DIRECTV 2002 Annual Report Download - page 117

HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (continued)
the dispute resolution process. As of December 31, 2002, approximately $670 million of proposed
adjustments remain unresolved. Hughes is contesting the matter in the arbitration process, which will
result in a binding decision unless the matter is otherwise settled. Although Hughes believes it has
adequately provided for the disposition of this matter, the impact of its disposition cannot be
determined at this time. It is possible that the final resolution of this matter could result in Hughes
making a cash payment to Boeing that would be material to Hughes’ consolidated results of operations
and financial position.
As previously reported, Hughes Communications Galaxy, Inc. (“HCGI”) filed a lawsuit on
March 22, 1991 against the United States Government based upon the National Aeronautics and
Space Administration’s breach of contract to launch ten satellites on the Space Shuttle. On June 30,
2000, a final judgment was entered in favor of HCGI in the amount of $103 million and in April 2002,
the United States government paid to Hughes the full amount of the judgment. As a result, Hughes
recorded a $95 million gain, net of legal costs, as an offset to “Selling, general and administrative
expenses” in the first quarter of 2002.
With respect to the previously reported dispute between General Electric Capital Corporation
(“GECC”) and DIRECTV arising out of a contract entered into between the parties on July 31, 1995,
the parties executed an agreement on June 4, 2002 to settle the matter for $180 million. The
settlement resulted in DIRECTV recording a second quarter 2002 pre-tax charge of $47 million to
“Interest expense.” In the first quarter of 2002, DIRECTV increased its provision for loss related to this
matter by $83 million, of which $56 million was recorded as a charge to “Selling, general and
administrative expenses” and $27 million was recorded as a charge to “Interest expense.” Previously,
DIRECTV had accrued $50 million as of December 31, 1999 associated with the expected settlement
of this claim. The $180 million settlement was paid to GECC in June 2002.
Litigation is subject to uncertainties and the outcome of individual litigated matters is not
predictable with assurance. In addition to the above items, various legal actions, claims, and
proceedings are pending against Hughes arising in the ordinary course of business. Hughes has
established loss provisions for matters in which losses are probable and can be reasonably estimated.
Some of the matters may involve compensatory, punitive, or treble damage claims, or sanctions, that if
granted, could require Hughes to pay damages or make other expenditures in amounts that could not
be estimated at December 31, 2002. After discussion with counsel representing Hughes in those
actions, it is the opinion of management that such liability is not expected to have a material adverse
effect on Hughes’ consolidated results of operations and financial position.
Other
The in-orbit satellites of Hughes and its subsidiaries are subject to the risk of failing prematurely
due to, among other things, mechanical failure, collision with objects in space or an inability to maintain
proper orbit. Satellites are subject to the risk of launch delay and failure, destruction and damage while
on the ground or during launch and failure to become fully operational once launched. Delays in the
production or launch of a satellite or the complete or partial loss of a satellite, in-orbit or during launch,
could have a material adverse impact on the operation of Hughes’ businesses. Hughes has, in the
past, experienced technical anomalies on some of its satellites. Service interruptions caused by
anomalies, depending on their severity, could result in claims by affected customers for termination of
their transponder agreements, cancellation of other service contracts or the loss of other customers.
107