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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 Commission file number 0-22085
ORION NETWORK SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-2008654
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2440 Research Boulevard, Suite 400, Rockville, Maryland 20850
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(Address of principal executive offices)
(301-258-8101)
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
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None
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share Series A 8%
Cumulative Redeemable Preferred Stock, par value $.01 per share Series
B 8% Cumulative Redeemable Preferred Stock, par value $.01 per share
11 1/4% Senior Notes Due 2007
12 1/2% Senior Discount Notes Due 2007
Warrants to Purchase Common Stock, par value $ .01 per share
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of shares of Common Stock held by non-affiliates
(based on the March 4, 1998 closing price of these shares) was approximately
$281.0 million. The Common Stock is traded over-the-counter and quoted through
the Nasdaq National Market.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 4, 1998
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Common Stock, $.01 par value 18,761,251 shares
DOCUMENTS INCORPORATED BY REFERENCE
None
1
ORION NETWORK SYSTEMS, INC.
TABLE OF CONTENTS
PART I
Page
Item 1. Business...................................................... 3
Item 2. Properties....................................................30
Item 3. Legal Proceedings.............................................31
Item 4. Submission of Matters to a Vote of Security Holders...........31
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matter........................................................31
Item 6. Selected Financial Data.......................................33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................35
Item 8. Financial Statements and Supplementary Data...................44
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................70
PART III
Item 10. Directors and Executive Officers of the Registrant............70
Item 11. Executive Compensation........................................75
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................80
Item 13. Certain Relationships and Related Transactions................83
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K......................................................84
2
PART I
ITEM 1. BUSINESS.
Statements contained in this Annual Report on Form 10-K regarding Orion's
expectations with respect to the pending acquisition by Loral, Orion 2 and Orion
3, related financing, future operations and other information, which can be
identified by the use of forward looking terminology, such as "may", "will",
"expect", "anticipate", "estimate", or "continue" or the negative thereof or
other variations thereon or comparable terminology, are forward looking
statements. See the "Risk Factors" section of Orion Network Systems, Inc.'s
Registration Statement on Form S-1 (Registration No. 333-19167), on file at the
Securities and Exchange Commission for cautionary statements identifying
important factors with respect to such forward looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from results referred to in forward looking statements. There can be
no assurance that Orion Network Systems, Inc.'s expectations regarding any of
these matters will be fulfilled. See Glossary at page G-1 at the end of this
Annual Report on Form 10-K for certain defined terms and certain technical terms
used herein.
OVERVIEW
Orion Network Systems, Inc. ("Orion" or the "Company") is a rapidly growing
provider of satellite-based communications services, focused primarily on (i)
private communications network services, (ii) Internet services and (iii) video
distribution and other satellite transmission services. Orion provides
multinational corporations with private communications networks designed to
carry high speed data, fax, video teleconferencing, voice and other specialized
services. The Orion satellite's ubiquitous coverage reaches all locations within
its footprint, enabling the delivery of high speed data to customers in emerging
markets and remote locations that lack the necessary infrastructure to support
these services. The Company also offers high speed Internet access and
transmission services to companies outside the United States seeking wide
bandwidth Internet access, while avoiding "last mile" terrestrial connections
and bypassing congested regional Internet network routes. In addition, Orion
provides satellite capacity for video distribution, satellite news gathering and
other satellite services primarily to broadcasters, news organizations and
telecommunications service providers. The Company provides its services directly
to customer premises using very small aperature terminals ("VSATs").
The Company commenced operations of Orion 1, a high power Ku-band satellite
in January 1995. As of December 31, 1997, Orion serviced 301 customers through
682 points of service. The Company's customers include Amoco Poland Limited,
Amway Corporation, AT&T Corp., BBC, British Telecom, CNN, Citibank, N.A., Global
One, GTECH Corporation, News International Limited, RTL Television, Pepsi-Cola
International, Sprint Communications, USA Today, Viacom International Inc.,
Volkswagen, Westinghouse Communications and World Wide Television News and or
certain of their subsidiaries. As of December 31, 1997, Orion's contract backlog
was $269.5 million (including $89 million from one pre-launch customer on Orion
3). Substantially all of Orion's current contracts with customers are
denominated in U.S. dollars. For the three months ended December 31, 1997, the
Company generated revenues of $18.2 million and had a loss from operations, and
net loss of $12.6 million and $27.5 million, respectively. For the year ended
December 31, 1997, the Company generated revenues of $72.7 million and had a
loss from operations, net loss and net cash used in operating activities of
$43.1 million, $105.7 million and, $28.0 million, respectively.
The Company believes that demand for satellite-based communications
services will continue to grow due to (i) the expansion of businesses beyond the
limits of wide bandwidth terrestrial infrastructure, (ii) accelerating demand
for high speed data services, (iii) growing demand for Internet and intranet
services, especially outside the U.S., (iv) increased size and scope of
television programming distribution, (v) worldwide deregulation of
telecommunications markets and (vi) continuing technological advancements.
Satellites are able to provide reliable, high bandwidth services anywhere in
their coverage areas, and the Company believes that it is well positioned to
satisfy market demand for these services.
THE ORION SATELLITE SYSTEM
The Company launched Orion 1, a high power satellite with 34 Ku-band
transponders, in November of 1994. Orion 1 provides coverage of 34 European
countries, much of the United States and parts of Canada, Mexico and North
Africa. Through arrangements with local ground operators, Orion currently has
the ability to deliver network services to and among points in most European
countries, the United States and many Latin American and Asian countries.
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In July 1996, the Company signed a contract with Matra Marconi Space for
the construction and launch of Orion 2 (which was amended and restated in
January 1997) and in February 1997 commenced construction of that satellite.
Orion 2 will expand the Company's European coverage and extend coverage to
portions of the Commonwealth of Independent States, Latin America and the Middle
East, as shown in more detail in the footprint set forth below under the caption
"Implementation of the Orion Satellite System -- Orion 2". Orion 2 will increase
significantly the Company's pan-European capacity, currently the area of
strongest demand for the Company's services. The Company recently commenced
selling services in certain areas of Latin America. Orion 2 is scheduled to be
launched in the second quarter of 1999.
In January 1997, the Company entered into a satellite procurement contract
with Hughes Space for the construction and launch of Orion 3, construction of
which was commenced in December 1996. Orion 3 will cover broad areas of the Asia
Pacific region including China, Japan, Korea, India, Southeast Asia, Australia,
New Zealand, Eastern Russia and Hawaii, as shown in more detail in the footprint
set forth below under the caption "Implementation of the Orion Satellite System
- -- Orion 3". Orion 3's footprint will provide the Company with the ability to
redistribute programming from the United States via Hawaii to most of the Asia
Pacific region. The Company has already taken a number of steps to establish an
early market presence in Asia, and has entered into an $89 million lease for
eight of Orion 3's 43 transponders. Orion 3 is scheduled to be launched in the
fourth quarter of 1998.
In the aggregate, the footprints of Orion 1, Orion 2 and Orion 3 will cover
over 85% of the world's population.
PENDING ACQUISITION OF THE COMPANY BY LORAL
On October 7, 1997, Orion, Loral Space & Communications Ltd. ("Loral") and
Loral Satellite Corporation, a wholly-owned subsidiary of Loral ("Merger Sub"),
entered into an Agreement and Plan of Merger (as amended on February 11, 1998,
the "Merger Agreement"), pursuant to which Merger Sub will merge with and into
the Company, with the Company being the surviving corporation and thereby
becoming a wholly-owned subsidiary of Loral (the "Loral Merger").
The Merger Agreement provides that (i) each share of Common Stock,
excluding treasury shares and shares owned by Loral or its subsidiaries, will be
converted into and exchanged for the right to receive the number of fully paid
and nonassessable shares of common stock, par value $.01 per share, of Loral
("Loral Common Stock") equal to the Exchange Ratio (as described below), (ii)
each share of the Company's Series A 8% Cumulative Redeemable Convertible
Preferred Stock (the "Series A Preferred Stock"), Series B 8% Cumulative
Redeemable Convertible Preferred Stock (the "Series B Preferred Stock" and
together with the Series A Preferred Stock, the "Senior Preferred Stock") and
Series C Preferred Stock (the Series C Preferred Stock and Senior Preferred
Stock are hereinafter referred to as the "Senior Preferred Stock") will be
converted into and exchanged for the right to receive the number of fully paid
and nonassessable shares of Loral Common Stock equal to the Exchange Ratio
multiplied by the number of shares of Common Stock into which such share of
Preferred Stock was convertible immediately prior to the Effective Time of the
Loral Merger, (iii) each outstanding stock option to purchase shares of Orion
Common Stock will be converted into an option to acquire the number of shares of
Loral Common Stock equal to the Exchange Ratio multiplied by the number of
shares of Common Stock for which such option was exercisable, and (iv) each
outstanding warrant to purchase shares of Orion Common Stock will be converted
into a warrant to acquire the number of shares of Common Stock equal to the
Exchange Ratio multiplied by the number of shares of Company Common Stock for
which such warrant was exercisable.
Pursuant to the terms of the Merger Agreement, the Exchange Ratio is determined
as follows:
(i) if the average of the volume-weighted average trading prices of Loral
Common Stock for the twenty consecutive trading days on which trading of Loral
Common Stock occurs ending the tenth trading day immediately prior to the
closing date for the Loral Merger (the "Determination Price") is less than
$24.458 but greater than $16.305, the Exchange Ratio is the quotient obtained by
dividing $17.50 by the Determination Price,
(ii) if the Determination Price is equal to or greater than $24.458, the
Exchange Ratio is 0.71553 and
(iii) if the Determination Price is equal to or less than $16.305, the
Exchange Ratio is 1.07329.
If the Loral Merger were to close on March 20, 1998, the Determination
Price would be 24.68652 and the Exchange Ratio would be 0.71553.
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A meeting of Orion's shareholders has been scheduled for March 20, 1998 to
vote to approve the Loral Merger. The Company expects the Loral Merger to close
following a favorable shareholder vote, however, there can be no assurance that
the Loral Merger will be consummated. Although not a condition of the Loral
Merger, Orion intends to seek an Internal Revenue Service ruling as to
eligibility for a tax-free exchange.
In connection with the Merger Agreement, certain principal stockholders of
Orion and members of Orion's management have agreed to vote in favor of the
Loral Merger and have granted to Loral the right to purchase their securities in
Orion for a price equal to the Loral Merger consideration under certain
circumstances. The Company expects the Loral Merger to be consummated by the
first quarter of 1998.
