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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the quarter ended June 30, 2002

or

For the transition period from                              to                             

Commission file number 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

        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 ý    No o

        The number of shares outstanding of the Registrant's common stock as of August 14, 2002 was:

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

TABLE OF CONTENTS

         PART I—FINANCIAL INFORMATION

PART II—OTHER INFORMATION

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UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in thousands of Euros, except par value share and number of shares)

Item 1. Financial Statements

The accompanying notes are an integral part of these condensed consolidated financial statements.

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UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in thousands of Euros, except per share amounts and number of shares)
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
(Stated in thousands of Euros, except number of shares)
(Unaudited)

(1)

As of December 31, 2001, Other Cumulative Comprehensive Income (Loss) represents foreign currency translation adjustments of 169,571, unrealized gain on investments of 4,522, and fair value of derivative assets of (26,920). As of June 30, 2002, Other Cumulative Comprehensive Income (Loss) represents foreign currency translation adjustments of 159,588, unrealized loss on investments of (16,029) and fair value of derivative assets of 13,212.

         The accompanying notes are an integral part of these condensed consolidated financial statements.

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UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands of Euros)
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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UNITED PAN-EUROPE COMMUNICATIONS N.V.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    Organization and Nature of Operations

        United Pan-Europe Communications N.V. ("UPC" or the "Company"), whose parent company is UnitedGlobalCom Inc. ("United"), which owns an indirect equity ownership interest in UPC through UGC Holdings Inc. ("UGC Holdings") of 53.1%, owns and operate broadband communications networks in 12 European countries through its three primary divisions, UPC Distribution, UPC Media and Priority Telecom. UPC Distribution, which comprises the local operating systems, provides video, telephone and internet services for residential customers, (Triple Play). UPC Media comprises the converging internet content and programming business and, in 2001, the internet access business. Priority Telecom focuses on providing network solutions to the business customer.

        The following chart presents a summary of the Company's significant investments as of June 30, 2002.

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(1)

UPC owns 92.0% of Médiaréseaux S.A. through its 100.0% owned subsidiary UPC France. The 8% minority shareholders in UPC France have the right to require UPC to purchase their shares in 2004 at the then fair market values.

(2)

Subsequent to June 30, 2002, UPC's interest in EWT/TSS Group was diluted to 28.7%. (See Note 15)

(3)

5,674,586 chello broadband ordinary shares of class B are being issued in consideration for the transfer of rights from UGC Holdings to chello broadband necessary to eliminate UGC Holdings territorial restrictions on chello broadband's business. Subsequent to the issuance of the ordinary shares of class B to UGC Holdings, UPC will own approximately 86.7% of chello broadband. Including the issued shares owned by the chello Foundation, UPC will own approximately 76.9% on a fully diluted basis.

(4)

UPC owns approximately 64.8% of Priority Telecom's issued and outstanding ordinary shares. UPC also owns 100% of the class A shares and the convertible shares.

2.    Risks and Going Concern Uncertainties

        UPC has experienced net losses since formation. As of June 30, 2002, there was substantial uncertainty whether UPC's sources of capital, working capital and projected operating cash flow would be sufficient to fund the Company's expenditures and service the Company's indebtedness over the next year. Accordingly, there is substantial doubt regarding the Company's ability to continue as a going concern. In addition, as a result of the events of default described below, UPC's senior notes, senior discount notes, the Exchangeable Loan and the UPC Distribution Bank Facility have been classified as current liabilities. UPC's ability to continue as a going concern is dependent on (i) UPC's ability to restructure its senior notes and senior discount notes, the Exchangeable Loan and convertible preferred stock and (ii) UPC's ability to generate the cash flows required to enable it to recover the Company's assets and satisfy the Company's liabilities, in the normal course of business, at the amounts stated in the consolidated financial statements. The report of the Company's previous independent accountant, Arthur Andersen, on the Company's consolidated financial statements for the year ended December 31, 2001, includes a paragraph that states that the Company has suffered recurring losses from operations and has a net capital deficiency that raises doubt about the Company's ability to continue as a going concern.

