UPC POLSKA INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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FORM 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

OR

/ / TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT 1934

FROM THE TRANSITION PERIOD FROM ______ TO ______

COMMISSION FILE NUMBER 000-22877

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UPC POLSKA, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 06-1487156
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification No.)

4643 ULSTER STREET
SUITE 1300
DENVER, COLORADO 80237
(Address of Principal Executive Offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 770-4001

Indicate by check (X) 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

The number of shares outstanding of UPC Polska, Inc.'s common stock as of
June 30, 2002, was:

COMMON STOCK 1,000

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UPC POLSKA, INC.
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED JUNE 30, 2002

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

UPC POLSKA, INC.
CONSOLIDATED BALANCE SHEETS
(STATED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)

See accompanying notes to unaudited consolidated financial statements.

3

UPC POLSKA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(STATED IN THOUSANDS OF U.S. DOLLARS)

(UNAUDITED)

See accompanying notes to unaudited consolidated financial statements.

4

UPC POLSKA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(STATED IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)

See accompanying notes to unaudited consolidated financial statements.

5

UPC POLSKA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATED IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)

See accompanying notes to unaudited consolidated financial statements.

6

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002

1. BASIS OF PRESENTATION

The information furnished by UPC Polska, Inc. and its subsidiaries ("UPC
Polska" or the "Company" previously @Entertainment, Inc.) has been prepared in
accordance with accounting principles generally accepted in the United States
("U.S. GAAP") and the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with U.S. GAAP
have been condensed or omitted pursuant to these rules and regulations. The
Company maintains its books of accounts in Poland, the Netherlands and in the
United States of America in accordance with local accounting standards in the
respective countries. These financial statements include all adjustments to the
Company's statutory books to present these statements in accordance with U.S.
GAAP. The consolidated financial statements include the financial statements of
UPC Polska, Inc. and its wholly owned and majority owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. The accompanying consolidated balance sheets, statements of
operations, statements of comprehensive loss and statements of cash flows are
unaudited, but in the opinion of management, reflect all adjustments which are
necessary for a fair statement of the Company's consolidated results of
operations and cash flows for the interim periods and the Company's financial
position as of June 30, 2002. The accompanying unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001 filed with the SEC (the
"2001 Annual Report"). The interim financial results are not necessarily
indicative of the results of the full year.

2. MERGER OF D-DTH BUSINESS

On August 10, 2001, the Company, United Pan-Europe Communications N.V.
("UPC"), and Group Canal+ S.A. ("Canal+"), the television and film division of
Vivendi Universal, announced the signing of a Shareholder Agreement and
Contribution and Subscription Agreement ("Definitive Agreements") to merge their
respective Polish digital satellite direct-to-home ("D-DTH") platforms, as well
as the Canal+ Polska premium channel, to form a common Polish D-DTH platform
(the "Canal+ merger").

The transaction contemplated by such agreements was consummated on
December 7, 2001. As part of the transaction, the Company, through its affiliate
Polska Telewizja Cyfrowa Wizja TV Sp. z o.o. ("PTC"), contributed Wizja TV Sp. z
o.o. and UPC Broadcast Centre Ltd., the Company's Polish and United Kingdom
D-DTH businesses, respectively, to Telewizyjna Korporacja Partycypacyjna S.A.
("TKP"), the Polish subsidiary of Canal+. The Company received 150.0 million
Euros (approximately $133.4 million as of December 7, 2001) in cash and PTC
received a 25% ownership interest in TKP upon receipt of court approval and
other legal matters in connection with the issuance of new TKP shares.

In connection with the requirements of the Definitive Agreements, the
Company was required to fund 30.0 million Euros ($26.8 million as of
December 31, 2001) to TKP. Pursuant to the terms of the Definitive Agreements,
the Company was contractually obligated to maintain this amount for this
specific purpose. Accordingly, on the Company's consolidated balance sheet as of
December 31, 2001, this was reflected as Restricted Cash and, based on the
contractual liability, it was shown as due to TKP. On February 1, 2002, the
Company and Canal+ completed all Polish legal formalities in connection with the
transaction. On the same day, the Company funded TKP with 30.0 million Euros

7

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

(approximately $26.4 million as of February 1, 2002) in the form of a
shareholder loan and registered its 25% investment in TKP with the Commercial
Court in Poland. The Company included the value of the shareholder loan in its
valuation of the fair value of its 25% investment in TKP. The Company valued its
25% ownership interest at the acquisition date (December 7, 2001) at
30.0 million Euros (approximately $26.8 million as of December 31, 2001), which
represents the fair market value of this ownership on December 7, 2001. The
Company accounts for this investment using the equity method. As a result of the
recognition of the Company's share in TKP's losses for the six months ended
June 30, 2002, the book value of this investment was zero as of June 30, 2002.

As of February 2002, the Company began distribution of Canal+ Multiplex, a
Polish-language premium package of three movie, sport and general entertainment
channels, across its network on terms as specified in the Contribution and
Subscription Agreement. The Company and TKP are currently negotiating the
definitive long-term channel carriage agreement for carriage of Canal+
Multiplex.

Additionally, in connection with the Canal+ merger, the Company terminated
the operations of Wizja Sport and transferred or assigned its economic benefits
and obligations of certain programming agreements to TKP to the extent that they
were directly related to the D-DTH business.

The Company also eliminated all aspects of its programming operations as a
direct result of the D-DTH disposition and has included in the loss on
disposition $217.6 million in 2001 related to the write-down of the programming
goodwill.

Pursuant to the indentures governing the Company's 14 1/2% Senior Discount
Notes due 2008, Series C Discount Notes due 2008 and 14 1/2% Senior Discount
Notes due 2009 (together, the "UPC Polska Notes"), the Company is required to
use the net cash proceeds from the Canal+ merger within 12 months of the
transaction date, December 7, 2001, for certain limited purposes. These include:

- to permanently repay or prepay senior bank indebtedness or any
unsubordinated indebtedness of the Company;

- to invest in any one or more businesses engaged, used or useful in the
Company's cable, D-DTH or programming businesses; or

- to invest in properties or assets that replace the properties and assets
sold.

Additionally, the Company's agreements related to the notes payable to UPC
and its affiliates contain limitations on the use of cash proceeds from the sale
of assets. However, the Company has received a waiver from UPC and its
affiliates to specifically exempt the net cash proceeds from these transactions
from the limitations contained in the loan agreements with UPC and its
affiliates. As of December 31, 2001 and June 30, 2002, a significant portion of
the Company's cash and cash equivalents have limitations imposed by the
Company's indentures. The Company is currently evaluating the potential uses for
its net cash proceeds from the Canal+ merger ($82.9 million as of December 31,
2001) and the Twoj Styl assets sale ($7.0 million). On April 2, 2002, the
Company used a portion of its net cash proceeds from the Canal+ merger and Twoj
Styl asset sale to pay off an unsubordinated promissory note in principal amount
of $7.0 million owed to Reece Communications, Inc. ("RCI"), a former minority
stockholder of Poland Cablevision (Netherlands) B.V. ("PCBV"). The net cash
proceeds, as defined, are net of the estimated costs provided by the Company
against liabilities associated with the Canal+ merger and the Twoj Styl asset
sale. These costs include provisions for expected termination costs of
programming agreements of $12.8 million and estimated professional and

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UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

other fees of $10.9 million in respect of the Canal+ merger transaction and net
of $0.3 million of transaction costs in respect of the Twoj Styl asset sale.

The following unaudited pro forma information for the three and six months
ended June 30, 2002 and 2001 gives effect to the disposition of the D-DTH
business as if it had occurred at the beginning of the respective periods
presented. This pro forma condensed consolidated financial information does not
purport to represent what the Company's results would actually have been if such
transaction had in fact occurred on such date.

3. GOING CONCERN AND LIQUIDITY RISKS

These unaudited consolidated financial statements have been prepared on a
going concern basis, which contemplates the continuation and expansion of
trading activities as well as the realization of assets and liquidation of
liabilities in the ordinary course of business. Cable television operators
typically experience losses and negative cash flow in their initial years of
operation due to the large capital investment required for the construction or
acquisition of their cable networks, acquisition of programming rights and the
administrative costs associated with commencing operations. Consistent with this
pattern, the Company has incurred substantial operating losses since inception
(1990).

During 2001, the Company reviewed its long term plan for all segments of its
operations and identified businesses which were profitable on an operating
profits basis and businesses, which required extensive additional financing to
become profitable. The Company has also assessed its ability to obtain
additional financing on terms acceptable to it. These reviews proved that as of
that point, the Company's only profitable business on an operating profits basis
was cable television and it could not provide further financing to its D-DTH and
programming businesses. As a result, the Company changed its business strategy
towards its operating segments. The Company decided to dispose of its D-DTH and
programming businesses and revised its business strategy for cable television
from aggressive growth to a focus on achievement of positive cash flow. The
Company expects to have positive EBITDA (EBITDA, an acronym for earnings before
interest, taxes, depreciation and amortization, is defined in Note 12) and
positive cash flows from operations in 2002.

As of June 30, 2002, the Company had negative working capital of
$368.0 million and a stockholder's deficit of $299.9 million. The Company
experienced operating losses of $4.7 million, $9.1 million, $42.1 million and
$93.9 million during the three and the six month periods ended June 30, 2002 and
2001, respectively. It also has significant commitments under non-cancelable
operating leases and for programming rights, as well as repayment obligations
related to PCI's 9 7/8% Senior Notes due 2003 ("PCI Notes") and the UPC Polska
Notes.

As of June 30, 2002, the Company had approximately $10.0 million in
outstanding notes payable to RCI, a former minority stockholder of PCBV. The
note, which bears an interest of 7% per annum and

9

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

matures in August 2003, has a scheduled payment of principal amount of
$4.0 million due in August 2002. UPC is the guarantor of the note. Since an
event of default has occurred under UPC's indentures, which was not cured or
waived within the applicable grace period, a cross-default has occurred under
the RCI note. As a result, RCI has the right to receive the interest at the
default rate of 12% per annum and to accelerate the repayment of the note.
Accordingly, the entire outstanding balance of the note is recognized as a
short-term liability.

On November 1, 2003, the Company will also be required to fulfill its
repayment obligation of approximately $14.5 million in principal amount under
the PCI Notes, and the Company will be required to commence cash interest
payments under the UPC Polska Notes aggregating approximately $50.8 million per
annum in 2004 and approximately $69.2 million per annum in 2005 and thereafter.
The Company also has an aggregate of approximately $23.8 million in interest
payments due to UPC and its affiliates as of June 30, 2002 on its currently
outstanding indebtedness. In prior years and as of the date of filing this
Quarterly Report on Form 10-Q, UPC and its affiliate have permitted the Company
to defer payment of interest due to UPC and its affiliate until September 30,
2002. The Company, however, has no assurances that UPC and its affiliate will
permit such deferral going forward.

Over the longer term, the Company must meet repayment obligations on its
indebtedness (including interest payable on a long-term basis), of approximately
$416.1 million under the UPC Polska Notes, $14.5 million under the PCI Notes and
$440.8 million due to UPC and its affiliates.

The Company, since its acquisition by UPC, has relied completely on funding
from its shareholder UPC and UPC's affiliates. However, the Company believes it
will not be able to obtain significant funding from UPC in the foreseeable
future. UPC has reviewed its funding requirements and possible lack of access to
debt and equity capital in the near term and has modified its business and
funding strategies.

On February 1, 2002, May 1, 2002 and August 1, 2002 UPC failed to make
required interest payments on its outstanding debt securities, which caused
events of default to occur on certain of the debt securities and loan agreements
of UPC and its affiliates, including Belmarken Holding B.V. ("Belmarken"). The
events of default continue to exist on UPC's outstanding debt securities as of
the date of filing of this Quarterly Report on Form 10-Q, although the holders
of such obligations have not yet accelerated the payment obligations of UPC and
its affiliates with respect to such securities. UPC, Belmarken and other UPC
affiliates have obtained waivers of the defaults on the other loan agreements.
These waivers expire on the earlier of (A) September 12 ,2002 and (B) the
occurrence of certain events, none of which has occurred as of August 14, 2002.

UPC has entered into negotiations with UnitedGlobalCom, Inc. ("United"),
UPC's parent, and certain holders of UPC's debt securities to restructure
certain of the indebtedness of UPC and its affiliates.

