Back to GetFilings.com
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.