LIBERTY SATELLITE & TECHNOLOGY INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

F O R M 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____

Commission File Number: 0-21317

LIBERTY SATELLITE & TECHNOLOGY, INC.
------------------------------------
(Exact name of Registrant as specified in its charter)

State Of Delaware 84-1299995
- ------------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

12300 Liberty Boulevard
Englewood, Colorado 80112
- ---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (720) 875-5400

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, and (2) has been subject to such filing
requirements for the past 90 days. /X/ Yes / / No

The number of shares outstanding of Liberty Satellite & Technology, Inc.'s
common stock as of July 31, 2002, was:

Series A common stock - 8,728,428 shares; and
Series B common stock - 34,765,764 shares.

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Condensed Consolidated Balance Sheets
(unaudited)

(continued)

I-1

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Condensed Consolidated Balance Sheets
(unaudited)

See accompanying notes to condensed consolidated financial statements.

I-2

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Condensed Consolidated Statements of Operations
(unaudited)

See accompanying notes to condensed consolidated financial statements.

I-3

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Condensed Consolidated Statements of Comprehensive Loss
(unaudited)

See accompanying notes to condensed consolidated financial statements.

I-4

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Condensed Consolidated Statement of Stockholders' Equity

Six months ended June 30, 2002
(unaudited)

See accompanying notes to condensed consolidated financial statements.

I-5

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Condensed Consolidated Statements of Cash Flows
(unaudited)

See accompanying notes to condensed consolidated financial statements.

I-6

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements

June 30, 2002
(unaudited)

(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of Liberty Satellite & Technology, Inc. and those of all
majority-owned or controlled subsidiaries ("LSAT" and together with its
consolidated subsidiaries, the "Company"). All significant
inter-company transactions have been eliminated.

GENERAL. LSAT has been a consolidated subsidiary of Liberty Media
Corporation ("Liberty Media") since March 16, 2000, when LSAT issued
preferred stock to Liberty Media in exchange for certain assets. On
March 28, 2000, Liberty Media acquired voting control of Ascent
Entertainment Group, Inc. ("Ascent"), and on June 8, 2000, Liberty
Media completed its acquisition of Ascent pursuant to which Ascent
became an indirect wholly-owned subsidiary of Liberty Media. Ascent's
primary operating subsidiary is On Command Corporation ("On Command"),
which provides in-room, on-demand video entertainment and informational
services to hotels, motels and resorts. At June 30, 2002, Liberty
Media, primarily through its ownership interest in Ascent, controlled
approximately 63% of the outstanding On Command common stock ("On
Command Common Stock"). On April 1, 2002, LSAT issued 34,000,000 shares
of its Series B common stock ("Series B Common Stock") to Liberty Media
in exchange for the 89.41% interest in Liberty Satellite, LLC ("LSAT
LLC") not already owned by LSAT, and 100% of the capital stock of
Ascent (the "LSAT LLC and Ascent Transaction"). As a result of the
consummation of the LSAT LLC and Ascent Transaction, Liberty Media's
common stock ownership in LSAT increased to 84.1% and its voting power
in LSAT increased to 97.6%. The foregoing transactions are described in
greater detail below.

As a result of the consummation of the LSAT LLC and Ascent Transaction,
LSAT became the owner of 100% of the equity interests of Ascent and
LSAT LLC. Due to the fact that LSAT, LSAT LLC and Ascent are all under
the common control of Liberty Media, the LSAT LLC and Ascent
Transaction has been accounted for in a manner similar to a
pooling-of-interests. As such, the Company's financial statements have
been restated to include LSAT LLC and Ascent as wholly-owned
subsidiaries of LSAT, effective with the respective March 2000 dates
that Liberty Media acquired control of such entities.

I-7

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

Separate results of operations for LSAT, LSAT LLC and Ascent for the
periods prior to the LSAT LLC and Ascent Transaction are as follows:

----------
(1) Includes Liberty Media purchase accounting adjustments
that have not been "pushed down" to Ascent's historical
financial statements.

In addition to LSAT's interests in On Command and various investments,
the Company is currently pursuing strategic opportunities worldwide in
the distribution of Internet and other content via satellite and
related businesses.

CONTRIBUTION OF SPRINT PCS STOCK AND FORMATION OF LSAT LLC. On March
16, 2000, LSAT completed two transactions with Liberty Media. Pursuant
to the terms of the first transaction, LSAT acquired a beneficial
interest in 5,084,745 shares of Sprint Corporation PCS Group common
stock ("Sprint PCS Stock") with an aggregate market value on the
closing date of $300,000,000 in exchange for 150,000 shares of LSAT
Series A Preferred Stock with a liquidation value of $150,000,000 and
150,000 shares of LSAT Series B Preferred Stock ("Series B Preferred
Stock") with a liquidation value of $150,000,000. The shares of Series
B Preferred Stock have super voting rights, which give Liberty Media
voting control over LSAT. Accordingly, since March 16, 2000, LSAT has
been a consolidated subsidiary of Liberty Media.

Pursuant to the terms of the second transaction with Liberty Media,
LSAT (through its wholly-owned subsidiaries) became the managing member
of two newly formed limited liability companies, LSAT LLC and LSAT
Astro LLC ("LSAT Astro," and together with LSAT LLC, the "LSAT Joint
Ventures"). LSAT contributed (i) its beneficial interest in 4,221,921
shares of General Motors Corporation Class H common stock ("GM Hughes
Stock"), subject to a stock appreciation right, and (ii) other assets
to LSAT LLC in exchange for a 10.59% ownership interest in LSAT LLC.
Liberty Media contributed cash and its interests in various satellite
related assets, including an 86.01% ownership interest in LSAT Astro,
to LSAT LLC in exchange for the remaining 89.41% ownership interest in
LSAT LLC. As LSAT is a consolidated subsidiary of Liberty Media, all of
the assets contributed by LSAT and Liberty Media to the LSAT Joint
Ventures were recorded at their net book values at the date of
contribution.

I-8

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

LIBERTY MEDIA'S ACQUISITION OF ASCENT. On March 28, 2000, Liberty Media
completed its cash tender offer for the outstanding common stock of
Ascent at a price of $15.25 per share. Approximately, 85% of the
outstanding common shares of Ascent were tendered in the offer, and
Liberty Media paid approximately $385,000,000. On June 8, 2000, Liberty
Media completed its acquisition of 100% of Ascent for an additional
$67,000,000. The total purchase price for the acquisition was
$452,000,000. Liberty Media accounted for such transaction using the
purchase method of accounting.

LSAT LLC AND ASCENT TRANSACTION. On August 16, 2001, LSAT entered into
two separate purchase agreements with Liberty Media and certain of its
subsidiaries and affiliates. Both agreements were amended in November
2001 and January 2002. One agreement provided for LSAT's acquisition of
certain subsidiaries of Liberty Media that hold an aggregate 89.41%
ownership interest in LSAT LLC in exchange for 25,298,379 shares of
Series B Common Stock. The second purchase agreement provided for
LSAT's acquisition of 100% of the capital stock of Ascent from a
subsidiary of Liberty Media in exchange for 8,701,621 shares of Series
B Common Stock. The foregoing transactions closed on April 1, 2002. As
noted above, the LSAT LLC and Ascent Transaction has been accounted for
in a manner similar to a pooling-of-interests.

REVERSE STOCK SPLIT. On April 1, 2002, LSAT effected 1 for 10 reverse
stock splits of its Series A common stock ("Series A Common Stock") and
Series B Common Stock. All share and per share amounts included in
these condensed consolidated financial statements have been adjusted to
give retroactive effect to such reverse stock splits.

These interim condensed consolidated financial statements are
unaudited. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) have been made that are necessary to
present fairly the financial position of the Company as of June 30,
2002 and the results of its operations for the three and six months
ended June 30, 2002 and 2001. The results of operations for any interim
period are not necessarily indicative of the results for the entire
year. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and related
notes thereto included in the Company's December 31, 2001 Annual Report
on Form 10-K.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.

Certain prior period amounts have been reclassified for comparability
with the 2002 presentation.

I-9

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

(2) NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 141, BUSINESS
COMBINATIONS ("Statement 141"), and Statement of Financial Accounting
Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("Statement
142"). Statement 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001.
Statement 141 also specifies, for all purchase method business
combinations completed after June 30, 2001, criteria that intangible
assets acquired in a purchase method business combination must meet to
be recognized and reported apart from goodwill. Statement 142 requires
that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement
142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance
with Statement of Financial Accounting Standards No. 144, ACCOUNTING
FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS.

The Company adopted the provisions of Statement 141 upon issuance, and
adopted Statement 142 effective January 1, 2002. Statement 141 requires
that upon adoption of Statement 142, the Company evaluate its existing
intangible assets and goodwill that were acquired in a prior purchase
business combination, and make any necessary reclassifications in order
to conform with the new criteria in Statement 141 for recognition apart
from goodwill. In connection with Statement 142's transitional goodwill
impairment evaluation, the Company was also required to perform an
assessment of whether there was an indication that goodwill was
impaired as of the date of adoption. In connection with the adoption of
Statement No. 142, the Company recognized a $93,131,000 impairment
loss, net of taxes, as the cumulative effect of a change in accounting
principle.

Adjusted net loss applicable to common stockholders and pro forma loss
per common share for the three and six months ended June 30, 2001,
exclusive of amortization expense related to goodwill are as follows
(amounts in thousands, except per share amounts):

I-10

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, which
requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The statement also
requires that the associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. This statement is
effective for financial statements issued for fiscal years beginning
after June 15, 2002. The adoption of this statement is not expected to
have a material impact on the Company's financial position, results of
operations or cash flows.

In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS ("Statement 144"), which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. Statement 144 supercedes prior statements that address the
disposal of a segment of a business, and eliminates the exception to
consolidation for subsidiaries for which control is likely to be
temporary. Statement 144 retains the prior statement's fundamental
provisions for the recognition and measurement of impairment of
long-lived assets to be held and used, as well as the measurement of
long-lived assets to be disposed of by sale. Statement 144 is effective
for fiscal years beginning after December 15, 2001. The adoption of
this statement did not have a material impact on the Company's
financial position, results of operations or cash flows.

