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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

o 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

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

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 ý        No o

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

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

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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.

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

See accompanying notes to unaudited consolidated financial statements.

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

See accompanying notes to unaudited consolidated financial statements.

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

See accompanying notes to unaudited consolidated financial statements.

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UPC POLSKA, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002

1.    BASIS OF PRESENTATION; GENERAL

        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 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 September 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.

        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 telephones). 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; refining the channel line up to the interests of existing subscribers; improving the effectiveness of the Company's sales and marketing efforts; reducing churn (customer disconnects); and increasing rates aggressively on broadcast packages.

        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 and operational structure; and using local rather than expatriate employees in management, thereby reducing general and administrative costs.

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").

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        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 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 (approximately $26.0 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 fair market value as of the acquisition date (December 7, 2001) at 30.0 million Euros (approximately $26.8 as of December 31, 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 nine months ended September 30, 2002, the book value of this investment was zero as of September 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 a 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 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 14¹/2% Senior Discount Notes due 2008, Series C Discount Notes due 2008 and 14¹/2% 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.

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        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. The Company is still evaluating how to use the remaining part of the net cash proceeds from the Canal+ merger (of approximately $75.7 million as of September 30, 2002). At the date of the filing of this Quarterly Report on Form 10-Q the Company has not made a final decision on how it will use such funds.

        During the nine months ended September 30, 2002, the Company used its net cash proceeds from the Twoj Styl assets sale ($7.0 million) to repay part of an unsubordinated promissory note in principal amount of $7.0 million owed to Reece Communications, Inc. ("RCI"), a former minority stockholder of a subsidiary of the Company, Poland Cablevision (Netherlands) B.V ("PCBV"). During the nine months ended September 30, 2002 the Company used the net cash proceeds from the Canal+ merger to repay part of an unsubordinated promissory note in principal amount of $4.0 million owed to RCI and for further development of the cable television and internet network of $3.2 million.

        The following unaudited pro forma information for the three and nine months ended September 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. Due to the large capital investment required for the construction or acquisition of the cable networks, acquisition of programming rights and the administrative costs associated with commencing operations, the Company has incurred substantial operating losses since inception.

        During 2001, the Company reviewed its long term plan for all segments of its operations and identified businesses which were profitable on an operating profit 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 resulted in a determination that as of that point, the Company's only profitable business on an operating profit 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 has positive

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EBITDA (EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization and, as used by the Company, is defined in Note 12) and positive cash flow from operations in 2002.

        As of September 30, 2002, the Company had negative working capital of $375.1 million and a stockholder's deficit of $340.3 million. The Company experienced operating losses of $3.6 million and $12.7 million for the three and nine months ended September 30, 2002 as compared to $47.5 million and $141.4 million for the three and nine month periods ended September 30, 2001, respectively. It also has significant commitments under operating leases and programming rights, as well as repayment obligations related its short and long term debt.

        As of September 30, 2002, the Company had approximately $6.0 million in outstanding notes payable to RCI, a former minority stockholder of PCBV. The note bears interest of 7% per annum and matures in August 2003. 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 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 be required to fulfill its repayment obligation of approximately $14.5 million in principal amount under the 9⁷/8% Senior Notes due 2003 (the "PCI Notes") of UPC Polska's subsidiary, Poland Communications, Inc. ("PCI"). At December 31, 2002 the PCI Notes will be classified as a short-term liability. The Company will also 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. At September 30, 2002, the unpaid interest owing to UPC and its affiliate aggregated to $35.6 million. In prior years UPC and its affiliate have permitted the Company to defer the payment of interest due. As of the date of filing of this Quarterly Report on Form 10-Q, UPC and its affiliate have agreed to permit such deferral until March 31, 2003. The Company, however, has no assurances that UPC and its affiliate will permit such deferral going forward.

        Over the long term, the Company must meet substantive repayment obligations on its indebtedness, including approximately $430.2 million under the UPC Polska Notes, $14.5 million under the PCI Notes and $452.5 million due to UPC and its affiliates and related interest.

