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UNITED PAN-EUROPE COMMUNICATIONS N.V. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001
PART IV
TABLE OF CONTENTS 3

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the year ended December 31, 2001

or

For the transition period from                          to            

Commission File No. 000-25365

UNITED PAN-EUROPE COMMUNICATIONS N.V.
(Exact name of Registrant as specified in its charter)

Registrant's telephone number, including area code: (31) 20-778-9840
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
American Depository Shares each representing one ordinary share

        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.  Yes /x/    No / /

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /

        The aggregate market value of the voting stock held by nonaffiliates of the Registrant, computed by reference to the last sales price of such stock, as of the close of trading on April 9, 2002 was USD 75.4 million.

        The number of shares outstanding of the Registrant's common stock as of March 31, 2002 was:

443,417,525 ordinary shares, including shares represented by American Depository Receipts

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Annual Report, to the extent not set forth herein, is incorporated herein by reference from the registrant's definitive proxy statement relating to the annual meeting of stockholders to be held in June 2002, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Annual Report relates.

UNITED PAN-EUROPE COMMUNICATIONS N.V.

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001

Table of Contents

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PART I

Item 1. Business

(a)  General Development of Business

        We began business as a provider of cable television services. Over the last few years we have been upgrading many of our networks so that they are capable of providing two-way telecommunications services, such as telephone, internet access and enhanced digital video services. We launched telephone services to business and residential customers in many of our operating companies under the brand name Priority Telecom in 1998 and 1999. Also in 1999, many of our operating companies launched internet services using our chello broadband access and portal. We continued to develop our video, telephone and internet businesses in 2001.

        In 2001, we took a number of actions to reorganize internally. We combined the management of our internet subsidiary, chello broadband N.V., and our programming businesses, led by UPCtv, to form a division, UPC Media. In December 2001, we transferred the assets and employees relating to the technical network and systems access to the internet from chello broadband N.V. to our UPC Distribution operating companies. In addition to internet services and pay television, UPC Media is developing interactive services and transactional television. At the end of 2001, UPC Media's activities included internet portal and content, video content and digital products and services. During 2001 and 2002, we decided that four of the eight thematic channels produced by UPCtv would be closed as part of the revision of our strategy. During 2001, certain of our operating companies spun off their business telephone activities and assets to our subsidiary, Priority Telecom N.V., which operates as a separate competitive local exchange carrier, or "CLEC", and as our provider of telephone and data network solutions to business customers, leveraging off our operating systems' existing network infrastructure. Priority Telecom N.V. was listed on the Euronext Amsterdam N.V. stock exchange ("Euronext") in September 2001. Our operating companies, which we sometimes refer to as UPC Distribution, provide analog and digital video services and telephone and internet services to residential customers.

        We operated from July 1995 to December 1997 as a 50–50 joint venture between United Europe, Inc., a subsidiary of UnitedGlobalCom, Inc., now known as UGC Holdings, Inc. ("UGC Holdings"), and Philips Electronics N.V. ("Philips"). In December 1997, we and United Europe, Inc. acquired the 50% of our ordinary shares held by Philips. Following this acquisition and until our initial public offering in February 1999, we were a wholly owned indirect subsidiary of UGC Holdings. As of December 31, 2001, UGC Holdings indirectly owned approximately 53.1% of our total outstanding ordinary shares A.

        We have grown substantially since formation through acquisitions of cable television systems and related businesses in our existing and new markets, and through organic growth from the sale of new services. We expect our new services, such as telephone, internet and digital video, to continue to develop and become an increasingly important part of our business.

        During 2001, we reviewed our current and long-range plan for all segments of our business and we hired a strategic consultant to assist us in the process. We worked extensively with this consultant to revise our strategic and operating plans. We have revised our strategic vision, no longer focusing on an aggressive digital roll-out, but on increasing sales of products and services that have better gross margins and are currently profitable. The revised business plan focuses on average revenue per subscriber and margin improvement, increased penetration of new service products within existing upgraded homes, efficient deployment of capital and focuses on products with positive net present values. As a result of the strategic review and other actions taken by us in 2001, we have recorded significant charges for asset impairments and various restructuring measures in 2001.

        On January 30, 2002, New UnitedGlobalCom Inc., now known as UnitedGlobalCom, Inc. ("United"), completed a transaction with Liberty Media Corporation ("Liberty"), pursuant to which United acquired a 99.5% economic interest in UGC Holdings, and Liberty increased its economic interest in United to 72.6%

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from the 19.7% economic interest it had held in UGC Holdings prior to the completion of the transaction. In addition, United acquired approximately USD 1,435 million and EUR 263 million principal amount at maturity of our 10⁷/8% Senior Notes due 2007, 10⁷/8% Senior Notes due 2009, 11¹/4% Senior Notes due 2009, 11¹/4% Senior Notes due 2010, 11¹/2% Senior Notes due 2010, 12¹/2% Senior Discount Notes due 2009, 13³/8% Senior Discount Notes due 2009 and 13³/4% Senior Discount Notes due 2010, which we refer to as our "senior notes" and "senior discount notes", as well as a EUR 1.0 billion Exchangeable Loan borrowed by our subsidiary Belmarken Holding B.V. ("Belmarken") and ourselves pursuant to the loan agreement among Belmarken and ourselves, as Obligors, UPC Internet Holding B.V., as Guarantor, and Liberty Belmarken, Inc., as Lender, dated as of May 25, 2001 (the "Exchangeable Loan"). Belmarken is one of our primary wholly-owned subsidiaries and is the indirect owner of most of our operating companies. The Exchangeable Loan is secured by pledges over the stock of Belmarken, its wholly owned subsidiary UPC Holding B.V. and UPC Internet Holding B.V., which owns chello broadband N.V.

        Viewing our funding requirements and our possible lack of access to debt and equity capital in the near term, we determined that we would not make interest payments on our senior notes and senior discount notes, as they fell due. On February 1, 2002, we failed to make required interest payments in the aggregate amount of EUR 113.0 million (USD 100.6 million) on our outstanding 10⁷/8% Senior Notes due 2009, 11¹/4% Senior Notes due 2010 and 11¹/2% Senior Notes due 2010. The indentures related to our senior notes and senior discount notes provide that failing to make interest payments constitutes an "Event of Default" under the notes if we are in default of the payment of interest on any of the notes for a period of time in excess of 30 days. Since we failed to make the interest payments upon expiration of this 30-day grace period on March 3, 2002, Events of Default occurred under those indentures. The occurrence of these Events of Default constituted cross Events of Default under the indentures related to the remaining series of senior notes and senior discount notes. The occurrence of the various Events of Default gives the trustees under the related indentures, or requisite number of holders of such notes, the right to accelerate the maturity of all of our senior notes and senior discount notes. As of March 31, 2002, neither the trustees for those notes nor the requisite number of holders of those notes have accelerated the payment of principal and interest under those notes.

        On February 1, 2002, as more fully described in the Form 8-K we filed with the Securities and Exchange Commission on that date, we signed a Memorandum of Understanding with United and UGC Holdings. The Memorandum of Understanding describes a non-binding agreement in principle with United and UGC Holdings to enter into negotiations with the holders of our senior notes and senior discount notes to attempt to reach agreement on a means to restructure our indebtedness at the holding company level.

        Our failure to make the February 1, 2002 interest payment on our outstanding 10⁷/8% Senior Notes due 2009, 11¹/4% Senior Notes due 2010 and 11¹/2% Senior Notes due 2010, and the resulting Events of Default under the indentures relating to our senior notes and senior discount notes, gave rise to cross events of default under the following credit and loan facilities:

•

the senior secured credit facility among UPC Distribution Holding B.V., our indirect wholly-owned subsidiary ("UPC Distribution"), as Borrower, TD Bank Europe Limited and Toronto Dominion (Texas), Inc., as Facility Agents, and a group of banks and financial institutions (the "UPC Distribution Bank Facility");



•

the revolving loan facility among EWT Elektro & Nachrichtentechnik GmbH, our majority-owned subsidiary ("EWT"), as Borrower, a group of entities as Guarantors, The Royal Bank of Scotland plc ("RBS") as Facility Agent and Security Agent and a group of financial institutions (the "EWT Facility"); and



•

the Exchangeable Loan.

4

        The UPC Distribution Bank Facility is secured by share pledges to the banks on UPC Distribution Holding B.V., which is the holding company of most companies within the UPC Distribution group, and over operating companies within this group. The EWT Facility is secured by share pledges over EWT to RBS. The occurrence of the cross events of default under those facilities give the creditors under those facilities the right to accelerate the maturity of the loans and to foreclose upon the collateral securing the loans.

        On March 4, 2002, as more fully described in the Form 8-K we filed with the Securities and Exchange Commission on that date, we received waivers from the lenders under the UPC Distribution Bank Facility, the EWT Facility and the Exchangeable Loan for the cross events of defaults under such facilities that existed or may exist as a result of our failure to make the interest payment due on February 1, 2002, on our outstanding 10⁷/8% Senior Notes due 2009, 11¹/4% Senior Notes due 2010 and 11¹/2% Senior Notes due 2010, failure by us to make the interest payment due on May 1, 2002 on our outstanding 10⁷/8% Senior Notes due 2007 and 11¹/4% Senior Notes due 2009 within the applicable cure periods, or any resulting cross defaults. Each of these waivers will remain effective until the earlier of

•

June 3, 2002,



•

the occurrence of any other Event of Default under the respective credit or loan facility that is not covered by the waiver, or



•

in the case of the waiver for the Exchangeable Loan only, the acceleration of any advances under the UPC Distribution Bank Facility, the conversion of the notes under the credit or loan facility into our ordinary shares in accordance with the terms of the Memorandum of Understanding, or five business days after United has given notice to us that, in its judgment, restructuring negotiations with holders of the senior notes and senior discount notes are not progressing satisfactorily.

        In addition, each of these waivers contains certain other conditions and undertakings and will terminate if there is a default by us of the terms of that waiver. The waiver under the UPC Distribution Bank Facility subjects us to a EUR 100 million drawdown limitation under that facility, subject to certain conditions, during the period in which the waiver is in place.

        As of April 12, 2002, we had not made the interest payment on the 10⁷/8% Senior Notes due 2009, 11¹/4% Senior Notes due 2010 and 11¹/2% Senior Notes due 2010. None of the notes or facilities described above had been accelerated or subject to enforcement actions, and none of the defaults described above had a material adverse effect on the operations of our subsidiaries or their or our relationships with customers, suppliers and employees.

