DIRECTV 2002 Annual Report Download - page 64

HUGHES ELECTRONICS CORPORATION
Commitments and Contingencies
Litigation
In connection with the 2000 sale by Hughes of its satellite systems manufacturing businesses to
Boeing, the stock purchase agreement provides for potential adjustment to the purchase price based
upon the final closing date financial statements of the satellite systems manufacturing businesses. The
stock purchase agreement also provides for a dispute resolution process to resolve any disputes that
arise in determining the purchase price adjustment. Based upon the final closing date financial
statements of the satellite systems manufacturing businesses that were prepared by Hughes, Boeing is
owed a purchase price adjustment of $164 million plus interest at a rate of 9.5% from the date of sale,
the total amount of which has been provided for in Hughes’ consolidated financial statements.
However, Boeing has submitted additional proposed adjustments, which are being resolved through
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.
Litigation is subject to uncertainties and the outcome of individual litigated matters is not
predictable with assurance. In addition to the above item, 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. See Item 3. Legal
Proceedings under Part I for further information.
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.
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
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