On July 24, 2002 United and a committee representing certain holders of
UPC's debt securities announced an agreement in principle on the terms of debt
restructuring. The agreed debt restructuring is subject to approval of UPC's
supervisory board and other conditions. The Company cannot make any assurance
that UPC will be able to reach agreement with either United or the note holders
on mutually satisfactory definitive terms for the debt restructuring or when, or
if, any definitive restructuring agreement will actually be consummated. In
addition, even if a definitive restructuring agreement is entered into and
consummated, there can be no assurance that it will enable UPC to provide
financing to the Company in the future.

10

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

Although the Company had anticipated being able to rely on UPC to meet its
payment obligations, given UPC's liquidity concerns, the Company is not certain
that it will receive the necessary (or any) financing from UPC. If the Company
is unable to rely on UPC for financial support, it will have to meet its payment
obligations with cash on hand or with funds obtained from public or private debt
or bank financing or any combination thereof, subject to the restrictions
contained in the indentures governing the outstanding senior indebtedness of the
Company and, if applicable, UPC and United.

The Company has approximately $110.1 million of unrestricted cash as of
June 30, 2002. However, as a result of the limitations imposed on it by the
indentures governing the UPC Polska Notes and the notes payable to UPC and its
affiliates, the Company is limited in its utilization of approximately
$82.9 million of this unrestricted cash, which represents net cash proceeds net
of the estimated costs associated with the Canal+ merger and the Twoj Styl asset
sale. As a result of these limitations and the potential inability of UPC to
provide necessary funding, if required, the Company has limited sources of
funding available to it outside of its operating cash flows. In addition, the
Company has loans payable to UPC and its affiliate in the amount of
$440.8 million (including accrued interest) as of June 30, 2002. The Company's
loan agreements with UPC contain various covenants, including a provision which
provides UPC with the ability to declare the loans immediately due and payable
if in its opinion, a material adverse change has occurred in the business,
operations, prospects or condition (financial or otherwise) of the Company or
any of its subsidiaries or, if in the opinion of UPC, any event or circumstance
has occurred that could have a material adverse effect on the Company's ability
to fulfill its obligations under the loan agreement in question.

The Company's loan agreements with UPC and Belmarken contain various
covenants and events of default which, among other things, permit UPC and
Belmarken to accelerate the loans if a continuing default exists under certain
notes issued by Belmarken and UPC (the "Belmarken Notes"), a default exists
under indebtedness of the Company or its subsidiaries which would permit or
cause such indebtedness to be accelerated or if, in the opinion of UPC, certain
material adverse events or conditions relative to the Company have occurred.
Although defaults exist under the Company's loans owing to UPC and Belmarken as
a result of the defaults under the Belmarken Notes and the RCI note, these
defaults have been waived by the relevant holders. These waivers are effective
(i) until December 31, 2002 in the case of the RCI note and (ii) until the
ealrier of (A) September 12, 2002 and (B) the occurrence of certain events, none
of which has occurred as of August 14, 2002, in the case of the Belmarken Notes.
Accordingly, the Company's loans payable to UPC and Belmarken are classified as
short-term liabilities.

In the event UPC or its affiliates accelerates payment owed to them by the
Company under their loans, the Company would have limited funds or available
borrowings to repay these loans. If the Company were to default on its loan
payments to UPC or its affiliates, the acceleration clauses in the indentures
governing the UPC Polska Notes may be triggered requiring those notes to be paid
off as well, and the Company would likely not have sufficient funds or available
borrowings to repay those notes. Additionally, under the UPC Polska Notes there
are various Events of Default, including the acceleration of the payment of
other debt of the Company in excess of $15.0 million. In the event the Company's
debt was accelerated, or if there was an event of default, which was not cured
in a timely manner pursuant to the respective agreements, the UPC Polska Notes
would become due. The Company's available cash on hand would be insufficient to
satisfy all of its obligations, and the Company cannot be certain that it would
be able to obtain the necessary financing at all, or on terms that will be
favorable to the Company. The Company has evaluated its compliance with its
indentures governing the UPC Polska Notes and the PCI Notes as of June 30, 2002
and as of the date of filing of

11

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

this Quarterly Report on Form 10-Q and has determined, based on its assessment,
that an Event of Default has not occurred under its indentures. As a result, the
amounts related to the UPC Polska Notes and the PCI Notes of $430.6 million have
been reflected as long-term liabilities in the Company's financial statements as
of June 30, 2002.

Moreover, if the Company's plans or assumptions change, if its assumptions
prove inaccurate, if it consummates investments in or acquisitions of other
companies, if it experiences unexpected costs or competitive pressures, or if
existing cash, and projected cash flow from operations prove to be insufficient,
the Company may need to obtain greater amounts of additional financing. While it
is the Company's intention to enter only into new financing or refinancing that
it considers advantageous, there can be no assurance that such sources of
financing would be available to the Company in the future, or, if available,
that they could be obtained on terms acceptable to the Company.

The Company has experienced net losses since its formation. As of
December 31, 2001, there was substantial uncertainty whether the Company'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. The Company's
ability to continue as a going concern is dependent on (i) the Company's ability
to restructure the UPC Polska Notes and its loans payable to UPC and its
affiliates and (ii) the Company's ability to generate the cash flows required to
enable it to maintain 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 former
independent accountant, Arthur Andersen Sp. z o.o., 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 and
negative cash flows from operations and has a negative working capital and a
shareholder's deficit that raises substantial doubt about the Company's ability
to continue as a going concern. The Company's management is currently evaluating
various options for restructuring its debt aimed to recapitalize the operations
of the Company.

Management of the Company believes that significant opportunities exist for
cable television providers capable of delivering high quality, Polish-language
programming on a multi-channel basis and other services on cable (i.e. data and
telephony). As such, the Company's current focus is on its cable television
market. The Company's business strategy is designed to increase its average
revenue per subscriber and also, although to a lesser extent, to increase its
subscriber base. The Company intends to achieve these goals by increasing
penetration of new service products within existing upgraded homes; providing
additional revenue-generating services to existing customers, including internet
services; developing content tailored to the interests of existing subscribers;
and improving the effectiveness of the Company's sales and marketing efforts.

The Company also intends to increase the effectiveness of its operations and
reduce its expenses by enhancing internal controls; improving corporate
decision-making processes; reorganizing the Company so as to simplify its legal
structure; and using local rather than expatriate employees in management,
thereby reducing general and administrative costs.

Several of the Company's Polish subsidiaries have statutory shareholders'
equity less than the legally prescribed limits because of accumulated losses. As
required by Polish law, the management of these companies will have to make
decisions on how to increase the shareholders' equity to be in compliance with
the Polish Commercial Code. The Company is currently considering several

12

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

alternatives, including the conversion of intercompany debt into equity, in
order to resolve these deficiencies.

4. GOODWILL AND OTHER INTANGIBLE ASSETS

On June 2, 1999, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with UPC, whereby UPC initiated a tender offer to
purchase all of the Company's outstanding shares in an all cash transaction
valuing the Company's shares of common stock at $19.00 per share.

The tender offer, initiated pursuant to the Merger Agreement closed on
August 5, 1999. On August 6, 1999, UPC reported that it had accepted for payment
a total of 33,701,073 shares of the Company's common stock (including 31,208
shares tendered pursuant to notices of guaranteed delivery) representing
approximately 99% of Company's outstanding shares of common stock (the
"Acquisition"). In addition, UPC acquired 100% of the outstanding Series A and
Series B 12% Cumulative Preference Shares of UPC Polska and acquired all of the
outstanding warrants and stock options.

As a result of the Acquisition, UPC pushed down the goodwill of
approximately of $979.3 million to the Company, establishing a new basis of
accounting as of the acquisition date. The goodwill was allocated between UPC
Polska's business segments based on the investment model used for acquisition.
During the year ended December 31, 2000 this figure increased by $12.3 million
due to the results of an arbitration settlement between the Company and TKP.
During the years ended December 31, 2000 and 2001, the goodwill was also
increased by $23.4 million as a result of a purchase by a subsidiary of the
Company of outstanding stock in PCBV from RCI, a PCBV minority shareholder.

In connection with the Canal+ merger discussed in Note 2, the Company
included in its loss on disposition the write-off of $252.9 million of
intangible assets related to the D-DTH business and $217.6 million related to
the programming segment.

As discussed in Note 6, as of January 1, 2002, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 142 ("SFAS 142"). SFAS 142
requires that goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed annually (or more frequently if impairment indicators
are present) for impairment. The Company has completed the first step of the
goodwill impairment test required by SFAS 142 and determined that an indication
of potential goodwill impairment exists. The Company is currently carrying out
the second step of the test to quantify the amount of the impairment. It is
possible that the substantial cumulative effect adjustment may be required as a
result of this process. As of June 30, 2002 net goodwill of approximately
$359.8 million is included in the accompanying consolidated balance sheet. The
consolidated statements of operations for the three and six months ended
June 30, 2002 do not include any goodwill amortization expense. For the three
and six months ended June 30, 2001, the consolidated statement of operations
included such amortization expense of approximately $16.2 million and
$32.1 million, respectively.

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash and other short-term investments
with original maturities of three months or less. See Note 2 and 3 for the
discussion related to the limitations on the use of $82.9 million of the cash
and cash equivalents.

13

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the amounts of revenues and expenses during the
reporting period. The Company's actual results could differ from those
estimates, which include, but are not limited to: allowance for doubtful
accounts, impairment charges of long-lived assets, valuation of equity
investment and revenue recognition.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The allowance for doubtful accounts is based upon the Company's assessment
of probable loss related to overdue accounts receivable. Upon disconnection of
the subscriber, all unpaid accounts receivable from the subscriber are fully
reserved. The allowance is maintained until receipt of payment or until the
account is deemed uncollectable for a maximum of three years.

REVENUE RECOGNITION

Revenue related to the provision of cable television and internet services
to customers are recognized in the period in which the related services are
provided in accordance with SFAS No. 51, "Financial Reporting by Cable
Television Companies" ("SFAS 51"). D-DTH revenues were recognized in accordance
with SAB 101 "Revenue Recognition in Financial Statements".

Initial installation fees related to cable television and internet services
are recognized as revenue in the period in which the installation occurs, to the
extent installation fees are equal to or less than direct selling costs, which
are expensed. To the extent installation fees exceed direct selling costs, the
excess fees are deferred and amortized over the average contract period.
However, due to regular promotional prices set up for installation fees, the
Company's direct selling costs exceed the associated gross installation revenue,
and accordingly, the Company did not report any deferred revenue on
installations as of June 30, 2002 and December 31, 2001.

TAXATION

Income taxes are accounted for under the asset and liability method in
accordance with SFAS 109, "Accounting for Income Taxes". Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.

U.S. TAXATION: The Company is subject to U.S. Federal taxation on its
worldwide income. Polish companies that are not engaged in a trade or business
within the U.S. or that do not derive income from U.S. sources are not subject
to U.S. income tax.

FOREIGN TAXATION: Polish companies are subject to corporate income taxes,
value added tax (VAT) and various local taxes within Poland, as well as import
duties on materials imported by them into Poland.

14

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

Income tax for other foreign companies is calculated in accordance with
Polish tax regulations. Due to differences between accounting practices under
Polish tax regulations and those required by U.S. GAAP, certain income and
expense items are recognized in different periods for financial reporting
purposes and income tax reporting purposes that may result in deferred income
tax assets and liabilities.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment include assets used in the development and
operation of the various cable distribution networks. During the period of
construction, plant costs and a portion of design, development and related
overhead costs are capitalized as a component of the Company's investment in
cable distribution networks.

The Company capitalizes new subscriber installation costs, including
material and labor of new connects or new service added to an existing location.
Capitalized costs are depreciated over a period similar to cable television
plant. The costs of subsequently disconnecting and reconnecting the customer are
expensed as incurred. Cable subscriber related costs and general and
administrative expenses are charged to operations when incurred.

When material, the Company capitalizes interest costs incurred during the
period of construction in accordance with SFAS No. 34, "Capitalization of
Interest Cost". Interest is not capitalized for short-term construction
projects. During the six months ended June 30, 2002 and 2001, no interest costs
were capitalized.

Depreciation is computed for financial reporting purposes using the
straight-line method over the following estimated useful lives:

Cable system assets......................................... 10 years
Set-top boxes............................................... 5 years
Vehicles.................................................... 5 years
Other property, plant and equipment......................... 5 - 10 years

INVENTORIES FOR CONSTRUCTION

Inventories for construction are stated at the lower of cost, determined by
the average cost method, or net realizable value. Inventories are principally
related to cable distribution networks. Cost of inventory includes purchase
price, transportation, customs and other direct costs.