        The occurrence of the events of default described above also triggered the right of the holders of a minority interest in our 51% owned subsidiary, UPC Germany, to acquire from us for nominal consideration shares of UPC Germany constituting 22% of UPC Germany's outstanding shares. On March 5, 2002, we received notice of the holders' notice of exercise. After settlement of this exercise, our interest in UPC Germany will be reduced to 29%. The involved parties are in discussion about this exercise notice.

        During the month of March 2002, we met with representatives of United, which currently holds the Exchangeable Loan and a significant portion of our senior notes and senior discount notes, and a steering committee representing the holders of our senior notes and senior discount notes (other than United) to begin preliminary discussions with respect to a process for, and terms of, a restructuring of those notes and the Exchangeable Loan. Currently, United and its advisors and the noteholders' steering committee and its advisors are conducting due diligence about us and our current financial condition. We have not reached any decisions with either United or the noteholders' steering committee regarding the terms or timing of a debt restructuring. We expect that this process will take a number of months to complete. If completed, the restructuring will result in substantial dilution of our existing shareholders, a loss of some or all of the fair value of our outstanding securities, including our ordinary shares, preference shares and senior notes and

5

senior discount notes, as well as the Exchangeable Loan. Since we are in preliminary discussions with United and the noteholders' steering committee, we cannot predict the terms or the timing of our restructuring. In addition, we cannot assure you that we will be able to reach agreement with either United or the noteholders on mutually satisfactory terms for the debt restructuring.

        If we are unable to reach agreement on the terms of the debt restructuring or are otherwise unable to successfully complete an agreed upon restructuring plan for our debt, we may seek relief under a debt moratorium, leading to a suspension of payments, or bankruptcy proceeding under applicable laws. If we seek relief under either of these proceedings, or any other laws that may be available to us, holders of our outstanding securities, including our ordinary shares, preference shares and senior notes and senior discount notes, as well as the Exchangeable Loan, may lose some or all of the value of their investment in our securities. Such proceedings could result in material changes in the nature of our business, material adverse changes to our financial condition and results of operations or our liquidation.

        In a separate transaction on February 1, 2002, we amended two swap agreements with a bank effective as of January 31, 2002 and as more fully described in the Form 8-K we filed with the Securities and Exchange Commissions on such date. The swap agreements were entered into in connection with the issuance of some of our senior notes and senior discount notes. The swap agreements were subject to early termination upon the occurrence of certain events, including the defaults described above. The amendment provides that the bank's obligations to us under the swap agreements have been substantially fixed and the agreements will be unwound on or prior to July 30, 2002. In settlement of the bank's obligations to us, the bank is entitled to offset, and will deliver to us, approximately EUR 400 million, subject to adjustment in the case of certain circumstances, in aggregate principal amount of our senior notes and senior discount notes held by that bank. Upon offset against, and delivery to us of, the senior notes and senior discount notes, our indebtedness will be reduced by approximately EUR 400 million and we will recognize an extraordinary gain.

        We have experienced net losses since formation. As of December 31, 2001, there was substantial uncertainty whether our sources of capital, working capital and projected operating cash flow would be sufficient to fund our expenditures and service our indebtedness over the next year. In addition, as a result of the events of default described above, our senior notes, senior discount notes, the Exchangeable Loan and the UPC Distribution Bank Facility have been classified as current liabilities. Our ability to continue as a going concern is dependent on (i) our ability to restructure the July 1999 Notes, October 1999 Notes, January 2000 Notes, the Exchangeable Loan and the convertible preferred stock and (ii) our ability to generate the cash flows required to enable us to recover our assets and satisfy our liabilities, in the normal course of business, at the amounts stated in the consolidated financial statements. Due to the uncertainty of our ability to continue as a going concern, the Report of Independent Accountants includes a modification in this respect.

Narrative Description of Business

        We own and operate broadband communications networks and services in 17 countries in Europe and in Israel. Our operations are organized into three principal divisions:

•

UPC Distribution, which delivers video, internet and telephone services to residential customers (the "Triple Play");



•

UPC Media, which comprises our converging chello broadband internet business and our content and programming businesses, led by UPCtv. UPC Media's operations also include our digital products;



•

Priority Telecom, which operates our CLEC business and provides telephone and data network solutions to the business market. The Priority Telecom brand is also used to offer telephone services to residential customers through UPC Distribution.

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        Our subscriber base is one of the largest of any group of broadband communications networks operated across Europe. Our goal is to enhance our position as a leading pan-European distributor of video programming services and to become a leading pan-European provider of telephone, internet and enhanced video services, offering a one-stop shopping solution for residential and business communication needs. Our business plan focuses on managed subscriber growth, whilst improving average revenue per subscriber, margins and penetration of products within our existing footprint.

        We have incurred substantial operating losses and negative cash flows from operations, which have been driven by continuing development efforts, including the introduction of new services such as digital video, telephone and internet. Additionally, substantial capital expenditures have been required to deploy these services and to acquire businesses. Management expects to incur operating losses at least through 2005, primarily as a result of the continued introduction of these new services, which are in the early stages of deployment, as well as continued depreciation expense. During 2001, we reviewed our current and long-range plan for all segments of our business and we hired a strategic consultant to assist us in the process. We worked extensively with this consultant to revise our strategic and operating plans. We have revised our strategic vision, no longer focusing on an aggressive digital roll-out, but on increasing sales of products and services that have better gross margins and are currently profitable. The revised business plan focuses on average revenue per subscriber and margin improvement, increased penetration of new service products within existing upgraded homes, efficient deployment of capital and focuses on products with positive net present values.

        Information regarding revenues, operating performance and assets of our business segments, revenues from external customers, and the long-lived assets of the geographic areas of our business is contained in Note 13 to our audited consolidated financial statements contained in this Annual Report on Form 10-K.

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Summary Operating Data for 2001 and 2000

        In the tables below, the "UPC Paid In Ownership" column shows the percentage we own of the operating systems in which we have an interest. The operating data set forth below reflect the aggregate statistics of the operating systems in which we have an ownership interest.

(1)

Homes passed represent the number of homes, which the constructed network passes.

(2)

Two-way homes passed represents the number of homes passed where customers can request and receive the installation of a two-way addressable set top and "normal" customer services (e.g. the service is launched, customers are billed and normal service activity is available).

(3)

Basic penetration represents the number of basic subscribers as a ratio of the number of homes passed.

(4)

The 8% minority shareholders in UPC France have the ability to call for a liquidity event in 2004 at fair market values.

(5)

The occurrence of the events of default described in Item 1 "General Development of Business" also triggered the right of the holders of a minority interest in our 51% owned subsidiary, UPC Germany, to acquire from us for nominal consideration shares of UPC Germany constituting 22% of UPC Germany's outstanding shares. On March 5, 2002, we received notice of the holders' notice of exercise. If such an exercise is consummated, our interest in UPC Germany will be reduced to 29%. The involved parties are in discussion about this exercise notice.

(6)

As of December 7, 2001 our Polish DTH business was contributed to a newly formed joint venture with Canal+ ("TKP") in which we have a 25% investment and is therefore reported as a non-consolidated company.

8

Summary Operating Data (Continued)

(1)

Hungary (Monor) and Czech Republic offer traditional telephone services.

9

Summary Operating Data (Continued)

(1)

Internet subscribers who are not served by chello broadband.

10

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Summary Operating Data (Continued)

(1)

Hungary (Monor) and Czech Republic offer traditional telephone services.

(2)

UTH owned 80% of Uniport as of December 31, 2000. UTH sold its 100% owned business of Uniport in April 2001.

(3)

In 2001 Mundi Telecom subscribers are included in Priority Telecom.

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(1)

Internet subscribers who are not served by chello broadband.

13

Summary Operating Data (Continued)

        Residential Revenue Generating Units    The operating data set forth below reflect the aggregate statistics of the operating systems in which we have an ownership interest. Revenue Generating Units ("RGUs") are the sum of Basic Cable, Digital, Residential Internet, Residential Telephony and DTH subscribers. For example, if a residential customer in our Austrian system subscribed to our basic cable service, digital video service, telephone service and internet services, the customer would constitute four RGUs.

(1)

UTH owned 80% of Uniport as of December 31, 2000. UTH sold its 100% owned business of Uniport in April 2001.

(2)

In 2001 Mundi Telecom subscribers were transferred to Priority Telecom and therefore are not included as residential subscribers.

(3)

As of December 7, 2001 our Polish DTH business was contributed to a newly formed joint venture with Canal+ (TKP) in which we have a 25% investment and is therefore reported as a disposed operation.

UPC Distribution

        UPC Distribution delivers video services, and, in many of our Western European systems, telephone and internet services to the residential market. Our distribution division also offers residential internet and telephone services in some of our Eastern European systems. Over the past few years, we have been upgrading our cable television systems to high speed, two-way capacity. In addition to enabling us to offer

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telephone and internet services, the upgraded network will provide us with technology to offer enhanced digital video services, such as near video on demand ("NVOD") and interactive television. As of December 31, 2001, approximately 74.1% of the network in our Western European systems, excluding Germany, had been upgraded, as well as 20.1% of our Eastern Europe systems.

        In 2001, we launched digital video in the Netherlands, Austria, France, Norway and Sweden. We expect that full digitalization of our television signals will be made possible by our network upgrade to full two-way capability. The roll-out of digital services via set-top computers installed in customers' homes will involve significant capital investment and the use of new technologies. We cannot assure you that we will be able to complete the roll-out of digital services on the planned schedule.

        During 2000 and 2001, we undertook a significant project of upgrading and integrating our information technology systems, creating a pan-European infrastructure to support the delivery of our services. The primary purpose of the project is the integration of software applications and processes into a complete IT and business solution. Various modules, such as billing and collection, customer care, activation and provisioning, capacity management, and reporting have been linked to a pan-European data center based in the Netherlands. By the end of 2001, we had migrated more than 1 million customers of UPC France and UPC Netherlands to the new platform.

UPC Distribution–Video

        As of December 31, 2001, our operating companies had approximately 7.2 million consolidated subscribers to their basic tier video services, excluding an additional 113,100 subscribers for our digital DTH service in Hungary, the Czech Republic and the Slovak Republic. In 2001, we launched digital video services commercially in the Netherlands, Austria, France, Norway and Sweden. At December 31, 2001, we had approximately 78,200 digital video subscribers in those countries. We plan to continue increasing our revenue per subscriber by expanding our video services program offerings through digital and expanded basic tier services, pay-per-view and digital audio.

        We offer our subscribers some of the most advanced analog and digital video services available today and a large choice of radio programs. In many systems, for example, we have introduced impulse pay-per-view services. We plan to continue to improve our expanded basic tier offerings by adding new channels. In addition, we offer subscribers additional choice by offering thematic groupings of tiered video services in a variety of genres and by increasing the number and time availability of pay-per-view offerings. Generally, basic tier pricing is regulated by media laws and local licenses, while the expanded basic tier is not specifically price regulated, although it is subject to the general rules of competition law.