In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64,
AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS
("Statement 145"). Statement 145 rescinds FASB Statement No. 4,
REPORTING GAINS AND LOSSES FROM EXTINGUISHMENT OF DEBT, and an
amendment of that Statement, FASB Statement No. 64, EXTINGUISHMENTS OF
DEBT MADE TO SATISFY SINKING-FUND REQUIREMENTS. Statement 145 also
rescinds FASB Statement No. 44, ACCOUNTING FOR INTANGIBLE ASSETS OF
MOTOR CARRIERS. Statement 145 amends FASB Statement No. 13, ACCOUNTING
FOR LEASES, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. Statement 145 also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions. Statement 145 is generally effective for financial
statements issued for fiscal years beginning after May 15, 2002. The
adoption of Statement 145 is not expected to have a material impact on
the Company's financial position, results of operations or cash flows.

In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR
DISPOSAL ACTIVITIES ("Statement 146"). Statement 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS
AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED
IN A RESTRUCTURING). Statement 146 is effective for exit or disposal
activities initiated after December 31, 2002. The adoption of Statement
146 is not expected to have a material impact on the Company's
financial position, results of operations or cash flows.

I-11

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

(3) TRANSACTIONS WITH LIBERTY MEDIA AND OTHER RELATED PARTIES

TRANSACTIONS WITH LIBERTY MEDIA

NOTE PAYABLE. In connection with the March 16, 2000 formation of LSAT
LLC, LSAT issued a $60,000,000 note payable to Liberty Media in
exchange for its 13.99% ownership interest in LSAT Astro. The note
bears interest at the 3 month London Interbank Offering Rate ("LIBOR")
plus 2% (3.84% at June 30, 2002). Interest payments are due
semi-annually on the first day of March and September. The note, which
allows for prepayments, matures on March 16, 2003 at which time all
unpaid principal and interest is due. At June 30, 2002, the unpaid
principal on the note was $48,411,000 and the accrued interest on the
note was $630,000.

TAX LIABILITY ALLOCATION AND INDEMNIFICATION AGREEMENT. In connection
with the LSAT LLC and Ascent Transaction, LSAT and Liberty Media
entered into a tax liability allocation and indemnification agreement
whereby LSAT will be obligated to make a cash payment to Liberty Media
in each year that LSAT (taken together with any of its subsidiaries)
has taxable income. The amount of the payment will be equal to the
amount of the taxable income of LSAT and its subsidiaries (determined
as if LSAT and its subsidiaries filed a separate return) multiplied by
the highest applicable corporate tax rate. In the event that (1) LSAT
and its subsidiaries, when treated as a separate group, has a net
operating loss or deduction or is entitled to a tax credit for a
particular year; and (2) Liberty Media is able to use such loss,
deduction or credit to reduce its tax liability, LSAT will be entitled
to a credit against current and future payments to Liberty Media under
the agreement. If LSAT disaffiliates itself with Liberty Media and the
members of Liberty Media's affiliated group prior to the time that LSAT
is able to use such credit, LSAT will be entitled to a payment from
Liberty Media at the earlier of the time that (1) LSAT and its
subsidiaries show they could have used the net operating loss or net
tax credit to reduce their own separately computed tax liability or (2)
the voting power of the stock of LSAT held by Liberty Media and the
members of its affiliated group drops below 20%.

In addition, under the tax liability allocation and indemnification
agreement, LSAT will have the opportunity to participate in the defense
of claims of the Internal Revenue Service that might affect its
liability under the agreement, and to participate in tax refunds paid
to Liberty Media where such refunds are due in part to LSAT's
operations.

At June 30, 2002, Ascent owed $15,063,000 to Liberty Media pursuant to
a tax liability allocation and indemnification agreement. Such amount
is non-interest bearing and is due on demand.

EXPENSE ALLOCATIONS AND REIMBURSEMENTS. Liberty Media allocates rent,
salaries, benefits and certain other general and administrative
expenses to the Company. Although there is no written agreement with
Liberty Media for these allocations and reimbursements, the Company
believes the allocated amounts to be reasonable. The aggregate
allocations from Liberty Media were $265,000 and $262,000 for the six
months ended June 30, 2002 and 2001, respectively. Such amounts are
included in selling, general and administrative expenses in the
accompanying condensed consolidated statements of operations. In
addition, the Company reimburses Liberty Media for certain expenses
paid by Liberty Media on behalf of the Company. Amounts owed to Liberty
Media pursuant to these arrangements ($154,000 at June 30, 2002) are
non-interest bearing and are generally paid on a monthly basis.

I-12

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

SKY LATIN AMERICA LOANS. During the year ended December 31, 2001, and
the three months ended March 31, 2002, Liberty Media loaned $18,552,000
and $6,573,000, respectively, to LSAT LLC. LSAT LLC used the proceeds
from these loans to fund capital calls from its various 10% investees
that operate satellite television systems in Latin America ("Sky Latin
America"). The loans provided for interest at 8% and were due and
payable on demand after November 27, 2001. Concurrently with the
closing of the LSAT LLC and Ascent Transaction, (i) Liberty Media
contributed to the Company, as part of that transaction and for no
additional consideration, promissory notes issued by subsidiaries of
Liberty Media, with an aggregate principal balance of $18,552,000 and
related accrued interest of $651,000, representing the loans described
above that were made through December 31, 2001, and (ii) LSAT LLC
repaid principal of $6,573,000 and accrued interest of $37,000 related
to the first quarter 2002 advances.

SALE OF ASCENT NETWORK SERVICES. Effective September 4, 2001, Ascent
completed the sale of Ascent Network Services to Liberty Livewire
Corporation ("Liberty Livewire"), a consolidated subsidiary of Liberty
Media, for cash consideration of $32,038,000. Ascent Network Services
provides video distribution services to the NBC television network and
other private networks. As Ascent and Liberty Livewire are both
consolidated subsidiaries of Liberty media, no gain or loss was
recognized in connection with this transaction. During the six months
ended June 30, 2001, Ascent Network Services paid management fees to
Liberty Livewire aggregating $4,800,000. Such management fees are
included in selling, general and administrative expenses in the
accompanying condensed consolidated statement of operations.

PUT OPTION LIABILITY. Effective September 29, 2000, LSAT LLC acquired a
1% managing common interest in a joint venture ("IB2 LLC") from a
subsidiary of Liberty Digital, Inc. ("Liberty Digital") for $652,000.
Liberty Digital, an indirect wholly-owned subsidiary of Liberty Media,
retained a preferred interest (the "Preferred Interest") in IB2 LLC,
which owns approximately 360,000 shares of iBEAM Broadcasting Corp.
("iBEAM") common stock ("iBEAM Stock"). The Preferred Interest had an
initial liquidation value of $64,574,000 and is entitled to a return of
9%, compounded annually. As part of the transaction, LSAT LLC granted
Liberty Digital the right to put the Preferred Interest to LSAT LLC for
a purchase price equal to $26,000,000 (the value of iBEAM Stock on
September 29, 2000) plus a 9% return, compounded annually (the "Put
Option"). LSAT LLC has the right to call Liberty Digital's Preferred
Interest at a price equal to the initial liquidation value plus a
return of 9%, compounded annually. Both the Put Option and call option
are exercisable on September 29, 2008. Under certain limited
circumstances, including iBEAM's bankruptcy, LSAT LLC can force Liberty
Digital to exercise the Put Option prior to September 29, 2008.

During the fourth quarter of 2001, iBEAM filed for bankruptcy under
Chapter 11 of the Bankruptcy Code. As a result of such bankruptcy
filing, the Company began carrying the Put Option liability at an
amount ($29,742,000 at June 30, 2002), which represents the Put Option
purchase price to LSAT LLC plus an accrued return to Liberty Digital of
9%, compounded annually. The Company anticipates that future losses
with respect to the Put Option will be limited to Liberty Digital's 9%
return on the Put Option liability.

Changes in the fair market value of the Put Option subsequent to
September 29, 2000 have been recognized as unrealized gains (losses) on
financial instruments in the Company's consolidated statements of
operations. During the six months ended June 30, 2002 and 2001, the
Company recorded unrealized losses of $1,254,000 and $2,460,000,
respectively, related to the Put Option.

I-13

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

TRANSACTIONS WITH OTHER RELATED PARTIES

PHOENIXSTAR MANAGEMENT AGREEMENT. Effective February 1, 2000, the
Company entered into a management agreement with Phoenixstar, Inc.
(formerly known as PRIMESTAR, Inc.) ("Phoenixstar") pursuant to which
the Company is managing Phoenixstar's affairs in exchange for a monthly
management fee. Prior to 1999, the Company beneficially owned 37% of
Phoenixstar's outstanding shares. In 1999, the Company agreed to forego
any liquidating distribution or other payment that may be made in
respect of the outstanding shares of Phoenixstar upon any dissolution
and winding-up of Phoenixstar, or otherwise in respect of Phoenixstar's
equity, and to transfer its shares in Phoenixstar to the other
Phoenixstar stockholders. Management fees from Phoenixstar aggregated
$210,000 for each of the six-month periods ended June 30, 2002 and
2001. In addition, the Company allocates certain general and
administrative expenses, such as office rent and computer support to
Phoenixstar. Under the current management agreement, expense
allocations have been limited to $5,000 per month since February 2001.
Such allocations aggregated $30,000 and $39,000 during the six months
ended June 30, 2002 and 2001, respectively, and are reflected as a
reduction of general and administrative expenses in the accompanying
condensed consolidated statements of operations.

(4) LOSS PER COMMON SHARE
The loss per common share for the three and six months ended June 30,
2002 and 2001 is based on 41,523,600 and 41,524,200 weighted average
shares outstanding during the three and six month 2002 periods,
respectively and 41,320,400 weighted average shares outstanding during
each of the 2001 periods. Potential common shares were not included in
the computation of diluted loss per share because their inclusion would
have been anti-dilutive. At June 30, 2002, the number of potential
common shares was approximately 2,159,000. Such potential common shares
consist of stock options to acquire shares of Series A Common Stock and
securities that are convertible into 1,696,717 shares of Series B
Common Stock at June 30, 2002. The foregoing potential common share
amounts do not take into account the assumed number of shares that
would be repurchased by the Company upon the exercise of stock options.

