sales and marketing expenses. Sales and marketing expenses were $8.6 million in 1995, as compared to $5.9 million in 1994, an increase of $2.7 million or 47%. The increase is due to the hiring of additional sales personnel, increased advertising and promotion expenses associated with increased sales and equipment sales commissions. Engineering and technical expenses. Engineering and technical expenses were $8.5 million in 1995, as compared to $3.0 million for 1994, an increase of $5.5 million or approximately 184%. The increase is attributable to increased staffing requirements related to control and operation of the satellite, and customer engineering functions in support of the expansion of the network services business. General and administrative expenses. General and administrative expenses were $10.1 million for 1995 compared to $5.1 million for 1994. The increase of $5.0 million or 99% was primarily due to the cost of in-orbit insurance for Orion 1, beginning in May 1995, and other costs associated with Orion's commencement of full commercial operations. Depreciation and amortization. Depreciation and amortization was $31.4 million in 1995, an increase of $29.7 million, as compared to $1.7 million for 1994. The increase primarily resulted from the commencement of depreciation of Orion 1 upon being placed in service January 20, 1995. Interest. Interest income was $1.9 million for 1995, compared to $0.4 million for the prior year. The increase in interest income during 1995 is primarily a result of interest earned on proceeds from Orion's initial public offering in August 1995. Interest expense, net of capitalized interest, increased from $0.06 million for 1994 to $24.7 million for 1995. The increase in interest expense in 1995 is attributable to expensing interest (including commitment fees and amortization of deferred financing costs) from the in-service date of Orion 1. Prior to that date, substantially all interest expense was capitalized as part of the cost of Orion 1. Other. Other expenses of $3.4 million for the year-ended December 31, 1995 are primarily related to costs incurred in connection with Orion Atlantic's plans to raise financing for Orion 2, which plans were deferred in November 1995. Net loss. The Company incurred a net loss of $26.9 million and $8.0 million for 1995 and 1994, respectively, after deduction of the Limited Partners' and minority interests' share in the Company's results of operations of $46.1 million and $7.4 million, respectively. LIQUIDITY AND CAPITAL RESOURCES Prior Funding. Orion has required significant capital for operating and investing activities in the development of its business, and will continue to need to expend significant additional capital in the future to develop fully its global satellite communications system. The Company's funding for its operations through January 1997 had been provided primarily by the sale of equity securities, including the completion of its initial public offering in August 1995 which generated proceeds to the Company of approximately $52 million (net of underwriting discounts), bank loans, vendor financing, lease arrangements and short-term loans from its investors. Funding for the construction and launch of the Orion 1 satellite and related facilities was fully committed through $90 million of equity from the limited partners of Orion Atlantic, an aggregate of $251 million under a secured bank credit facility and approximately $11 million under other debt facilities, dedicated primarily to the construction of the TT&C facility, which is being used to control Orion 1. The Orion 1 credit facility was refinanced in January 1997 with the proceeds from the Bond Offering, and concurrently with the Bond Offering, Orion acquired all of the limited partnership interests (those which it did not already own) in Orion Atlantic in exchange for 123,172 shares of Series C Convertible Preferred Stock representing approximately 7 million underlying common shares. 31 Existing Capital Resources. The net proceeds of the January 1997 Bond Offering to the Company were approximately $684 million, and the net proceeds of the Convertible Debentures Offering were approximately $59 million. Of the Bond Offering proceeds, approximately $223 million was used for repayment of the Orion 1 credit facility (including payment of accrued interest and hedge breakage costs), approximately $24 million was used to make certain initial payments for the Orion 2 satellite contract, approximately $13 million was used to pay accrued satellite incentive fees under the Orion 1 satellite contract and approximately $4 million was used to pay amounts owing to STET, a former limited partner of Orion Atlantic. On a pro forma basis, after giving effect to the Bond Offering, the Convertible Debentures Offering and other related transactions as of December 31, 1996, the Company had cash and cash equivalents of $140 million and restricted and segregated cash of $407 million including $273 million which was segregated in the financial statements by the Company to be used to make payments for additional satellites and certain related costs. The restricted cash consisted of $134 million placed in a pledged account (to pre-fund the first six interest payments on the Senior Notes). Existing Indebtedness Notes. In the Bond Offering, Orion issued approximately $445 million of 11.25% Senior Notes due 2007 and approximately $484 million principal amount at maturity ($265.4 million initial accreted value) of 12.5% Senior Discount Notes due 2007. Interest on the Senior Notes is payable semi-annually in cash on January 15 and July 15 of each year, commencing July 15, 1997. The Senior Discount Notes do not accrue cash interest prior to January 15, 2002. Thereafter, cash interest will accrue until maturity at an annual rate of 12.5% payable semi-annually on January 15 and July 15 of each year, commencing July 15, 2002. The Notes have the benefit of Guarantees issued by each of the material subsidiaries of the Company. The Senior Notes initially are secured by the securities purchased with the $134 million held in a pledged account until the Company makes the first six scheduled interest payments on the Senior Notes and thereafter the Senior Notes will be unsecured. The Senior Discount Notes are unsecured. The Notes are redeemable, at the Company's option, in whole or in part, at any time on or after January 15, 2002 at specified redemption prices. In the event of a change of control (as defined in the indentures relating to the Notes), the Company will be obligated to make an offer to purchase all outstanding Notes at a purchase price equal to 101% of their principal or accreted value, plus accrued and unpaid interest thereon to the repurchase date. The indebtedness evidenced by the Notes ranks pari passu in right of payment with all existing and future unsubordinated indebtedness of the Company and the guarantors, respectively, and senior in right of payment to all existing and future subordinated indebtedness of the Company and the guarantors. The indentures relating to the Notes (the "Indentures") contain certain covenants which, among other things, restrict distributions to stockholders of the Company, the repurchase of equity interests in the Company and the making of certain other investments and restricted payments, the incurrence of additional indebtedness by the Company and its restricted subsidiaries, the creation of certain liens, certain asset sales, transactions with affiliates and related parties, and mergers and consolidations. The foregoing description of the Notes is qualified in its entirety by the description of such Notes in the Indentures and Notes documents, copies of which have been filed as exhibits to this Annual Report on Form 10-K. Convertible Debentures. In January 1997, the Company also completed the sale of $60 million of its convertible junior subordinated debentures to British Aerospace ($50 million) and Matra Marconi Space ($10 million). The Convertible Debentures will mature in 2012, and will bear interest at a rate of 8.75% per annum to be paid semi-annually in arrears solely in Common Stock of the Company at prices of between $10.21 and $14.00 per share, depending on the average trading prices of the Common Stock during the applicable measurement period. The Convertible Debentures (and accrued but unpaid interest) may be converted in whole or in part into Common Stock at any time at an initial conversion rate of $14.00 per share, as adjusted for stock splits or other recapitalizations, certain dividends or issuances of stock to all stockholders, issuances of stock (or certain rights to acquire stock) at a price per share below $14.00, and other events. Orion may at any time (except during 90 days after a change in control) redeem all or part (but not less than 25% on any one occasion) of the Convertible Debentures for cash consideration determined by multiplying the number of shares of Common Stock issuable upon conversion of the Convertible Debentures by the greater of (i) the average closing price of the Common Stock over the 20 trading days preceding the redemption or (ii) $17.50 per share. Alternatively, Orion, in its sole discretion, may effect the sale through a public or private offering, of the Common Stock underlying the Convertible Debentures or received as payment of dividends on, the Convertible Debentures. In such event, the holders of the Convertible Debentures will be entitled to receive a price per share equal to the greater of (a) at least 95% of the average closing price of the Common Stock over the preceding 20 trading days or (b) $17.50 per share. From and after the time when less than $50 million of Notes remain outstanding, in the event of a change of control of Orion (defined as the acquisition by any stockholder of a majority of the voting securities of Orion), either Orion or any holder of the Convertible Debentures may, within 90 days after such change of control, require the sale of the Convertible Debentures, as converted into Common Stock, to Orion for a purchase price equal to the greater of (a) the price payable in an optional redemption (as described above) and (b) the price paid to holders of Common Stock in the change of control transaction. The Indentures for the Notes contain a covenant which will effectively prohibit Orion from honoring such right. The Convertible Debentures are subordinated to all other indebtedness of the Company, including the Notes. The Convertible Debentures contain minimal covenants and events of default so long as $50 million or more of the Notes remain outstanding, but a more extensive set of covenants and events of default will apply after less than $50 million of Notes are outstanding. Other Indebtedness and Other Obligations. At December 31, 1996, the Company had outstanding indebtedness of approximately $7.0 million under a seven year term loan provided by General Electric Capital Corporation ("GECC") for the TT&C facility, which is secured by the TT&C facility and various assets relating thereto. Additionally, at December 31, 1996 the Company had obligations of approximately $44 million, with a present value of $22.4 million, payable to the manufacturer of Orion 1 through 2007 (of which $13 million was paid in January 1997 upon 32 the completion of the Bond Offering), and $8 million payable to a former partner in Orion Atlantic through 1997 (of which approximately $5 million, plus interest of approximately $1.7 million was paid in cash in January 1997 upon the closing of the Bond Offering). Current Funding Requirements. Based upon its current expectations for growth, the Company anticipates it will have substantial funding requirements over the next three years to fund the costs of Orion 2 and Orion 3, the purchase of VSATs, other capital expenditures and other capital needs. Interest charges on the Senior Notes over the next three years are fully provided for by Restricted Cash. The in-orbit delivered costs of the Orion 2 and Orion 3 satellites are expected to aggregate approximately $500 million. In addition to the $3 million paid in the fourth quarter of 1996, Orion will need to make payments of approximately $98 million ($37.3 million of which had already been paid as of March 1, 1997), $350 million and $50 million in 1997, 1998 and 1999, respectively. These amounts include the Company's estimate regarding the cost of launch insurance, although the Company has not had material discussions with potential insurers and has not received any commitment to provide insurance. The contracts for Orion 2 and Orion 3 provide firm fixed prices for the construction and launch of those satellites and provides for penalties in event of late delivery by the manufacturer, however, the Company's actual payments could be substantially higher due to any change orders for the satellites, insurance rates, delays and other factors. The Company anticipates that its existing cash balances and payments under the DACOM contract will be sufficient to meet substantially all of its capital requirements for the delivery in orbit of Orion 2 and Orion 3. In connection with the Bond Offering, the Company segregated $273 million of the net proceeds to make payments for additional satellites and certain related costs (or to pay interest and principal on the Notes). The Company also can use a portion of its working capital for such costs if it chooses to do so. The Company had working capital of $126 million at December 31, 1996 (after giving effect to the Transactions). However, there can be no assurance that cost increases for Orion 2 and/or Orion 3 due to change orders, insurance rates or construction delays, among other factors may not increase the Company's capital requirements or that the Company's growth may vary from its expectations resulting in changes in its cash requirements or expected cash. The balance of the Company's funding requirements are dependent upon its growth and cash flow from operations. The Company cannot predict whether its existing resources and cash flows will be adequate to cover its future cash needs. If existing resources and cash flows are not sufficient to cover the Company's future cash needs, the Company will need to raise additional financing. The Company does not have a revolving credit facility or other source of readily available capital. Sources of additional capital may include public or private debt, equity financings or strategic investments. To the extent that the company seeks to raise additional debt financing, the Indentures limit the amount of such additional debt (under a variety of provisions contained in such Indentures) and prohibit the Company from using Orion 1, Orion 2 or Orion 3 as collateral for indebtedness for money borrowed. If the Company requires additional financing and is unable to obtain financing from outside sources in the amounts and at the times needed, there would be a material adverse effect on the Company. TAXES As of December 31, 1996, Orion had net operating loss carryforwards for federal tax purposes of approximately $77.7 million. The ability of Orion to benefit from net operating losses for federal income tax purposes will depend on a number of factors, including whether Orion has sufficient income from which to deduct the losses, limitations that may arise as a result of changes in the ownership of Orion, including as a result of the Transactions and other factors, and certain other limitations which may significantly reduce the economic benefit of those losses to Orion. Due to uncertainty regarding its ability to realize the benefits of such net operating loss carryforwards, the Company has established a valuation allowance for the full amount of its net operating loss carryforwards. Of Orion's net operating losses, approximately $58.9 million was incurred by Orion Atlantic and allocated to Orion. Orion Atlantic is structured as a partnership for U.S. income tax purposes. As a result, Orion Atlantic itself generally should not be subject to federal income taxation. Instead, the partners of Orion Atlantic, including Orion and OrionSat, will separately report their allocable shares of Orion Atlantic's net income, loss, gain, deductions, and credits, as determined under the allocation provisions of the Partnership Agreement. Orion Atlantic may, however, be subject to income tax on a portion of its income in certain states and other countries in which it has operations. Under the Partnership Agreement, the first $20 million of any losses was allocated to OrionSat, and any losses in excess of that amount generally have been allocated to the partners, including Orion and OrionSat, in proportion to their respective percentage interests. Subsequent to consummation of the Exchange, all losses will be allocated to Orion. EFFECT OF INFLATION Orion believes that inflation has not had a material effect on the results of operations to date. 33 EFFECT OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. Orion adopted Statement No. 121 in the first quarter of 1996. The effect of adoption was not material to its financial condition or results of operations. In October 1995, the FASB issued Statement No. 123, Accounting for Stock Based Compensation, which is effective for awards after January 1, 1996. Orion has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock based award programs, because the alternative fair value accounting provided for under FASB Statement No. 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of the employee award equals the market price of the underlying stock on the date of grant, as has been the case historically with Orion's awards, no compensation expense is recognized. 34 ITEM 8. REPORT OF INDEPENDENT AUDITORS. The Board of Directors Orion Network Systems, Inc. We have audited the accompanying consolidated balance sheets of Orion Network Systems, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Orion Network Systems, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Washington, DC March 7, 1997 35 ORION NETWORK SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
December 31, December 31, 1996 1995 -------------- ------------- Assets Current assets: Cash and cash equivalents $ 42,187,807 $ 55,111,585 Accounts receivable (less allowance for doubtful accounts of $100,000 and $278,000 at December 31, 1996 and 1995, respectively) 6,473,316 5,189,598 Notes receivable and accrued interest 78,969 129,810 Prepaid expenses and other current assets 3,504,434 3,168,058 -------------- ------------- Total current assets 52,244,526 63,599,051 Property and equipment, at cost: Land 73,911 73,911 Telecommunications equipment 25,342,528 13,836,841 Furniture and computer equipment 4,849,711 3,395,799 Satellite and related equipment 321,247,346 321,407,936 -------------- ------------- 351,513,496 338,714,487 Less: accumulated depreciation (68,224,957) (32,170,865) Satellite construction in progress 4,560,844 510,613 -------------- ------------- Net property and equipment 287,849,383 307,054,235 Deferred financing costs, net 12,918,233 12,894,720 Other assets, net 5,252,302 5,527,221 -------------- ------------- Total assets $ 358,264,444 $ 389,075,227 ============== ============= Liabilities and stockholders' equity (deficit) Current liabilities: Accounts payable $ 6,411,028 $ 10,454,723 Accrued liabilities 7,653,208 6,812,223 Other current liabilities 5,406,072 2,111,687 Interest payable 8,583,882 8,005,079 Current portion of long-term debt 34,975,060 28,607,110 -------------- ------------- Total current liabilities 63,029,250 55,990,822 Long-term debt 218,236,839 250,669,286 Other liabilities 46,348,291 20,698,084 Limited Partners' interest in Orion Atlantic 10,130,058 14,626,338 Minority interest in other consolidated entities 54,008 52,354 Commitments and contingencies (Note 4) Series A 8% Cumulative Redeemable Convertible Preferred Stock, $.01 par value; 15,000 shares authorized; 13,871 and 14,491 shares issued and outstanding at December 31, 1996 and 1995, respectively, plus accrued dividends 16,097,880 15,705,054 Series B 8% Cumulative Redeemable Convertible Preferred Stock, $.01 par value; 5,000 shares authorized; 4,298 and 4,483 shares issued and outstanding at December 31, 1996 and 1995, respectively, plus accrued dividends 4,804,486 4,652,647 Stockholders' equity (deficit): Common stock, $.01 par value; 40,000,000 shares authorized; 11,244,665 and 11,115,965 issued, 10,985,150 and 10,856,450 out- standing at December 31, 1996 and 1995, respectively, less 259,515 held as treasury shares (at no cost) 112,447 111,160 Capital in excess of par value 86,932,391 85,485,613 Accumulated deficit (87,481,206) (58,916,131) -------------- ------------- Total stockholders' equity (deficit) (436,368) 26,680,642 -------------- ------------- Total liabilities and stockholders' equity (deficit) $ 358,264,444 $ 389,075,227 ============== =============
See notes to consolidated financial statements. 36 ORION NETWORK SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, ------------------------------------------------------- 1996 1995 1994 ------------------ --------------- ------------------ Service revenue $ 41,847,292 $ 22,283,882 $ 3,415,053 Operating expenses: Direct 6,024,109 10,485,745 3,503,037 Sales and marketing 11,465,040 8,613,399 5,863,823 Engineering and technical services 8,672,943 8,539,644 3,004,144 General and administrative 15,089,800 10,072,429 5,058,201 Depreciation and amortization 36,948,158 31,403,376 1,716,019 ------------------ --------------- ------------------ Total operating expenses 78,200,050 69,114,593 19,145,224 ------------------ --------------- ------------------ Loss from operations (36,352,758) (46,830,711) (15,730,171) Other expense (income): Interest income (2,313,842) (1,924,822) (413,435) Interest expense 27,764,126 24,738,446 60,559 Other 22,018 3,359,853 (54,737) ------------------ --------------- ------------------ Total other expense (income) 25,472,302 26,173,477 (407,613) ------------------ --------------- ------------------ Loss before minority interest (61,825,060) (73,004,188) (15,322,558) Limited Partners' and minority interest in the net loss of Orion Atlantic and other consolidated entities 34,629,650 46,089,010 7,357,640 ------------------ --------------- ------------------ Net loss (27,195,410) (26,915,178) (7,964,918) Preferred stock dividend, net of forfeitures 1,369,665 1,329,007 626,400 ------------------ --------------- ------------------ Net loss attributable to common stockholders $ (28,565,075) $ (28,244,185) $ (8,591,318) ================== =============== ================== Net loss per common share $ (2.62) $ (3.07) $ (0.86) ================== =============== ================== Weighted average common shares outstanding 10,951,823 9,103,505 9,272,166 ================== =============== ==================
See notes to consolidated financial statements. 37 ORION NETWORK SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock ------------------------------ Capital in Total Number of Excess of Accumulated Stockholders' Shares Amount Par Value Deficit Equity (Deficit) -------------- -------------- ------------- ------------- ---------------- Balance at December 31, 1993 6,583,994 $ 65,840 $ 30,414,374 $ (22,080,628) $ 8,399,586 Issuance of common stock 782,503 7,825 6,326,028 -- 6,333,853 Exercise of stock options 31,967 319 208,131 -- 208,450 Conversion of common stock to redeemable preferred stock (352,941) (3,529) (2,996,471) -- (3,000,000) Preferred stock dividend, net of forfeitures -- -- -- (626,400) (626,400) Net loss for 1994 -- -- -- (7,964,918) (7,964,918) -------------- -------------- ------------- ------------- ---------------- Balance at December 31, 1994 7,045,523 70,455 33,952,062 (30,671,946) 3,350,571 Issuance of common stock 4,002,941 40,030 50,960,330 -- 51,000,360 Exercise of stock options and warrants 67,501 675 573,221 -- 573,896 Preferred stock dividend, net of forfeitures -- -- -- (1,329,007) (1,329,007) Net loss for 1995 -- -- -- (26,915,178) (26,915,178) -------------- -------------- ------------- ------------- ---------------- Balance at December 31, 1995 11,115,965 111,160 85,485,613 (58,916,131) 26,680,642 Conversion of preferred stock to common stock 91,071 911 804,034 -- 804,945 Issuance of stock warrants -- -- 300,000 -- 300,000 Exercise of stock options and warrants 37,629 376 342,744 -- 343,120 Preferred stock dividend, net of -- -- -- (1,369,665) (1,369,665) forfeitures Net loss for 1996 -- -- -- (27,195,410) (27,195,410) -------------- -------------- ------------- ------------- ---------------- Balance at December 31, 1996 11,244,665 $ 112,447 $ 86,932,391 $ (87,481,206) $ (436,368) ============== ============== ============= ============= ================
See notes to consolidated financial statements. 38 ORION NETWORK SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, ------------------------------------------------------------- 1996 1995 1994 ---------------- ---------------- ----------------- Operating activities Net loss $ (27,195,410) $ (26,915,178) $ (7,964,918) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 36,948,158 31,403,376 1,713,117 Amortization of deferred financing costs 2,130,588 2,130,588 -- Provision for bad debts 919,453 277,529 -- Satellite incentives and accrued interest 2,371,506 5,185,834 -- Limited Partners' and minority interest in the net loss of Orion Atlantic and other consolidated entities (34,629,650) (46,089,010) (7,352,704) Gain on sale of assets (54,738) (59,301) (54,737) Changes in operating assets and liabilities: Accounts receivable (2,203,171) (4,915,257) (426,281) Accrued interest 50,481 (129,810) -- Prepaid expenses and other current assets (336,376) (3,017,782) 159,030 Other assets (69,708) (519,773) 321,443 Accounts payable and accrued liabilities (3,621,847) 7,327,377 535,092 Other current liabilities 3,296,913 3,670,988 -- Interest payable 578,803 (885,106) -- ---------------- ---------------- ----------------- Net cash used in operating activities (21,814,998) (32,535,525) (13,069,958) Investing activities Capital expenditures (12,625,444) (8,549,799) (3,432,286) Deferred revenue, net 9,900,000 -- -- Satellite construction costs (3,750,231) (510,613) (47,670,720) Refund from satellite manufacturer -- 2,750,000 -- FCC license costs (37,865) (558,817) (96,030) ---------------- ---------------- ----------------- Net cash used in investing activities (6,513,540) (6,869,229) (51,199,036) Financing activities Limited Partners capital contributions 30,135,000 7,600,000 4,000,000 Redemption of limited partner interest -- (4,450,000) -- Expenditures on debt and equity financing costs (2,265,291) -- (409,181) Proceeds from issuance of redeemable preferred stock -- 4,483,001 10,928,293 Proceeds from issuance of common stock and subscriptions, net of issuance costs 343,120 51,974,436 6,542,303 PPU borrowings -- 2,275,000 4,375,000 Proceeds from issuance of notes payable -- 551,850 8,136,191 Proceeds from senior notes payable to banks -- 18,367,134 36,685,505 Payments of senior notes payable to banks (22,768,340) (12,468,049) -- Payments of notes payable (5,033,941) (1,916,966) -- Payments on capital lease obligations (755,995) (576,727) (252,823) Capacity and other liabilities 15,750,207 17,483,733 2,101,168 Distributions to joint venture minority interest -- (25,904) (22,873) ---------------- ---------------- ----------------- Net cash provided by financing activities 15,404,760 83,297,508 72,083,583 ---------------- ---------------- ----------------- Net (decrease) increase in cash and cash equivalents (12,923,778) 43,892,754 7,814,589 Cash and cash equivalents at beginning of period 55,111,585 11,218,831 3,404,242 ---------------- ---------------- ----------------- Cash and cash equivalents at end of period $ 42,187,807 $ 55,111,585 $ 11,218,831 ================ ================ =================
See notes to consolidated financial statements. 39 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Orion Network Systems, Inc. (Orion) was incorporated in the State of Delaware on October 26, 1982 (inception) under the name Orion Satellite Corporation, and in January 1988, changed its name to Orion Network Systems, Inc. Orion has developed and operates an international satellite communications system for use in private communications networks to multinational businesses and transmission capacity for video and other program distribution services. Orion has been financed by private and public equity and debt from individual and corporate investors. Orion's first satellite (Orion 1) was successfully launched on November 29, 1994. Orion took delivery of the Orion 1 satellite on January 20, 1995. In August 1995, the Company completed its initial public offering of common stock by selling 4,000,000 common shares at $14 per share. Proceeds to the Company, net of underwriting discount, aggregated approximately $52.25 million. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION POLICY The consolidated financial statements include the accounts of Orion, its two wholly-owned subsidiaries OrionNet, Inc. (OrionNet) and OrionSat, its 83% owned subsidiary, Asia Pacific Space and Communications Ltd. (Asia Pacific), the Orion Financial Partnership, in which Orion holds a 50% interest, and Orion Atlantic, in which Orion holds, at December 31, 1996, a 41 2/3% ownership interest. Management control and direction of Orion Atlantic by OrionSat is a requirement of the FCC in order for Orion Atlantic to continue to hold the license authority received in June 1991. OrionSat, as the general partner of Orion Atlantic, exercises such control through the provisions of the partnership agreement. The amount reflected in the balance sheet as "Limited Partners' interest in Orion Atlantic" represents amounts invested by entities other than Orion (net of syndication costs related to the investments) adjusted for those Limited Partners' share of operating results. All significant intercompany accounts and transactions have been eliminated. CASH AND CASH EQUIVALENTS Orion considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents includes cash in banks and short term investments as follows: DECEMBER 31, ---------------------------------- 1996 1995 -------------- ----------------- Cash....................... $ 2,627,477 $ 3,091,277 Money market funds......... 14,213,484 6,018,925 Commercial paper........... 25,346,846 34,612,175 FHLMC discount notes....... -- 11,389,208 -------------- ----------------- $ 42,187,807 $ 55,111,585 ============== ================= The commercial paper held at December 31, 1996 matures between January and March 1997. PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation and amortization are calculated using the straight-line method over their estimated useful lives as follows: Satellite and related equipment.............. 10.5 years Telecommunications equipment................. 2-7 years Furniture and computer equipment............. 2-7 years Costs incurred in connection with the construction and successful deployment of the Orion 1 satellite and related equipment are capitalized. Such costs include direct contract cost, allocated indirect costs, launch costs, launch insurance, construction period interest and the present value of satellite incentive payments. Similar costs for Orion 2 and Orion 3 are included in "Satellite construction in progress". Orion began depreciating the Orion 1 satellite over its estimated useful life commencing on the date of operational delivery in orbit (January 20, 1995). In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The effect of adoption was not material. 40 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED FINANCING COSTS Deferred financing costs related to obtaining debt and Orion's share of equity financing for Orion Atlantic are amortized over the period the debt is expected to be outstanding. Accumulated amortization at December 31, 1996 and 1995 was $9,122,000 and $6,991,000, respectively. Amortization through January 1995 was capitalized as part of the cost of the satellite. Costs of approximately $3.4 million relating to a debt offering that was postponed in November 1995 have been charged to "Other" expense. OTHER ASSETS Other assets consist principally of FCC license application costs, organization costs and goodwill. The Company began amortizing FCC license application costs related to Orion 1 in January 1995 over the estimated useful life of the satellite. Organization costs and goodwill are amortized over five and ten years respectively. Accumulated amortization at December 31, 1996 and 1995 was $3,150,000 and $3,069,000, respectively. INTEREST RATE MODIFICATION AGREEMENTS Orion may, from time to time, enter into interest-rate swap and cap agreements to modify the interest characteristics of its outstanding debt from a floating to a fixed-rate basis. These agreements involve the receipt of floating rate amounts in an exchange for fixed-rate interest payments over the life of the agreement without an exchange of the underlying principal amount. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest expense related to the debt. The related amount payable to or receivable from counterparties is included in interest payable. The fair values of the swap agreements are not recognized in the financial statements. REVENUE RECOGNITION Orion's revenue results from providing telecommunications and related services. Revenue is recognized as earned in the period in which services are provided. The following summarizes the Company's domestic and foreign revenues for the year ended December 31, 1996 and 1995: Year ended December 31, ------------------------------- 1996 1995 -------------- ---------------- Revenues from unaffiliated customers United States....................... $ 21,261,980 $ 8,528,736 Europe.............................. 14,571,979 8,056,146 Revenues from related parties........... 6,013,333 5,699,000 -------------- ---------------- Total services revenue.................. $ 41,847,292 $ 22,283,882 ============== ================ 41 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The Company recognizes deferred tax assets and liabilities for the expected future consequences of temporary differences between financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect when the difference is expected to reverse. Following is a summary of the components of the net deferred tax asset at December 31, 1996 and 1995 (in thousands): December 31, 1996 1995 ---------------- ---------------- Tax benefit of temporary differences: Net operating loss carryforward $ 29,535 $ 19,463 Orion Atlantic losses.......... 182 1,237 Other.......................... 2,427 1,056 ---------------- ---------------- Total.......................... 32,144 21,756 Valuation allowance............ (32,144) (21,756) ---------------- ---------------- Net deferred tax asset......... $ -- $ -- ================ ================ At December 31, 1996, Orion has approximately $77.7 million in net operating loss carryforwards which expire at varying dates from 2004 through 2011. The use of these loss carryforwards may be limited under the Internal Revenue Code as a result of ownership changes experienced by Orion. Due to uncertainty regarding its ability to realize the benefits of such net operating loss carryforwards, the Company has established a valuation allowance for the full amount of its net operating loss carryforwards. NET LOSS PER COMMON SHARE Net loss per common share is based on the weighted average number of common shares outstanding during the period. Pursuant to the requirements of the Securities and Exchange Commission, common stock issued and stock issuable relating to convertible preferred stock, warrants and options granted within one year of filing the registration statement relating to the Company's initial public offering of common stock were treated as outstanding for all periods prior to the second quarter of 1995. STATEMENTS OF CASH FLOWS Non-cash investing and financing activities and supplemental cash flow information includes:
December 31, 1996 -------------------------------------------------- 1996 1995 1994 --------------- --------------- --------------- Satellite construction costs financed by notes payable $ -- $ -- $ 7,862,050 Conversion of common stock to redeemable preferred stock.................................... Property and equipment financed by capital leases.... 482,452 2,850,766 94,323 Preferred stock dividend, net of forfeitures......... 1,369,665 1,329,007 626,400 Conversion of preferred stock to common stock........ 804,945 9,000 -- Premium on satellite due to redemption of L.P. interest -- 3,066,925 -- Redemption of STET interest with notes payable....... -- 8,000,000 -- Reduction in amount due to satellite manufacturer.... -- 485,799 -- Satellite incentive obligation capitalized........... -- 14,816,406 -- Interest paid during the year, net of amounts 20,619,316 11,312,875 45,051 capitalized..........................................