The foregoing descriptions of the Merger Agreement and Principal
Stockholder Agreement with Loral do not purport to be complete and are more
fully described in Registration Statement No. 333-46407 on Form S-4, and have
been filed as exhibits 2.1, 2.2 and 2.3, respectively, and are incorporated
herein by reference. More information on Loral is also available in the
foregoing Registration Statement No. 33-46407.
OTHER RECENT DEVELOPMENTS
On March 26, 1997, Orion acquired German-based Teleport Europe GmbH (now
known as Orion Network Systems-Europe GmbH) ("Orion Europe") a communications
company specializing in private satellite networks for voice and data services.
Orion purchased the shares of Orion Europe held by the German companies, Vebacom
GmbH and RWE Telliance AG, now known as o.tel.o for approximately $9 million.
Orion Europe's 1996 revenues were in excess of $14 million. The acquisition
expanded Orion's customer base by approximately 55 customers, including some of
Germany's leading multinational corporations, and added over 200 Network Service
sites (exclusive of Broadcast Service sites). In addition, Orion acquired Orion
Europe's licenses and operating agreements to provide satellite network services
in 40 countries, including 17 countries in which Orion previously did not
provide service.
In January 1997, the Company consummated the Merger (as defined below) as
part of a series of transactions which significantly changed the Company. Those
transactions, which are discussed in more detail in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," of
this Annual Report on Form 10-K, are as follows:
(i) the acquisition of all of the limited partnership interests which the
Company did not already own in the Company's operating subsidiary, Orion
Atlantic, that owns the Orion 1 satellite, along with rights to receive
repayment of various advances by Orion Atlantic and various other rights, in an
exchange transaction for 123,172 shares of Series C Preferred Stock (the
"Exchange");
(ii) the acquisition by the Company of the only outstanding minority
interest in the Company's subsidiary Orion Network Systems-Asia Pacific, Inc. (
formerly known as Orion Asia Pacific Corporation) from British Aerospace
Satellite Investments, Inc., in exchange (the "OAP Acquisition") for
approximately 86,000 shares of the Company's Common Stock;
(iii) a $710 million notes offering, with warrants representing
approximately 2.6% of the outstanding Common Stock of the Company on a fully
diluted basis (the "Bond Offering"), and
(iv) the sale of $60 million of the Company's Convertible Debentures to
British Aerospace Holdings, Inc. and Matra Marconi Space (the "Convertible
Debentures Offering").
The Exchange and the OAP Acquisition resulted in the Company owning 100% of
Orion Atlantic and its other significant subsidiaries and, therefore, a greatly
simplified corporate structure. The Exchange also resulted in a significant
increase in the Company's capital stock outstanding. The net proceeds of the
Bond Offering and Convertible Debentures Offering were used by the Company to
repay the credit facility it entered into in connection with the construction of
the Orion 1 satellite, to pre-fund the first three years of interest payments on
certain of the Notes, and will be used by the Company for the construction and
launch of two additional satellites, Orion 2 and Orion 3.
5
The Company also recently achieved the following significant milestones
with respect to the expansion of its satellite network, which are discussed in
more detail under the caption "Implementation of the Orion Satellite System" :
(i) Orion commenced construction of Orion 2 in February 1997 under a
satellite procurement contract with Matra Marconi Space for Orion 2. Orion
commenced construction of Orion 3 in December 1996 and entered into a satellite
contract with Hughes Space and Communications International, Inc. for Orion 3 in
January 1997.
(ii) Orion has entered into a contract with DACOM Corp., a Korean
communications company ("DACOM"), under which DACOM will, subject to certain
conditions, lease eight dedicated transponders on Orion 3 for 13 years, in
return for approximately $89 million, payable over a period from December 1996
through seven months following the lease commencement date for the transponders
(which is scheduled to occur by January 1999). Payments are subject to refund
unless Orion 3 commences commercial operation by June 30, 1999.
THE ORION STRATEGY
Orion strategy is to maximize its revenues per satellite transponder
through the delivery of value added services to end users. To quickly establish
a stable base of revenues, Orion sells transponder capacity to video
broadcasters and telecommunications service providers. However, Orion's
long-term strategic focus is on value-added private network and Internet access
services, which include network design, VSAT installation, support and
monitoring, in addition to basic satellite capacity service. The implementation
of Orion's strategy is based on the following elements:
o Focus on Specialized Communications Needs of Multinational Organizations
o Bridge to Emerging Markets and Remote Locations
o End-to-End Service
o Global Coverage
o Early Market Entry
o Local Presence
o Ownership of Facilities
Focus on Specialized Communications Needs of Multinational Organizations
Orion targets the needs of multinational businesses and governmental
customers for customized private network communications services. Advantages of
the Company's satellite-based network services include: (i) transmission over
wide areas to multiple dispersed sites including sites in emerging markets; (ii)
interconnectivity among all sites; (iii) wide bandwidth and high data speeds;
(iv) transmission of data, fax, teleconferencing and voice over the same
network; (v) high transmission reliability, quality and security; (vi) Internet
access; and (vii) rapid implementation, both for the initial installation and
for later network modifications. Due to the flexibility of the network, Orion is
able to provide companies with customized solutions to link multiple locations.
Bridge to Emerging Markets and Remote Locations
Orion targets customers doing business in emerging markets and remote
locations of developed markets which often lack the fiber optic and digital
infrastructure required for wide bandwidth, high speed data applications.
Terrestrial transmissions in many emerging markets must often pass through
local, poorly developed network segments before reaching the customer premises,
making it difficult to send and receive high speed data. In contrast, Orion's
satellite system completely avoids such "bottlenecks" in local network segments
by sending and receiving transmissions directly to and from customers, avoiding
the need to interconnect with the local infrastructure. A significant portion of
Orion's private communications network customers transmit high-speed data to and
from locations in Central and Eastern Europe. Orion 2 and Orion 3 will extend
coverage to the Commonwealth of Independent States, Latin America and the Asia
Pacific Region.
End-to-End Service
Orion provides its services directly to and among customer locations using
satellite transmission and VSATs installed at customer premises. Offering
end-to-end services and bypassing terrestrial infrastructure allows Orion to
offer higher reliability and higher quality services than some terrestrial
facilities by bypassing multiple telecommunications service providers and local
networks and avoiding related toll charges. It also permits Orion to install
networks more quickly than many of its competitors, who must deal with multiple
vendors and multiple communications technologies. Orion offers its
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customers one-stop shopping. This includes a single point of contact, an
all-inclusive contract and consistent quality of service throughout the network.
Global Coverage
Orion believes that providing global coverage is a competitive advantage in
marketing to multinational corporations. Orion 1 covers 34 European countries,
much of the U.S. and portions of Canada, Mexico and North Africa. Orion uses
capacity leased from other carriers to supplement its network coverage area
(such as to areas of Russia, Asia and Latin America). Orion estimates that when
Orion 2 (with coverage of Europe, Russia, the eastern United States, Latin
America, North Africa and the Middle East) and Orion 3 (with coverage of the
Asia Pacific region) are deployed, the satellite footprints in the aggregate
will cover an area inhabited by over 85% of the world's population. This
coverage will enable Orion to offer its customers a single source for service
offerings and a greater measure of network quality control than terrestrial
alternatives.
Early Market Entry
Orion develops an early market presence in targeted geographic areas prior
to satellite launch in order to build its customer base. To accomplish this,
Orion hires sales people, develops relationships with local ground operators,
and delivers its services using leased satellite capacity. Orion employed this
strategy prior to the commercial operation of the Orion 1 satellite and is
pursuing the same approach with Orion 2 and Orion 3. For example, the Company is
currently providing service in Latin America, Asia and Russia over leased
satellite capacity.
Local Presence
Orion has arrangements with ocal ground operators covering most countries
within the Orion 1 footprint, and is entering into additional arrangements as it
offers services in new areas. These ground operators are critical to providing
integrated service because they obtain necessary licenses, install and maintain
the customers' networks, provide in-country business experience and often
facilitate market entry.
Ownership of Facilities
Orion believes it is strategically important to own its satellite
facilities. Orion believes that over the long-term ownership of satellite
facilities provides a cost advantage over resellers and other private service
providers that must lease satellite capacity to provide services to customers.
The Company's satellite ownership enables it to control the quality and
reliability of its network solutions, maintain the flexibility to rapidly add
capacity, new locations and new features to its customer networks, and respond
quickly to customer requests.
INDUSTRY OVERVIEW
Fixed communications satellites are generally located in geostationary
orbit approximately 22,300 miles above the earth and blanket large geographic
areas of the earth with signal coverage. Satellites are thus well suited for
transmissions that must reach many locations over vast distances simultaneously
(i.e., point-to-multipoint transmissions), such as the distribution of
television programming to cable operators, television stations and directly to
homes. Satellites can be accessed from virtually any location within the
geographic area they cover. This ubiquitous coverage allows the satellite to
transmit voice and data communications to remote locations and emerging markets
where terrestrial infrastructure is not well developed.
Prior to the late 1970s or early 1980s, most terrestrial infrastructure
consisted of copper wire (and, to a lesser extent, microwave systems), which was
well suited for ordinary telephone service. Today most developed economies
employ fiber optic cables, which provide much wider bandwidth than copper. In
addition, transoceanic cables now link most major industrialized countries.
Fiber optic cables are well suited for carrying large amounts of bulk traffic
between two fixed locations, and unlike copper wire facilities have sufficient
capacity to carry the high speed data communications that comprise an increasing
percentage of communications traffic. However, in many less developed areas,
terrestrial facilities still consist mainly of copper wire. Even in areas with
fiber optic networks, the "last mile" connections to customer premises often
consist of copper wire. As a result, customers with sites in areas which are
underdeveloped or which have not upgraded their "last mile" copper wire to fiber
optic cable often do not have access to the full range of high speed data
communications demanded by many businesses.
7
Satellites provide a number of advantages over terrestrial facilities for
many high speed communications services. First, satellites provide ubiquitous
service within their footprint and can deliver service directly to customers'
premises. Satellites enable high speed communications service where there is no
suitable terrestrial alternative available. In addition, satellites can
completely bypass terrestrial network congestion points, "last mile" bottlenecks
and unreliable networks of incumbent service providers to provide advanced
services to locations where conventional terrestrial service is available but
inadequate. Second, the cost to provide bandwidth via satellite does not
increase with the distance between sending and receiving stations. Not only must
terrestrial networks add physical capacity to cover additional distances, they
must also continually reamplify transmission signals. Satellites are well suited
for transmission across large distances, for wide bandwidth and for
point-to-multipoint (broadcast) applications. Finally, since VSATs are
relatively easy to install and/or relocate, high power satellite networks can be
rapidly installed, upgraded and reconfigured. In contrast, installation of fiber
optic cable is expensive, time consuming and requires obtaining rights-of-way.