(5) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest was $8,333,000 and $14,281,000 for the six
months ended June 30, 2002 and 2001, respectively. Cash paid for income
taxes was not significant during these periods. There were no
significant non-cash investing and financing activities for the six
months ended June 30, 2002. Significant non-cash investing and
financing activities for the six months ended June 30, 2001 are as
follows (amounts in thousands):

Recorded value of cost investment acquired $ 20,000
Conversion of note receivable (5,000)
------------
Cash paid for cost investment $ 15,000
============

I-14

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

(6) INVESTMENTS IN AFFILIATES
The following table reflects the Company's carrying amount of its
investments accounted for using the equity method:

The following table reflects the Company's share of losses of
affiliates:

ASTROLINK

The Company owns a direct 13.99% interest in LSAT Astro and an indirect
(through LSAT LLC) 86.01% interest in LSAT Astro. LSAT Astro owns an
approximate 31.5% ownership interest in Astrolink. Astrolink, a
developmental stage entity, originally intended to build a global
telecom network using Ka-band geostationary satellites to provide
broadband data communications services. Astrolink's original business
plan required approximately $2.4 billion in additional financing over
the next several years. During the fourth quarter of 2001, certain of
the members of Astrolink informed Astrolink that they do not intend to
provide any of Astrolink's required financing. In light of this
decision, Astrolink is considering several alternatives with respect to
its proposed business plan, including, but not limited to, seeking
alternative funding sources, scaling back its proposed business plan,
and liquidating the venture entirely. There can be no assurance that
Astrolink will be able to obtain the necessary financing for a
scaled-back business plan on acceptable terms.

I-15

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

During the second quarter of 2002, LSAT signed a non-binding letter of
intent with the other partners of Astrolink, in connection with a
proposed restructuring of Astrolink. The non-binding letter of intent
contemplates the settlement of all claims among the parties and their
affiliates relating to Astrolink and the acquisition of all the assets
of Astrolink by LSAT. If the transactions contemplated by the
non-binding letter of intent are consummated, Liberty Media will make a
capital contribution to LSAT at the closing, in exchange for shares of
Series B Common Stock at fair market value at closing. The parties have
agreed not to publicly disclose the specific economic terms of the
proposed transaction, pending execution of a definitive agreement on
such terms. Subject to consummation of the transactions contemplated by
the non-binding letter of intent, and any necessary regulatory
approvals, LSAT currently plans to pursue a revised operating plan for
the new Astrolink system, taking into account current financial and
market factors. The transactions contemplated by the non-binding letter
of intent are subject to, among other conditions, the negotiation,
execution and delivery of definitive agreements, required third party
and governmental consents, and the termination or renegotiation, on
terms acceptable to LSAT, of Astrolink's prior procurement contracts.

During the second quarter of 2001, the Company determined that its
investment in Astrolink experienced a nontemporary decline in value.
Accordingly, the carrying amount of such investment was adjusted to its
then estimated fair value resulting in a recognized loss of
$155,000,000. Such loss is included in share of losses of affiliates.
Based on a fourth quarter 2001 assessment of Astrolink's remaining
sources of liquidity and Astrolink's inability to obtain financing for
its business plan, the Company concluded that the carrying value of
LSAT Astro's investment in Astrolink should be reduced to reflect a
fair value that assumes the liquidation of Astrolink. Accordingly, LSAT
Astro wrote-off all of its remaining investment in Astrolink during the
fourth quarter of 2001. The aggregate amount required to reduce LSAT
Astro's investment in Astrolink to zero was $249,868,000. Including
such fourth quarter amount, LSAT Astro recorded losses and charges
relating to its investment in Astrolink aggregating $417,202,000 during
the year ended December 31, 2001.

Since LSAT Astro's investment in Astrolink was reduced to zero at
December 31, 2001, LSAT Astro's share of Astrolink's losses since
December 31, 2001 has been limited to the amounts loaned to Astrolink
by the Company during the six months ended June 30, 2002 ($647,000). At
June 30, 2002, the Company was not obligated to provide additional
funding to Astrolink.

AEROCAST

LSAT LLC owns an approximate 45.5% ownership interest in Aerocast.
Aerocast is developing next generation streaming media technologies for
broadband network operators and video content providers. Aerocast
intends to utilize terrestrial and satellite platforms to distribute
streaming media to businesses and consumers with high-speed internet
access.

At June 30, 2002, the carrying amount of the Company's investment in
Aerocast exceeded the Company's proportionate share of Aerocast's net
assets by $7,627,000. Such excess relates to intellectual property and
technology developed by Aerocast, and is being amortized over a useful
life of five years. Amortization aggregated $1,041,000 and $983,000 for
the six months ended June 30, 2002 and 2001, respectively, and is
included in share of losses of affiliates.

I-16

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

Aerocast is in the start-up phase of its business, and the Company
anticipates that Aerocast will need additional financing to fund its
business plan. In order to maintain its current ownership interest in
Aerocast, the Company may be required to participate in such additional
financing. If the Company is unable or unwilling to provide additional
financing, its ownership interest may be diluted or it may forfeit
certain voting or other shareholder rights. There is no assurance that
Aerocast will be able to obtain the necessary financing on acceptable
terms. If it is unable to secure the necessary financing, Aerocast may
be forced to alter its business plan or consider a plan of liquidation.

Summarized unaudited combined financial information for Aerocast is as
follows:

(7) INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES AND OTHER COST INVESTMENTS
Investments in available-for-sale securities and other cost investments
are summarized as follows:

* Denotes an investment carried as an available-for-sale security.
Amounts shown in the table represent the combined fair market value
of the security and any related derivative instrument.

(a) SPRINT PCS GROUP

The Company acquired beneficial interest in 5,084,745 shares of Sprint
Corporation PCS Group common stock ("Sprint PCS Stock") from Liberty
Media in March 2000. The Company accounts for such investment as an
available-for-sale security.

I-17

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

The trust holding the Sprint PCS Stock for LSAT's benefit has entered
into an equity collar (the "Sprint PCS Collar") with a financial
institution with respect to the Sprint PCS Stock. The collar provides
the trust with a put option that gives it the right to require its
counterparty to buy 5,084,745 shares of Sprint PCS Stock from the trust
in seven tranches in March 2003 for a weighted average price of $59.71
per share. LSAT simultaneously sold a call option giving the
counterparty the right to buy the same shares of stock from the trust
in seven tranches in March 2003 for a weighted average price of $82.39
per share. The put and call options for this collar were equally
priced, resulting in no cash cost to the trust or the Company. At June
30, 2002, the fair value of the Sprint PCS Collar was approximately
$276,729,000.

Effective May 9, 2001, LSAT transferred (i) its beneficial interest in
the Sprint PCS Stock, (ii) the Sprint PCS Collar and (iii) the PCS Loan
Facility (as described in note 8) to LSAT LLC in exchange for two
secured demand promissory notes in the aggregate principal amount of
$224,226,000. Such notes bear interest at a rate of 6.5% per annum and
are due in March 2003. As LSAT LLC is a consolidated subsidiary of
LSAT, there was no effect on the Company's consolidated balance sheet
on the date of the transaction.

(b) SKY LATIN AMERICA

The amounts shown in the table for Sky Latin America represent the
aggregate book basis of a number of different satellite television
operators located in Mexico, Brazil, Chile, Colombia and Argentina.
LSAT LLC has a 10% beneficial interest in each of the Sky Latin America
businesses.

During the second quarter of 2002, the Company recorded a $58,948,000
loss to reflect a nontemporary decline in the value of LSAT LLC's
investment in Sky Latin America.

(c) GM HUGHES

The Company, through LSAT LLC, holds 1,821,921 shares of General Motors
Corporation Class H common stock ("GM Hughes Stock") and accounts for
such shares as available-for-sale.

LSAT LLC has entered into a put spread collar with a financial
institution with respect to its shares of GM Hughes Stock. The collar
(i) provides LSAT LLC with a put option that gives it the right to
require its counterparty to buy 1,821,921 shares of GM Hughes Stock
from LSAT LLC in three tranches in October 2003 for a weighted average
price of $26.64, and (ii) provides the counterparty with a put option
that gives it the right to require LSAT LLC to repurchase the shares of
GM Hughes Stock for a weighted average price of $14.80. LSAT LLC
simultaneously sold a call option giving the counterparty the right to
buy the same shares of stock from LSAT LLC in three tranches in October
2003 for a weighted average price of $54.32 per share. The put and call
options for this collar were equally priced, resulting in no cash cost
to LSAT LLC. At June 30, 2002, the fair value of the GM Hughes put
spread collar was approximately $19,119,000, which represented an
increase of $4,373,000 from December 31, 2001. Such increase is
included in unrealized gains on financial instruments in the
accompanying condensed consolidated statement of operations.

(d) XMSR

XMSR, a publicly traded company, offers 100 national audio channels of
music, news, talk, sports and children's programming from two
satellites directly to vehicle, home and portable radios. LSAT LLC
currently owns 1,000,000 shares of XMSR common stock representing an
approximate 1% interest.

LSAT LLC has entered into an equity collar with a financial institution
with respect to its shares of XMSR common stock. The collar provides
LSAT LLC with a put option that gives it the right to

I-18

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

require its counterparty to buy 1,000,000 shares of XMSR common stock
from LSAT LLC in three tranches in November 2003, December 2003 and
February 2004 for a weighted average price of $28.55. LSAT LLC
simultaneously sold a call option giving the counterparty the right to
buy the same shares of stock from LSAT LLC in three tranches in
November 2003, December 2003 and February 2004 for a weighted average
price of $51.49 per share. The put and call options for this collar
were equally priced, resulting in no cash cost to LSAT LLC. At June 30,
2002, the fair value of the XMSR equity collar was approximately
$20,614,000.

On June 27, 2001, LSAT LLC entered into an agreement to lend 1,000,000
shares of XMSR to a third party. The obligation of such third party to
return those shares to LSAT LLC is secured by cash collateral equal to
100% of the market value of that stock, which was $7,250,000 at June
30, 2002. Such cash collateral is reported as restricted cash in the
accompanying condensed consolidated balance sheet. During the period of
the loan, which is terminable by either party at any time, the cash
collateral is to be marked-to-market daily. Interest accrues on the
cash collateral for the benefit of LSAT LLC at the rate of 0.15% per
annum. As of June 30, 2002, 1,000,000 shares of XMSR had been lent
under this agreement. The loan has no stated maturity date.