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        The Company has 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, telephony and internet. Additionally, substantial capital expenditures have been required to deploy these services and to acquire businesses. Management expects the Company 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, the Company reviewed its current and long-range plan for all segments of its business and the Company engaged a strategic consultant to assist the Company in the process. The Company worked extensively with this consultant to revise the Company's strategic and operating plans. The Company has revised its 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 profitability. 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 focus on products with positive net present values.

        Viewing the Company's funding requirements and the Company's possible lack of access to debt and equity capital in the near term, UPC determined that it would not make interest payments on UPC's senior notes and senior discount notes, as they fell due. On February 1, 2002, UPC failed to make required interest payments in the aggregate amount of EUR 113.0 million (USD 100.6 million) on UPC's outstanding 10⁷/8% Senior Notes due 2009, 11¹/4% Senior Notes due 2010 and 11¹/2% Senior Notes due 2010. The indentures related to UPC's senior notes and senior discount notes provide that failing to make interest payments constitutes an "Event of Default" under the notes if UPC is in default of the payment of interest on any of the notes for a period of time in excess of 30 days. Since UPC failed to make the interest payments on the first three series of notes upon expiration of this 30-day grace period on March 3, 2002, Events of Default occurred under the related 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 the Company's senior notes and senior discount notes and to foreclose on the collateral securing the loan. In addition, on May 1, 2002 and August 1, 2002, UPC failed to make required interest payments in the aggregate amount of EUR 38.9 million and EUR 123.5 million respectively, on UPC's outstanding 10⁷/8% Senior Notes due 2007 and 11¹/4% Senior Notes due 2009, 10⁷/8% Senior Notes due 2009, 11¹/4% Senior Notes due 2010 and 11¹/2% Senior Notes due 2010, As of August 14, 2002, neither the trustees for the defaulted notes nor the requisite number of holders of those notes have accelerated the payment of principal and interest under those notes.

        UPC's failure to make the February 1, 2002, May 1, 2002 and August 1, 2002 interest payments on its senior notes and senior discount notes, and the resulting Events of Default under the indentures relating to those 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., UPC's 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, UPC's then 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

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•

the USD 856.8 million 6% Guaranteed Discount Notes due 2007 issued under the loan agreement among Belmarken Holding B.V. ("Belmarken"), UPC, UPC Internet Holding B.V. and Liberty Belmarken, Inc. as the original lender ("the Exchangable Loan"). The Exchangeable Loan was transferred to United in January 2002.

        On July 30, 2002, UPC transferred 22.3% of the UPC Germany shares to the holders of the minority interest in UPC Germany (See Note 15). Due to the share transfer, UPC became the minority shareholders of UPC Germany. The EWT facility was refinanced by the new majority shareholders and the cross default ceased to exist.

        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 certain operating companies within this group. The EWT Facility was secured by share pledges of EWT to RBS. 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.. The Exchangeable Loan is continued to be held by United as of August 14, 2002. The occurrence of the cross events of default under the UPC Distribution Bank Facility and the Exchangeable Loan 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, UPC received the first 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 the Company's failure to make the interest payment due on February 1, 2002 on the Company's outstanding 10⁷/8% Senior Notes due 2009, 11¹/4% Senior Notes due 2010 and, 11¹/2% Senior Notes due 2010 within the applicable cure periods, or any resulting cross defaults. During the period from June 4, 2002 to July 28, 2002, UPC received bi-weekly waivers from the bank lenders and United. On July 29, 2002, the bank lenders and United extended the coverage of the waivers to our outstanding 10⁷/8% senior notes due 2007, 11¹/4% senior notes due 2009 and the resulting cross defaults and the duration of the waivers until September 12, 2002. The other terms of the waivers remain unchanged from those announced on March 4, 2002.