        The increased channel capacity provided by digitalization will enable us to offer digital subscribers more choice in video products, such as NVOD, digital expanded basic tiers, and additional premium channels. In addition, digitalization allows us to provide value added services such as digital music, walled garden, interactive television and basic e-mail functionality. The increased channel capacity provided by digitalization enables digital subscribers to customize their subscriptions for our products and services to suit their lifestyles and personal interests. We also provide our digital subscribers with customizable programming guides that enables them to program their favorite channels and also allows parents to restrict their children's viewing choices. Because many of these products and services are new and have not achieved market acceptance, there can be no assurance when or if we will be able to market them successfully.

        In areas where our cable television franchises are exclusive, our operating companies generally face competition from DTH satellite service providers and in certain area's also from television terrestrial broadcasters. We face the most competition from DTH providers in France, Poland and Sweden. In those areas where our cable television franchises are non-exclusive, our operating companies face competition from other cable television providers, in addition to DTH satellite service providers and television terrestrial broadcasters.

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UPC Distribution–Telephone

        We offer residential telephone services, branded as Priority Telecom, over our networks in our Austrian, Dutch, French and Norwegian systems. Our operating companies generally do not offer telephone services to business customers in those countries in which our business telephone activities have been spun-off to Priority Telecom. We also have a traditional switched telephone network in Hungary and the Czech Republic. We offer our residential telephone customers local, national and international voice services, in addition to several value added features. As of December 31, 2001, we had 454,600 residential telephone subscribers.

        Traditional telephone service is carried over twisted copper pair in the local loop. The cable telephone technology that we are using allows telephone traffic to be carried over our upgraded network without requiring the installation of twisted copper pair. This technology requires the addition of equipment at the master telecom center, the distribution hub and in the customer's home to transform voice communication into signals capable of transmission over the fiber and coaxial cable. We are currently working in close co-operation with some suppliers to develop the possible introduction of alternative telephony technologies, including Voice over Internet Protocol ("VOIP"). VOIP is well-suited for many of our networks, as the technology used is similar to our existing internet service. Because of these similarities, we believe we can decrease significantly our capital expenditures for the introduction of VOIP as compared to other technologies. Since VOIP is in relatively early stage of development and VOIP services are not rolled out on any significant scale in the world, there can be no assurances when or if we will be able to successfully launch VOIP services to our customers.

        We generally price our telephone service at a discount compared to services offered by incumbent telecommunications operators. We are, however, reviewing this strategy in order to improve gross margin. Because of the relatively high European local tariff rates, we believe potential customers will continue to be receptive to our telephone services, especially in a bundled offer with any of our other services. In addition to offering competitive pricing, we offer a full complement of services to telephone subscribers including custom local access services, "CLASS," including caller ID, call waiting, call forwarding, call blocking, distinctive ringing and three-way calling. We also provide voice mail and second lines. The introduction of number portability in some of our markets, including the Netherlands, Norway and France, provides an even greater opportunity, as potential customers will be able to subscribe to our service without having to change their existing telephone numbers.

        Each operating company that offers telephone services has entered into an interconnection agreement with the incumbent national telecommunications service provider. In addition, certain of these operating companies have also entered into interconnection agreements with other telecommunications service providers, providing alternative routes and additional flexibility. Even though we have secured these interconnection arrangements, we may still experience difficulty operating under them. In Austria, our interconnection arrangement is subject to a dispute with the incumbent telecommunications service provider, which is pending at the administrative court. Priority Telecom manages our interconnection relationships.

        In the provision of telephone services, our operating companies face competition from the incumbent telecommunications operator in each country. These operators have substantially more experience in providing telephone services and may have greater resources to devote to the provision of telephone services. In many countries, our operating companies also face competition from other new telephone service providers like ourselves, including traditional fixed line providers, other cable telephone providers, wireless telephone providers and indirect access providers.

UPC Distribution–Internet

        We initially launched our broadband internet business in a few of our operating systems in September 1997. As we have upgraded our network, we have continued to roll out our internet service. We

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currently offer internet services in ten countries. As of December 31, 2001, we had 510,600 consolidated residential internet subscribers.

        Cable modem technology allows access to the internet over our existing upgraded network. The data communication is transformed into signals capable of transmission over fiber and coaxial cable by the addition of incremental electronic equipment, including servers, routers and switches at the master telecom center. Cable modems allow internet access at speeds significantly faster than traditional dial-up access, although we cannot guarantee the speed over our networks since it is a shared medium. A number of different technologies designed to provide much faster access than traditional dial-up modems have been proposed and are being introduced, such as Integrated Services Digital Network ("ISDN") and asynchronous digital subscriber line ("ADSL"), which compete with our cable modem access technology. Cable modem technology, unlike most other high-speed technologies, is based on the widely used Transport Control Protocol/Internet Protocol ("TCP/IP"), which is used on local area networks and the internet. A global standard for TCP/IP has been created and accepted.

        Our local operating companies have entered into franchise arrangements with chello broadband N.V. Under the franchise arrangements chello broadband N.V. provides our operating companies with product development, customer support, local language broadband portals and marketing support for a fee based upon a percentage of subscription revenue. In December 2001, we transferred the assets and employees relating to the technical network and systems access to the internet from chello broadband N.V. to the UPC Distribution operating companies. As part of the transfer, certain elements of the chello broadband N.V. franchise agreement with our operating companies were revised to reflect changes in costs and operational responsibilities. chello broadband N.V. is expected to enter into a separate framework operating agreement and service level agreements with companies within the UPC Distribution group with regard to certain operational matters.

        The primary components of the transferred network assets and systems are the network operations center, the AORTA backbone infrastructure, and internet related equipment and assets at master and regional data centers containing servers, routers and associated software. This infrastructure allows internet traffic to be rerouted if parts of the network are congested or impaired. The core backbone infrastructure connects Amsterdam, Stockholm, Vienna, Paris, Brussels, London, Oslo and New York. The network operations center is used to monitor the quality of services. This center located in Amsterdam, operates 24 hours per day, seven days per week, and manages the infrastructure, regional data centers, regional networks, head-end facilities, servers and other components of the network infrastructure. During 2001, bandwidth-monitoring tools were introduced in conjunction with UPC Distribution, which are critical for effective network cost control. The bandwidth monitoring tools will enable us to introduce pricing policies, under which heavy internet users pay fees based on their use of internet, rather than a fixed fee.

        In providing internet access to our customers, we face competition from incumbent telecommunications companies and other telecommunications operators and other cable-based and non-cable-based internet service providers. The internet services offered by these competitors include both traditional dial-up internet services and high-speed access services. We have encountered competition from ADSL, a new technology, which provides high-speed internet access over traditional telephone lines. ADSL services are offered by both incumbent and alternative providers. We expect to face strong competition from ADSL operators for our internet service in the future.

UPC Distribution–Operating Companies


Western Europe

        Austria: UPC Telekabel Group.     UPC Telekabel Group consists of five Austrian corporations, each of which owns a cable television operating system. We own 95% of, and manage, each UPC Telekabel Group company. Each of the respective cities in which the operating systems are located owns, directly or

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indirectly, the remaining 5% interest in each company. The UPC Telekabel Group provides cable television and communications services to the Austrian cities of Vienna, Klagenfurt, Graz, Baden and Wiener Neustadt. UPC Telekabel Group's largest subsidiary, Telekabel Wien, serves Vienna and represents approximately 87% of UPC Telekabel Group's total subscribers. It owns and operates one of the larger clusters of cable systems in the world in terms of subscriber numbers served from a single headend.

        We intend on capitalizing on UPC Telekabel Group's strong market position and positive perception by its customers by expanding UPC Telekabel Group's service offerings as its network is 99.6% upgraded to full two-way capability. The upgraded network enabled UPC Telekabel Group to launch an expanded basic tier, impulse pay-per-view services and internet/data and access services in 1997. UPC TeleKabel Group launched the Priority Telecom cable telephone service in Vienna on a commercial basis in early 1999, and the chello broadband service in June 1999. We launched digital video services in Austria in the second half of 2001.

        In Austria, our interconnection arrangement is subject to a dispute with the incumbent telecommunications service provider, which is pending at the administrative court.

        In connection with United Europe, Inc. acquisition of Philips' interest in us in December 1997, the City of Vienna and Philips agreed that Philips will continue to guarantee the capital level to be maintained by Telekabel Wien. Philips has also agreed to guarantee the continued fulfillment of the agreements that were originally concluded between the city and Philips and that were assigned by Philips to us. These agreements have a term until 2022, with an extension option. We have agreed to indemnify Philips for any liability under Philips' guarantee. Due to its position as a guarantor, Philips has the right to appoint one member to our Supervisory Board. This Supervisory Director has a veto right that is limited to fundamental decisions and exceptional business matters, such as the sale or disposition of our interests in Telekabel Wien, if certain threshold values are met.

        The City of Vienna's approval is required for any change of control over us, which approval cannot be unreasonably withheld if the buyer is a reputable telecommunications and/or cable television operator. In the absence of such approval, the City of Vienna can require UGC Holdings to own Telekabel Wien separately from UPC.

        Belgium: UPC Belgium.     UPC Belgium, our 100% owned subsidiary, provides cable television and communications services in selected areas of Brussels and Leuven. UPC Belgium plans to increase revenues through the continued introduction of new services that currently are not subject to price regulation. UPC Belgium offers an expanded basic tier cable television, and also distributes three premium channels, two in Brussels and one in Leuven, which are provided by Canal+. UPC Belgium's network is fully upgraded to two-way capability and will continue to introduce expanded service offerings. UPC Belgium began offering internet access services in September 1997 and introduced the chello broadband service in early 1999.

        France: UPC France.     We have been constructing and operating cable television and communications systems in France since 1996. During 1999, we acquired several additional major cable television systems and UPC France is now one of the largest cable television providers in France. UPC France's initial operating companies constructed their networks with technology and capacity that enabled them to offer integrated video, voice and internet services. We are continuing to upgrade certain of the networks of our acquired French systems to be able to offer cable telephone and internet services in these systems as well. UPC France's major operations are located in suburban Paris, the Marne-la-Vallee area east of Paris, Lyon and in other towns and cities throughout France. We currently own through UPC France Holding B.V. 92% of Médiaréseaux S.A., which in turn holds all our interests in the distribution activities in France.