(e) OTHER

On March 30, 2001, On Command acquired certain preferred stock of STSN,
Inc. ("STSN") in exchange for cash of $15,000,000 and the conversion of
a $5,000,000 convertible promissory note. During the fourth quarter of
2001, On Command recorded a $16,539,000 loss to reflect an other than
temporary decline in the estimated fair value of its investment. Such
estimated fair value was based on the price of securities sold by STSN
to On Command and other investors during the first quarter of 2002. In
this regard, On Command purchased $2,599,000 of preferred stock from
STSN during the first six months of 2002.

During the first quarter of 2002, On Command transferred certain
equipment with a carrying value of $1,411,000 to STSN. In connection
with this transfer, STSN agreed to make quarterly royalty payments to
On Command equal to 20% of the net operating margin of the assets
transferred for the next seven years. For purposes of these royalty
payments, net operating margin is defined as gross revenue less all
direct costs. Due to the uncertainty involved in estimating these
royalty payments, On Command recorded an impairment loss on this
transaction equal to the $1,411,000 carrying value of the contributed
equipment. The royalty payments from STSN are recognized as revenue
when received by On Command. During the first six months of 2002,
royalty payments received from STSN were not significant.

During the first quarter of 2001, On Command completed a transaction
that resulted in On Command's acquisition of a 7.5% interest in e-ROOM
CORPORATION ("e-ROOM") and the settlement of certain litigation. To
acquire the 7.5% interest and settle the litigation, On Command (i)
contributed its Asia-Pacific subsidiaries to e-ROOM and transferred On
Command intercompany receivables from such subsidiaries to e-ROOM, (ii)
issued 275,000 shares of On Command Common Stock to e-ROOM, and (iii)
paid $1,000,000 to e-ROOM. On Command also agreed that e-ROOM will have
the option during the 15 day period beginning on March 1, 2003 to cause
On Command to repurchase all, but not less than all, of the 275,000
shares of On Command Common Stock issued to e-ROOM at a price of $15
per share. Such repurchase obligation will terminate if the On Command
Common Stock closes at or above $15 per share on any ten consecutive
trading days prior to March 1, 2003, and the shares of On Command
Common Stock held by e-ROOM are freely tradable during such period. Due
to the existence of this repurchase obligation, On Command valued the
On Command Common Stock issued to e-ROOM at $15 per share. The excess
of the value assigned to the consideration paid to e-ROOM

I-19

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

over the then estimated $5,298,000 fair value of the 7.5% interest in
e-ROOM received by On Command has been reflected as loss on settlement
of litigation in the accompanying condensed consolidated statements of
operations. On Command's original estimate of the litigation loss
resulted in a $4,764,000 charge during the fourth quarter of 2000. An
additional charge of $3,700,000 was recorded during the first quarter
of 2001 to reflect a change in the estimate of the amount of On
Command's intercompany receivables to be transferred to e-ROOM. During
the fourth quarter of 2001, On Command recorded a $2,000,000 impairment
charge to reflect an other than temporary decline in the estimated fair
value of its investment in e-ROOM.

DERIVATIVE INSTRUMENTS

The Company uses equity collars and put spread collars to manage fair
value risk associated with certain investments. Derivative instruments
are generally not used for speculative purposes. The derivative
instruments may involve elements of credit and market risk in excess of
amounts recognized in the financial statements. The Company monitors
its positions and the credit quality of counterparties, consisting
primarily of major financial institutions and does not expect
nonperformance by any of its counterparties.

The Company's equity collars are accounted for as fair value hedges.
Accordingly, changes in the fair value of the equity collars are
recognized in earnings as unrealized gains or losses on financial
instruments along with the changes in the fair value of the underlying
securities. The Company's put spread collars have not been designated
as fair value hedges, and therefore changes in the fair value of the
put spread collars are recorded as unrealized gains or losses on
financial instruments in the Company's condensed consolidated
statements of operations.

For derivatives designated either as fair value or cash flow hedges,
changes in the time value of the derivatives are excluded from the
assessment of hedge effectiveness and are recognized in earnings. Hedge
ineffectiveness, determined in accordance with Statement of Financial
Accounting Standard No. 133, had no impact on earnings for the six
months ended June 30, 2002 and 2001. No fair value hedges or cash flow
hedges were derecognized or discontinued during the six months ended
June 30, 2002 and 2001.

For the six months ended June 30, 2002, unrealized losses on financial
instruments include a $4,373,000 gain related to the GM Hughes put
spread collar, a $3,872,000 loss related to changes in the time value
of equity collars and a $1,254,000 loss related to the iBEAM Put
Option.

NONTEMPORARY DECLINES IN FAIR VALUE OF INVESTMENTS

During the six months ended June 30, 2002 and 2001, the Company
determined that certain of its investments experienced other than
temporary declines in value. As a result, the cost bases of such
investments were adjusted to their respective estimated fair values.
Such adjustments resulted in recognized losses of $58,948,000 (all of
which related to Sky Latin America) during the 2002 period, and
$39,932,000 (including $20,518,000 related to LSAT LLC's investment in
Wildblue Communications, Inc. ("Wildblue") and $14,575,000 related to
LSAT LLC's investment in XMSR) during the 2001 period.

I-20

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

Investments in available-for-sale securities (including related equity
collars) are summarized below. Such amounts are in addition to the
unrealized gains and losses recognized in the condensed consolidated
statements of operations.

(8) DEBT
Debt is summarized as follows:

(a) On Command's revolving credit facility, as amended, (the "On
Command Revolving Credit Facility") provides for aggregate
borrowings of $275,000,000. Borrowings under the On Command
Revolving Credit Facility are due and payable in July 2004.
Subject to certain conditions, the On Command Revolving Credit
Facility can be renewed for two additional years. On Command's
ability to draw additional funds under the On Command Revolving
Credit Facility is limited by certain financial covenants. On
Command had $9,367,000 of remaining availability under the On
Command Revolving Credit Facility at June 30, 2002.

Revolving loans extended under the On Command Revolving Credit
Facility bear interest at the London Interbank Offering Rate
("LIBOR") plus a spread that may range from 1.10% to 2.75%
depending on certain operating ratios of On Command (4.93%
effective borrowing rate at June 30, 2002). In addition, a
facility fee ranging from 0.15% to 0.50% per annum is charged on
the On Command Revolving Credit Facility, depending on certain
operating ratios of On Command. The On Command Revolving Credit
Facility contains customary covenants and agreements, most notably
the inclusion of restrictions on On Command's ability to pay
dividends or make other distributions, and restrictions on On
Command's ability to make capital expenditures. In addition, On
Command is required to maintain minimum leverage and interest
coverage ratios. On Command was in compliance with such covenants
at June 30, 2002. Substantially all of On Command's assets are
pledged as collateral for borrowings under the On Command
Revolving Credit Facility.

Although On Command expects to be in compliance with the covenants
of the On Command Revolving Credit Facility through December 31,
2002, On Command currently believes that it will not be in
compliance with the leverage ratio covenant as of March 31, 2003
as a result of

I-21

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

certain changes to such covenant that take effect for the periods
ending subsequent to 2002. On Command intends to seek an amendment
to the On Command Revolving Credit Facility that would allow On
Command to maintain compliance with this covenant. Although no
assurance can be given, On Command believes that it will be
successful in obtaining such an amendment on acceptable terms to
On Command. In the event On Command is unable to obtain an
acceptable amendment to the On Command Revolving Credit Facility,
On Command would seek to refinance the On Command Revolving Credit
Facility with alternative sources of financing. No assurance can
be given that any such alternative financing would be available on
terms acceptable to On Command.

(b) LSAT LLC's revolving credit facility, as amended, provides for
maximum borrowings of $303,000,000 (the "PCS Loan Facility"). In
May 2001, LSAT transferred its rights and obligations under the
PCS Loan Facility to LSAT LLC. The PCS Loan Facility is secured by
LSAT LLC's interest in shares of Sprint PCS Stock and by the
Sprint PCS Collar described in note 7. Interest accrues at the 30
day LIBOR (1.84% at June 30, 2002) and is payable monthly. The
principal balance is due and payable March 10, 2003. At June 30,
2002, borrowing availability pursuant to the PCS Loan Facility
was $190,497,000.

(c) Other debt represents capital lease obligations.

The fair value of the Company's debt is estimated based upon the quoted
market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. Due
to its variable rate nature, the fair value of the Company's debt
approximated its carrying value at June 30, 2002.

(9) TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
During the second quarter of 2001, Ascent purchased 2,245,155 shares of
common stock of On Command from On Command's former Chairman of the
Board and Chief Executive Officer for aggregate cash consideration of
$25,191,000. Such purchase price represents a per share price of
$11.22. The closing market price for On Command common stock on the day
the transaction was signed was $7.77. The Company has included the
$7,746,000 difference between the aggregate market value of the shares
purchased and the cash consideration paid in selling, general and
administrative expenses in the accompanying condensed consolidated
statement of operations.

(10) SIGNIFICANT CUSTOMERS
During the first six months of 2002, hotels owned, managed or
franchised by Marriott International, Inc. ("Marriott"), Hilton Hotels
Corporation ("Hilton") and Six Continents Hotels, Inc. ("Six
Continents") accounted for 29.3%, 17.0% and 10.9%, respectively, of On
Command's room revenue. The loss of any of these customers, or the loss
of a significant number of other hotel chain customers, could have a
material adverse effect on On Command's results of operations and
financial condition. However, contracts with respect to individually
owned, managed or franchised hotels expire over an extended period of
time depending on the installation date of the individual hotel.
Additionally, the terms of On Command's contracts with hotels owned by
a hotel chain are sometimes different than those of On Command's
contracts with hotels that are managed or franchised by the same hotel
chain.