GOODWILL AND OTHER INTANGIBLES

Prior to the Acquisition, goodwill, which represents the excess of purchase
price over fair value of net assets acquired, was amortized on a straight-line
basis over the expected periods to be benefited, generally ten years, with the
exception of amounts paid relating to non-compete agreements. The portion of the
purchase price relating to non-compete agreements was amortized over the term of
the underlying agreements, generally five years.

Effective as of the date of the Acquisition, August 6, 1999, the Company
revalued all its previously existing goodwill, including amounts related to
non-compete agreements that related to transactions completed prior to the
Acquisition. The goodwill that was pushed down to the Company was amortized
using straight-line basis over the expected periods to be benefited, which is
fifteen years.

15

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), which the Company adopted 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. 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.

The Company is working with an external party to compare the fair value of
the Company's 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 Company has completed the first step of the goodwill impairment test
required by SFAS 142 and determined that an indication of potential goodwill
impairment exists. The Company is currently carrying out the second step of the
test to quantify the amount of the impairment. It is possible that a substantial
cumulative effect adjustment may be required as a result of this process. As of
June 30, 2002, net goodwill of approximately $359.8 million is included in the
accompanying consolidated balance sheets. The consolidated statement of
operations for the three and six months ended June 30, 2002 does not include any
goodwill amortization expense. For the three and six months ended June 30, 2001,
the consolidated statement of operations included such amortization expense of
approximately $16.2 million and $32.1 million, respectively.

The following table presents the pro forma effect on net loss from the
reduction of amortization expense as a result of SFAS 142:

Through its subsidiaries, the Company has entered into lease agreements with
the Polish national telephone company ("TPSA"), for the use of underground
telephone conduits for cable wiring. Costs related to obtaining conduit and
franchise agreements with housing cooperatives and governmental authorities are
capitalized and generally amortized over a period of ten years. In the event the
Company does not proceed to develop cable systems within designated cities,
costs previously capitalized will be charged to expense.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" ("SFAS 141"), which was adopted effective July 1, 2001.
SFAS 141 requires the purchase method of accounting for all business
combinations initiated after June 30, 2001. The Company has applied SFAS 141 to
its only applicable transactions, the purchases of minority interests in TKP and
PCBV on December 7, 2001 and August 28, 2001, respectively.

16

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

DEFERRED FINANCING COSTS

Costs incurred to obtain financing have been deferred and amortized as
interest expense over the life of the loan using the effective interest method.
Deferred financing costs were zero as of June 30, 2002 and December 31, 2001.

INVESTMENT IN AND ADVANCES TO AFFILIATED COMPANIES, ACCOUNTED FOR UNDER THE
EQUITY METHOD

For those investments in companies in which the Company's ownership interest
is 20% to 50%, its investments are held through a combination of voting common
stock, preferred stock, debentures or convertible debt and/or the Company exerts
significant influence through board representation and management authority, or
in which majority control is deemed to be temporary, the equity method of
accounting is used. Under this method, the investment, originally recorded at
cost, is adjusted to recognize the Company's proportionate share of net earnings
or losses of the affiliates, limited to the extent of the Company's investment
in and advances to the affiliates, including any debt guarantees or other
contractual funding commitments.

The Company records an investment impairment charge when it believes an
investment has experienced a decline in value that is other than temporary.
Future adverse changes in market conditions or poor operating results of
underlying investments could result in an inability to recover the carrying
value of the investments that may not be reflected in an investment's current
carrying value, thereby possibly requiring an impairment charge in the future.

The Company has valued its investments as of June 30, 2002 at $5.4 million
in relation to its investment in TKP and Fox Kids Poland ("FKP"). The investment
in TKP has a carrying value of zero at June 30, 2002 as a result of TKP losses.
In addition, the Company will review the carrying value of its investment in FKP
in the second half of 2002 when audited financial statements of FKP are
received.

STOCK-BASED COMPENSATION

The Company has adopted the disclosure-only provision of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, the Company accounts for employee stock
options and other stock-based awards using the intrinsic value method as
outlined under APB Opinion No. 25, "Accounting for Stock Issued to Employees",
with pro forma disclosure of net loss and loss per share as if the fair value
method for expense recognition under SFAS 123 had been applied.

FOREIGN CURRENCIES

Foreign currency transactions are recorded at the exchange rate prevailing
at the date of the transactions. Assets and liabilities denominated in foreign
currencies are translated at the rates of exchange at balance sheet date. Gains
and losses on foreign currency transactions are included in the consolidated
statement of operations.

17

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

The financial statements of foreign subsidiaries are translated into U.S.
dollars using (i) exchange rates in effect at period end for assets and
liabilities, and (ii) average exchange rates during the period for results of
operations. Adjustments resulting from translation of financial statements are
reflected in accumulated other comprehensive income/(loss) as a separate
component of stockholder's equity. The Company considers all of its intercompany
loans to its Polish subsidiaries to be of a long-term investment nature. As a
result, any foreign exchange gains or losses resulting from the intercompany
loans are reported in accumulated other comprehensive loss as a separate
component of stockholder's equity.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value Of Financial Instruments" requires the Company to make disclosures of fair
value information of all financial instruments, whether or not recognized on the
consolidated balance sheets, for which it is practicable to estimate fair value.

The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses and notes payable. At
June 30, 2002 and December 31, 2001, the carrying value of cash and cash
equivalents, accounts receivable, and accounts payable and accrued expenses on
the accompanying consolidated balance sheets approximates fair value due to the
short maturity of these instruments.

At June 30, 2002 and December 31, 2001, the fair value of the Company's
notes payable balance approximated $91,247,000 and $96,072,000, respectively,
based on the last trading price of the notes as of these dates. It was not
practical to estimate the fair value of amounts due to affiliates and due from
affiliates because of the nature of these instruments, the circumstances
surrounding their issuance, and the absence of quoted market prices for similar
financial instruments.

At the date of the Acquisition, the Company's and PCI Notes were restated to
their fair market value at that date. The resulting $61.9 million increase was
recorded in the pushed-down purchase accounting entries.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company assesses the recoverability of a long-lived asset (mainly
property, plant and equipment, intangibles, and certain other assets) by
determining whether the carrying value of the asset can be recovered over the
remaining life of the asset through projected undiscounted future operating cash
flows expected to be generated by such asset. If impairment in value is
estimated to have occurred, the assets carrying value is reduced to its
estimated fair value. The assessment of the recoverability of long-lived assets
will be impacted if estimated future operating cash flows are not achieved.
Additionally if the Company's plans or assumptions change, if its assumptions
prove inaccurate, if it consummates investments in or acquisitions of other
companies, if it experiences unexpected costs or competitive pressures, or if
existing cash and projected cash flow from operations prove to be insufficient,
the Company may need to impair certain of its long-lived assets. The Company is
currently evaluating the potential impact of the adoption of Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144") will have on the Company's financial
position and results of operations. As discussed in Note 6, as of the date of
filing this Form 10-Q, the Company has not completed its evaluation of the
impact of

18

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

adopting SFAS 144. However, management is aware that the adoption could result
in material adjustments to its long-lived assets and its statement of operations
during 2002.

ADVERTISING COSTS

All advertising costs of the Company are expensed as incurred. The Company
incurred advertising costs of approximately $703,000 and $1,009,000 for the
three and the six months ended June 30, 2002 (including $61,000 and $143,000 in
respect of cable and internet operations, respectively) and $990,000 and
$3,271,0000 for the three and the six months ended June 30, 2001.

6. NEW ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"),
which the Company adopted effective July 1, 2001. SFAS 141 requires the purchase
method of accounting for all business combinations initiated after June 30,
2001. The Company has applied SFAS 141 to its only applicable transactions, the
purchase of the minority interest in TKP and PCBV on December 7, 2001 and
August 28, 2001, respectively.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
which the Company adopted 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. 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.

The Company is working with an external party to compare the fair value of
the Company's 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 Company has completed the first step of the goodwill impairment test
required by SFAS 142 and determined that an indication of potential goodwill
impairment exists. The Company is currently carrying out the second step of the
test to quantify the amount of the impairment. It is possible that the
substantial cumulative effect adjustment may be required as a result of this
process. As of June 30, 2002, net goodwill of approximately $359.8 million is
included in the accompanying consolidated balance sheets. The consolidated
statement of operations for the three and six months ended June 30, 2002 does
not include any goodwill amortization expense. For the three and six months
ended June 30, 2001, the consolidated statement of operations included such
amortization expense of approximately $16.2 million and $32.1 million,
respectively.

In August 2001, the Financial Accounting Standards Board issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). This
statement addresses the financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset and reported as a liability. This statement is effective for
fiscal years beginning after

19

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

June 15, 2002. The adoption of SFAS 143 is not anticipated to have a material
impact on Company's financial position or results of operations.

In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets
("SFAS 144"), which is effective for fiscal periods beginning after
December 15, 2001 and interim periods within those fiscal years. SFAS 144
establishes accounting and reporting standards for impairment or disposal of
long-lived assets and discontinued operations. The Company is currently
evaluating the potential impact the adoption of SFAS 144 will have on Company's
financial position and results of operation. The Company expects it will have
its SFAS 144 evaluation completed during the fourth quarter of 2002. At this
point, management is aware that the adoption of SFAS 144 could result in
material adjustments to its long-lived assets and its statement of operations
during 2002.

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 4, early application is encouraged. UPC has not
adopted SFAS 145 and is currently evaluating the impact of SFAS 145 on 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.

7. RELATED PARTY TRANSACTIONS

During the ordinary course of business, the Company enters into transactions
with related parties. The principal related party transactions are described
below.

20

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

CALL CENTER AND IT REVENUE

The Company provided certain call center services to TKP in connection with
Canal+ merger transaction until June 30, 2002. The total revenue from these
services amounted to $938,000 and $1,856,000 for the three and the six months
ended June 30, 2002, respectively.

Additionally, during the three month period ended June 30, 2002, the Company
has provided to TKP certain IT services for D-DTH subscriber data migration to
TKP's D-DTH platform. The total revenue from these services amounted to $221,000
for the three months ended June 30, 2002.

These revenues were generated only during the six months ended June 30, 2002
and the Company does not expect that any additional services will be provided to
TKP to generate such revenue for the reminder of 2002.

OTHER REVENUE

Commencing April 2002, the Company has provided certain IT services relating
to a subscribers management system to other Central European affiliates of UPC.
The total revenue from these services amounted to $281,000 for the three months
ended June 30, 2002. This revenue is earned on a "cost plus" basis and the
Company expects to continue providing these services.

DIRECT OPERATING EXPENSES CHARGED BY AFFILIATES

Certain of the Company's affiliates have provided programming to the
Company. The Company incurred programming fees from these affiliates of
$622,000, $1,471,000, $1,661,000 and $2,963,000 for the three and the six months
ended June 30, 2002 and 2001, respectively.

The Company was also provided with Canal+ Multiplex programming by TKP. The
total cost related to this service amounted to $139,000 and $168,000 for the
three and the six months ended June 30, 2002. There were no such costs in the
three and the six months ended June 30, 2001.

The Company has incurred direct costs related to Internet services from its
affiliates amounting to $374,000 and $700,000 for the three and the six months
ended June 30, 2002 as compared to $196,000 and $1,017,000 for the three and the
six months ended June 30, 2001, respectively.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

UPC provides the Company with services such as legal services, negotiation
of contracts with programmers, financial reporting assistance, investor
relations, corporate communications, information technology, equipment
procurement and facilities. UPC allocates to the Company the Company's
proportionate share of such costs for these services based on the Company's
revenues. Taking into account the relative size of its operating companies and
their estimated use of UPC resources, the allocation may be adjusted in the
future. During the three and the six months ended June 30, 2002 and 2001, UPC
charged the Company with $1,397,000, $2,742,000, $2,692,000 and $5,191,000,
respectively, for those services. The above charges are reflected as a component
of selling, general and administration expenses in the consolidated statements
of operations.

21

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

INTEREST EXPENSE

During the three and the six months ended June 30, 2002 and 2001, the
Company incurred interest expense in relation to the loans payable to UPC and
its affiliates of $11,760,000, $23,839,000, $11,285,000 and $21,817,000,
respectively.

NOTES PAYABLE TO UPC AND ITS AFFILATES

8. RECLASSIFICATIONS

Certain amounts have been reclassified in the corresponding period's
unaudited consolidated financial statements to conform to the unaudited
consolidated financial statement presentation for the three and the six months
ended June 30, 2002.

9. PER SHARE INFORMATION

Basic loss per share has not been computed since a single shareholder, UPC,
holds 100% of the outstanding shares.