The current generation of high power Ku-band satellites, such as Orion 1,
is particularly well suited to provide high speed business communications
services in addition to video distribution services. The use of the Ku-band
frequencies (as opposed to the C-band used by older generations of satellites)
offers reduced interference with ground communications. This enables satellites
to use the higher broadcasting power necessary to support small, low-cost VSAT
earth stations and makes it cost effective to transmit to or among numerous
locations.
DATA NETWORKING
During the past decade, there has been significant growth in data
networking applications. The data networking market includes a number of types
of services, including leased lines for private networks, public data network
services, managed network services, frame relay and other services such as ATM
(asynchronous transfer mode) and WAN (wide area network) services. Data
networking applications include:
Private network services; intranets. Many companies are utilizing their own
"private" networks to meet their specific communications requirements, including
voice and data communications, business television transmissions, video
teleconferencing, high speed fax and e-mail. Corporate networks offer higher
performance, greater control and security than can be provided through the
public network. Corporations are also taking advantage of intranets to
distribute information within their own companies using Internet technologies.
Data inquiry, collection and retrieval. Hotel and travel reservation
systems and financial enterprises use private communications networks for
database inquiries and retrieval of information stored on computers. Banks use
such networks to verify account balances and connect automatic teller machines
to computers. Retail establishments verify credit standing and gather inventory
information. Other businesses use private communications networks to gather data
from multiple locations and transport it to central locations for analysis.
Internet. Business and consumers rely on the Internet for a growing number
of services, including research, e-mail, data exchange, software and graphics,
financial services and shopping, and even voice communications. These
applications are predicted to continue to expand and diversify in the future as
enabling technologies mature.
Image transmissions. Manufacturing, publishing, research and medical
industries use dedicated communications networks for high-resolution image
transmissions requiring large amounts of bandwidth.
Government networks. Network telecommunications are employed for complex
military and nonmilitary government applications, including administrative and
logistical functions, that require high security and customer network control.
Orion believes that the demand for international data networking will
continue to grow as a result of (i) the shift to client/server computing, (ii)
the proliferation of bandwidth intensive applications and the development of
protocols such as frame relay to handle these applications, and (iii) use of the
Internet and intranets as part of main-stream corporate communications.
(i) Shift to client/server computing. Businesses are increasingly
shifting from using large host computers and centralized data network
architectures to distributed PC and workstation based platforms. As a
result, businesses require more private network infrastructure to establish
and interconnect local and wide area networks. As businesses expand, the
ability to link multiple locations becomes more important.
8
(ii) Proliferation of bandwidth intensive applications; frame relay.
Companies are relying more heavily on applications such as CAD/CAM and
image transfer that require more bandwidth and result in traffic patterns
that involve bursts of transmissions. In addition, there is increasing
demand for near-instantaneous response time and more reliable data
transport. Frame relay services support these applications and reduce the
cost of fully and partially meshed networks.
(iii) Expansion in Internet and intranet services. The Internet is
becoming a major vehicle for economic and social activity enabling broad,
global access to financial and business information, research material, and
information on leisure, arts and general interest topics. Business uses of
the Internet include communication within and among businesses, electronic
commerce, advertising and merchandising. Internet usage has also led to
increased demand for "intranet" services for corporate applications.
Intranet servers are used for publishing information, processing data and
data-based applications and collaboration among employees, vendors, and
customers.
The significant growth in data networking services has led to rapid growth
in demand for satellite-based networks. Multinational companies are not always
able to implement client/server architectures, install wide bandwidth
applications or employ Internet and intranet solutions in every market due to
underdeveloped terrestrial communications infrastructure. Therefore, a growing
use of VSATs is to provide wide bandwidth capacity to industrial sites in
emerging markets and remote locations.
ORION MARKET OPPORTUNITY
The Company believes that demand for satellite-based communications
services will continue to grow because of (i) the expansion of businesses beyond
the limits of wide bandwidth terrestrial infrastructure, (ii) accelerating
demand for high speed data services, (iii) growing demand for Internet and
intranet services, especially outside the U.S., (iv) increased size and scope of
television programming distribution, (v) worldwide deregulation of
telecommunications markets and (vi) continuing technological advancements.
(i) Expansion of business beyond the limits of wide bandwidth
terrestrial infrastructure. Overall growth in the international
telecommunications market reflects the increasingly international nature of
business, the increasing importance of emerging and newly industrialized
economies and the increase in international trade. International businesses
expanding into emerging markets often rely on the incumbent communications
service providers for voice circuits. However, as large organizations
increasingly rely on more sophisticated, high speed communications services
to run their businesses, many of these companies face operational
bottlenecks when attempting to implement more sophisticated communications
networks. These problems are faced both by companies in emerging markets
and companies in developed markets that rely on "last mile" copper
infrastructure to interconnect with a fiber optic network. Satellites
provide wide bandwidth end-to-end service directly connecting customer
premises and bypassing the limitations of terrestrial facilities.
(ii) Accelerating demand for high speed data services. The growth of
graphical user interfaces, the popularity of bandwidth-intensive
applications such as CAD/CAM, the incorporation of high-resolution
electronic images into business processes and video teleconferencing have
necessitated major upgrades of corporate data networks to accommodate the
high data transfer requirements of these applications. Most of these high
speed data services require fiber optic cable or other high bandwidth
connections to the customer premises. Even in developed markets, the "last
mile" connection to the customer premises often consists of copper wire,
which cannot support many high speed data services. Satellites are well
positioned to take advantage of this trend because they provide reliable
high bandwidth service everywhere in their coverage areas, reaching sites
in underdeveloped areas, and bypass "last mile" copper wire facilities that
are unable to support high speed communications.
(iii) Demand for Internet and intranet services. The growth in
Internet and intranet services has further strained corporate network
infrastructures. The utility of Internet services to users is often
constrained by the lack of sufficient bandwidth to support high-resolution
graphical applications and images. Even where infrastructure quality is
high, the rapid growth of the Internet continues to create network
congestion. Users are sometimes unable to use current-generation software
or gain high speed access to the Internet due to the poor quality of their
local terrestrial infrastructure. Satellites have many advantages in
delivering Internet services. Satellite-based networks provide services
directly to customer premises, bypassing terrestrial bottlenecks and
congested Internet routing facilities. In addition, satellite based
networks can be designed to support asymmetric and multicast Internet
traffic much more efficiently than terrestrial networks.
9
(iv) Increased size and scope of television programming distribution.
The global television market is experiencing significant growth, both in
terms of the number of broadcasters creating programming and the number of
channels available to viewers. Within the U.S., the number of television
broadcast and cable television program networks grew from three in 1970 to
over 100 in 1993 and to approximately 200 in 1996. U.S. and international
broadcasters are seeking to expand into each others' markets, increasing
the need for satellite transmission capacity. Non-U.S. broadcasters are
using international satellites to distribute domestic programming to U.S.
and other overseas audiences of similar cultural heritage. Furthermore, the
Company believes that as the number of broadcasters and channels increases,
individual competitors will have a greater need for competitive
differentiation which will increase the use of live transmissions and
expand television coverage. Multichannel programming is expanding rapidly
in Eastern Europe, Latin America and Asia. The growth in multichannel
programming has increased the demand for international programming such as
news and sports. Orion is well positioned to take advantage of this growth
due to its high-power Ku-band satellite and trans-Atlantic footprint.
(v) Worldwide deregulation of telecommunications markets. During the
past decade many countries have liberalized their telecommunications
markets in order to permit new competitors to provide facilities and
services. These changes have been particularly apparent in Europe, where
Orion currently has the ability to deliver network service to and among
points in most countries. Deregulation is also creating new competitors to
national telecommunications companies, which represent potential additional
customers for the Company's services.
(vi) Continuing technological advancements. The following recent
technological advances are expected to increase capacity, efficiency and
demand for satellite services:
1. High Power Satellites. The ability of service providers to
deliver high quality services directly to customer premises has
greatly improved with the development of high power satellites.
Older, lower power satellites require large, expensive earth
stations to receive transmissions. Typically these earth stations
were located outside urban areas and required interconnection with
public telephone systems. High power satellites, such as Orion 1,
enable the use of small, inexpensive VSAT earth stations that may
be installed at customer locations, thereby reducing customer
costs and bypassing all terrestrial facilities.
2. Meshed Network Services. Traditional VSAT networks employ a
hub/star architecture anchored by an expensive hub earth station
that controls the network and communicates with each of the VSATs.
Recent advances in VSAT technology have led to the creation of
fully meshed satellite-based networks. These networks offer less
transmission delay than hub/star networks by enabling any network
node to communicate with any other network node directly through
the satellite without having to transmit through a central network
control point.
3. Frame Relay. The Company believes that despite rapid
advances in network services and application software, many
companies hesitated to implement meshed data networks due to high
overhead costs generated by descriptive and routing commands
required to travel with the data traffic. Frame relay technology
reduces the number and complexity of commands needed to send data,
and enables companies to implement more cost-effective meshed
networks. To meet customers' demands for fully meshed frame relay
network services, the Company has developed its VISN service.
4. Compressed Digital Video. CDV technology is designed to
compress up to ten high-quality video channels into the same
bandwidth that previously carried one or two analog channels. This
technology is creating a rapid expansion in the number of
available video channels with improved transmission quality. CDV
lowers the per-channel cost of delivering programming via
satellite and cable television systems, thereby enabling more
programming options to be provided to smaller markets. The Company
believes that CDV will enable continued growth in the number of
video channels and also accelerate broadcasters' efforts to
distribute their programming internationally. The Company also
believes that CDV will result in higher total revenues per
transponder as more customers can be served per transponder.
However, CDV may also in effect increase the supply of satellite
transponders, causing prices to decline.