        Most of our French systems offer various tiers of cable television service. To increase its average monthly revenue per subscriber, UPC France began offering pay-per-view services in May 1998. We are

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expanding these revenue-generating services across our acquired systems. In addition UPC France launched a digital video product commercially in 2001.

        In June 1998, UPC France obtained a 15-year telephone and network operator license for an area that includes 1.5 million homes in the eastern suburbs of Paris. UPC France began offering telephone services, under the Priority Telecom brand in its existing cable television franchise area in March 1999 and has continued to roll out telephone services in 2000 and 2001 in suburban Lyon and Limoges.

        UPC France launched chello broadband's internet access services over the upgraded portions of its network in 1999. We launched chello broadband's internet access service in our systems in the suburban Lyon and Limoges areas in the second quarter of 2000.

        Germany: UPC Germany.     In October 2000, our 51% owned subsidiary, UPC Germany, acquired EWT/TSS, the fourth largest independent German broadband cable operator. EWT/TSS has cable operations throughout Germany, with the greatest concentration in Nordrhein-Westfalen, Berlin/Brandenburg and Sachsen/Thueringen. EWT/TSS is the second largest cable provider in Berlin, and has introduced cable telephone services in Berlin on a trial basis. Pursuant to the agreement to acquire EWT/TSS Group, we are required to fulfill a so-called contribution obligation by no later than March 2003, by contribution of certain assets amounting to approximately 358.8 million. If we fail to make such contribution by such date, or in certain circumstances such as a material default by us under our financing agreements, the 49% owner in UPC Germany may call for 22% of the ownership interest in exchange for 1 Deutsche Mark. On March 5, 2002, we received notice of the holders' notice of exercise. Upon settlement of this exercise, our interest in UPC Germany will be reduced to 29% and we would no longer consolidate UPC Germany. In addition, we believe the delivery of the shares also extinguishes the contribution obligation.

        We also own approximately 25% of PrimaCom AG ("PrimaCom"), which owns and operates cable television networks in Germany. PrimaCom's footprint shares a significant geographic overlap with EWT/TSS.

        The Netherlands: UPC Nederland.     Our Dutch systems are our largest group of cable television and communications systems. We have had operations in the Netherlands since we were formed in 1995. We began upgrading a portion of our Dutch networks in 1997 and, as of December 31, 2001, approximately 87.9% of our network was fully upgraded. As our subscribers are located in large clusters, including the major cities of Amsterdam, Rotterdam, and Eindhoven, we have constructed a national fiber backbone to interconnect these regional networks. In addition to television services, UPC Nederland offers internet and telephone services over its upgraded network.

        As a result of the high penetration in our Dutch systems and the rate regulation of the basic tier in many of UPC Nederland's franchise areas, we have focused our efforts on increasing revenue per subscriber in these systems through the introduction of new video, telephone and internet services. Many of our Dutch systems have offered an expanded basic tier since late 1996 through the introduction of an analog decoder. We initially launched impulse pay-per-view services in April 1997. In 2001, we commenced the roll-out of digital video services in our Dutch systems.

        UPC Nederland launched its cable telephone service in Amsterdam in July 1997 and its Priority Telecom cable telephone service in many other parts of its network in May 1999. In some of our acquired systems, we launched cable telephone services in 2000 and 2001.

        Some of our Dutch systems had internet access services as early as 1997. We launched chello broadband's internet/data services in UPC Nederland's existing systems in early 1999. In 2000, we launched chello broadband in Rotterdam.

        During 2000 and 2001, we continued to integrate our Dutch acquisitions. We began the process of rationalizing the 11 legacy billing systems and four call centers inherited from our Dutch acquisitions. In

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2001, we continued to focus on the bundling of our new services to achieve increased revenue per subscriber and we also achieved additional cost savings through continuing rationalization of operating activities.

        Norway: UPC Norge.     UPC Norge is Norway's largest cable television operator. UPC Norge's main network is located in Oslo and its other systems are located primarily in the southeast and along the southwestern coast. UPC Norge has been upgrading its network to two-way capacity since 1998.

        UPC Norge offers cable television subscribers four tiers of video services. Our goals for UPC Norge's cable television business are to continue to increase its penetration rate, to improve its revenue per subscriber generally by providing additional programming and services and to increase average revenue per subscriber in systems in which expanded basic tiers are more recent additions.

        UPC Norge introduced Priority Telecom's cable telephone service in April 1999 in the upgraded portions of its network. UPC Norge launched an internet access service in March 1998 and introduced chello broadband service in April 1999. In 2001, we commenced the roll-out of digital video services.

        Sweden: UPC Sweden.     UPC Sweden operates cable television and communications systems servicing the greater Stockholm area. UPC Sweden launched internet services in 1999. We commenced a roll-out of digital video services in Stockholm during the fourth quarter of 2001.

        UPC Sweden leases the fiber optic cables it uses to link to its main headend under agreements with Stokab, a city-controlled entity with exclusive rights to lay ducts for cables for communications or broadcast services in the City of Stockholm. The main part of the leased ducting and fiber optic cables is covered by an agreement, which expires in January 2019. Additional fiber optic cables are leased under several short-term agreements, most of which have three year terms but some of which have ten year terms.

Central and Eastern Europe

        In addition to the video, internet and telephone services we offer in Central and Eastern Europe, we have provided DTH services in the Czech Republic, Hungary, Poland and the Slovak Republic. In December 2001, we merged our Polish and United Kingdom DTH business into Telewizyjna Korporacja Partycypacyjna S.A. ("TKP"), a subsidiary of Canal+ Group ("Canal+"). We are reviewing the strategic position of the DTH businesses in Czech Republic, Hungary and Slovak Republic.

        Czech Republic: UPC Ceská republika a.s.     Our Czech Republic subsidiary provides cable television services in the cities of Prague and Brno, the Czech Republic's second largest city. In October 27, 1999, we acquired 94.6% of Kabel Plus, the leading provider of cable television services in the Czech Republic. In September 24, 2000, we acquired DattelKabel, a Prague-based cable television operator.

        We offer a number of tiers of programming services in the Czech Republic. We launched DTH service during the third quarter of 2000, leveraging off our then existing DTH platform in Poland. During 2001 we launched internet services.

        Hungary: UPC Magyarorszag.     We have owned and operated systems in Hungary for nearly a decade. Our network in Hungary is approximately 49% two-way upgraded. We launched DTH service in the third quarter of 2000, leveraging off our then existing DTH platform in Poland. In the fourth quarter of 2000, UPC Magyarorszag launched chello broadband internet services. We currently offer a number of tiers of programming services.

        Monor, one of our Hungarian operating companies, has offered traditional switched telephone services since December 1994. Monor has the exclusive, local loop telephone concession for the region of Monor, which expires in the second half of 2003. We have an economic ownership interest in Monor of approximately 98.9%.

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        Poland: UPC Polska.     In August 1999 we acquired @Entertainment, Inc., now called UPC Polska, Inc. which owns and operates the largest cable television system in Poland. UPC Polska's subscribers are located in regional clusters encompassing eight of the ten largest cities in Poland. In addition, until December 7, 2001, UPC Polska had a DTH broadcasting service for Poland, targeted at homes outside of its cable network coverage area. On August 10, 2001, we and Canal+, the television and film division of Vivendi Universal, announced the signing of definitive agreements to merge our and their respective Polish DTH platforms, as well as the Canal+ Polska premium channel, to form a common Polish DTH platform. In December 2001, UPC Polska merged its Polish and United Kingdom DTH assets with TKP, a subsidiary of Canal+, and placed EUR 30.0 million into an escrow account, which was used to fund TKP with a loan of EUR 30.0 million in the first quarter of 2002. For this we received a 25% ownership interest in TKP and EUR 150.0 million in cash. As part of this transaction, through a carriage agreement, the Canal+ Polska premium channel will also be available on UPC Polska's cable network. TKP will be managed and controlled by Canal+, which initially will own the remaining 75% of TKP. For accounting purposes, TKP was deemed the acquirer. UPC Polska's investment in TKP is recorded at fair value as of the date of the transaction. UPC Polska's carrying value of the Polish DTH assets being contributed was significantly higher than the determined fair value of its investment in TKP, leading to a write-down of 465.5 million at the date the transaction was consummated.

        UPC Polska currently offers cable subscribers three packages of cable television service. Some areas are offered a package of up to 60 channels. For an additional monthly charge, certain of the company's cable networks have offered two premium television services, the HBO Poland service and Wizja Sport. As part of the restructuring of UPC Polska's programming segment, UPC Polska discontinued Wizja Sport in December 2001. In February 2002, UPC Polska began distribution of Canal+ Multiplex, a Polish-language premium package of three movie, sport and general entertainment channels, through its network on terms set forth in the agreement governing the joint venture with Canal+. UPC Polska and TKP are currently negotiating the definitive long-term channel carriage agreement for carriage of Canal+Multiplex.

        UPC Polska launched chello broadband internet service in the fourth quarter of 2000.

        UPC Polska has been able to avoid constructing its own underground conduits in certain areas by entering into a series of agreements with TPSA (the Polish national telephone company) which permit UPC Polska to use TPSA's infrastructure for an indefinite period or, in some instances, for fixed periods up to 20 years. Over 80% of UPC Polska's cable television plant has been constructed using pre-existing conduits from TPSA. A substantial portion of these contracts permits termination by TPSA without penalty upon breaches of specified regulations. Any termination by TPSA of such contracts could result in UPC Polska losing its permits, the termination of agreements with co-op authorities and programmers, and an inability to service customers with respect to the areas where its networks utilize the conduits that were the subject of such TPSA contracts. In addition, some conduit agreements with TPSA provide that cables can be installed in the ducts only for the use of cable television. If UPC Polska uses the cables for a purpose other than cable television, such as data transmission, telephone, or internet access, such use could be considered a violation of the terms of certain conduit agreements, unless this use is expressly authorized by TPSA. There is no guarantee that TPSA would give its approval to permit other uses of the conduits.

        Romania:     Since 1993, when we first entered the Romanian market, we have widened our customer base through acquisition and marketing activities in conjunction with build out. We entered into a joint venture with the owners of two Romanian cable television companies (collectively, "AST") to which our and AST's Romanian assets were contributed. Through 2001, we held a 70% interest in the joint venture and the former owners of AST held the remaining 30%. We acquired the 30% remainder of the partnership from the former owners for EUR 24.1 million, as a result of the former owner's exercise put right, requiring UPC to purchase all of their partnership interests effective December 31, 2001. The minority interest was acquired and the purchase price was paid in February 2002. Our Romanian systems offer subscribers two or three different tiers of programming.