10. COMMITMENTS AND CONTINGENCIES

BUILDING LEASES

The Company leases several offices and warehouses within Poland under
cancelable operating leases. The future minimum lease payments as of June 30,
2002 are $1,037,000 in 2002, $1,340,000 in 2003, $1,306,00 in 2004, $1,302,000
in 2005 and $521,000 in 2006.

CONDUIT LEASES

The Company also leases space within various telephone duct systems from
TPSA under cancelable operating leases. The TPSA leases expire at various times,
and a substantial portion of the Company's contracts with TPSA permit
termination by TPSA without penalty at any time either immediately upon the
occurrence of certain conditions or upon provision of three to six months notice
without cause.

In addition, some conduit agreements with TPSA provide that cables can be
installed in the conduit only for the use of cable television. If the Company
uses the cables for a purpose other than cable television, such as data
transmission, telephone, or internet access, such use could be considered

22

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

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. The Company is currently in the
process of providing internet services to its cable customers in certain of its
markets.

Minimum future lease commitments for the aforementioned conduit leases
relate to 2002 and 2003 only, as all leases are cancelable in accordance with
the aforementioned terms. The future minimum lease commitments related to these
conduit leases approximates $926,000 as of June 30, 2002.

PROGRAMMING COMMITMENTS

The Company has entered into long-term programming agreements and agreements
for the purchase of certain exhibition or broadcast rights with a number of
third party and affiliated content providers for its cable systems. The
agreements have terms, which range from one to twenty years and require that the
license fees be paid either at a fixed amount payable at the time of execution
or based upon a guaranteed minimum number of subscribers connected to the system
each month. At June 30, 2002, the Company had an aggregate minimum commitment in
relation to these agreements of approximately $132,527,000 over the next sixteen
years, approximating $11,927,000 remaining in 2002, $21,770,000 in 2003,
$19,026,000 in 2004, $16,336,000 in 2005, $6,985,000 in 2006 and $56,483,000 in
2007 and thereafter.

In connection with the Canal+ merger, TKP assumed the programming rights and
obligations directly related to the Company's D-DTH business and assumed the
Company's guarantees relating to the Company's D-DTH business. Pursuant to the
Definitive Agreements for the Canal+ merger, the Company remains contingently
liable for the performance under those assigned contracts. As of June 30, 2002,
management estimates its potential exposure under these assigned contracts to be
approximately $55.6 million.

REGULATORY APPROVALS

The Company is in the process of obtaining permits from the Chairman of the
Office for Telecommunication Regulation ("URT") for several of its cable
television systems. If these permits are not obtained, URT could impose
penalties, such as fines or, in severe cases, revocation of all permits held by
an operator or the forfeiture of the operator's cable networks. Management of
the Company does not believe that these pending approvals result in a
significant risk to the Company.

LITIGATION AND CLAIMS

From time to time, the Company is subject to various claims and suits
arising out of the ordinary course of business. While the ultimate result of all
such matters is not presently determinable, based upon current knowledge and
facts, management does not expect that their resolution will have a material
adverse effect on the Company's consolidated financial position or results of
operations.

HBO LAWSUIT

Two of the Company's subsidiaries, Telewizja Kablowa Gosat-Service Sp. z
o.o. and PTK S.A., and four unrelated Polish cable operators and HBO Polska Sp.
z o.o. ("HBO Polska") were made defendants in a lawsuit instituted by Polska
Korporacja Telewizyjna Sp. z o.o. ("PKT"), an indirect partially-owned
subsidiary of Canal+. The lawsuit was filed in the Provincial Court in Warsaw,
XX

23

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

Economic Division (Sad Wojewodzki w Warszawie, Wydzial XX Gospodarczy) (the
"Court"). The main defendant in the proceedings is HBO Polska which is accused
of broadcasting HBO television programming in Poland without a license from the
Polish National Radio and Television Council as required by the Polish
Television Act and thereby undertaking an activity constituting an act of unfair
competition. The plaintiff has asked the Court to order HBO Polska to cease
broadcasting of its programming in Poland until it has received a broadcasting
license from the Polish National Radio and Television Council, and that the
defendant cable operators be ordered (i) to cease carrying the HBO Polska
programming on their cable networks in Poland until HBO Polska has received a
broadcasting license from the Polish National Radio and Television Council,
(ii) not to use their current filters for the purpose of unscrambling the HBO
Polska programming, and (iii) in the future, to use effective encoding systems
and systems of controlled access to the HBO Polska programming. The Company
expects that the case will be formally dismissed shortly as a settlement was
reached by the parties on July 31, 2002. In connection with this settlement PKT
withdrew its claim on August 7, 2002. The Company will not incur any material
costs as a result of this settlement.

HBO ARBITRATION

The Company is involved in a dispute against HBO Communications (UK) Ltd.,
Polska Programming B.V. and HBO Poland Partners concerning its cable carriage
agreement ("Cable Agreement") and its D-DTH carriage agreement ("D-DTH
Agreement") for the HBO premium movie channel. With respect to the Cable
Agreement, on April 25, 2002, the Company commenced an arbitration proceeding
before the International Chamber of Commerce, claiming that HBO was in breach of
the "most favored nations" clause thereunder ("MFN") by providing to other cable
operators in the relevant Territory terms that are more favorable than those
offered to the Company. Specifically, the Company contends that its "Service
Fee" under the Cable Agreement should not include any minimum guarantees because
such minimum guarantees are not required of other cable operators in the
Territory.

In its answer in the arbitration, HBO asserted counterclaims against the
Company, alleging that the Company was liable for minimum guarantees under the
Cable Agreement, and also that the Company was liable for an increase in minimum
guarantees under the D-DTH Agreement, based on the fact that UPC Polska merged
its D-DTH business with Cyfra+ in December 2001. The Company responded to the
counterclaims by (i) denying that it owes any sums for minimum guarantees under
the Cable Agreement, in light of the MFN clause, and (ii) by denying that it
owes any sums for an increase in minimum guarantees under the D-DTH Agreement,
because it has not purchased an equity interest in HBO, a condition on which UPC
contends the increase in minimum guarantees is predicated under the D-DTH
Agreement. The Company intends to vigorously prosecute its claims and defend
against HBO's counterclaims. Given that the actual number of future cable and
D-DTH subscribers is unknown, the Company is unable to estimate the extent of
any financial impact, if any, on the Company should HBO prevail on its cable and
D-DTH counterclaims.

THE GROUPE JEAN-CLAUDE DARMON PROCEEDING AGAINST WIZJA TV SP. Z O.O.

On January 27, 2000, the Groupe Jean-Claude Darmon ("Darmon"), a French
company, commenced legal proceedings against Wizja TV Sp. z o.o., a former
subsidiary of the Company, and SPN Widzew SSA Sportowa Spolka Akcyjna ("Lodz
Football Club") in the Paris Commercial Court

24

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

("Tribundal de Commerce de Paris"). UFA Sport has also been joined into this
action as a further defendant.

Wizja TV Sp. z o.o. has been accused of infringing broadcast and advertising
rights which Darmon purports to hold. Darmon has accused Wizja TV Sp. z o.o. of
interrupting the broadcast signal of the UEFA Cup match on October 21, 1999
between Lodz Football Club and AS Monaco. Darmon seeks damages in the amount of
Euros 1,985,000 (approximately $1,961,500) from Wizja Sp. z o.o. The case has
been suspended indefinitely as UFA Sport, Sport+, the sport rights division of
Canal+ and Darmon merged to become a new sport rights agency. Whilst Wizja TV
Sp. z o.o. is no longer a subsidiary of the Company, the Company has provided a
full indemnity of any cost Wizja TV Sp. z o.o. may suffer as a consequence of
the action. The Company is unable to predict the outcome of this case.

11. LONG-TERM DEBT

12. SEGMENT INFORMATION

Prior to December 7, 2001, UPC Polska, Inc. and its subsidiaries classified
its business into four segments: (1) cable television, (2) D-DTH television,
(3) programming, and (4) corporate. Information about the operations of the
Company in these different business segments was set forth below based on the
nature of the services offered. As a result of the disposition of the D-DTH
business and the resulting elimination of the programming business in
December 2001, beginning January 1, 2002, the Company started to operate with
only one segment, its cable operations.

In addition to other operating statistics, the Company measures its
financial performance by EBITDA. The Company defines EBITDA to be net loss
adjusted for interest and investment income, depreciation and amortization,
interest expense, foreign exchange gains or losses, share in results of
affiliated companies, income tax expense, non operating income or expense and
impairment of D-DTH equipment. The items excluded from EBITDA are significant
components in understanding and assessing the Company's financial performance.
The Company and industry analysts believe that EBITDA and related measures of
cash flow from operating activities serve as important financial indicators in
measuring and comparing the operating performance of media companies.

EBITDA is not a U.S. GAAP measure of profit and loss or cash flow from
operations and should not be considered as an alternative to net income, cash
flows or any other measure of performance or liquidity under generally accepted
accounting principles, or as an indicator of a company's operating performance.
The presentation of EBITDA may not be comparable to statistics with s similar
name reported by other companies. Not all companies and analysts calculate
EBITDA in the same manner.

25

UPC POLSKA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (CONTINUED)

SELECTED SEGMENT DATA
(UNAUDITED IN THOUSANDS OF U.S. DOLLARS)

26

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

The following discussion and analysis provides information concerning the
results of operations and financial condition of UPC Polska, Inc. (the
"Company"). Such discussion and analysis should be read in conjunction with the
accompanying unaudited consolidated financial statements of the Company.
Additionally, the following discussion and analysis should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the audited consolidated financial statements included
in Part II of the Company's 2001 Annual Report filed on form 10-K. The following
discussion focuses on material trends, risks and uncertainties affecting the
results of operations and financial condition of the Company.

Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, that are not historical facts but rather reflect
the Company's current expectations concerning future results and events. The
words "believes", "expects", "intends", "plans", "anticipates", "likely",
"will", "may", "shall" and similar expressions identify such forward-looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company (or entities in which the Company has
interests), or industry results, to differ materially from future results,
performance or achievements expressed or implied by such forward-looking
statements.

Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's view only as of the date of this
Quarterly Report on Form 10-Q. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements, which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events, conditions or circumstances.

The risks, uncertainties and other factors that might cause such differences
include, but are not limited to:

- economic conditions in Poland generally, as well as in the pay television
business in Poland, including decreasing levels of disposable income per
household and increasing rates of unemployment;

- changes in laws and regulations affecting the Company, especially those
related to copyright and taxation;

- changes in the television viewing preferences and habits of the Company's
subscribers;

- programming alternatives offered by the Company's competitors, especially
the availability of free programming;

- the Company's inability to comply with government regulations;

- the continued strength of the Company's competitors;

- future financial performance of the Company and United Pan-Europe
Communications N.V. ("UPC"), including availability, terms and deployment
of capital;

- the overall market acceptance of Company's products and services,
including acceptance of the pricing of those products and services

- the Company's ability to obtain debt or equity financing or to restructure
its outstanding indebtedness; and

- the failure of Telewizyjna Korporacja Partycypacyjna S.A. ("TKP") to
satisfy contractual obligations owed to or on behalf of the Company
arising out of the Company's transaction with

27

Group Canal+ S.A. ("Canal+ merger"), any loss in value of the Company's
equity interest in TKP due to Polska Telewizja Cyfrowa Wizja TV Sp. z o.o.
("PTC"), a subsidiary of the Company, no longer being a Polish person, and
the Company's limited ability to liquidate its investment in TKP.

The report of the Company's former independent accountants, Arthur Andersen Sp.
z o.o., 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 and negative cash flows from operations and has a
negative working capital and a shareholder's deficit that raises substantial
doubt about its ability to continue as a going concern. The Company's
management's plans in regard to these matters are described in Note 3 to the
consolidated financial statements contained in this Quarterly Report on
Form 10-Q. The Company's consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result,
should the Company be unable to continue as a going concern. Investors in the
Company should review carefully the report of Arthur Andersen Sp. z o.o. There
can be no assurance the Company will be able to continue as a going concern.

OVERVIEW

During 2001, the Company undertook a review of its long-term business
strategy. This review resulted in the determination by the Company to focus on
its cable operations. This change in strategy led to the elimination of its
programming segment and the merger of its digital satellite direct-to-home, or
"D-DTH", business with TKP's D-DTH and premium pay television business, with the
Company retaining a 25% equity interest in TKP.

On December 7, 2001, the Company merged its existing D-DTH platform with the
D-DTH and premium television business of TKP, an entity controlled and operated
by Group Canal+ S.A. ("Canal+"). The Company has a 25% equity interest in TKP.
This transaction resulted in the discontinuance of the Company's D-DTH and
programming businesses. The total loss recognized on disposition of the
Company's D-DTH assets was $428.1 million.