In October 2000, Hilton announced that it would not be renewing its
master contract with On Command. In addition, On Command's master
contract with Promus Hotel Corporation ("Promus"), a subsidiary of
Hilton, expired on May 25, 2002. As a result, hotels owned, managed or
franchised by Hilton or Promus are currently subject to a master
contract between Hilton and a competitor of On Command. Accordingly, On
Command anticipates that hotels owned by Hilton or Promus will not
renew their contracts as they expire. On the other hand, hotels that
are

I-22

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

managed or franchised by Hilton are not precluded from renewing their
contracts with On Command, and, although no assurance can be given, On
Command anticipates that certain of those hotels will choose to renew.
At June 30, 2002, On Command provided service to approximately 134,000
rooms in 555 hotels that are owned, managed or franchised by Hilton or
Promus. The majority of these rooms are located in managed or
franchised hotels that are not owned by Hilton or Promus. Through June
30, 2002, On Command's contracts with 73 of the aforementioned 555
hotels (19,300 rooms) had expired and service to these hotels is
currently provided under monthly or other short-term renewals. On
Command's individual contracts with the remaining 482 Hilton or Promus
hotels (114,700 rooms) expire at various dates through 2010 with the
majority expiring by 2005. Over time, On Command anticipates that the
revenue it derives from hotels that are owned, managed or franchised by
Hilton or Promus will decrease. However, due to the uncertainties
involved, On Command is currently unable to predict the amount and
timing of the revenue decreases.

(11) COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain equipment pursuant to
noncancelable operating leases. In addition, LSAT LLC has guaranteed
certain lease obligations of the Sky Latin America businesses through
2015. Such guarantees aggregated approximately $103,926,000 at December
31, 2001. Currently, LSAT LLC is not certain of the likelihood of being
required to perform under such guarantees.

On Command is a party to affiliation agreements with programming
suppliers. Pursuant to certain of such agreements, On Command is
committed to carry such suppliers' programming on its video systems.
Additionally, certain of such agreements provide for penalties and
charges in the event the programming is not carried or not delivered to
a contractually specified number of rooms.

The Company has contingent liabilities related to legal proceedings,
taxes and other matters arising in the ordinary course of business.
Although it is reasonably possible the Company may incur losses upon
conclusion of such matters, an estimate of any loss or range of loss
cannot be made. In the opinion of management, it is expected that
amounts, if any, which may be required to satisfy such contingencies
will not be material in relation to the accompanying condensed
consolidated financial statements.

(12) INFORMATION ABOUT OPERATING SEGMENTS
LSAT identifies its reportable segments as those consolidated
subsidiaries that represent 10% or more of its combined revenue and
those equity method affiliates whose share of earnings or losses
represent 10% or more of its pre-tax earnings or loss. Subsidiaries and
affiliates not meeting this threshold are aggregated together for
segment reporting purposes. The segment presentation for prior periods
has been conformed to the current period segment presentation.

For the six months ended June 30, 2002, LSAT had two operating
segments: On Command and Other. On Command provides in-room, on-demand
video entertainment and information services to hotels, motels and
resorts primarily in the United States and is majority owned and
consolidated by LSAT. Other includes LSAT's non-consolidated
investments, corporate and other consolidated businesses not
representing separately reportable segments.

The accounting policies of the segments that are also consolidated
subsidiaries are the same as those described in the summary of
significant accounting policies. LSAT evaluates performance based on
the measures of revenue and operating cash flow. LSAT defines operating
cash flow as operating income before deducting stock compensation,
depreciation and amortization and impairment of long-lived assets.
LSAT's definition of operating cash flow may differ from cash

I-23

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

flow measurements provided by other public companies. LSAT believes
operating cash flow is a widely used financial indicator of companies
similar to LSAT and its affiliates, which should be considered in
addition to, but not as a substitute for, operating income, net income,
cash flow provided by operating activities and other measures of
financial performance prepared in accordance with generally accepted
accounting principles. LSAT generally accounts for intersegment sales
and transfers as if the sales or transfers were to third parties, that
is, at current prices.

LSAT's reportable segments are strategic business units that offer
different products and services. They are managed separately because
each segment requires different technology, distribution channels and
marketing strategies.

LSAT utilizes the following financial information for purposes of
making decisions about allocating resources to a segment and assessing
a segment's performance:

The following table provides a reconciliation of segment operating cash
flow to loss before income taxes and minority interest:

I-24

LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

(13) SUBSEQUENT EVENTS
On July 18, 2002, the Company consummated the sale (the "OCE Sale") of
its 70% majority shareholdings in On Command Europe ("OCE") to Techlive
Limited ("Techlive"), the owner of the remaining 30% interest in OCE.
Proceeds from the sale aggregated $2,550,000. Such proceeds do not
reflect any reduction for OCE's cash balances (approximately $1,400,000
at June 30, 2002) that were transferred to Techlive as a part of the
OCE Sale. As a result of the consummation of the OCE Sale, On Command
recorded a $5,103,000 impairment loss during the second quarter of 2002
to reduce the carrying value of OCE's long-lived assets to the fair
value indicated by the OCE Sale.

Concurrent with the consummation of the OCE Sale, On Command and
Techlive entered into a License Agreement (the "License Agreement"),
and On Command received a $200,000 payment for (i) the use of the "On
Command Europe" corporate name through July 17, 2003; and (ii) the fee
due for the first year of the License Agreement. The License Agreement
provides OCE with the ability to continue to operate as an authorized
On Command distributor, subject to performance criteria to be
determined by On Command, for a period of ten years. As part of the
agreement, On Command will license software and provide technical
support to OCE at escalating per room rates over the next ten years.

I-25

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

The following discussion and analysis provides information concerning the
financial condition and results of operations of the Company and should be read
in conjunction with the accompanying condensed consolidated financial statements
of the Company.

Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. To the extent that such statements are not
recitations of historical fact, such statements constitute forward-looking
statements which, by definition, involve risks and uncertainties. Where, in any
forward-looking statement, the Company expresses an expectation or belief as to
future results or events, such expectation or belief is expressed in good faith
and believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The following include some but not all of the factors that could cause actual
results or events to differ materially from those anticipated:

- - general economic and business conditions and industry trends;
- - trends in hotel occupancy rates and business and leisure travel patterns;
- - the regulatory and competitive environment of the industries in which the
Company, and the entities in which it has interests, operate;
- - uncertainties inherent in new business strategies, new product launches and
development plans;
- - rapid technological changes;
- - the acquisition, development and/or financing of telecommunications
networks and services;
- - future financial performance, including availability, terms and deployment
of capital;
- - the ability of vendors to deliver required equipment, software and
services;
- - availability of qualified personnel;
- - changes in, or failure or inability to comply with, government regulations,
including, without limitation, regulations of the Federal Communications
Commission, and adverse outcomes from regulatory proceedings;
- - changes in the nature of key strategic relationships with major customers,
partners and joint venturers;
- - competitor responses to the Company's products and services, and the
products and services of the entities in which it has interests, and the
overall market acceptance of such products and services.

These forward-looking statements and such risks, uncertainties and other factors
speak only as of the date of this Quarterly Report, and the Company expressly
disclaims any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained herein, to reflect any change in our
expectations with regard thereto, or any other change in events, conditions or
circumstances on which any such statement is based.

RECENT TRANSACTIONS

LSAT LLC AND ASCENT TRANSACTION. On August 16, 2001, LSAT entered into two
related purchase agreements with Liberty Media and certain of its subsidiaries
and affiliates. Both agreements were amended in November 2001 and January 2002.
One agreement provided for LSAT's acquisition of certain subsidiaries of Liberty
Media that hold an aggregate 89.41% ownership interest in LSAT LLC in exchange
for 25,298,379 shares of Series B Common Stock of the Company. The second
purchase agreement provided for LSAT's acquisition of 100% of the capital stock
of Ascent from a subsidiary of Liberty Media in exchange for 8,701,621 shares of
Series B Common Stock of the Company. The foregoing LSAT LLC and Ascent
Transaction closed on April 1, 2002. As a result of the consummation of the LSAT
LLC and Ascent Transaction, Liberty Media's common stock ownership in LSAT
increased to 84.1% and its voting power in the Company increased to 97.6%.

As a result of the consummation of the LSAT LLC and Ascent Transaction, LSAT
became the owner of 100% of the equity interests of Ascent and LSAT LLC. Due to
the fact that the Company, LSAT LLC and Ascent are all under the common control
of Liberty Media, the LSAT LLC and Ascent Transaction has been accounted for by
the Company in a manner similar to a pooling-of-interests. As such, the
Company's consolidated financial statements have been restated to include LSAT
LLC and Ascent as wholly-owned subsidiaries of LSAT effective with the
respective March 2000 dates that Liberty Media acquired control of such
entities.

I-26

As a result of the LSAT LLC and Ascent Transaction, LSAT's primary operating
subsidiary is On Command. Through Ascent, a wholly-owned subsidiary of LSAT,
LSAT owned approximately 63% of the outstanding On Command Common Stock at June
30, 2002. On Command develops, assembles, installs, and operates proprietary
video systems. On Command's primary distribution system allows hotel guests to
select, on an on-demand basis, motion pictures on computer-controlled television
sets located in their hotel rooms. On Command also provides, under long-term
contracts, in-room viewing of select cable channels and other interactive
services to hotels and businesses. The interactive services include video games,
Internet offerings, CD quality music and various hotel and guest services. At
June 30, 2002, On Command had operating subsidiaries or branches in the United
States, Canada, Mexico and Europe. See note 13 to the accompanying condensed
consolidated financial statements.

SALE OF ASCENT NETWORK SERVICES. Effective September 4, 2001, Ascent completed
the sale of Ascent Network Services to Liberty Livewire, a consolidated
subsidiary of Liberty Media, for cash consideration of $32,038,000. Ascent
Network Services provides video distributions services to the NBC television
network and other private networks. As Ascent and Liberty Livewire are both
consolidated subsidiaries of Liberty Media, no gain or loss was recognized in
connection with this transaction.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

REVENUE

IN-ROOM ENTERTAINMENT REVENUE

Revenue from On Command's in-room entertainment services consists primarily of
fees collected from hotels for in-room services provided to hotel guests by On
Command ("room revenue"). Services provided by On Command to hotel guests
include pay-per-view movies, free-to-guest programming, video games, Internet
service, short video products and digital music. On Command also earns revenue
from the sale of video systems to third parties and the sale of video equipment
to hotels ("video system and equipment sales"). Total in-room entertainment
revenue decreased $2,340,000 or 3.7% and $7,171,000 or 5.7% during the three and
six months ended June 30, 2002, respectively, as compared to the corresponding
prior year periods.