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        Slovak Republic: UPC Slovensko.     We are the largest cable operator in the Slovak Republic. We offer subscribers three tiers of cable television service. We launched DTH service in the Slovak Republic in the fourth quarter of 2000, leveraging its existing DTH platform in Poland.

UPC Media

        Our division, UPC Media, operates our converging internet and video content and programming businesses, including digital products, through chello broadband N.V., UPCtv and other of our subsidiaries. During most of 2001, chello broadband N.V. also operated all aspects of our internet business for residential customers, including internet access. In December 2001, the assets and employees relating to the technical network and systems access to the internet, were transferred from chello broadband N.V. to UPC Distribution. UPC Media focuses on four key areas: (i) chello broadband internet services; (ii) interactive television services; (iii) transactional television services, such as pay per view movies and (iv) pay television channels.

chello broadband

        In 1998, we founded our chello broadband business for the purpose of developing a global broadband internet operation. The chello broadband product provides high speed access to the internet gateway, as well as local language content through the chello broadband portal. The chello broadband product was launched in early 1999, and at December 31, 2001, it had approximately 519,500 subscribers, including 8,900 subscribers on non-UPC networks. chello broadband products are offered to residential customers through UPC Distribution operating companies and to business customers in the Netherlands, Austria and Scandinavia through Priority Telecom. In addition, chello broadband N.V. offers its products to residential and business customers through the Austrian company Telesystems Tyrol. chello broadband N.V. was formed in 2000 as a subsidiary that would operate and market our internet services.

        Through these arrangements, chello broadband N.V. provides affiliated and non-affiliated companies with product development, aspects of customer support, local language broadband portals and marketing support for a fee based upon percentage of subscription and installation revenue as defined in the agreement. The agreement further provides that in the future the local operator will receive a percentage of the revenue from chello broadband e-commerce and advertising.

        chello broadband N.V. has long-term agreements with our operating companies for the distribution of broadband internet services to residential customers using the cable television infrastructure of the local companies, covering 5.0 million homes in Europe. chello broadband N.V. currently provides its services to residential customers through our subsidiaries in Austria, Belgium, France, the Netherlands, Norway, Sweden, Hungary and Poland. chello broadband N.V.'s agreements with our operating companies generally cover all the homes in their territory. Therefore as the operating companies' networks expand, chello broadband N.V's exclusive rights to distribute its services will expand as well. Until the fourth quarter of 2001, chello broadband N.V. had similar franchise arrangements with affiliates of UGC Holdings. However as part of a strategic review, chello broadband N.V. agreed with UGC Holdings to cease operations, and to withdraw as service provider, in New Zealand, Australia and Chile, where it had previously agreed to develop internet services for affiliates of UGC Holdings. As a result, we believe chello broadband will be able to better focus on its core markets in Europe.

        There is a separate arrangement in place with Priority Telecom N.V. for provision of chello broadband N.V. services to business customers. Priority Telecom N.V is marketing the chello brand name for this range of customers and chello broadband N.V. has a revenue sharing agreement in place for this.

        Until December 2001, chello broadband N.V. operated access, portal, content and, network aspects of our internet businesses. To achieve cost efficiencies and synergies across our operating groups, the chello technology group and associated network assets including AORTA were transferred from chello broadband N.V. into UPC Distribution in December 2001. As a result, the technical network and systems access to the

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internet are now operated by the UPC Distribution Group, with chello broadband N.V. providing affiliates product development, certain aspects of customer support, local language broadband portals, and marketing support for a fee based upon percentage of subscription and installation revenue as defined in the franchise agreement. As part of the transfer, certain elements of the chello broadband N.V. franchise agreement with our operating companies were revised to reflect changes in costs and operational responsibilities and chello broadband N.V. is expected to enter into a separate framework operating agreement and service level agreement with companies within the UPC Distribution group with regard to certain operational responsibilities.

        The primary components of the transferred network assets and systems are the network operations center, the backbone infrastructure, and the master and regional data centers containing servers, routers and associated software. This infrastructure allows internet traffic to be rerouted if parts of the network are congested or impaired. The core infrastructure connects Amsterdam, Stockholm, Vienna, Paris, Brussels, London, Oslo and New York. The network operations center is used to monitor the quality of services. This center located in Amsterdam, operates 24 hours per day, seven days per week, and manages the infrastructure, regional data centers, regional networks, head end facilities, servers and other components of the network infrastructure. During 2001, bandwidth-monitoring tools were introduced in conjunction with UPC Distribution, which are critical for effective network cost control. The bandwidth monitoring tools will enable us to introduce pricing policies, under which heavy internet users pay fees based on their use of the internet, rather than a fixed fee.

        In the provision of internet access services and online content, our chello broadband products face competition from incumbent telecommunications companies and other telecommunications operators, other cable-based internet service providers, non-cable-based internet service providers and internet portals. The internet services offered by these competitors include both traditional dial-up internet services and high-speed access services.

Interactive Services

        We expect the development of interactive television ("iTV") services to play an important role in the take-up of our digital television product. Our Interactive Services Group within UPC Media is responsible for core digital products, such as electronic program guide ("EPG"), walled garden, television-based email, and PC/TV portals as well as other television and PC-based applications supporting various areas including communications services and enhanced television ("ETV") services. We expect to offer increasing support and services built upon the above core platform to enable products such as on-screen betting, broadcast synchronous interactive applications and games services. We have successfully completed the initial launch of our base set of services (such as EPG and walled garden) in both the Netherlands and Austria. Because these are new products that have not yet received significant customer acceptance, we are unable to predict when or if we will be able to market these products successfully.

Transactional Television

        Transactional television, consisting of Near Video On Demand ("NVOD") and Video On Demand ("VOD"), is another important component of our digital services. Our current digital product in the Netherlands includes 36 channels of NVOD programming. In addition, we launched NVOD in Austria in 2001. UPC Media is in the process of developing VOD services for our affiliates and potentially third party cable operators. The VOD service will provide VOD subscribers with enhanced playback functionality and will give subscribers access to a broad array of on-demand programming, including movies, live events, local drama, music videos, kids programming, and adult programming. However, since the VOD product is still under development, no assurance can be given when or if it will become successful.

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Pay Television

        UPC Media markets its own pay television products, consisting of a thematic channel bouquet launched by UPCtv in 1999. The current channels include various genres, such as extreme sports and lifestyles ("Extreme"); men's information and entertainment ("Avante"); women's information and entertainment ("Club"); and real life documentaries ("Reality TV"). The channels are distributed from our digital media center ("DMC") located in Amsterdam. We distribute these channels through our system, and also distribute certain of these channels to entities that are not affiliated with us and in countries where we do not currently operate. In addition, we currently have contracts with over 40 third parties enabling us to distribute other pay television programs. At the end of 2001, we undertook a strategic review of our thematic channels that resulted in the decision to rationalize our original eight thematic bouquet to a thematic bouquet of four channels and cease operations of visual arts, style and design channel ("Expo"), premium films channel ("Film1"), local sports programming channel ("Sport 1") and mind, body and spirit channel ("Innergy") during the fourth quarter of 2001 and during 2002.

        The DMC is a technologically advanced production facility that provides UPCtv and other broadcasters with production and post-production play out and transmission facilities. The DMC combines the ability to produce high-quality, customized programming by integrating various video segments, language dubbing, sub-titling and special effects, with up and down-link facilities for delivery to customers.

        In addition to the UPCtv channels and the third party distribution contracts, we have been involved in branded equity ventures for the development of country specific programming, including, Iberian Programming Services, Xtra Music, Cinenova, MTV Networks Polska and ATV. We are currently reviewing our various investments and may decide to divest certain of those investments.

        We also have a investment of approximately 21.2% of SBS Broadcasting SA, which creates, acquires, packages and distributes programming and other media content in many of our territories and elsewhere in Europe via commercial general entertainment television channels, radio stations and the internet.

Priority Telecom

        In 1998, we founded our Priority Telecom business for the purpose of providing telephone services to customers passed by our upgraded networks. Due to the potential value of our business customers, we decided to establish Priority Telecom N.V. as a separate CLEC, which would operate as our primary vehicle for providing telecommunication services to business customers and to spin-off the business customers of our local operating companies into Priority Telecom N.V.. In November 2000, a subsidiary of Priority Telecom N.V. merged with Cignal Global Communications ("Cignal"), a global carriers' carrier. As consideration for the merger between Priority Telecom N.V. and Cignal, the former shareholders of Cignal received 16% of the shares of Priority Telecom N.V. on a fully diluted basis, in return for their Cignal shares. Priority Telecom N.V. decided to close its international wholesale business during the second quarter of 2001. Through Priority Telecom N.V., our CLEC business is currently operating in metropolitan areas in the Netherlands, Austria and Norway. UPC Distribution's local operating companies continue to provide telephone services to residential customers using the Priority Telecom brand. As of December 31, 2001, Priority Telecom N.V. had approximately 7,800 business customers.

        Priority Telecom N.V. was listed on the Euronext Amsterdam stock exchange in September 2001. In connection with the listing, the capital structure of Priority Telecom N.V. was restructured, and we contributed additional equity to Priority Telecom N.V.. We currently hold approximately 79.1% of Priority Telecom N.V.'s outstanding shares. The former Cignal shareholders hold approximately 11.8% and the balance is held by a foundation reserving such shares for issuance pursuant to employee benefit plans.

        Priority Telecom N.V. has developed a product portfolio for advanced telecommunication solutions, including VOIP, InterLAN, IP-virtual private network ("IP-VPN") services and Application Service Provider ("ASP") enabling services. We believe these products will help us anticipate and meet changing

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business customer requirements. Some of these, such as VOIP, are new products using emerging technologies. Accordingly, we cannot predict when or if we will be able to market such products successfully.

        We expect Priority Telecom N.V. to be able to leverage substantially from the existing infrastructure of UPC Distribution's operating companies, allowing for efficient, cost-effective growth. The network used by Priority Telecom N.V. consists of indefeasible rights of use ("IRUs"), granted by UPC Distribution operating companies, to our metropolitan area fiber networks and a backbone connecting these fibre networks. Given the density of this fibre network, it is possible for Priority Telecom N.V. to connect business customers directly to its core metropolitan area networks that could only be connected by the incumbents in the past. We believe this provides strategic advantages for Priority Telecom N.V.. In addition, the dense network enables Priority Telecom N.V. to execute a "smart build" strategy. It allows "regular" CLEC extensions to the current footprint and addition of local tails for limited capital expenditure with a short execution time.

        The metropolitan and national networks used by Priority Telecom N.V. are based on 25-year IRUs granted to the UPC Distribution operating companies. As part of the IRU agreements, Priority Telecom N.V. pays UPC Distribution operating companies annual administration, operations and maintenance fees. In addition to the IRU agreements, Priority Telecom N.V. has access to the local tail circuits of UPC Distribution.