On February 1, 2002, the Company contributed an additional 30.0 million
Euros (approximately $26.8 million as of December 7, 2001) to TKP in the form of
a loan, which was included in the fair value assessment of its investment.

The Company operates one of the largest cable television systems in Poland
with approximately 1,865,500 homes passed and approximately 998,000 total
subscribers as of June 30, 2002. The Company's overall revenue has decreased
$14.0 million or 40.3% from $34.7 million for the three months ended June 30,
2001 to $20.7 million for the three months ended June 30, 2002 and
$32.7 million or 44.6% from $73.3 million for the six months ended June 30, 2001
to $40.6 million for the six months ended June 30, 2002, primarily as a result
of the disposition of its D-DTH and programming businesses. During the same
periods, the revenues relating to the Company's cable operations have increased
$0.2 million or 1.0% from $20.2 million for the three months ended June 30, 2001
to $20.4 million for the three months ended June 30, 2002 and increased
$1.2 million or 3.1% from $38.9 million for the six months ended June 30, 2001
to $40.1 million for the six months ended June 30, 2002.

The Company's business strategy is designed to increase its average revenue
per subscriber, and also, although to a lesser extent, to increase its
subscriber base.

The Company intends to achieve these goals by:

- increasing penetration of new service products within existing upgraded
homes;

28

- providing additional revenue-generating services to existing customers,
including internet services;

- developing content tailored to the interests of existing subscribers; and

- improving the effectiveness of the Company's sales and marketing efforts.

The Company also intends to increase the effectiveness of its operations and
reduce its expenses by:

- enhancing internal controls;

- improving corporate decision-making processes;

- reorganizing the Company so as to simplify its legal structure; and

- using more local rather than expatriate employees in management, thereby
reducing general and administrative costs.

The Company's revenues are, and will continue to be, derived primarily from
monthly subscription fees for cable television services. The Company charges its
subscribers fixed monthly fees for their choice of service packages and for
other services, such as premium channels, tuner rentals and additional outlets,
all of which are included in monthly subscription fees. The Company currently
offers broadcast, intermediate (in limited areas) and basic packages of cable
service. At June 30, 2002, approximately 62.3% of the Company's subscribers
received its basic package. For the six months ended June 30, 2002,
approximately 91.7% of the Company's revenue was derived from monthly
subscription fees. For the six months ended June 30, 2001, 97.9% of the
Company's revenue in its cable segment was derived from monthly subscription
fees.

The Company also provides internet services to its customers. Although the
Company does not currently intend to apply additional capital to invest in
development of this service, it intends to expand its Internet service offering
at some point in the future. Revenue of $0.9 million and $1.8 million for the
three and the six months ended June 30, 2002 as compared to $0.3 million and
$0.5 million for the corresponding periods in 2001 was attributable to the
Company's internet services. Individual and home office internet subscribers are
charged a standard monthly subscription fee of $41.40 and $51.30, respectively,
for internet and cable TV services combined (rates as of June 30, 2002,
excluding 7% VAT tax). The standard installation fee is approximately $56.70 for
existing cable customers and approximately $69.10 for new customers (rates as of
June 30, 2002, excluding 7% VAT tax). However, the Company regularly offers a
promotional installation fee at the nominal price of approximately $0.25.

In addition, the Company has provided (as part of Canal+ merger transaction)
certain call center services, such as billing and subscriber support and IT
service to TKP until June 30, 2002. Revenue of $1.2 million and $2.1 million was
attributable to these services for the three and the six months ended June 30,
2002, respectively, and there will be no more such revenue for the remainder of
2002.

In 2002, the Company's principal objective under its revised business
strategy is for its cable business to become cash flow positive. The Company is
also focusing on enhancing its position as a leading provider of cable
television by capitalizing on favorable opportunities that it believes exists in
Poland. The Company's business strategy is designed to increase its average
revenue per subscriber, and also, although to a lesser extent, to increase its
subscriber base. The Company also intends to increase the effectiveness of its
operations and reduce its expenses.

The Company has implemented a pricing strategy designed to increase revenue
per subscriber and thus its profit margin. For an additional monthly charge,
certain of the Company's cable networks in 2001 offered two premium television
services - the HBO Poland Service and Wizja Sport (since March, 2001 Wizja Sport
has been included in the basic service package and in December 2001 ceased

29

operation). In connection with the Canal+ merger, in February 2002, Canal+
Multiplex began to be distributed across the Company's network. The Company, its
parent and TKP are currently negotiating the definitive long-form channel
carriage agreement for distribution of Canal+ Multiplex. The Company offers HBO
Poland and Canal+ Multiplex for approximately $7.10 and $7.90 per month,
respectively (rates as of June 30, 2002, excluding 22% VAT tax). The Company
also offers these channels as a package at approximately $12.00 per month (rates
as of June 30, 2002, excluding 22% VAT).

The Company divides operating expenses into:

- direct operating expenses,

- selling, general and administrative expenses, and

- depreciation and amortization expenses.

During the six months ended June 30, 2002, direct operating expenses
consisted of programming expenses, maintenance and related expenses necessary to
service, maintain and operate the Company's cable systems, billing and
collection expenses and customer service expenses. Selling, general and
administrative expenses consisted principally of administrative costs, including
office related expenses, professional fees and salaries, wages and benefits of
non-technical employees, advertising and marketing expenses, bank fees and bad
debt expense. Depreciation and amortization expenses consisted of depreciation
of property, plant and equipment and amortization of intangible assets.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the Company's financial condition and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets and liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities at the date of our financial statements.
Actual results may differ from these estimates under different assumptions or
conditions.

Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, which would potentially result in
materially different results under different assumptions and conditions. The
Company believes that its critical accounting policies are limited to those
described below. For a detailed discussion on the application of these and other
accounting policies, see Note 5 "Summary of Significant Accounting Policies" in
the notes to the unaudited consolidated financial statements contained in this
Quarterly Report as Form 10-Q and the Management's Discussion and Analysis of
Financial Condition and Results of Operations Section of the Company's 2001
Annual Report.

GOODWILL AND OTHER INTANGIBLES

Prior to the acquisition of the Company's outstanding shares by United
Pan-Europe Communications N.V. ("UPC") ("Acquisition"), goodwill, which
represents the excess of purchase price over fair value of net assets acquired,
was amortized on a straight-line basis over the expected periods to be
benefited, generally ten years, with the exception of amounts paid relating to
non-compete agreements. The portion of the purchase price relating to
non-compete agreements was amortized over the term of the underlying agreements,
generally five years.

Effective as of the date of the Acquisition, August 6, 1999, the Company
revalued all its previously existing goodwill, including amounts related to
non-compete agreements that related to transactions

30

completed prior to the Acquisition. The goodwill that was pushed down to the
Company was amortized using straight-line basis over the expected periods to be
benefited, which is fifteen years.

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), which the Company adopted 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. 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.

The Company is working with an external party to compare the fair value of
the Company's 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 Company has completed the first step of the goodwill impairment test
required by SFAS 142 and determined that an indication of potential goodwill
impairment exists. The Company is currently carrying out the second step of the
test to quantify the amount of the impairment. It is possible that a substantial
cumulative effect adjustment may be required as a result of this process. As of
June 30, 2002, net goodwill of approximately $359.8 million is included in the
accompanying consolidated balance sheets. The consolidated statement of
operations for the three and six months ended June 30, 2002 does not include any
goodwill amortization expense. For the three and six months ended June 30, 2001,
the consolidated statement of operations included such amortization expense of
approximately $16.2 million and $32.1 million, respectively.

Through its subsidiaries, the Company has entered into lease agreements with
the Polish national telephone company ("TPSA"), for the use of underground
telephone conduits for cable wiring. Costs related to obtaining conduit and
franchise agreements with housing cooperatives and governmental authorities are
capitalized and generally amortized over a period of ten years. In the event the
Company does not proceed to develop cable systems within designated cities,
costs previously capitalized will be charged to expense.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" ("SFAS 141"), which was adopted effective July 1, 2001.
SFAS 141 requires the purchase method of accounting for all business
combinations initiated after June 30, 2001. The Company has applied SFAS 141 to
its only applicable transactions, the purchases of minority interests in TKP and
PCBV on December 7, 2001 and August 28, 2001, respectively.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company assesses the recoverability of a long-lived asset (mainly
property, plant and equipment, intangibles, and certain other assets) by
determining whether the carrying value of the asset can be recovered over the
remaining life of the asset through projected undiscounted future operating cash
flows expected to be generated by such asset. If impairment in value is
estimated to have occurred, the assets carrying value is reduced to its
estimated fair value. The assessment of the recoverability of long-lived assets
will be impacted if estimated future operating cash flows are not achieved.
Additionally if the Company's plans or assumptions change, if its assumptions
prove inaccurate, if it consummates investments in or acquisitions of other
companies, if it experiences unexpected costs or competitive pressures, or if
existing cash and projected cash flow from operations prove to be insufficient,
the Company may need to impair certain of its long-lived assets. The Company is
currently evaluating the potential impact the adoption of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144")

31

will have on the Company's financial position and results of operations. As
discussed in Note 6, as of the date of filing this Form 10-Q, the Company has
not completed its evaluation of the impact of adopting SFAS 144. However,
management is aware that the adoption could result in material adjustments to
its long-lived assets and its statement of operations during 2002.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The allowance for doubtful accounts is based upon the Company's assessment
of probable loss related to overdue accounts receivable. Upon disconnection of
the subscriber, all unpaid accounts receivable from the subscriber are fully
reserved. The allowance is maintained until receipt of payment or until the
account is deemed uncollectable for a maximum of three years.

REVENUE RECOGNITION

Revenue related to the provision of cable television and internet services
to customers are recognized in the period in which the related services are
provided in accordance with SFAS No. 51, "Financial Reporting by Cable
Television Companies" ("SFAS 51"). D-DTH revenues were recognized in accordance
with SAB 101 "Revenue Recognition in Financial Statements".

Initial installation fees related to cable television and internet services
are recognized as revenue in the period in which the installation occurs, to the
extent installation fees are equal to or less than direct selling costs, which
are expensed. To the extent installation fees exceed direct selling costs, the
excess fees are deferred and amortized over the average contract period.
However, due to regular promotional prices set up for installation fees, the
Company's direct selling costs exceed the associated gross installation revenue
and accordingly the Company did not report any deferred revenue on installations
as of June 30, 2002 and December 31, 2001.

FOREIGN CURRENCIES

Foreign currency transactions are recorded at the exchange rate prevailing
at the date of the transactions. Assets and liabilities denominated in foreign
currencies are translated at the rates of exchange at balance sheet date. Gains
and losses on foreign currency transactions are included in the consolidated
statement of operations.

The financial statements of foreign subsidiaries are translated into U.S.
dollars using (i) exchange rates in effect at period end for assets and
liabilities, and (ii) average exchange rates during the period for results of
operations. Adjustments resulting from translation of financial statements are
reflected in accumulated other comprehensive income/(loss) as a separate
component of stockholder's equity. The Company considers all of its intercompany
loans to its Polish subsidiaries to be of a long-term investment nature. As a
result, any foreign exchange gains or losses resulting from the intercompany
loans are reported in accumulated other comprehensive loss as a separate
component of stockholder's equity.

INVESTMENTS IN AFFILIATED COMPANIES, ACCOUNTED FOR UNDER THE
EQUITY METHOD

For those investments in companies in which the Company's ownership interest
is 20% to 50%, its investments are held through a combination of voting common
stock, preferred stock, debentures or convertible debt and/or the Company exerts
significant influence through board representation and management authority, or
in which majority control is deemed to be temporary, the equity method of
accounting is used. Under this method, the investment, originally recorded at
cost, is adjusted to recognize the Company's proportionate share of net earnings
or losses of the affiliates, limited to the extent of the Company's investment
in and advances to the affiliates, including any debt guarantees or other
contractual funding commitments.

32

The Company records an investment impairment charge when it believes an
investment has experienced a decline in value that is other than temporary.
Future adverse changes in market conditions or poor operating results of
underlying investments could result in an inability to recover the carrying
value of the investments that may not be reflected in an investment's current
carrying value, thereby possibly requiring an impairment charge in the future.

The Company has valued its investments as of June 30, 2002 at $5.4 million
in relation to its investment in TKP and Fox Kids Poland ("FKP"). The investment
in TKP has been written down to zero as a result of TKP's losses, as of
June 30, 2002. In addition, the Company will review the carrying value of its
investment in FKP in the second half of 2002 when audited financial statements
of FKP are received.