10
ORION SERVICES
Orion provides satellite-based digital communications services comprised
of: (i) private network services for multinational business and governmental
customers, (ii) Internet backbone and access services and (iii) satellite
transmission capacity services, including video distribution services for
broadcasters, news organizations and international carriers. For 1997,
approximately 43% of revenues were derived from the sale of satellite capacity
(primarily for video distribution services). These figures are consistent with
the Company's strategy of building a stable base of revenues through sales of
transmission capacity and then focusing on the delivery of value-added private
network services to end-users.
PRIVATE COMMUNICATIONS NETWORK SERVICEs
International Leased Line Services. Orion's international leased line
services include Digital Link and Digital Channelized Link. Digital Link can be
designed as a "point-to-point" private network service directly connecting
customer locations or as a "point-to-multipoint" service for customers seeking
to transmit communications from a central location to numerous remote sites.
Orion also offers Digital Channelized Link, a multiplexed version of Digital
Link that integrates digitally compressed voice, fax and data traffic into a
single channel. Digital Link and Digital Channelized Link services have been
offered by Orion since 1993. International leased line services have constituted
a majority of Orion's bookings of private communications network services to
date.
International Data Networking Services. Orion's fully-meshed frame relay
based international data networking service, "Virtual Integrated Sky Network"
("VISN"), allows customers to transmit and receive voice, fax and data
communications, including intranet services, among multiple locations
simultaneously. VISN was developed by Orion and is produced by Nortel Dasa (a
joint venture among Northern Telecom, Dornier GmbH, and Daimler Benz Aerospace
AG). The first phase of this service became available to customers commencing in
the third quarter of 1995. Subsequent phases of the service have been introduced
during 1996 and 1997, with further phases expected to be introduced during 1998.
VISN offers customers bandwidth on demand for data, voice and fax and, following
the introduction of in-process and future releases, customers will have the
option to be charged on a "pay per use" basis (e.g., minutes of use for voice
and volume for data). VISN employs TDMA technology, which further increase the
effective bandwidth available for data transmission. The VISN product was
awarded "Best New Transport Technology Product" at the 1995 ComNet New Product
Achievement Awards Competition. Most customers have between four and ten sites,
and generally have minimum data rates with the ability to use substantially
greater bandwidth for bursts of traffic.
INTERNET BACKBONE AND ACCESS SERVICES
The Company believes that the rapid growth of the Internet has created
substantial opportunities for Orion. First, the United States has become the
residence of the majority of the world's Internet content. Companies are looking
for reliable, wide bandwidth connections which bypass congested Internet network
segments. Orion's transatlantic capacity is well suited for companies in Europe,
including International Internet Service providers ("IIPS"), seeking high-speed
access to the U.S. Internet. Second, the Internet has begun to evolve from a
user centered "pull" environment (users requesting information) to a content
provider centered "push" environment (information delivered to users without
concurrent request). Broadly distributed entertainment, information and
advertising via the Internet are well suited for broadcast, point-to-multipoint
communications facilities, such as satellite. By using satellite broadcasts to
transmit the most popular Internet content to regional locations. IISPs can
reduce their costs and relieve network congestion. Finally, Internet data
communications re typically asymmetric. A typical large Internet data
transmission is predicated by a user request that comprises only a few bytes of
traffic. This interaction is inefficient when carried over terrestrial
full-duplex networks, which carry the same capacity in each direction, providing
an inexpensive circuit for user requests and high-speed, reliable and available
capacity for the data that flows back to the user.
Orion's WorldCast service (patent pending) is a satellite based Internet
service for IISPs and other corporate users that supports asymmetric and
multicast traffic. Orion recently consolidated its Internet service offerings
under the WorldCast banner. WorldCast is a flexible network solution that can be
customized to meet the specifications of an IISP or other user of Internet
services. It provides a multicast, burstable TCP/IP network with committed
information rates that can be configured as a pure satellite network with VSATs
or integrated with existing terrestrial networks. Orion customizes an IISP's
Internet connectivity by taking advantage of the asymmetric broadcast
characteristics of the Internet. The WorldCast service includes a Usenet
multicast channel.
11
VIDEO DISTRIBUTION AND OTHER SATELLITE TRANSMISSION SERVICES
Orion provides transmission capacity to cable and television programmers,
news and information networks, telecommunications companies and other carriers
for a variety of applications. A majority of Orion's transmission capacity
services consist of video services. The Company generally offers transmission
capacity services under long term contracts and also offers occasional use
services for periods of up to a few hundred hours.
Video Services -- Contribution. Orion's video services include
"contribution," the long-distance transport of video signals (usually one or
more television channels) to one location.
Video Services -- Distribution. Cable and television programmers use
Orion's satellite transmission services for distribution of television
programming to local broadcast stations, cable head-ends, MMDS (multichannel
microwave distribution) systems and SMATV (satellite master antenna television).
Orion has a joint marketing agreement with NTL, which operates one of the
largest video gateways in Europe, located in downtown London. Orion and NTL
offer programmers uplink, compression and distribution to cable head-ends
throughout the United Kingdom and to locations in Europe. Orion's ability to
offer video distribution services is aided by the transponder switching
capabilities of Orion 1, which are (and those of Orion 2 and Orion 3 are
expected to be) designed to permit programs to be distributed simultaneously
throughout the satellite's coverage area.
News and Special Events. Orion 1 is used for transmission of special events
or remote feeds to international news bureaus from television stations and
on-location mobile transmitters. Because Orion's Ku-band technology and VSAT
ground segment infrastructure offers high reception sensitivity, the Company is
especially effective in transmitting television signals sent from low-powered
portable transmitters typically used by news organizations and program
distributors. In contrast to video contribution services, news and special
events are characterized by occasional use rather than long-term capacity
contracts.
International Carriers. Orion satellite transmission services are used by
international carriers to provide backup for terrestrial lines and to provide
communications services to areas with inadequate telecommunications
capabilities. These carriers resell Orion's capacity as part of their own
services.
Capacity Sales. Orion sells bulk capacity to resellers who use Orion's
transmission capacity as one component of a customer's end-to-end communications
solution. For example, Orion currently sells capacity to a number of firms that
resell Orion's capacity to governmental organizations.
Orion offers a range of value-added services in conjunction with its video
distribution and other satellite transmission services. Such services may
include the provision of video uplinking and receiving stations, digital
compression equipment and software, transmission monitoring and gateway
interconnection services.
FEATURES AND BENEFITS
Orion's satellite-based services offer customers a number of important
features, which provide significant benefits versus competing alternatives.
Bypass terrestrial network and multiple international connection
points. Orion's ability to bypass terrestrial facilities improves service
reliability and quality by reducing potential points of failure and
avoiding "last mile" limitations. In addition, terrestrial bypass allows
Orion to avoid the multiple in-country toll charges of terrestrial
facilities and thereby reduces cost.
Direct end-to-end service to customer sites. Orion provides service
from rooftop to rooftop using VSAT earth stations located on customer
premises. This "end-to-end service" is reliable, rapidly installed, easily
upgraded and avoids the "last mile" limitations of some terrestrial
alternatives.
Ubiquitous coverage. Orion delivers wide bandwidth service to emerging
markets and remote locations where there are no effective terrestrial
alternatives.
One-stop shopping. Orion provides its customers with a single point of
contact for customer care, including service, billing and support.
12
Two-way communications for all sites. Orion's meshed network solutions
and frame relay services promote network efficiency and allow real-time
data transfer among dispersed network points.
Well-suited for asymmetric communications traffic. Orion's network
solutions can be designed to carry asymmetric traffic efficiently, which
increases performance and lowers cost to customers for services such as
Internet services.
Point to multipoint capability. Orion's ability to broadcast video,
data and voice to multiple locations simultaneously enables efficient
network design.
High power Ku-band transmissions, high reception sensitivity. Orion's
high power transmissions allow customers to lower costs by utilizing small,
less expensive earth station equipment. Orion 1's reception sensitivity
allows for effective reception from portable earth stations, an advantage
in satellite news gathering.
Cost-competitive. Orion prices its services to be competitive with both
satellite-based and terrestrial alternatives.
CUSTOMERS AND BACKLOG
Customers. As of December 31, 1997, Orion had entered into contracts with
301 customers, principally large multinational corporations, European companies
and governmental agencies. These entities come from many different industries,
including communications, broadcasting manufacturing, government, banking and
finance, energy, lottery, consumer distribution, Internet access services and
publishing. Selected customers from each service area are set forth below.
- ---------------------------------------------------------------------------------------------------
Private Network Services: AT&T EDS
Digital Link/Digital Channelized Amoco GE Americom
Link GTECH Hewlett-Packard
Chase Manhattan Bank News International Limited
Citibank USA TODAY
Concert Global Network Westinghouse
Private Network Services: Balluff & Co. Pepsi Cola
VISN Creditanstalt Price Waterhouse
WorldCast Ebone LV Net Teleport
Banknet Spectrum
Datac Terminal Bar
Global Ukraine Global One
Video Transmission and Other AsiaNet Hughes Network Systems
Black Entertainment
Television MCI
Bonneville International RTL Television
British Telecom Telecom Italia
CNN Viacom International
Comsat
- --------------------------------------- ---------------------------------------------------------------------
Orion has entered into a contract with DACOM Corp., a Korean communications
company which provides international and long distance telephone and leased line
services, international and domestic data communications and value added network
services. Under the contract, DACOM will, subject to certain conditions, lease
eight dedicated transponders on Orion 3 for thirteen years for direct-to-home
television service and other satellite services, for $89 million payable in
installments from December 1996 through seven months following the lease
commencement date of the transponders. Payments are subject to refund if Orion 3
has not been successfully launched and commenced commercial operation by June
30, 1999. Although Orion 3 is scheduled to be launched in the fourth quarter of
1998, there can be no assurance that Orion will be able to meet the delivery
requirement of this contract.
13
Backlog. At December 31, 1997, Orion had approximately $269.5 million of
contracts in backlog (including $89 million from the DACOM contract and after
giving effect to the Exchange and related transactions, which resulted in
changes to arrangements with Exchanging Partners that reduced backlog by
approximately $11 million), as compared to approximately $214.9 million at
December 31, 1996. The backlog contracts generally have terms of between three
and four years. Orion presently anticipates that at least $206.6 million of its
backlog will be realized after 1998. Orion has begun to receive contract
renewals under expiring contracts (under some of the earliest contracts, which
were entered into in 1993 and 1994). The size of contracts varies significantly,
depending on the amount of capacity required to provide service, the geographic
location of the network and other services provided.