        We and our operating companies have also signed operating agreements with Priority Telecom N.V., whereby Priority Telecom N.V. offers a range of services to our operating companies and our operating companies offer a range of services to Priority Telecom. The services which we provide to Priority Telecom N.V. include equipment-, local loop- and other capacity leases, human resource, billing, information technology and co-location services.

        We and our operating companies intend to provide Priority Telecom N.V. with a variety of services and facilities made available under the operating agreements and indefeasible rights of use agreements, in support of Priority Telecom's telecommunications business, up to an aggregate value of EUR 50 million. Priority Telecom N.V. intends to finance these services as follows:

•

The operating agreements for Austria, the Netherlands and Norway will be subject to an addendum which amends the payment terms of the operating agreements to allow payments, to an aggregate of EUR 30 million, to be made in Series 1 Convertible Shares, cash or securities for services provided through December 2003;



•

Under the indefeasible rights of use agreements for the Netherlands, Austria and Norway, certain subsidiaries of Priority Telecom N.V. may purchase services and facilities over a 27-month period up to a value of EUR 20 million. The value of services received plus interest at a rate equal to the three-month EURIBOR plus 3.75%, compounded quarterly will be payable in cash 36 months from the date of invoice.

        Priority Telecom revised its strategic plans for using within Priority Telecom certain assets acquired in the Cignal transaction, because of reduced levels of private equity funding activity for CLEC businesses and a decision by us to complete a public offering of Priority Telecom in the second half of 2001. The changes in strategic plans included a decision to phase-out the legacy international wholesale voice operations of Cignal. When we and Priority Telecom reached agreement to acquire Cignal in the second quarter of 2000, the companies originally intended to continue the international wholesale voice operations of Cignal for the foreseeable future. This original plan for the international wholesale voice operations was considered in the determination of the consideration to be paid for Cignal and the subsequent allocation of the purchase price.

        Under the terms of a Shareholder's Agreement, entered into with the former shareholders of Cignal, we granted the Cignal shareholders an option to put their interest in Priority Telecom back to us if an initial public offering for Priority Telecom was not consummated by October 1, 2001. The value to be paid by us

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upon exercise of the put is the greater of the fair market value of the Cignal shareholder's interest in Priority Telecom or USD 200.0 million. The arrangement provided us with the option to pay for the put, if exercised, in either our shares or cash. We have received a notice purporting to exercise certain option rights of the former shareholders of Cignal. We believe these option rights did not exist at the time of the purported exercise, since they were granted subject to the condition that no initial public offering of Priority Telecom N.V. took place prior to October 1, 2001. We believe a successful initial public offering of Priority Telecom N.V. was completed prior to that date and, accordingly that the notice is not effective and accordingly we are entitled to disregard it.

        Priority Telecom faces competition from the incumbent telecommunications operators and from other CLEC operators in the countries in which it does business. Some of these operators have substantially more experience in providing telephone services and have substantively greater resources to devote to the provision of telephone services.

Other Information

Employees

        As of December 31, 2001, we, together with our consolidated subsidiaries, had approximately 9,940 employees. Certain of our operating subsidiaries, including our Austrian, Dutch and Norwegian systems, are parties to collective bargaining agreements with some of their respective employees. We believe that we have in general a constructive relationship with our employees.

Regulation

        Our distribution, video, telephone and content businesses are regulated in each of the countries in which we operate. The scope of regulation varies from country to country, although in some significant respects regulation in our Western European markets is harmonized under the regulatory structure of the European Union ("EU"). Adverse regulatory developments could subject us to a number of risks. These regulations could limit our growth plans, our revenues, and the number and types of services we offer in different markets. In addition, regulation may impose certain obligations on our systems that subject them to competitive pressure, including pricing restrictions, interconnection obligations, open-network provision obligations and restrictions on content we deliver, including content provided by third parties. Failure to comply with current or future regulation could expose us to various penalties.

        In general, the regulatory environment in the EU countries in which we operate is to an increasing degree shaped by the EU framework. Since January 1, 1998, EU directives have set out a framework for telecommunications regulation that all EU Member States must follow. Regular implementation reports from the European Commission assess the compliance of Member States with the various requirements of the directives. In addition, the European Commission has taken action to enforce compliance on Member States. The EU is taking steps to substantially increase the level of harmonization across the whole range of communications and broadcasting services from January 1, 2003. In addition, all EU legislation is required to be implemented in those countries seeking EU membership before they accede to the EU. Thus, EU rules have a strong influence and foreshadowing effect in almost all of our countries of operation.

        Set forth below is an overview of the types of regulation that affect our various businesses, as well as a summary of the regulatory environment in the EU and certain countries in which we operate a significant proportion of our major systems.

European Union

        Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom are all member states of the EU. As such,

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these countries are required to enact national legislation which implements European Union directives. Although not an EU Member State, Norway is a member of the European Economic Area and has generally implemented, or is implementing, the same principles on the same timetable as EU member states. The Czech Republic, Hungary, Malta, Poland, Romania and the Slovak Republic, which are in the process of negotiating their membership in the EU, have started adjusting their regulatory system to EU requirements. As a result, most of the markets in which we operate have been significantly affected by regulation initiated at the EU level.

        On December 12, 2001 the European Council of Ministers reached an informal agreement following the European Parliament's second reading vote on a proposed a suite of new directives which will revise the regulatory regime concerning communications services across the EU. These four directives were adopted by the Council of Ministers on February 14, 2002. Member States will be required to transpose them into their national law within 15 months after their publication in the European Official Journal, which will follow shortly after the agreement by the Council of Ministers. Additionally, there is one further directive still in an earlier stage dealing with data protection in the communications sector, which, it is thought, will be adopted shortly thereafter.

        The new regulatory framework seeks, among other things, to harmonize national regulations and licensing systems and further increase market competition. These policies will seek to harmonize licensing procedures, reduce administrative fees, ease access and interconnection, and reduce the regulatory burden for telecommunications companies. The trend seems to be to use general competition laws rather than regulation to prevent dominant carriers from abusing their market power.

        Conditional Access for Video Services.     EU member states may regulate the offering of conditional access systems, such as set-top computers used for the expanded basic tier services offered by many of our operating companies. Under EU law, providers of conditional access systems may be required to make them available on a fair, reasonable and non-discriminatory basis to other video service providers, such as broadcasters.

        Separation of Video and Telephone Operations.     In June 1999, the European Commission adopted a directive requiring member states to enact legislation directing certain telecommunications operators to separate their cable television and telecommunications operations into distinct legal entities. This directive is intended to aid the development of the cable television sector and to encourage competition and innovation in local telecommunications and high speed internet access. The directive includes competition safeguards to deter anticompetitive cross-subsidies or discrimination by incumbent telecommunications operators as they enter into cable television or broadband services. Our operations do not fall within the ambit of this directive. These provisions will be carried over into the new regulatory framework.

        Telephone Interconnection.     An EU directive sets forth the general framework for interconnection, including general obligations for telecommunications operators to allow interconnection with their networks. Public telecommunications network operators are required to negotiate interconnection agreements on a non-discriminatory basis. Public telecommunications network operators with significant market power (which, although it may vary, is generally presumed when an operator has 25% or more of the relevant market) are subject to additional obligations. They must offer interconnection without discriminating between operators that offer similar services, and their interconnection charges must follow the principles of transparency and be based on the actual cost of providing the interconnection and carriage of telephone traffic. The directive also contains provisions on collocation of facilities, number portability with certain exceptions, supplementary charges to contribute to the costs of universal service obligations and other interconnection standards. As a result, if the principles in the directive are fully applied, our operating companies in the EU and Norway should be able to interconnect with the public fixed network and other major telecommunications networks on reasonable terms in order to provide their services. Following the entry into force of the new regulatory package interconnection rules will be subsumed into a wider access and interconnection Directive.

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        Telephone Licensing.     EU member states are required to adopt national legislation so that providers of telecommunications services generally require either no authorization or a general authorization which is conditional upon "essential requirements," such as the security and integrity of the network's operation. Licensing conditions and procedures must be objective, transparent and non-discriminatory. In addition, telecommunications operators with significant market power, typically 25% of the relevant markets, may be required by member states to hold individual licenses carrying more burdensome conditions than the authorizations held by other providers. License fees can only include administrative costs except in the case of scarce resources where additional fees are allowed. Following the entry into force of the new regulatory package licensing rules will be subsumed into a new authorizations Directive. This will see a move to general authorizations rather than individual licenses in almost all cases.

        Broadcasting.     Generally, broadcasts emanating from and intended for reception within a country have to respect the laws of that country. EU member states are required to allow broadcast signals of broadcasters in other member states to be freely transmitted within their territory so long as the broadcaster complies with the law of the originating member state. An international Convention extends this right beyond the EU's borders into the majority of territories in which UPC operates. An EU directive also establishes quotas for the transmission of European-produced programming and programs made by European producers who are independent of broadcasters.

        EU member states are required to permit a satellite broadcaster to obtain the necessary copyright license for its programs in just one country (generally, the country in which the broadcaster is established), rather than obtaining copyright licenses in each country in which the broadcast is received. This concession does not apply to cable distribution.

Distribution Infrastructure and Video Business

        Licenses.     Our operating companies are generally required to either obtain licenses, permits or other governmental authorizations from, or notify or register with, relevant local or regulatory authorities to own and operate their respective distribution systems. Generally, these licenses are non-exclusive. In many countries, licenses are granted for a specified number of years. For example, most of the licenses of our Israeli operating company expire in 2002 and we will seek renewal.

        The businesses of our operating companies are dependent on these licenses, permits and authorizations and the loss or non-continuation of them, as a result of noncompliance with their terms or otherwise, could have a material adverse effect on us. We believe we are in material compliance with the material terms of such licenses, permits and authorizations.

        In some countries, including Austria, France and Israel, we pay annual franchise fees based on the amount of our revenues. In other countries, the fee consists of a payment upon initial application and/or nominal annual payments.

        Video "Must Carry" Requirements.     In most countries where we provide video and radio services, we are required to transmit to subscribers certain "must carry" channels, which generally include public national and local channels. Certain countries have adopted additional programming requirements. For example, in France various laws restrict the content of programming we are allowed to offer. In parts of Belgium, we must seek authorization for distribution of non-EU programming. In Israel, cable television providers must obtain an authorization from their cable programming offerings and must spend at least 15% of their programming expenses on local programming.