SEGMENT RESULTS OF OPERATIONS

Prior to December 7, 2001, the Company and its subsidiaries classified its
business into four segments: (1) cable television, (2) D-DTH television,
(3) programming, and (4) corporate. Information about the operations of the
Company in these different business segments was set forth below based on the
nature of the services offered. As a result of the disposition of the D-DTH
business and the resulting elimination of the programming business in
December 2001, beginning January 1, 2002, the Company started to operate with
only one segment, its cable television business.

In addition to other operating statistics, the Company measures its
financial performance by EBITDA. The Company defines EBITDA to be net loss
adjusted for interest and investment income, depreciation and amortization,
interest expense, foreign exchange gains or losses, share in results of
affiliated companies, income tax expense, non operating income or expense and
impairment of D-DTH equipment. The items excluded from EBITDA are significant
components in understanding and assessing the Company's financial performance.
The Company and industry analysts believe that EBITDA and related measures of
cash flow from operating activities serve as important financial indicators in
measuring and comparing the operating performance of media companies.

EBITDA is not a U.S. GAAP measure of profit and loss or cash flow from
operations and should not be considered as an alternative to net income, cash
flows or any other measure of performance or liquidity under generally accepted
accounting principles, or as an indicator of a company's operating performance.
The presentation of EBITDA may not be comparable to statistics with s similar
name reported by other companies. Not all companies and analysts calculate
EBITDA in the same manner.

33

SEGMENT RESULTS OF OPERATIONS
(UNAUDITED IN THOUSANDS OF U.S. DOLLARS)

- ------------------------

(1) Comprised of Wizja programming costs charged to the cable segment and D-DTH
segment by the programming segment in the three months ended June 30, 2001.

REVENUE. Revenue decreased $14.0 million, or 40.3%, from $34.7 million in
the three months ended June 30, 2001 to $20.7 million in the three months ended
June 30, 2002 and decreased $32.7 million, or 44.6%, from $73.3 million in the
six months ended June 30, 2001 to $40.6 million in the six months ended
June 30, 2002, primarily as a result of the elimination of the Company's D-DTH
and programming businesses. During the same periods, the revenues from the
Company's cable operations increased by $0.2 million, or 1.0%, from
$20.2 million to $20.4 million in the three months ended June 30, 2001 and 2002,
respectively and increased by $1.2 million, or 3.1%, from $38.9 million to
$40.1 million in the six months ended June 30, 2001 and 2002, respectively. This
increase was primarily attributable to an increase in revenue from internet
subscriptions from $0.3 million for the three months ended June 30, 2001 to
$0.9 million for the three months ended June 30, 2002 and from $0.5 million for
the six months ended June 30, 2001 to $1.8 million for the six months ended
June 30, 2002. This increase was partially offset by the depreciation of the
Polish zloty against the US dollar and a decrease in the number of basic
subscribers. In addition, during the three and the six months ended June 30,
2002, the Company obtained revenue of $1.2 million and $2.1 million,
respectively, from certain call center services such as billing and subscriber
support and IT services, provided to TKP. These revenues were generated only
during the six months ended June 30, 2002. The Company does not expect that any
additional services will be provided to TKP to generate such revenue for the
remainder of 2002.

Revenue from monthly subscription fees represented 91.7% and 97.9% of cable
television revenue for the six months ended June 30, 2002 and 2001,
respectively. During the three and the six months

34

ended June 30, 2002, the Company generated approximately $1.0 million and
$1.9 million, respectively, of premium subscription revenue as a result of
providing the HBO Poland service pay movie channel and the Canal+ Multiplex
channel to cable subscribers as compared to $1.1 million and $2.3 million for
the three and the six months ended June 30, 2001, respectively, when HBO Poland
and Wizja Sport were provided as premium channels. Commencing April 1, 2001,
Wizja Sport was moved to the basic package and therefore did not generate
premium revenue.

Revenue from installation fees amounted to $61,000, $161,000, $245,000 and
$430,000 for the three and six months ended June 30, 2002 and 2001,
respectively.

DIRECT OPERATING EXPENSES. Direct operating expenses decreased
$17.8 million, or 63.1%, from $28.2 million for the three months ended June 30,
2001 to $10.4 million for the three months ended June 30, 2002 and decreased
$40.2 million, or 66.0%, from $60.9 million for the six months ended June 30,
2001 to $20.7 million for the six months ended June 30, 2002, primarily as a
result of the elimination of the Company's D-DTH and programming businesses.
During the same periods, the direct operating expenses for the Company's cable
operations decreased $2.3 million, or 18.1%, from $12.7 million for the three
months ended June 30, 2001 to $10.4 million for the three months ended June 30,
2002 and decreased $4.4 million, or 17.5%, from $25.1 million for the six months
ended June 30, 2001 to $20.7 million for the six months ended June 30, 2002,
principally as a result of the decrease in programming expenses resulting from
the discontinuation of the Wizja Jeden and Wizja Sport channels, a decrease in
programming charges (as a result of renegotiation of certain programming
agreements) and a decrease in the number of subscribers.

Direct operating expenses decreased from 81.3% of revenues for the three
months ended June 30, 2001 to 50.2% of revenues for the three months ended
June 30, 2002 and decreased from 83.1% of revenues for the six months ended
June 30, 2001 to 51.0% of revenues for the six months ended June 30, 2002, while
direct operating expenses relating to cable operations decreased from 62.9% of
cable operations revenues for the three months ended June 30, 2001 to 51.0% of
cable operations revenues for the three months ended June 30, 2002 and decreased
from 64.5% of cable operations revenues for the six months ended June 30, 2001
to 51.6% of cable operations revenues for the six months ended June 30, 2002.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $7.6 million, or 50.3%, from $15.1 million for
the three months ended June 30, 2001 to $7.5 million for the three months ended
June 30, 2002 and decreased $17.5 million, or 54.9%, from $31.9 million for the
six months ended June 30, 2001 to $14.4 million for the six months ended
June 30, 2002, primarily as a result of the elimination of the Company's D-DTH
and programming businesses. During the same periods, selling, general and
administrative expenses relating to cable operations increased $0.2 million, or
3.9%, from $5.1 million for the three months ended June 30, 2001 to
$5.3 million for the three months ended June 30, 2002 and decreased
$1.7 million, or 14.5%, from $11.7 million for the six months ended June 30,
2001 to $10.0 million for the six months ended June 30, 2002. This decrease was
attributable mainly to a decrease in bad debt expense (of approximately
$1.5 million) and improved operating efficiency.

As a percentage of revenue, overall, selling, general and administrative
expenses decreased from 43.5% for the three months ended June 30, 2001 to
approximately 36.2% for the three months ended June 30, 2002 and decreased from
43.5% for the six months ended June 30, 2001 to approximately 35.5% for the six
months ended June 30, 2002. As a percentage of cable operations revenue,
selling, general and administrative expenses relating to cable operations
increased from 25.2% for the three months ended June 30, 2001 to approximately
26.0% for the three months ended June 30, 2002 and decreased from 30.1% for the
six months ended June 30, 2001 to approximately 24.9% for the six months ended
June 30, 2002.

35

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased $26.1 million, or 77.9%, from $33.5 million for the three months ended
June 30, 2001 to $7.4 million for the three months ended June 30, 2002 and
decreased $50.6 million, or 77.6%, from $65.2 million for the six months ended
June 30, 2001 to $14.6 million for the six months ended June 30, 2002,
principally as a result of the elimination of the Company's D-DTH and
programming businesses, as well as the non-amortization of goodwill, resulting
from the application of SFAS 142. Depreciation and amortization expense as a
percentage of revenues decreased from 96.5% for the three months ended June 30,
2001 to 35.7% for the three months ended June 30, 2002 and decreased from 88.9%
for the six months ended June 30, 2001 to 36.0% for the six months ended
June 30, 2002.

Depreciation and amortization expense relating to cable operations decreased
$7.0 million, or 49.0%, from $14.3 million for the three months ended June 30,
2001 to $7.3 million for the three months ended June 30, 2002 and decreased
$13.0 million, or 47.4%, from $27.4 million for the six months ended June 30,
2001 to $14.4 million for the six months ended June 30, 2002, as a result of the
non-amortization of goodwill, resulting from the application of SFAS 142.
Depreciation and amortization expense relating to cable operations as a
percentage of cable operations revenues decreased from 70.8% for the three
months ended June 30, 2001 to 35.8% for the three months ended June 30, 2002 and
decreased from 70.4% for the six months ended June 30, 2001 to 35.9% for the six
months ended June 30, 2002.

OPERATING LOSS. Each of the factors discussed above contributed to
operating losses of $4.7 million and $9.1 million for the three and the six
months ended June 30, 2002, respectively, compared to operating losses of
$42.1 million and $93.9 million for the three and the six months ended June 30,
2001, respectively.

Operating losses relating to cable operations amounted to $2.7 million,
$5.1 million, $11.9 million and $25.2 million for the three and the six months
ended June 30, 2002 and 2001, respectively.

The composition of customers receiving basic, intermediate and premium or
internet services influences the Company's operating margin in the following
ways:

- The average price charged to customers receiving each of the services is
different, influencing the Company's total revenue.

- Programming expenses are incurred only in relation to the provision of
basic and premium service. Due to certain channels being charged to the
Company on a fixed fee basis (minimum guarantee), the Company's operating
margin is adversely affected when the actual number of subscribers is
lower than the guaranteed level of subscribers under the Company's
programming agreements.

- Intermediate service does not require programming charges (only channels
"free to air" are provided under this service). Fees for intermediate
service are significantly lower than basic service (on average fees
generated from our intermediate service are approximately 10% of those
generated from basic service).

- Premium service is available only to those subscribers who already receive
basic service. Therefore, as an additional product to an existing
customer, the Company's premium service generates additional revenues and
margins. However, one of the Company's premium channel agreements has a
minimum guaranteed provision. As such, a decrease in the number of premium
subscribers below the guaranteed level has a direct adverse impact on the
Company's total operating margin. This occurred in 2001 with respect to
the Company's premium service. Also, in March 2001, Wizja Sport channel,
which was previously provided as a premium channel, was moved to the basic
package, resulting in higher programming costs to the Company since the
channel was made available to a larger group of subscribers.

36

- Internet service is also currently available only to these subscribers who
already receive basic service. The internet service is subject to direct
expenses of approximately 40% of revenue from the provision of internet
access services and therefore contributes positively to the operating
margins of the Company.

INTEREST EXPENSE. Interest expense increased $3.1 million, or 13.1%, from
$23.7 million for the three months ended June 30, 2001 to $26.8 million for the
three months ended June 30, 2002 and increased $6.7 million, or 14.5%, from
$46.2 million for the six months ended June 30, 2001 to $52.9 million for the
six months ended June 30, 2002. Interest expense increased mainly as a result of
the additional financing from UPC during the second, third and fourth quarters
of 2001 and as a result of the capitalization of interest of $44.3 million for
fiscal year 2001.

INTEREST AND INVESTMENT INCOME. Interest and investment income amounted to
$1.3 million, $2.2 million, $0.3 million and $0.6 million for the three and the
six months ended June 30, 2002 and 2001, respectively. The increase relates to
interest on bank deposits.

EQUITY IN LOSSES OF AFFILIATED COMPANIES. The Company recorded
$10.8 million and $18.4 million of equity in losses of affiliated companies for
the three and the six months ended June 30, 2002, respectively, relating to the
Company's loss in its investment in TKP. The investment in TKP has been written
down to zero as a result of TKP's losses, as of June 30, 2002. In addition, the
Company will review the carrying value of its investment in FKP in second half
of 2002 when audited financial statements of FKP are received.

FOREIGN EXCHANGE GAIN/LOSS, NET. For the three months ended June 30, 2002,
foreign exchange gain amounted to $13.2 million, as compared to the gain of
$4.8 million for the three months ended June 30, 2001. For the six months ended
June 30, 2002, foreign exchange gain amounted to $7.1 million, as compared to
the gain of $5.6 million for the six months ended June 30, 2001. These gains
were attributable to the significant depreciation of the U.S. dollar against the
Euro during second quarter of 2002 (the majority of the Company's cash deposits
were held in Euros as at June 30, 2002). These foreign exchange gains were
partially compensated with depreciation of Polish zloty against the U.S. dollar
during the six months ended June 30, 2002 as compared to gains in the three and
the six months ended June 30, 2001 resulting from the Polish zloty appreciation
against the U.S. dollar during the corresponding periods ended June 30, 2001.