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current year presentation. 42 ORION NETWORK SYSTEMS, INC. - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ORION ATLANTIC Orion Atlantic is a Delaware limited partnership formed to provide international private communications networks and basic transponder capacity and capacity services (including ancillary ground services) to businesses and institutions with trans-Atlantic and intra-European needs. The business was organized by OrionSat, the general partner of Orion Atlantic. The principal purposes of Orion Atlantic were to finance the construction, launch and operation of up to two telecommunications satellites in geosynchronous orbit over the Atlantic Ocean and to establish a multinational sales and service organization. Eight international corporations, including Orion, invested a total of $90 million in equity as limited partners in Orion Atlantic. Orion Atlantic also has a credit facility which provided up to $251 million for the first satellite from a syndicate of major international banks led by Chase Manhattan Bank, N.A. In addition to their equity investments, the Limited Partners have agreed to lease capacity on the satellites up to an aggregate $155 million and have entered into additional contingent capacity lease contracts ("contingent call") up to an aggregate $271 million, as support for repayment of the senior debt. The firm capacity leases and contingent calls are payable over a seven-year period after the first satellite is placed in service. In July 1995, January and July 1996 the Limited Partners (excluding the Company) paid $7.6 million, $18.0 million and $12.1 million, respectively, pursuant to the contingent calls. Satellite Construction Contract --The fixed base price of Orion 1, excluding obligations relating to satellite performance, aggregated $227 million. In addition to the fixed base price, the contract requires payments in lieu of a further contract price increase, aggregating approximately $44 million through 2006. Such payments are due, generally, if 24 out of 34 satellite transponders are operating satisfactorily. Shortly after acceptance of the satellite in January 1995, the Company filed a warranty claim with the satellite manufacturer relating to one transponder that was not performing in accordance with contract specifications. In August 1995, Orion Atlantic received a one time refund of $2.75 million which was applied as a mandatory prepayment to the senior notes payable - banks. The Company believes that since Orion 1 is properly deployed and operational, based upon industry data and experience, payment of the obligation mentioned above is highly probable and the Company has capitalized the present value of this obligation of approximately $14.8 million as part of the cost of the satellite. Payment of amounts due under this obligation are delayed until payment is permitted under the senior notes payable -- banks. The present value was estimated by discounting the obligation at 14% over the expected term, assuming payment of the incentives begins upon expiration of the senior notes payable -- banks in 2002. Partnership and Limited Partners -- OrionSat has the primary responsibility for the control, management and operations of Orion Atlantic. Under the partnership agreement, the limited partners have rights of approval for a limited number of matters, e.g., terms for acceptance of new partners, significant budget modifications, and certain borrowings. The financing and legal structure of Orion Atlantic restricts the use of partnership resources to the purposes of constructing, launching and operating the satellite system. Condensed balance sheet information for Orion Atlantic at December 31, 1996 and 1995 is as follows: December 31, ---------------------------------- 1996 1995 --------------- ---------------- Assets Current assets........................... $ 14,959,986 $ 14,085,169 Property and equipment, net.............. 285,006,166 303,889,894 Deferred financing costs and other....... 12,773,951 16,051,517 --------------- ---------------- Total assets........................ $ 312,740,103 $ 334,026,580 =============== ================ Liabilities and partnership capital Current liabilities...................... $ 59,139,777 $ 52,883,250 Long-term debt and other liabilities..... 274,732,228 284,110,104 Partnership capital subject to redemption -- -- Partnership (deficit) capital............ (19,081,902) 1,533,226 Less: Orion Network Systems, Inc. note.. (2,050,000) (4,500,000) --------------- ---------------- Total liabilities and partnership capital......................... $ 312,740,103 $ 334,026,580 ================ =============== 43 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ORION ATLANTIC (CONTINUED) Redemption of STET Partnership Interest; Issuance of New Interest to Orion. -- In November 1995 Orion Atlantic redeemed the limited partnership interest held by STET (the "STET Redemption"). Such redemption was for $11.5 million, including $3.5 million of cash and $8.0 million in 12%, promissory notes due through 1997. STET's firm and contingent capacity leases remain in place until released by the Banks under the Orion 1 Credit Facility. STET's existing contractual arrangements with Orion Atlantic have been modified in a number of respects, including (i) a reduction of approximately $3.5 million in amounts due by Orion Atlantic to Telespazio S.p.A., an affiliate of STET, over a ten-year period under contracts relating to the construction of Orion 2, back-up tracking, telemetry and command services through a facility in Italy and engineering consulting services, (ii) the establishment of ground operations and distribution agreements between Orion Atlantic and Telecom Italia, a subsidiary of STET, relating to Italy, and the granting to Telecom Italia of exclusive marketing rights relating to Italy for a period ending December 1998 conditioned upon Telecom Italia achieving certain sales quotas, and (iii) canceling exclusive ground operations and sales representation agreements between Orion Atlantic and STET (or its affiliates) relating to Eastern Europe. Orion Atlantic funded the STET Redemption by selling a new limited partnership interest to Orion for $8 million (including $3.5 million in cash and $4.5 million in 12% promissory notes due through 1997). In connection with the STET redemption, Orion agreed to indemnify Telecom Italia for payments which were made in July 1995 of $950,000 and which would be made in the future under its firm and contingent capacity agreements with Orion Atlantic and posted a $10 million letter of credit to support such indemnity. The Company has accounted for this transaction as an acquisition of a minority interest and, as a result, approximately $3.1 million was allocated to the cost of the satellite and related equipment. During 1995, Orion Atlantic entered into agreements with certain Limited Partners (including the Company) under which the participating Limited Partners would voluntarily give up their rights to receive capacity under their firm capacity agreements through January 1996. The participating Limited Partners would continue to make payments for such capacity but would have the right to receive refunds from Orion Atlantic out of cash available after operating costs and payments under the Credit Facility. Through December 31, 1996 and 1995, Orion Atlantic has received $27.7 million and $14.1 million (excluding payments from the Company) under the firm capacity agreements subject to refund, which amounts are included in "Other liabilities." In addition, services revenue included $6.0 million and $5.7 million in 1996 and 1995 from Limited Partners pursuant to the firm capacity commitments, not subject to refund. 4. COMMITMENTS AND CONTINGENCIES Obligations with Respect to Orion Atlantic -- Orion has certain significant obligations to Orion Atlantic and the Limited Partners, including commitments under satellite capacity agreements between Orion and Orion Atlantic, under which Orion will be liable to pay Orion Atlantic approximately $2.5 million per year for seven years for satellite capacity and is contingently liable for up to an additional $4.3 million per year for up to seven years if Orion Atlantic experiences cash flow deficits not outstanding at December 1997 commencing when Orion Atlantic's first satellite begins commercial operations; and reimbursement (jointly and severally with OrionSat) with respect to a $10 million letter of credit provided by OrionSat to a limited partner, which is secured by 259,515 shares of Orion's common stock held in treasury and cash distributions that Orion and OrionSat may receive with respect to their partnership interests in Orion Atlantic. Orion 1 satellite -- In November 1995, a portion of the Orion 1 satellite experienced an anomaly that resulted in a temporary service interruption, lasting approximately two hours, in the dedicated capacity serving the European portion of Orion Atlantic's services. The nine affected transponders account for a majority of Orion Atlantic's present revenues. Full service to all affected customers was restored using redundant equipment on the satellite. Orion Atlantic believes, based on the data and the Telesat Report (issued by Telesat Canada, independent engineering consultants dated November 14, 1995), that, because the redundant component is functioning fully in accordance with specifications and the performance record of similar components is strong, the anomalous behavior is unlikely to affect the expected performance of the satellite over its useful life. Furthermore, there has been no effect on Orion Atlantic's ability to provide services to customers. However, in the event that the currently operating component fails, Orion 1 would experience a significant loss of usable capacity. In such event, while Orion Atlantic would be entitled to insurance proceeds of approximately $50 million and could lease replacement capacity and function as a reseller with respect to such capacity (at reduced levels of profitability), the loss of capacity would have a material adverse effect on Orion and on Orion Atlantic. Orion 2 satellite -- July 1996, the Company signed a contract with Matra Marconi Space for the construction and launch of Orion 2 (which was amended and restated in January 1997) and in February 1997 commenced construction of that satellite. The contract provides for delivery in orbit of Orion 2 by June 1999, for a firm fixed price of $201 million, excluding launch insurance. Orion 2 will expand the Company's European coverage and extend coverage to portions of the Commonwealth of Independent States, Latin American and the Middle East. Orion 3 -- In January 1997, the Company entered into a satellite procurement contract with Hughes Space for the construction and launch of Orion 3, construction of which commenced in December 1996. The contract provides for delivery in orbit of Orion 3 by December 1998, for a firm fixed price of $208 million, excluding launch insurance. Orion 3 will cover broad areas of the Asia Pacific region including China, Japan, Korea, Southeast Asia, Australia, New Zealand, Eastern Russia and Hawaii. 44 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. COMMITMENTS AND CONTINGENCIES (CONTINUED) In November 1996, Orion entered into a contract with DACOM Corp. ("DACOM"), a Korean communications company, under which DACOM will lease eight dedicated transponders on Orion 3 for 13 years, in return for approximately $89 million, which is payable over a period from December 1996 through six months following the lease commencement date for the transponders (which is scheduled to occur by January 1999). DACOM is to deposit funds with Orion in accordance with a milestone schedule. In December 1996, Orion received a $10 million deposit and such amount is included in "Other liabilities". Orion maintains a $10 million letter of credit which increases as DACOM makes additional deposits. DACOM has the right to terminate the contract at any time prior to March 31, 1997, upon which termination Orion would be entitled to retain all deposited funds. Prior to launch, payments will be held in escrow and are subject to refund pending the successful launch and commencement of commercial operation of Orion 3. Eutelsat Lease -- In January 1993, Orion Atlantic entered into a lease, which expired in December 1994, with one of its limited partners under which Orion Atlantic leased one-half of a transponder on a EUTELSAT satellite for use in providing private network services prior to the operational delivery of Orion 1. The lease required quarterly payments of $481,000 of which $855,000 was deferred by the limited partner until March 1995. Rent under this lease totaled $1.9 million in 1994. Litigation -- In October 1995, Skydata Corporation ("Skydata"), a former contractor, filed suit against Orion Atlantic, Orion Satellite Corporation and Orion, in the United States District Court for the Middle District of Florida, claiming that certain Orion Atlantic operations using frame relay switches infringe a Skydata patent. Skydata's suit sought damages in excess of $10 million and asked that any damages assessed be trebled. On December 11, 1995, the Orion parties filed a motion to dismiss the lawsuit on the grounds of lack of jurisdiction and violation of a mandatory arbitration agreement. In addition, on December 19, 1995, the Orion parties filed a Demand for Arbitration against Skydata with the American Arbitration Association in Atlanta, Georgia, requesting damages in excess of $100,000 for breach of contract and declarations, among other things, that Orion and Orion Atlantic own a royalty-free license to the patent, that the patent is invalid and unenforceable and that Orion and Orion Atlantic have not infringed on the patent. On March 5, 1996, the court granted the Company's motion to dismiss the lawsuit on the basis that Skydata's claims are subject to arbitration. Skydata appealed the dismissal to the United States Court of Appeals for the Federal Circuit. Skydata also filed a counterclaim in the arbitration proceedings asserting a claim for $2 million damages as a result of the conduct of Orion and its affiliates. On May 15, 1996, the arbitrator granted the Orion parties' request for an initial hearing on claims relating to the Orion parties' rights to the patent, including the co-ownership claim and other contractual claims. This initial hearing was scheduled to take place in November 1996. On November 9, 1996, Orion and Skydata executed a letter to settle in full the pending litigation and arbitration. As part of the settlement, the parties are to release all claims by either side relating in any way to the patent and/or the pending litigation and arbitration. In addition, Skydata is to grant Orion (and its affiliates) an unrestricted paid-up license to make, have made, use or sell products or methods under the patent and all other corresponding continuation and reissue patents. Orion is to pay Skydata $437,000 over a period of two years as part of the settlement. The parties are in the process of documenting the final terms in a formal settlement agreement. While Orion is party to regulatory proceedings incident to the business of Orion, there are no other material legal proceedings pending or, to the knowledge of management, threatened against Orion or its subsidiaries. Other -- Orion has entered into operating leases, principally for office space. Rent expense was $915,000, $735,000 and $668,000 during the years ended December 31, 1996, 1995, and 1994, respectively. Future minimum lease payments are as follows: 1997...................... $ 1,073,582 1998...................... 969,302 1999...................... 989,640 2000...................... 13,694 ------------ $ 3,046,218 ============ 45 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT See Note 9 for discussion of significant financing transactions that were consummated on January 31, 1997. Long-term debt at December 31, 1996 and 1995, consists of the following: December 31, ----------------------------- 1996 1995 ------------ -------------- Senior notes payable - banks............ $207,714,842 $ 230,483,182 Note payable - TT&C Facility............ 6,956,624 8,774,266 Satellite incentive obligation.......... 22,373,746 20,002,240 Notes payable - STET.................... 5,550,000 8,000,000 Note payable - Limited Partners......... 8,050,000 8,050,000 Other .................................. 2,566,687 3,966,708 ------------ -------------- Total long-term debt.................... 253,211,899 279,276,396 Less: current portion................... 34,975,060 28,607,110 ------------ -------------- Long-term debt less current portion..... $218,236,839 $ 250,669,286 ============ ============== Total interest (including commitment fees and amortization of deferred financing costs) incurred for the years ended December 31, 1996, 1995 and 1994 was $27.8, $26.0, and $27.0 million, respectively. Substantially all of the interest incurred in 1994 was capitalized and $1.3 million was capitalized in 1995. Aggregate annual maturities of long-term debt consist of the following (in thousands): 1997.................. $ 34,964 1998.................. 34,422 1999.................. 46,914 2000.................. 43,619 2001.................. 47,317 Thereafter............ 45,976 --------------- $ 253,212 =============== Senior Notes Payable to Banks -- In December 1991, OrionSat, on behalf of Orion Atlantic, executed a credit agreement for up to $400 million of senior debt from an international banking syndicate. Amounts advanced under the credit facility are secured by the assets of Orion Atlantic and are due over seven years in graduated installments beginning July 31, 1995. The credit agreement prohibits the extension of credit by Orion Atlantic to any affiliate of the partnership, as defined. Accordingly, Orion Atlantic may not loan or advance funds to the Company or its affiliates. The credit agreement also restricts distributions to the partners. At December 31, 1996, none of Orion Atlantic's capital was available for distribution. The credit facility has a number of other customary covenants and requirements, including the Banks' approval of significant changes to the construction contract and increases in budgeted costs. The Banks also have full recourse to OrionSat as general partner, and Orion has pledged its investment in the common stock of OrionSat and its limited partner ownership interest to the Banks. Amounts outstanding under the credit facility bear interest at 1.75% over the LIBOR (7.6% at December 31, 1996). Orion Atlantic has entered into agreements with Chase Manhattan Bank, N.A. ( "Chase" ) for interest rate hedging arrangements which fixed the maximum interest rate through November 1995 at 11.54%. Thereafter a self funding interest rate cap agreement is in place relating to a notional amount declining every six months from $150 million effective November 30, 1995 to $15.6 million effective March 31, 2001. Under the terms of the cap agreement, when LIBOR equals or exceeds 5.5% Orion Atlantic pays Chase a fee equal to 3.3% per annum of the notional amount and receives a payment from Chase in an amount equal to the difference between the actual LIBOR rate and 5.5% on the notional amount. There was an unrealized loss at December 31, 1996 and 1995 of approximately $6.4 million and $4.6 million relating to this arrangement. 46 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG TERM DEBT (CONTINUED) Note Payable -- TT&C Facility -- Orion Atlantic entered into a financing arrangement with General Electric Capital Corporation ("GECC") to finance the Tracking Telemetry and Control ("TT&C") Facility. The TT&C arrangement calls for a note payable, the maximum amount of which is $11 million of which up to $8.9 million is for payment to Lockheed Martin under the Satellite Control System Contract, with the remaining balance available to be drawn to finance the cost of launch insurance required for the benefit of GECC. In June 1995, Orion Atlantic accepted the TT&C Facility and Orion Atlantic refinanced $9.3 million from GECC as a seven-year term loan, payable monthly. Orion Atlantic made a mandatory prepayment of $1 million in January 1996. The interest rate is fixed at 13.5%. The TT&C debt is secured by the TT&C Facility, the Satellite Control System Contract and Orion Atlantic's leasehold interest in the TT&C Facility land. The TT&C financing agreement contains similar representations, warranties and covenants to those in the senior notes. Satellite incentive obligation -- The obligations relating to satellite performance have been recorded at the present value (discounted at 14%, the Company's estimated incremental borrowing rate for unsecured financing) of the required payments commencing at the maturity of the senior notes payable to banks and continuing through 2006. Under the terms of the construction contract, payment of the obligation is delayed until such time as payment is permitted under the senior notes payable to banks. Notes Payable -- STET -- In connection with the STET Redemption, the Company issued STET $8 million of promissory notes which bear interest at 12% per annum. Payments are due as follows: $2.5 million plus accrued interest paid on December 31, 1996; $3.5 million plus accrued interest on the earlier of December 31, 1997 or the refinancing of the senior notes payable to banks; and the remaining $2.0 million in monthly installments of $0.2 million plus accrued interest beginning January 1997. Notes Payable -- Limited Partners -- In 1993, Orion Atlantic received commitments for Preferred Participation Units (PPUs) aggregating $9.6 million from certain Limited Partners (including $1.5 million from Orion Network Systems) for development of Orion Atlantic's network services business. Holders of PPUs earn interest on aggregate amounts drawn at the rate of 30% per annum, of which 6% is paid and the remainder accrued, but not paid until July 1, 1995, at which time interest and principal payments due are subordinated to operating requirements and senior notes debt service but are payable prior to distributions to Limited Partners. Principal amounts drawn are payable on February 1, 1999. Principal amounts may be prepaid without penalty on or after January 1, 1996. Interest payable at December 31, 1996 and 1995 is $5.9 million and $3.5 million and is included in "Other liabilities". 6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY See Note 9 for discussion of significant equity transactions that were consummated on January 31, 1997. The Company has authorized 1,000,000 shares of $0.01 par value preferred stock. Redeemable Preferred Stock In June 1994, Orion issued 11,500 shares of Series A 8% Cumulative Redeemable Convertible Preferred Stock at $1,000 per share and granted an option to purchase an additional 3,833 shares of similar preferred stock at $1,000 per share. Dividends on preferred stock accrue at 8% per year and are payable as and when declared. Orion may redeem the preferred stock at the amount invested plus accrued and unpaid dividends. Upon such a redemption, the preferred stockholders would receive a warrant to acquire at $8.50 per share the number of shares of common stock into which the preferred stock was convertible. The 11,500 shares issued are convertible into 1,352,941 shares of common stock ($8.50 per share). Upon conversion any accrued and unpaid dividends are forfeited. Orion may require conversion of the preferred stock beginning in June 1996 if certain conditions are met. After Orion issued preferred stock (along with warrants and options to make an additional investment) in June 1994, the Directors and affiliates of Directors who purchased common stock in December 1993 and the institutions and other investors who purchased common stock in June 1994 each exercised its right to receive preferred stock (along with warrants and options to make an additional investment) in exchange for the common stock previously acquired and Orion issued an aggregate of 3,000 shares of Series A Preferred Stock and related options for 1,000 shares to such persons and entities. The 3,000 shares issued are convertible into 352,941 shares of common stock ($8.50 per share). Through December 31, 1996, 629 shares of preferred stock were converted into 74,000 shares of common stock. The remaining 13,871 shares issued are convertible into 1,631,882 shares of common stock and the preferred stock underlying the options are convertible into 25,894 shares of common stock. 47 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED) The preferred stock has a liquidation preference equal to the amount invested plus accrued and unpaid dividends. Preferred stockholders are entitled to vote on an as-converted basis and have the right to put the stock to Orion upon a merger, change of control or sale of substantially all assets at the greater of liquidation value or fair value. The put expires upon the completion of a qualified public equity offering, as defined. If the preferred stock is not previously redeemed or converted to common stock, the preferred stockholders also have the right to put the stock to Orion as follows: 33 1/3% beginning in June 1999; 66 2/3% beginning in June 2000; and 100% beginning in June 2001. In June 1995, certain Directors, affiliates of Directors, and certain holders of Series A Preferred Stock purchased 4,483 shares of Series B Preferred Stock for approximately $4.5 million. This purchase was pursuant to an option granted in June 1995 to purchase $1 of preferred stock similar to the Series A Preferred Stock for each $3 of Series A Preferred Stock purchased in June 1994, except that such similar preferred stock would be convertible at any time with Common Stock at a price within a range of $10.20 to $17.00 per share of common stock based upon when the option is exercised. The Series B Preferred Stock has rights, designations and preferences substantially similar to those of the Series A Preferred Stock, and is subject to similar covenants, except that the Series B Preferred Stock is convertible into 439,510 shares of Common Stock at an initial price of $10.20 per share, subject to certain anti-dilution adjustments, and purchases of Series B Preferred Stock did not result in the purchaser receiving any rights to purchase additional preferred stock. Through December 31, 1996, 185 shares of preferred stock were converted into 18,137 shares of common stock. Stockholders' Equity Stock Options -- In 1987, Orion adopted a stock option plan. Under this plan, as amended, 1,470,588 shares of common stock are reserved for issuance upon exercise of options granted. Shares of common stock may be purchased under this plan at prices not less than the fair market value, as determined by the Board of Directors, on the date the option is granted. The Board of Directors also has granted nonqualified options to purchase 53,341 shares of common stock outside the plan described at prices ranging from $5.44 to $12.24 per share. Stock options outstanding at December 31:
1996 1995 1994 --------------- --------------- ---------------- Range of exercise price........... $ 8.16 - 12.24 $ 5.44 - 12.24 $ 5.44 - 12.24 --------------- --------------- ---------------- Outstanding of beginning of year 971,469 804,056 871,464 Granted during year............... 122,750 380,069 37,867 Exercised......................... (37,629) (60,928) (31,967) Canceled ......................... (144,927) (151,728) (73,308) --------------- --------------- ---------------- Outstanding at end of year........ 911,663 971,469 804,056 =============== =============== ================
In November 1993, stock options for 95,588 shares of common stock were granted to key executives which may be exercised only upon the achievement of certain business and financial objectives. At December 31,1995, the executives had earned the right to exercise 40,441 of these options based on the achievement of such objectives. The remaining options were canceled during 1996. Stock options vest annually over a one to five-year period. All options are exercisable up to seven years from the date of grant. There are 558,925 shares available to be granted under the plan. As of December 31, 1996 and 1995, 429,265 and 356,226, respectively, qualified and nonqualified options were exercisable. In July 1996, the Company granted, subject to shareholder approval, the Chairman of the Executive Committee 100,000 options at $9.83 per share. These options vest as follows, 50,000 on January 17, 1997 and 50,000 upon successful completion of either a refinancing of the Orion 1 satellite, financing for construction, launch and insurance for Orion 2 or Orion 3 or completes a substantial acquisition or relationship with a strategic partner. These requirements were met in January 1997. Non-Employee Director Stock Option Plan -- In 1996, Orion adopted a non-employee director stock option plan. Under this plan, 380,000 shares of common stock are reserved for issuance. During 1996, there were 190,000 options granted pursuant to this plan at $8.49 to $12.53 per share. 48 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED) The Company has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock based award programs, because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") which is effective for awards after January 1, 1996 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of the employee award equals the market price of the underlying stock on the date of grant, as has been the case historically with the Company's awards, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its stock options under the fair value method of that statement. The fair value of these options was estimated at the date of the grant using a Black-Scholes valuation model with the following assumptions: risk free interest rate of 6.5%, dividend yield of 0%, volatility factor of the expected market price of the Company's common stock of 68% and a weighted-average expected life of the option of 5.8 years. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. For the years ended December 31, 1996 and 1995, the Company's pro forma net loss and net loss per share would have been $28.0 million or $2.68 per share, and $27.3 million or $3.11 per share, respectively. 401(k) Profit Sharing Plan -- In September 1996, Orion amended the 401(k) profit sharing plan. Under this plan, 100,000 shares of common stock are reserved for issuance as the Company's discretionary match of employee contributions. The Company's matching contributions may be made in either cash or in the equivalent amount of the Company's common stock. Stock Purchase Plan -- In September 1996, Orion adopted an employee stock purchase plan. Under this plan, 500,000 shares of common stock are reserved for issuance. Shares of common stock purchased under this plan through payroll deduction. The purchase price of each share of common stock purchased under the plan will be 85% of the fair market value of the common stock on the measurement date. Stock Warrants -- In November 1996, Orion granted 50,000 warrants to DACOM to purchase shares of common stock at $14 per share. The warrants are exercisable for a six month period beginning six months after the commencement date, as defined in the Joint Investment Agreement, and ending one year after the commencement date and will terminate at that time or at any time the Joint Investment Agreement is terminated. The fair value of the warrant at the date of issue was $300,000 and was estimated using a Black-Scholes valuation model. Stock warrants outstanding at December 31, 1996 and 1995 were 142,115 and 553,768, respectively. Outstanding warrants are exercisable at $9.79 to $14 per share. Warrants totaling 461,653 expired during the year ended December 31, 1996. In January 1997, British Aerospace exercised 86,505 warrants to purchase shares of common stock at $11.56 per share. The holders of preferred stock also hold warrants to purchase 1,631,882 shares of common stock at the conversion price of such preferred stock. These warrants do not become exercisable unless Orion exercises its right to repurchase the preferred stock at the liquidation value, plus accrued and unpaid dividends. Reserve for Issuance - The Company has 24,125,482 shares of common stock at December 31, 1996 reserved for issuance upon conversion of preferred stock, exercise of outstanding stock options and warrants, and common stock issued under the stock purchase and 401(k) profit sharing plans. 7. FAIR VALUES OF FINANCIAL INSTRUMENTS Other than amounts due under the senior notes payable to banks, Orion believes that the carrying amount reported in the balance sheet of its other financial assets and liabilities approximates their fair value. The fair value of Orion Atlantic's senior notes payable to banks at December 31, 1996 and 1995 was estimated to be $214.1 million and $235.1 million based on the principal balance outstanding, net of the estimated fair value of the interest rate modification agreement, which approximates an implicit loss of $6.4 million and $4.6 million, respectively. Credit risk exists if the counterparty is not able to make the required payments to Orion under these agreements. Orion believes the risk to be remote. 49 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. CONDENSED FINANCIAL INFORMATION OF ORION The net assets, credit facilities and other resources of Orion Atlantic are restricted to the construction and operation of the satellite system. Presented below are condensed balance sheets of Orion (parent company only basis) at December 31, 1996 and 1995 and condensed statements of operations and cash flows for the years ended December 31, 1996, 1995 and 1994. All material contingencies, obligations and guarantees of Orion have been separately disclosed in the preceding notes to the financial statements. CONDENSED BALANCE SHEETS OF ORION NETWORK SYSTEMS, INC.
December 31, 1996 1995 --------------- ---------------- ASSETS Current assets: Cash and cash equivalents................................... $ 26,564,562 $ 48,797,627 Receivable from Orion Atlantic.............................. 253,088 1,217,169 Other current assets........................................ 766,784 611,391 --------------- ---------------- Total current assets................................... 27,584,434 50,626,187 Investment in and advances to subsidiaries: OrionNet.................................................... 8,331,248 5,993,628 OrionSat.................................................... (35,336,290) (20,496,009) Asia Pacific................................................ 1,397,588 1,634,048 Orion Asia Pacific.......................................... 4,324,426 -- Orion Atlantic.............................................. 9,194,820 10,585,573 Other assets.................................................. 10,590,071 6,256,742 --------------- ---------------- Total assets........................................... $ 26,086,297 $ 54,600,169 =============== ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes and interest payable to Orion Atlantic................ $ 2,327,427 $ 2,482,667 Accounts payable and accrued liabilities.................... 2,828,616 2,361,291 --------------- ---------------- Total current liabilities.............................. 5,156,043 4,843,958 Notes and interest payable to Orion Atlantic.................. -- 2,077,327 Other liabilities............................................. 464,256 640,541 Redeemable preferred stock.................................... 20,902,366 20,357,701 Stockholders' equity (deficit)................................ (436,368) 26,680,642 --------------- ---------------- Total liabilities and stockholders' equity............. $ 26,086,297 $ 54,600,169 =============== ================
50 ORION NETWORK SYSTEMS, INC. - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. CONDENSED FINANCIAL INFORMATION OF ORION (CONTINUED) CONDENSED STATEMENTS OF OPERATIONS OF ORION NETWORK SYSTEMS, INC.
Year ended December 31, ------------------------------------------------------------ 1996 1995 1994 --------------- --------------- ---------------- Services revenue..................................... $ 34,000 $ -- $ -- Operating expenses and other income: General and administrative........................ 3,832,286 3,171,305 2,487,201 Interest income, net.............................. (1,883,719) (1,834,589) (243,152) --------------- --------------- ---------------- Total operating expenses and other income......... 1,948,567 1,336,716 2,244,049 Equity in net losses of subsidiaries................. 25,280,843 25,578,462 5,720,869 Net loss............................................. $ (27,195,410) $ (26,915,178) $ (7,964,918) =============== =============== ================
CONDENSED STATEMENTS OF CASH FLOWS OF ORION NETWORK SYSTEMS, INC.
Year ended December 31, 1996 1995 1994 ---------------- ---------------- --------------- Net cash used in operations...................... $ (4,046,446) $ (4,107,237) $ (2,709,307) Investing activities:............................ Advances to subsidiaries....................... (6,918,710) (3,264,024) (2,973,264) Investment in Orion Atlantic................... (8,610,000) (5,400,000) -- Capital expenditures........................... (504,729) (597,698) (771,890) ---------------- ---------------- --------------- Net cash used in investing activities.......... (16,033,439) (9,261,722) (3,745,154) Financing activities: Proceeds from issuance of redeemable preferred stock -- 4,483,001 10,928,293 Proceeds from issuance of common stock......... 343,120 51,974,436 6,542,303 PPU funding.................................... -- (455,000) (765,000) Repayment of notes payable..................... (2,496,300) (37,792) (5,648,535) ---------------- ---------------- --------------- Net cash (used in) provided by financing activities (2,153,180) 55,964,645 11,057,061 ---------------- ---------------- --------------- Net (decrease) increase in cash and cash equivalents (22,233,065) 42,595,686 4,602,600 Cash and cash equivalents at beginning of year... 48,797,627 6,201,941 1,599,341 ---------------- ---------------- --------------- Cash and cash equivalents at end of year......... $ 26,564,562 $ 48,797,627 $ 6,201,941 ================ ================ ===============
Basis of presentation -- In these parent company-only condensed financial statements, Orion's investment in subsidiaries is stated at cost less equity in the losses of subsidiaries since date of inception or acquisition. 51 ORION NETWORK SYSTEMS, INC. - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. SUBSEQUENT EVENTS (UNAUDITED) THE EXCHANGE On January 31, 1997, the Company acquired all of the limited partnership interests which it did not already own in Orion Atlantic. Specifically, the Company acquired the Orion Atlantic limited partnership interests and other rights relating thereto held by British Aerospace Communications, Inc., COM DEV Satellite Communications Limited, Kingston Communications International Limited, Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate of Matra Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of Nissho Iwai Corp. (collectively, the "Exchanging Partners"). Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the "Exchange Agreement"), the Exchanging Partners exchanged (the "Exchange") their Orion Atlantic limited partnership interests for 123,172 shares of a newly created class of the Company's Series C 6% Cumulative Convertible Redeemable Preferred Stock (the "Series C Preferred Stock"). In addition, the Company acquired certain rights held by certain of the Exchanging partners, including certain of the Exchanging Partners' rights to receive repayment of various advances. The 123,172 shares of Series C Preferred Stock issued in the Exchange are convertible (as of January 31, 1997) into approximately 7 million shares of the Company's common stock. As a result of the Exchange, certain of the Exchanging Partners became principal stockholders of the Company. The Exchange and the acquisition by the Company of the only outstanding minority interest in the Company's subsidiary Orion Asia Pacific Corporation from British Aerospace Satellite Investments, Inc. on January 8, 1997 (in exchange for approximately 86,000 shares of the Company's Common Stock) results in the Company owning 100% of all its significant subsidiaries and, therefore, a greatly simplified corporate structure. THE MERGER The Exchange was conducted on a tax-free basis by means of a Merger (defined below) that was consummated on January 31, 1997. Pursuant to the Exchange Agreement, Orion Oldco Services, Inc., formerly known as Orion Network Systems, Inc. ("Old Orion"), formed the Company as a new Delaware corporation with a certificate of incorporation, bylaws and capital structure substantially identical in all material respects with those of Old Orion. Also pursuant to the Exchange Agreement, the Company formed a wholly owned subsidiary, Orion Merger Company, Inc. ("Orion Merger Subsidiary"). Pursuant to an Agreement and Plan of Merger, Orion Merger Subsidiary was merged with and into Old Orion, and Old Orion became a wholly owned subsidiary of the Company (the "Merger"). On January 31, 1997, the effective time of the Merger, all of the stockholders of Old Orion received stock in the Company with substantially identical rights to the Old Orion stock they held prior to the effective time of the Merger. Following the Merger, the Company changed its name from Orion Newco Services, Inc. to Orion Network Systems, Inc. and the Company's wholly owned subsidiary Orion Network Systems, Inc. changed its name to Orion Oldco Services, Inc. THE FINANCINGS On January 31, 1997, the Company completed a $710 million bond offering (the "Offering") comprised of approximately $445 million of Senior Note Units, each of which consists of one 11.25% Senior Note due 2007 (a "Senior Note") and one Warrant to purchase 0.8463 shares of common stock, par value $ .01 per share ("Common Stock") of the Company (a "Senior Note Warrant"), and approximately $265.4 million of Senior Discount Note Units, each of which consists of one 12.5% Senior Discount Note due 2007 (a "Senior Discount Note," and together with the Senior Notes, the "Notes") and one Warrant to purchase 0.6628 shares of Common Stock of the Company (a "Senior Discount Note Warrant," and together with the Senior Note Warrants, the "Warrants"). Interest on the Senior Notes will be payable semi-annually in cash on January 15 and July 15 of each year, commencing July 15, 1997. The Senior Discount Notes will not pay cash interest prior to January 15, 2002. Thereafter, cash interest will accrue until maturity at an annual rate of 12.5% payable semi-annually on January 15 and July 15 of each year, commencing July 15, 2002. The exercise price for the Warrants is $ .01 per share of Common Stock of the Company. The shares of Common Stock of the Company initially issuable upon exercise of the Warrants represent approximately 2.62% of the outstanding Common Stock of the Company on a fully diluted basis as of January 31, 1997. The net proceeds of the Offering to the Company were approximately $684 million. Other than $134 million placed in a pledged account to pre-fund the first six interest payments on the Senior Notes, the net proceeds from the Offering were used by the Company to repay the Orion 1 credit facility and may be used to build and launch additional satellites, including the Orion 2 and Orion 3 satellites. On January 31, 1997, the Company also completed the sale of $60 million of its convertible junior subordinated debentures (the "Convertible Debentures") to two investors, British Aerospace Holdings, Inc. ("British Aerospace") and Matra Marconi Space UK Limited ("Matra Marconi Space") purchased $50 million and $10 million of the Convertible Debentures, respectively (collectively, the "Convertible Debenture Investments," and together with the Offering, the "Financings"). The Convertible Debentures will mature in 2012, and will bear interest at a rate of 8.75% per annum to be paid semi-annually in arrears solely in common stock of the Company. The Convertible Debentures are subordinated to all other indebtedness of the Company, including the Notes. 52 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED) PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following pro forma condensed consolidated financial statements give effect, as of December 31, 1996, as to the Balance Sheet, and January 1, 1996, as to the Statement of Operations, to the Exchange, the Merger and the Financings consummated on January 31, 1997, all as described above. In addition, the pro forma condensed consolidated financial statements give effect to the following transactions, which were, directly or indirectly, conditions precedent to, or result from, the Exchange, the Merger and the Financings as described above: (i) the use of the net proceeds from the Financings to repay indebtedness under the Orion 1 Credit Facility, to prefund the first six scheduled interest payments, and to pay interest rate hedge breakage costs associated with the Orion 1 Credit Facility, (ii) the acquisition by Orion of British Aerospace's 17% ownership of Orion Asia Pacific for approximately 86,000 shares of common stock, (iii) payments of approximately $4.0 million, including accrued interest, owed to STET, a former limited partner of Orion Atlantic, and (iv) the write-off of deferred financing fees (such transactions collectively with the Merger, the Exchange, and the Financings, the "Transactions"). The unaudited pro forma condensed consolidated financial statements do not purport to present the actual financial position or results or operations of the Company had the Transactions in fact occurred on the dates specified, nor are they indicative of the results of operations that may be achieved in the future. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (AMOUNTS, EXCEPT SHARE AMOUNTS, IN 000'S)
DECEMBER 31, 1996 ------------------- Assets Current assets................................................ $ 149,720 Property and equipment, net................................... 320,707 Restricted and segregated cash................................ 406,937 Deferred financing costs, net................................. 25,865 Other assets, net............................................. 25,365 ------------------- Total assets.................................................. $ 928,594 =================== Liabilities and stockholders' equity Current liabilities........................................... $ 23,730 Long-term debt................................................ 779,283 Other liabilities............................................. 11,528 Limited Partners' interest in Orion Atlantic.................. -- Redeemable preferred stock.................................... 111,902 Stockholders' equity.......................................... 2,151 ------------------- Total liabilities and stockholders' equity.................... $ 928,594 =================== PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 ------------------- Services revenue.............................................. $ 41,847 Operating expenses............................................ 82,931 Other expense (income)........................................ 92,546 Net loss...................................................... (133,630) Preferred stock dividend and accretion, net of forfeitures.... 9,273 ------------------- Net loss attributable to common stockholders.................. $ (142,903) =================== Net loss per common share..................................... $ (12.71) =================== Weighted average common shares outstanding.................... 11,247,062 ===================
53 ORION NETWORK SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED) TELEPORT EUROPE ACQUISITION On March 26, 1997, Orion acquired German-based Teleport Europe GmbH, a communications company specializing in private satellite networks for voice and data services. Orion purchased the shares of Teleport Europe held by the German companies, Vebacom GmbH and RWE Telliance AG, now known as o.tel.o for approximately $9 million. 10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 1996 and 1995:
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 --------------- --------------- ---------------- ---------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 Revenues...................... $ 7,646 $ 10,123 $ 12,247 $ 11,831 Loss from operations.......... (10,155) (8,963) (7,151) (10,084) Loss before minority interest. (16,985) (14,637) (12,985) (17,218) Net loss...................... (7,251) (6,760) (5,796) (7,388) Net loss per share............ (0.70) (0.65) (0.55) (0.72) 1995 Revenues...................... $ 2,508 $ 5,238 $ 6,201 $ 8,336 Loss from operations.......... (11,891) (12,038) (13,525) (9,377) Loss before minority interest. (15,978) (18,248) (19,186) (19,592) Net loss...................... (5,996) (6,991) (6,998) (6,930) Net loss per share............ (0.64) (0.75) (0.78) (0.67)
54 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND FINANCIAL DISCLOSURES. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
TERM EXPIRES NAME AGE POSITION WITH ORION (DIRECTORS) - ---------------------- ------- ----------------------------------------------- ------------------ Gustave M. Hauser..... 68 Chairman, Director 1998 W. Neil Bauer......... 50 President and Chief Executive Officer. 1999 Director (Principal Executive Officer) David J. Frear........ 40 Vice President, Chief Financial Officer -- and Treasurer (Principal Financial Officer and Principal Accounting Officer) Richard H. Shay....... 56 Vice President, Corporate and Legal Affairs, -- and Secretary Denis Curtin.......... 58 Senior Vice President, Orion Satellite -- Corporation and General Manager, Engineering and Satellite Operations Han C. Giner.......... 58 Vice President of Orion and President, -- Orion Asia Pacific Corporation, Vice President of Orion Richard J. Brekka..... 36 Director 1997 Warren B. French, Jr.. 73 Director 1997 Barry Horowitz........ 53 Director 1998 Sidney S. Kahn........ 60 Director 1999 John G. Puente........ 67 Director 1998 W. Anthony Rice....... 45 Director 1997 John V. Saeman........ 61 Director 1998 Robert M. Van Degna... 53 Director 1999
55 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS Information with respect to the business experience and the affiliations of the directors and executive officers of Orion is set forth below. Gustave M. Hauser has been Chairman of Orion since January 1996 and has been a director of Orion since December 1982. Since 1983, he has been Chairman and Chief Executive Officer of Hauser Communications, Inc., an investment and operating firm specializing in cable television and other electronic communications. From 1973 to 1983 he served as Chairman and Chief Executive Officer of Warner-Amex Cable Communications, Inc. (formerly Warner Cable Communications, Inc.), a major multiple system operator of cable television systems and originator of satellite delivered video programming. He is a trustee of the Museum of Television and Radio. He is a past Vice Chairman of the National Cable Television Association, and from 1970 to 1977 he served, by appointment of the President of the United States, as a director of the Overseas Private Investment Corporation. W. Neil Bauer has been President of Orion since March 1993, and has been Chief Executive Officer and a director since September 1993. From 1989 to February 1993, Mr. Bauer was employed by GE American Communications, Inc., where he served as Senior Vice President and General Manager of Commercial Operations. Prior to 1989, Mr. Bauer was Chief Financial Officer of GE American Communications, Inc. and later head of commercial sales. He held several key financial planning positions at GE/RCA from 1984 through 1986 focused on operational and business analysis of diverse business units including all communications units. From 1974-1983, he was employed by RCA Global Communications, an international record carrier. During this period, he held several financial and operational positions and was responsible for financial and business planning. David J. Frear has been Vice President and Chief Financial Officer of Orion since November 1993 and Treasurer of Orion since January 1994. From September 1990 through April 1993, Mr. Frear served as Vice President and Chief Financial Officer of Millicom Incorporated, an international telecommunications service company. From January 1988 to September 1990, Mr. Frear held various positions in the investment banking department at Bear, Stearns & Co. Inc. Mr. Frear received his CPA in 1979. Richard H. Shay has been Secretary of Orion since January 1993 and a Vice President since April 1992. From July 1981 until September 1985, Mr. Shay served as Chief Counsel to the National Telecommunications and Information Administration ("NTIA") of the U.S. Department of Commerce and then as Deputy General Counsel to the Department, where he was responsible for the legal matters of the Department's agencies. In his capacity as Chief Counsel to NTIA, Mr. Shay also served as Acting Director of its Office of International Policy, served on the official U.S. delegation to the 1982 Nairobi Plenipotentiary Conference of the ITU and was involved in preparation for the 1983 ITU Direct Broadcast Satellite World Administrative Radio Conference. Denis J. Curtin is Senior Vice President, OrionSat and General Manager, Engineering and Satellite Operations. He joined the Company in September 1988 as Vice President, Engineering. He previously was Senior Director of Satellite Engineering of COMSAT's Systems Division. While at COMSAT, Dr. Curtin served for over 21 years in the systems engineering, program and engineering management of both domestic and international satellite systems. He has an MS in Physics, a Ph.D. in Mechanical Engineering, and has published numerous papers on solar cell and solar array technology, is the editor of the Trends in Satellite Communications and is a Fellow of the American Institute of Astronautics and Aeronautics. Hans C. Giner became President of Orion Asia Pacific Corporation, Orion's subsidiary devoted to pursuing construction and launch of a satellite covering the Asia Pacific region, in the fourth quarter of 1995 and a Vice President of Orion in the first quarter of 1996. Mr. Giner served as a consultant to Orion from October 1995 through January 1996 relating to similar matters. Prior thereto, he held senior positions in the satellite and telecommunications industries for more than 20 years. Most recently, from April 1994 through September 1995 he served as President of Stellar One Corporation, a high-tech company designing, manufacturing and distributing technologies for telecommunications groups, particularly local telephone and cable television companies. Prior to that, from November 1987 through March 1994, Mr. Giner held several positions for, and ultimately served as president and CEO of Millisat Holdings, Inc., a member of the Millicom Group, with worldwide responsibility for development of media and telecommunications properties, including broadcast, cable and wireless television. Richard J. Brekka has been a director of Orion since June 1994. He is a Managing Director of CIBC Wood Gundy Capital ("CIBC-WG"), the merchant banking division of Canadian Imperial Bank of Commerce ("CIBC") and is a Director and the President of CIBC Wood Gundy Ventures, Inc., an indirect wholly owned subsidiary of CIBC . Mr. Brekka joined CIBC-WG in February 1992. Prior to joining CIBC-WG, Mr. Brekka was an officer of Chase Manhattan Bank's merchant banking group from February 1988 until February 1992. Warren B. French, Jr. has been a director of Orion since August 1988. He was President and a director of Shenandoah Telephone Company of Edinburg, Virginia from 1973 to 1988 and President and a director of Shenandoah Telecommunications Company, the parent company of Shenandoah Telephone Company, from 1981 to 1988. From 1988 through 1995, he was Chairman and a director of Shenandoah Telecommunications Company. He is a past Chairman of the United States Telephone Association and is a former director of First National Corporation. Mr. French is a director of Hungarian Telephone and Cable Corp. Barry Horowitz has been a director of Orion since May 1996. He is President and Chief Executive Officer of Mitretek Systems, Inc. Mitretek works with federal, state and local governments as well as other non-profit public interest organizations on technology-based research and development programs. Mitretek was incorporated in December 1995 as a result of a restructuring with The MITRE Corporation. Principal 56 capabilities are related to information and environmental system technologies. In addition, Dr. Horowitz is President and Chief Executive Officer of Concept 5 Technologies, Inc., a subsidiary of Mitretek, which provides technical services to commercial clients, with its initial focus on the financial community. Prior to the restructuring and since 1969, Dr. Horowitz served MITRE in several capacities, including Trustee and President and CEO. Sidney S. Kahn has been a director of Orion since July 1987. He is presently a private investor. From 1977 to December 1989, he was Senior Vice President of E.F. Hutton Company, Inc., a wholly owned subsidiary of the E.F. Hutton Group, Inc. He is also a director of Delia's, Inc. John G. Puente has been a director since 1984. Mr. Puente was Chairman of Orion from April 1987 through January 1996, and since July, 1996 has been serving as a consultant to the Company and chairman of the Company's Executive Committee. He served as Chief Executive Officer of Orion from April 1987 through September 1993. He was a director and, from 1978 to April 1987, served as Senior Vice President, Executive Vice President or Vice Chairman of M/A-COM, Inc., a diversified telecommunications and manufacturing company. He was a founder of SouthernNet, Inc., a fiber optic long distance communications company and one of the two companies that merged to form Telecom USA, Inc. (which was later acquired by MCI), serving as a director of SouthernNet from July 1984 until August 1987, and Chairman of the Board of SouthernNet from July 1984 until December 1986. During his tenure as Chairman of the Board of SouthernNet, Mr. Puente was instrumental in the founding of the National Telecommunications Network, a national consortium of long distance fiber optic communications companies, and was its first chairman. In 1972, Mr. Puente was a founder of DCC, Inc., of which he became Chairman and CEO. In 1978, DCC, Inc. was acquired by Microwave Associates to form M/A-COM, Inc.; DCC, Inc., subsequently was acquired by Hughes Aircraft Company and became Hughes Network Systems, Inc. Mr. Puente also played a prominent role in the early development of the communications satellite industry, holding technical and executive positions in COMSAT and American Satellite Corporation. He is also a director of Primus Telecommunications, Inc. W. Anthony Rice has been a director of Orion since January 1994. Mr. Rice is Chief Executive Officer of British Aerospace Asset Management, the business unit responsible for all of the company's activities in respect of commercial aircraft leasing and financing. Previously, he served as Group Treasurer of British Aerospace Public Limited Company from 1991 until the end of 1995. British Aerospace is Europe's leading defense and aerospace company. John V. Saeman has been a director of Orion since December 1982. He is an owner of Medallion Enterprises LLC, a private investment firm located in Denver, Colorado. Mr. Saeman was Vice Chairman and Chief Executive Officer of Daniels & Associates, Inc. and its related entities in the telecommunications field from 1980 to 1988. He is former director as well as past Chairman of Cable Satellite Public Affairs Network (C-Span) as well as a former director and past Chairman of the National Cable Television Association. Mr. Saeman was a director of Celerex Corporation and is a director of Nordstrom National Credit Bank. Celerex Corporation filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code in 1995. Robert M. Van Degna has been a director of Orion since June 1994. He is the managing general partner of Fleet Equity Partners ("Fleet"). Mr. Van Degna joined Fleet Financial Group in 1971 and has held a variety of lending and management positions until he organized Fleet in 1982 and became its managing general partner. Mr. Van Degna also serves as a director of ACC Corporation and Preferred Networks, Inc. Orion's Certificate of Incorporation and Bylaws provide that the Board of Directors of Orion, which presently consists of eleven 11 members (including one vacancy), shall consist of that number of directors determined by resolution of the Board of Directors. The Certificate of Incorporation provides that the Board of Directors shall be divided into three classes, each consisting of approximately one-third of the total number of directors. Class I Directors, consisting of Messrs. Hauser, Horowitz, Puente and Saeman, will hold office until the 1998 annual meeting of stockholders; Class II Directors, consisting of Messrs. Bauer, Kahn and Van Degna will hold office until the 1999 annual meeting of stockholders; and Class III Directors consisting of Messrs. Brekka, Rice and French will hold office until the 1997 annual meeting of stockholders. There are no family relationships among any of the directors or officers of Orion. Executive Officers serve at the discretion of the Board of Directors. Three directors, Messrs. Rice, Brekka and Van Degna, were elected pursuant to agreements with each of British Aerospace, CIBC and Fleet, respectively, which terminated in August 1995 when the Common Stock became publicly traded. COMMITTEES OF THE BOARD OF DIRECTORS Orion's Committee on Audit, Corporate Responsibility and Ethics (the "Audit Committee") is composed of Messrs. Van Degna, (Chairman), Hauser and Kahn, all of whom are non-management Directors. The Company also has a committee on Human Resources and Compensation (the ("Compensation Committee"), which is composed of Messrs. Brekka (Chairman), French and Van Degna, an Executive Committee composed of Messrs. Puente (Chairman), Hauser, Kahn, Saeman and Van Degna, a Finance Committee composed of Messrs. Kahn (Chairman), Hauser, Saeman, Brekka, Rice and Puente and a Nominating Committee composed of Messrs. Saeman (Chairman), French and Puente. The information under the caption "Board Committees" in the Company's definitive proxy statement to be filed for its Annual Meeting of Stockholders to be held on May 22, 1997 (the "Proxy Statement") is hereby incorporated herein by reference. The Proxy Statement is being prepared and will be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and furnished to the Company's Stockholders, on or about April 15, 1997. LIMITS ON LIABILITY; INDEMNIFICATION Orion's Certificate of Incorporation provides that Orion's directors will not be liable for monetary damages for breach of the directors' fiduciary duty of care to Orion and its stockholders. This provision in the Certificate of Incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as an injunction or other forms of non-monetary relief would remain available under Delaware law. In 57 accordance with the requirements of Delaware law, Orion's directors remain subject to liability for monetary damages (i) for any breach of their duty of loyalty to Orion or its stockholders, (ii) for acts or omissions not in good faith or involving intentional misconduct or knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law for approval of an unlawful dividend or an unlawful stock purchase or redemption and (iv) for any transaction from which the director derived an improper personal benefit. This provision also does not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. Orion's Certificate of Incorporation also provides that, except as expressly prohibited by law, Orion shall indemnify any person who was or is a party (or threatened to be made a party) to any threatened, pending or completed action, suit or proceeding by reason of the fact that such person is or was a director or officer of Orion (or is or was serving at the request of Orion as a director or officer of another enterprise), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and a manner such person reasonably believed to be in or not opposed to the best interests of Orion, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Such indemnification shall not be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to Orion unless (and only to the extent that) the Delaware Court of Chancery or the court in which such action or suit was brought determines that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity. ITEMS 11, 12 AND 13. The information called for by Part III (Items 11, 12 and 13) is incorporated herein by reference from the material included under the captions "Nominees for Election," "Executive Officers," "Executive Compensation and Other Information" (but excluding the Human Resources and Compensation Committee Report on Executive Compensation), "Security Ownership of Certain Beneficial Owners", "Security Ownership of Management," and "Compensation Committee Interlocks and Insider Participation in the Proxy Statement. The Proxy Statement is being prepared and will be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and furnished to the Company's Stockholders, on or about April 15, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) (1) and (2) List of Financial Statements and Financial Statement Schedules The following consolidated financial statements of Orion Network Systems, Inc. are included in Item 8: Consolidated Balance Sheets - December 31, 1996 and 1995 Consolidated Statements of Operations - Years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 1996, 1995, and 1994 Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements - December 31, 1996 All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 58
Exhibit Number Description 1.1 Form of Underwriting Agreement. (Incorporated by reference to exhibit number 1.1 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 3.1 Restated Certificate of Incorporation of Orion Newco Services, Inc. (Incorporated by reference to exhibit number 3.1 in Registration Statement on Form 8-B of Orion Newco Services, Inc. filed with the Commission on January 31, 1997)* 3.2 Amended and Restated Bylaws of Orion Newco Services, Inc. (Incorporated by reference to exhibit number 3.2 in Registration Statement on Form 8-B of Orion Newco Services, Inc. filed with the Commission on January 31, 1997)* 3.3 Certificate of Incorporation of Orion Network Systems, Inc. (Incorporated by reference to exhibit number 3.1 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 3.4 Bylaws of Orion Network Systems, Inc. (Incorporated by reference to exhibit number 3.2 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 3.5 Certificate of Incorporation of Orion Satellite Corporation. (Incorporated by reference to exhibit number 3.5 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 3.6 Bylaws of Orion Satellite Corporation. (Incorporated by reference to exhibit number 3.6 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 3.7 Certificate of Limited Partnership of International Private Satellite Partners, L.P. (Incorporated by reference to exhibit number 3.7 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 3.8 Form of Third Amended and Restated Agreement of Limited Partnership of International Private Satellite Partners, L.P. (Incorporated by reference to exhibit number 3.8 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 3.9 Certificate of Incorporation of OrionNet, Inc. (Incorporated by reference to exhibit number 3.9 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 3.10 Bylaws of OrionNet, Inc. (Incorporated by reference to exhibit number 3.10 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 3.11 Certificate of Incorporation of Orion Asia Pacific Corporation. (Incorporated by reference to exhibit number 3.11 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 3.12 Bylaws of Orion Asia Pacific Corporation. (Incorporated by reference to exhibit number 3.12 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 3.13 Certificate of Incorporation OrionNet Finance Corporation. (Incorporated by reference to exhibit number 3.13 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 3.14 Bylaws of Orion Net Finance Corporation. (Incorporated by reference to exhibit number 3.14 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 3.15 Certificate of Incorporation of Asia Pacific Space and Communications, Ltd. (Incorporated by reference to exhibit number 3.15 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 3.16 Bylaws of Asia Pacific Space and Communications, Ltd. (Incorporated by reference to exhibit number 3.16 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 3.17 Certificate of Incorporation of Orion Atlantic Europe, Inc. (Incorporated by reference to exhibit number 3.17 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 3.18 Bylaws of Orion Atlantic Europe, Inc. (Incorporated by reference to exhibit number 3.18 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 59 Exhibit Number Description 4.1 Form of Senior Note Indenture and Form of Note included therein. (Incorporated by reference to exhibit number 4.1 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 4.2 Form of Senior Discount Note Indenture and Form of Note included therein. (Incorporated by reference to exhibit number 4.2 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 4.3 Form of Collateral Pledge and Security Agreement. (Incorporated by reference to exhibit number 4.3 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 4.4 INTENTIONALLY OMITTED 4.5 Form of Warrant Agreement, by and between Orion and Bankers Trust Company, and Form of Warrant included therein. (Incorporated by reference to exhibit number 4.5 in Registration Statement No. 333-19167 on Form S-1 of Orion Network Systems, Inc.)* 4.6 Forms of Warrant issued by Orion. (Incorporated by reference to exhibit number 4.1 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 4.7 Forms of Warrant issued by Orion to holders of Preferred Stock. (Incorporated by reference to exhibit number 4.2 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 4.8 Forms of Certificates of Designation of Series A 8% Cumulative Redeemable Convertible Preferred Stock, Series B 8% Cumulative Redeemable Convertible Preferred Stock and Series C 6% Cumulative Redeemable Convertible Preferred Stock of Orion. (Incorporated by reference to exhibit number 4.3 in Registration Statement No. 333-19795 on Form 8-B of Orion Newco Services, Inc. filed with the Commission on January 31, 1997.)* 4.9 Forms of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock certificates of Orion. (Incorporated by reference to exhibit number 4.4 in Registration Statement No. 333-19795 on From S-4 of Orion Newco Services, Inc.)* 4.10 Form of Common Stock Certificate of Orion. (Incorporated by reference to exhibit number 4.5 in Registration Statement No. 333-19795 on Form S-4 of Orion Newco Services, Inc.)* 4.11 Form of Warrant issued to DACOM Corp. (Incorporated by reference to exhibit number 4.6 in Registration Statement No. 333-19795 on Form S-4 of Orion Newco Services, Inc.)* 4.12 Debenture Purchase Agreement, dated January 13, 1997, with British Aerospace and Matra Marconi Space (Incorporated by reference to exhibit number 4.7 in Registration Statement No. 333-19795 on Form S-4 of Orion Newco Services, Inc.), as amended as of January 31, 1997 (Incorporated by reference to exhibit 10.4 in Current Report on Form 8-K dated February 14, 1997 of Orion Network Systems, Inc.)* 10.1 Second Amended and Restated Purchase Agreement, dated September 26, 1991 ("Satellite Contract") by and between OrionSat and British Aerospace PLC and the First Amendment, dated as of September 15, 1992, Second Amendment, dated as of November 9, 1992, Third Amendment, dated as of March 12, 1993, Fourth Amendment, dated as of April 15, 1993, Fifth Amendment, dated as of September 22, 1993, Sixth Amendment, dated as of April 6, 1994, Seventh Amendment, dated as of August 9, 1994, Eighth Amendment, dated as of December 8, 1994, and Amendment No. 9 dated October 24, 1995, thereto. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THESE DOCUMENTS.] (Incorporated by reference to exhibits number 10.13 and 10.14 in Registration Statement No. 33-80518 on Form S-1 on Orion Network Systems, Inc.)* 10.2 Restated Amendment No. 10 dated December 10, 1996, between Orion Atlantic and Matra Marconi Space to the Second Amended and Restated Purchase Agreement, dated September 16, 1991 by and between OrionSat and British Aerospace PLC (which contract and prior exhibits thereto were incorporated by reference as exhibit number 10.1). (Incorporated by reference to exhibit number 10.2 in Registration Statement No. 333-19795 on Form S-4 of Orion Newco Services, Inc.)* 60 Exhibit Number Description 10.3 Ground Support System Agreement, dated as of August 2, 1991, by and between Orion Atlantic and Telespazio S.p.A. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.25 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.4 Italian Facility and Services Agreement, dated as of August 2, 1991, by and between OrionSat and Telespazio S.p.A. as amended by the amendment thereto, dated March 19, 1994. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THESE DOCUMENTS]. (Incorporated by reference to exhibit number 10.26 in Registration statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.5 Contract for a Satellite Control System, dated December 7, 1992, by and between Orion Atlantic, Telespazio S.p.A. and Martin Marietta Corporation. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.31 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.6 Credit Agreement, dated as of November 23, 1993, by and between Orion Atlantic, OrionSat and General Electric Capital Corporation ("GECC"). [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.32 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.7 Security Agreement, dated as of November 23, 1993, by and between Orion Atlantic, OrionSat and GECC. (Incorporated by reference to exhibit number 10.33 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.8 Assignment and Security Agreement, dated as of November 23, 1993, by and between Orion Atlantic, OrionSat and GECC. (Incorporated by reference to exhibit number 10.34 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.9 Consent and Agreement, dated as of November 23, 1993, by and between Orion Atlantic, Martin Marietta Corporation and GECC. (Incorporated by reference to exhibit number 10.35 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.10 Deed of Trust, dated as of November 23, 1993, by and between Orion Atlantic, W. Allen Ames, Jr. And Michael J. Schwel, as Trustees, and GECC. (Incorporated by reference to exhibit number 10.37 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.11 Lease Agreement, dated as of November 23, 1993, by and between OrionNet, Inc. and Orion Atlantic, as amended by an Amendment, dated January 3, 1995. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THESE DOCUMENTS.] (Incorporated by reference to exhibit number 10.38 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.12 Note for Interim Loans, dated as of November 23, 1993, by and between Orion Atlantic and GECC. (Incorporated by reference to exhibit number 10.42 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.13 Sales Representation Agreement and Ground Operations Service Agreement, each dated as of May 1, 1994 and June 03, 1994, by and between each of OrionNet, Inc. and Kingston Communications, respectively, and Orion Atlantic, as amended by side agreements, dated May 1, 1994, July 12, 1994, and February 1, 1995. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THESE DOCUMENTS.] (Incorporated by reference to exhibit number 10.43 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.14 Lease Agreement, dated as of October 2, 1992, by and between OrionNet and Research Grove Associates, as amended by Amendment No. 1 dated March 26, 1993. Amendment No. 2 dated August 23, 1993, and Amendment No. 3 dated December 20, 1993. (Incorporated by reference to exhibit number 10.39 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 61 Exhibit Number Description 10.15 Sales Representation Agreement and Ground Operations Service Agreement, dated as of June 30, 1995, by and between MCN Sat Service, S.A. and Orion Atlantic [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.69 in Orion's Registration Statement No. 33-80518 on Form S-1).* 10.16 Volume Purchase Agreement, dated January 18, 1995, by and between the Company and Dornier GmbH. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.66 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.17 Product Development, License and Marketing Agreement, dated January 18, 1995, by and between the Company and Dornier GmbH. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.65 in Orion's Registration Statement No. 33-80518 on Form S-1.)* 10.18 Sales Representation Agreement, dated as of June 8, 1995, by and between Nortel Dasa Network Systems GmbH & Co. KG and Orion Atlantic. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.70 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.19 Orion 2 Spacecraft Purchase Contract, dated January 29, 1997 between Orion Atlantic and Matra Marconi Space. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS DOCUMENT. THE CONFIDENTIAL PORTIONS HAVE BEEN REDACTED AND FILED SEPARATELY WITH THE COMMISSION.] 10.20 Orion's Amended and Restated 1987 Stock Option Plan as amended. (Incorporated by reference to exhibit number 10.23 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.21 Purchase Contract, dated December 4, 1991, by and between OrionNet, Inc., Shenandoah Valley Leasing Company and MCI Telecommunications Corporation. {CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTION OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.30 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.22 Amended and Restated Partnership Agreement of Orion Financial Partnership, dated as of April 15, 1994, by and between OrionNet and Computer Leasing Inc. ("CLI"). (Incorporated by reference to exhibit number 10.44 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.23 Continuing Guaranty, dated as of April 15, 1994, of the Company of obligations of OrionNet Finance Corporation. (Incorporated by reference to exhibit number 10.45 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.24 Release of Continuing Guaranty, dated as of December 29, 1994, by the Orion Financial Partnership. (Incorporated by reference to exhibit number 10.46 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.25 Confirmation of Continuing Guaranty, dated as of December 29, 1994, of the Company of the obligation of OFC. (Incorporated by reference to exhibit number 10.47 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.26 Continuing Guarantee, dated as of December 29, 1994, by Lessor Capital Funding Limited Partnership in favor of Orion Financial Partnership, (Incorporated by reference to exhibit number 10.48 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.27 Master Lease Agreement, dated as of April 15, 1994, by and between OrionNet and Orion Financial Partnership. (Incorporated by reference to exhibit number 10.49 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 62 Exhibit Number Description 10.28 Collateral Assignment and Pledge and Security Agreement, dated April 22, 1994, by and between CLI and Orion Financial Partnership. (Incorporated by reference to exhibit number 10.50 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.29 Purchase Agreement, dated as of April 22, 1994, by and between OrionNet and Orion Financial Partnership. (Incorporated by reference to exhibit number 10.51 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.30 Stock Purchase Agreement, dated as of April 29, 1994, by and between the Company and SS/L. (Incorporated by reference to exhibit number 10.53 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.31 Registration Rights Agreement, dated as of April 29, 1994, by and between the Company and SS/L. (Incorporated by reference to exhibit number 10.54 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.32 Purchase Agreement, dated as of June 17, 1994, by and between the Company, CIBC, Fleet and Chisholm. (Incorporated by reference to exhibit number 10.55 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.33 Stockholders Agreement, dated as of June 17, 1994, by and between the Company, CIBC, Fleet, Chisholm and certain principal stockholders of the Company. (Incorporated by reference to exhibit number 10.56 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.34 Registration Rights Agreement, dated as of June 17, 1994, by and between the Company CIBC, Fleet and Chisholm. (Incorporated by reference to exhibit number 10.57 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.35 Purchase Agreement, dated as of June 19, 1995, by and among the Company, CIBC, Fleet and an affiliate of Fleet. (Incorporated by reference to exhibit number 10.58 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.36 Definitive Agreement, dated April 26, 1990, by and between Orion Asia Pacific and Republic of the Marshall Islands and Stock Option Agreement related thereto. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THESE DOCUMENTS.] (Incorporated by reference to exhibit number 10.60 in Registration Statement No. 33-80518 on Form S-1 of Orion Network Systems, Inc.)* 10.37 Amended and Restated Option Agreement, dated January 29, 1997, by and between Orion Atlantic and Matra Marconi Space and First Amendment, dated February 13, 1997, thereto. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THESE DOCUMENTS. THE CONFIDENTIAL PORTIONS HAVE BEEN REDACTED AND FILED SEPARATELY WITH THE COMMISSION.] 10.38 INTENTIONALLY OMITTED 10.39 TT&C Earth Station Agreement, dated as of November 11, 1996, by and between Orion Asia Pacific and DACOM Corp. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.39 in Registration Statement No. 333-19795 on Form S-4 of Orion Newco Services, Inc.)* 10.40 Joint Investment Agreement, dated as of November 11, 1996, by and between Orion Asia Pacific and DACOM Corp. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.40 in Registration Statement No. 333-19795 on Form S-4 of Orion Newco Services, Inc.)* 10.41 Orion Network Systems, Inc. Employee Stock Purchase Plan. (Incorporated by reference to exhibit number 4.4 in Registration Statement No. 333-19021 on Form S-8 of Orion Network Systems, Inc.)* 10.42 Orion Network Systems, Inc. 401(k) Profit Sharing Plan (Incorporated by reference to exhibit number 4.5 in Registration Statement No. 333-19021 on Form S-8 of Orion Network Systems, Inc.)* 63 Exhibit Number Description 10.43 Orion Network Systems, Inc. Non-Employee Director Stock Option Plan. (Incorporated by reference to exhibit number 10.43 in Registration Statement No. 333-19795 on Form S-4 of Orion Newco Services, Inc.)* 10.44 Exchange Agreement dated June 1996 among Orion Network Systems, Orion Atlantic, OrionSat and the Limited Partners (Incorporated by reference to exhibit 10 in Current Report on Form 8-K dated December 20, 1996, of Orion Network Systems, Inc..)* 10.45 First Amendment to Exchange Agreement dated December 1996 among Orion Network Systems, Orion Atlantic, OrionSat and the Limited Partners. (Incorporated by reference to exhibit number 10.45 in Registration Statement No. 333-19795 on Form S-4 of Orion Newco Services, Inc.)* 10.46 Redemption Agreement dated November 21, 1995, by and between STET and Orion Atlantic, the promissory notes delivered thereunder and Instrument of Redemption relating thereto. (Incorporated by reference to exhibit number 10.1 in Current Report on Form 8-K dated November 21, 1995 of Orion Network Systems, Inc.)* 10.47 IPSP-Telecom Italia Agreement dated November 21, 1995, by and between Telecom Italia and Orion Atlantic. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to exhibit number 10.2 in Current Report on Form 8-K dated November 21, 1995 of Orion Network Systems, Inc.)* 10.48 Indemnity Agreement dated November 21, 1995, by and among Telecom Italia, Orion Atlantic, Orion and STET. (Incorporated by reference to exhibit number 10.3 in Current Report on Form 8-K dated November 21, 1995 of Orion Network Systems, Inc.)* 10.49 Subscription Agreement dated November 21, 1995, by and between Orion and Orion Atlantic, and the Promissory note delivered thereunder. (Incorporated by reference to exhibit number 10.5 in Current Report on Form 8-K dated November 21, 1995 of Orion Network Systems, Inc.)* 10.50 First Amendment to the Italian Facility and Services Agreement dated November 21, 1995, by and between Orion Atlantic and Nuova Telespazio. (Incorporated by reference to exhibit number 10.7 in Current Report on Form 8-K dated November 21, 1995 of Orion Network Systems, Inc.)* 10.51 Registration Rights Agreement, dated January 13, 1997, by and among Orion Newco Services, Inc., British Aerospace Holdings, Inc. and Matra Marconi Space. (Incorporated by reference to exhibit number 10.51 in Registration Statement No. 333-19795 on form S-4 of Orion Newco Services. Inc.)* 10.52 Orion 3 Spacecraft Purchase Contract, dated January 15, 1997, by and among Hughes Space and Communications International, Inc., Orion Asia Pacific Corporation and Orion Network Systems. [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.]* 12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges. 21.1 List of subsidiaries of Orion. (Incorporated by references to exhibit number 21.1 in Registration Statement on Form 8-B of Orion Newco Services, Inc. filed with the Commission on January 31, 1997.)* 23.1 Consent of Ernst & Young LLP * Exhibits incorporated by reference.
64 (b) Reports on Form 8-K filed in the fourth quarter of 1996: Current Report on Form 8-K dated December 20, 1996 reporting execution of the Exchange Agreement.. The Company also filed a Current Report on Form 8-K on February 14, 1997 reporting consummation of the Exchange. (c) Exhibits None. (d) Financial Statement Schedule None. 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Orion Network Systems, Inc. --------------------------------------------------- (Registrant) Date: March___, 1997 /s/ W. Neil Bauer --------------------------------------------------- W. Neil Bauer, President Chief Executive Office and Director (Principal Executive Office) Date: March ___, 1997 /s/ David, J. Frear --------------------------------------------------- David J. Frear, Vice President Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Gustave M. Hauser /s/ John V. Saeman - ----------------------------------------------------- ---------------------------------------------------- Gustave M. Hauser John V. Saeman Chairman, Director Director /s/ John G. Puente /s/ Richard J. Brekka - ----------------------------------------------------- ---------------------------------------------------- John G. Puente Richard J. Brekka Director Director /s/ Warren B. French, Jr. /s/ Sidney S. Kahn - ----------------------------------------------------- ---------------------------------------------------- Warren B. French, Jr. Sidney S. Kahn Director Director /s/ W. Anthony Rice /s/ Robert M. Van Degna - ----------------------------------------------------- ---------------------------------------------------- W. Anthony Rice Robert M. Van Degna Director Director /s/ Barry Horowitz ---------------------------------------------------- Barry Horowitz Director
66
GLOSSARY ORION, THE EXCHANGING PARTNERS AND CERTAIN CREDITORS: Banks............................ A syndicate of international banks that are parties to the Orion 1 Credit Facility. British Aerospace................ British Aerospace Public Limited Company, one of the world's leading aerospace organizations, and its affiliates, including its subsidiary British Aerospace Communications, Inc., a Limited Partner. Kingston Satellite Services, a joint venture between Kingston Communications and British Aerospace, serves as sales representative and ground operator for Orion in the United Kingdom. COM DEV.......................... COM DEV Satellite Communications Limited, a Limited Partner and a subsidiary of COM DEV, Limited. COM DEV, Limited is also a supplier of value-added satellite communications services, products for wireless personal communications and satellite remote sensing data. GECC............................. General Electric Capital Corporation, the lender for the TT&C Financing. Kingston Communications.......... Kingston Communications International Limited, a Limited Partner and a subsidiary of Kingston Communications (Hull) plc, the only municipally-owned telephone company in the United Kingdom. Kingston Satellite Services, a joint venture between Kingston Communications and British Aerospace, serves as sales representative and ground operator for Orion in the United Kingdom. Limited Partners................. The limited partners in Orion Atlantic, including British Aerospace Communications, Inc., COM DEV, Kingston Communications, Lockheed Martin CLS, MCN Sat US, Inc. and Trans-Atlantic Satellite, Inc. Lockheed Martin.................. Lockheed Martin Corporation, a major manufacturer of aerospace and military equipment, and the ultimate parent company of Lockheed Martin CLS, a Limited Partner and the launch subcontractor under the Orion 1 Satellite Contract. Lockheed Martin CLS acquired the assets of General Dynamics Commercial Launch Services through a transfer of assets from Martin Marietta Corporation, which in turn acquired these and other assets (including the Atlas family of launch vehicles) from General Dynamics Corporation in 1994. Lockheed Martin CLS.............. Lockheed Martin Commercial Launch Services, Inc., a Limited Partner and a subsidiary of Martin Marietta Technologies, Inc., a Lockheed Martin company. Lockheed Martin CLS acquired the assets of General Dynamics Commercial Launch Services through a transfer of assets from Martin Marietta Corporation, which in turn acquired these and other assets (including the Atlas family of launch vehicles) from General Dynamics Corporation in 1994. Lockheed Martin CLS is a commercial launch services provider and provided launch services to Orion as the launch subcontractor under the Orion 1 Satellite Contract. Lockheed Martin CLS became a Limited Partner by acquiring the limited partnership interest of General Dynamics CLS in the 1994 transaction described above. Matra Hachette................... Matra Hachette, an aerospace, defense, industrial and media company and part of the Lagardere Groupe of France, and the parent company of MCN Sat US, Inc., a Limited Partner. Matra Hachette is one of the parent companies of Matra Marconi Space which is the parent company of MMS Space Systems, the prime contractor for Orion 1, and the manufacturer under the Orion 2 Satellite Contract. Nissho Iwai Corp................. Nissho Iwai Corporation, is a trading company in Japan, and the parent company of Trans-Atlantic Satellite, Inc., a Limited Partner. Orion............................ (1) the combined operations of Orion Network Systems, Inc., a Delaware corporation, and its subsidiaries (collectively, the "Operating Company"), prior to the date of the merger of a newly formed subsidiary ("Merger Sub") of Orion Newco Services, Inc., a recently formed Delaware corporation ("Orion Newco"), into the Operating Company (the "Merger") and (2) Orion and its subsidiaries, including the Operating Company, after the Merger. Orion 1 Credit Facility.......... A facility of up to $251 million of senior debt provided to finance Orion 1, which will be repaid with proceeds of the Offering. Orion Asia Pacific............... Asia Pacific Space and Communications, Ltd., a Delaware corporation. Orion acquired 83% of the stock of such company in December 1992 and has acquired the remaining 17%, which was held by British Aerospace, in exchange for approximately 86,000 shares of Common Stock in the OAP Acquisition. Orion Atlantic................... International Private Satellite Partners, L.P., a Delaware limited partnership of which OrionSat is the general partner, which owns Orion 1. 67 GLOSSARY (continued) OrionNet......................... OrionNet, Inc., a Delaware corporation and wholly owned subsidiary of Orion. OrionSat......................... Orion Satellite Corporation, a Delaware corporation and wholly owned subsidiary of Orion. Partners......................... The partners in Orion Atlantic, consisting of OrionSat, as the general partner, and the Limited Partners (including Orion). Partnership Agreement............ The limited partnership agreement of Orion Atlantic, which includes the terms and conditions governing the partnership arrangements among the Partners. STET............................. STET-Societa Finanziaria Telefonica-per Azioni is a former Limited Partner and the parent company of Telecom Italia, the Italian PTT. STET Redemption.................. The redemption on November 21, 1995 by Orion Atlantic of the limited partnership interest held by STET and modification of STET's previously existing contractual arrangements with Orion Atlantic. TT&C Financing................... A facility of up to $11 million provided by GECC for Orion's TT&C facility that was converted to a seven-year term loan on June 1, 1995 and which had an outstanding balance of $7.2 million as of September 30, 1996. SATELLITE CONSTRUCTION AND SATELLITE COMMUNICATIONS: bandwidth....................... The relative range of frequencies that can be passed through a transmission medium without distortion. The greater the bandwidth, the greater the information carrying capacity. Bandwidth is measured in Hertz. C-band........................... Certain high frequency radio frequency bands between 3,400 to 6,725 MHz used by communications satellites. constructive total loss.......... If a satellite is completely destroyed or incapable of operation (except for certain failures due to circumstances beyond the control of the manufacturer) during a specified number of days after launch. footprint ....................... Signal coverage area for a satellite. Hertz............................ The unit for measuring the frequency with which an electromagnetic signal cycles through the zero-value state between the lowest and highest states. One Hertz (abbreviated as Hz) equals one cycle per second; kHz (kiloHertz) stands for thousands of Hertz; MHz (megaHertz) stands for millions of Hertz. Hughes Space..................... Hughes Space and Communications International, Inc., the manufacturer under the Orion 3 Satellite Contract. Hughes Space is a subsidiary of Hughes Aircraft Company, which is a subsidiary of General Motors Corporation. Ku-band.......................... Certain high frequency radio frequency bands between 10,700 to 14,500 MHz permitting the use of smaller antennae than the older C-band technology. Matra Marconi Space.............. Matra Marconi Space UK Limited, the parent company of MMS Space Systems and a subsidiary of Matra Marconi Space NV, and the manufacturer under the Orion 2 Satellite Contract. Matra Marconi Space NV is owned by Matra Hachette (51 percent) and General Electric Co. of Britain (49 percent). Orion 1.......................... The high-power Ku-band communications satellite operated over the Atlantic Ocean by Orion. Orion 1 Satellite Contract....... The fixed price turnkey contract originally entered into between British Aerospace and Orion Atlantic for the design, construction, launch and delivery in orbit of Orion 1. British Aerospace assigned its rights under the contract to MMS Space Systems, which was subsequently purchased by Matra Marconi Space NV and renamed MMS Space Systems Limited. British Aerospace remains liable to Orion for the performance of the contract but performance has been assigned to MMS Space Systems and the Company understands that MMS Space Systems and Matra Marconi Space NV have fully indemnified British Aerospace against liabilities thereunder. Orion 2 ......................... The high-power Ku-band communications satellite to be operated over the Atlantic Ocean by Orion. Orion 2 Satellite Contract....... The spacecraft purchase agreement between Orion and Matra Marconi Space for construction and launch of Orion 2. 68 GLOSSARY (continued) Orion 3.......................... The high-power Ku-band communications satellite to be operated by Orion in the Asia Pacific region. Orion 3 Satellite Contract....... The spacecraft purchase agreement between Orion Asia Pacific, a wholly owned subsidiary of Orion, and Hughes Space for construction and launch of Orion 3. Space Systems or MMS Space Systems........................ MMS Space Systems Limited, a former subsidiary of British Aerospace which was sold to Matra Marconi Space NV, in 1994. MMS Space Systems served as the prime contractor under the Orion 1 Satellite Contract. Transponder...................... The part of a satellite which is used for the reception of communication signals from, and the frequency conversion, amplification and transmission of communication signals to, earth. TT&C Station..................... A satellite control system, which includes a satellite control center and a tracking, telemetry and command station complex at Mt. Jackson, Virginia. VSAT............................. Very small aperture terminal earth stations that can be installed on rooftops or elsewhere at customer locations, with antennas as small as 0.8 meters but ranging in sizes up to 2.4 meters in diameter. REGULATION AND COMPETITION: Communications Act............... The U.S. Communications Act of 1934, as amended. EUTELSAT......................... European regional satellite facilities consortium owned by approximately 40 European countries. FCC............................. The United States Federal Communications Commission. INTELSAT......................... International Telecommunications Satellite Organization, an international satellite facilities consortium owned by approximately 140 government and privately owned telecommunications companies. ITU ............................ International Telecommunication Union, an international body formed by treaty that is responsible for coordinating and registering orbital slots to satellites. Orion 1 License.................. The license granted to Orion by the FCC to construct, launch and operate Orion 1, at designated orbital location 37.5(Degree) West longitude over the Atlantic Ocean. PanAmSat......................... PanAmSat Corporation, a publicly traded U.S. company providing trans-Atlantic satellite service and services to Latin America, the Pacific Ocean region, and the Indian Ocean region, using a satellite system separate from INTELSAT. PTT ............................ Postal, telephone and telegraph organization, ordinarily a government-owned communications monopoly. 69