Although many of the Company's customers, especially customers under large
and long-term contracts, are large corporations with substantial financial
resources, other contracts are with companies that may be subject to other
business or financial risks. If customers are unable or unwilling to make
required payments, the Company may be required to reduce its backlog figures
(which would result in a reduction in future revenues of the Company), and such
reductions could be substantial. The Company has recently instituted tighter
credit policies, and has taken steps to remove from backlog arrangements with
customers who have not taken service or have not made all required payments. The
Company's contracts commence and terminate on fixed dates. If the Company is
delayed in commencing service or does not provide the required service under any
particular contract, as it has occasionally done in the past, it may not be able
to recognize all the revenue it initially includes in backlog under that
contract. In addition, the current backlog contains some contracts for the
useful life of Orion 1; if the useful life of Orion 1 is shorter than expected,
some portion of backlog may not be realized unless services satisfactory to the
customer can be provided over another satellite.
SALES AND MARKETING
Orion uses both direct and indirect sales channels. Orion markets its
private communications network services and Internet services through direct
sales, local representatives and distributors in Europe, the United States,
Latin America and Asia, and wholesale arrangements with major carriers, Internet
service providers, resellers and systems integrators. Orion markets its video
distribution and other satellite transmission services primarily through direct
sales. Orion also has established arrangements with local companies in most
countries within the Orion 1 footprint to assist Orion with selling efforts and
to provide customer support and network maintenance functions in those countries
(as discussed below under the caption "Network Operations; Local Ground
Operators").
Orion generally will enter into a single contract with customers covering
service to a number of countries. Orion offers the business customer a single
point-of-contact, a single contract and one price for its entire network, which
Orion believes constitutes true "one-stop shopping." Orion prices its services
centrally, using a single, easily administered set of pricing procedures for
customer networks.
Marketing will be critical to Orion's success. However, Orion has limited
experience in marketing, having commenced full commercial operations in 1995.
Orion's marketing program until recently consisted of direct sales using U.S.
and European based sales forces and indirect sales channels, including Limited
Partner sales representatives, for sales in Europe. The majority of Orion's
contract bookings to date have been generated by its direct sales force. During
1997, Orion significantly increased its direct sales capabilities in Europe,
particularly with respect to sales of private communications network services.
Sales of Orion's services generally involve a long-term complex sales process,
and Orion's bookings have fluctuated significantly.
The Company may from time to time enter into joint ventures or acquire
businesses which provide it with additional customers or which enhance its
marketing capabilities. In the first quarter of 1997, the Company completed such
an acquisition, as discussed above under "Other Recent Developments".
DIRECT SALES
Orion has assembled a direct sales force of 58 (as of December 31, 1997)
full-time employees to offer its private communications network and satellite
transmission services, primarily in the United States and Europe. Approximately
48% of the sales force is based in the United States and approximately 52% is
based in Europe. Orion expects to continue to expand its sales force
significantly throughout 1998, in the U.S., Europe, Latin America and Asia.
14
INDIRECT SALES CHANNELS
Major Carriers and Other Distributors. Orion has entered into distributor
resale arrangements with major carriers, teleport operators, resellers and other
companies in the United States and internationally. These distributors typically
purchase communications network services from Orion at a wholesale rate for
resale to their customers. This represents an important sales channel for the
Company, and the Company is focusing on strengthening these relationships. Major
carriers employ substantial sales forces and have the advantage of being
existing providers to many of Orion's target customers, which makes marketing
easier and increases awareness of customer needs.
Representatives. Orion has entered into agreements for the marketing of its
private communications network services in the United Kingdom, France, Germany,
Austria, Italy and other European countries. These agreements call for sales,
marketing and customer support services in specified geographical areas,
generally on a non-exclusive basis. Generally, the duration of these agreements
is three years. Third party sales representatives receive commissions and fees
for sales and customer support services, each of which are payable over the life
of the customer contracts to which the representative's services relate and
which are based upon the revenues derived. Two former limited partners of the
Orion Atlantic Limited Partnership who serve as sales representatives (and
ground operators) are entitled to receive additional commissions under a "profit
sharing" formula based on their overall contribution to sales, but no amounts
have been paid under such formula to date. The agreements with these sales
representatives terminate in 1998. Orion expects that payments, if any, under
the profit sharing arrangement will not be material.
Indirect sales channels are supervised by Orion sales managers, who
establish marketing strategies with the representatives, establish pricing, lend
engineering support, attend certain sales calls, develop marketing materials and
sales training tools, coordinate joint efforts in promotional events and provide
information about Orion's services.
NETWORK OPERATIONS; LOCAL GROUND OPERATORS
Orion has a network operations facilities at its corporate headquarters in
Rockville, Maryland, and in Hannover Germany supported by arrangements with
local companies in most countries within the Orion 1 footprint who assist Orion
with selling efforts and perform customer support and network maintenance
functions. Orion's relationships with ground operators are critical to providing
integrated service because ground operators maintain the customers' networks,
provide in-country business experience and often facilitate market entry and
licensing.
Network Operations. Once the Company enters into a contract with a
customer, it finalizes the design of the customer's network, acquires the
required equipment and arranges for the installation and commissioning of the
network. Upon commencement of service, Orion also monitors the performance of
the networks through its U.S. and German based network management centers . The
network management centers allow Orion to perform diagnostic procedures on
customer networks and to reconfigure networks to alter data speeds, change
frequencies and provide additional bandwidth.
Ground Operators. Through arrangements with local ground operators, Orion
currently has the ability to deliver network services (through Orion 1 or leased
capacity on other satellites) to or among points in most European countries, the
United States and Mexico (which comprise substantially all of the countries
within the coverage area of Orion 1), as well as arrangements to deliver network
services in various Latin American and Asian countries. The ground operator
agreements call for installation and maintenance of VSATs and other equipment,
customer support and other functions in designated geographical areas, generally
on a non-exclusive basis. Generally, such ground operations agreements last
three years. Orion coordinates ground operations services (including service
calls) by its local agents through centralized customer service centers located
at Orion's corporate headquarters and at its facilities in Hannover. Orion also
provides its ground operators with installation and maintenance training
materials and support. Ground operators receive fixed fees for installation,
maintenance and other services, which vary depending on the level of services
and the geographic area. Certain ground operators receive payments for customer
support over the life of the related customer contract, based upon the revenues
derived. Two former limited partners of the Orion Atlantic Limited Partnership
who serve as ground operators are entitled to receive additional fees under a
profit sharing formula, but no amounts have been paid under such formula to date
and Orion expects that, unless such ground operators significantly increase the
number of VSATs they maintain on behalf of Orion for Orion's customers, profit
sharing payments will not be material. Orion's operations will continue to
depend significantly on Orion being able to provide ground operations for
private network services using representatives and distributors throughout the
footprint of Orion's satellites. In the event that its network of ground
operators is not maintained and expanded, or fails to perform as expected,
Orion's ability to offer private network services will be impaired.
15
MIGRATION PLAN FOR NEW MARKETS
Prior to the launch of Orion 1, the Company began providing private
communications network services to customers over satellite capacity leased from
others. This early market entry strategy has been extended to Latin America and
Asia with the commencement of construction of the Orion 2 and Orion 3
satellites. By developing an early market presence, Orion builds its customer
base, establishes relationships with ground operators and becomes familiar with
the regulations and practices in its new markets prior to launch of its
satellites. Upon the launch of Orion 1, Orion migrated its customer base to its
own satellite, and Orion expects to pursue the same approach for Orion 2 and
Orion 3.
In Latin America, the Company has agreements with a ground operators in a
number of countries and is currently providing service to customers in Mexico,
Colombia and Paraguay over leased capacity. The Company intends to migrate such
services to Orion 2 after it commences operations, as Orion did with its Orion 1
satellite. The Company has a direct sales force focused on selling in Latin
America, and is pursuing relationships with additional ground operators,
distributors and joint venture partners.
In Asia, the Company has agreements with ground operators in several
countries, and has commenced discussions with such entities in a number of other
Asian countries. The Company has begun marketing its services in Asia, both to
existing customers with Asian operations and through regional sales offices in
Hong Kong and Singapore. The Company expects its marketing for Orion 3 will be
assisted by the $89 million pre-construction lease by DACOM, a Korean
communications company, of eight of Orion 3's transponders for direct-to-home
service and other satellite services.
IMPLEMENTATION OF THE ORION SATELLITE SYSTEM
Orion currently provides its services with Orion 1 and with facilities
leased from other providers covering areas outside the satellite's footprint.
Ultimately the Company will provide these services with three satellites,
together with facilities leased outside of its footprints. Orion 1 provides
coverage of the Northern Atlantic Ocean region. Orion 2 is being designed to
cover the Atlantic Ocean region but with coverage of points further East (into
the Commonwealth of Independent States) and South (into Latin America and
Africa), and Orion 3 is being designed to cover the Asia Pacific region.
The design, construction, launch and in-orbit delivery of a satellite is a
long and capital-intensive process. Satellites comparable to Orion's typically
cost in excess of $200 million (exclusive of development, financing and other
costs) and take two to three years to construct, launch and place in orbit.
Prior to launch, the owner generally must obtain a number of licenses and
approvals, including approval of the host country's national telecommunications
authorities to construct and launch the satellite, coordination and registration
of an orbital slot (of which there are a limited number) through the ITU to
avoid interference with other communications systems and a consultation on
interference with INTELSAT (and EUTELSAT in the case of European satellites).
Obtaining the necessary consents can involve significant time and expense, and
in the case of the United States, requires a showing that the owner has the
financial ability to fund the construction and launch of the satellite and to
operate for one year. The Company has commenced construction of Orion 3 and
Orion 2 prior to receipt of all regulatory approvals. Failure to obtain such
approvals prior to launch would have a material adverse effect on the Company.
Orion 1 is expected to have an in-orbit useful life of approximately 10.7 years,
estimated to end in October 2005, and Orion 2 and Orion 3 are expected to have
in-orbit useful lives of 13 years and 15 years, respectively (based upon present
design). While there can be no assurances that adequate financing and regulatory
approvals will be obtained, Orion plans to launch replacement satellites as its
satellites reach the end of their useful lives.
ORION 1
Orion 1 was launched in November 1994 and commenced commercial operations
in January 1995.
Satellite Design and Footprint. Orion 1, which is in geosynchronous orbit
at 37.5(Degree) West Longitude, is a high power Ku-band telecommunications
satellite that contains 28 transponders of 54 MHz bandwidth and six transponders
of 36 MHz bandwidth (although one of these transponders has not operated in
accordance with specifications, as described below). The footprint of Orion 1 is
shown below (although certain transponders of Orion 1 can be reconfigured to
match changing business and telecommunications requirements).