Each of these waivers will therefore remain effective until the earlier of

•

September 12, 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 UPC's ordinary shares in accordance with the terms of the Memorandum of Understanding, or five business days after United has given notice to the Company 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 UPC of the terms of that waiver. The waiver under the UPC Distribution Bank Facility subjects UPC to a EUR 100 million drawdown limitation under that facility, during the period in which the waiver is in place. Availability under the limitation is subject to certain conditions.

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        As of August 14, 2002, UPC had not made the interest payments on the 10⁷/8% Senior Notes due 2009, 11¹/4% Senior Notes due 2010, 11¹/2% Senior Notes due 2010, 10⁷/8% Senior Notes due 2007 and the 11¹/4% Senior Notes due 2009. None of the defaults described above have had a material adverse effect on the operations of UPC's subsidiaries or their or UPC's relationships with customers, suppliers and employees.

        On February 1, 2002, UPC signed a Memorandum of Understanding with United and UGC Holdings (the "Memorandum of Understanding"). The Memorandum of Understanding is a non-binding agreement in principle with United and UGC Holdings to enter into negotiations with the holders of the Company's senior notes and senior discount notes to attempt to reach agreement on a means to restructure the Company's indebtedness at the holding company level.

        During the month of March 2002, UPC met with representatives of United, which currently holds the Exchangeable Loan and a significant portion of the Company's senior notes and senior discount notes, and an ad hoc noteholder' committee representing the holders of the Company's 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. United and its advisors and the ad hoc noteholders committee and its advisors completed the due diligence about UPC and the Company's current financial condition.

        On July 24, 2002, United announced that it and the ad hoc noteholders' committee representing holders of UPC's senior notes and senior discount notes agreed in principle on a recapitalization plan for UPC. The agreed recapitalization will substantially delever UPC's balance sheet eliminating approximately 4.3 billion accreted value of senior notes and senior discount notes, 925.1 million Exchangeable Loan, and 1.6 billion of convertible preference shares in exchange for equity issued by a new holding company of UPC ("New UPC"). The agreement, which is subject to documentation among United, UPC and the ad-hoc committee of noteholders and certain other approvals and conditions, consists primarily of the following key terms:

•

United will receive approximately 65.5% of New UPC's pro forma equity for the exchange of its 1.5 billion in UPC notes and its 925.1 million Exchangeable Loan;



•

Third-party noteholders will receive approximately 32.5% of New UPC's pro forma equity for the exchange of their holding of 2.8 billion in UPC notes;



•

Approximately 2% of New UPC's pro forma equity will be available for UPC's existing preferred and ordinary shareholders, including United;



•

In addition, United will agree to purchase up to EUR 100 million in New UPC common stock at the consummation of the UPC restructuring subject to reduction if UPC sells any assets or raises any non-dilutive capital in the interim. United will purchase the stock at the valuation implied by the restructuring. The third party noteholders will have the option to participate pro rata in the equity issuance; and



•

The third-party noteholders will have certain board representation and minority rights.

        UPC expects that this process will take a number of months to complete. If completed, the restructuring will result in substantial dilution of UPC's existing shareholders, a loss of some or all of the value of the Company's outstanding securities, including the Company's ordinary shares, preference shares, senior notes and senior discount notes.

        If United, UPC and the noteholders are unable to conclude documentation for the debt restructuring agreed in principle or if UPC is otherwise unable to successfully complete an agreed upon

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restructuring plan for the Company's debt, UPC may seek relief under (i) a debt moratorium, leading to a suspension of payments and in case no other agreement can be made, (ii) bankruptcy proceeding under applicable laws. If UPC seeks relief under either of these proceedings, or any other laws that may be available to the Company, holders of the Company's outstanding securities, including the Company's 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 the Company's securities. Such proceedings could result in material changes in the nature of UPC's business, material adverse changes to UPC's financial conditions and results of operations or the Company's liquidation.

3.    Basis of Presentation

Basis of Presentation

        The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles for interim financial information and are in the form prescribed by the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. The interim unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements of the Company as of and for the year ended December 31, 2001. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six month period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

        Certain prior period amounts have been reclassified to conform with current period presentation.