EX-8 2 EXHIBIT 8 EXHIBIT 8 --------- ARTICLE 7: ACCESS TO WORK Articles 7 and 40 of the ORION 2 Purchase Contract are hereby incorporated by reference herein and made a part hereof with the exceptions and amendments set forth below. ACCESS TO WORK (REF. ARTICLE 7.1 OF PART 1(A) OF THE ORION 2 PURCHASE CONTRACT): During the Option Period, access to work areas related to Contractor's product line of all platform equipment and subsystems ("Platform Generic Equipment and Subsystems") shall be provided at reasonable times provided that such access does not unreasonably interfere with the Work and is coordinated with the Contractor Project Manager. This sentence shall not affect ORION's access to Work related to the payload and/or its subsystems. RESIDENTS/REPRESENTATIVES (REF. ARTICLE 7.2 OF PART 1(A); SECTIONS 3.4.5, 3.9.1, 3.9.2, 3.9.3 OF PART 2(A); ITEM 39 OF PART 2(B); AND SECTIONS 1.2, 3.1, 3.1.1, 3.1.2, 3.1.4, 3.1.5, 3.1.6, 3.1.7, 3.1.7.1, 3.1.7.2, 3.1.7.4, AND 3.2 OF PART 3(B) OF THE ORION 2 PURCHASE CONTRACT) During the Option Period, the attendance at meetings and reviews by ORION residents and representatives shall not extend to those meetings and reviews related solely to Platform Generic Equipment and Subsystems; with regard to such meetings and reviews, Contractor shall review the contents of such meetings and reviews promptly with ORION to the extent that such contents affect the ORION 2 Spacecraft. Notwithstanding the above, ORION shall be permitted to attend design reviews of Platform Generic Subsystems, such attendance to be coordinated with the Contractor Project Manager. ARTICLE 40: PROGRESS REPORTS PROGRESS REPORTS (REF. ARTICLE 40 OF PART 1(A) OF ORION 2 PURCHASE CONTRACT) During the Option Period, the provisions of Article 40 of the Orion 2 Purchase Contract shall not apply to Platform Generic Equipment and Subsystems; instead, during the Option Period Contractor shall (a) provide ORION regular Progress Reports, in reasonable detail, on the status of the Platform Generic Equipment and Subsystems, 1 including any schedule or performance issues, with the same frequency as Contractor is required to deliver progress reports under the ORION 2 Purchase Contract, and (b) allow ORION to participate in meetings in accordance with Article 7, as amended, above. Nothing in this provision shall relieve Contractor of any of its obligations for the Delivery of Data and Documentation under Part 2(A) (Statement of Work) and Part 2(B) (Contract Documentation Requirements List). 2 FIRST AMENDMENT TO THE AMENDED AND RESTATED OPTION AGREEMENT FOR PURCHASE OF ORION 2 SPACECRAFT THIS FIRST AMENDMENT TO THE AMENDED AND RESTATED OPTION AGREEMENT FOR PURCHASE OF ORION 2 SPACECRAFT (this "First Amendment"), dated as of February 13, 1997 ("Effective Date"), by and between International Private Satellite Partners, L.P., d/b/a Orion Atlantic, L.P., a Delaware limited partnership with its principal offices at 2440 Research Boulevard, Rockville, Maryland 20850, United States ("ORION"), and Matra Marconi Space UK Limited, a company organized and existing under the laws of England and Wales with its Registered Office at The Grove, Warren Lane, Stanmore, Middlesex, HA7 4LY, England ("MMS"). WHEREAS, Orion Satellite Corporation, as General Partner of ORION, and MMS entered into the Amended and Restated Option Agreement for Purchase of ORION 2 Spacecraft, dated January 29, 1997 (the "Option Agreement"); WHEREAS, the parties desire to amend certain provisions of the Option Agreement; NOW, THEREFORE, in consideration of the above premises and the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto (hereinafter the "Parties") agree as follows: 1. The table in Section 4.1 is deleted and replaced with the following:
Option Option Installment Total Option Installment Payment Option Installment Payment Amount (Launch Installment Payment Payment Amount Vehicle) Payment # Date Amount (Spacecraft) 1 Feb. 28, 1997* US$ 2.0 Million 2 March 31, 1997 US$ 26.4 Million 3 July 31, 1997 4 Dec. 31, 1997 - ---------------------------------------------------------------------------------------------------------------- Total US$ 48.4 Million
2. Section 4.4 of the Option Agreement is deleted. 3. Section 5.1 of the Option Agreement is deleted and replaced with the following: 5.1 ORION may exercise the Option from the First Installment Payment Date through the last day of the Option Period by paying to (a) MMS the cumulative Milestone Payments payable under the ORION 2 Purchase Contract through the exercise date less the Option Installment Payments (Spacecraft) paid pursuant to Section 4.1 above to such date and (b) the 3 Launch Vehicle Agency the cumulative Progress Payments payable under the ORION 2 Purchase Contract through the exercise date less the sum of US ___________ and the Option Installment Payments (Launch Vehicle) of US __________ paid pursuant to Section 4.1 above to such date (in the aggregate, the "Option Exercise Price"). If there is a dispute as to the cumulative Milestone Payments or Progress Payments payable through the exercise date, the provisions set forth in Article 6.2 of the ORION 2 Purchase Contract shall apply. The Milestone Payments and the Progress Payments required to be made hereunder shall be made by wire transfer to the accounts designated in Article 6.1.3 of the ORION 2 Purchase Contract. MMS shall notify, and shall cause the Launch Vehicle Agency to notify, ORION of any change in the account information contained in said Article 6.1.3 at least ten days before any Milestone Payment or Progress Payment is required to be made. 4. Section 10 of the Option Agreement is deleted and replaced with the following: 10. Payments. ORION shall make all Option Installment Payments (Spacecraft and Launch Vehicle) to MMS by transferring the amounts required to be paid to the MMS account designated in Article 6.1.3 of the ORION 2 Purchase Contract. All payments to be made pursuant hereto shall be made in U.S. Dollars. MMS shall notify ORION of any change in the account information contained in Article 6.1.3 at least ten days before any Option Installment Payment is required to be made. 5. In the event of any inconsistency between this First Amendment and the remaining provisions of the Option Agreement, the terms of this First Amendment shall govern. 6. This First Amendment may be executed by the Parties in two or more counterparts, each of which shall be deemed to be an original instrument but all of which shall be deemed to be one and the same instrument. 7. This First Amendment shall be governed by the law of the State of Maryland of the United States of America. IN WITNESS WHEREOF, the Parties have caused this First Amendment to be executed by their duly authorized representatives, with an Effective Date as set forth in the introductory paragraph of this First Amendment. INTERNATIONAL PRIVATE SATELLITE MATRA MARCONI SPACE PARTNERS, L.P. UK LIMITED By: Orion Satellite Corporation, General Partner By: By: ---------------------------------- ------------------------------- Name: W. Neil Bauer Name: Armand Carlier Title: President and CEO Title: Chairman EX-10.19 3 EXHIBIT 10.19 COMMERCIAL-IN-CONFIDENCE ORION 2 SPACECRAFT PURCHASE CONTRACT --------------------------------------------------------------------- ORION 2 SPACECRAFT PURCHASE CONTRACT PART 1(A) ORION 2 PRICING, TERMS AND CONDITIONS --------------------------------------------------------------------- TABLE OF CONTENTS WHEREAS........................................................................1 DEFINITIONS....................................................................1 1. ORION 2 CONTRACT...........................................................11 2. ENTIRE AGREEMENT, EFFECTIVE DATE...........................................12 3. SCOPE OF THE WORK..........................................................12 4. RESERVED...................................................................13 5. CONTRACT PRICE.............................................................14 6. PAYMENT....................................................................15 7. ACCESS TO WORK.............................................................19 8. DELIVERABLE ITEMS AND DELIVERY DATES.......................................22 9. FINAL ACCEPTANCE...........................................................23 10. TRANSFER OF TITLE AND ASSUMPTION OF RISK..................................28 11. ORION 2 SPACECRAFT DELIVERY INCENTIVE AND LATE DELIVERY LIQUIDATED DAMAGES...................................................28 12. EXTENSIONS FOR EXCUSABLE DELAYS...........................................29 13. CORRECTION OF DEFECTS.....................................................31 14. DISCLAIMER OF WARRANTIES, LIMITATION OF LIABILITY AND INTER-PARTY WAIVER OF LIABILITY..........................................34 15. ORION 2 SPACECRAFT IN-ORBIT PERFORMANCE WARRANTY..........................36 16. SUBCONTRACTS..............................................................40 i 17. INDEMNIFICATION...........................................................41 18. INSURANCE.................................................................43 19. REPLACEMENT SATELLITE.....................................................46 20. TERMINATION FOR CONVENIENCE...............................................49 21. REMEDIES FOR DEFAULT......................................................50 22. TERMINATION IN SPECIAL CASES..............................................55 23. PUBLICATION OF INFORMATION................................................56 24. CONFIDENTIALITY AND NONDISCLOSURE OF PROPRIETARY INFORMATION...................................................57 25. LICENSE RIGHTS............................................................59 26. PATENTS, TRADEMARKS AND COPYRIGHTS........................................60 27. ORION 2 CONTRACT AMENDMENTS...............................................61 28. GOVERNMENTAL APPROVALS....................................................62 29. RESPONSIBILITY FOR THE CONTRACT...........................................63 30. DISPUTE RESOLUTION........................................................64 31. CONTRACT MANAGEMENT.......................................................66 32. SECURITY INTEREST AND FINANCIAL INFORMATION...............................67 33. ASSIGNMENT................................................................67 34. NOTICES AND DOCUMENTATION.................................................68 35. SEVERABILITY AND WAIVER...................................................70 36. COMPLIANCE WITH THE LAW, PERMITS AND LICENSES.............................70 ii 37. APPLICABLE LAW; SUBMISSION TO JURISDICTION; APPOINTMENT OF AGENT FOR ACCEPTANCE OF SERVICE; INTERPRETATION AND LANGUAGE................71 38. SURVIVAL..................................................................72 39. KEY PERSONNEL.............................................................72 40. PROGRESS REPORTS..........................................................73 41. LAUNCH VEHICLE AGENCY.....................................................73 42. GUARANTEE OF CONTRACTOR OBLIGATIONS.......................................74 43. INTEREST..................................................................75 44. COUNTERPARTS..............................................................75 COMMERCIAL-IN-CONFIDENCE ORION 2 SPACECRAFT PURCHASE CONTRACT PART 1(A) ORION 2 PRICING, TERMS and CONDITIONS THIS ORION 2 SPACECRAFT PURCHASE CONTRACT (referred to herein as the "ORION 2 Contract") is made as of the 29th day of January 1997, between INTERNATIONAL PRIVATE SATELLITE PARTNERS, L.P., d/b/a ORION ATLANTIC, L.P., a Delaware limited partnership with its principal offices located at 2440 Research Boulevard, Rockville, Maryland 20850, United States of America (hereinafter called "ORION"), and MATRA MARCONI SPACE UK LIMITED, a company organized and existing under the Laws of England and Wales with its registered office at The Grove, Warren Lane, Stanmore, Middlesex, HA7 4LY, ENGLAND (hereinafter called the "Contractor"). WHEREAS A. The primary object of ORION is the carrying on of the business of providing a telecommunications system by the use of space satellites. B. ORION anticipates providing the business referred to in recital A through the ORION satellite ("ORIONSAT") system. C. The ORION 2 Spacecraft to be constructed pursuant to this ORION 2 Contract is intended to form part of the space segment of the ORIONSAT system. D. ORION and the Contractor have agreed that the Contractor will perform the work as defined below and that ORION will pay for the Work on the terms and conditions set out in this Agreement. NOW, THEREFORE, in consideration of the above premises and the mutual covenants and agreements contained herein, the parties hereto (hereinafter, the "Parties") agree as follows: DEFINITIONS "Advance Funding" means the funding requirements for Long-Lead Items related to the Replacement Satellite, as set forth in Article 19.2 hereof. "Affiliate" means, with respect to any entity, any other entity Controlling, Controlled by or under common Control with such entity. "Aggregate Predicted Transponder Life" means the sum of the Predicted Transponder Life of each and every Serviceable Transponder embodied in the Launched ORION 2 Spacecraft and represents a projection of the revenue-earning capacity of the Launched ORION 2 Spacecraft. "Amendment to the ORION 2 Contract" means a written agreement modifying the ORION 2 Contract, which agreement is signed on behalf of ORION by its President (or another person designated by the President in writing to sign such agreement) and on behalf of the Contractor by both its respective Contracts Manager and Project Manager, and which agreement expressly states that it is an "Amendment to the ORION 2 Contract." "Business Day" means any day other than the following: a Saturday, Sunday or other day on which banks are authorized to be closed in the State of New York or London, England. "Calendar Day" means any day. "Constructive Total Loss" means, with respect to the ORION 2 Spacecraft, that either of the following conditions (A or B) applies: (A) (i) the Aggregate Predicted Transponder Life is less than __________________________, or (ii) fewer than _______________ downlink Transponders are Serviceable Transponders, or (iii) fewer than____________ downlink Transponders with ______ at the ________ GHz frequency and _______ at either of the two frequency ranges of _________ or _________ GHz frequency are Serviceable Transponders; or (B) (i) the ORION 2 Spacecraft fails to arrive at its designated orbital location or the Contractor fails to deliver the In-Orbit Acceptance Report within one hundred and eighty (180) Calendar Days after Launch, or (ii) the ORION 2 Spacecraft is completely destroyed or is otherwise rendered incapable of operation. "Consultant" means any third party (i) authorized by ORION to provide technical and program support and assistance in connection with the performance of the ORION 2 Contract, or (ii) which is a representative of or consultant to any Financing Entity. "Contract Price" means the firm fixed price of Two Hundred Million, Eight Hundred Thirty Thousand Dollars ($200,830,000) as such may be adjusted in accordance with the terms of the ORION 2 Contract. "Control," "Controlling," or "Controlled" means with regard to any entity the legal, beneficial or equitable ownership, directly or indirectly, of fifty (50) percent or more of the capital stock (or other ownership interest, if not a corporation) of such entity ordinarily having voting rights. "Correction Plan" means a plan submitted by the Contractor which details how the Contractor shall correct (i) a failure to make adequate progress towards completion of any Work or (ii) a default or breach under the ORION 2 Contract in accordance with Article 21. "Data and Documentation" means that data and documentation to be supplied by the Contractor to ORION pursuant to the requirements of Part 2(A) (Statement of Work) and as specified in Part 2(B) (ORION 2 Contract Documentation Requirements List). "Defect" means (i) with regard to the ORION 2 Spacecraft and all components thereof, any defect in design, material or workmanship, or failure to perform in accordance with the specifications and requirements set out or referred to in the ORION 2 Contract and the Data and Documentation delivered from time to time under the ORION 2 Contract which ORION or its Consultant reasonably believes may adversely affect the ORION 2 Spacecraft performance; (ii) with regard to services, a failure to conform to a high standard consistent with industry practice; and (iii) with regard to Data and Documentation, a failure to meet any specifications or requirements set forth in the ORION 2 Contract. "Deliverable Item" means the ORION 2 Spacecraft and Data and Documentation and other items so identified in subsequent amendments to the ORION 2 Contract. Where the context permits, as used herein the term "Deliverable Items" shall include and refer not only to the whole of the items listed in Article 8, but also every component part thereof. "Delivery" shall have the meaning ascribed to it in Article 8.1. "Delivery Dates" means those dates set forth in Article 8.1. "Demand" means, in the context of Article 21 hereof, a demand by ORION made of the Contractor for the Contractor to provide a Correction Plan in the event that the Contractor is failing to make adequate progress in the performance of the ORION 2 Contract or is in default or breach. "Dollars" shall mean United States Dollars. "Excusable Delay" shall have the meaning ascribed to it in Article 12. "F1 Contract" means the Second Amended and Restated Purchase Contract for the F1 Spacecraft between Orion Atlantic, L.P. and MMS Space Systems Limited (formerly known as British Aerospace Space Systems Limited), as assignee of British Aerospace Public Limited Company, dated 26 September 1991, as amended. "Final Acceptance" shall have the meaning ascribed to it in Article 9. "Financing Agreements" means any and all documents and agreements evidencing and/or securing monies provided on a full or partial debt basis by any Financing Entity to ORION to fund the construction and delivery of the ORION 2 Spacecraft and the purchase of Long-Lead Items. "Financing Entity" means any entity (other than the Contractor or parties related to the Contractor), e.g., commercial bank, merchant bank, investment bank, commercial finance organization, corporation, or partnership, providing money on a full or partial debt basis to ORION to fund the construction and delivery of the ORION 2 Spacecraft and purchase of Long-Lead Items. "Initial Incentive Amount" means _____________________________ __________________________________ of the Total Amount at Risk, as may be adjusted in accordance with the terms of the ORION 2 Contract. "In-Orbit Acceptance Requirements" means that document which is Part 3(D) of the ORION 2 Contract. "In-Orbit Acceptance Test Plan" means that document which is a Deliverable Item under Part 2(B) (ORION 2 Contract Documentation Requirements List) and as described in Part 3(D) (In-Orbit Commissioning and Acceptance Test Requirements) of the ORION 2 Contract. "In-Orbit Acceptance Test Report" or means that document which is a "In-Orbit Acceptance Report" Deliverable Item under Part 2(B) (ORION 2 Contract Documentation Requirements List) and as described in Parts 2(A) (Statement of Work) and 3(D) (In-Orbit Commissioning and Acceptance Test Requirements) of the ORION 2 Contract. "In-Orbit Performance Warranty" shall mean the Contractor's warranty as to the performance of the ORION 2 Spacecraft following Final Acceptance. "In-Orbit Performance Warranty Period" shall have the meaning ascribed to it in Article 15.2. "Insurers" means those entities providing Launch Insurance. "Intentional Ignition" means, with respect to the Launch Vehicle, the point in time during the launch countdown when initiation of the gas generators igniters firing command and firing of any of the gas generators igniters occurs. "Key Personnel" shall have the meaning ascribed to it in Article 39. "Launch" means Intentional Ignition, followed by (i) release of the Launch Vehicle from the launcher hold down restraints for purposes of lift-off, or (ii) a Constructive Total Loss. "Launch Agreement" means the agreement between the Contractor and the Launch Vehicle Agency to perform the Launch of the ORION 2 Spacecraft. "Launch Damaged Transponders" shall have the meaning ascribed to it in Article 15.2.2. "Launch Date" means the calendar date within the Launch Period during which the Launch is scheduled to occur. "Launch Insurance" means insurance which covers the ORION 2 Spacecraft from the period beginning at Intentional Ignition and ending no sooner than one hundred eighty (180) Calendar Days following Launch. "Launch Period" means the period 1 May 1999 through 31 July 1999, as such period may be adjusted by agreement of the Parties, during which the Launch is scheduled to occur. "Launch Services" shall mean the launch campaign/transportation, launch services, mission planning and launch/early operations phase services as more particularly described in Section 7 of Part 2(A). "Launch Slot" means the 30 day period during which the Launch is scheduled to occur as set forth in the Launch Agreement, which period will be determined within seven days of the Launch Vehicle Agency's receipt of Progress Payment No. 6. "Launch Vehicle" means an Atlas IIAS Standard launch vehicle system (with such customization as may be agreed separately between the Launch Vehicle Agency and ORION) consisting of an Atlas lower stage and Centaur upper stage connected by an interstage adapter, the payload fairing, and the payload adapter with separation system. "Launch Vehicle Agency" means Lockheed Martin or such other Subcontractor as is selected to supply the Launch Vehicle for the ORION 2 Spacecraft. "Launched ORION 2 Spacecraft" means the ORION 2 Spacecraft after its Launch. "Long-Lead Items" means those satellite components purchased by the Contractor pursuant to Article 19. "Major Subcontract" means a Subcontract which is of a value exceeding Two Million, Five Hundred Thousand Dollars ($2,500,000 ) or of importance or critical in nature to the overall program (e.g., a Subcontract for major or critical units, subsystems or other items or services). "Maneuver Lifetime" shall have the meaning ascribed to it in Article 3.4. "Milestone" means completion of a portion of the Work with respect to which a payment is to be made in accordance with the Milestone Payment Plan incorporated in Part 1(B) (ORION 2 Payment Plans and Termination Liability Amounts) of the ORION 2 Contract. "Milestone Payments" means those payments listed as Milestone Payments in Part 1(B) (ORION 2 Payment Plans and Termination Liability Amounts) of the ORION 2 Contract. "Mission Specific Hardware and Software" means those items of hardware and software described in Section 10 of Part 2(A) (Statement of Work) of the ORION 2 Contract. "Monthly Amount" means the difference between the Total Amount at Risk and the Initial Incentive Amount which difference is divided into sixty (60) equal monthly amounts each having a value of ------------ ---------------------------------- __________________________, as may be adjusted in accordance with the terms of the ORION 2 Contract. "NPD" or "Notice to Proceed Date" means February 28, 1997. "Option" means ORION's option to purchase the ORION 2 Spacecraft from Contractor, which option was granted by Contractor to ORION under Section 2 of the Option Agreement. "Option Agreement" means the Amended and Restated Option Agreement for Purchase of ORION 2 Spacecraft, dated the date first written above, between ORION and Contractor. "ORION 2 Spacecraft" means the satellite to be constructed and delivered to ORION as part of the Work and as identified in Part 2(A) (Statement of Work) of the ORION 2 Contract. "Other Users" shall have the meaning set forth in Article 14.4.1. "Partial Loss" shall have the meaning ascribed to it in Article 9.2.2. "Predicted Transponder Life" means the period of time, measured in years, over which a Serviceable Transponder can be operated, commencing from the date of Delivery of the In-Orbit Acceptance Report, this period of time being equal to whichever is the shortest of: (i) thirteen (13) years, or (ii) the ORION 2 Spacecraft predicted propellant life calculated in accordance with Section 5 of Part 3(D) (In-Orbit Commissioning and Acceptance Test Requirements) of the ORION 2 Contract, or (iii) the period of time over which there is predicted to be sufficient solar array power to operate such Serviceable Transponder co-extensively with all other Serviceable Transponders, calculated in accordance with Section 5 of Part 3(D) (In-Orbit Commissioning and Acceptance Test Requirements) of the ORION 2 Contract. "Primary Transponder" means a Transponder where the communication signals are received from and transmitted to the ground. "Progress Payments" means those payments listed as Progress Payments in Part 1(B) (ORION 2 Payment Plans and Termination Liability Amounts). "Replacement Satellite" shall have the meaning ascribed to it in Article 19. "Request for Payment" means a request for payment in the form of Annex A hereto. "Revenue" means all amounts received by ORION with respect to an individual Primary Transponder, whether as a result of its sale, lease, license or other disposition, it being understood that, if said amounts are not received in equal monthly installments, the total amount received or to be received by ORION shall be deemed received in equal monthly installments over the remainder of the Predicted Transponder Life of such Transponder. "Satisfactorily Operating Primary means a Primary Transponder which Transponder" is capable of meeting (i) the requirements of Part 3(A) (ORION 2 Spacecraft Specifications) regarding Primary Transponder performance and (ii) the Primary Transponder Test Requirements defined in Part 3(D) (In-Orbit Commissioning and Acceptance Test Requirements). "Senior Executive" means each of the senior executives designated from time to time in writing, by ORION and by the Contractor, respectively, to be their representatives for the purposes of dispute resolution under the ORION 2 Contract. "Serviceable Transponder" means a Primary Transponder which meets the requirements therefor as set forth in Section 5 of Part 3(D) (In-Orbit Commissioning and Acceptance Test Requirements) of the ORION 2 Contract and is determined, pursuant to Section 5.2 thereof, to be capable of operation in accordance with such requirements during periods of eclipse. In the event that the Launched ORION 2 Spacecraft has insufficient energy to operate thirty (30) Serviceable Transponders in eclipse, those specific Transponders, if any, which failed the testing requirements of Section 5.2 of Part 3(D), will not be counted twice in determining the total number of Transponders that are not Serviceable Transponders. "Subcontract" means a contract awarded by the Contractor to a Subcontractor or a contract awarded by a subcontractor at any tier for the performance of any of the Work specified in the ORION 2 Contract. "Subcontractor" means a person or company awarded a Subcontract. "Termination Liability Amounts" means the amounts listed as Termination Liability Amounts in Part 1(B) (ORION 2 Payment Plans and Termination Liability Amounts) of the ORION 2 Contract. "Total Amount at Risk" means a firm fixed sum of Ten Million, Two Hundred Forty Thousand Dollars ($10,240,000). "Transponder" means an individual transmission channel of defined bandwidth providing a path, inclusive of amplification, frequency translation and frequency channelization, from a receive antenna with defined coverage and polarization to a transmit antenna also with defined coverage and polarization. "Work" means the whole of the work described in Part 2(A) (Statement of Work) and elsewhere in the ORION 2 Contract and, where the context so permits or requires, "Work" includes any part or parts of the Work. The Work includes all elements and phases of delivering the operational ORION 2 Spacecraft in-orbit from design and manufacture through to Launch, Launch Services and in-orbit testing, including, but not limited to, provision of all necessary equipment and documentation related thereto, including Deliverable Items. Note: The satellites(s) (one or more) referred to herein are variously described as the "spacecraft" or the "satellite(s)". 1. ORION 2 CONTRACT 1.1 The documents listed in this Article, as amended from time to time in accordance with Article 27 herein, constitute the ORION 2 Contract:
Issue No. Part 1(A): ORION 2 Pricing, Terms and Conditions Issue 1 Part 1(B): ORION 2 Payment Plans and Termination Liability Amounts Issue 1 Part 2(A): ORION 2 Statement of Work Issue 3 Part 3(A): ORION 2 Spacecraft Specifications Issue 3 Part 3(D): ORION 2 In-Orbit Commissioning and Acceptance Test Requirements Issue 3 Part 3(C): ORION 2 Spacecraft On-Ground Test Requirements Issue 4 Part 2(B): ORION 2 Contract Documentation Requirements List Issue 2 Part 3(B): ORION 2 Spacecraft Product Assurance Requirements Issue 4 Part 4: Replacement Satellite Long-Lead Items Issue 3 Annex A: ORION 2 Request for Payment and Contractor's Certificates Issue 1 Appendix I: Form of Contractor Certificate Issue 1 Annex B: Launch Agreement Inter-Party Waiver of Liability Provision Issue 1
1.2 Notwithstanding anything herein to the contrary, the documents listed in Article 1.1 above shall be deemed to constitute one fully integrated agreement between the Parties. Should there be any ambiguity, discrepancy or inconsistency among any of the documents constituting the ORION 2 Contract, such ambiguity, discrepancy or inconsistency shall be resolved according to the order of precedence in which the documents are listed in Article 1.1. Unless specifically indicated otherwise herein, all Article and Paragraph references in this Part 1(A) shall be deemed to be to Part 1(A). 1.3 In the event the Parties are unable to resolve any ambiguity, discrepancy or inconsistency which affects the Work, ORION shall direct the Contractor and the Contractor shall follow such direction as to the interpretation to be followed in carrying out the Work. If the Contractor disputes ORION's interpretation and such interpretation results in delay and/or increased cost and/or risks, such dispute shall be handled by the procedures set forth in Article 30. 2. ENTIRE AGREEMENT, EFFECTIVE DATE 2.1 This ORION 2 Contract constitutes the sole agreement as to the Work to be performed hereunder by the Contractor and supersedes all prior agreements relating thereto other than the Option Agreement, which shall survive until ORION exercises the Option granted thereunder. The Parties further agree that this ORION 2 Contract does not supersede the F1 Contract (including all amendments thereto) and the F1 Contract shall not be integrated herewith. 2.2 On the date ORION exercises the Option, the ORION 2 Purchase Contract shall be fully effective and shall be deemed to have been in full force and effect from the date upon which Contractor receives Option Installment Payment 1under the Option Agreement. 3. SCOPE OF THE WORK 3.1 The Contractor shall furnish the Work in accordance with the provisions of the documents which constitute the ORION 2 Contract. In the performance of the Work, the Contractor shall supply all personnel, materials and facilities necessary therefor. 3.2 ORION shall specify the final beam coverage for one (1) of the transmit (Tx)/receive(Rx) coverages no later than NPD and for a second Tx/Rx coverage no later than three (3) months after NPD. ORION shall also, no later than two (2) months after NPD, specify the final transponder beam connectivities. If all finalized beam coverages are consistent with what is achievable with the proposed antenna aperture sizes meeting the requirements of Part 3(A), price and delivery schedule shall remain unchanged. If all finalized transponder connectivities are consistent with the proposed switching and filtering hardware meeting the requirements of Part 3(A), price and delivery schedule shall remain unchanged. 3.3 Prior to NPD, the Contractor shall present a thermal design approach with supporting data and analysis (at the communications panel level), which shall demonstrate to the reasonable satisfaction of ORION that the ORION 2 Spacecraft will be designed in full compliance with the requirements of Section 8 of Part 3(A) regarding the thermal control subsystem. 3.4 Prior to NPD, the Contractor shall demonstrate that the ORION 2 Spacecraft has a realistically calculated forty (40) kg dry mass margin adequate to meet the specified contract performance requirements, including maneuver lifetime ("Maneuver Lifetime") as set forth in Section 2.1 of Part 3(A). 3.5 The Launch Vehicle Agency is obligated under the Launch Agreement to deliver the Launch Vehicle with a contract level of performance of seven thousand, six hundred (7,600) pounds of payload systems mass to a reference geosynchronous transfer orbit. The Parties have discussed with the Launch Vehicle Agency methods of enhancing the performance of the Launch Vehicle by using _______________________________, which will increase the delivery capability of the Launch Vehicle by approximately one hundred seventy (170) pounds of payload systems mass to a reference geosynchronous transfer orbit (the "Launch Enhancements"). The ORION 2 Spacecraft Maneuver Lifetime is based upon the availability of the Launch Enhancements. Notwithstanding any other provision of this ORION 2 Contract, if the Launch Vehicle Agency does not make the Launch Enhancements available, the Maneuver Lifetime shall be reduced to twelve and seven tenths (12.7) years. In such case, ORION and the Contractor shall use all commercially reasonable efforts to cause the Maneuver Lifetime to be increased to thirteen (13) years and the Parties agree to amend such number in the ORION 2 Contract to the extent of such increase. If the Launch Vehicle Agency provides to the Contractor other Launch Vehicle improvements in addition to the Launch Enhancements, then seventy percent (70%) of any increased payload systems mass achieved due to such Launch Vehicle improvements shall be allocated to ORION to increase the Maneuver Lifetime and thirty percent (30%) of the same shall be allocated to the Contractor to increase the Contractor's mass margin. 4. RESERVED 5. CONTRACT PRICE 5.1 For the full, satisfactory and timely performance of the Work by the Contractor in accordance with the provisions of the ORION 2 Contract, ORION shall pay the Contractor the Contract Price, which includes all taxes applicable at NPD including personal property taxes, imposts and duties wherever the Work is being carried out but excludes interest due under Article 6.1.2. The Contract Price shall be paid in accordance with Article 6 below. Except as otherwise expressly provided in the ORION 2 Contract, the Contract Price is not subject to any escalation, or to any adjustment or revision by reason of the actual cost incurred by the Contractor in the performance of the ORION 2 Contract. The Contract Price shall comprise the following elements, including any related training and documentation:
Item Description Amounts $ - ------------------ ------------------------------------------------------------ ---------------------------------- 1. ORION 2 Spacecraft 2. Launch Vehicle 3. Launch Services - ------------------ ------------------------------------------------------------ ---------------------------------- CONTRACT PRICE TOTAL $200,830,000 - ------------------ ------------------------------------------------------------ ----------------------------------
5.2 Variations in Contract Price The Contract Price is subject to increase with the mutual consent of the Parties if the Contractor does not receive Option Installment Payment 2 under the Option Agreement on or prior to April 30, 1997. 6. PAYMENT 6.1.1 Payments The ORION 2 Contract shall be paid as follows: (a) Progress Payments. ORION shall make Progress Payments to the Launch Vehicle Agency in accordance with the Progress Payment Plan specified in Part 1(B) as adjusted by Articles 5 and/or 27 hereof. Each Progress Payment shall be payable by the Contractor submitting to ORION a Request for Payment accompanied by a certificate in the form of Appendix I to Annex A hereto. (b) Milestone Payments. (i) ORION shall make Milestone Payments to the Contractor in accordance with the Milestone Payment Plan specified in Part 1(B) as adjusted by Articles 5 and/or 27 hereof. Each Milestone Payment shall be payable by the Contractor submitting to ORION a Request for Payment accompanied by a certificate in the form of Appendix I to Annex A hereto together with such supporting data as the Contractor deems necessary or appropriate. A Milestone shall not be regarded as completed until all of the Work relevant to that Milestone has been completed and documented in accordance with applicable specifications and procedures and relevant documentation and training required under the ORION 2 Contract for such Milestone have been provided to ORION. The Contractor's failure to achieve any Milestone in the sequence set forth in Part 1(B) shall not limit the Contractor's rights to claim and be paid other Milestone Payments when the relevant Milestone is achieved. (ii) In no event shall the cumulative Milestone Payments made to the Contractor for the ORION 2 Spacecraft or Launch Services at any point in time exceed the cumulative amounts specified up to that point in time for Milestone Payments for the ORION 2 Spacecraft or Launch Services as set forth in Part 1(B) as it may be modified from time to time. (c) Credit for Payments. All Option Installment Payments (Spacecraft and Launch Vehicle) that the Contractor or the Launch Vehicle Agency receives from ORION under the Option Agreement shall be applied against Milestone Payments and Progress Payments, respectively. The Contractor shall apply the $1,000,000 paid to the Launch Vehicle Agency prior to the date of the Option Agreement against Progress Payments. (d) Delivery to ORION. Each Request for Payment and accompanying certificate shall be telefaxed to ORION followed by airmailed signed copies. 6.1.2 Payments by ORION ORION shall pay each Milestone Payment and Progress Payment in full within thirty (30) Calendar Days after the delivery of a Request for Payment (in accordance with the procedures set forth in Article 6.1.1) into the appropriate bank accounts set forth in Article 6.1.3. Where the thirty (30) Calendar Days allowed for payment after delivery of a Request for Payment for a Milestone or Progress Payment causes a payment to become due on a non-Business Day, such payment shall be due on the next Business Day. Contractor shall be entitled to the interest earned on any properly due but unpaid amount for each Calendar Day after the date any Progress or Milestone Payment is due; Contractor shall be paid any interest to which it is entitled within ten (10) Calendar Days of the determination that such interest is due; and interest shall be calculated in accordance with Article 43. Any amounts payable to the Launch Vehicle Agency shall be paid directly by ORION. 6.1.3 Procedures Payment shall be made in accordance with Articles 6.1.1 and 6.1.2 into the following bank accounts: In the case of the Contractor: Account name: MATRA MARCONI SPACE UK LIMITED Account number: Bank name: Midland Bank Plc Sort code: Bank address: 16 King Street Covent Garden London England In the case of ORION: Account name: IPSP Receipt Account Account number: Bank name: The Chase Manhattan Bank, N.A. Sort code: Bank address: 4 Chase MetroTech Center Brooklyn, New York 11245 United States of America In the case of the Launch Vehicle Agency: Account name: Lockheed Martin Commercial Launch Services, Inc. Account number: Bank name: Citibank N.A. ABA number: Bank address: One Penn's Way New Castle Delaware 19720 United States of America Any payment shall be deemed to have been made when credit for the amount is established in the above bank accounts. Each Party shall notify the other Party in writing within ten (10) Calendar Days of a change to the above bank accounts. 6.2 Dispute In a written notice (which may be a telefax followed by an originally signed copy) received by the Contractor no later than twenty (20) Business Days after receipt by ORION of a Request for Payment in connection with a Milestone Payment or other payment under Article 6.4, ORION may dispute timely completion of the Milestone associated with such Milestone Payment or other payments. In the event there is such a dispute, ORION shall nonetheless pay the Milestone Payment in accordance with Article 6.1.2 without waiving any of its rights. In the event it is determined, either by agreement of the Parties or by dispute resolution pursuant to Article 30 hereof, that the Milestone with respect to which such notice shall have been timely received was not completed as of the date of the Request for Payment, ORION shall be entitled to the interest at the rate specified in Article 43 earned on the disputed amount for each Calendar Day after the date such Milestone Payment was paid until the day the Milestone associated therewith is completed. ORION shall be paid any interest to which it is entitled within ten (10) Calendar Days of the determination that such interest is due. Interest shall be calculated in accordance with Article 43. 6.3 Other Payments Except as otherwise expressly stated herein, all other payments by ORION to the Contractor shall be made in accordance with the procedures set forth in Article 6.1.3 within thirty (30) Calendar Days after receipt by ORION of a telefaxed invoice. This invoice will be followed by an airmailed original and one copy. 6.4 Setoff In the event that one Party has not paid the second Party any amount which is due and payable to the second Party under the ORION 2 Contract, such second Party shall have the right to set off such amount against payments due to the first Party, provided any amount in dispute pursuant to Article 6.2 shall not be considered due and payable while the dispute is being resolved. 6.5 If (a) the Contractor fails to make the Spacecraft available to the Launch Vehicle Agency in sufficient time for the Launch to occur on or prior to 31 July 1999 and such failure is due to any reason other than the Contractor's failure to perform the Work in accordance with Part 2(A) or other than Excusable Delay (but not Excusable Delay caused by ORION's failure to meet its responsibilities under the Orion 2 Contract, including Article 18.5, its invalid exercise of its rights under Article 13, or its exercise of its rights under Article 41), or (b) the Launch Agreement is terminated pursuant to Article 41, then the Contract Price shall be increased by any additional amount required by the Launch Vehicle Agency to perform the Launch. 7. ACCESS TO WORK 7.1 ORION and the Consultants shall have reasonable access (upon reasonable notice to the Contractor from ORION, but no less than forty-eight (48) hours) to any premises of the Contractor or Major Subcontractors, or other selected Subcontractors on an "as needed" basis for short durations, where Work is being performed and may observe all of the Work, as well as any associated facilities and documentation, during regular business hours, or such other times as Work is being performed under the ORION 2 Contract. ORION shall justify to the Contractor why such access to other selected Subcontractors is needed but such access shall not be unreasonably withheld. ORION and the Consultants shall also be entitled to attend all meetings and reviews of the Contractor and of the Contractor with Subcontractors related to project schedule and management, engineering, design, manufacturing, integration and testing and Launch as reasonably necessary and with the prior approval of the Contractor. The Contractor shall provide ORION and the Consultants reasonable assistance in the performance of such inspections. The Parties agree that non-escort permanent badges to agreed work areas where ORION activities are being performed shall be made available to all ORION representatives subject to adequate notice of personnel details being provided to the Contractor and security clearance being granted. 7.2 The Contractor shall provide office space and facilities for the accommodation of up to six (6) representatives (plus a secretary) employed by ORION (or its Consultants) at the Contractor's plants and at environmental test facilities (if located off site) and shall ensure that such space and facilities are provided at the repeater Subcontractors' plant for up to three (3) representatives and at other selected Subcontractors' plants on a temporary basis to attend meetings or witness tests. Provision for up to four (4) engineers (plus a secretary) shall be made at the Launch site facility. At a minimum, the Contractor shall provide desks, chairs, normal office supplies, local telephone service (long distance telephone usage to be charged to ORION), car parking facilities and access to meeting rooms, copying machines and facsimile equipment, and access to and use of video conferencing facilities, if any, at the Contractor's plants (in this connection, Contractor will take reasonable measures to facilitate video conferencing between Contractor's plants and ORION's premises, provided the video conferencing facilities of both Parties are fundamentally compatible). ORION shall make ORION space segment capacity for video conferencing available without charge. 7.3 The Contractor shall require that any Subcontract contains a provision substantially similar to this Article 7 to ensure ORION's rights under the ORION 2 Contract, except that ORION's access to the Launch Vehicle Agency's facilities shall be controlled by the Launch Vehicle Agency. 7.4 ORION and its Consultants will have reasonable access to any drawings, specifications, standards or process descriptions which are available to the Contractor and relevant to the ORION 2 Spacecraft and Data and Documentation to be Delivered under the ORION 2 Contract. If an electronic mail system is used by the Contractor to distribute documentation, access to ORION representatives is to be approved by the Contractor. The Contractor will make available, to the extent permitted under Article 24, copies of such documentation, at no charge to ORION, on the reasonable request of ORION or ORION's Consultant where such documentation is necessary for evaluation of designs, performance considerations, assessment of test plans and test results or for any other purpose connected with the design, qualification, testing, Launch, Final Acceptance or operation of the ORION 2 Spacecraft components. The Contractor will allow ORION or its Consultants reasonable access to all drawings and document indices to facilitate their work in this respect. The Contractor shall establish data links between its and ORION's facilities such that ORION has remote electronic access to those project related documents identified in Part 2(B). ORION shall make space segment capacity required for such remote access available without charge. The Contractor will also provide ORION and its Consultants with "real time" access to all measured data taken at the Contractor's and Subcontractors' facilities on a non-interference basis. In addition, ORION shall have access to those project related documents which are of the type to which ORION had access during the implementation of the F1 Contract. 7.5 In exercising its rights under the ORION 2 Contract, ORION and the Consultants shall be subject to Governmental security requirements of the Contractor and its Subcontractors and the Contractor shall use its best efforts to ensure that such security requirements do not unduly restrict access or viewing by ORION subject to adequate notice of ORION personnel details being provided to the Contractor. Access by ORION or any Consultant to Subcontractor facilities shall be coordinated through the Contractor. 7.6 In the event a meeting is convened at the Contractor's or a Subcontractor's plant, the Contractor shall provide reasonable advance notice to ORION (e.g., one week for regularly scheduled meetings) and make the necessary arrangements to facilitate the entry of ORION or its Consultants to the meeting place subject to adequate notice of ORION personnel details being provided to the Contractor. 7.7 Subject to Article 27 hereof, the inspection, examination, agreement to, or approval, waiver or deviation by ORION (other than in accordance with Article 27) with regard to any design, drawing, specification or other documentation produced under the ORION 2 Contract shall not relieve the Contractor from fulfilling its contractual obligations or result in any liability being imposed on ORION. 7.8 ORION shall have the right to participate in and make recommendations, but not to control, give directions or assign actions, in all review meetings at the system, subsystem and critical component levels, as well as test review board, manufacturing review board and failure review board meetings. The Parties agree to work cooperatively in resolving issues that arise at the various review board meetings and, where ORION has an objection to a recommended resolution/implementation, the Parties agree to discuss it at a senior management level (ORION's Senior Vice President, Engineering and Satellite Operations and Contractor's Director of Civil Communications Satellites) prior to implementation, but the final decision concerning implementation shall remain with the Contractor who shall provide ORION with a written explanation for its decision. 8. DELIVERABLE ITEMS AND DELIVERY DATES 8.1 "Delivery" shall be deemed to have occurred for each Deliverable Item upon its Final Acceptance by ORION. The Parties acknowledge that the Delivery of the ORION 2 Spacecraft is to be in orbit. Subject to this Article and Articles 12, 18.5 and 27, the Parties agree that the Delivery Dates for Deliverable Items under the ORION 2 Contract (depending on the final configuration selected) are as follows:
Item Description Delivery Date 1. Delivery of ORION 2 Spacecraft in Orbit 28.25 months after NPD (provided a Launch Slot is available in such timeframe) 2. Data and Documentation As specified in Section 9.2.1 of Part 1(A), Part 2(A), Part 2(B) and Part 3(D) 3. Mission Specific Hardware and Software As specified in Section 10 of Part 2(A) - -------- ------------------------------------------------- -------------------------------------------
The Parties will negotiate in good faith reasonable adjustments in the Delivery Date for the ORION 2 Spacecraft upon the addition, elimination or technical complication or simplification of other ORION 2 Spacecraft items prior to NPD, to the extent such additions, eliminations and/or technical complications or simplifications are, singly or in the aggregate, material (i.e., more than minor in effect on cost, schedule and/or performance). If at NPD there is less than twenty-eight and three quarters (28.75) months from NPD to the last possible day of the Launch Period, then the Parties shall, in good faith, negotiate a revised delivery schedule with the Launch Vehicle Agency (or, if necessary, with a different launch vehicle provider) such that there is at least a two (2) month margin in the schedule (which schedule is twenty-six and three quarters (26.75) months to Launch) and the Parties shall enter into an Amendment of the ORION 2 Contract reflecting any resultant changes in schedule and Contract Price. If (a) the Contractor fails to make the Spacecraft available to the Launch Vehicle Agency in sufficient time for the Launch to occur on or prior to 31 July 1999 and such failure is due to Excusable Delay or (b) the Launch Agreement is terminated pursuant to Article 41, then the Delivery schedule shall be amended to reflect an in-orbit Delivery Date occurring six (6) weeks (forty-two (42) Calendar Days) after the actual launch date of the Orion 2 Spacecraft. For the avoidance of doubt, the Parties recognize and agree that in the event of a Constructive Total Loss of the ORION 2 Spacecraft, the Delivery Dates provided in Article 8 hereof shall, in respect of the ORION 2 Spacecraft and its related Data and Documentation not already delivered, be extinguished and have no further effect. 8.2 The Contractor understands and agrees that, with respect to the Delivery Dates for all Deliverable Items, whether those items are set out in the ORION 2 Contract or in subsequent Amendments to the ORION 2 Contract, time is of the essence under the ORION 2 Contract. Nothing in the foregoing sentence shall in any way modify either the specific remedies for default specified elsewhere in the ORION 2 Contract, including but not limited to Articles 11.2 and 21, or the specific dispute resolution requirements specified in the ORION 2 Contract. 8.3 The Contractor, if requested to do so by ORION, agrees to construct and launch an additional satellite, the Replacement Satellite, in accordance with the terms set forth in Article 19. 8.4 On time schedules to be mutually agreed to in writing, ORION will make available to the Contractor fully operational in-orbit test equipment equivalent to that used on the F1 Spacecraft as specified in Part 2(A) and facilities (Mt. Jackson and Fucino) for use in meeting the requirements of Part 3(D). Contractor will make available (but not deliver) additional test equipment, as reasonably necessary, for in-orbit testing of the American coverage beam in order to satisfy the requirements of Part 3(D). 9. FINAL ACCEPTANCE 9.1 Data and Documentation 9.1.1 "Final Acceptance" (and therefore, Delivery) of Data and Documentation shall occur only when: (i) the Contractor has fulfilled the ORION 2 Contract requirements for the Data and Documentation; and (ii) the Data and Documentation has been delivered at the place specified in the ORION 2 Contract in a condition fully conforming to the provisions of the ORION 2 Contract. Data and Documentation, other than Data and Documentation which requires approval and acceptance by ORION in accordance with Article 9.1.2 hereof, shall be deemed to have achieved Final Acceptance unless rejected by ORION in writing within ten (10) Business Days after receipt of said Data and Documentation by ORION. If Data and Documentation not requiring approval and acceptance by ORION is unacceptable, ORION shall, within the said ten (10) Business Days, notify the Contractor in writing in which respects the Data and Documentation is unacceptable. Any Data and Documentation that is considered by ORION to be unacceptable with respect to which ORION has so notified the Contractor as being unacceptable, shall be deemed under the ORION 2 Contract not to have been Delivered unless and until the Defects that resulted in such rejection have been remedied or demonstrated not to exist pursuant to verification procedures in accordance with the ORION 2 Contract and the Data and Documentation is at the specified delivery location in accordance with the ORION 2 Contract whereupon ORION shall accept the Data and Documentation in writing and Final Acceptance shall occur. 9.1.2 Final Acceptance of any Data and Documentation requiring approval by ORION in accordance with Part 2(B) shall occur when such approval has been granted by ORION in writing. ORION shall respond under this Article 9.1.2 within ten (10) Business Days after receipt of such Data and Documentation by ORION; failing such response, the Parties shall be deemed forthwith to be in dispute and their rights shall be determined in accordance with the provisions of Article 30 hereof. 9.1.3 The provisions of this Article 9.1 shall not apply to the Final Acceptance of a Launched ORION 2 Spacecraft or to the In-Orbit Acceptance Report. The Final Acceptance of the Launched ORION 2 Spacecraft and of the In-Orbit Acceptance Report essential thereto shall be governed by Article 9.2. 9.2 Launched ORION 2 Spacecraft 9.2.1 Upon arrival at its designated orbital location, the Contractor will perform the tests and analyses as set forth in Part 3(D) for the Launched ORION 2 Spacecraft to determine the Aggregate Predicted Transponder Life of the Launched ORION 2 Spacecraft. The results of such tests and analyses will be furnished to ORION in an In-Orbit Acceptance Report prepared by the Contractor for the Launched ORION 2 Spacecraft in accordance with Part 2(A), Part 2(B) and Part 3(D). Unless the Launched ORION 2 Spacecraft is a Constructive Total Loss, Delivery and Final Acceptance will take place upon receipt by ORION of the In-Orbit Acceptance Report in full compliance with Part 2(A), Part 2(B) and Part 3(D). (a) In respect of the Launched ORION 2 Spacecraft (if it arrives at its designated orbital location): (i) Within one hundred and eighty (180) days after Launch of the ORION 2 Spacecraft, the Contractor shall furnish to ORION the In-Orbit Acceptance Report in full compliance with Part 2(A), Part 2(B) and Part 3(D) in respect of the Launched ORION 2 Spacecraft. (ii) Unless ORION shall respond to such In-Orbit Acceptance Report within thirty (30) Calendar Days after receipt thereof, or such other period of time acceptable to both Parties, the Report shall be deemed acceptable. (iii) If ORION's response under Article 9.2.2(a)(ii) contains an objection to such In-Orbit Acceptance Report, the Parties shall be deemed forthwith to be in dispute and their rights shall be determined in accordance with the provisions of Article 30 hereof. (iv) The existence of a dispute shall not affect Final Acceptance set forth above; unless, under the procedures in Article 30, it is ultimately determined that the Launched Spacecraft is a Constructive Total Loss. If the Launched ORION 2 Spacecraft fails to arrive at its designated orbital location in time to complete in-orbit testing and provision of the In-Orbit Acceptance Report within one hundred and eighty (180) Calendar Days after Launch, the ORION 2 Spacecraft shall be deemed a Constructive Total Loss. (b) Without limiting any other Contractor obligations under this Article 9 and in order to comply with insurance requirements, within thirty (30) Calendar Days following receipt of information that one or more of the following circumstances exist, the Contractor shall provide written notice of loss to ORION and to all insurers under applicable policies (provided that the Contractor shall have no obligation to provide such notice to the Launch Insurance insurer unless ORION identifies such insurer to the Contractor) specifying in such notice: (i) The basis for a Partial Loss or a Constructive Total Loss under Articles 9.2.2 or 9.2.3, respectively; or (ii) within any of the provisions of Article 9.2.3; or (iii) The Parties are deemed to be in dispute under any of the provisions of Article 9.2.1(a) or Article 9.2.3. Such notice of loss shall comply with the provisions of Article 34 hereof, and the foregoing specified time for the provision of notice may be shortened in compliance with the respective requirements of such insurers. 9.2.2 A Partial Loss shall occur in respect of the Launched ORION 2 Spacecraft, if the In-Orbit Acceptance Report accurately confirms (a) that the Aggregate Predicted Transponder Life is ________________________ ____________ years or less but (i) is _______________________ years or higher, and (ii) at least_________________ downlink Transponders with ______ at the _________ GHz frequency and _________ at either of the two frequency ranges of _________ or _________ GHz frequency are Serviceable Transponders, and (iii) at least_______ American downlink Transponders are Serviceable Transponders, then the ORION 2 Spacecraft will be deemed to have sufficient revenue-earning capacity to form an economically viable part of the space segment of the ORIONSAT system. In such case, ORION must accept the ORION 2 Spacecraft; and/or; (b) that the ORION 2 Spacecraft has fewer than_______ American downlink Transponders which are Serviceable Transponders. 9.2.3 Notwithstanding any other provisions of this Article 9, if the ORION 2 Spacecraft is a Constructive Total Loss pursuant to item B of the definition of such term, the Contractor shall furnish ORION with written notice of loss in respect of the Launched ORION 2 Spacecraft. Such notice shall be furnished to ORION promptly upon the Contractor's concluding from information available to it that such Constructive Total Loss has occurred. In no circumstance shall such notice of loss be furnished to ORION later than one hundred and eighty (180) Calendar Days after Launch of the ORION 2 Spacecraft. If the Contractor fails to provide ORION with the notice of loss in respect of the Launched ORION 2 Spacecraft specified under this Article 9.2.3 within the respective times specified herein, or if ORION rejects the Contractor's notice of loss, the Parties shall be deemed forthwith to be in dispute and their rights shall be determined in accordance with the provisions of Article 30 hereof. In all circumstances Final Acceptance shall be deemed to have occurred upon Constructive Total Loss. In the event of Constructive Total Loss the provisions of Article 15 shall not apply. 9.2.4 In the event of a dispute as to the performance of the Launched ORION 2 Spacecraft, the Parties agree to have an independent determination of the ORION 2 Spacecraft technical status performed by a mutually acceptable technically qualified third party. The costs incurred in retaining the third party shall be shared equally between the Contractor and ORION. The Parties agree that before reference to such mutually-acceptable technically-qualified third party, an informal forum between Contractor's Senior Executive and ORION's Senior Executive shall take place to attempt a resolution of said dispute. In the event that such efforts to resolve the dispute have been unsuccessful, the Parties shall proceed under Article 30 hereof. The foregoing independent determination may be used by either Party in any arbitration under Article 30 hereof, but such determination shall not be binding upon the arbitrators. 9.2.5 In addition, the following provisions shall be applicable to the implementation of this Article 9.2: (a) Warranty The Parties hereto warrant and represent that they will not withhold from each other any of the material information they have or will have concerning anomalies, failures and deviations from the requirements of the ORION 2 Contract, from NPD through Intentional Ignition in respect of the ORION 2 Spacecraft. (b) Access to Technical Information Upon request of a Party, the other Party will respond or permit the first Party to respond to any insurers in relation to all specific and reasonable questions relating to design, test, quality control, launch and orbital information. In addition, in the event a Party notifies or is notified by the other Party of an occurrence which may be expected to result in a Partial Loss or Constructive Total Loss under this Article 9.2, such other Party will permit and assist the first Party to: (i) conduct review sessions with a competent representative selected by the insurers to discuss any continued issue relating to such occurrence, including information conveyed to either Party; and (ii) use its best efforts to secure the insurers' access to all information used in or resulting from any investigation or review of the cause or effects of such occurrence; and (iii) make available for inspection and copying all information necessary to establish the scope of such occurrence and verifying the accounting methods employed to compute any refund payment obligated thereby. 9.2.6 If either Party at any time after Launch but prior to Final Acceptance has a reasonable basis for concluding that Final Acceptance will not be achieved within the time limits provided for in this Article 9 and the other Party fails to agree with that conclusion within thirty (30) Calendar Days of notice, either Party shall have the right to proceed under Article 30. 9.2.7 Notwithstanding that title to each Deliverable Item remains with the Contractor until Final Acceptance, the Contractor shall have no liability under this ORION 2 Contract for a Partial Loss or a Constructive Total Loss; however, this Article 9.2.7 shall have no effect on the rights of the Parties under Article 11.2 and 15. 10. TRANSFER OF TITLE AND ASSUMPTION OF RISK 10.1 Transfer of title, free and clear of all liens and encumbrances of any kind, and risk of loss or damage to each Deliverable Item shall pass to ORION at Final Acceptance, provided, however, risk of loss or damage to the ORION 2 Spacecraft shall pass to ORION at Intentional Ignition. 10.2 In the event of a Constructive Total Loss, title free and clear of all liens and encumbrances of any kind shall pass to ORION. In such event, at ORION's direction, Contractor shall surrender the ORION 2 Spacecraft to insurers obligated to cover such loss. 11. ORION 2 SPACECRAFT DELIVERY INCENTIVE AND LATE DELIVERY LIQUIDATED DAMAGES 11.1 Delivery Incentive ORION acknowledges and agrees that the Delivery of the ORION 2 Spacecraft earlier than the Delivery Dates determined under Article 8 may be the sole or partial cause of financial gain being sustained by ORION. In the event of the Delivery of the ORION 2 Spacecraft earlier than the applicable Delivery Date as it may be adjusted pursuant to Articles 8, 12, 18.5 and/or 27 hereof, ORION agrees to pay the Contractor within thirty (30) Calendar Days of Final Acceptance as an incentive the sum of Twenty-Five Thousand Dollars ($25,000) per Calendar Day for each day that Delivery of the ORION 2 Spacecraft occurs earlier than the Delivery Date for the ORION 2 Spacecraft, provided, however, that such payments may be delayed until such time as payment is permitted under any Financing Agreement. 11.2 Late Delivery Liquidated Damages The Contractor acknowledges and agrees that failure to meet the ORION 2 Spacecraft Delivery Date may be the sole or partial cause of substantial financial loss or damage being sustained by ORION, due to the cost of carrying any ORION external financing, cost of alternative means of providing service to customers and loss of continuity of service. In the event that the Delivery of the ORION 2 Spacecraft is later than the applicable Delivery Date as set forth in Article 8.1 (and notwithstanding Article 9.2) and where such delay is not subject to an extension of time pursuant to Articles 8, 12, 18.5 and/or Article 27 hereof, the Contractor agrees to pay to ORION, as liquidated damages and not as a penalty for each Calendar Day during the period of such delay from and including the ___________ Calendar Day of lateness up to and including the____ ____________________ Calendar Day of lateness (the "Liquidated Damages Period") as follows: (i) the sum of _____________________________________________ for each Calendar Day in such Liquidated Damages Period during which the Contractor has not achieved Milestone 15 (lateness to run from ___________ months and ____________ after NPD) and (ii) the sum of _________________________ per day for each other Calendar Day in such Liquidated Damages Period. The total amount of liquidated damages payable by the Contractor shall not exceed the sum of Eleven Million, Eight Hundred Twelve Thousand, Five Hundred Dollars ($11,812,500). Liquidated damages may not be levied on the ORION 2 Spacecraft after termination in accordance with this ORION 2 Contract or after the ORION 2 Spacecraft has been declared a Constructive Total Loss in accordance with Article 9 but ORION shall have the right to collect those liquidated damages that have previously accrued. 11.3 ORION shall have the right to offset any liquidated damages owed to it under this Article against any amounts due the Contractor under the ORION 2 Contract. 11.4 Except as provided under the provisions of Article 21, the liquidated damages provided in this Article shall be ORION's exclusive remedy for late Delivery of the ORION 2 Spacecraft and shall be in lieu of all other damages under the ORION 2 Contract, or at law. This provision in no way limits ORION's remedies under Article 22 for insolvency or bankruptcy of the Contractor. 12. EXTENSIONS FOR EXCUSABLE DELAYS 12.1 The Contractor shall be entitled to extensions of time beyond the Delivery Dates determined under Article 8 only in accordance with the following provisions, and the provisions of Articles 8, 18.5 and 27 and any other specific provision of the ORION 2 Contract providing for extensions of time beyond the Delivery Dates set forth in Article 8.1. 12.2 12.2.1 RESERVED 12.2.2 Any delay in the performance of the Work caused by an event which is beyond the reasonable control of the Contractor or its Subcontractors, such as, but not limited to, any civil commotion, invasion, hostilities, sabotage, earthquake, fire, flood, explosion, governmental regulations or controls, labor strikes, work stoppages or slow downs (but excluding any such labor strikes, work stoppages or slow downs occurring at the facilities of the Contractor and/or at any or all of the facilities of the Launch Vehicle Agency, NEC, or COMDEV), freight embargoes, or acts of God, and which delay could not have been avoided by the Contractor or a Subcontractor through the exercise of reasonable foresight or reasonable precautions, and which cannot be circumvented by the Contractor or a Subcontractor through use of its reasonable efforts to establish work-around plans or other means, or delay caused by failure by ORION to meet its responsibilities (including an invalid exercise of its rights under Article 13) under the ORION 2 Contract or exercise by ORION of its rights under Articles 18.5 or 41 shall constitute "Excusable Delay" if notice thereof is given to ORION, in writing, within ten (10) Business Days after the Contractor shall have first learned of the occurrence of such an event. Such notice shall include a detailed description of the portion of the Work known to be affected by such a delay, as well as details of any work-around plans, alternate sources or other means the Contractor expects to utilize to minimize a delay in performance of the Work. Notice must also be given to ORION in writing when the event constituting an Excusable Delay appears to have ended. Without prejudice to the foregoing, any postponement of the Launch of the ORION 2 Spacecraft which is announced by the Launch Vehicle Agency more than one (1) calendar month prior to the Launch Date shall constitute an event of "Excusable Delay" within the meaning of this Article 12, provided that the maximum total amount of such Excusable Delay shall be twelve (12) months. Notwithstanding the foregoing, any postponement of the ORION 2 Spacecraft scheduled Delivery Date due to a launch failure within sixty (60) Calendar Days prior to the Launch Date or a Launch postponement due to bad weather or a launch vehicle accident occurring proximate to the Launch Date shall constitute an event of "Excusable Delay" within the meaning of this Article 12 if notice thereof is given to ORION, in writing as soon as practicable but in no event later than seven (7) Calendar Days after the Contractor shall have first learned of the occurrence of such an event, provided, however, that the maximum total amount of such Excusable Delay shall be twelve (12) months. The Contractor shall be entitled to such extensions of time as are reasonable for the Excusable Delay. In the event ORION disputes the Excusable Delay, ORION must inform the Contractor in writing within ten (10) Business Days from the date of receipt of written notice of the event constituting an Excusable Delay and, if the Parties have not resolved the dispute within the ten (10) Business Days of the Contractor's receipt of written notice from ORION, the dispute shall be resolved pursuant to Article 30. Without prejudice to the foregoing, if any Excusable Delays other than Excusable Delays resulting from ORION's failure to meet its responsibilities (including an invalid exercise of its rights under Article 13) under the Orion 2 Contract, or its exercise of its rights under Article 41 or resulting from Article 18.5, exist for a cumulative period of time exceeding eighteen (18) calendar months, the Contractor agrees to pay to ORION, as liquidated damages and not as a penalty, such reasonable interest costs as ORION actually incurs in relation to any debt financing of the ORION 2 Spacecraft directly as a consequence of such Excusable Delay. The Contractor's liability to pay such interest costs to ORION shall be calculated as, and shall be limited to, the amount of such interest costs incurred by ORION between (i) the first (1st) Calendar Day of the nineteenth (19th) calendar month of such Excusable Delay and (ii) the last Calendar Day of such Excusable Delay or the date of termination of the ORION 2 Contract, whichever is the earlier. ORION shall be required to provide reasonable evidence to the Contractor of it having reasonably incurred such interest costs. 12.3 Any extension of time granted under this Article shall be formalized by the execution of an Amendment to the ORION 2 Contract wherein adjustments shall be recorded with respect to the new Delivery Dates for the Deliverable Items set forth in Article 8, the dates set forth in Article 41 and the delivery dates set forth in Article 19.1 and modifications made as appropriate to the Advance Funding schedule of payments set forth in Article 19.2 and the Part 1(B) Milestone Payment Schedule, and Progress Payment Schedule, and Termination Liability Amounts Schedule. The Contractor acknowledges and understands that the occurrence of an Excusable Delay shall not entitle the Contractor to an increase in the Contract Price unless the Excusable Delay is caused directly by ORION's failure to meet its responsibilities under the ORION 2 Contract or by exercise by ORION of its rights under Article 41 or resulting from Article 18.5, in which event there shall be an equitable adjustment to the Contract Price. 13. CORRECTION OF DEFECTS 13.1 ORION shall notify the Contractor in writing when it believes any Defect exists in the ORION 2 Spacecraft, the services or the Data and Documentation. The Contractor may from time to time advise ORION in writing that it disagrees with ORION or ORION's Consultant as to the existence or nature of a Defect. In such event, the Parties shall negotiate in good faith to determine what Defect exists, if any, and any action required to remedy such Defect. 13.2 Without limiting the obligations of the Contractor or the rights of ORION under the provisions of the ORION 2 Contract, prior to Launch of the ORION 2 Spacecraft the Contractor shall, at its expense, use its best efforts to promptly correct any Defect related to the ORION 2 Spacecraft which it or ORION discovers during the course of the Work, and notwithstanding that a payment may have been made in respect thereof, and regardless of prior reviews, inspections, approvals or acceptances. This provision is subject to the right of the Contractor to have any items containing a Defect returned at the Contractor's expense to the Contractor's facility for the Contractor to verify the non-conformance and to correct the Defect. All transportation costs such as packaging, shipping and insurance, shall be paid by the Contractor, except that if it is reasonably determined after investigation that ORION or its Consultants directly caused the Defects in question, or that the item is in conformance with applicable specifications and requirements, ORION will reimburse the Contractor for the above-described costs and will pay all costs associated with the shipment to and from the Contractor's facility. If the Contractor fails to so correct such Defects within a reasonable time after notification from ORION and after the Parties have followed the provisions of Article 13.1 above (including agreement on the existence of such Defect), ORION may, by separate contract or otherwise, correct or replace such items or services, and, unless it is reasonably determined after investigation that ORION directly caused the Defect in question, or that the item or service is in conformance with applicable specifications or requirements, the Contractor shall pay to ORION the reasonable cost of such correction or replacement. The amount payable by the Contractor shall be verified at the Contractor's request by an internationally recognized firm of accountants appointed by the Contractor, such appointment to be approved by ORION and such approval not to be unreasonably withheld or delayed. The costs of such verification shall be paid by the Contractor and shall be without prejudice to the right of either Party to seek arbitration under Article 30. The report of such accountants may be used by either Party in any arbitration proceeding but shall not be binding upon the arbitrators. In such event, the Contractor, if required by ORION, but pursuant to the arrangement set forth in this Article 13.2, shall promptly repay such portion of the Contract Price as is equitable in the circumstances. The amount paid to ORION to correct such Defect may be offset against any payments due to the Contractor by ORION under this ORION 2 Contract. 13.3 Without limiting the obligations of the Contractor or the rights of ORION under other provisions of the ORION 2 Contract, if the data available from the Launched ORION 2 Spacecraft or from other spacecraft of a similar class which is being built by the Contractor shows that the ORION 2 Spacecraft contains a Defect, the Contractor shall inform ORION of such Defect and shall, promptly upon the request of ORION, use its best efforts to take appropriate corrective measures with respect to the Replacement Satellite, if any, which has not been Launched so as to satisfactorily eliminate from such Replacement Satellite such Defects. The Contractor shall fulfill the foregoing obligations at its own cost and expense, including all costs arising from charges for shipping, insurance, taxes and other matters associated with the corrective measures. If the Contractor fails to take such corrective measures with respect to such Replacement Satellite which has not been Launched, within a reasonable time, ORION may have any or all such Defects corrected through other means, in which event the Contractor shall make such Replacement Satellite which has not been Launched and its component parts thereof available as required and shall pay, subject to the verification procedures set forth in Article 13.2, all reasonable costs of such corrective measures. In the event ORION makes such corrections, ORION may offset the amount paid to have the Defects corrected against any payments due the Contractor by ORION under this ORION 2 Contract. 13.4 Without limiting the obligations of the Contractor or the rights of ORION under other provisions of the ORION 2 Contract, if the data available from another spacecraft of a similar class that is being built or has been launched by Contractor shows that the ORION 2 Spacecraft contains a Defect, the Contractor shall inform ORION of such Defect and shall, promptly upon the request of ORION, use its best efforts prior to Launch to take appropriate corrective measures with respect to the ORION 2 Spacecraft so as to satisfactorily eliminate such Defect from the ORION 2 Spacecraft. The Contractor shall fulfill the foregoing obligations at its own cost and expense, including all costs arising from charges for shipping, insurance, taxes, and other matters associated with the corrective measures. If the Contractor fails to take such corrective measures with respect to the ORION 2 Spacecraft within a reasonable time after request from ORION, ORION may by separate contract or otherwise, have all such Defects corrected and the Contractor shall pay, subject to the verification procedures set forth in Article 13.2, all reasonable costs of such corrective measures. In the event ORION makes such corrections, ORION may offset the amount paid to have the Defects corrected against any payments due the Contractor from ORION under this ORION 2 Contract. 13.5 Subject to Article 12, the Contractor acknowledges and agrees that it shall not be entitled to payment for any additional costs incurred as a consequence of any Defect. In addition to ORION's rights under Article 21, if correction of any Defect causes a delay in the Delivery of the ORION 2 Spacecraft, despite the best efforts of the Contractor to correct the Defect, the provisions of Article 11.2 and Article 12, relating to liquidated damages, shall apply, as appropriate in addition to the remedies in this Article 13. 13.6 After notification of a Defect to the Contractor, the Parties may jointly elect in writing, pursuant to Article 27, not to require correction or replacement of such items or services or to waive the Defects noted for the Replacement Satellite, if any, which has not been Launched. In such event the Contractor, if required by ORION but pursuant to the arrangements set forth in Article 13.2, shall repay such portion of the Contract Price as is equitable in the circumstances. 13.7 Subject to the provisions of any applicable law, the Contractor agrees to enforce any manufacturer's warranty given to it in connection with any Work to be provided under the ORION 2 Contract and the Contractor shall assign to ORION warranty protection or pledge to ORION any proceeds therefrom in respect of that Work and other items as are given to the Contractor by the manufacturers or service providers. 13.8 Notwithstanding any other provision of the ORION 2 Contract, the Contractor shall advise ORION immediately by telephone and confirm in writing any event, circumstance or development which materially threatens the quality of the ORION 2 Spacecraft or component part thereof as well as any services or Data and Documentation to be provided hereunder or the Delivery Dates established. 13.9 For any Defect which does not adversely affect the form, fit, useful life, reliability or function (i.e., operational performance) of a Transponder, the Contractor and ORION agree to negotiate a reasonable resolution, subject to approval by any Financing Entity, which may not require repair of the Defect, but which may require reasonable compensation to ORION. If the Parties are unable to reach an agreed resolution within five (5) Business Days of ORION receiving notice of the Defect from the Contractor ("Notice Date"), the Contractor shall have the right to elevate the negotiations to Contractor's Senior Executive and to ORION's Senior Executive. Any resolution reached by ORION's Senior Executive and Contractor's Senior Executive may be subject to approval by the Financing Entities. In the event the Parties are unable to reach an agreed resolution or achieve approval of any Financing Entity within fifteen (15) Business Days of the Notice Date, ORION shall thereafter be able to exercise all of its rights under this Article 13. 14. DISCLAIMER OF WARRANTIES, LIMITATION OF LIABILITY AND INTER-PARTY WAIVER OF LIABILITY 14.1 EXCEPT AS SPECIFICALLY PROVIDED IN THE ORION 2 CONTRACT, THE CONTRACTOR MAKES NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE ORION 2 CONTRACT OR THE PERFORMANCE OF THE CONTRACTOR HEREUNDER OR THE EQUIPMENT OR WORK FURNISHED HEREUNDER, WHETHER ARISING UNDER LAW OR AT EQUITY. ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS IS EXCLUDED, THE EXPRESS WARRANTIES OF THE CONTRACTOR CONTAINED IN THE ORION 2 CONTRACT BEING EXCLUSIVE. 14.2 EXCEPT AS OTHERWISE PROVIDED IN THE ORION 2 CONTRACT, IN NO EVENT SHALL EITHER PARTY OR A PARTY'S AFFILIATES AND ITS AND THEIR SUBCONTRACTORS AND ITS AND THEIR OFFICERS, EMPLOYEES AND AGENTS, BE LIABLE, IN CONTRACT, IN TORT, OR OTHERWISE FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY NATURE ARISING AT ANY TIME OR FROM ANY CAUSE WHATSOEVER, INCLUDING SPECIFICALLY BUT WITHOUT LIMITATION, LOSS OF PROFITS OR REVENUE, LOSS OF FULL OR PARTIAL USE OF ANY EQUIPMENT, LOSSES BY REASON OF OPERATION OF ANY DELIVERABLE ITEM AT LESS THAN CAPACITY, DELAYS, COST OF REPLACEMENTS, COST OF CAPITAL, LOSS OF GOODWILL, CLAIMS OF CUSTOMERS, OR OTHER SUCH DAMAGES. 14.3 THE TOTAL LIABILITY OF EITHER PARTY TO THE OTHER WITH RESPECT TO ALL CLAIMS OF ANY KIND, INCLUDING WITHOUT LIMITATION LIQUIDATED DAMAGES, WHETHER AS A RESULT OF BREACH OF CONTRACT, WARRANTY, STRICT LIABILITY OR OTHERWISE, AND WHETHER ARISING BEFORE OR AFTER DELIVERY OF ANY DELIVERABLE ITEM, FOR ANY LOSS FROM THE ORION 2 CONTRACT, OR FROM THE PERFORMANCE OR BREACH THEREOF, SHALL BE LIMITED TO THE REMEDIES SET FORTH IN THE ORION 2 CONTRACT AND SHALL IN NO EVENT EXCEED THE CONTRACT PRICE TOTAL. 14.4 14.4.1 All operations at the launch site pursuant to this Agreement will be subject to a no-fault, no-subrogation inter-party waiver of liability under terms substantially similar to those set forth in Article 15.2 of the Launch Agreement attached hereto as Annex B. Prior to commencement of Launch Services, the Contractor will provide ORION with evidence reasonably satisfactory to ORION that each other entity ("Other Users") concurrently conducting operations at such launch site, including the Launch Vehicle Agency, has agreed to such inter-party waiver of liability. 14.4.2 If either Party contracts or subcontracts with a third party to provide services that necessitate the Contractor's or Subcontractor's presence on the launch site, then such Party will also ensure that such third party agrees to a no-fault, no-subrogation inter-party waiver of liability and indemnity for damages it sustains, identical to the Parties' respective undertakings under this Article 14.4 and Annex B. 14.4.3 In the event that either ORION or the Contractor fails to obtain the aforesaid inter-party waiver of liability and indemnity from their respective contractors or subcontractors, then such Party shall indemnify and hold the other Party, the Other Users of launch services and their respective contractors and subcontractors harmless from claims brought by such Party's subcontractors with respect to matters that otherwise would have been covered by the inter-party waiver of liability. 14.4.4 Notwithstanding any other term or provision contained in the Contract, this Article 14.4 shall survive the completion or termination of this ORION 2 Contract in any manner whatsoever. 14.4.5 The Parties will take such further actions as may be required to implement the provisions of this Article 14.4, including the execution of such agreements and waivers as are customarily used with respect to operations at the launch site and are consistent with the provisions of this Article 14.4. 15. ORION 2 SPACECRAFT IN-ORBIT PERFORMANCE WARRANTY 15.1 Total Amount at Risk The Total Amount at Risk shall be placed at risk by the Contractor against failure by the ORION 2 Spacecraft's Transponders to meet the criteria for Satisfactorily Operating Primary Transponders as set forth in Article 15.3.1. The Total Amount at Risk shall be adjusted pro rata should the Contract Price be modified pursuant to Article 5.2 or otherwise modified by an Amendment to the ORION 2 Contract. 15.2 In-Orbit Performance Warranty 15.2.1 The Contractor warrants that the ORION 2 Spacecraft will provide thirty (30) Satisfactorily Operating Primary Transponders at and after its Final Acceptance pursuant to Article 9 hereof for a period of five (5) years commencing upon the date of its Final Acceptance (the "In-Orbit Performance Warranty Period"). To the extent that the ORION 2 Spacecraft fails to provide said capability, the Contractor shall pay ORION as damages liquidated in their amounts and not as a penalty, an amount which shall be calculated as specified below up to the Total Amount at Risk. 15.2.2 Upon Final Acceptance, as defined in Article 9 hereof, the Total Amount at Risk shall be earned and retained by the Contractor in the manner and to the extent provided hereunder: (a) The Initial Incentive Amount and the Monthly Amounts shall be adjusted pro rata should the Contract Price be modified pursuant to Article 5.2 or otherwise modified following the agreement between the Parties of an Amendment to the ORION 2 Contract pursuant to Article 27 hereof. (b) The Initial Incentive Amount shall be earned and retained by the Contractor if, and only if, at Final Acceptance, the ORION 2 Spacecraft has________ Satisfactorily Operating Primary Transponders and a propellant lifetime as calculated in accordance with Part 3(D) of at least the Maneuver Lifetime less________ year. Contractor shall not be liable for damages under this Article 15.2.2(b) where its failure to meet such propellant lifetime requirement is due to a malfunction of the Launch Vehicle operation or where its failure to meet the ________ Satisfactorily Operating Transponder requirement is due to the Launch environment exceeding the ORION 2 Spacecraft on-ground test requirements as specified in Part 3(C). (c) The Monthly Amount corresponding and assigned to each calendar month of operation during the In-Orbit Performance Warranty Period shall be earned and retained by the Contractor according to the number of Satisfactorily Operating Primary Transponders which the ORION 2 Spacecraft has, as provided in Table 15.2 hereof. Contractor shall not be liable for damages under this Article 15.2.2(c) to the extent of the number of Transponders ("Launch-Damaged Transponders") that, at Final Acceptance, are not Satisfactorily Operating Transponders due to the Launch environment exceeding the ORION 2 Spacecraft on-ground test requirements as specified in Part 3(C); in such case, Table 15.2 shall be adjusted by decreasing the number of Satisfactorily Operating Transponders required to earn each specified proportion of the Monthly Amount by the number of Launch-Damaged Transponders. TABLE 15.2
Number of Satisfactorily Operating Proportion of Monthly Amount Earned (%) Primary Transponders - ----------------------------------------------------------- --------------------------------------------------------- 0 - ----------------------------------------------------------- ---------------------------------------------------------
(d) In the event that the Initial Incentive Amount shall not have been earned by the Contractor, as specified in subparagraph (b) above, or any of the Monthly Amounts are not earned by the Contractor during the relevant time period, as specified in subparagraph (c) above, those amounts (as appropriate) shall be repaid by the Contractor to ORION. Payment shall be due thirty (30) Calendar Days after the date of receipt by the Contractor of a telefaxed invoice (which shall be followed by the airmailed original plus one copy) from ORION; interest shall be paid (at the rate specified in Article 43) on any amounts not paid when due. Invoices shall be accompanied by sufficient data to support ORION's claim. ORION may offset any such payments not made by the Contractor against any outstanding balance due under the ORION 2 Contract. The Contractor shall be deemed to have accepted the invoice ten (10) Business Days after receipt of the invoice unless, within such time period, it notifies ORION of a dispute. The Contractor shall pay any undisputed part of an invoice. 15.3 Satisfactorily Operating Primary Transponder 15.3.1 If a Primary Transponder does not satisfy the requirements of a Satisfactorily Operating Primary Transponder, but ORION nevertheless elects to use such Primary Transponder for Revenue-earning purposes, then, where the Revenue (or equivalent consideration) received by ORION for such Primary Transponder in any one calendar monthly period is less than the Monthly Amount at Risk for such Primary Transponder, the Contractor shall, in the succeeding month, pay the difference between the said Monthly Amount at Risk for such Primary Transponder and ORION's actual monthly Transponder Revenue for such calendar monthly period. In no event shall any one monthly payment by the Contractor under this Article 15.3.1 exceed the Monthly Amount at Risk for such Primary Transponder. In the event that a Primary Transponder is determined not to be a Satisfactorily Operating Primary Transponder but is later used for Revenue-earning purposes, ORION agrees to advise the Contractor within seven (7) Business Days after commencing such use. 15.3.2 For the purposes of this Article, in determining whether a Primary Transponder is a Satisfactorily Operating Primary Transponder no account shall be taken of any period of unavailability: (a) attributable to ORION 2 Spacecraft maintenance activities, station keeping maneuvers, payload reconfiguration for business purposes or station change maneuvers; or (b) less than one one-hundredth percent (0.01%) outage per month; or (c) attributable to communications link fading due to external causes, including but not limited to weather; or (d) arising directly or indirectly as a consequence of any negligent act or omission of ORION or any of its agents, assignees, Consultants, employees, or customers; or (e) attributable to earth station sun blinding. 15.4 15.4.1 All measurements, computations and analyses, for the purpose of determining whether a Primary Transponder is a Satisfactorily Operating Primary Transponder shall be performed by ORION or its Consultants, provided that the Contractor may, at its expense, assist in determining the nature of anomalies and corrective measures. The Contractor shall for this purpose be given access to any data collected by ORION. 15.4.2 If ORION desires, following Final Acceptance, to make any changes to the ORION 2 Spacecraft's in-orbit procedures, ORION shall notify the Contractor in writing of same and the Contractor shall have the right to approve such proposed changes. The Contractor shall not unreasonably withhold such approval and shall work with ORION in good faith to evaluate the proposed changes within a reasonable time period. Notwithstanding Article 27.3 hereof, if the Contractor reasonably concludes that in determining whether to approve the proposed changes to the said in-orbit procedures it will incur a cost in excess of Five Thousand Dollars ($5,000), the Contractor shall promptly inform ORION within fifteen (15) Calendar Days as to the estimated cost and a reasonable time for completion. If ORION requests the Contractor to make such determination, the Contractor shall immediately commence work and shall be entitled to claim and shall be paid by ORION all such reasonable costs plus a profit of ten percent (10%). In addition, if ORION proceeds with a change in the in-orbit procedures without Contractor's approval or the Contractor reasonably considers that a proposed change after approval would adversely affect the ORION 2 Spacecraft's operational ability, characteristics, lifetime, propellant, power or station keeping abilities, the Parties shall enter good faith negotiations to determine what equitable consideration in lieu of potential or actual lost In-Orbit Performance Warranty payments shall be provided to the Contractor. 15.5 The rights and remedies under this Article are exclusive for the failure of the ORION 2 Spacecraft and/or its Primary Transponders after Final Acceptance to meet the criteria for a Satisfactorily Operating Primary Transponder and in substitution of any other rights and remedies ORION has under the ORION 2 Contract or otherwise at law as a result of such failure. 16. SUBCONTRACTS 16.1 The Contractor has represented that in the performance of the Work required by the ORION 2 Contract, it will be necessary for the Contractor or its Subcontractors to enter into the following Major Subcontracts. The Contractor shall select the Major Subcontractors and ORION shall be provided with copies of the technical content of all Major Subcontracts and with a copy of the full Launch Agreement promptly upon execution thereof. Initially, the Major Subcontractors are as provided below:
- ------------------------------------- ----------------------------- ------------------------------------------------- Name of Major Subcontractor Location Description of Work - ------------------------------------- ----------------------------- ------------------------------------------------- Lockheed Martin USA Launch Vehicle NEC Japan KU Band Transponders COMDEV Canada Multiplexers, Switching __________* __________ Antennas Fokker Netherlands Solar Array __________* __________ Propellant Tank __________* __________ Battery __________* __________ Apogee Kick Motor *Contractor shall comply with Article 16.2 in selection of these Major Subcontractors - ------------------------------------- ----------------------------- -------------------------------------------------
16.2 In the event that the Contractor or a Subcontractor selects or has a necessity to terminate any Major Subcontract or substitute Subcontractors on any Major Subcontract, the Contractor shall consult with ORION and discuss any and all such actions prior to implementation. Subject to Article 16.3, ORION shall have no right of prior approval of Contractor's actions. 16.3 In the event that the Contractor has a necessity to terminate or substitute Lockheed Martin, or NEC or COMDEV, Limited the Contractor shall first consult with and obtain the approval of ORION. If ORION does not approve such actions and the Contractor deems such actions to be necessary to meet its performance obligations under the ORION 2 Contract, then the Contractor may take such action without ORION's approval. 16.4 In the event that the Contractor or a Subcontractor which has been awarded a Major Subcontract has reason to waive, or to agree to, a deviation in any of the technical requirements of any Major Subcontract which will cause a material impact on the technical parameters of the ORION 2 Spacecraft as set forth in Part 3(A), such variations shall be handled in accordance with Part 3(B) and shall require a formal Amendment to this ORION 2 Contract pursuant to Article 27. 16.5 Nothing in the ORION 2 Contract shall be construed as creating any contractual relationship between ORION and any Subcontractor. The Contractor is fully responsible to ORION for the acts and omissions of Subcontractors and of all persons used by the Contractor or a Subcontractor in connection with the performance of the Work under the ORION 2 Contract. Any failure by a Subcontractor to meet its obligations to the Contractor shall not constitute a basis for Excusable Delay, except as provided in Article 12 hereof, and shall not relieve the Contractor from meeting any of its obligations under the ORION 2 Contract. 17. INDEMNIFICATION 17.1 The Contractor shall indemnify and hold ORION, its officers, employees, Consultants, and assignees ("ORION Associates") harmless from and against any and all losses, damages, liabilities or demands (including reasonable legal fees) arising out of suits or claims brought by third parties, including the employees and Consultants of ORION, the Contractor, and its Subcontractors, on account of damage to property and injury to persons (including sickness and death), resulting from any act or omission of the Contractor or its Subcontractors in the performance of the Work, or an act or omission of ORION, occurring at any installation of the Contractor or any Subcontractor, and at its expense shall defend any suits or other proceedings brought against said indemnitees, on account thereof, and shall pay all expenses (including reasonable legal fees) and satisfy all judgments which may be incurred by or rendered against them, or any of them, in connection therewith; provided that ORION notifies the Contractor within ten (10) Business Days, in writing, after ORION management has actual notice of any such suit or a written threat of such suit within twenty (20) Business Days of such claim and permits the Contractor to answer the claim or suit and defend the same and gives the Contractor authority and such assistance and information as is available to ORION or the defense of such claim or suit, and provided further that ORION does not by an act (including any admission or acknowledgment or omission) prejudice such defense. Any such assistance or information which is furnished by ORION at the written request of the Contractor is to be at the Contractor's expense. With regard to suits or claims brought by or on behalf of employees or Consultants of ORION, Contractor's indemnification obligations shall be limited to the amount of insurance required to be maintained by Contractor under Article 18. Notwithstanding the foregoing, in no event shall the Contractor have any indemnification liability regarding any claims or suits of any ORION customers. 17.2 ORION shall have a reciprocal obligation to indemnify the Contractor to the extent described in Article 17.1, except that such obligation shall not apply with respect to claims for acts or omissions of ORION or its Consultants occurring at any installation of the Contractor or any Subcontractor. 17.3 If the Contractor insures against any loss or damage which the Contractor may suffer in respect of which the Contractor is required to indemnify ORION or an ORION Associate pursuant to Article 17.1, it shall be a condition that the Contractor arrange for the insurer to waive its right of subrogation against ORION and every ORION Associate. ORION shall be entitled to require proof from time to time that the Contractor has complied with its obligations under this Article. In the event that the Contractor does not comply with such obligations, the indemnity referred to in Article 17.1 shall extend to any claim which may be made by an insurer pursuant to an alleged right of subrogation. 17.4 In respect to every insurance referred to in Article 18, the Contractor shall provide documentary evidence (which may be the insurance policies themselves) that ORION's insurable interest has been noted by the Contractor's insurers. 17.5 Without prejudice to ORION's rights under Article 26, ORION shall hold the Contractor harmless from and against any suit or claims which may arise in connection with the use, operation, performance, nonperformance, failure or degradation of the ORION 2 Spacecraft after Final Acceptance or for other Deliverable Items after Delivery, provided that the Contractor notifies ORION within ten (10) Business Days in writing after it receives notice of any such suit or within twenty (20) Business Days of such claim and permits ORION to answer the claim or suit and defend the same and gives ORION authority and such assistance and information as is available to the Contractor for the defense of such claim or suit, and provided further that the Contractor does not by an act (including any admission or acknowledgment or omission) prejudice such defense. Any such assistance or information which is furnished by the Contractor at the written request of ORION is to be at ORION's expense. The foregoing shall not be deemed to release the Contractor from any of its obligations under Articles 9, 15 and 26 hereof. 18. INSURANCE 18.1 Insurance of the Work 18.1.1 Before the Contractor commences the Work, the Contractor shall have an insurance policy covering the ORION 2 Spacecraft and all component parts thereof and all materials of whatever nature used or to be used in completing the Work (collectively, the "Loss Items") against all risks, loss or damage prior to Intentional Ignition (including coverage against damage or loss caused by earth movement, flood, boiler, turbine and machinery accidents) subject to normal "All Risks Policy" exclusions. ORION and any Financing Entity shall be named as loss payee, but only in relation to all risks, loss or damage to the Loss Items. ORION, and each Financing Entity, if any, shall be named insured on any such policy in relation to all risks, loss or damage to the Loss Items. The details of the insurer and the relevant extracts of the policy shall be submitted to ORION. 18.1.2 All items shall be insured for a sum not less than their replacement value or their price under the ORION 2 Contract, whichever is the greater. Such insurance coverage shall be maintained by the Contractor up to the point of Intentional Ignition of the ORION 2 Spacecraft ordered by ORION pursuant to the ORION 2 Contract and shall provide (1) coverage for removal of debris, and insuring the structures, machines, equipment, facilities, fixtures and other properties constituting a part of the project, (2) transit coverage, including ocean marine coverage (unless insured by the supplier), and (3) off-site coverage covering any key equipment, and (4) off-site coverage covering any property or equipment not stored on the construction sites. The deductible for all such insurance shall not exceed Two Hundred Fifty Thousand Dollars ($250,000). 18.1.3 The insurance of the Work as required by this Article 18, whether effected by the Contractor or ORION, shall not limit, bar or otherwise affect the liability and obligation of the Contractor to complete the Work and Deliver the Deliverable Items in accordance with the ORION 2 Contract. The Contractor's insurers shall waive all rights of subrogation against ORION save those for which ORION indemnifies the Contractor pursuant to Article 17.2 hereof. 18.1.4 The Contractor agrees to assign to any Financing Entity the proceeds of the Contractor's "All Risks Policy" with regard to any damage incurred on the ORION 2 Spacecraft where such damage would result in an Excusable Delay which, together with previous Excusable Delays resulting from damage covered by the Contractor's "All Risks Policy," would be greater than one hundred eighty (180) Calendar Days. 18.2 Public Liability Insurance 18.2.1 Before the Contractor commences the Work, the Contractor shall have a Public Liability Policy of insurance. The policy shall cover the Contractor and all Subcontractors employed from time to time in relation to the Work and performance of the ORION 2 Contract for their respective rights and interests and cover their liabilities to third parties. 18.2.2 The Contractor's insurers shall waive all rights of subrogation against ORION save those for which ORION indemnifies the Contractor pursuant to Article 17.2 hereof. 18.2.3 The Public Liability Policy of insurance shall be for an amount not less than One Hundred Million Dollars ($100,000,000) in respect of any one occurrence and shall be effected with reputable insurers. The policy shall be maintained until all Work pursuant to the ORION 2 Contract, including remedial work, is Delivered. Such insurance shall not contain any exclusion which denies coverage for third party injuries to persons or damage to property of others arising out of preparation of maps, plans, designs, specifications or the performance of inspection services or out of any other services to be performed by the Contractor under the ORION 2 Contract. 18.2.4 ORION and the Financing Entity, if any, shall be named as named insured on such Public Liability insurance policy. 18.3 Insurance of Employees 18.3.1 Before commencing the Work, the Contractor shall insure against liability for death or injury to persons employed by the Contractor, including liability imposed by statute and at common law. The insurance coverage shall be for an amount in the greater of (i) Ten Million Dollars ($10,000,000) or (ii) as required by law, and shall be maintained until all Work pursuant to the ORION 2 Contract, including remedial work, is Delivered. The Contractor shall ensure that all Subcontracts contain a similar provision. 18.3.2 The Contractor's insurers shall waive all rights of subrogation against ORION save those for which ORION indemnifies the Contractor pursuant to Article 17.2 hereof. 18.4 Comprehensive Automobile Liability 18.4.1 Before commencing the Work, the Contractor shall self-insure or Contractor shall insure against liability for claims of personal injury (including bodily injury and death) and property damage covering all owned, leased, non-owned and hired vehicles used at any of the Contractor's facilities in the performance of the Contractor's obligations under the ORION 2 Contract in an insurance amount not less than Five Million Dollars ($5,000,000) per occurrence for combined bodily injury and property damage. 18.4.2 The Contractor's insurers shall waive all rights of subrogation against ORION save those for which ORION indemnifies the Contractor pursuant to Article 17.2 hereof. 18.5 Launch Insurance ORION shall have the responsibility to procure Launch Insurance. Failure to secure a binder for Launch Insurance by sixty (60) days before the Launch Date shall be deemed an Excusable Delay, which Excusable Delay shall extend from the sixtieth (60th) day before the Launch Date until the date such insurance is so secured and written verification thereof is provided to the Contractor. 18.6 Inspection and Provisions of Insurance Policies 18.6.1 Before the Contractor commences the Work, and whenever requested in writing by ORION, the Contractor shall produce evidence that the insurance required by Articles 18.1, 18.2, 18.3 and 18.4 has been effected or is being maintained. Contractor shall provide ORION with copies of all required insurance policies and shall provide ORION with written notice no later than thirty (30) Calendar Days before the expiration date of each such policy. 18.6.2 If, after being requested in writing by ORION to do so, the Contractor fails to produce evidence of compliance with the insurance obligations within fourteen (14) Calendar Days, ORION may effect and maintain the insurance and pay the premiums. The amount paid shall be a debt due from Contractor to ORION and may be offset against any payments due the Contractor by ORION. 18.6.3 The Contractor shall, as soon as practicable, inform ORION in writing of any occurrence that may give rise to a claim under a policy of insurance required by Articles 18.1, 18.2, 18.3, 18.4 or 18.5 and shall keep ORION informed of subsequent developments concerning the claim. The Contractor shall ensure that Subcontractors similarly inform ORION of any such occurrences through the Contractor. Each Party shall provide to the other Party any information which may reasonably be required to prepare and present an insurance claim. 19. REPLACEMENT SATELLITE 19.1 The Contractor agrees to provide an additional satellite ("Replacement Satellite") delivered in-orbit no later than twenty-one and one quarter (21.25) months after receipt of an order from ORION (but in no case earlier than thirty-four and one quarter (34.25) months after NPD). Orion may place such order at any time during the performance of the ORION 2 Contract but in no event earlier than seven (7) months after receipt by the Contractor of the applicable Total Advance Funding in Article 19.2 or later than sixty (60) Calendar Days after the ORION 2 Spacecraft is determined to be a Constructive Total Loss (should that event occur). The in-orbit delivery dates shall be conditioned on ORION having ordered and simultaneously paid for the Long-Lead Items (and associated work) set forth in Article 19.2 by the dates set forth therein. 19.2 The Contractor agrees to deliver the Replacement Satellite on the schedule set forth in Article 19.1 provided ORION makes the following Advance Funding payments for Long-Lead Items on the schedule set forth below: Fixed Charge at NPD --____________________________________________________ Replacement Satellite Total Advance Funding Order Period Variable Charge (Fixed and Variable Charges) - --------------------- --------------- ---------------------------- ORION 2 NPD ORION 2 NPD + 6 months ORION 2 NPD + 12 months ORION 2 NPD + 18 months ORION 2 NPD + 21 months 19.3 The Contractor shall furnish the Replacement Satellite in accordance with the provisions of the documents which constitute the ORION 2 Contract, with the dates therein adjusted (if necessary) for the later timeframe of the Replacement Satellite, and with the spacecraft test program revised as follows: Deletion of Sine Vibration Test (except Test in the thrust-axis) Deletion of EMC Test (however, the ESD Test is to be performed) Deletion of Separation Shock Test Rescheduling of adapter fit/fail check to Launch Site Reduction of Thermal Vacuum Test to one balance phase only Reduction in levels/durations from "Protoflight" to "Flight Acceptance" 19.4 The firm fixed price for the Replacement Satellite ("Replacement Satellite Price"), assuming an order had been placed by ORION on or before 1 March 1997, is as follows: (a) In U.S. Dollars --The firm fixed price is _____________________________ _________________________________________________________, or (b) The sum of the following currency amounts: US$ GB(pound) Yen D Fl Fr F DM After1 March 1997, upon request of ORION, Contractor shall provide ORION with a firm fixed price in U.S. dollars for the Replacement Satellite at least ten (10) Calendar Days prior to the time of order of the Replacement Satellite, which firm fixed price shall exceed the firm fixed price set forth in (a) above only to the extent of currency fluctuations subsequent to1 March 1997; in any event, the price in U.S. dollars shall not exceed________________________ ____________________________________________________________________ excluding the inflation adjustment described in the second succeeding paragraph. At the time of order of the Replacement Satellite, ORION shall advise the Contractor which of the above pricing approaches (U.S. dollars or sum of currencies) it selects. Where ORION orders the Replacement Satellite after 1 March 1997, the prices set forth in this Article 19.4 shall be increased by a monthly inflation factor of one-third of one percent (0.33%) from March 1997 to the month in which ORION places the Replacement Satellite Order. The Replacement Satellite Price set forth in this Article 19.4 shall be reduced by the amount of any Advance Funding payments made by ORION under Article 19.2 hereof. The Replacement Satellite Payment Plan and Termination Schedule shall be negotiated between the Parties prior to ORION ordering the Replacement Satellite; the Payment Plan shall match Contractor's actual expenditure profile so as to avoid prepayments and financing costs. Selection of the launch vehicle and launch services contractor will be made by ORION (with the concurrence of Contractor) in sufficient time to permit Replacement Satellite delivery on the schedule set forth in Article 19.1. The prices for both such items will be identified and agreed as a part of such process. ORION shall provide for launch insurance for the Replacement Satellite. Except as otherwise required by the terms of this Article 19, contract terms for the Replacement Satellite will be identical to the ORION 2 Contract, with risk elements (e.g., liquidated damages for late delivery and warranty payback incentives) adjusted to the change in price from the ORION 2 Spacecraft so as to represent the same percentage risk. 19.5 Where the Advance Funding for the Replacement Satellite has been paid by ORION, but ORION fails to order the Replacement Satellite by the time required in this Article 19, the option for the Replacement Satellite shall no longer be effective and Contractor shall deliver to ORION, within thirty (30) Calendar Days of the expiration date of the option, the Long-Lead Items set forth in Part 4, said Long-Lead items to be mutually agreed to by the Parties no later than 15 May 1997. 20. TERMINATION FOR CONVENIENCE 20.1.1 ORION may, by notice in writing, and without giving any reason or showing cause therefor, at any time prior to Launch of the ORION 2 Spacecraft, terminate the ORION 2 Contract with respect to the Work in its entirety and the Contractor shall immediately cease Work accordingly, and shall similarly direct its Subcontractors. 20.1.2 In the event of such termination under this Article, ORION shall be obligated to pay (i) to the Contractor an amount equal to the sum of the Termination Liability Amounts for the ORION 2 Spacecraft and Launch Services as specified in Part 1(B) corresponding to the month in which termination occurs less the greater of the Advance Payment or the sum of the Milestone Payments actually received by the Contractor, provided that, where such amount is a negative number, the Contractor shall pay such amount promptly to ORION within twenty (20) Calendar Days; and (ii) to the Launch Vehicle Agency an amount equal to the Termination Liability Amount for the Launch Vehicle as specified in Part 1(B) corresponding to the month in which Termination occurs less any Progress Payment actually received by the Launch Vehicle Agency. The Contractor shall submit an invoice to ORION within sixty (60) Calendar Days after the termination date which shall specify the amounts due to the Contractor and the Launch Vehicle Agency from ORION pursuant to this Article 20.1.2 and the Contractor and the Launch Vehicle Agency shall immediately be entitled to payment by ORION of such amounts immediately thereafter. Payment by the Financing Entities of such amount to the Contractor and the Launch Vehicle Agency shall relieve ORION from its obligation to make such payments. 20.2 The amount payable by ORION to the Contractor pursuant to Article 20.1 shall constitute a total discharge of ORION's liabilities to the Contractor for termination pursuant to this Article 20. 20.3 If the ORION 2 Contract is terminated as provided in this Article and full payment made in accordance with Articles 20.1, ORION may require the Contractor to transfer to ORION, in the manner and to the extent directed by ORION, title to and possession of any items comprising all or any part of the Work terminated (including, without limitation, all Work-in-progress and all inventories), and the Contractor shall, upon the direction and at the expense of ORION, protect and preserve property in the possession of the Contractor or its Subcontractors in which ORION has an interest and shall facilitate access to and possession by ORION of items comprising all or any part of the Work so terminated. If ORION so requests or ORION has not taken delivery of property in which it has an interest within sixty (60) Calendar Days after termination, or such longer period as is agreed between the Parties, the Contractor shall make a reasonable, good faith effort to sell such items and to remit any sales proceeds to ORION, less a deduction for costs of disposition reasonably incurred by the Contractor. 21. REMEDIES FOR DEFAULT 21.1 (a) If, at any time prior to Intentional Ignition in respect of the ORION 2 Spacecraft (but not thereafter), the Contractor has failed to make adequate progress toward the completion of the ORION 2 Spacecraft and such failure does not result from Excusable Delay, such that the Contractor, due to causes related to the ORION 2 Spacecraft, and regardless of the status of the Launch Vehicle (or associated services provided by the Launch Vehicle Agency), will not be able to Launch the ORION 2 Spacecraft by ninety (90) Calendar Days after the Delivery Date (as such date may have been modified in accordance with the ORION 2 Contract), then ORION shall be entitled to deliver to the Contractor a Demand for correction of the failure within thirty (30) Calendar Days after ORION learns of such failure. Such Demand shall state full details of the failure. Within ten (10) Calendar Days after receipt of the Demand, or such longer time as the Parties agree, the Contractor shall submit to ORION a Correction Plan for achieving Final Acceptance not later than two hundred and seventy (270) Calendar Days after the Delivery Date provided that no Correction Plan shall ever result in a change to a Delivery Date as specified in Article 8, unless the Parties agree in accordance with Article 27. If the Correction Plan does not reasonably correct or offset the effect of the failure so as to demonstrate that Final Acceptance can be achieved not later than two hundred and seventy (270) Calendar Days after the ORION 2 Spacecraft Delivery Date, ORION may reject the Correction Plan within thirty (30) Calendar Days after receipt, in which case the Parties shall negotiate in good faith to develop a Correction Plan which will be satisfactory to both Parties. If ORION does not reject the Correction Plan within thirty (30) Calendar Days after receipt, the ORION 2 Contract shall be deemed modified in accordance with the Correction Plan and the failure shall be deemed cured so long as Contractor complies with the terms of such Correction Plan. (b) If, in addition to the Contractor's failure to make adequate progress toward completion of the ORION 2 Spacecraft due to the causes set forth in (a) above, the Contractor is experiencing any delays other than Excusable Delays such that the Contractor will not be able to Launch the ORION 2 Spacecraft in order to achieve Final Acceptance within three hundred sixty-five (365) Calendar Days after the ORION 2 Spacecraft Delivery Date (as may have been modified in accordance with this ORION 2 Contract), then ORION shall be entitled to deliver to the Contractor a Demand for correction of the failure within thirty (30) Calendar Days after ORION learns of such failure. Such Demand shall state full details of the failure. Within ten (10) Calendar Days after receipt of the Demand, or such longer time as the Parties agree, the Contractor shall submit to ORION a Correction Plan for achieving Final Acceptance not later than three hundred and sixty-five (365) Calendar Days after the ORION 2 Spacecraft Delivery Date provided that no Correction Plan shall ever result in a change to a Delivery Date as specified in Article 8, unless the Parties agree in accordance with Article 27. If the Correction Plan does not reasonably correct or offset the effect of the failure so as to demonstrate that Final Acceptance can be achieved not later than three hundred and sixty-five (365) Calendar Days after the ORION 2 Spacecraft Delivery Date, ORION may reject the Correction Plan within thirty (30) Calendar Days after receipt, in which case the Parties shall negotiate in good faith to develop a Correction Plan which will be satisfactory to both Parties. If ORION does not reject the Correction Plan within thirty (30) Calendar Days after receipt, the ORION 2 Contract shall be deemed modified in accordance with the Correction Plan and the failure shall be deemed cured so long as Contractor complies with the terms of such Correction Plan. 21.2 In the event (i) the Contractor does not submit a Correction Plan to ORION within ten (10) Calendar Days after receipt of a Demand, or (ii) the Parties cannot develop a Correction Plan which reasonably corrects or offsets the effect of the failure, or which otherwise is satisfactory to both Contractor and ORION within twenty (20) Calendar Days after the rejection of the Correction Plan, ORION may, as its sole remedy, elect one of the remedies set forth in Article 21.3 below, and the Contractor shall forthwith notify ORION of completed Work and all Work-in-progress relating to the ORION 2 Spacecraft in respect of which ORION exercises its rights under this Article. ORION shall elect one of the remedies specified in Article 21.3 (i) within forty (40) Calendar Days after the Contractor's receipt of a Demand, if the Contractor fails to submit a Correction Plan, or (ii) within thirty (30) Calendar Days after the deadline for the Parties' joint development of a satisfactory Correction Plan. 21.3 ORION's remedies as referenced in Article 21.2 are as follows: (a) ORION may terminate the ORION 2 Contract with respect to the ORION 2 Spacecraft and may cause the ORION 2 Spacecraft to be completed by another party, and as total damages (in addition to any applicable liquidated damages for delay levied pursuant to Article 11 and/or Article 12 up to the date of termination) may charge the Contractor for any reasonable increased cost incurred in connection therewith in excess of the Contract Price; provided that the Contractor's liability under this paragraph shall not exceed the Contract Price (without regard to any payments made to the Contractor to the date of termination). The amount payable by the Contractor shall be verified at the Contractor's request and expense by an internationally recognized firm of accountants appointed by the Contractor for that purpose subject to approval of ORION, such approval not to be unreasonably withheld or delayed. A demand for any such excess costs must be made within one (1) year after the termination and must be paid within sixty (60) Calendar Days of receipt of such verification. In the event of election by ORION under this paragraph, the Contractor shall complete the Launch Vehicle and Launch Services portion of the ORION 2 Contract (as it may need to be amended as a consequence of ORION's election) and shall be liable for any reasonable additional costs over and above the Contract Price for those Launch Vehicle and Launch Services so affected as set forth in Article 5, as adjusted. The Contractor's right to verification shall be without prejudice to the rights of either Party under Article 30. The report issued by the accountants may be used by either Party during any arbitration proceedings, but the report shall not be binding on the arbitrator(s). By notice in writing received by ORION no later than sixty (60) Calendar Days after receipt of ORION's invoice pursuant to this Article 21.3, the Contractor may dispute the amount of said invoice. In the event that the Contractor does not so notify ORION that it disputes ORION's invoice, the Contractor shall be deemed to have accepted said invoice; or (b) ORION may terminate the ORION 2 Contract, and in which case the Contractor shall pay ORION (i) all amounts previously paid by ORION to the Contractor and (ii) applicable liquidated damages for delay levied pursuant to Article 11 and/or Article 12 up to the date of termination. Title to the ORION 2 Spacecraft shall vest or remain vested in the Contractor. 21.4 The remedies provided in Article 21.3 are exclusive and in substitution for any other rights and remedies under the ORION 2 Contract or otherwise at law or equity with respect to such defaults. No termination rights shall be available to ORION in respect of the ORION 2 Spacecraft after the same has been Launched. 21.5 If the Contractor refuses or fails to observe or perform any material duty or obligation in the ORION 2 Contract, except those obligations covered in Articles 21.1 through 21.3 and other obligations of the Contractor for which particular remedies are specified elsewhere in the ORION 2 Contract as being exclusive, then ORION shall be entitled to deliver to the Contractor a Demand that it correct the breach within thirty (30) Calendar Days. Such Demand shall state fully the details of the breach. Within ten (10) Calendar Days after receipt of the Demand, or such longer time as the Parties agree, the Contractor shall submit to ORION a formal Correction Plan. If the Correction Plan does not reasonably correct or offset the effect of the breach in a timely manner, ORION may reject the Correction Plan within thirty (30) Calendar Days after receipt, in which case the Parties shall negotiate in good faith to develop a Correction Plan which will be satisfactory to both Parties. If ORION does not reject the Correction Plan within thirty (30) Calendar Days after receipt, the ORION 2 Contract shall be deemed modified in accordance with the Correction Plan and the breach shall be deemed cured so long as Contractor complies with the terms of such Correction Plan. In the event the Contractor fails to submit a Correction Plan or the Parties cannot develop a Correction Plan which reasonably corrects or offsets the effect of the breach in a timely manner, or which otherwise is satisfactory to both Contractor and ORION within twenty (20) Calendar Days after the Demand, ORION shall be entitled to any remedies available at law or equity, subject to Article 14.2 hereof and pursuant to the provisions of Article 30. 21.6 Contractor's Right to Terminate 21.6.1 (a) The Contractor shall be entitled to terminate the ORION 2 Contract in whole or, where severable, in part, if Contractor gives written notice to ORION of the following event and ORION fails to cure such event within thirty (30) Calendar Days after receiving such written notice: default in the payment of any Progress Payment or Milestone Payment or Termination Liability Amount when the same shall have become due and payable. (b) The Contractor shall be entitled to terminate the ORION 2 Contract by giving written notice to ORION where insurance proceeds are paid to any Financing Entity pursuant to Article 18.1.4 (All-Risk Insurance), and such proceeds are not paid over to the Contractor within thirty (30) Calendar Days of receipt by any Financing Entity. (c) Except as specified in the ORION 2 Contract, the Contractor shall not have the right to terminate or suspend the ORION 2 Contract. 21.6.2 In the event of such termination, the Contractor shall be entitled forthwith to take any or all of the following actions: (a) treat the ORION 2 Contract as terminated as to any or all of the items then undelivered or services unperformed and cease or suspend manufacture of any of the items to be supplied hereunder; (b) withhold delivery of any of the items to be supplied hereunder until the Contractor has received full payment under this Article and retain all sums then paid on account thereof; (c) cease or suspend performance of any of the services to be provided to ORION hereunder, except those services which are specifically intended to be provided in connection with a termination of the ORION 2 Contract; and (d) take payment of an amount equal to the Termination Liability Amount for the ORION 2 Spacecraft for the calendar month next following the calendar month in which the date of termination occurs, less the sum of the Milestone and Progress Payments actually received by the Contractor, provided that, where such amount is a negative number, the Contractor shall refund such amount promptly to ORION within twenty (20) Calendar Days. Where the Contractor is owed money by ORION, the Contractor shall submit an invoice to ORION within sixty (60) Calendar Days after the termination date which shall specify the amount due to the Contractor from ORION pursuant to this Article 21.6 and the Contractor shall immediately be entitled to full payment by ORION immediately thereafter. Payment by any Financing Entity of such amount to the Contractor shall relieve ORION from its obligation to make such payment. To the extent that full payment has been made therefor, ORION may require the Contractor to transfer to ORION in the manner and to the extent directed by ORION, title to and possession of any items comprising all or any part of the Work terminated (including, without limitation, all Work-in-progress and all inventories), and the Contractor shall, upon direction of ORION, protect and preserve property at ORION's expense in the possession of the Contractor or its Subcontractors in which ORION has an interest and shall facilitate access to and possession by ORION of items comprising all or part of the Work terminated. Alternatively, ORION may request the Contractor to make a reasonable, good faith effort to sell such items and to remit any sales proceeds to ORION less a deduction for costs of disposition reasonably incurred by the Contractor for such efforts. 21.7 In all instances, the Party terminating or claiming other remedies shall take all reasonable steps available to it to mitigate any claim which it may have against the defaulting Party. 21.8 Except in the case of a default under Article 21.6.1, Article 22.1(a) and Article 22.3(a), prior to either Party exercising its right to terminate the ORION 2 Contract under this Article, the Parties agree that ORION's Senior Executive and the Contractor's Senior Executive, and if mutually agreed, an independent third party, will meet within fifteen (15) Calendar Days of receipt of written notice of the dispute by one Party to the other Party to try to resolve the said dispute. If ORION's Senior Executive and the Contractor's Senior Executive cannot agree on an appropriate resolution of the dispute, then the Parties shall resolve their dispute in accordance with the provisions of Article 30. 21.9 Nothing in this Article 21 shall affect ORION's rights to liquidated damages under Articles 11 or 12 hereof. 22. TERMINATION IN SPECIAL CASES 22.1 The Contractor shall be deemed to be in default under the ORION 2 Contract if: (a) it is declared insolvent or bankrupt by a court of competent jurisdiction, is the subject of any proceedings related to its liquidation, insolvency or for the appointment of a receiver or an administrative receiver; or makes an assignment for the benefit of its creditors or enters into an agreement for the composition, extension or readjustment of all or substantially all of its obligations; or (b) the Contractor has resorted to fraudulent or corrupt practices in connection with its securing or implementing of the ORION 2 Contract. 22.2 If the Contractor is in default pursuant to Article 22.1, then ORION may terminate the ORION 2 Contract in accordance with the provisions of Article 21.3. 22.3 ORION shall be deemed to be in default under the ORION 2 Contract if: (a) it is declared insolvent or bankrupt by a court of competent jurisdiction, is the subject of any proceedings related to its liquidation, insolvency or for the appointment of a receiver or an administrative receiver, makes an assignment for the benefit of all its creditors or enters into an agreement for the composition, extension or readjustment of all or substantially all of its obligations; or (b) it has resorted to fraudulent or corrupt practices in connection with its securing or implementing of the ORION 2 Contract. 22.4 If ORION is in default pursuant to Article 22.3, then the Contractor may terminate the ORION 2 Contract in accordance with the provisions of Article 21.6. 23. PUBLICATION OF INFORMATION 23.1 Neither the Contractor, nor ORION nor any of their independent consultants, officers, employees, agents, contractors, Subcontractors or assignees, shall publish any material (including articles, films, brochures, advertisements and photographs), or authorize other persons to publish such material, or deliver speeches about the Work without the prior written approval of the other Party, which approval shall not be unreasonably withheld. This obligation shall not apply to ORION's statement or publication of any sort relating to the performance specifications or Statement of Work, which are intellectual property of ORION and may be published as ORION so determines. The above obligation shall also not apply to information which is publicly available from any Governmental agencies or which is or otherwise becomes publicly available without breach of this Agreement. Notwithstanding the foregoing, the Contractor, ORION, and Subcontractors may make (i) any filings that the Contractor, ORION or a Subcontractor considers advisable or necessary under applicable securities laws, including the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules applicable to the National Market System, or the securities laws applicable to public companies in the Republic of France (the "French Securities Laws"), and the Parties shall comply with the provisions of Article 24.5 with respect thereto, (ii) such other filings as may be required to be made by any governmental agency or any administrative or judicial body before which an action affecting the Contractor, ORION, a Subcontractor, any of their Affiliates or the ORION 2 Spacecraft is pending, and (iii) such other filings as may be required by applicable law. 23.2 The application for approval to publish any material or deliver speeches about the Work shall be submitted to the other Party in writing and shall include full particulars of any intended publication. Upon receipt of the other Party's agreement in principle to the proposed publication, the applicant shall submit for final approval by the other Party any material to be published in the form and context in which it is intended to be used. The other Party may then approve or decline to approve publication in whole or in part of the material and at its discretion may specify a time for publication. 24. CONFIDENTIALITY AND NONDISCLOSURE OF PROPRIETARY INFORMATION 24.1 During the course of performance of the ORION 2 Contract each Party may have access to or receive information from the other, such as information concerning inventions, techniques, processes, devices, discoveries and improvements, or regarding administrative, marketing, financial or manufacturing activities. All such information, including any materials or documents containing such information, whether disclosed orally or otherwise, shall be considered proprietary and confidential information of the disclosing Party ("Proprietary Information"). 24.2 (a) For the purpose of this Article 24, "Proprietary Information" shall not include any information which the receiving Party can establish to have (i) become publicly known without breach of the ORION 2 Contract; (ii) been given to the receiving Party by a third party who is not obligated to maintain confidentiality; (iii) been independently developed by the receiving Party without reference to the Proprietary Information of the other, as established by documentary evidence; or (iv) been developed by the receiving Party prior to the date of receipt from the other Party, as established by documentary evidence. (b) The Contractor agrees that it will not, for the period specified in Article 24.3(a), disclose details of the Work to be provided to ORION hereunder, to the extent that such disclosure would reveal specific performance information regarding the ORIONSAT system and the ORION 2 Spacecraft or any other information which would materially affect ORION's commercial interest or the commercial use of the ORIONSAT System without the prior written consent of ORION which shall not be unreasonably withheld. Notwithstanding the foregoing, the Parties expressly agree that the Contractor shall have the unrestricted right at any time to use and to supply to third parties services or equipment similar or identical to any Work provided hereunder. (c) ORION agrees that it will not, for the period specified in Article 24.3(a), disclose Proprietary Information of the Contractor to the extent that such disclosure would reveal information to a direct competitor of the Contractor which would materially affect the commercial interests of the Contractor without the prior written consent of the Contractor which shall not be unreasonably withheld. Contractor agrees that for purposes of this Article 24, in the event that TELESAT and/or COMSAT are engaged as Consultants to ORION for purposes of the ORION 2 Contract, they shall not be deemed direct competitors to the Contractor. 24.3 (a) Both during and for a period of three (3) years after the termination or expiration of the ORION 2 Contract, each Party agrees to preserve and protect the confidentiality of the Proprietary Information of the other and all physical forms thereof, whether disclosed before the ORION 2 Contract is signed or afterward. Neither Party shall disclose or disseminate Proprietary Information of the other to any third party, including employees, independent consultants, or Subcontractors unless such party has (i) a need to know the Proprietary Information for the purpose of establishing, maintaining, operating, financing or marketing the ORIONSAT system, and (ii) has executed an agreement obligating the party to maintain the confidentiality of the Proprietary Information and limiting the use of the Proprietary Information to establishing, maintaining, operating, financing or marketing the ORIONSAT system. Neither Party shall use Proprietary Information of the other for its own benefit or for the benefit of any third party, except as specifically provided under the terms and conditions of the ORION 2 Contract. (b) The foregoing shall not affect any right of ORION in respect of Data and Documentation provided for under the ORION 2 Contract nor shall either Party be prevented from using the general know-how and abilities gained during the performance of the ORION 2 Contract for any purpose whatsoever. 24.4 (a) Either Party shall be entitled to make copies of any documents containing Proprietary Information under the terms and conditions outlined above. (b) ORION shall have the right at any time to remove, obliterate or ignore any proprietary/confidential legend placed on any Data or Documentation, or other information furnished under the ORION 2 Contract by the Contractor where the legend is not in accordance with the ORION 2 Contract but only after notice to the Contractor and reasonable opportunity for the Contractor to defend such legend. 24.5 Notwithstanding the foregoing, the Contractor, ORION and Subcontractors may make (i) any filings that the Contractor, or ORION or a Subcontractor considers advisable or necessary under applicable securities laws, including the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules applicable to the National Market System, or the securities laws applicable to public companies in the Republic of France (the "French Securities Laws"), (ii) such other filings as may be required to be made by any governmental agency or any administrative or judicial body before which an action affecting the Contractor, ORION, a Subcontractor, any of their Affiliates, or the ORION 2 Spacecraft is pending and (iii) such other filings as may be required by applicable law. Prior to making any filings containing Proprietary Information of the other Party, the disclosing Party shall provide the other Party reasonable advance notice of the filing and cooperate with such other Party in obtaining confidential treatment for such Proprietary Information. In addition, if ORION or the Contractor desires for any information to be contained within such a filing to be accorded confidential treatment and not disclosed to the public, it shall so indicate to the other Party and such other Party shall cooperate with the disclosing Party in obtaining confidential treatment for such information. 25. LICENSE RIGHTS 25.1 Except as set forth in Article 25.5, the Contractor grants to ORION an irrevocable, non-exclusive license to use and have used throughout the world any software, and any invention covered by any patent, now or hereafter owned by the Contractor, or for which the Contractor has or may acquire the right to grant such a license, which software and/or invention is directly incorporated in any Deliverable Item or directly employed in the use of any Deliverable Item under the ORION 2 Contract. Such license shall: (a) be deemed to be fully paid-up for the purposes of the ORION 2 Contract including use, redesign or modification of any items delivered under the ORION 2 Contract; and (b) be on reasonable terms and conditions for other purposes. Such license shall be transferable to the Financing Entities and, subject to the Contractor's approval, any other entity, such approval not to be unreasonably withheld. 25.2 The Contractor shall, unless otherwise authorized or directed by ORION, include in each Subcontract hereunder a license rights clause pursuant to which each Subcontractor will grant rights to ORION to the same extent as the rights granted by the Contractor in Article 25.1. 25.3 This Article shall not be construed as limiting any rights of ORION or obligations of the Contractor under the ORION 2 Contract, including specifically the right of ORION, without payment of additional compensation to the Contractor, to use, have used, deliver, lease, sell or otherwise dispose of, any item or any part thereof, required to be delivered under the ORION 2 Contract. 