16
INSERT MAP
Satellite Construction and Performance. Orion 1 was constructed by Matra
Marconi Space's subsidiary MMS Space Systems Limited, one of the major satellite
contractors in Europe. Orion 1 was designed both for the delivery of high-speed
data and for high-powered digital video transmission to corporate users. In
particular, Orion 1 was designed with high reception sensitivity, which enables
two-way transmission from and to small earth stations, reducing the equipment
and transmission cost to customers. Orion 1 has transatlantic networking
capability, which allows users to uplink data in the U.S. or Europe and downlink
that transmission simultaneously to the U.S. and Europe.
This configuration simplifies customers' transatlantic networking
solutions. Orion believes that Orion 1's Ku-band technology and VSAT ground
segment infrastructure is among the least expensive, most flexible technologies
for interactive satellite transmissions in the North Atlantic market. Like most
recent satellites, Orion 1 offers digitally compressed transmission, in addition
to analog transmission, which allows the satellite to increase by up to ten-fold
its usable bandwidth per transponder, leading to greater revenue per transponder
and greater network availability to customers in need of bandwidth on demand.
When Orion 1 was delivered into orbit, one of the 36 MHz transponders with
coverage of the United States did not perform in accordance with contract
specifications. Orion settled the matter with the manufacturer for a one time
refund of $2.75 million (which amount was applied as a mandatory prepayment
under the existing Orion 1 Credit Facility). In addition, the manufacturer will
pay Orion approximately $7,000 per month for the life of the satellite under the
warranty to the extent the transponder is not used to generate revenue. Orion
believes that the failure of such transponder to perform in accordance with
specifications will not have a significant impact on Orion's ability to offer
its services.
In November 1995, one of Orion 1's components supporting nine transponders
of dedicated capacity serving the European portion of the Orion 1 footprint
experienced an anomaly that resulted in a temporary service interruption,
lasting approximately two hours. Full service to all affected customers was
restored using redundant equipment on the satellite. Orion believes, based on
the data received to date by Orion from its own investigations and from the
manufacturer, and based upon advice from Orion's independent engineering
consultant, Telesat Canada, that because the redundant component is functioning
fully in accordance with specifications and the performance record of similar
components is strong, the anomalous behavior is unlikely to affect the expected
performance of the satellite over its useful life. Furthermore, there has been
no effect on Orion's ability to provide services to customers. However, in the
event that the redundant component fails, Orion 1 would experience a significant
loss of usable capacity. In such event, while Orion would be entitled to
insurance proceeds of approximately $47 million and could lease replacement
capacity and function as a reseller with respect to such capacity (at
substantially reduced gross margins), the loss of capacity would have a material
adverse effect on Orion.
Control of Satellite. Orion uses its tracking, telemetry and command
facility in Mt. Jackson, Virginia (the "TT&C facility") to control Orion 1, and
has in place backup facilities at its headquarters in Rockville, Maryland. In
addition, Orion has a satellite control center at Orion's headquarters in
Rockville, Maryland, from which commands can be sent to the satellite, directly,
or remotely through the TT&C facility. Orion also has constructed a network
management center at its headquarters to monitor the performance of Orion 1 and
to perform diagnostic procedures on and to reconfigure its communications
networks. Orion leases additional facilities in Europe for backup tracking,
telemetry and command and network monitoring functions.
17
ORION 2
Schedule and Footprint. Orion intends to launch Orion 2 in the Atlantic
Ocean region to bolster its European capacity and to expand its coverage area in
the Commonwealth of Independent States, Latin America and parts of Africa. Orion
2 will be a high power Ku-band communications satellite which will contain
approximately 30 transponders of 54 MHz bandwidth. Orion has obtained
conditional authorization from the FCC for the orbital slot at 12(Degree) West
Longitude for operation of Orion 2. The FCC has commenced the coordination
process through the ITU and will commence consultation with INTELSAT upon
request from Orion. Orion commenced construction of Orion 2 in February 1997 and
expects to launch Orion 2 in mid 1999.
[Document contains a map of North America, Latin America, Europe, Africa and
Asia showing in
shaded areas the proposed coverage footprint of Orion 2]
Satellite Construction, Launch and Performance. Matra Marconi Space and MMS
Space Systems are the prime contractors for Orion 2 and will use MMS Space
Systems' EUROSTAR satellite platform for Orion 2. This platform was previously
used for Inmarsat 2, Telecom 2, Hispasat and Orion 1. Lockheed Martin CLS will
provide launch services for Orion 2 using the Atlas II A-S launch vehicle. Atlas
II A-S, which is larger than the launch vehicle used for the launch of Orion 1,
is an expanded version of Atlas II. All 26 of the Atlas II, II A and II A-S
launches have been successful. There have been more than 500 Atlas flights since
the first research and development launch in 1957.
The Orion 2 satellite will be tested extensively prior to launch. Matra
Marconi Space is obligated to correct all defects in the satellite or its
components discovered prior to the launch. If Orion 2 is launched but fails to
meet the specified performance criteria following launch, or fails to arrive at
its designated orbit within 180 days of launch, or is completely destroyed or
incapable of operation, Orion 2 will be deemed a "constructive total loss." Upon
a constructive total loss of Orion 2, Orion would generally be entitled to order
from Matra Marconi Space a replacement satellite on substantially the same terms
and conditions as set forth in the Orion 2 Satellite Contract, subject to
certain pricing adjustments. If Orion 2 is substantially able to perform but
fails to meet certain criteria for full acceptance, Orion 2 will be deemed a
"partial loss." Upon a partial loss of Orion 2, Orion would be entitled to
receive a partial refund based on calculations of Orion 2's performance
capabilities. If Orion 2 is not a constructive total loss or partial loss, but
does not meet the specified performance requirements at final acceptance or for
five years thereafter, Matra Marconi Space may be required to make certain
refund payments to Orion up to a maximum of approximately $10 million. Orion's
principal remedy in the case of a constructive total loss or partial loss will
be under the launch insurance the Company is to obtain. The Orion 2 Satellite
Contract provides Orion with an option to purchase a replacement satellite.
Under the contract, Orion has an option to purchase a replacement satellite for
Orion 2, to be delivered in orbit no later than 21 1/4 months after Orion's
exercise of the option. A total or partial loss will involve delays and loss of
revenue, which will impair Orion's ability to service its indebtedness,
including the Notes, and such insurance will not protect Orion against business
interruption, loss or delay of revenues or similar losses and may not fully
reimburse the Company for its expenditures.
18
The Orion 2 Satellite Contract provides for incentive payments to encourage
early delivery and limited liquidated damages payable in the event of late
delivery. The incentive payments would equal $25,000 per day for each day that
Orion 2 is delivered prior to the scheduled delivery date. Liquidated damages in
the event of a late delivery of Orion 2 also would be calculated on a daily
basis, with the aggregate amount not to exceed approximately $12 million. These
liquidated damages would be Orion's exclusive remedy for late delivery.
Control of Satellite. Orion expects to use the TT&C facility to control
Orion 2, and to use its existing network monitoring facilities in Rockville,
Maryland and backup facilities in Europe.
ORION 3
Schedule and Footprint. Orion intends to launch Orion 3 in the Asia Pacific
region. Orion 3 is expected to cover all or portions of China, Japan, Korea,
India, Hawaii, Southeast Asia, Australia, New Zealand, and Eastern Russia. Orion
3 is expected to be a high-power satellite with twenty-three 54 MHz and two 27
MHz equivalent Ku-band transponders, ten 36 MHz C-band transponders for use by
Orion, and eight Ku-band transponders to be used by DACOM, a large Asian
customer, for direct-to-home television services and other satellite services.
Orion, through the Republic of the Marshall Islands, has filed the appropriate
documentation with the ITU process and is in the process of coordinating the
orbital slot at 139(Degree) East Longitude. Orion has commenced, but has not
completed the consultation process with INTELSAT with respect to such orbital
slot. Orion commenced construction of Orion 3 in December 1996. Orion 3 is
scheduled to be launched in the fourth quarter of 1998.
The proposed coverage of Orion 3 is shown below.
[INSERT COVERAGE MAP]
19
Pre-Construction Customer. Orion has entered into a contract with DACOM
Corp., a Korean communications company which provides international and long
distance telephone and leased line services, international and domestic data
communications and value added network services. Under the contract, DACOM will
lease eight dedicated transponders on Orion 3 for 13 years for direct-to-home
television service and satellite services, in return for payment of
approximately $89 million payable over a period from December 1996 through seven
months following the lease commencement date for the transponders. Payments are
subject to refund if the successful launch and commencement of commercial
operations of Orion 3 has not occurred by June 30, 1999. Although Orion 3 is
scheduled to be launched in the fourth quarter of 1998, there can be no
assurance that Orion will meet the delivery requirements of this contract. As
part of the arrangements with DACOM, Orion granted DACOM a warrant to purchase
50,000 shares of Common Stock at $14 per share.
Satellite Construction, Launch and Performance. Orion has selected Hughes
Space as the prime contractor for Orion 3 and will use a Hughes Space HS 601 HP
satellite platform for Orion 3. Launch services for Orion 3 will be provided
using the McDonnell Douglas Delta III launch vehicle. Delta III, which is larger
than the launch vehicle used for the launch of Orion 1, is an expanded version
of the Delta II launch vehicle which has had 53 successful launches with a
failure rate of less than 4%. A launch of a Delta II (on January 17, 1997)
resulted in a launch failure. There have been no Delta III flights to date, and
the Company expects its launch to be the third Delta III flight based upon
information provided by the launch vehicle manufacturer regarding its present
flight schedules.
Under the Orion 3 Satellite Contract, the Orion 3 satellite will be tested
extensively prior to launch. Hughes Space is obligated to correct all defects in
the satellite or its components discovered prior to the launch. The risk of loss
or damage to Orion 3 passes from Hughes Space to Orion at the time of
intentional ignition of Orion 3. After Orion 3 is launched and meets the
specified performance criteria following launch, and has not suffered damage
caused by any failure or malfunction of the launch vehicle, Hughes Space is
required to perform in-orbit testing of Orion 3 to determine whether the
transponders meet the specified performance criteria. If the transponders meet
the specified performance criteria, Hughes Space is entitled to retain the full
satellite performance payments described below.