New Accounting Principles

        The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") effective January 1, 2002. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized, but are tested for impairment on an annual basis and whenever indicators of impairment arise. In addition, goodwill on equity method investments is no longer amortized, but tested for impairment in accordance with APB 18. The goodwill impairment test, which is based on fair value, is performed on a reporting unit level. All recognized intangible assets that are deemed not to have an indefinite life are amortized over their estimated useful lives.

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        The following table presents the pro forma effect on net loss from the reduction of amortization expense and the reduction of amortization of excess basis on equity method investments, as a result of the adoption of SFAS 142:

        The Company has engaged an external party to compare the fair value of its reporting units with their respective carrying amounts, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test will be performed to measure the amount of impairment loss. The first step of the goodwill impairment test was performed and the carrying value of certain reporting units exceeded the fair value, including the Netherlands, Sweden, Hungary, Czech, France, Slovak, Poland and Priority Telecom. The Company is currently carrying out the second step of the test to quantify how much of the total goodwill will be impaired. A substantial cumulative effect adjustment will be required as a result of this process. The determination of the potential impairment adjustment will be completed by the end of the year. As of June 30, 2002, net goodwill of approximately 2.9 billion is included in the accompanying condensed consolidated balance sheets.

        In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." ("SFAS 145"). SFAS 145, which updates, clarifies and simplifies existing accounting pronouncements, addresses the reporting of debt extinguishments and accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The provisions of SFAS 145 are generally effective for the Company's 2003 fiscal year, or in the case of specific provisions, for transactions occurring after May 15, 2002 or financial statements issued on or after May 15, 2002. For certain provisions, including the rescission of Statement No. 4, early application is encouraged. UPC has not adopted SFAS 145 and is currently evaluating the impact of SFAS 145 on

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the Company's consolidated financial statements. The Company does not believe that the adoption of SFAS 145 will have a material impact on the Company's net loss, financial position or cash flows.

        On June 28, 2002 the Financial Accounting Standards Board voted in favor of issuing SFAS No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force ("EITF") has set forth in the EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The scope of SFAS 146 also includes (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. SFAS 146 will be effective for financial statements issued for fiscal years beginning after December 31, 2002. The Company has not yet determined the impact of SFAS 146 on its results of operations and financial position.

4.    Impairment and Restructuring Charges

        During 2001, the Company implemented a restructuring plan to both lower operating expenses and strengthen its competitive and financial position, by eliminating certain employee positions, reducing office space and related overhead expenses, recognizing losses related to excess capacity under certain contracts and cancellation of certain programming contracts. The Company also incurred certain restructuring charges during the three and six month period ended June 30, 2002 related to employee severance and termination costs.

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        The following table summarizes these costs by type and related segment of the business.

        Employee severance and termination costs.    These costs relate to termination salaries, benefits, outplacement and other related costs to the employees involuntarily terminated. The total workforce reduction was effected through a combination of involuntary terminations and reorganizing operations to permanently eliminate open positions resulting from normal employee attrition. These costs were determined in accordance with the criteria of EITF 94-3. Salaries and benefits earned during the transition period have not been included in the restructuring charge.

        Office closures.    In addition to the decrease in employee positions, the restructuring plan provided for reduction in office space and related overhead expenses. Office closure and consolidation costs are the estimated costs to close specifically identified facilities, costs associated with obtaining subleases, lease- termination costs and other related costs.

        Programming and lease contract termination costs.    These costs relate to costs associated with the impairment, cancellation or recognition of costs associated with excess capacity of certain contracts.

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        The following table summarizes the number of employees to be terminated during 2002 in accordance with the restructuring by both division and function and the number of employees still to be terminated as of June 30, 2002:

5.    Investments in and Advances to Affiliated Companies

Equity Method Investments

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Marketable Equity Securities of United, at Fair Value

        UPC holds 5,569,240 Class A common shares of United as of June 30, 2002. The fair value of these shares was approximately 15.5 million as of June 30, 2002, including a cumulative unrealized loss of approximately 11.1 million.