        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, August 1, 2002 and November 1, 2002 UPC failed to make required interest payments on its outstanding debt securities, which caused potential cross defaults on certain other 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 with respect to such securities. UPC and its affiliates have obtained waivers to the potential cross defaults on their other debt securities and loan agreements, which are subject to certain conditions.

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        On September 30, 2002, UPC announced that it had entered into a restructuring agreement with its parent company, UnitedGlobalCom, Inc. ("United"), certain affiliates of United and certain holders of UPC's outstanding debt securities. The restructuring agreement contains:

•

a plan for the restructuring of UPC's debt and equity capital and the filing by UPC of a voluntary case under Chapter 11 of the United States Bankruptcy Code and a voluntary provisional moratorium petition and plan of compulsory composition (Akkoord) under the Dutch Bankruptcy Code, and



•

an agreement by the security holders to forbear from exercising rights and remedies relating to the defaults while the restructuring agreement remains in effect.

        The restructuring agreement may be terminated for a variety of reasons, including UPC's failure to make bankruptcy filings by December 31, 2002 or the lapse of a period of nine months from the date the bankruptcy filings are made. To the Company's knowledge none of the termination events has occurred as of the date of the filing of this Quarterly Report on Form 10-Q.

        On September 30, 2002, UPC also announced that it had received an extended waiver to its principal loan agreement. The extended waiver expires on the earlier of (A) March 31, 2003 or (B) the occurrence of certain events, none of which, to the knowledge of the Company, has occurred as of the date of the filing of this Quarterly Report on Form 10-Q.

        Consummation of the restructuring contemplated by the UPC's restructuring agreement is subject to various conditions. The Company cannot make any assurance that these conditions will be satisfied or that the restructuring will be consummated. In addition, even if the restructuring agreement is consummated, there can be no assurance that UPC will be able 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 and, if applicable, UPC and United.

        The Company has approximately $107.1 million of unrestricted cash as of September 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 $75.7 million as of September 30, 2002 of this unrestricted cash, which represents the remaining net cash proceeds of the Canal+ merger and funds utilized to date in accordance with the indentures. 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. 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

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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 potential cross defaults exist under the Company's loans owing to UPC and Belmarken as a result of the potential defaults under the Belmarken Notes and the default under the RCI note, these potential 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 earlier of (A) March 31, 2003 or (B) the occurrence of certain events, none of which, to the knowledge of the Company, has occurred as of the date of the filing of this Quarterly Report on Form 10-Q, 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 affiliate ceases to allow deferral of interest payments or 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 UPC Polska Notes were accelerated as a result of such a cross acceleration or another event of default, the Company would have limited funds or available borrowings to repay these notes. In any such circumstances 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 borrowings needed to repay such amounts at all, or on terms that will be favorable to the Company.

        Moreover, if the Company's plans or assumptions change, if its assumptions prove inaccurate, 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 affiliate and (ii) the Company's ability to generate the cash flows required to enable it to recover the Company's assets and satisfy the Company's liabilities, in the normal course of business, at the amounts stated in the consolidated financial statements. The report of the Company's 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 shareholder's deficit that raises substantial doubt about the Company's ability to continue as a going

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concern. The Company's management is currently evaluating various debt restructuring options aimed at recapitalizing the Company.

        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 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, providing for UPC to acquire (the "Acquisition") 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. 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 revalued all of its previously existing goodwill, including amounts related to non-compete agreements that related to transactions completed prior to Acquisition, and 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 former 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 a substantial cumulative effect adjustment may be required as a result of this process. As of September 30, 2002 net goodwill of approximately $350.6 million is included in the accompanying consolidated balance sheet. The consolidated statements of operations for the three and nine months ended September 30, 2002 do not include any goodwill amortization expense. For the three and nine months ended September 30, 2001, the consolidated statement of operations included such amortization expense of approximately $15.5 million and $47.6 million, respectively.

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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 $75.7 million of the cash and cash equivalents.

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 investment in affiliates and revenue recognition.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

        The allowance for doubtful accounts is based upon the Company's assessment of probable loss related to 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 September 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.

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        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.