Orion has an option to purchase an additional satellite (which may be used
as a replacement satellite) to be launched within 12 to 19 months after Orion
exercises such option. Orion must pay a fee if it exercises this option; the
size of the fee will depend on whether the additional satellite is required to
be delivered in 12, 15 or 19 months. Hughes Space is obligated to furnish the
replacement satellite on terms substantially similar to those contained in the
Orion 3 Satellite Contract.
The Orion 3 Satellite Contract provides for incentive payments to encourage
satellite performance and limited liquidated damages payable in the event of
late delivery. The incentive payments could total $18 million depending on the
satellite's performance, of which $10 million could be payable upon acceptance
of the Orion 3 satellite and $8 million is payable over the course of the
satellite's operational lifetime. In the event that it is determined during the
Orion 3's operational lifetime that a transponder is not successfully operating,
Orion is entitled to receive payment refunds under the Orion 3 Satellite
Contract. Liquidated damages in the event of a late delivery of Orion 3 also
would be calculated on a daily basis, with the aggregate amount not to exceed
approximately $6 million. These liquidated damages would be Orion's exclusive
remedy for late delivery.
Control of Satellite. Orion is in the process of completing a tracking,
telemetry and command facility in the United States to control Orion 3 and
expects to maintain backup facilities in Korea, pursuant to arrangements with
DACOM.
20
SUMMARY SATELLITE DATA
ORION 1 ORION 2* ORION 3*
Region Covered.................. Europe, Southeastern Eastern U.S., Southeastern Canada China, Japan, Korea, India,
Canada, U.S., East of the Europe, Commonwealth of Independent Hawaii,Southeast Asia,
Rockies and Paris of States, Middle East, North Africa and Australia, New Zealand
Mexico America and Eastern Russia
Expected Launch................. Operational(1) Mid 1999 Fourth Quarter of 1998
Satellite Manufacturer.......... MMS Space Systems Matra Marconi Space Hughes Space
(subsidiary of Matra
Marconi Space)
Transponders(2)................. 34 30 43
Ku-Band(3)...................... 28@0054 MHz 30@0054 MHz 23@0054 MHz
6@0036 MHz 2@0027 MHz
8@0036 MHz (4)
C-Band(5)....................... -- -- 10@0036 MHz
Usable Bandwidth(6)............. 1728 MHz 1620 MHz 1944 MHz
EIRP(7)......................... 47 to 52 dBW 47 to 50 dBW 44 to 52
for Ku-Band;
34 to 38
for C-band
returns
Total Prime Power(8) ........... 4500 Watts 7000 Watts 8000 Watts
Expected End of Useful Life(9).. 2005 2012 2013
Approximate Percentage of World
Population Covered by
Satellite(10)................... 17.9% 27.0% 57.0%
* All information relating to Orion 2 and Orion 3 is based on currently
proposed satellite designs. Particular features of Orion 2 and Orion 3 are
subject to change, although changes are not expected to have a material
impact on the operating specifications of the satellites.
(1) Orion 1 was launched on November 29, 1994 and commenced commercial
operations on January 20, 1995.
(2) Satellite transponders receive signals up from earth stations and then
convert, amplify and transmit the signals back down to other earth
stations.
(3) Ku-band frequencies are higher than C-band frequencies and are used
worldwide for commercial satellite communications.
(4) Orion has entered into a contract with DACOM under which Orion will
provide eight dedicated transponders on Orion 3 for direct-to-home
television service and other satellite services, provided that Orion 3 is
delivered in orbit and fully operational by June 30, 1999.
(5) C-band frequencies minimize interference from atmospheric conditions such
as rain. C-band satellites share frequencies with terrestrial based
microwave systems and therefore require more on-ground coordination to
avoid interference problems and generally are lower power, requiring the
use of large earth stations to receive signals. A portion of Orion 3 is
designed to transmit over C-band frequencies since Orion 3 is to cover
areas of Asia where satellite signals experience significant interference
from rain during several months of the year.
(6) Bandwidth is a measure of the transponder resource which determines the
information carrying capacity. The actual information carrying capacity of
a transponder is determined by a combination of the transponder's
bandwidth and radio-frequency ("RF") power.
(7) Equivalent isotropic radiated power ("EIRP") is a measure of the RF power
of each transponder. Smaller and less expensive earth terminal antennas
can be used with higher EIRP transponders.
21
(8) Total prime power is the total amount of power that is required to support
all of the communications and electronics functions of the satellite.
(9) The expected end of a satellite's in-orbit useful life is based on the
period during which the satellite's on board fuel permits proper station
keeping maneuvers for the satellite. The information for Orion 1 is based
on 1997 fuel level estimates. The information for Orion 2 and Orion 3 is
based on their expected launch dates and their expected satellite designs,
internal studies, the Orion 2 Satellite Contract and the Orion 3 Satellite
Contract.
(10) The approximate percentages of world population covered or to be covered
by the Orion satellites are not additive. In the aggregate, the footprints
of the Orion satellites would cover over 85% of the world's population.
ORBITAL SLOTS
Orion 1. Orion has been licensed by the FCC and has completed the
coordination process with INTELSAT to operate Orion 1 in geostationary orbit at
37.5(Degree) West Longitude.
Orion 2. Orion has obtained conditional authorization from the FCC for the
construction, launch and operation of Orion 2 at 12(Degree) West Longitude. On
behalf of Orion, the FCC has commenced the orbital slot coordination process
through the ITU. Orion believes that its use of the 12(Degree) West Longitude
slot for Orion 2 is not likely to interfere with proposed uses of adjacent slots
filed for by other governments, except for a possible overlap of 75 MHz with one
such filing as discussed more fully below under the caption "-- ITU Coordination
Process". Orion has commenced consultation with INTELSAT regarding Orion 2, and
believes that since there are no INTELSAT satellites located adjacent to the
12(Degree) West Longitude orbital slot, the INTELSAT coordination should be
obtained in due course.
Orion 3. Orion, through the Republic of the Marshall Islands, has filed the
appropriate documentation with the ITU to begin the ITU coordination process for
Orion 3 at 139(Degree) East Longitude. Based upon the time of filing by the
Republic of the Marshall Islands, Orion believes that the proposed orbital slot
for Orion 3 would have effective priority under ITU procedures with respect to
the 139(Degree) East Longitude orbital slot, but some proposals for adjacent
slots would be entitled to priority over the Company's proposal (through the
Republic of the Marshall Islands) with respect to certain frequencies. Orion
believes, based upon its monitoring of the other proposals and information in
the industry regarding their progress, that none of these entities will launch a
satellite prior to launch of Orion 3 to take advantage of such priority. Orion
has not commenced the consultation process with INTELSAT with respect to Orion
3, but as in the case of Orion 2 expects to complete the INTELSAT coordination
in due course.
Other Orbital Slots. Orion has received an authorization from the FCC for a
Ku-band satellite in geostationary orbit at 47(Degree) West Longitude, and has
coordinated this orbital position with INTELSAT. Orion has filed an application
with the FCC to operate a satellite at 126(Degree) East Longitude. The FCC has
filed documentation with the ITU to commence the coordination process for this
slot. In May 1996, in response to Orion's application, the FCC assigned the U.S.
domestic orbital location of 135(Degree) West Longitude to Orion. In November
1996, the FCC granted authorization to Orion to utilize the slot, conditioned on
Orion submitting financial qualification information, or documentation
justifying a waiver of the financial requirements, within 120 days after the
release of the individual order with respect to Orion's application. Orion made
its filing on March 19, 1997. The Company has also filed an application with the
FCC to amend its license to operate a Ku-band satellite in geostationary orbit
at 37.5(degree) West Longitude to include C-band operations at 37.5(degree) West
Longitude.
In May 1997, the FCC confirmed the assignment of Ka-band orbital locations
to applicants proposing to provide geostationary-satellite services. Orion was
assigned Ka-band orbital locations at 89(degree) West Longitude, 81(degree) West
Longitude, 47(degree) West Longitude, and 126.5(degree) East Longitude. With the
relinquishment by AT&T of certain orbital assignments, applicants entered into
new negotiations for a further assignment plan. As a result of these
negotiations, Orion would receive an additional authorization of 67(degree) West
Longitude. In December 1997, the FCC confirmed the previous five Ka-band orbital
assignments to Orion and indicated the 67(degree) West Longitude location was
now under active consideration. In addition, in November 1997, the FCC commenced
a second processing round for Ka-band orbital assignments and Orion filed
amended applications seeking Ka-band orbital assignments for the 15(degree) West
Longitude and 139(degree) East Longitude locations. No other satellite operator
has filed for the 15(degree) West Longitude or 139(degree) East Longitude
locations. There can be no assurance that Orion will receive final licenses to
operate at these orbital positions, or that the FCC will act favorably on
Orion's additional satellite filings.
22
ITU Coordination Process. An international treaty to which the U.S. and the
Republic of the Marshall Islands are parties requires coordination of satellite
orbital slots through the procedures of the ITU. There are only a limited number
of such orbital slots. ITU procedures provide for a priority to attach to
proposals that are submitted first for a particular orbital slot and associated
frequencies, and provide for protection from interference by satellites in
adjacent slots. This priority does not establish legally-binding rights, but at
a minimum establishes certain procedural rights and obligations for and with
respect to the party that first submits its proposal.
Over the past decade, a substantial increase in satellite proposals
introduced into the ITU coordination process has caused delays in that process.
In addition, many proposals are submitted to the ITU for registration of
satellite systems that ultimately are not constructed or launched. As a result,
the ITU is investigating ways to improve or streamline the filing process for
registration of orbital slots. In the meantime, it has become international
practice for operators who propose to use a certain orbital slot to investigate
and evaluate whether proposals to launch satellites into the same or a nearby
orbital location are likely to result in actual operation, and for operators to
negotiate with other countries or operators that propose to use the same or a
nearby orbital location. There can be no assurance of the outcome of any
objections to this international practice or as to the results of the ITU's
investigations.
Orion is involved in discussions with certain governments concerning their
proposals to use orbital slots. While Orion believes that it can successfully
coordinate and resolve any interference concerns regarding the use of the
orbital locations and frequency bands proposed for Orion 2 and Orion 3, there
can be no assurance that this will be achieved, nor can there be assurance that
ITU coordination will be completed by the scheduled launch dates for Orion 2 and
Orion 3.