Room revenue decreased $26,000 from $59,156,000 during the three months ended
June 30, 2001 to $59,130,000 during the corresponding 2002 period, and decreased
$6,633,000 from $120,017,000 during the six months ended June 30, 2001 to
$113,384,000 during the corresponding 2002 period. Such changes in room revenue
during the three and six-month periods are attributable to a lower volume of
pay-per-view buys offset by (i) increases attributable to higher average rates
for certain pay-per-view products and (ii) increased revenue from short videos
and other new products. During the six-month period, the beneficial effect of
the higher rates and new products was more than offset by a reduction in the
volume of pay-per-view buys. Most of the decrease in pay-per-view buys in both
the three- and six-month periods is attributable to a decline in occupancy
rates, as further discussed below. A 3.3% reduction in the average number of
rooms served by On Command during the six months ended June 30, 2002, as
compared to the corresponding prior year period, also contributed to the
decrease in pay-per-view buys. The decline in the average number of rooms served
by On Command is attributable to (i) the transfer of certain hotel rooms to
e-ROOM as part of a litigation settlement (as further described in note 7 to the
accompanying condensed consolidated financial statements), (ii) the loss of
rooms to competitors, and (iii) the discontinuance of service to certain
non-profitable rooms.

Overall hotel occupancy rates declined 3.8% during the six months ended June 30,
2002, as compared to the corresponding prior year period. In addition, occupancy
rates for luxury hotels declined 4.9% over the same period. Since On Command
derives a significant portion of its revenue from luxury and other upscale
hotels, On Command believes that the occupancy rate for luxury hotels is the
best indicator of the impact changes in hotel occupancy are having on On
Command's business. Hotel occupancy rates are outside of On Command's control,
and changes in hotel occupancy rates can have a significant impact on On
Command's results of operations.

I-27

During the six months ended June 30, 2002, hotels owned, managed or franchised
by Marriott, Hilton and Six Continents accounted for 29.3%, 17.0% and 10.9%,
respectively, of On Command's room revenue. The loss of any of these customers,
or the loss of a significant number of other hotel chain customers, could have a
material adverse effect on On Command's results of operations and financial
condition. However, contracts with respect to individually owned, managed or
franchised hotels expire over an extended period of time depending on the
installation date of the individual hotel. Additionally, the terms of On
Command's contracts with hotels owned by a hotel chain are sometimes different
than those of On Command's contracts with hotels that are managed or franchised
by the same hotel chain.

In October 2000, Hilton announced that it would not be renewing its master
contract with On Command. In addition, On Command's master contract with Promus,
a subsidiary of Hilton, expired on May 25, 2002. As a result, hotels owned,
managed or franchised by Hilton or Promus are currently subject to a master
contract between Hilton and a competitor of On Command. Accordingly, On Command
anticipates that hotels owned by Hilton or Promus will not renew their contracts
as they expire. On the other hand, hotels that are managed or franchised by
Hilton are not precluded from renewing their contracts with On Command, and,
although no assurance can be given, On Command anticipates that certain of those
hotels will choose to renew. At June 30, 2002, On Command provided service to
approximately 134,000 rooms in 555 hotels that are owned, managed or franchised
by Hilton or Promus. The majority of these rooms are located in managed or
franchised hotels that are not owned by Hilton or Promus. Through June 30, 2002,
On Command's contracts with 73 of the aforementioned 555 hotels (19,300 rooms)
had expired and service to these hotels is currently provided under monthly or
other short-term renewals. On Command's individual contracts with the remaining
482 Hilton or Promus hotels (114,700 rooms) expire at various dates through
2010, with the majority expiring by 2005. Over time, On Command anticipates that
the revenue it derives from hotels that are owned, managed or franchised by
Hilton or Promus will decrease. However, due to the uncertainties involved, On
Command is currently unable to predict the amount and timing of the revenue
decreases.

Video system and equipment sales decreased $2,314,000 from $4,183,000 during the
three months ended June 30, 2001 to $1,869,000 during the corresponding 2002
period, and decreased $538,000 from $5,536,000 during the six months ended
June 30, 2001 to $4,998,000 during the corresponding 2002 period. Such decreases
are primarily attributable to the net effects of decreases in sales of On
Command's video systems to third parties, increases in sales of On Command's
music systems, and a one-time $700,000 reduction of revenue during the first
quarter of 2001 attributable to the net impact of a sales return and the
associated restocking fee.

OTHER REVENUE

Other revenue in the 2001 periods is primarily comprised of the revenue of
Ascent Network Services. Ascent sold Ascent Network Services to Liberty Livewire
on September 4, 2001. For additional information, see note 3 to the accompanying
condensed consolidated financial statements.

OPERATING COSTS

IN-ROOM ENTERTAINMENT OPERATING COSTS

In-room entertainment operating costs consist primarily of fees paid to movie
and other content providers, hotel commissions, connectivity costs associated
with On Command's Internet product, costs associated with the manufacturing of
video systems sold to other providers, costs associated with the repair,
maintenance and support of video systems and other room service equipment, and
costs associated with research and development activities.

I-28

In-room entertainment operating costs decreased $3,933,000 or 9.3% and
$7,700,000 or 9.3% during the three and six months ended June 30, 2002, as
compared to the corresponding prior year periods. The majority of such
reductions are attributable to (i) lower labor and overhead costs resulting from
a May 2001 corporate restructuring and other cost savings measures, and (ii) a
decrease in the costs associated with video system and equipment sales due to
lower sales volumes. In addition, an overall reduction in direct in-room service
costs (content fees, hotel commissions and other direct in-room service costs)
contributed to the decrease during the six-month period. Such decrease in direct
in-room service costs resulted from the net effect of (i) increases attributable
to higher guest programming costs and (ii) decreases attributable to lower
license fee royalties and certain cost saving measures. Hotel commissions
generally varied with room revenue and accordingly, lower hotel commissions
contributed to the decrease during the six-month period. The increase in guest
programming costs is the result of higher rates from program suppliers, and an
increase in the number of rooms with upgraded video systems that provide for a
greater number of programming alternatives. The decrease in license fee
royalties is primarily attributable to a lower volume of feature film buys. Due
to changes in the mix of pay-per-view buys, license fee royalties decreased as a
percentage of room revenue during the six months ended June 30, 2002, as
compared to the corresponding prior year period. Direct in-room service costs
represented 50.2% and 48.4% of total room revenue during the six months ended
June 30, 2002 and 2001, respectively. The higher percentage in 2002 is primarily
attributable to the fact that certain of On Command's content fees and other
in-room service costs do not vary with room revenue and occupancy rates.

On Command is a party to various agreements that permit On Command to distribute
movies and programming networks. No assurance can be given that the cost of such
movies and programming networks will not increase in future periods as contracts
expire and renewals are negotiated. Any cost increases that On Command is not
able to pass on to its customers would result in increased pressure on On
Command's operating margins.

OTHER OPERATING COSTS

Other operating costs in the 2001 periods represent the operating costs of
Ascent Network Services. Ascent sold Ascent Network Services to Liberty Livewire
on September 4, 2001. For additional information, see note 3 to the accompanying
condensed consolidated financial statements.

SELLING GENERAL AND ADMINISTRATIVE EXPENSE

Selling, general and administrative expense decreased $21,050,000 or 78.0% and
$28,460,000 or 69.3% during the three and six months ended June 30, 2002,
respectively, as compared to the corresponding prior year periods. Costs
associated with On Command's relocation and restructuring activities during the
2001 periods accounted for $8,098,000 and $11,445,000 respectively of the
decreases. The three and six month decreases also include $7,746,000 related to
Ascent's second quarter 2001 purchase of 2,245,155 shares of On Command Common
Stock from the then Chief Executive Officer of On Command. For additional
information regarding this transaction, see note 9 to the accompanying
condensed consolidated financial statements. The remaining decreases are
primarily attributable to the elimination of expenses as a result of the
September 2001 sale of Ascent Network Services, and cost reductions realized
by On Command as a result of a May 2001 corporate restructuring and other
cost savings measures.

STOCK COMPENSATION

LSAT records estimated stock compensation pursuant to the intrinsic value
method of Accounting Principles Board Opinion No. 25. Such estimate is
subject to future adjustment based upon the market value of the underlying
common stock. Since none of LSAT's outstanding stock appreciation rights
("SARs") were in-the-money at June 30, 2002 or 2001, LSAT recorded no
compensation expense with respect to SARs during the six months ended June
30, 2002 and 2001. The stock compensation expense recorded during the six
months ended June 30, 2002 and 2001 is attributable to restricted stock
awards granted in February 2001.

I-29

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense decreased 9,096,000 or 21.3% and
$19,212,000 or 22.2% during the three and six months ended June 30, 2002 and
2001 respectively, as compared to the corresponding prior year periods. Such
decreases are primarily attributable to the Company's adoption of Statement 142,
which, as further described in note 2 to the accompanying condensed consolidated
financial statements, required the Company to cease recording goodwill
amortization effective January 1, 2002.

IMPAIRMENT OF LONG-LIVED ASSETS

On Command recorded impairment losses of $1,411,000 and $5,103,000 during the
first and second quarters of 2002, respectively. The first quarter loss
relates to a transaction in which certain equipment was transferred to STSN,
and the second quarter loss relates to the OCE Sale. For additional
information, see notes 7 and 13 to the accompanying condensed consolidated
financial statements.

OTHER INCOME (EXPENSE)

The Company recognized interest income of $963,000 and $8,566,000 during the six
months ended June 30, 2002 and 2001, respectively. The 2002 income was earned
primarily on certain bonds that were purchased by LSAT LLC in August 2001. Such
bonds are included with the Company's investment in Sky Latin America. The 2001
income was earned primarily on the cash and cash equivalent balances maintained
by Ascent. The majority of Ascent's cash and cash equivalent balances were
utilized to redeem the Ascent Senior Secured Discount Notes on December 31,
2001. To a lesser extent, interest earned on LSAT Astro's cash and cash
equivalent balances also contributed to the Company's interest income during the
six months ended June 30, 2001. During 2001, all of LSAT Astro's cash and cash
equivalent balances were utilized to fund the capital calls of Astrolink, LSAT
Astro's 31.5%-owned investee.