        Pricing Restrictions.     Local or national regulatory authorities in many countries where we provide video services also impose pricing restrictions. Generally, in these cases, basic tier price increases must be approved by the relevant local or national authority. In certain countries, price increases will only be approved if the increase is justified by an increase in costs associated with providing the service or if the increase is less than or equal to the increase in the consumer price index. Even in countries where rates are

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not regulated, subscriber fees may be challenged if they are deemed to constitute anti-competitive practices. These price restrictions are generally not applied to expanded basic tier or digital programming.

Telephone Business

        The liberalization of the telecommunications market in much of Europe allowed new entrants like us to enter the telephone services market. The regulatory situation in most of the Eastern European markets in which we operate and in Israel currently precludes us from offering traditional switched telephone services.

        Generally, our operating companies are required to obtain licenses to offer telephone services, although, in some countries, we need only register with the appropriate regulatory authority. Our operating companies and Priority Telecom N.V. are dependant on these licenses for the conduct of their telephone businesses and the loss or non-continuation of them, as a result of noncompliance with their terms or otherwise, could have a material adverse effect on us. We believe we are in material compliance with the material terms of such licenses, permits and authorizations. Our operating companies have, to date, generally not been subject to telephone rate regulation but would become subject to such regulation in a number of jurisdictions if they are deemed to hold significant market power, typically defined as at least 25% market share in a relevant market. In some countries, we must notify the regulatory authority of our tariff structure and any subsequent price increases.

        Incumbent telephone providers in each EU market are required to offer new entrants into the telephone market interconnection with their networks. Interconnection must be offered on a non-discriminatory basis and in accordance with certain principles set forth in the relevant EU directive, including cost-based pricing.

Content Business

        Internet/Data.     Our chello broadband subsidiary and most of our operating companies must comply with both EU regulation and with relevant domestic law in the provision of internet access services and on-line content. In several countries, including Norway and France, the provision of internet/data services does not require any sort of license or notification to a regulatory body. Other countries, including Austria, Belgium and the Netherlands, require that providers of these services register with or notify the relevant regulatory authority of the services they provide and, in some cases, the prices charged to subscribers for such services.

        Our operating companies that provide internet services must comply with both internet-specific and general legislation concerning data protection, content provider liability and electronic commerce. As regulation in this area develops, it will likely have a significant impact on the provision of internet services by our operating companies. For example, in June 2000, the EU issued a directive establishing several principles for the regulation of e-commerce activities, including that companies providing network services or storage of information have limited obligations and liability for information transmitted by or stored on their systems.

        Programming.     The Polish programming we produce and one of our UPCtv channels are licensed in the United Kingdom by the Independent Television Commission as satellite television services. Some of our UPCtv channels are licensed in the Netherlands. This programming is then retransmitted under the European Convention on Transfrontier Broadcasting.

Competition Law and Other Matters

        EU directives and national consumer protection and competition laws in our Western European and certain other markets impose limitations on the pricing and marketing of integrated packages of services, such as video, telephone and internet/data services. These limitations are common in developed market

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economies and are designed to protect consumers and ensure a fair competitive market. While we may offer our services in integrated packages in our Western European markets, we are generally not permitted to make subscription to one service, such as cable television, conditional upon subscription to another service, such as telephone, that a subscriber might not otherwise take. In addition, we must not abuse or enhance a dominant market position through unfair anti-competitive behavior. For example, cross-subsidization between our business lines that would have this effect would be prohibited. We have to be careful, therefore, in accounting for discounts in services provided in integrated packages.

        Should we become larger throughout the EU and in individual countries in terms of service area coverage and number of subscribers, we may face further regulatory scrutiny. Regulators may prevent certain acquisitions or permit them only subject to certain conditions. In a number of non-EU jurisdictions where our operating companies have a significant market presence, we are subject to certain limitations. For example, in Hungary a single cable operator may not provide service to homes exceeding in the aggregate one -sixth of the Hungarian population.

The Netherlands

        In the Netherlands debates are ongoing about if, when and how third parties should be allowed access to cable networks given the high penetration of cable infrastructure in the Netherlands (exceeds 90%). In the summer of 2000, the Dutch government committed to produce a law on access to cable, in line with the EU framework, within two years. This law was finally sent to the Dutch Parliament in January 2002. There can be no certainty at the moment as to the final form of any such law, if passed, nor of the way in which it will be implemented by the regulatory authorities should it come into force. We expect debate on this issue at national and European level to continue for some time. Furthermore, it is unclear which economic model would support such access, especially given the early stage of the introduction of internet services on cable networks in the Netherlands and the small market share internet access via cable has in the overall internet access market.

Poland Regulatory Issues

        In addition to many of the issues discussed above, Poland has certain foreign ownership restrictions. In Poland, cable television permits may only be issued to and held by Polish citizens, or companies in which foreign persons hold no more than 49% of the share capital, ownership interests and voting rights. In addition, a majority of the management and supervisory board of any cable television operator holding permits must be comprised of Polish citizens residing in Poland. Programming may be broadcast in Poland only by Polish entities in which foreign persons hold no more than 33% of the share capital, ownership interest and voting rights. The majority of the management and supervisory boards of any company holding a broadcasting license must be comprised of Polish citizens residing in Poland. We believe that the ownership structure of UPC Polska and its subsidiaries comply with Poland's regulatory restrictions on foreign ownership.

        Television operators, including cable and DTH operators, in Poland are subject to the provisions of the Polish Copyright Act. Recent legislation has increased the rights of authors in their copyrighted materials, which could lead to a significant increase of fees to be paid by television operators.

        On January 1, 2001, the Polish Parliament passed a new Telecommunications Law. Under the new Telecommunications Law only the operation of public telephone networks and the operation of public networks used for the broadcasting or distributing of radio and TV programs are required to obtain a telecommunications permit to be issued by a new regulatory authority, the Office of Telecommunications Regulation ("OTR"). Other types of telecommunications activities, such as data transmission and internet access services, are subject to registration with the OTR.

        The new Telecommunications Law may affect UPC Polska's ability to obtain required radio frequencies allocations in case such frequencies would be assigned by way of public tenders. The pending

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new Telecommunications Law also contains provisions regarding the access to networks and infrastructure sharing, and eliminates foreign ownership restrictions with respect to the provision of cable television and domestic telecommunications services.

Item 2. Properties

        We lease our corporate offices in Amsterdam, along with administration offices in London. Our operating companies and subsidiaries generally lease their offices as well. We own small parcels of property in various countries that we use for our network equipment. In other countries, we have been able to obtain easements for this equipment and our cable network.

Item 3. Legal Proceedings

        The following is a description of the legal proceedings to which we or one of our subsidiaries is a party. In addition, from time to time, we may become involved in litgation relating to claims arising out of our operations in the normal cause of our business. In the opinion of our management, the ultimate resolution of these legal proceedings would not be likely to have a material adverse effect on our subsidiaries' business, results of operations, financial condition or liquidity.

        On July 4, 2001, InterComm Holdings LLC, InterComm France CVOHA ("ICF I"), InterComm France II CVOHA ("ICF II"), and Reflex Participations ("Reflex," collectively with ICF I and ICF II, the "ICF Party") served a demand for arbitration on us, UGC Holdings, and our subsidiaries, Belmarken Holding B.V. and UPC France Holding B.V.. The claimants allege breaches of obligations allegedly owed by us in connection with the ICF Party's position as a minority shareholder in Médiaréseaux S.A.. The claimants seek relief in the nature of immediate acceleration of an alleged right to require us or an affiliate to purchase all or any of the remaining shares in Médiareséaux S.A. from the ICF Party and/or compensatory damages, but in either case no less than EUR 70 million, plus reasonable fees and costs. The ICF Party has not specified from which entity it is seeking such relief, however, UGC Holdings is not a party to any agreement with the claimants and has been dismissed from the proceedings. We and our affiliates, as respondents, deny these claims and intend to defend against claimants' allegations vigorously. On July 23, 2001 the ICF Party obtained an order granted by the civil court of Meaux (Juge de l'execution of the Tribunal de Grande Instance of Meaux) for the attachment of Médiaréseaux S.A.'s shares held by UPC France Holding B.V. by means of unilateral proceedings without enabling the latter to defend itself. This attachment order has since been dissolved. We are vigorously defending the arbitration proceedings and have filed appropriate counter claims.

Item 4. Submission of Matters to a Vote of Security Holders

        None.

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PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

        Our ordinary shares A trade on the Euronext stock exchange under the symbol "UPC" and American Depositary Shares ("ADSs") representing our ordinary shares A trade on the Nasdaq National Market under the symbol "UPCOY." Each ADS represents one ordinary share A. The following table shows the range of high and low sales prices reported on Euronext and Nasdaq:

        As of April 9, 2002, there were approximately 59 registered holders of our ADS's. We generally do not know who the owners of our ordinary shares A are since they are held in bearer form.

        We have never paid cash dividends on our ordinary shares A.

Amsterdam Exchange–Negative Equity

        As of December 31, 2001 we had negative shareholders' equity. This does not affect the fundamentals of our business and is a function of significant capital investment with correspondingly high depreciation and amortization charges, typical of the telecommunications industry. Upon occurrence of the event, we promptly reported this deficit to the Euronext. As expected, the Euronext stock exchange has put our shares on the so called "penalty bench" until such time as we return to positive shareholders' equity. In addition, on February 14, 2002, Euronext removed our shares from the AEX index after a three-month notice period. This has not, however, resulted in a delisting of our shares, which are still freely tradeable. We believe that the status of our shares on Euronext will not have an impact on our business operations, although we believe it will have a negative effect on our stock price and could adversely affect our ability to raise equity in the future.

        By letter of February 15, 2002, Euronext confirmed that once a company has been referred to the penalty bench it is Euronext's consistent policy not to lift the measure until such time as a financial restructuring of a company has been completed resulting in the shareholders' equity of such a company meeting at least the level required in order to be listed on the Euronext, and other Euronext requirements according to its rules are satisfied. Euronext confirmed that we would need to satisfy the following in order for the penalty bench measure imposed on us to be lifted:

•

we will need to receive unconditional commitments for a financial restructuring that will result in having adequate shareholders' equity to safeguard that our shareholders' equity will in the foreseeable future not again turn negative,



•

the consequences for the holders of our ordinary shares now traded on Euronext will need to be known, and



•

our equity will need to receive a sufficiently large free float.

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        In accordance with article 108A, book 2 of the Dutch Civil Code, we will address the issue of negative equity at our next general shareholders' meeting.

Nasdaq National Market Listing Requirements

        Our ordinary shares are traded in the form of American Depositary Receipts ("ADRs") on the Nasdaq National Market under the symbol "UPCOY." Nasdaq has traditionally maintained certain rules regarding bid prices for continued listing on the market. Following our third quarter results announcement on November 14, 2001 and as a result of reporting negative shareholders equity we are currently listed on the Nasdaq National Market under Standard Two. The minimum bid price applicable to us for continued listing under Standard Two is USD 3.00.