In the event that successful coordination cannot be achieved, Orion may
have to modify the satellite design for Orion 2 or Orion 3 in order to minimize
the extent of any potential interference with other proposed satellites using
those orbital locations or frequency bands. Any such modifications may result in
certain features of Orion 2 and Orion 3 differing from those described in this
Prospectus and may result in limitations on the use of one or more transponders
on Orion 2 or Orion 3 or delays in the launch of Orion 2 or Orion 3. In order to
achieve successful coordination, Orion may also have to modify the operation of
the satellites, or enter into commercial arrangements with operators of other
satellites, in order to protect against harmful interference to Orion's
operations. If interference occurs with satellites that are in close proximity
to Orion 2 and Orion 3, or with satellites that are subsequently launched into
locations in close proximity without completing ITU coordination procedures,
such interference would have an adverse effect on the proposed use of the
satellites and on Orion's business and financial performance.
INSURANCE
Orion has obtained satellite in-orbit life insurance for Orion 1 covering
the period from May 1997 to May 1998 in an amount of approximately $205 million
providing protection against partial or total loss of the satellite's
communications capability, including loss of transponders, power, fuel, or
ability to control the positioning of the satellite. The aggregate premium for
in-orbit insurance for Orion 1 is approximately $4.6 million per annum. Orion
has obtained launch and in-orbit life insurance for Orion 2 and Orion 3 covering
the period from launch to two years after launch in an amount of up to $220
million for Orion 2 and up to $230 million for Orion 3. This coverage provides
protection against partial or total loss of the satellite's communications
capability, including loss of transponders, power, fuel or ability to control
the positioning of the satellite. The aggregate premium for the combined Orion 2
and Orion 3 coverage for the launch plus two year period is estimated to be
approximately $72.5 million. Orion has instructed its insurance broker to
determine if current market conditions will allow for improvements to the
existing Orion 2/Orion 3 policy terms. Launch and in-orbit insurance for its
satellites will not protect the Company against business interruption, loss or
delay of revenues and similar losses and may not fully reimburse the Company for
its expenditures.
COMPETITION
As a provider of data networking and Internet-related services, Orion
competes with a large number of telecommunications service providers and
value-added resellers of transmission capacity. As a provider of satellite
transmission capacity, Orion competes with other providers of satellite and
terrestrial facilities.
23
Many of these competitors have significant competitive advantages,
including long-standing customer relationships, close ties with regulatory and
local authorities, control over connections to local telephone networks and have
financial resources, experience, marketing capabilities and name recognition
that are substantially greater than those of Orion. The Company believes that
competition in emerging markets will intensify as incumbent service providers
adapt to a competitive environment and international carriers increase their
presence in these markets. The Company also believes that competition in more
developed markets will intensify as larger carriers consolidate, enhance their
international alliances and increase their focus on data networking. Orion's
ability to compete with these organizations will depend in part on Orion's
ability to price its services at a significant discount to terrestrial service
providers, its marketing effectiveness, its level of customer support and
service and the technical advantages of its systems.
SERVICE PROVIDERS
Orion has encountered strong competition from major established carriers
such as AT&T, MCI, Sprint, British Telecom, Cable & Wireless, Deutsche Telekom,
France Telecom and Kokusai Denshin Denwa, which provide international telephone,
private line and private network services using their national telephone
networks and link to those of other carriers. A number of these carriers have
formed global consortia to provide private network services, including AT&T --
Unisource Services Company (AT&T, PTT Telecom Netherlands, Telia (Sweden), Swiss
Telecom PTT and Telefonica of Spain), Concert (British Telecom and MCI), and
Global One (Sprint, France Telecom and Deutsche Telekom). Other service
providers include Worldcom (which is in the process of acquiring MCI), Infonet,
SITA, Telemedia International, Spaceline, ANT Bosch (acquired by General
Electric), Impsat, and various local resellers of satellite capacity. Finally,
service organizations that purchase satellite capacity, VSAT and other hardware
and install their own networks may be considered competitors of the Company with
respect to their own networks. Although these carriers and service providers are
competitors, some are also Orion's customers. Orion believes that all network
service providers are potential users of Orion's satellite capacity for the
network services they offer their customers.
SATELLITE CAPACITY
Orion provides fixed satellite service and does not intend to compete with
most proposed mobile satellites or low earth orbit systems ("LEO") such as
Globalstar, Iridium or Odyssey (although the Company expects to compete with
Teledesic, a proposed LEO system), or, with the exception of the pre-leased
transponders on Orion 3 to be used for video transmissions, with direct-to-home
satellite systems such as Primestar, DirecTV or EchoStar. Mobile satellite
services are characterized by voice and data transmission to and from mobile
terminals on platforms such as ships or aircraft. Direct-to-home services are
characterized by the transmission of television and entertainment services
directly to consumers. Orion's satellites will compete with trans-Atlantic fixed
satellite systems, European regional and domestic systems and Asian systems.
Existing International and Trans-Atlantic Satellite Systems. The market for
international fixed satellite communications capacity has been dominated by
INTELSAT for thirty years, and INTELSAT can be expected to continue to dominate
this market for the foreseeable future. INTELSAT, a consortium of approximately
140 countries established by international treaty in 1964, owns and operates the
largest fleet of commercial geosynchronous satellites in the world
(approximately 25 satellites, with additional satellites on order). INTELSAT's
satellites have historically been general purpose, lower-power satellites
designed to serve large areas with public telephone service transmitted between
expensive gateway earth stations. INTELSAT generally provides capacity directly
to its signatories who then market such capacity to their customers. The
availability of new services generally is subject to the discretion of each
country's signatory and INTELSAT is required under its charter to set its
pricing in order to achieve a fixed pre-tax return on equity that is established
from time to time by INTELSAT's board of governors. INTELSAT is considering a
restructuring and it is expected that the Intelsat Assembly of Parties will
decide on a new structure for the organization in 1998. Any restructuring of
INTELSAT that increases its marketing flexibility could materially impact
Orion's ability to compete in the market for private satellite delivered
services.
PanAmSat currently operates six satellites, with four satellites providing
coverage in the Atlantic Ocean region, one in the Asia Pacific region and one in
the Indian Ocean region. These satellites primarily provide broadcasting
services, such as television programming and backhaul operations. PAS 3,
launched in January 1996, with coverage of the Atlantic Ocean, competes directly
with Orion 1. It has performance attributes which are generally comparable to
those of Orion 1 and carries 16 Ku-band transponders, of which 8 transponders
are capable of providing service to or within Europe, and 16 C-band
transponders. PanAmSat has announced that it intends to launch two additional
satellites in 1998 .
24
Existing European Regional and Domestic Satellite Systems. In Europe, Orion
competes with certain regional satellites systems and may compete with domestic
satellite systems. Regional and domestic satellite systems generally have
limited ability to serve customers with needs for extensive international
networks. Orion's primary competitor in Europe is the major regional satellite
system operated by EUTELSAT. EUTELSAT, established in 1977, presently comprises
over approximately 45 member countries. EUTELSAT operates ten satellites,
providing telephony, television, radio and data services, and has announced a
plan to launch four new satellites through 1999.
Asian Pacific Region Satellite Systems. Orion believes that
currently-operating satellite systems in the Asia Pacific region generally are
limited in their ability to provide private network and similar services at an
acceptable performance level due to insufficient power, limited Ku-band capacity
and limited geographic coverage. Nevertheless, there is a large number of
satellite systems operating in Asia. The major Asia Pacific regional satellite
systems include the AsiaSat system licensed in Hong Kong (with two satellites in
operation ), the Chinese Apstar system (with three satellites in operation) and
the Indonesian Palapa system (with six satellites in orbit). Japan has licensed
several satellite networks for domestic and international service, including the
JCSat series (five satellites in operation), NTT's two N-Star satellites, and
Space Communications Corporation's Superbird Series (three satellites in
operation). Optus operates four Australian domestic satellites that offer
limited international coverage and plans several follow-on satellites. Korea
operates Koreasat 1 and 2, primarily for domestic service, with plans for a
third satellite that would offer expanded regional service in 1999. Thailand has
licensed the Thaicom system, with two domestic satellites and one regional
satellite in operation. Measat operates a Malaysian system consisting of two
satellites providing DTH service to Malaysia and parts of Asia.
Other Satellite Systems. There are numerous satellites other than the ones
discussed above that compete to some extent with Orion. In addition, the Company
is aware of a substantial number of satellites that are in construction or in
the planning stages, including a number of systems proposing to operate in the
Ka frequency band. Most of these satellites will cover areas within the
footprint of Orion 1 and/or the proposed footprints of Orion 2 and Orion 3. As
these new satellites commence operations, they (other than replacement
satellites not significantly larger than the ones they replace) will
substantially increase the capacity available for sale in the Company's markets.
After a satellite has been successfully delivered in orbit, the variable cost of
transmitting additional data via the satellite is limited. Accordingly, absent a
corresponding increase in demand, this new capacity can be expected to result in
significant additional price reductions. For example, Teledesic Corporation
proposes to operate up to 840 low earth orbit small satellites by 2001 to
provide global satellite services (including voice, data and broadband
transmission services). Although Orion cannot assess to what degree, if any,
these proposed satellites might compete with Orion in the future, Teledesic
could provide significant competition to the Company.
TERRESTRIAL CAPACITY
Orion competes with terrestrial facilities for intra-Europe and
trans-Atlantic capacity.
European Facilities. Orion's services compete with terrestrial
telecommunications delivery services, which are being improved gradually through
the build-out of fiber optic networks and a move from analog to digital
switching. As fiber networks and digital network switching become more
prevalent, the resulting improved and less expensive terrestrial capacity is
increasingly competitive with Orion's services.
Undersea Cable. Undersea fiber optic cable capacity has increased
substantially in recent years. Although Orion believes that undersea cable
capacity is not as well suited as satellite capacity to serve the requirements
of video broadcasters or the demand for multi-point private network services,
fiber optic and coaxial cables are well suited for carrying large amounts of
bulk traffic, such as long distance telephone calls, between two locations.
Operators of undersea fiber optic cable systems typically are joint ventures
among major telecommunications companies. Orion expects strong competition from
these carriers in providing private network services.
REGULATION
REGULATORY OVERVIEW
The international telecommunications environment is highly regulated. As an
operator of privately owned international satellite systems licensed by the
United States, Orion is subject to the regulatory authority of the United States
(primarily the FCC) and the national communications authorities of the countries
in which it provides service. Each of these entities can
25
potentially impose operational restrictions on Orion. In addit