During the six months ended June 30, 2002 and 2001, the Company recognized
interest expense of $9,786,000 and $25,137,000, respectively. The decrease in
interest expense represents the combined effect of a decrease in interest rates
and a decrease in the Company's weighted average debt balance. The reduction in
the Company's weighted average debt balance is primarily due to the December 31,
2001 redemption of the Ascent Senior Secured Discount Notes.

During the six months ended June 30, 2002 and 2001, the Company's share of
losses of affiliates aggregated $3,358,000 and $165,078,000, respectively. The
2002 amount includes $2,711,000 representing the Company's share of Aerocast's
losses and $647,000 representing losses with respect to the Company's investment
in Astrolink. Since LSAT Astro's investment in Astrolink was reduced to zero at
December 31, 2001, LSAT Astro's share of Asrtolink's losses has been limited to
the amounts loaned to Astrolink by the Company during the six months ended June
30, 2002. At June 30, 2002, the Company was not obligated to provide additional
funding to Astrolink. The Company's share of losses for the six months ended
June 30, 2001 includes a $155,000,000 loss representing a reduction in the
carrying value of LSAT Astro's investment in Astrolink. For additional
information, see note 6 to the accompanying condensed consolidated financial
statements.

Unrealized gains (losses) on financial instruments during the six months ended
June 30, 2002 and 2001 aggregated ($753,000) and $14,002,000, respectively. The
details of such gains (losses) are as follows (amounts in thousands):

I-30

Nontemporary declines in fair values of investments aggregated $58,948,000 and
$39,932,000 during the six months ended June 30, 2002 and 2001, respectively.
The 2002 amount represents a reduction of the carrying value of LSAT LLC's
investment in Sky Latin America. The 2001 amount includes reductions of the
carrying values of LSAT LLC's investments in Wildblue and XMSR of $20,518,000
and $14,575,000, respectively. For additional information, see note 7 to the
accompanying condensed consolidated financial statements.

INCOME TAXES

The Company recognized income tax benefits of $6,712,000 and $10,988,000
during the six months ended June 30, 2002 and 2001, respectively. The 2002
benefit includes a $5,666,000 tax refund received by LSAT as a result of a
change in tax law that occurred during the first quarter of 2002. Such change
resulted in the elimination of restrictions on the use of net operating loss
carryforwards to offset alternative minimum tax liabilities. The 2002 and
2001 income tax benefits also include deferred tax benefits associated with
losses recognized by Ascent. Ascent has recognized such losses to the extent
that the tax effect of such losses offsets Ascent's deferred income tax
liability. At June 30, 2002, Ascent's deferred tax liability was $16,576,000.
Ascent's majority-owned subsidiary, On Command, is not included in the
consolidated tax return of Liberty Media. At the LSAT level, LSAT is only
able to recognize income tax benefits for financial reporting purposes to the
extent that such benefits offset recorded income tax liabilities or LSAT
generates taxable income. For financial reporting purposes, all of LSAT's
income tax liabilities had been fully offset by income tax benefits at June
30, 2002 and 2001. In connection with the consummation of the LSAT LLC and
Ascent Transaction, the Company and Liberty Media entered into a Tax
Liability Allocation and Indemnification Agreement. For additional
information, see note 3 to the accompanying condensed consolidated financial
statements.

MINORITY INTERESTS IN LOSS (EARNINGS) OF CONSOLIDATED SUBSIDIARIES

The minority interests' share of losses of consolidated subsidiaries aggregated
$383,000 and $16,023,000 during the six months ended June 30, 2002 and 2001,
respectively. Such amounts primarily represent the minority interests' share of
On Command's net losses. The decrease is primarily attributable to a change in
how On Command's losses are allocated. During the first quarter of 2002, the
cumulative losses allocated by Ascent to the On Command minority interests
exceeded Ascent's carrying amount for the minority interests in On Command's
equity. Since the On Command minority interest holders have no obligation to
make further contributions to On Command, 100% of On Command's losses for
periods subsequent to March 31, 2002 have been, and will be in future periods,
allocated to Ascent unless and to the extent that the On Command minority
interest holders make additional investments in On Command's equity.

MATERIAL CHANGES IN FINANCIAL CONDITION

LSAT is a holding company that does not generate positive cash flow at the
LSAT level. The only subsidiary of LSAT that generates significant revenue is
On Command. Due to covenant restrictions contained in On Command's bank
credit facility, LSAT is generally not entitled to the cash resources or cash
generated by the operations of On Command. The sources of liquidity available
to LSAT at the LSAT level are described below.

On a consolidated basis, the Company used cash provided by operating
activities of $32,302,000 and cash provided by financing activities of
$16,643,000 to fund investing activities of $50,134,000. The Company's
investing activities included $23,350,000 of investments in and advances to
affiliates and $26,315,000 of capital expenditures.

LSAT LLC's PCS Loan Facility, as amended, provides for maximum borrowings of
$303,000,000 and is due and payable on March 10, 2003. The PCS Loan Facility is
secured by the Company's interest in the Sprint PCS Stock and the Sprint PCS
Collar described below. Interest accrues at the 30 day LIBOR (1.84% at June 30,
2002) and is payable monthly. The Company anticipates that it will use available
borrowings under the PCS Loan Facility to fund its investing and operating
activities. At June 30, 2002, borrowing availability pursuant to the PCS Loan
Facility was $190,497,000.

I-31

In March 2000, LSAT entered into a $60,000,000 note payable to Liberty Media.
The note bears interest at the 3 month LIBOR plus 2% (3.84% at June 30, 2002).
Interest payments are due semi-annually on the first day of March and September.
The note, which allows for prepayments, matures on March 16, 2003 at which time
all unpaid principal and interest is due. At June 30, 2002, the unpaid principal
on the note was $48,411,000 and the accrued interest on the note was $630,000.

Borrowings under the PCS Loan Facility and the note payable to Liberty Media
are due and payable in March 2003. Although the Company could elect to use
proceeds from the sale of its Sprint PCS Stock and the unwinding of the
Sprint PCS Collar to repay in full the PCS Loan Facility and the note payable
to Liberty Media, the Company might also seek to refinance or extend the PCS
Loan Facility and/or the note payable to Liberty Media in order to avoid
selling some or all of its Sprint PCS Stock. No assurance can be given that
the Company would be able to obtain, on terms acceptable to the Company, the
external financing that might be required to repay the Liberty Media note
and/or the PCS Loan Facility if such borrowings are not otherwise extended or
repaid.

During the year ended December 31, 2001 and the three months ended March 31,
2002, Liberty Media loaned $18,552,000 and $6,573,000, respectively, to LSAT
LLC. LSAT LLC used the proceeds from these loans to fund capital calls from Sky
Latin America. The loans provided for interest at 8% and were due and payable on
demand after November 27, 2001. Concurrently, with the closing of the LSAT LLC
and Ascent Transaction, (i) Liberty Media contributed to the Company, as part of
that transaction and for no additional consideration, promissory notes issued by
subsidiaries of Liberty Media, with an aggregate principal balance of
$18,552,000 and related accrued interest of $651,000, representing the loans
described above that were made through December 31, 2001, and (ii) LSAT LLC
repaid principal of $6,573,000 and accrued interest of $37,000 related to the
first quarter 2002 advances.

As a result of the consummation of the LSAT LLC and Ascent Transaction,
Liberty Media no longer has a direct ownership interest in LSAT LLC, and has
no obligation to provide funding to LSAT LLC. Accordingly, LSAT's primary
sources of liquidity at the LSAT level are expected to be borrowing
availability under the PCS Loan Facility and cash and cash equivalent
balances held by LSAT. At June 30, 2002, LSAT's cash and cash equivalent
balances aggregated $32,724,000. LSAT does not expect Ascent or its principal
operating subsidiary, On Command, to provide any of LSAT's financial
resources during 2002. The financial resources and requirements of On Command
are described below. During 2002, LSAT anticipates that, at the LSAT level,
it will use a portion of its financial resources to fund LSAT LLC's capital
contributions to Sky Latin America, LSAT's operating deficit, its interest
requirements under the PCS Loan Facility and the note payable to Liberty
Media, and its preferred stock dividend requirements, as described below.

The On Command Revolving Credit Facility, as amended, provides for aggregate
borrowings of $275,000,000. Borrowings under the On Command Revolving Credit
Facility are due and payable in July 2004. Subject to certain conditions, the On
Command Revolving Credit Facility can be renewed for two additional years. On
Command's ability to draw additional funds under the On Command Revolving Credit
Facility is limited by certain financial covenants. On Command had $9,367,000 of
remaining availability under the On Command Revolving Credit Facility at June
30, 2002.

Revolving loans extended under the On Command Revolving Credit Facility bear
interest at the London Interbank Offering Rate ("LIBOR") plus a spread that may
range from 1.10% to 2.75% depending on certain operating ratios of On Command
(4.93% effective borrowing rate at June 30, 2002). In addition, a facility fee
ranging from 0.15% to 0.50% per annum is charged on the On Command Revolving
Credit Facility, depending on certain operating ratios of On Command. The On
Command Revolving Credit Facility contains customary covenants and agreements,
most notably the inclusion of restrictions on On Command's ability to pay
dividends or make other distributions, and restrictions on On Command's ability
to make capital expenditures. In addition, On Command is required to maintain
minimum leverage and interest coverage ratios. On Command was in compliance with
such covenants at June 30, 2002. Substantially all of On Command's assets are
pledged as collateral for borrowings under the On Command Revolving Credit
Facility.

I-32

Although On Command expects to be in compliance with the covenants of the On
Command Revolving Credit Facility through December 31, 2002, On Command
currently believes that it will not be in compliance with the leverage ratio
covenant as of March 31, 2003 as a result of certain changes to such covenant
that take effect for the periods ending subsequent to 2002. On Command intends
to seek an amendment to the On Command Revolving Credit Facility that would
allow On Command to maintain compliance with this covenant. Although no
assurance can be given, On Command believes that it will be successful in
obtaining such an amendment on acceptable terms to On Command. In the event On
Command is unable to obtain an acceptable amendment to the On Command Revolving
Credit Facility, On Command would seek to refinance the On Command Revolving
Credit Facility with alternative sources of financing. No assurance can be given
that any such alternative financing would be available on terms acceptable to On
Command.