        Income tax for other foreign companies is calculated in accordance with tax regulations in effect in the respective countries. Due to differences between accounting practices under Polish and other foreign 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 nine months s ended September 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:

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 systems. 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

15

completed prior to the Acquisition. The goodwill that was pushed down to the Company was amortized on a 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, the goodwill of the reporting unit is not considered to be 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 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 September 30, 2002, net goodwill of approximately $350.6 million is included in the accompanying consolidated balance sheets. The consolidated statement of operations for the three and nine months ended September 30, 2002 does not include any goodwill amortization expense. For the three and nine months ended September 30, 2001, the consolidated statement of operations included such amortization expense of approximately $15.5 million and $47.6 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 generally 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 required to be adopted July 1, 2001. SFAS 141 requires the

16

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 minority interests in TKP and PCBV on December 7, 2001 and August 28, 2001, respectively.

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%, 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 September 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 September 30, 2002 as a result of TKP losses. In addition, the Company will review the carrying value of its investment in FKP in the last quarter of 2002 when audited financial statements of FKP are received.

STOCK-BASED COMPENSATION

        The Company has adopted the disclosure-only provisions 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 the 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 the 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.

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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 September 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 September 30, 2002 and December 31, 2001, the fair value of the Company's notes payable balance approximated $38,443,000 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 due to 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 long-lived assets (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 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") 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.

ADVERTISING COSTS

        All advertising costs of the Company are expensed as incurred. The Company incurred advertising costs of approximately $151,000 and $1,160,000 for the three and the nine months ended September 30, 2002 (including $36,000 and $179,000 in respect of internet operations, respectively) and $1,122,000 and $4,393,000 for the three and the nine months ended September 30, 2001.

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6.    NEW ACCOUNTING STANDARDS

        In July 2001, the Financial Accounting Standards Board issued SFAS 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 minority interests 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, the goodwill of the reporting unit is not considered to be 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 September 30, 2002, net goodwill of approximately $350.6 million is included in the accompanying consolidated balance sheets. The consolidated statement of operations for the three and nine months ended September 30, 2002 does not include any goodwill amortization expense. For the three and nine months ended September 30, 2001, the consolidated statement of operations included such amortization expense of approximately $15.5 million and $47.6 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 June 15, 2002. The Company does not anticipate that the adoption of SFAS 143 will have a material impact on its 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 Assts ("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 its financial position and results of operations. The Company expects it will have its SFAS 144 evaluation completed during the fourth quarter of 2002. At this point, management believes that the adoption of SFAS 144 could result in material adjustments to its long-lived assets and its statement of operations during 2002.

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        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. 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.

CALL CENTER AND IT REVENUE

        During 2002 the Company provided certain call center services to Telewizyjna Korporacja Partycypacyjna S.A. ("TKP") in connection with Canal + merger transaction. The total revenue from these services amounted to zero and $1,856,000 for the three and the nine months ended September 30, 2002, respectively.

        Additionally, during the nine month period ended September 30, 2002, the Company has provided to TKP certain IT services for D-DTH subscriber data migration to TKP's DTH platform. The total revenue from these services amounted to $26,000 and $247,000 for the three and the nine months ended September 30, 2002, respectively.

        These revenues were generated primarily in first half of 2002 and the Company does not expect that any additional services will be provided to TKP to generate such revenue for the remainder 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 $129,000 and $410,000 for the three and the nine months ended September 30, 2002,

20

respectively. 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 $896,000 and $2,367,000 for the three and the nine months ended September 30, 2002, respectively, as compared to $1,944,000 and $4,907,000 for the three and the nine months ended September 30, 2001, respectively.

        The Company was also provided with Canal+ Multiplex programming by TKP. The total cost related to this service amounted to $170,000 and $338,000 for the three and the nine months ended September 30, 2002. There were no such costs in the three and the nine months ended September 30, 2001.

        The Company has incurred direct costs related to internet services from its affiliates amounting to $413,000 and $1,113,000 for the three and the nine months ended September 30, 2002, respectively, as compared to $298,000 and $1,315,000 for the three and the nine months ended September 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 nine months ended September 30, 2002 UPC charged the Company with $1,521,000 and $4,263,000, respectively, as compared to $2,596,000 and $7,787,000 for the three and the nine months ended September 30, 2001, respectively, for those services. The above charges are reflected as a component of selling, general and administration expenses in the consolidated statements of operations.