INCOME TAX EXPENSE. The Company recorded $23,000 and $89,000 of income tax
expense for the three and the six months ended June 30, 2002, as compared to
$47,000 and $83,000 for the three and the six months ended June 30, 2001.

NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders decreased from a loss of $59.9 million for the three months ended
June 30, 2001 to a loss of $28.1 million for the three months ended June 30,
2002 and decreased from a loss of $133.6 million for the six months ended
June 30, 2001 to a loss of $71.5 million for the six months ended June 30, 2002,
due to the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

The Company has met its cash requirements in recent years primarily with
(i) capital contributions and loans from certain of the Company's principal
stockholders, (ii) borrowings under available credit facilities, (iii) cash
flows from operations, (iv) the sale of approximately $200 million of common
stock through the Company's initial public equity offering in August 1997,
(v) the sale of $252 million aggregate principal amount at the maturity of the
14 1/2% Senior Discount Notes in July 1998 with gross proceeds of approximately
$125 million, (vi) the sale of $36,001,321 principal amount at maturity of its
Series C Discount Notes in January 1999 with gross proceeds of $9.8 million,
(vii) the sale of

37

$256.8 million aggregate principal amount at maturity of its 14 1/2% Senior
Discount Notes in January 1999 with gross proceeds of $96.1 million, and
(viii) the sale of the Series A 12% Cumulative Preference Shares, the Series B
12% Cumulative Preference Shares and Warrants in January 1999 with gross
proceeds of $48.2 million.

Since the acquisition of all of the outstanding stock of the Company by UPC
on August 6, 1999, the Company has met its capital requirements primarily
through capital contributions and loans from UPC.

Pursuant to the indentures governing the Company's 14 1/2% Senior Discount
Notes due 2008, Series C Discount Notes due 2008 and 14 1/2% Senior Discount
Notes due 2009 (together, the "UPC Polska Notes") and the indentures governing
the PCI 9 7/8% Senior Notes due 2003 of UPC Polska's subsidiary Poland
Communications, Inc. ("PCI Notes"), the Company and it's affiliate are subject
to certain restrictions and covenants,including, without limitation, covenants
with respect to the following matters:

a. limitation on indebtedness;

b. limitation on restricted payments;

c. limitation on issuances and sales of capital stock of restricted
subsidiaries;

d. limitation on transactions with affiliates;

e. limitation on liens;

f. limitation on guarantees of indebtedness by subsidiaries;

g. purchase of the notes upon a change of control;

h. limitation on sale of assets;

i. limitation on dividends and other payment restrictions affecting
restricted subsidiaries;

j. limitation on investments in unrestricted subsidiaries;

k. consolidations, mergers, and sale of assets;

l. limitation on lines of business; and

m. provision of financial statements and reports.

The Company is in compliance with these covenants. However, as discussed
further in Note 3 to the Company's unaudited consolidated financial statements,
an acceleration of the Company's repayment obligations of other debt of the
Company in excess of $15.0 million would trigger an Event of Default (as defined
in the indentures) under its indentures. The Company has evaluated compliance
with its indentures governing the UPC Polska Notes and the PCI Notes as of
June 30, 2002 and as of the date of filing this Quarterly Report on Form 10-Q
and has determined, based on its assessment, that an Event of Default has not
occurred under these indentures. Accordingly, the Company continues to reflect
these notes as a long-term liability.

The indentures covering the UPC Polska Notes and the PCI Notes provide that,
following a Change of Control (as defined therein), each note holder has the
right, at such holder's option, to require the respective issuer to offer to
repurchase all or a portion of such holder's notes at the repurchase prices
described below. The Company believes that the August 6, 1999 acquisition by UPC
of the Company constituted a Change of Control. Accordingly, the Company and PCI
made offers to repurchase (the "Offers") from the holders the UPC Polska Notes,
Series C Notes, Discount Notes and the PCI Notes. The Offers expired at 12:01
PM, New York City time on November 2, 1999.

38

In accordance with the terms of the indentures governing the UPC Polska and
the PCI Notes, UPC Polska was required to offer to repurchase the UPC Polska
Notes at 101% of their accreted value at maturity on the Expiration Date plus
accrued and unpaid interest and PCI was required to offer to repurchase the PCI
Notes at the purchase price of 101% of the principal amount owed on the
Expiration Date. As of August 5, 1999, UPC Polska had $376,943,000 aggregate
principal amount at maturity of the UPC Polska Notes outstanding and PCI had
$129,668,000 aggregate principal amount at maturity of the PCI Notes
outstanding. Pursuant to the Offer, UPC Polska purchased $49,139,000 aggregate
principal amount at maturity of the UPC Polska Notes for an aggregate price of
$26,455,014 and PCI purchased $113,237,000 aggregate principal amount of the PCI
Notes for an aggregate price of $114,369,370. UPC financed the Company's
repurchase of the UPC Polska Notes and PCI Notes and the Company's operating
activities by making loans of $217.3 million to the Company in the fourth
quarter of 1999.

The Company purchased 14,000 shares of Mandatorily Redeemable Debenture
Stock ("Debenture Stock") issued by PCI for $140 million to fund PCI's purchase
of PCI Notes and operations. The Company used a portion of the proceeds of the
loans from UPC to purchase the Debenture Stock. The Debenture Stock is
redeemable on December 31, 2003 at the issue price plus interest of 10% per
annum compounded annually. To secure its obligations under the Debenture Stock,
PCI has pledged to the Company notes issued to it by its subsidiary Poland
Cablevision (Netherlands) B.V. ("PCBV") with an aggregate principal amount of
$176,815,000. The PCI note holders will be equally and ratably secured by the
pledge in accordance with the terms of the PCI indenture.

In 2001, UPC directly or through its affiliates made capital contributions
of $48.5 million and additional loans of $40.5 million to the Company. This
compares to additional loans and capital contributions of $115.1 million and
$50.6 million, respectively, made by UPC in 2000. UPC made no additional loans
and/or capital contributions to the Company during the first quarter of 2002.
During the second quarter of 2002 UPC made additional capital contributions of
$2.7 million to the Company and additionally there was a contribution of
$18.8 million of unsubordinated loans payable to UPC into paid-in capital. On
June 30, 2002 and December 31, 2001, the Company had, on a consolidated basis,
approximately $857.8 million and $865.6 million respectively, aggregate
principal amount of indebtedness outstanding, of which $417.0 million (including
$44.3 million of capitalized interest for 2001) and $444.5 million,
respectively, was owed to UPC and its affiliates. All of the loans from UPC and
its affiliates to UPC Polska bear interest at 11.0% per annum, and mature in
2007 and 2009. Loans from UPC with an aggregate principal amount of
$150.0 million have been subordinated to the UPC Polska Notes. The loans from
UPC have been used primarily for the repurchase of the UPC Polska Notes and the
PCI Notes, to fund capital expenditures, operating losses and working capital
primarily related to the development and operation of the Company's D-DTH
business, and for general corporate purposes and certain other investments,
including the acquisition of cable television networks and certain minority
interests in our subsidiaries which were held by unaffiliated third parties.

The Company had negative cash flows from operating activities of
$0.7 million for the six months ended June 30, 2002 and $44.8 million for the
six months ended June 30, 2001, primarily due to repayments to its creditors. As
of June 30, 2002, the Company had negative working capital of $368.0 million and
a stockholder's deficit of $299.9 million. The Company experienced operating
losses of $9.1 million and $93.9 million during the six months ended June 30,
2002 and 2001, respectively.

Cash used for the purchase and build-out of the Company's cable television
networks, purchase of D-DTH equipment including set top decoders, and the
purchase of other property, plant, and equipment was $2.4 million for the six
months ended June 30, 2002 and $22.9 million for the six months ended June 30,
2001. Cash used for the purchase and expansion of the Company's cable television
networks was $2.4 million and $9.0 million for the six months ended June 30,
2002 and 2001, respectively.

39

The Company has approximately $110.1 million of cash as of June 30, 2002, of
which $82.9 million represents remaining net cash proceeds from the Canal+
merger and the sale of its 50% investment in Twoj Styl, a publishing company.
The Company used a portion of its net cash proceeds from the Canal+ merger and
the Twoj Styl asset sale to pay off in April 2002 an unsubordinated promissory
note in principal amount of $7.0 million owed to Reece Communications, Inc.
("RCI"), a former minority stockholder of PCBV. The net cash proceeds, as
defined, are net of the estimated costs provided by the Company against
liabilities associated with the Canal+ merger and the Twoj Styl asset sale.
These costs include provisions for estimated termination costs of programming
agreements of $12.8 million and estimated professional and other fees of
$10.9 million in respect of the Canal+ merger transaction and net of
$0.3 million of transaction costs relating to the Twoj Styl asset sale.
Additionally, the Company's agreements related to the notes payable to UPC and
its affiliates contain limitations on the use of cash proceeds from the sale of
assets. The Company has received a waiver from UPC and its affiliate to
specifically exempt these net cash proceeds from these transactions from the
limitations contained in the loan agreements with UPC and its affiliates.

Pursuant to the indentures governing each of the UPC Polska Notes discussed
in more detail in Note 2 to the Company's unaudited consolidated financial
statements contained in this Quarterly Report on Form 10-Q, the Company is
required to use the net cash proceeds from the sale of assets within 12 months
from the transaction date for certain limited purposes. These include:

- to permanently repay or prepay senior bank indebtedness or any
unsubordinated indebtedness of the Company;

- to invest in any one or more businesses engaged, used or useful in the
Company's cable, D-DTH or programming businesses; or

- to invest in properties or assets that replace the properties and assets
sold.

The Company is currently evaluating the potential uses for the remaining
amount of $82.9 million (after repayment of the above mentioned loan to former
minority stockholder of PCBV) of these net cash proceeds from the Canal+ merger
and the Twoj Styl asset sale.

On June 30, 2002, the Company was committed to pay at least $139.3 million
in guaranteed payments (including but not limited to payments for programming
and rights) over the next sixteen years of which at least approximately
$14.0 million was committed through the end of 2002. In connection with the
disposition of the D-DTH business, TKP assumed the Company's previous
obligations under certain contracts. Pursuant to the definitive agreements
governing the Canal+ merger and the contracts, which TKP assumed, the Company
remains contingently liable for performance under those contracts. As of
June 30, 2002, management estimates the potential exposure for contingent
liability on these assumed contracts to be approximately $55.6 million.

40

The following table presents the Company's minimum future commitments under
its programming and lease contracts.

As of June 30, 2002, the Company had negative working capital, due to the
classification of loans to UPC and its affiliates as current liabilities. In
addition to its contractual commitments described in the table above, the
Company has interest payment and principal repayment obligations related to the
PCI Notes and the UPC Polska Notes. As of June 30, 2002, the Company had
approximately $10.0 million in outstanding notes payable to RCI, a former
minority stockholder of PCBV. The note, which bears an interest of 7% per annum
and matures in August 2003, has a scheduled payment of principal amount of $4.0
million due in August 2002. UPC is the guarantor of the note. Since an event of
default has occurred under UPC's indentures, which was not cured or waived
within the applicable grace period, a cross-default has occurred under the RCI
note. As a result, RCI has the right to receive the interest at the default rate
of 12% per annum and to accelerate the repayment of the note. Accordingly, the
entire outstanding balance of the note is recognized as a short-term liability.

On November 1, 2003, the Company will also be required to fulfill its
repayment obligation of approximately $14.5 million in principal amount under
the PCI Notes, and the Company will be required to commence cash interest
payments under the UPC Polska Notes aggregating approximately $50.8 million per
annum in 2004 and approximately $69.2 million per annum in 2005 and thereafter.
The Company also has an aggregate of approximately $23.8 million in interest
payments due to UPC and its affiliate in 2002 on its currently outstanding
indebtedness. In prior years and as of the date of filing this Quarterly Report
on Form 10-Q, UPC and its affiliate have permitted the Company to defer payment
of interest due to UPC and its affiliate until September 30, 2002. The Company,
however, has no assurances that UPC and its affiliate will permit such deferral
going forward.

The Company, since its August 6, 1999 acquisition by UPC, has relied
completely on funding from its shareholder UPC and UPC's affiliates. However,
the Company believes it will not be able to obtain significant funding from UPC
in the foreseeable future. UPC has reviewed its funding requirements and
possible lack of access to debt and equity capital in the near term and has
modified its business and funding strategies.