25.4 The Contractor grants to ORION a non-exclusive license to use the Contractor's thermal propellant gauging software program (the "Software Program") on the terms set out hereunder: (a) such license shall be for the use of ORION and ORION's Consultants, advisors and agents in support of ORION's internal business and for use upon equipment notified in writing to the Contractor. (b) ORION shall not, without the express written approval of the Contractor, modify, enhance, copy, download or reverse engineer the Software Program; provided, however, ORION shall be permitted to copy the Software Program for archival or disaster recovery purposes. (c) ORION shall not assign, transfer, sell, lease, sub-license or otherwise deal in the Software Program; provided, however, the license shall be transferable to the Financing Entities with the prior written consent of the Contractor, which consent shall not be unreasonably withheld or delayed. 26. PATENTS, TRADEMARKS AND COPYRIGHTS 26.1 The Contractor, at its own expense, shall defend ORION and its officers, employees, agents, consultants and Subcontractors and assignees against any claim or suit based on an allegation that the manufacture of any item in the performance of the ORION 2 Contract, or the use, lease or sale of any item delivered or to be delivered under the ORION 2 Contract, infringes any letters patent, trademarks, copyrights or other proprietary rights of any third party, and shall pay any royalties and other costs related to the settlement of such claim or suit and the costs and damages, including attorneys' fees, incurred as the result of any such claim or suit; provided that (i) ORION promptly notifies the Contractor in writing within ten (10) Calendar Days of any such claim or suit, (ii) permits the Contractor to answer the claim or suit and defend the same, (iii) gives the Contractor authority and such assistance and information as is available to ORION for the defense of such claim or suit, and provided further that ORION does not by any act (including any admission or acknowledgment or omission) prejudice such defense. Any such assistance or information which is furnished by ORION at the written request of the Contractor is to be at the Contractor's expense. 26.2 If the manufacture of any item in the performance of the ORION 2 Contract or the use, lease or sale of any item delivered or to be delivered under the ORION 2 Contract, is enjoined as a result of a suit based on a claim of infringement, the Contractor shall resolve the matter so that the item is no longer subject to such injunction or replace the item with a functionally-equivalent, non-infringing item satisfactory to ORION. 26.3 ORION neither represents nor warrants that the performance of any Work or the manufacture, use, lease or sale of any Deliverable Item will be free from third party claims of infringement of any patents or other proprietary rights. 27. ORION 2 CONTRACT AMENDMENTS 27.1 Except as otherwise specifically provided, the ORION 2 Contract shall not be modified except by an Amendment to the ORION 2 Contract. No purchase order, acknowledgment, quotation or other similar document issued by either Party with respect to the subject matter of the ORION 2 Contract shall be deemed to be a part of the ORION 2 Contract or to modify the ORION 2 Contract in any respect relating to the Work. No oral agreement or conversation with any officer, agent or employee of ORION or the Contractor, either before or after execution of the ORION 2 Contract shall affect or modify any of the terms or obligations contained in the ORION 2 Contract. 27.2 At any time prior to completion and Delivery of all the Work under the ORION 2 Contract, ORION may, in writing, vary the Work with respect to the unlaunched ORION 2 Spacecraft within the general scope of the ORION 2 Contract. If any such variation causes an increase or decrease in the cost of, or in the time required for the performance of the ORION 2 Contract, a change in the specifications of any Deliverable Item, or a change in the Aggregate Predicted Transponder Life, the Parties shall negotiate in good faith an equitable adjustment to the Contract Price or any other terms affected by such variation, or to the Delivery Dates, or the specifications, which shall be formalized in an Amendment to the ORION 2 Contract. The Contractor shall not implement such variation, and ORION shall not be liable for any change in Contract Price or Delivery Dates pursuant to such variation, until and unless the Parties have entered into a written Amendment to the ORION 2 Contract. Should ORION decide not to implement any proposed variation of the Work it will pay the Contractor its reasonable preparation costs in evaluating the same. 27.3 At any time prior to Delivery of all the Work under the ORION 2 Contract, the Contractor may, in writing, request a variation of the Work within the general scope of the ORION 2 Contract. If ORION agrees with the request of the Contractor for variation of the Work and such variation causes an increase or decrease in the cost of, or in the time required for, the performance of the ORION 2 Contract, or a change in the specifications of any Deliverable Item, the Parties shall negotiate in good faith an equitable adjustment to the Contract Price or any other terms affected, or Delivery Dates, or the specifications, which shall be formalized in an Amendment to the ORION 2 Contract. The Contractor shall not implement such variation, and ORION shall not be liable for any change in Contract Price or Delivery Dates pursuant to such variation, until and unless the Parties have entered into an Amendment to the ORION 2 Contract. 27.4 At any time prior to Delivery of all the Work under the ORION 2 Contract, the Contractor may, in writing, request to rearrange the Milestone Payments contained in Part 1(B) in order to reflect the current program status. Any such requested change shall not become effective until and unless the Parties have entered into an Amendment to the ORION 2 Contract which implements the requested change. 28. GOVERNMENTAL APPROVALS Notwithstanding any other Article in the ORION 2 Contract, the Parties understand and agree that certain restrictions, including those placed on access to Contractor's and Subcontractor's plants and the use, sale or other disposition of technical data, and/or Work delivered under the ORION 2 Contract may be imposed by any Government which has jurisdiction over the Work. The Parties at all times, both before and after completion of the ORION 2 Contract, agree to be and remain bound by any such Government requirements pertaining to the technical data or Work and shall cooperate in obtaining all required consents and approvals. ORION shall be given an opportunity to comment on any application to the United States Government by the Contractor prior to submission of such application. The Contractor shall in good faith consider any comments made by ORION. 29. RESPONSIBILITY FOR THE CONTRACT 29.1 The Contractor, by having submitting a tender to perform the Work and by executing the ORION 2 Contract, shall be deemed: (a) to have satisfied itself as to: (i) all the conditions and circumstances which may affect the Contract Price, as defined in Article 5; and (ii) the feasibility of the Work to be performed in accordance with the terms and conditions of the ORION 2 Contract; (b) to warrant that it has the necessary skills, facilities and capacity to perform the Work in accordance with the terms and conditions of the ORION 2 Contract. 29.2 The Contractor acknowledges that it has fixed the Contract Price according to its own view and assessment of all relevant matters and no additional costs, except as otherwise expressly provided for in the ORION 2 Contract, will be charged over and above the Contract Price. 29.3 The Parties acknowledge that they have thoroughly examined all parts of the ORION 2 Contract, and agree that they are complete, consistent and accurate. If the Contractor decides, during the performance of the Work, that any portion of the ORION 2 Contract is inaccurate or incomplete, or that there are inconsistencies, it shall notify ORION in writing specifying full particulars and request resolution before proceeding with the Work in question. If the Contractor proceeds before obtaining such a resolution, it does so at its own risk and expense, and whether or not the course it has chosen is satisfactory to ORION, it shall be entitled to no increase in the Contract Price or any extension of the Delivery Dates set out in Article 8. If the Contractor proceeds with the Work before obtaining resolution of any inaccuracy, incomplete information or inconsistency and the course of action it has pursued is not chosen by ORION, it shall, upon request by ORION, promptly at its own expense follow the course of action directed by ORION and make all readjustments that may be required. 29.4 ORION shall within twenty (20) Calendar Days after written notification by the Contractor pursuant to Article 29.3 provide a response and resolution of the issues raised by the Contractor. 29.5 The Contractor covenants that it will cooperate fully with, and will use reasonable efforts to ensure the full cooperation of, all Subcontractors with ORION in doing all things reasonably necessary to achieve the due performance of the ORION 2 Contract. 30. DISPUTE RESOLUTION 30.1 If any dispute arises out of or in connection with this ORION 2 Contract or the breach thereof, including but not limited to any failure to reach agreement on price, schedule or performance, any claim for breach of contract and any question regarding its existence, validity or termination, such dispute shall be finally settled by arbitration in accordance with this Article 30. Prior to commencing arbitration with respect to any dispute, either Party shall give written notice to the other of its position and reasons therefore and may recommend corrective action. In the event that mutual agreement cannot be reached within ten (10) Calendar Days after receipt of such notice, or such other period as may be specified in the ORION 2 Contract, the respective positions of the Parties shall be forwarded to ORION's Senior Executive and the Contractor's Senior Executive, for discussion and an attempt shall be made by these persons to reach mutual agreement within a further ten (10) Calendar Days. To increase the probability of an expeditious resolution of the dispute, ORION's Senior Executive and Contractor's Senior Executive may meet during the ten (10) Calendar Day period and have each side present its position and reasoning directly to them at such meeting. 30.2 If mutual agreement is not reached through the above process, either Party may refer such dispute for final determination to an arbitration tribunal convened in accordance with the terms of Articles 30.3 and 30.4. 30.3 The arbitration tribunal shall consist of three (3) arbitrators, one (1) arbitrator to be appointed by ORION, one (1) arbitrator by the Contractor and the third arbitrator to be appointed by the former two (2) arbitrators; provided that if a Party fails to appoint an arbitrator within the time stipulated in Article 30.8, the other Party having appointed an arbitrator, such appointee shall be the sole arbitrator. 30.4 Except as otherwise provided herein, the arbitration shall be conducted in accordance with and subject to the rules of the American Arbitration Association ("AAA"), including the AAA's Supplementary Procedures for International Commercial Arbitration and shall be held in Washington, District of Columbia, USA. The Parties may be represented by persons of their choice. 30.5 The applicable law governing this arbitration proceeding shall be exclusively the United States Arbitration Act, 9 U.S.C., Section 1 et seq. 30.6 Except as provided in this Article 30.6 with respect to enforcement of arbitral awards, neither Party shall be entitled to maintain any action at law or suit in equity in respect to matters covered by this Article 30; the exclusive means of resolving all such matters shall be the arbitration process set forth in this Article 30. The award of the arbitral tribunal shall be final and binding on the Parties hereto, and, upon application duly made to a court of competent jurisdiction by a Party hereto, judgment thereon shall be entered in such court. 30.7 Pending a decision by the arbitrators as referred to in this Article, the Contractor shall, unless directed otherwise by ORION in writing, fulfill all of its obligations under the ORION 2 Contract, including, if and so far as it is reasonably practicable, the obligation to take steps necessary during the arbitration proceedings to ensure that the Work will be Delivered within the time stipulated or within such extended time as may be allowed under the ORION 2 Contract, provided always ORION shall continue to make payments therefore in accordance with the ORION 2 Contract. 30.8 The following time limits shall be observed in respect to any arbitration referred to in this Article: (a) either Party may demand arbitration in writing after the period of twenty (20) Calendar Days referred to in Article 30.1 has expired, or such other time period as may be specified in the ORION 2 Contract; (b) each Party shall appoint its arbitrator within twenty (20) Calendar Days of receipt of the AAA acknowledgment of a demand for arbitration; (c) the two appointed arbitrators shall appoint a third arbitrator within a further twenty (20) Calendar Days from the time stipulated in Article 30.8(b) (unless the two arbitrators agree to an extension not to exceed an additional twenty (20) Calendar Days); and (d) any decision by an arbitrator(s) referred to in Article 30.2 or 30.3 shall be made within six (6) months from the date on which a Party demands arbitration or within such extended period as the arbitrator(s) may allow. 30.9 The fees and expenses of the arbitrator(s) and AAA administrative fees and costs shall be borne equally by the Parties. Each Party shall bear the costs of its own legal representation, witnesses produced by such Party, document production and other discovery expenses. 30.10 In the case of any dispute pursuant to Article 9 hereof, the arbitration tribunal shall award prejudgment interest on any amount which the tribunal determines is owing from one Party to the other, such interest to be calculated at an annual rate equal to the Prime Rate then in effect for each Calendar Day from forty-five (45) Calendar Days following the date of loss or from the date of the filing for arbitration, whichever is the earlier, until the date full payment is made. 31. CONTRACT MANAGEMENT 31.1 In General The Contractor shall conduct meetings, reviews and analyses and shall prepare and deliver reports and documentation as provided in Part 2(A). 31.2 Approvals and Acceptances No approval, acceptance, waivers or deviations prior to Final Acceptance by ORION of any action or item under the ORION 2 Contract shall waive any of ORION's contractual rights with regard to Final Acceptance of any Deliverable Item. 31.3 ORION 2 Contract Monitoring 31.3.1 During the performance of the ORION 2 Contract, the Contractor and ORION shall each designate a person to be its Contract Program Manager, whose duties shall be to monitor the Work and to act as liaisons between the Parties. Such monitoring by ORION shall not relieve the Contractor from performing the ORION 2 Contract in accordance with its terms and shall not in any way detract from the Contractor's position as an independent contractor. 31.3.2 Any Consultant who performs services on behalf of ORION shall have access to the Work and data and may witness tests in the same manner as ORION, as provided in Article 7. ORION's Consultants shall execute non-disclosure agreements with the Parties and, as necessary, with Subcontractors. 31.3.3 ORION's Consultants shall have no authority to change any part of the ORION 2 Contract, or to direct the Contractor or to bind ORION. Any changes to the ORION 2 Contract shall be made only in accordance with Article 27, but ORION's Consultants may participate in discussions regarding such changes. Any action taken by the Contractor prior to the resolution of any such question shall be at the Contractor's own risk and expense. 32. SECURITY INTEREST AND FINANCIAL INFORMATION The Contractor agrees to cooperate with ORION and endeavor in good faith to provide security interests in the Work after ORION exercises the Option and periodic financial reports concerning the Contractor's financial status, if such are required by any Financing Entity, and to negotiate in good faith the terms upon which such security interests are to be provided and the content/frequency of such financial reports. 33. ASSIGNMENT 33.1 The Contractor shall not, without the prior written approval of ORION and except on such terms and conditions as are determined in writing by ORION, assign, mortgage, charge or encumber the ORION 2 Contract or any part thereof, any of its rights, duties, or obligations thereunder, the Work or any monies payable or to become payable under the ORION 2 Contract, to any person, except to a parent or a wholly-owned direct or indirect subsidiary company of the Contractor, or for the purpose of corporate merger, recapitalization or reconstruction. 33.2 The Parties recognize that this ORION 2 Contract may be financed through external sources. The Contractor agrees to work cooperatively to negotiate and execute such documents as may be reasonably required to implement such financing (other than any document requiring the subordination or delay of any payments required to be paid hereunder) and agrees ORION shall have the right to assign its rights, duties or obligations under the ORION 2 Contract to ORION Network Systems, Inc., any ORION subsidiary, and to any Financing Entity, subject to prior notice to the Contractor. 33.3 Provided that the Contractor's rights under the ORION 2 Contract, including the ability to perform the Work, in the Contractor's reasonable judgment, are not and would not be adversely affected, the Contractor shall not withhold its approval to any assignment, mortgage, charge or encumbrance of any of the rights, duties or obligations of ORION under the ORION 2 Contract. 33.4 Assignment of this ORION 2 Contract shall not relieve the assigning Party of any of its obligations nor confer upon the assigning Party any rights except as provided in the ORION 2 Contract. 34. NOTICES AND DOCUMENTATION 34.1 Any notice or other communication required or permitted pursuant to the ORION 2 Contract including invoices shall be sufficiently given if given in writing, delivered personally or by pre-paid registered air mail, or by telex, or by facsimile to the following address: In the case of ORION: ORION SATELLITE CORPORATION 2440 Research Boulevard Suite 400 Rockville, Maryland 20850 United States of America For the attention of Dr. Denis Curtin, Senior Vice President, Engineering and Satellite Operations, for technical, management and commercial matters and Richard H. Shay, Vice President of Corporate and Legal Affairs for contract matters or such other persons at such address as ORION may from time to time direct in writing for specific purposes. with a copy to: Shaw, Pittman, Potts & Trowbridge 2300 N Street, N.W. Washington, DC 20037 United States of America For the attention of Jane Sullivan Roberts for notices relating to matters under Articles 6, 9, 15 and 21. In the case of Contractor: MATRA MARCONI SPACE UK LIMITED Gunnels Wood Road Stevenage, Hertfordshire SG1 2AS England For the attention of Mr. A Haigh, ORION Project Manager for technical or management matters For the attention of Mr. Arthur Blick, Commercial Manager 34.2 A notice given either by certified mail, or by confirmed facsimile or telex followed the same day by the original document via certified mail, shall be deemed to be a notice in writing for the purpose of the ORION 2 Contract and shall be deemed to have been given upon receipt by the sender of the answer-back code of the recipient at the conclusion of the telex or by the actual receipt of the letter or of the facsimile confirmed by its answer-back code, provided transmission is completed during normal business hours on a Business Day in the place of the addressee and if it is not so completed then upon the commencement of normal business hours on the next Business Day in the place of the addressee after transmission is completed. 34.3 The Contractor agrees that any communication or notice required or permitted to be given by ORION to the Contractor which is given by the Program Manager or Contracts Manager or has, prior to the execution of the ORION 2 Contract been so given, shall be deemed to have been given by ORION. 34.4 Without affecting the provisions of Article 34.2, the Parties agree that all correspondence on contract matters shall, if sent by confirmed facsimile or telex, be followed, as soon as reasonably practicable after the sending of such correspondence, by the original document via first-class mail. 35. SEVERABILITY AND WAIVER 35.1 In the event any one or more of the provisions of the ORION 2 Contract shall, for any reason, be held to be invalid or unenforceable, the remaining provisions of the ORION 2 Contract shall be unimpaired, and the invalid or unenforceable provision shall be replaced by a mutually acceptable enforceable provision which comes closest to the intention of the Parties underlying the invalid or unenforceable provision. 35.2 A waiver of any breach of a provision hereof shall not be binding upon either Party unless the waiver is in writing and such waiver shall not affect the rights of the Party not in breach with respect to any other or future breach. 36. COMPLIANCE WITH THE LAW, PERMITS AND LICENSES 36.1 The Contractor shall, at its own expense, comply with the requirements of any laws of any place in which any part of the Work is to be done and with the lawful requirements of public, municipal and other authorities in any way affecting or applicable to any Work. 36.2 The Contractor shall at its own expense obtain any permits, licenses, approvals or certificates, including any required for import or export, necessary for the performance of the Work under the ORION 2 Contract. The Contractor shall, at its own expense, perform the Work in accordance with the conditions of any applicable permits or licenses, approvals or certificates. ORION agrees to use its best efforts in assisting the Contractor to obtain any of the documents referred to above which are issued by a United States authority. 36.3 ORION shall not be responsible in any way for the consequences, direct or indirect, of any violation by the Contractor or its Subcontractors, or their officers, employees, agents or servants of any law of a country in which the Work is performed, or of any country whatsoever. 37. APPLICABLE LAW; SUBMISSION TO JURISDICTION; APPOINTMENT OF AGENT FOR ACCEPTANCE OF SERVICE; INTERPRETATION AND LANGUAGE 37.1 Except as provided in Article 30.5 hereof, the ORION 2 Contract shall be governed by and interpreted in accordance with the laws of the State of Maryland, United States of America, without regard to the conflict of laws provisions thereof. 37.2 The Contractor appoints Powell, Goldstein, Frazer & Murphy, attention J. Gail Bancroft, 1001 Pennsylvania Avenue, N.W., Washington, D.C. 20004, United States of America as its agent for acceptance of service of process in the United States. Contractor shall notify ORION promptly in writing of the appointment by Contractor of a new agent or of a change in the agent's address. 37.3 In the ORION 2 Contract unless the context otherwise requires: i) words of any gender include any other gender; ii) the singular includes the plural and vice versa; iii) "person" includes a reference to a partnership, firm, or any other body of persons, company or organization whether incorporated or unincorporated. 37.4 Any heading to this ORION 2 Contract shall not be used in the construction or interpretation of the ORION 2 Contract. 37.5 All communications between the Parties to the ORION 2 Contract shall be in the English language. 37.6 Any reference to liquidation damages means agreed liquidated or ascertained damages and not a penalty. 38. SURVIVAL Any provision of the ORION 2 Contract which can be reasonably construed to survive the expiration or termination of the ORION 2 Contract for any reason, including but not limited to the indemnification and confidentiality obligations set forth herein, shall survive such expiration or termination of the ORION 2 Contract. 39. KEY PERSONNEL 39.1 The Contractor will assign properly qualified and experienced personnel to the program contemplated under the ORION 2 Contract. Personnel assigned to the following positions shall be considered "Key Personnel": a) The Contractor's Project Manager b) The Contractor's Contracts Manager c) The Contractor's PA Manager d) The Contractor's Resident Manager at NEC e) The Contractor's Engineering Manager f) The NEC Project Manager g) The Contractor's AIT Manager ORION shall have the right to approve the Contractor's Project Manager and NEC's Project Manager which approval shall not be unreasonably withheld or delayed. Other Key Personnel shall not be assigned to other duties without the Contractor giving prior written notice to and consulting with ORION. The Contractor shall provide a chart to ORION of the Program Key Personnel and shall keep such chart current. 39.2 Subject to ORION's right to approve the selection of the Contractor's Project Manager pursuant to Article 39.1, in the event that an employee included in the list of Key Personnel becomes unavailable for work under the ORION 2 Contract, the Contractor shall replace him by a person of substantially equivalent qualifications and abilities. 40. PROGRESS REPORTS 40.1 The Contractor shall render such reports as to the progress of the Work and attend such meetings with ORION as specified in Part 2(A) (Statement of Work) and Part 2(B) (Contract Documentation Requirements List). 41. LAUNCH VEHICLE AGENCY 41.1 41.1.1 The Contractor hereby agrees that ORION shall have the right to direct the Contractor to terminate the Launch Agreement at any time, in which case ORION shall be liable for the termination charges specified in the termination liability schedule set forth in Table 21.6 of the Launch Agreement and attached hereto as Annex C. 41.1.2. The Contractor hereby agrees that ORION shall have the right to direct the Contractor to terminate the Launch Agreement, in whole or, where severable, in part and for ORION to receive directly from the Launch Vehicle Agency a full refund of all amounts previously paid by ORION (excluding postponement fees and retanking charges) (or where the Launch Vehicle Agency provides such amounts to the Contractor, the Contractor shall pay over such amounts to ORION with no right of offset) where there has been more than three hundred sixty-five (365) cumulative Calendar Days of Launch postponement by the Launch Vehicle Agency. In the event that, as a result of ORION exercising such right, there is any delay in the performance of the Work, such delay shall constitute an Excusable Delay and the provisions of Article 12 hereof shall be applicable. ORION's right to direct the Contractor to terminate the Launch Agreement is conditional upon receipt of the Contractor's written notification of a Launch postponement or upon the occurrence of a single or cumulative delays by the Launch Vehicle Agency which exceed three hundred sixty-five (365) Calendar Days. ORION must direct the Contractor to terminate within sixty (60) Calendar Days of the first of the two events above or must waive its right to direct the termination of that Launch under this Article unless further delayed by the Launch Vehicle Agency. 41.2 The Launch Vehicle Agency shall provide such insurance as required by the United States Department of Transportation for loss or damage to United States Government property resulting from activities to be carried out in connection with Launches to be provided under the ORION 2 Contract. In consideration of and conditioned upon a reciprocal waiver by the United States Government, both ORION and the Contractor agree to waive any claim against the United States Government or its agencies for any property damage or loss they sustain or for any personal injury to, death of, or any property damage or loss sustained by their own employees. 41.3 The Launch Vehicle Agency has executed agreements with various United States Government agencies for use of Government-owned property and facilities relating to the production of launch vehicles and launch operations at Cape Canaveral Air Station (CCAS) in Florida. ORION agrees that it will comply with the United States Government's laws and regulations as they relate to ORION-furnished property and personnel, and those agreements relating directly to the United States expendable launch vehicle program. The Contractor will request the Launch Vehicle Agency to furnish copies of such agreements to ORION upon ORION's request. ORION will indemnify the Contractor for any ORION violation of the laws, regulations or agreements as specified herein. In furtherance of the foregoing, the Parties shall, before Launch, execute and deliver the Agreement for Waiver of Claims and Assumption of Responsibility, the execution of which is required by the United States Department of Transportation as a condition of granting the Contractor's license to conduct launch activities and launch the ORION 2 Spacecraft. 41.4 On or before the last day of the twenty-second (22nd) month after NPD, Contractor, acting upon the advice and with the consent of ORION, shall cooperate in good faith with the Launch Vehicle Agency to finalize the selection of a Launch Date within the Launch Slot. The Parties recognize that, if the Contractor and the Launch Vehicle Agency cannot mutually agree upon a Launch Date, the Launch Vehicle Agency may select the Launch Date, taking into account all available launch opportunities and the Contractor's requirements and interests. 42. GUARANTEE OF CONTRACTOR OBLIGATIONS The Contractor shall provide an unconditional corporate guarantee by Matra Marconi Space NV and, if required, other entities acceptable to any Financing Entity, in respect of its obligations under the ORION 2 Contract. 43. INTEREST Any interest due under the ORION 2 Contract shall be calculated in accordance with LIBOR plus three percent (3%). 44. COUNTERPARTS This Agreement may be executed in a number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the President of ORION SATELLITE CORPORATION, the General Partner of International Private Satellite Partners, L.P., has hereto set his hand for and on behalf of International Private Satellite Partners, L.P., on the 29th day of January 1997, and a Director of MATRA MARCONI SPACE UK LIMITED has hereto set his hand for and on behalf of MATRA MARCONI SPACE UK LIMITED on the 28th day of January 1997. INTERNATIONAL PRIVATE SATELLITE MATRA MARCONI SPACE UK LIMITED PARTNERS, L.P. By: Orion Satellite Corporation, its General Partner By By --------------------------------- --------------------------------- W. Neil Bauer, President and CEO Armand Carlier, Chairman Annex A FORM OF REQUEST FOR PAYMENT (Terms of this Form will be revised to conform to the requirements of the ORION 2 Credit Agreement) [Date] ORION SATELLITE CORPORATION 2440 Research Boulevard Suite 400 Rockville, Maryland 20850 United States of America Attention: [ ] RE: Part 1(A) ORION 2 Spacecraft Purchase Contract, dated as of [...] (as amended, supplemented or modified from time to time, the "ORION 2 Contract"), between INTERNATIONAL PRIVATE SATELLITE PARTNERS, L.P., d/b/a ORION ATLANTIC, L.P. ("ORION") and MATRA MARCONI SPACE UK LIMITED (the "Contractor") Ladies and Gentlemen: This Request for Payment is delivered to ORION pursuant to Article 6 of the ORION 2 Contract and constitutes the Contractor's request for payment in the amount of $ [...] for Milestone Payment No. ________, and Progress Payment No. __________. Very truly yours, MATRA MARCONI SPACE UK LIMITED By: Title: Appendix I to Annex A Form of Contractor Certificate (Terms of this Form will be revised to conform to the requirements of the ORION 2 Credit Agreement) Reference: Milestones Payment No. _____ Progress Payment No. _____ ________________ ____, 19___ RE: ORION 2 Spacecraft Purchase Contract, with International Private Satellite Partners, L.P. d/b/a Orion Atlantic, L.P. (as amended, supplemented or modified and in effect from time to time the "ORION 2 Contract") ORION SATELLITE CORPORATION 2440 Research Boulevard Suite 400 Rockville, Maryland 20850 United States of America Attention: [ ] Ladies and Gentlemen: This Certificate is delivered to you in connection with the ORION 2 Contract. Each capitalized term used herein and not otherwise defined shall have the meaning assigned thereto in the ORION 2 Contract. We hereby certify, after due inquiry, that, as of the date hereof: 1. The ORION 2 Contract is in full force and effect and except as set forth in Schedule I hereto, has not been amended, supplemented or otherwise modified, and attached hereto are true, correct and complete copies of all Amendments to the ORION 2 Contract or any other modification or amendment to the ORION 2 Contract not heretofore delivered to the Financing Entity. 2. Except as set forth in Schedule I hereto, we are not aware of any event that has occurred or failed to occur which occurrence or non-occurrence, as the case may be, could reasonably be expected to cause the date of Final Acceptance of the ORION 2 Spacecraft to occur later than the Delivery Date therefor. 3. Except as set forth in Schedule I hereto, no event or condition exists that permits or requires us to cancel, suspend or terminate our performance under the ORION 2 Contract or that could excuse us from liability for non-performance thereunder. 4. Except with respect to amounts that are the subject of a dispute (such amounts and such disputes being described in reasonable detail in Schedule II hereto), all amounts due and owing to us have been paid in full through the date of the immediately preceding Construction Certificate and are not overdue. To the extent payment to us has been or will be made as specified in this and the immediately preceding Contractor Certificates, there are and will be no mechanics' or materialsmen's liens except Permitted Liens (as defined in the Financing Agreements) on the Project (as defined in the Financing Agreements), the Collateral (as defined in the Financing Agreements) or on any other property in respect of the work which has or will be performed under the ORION 2 Contract. 5. a. The amount contained in the Request for Payment delivered to you concurrently herewith in accordance with the terms of Article 6.1.1(b) of the ORION 2 Contract represents monies owed to us in respect of Milestone Payment No. _____. b. The amount referred to in paragraph (a) above was computed in accordance with the terms of the ORION 2 Contract. c. The Milestone to which Milestone Payment No. ____ relates has been completed in accordance with the ORION 2 Contract.* 6. a. The amount of the Request for Payment delivered to you concurrently herewith in accordance with the provisions of Article 6.1.1(a) of the ORION 2 Contract represents monies owed to us in respect of Progress Payment No. ____. b. The amount referred to in paragraph (a) above was computed in accordance with the ORION 2 Contract.* 7. An amount of $_________ is due to us and represents monies owed to us in respect of the principal amounts due and payable on the outstanding Note.* Very truly yours, MATRA MARCONI SPACE UK LIMITED By: Title: * Include when relevant SCHEDULE I to Appendix I to Annex A List of Exceptions: Amendments to ORION 2 Spacecraft Purchase Contract: Exceptions Affecting Final Acceptance Date: Exceptions Affecting Contractor's Performance: SCHEDULE II to Appendix I to Annex A List of Disputes: ANNEX B INTER-PARTY WAIVER OF LIABILITY PROVISIONS IN LAUNCH AGREEMENT LAUNCH AGREEMENT TERMINATION CHARGES COMMERCIAL-IN-CONFIDENCE --------------------------------------------------------------------- ORION 2 SPACECRAFT PURCHASE CONTRACT PART 1(B) ORION 2 PAYMENT PLANS AND TERMINATION LIABILITY AMOUNTS --------------------------------------------------------------------- 15 January 1997 CONFIDENTIAL Issue 4 CONTENTS -------- Section Description Page No. - ------- ----------- -------- 1. Progress Payment Plan 2 2. Milestone Payment Plans 4 3. Termination Liability Amounts 7 15 January 1997 CONFIDENTIAL Issue 4 ORION SATELLITE CORPORATION PART 2(A) ORION 2 STATEMENT OF WORK Issue: 3 Dated: 28 June 1996 Signed: Date: On behalf of ORION Satellite Corporation Signed: Date: On behalf of Matra Marconi Space UK Limited 15 January 1997 CONFIDENTIAL Issue 4 TABLE OF CONTENTS 1. INTRODUCTION..............................................................1 1.1 Scope...............................................................1 1.2 Responsibilities....................................................1 2. EQUIPMENT, DOCUMENTATION, AND SERVICES......................................2 2.1 Introduction........................................................2 2.2 Deliverable Equipment...............................................3 2.2.1 Flight Spacecraft............................................3 2.2.2 Mission Specific Hardware and Software.......................3 2.2.3 Optional Networking Transponders.............................3 2.2.4 Optional Spacecraft Dynamic Simulator........................3 2.3 Deliverable Documentation...........................................4 2.4 Services............................................................4 2.4.1 Launch Support Services......................................4 2.4.2 Launch Services..............................................5 2.4.3 Reserved.....................................................5 2.4.4 Mission Support Services.....................................5 2.4.5 Operations Training..........................................5 3. PROGRAM MANAGEMENT........................................................6 3.1 Introduction........................................................6 3.1.1 Scope........................................................6 3.1.2 Responsibilities.............................................6 3.1.3 Program Management Plan......................................7 3.2 Program Management Interface........................................8 3.3 Documentation and Data Management...................................8 3.3.1 General......................................................8 3.3.2 Documentation Center.........................................9 3.3.3 Data Management Plan.........................................9 3.3.4 Documentation Submission Criteria............................9 3.3.5 Revision and Maintenance of Documentation....................9 3.3.6 Monthly Documentation Status Report..........................9 3.4 Meetings............................................................9 3.4.1 Inaugural Meeting.........................................................9 3.4.2 Progress Meetings...........................................10 3.4.3 Senior Management Meetings..................................10 3.4.4 Quarterly Progress Meetings.................................10 15 January 1997 CONFIDENTIAL Issue 4 3.4.5 Subcontractor Progress Meetings and Other Meetings..........10 3.4.6 Agenda Co-ordination Procedure..............................11 3.4.7 Minutes.....................................................11 3.5 Reviews............................................................11 3.6 Action Item Control................................................12 3.7 Management of Contract Changes.....................................12 3.8 Program Planning and Status Information............................12 3.8.1 Hardware Matrix ............................................12 3.8.2 Qualification Status List...................................13 3.8.3 Critical Items List.........................................13 3.8.4 Program Schedules ..........................................13 3.8.5 Program Progress Report.....................................14 3.8.6 Executive Summary...........................................15 3.9 Program Monitoring and Notification Requirements...................15 3.9.1 ORION Representatives.......................................15 3.9.2 Office Accommodation and Facilities.........................16 3.9.3 Attendance at Meetings......................................16 3.9.4 Access to Documentation.....................................16 3.9.5 ORION Presence During Development, Qualification, and Acceptance Tests............................................16 3.9.6 Notification Requirements...................................17 3.9.7 Material Review Board (MRB) and Failure Review Board (FRB).................................................17 4. DESIGN ACTIVITIES18 4.1 General............................................................18 4.2 Design Reviews.....................................................18 4.3 Design Analyses and Study Reports..................................18 4.3.1 Analyses at Spacecraft System Level.........................19 4.3.1.1 Spacecraft Failure Analysis.............................19 4.3.1.2 Dynamic Analysis........................................19 4.3.1.3 Antenna Pointing Error Analysis.........................20 4.3.1.4 Propellant Budget Analysis..............................21 4.3.1.5 Mass Properties Analysis................................21 4.3.1.6 Power Budget Analysis...................................21 4.3.1.7 Mission Analysis........................................22 4.3.1.8 Electromagnetic Compatibility (EMC) Analysis............22 4.3.1.9 Environmental Effects Analysis..........................23 4.3.1.10 Worst Case Performance Analysis.........................24 4.3.1.11 Autonomous Commands Analysis............................24 4.3.2 Subsystem Level Analyses................................24 4.3.2.1 Communications Subsystem Analysis.......................25 4.3.2.2 Telemetry, Tracking, and Command (TT&C) Subsystem Analysis................................................28 15 January 1997 CONFIDENTIAL Issue 4 4.3.2.3 Attitude and Orbit Control Subsystem (AOCS) Analysis....29 4.3.2.4 Propulsion Subsystem Analysis...........................30 4.3.2.5 Power Subsystem Analysis................................30 4.3.2.6 Thermal Subsystem Analysis..............................31 4.3.2.7 Structure Analysis......................................32 5. PRODUCT ASSURANCE.........................................................33 5.1 Product Assurance Requirements.....................................33 5.2 Quality Assurance Tasks............................................33 6. MANUFACTURING, ASSEMBLY, INTEGRATION AND TEST............................35 6.1 General............................................................35 6.2 Test Plan..........................................................35 6.3 Test Procedures, Data, and Reports.................................36 6.3.1 Unit and Subsystem Test Procedures and Reports..............36 6.3.2 Spacecraft Test Procedures and Reports......................37 6.3.3 Test Data...................................................37 6.3.4 Spacecraft Log Book.........................................38 6.4 Test Reviews.......................................................38 6.5 Preshipment Review.................................................39 6.6 System and Major Subsystems Integration and Test Notification......39 6.7 Failure Notification..............................................39 6.8 Electrical and Mechanical Ground Support Equipment (EGSE/MGSE).....40 6.9 Test Equipment Requirements........................................40 6.10 Software Requirements..............................................40 6.11 Delivery of Drawings and Engineering Control Documents for Spacecraft Operation and In-Orbit Control......................40 6.12 Secure Command System and Certification............................41 7. LAUNCH AND MISSION SUPPORT SERVICES......................................42 7.1 Scope..............................................................42 7.2 Launch Vehicle Compatibility.......................................42 7.3 Launch Support Services............................................42 7.3.1 Spacecraft Preparation at the Launch Sites..................43 7.3.2 Spacecraft Propellant and Pressurant........................43 7.3.3 Support of Meetings and Reviews.............................43 7.4 Safety.............................................................43 7.5 Launch Services....................................................44 15 January 1997 CONFIDENTIAL Issue 4 7.6 Mission Support....................................................44 7.6.1 Scope ......................................................44 7.6.2 Mission Support Activities..................................45 7.6.2.1 Preparation and Definition of Mission Support Documents.45 7.6.2.2 World-Wide Ground Segment...............................48 7.6.2.3 Mission Support Procedures and Sequence of Events.......49 7.6.2.4 Spacecraft/ORION SCS Compatibility......................49 7.6.2.5 In-Orbit Test Plan and Procedure........................50 7.6.2.6 Mission Reviews.........................................50 7.6.2.7 Training ...............................................51 7.6.2.7.1 Classroom Training......................................51 7.6.2.7.2 On the Job Training.....................................52 7.6.2.7.3 Course Materials........................................53 7.6.2.8 Real-Time Mission Operations............................53 7.6.2.9 Post-Mission Review.....................................53 7.6.2.10 In-Orbit Testing and Test Report........................54 7.6.2.11 Spacecraft Acceptance Review............................54 7.6.2.12 Spacecraft Operational Support..........................54 8. SHIPPING AND TRANSPORTATION.............................................55 8.1 Shipping and Transportation Plan.................................55 8.2 Spacecraft Shipment ...............................................55 9. OPTIONS 9.1 Networking Transponders............................................56 9.2 Spacecraft Dynamic Simulator Software..............................56 10. MISSION SPECIFIC HARDWARE AND SOFTWARE ..................................57 10.1 Command Generators.................................................57 10.2 Propulsion Model...................................................57 10.3 Propellant Gauging.................................................57 10.4 Sensor Blinding Prediction Model...................................57 15 January 1997 CONFIDENTIAL Issue 4 ORION SATELLITE CORPORATION PART 2(B) ORION 2 CONTRACT DOCUMENTATION REQUIREMENTS LIST (CDRL) Issue: 2 Dated: 28 June 1996 Signed: Date: On behalf of ORION Satellite Corporation Signed: Date: On behalf of Matra Marconi Space UK Limited 15 January 1997 CONFIDENTIAL Issue 4 ORION SATELLITE CORPORATION PART 3(A) ORION 2 SPACECRAFT SPECIFICATIONS Issue:3 Dated: 28 June 1996 Signed: Date: On Behalf of ORION Satellite Corporation Signed: Date: On Behalf of Matra Marconi Space UK Limited 15 January 1997 CONFIDENTIAL Issue 4 TABLE OF CONTENTS 1. INTRODUCTION................................................................ 1.1 Scope and Purpose.................................................... 1.2 Description of the ORION 2 Spacecraft................................ 