6.    Property, Plant and Equipment

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7.    Goodwill and Other Intangible Assets

8.    Long-Term Debt

        All non-Euro denominated borrowings are recorded each period using the period end spot rate with the result being recorded as foreign exchange gain or loss. As discussed in Note 2 "Risks and Going Concern Uncertainties", since of March 3, 2002, the Company has been in default under its senior notes and senior discount notes and has had short term waivers with respect to the UPC Distribution Bank Facility, the Exchangeable Loan and the EWT Facility. Accordingly, these borrowings have been reclassified to current portion of long-term debt. On July 30, 2002, UPC transferred 22.3% of the UPC Germany shares to the holders of a minority interest in UPC Germany. Due to the share transfer, the EWT facility was refinanced by the new majority shareholder and the cross default ceased to exist.

Exchangeable Loan

        The Exchangeable Loan was transferred to United on January 30, 2002, as part of a transaction between Liberty Media Corporation ("Liberty"), the original holder of the Exchangeable Loan, and United. United may exchange the notes issued under the Exchangeable Loan for UPC's ordinary shares at USD 6.85 per share under certain circumstances before or after May 29, 2002.

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UPC Distribution Bank Facility

        As indicated in Note 2, the Company is in default under the terms of this facility as a result of the missed interest payments during the first quarter of 2002. The Company had obtained waivers of the default from the bank syndicate, which expired on June 3, 2002, which was extended on the same terms thereafter, currently until September 12, 2002. During the period of waiver, the Company is permitted to borrow another 100 million under the facility, subject to certain conditions. UPC has not made any drawdown of the permitted 100 million as of August 14, 2002.

Derivative Instruments

        In connection with certain borrowings, the Company has entered into both cross-currency swaps and interest rate swaps providing economic hedges to both currency and interest rate exposure.

        The following table details the fair value of the derivative instruments outstanding by related borrowing (in thousand of Euros)

        Of the above derivative instruments, only the 1.725 billion interest rate swap on the UPC Distribution Bank Facility qualifies as an accounting cash flow hedge. Accordingly, the changes in fair value of this instrument are recorded through other comprehensive income in the consolidated statement of shareholders' deficit. The remaining instruments are marked-to-market each period with the corresponding fair value gain (loss) recorded as a part of foreign exchange gain (loss) and other income (expense) in the accompanying consolidated statements of operations. For the three months ended June 30, 2002 and 2001, the Company recorded a loss of 2.9 million and 57.0 million, respectively, and for the six months ended June 30, 2002 and 2001, the Company recorded a loss of 180.7 million and a gain of 25.6 million, respectively, in connection with the mark-to-market valuations.

        In June 2002, the Company recognized an extraordinary gain of 347.2 million from the delivery by certain banks of 404.6 million in aggregate principal amount of the Company's senior notes and senior discount notes as settlement of the interest rate/cross currency derivative contracts on UPC's July 1999 Senior Notes, UPC's October 1999 Senior Notes and the UPC January 2000 Senior Notes.

        The condensed consolidated balance sheets reflect these instruments as derivative assets or liabilities as appropriate.

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9.    Commitments and Contingencies

Purchase Commitments

        UPC has terminated for cause an agreement for the supply of various types of equipment in an aggregate amount of 34.6 million. UPC intends to source such equipment from alternative suppliers.

