DIRECTV 2003 Annual Report Download - page 114

THE DIRECTV GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (continued)
State on China launch issues of the mid-1990s. Also in connection with the settlement, HNS agreed to extend the
scheduled launch date for the first Boeing built SPACEWAY satellite from the fourth quarter of 2003 until 2004
and agreed to re-assume responsibility for obtaining the related satellite in-orbit and launch insurance. Boeing
paid $54 million to HNS on July 23, 2003, which was a repayment of the cumulative insurance progress
payments made by HNS to Boeing. This cash receipt was recorded as a reduction to capital expenditures. As a
result of the settlement of the purchase price adjustment dispute, the Company recorded an after-tax charge of
$6.3 million to discontinued operations during 2003. The $360 million payment was recorded in discontinued
operations in the Consolidated Statements of Cash Flows.
On June 4, 2002, DIRECTV, Inc., a wholly-owned subsidiary of DIRECTV Holdings LLC, and General
Electric Capital Corporation (“GECC”) executed an agreement to settle, for $180 million, a claim arising from a
contractual arrangement whereby GECC managed a credit program for consumers who purchased DIRECTV
programming and related hardware. As a result, in 2002, the provision for loss related to this matter was
increased by $122.0 million, of which $48.0 million was recorded as a charge to “Selling, general and
administrative expenses” and $74.0 million was recorded as a charge to “Interest expense” in the Consolidated
Statements of Income.
During 2002, the Company recorded a $95.0 million gain, net of legal costs, as an offset to “Selling, general
and administrative expenses” in the Consolidated Statements of Income as a result of the favorable resolution of
a lawsuit filed against the U. S. government on March 22, 1991. The lawsuit was based upon NASA’s breach of
contract to launch ten satellites on the Space Shuttle.
Litigation is subject to uncertainties and the outcome of individual litigated matters is not predictable with
assurance. Various legal actions, claims and proceedings are pending against the Company arising in the ordinary
course of business. The Company 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 the Company to pay damages or make other expenditures in amounts
that could not be estimated at December 31, 2003. After discussion with counsel representing the Company in
those actions, it is the opinion of management that such liability is not expected to have a material adverse effect
on the Company’s consolidated results of operations and financial position.
Other
The in-orbit satellites of the Company 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 the Company’s businesses. The Company 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 customers.
The Company 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. The Company 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 satellite components or systems that have suffered anomalies in
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