        On September 27, 2001, Nasdaq announced a suspension of the minimum bid requirements for continued listing. The suspension of these requirements remained in effect until January 2, 2002, when they were reinstated.

        On January 2, 2002, our stock was trading below the USD 3.00 minimum bid price and has not traded above USD 3.00 to date. On February 14, 2002, we were informed, through a notification from Nasdaq, that we would be delisted on May 15, 2002, if the stock does not trade for 10 consecutive trading days above USD 3.00 during a 90 day cure period, beginning February 15, 2002. By response letter, we informed Nasdaq about our restructuring process and invited Nasdaq to engage with us in a dialogue on the matter. Should our shares continue to trade below the minimum bid requirement throughout the cure period, we would be subject to having our ADRs no longer eligible for trading on the Nasdaq National Market. Such a development could have an adverse effect on our stock price.

Item 6. Selected Financial Data

        The following selected consolidated financial data for the years ended December 31, 2001, 2000, 1999, 1998, and 1997 have been derived from our audited consolidated financial statements, as restated for 1998 and 1997 to include the financial data of Monor Communications Group, Inc., Tara Television Limited and Ibercom, Inc. for all periods in which their operations were part of UGC Holdings' consolidated results. On December 11, 1997, UGC Holdings acquired the 50% of our company that it did not already own from Philips. As a result of this acquisition and the associated push-down of UGC Holdings' basis on December 11, 1997, the financial information for the years ended December 31, 2001, 2000, 1999 and 1998 is presented on a "post-acquisition" basis. We adopted the Euro reporting as our currency effective December 31,1999. We have retroactively restated financial information for all periods presented using the exchange rate fixed on January 1, 1999 of EUR 1.0 to 2.20371 Dutch Guilders. The consolidated financial data set forth below for our company is qualified by reference to, and should be read in conjunction with, our audited consolidated financial statements and notes thereto and also with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".

        Viewing our funding requirements and our possible lack of access to debt and equity capital in the near term, we determined that we would not make interest payments on our senior notes and senior discount notes, as they fell due. On February 1, 2002, we failed to make required interest payments in the aggregate amount of EUR 113.0 million (USD 100.6 million) on our outstanding 10⁷/8% Senior Notes due 2009, 11¹/4% Senior Notes due 2010 and 11¹/2% Senior Notes due 2010. The indentures related to our senior notes and senior discount notes provide that failing to make interest payments constitutes an "Event of Default" under the notes if we are in default of the payment of interest on any of the notes for a period of time in excess of 30 days. Since we failed to make the interest payments upon expiration of this 30-day grace period on March 3, 2002, Events of Default occurred under those indentures. The occurrence of these Events of Default constituted cross Events of Default under the indentures related to the remaining series of senior notes and senior discount notes. The occurrence of the various Events of Default gives the trustees under the related indentures, or requisite number of holders of such notes, the right to accelerate

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the maturity of all of our senior notes and senior discount notes. As of March 31, 2002, neither the trustees for those notes nor the requisite number of holders of those notes have accelerated the payment of principal and interest under those notes.

        On February 1, 2002, as more fully described in the Form 8-K we filed with the Securities and Exchange Commission on that date, we signed a Memorandum of Understanding with United and UGC Holdings. The Memorandum of Understanding describes a non-binding agreement in principle with United and UGC Holdings to enter into negotiations with the holders of our senior notes and senior discount notes to attempt to reach agreement on a means to restructure our indebtedness at the holding company level.

        Our failure to make the February 1, 2002, interest payment on our outstanding 10⁷/8% Senior Notes due 2009, 11¹/4% Senior Notes due 2010, and 11¹/2% Senior Notes due 2010, and the resulting Events of Default under the indentures relating to our senior notes and senior discount notes, gave rise to cross events of default under the following credit and loan facilities:

•

the senior secured credit facility among UPC Distribution Holding B.V., our indirect wholly-owned subsidiary ("UPC Distribution"), as Borrower, TD Bank Europe Limited and Toronto Dominion (Texas), Inc., as Facility Agents, and a group of banks and financial institutions (the "UPC Distribution Bank Facility");



•

the revolving loan facility among EWT Elektro & Nachrichtentechnik GmbH, our majority-owned subsidiary ("EWT"), as Borrower, a group of entities as Guarantors, The Royal Bank of Scotland plc ("RBS") as Facility Agent and Security Agent and a group of financial institutions (the "EWT Facility"); and



•

the Exchangeable Loan.

        The UPC Distribution Bank Facility is secured by share pledges to the banks on UPC Distribution Holding B.V., which is the holding company of most companies within the UPC Distribution group, and over operating companies within this group. The EWT Facility is secured by share pledges over EWT to RBS. The occurrence of the cross events of default under those facilities give the creditors under those facilities the right to accelerate the maturity of the loans and to foreclose upon the collateral securing the loans.

        On March 4, 2002, as more fully described in the Form 8-K we filed with the Securities and Exchange Commission on that date, we received waivers from the lenders under the UPC Distribution Bank Facility, the EWT Facility and the Exchangeable Loan for the cross events of defaults under such facilities that existed or may exist as a result of our failure to make the interest payment due on February 1, 2002, on our outstanding 10⁷/8% Senior Notes due 2009, 11¹/4% Senior Notes due 2010 and 11¹/2% Senior Notes due 2010, any future failure by us to make the interest payment due on May 1, 2002 on our outstanding 10⁷/8% Senior Notes due 2007 and 11¹/4% Senior Notes due 2009 within the applicable cure periods, or any resulting cross defaults.

        Each of these waivers will remain effective until the earlier of

•

June 3, 2002,



•

the occurrence of any other Event of Default under the respective credit or loan facility that is not covered by the waiver, or



•

in the case of the waiver for the Exchangeable Loan only, the acceleration of any advances under the UPC Distribution Bank Facility, the conversion of the notes under the credit or loan facility into our ordinary shares in accordance with the terms of the Memorandum of Understanding, or five business days after United has given notice to us that, in its judgment, restructuring negotiations with holders of the senior notes and senior discount notes are not progressing satisfactorily.

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        In addition, each of these waivers contains certain other conditions and undertakings and will terminate if there is a default by us of the terms of that waiver. The waiver under the UPC Distribution Bank Facility subjects us to a EUR 100 million drawdown limitation under that facility, subject to certain conditions, during the period in which the waiver is in place

        As of April 12, 2002, we had not made the interest payment on the 10⁷/8% Senior Notes due 2009, 11¹/4% Senior Notes due 2010, and 11¹/2% Senior Notes due 2010, and none of the defaults described above have had a material adverse effect on the operations of our subsidiaries or their or our relationships with customers, suppliers and employees.

        The occurrence of the events of default described above also triggered the right of the holders of a minority interest in our 51% owned subsidiary, UPC Germany, to acquire from us for nominal consideration shares of UPC Germany constituting 22% of UPC Germany's outstanding shares. On March 5, 2002, we received notice of the holders' notice of exercise. After settlement of this exercise, our interest in UPC Germany will be reduced to 29%. The involved parties are in discussion about this exercise notice.

        During the month of March 2002, we met with representatives of United, which currently holds the Exchangeable Loan and a significant portion of our senior notes and senior discount notes, and a steering committee representing the holders of our senior notes and senior discount notes (other than United) to begin preliminary discussions with respect to a process for, and terms of, a restructuring of those notes and the Exchangeable Loan. Currently, United and its advisors and the noteholders' steering committee and its advisors are conducting due diligence about us and our current financial condition. We have not reached any decisions with either United or the noteholders' steering committee regarding the terms or timing of a debt restructuring. We expect that this process will take a number of months to complete. If completed, the restructuring will result in substantial dilution of our existing shareholders, a loss of some or all of the fair value of our outstanding securities, including our ordinary shares, preference shares and senior notes and senior discount notes, as well as the Exchangeable Loan. Since we are in preliminary discussions with United and the noteholders' steering committee, we cannot predict the terms or the timing of our restructuring. In addition, we cannot assure you that we will be able to reach agreement with either United or the noteholders on mutually satisfactory terms for the debt restructuring.

        If we are unable to reach agreement on the terms of the debt restructuring or are otherwise unable to successfully complete an agreed upon restructuring plan for our debt, we may seek relief under a debt moratorium, leading to a suspension of payments, or bankruptcy proceeding under applicable laws. If we seek relief under either of these proceedings, or any other laws that may be available to us, holders of our outstanding securities, including our ordinary shares, preference shares and senior notes and senior discount notes, as well as the Exchangeable Loan, may lose some or all of the value of their investment in our securities. Such proceedings could result in material changes in the nature of our business, material adverse changes to our financial condition and results of operations or our liquidation.

        In a separate transaction on February 1, 2002, we amended two swap agreements with a bank effective as of January 31, 2002 and as more fully described in the Form 8-K we filed with the Securities and Exchange Commissions on such date. The swap agreements were entered into in connection with the issuance of some of our senior notes and senior discount notes. The swap agreements were subject to early termination upon the occurrence of certain events, including the defaults described above. The amendment provides that the bank's obligations to us under the swap agreements have been substantially fixed and the agreements will be unwound on or prior to July 30, 2002. In settlement of the bank's obligations to us, the bank is entitled to offset, and will deliver to us, approximately EUR 400 million, subject to adjustment in the case of certain circumstances, in aggregate principal amount of our senior notes and senior discount notes held by that bank. Upon offset against, and delivery to us of, the senior notes and senior discount notes, our indebtedness will be reduced by approximately EUR 400 million and we will recognize an extraordinary gain.

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        We have experienced net losses since formation. As of December 31, 2001, there was substantial uncertainty whether our sources of capital, working capital and projected operating cash flow would be sufficient to fund our expenditures and service our indebtedness over the next year. In addition, as a result of the events of default described above, our senior notes,senior discount notes, the Exchangeable Loan and the UPC Distribution Bank Facility have been classified as current liabilities. Our ability to continue as a going concern is dependent on (i) our ability to restructure the July 1999 Notes, October 1999 Notes, January 2000 Notes, the Exchangeable Loan and the convertible preferred stock and (ii) our ability to generate the cash flows required to enable us to recover our assets and satisfy our liabilities, in the normal course of business, at the amounts stated in the consolidated financial statements. Due to the uncertainty of our ability to continue as a going concern, the Report of Independent Accountant includes a modification in this respect.

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SELECTED CONSOLIDATED FINANCIAL DATA