Purchase Options

        At June 30, 2002, UPC had effective ownership of 51% of EWT/TSS Group through its 51% owned subsidiary UPC Germany. Under the shareholders agreement among UPC and the 49% shareholders of UPC Germany, the shareholders had an option to put their interest in UPC Germany to UPC in exchange for approximately 10.6 million of UPC's ordinary shares A, as adjusted for final settlement. The option would expire March 31, 2003. UPC had the option to pay for the put, if exercised, in either its 10.6 million shares or the equivalent value of cash on such date. If the option was not exercised, upon its expiration, the 49% shareholder had the right to demand that UPC contribute cash and/or other assets (including stock) to UPC Germany equal to approximately 358.8 million, representing the remainder of UPC's contribution obligation to UPC Germany. Pursuant to the agreement by which UPC acquired EWT/TSS Group, UPC was 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. The 49% shareholder of UPC Germany could call for 22% of the ownership interest in certain circumstances such as a material default by UPC under its financing agreements, in exchange for the Euro equivalent of 1 Deutsche Mark. On March 5, 2002, UPC received notice of the holders' notice of exercise of the call. On July 30, 2002, UPC settled the exercise. From that date, the Company's interest in UPC Germany has been reduced to 28.7% and the Company will no longer consolidate UPC Germany. In addition, the delivery of the shares extinguished the contribution obligation. At the same time the EWT facility was refinanced by the new majority shareholder, and UPC was released from its liability under this facility.

        For details on revenue, Adjusted EBITDA and total assets of UPC Germany as of June 30, 2002, see Note 10 of the notes to the condensed consolidated financial statements.

Litigation and Claims

        The following is a description of certain legal proceedings to which UPC or one of UPC's subsidiaries is a party. In addition, from time to time, UPC may become involved in litigation relating to claims arising out of its operations in the normal course of the Company's business. In the opinion of the Company's management, the ultimate resolution of these legal proceedings would not be likely to have a material adverse effect on UPC's 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 UPC, UGC Holdings, and its subsidiaries, Belmarken Holding B.V. and UPC France Holding B.V.. The claimants allege breaches of obligations allegedly owed by UPC 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 UPC 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 163 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

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dismissed from the proceedings. UPC and its affiliates, as respondents, deny these claims and intend to defend against claimants' allegations vigorously. UPC is vigorously defending the arbitration proceedings and has filed appropriate counter claims.

10.  Segment and Geographic Information

        The Company is managed internally as three primary divisions, UPC Distribution, UPC Media and Priority Telecom. In addition, Corporate, IT and Other is a separate reporting segment. UPC Distribution focuses on providing cable television, DTH, internet and telephony services to residential customers and is comprised of the local operating systems. chello broadband serves as the internet access provider and was, in February 2001, combined with the programming businesses led by UPCtv under one management team as UPC Media. Priority Telecom is focused on providing services to business customers. Corporate, IT and Other relates primarily to centralized activities, which support multiple platforms and services.

        The Company evaluates performance and allocates resources based on the results of these divisions. The key operating performance criteria used in this evaluation include revenue growth and "Adjusted EBITDA". Adjusted EBITDA is not a generally accepted accounting principle ("GAAP") measure. Adjusted EBITDA represents net operating earnings before depreciation, amortization, stock-based compensation charges including retention bonuses, and impairment and restructuring charges. Adjusted EBITDA is one of the primary measures used by the Company's chief operating decision makers to measure the Company's operating results and to measure segment profitability and performance. Management believes that Adjusted EBITDA is meaningful to investors because it provides an analysis of operating results using the same measures used by the Company's chief operating decision makers, that Adjusted EBITDA provides investors with the means to evaluate the financial results of the Company compared to other companies within the same industry and that it is common practice for institutional investors and investment bankers to use various multiples of current or projected Adjusted EBITDA for purposes of estimating current or prospective enterprise value. The Company's calculation of Adjusted EBITDA may or may not be consistent with the calculation of this measure by other companies in the same industry. Investors should not view adjusted EBITDA as an alternative to GAAP income as a measure of performance, or to cash flows from operating investing and financing activities as a measure of liquidity. In addition, Adjusted EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. Adjusted EBITDA excludes non-cash and cash stock-based compensation charges, which result from variable plan accounting for certain of the Company's and its subsidiaries' stock option and phantom stock option plans.

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        A summary of the segment information is as follows:

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