DIRECTV 2002 Annual Report Download - page 118

HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Hughes uses in-orbit and launch insurance to mitigate the potential financial impact of satellite
fleet in-orbit and launch failures unless the premium costs are considered uneconomic relative to the
risk of satellite failure. The insurance generally covers the unamortized book value of covered satellites
and does not compensate for business interruption or loss of future revenues or customers. Hughes
relies on in-orbit spare satellites and excess transponder capacity at key orbital slots to mitigate the
effects of satellite failure on its ability to provide service. Where insurance costs related to known
satellite anomalies are prohibitive, Hughes’ insurance policies contain coverage exclusions and
Hughes is not insured for certain other satellites. The book value of satellites that were insured with
coverage exclusions amounted to $563.5 million and the book value of the satellites that were not
insured was $1,049.7 million at December 31, 2002.
PanAmSat and the manufacturer of the Galaxy VIII-iR satellite have agreed in principle to
terminate the Galaxy VIII-iR satellite construction contract. The agreement is subject to the execution
of mutually acceptable documentation, but there can be no assurance that this will occur. In connection
with the termination of the contract, as of December 31, 2002, PanAmSat had a receivable due from
the satellite manufacturer of $72.0 million, which represents amounts previously paid to the
manufacturer (of approximately $58.8 million), liquidated damages and interest owed under the
construction agreement. PanAmSat expects that it will collect substantially all of this receivable and
does not anticipate recording a charge to earnings related to this receivable. In addition, PanAmSat
has agreed with the Galaxy VIII-iR launch vehicle provider to defer use of the launch to a future
satellite. PanAmSat had intended to locate the Galaxy VIII-iR satellite at 95 degrees west longitude.
However, with the successful launch and commencement of service on the Galaxy IIIC satellite at this
same orbital location in September 2002, PanAmSat believes it has sufficient capacity to meet
customer demand for services at this location.
Hughes is contingently liable under standby letters of credit and bonds in the aggregate amount of
$65.1 million which were undrawn at December 31, 2002 and DLA has guaranteed $3.0 million of bank
debt related to non-consolidated DLA local operating companies, which is due in varying amounts
through 2005. Additionally, as described in Note 18, DLA may be required to repurchase Clarin’s
3.98% interest in DLA for $195 million in November 2003. In the first quarter of 2003, Clarin notified
DLA that it believes that DLA’s decision to initiate discussions with Clarin and certain other
programmers, suppliers and business associates to address DLA’s financial and operational
challenges has caused DLA to be responsible immediately to purchase Clarin’s equity interest in DLA.
See Note 22 for further discussion of this matter.
The Hughes Board of Directors has approved several benefit plans designed to provide benefits
for the retention of about 205 key employees and also provide benefits in the event of employee lay-
offs. Generally, these benefits are only available if a qualified change-in-control of Hughes occurs.
Upon a change-in-control, the retention benefits will be accrued and expensed when earned and the
severance benefits will be accrued and expensed if an employee is identified for termination. A total of
up to about $105 million for retention benefits will be paid, with approximately 50% paid at the time of a
change-in-control and 50% paid up to 12 months following the date of a change-in-control. The amount
of severance benefits to be paid will be based upon decisions that will be made relating to employee
layoffs, if any, following the date of a change-in-control. In addition, as of December 31, 2002,
approximately 30.5 million employee stock options to purchase shares of GM Class H common stock
will vest upon a qualifying change-in-control and up to an additional 8.4 million employee stock options
could vest if employees are laid off within one year of a change-in-control.
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