On February 1, 2002, May 1, 2002 and August 1, 2002 UPC failed to make
required interest payments on its outstanding debt securities, which caused
events of default to occur on certain of the debt securities and loan agreements
of UPC and its affiliates, including Belmarken Holding B.V. ("Belmarken"). The
events of default continue to exist on UPC's outstanding debt securities as of
the date of filing of this Quarterly Report on Form 10-Q, although the holders
of such obligations have not yet accelerated the payment obligations of UPC and
its affiliates with respect to such securities. UPC, Belmarken and other UPC
affiliates have obtained waivers of the default on the other loan agreements.
These waiver expire on the earlier of (A) September 12, 2002 and (B) the
occurrence of certain events, none of which has occurred as of August 14, 2002.

41

UPC has entered into negotiations with UnitedGlobalCom, Inc. ("United"),
UPC's parent, and certain holders of UPC's debt securities to restructure
certain of the indebtedness of UPC and its affiliates.

On July 24, 2002, United and a committee representing certain holders of
UPC's debt securities announced an agreement in principle on the terms of debt
restructuring. The agreed debt restructuring is subject to approval of UPC's
supervisory board and other conditions. The Company cannot make any assurance
that UPC will be able to reach agreement with either United or the note holders
on mutually satisfactory definitive terms for the debt restructuring or when, or
if, any definitive restructuring agreement will actually be consummated. In
addition, even if a definitive restructuring agreement is entered into and
consummated, there can be no assurance that it will enable UPC to provide
financing to the Company in the future.

Although the Company had anticipated being able to rely on UPC to meet its
payment obligations, given UPC's liquidity concerns, the Company is not certain
that it will receive the necessary (or any) financing from UPC. If the Company
is unable to rely on UPC for financial support, it will have to meet its payment
obligations with cash on hand or with funds obtained from public or private debt
or bank financing or any combination thereof, subject to the restrictions
contained in the indentures governing the outstanding senior indebtedness of the
Company, UPC and United.

Moreover, if the Company's plans or assumptions change, if its assumptions
prove inaccurate, if it consummates investments in or acquisitions of other
companies, if it experiences unexpected costs or competitive pressures, or if
existing cash, and projected cash flow from operations prove to be insufficient,
the Company may need to obtain greater amounts of additional financing. While it
is the Company's intention to enter only into new financing or refinancing that
it considers advantageous, there can be no assurance that such sources of
financing would be available to the Company in the future, or, if available,
that they could be obtained on terms acceptable to the Company.

The Company has experienced net losses since its formation. As of
December 31, 2001, there was substantial uncertainty whether UPC Polska'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. UPC Polska's
ability to continue as a going concern is dependent on (i) the Company's ability
to restructure the UPC Polska Notes and its loans payable to UPC and its
affiliates and (ii) the Company's ability to generate the cash flows required to
enable it to maintain 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 former
independent accountant, Arthur Andersen Sp. z o.o., 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 and
negative cash flows from operations and has a negative working capital and a
shareholder's deficit that raises substantial doubt about the Company's ability
to continue as a going concern.

The management of the Company is currently evaluating various options of its
debt restructuring aimed to recapitalize the operations of the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

The principal market risk (i.e., the risk of loss arising from adverse
changes in market rates and prices) to which the Company is exposed is foreign
exchange rate risk from fluctuations in the Polish zloty currency exchange rate.
The Company revenues from subscribers are in Polish zloty, while its major costs
components are denominated in foreign currencies. In particular, the Company's
programming commitments are denominated in US dollars or Euros. Also the
Company's loans payable

42

to UPC and its affiliates as well as the UPC Polska Notes and PCI Notes are
expressed in the U.S. dollars.

The Company's long-term debt is primarily subject to a fixed rate, and
therefore the Company is neither materially benefited nor materially
disadvantaged by variations in interest rates.

FOREIGN EXCHANGE AND OTHER INTERNATIONAL MARKET RISKS

Operating in international markets involves exposure to movements in
currency exchange rates. Currency exchange rate movements typically affect
economic growth, inflation, interest rates, governmental actions and other
factors. These changes, if material, can cause the Company to adjust its
financing and operating strategies. The discussion of changes in currency
exchange rates below does not incorporate these other important economic
factors.

International operations constitute 100% of the Company's consolidated
operating loss for the three months ended June 30, 2002. Some of the Company's
operating expenses and capital expenditures are expected to continue to be
denominated in or indexed in U.S. dollars and Euros. By contrast, substantially
all of the Company's revenues are denominated in zloty. Therefore, any
devaluation of the Polish zloty against the U.S. dollar or Euro that the Company
is unable to offset through price adjustments will require it to use a large
portion of its revenue to service its U.S. dollar or Euro denominated
obligations and contractual commitments.

The Company estimates that a further 10% change in foreign exchange rates
would impact reported operating loss by approximately $1.4 million. In other
terms, a 10% depreciation of the Polish zloty against the U.S. dollar and Euro
would result in a $1.4 million increase in the reported operating loss. This was
estimated using 10% of the Company's operating losses after adjusting for
unusual impairment and other items, including U.S. dollar denominated or indexed
expenses. The Company believes that this quantitative measure has inherent
limitations because, as discussed in the first paragraph of this section, it
does not take into account any governmental actions or changes in either
customer purchasing patterns or the Company's financing or operating strategies.

The Company does not generally hedge foreign currency translation risk.
While the Company may consider entering into transactions to hedge the risk of
exchange rate fluctuations, there is no assurance that it will be able to obtain
hedging arrangements on commercially satisfactory terms. Therefore, shifts in
currency exchange rates may have an adverse effect on the Company's financial
results and on its ability to meet its U.S. dollar and Euro denominated debt
obligations and contractual commitments.

Poland has historically experienced high levels of inflation and significant
fluctuations in the exchange rate for the zloty, but since 1999 the inflation
has slowed. Inflation rates were approximately 7.3% in 1999, approximately 10.1%
in 2000 and approximately 5.5% in 2001. The rate of inflation for the six months
period ended June 30, 2002 was approximately 1.1%. The exchange rate for the
Polish zloty has stabilized and the rate of evaluation of the zloty has
generally decreased since 1991. For the years ended December 31, 2000 and 2001,
the Polish zloty has appreciated against the U.S. dollar by approximately 0.12%
and 3.80%, respectively. For the period of the six months ended June 30, 2002,
the Polish zloty has depreciated against the U.S. dollar by approximately 0.8%.
Inflation and currency

43

exchange fluctuations may have a material adverse effect on the business,
financial condition and results of operations of the Company.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company is subject to various claims and suits
arising out of the ordinary course of business. While the ultimate result of all
such matters is not presently determinable, based upon current knowledge and
facts, management does not expect that their resolution will have a material
adverse effect on the Company's consolidated financial position or results of
operations.

HBO LAWSUIT

Two of the Company's subsidiaries, Telewizja Kablowa Gosat-Service Sp. z
o.o. and PTK S.A., and four unrelated Polish cable operators and HBO Polska Sp.
z o.o. ("HBO Polska") were made defendants in a lawsuit instituted by Polska
Korporacja Telewizyjna Sp. z o.o., an indirect partially-owned subsidiary of
Canal+. The lawsuit was filed in the Provincial Court in Warsaw, XX Economic
Division (Sad Wojewodzki w Warszawie, Wydzial XX Gospodarczy) (the "Court"). The
main defendant in the proceedings is HBO Polska which is accused of broadcasting
HBO television programming in Poland without a license from the Polish National
Radio and Television Council as required by the Polish Television Act and
thereby undertaking an activity constituting an act of unfair competition. The
plaintiff has asked the Court to order HBO Polska to cease broadcasting of its
programming in Poland until it has received a broadcasting license from the
Polish National Radio and Television Council, and that the defendant cable
operators be ordered (i) to cease carrying the HBO Polska programming on their
cable networks in Poland until HBO Polska has received a broadcasting license
from the Polish National Radio and Television Council, (ii) not to use their
current filters for the purpose of unscrambling the HBO Polska programming, and
(iii) in the future, to use effective encoding systems and systems of controlled
access to the HBO Polska programming. The Company expects that the case will be
formally dismissed shortly as a settlement was reached by the parties on
July 31, 2002. In connection with this settlement PKT withdrew its claim on
August 7, 2002. The Company will not incur any material costs as a result of
this settlement.

44

HBO ARBITRATION

The Company is involved in a dispute against HBO Communications (UK) Ltd.,
Polska Programming B.V. and HBO Poland Partners concerning its cable carriage
agreement ("Cable Agreement") and its D-DTH carriage agreement ("D-DTH
Agreement") for the HBO premium movie channel. With respect to the Cable
Agreement, on April 25, 2002, the Company commenced an arbitration proceeding
before the International Chamber of Commerce, claiming that HBO was in breach of
the "most favored nations" clause thereunder ("MFN") by providing to other cable
operators in the relevant Territory terms that are more favorable than those
offered to the Company. Specifically, the Company contends that its "Service
Fee" under the Cable Agreement should not include any minimum guarantees because
such minimum guarantees are not required of other cable operators in the
Territory.

In its answer in the arbitration, HBO asserted counterclaims against the
Company, alleging that the Company was liable for minimum guarantees under the
Cable Agreement, and also that the Company was liable for an increase in minimum
guarantees under the D-DTH Agreement, based on the fact that the Company merged
its D-DTH business with Cyfra+ in December 2001. The Company responded to the
counterclaims by (i) denying that it owes any sums for minimum guarantees under
the Cable Agreement, in light of the MFN clause, and (ii) by denying that it
owes any sums for an increase in minimum guarantees under the D-DTH Agreement,
because it has not purchased an equity interest in HBO, a condition on which the
Company contends the increase in minimum guarantees is predicated under the
D-DTH Agreement. The Company intends to vigorously prosecute its claims and
defend against HBO's counterclaims. Given that the actual number of future cable
and D-DTH subscribers is unknown, the Company is unable to estimate the extent
of any financial impact, if any, on the Company should HBO prevail on its cable
and D-DTH counterclaims.

THE GROUPE JEAN-CLAUDE DARMON PROCEEDING AGAINST WIZJA TV SP. Z O.O.

On January 27, 2000, the Groupe Jean-Claude Darmon ("Darmon"), a French
company, commenced legal proceedings against Wizja TV Sp. z o.o., a former
subsidiary of the Company, and SPN Widzew SSA Sportowa Spolka Akcyjna ("Lodz
Football Club") in the Paris Commercial Court ("Tribundal de Commerce de
Paris"). UFA Sport has also been joined into this action as a further defendant.

Wizja TV Sp. z o.o. has been accused of infringing broadcast and advertising
rights which Darmon purports to hold. Darmon has accused Wizja TV Sp. z o.o. of
interrupting the broadcast signal of the UEFA Cup match on October 21, 1999
between Lodz Football Club and AS Monaco. Darmon seeks damages in the amount of
Euros 1,985,000 (approximately $1,961,500) from Wizja Sp. z o.o. The case has
been suspended indefinitely as UFA Sport, Sport+, the sport rights division of
Canal+ and Darmon merged to become a new sport rights agency. Whilst Wizja TV
Sp. z o.o. is no longer a subsidiary of the Company, the Company has provided a
full indemnity of any cost Wizja TV Sp. z o.o. may suffer as a consequence of
the action. The Company is unable to predict the outcome of this case.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS:

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

45

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibit Listing

None.

(b) Reports on Form 8-K

The Company filed the following Report on Form 8-K during the three months
ended June 30, 2002:

- Current Report on Form 8-K, filed on July 15, 2002, relating to the
dismissal of Arthur Andersen Sp. z o.o, its independent auditor, and
engagement of KPMG Polska Sp. z o.o. as its new auditor.

- Current Report on Form 8-K/A, filed on August 6, 2002, relating to the
dismissal of Arthur Andersen Sp. z o.o., its independent auditor, and
engagement of KPMG Polska Sp. z o.o. as its new auditor.

- Current Report on Form 8-K/A filed on April 19, 2002, relating to the
consummation of the merger with the Canal+ Group.

46

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

UPC POLSKA, INC.

By: /s/ SIMON BOYD
-----------------------------------------
Simon Boyd
President And Chief Executive Officer

DATE: August 14, 2002

CERTIFICATION

The undersigned Chief Executive Officer and Chief Financial Officer of the
Registrant hereby certify that this Report fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the
information contained in this Report fairly presents, in all material respects,
the financial condition and results of operations of the Registrant.

By: /s/ SIMON BOYD
-----------------------------------------
Simon Boyd
President And Chief Executive Officer

By: /s/ JOANNA NIECKARZ
-----------------------------------------
Joanna Nieckarz
Chief Financial Officer

DATE: August 14, 2002

47