1.3 General Requirements.................................................1 2. SPACECRAFT SYSTEM CHARACTERISTICS...........................................3 2.1 Life.................................................................3 2.1.1 Manoeuver Life............................................3 2.1.2 Orbital Life..............................................3 2.2 Launch Configuration.................................................3 2.3 Spacecraft Reliability and Quality Assurance Requirements....................................................3 2.5 General Spacecraft Design Considerations.............................6 2.5.1 Configuration.............................................6 2.5.2 Maintainability, Interchangeability, and Accessibility...........................................6 2.5.3 Mechanical Design Criteria for Units and Assemblies.......7 2.5.4 Thermal Design Criteria for Units and Assemblies..............................................7 2.5.5 Design Criteria for Electronic Units and Onboard Software................................................7 2.5.6 Use of Connectors.........................................8 2.5.7 Spacecraft Testing Via the Telemetry System...............8 2.5.8 Hard-line Connections for Communications and TT&C Subsystem Testing...................................8 2.5.9 Insulation of Conductors..................................8 2.5.10 Radiation Environment....................................9 2.5.11 Design Considerations Associated with Charging Phenomena...............................................9 2.5.12 Zero-g Testing..........................................11 2.5.13 Operation Following Storage.............................11 2.5.14 Launch Windows and Mission Profile Constraints..........11 2.5.15 Telemetry Transmitters Status During Launch.............12 2.5.16 Helium Pressurant Venting (if applicable)...............12 2.5.17 Orbit Control Maneuvers.................................12 2.5.18 Operation in Inclined Orbit.............................12 2.5.19 Attitude Control Failure Mode Recovery and Continued Operation..............................................12 2.6 Definition of Coordinate Axes and Attitude Angles...................13 2.7 Antenna Beam Pointing Accuracy......................................13 2.8 Minimum Performance and Defect Criteria.............................15 3.0 COMMUNICATIONS SUBSYSTEM..................................................16 15 January 1997 CONFIDENTIAL Issue 4 3.1 General.............................................................16 3.1.1 Definitions..............................................16 3.1.2 Conditions for Specification.............................19 3.1.3 Primary Transmission Modes...............................20 3.2 Coverage............................................................20 3.2.1 Coverage Regions.........................................20 3.2.2 Beams....................................................22 3.3 Polarization........................................................27 3.3.1 Orthogonality............................................27 3.3.2 Receive Beam Isolation...................................28 3.3.3 Transmit Beam Isolation..................................28 3.4 Capacity............................................................30 3.5 Frequency Plan......................................................31 3.6 Communications Subsystem and Antenna Beam Interconnectivity.........33 3.6.1 Communications Subsystem Configuration...................33 3.6.2 Antenna Beam Interconnectivity...........................33 3.7 Input Characteristics...............................................34 3.7.1 Receive Sensitivity (G/T)................................34 3.7.2 Gain and Level Control...................................37 3.7.2.1 Fixed Gain Mode.......................................37 3.7.2.2 Automatic Level Control Mode..........................37 3.7.3 Transponder Gain........................................38 3.7.3.1 FG Mode...............................................38 3.7.3.2 ALC Mode..............................................38 3.7.4 Drive Conditions.........................................38 3.7.4.1 Overdrive Capability...................................38 3.7.4.2 Overdrive Damage Limit.................................39 3.7.4.3 Pulsed Transient Response..............................39 3.7.5 Receive Rejection........................................39 3.7.6 Linearity of the Common Receive Section..................40 3.7.7 Interference from Command Carrier........................40 3.8 Output Characteristics..............................................41 3.8.1 Effective Isotropic Radiated Power (EIRP)................41 3.8.2 Spurious Outputs.........................................45 3.8.3 Spurious Modulation......................................46 3.8.4 AM/AM Transfer...........................................46 3.8.5 AM/FM Transfer...........................................48 3.8.5.1 Continuous Mode........................................48 3.8.5.2 Pulsed Level...........................................48 3.8.6 Passive Intermodulation..................................48 3.8.7 Multipaction Requirements................................48 3.9 Transfer Characteristics............................................48 3.9.1 Gain Versus Frequency....................................49 3.9.2 Gain Slope...............................................51 15 January 1997 CONFIDENTIAL Issue 4 3.9.3 Group Delay Versus Frequency.............................51 3.9.4 Group Delay Slope........................................53 3.9.5 Group Delay Stability....................................53 3.9.6 Group Delay Ripple.......................................53 3.9.7 Phase Linearity and AM/PM Conversion Coefficient.........53 3.9.8 AM/PM Transfer Coefficient...............................54 3.9.9 Amplitude Linearity......................................54 3.9.10 Frequency Stability.....................................55 3.9.11 Out-Of-Band Response....................................55 3.10 Cessation of Emissions.............................................56 3.11 Traffic Routing....................................................56 3.12 Redundancy.........................................................57 3.13 Power Amplifiers...................................................57 3.13.1 Linearized TWTAs.................................................57 3.13.2 TWTA Auto-Restart Capability............................57 3.14 TT&C Interface.....................................................58 3.14.1 Command Requirements....................................58 3.14.2 Telemetry Requirements..................................58 4.0 TELEMETRY, TRACKING, AND COMMAND (TT&C)...................................64 4.1 Telemetry...........................................................64 4.1.1 Functional Requirements..................................64 4.1.1.1 Purpose................................................64 4.1.1.2 Function...............................................65 4.1.1.3 Operation..............................................65 4.1.1.4 Interaction with the Communications Subsystem..........65 4.1.1.5 Redundancy.............................................65 4.1.1.6 Interfaces.............................................66 4.1.1.6.1 All Subsystems.......................................66 4.1.1.6.2 Communications Subsystem.............................67 4.1.1.6.3 Telemetry, Tracking and Command Subsystem............67 4.1.1.6.4 Attitude and Orbit Control Subsystem.................68 4.1.1.6.5 Propulsion Subsystem.................................69 4.1.1.6.6 Power Subsystem......................................69 4.1.1.6.7 Thermal Subsystem....................................70 4.1.1.6.8 Deployment and Pointing Mechanisms...................70 4.1.1.7 Accuracy...............................................71 4.1.1.8 Data Channel Dynamic Range.............................71 4.1.1.9 Spare Capacity.........................................72 4.1.2 RF Parameters............................................72 4.2 Command.............................................................73 4.2.1 Functional Requirements.................................73 15 January 1997 CONFIDENTIAL Issue 4 4.2.1.1 Purpose................................................73 4.2.1.2 Function...............................................73 4.2.1.3 Operation..............................................73 4.2.1.4 Isolation..............................................73 4.2.1.5 Redundancy.............................................74 4.2.1.6 Interfaces.............................................74 4.2.1.7 System Test Considerations.............................74 4.2.1.8 Spare Capacity.........................................75 4.2.2 RF Parameters............................................75 4.2.3 Baseband Characteristics.................................75 4.2.3.1 Error Prevention and Detection.........................76 4.2.3.2 Command Security.......................................76 4.2.3.3 Command Acceptance Probability.........................77 4.3 Ranging.............................................................77 4.3.1 Functional Requirement...................................77 4.3.1.1 Purpose................................................77 4.3.1.2 Function...............................................77 4.3.1.3 Operation..............................................78 4.3.1.4 Isolation..............................................78 4.3.2 Performance Requirements.................................78 5. ATTITUDE AND ORBIT CONTROL SUBSYSTEM (AOCS)................................79 5.1 Functional Description..............................................79 5.2 Subsystem Performance and Design Requirements.......................79 5.2.1 Attitude Determination...................................79 5.2.1.1 Transfer Orbit.........................................79 5.2.1.2 Synchronous Orbit......................................80 5.2.2 Attitude Control.........................................80 5.2.2.1 Parking Orbit (If Applicable)..........................80 5.2.2.2 Transfer Orbit.........................................80 5.2.2.3 Transfer to Geosynchronous Orbit and Initial Acquisition............................................80 5.2.2.4 On Orbit Control and Antenna Pointing Mode.............80 5.2.3 Reacquisition............................................81 5.2.4 Ground Control...........................................81 5.2.4.1 Ground Control Command Capability......................81 5.2.5 Safe Modes...............................................81 5.2.6 Special Features.........................................82 5.2.6.1 Antenna Pattern Measurement Capability.................82 5.2.6.2 Control Bias Capability................................82 5.2.6.3 AOCS Switching.........................................82 5.2.6.4 Control Electronics Fault Protection...................82 5.2.6.5 Dynamic Stability......................................83 5.2.7 Subsystem Configuration and Interfaces...................83 5.2.7.1 Redundancy.............................................83 5.2.7.2 TT&C Interfaces........................................83 15 January 1997 CONFIDENTIAL Issue 4 5.2.7.3 Propulsion Interfaces..................................83 6. PROPULSION SUBSYSTEM.......................................................84 6.1 Functional Description..............................................84 6.2 Design Requirements.................................................84 6.3 Redundancy..........................................................86 6.4 Maneuver Life and Propellant Loading................................87 6.4.1 General Requirements.....................................87 6.4.2 Propellant Budgeting Methodology.........................87 6.4.2.1 Actual Hardware Performance Test Data..................87 6.4.2.2 Inefficiencies of Operation............................88 6.4.2.3 Inflight Performance...................................88 6.4.2.4 Specific Maneuver Requirements.........................88 6.5 TT&C Interfaces.....................................................89 7. POWER SUBSYSTEM............................................................90 7.1 Functional Description..............................................90 7.2 General Requirements................................................90 7.3 Energy Generation...................................................91 7.3.1 Solar Cells..............................................91 7.3.2 Power Output.............................................91 7.3.3 Power Transfer Assembly..................................91 7.4 Energy Storage......................................................92 7.4.1 Batteries................................................92 7.4.2 Battery Charge Management................................92 7.4.3 Cell Failure.............................................93 7.4.4 Battery Removal and Storage..............................93 7.5 Power Conditioning and Control......................................93 7.5.1 Bus Configuration........................................93 7.5.2 Failure Modes and Shutdown Sequence......................94 7.5.3 Bus Undervoltage and Overvoltage.........................95 7.5.4 Interaction Between the Communications and Power Subsystems...............................................95 7.6 TT&C Interfaces.....................................................95 8. THERMAL CONTROL SUBSYSTEM..................................................96 8.1 Functional Description..............................................96 8.2 Performance Requirements............................................96 8.3 Subsystem Design Requirements.......................................97 8.3.1 Instrumentation.......................................98 8.3.2 Materials.............................................98 8.3.3 Venting...............................................98 8.3.4 Grounding.............................................99 15 January 1997 CONFIDENTIAL Issue 4 8.3.5 Multi-Layer Insulating Blanket (MLI)..................99 8.3.6 Contamination Control.................................99 8.4 TT&C Interfaces...................................................100 9. STRUCTURE SUBSYSTEM.......................................................101 9.1 Functional Description.............................................101 9.2 Performance Requirements...........................................101 9.3 Design Requirements................................................101 10 MECHANISMS................................................................103 10.1 Design Requirements...............................................103 10.2 TT&C Interfaces...................................................104 11. PYROTECHNIC AND ELECTROEXPLOSIVE DEVICES.................................105 Attachment: Annex A Radiation Environment Specification, Issue C, 13 October 1995 15 January 1997 CONFIDENTIAL Issue 4 PART 3(A) ANNEX A RADIATION ENVIRONMENT SPECIFICATION 'REDLINED' AND AMENDED 10 OCTOBER 1995 'REDLINED' AND AMENDED 13 OCTOBER 1995 ======================================= 15 January 1997 CONFIDENTIAL Issue 4 TABLE OF CONTENTS 1. INTRODUCTION.............................................................1 2. SYNCHRONOUS ORBIT CONDITIONS..............................................1 2.1 Electrons............................................................1 2.2 Protons..............................................................2 2.3 Alpha Particles......................................................2 2.4 Cosmic Ray Radiation.................................................3 2.5 Ultraviolet Radiation................................................4 2.6 Plasma...............................................................4 2.7 Micrometeroids.......................................................5 3. TRANSFER ORBIT CONDITIONS.................................................5 3.1 Transfer Orbit Electron Flux Values..............................5 3.2 Transfer Orbit Proton Flux Values................................5 15 January 1997 CONFIDENTIAL Issue 4 ORION SATELLITE CORPORATION PART 3(B) ORION 2 SPACECRAFT PRODUCT ASSURANCE REQUIREMENTS Issue: 4 Dated: 15 January 1997 Signed: Date: On behalf of ORION Satellite Corporation Signed: Date: On behalf of Matra Marconi Space UK Limited Part 3(B) ORION 2 Spacecraft Product Assurance Requirements page xvii CONFIDENTIAL 28 June 1996 Issue 3 TABLE OF CONTENTS 1. INTRODUCTION..............................................................1 1.1 Scope............................................................1 1.2 Product Assurance Objectives.....................................1 2. PRODUCT ASSURANCE REQUIREMENTS............................................3 2.1 Product Assurance Plan...........................................3 2.2 Organization and Management......................................3 2.3 Reporting........................................................3 2.4 Non-Conformance..................................................4 2.5 Contract Change Management.......................................4 2.5.1 Change Classification...................................4 2.5.2 Preliminary Change Assessment...........................5 2.5.3 Change Request (CR).....................................5 2.5.4 Contract Change Notice (CCN)............................6 2.5.5 Review and Approval of a Change.........................7 2.5.6 Change Review Board.....................................7 2.5.7 Implementation of a Change by the Contractor............8 2.5.8 Directed Changes........................................8 2.5.9 Go Ahead Procedure......................................8 2.5.10 CR/CCN Log..............................................9 2.5.11 Waivers and Deviations..................................9 3. REVIEWS AND AUDITS.......................................................11 3.1 Design Reviews..................................................11 3.1.1 Review Chairperson and Review Board....................12 3.1.2 Review Notification....................................12 3.1.3 Data Packages..........................................12 3.1.4 Review Procedures......................................12 3.1.5 Review Summary.........................................13 3.1.6 Review Completion......................................13 3.1.7 Subsystem and Unit Design Reviews......................13 3.1.7.1 Unit and Subsystem Preliminary Design Reviews..........14 3.1.7.2 Unit and Subsystem Critical Design Reviews.............14 3.1.7.3 Communications Subsystem Final Design Review...........15 3.1.7.4 Unit Qualification Design Review.......................15 3.1.8 Spacecraft System Design Reviews.......................15 3.1.8.1 System Preliminary Design Review.......................16 3.1.8.2 System Critical Design Review..........................16 CONFIDENTIAL 28 June 1996 Issue 3 3.1.8.3 System Final Design Review.............................16 3.2 Test Reviews....................................................17 3.3 Preshipment Review..............................................17 3.4 Further Reviews and Inspections.................................18 3.5 Design Review Documentation.....................................19 3.6 Test Review Documentation.......................................19 3.7 Program Audits..................................................20 3.8 ORION Right of Access...........................................20 4. SUBCONTRACTOR AND SUPPLIER MANAGEMENT....................................21 4.1 Subcontractor/Supplier Product Assurance Plan...................21 4.2 Requirements....................................................21 4.3 Reviews and Controls............................................21 5. RELIABILITY ASSURANCE....................................................22 5.1 Reliability Analysis............................................22 5.2 Parts Derating and Stress Analysis..............................23 5.3 Failure Modes, Effects, and Criticality Analyses................23 5.4 Worst-Case Analysis (WCA).......................................24 5.5 Critical Items Control..........................................25 5.6 Design Verification Matrix (DVM)................................26 5.7 Qualification Status List (QSL).................................26 6. QUALITY ASSURANCE........................................................27 6.1 Quality Assurance...............................................27 6.2 Procurement and Fabrication.....................................27 6.3 Test and Inspection.............................................27 6.4 Workmanship Standards...........................................28 6.5 Quality Records and Traceability................................28 6.6 Non-Conformance Control.........................................28 6.6.1 Non-Conformance Reporting..............................29 6.6.2 Non-Conformance/Failure Review and Disposition.........29 6.6.3 Failure Analysis and Corrective Action.................29 7. PARTS PROCUREMENT........................................................30 7.1 Parts Procurement and Control...................................30 7.2 Organization and Responsibilities...............................30 7.3 Selection and Application.......................................30 7.4 Quality Provisions..............................................31 7.5 Radiation.......................................................32 7.6 Lot Transfer....................................................32 CONFIDENTIAL 28 June 1996 Issue 3 7.7 Traceability....................................................32 7.8 Hybrids, MCMs, Battery Cells, TWTs, and Magnetics...............32 7.9 Traveling Wave Tube Amplifiers..................................33 7.10 Parts Documentation............................................34 8. MATERIALS AND PROCESSES..................................................35 8.1 Materials and Process Control...................................35 8.2 Organization....................................................35 8.3 Critical Materials and Processes................................35 8.4 Materials and Process Selection.................................35 8.5 Materials and Process Documentation.............................36 9. SOFTWARE QUALITY ASSURANCE...............................................37 9.1 Software Quality Assurance Plan.................................37 9.2 Software Development............................................37 9.3 Configuration Control...........................................37 9.4 Verification and Acceptance Testing.............................37 9.5 Non-Conformance Control.........................................38 10. CONFIGURATION MANAGEMENT.................................................39 10.1 Configuration Management.......................................39 10.2 Configuration Identification and Control.......................39 10.3 Change Control.................................................40 10.4 Configuration Verification.....................................40 10.5 Configuration Status Accounting and Documentation..............40 11. SAFETY...................................................................41 11.1 General........................................................41 11.2 Hazardous Conditions...........................................41 11.3 Safety and Hazard Analyses.....................................41 12. Launch Vehicle...........................................................42 12.1 Introduction...................................................42 12.2 Reporting......................................................42 12.3 Reviews........................................................42 12.3.1 Mission Specific Preliminary Design Review(PDR)...........42 CONFIDENTIAL 28 June 1996 Issue 3 12.3.2 Mission Specific Critical Design Review (CDR).............42 12.3.3 System Review.............................................42 12.3.4 Pre Shipment Review.......................................43 12.3.5 Review Summary and Action Items...........................43 12.4 Launch Readiness Review........................................43 APPENDIX 1 REVIEW ITEM DISCREPANCY FORM......................................44 APPENDIX 2 CHANGE REQUEST FORM...............................................45 APPENDIX 3 CONTRACT CHANGE NOTICE FORM.......................................46 APPENDIX 4 REQUEST FOR DEVIATION/WAIVER FORM.................................47 APPENDIX 5 NON-CONFORMANCE REPORT FORM.......................................48 CONFIDENTIAL 28 June 1996 Issue 3 ORION SATELLITE CORPORATION PART 3(C) ORION 2 SPACECRAFT ON-GROUND TEST REQUIREMENTS Issue: 4 Dated: 15 January 1997 Signed: Date: On behalf of ORION Satellite Corporation Signed: Date: On Behalf of Matra Marconi Space UK Limited CONFIDENTIAL 28 June 1996 Issue 3 TABLE OF CONTENTS 1. INTRODUCTION..............................................................1 2. GENERAL COMMENTS..........................................................2 2.1 Test Philosophy......................................................2 2.2 Definitions..........................................................3 2.3 Test Requirements....................................................4 2.3.1 General...................................................5 2.3.2 Test Equipment and Test Facility Requirements.............6 2.3.3 Zero-G Testing............................................6 2.3.4 Acceptance Tests..........................................7 2.3.5 Protoflight Tests.........................................7 2.3.6 Qualification Tests....................................... 2.4 WITNESSING OF TESTS..................................................8 2.5 TEST DATA............................................................9 2.6 TEST REVIEWS.........................................................9 2.7 DOCUMENTATION........................................................9 2.8 ORGANIZATION.........................................................9 3. UNIT, SUBSYSTEM AND SPACECRAFT TEST PROGRAM .............................10 3.1 EQUIPMENT CATEGORIZATION............................................ 3.2 TEST PROGRAM OVERVIEW...............................................10 4. PROTOFLIGHT TESTS........................................................25 4.1 Unit Protoflight Tests..............................................25 4.2 Subsystem Protoflight Tests.........................................31 4.2.1 Repeater Subsystem.......................................31 4.2.2 Antenna Subsystem........................................32 4.2.3 Telemetry, Tracking, and Command (TT&C) Subsystem........ 4.2.4 AOCS Subsystem Protoflight Dynamic Test 4.2.5 Propulsion Subsystem.....................................36 4.2.6 Power Subsystem..........................................36 4.2.6.1 Solar Array............................................36 4.2.6.2 Battery Assembly.......................................39 4.2.7 Structure Subsystem Protoflight Test.....................39 4.2.8 Thermal Subsystem Protoflight Test.......................37 4.3 Spacecraft Protoflight Test.........................................38 4.3.1 Integration Tests........................................38 CONFIDENTIAL 28 June 1996 Issue 3 4.3.2 Integrated System Test..................................38 4.3.3 Electro Magnetic Compatibility (EMC) Test...............40 4.3.4 RF Health Check.........................................40 4.3.5 Electro Static Discharge (ESD) Test.....................41 4.3.6 Spacecraft Alignment Test...............................43 4.3.7 Sinusoidal Vibration....................................42 4.3.8 Post-Sinusoidal Vibration Functional Tests..............42 4.3.9 Acoustic Vibration Test.................................44 4.3.10 Post-Acoustic Vibration Functional Tests................44 4.3.11 Shock and Deployment Tests..............................44 4.3.12 Post-Launch Environment Performance Test................45 4.3.13 Thermal Balance/Thermal Vacuum Test.....................45 4.3.14 Final Performance Test..................................47 4.3.15 RF Range Test...........................................45 4.3.16 Spacecraft Mass Properties Measurements.................46 5. FLIGHT ACCEPTANCE TESTS..................................................54 5.1 Unit Acceptance Tests...............................................54 5.1.1 PIM......................................................55 5.1.2 Power Handling MP and GP................................55 5.2 Subsystem Acceptance Tests..........................................55 5.2.1 Antenna Subsystem........................................56 5.2.2 Attitude and Orbit Control Subsystem (AOCS)..............56 5.2.3 Power Subsystem..........................................56 5.2.4 Structure Subsystem Acceptance Tests.....................56 5.2.5 Thermal Subsystem........................................57 5.2.6 Platform Harness.........................................57 5.3 Spacecraft Acceptance Test..........................................56 6. LIFE TESTS...............................................................59 7. DEVELOPMENT AND QUALIFICATION TEST.......................................60 7.1 Communications Subsystem Tests......................................60 7.1.1 Antenna Unit and Subsystem Test..........................60 7.1.2 Repeater Units...........................................61 7.2 Structure Subsystem Tests...........................................61 7.2.1 Structure Static Test....................................61 7.3 AOCS Subsystem Qualification Tests..................................61 7.3.1 AOCS Subsystem Dynamic Tests.............................61 7.3.2 Liquid Slosh Test........................................61 7.4 Propulsion Subsystem Qualification Tests............................61 7.4.1 General..................................................62 7.4.2 Thrusters................................................62 CONFIDENTIAL 28 June 1996 Issue 3 7.4.3 Liquid Apogee/Perigee Engines............................63 7.4.4 Propellant Tank..........................................62 7.4.5 Subsystem Verification Test..............................63 7.5 Thermal Subsystem...................................................63 7.5.1 Thermal Surfaces.........................................64 7.5.2 Heat Pipes...............................................64 7.6 Mechanisms..........................................................65 8. INTERFACE COMPATIBILITY TESTS............................................65 8.1 Ground Control System Compatibility.................................66 8.2 Launch Vehicle Compatibility........................................66 9. LAUNCH PREPARATION TEST..................................................67 9.1 General.............................................................67 9.2 Launch Site Functional Test.........................................67 9.3 Launch Preparation Functional Tests.................................68 9.4 Post-Encapsulation and Launch Pad Tests.............................69 10. DESIGN VERIFICATION MATRICES (DVM)......................................70 10.1 Design Verification................................................69 11. TEST CONFIGURATION MATRICES.............................................87 11.1 Introduction.......................................................87 11.2 Repeater Test Configurations.......................................87 11.2.1 Overall Guidelines......................................87 11.2.2 Subsystem Level.........................................88 11.2.3 Spacecraft Level........................................88 11.2.4 RF Link Calibrations....................................89 11.2.5 Performance Parameters..................................89 11.3 Antenna Test Configurations........................................90 11.3.1 Unit/Subsystem Level....................................90 11.3.2 Spacecraft Level........................................91 CONFIDENTIAL 28 June 1996 Issue 3 ORION SATELLITE CORPORATION PART 3(D) ORION 2 IN-ORBIT COMMISSIONING AND ACCEPTANCE TEST REQUIREMENTS Issue: 3 Dated: 28 June 1996 Signed: Date: On behalf of ORION Satellite Corporation Signed: Date: On behalf of Matra Marconi Space UK Limited 28 June 1996 Issue 3 PART 3(D) IN-ORBIT COMMISSIONING AND ACCEPTANCE TEST REQUIREMENTS CONTENTS NO. PAGE 1. SCOPE............................................................ 1 2. DEFINITIONS...................................................... 1 3. INTRODUCTION..................................................... 2 4. COMMISSIONING.................................................... 4 4.1 Commissioning Activities.................................. 4 4.2 Documentation............................................. 5 5. ACCEPTANCE TESTING............................................... 6 5.1 Aggregate Predicted Transponder Life...................... 6 5.2 Transponder Acceptance Tests.............................. 8 5.3 Determination of other Spacecraft Parameters............. 12 5.4 Documentation............................................ 15 6. POST ACCEPTANCE TRANSPONDER TESTING............................. 18 ANNEX A GROUND TEST FACILITY CONCEPT............................. 20 ANNEX B COMMISSIONING ACTIVITIES................................. 23 ANNEX C TRANSPONDER PERFORMANCE TESTS............................ 30 EX-10.37 4 EXHIBIT 10.37 AMENDED AND RESTATED OPTION AGREEMENT FOR PURCHASE OF ORION 2 SPACECRAFT This Option Agreement ("Agreement"), dated January 29, 1997 ("Effective Date") by and between International Private Satellite Partners, L.P., d/b/a Orion Atlantic, L.P., a Delaware limited partnership with its principal offices located at 2440 Research Boulevard, Rockville, Maryland 20850, U.S.A. ("ORION"), and Matra Marconi Space UK Limited, a company organized and existing under the laws of England and Wales with its registered office at The Grove, Warren Lane, Stanmore, Middlesex, HA7 4LY, England ("MMS"), WHEREAS, ORION desires to purchase from MMS, and MMS desires to sell to ORION, an option to purchase a communications satellite ("ORION 2 Spacecraft") designed, developed, built and delivered in orbit on an Atlas IIAS launch vehicle with the configuration, schedule and technical performance requirements set forth in the ORION 2 Purchase Contract, dated the date hereof, as such contract may be amended from time to time (the "ORION 2 Purchase Contract"); and WHEREAS, the Parties desire to enforce certain provisions of the ORION 2 Purchase Contract as though such contract were enforceable on the date hereof; NOW, THEREFORE, in consideration of the mutual promises and undertakings contained herein, the Parties, intending to be legally bound, agree as follows: 1. All terms used herein and not defined shall have the meanings attributed to them in the ORION 2 Purchase Contract. 2. Grant of Option. MMS hereby grants to ORION the option to purchase from MMS the ORION 2 Spacecraft constructed and delivered in accordance with the terms and conditions of the ORION 2 Purchase Contract (the "Option"). 3. First Installment Payment Date; Option Period. For the purposes of this Agreement, the "First Installment Payment Date" shall be the date upon which MMS receives Option Installment Payment 1 and the "Option Period" shall be the period commencing on the First Installment Payment Date and expiring on the earlier of (a) the date upon which ORION exercises the Option in accordance with Section 5 below and (b) the last day of the 16th month following the First Installment Payment Date, but in no event later than June 30, 1998. At ORION's request, MMS shall extend the Option Period through July 31, 1998, if, on or before June 30, 1998, ORION pays to (a) MMS an extension fee of $2 million and (b) the Launch Vehicle Agency an additional $700,000 in satisfaction of an increase in the Launch Vehicle price. 4. Consideration for Option. ------------------------- 4.1 In consideration for MMS' grant of the Option, ORION has paid US $1 million to the Launch Vehicle Agency for a launch reservation covering the Launch Period and shall pay an additional US $48.4 million in installments as specified in the table below on or before the dates specified in such table (each such payment being referred to herein as an "Option Installment Payment"):
Option Option Option Total Option Installment Installment Installment Installment Payment Amount Payment Amount Payment # Payment Date Payment Amount (Spacecraft) (Launch Vehicle) - --------- ------------ -------------- ------------ ---------------- 1 Feb. 28, 1997* US$ 2.0 Million 2 March 31, 1997 US$ 22.0 Million 3 June 15, 1997 4 July 31, 1997 5 Dec. 31, 1997 - ----------------------------------------------------------------------------------------------------- Total US$ 48.4 Million
- ----------------------------------- *Or on such earlier date as ORION's planned financings are closed and funds are disbursed into ORION's account. The sum of the Option Installment Payments and the US $1 million paid to the Launch Vehicle Agency prior to the date hereof is referred to herein as the "Option Price." 4.2 MMS shall provide ORION ten (10) days written notice of each Option Installment Payment due hereunder after Option Installment Payment 2. 4.3 No portion of the Option Price shall be refundable under any circumstances, including the bankruptcy or insolvency of ORION. 4.4 If ORION's planned financings are not closed and funds disbursed by March 31, 1997, ORION may extend Option Installment Payment 2 until April 30, 1997 by making a partial payment of $2.5 million ___________________________________________________________ on or before March 31, 1997. Moreover, to the extent net proceeds from ORION's planned public debt financings are greater than $250,000,000 (exclusive of pre-funded amounts to pay interest), ORION shall accelerate the payment of the Launch Vehicle portion of Option Installment Payments 3 and 5 to the date upon which Option Installment Payment 2 is made. 2 5. Exercise of Option; Effect of Exercise. 5.1 Orion may exercise the Option from the First Installment Payment Date through the last day of the Option Period by paying to (a) MMS the cumulative Milestone Payments payable under the ORION 2 Purchase Contract through the exercise date less the Option Installment Payments (Spacecraft) paid pursuant to Section 4.1 above to such date and (b) the Launch Vehicle Agency the cumulative Progress Payments payable under the ORION 2 Purchase Contract through the exercise date less the Option Installment Payments (Launch Vehicle) paid pursuant to Section 4.1 above to such date (in the aggregate, the "Option Exercise Price"). If there is a dispute as to the cumulative Milestone Payments or Progress Payments payable through the exercise date, the provisions set forth in Article 6.2 of the ORION 2 Purchase Contract shall apply. 5.2 As of the date ORION exercises the Option, the ORION 2 Purchase Contract shall be deemed to be fully effective and to have been in full force and effect from the First Installment Payment Date. 6. Title to Work. Notwithstanding any provision of the ORION 2 Purchase Contract incorporated by reference herein, MMS shall retain title to the Work from the Effective Date until ORION exercises the Option. Upon ORION's exercise of the Option in accordance with this Agreement, title to the Work shall be governed by the ORION 2 Purchase Contract. 7. MMS' Covenant. MMS covenants to ORION and ORION acknowledges that (a) MMS will commence to perform the Work on the First Installment Payment Date and will continue to perform the Work until termination of this Agreement if ORION pays each Option Installment Payment on or before the date such Payment is required to be made and (b) to perform the Work according to the schedule set forth in the ORION 2 Purchase Contract, MMS will be required to expend funds in excess of the Option Price. 8. Access to Work and Progress Reports. During the Option Period, the provisions of Exhibit 8 shall govern ORION's access to Work under Article 7 of the ORION 2 Purchase Contract and MMS' delivery of progress reports under Article 40 of the ORION 2 Purchase Contract. 9. Representations. (a) MMS represents, warrants and covenants that (1) it has the power and authority to grant the Option and to execute, deliver, and perform this Agreement and (2) its performance of this Agreement will not violate any other agreement to which MMS is a party. (b) ORION represents and warrants that (1) it has the power and authority to execute, deliver, and perform this Option Agreement, (2) its performance of this Agreement will not violate any other agreement to which ORION is a party, (3) it is not entering into this Agreement with an intent to hinder, delay, or defraud any of its creditors, and (4) the making of the 3 3 payments required to be made hereunder will not, at the time such payments are made, cause ORION to be insolvent. 10. Payments. ORION shall make all Option Installment Payments (Spacecraft) to MMS and all Option Installment Payments (Launch Vehicle) to the Launch Vehicle Agency by transferring the amounts required to be paid .to the accounts designated in Article 6.1.3 of the ORION 2 Purchase Contract. All payments to be made pursuant hereto shall be made in U.S. Dollars. MMS shall notify, and shall direct the Launch Vehicle Agency to notify, ORION of any change in the account information contained in Article 6.1.3 at least ten days before any Option Installment Payment is required to be made. 11. Failure to Exercise Option or to Make Payments - Sole and Exclusive Remedy. Notwithstanding any other provision of this Agreement or any provision of the ORION 2 Purchase Contract incorporated by reference herein, if: (a) ORION fails to exercise the Option in the manner provided in this Agreement on or before the date the Option Period expires; or (b) ORION fails to pay any Option Installment Payment hereof (after receipt of notice under Section 4.2) on or before the dates specified in Section 4; then, at its option, MMS may terminate this Option Agreement immediately upon written notice to ORION and retain all money paid by ORION to MMS pursuant to this Agreement and the ownership of all Work. This is MMS' sole and exclusive remedy for ORION's failure to make any Option Installment Payment. 12. Term and Termination. The term of this Agreement shall begin on the Effective Date and continue until the earliest to occur of the following: (a) ORION exercises the Option in the manner provided in this Agreement; (b) the last day of the Option Period expires; (c) MMS terminates this Option Agreement in accordance with Section 11; and (d) the date upon which ORION and MMS mutually agree to terminate this Agreement. In addition, MMS may terminate this Option Agreement if, on March 31, 1997 (or April 30, 1997 if extended pursuant to Section 4.4 hereof), Restated Amendment # 10 to the Second Amended and Restated Purchase Contract, between MMS and ORION, is not in full force and effect and there is no default thereunder. Within 30 days of the termination of this Agreement for any reason other than ORION's exercise of the Option, ORION shall return to MMS all copies of all Data and Documentation provided to ORION in respect of the ORION 2 Spacecraft. 13. Incorporation by Reference. A copy of the ORION 2 Purchase Contract is attached hereto. Each Amendment to the ORION 2 Contract shall, upon its execution, be attached to this Agreement. The provisions of the ORION 2 Purchase Contract identified on Exhibits 8 and 13 hereto shall be incorporated by reference herein and made a part hereof and shall be enforceable as though stated in full herein. 14. Notices. Any notice or other communication required or permitted to be made or given by either Party pursuant to this Agreement shall be sufficiently given if given in accordance with Article 34 of the ORION 2 Purchase Contract. 15. General. 4 4 15.1 This Agreement (and any Exhibits hereto) sets forth the entire understanding between the Parties with respect to its subject matter and supersedes all prior and contemporaneous agreements and understandings with respect thereto other than the ORION 2 Purchase Contract. 15.2 This Agreement shall not constitute, give effect to, or otherwise imply, a joint venture, partnership, agency or formal business organization of any kind between the Parties. 15.3 This Agreement may be amended only by a written instrument signed by an authorized representative of each Party. 15.4 ORION may not assign or transfer this Agreement except to any party that (a) demonstrates to MMS' reasonable satisfaction that it has the financial ability to pay the Option Exercise Price and (b) satisfies any export license requirements applicable to MMS' performance of the Work. MMS shall not assign, delegate, or in any manner transfer this Agreement without the prior written consent of ORION. This Agreement shall be binding upon the successors and assigns of the Parties hereto. 15.5 No Party shall, by any act, delay, indulgence, omission, or otherwise (except by a written instrument signed by the Parties hereto), be deemed to have waived any right hereunder or to have acquiesced in any breach of any of the terms and conditions hereof and no failure by a Party to exercise or delay in exercising any right, power, or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power, or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. A Party's waiver of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy that such Party would otherwise have on any future occasion. 15.6 The rights and remedies herein provided are cumulative, may be exercised singly or concurrently, and are not exclusive of any rights or remedies provided at law or in equity (other than the remedy in Section 11 for ORION's failure to make Option Installment Payments at the times specified therein, which is an exclusive remedy). 15.7 If any provision of this Agreement is declared invalid or otherwise unenforceable, the enforceability of the remaining provisions shall be unimpaired, and the Parties shall replace the invalid or unenforceable provision with a valid and enforceable provision that reflects the original intentions of the Parties as nearly as possible in accordance with applicable law. This Agreement shall benefit the Parties hereto only. 15.8 Provisions of this Agreement which by their express terms impose continuing obligations on the Parties shall survive the expiration or termination of this Agreement. 15.9 This Agreement may be executed in a number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. 15.10 This Agreement shall be governed by and construed in accordance with the substantive laws of the State of Maryland, exclusive of its choice of law rules. 5 IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives, with an Effective Date as set forth in the introductory paragraph of this Agreement. INTERNATIONAL PRIVATE MATRA MARCONI SPACE SATELLITE PARTNERS, L.P. UK LIMITED By: Orion Satellite Corporation, General Partner By: _____________________________ By: ____________________________ Name: Name: Armand Carlier Title: Title: Director 6 EX-11.1 5 EXHIBIT 11.1 Statement Re: Computation of Net Loss Per Common Share
Year Ended December 31, -------------------------------------------------- 1996 1995 1994 -------------------------------------------------- Average shares outstanding 10,951,823 8,476,126 6,555,441 Adjustments for issuance of common stock and other instruments within one year of the initial filing of the registration statement: Common stock issued 203,533 Common stock options granted 82,445 333,455 Common stock issuable upon conversion of preferred stock issued 426,470 1,705,882 Common stock issuable upon conversion of preferred options granted 118,464 473,855 ---------- --------- --------- Weighted average shares used in calculating per share data 10,951,823 9,103,505 9,272,166 Net loss attributable to common stockholders (28,565,075) (26,915,178) (b) (7,964,918) (a) Net loss per common share (2.62) ($3.07) ($0.86)
(a) Adjusted to add back the preferred stock dividend based upon assumed conversion of preferred stock to common stock issued within one year of filing for an initial public offering. (b) 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 6 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 March 7, 1996, with respect to the consolidated financial statements of Orion Network Systems, Inc. (a Delaware corporation that is now known as Orion Oldco Services, Inc.) included in the Annual Report (Form 10-K) for the year ended December 31, 1996. 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-xxxxx) pertaining to the Orion Network Systems, Inc. Non-Employee Director Stock Option Plan /s/ Ernst & Young LLP ------------------------------ ERNST & YOUNG LLP Washington D.C. March 24, 1997 EX-27 7 FORM 27
5 (Replace this text with the legend) 0001029850 Orion Network Systems, Inc. 1 US Dollar 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 42,187,807 0 6,573,316 100,000 0 52,244,526 351,513,496 (68,224,957) 358,264,444 63,029,250 0 0 20,902,366 112,447 (548,815) 358,264,444 500,860 41,847,292 376,945 78,200,050 25,388,243 919,453 25,450,284 (27,111,351) 84,059 (27,195,410) 0 0 0 (27,195,410) (2.62) (2.62)
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