Historically, On Command has required external financing to fund the cost of
installing and upgrading video systems in hotels However, during 2002, On
Command intends to reduce its reliance on external financing by reducing
expenses and by more effectively managing capital expenditures. Assuming On
Command is successful in reducing expenses, increasing revenue per equipped
room, and more effectively managing capital expenditures, On Command expects
that it will be able to rely on cash provided by operations, existing
availability under the On Command Revolving Credit Facility, and existing
cash and cash equivalent balances to fund its capital expenditures and other
anticipated liquidity requirements. On Command's revenue targets for 2002 are
based in part on the assumption that the overall hotel occupancy rate for
2002 will be consistent with the 2001 rate. Through June 30, 2002, On
Command's actual revenue is approximately 2.7% behind the targeted amount due
in large part to decreases in occupancy rates. Although On Command expects to
derive increased revenue per equipped room as a result of ongoing system
upgrades, no assurance can be given that On Command will meet its revenue
targets if occupancy rates do not improve. Nevertheless, On Command expects
to compensate for any revenue shortfall by reducing expenses and managing its
capital expenditures. Accordingly, although no assurance can be given, On
Command continues to believe that it will not require additional sources of
liquidity to fund its capital expenditures and anticipated liquidity
requirements. Notwithstanding the foregoing, On Command anticipates that it
will require additional external financing to (i) fund any significant new
growth initiatives or unanticipated liquidity requirements, or (ii) refinance
the On Command Revolving Credit Facility, if necessary. No assurance can be
given that On Command will be successful in reducing its reliance on external
financing during the balance of 2002, and if external financing is required,
no assurance can be given that any such financing would be available on terms
acceptable to On Command.

The trust holding the Sprint PCS Stock in which LSAT LLC has a beneficial
interest has entered into an equity collar with a financial institution for LSAT
LLC's benefit with respect to such Sprint PCS Stock. The collar provides the
trust with a put option that gives it the right to require its counterparty to
buy 5,084,745 shares of Sprint PCS Stock from the trust in seven tranches in
March 2003 for a weighted average price of $59.71 per share. The trust
simultaneously sold a call option giving the counterparty the right to buy the
same number of shares of stock from the trust in seven tranches in March 2003
for a weighted average price of $82.39 per share. The put and call options for
this collar were equally priced, resulting in no cash cost to the trust or the
Company. The fair value of the Sprint PCS Collar was approximately $276,729,000
at June 30, 2002.

LSAT LLC has entered into a put spread collar with a financial institution with
respect to the Company's shares of GM Hughes Stock. The collar (i) provides LSAT
LLC with a put option that gives it the right to require its counterparty to buy
1,821,921 shares of GM Hughes Stock from LSAT LLC in three tranches in October
2003 for a weighted average price of $26.64, and (ii) provides the counterparty
with a put option that gives it the right to require LSAT LLC to repurchase the
1,821,921 shares of GM Hughes Stock for a weighted average price of $14.80. LSAT
LLC simultaneously sold a call option giving the counterparty the right to buy
the same shares of stock from LSAT LLC in three tranches in October 2003 for a
weighted average price of $54.32 per share. The put and call options for this
collar were equally priced, resulting in no cash cost to LSAT LLC. At June 30,
2002, the fair value of the GM Hughes Stock put spread collar was approximately
$19,119,000.

I-33

LSAT LLC has also entered into an equity collar with a financial institution
with respect to the Company's shares of XMSR common stock. The collar provides
LSAT LLC with a put option that gives it the right to require its counterparty
to buy 1,000,000 shares of XMSR common stock from LSAT LLC in three tranches in
November 2003, December 2003 and February 2004 for a weighted average price of
$28.55. LSAT LLC simultaneously sold a call option giving the counterparty the
right to buy the same shares of stock from LSAT LLC in three tranches in
November 2003, December 2003 and February 2004 for a weighted average price of
$51.49 per share. The put and call options for this collar were equally priced,
resulting in no cash cost to LSAT LLC. The fair value of the XMSR equity collar
was approximately $20,614,000 at June 30, 2002.

On June 27, 2001, LSAT LLC entered into an agreement to loan 1,000,000 shares of
XMSR to a third party. The obligation of such third party to return those shares
to LSAT LLC is secured by cash collateral equal to 100% of the market value of
that stock, which was $7,250,000 at June 30, 2002. Such cash collateral is
reported as restricted cash in the accompanying consolidated balance sheet.
During the period of the loan, which is terminable by either party at any time,
the cash collateral is to be marked-to-market daily. Interest accrues on the
cash collateral for the benefit of LSAT LLC at the rate of .15% per annum. As of
June 30, 2002, 1,000,000 shares of XMSR had been lent under this agreement. The
loan has no stated maturity date.

The Company accounts for its equity collars as fair value hedges. Accordingly,
changes in the fair value of these equity collars are reported in earnings along
with the changes in the fair value of the underlying securities. The Company
recognizes in earnings the ineffective portion of its equity collars. The
Company's put spread collars have not been designated as fair value hedges, and
therefore changes in the fair value of the put spread collars are recorded as
unrealized gains on financial instruments in the Company's condensed
consolidated statements of operations.

LSAT LLC has guaranteed certain lease obligations of the Sky Latin America
businesses through 2015. Such guarantees aggregated approximately $103,926,000
at December 31, 2001. Currently, the Company is not certain of the likelihood of
being required to perform under such guarantees.

Effective September 29, 2000, LSAT LLC acquired a 1% managing common interest
in IB2 LLC from a subsidiary of Liberty Digital for $652,000. Liberty Digital
retained a Preferred Interest in IB2 LLC, which owns approximately 360,000
shares of iBEAM Stock. The Preferred Interest had an initial liquidation
value of $64,574,000 and is entitled to a return of 9%, compounded annually.
As part of the transaction, LSAT LLC granted Liberty Digital the right to put
the Preferred Interest to LSAT LLC for a purchase price equal to $26,000,000
(the value of iBEAM Stock on September 29, 2000) plus a 9% return, compounded
annually (the "Put Option"). LSAT LLC has the right to call Liberty Digital's
Preferred Interest at a price equal to the initial liquidation value plus a
return of 9%, compounded annually. Both the Put Option and call option are
exercisable on September 29, 2008. Under certain limited circumstances,
including iBEAM's bankruptcy, LSAT LLC can force Liberty Digital to exercise
the Put Option prior to September 29, 2008. During the fourth quarter of
2001, iBEAM filed for bankruptcy under Chapter 11 of the Bankruptcy Code. As
a result of such bankruptcy filing, the Company began carrying the Put Option
liability at an amount ($29,742,000 at June 30, 2002), which represents the
Put Option purchase price to LSAT LLC plus an accrued return to Liberty
Digital of 9%, compounded annually. The Company anticipates that future
losses with respect to the Put Option will be limited to Liberty Digital's 9%
return on the Put Option liability.

In March 2000, LSAT issued 150,000 shares of Series A Cumulative Preferred
Stock ("Series A Preferred Stock"), and 150,000 shares of Series B Preferred
Stock to Liberty Media in exchange for shares of Sprint PCS Stock. On the
date of issuance, each such series of preferred stock had an aggregate stated
value of $150,000,000. The Series A Preferred Stock and Series B Preferred
Stock, which were each issued at a discount to their stated values, are
redeemable at the option of Liberty Media on or after April 1, 2020 at a
price equal to stated value plus all accrued and unpaid dividends. The
Company may elect to use cash or Series A Common Stock to satisfy such
dividend requirements through March 2003. Accrued dividends on the Series A
Preferred Stock and Series B Preferred Stock aggregated $22,500,000 at June
30, 2002.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At June 30, 2002, the Company had $426,547,000 of variable-rate liabilities
with a weighted-average interest rate of 3.99%. Accordingly, the Company is
sensitive to interest rate risk. To date, the Company has not entered into
any derivative instruments to manage its interest rate exposure. At June 30,
2002, the Company's variable rate liabilities were due and payable as follows
(amounts in thousand):

March 2003 $ 160,914
July 2004 265,633
-----------------
$ 426,547
=================

The Company is exposed to changes in stock prices primarily as a result of its
significant holdings in Sprint PCS Stock and other publicly traded securities.
The Company uses equity collars and a put spread collar to hedge market risk
with respect to certain of its publicly traded securities. At June 30, 2002, the
aggregate fair market value of the Company's publicly traded securities
(excluding the fair value of related hedge instruments) was $58,311,000
($22,729,000 of which represents the fair value of the Sprint PCS Stock). At
June 30, 2002, the fair value of the Company's equity collars was $297,344,000
($276,729,000 of which represents the fair value of the Sprint PCS Stock equity
collar), and the fair value of the Company's put spread collar was $19,119,000.
At June 30, 2002, the fair market value of the GM Hughes Stock that is the
subject of the put spread collar was $18,948,000. One element of the GM Hughes
put spread collar provides a counterparty with the right to require the Company
to repurchase the GM Hughes Stock for a weighted average price of $14.80 per
share in October 2003. At June 30, 2002, the per share market value of GM Hughes
Stock was $10.40. In addition, the Company owned $9,385,000 of publicly traded
securities at June 30, 2002 that were not hedged.

Although the Company's equity collars and put spread collar provide
protection against market risk, such derivative instruments may involve
elements of credit risk and market risk in excess of what is recognized in
the Company's condensed consolidated financial statements. The Company
monitors its positions and the credit quality of counterparties, consisting
primarily of major financial institutions and does not anticipate
nonperformance by any counterparty. For additional information concerning
the Company's investments in publicly traded securities and related
derivative financial instruments, see note 7 to the accompanying condensed
consolidated financial statements of the Company.

On Command transacts business in various foreign currencies, including Canada
and Mexico and to a lesser extent, Spain. On Command believes the risks of
foreign exchange rate fluctuations on its present operations are not material to
On Command's overall financial condition. However, On Command will consider
using foreign currency contracts, swap arrangements, or other financial
instruments designed to limit exposure to foreign exchange rate fluctuations, if
deemed prudent.

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PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits:

None.

(b) Reports on Form 8-K filed during quarter ended June 30, 2002:

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

LIBERTY SATELLITE & TECHNOLOGY, INC.

Date: August 14, 2002 By: /s/ Kenneth G. Carroll
-----------------------------------------
Kenneth G. Carroll
Acting President, Chief Financial Officer and
Treasurer (Principal Financial Officer and
Principal Accounting Officer)

II-37