INTEREST EXPENSE

        During the three and the nine months ended September 30, 2002, the Company incurred interest expense in relation to the loans payable to UPC and its affiliates of $11,720,000 and $35,559,000 as compared to $11,081,000 and $32,898,000 for the three and the nine months ended September 30, 2001, respectively.

NOTES PAYABLE TO UPC AND ITS AFFILATES

        The Company was indebted to UPC and its affiliate in the following amounts.

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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 nine months ended September 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 September 30, 2002 are $622,000 in 2002, $1,428,000 in 2003, $1,304,000 in 2004, $1,297,000 in 2005 and $516,000 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 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 $1,097,000 as of September 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 (guaranteed minimum) payable at the time of execution or based upon an actual number of subscribers connected to the system each month. As of September 30, 2002, the Company had an aggregate minimum commitment in relation to fixed obligations resulting from these agreements of approximately $62,457,000 over the next sixteen years, approximating $1,204,000 in 2002, $4,791,000 in 2003, $4,974,000 in 2004, $3,063,000 in 2005, zero in 2006 and $48,425,000 in aggregate for all years after 2006. In addition the Company has a variable

22

obligation in relation to these agreements, which is based on the actual number of subscribers in the month for which the fee is due.

        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 September 30, 2002, management estimates its potential exposure under these assigned contracts to be approximately $50.7 million.

REGULATORY FRAMEWORK

        The Company is in possession of all valid telecommunication permits, a considerable number of which were issued in 2001 for a 10 year period. If there is a necessity of renewal, the Company applies to the President of the Office for Telecommunications and Post Regulation ("URTiP"). Historically, the Company has not experienced difficulties in obtaining such renewals and believes it will continue to receive such renewals in the normal course of business.

        The Polish Parliament voted on October 28, 2002 to remove the statutory license from the copyright law effective January 1, 2003, subject to formal signature by the President of Poland. The full effect of this potential change is unclear however it may result in an obligation for cable operators to have all agreements with broadcaster and copyright associations in place by January 1, 2003. Its effects on the copyright fees paid by cable operators is also uncertain as a new copyright law, currently under review, is due to be passed in 2003.

        The statutory license has been used so far by all cable operators in Poland to retransmit domestic and foreign free-to-air (FTA) channels without formal agreements with the broadcasters, primarily Polish channels (TVP, Polsat, TVN) and a number of foreign FTAs (e.g. German channels).

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 ARBITRATION

        The Company is involved in a dispute with 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 programming to other cable operators in the relevant Territory on 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

23

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 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 D-DTH counterclaim.

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 ("Tribunal 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.

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        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 the same or a similar name reported by other companies. Not all companies and analysts calculate EBITDA in the same manner.

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

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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 taxation;



•

risks associated with new copyrights law (which is expected to be enacted in the near term)



•

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 and ability to restructure its outstanding indebtedness;



•

the overall market acceptance of the 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

27

•

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 Group Canal+ S.A. ("Canal+ merger") and the Company's limited ability to liquidate its investment in TKP.

        The report of the Company's 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 flow from operations and has negative working capital and shareholder's deficit that raise 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 1,865,800 homes passed and approximately 986,400 total subscribers. The Company's overall revenue has decreased $15.5 million or 45.2% from $34.3 million for the three months ended September 30, 2001 to $18.8 million for the three months ended September 30, 2002 and $48.1 million or 44.7% from $107.6 million for the nine months ended September 30, 2001 to $59.5 million for the nine months ended September 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 remained at a similar level of $18.6 million for the three months ended September 30, 2001 and 2002 but increased $1.2 million or 2.1% from $57.5 million for the nine months ended September 30, 2001 to $58.7 million for the nine months ended September 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;

•

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

•

refining the channel line up available on its cable network;

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•

improving the effectiveness of the Company's sales and marketing efforts;

•

reducing churn (customer disconnects); and

•

increasing rates aggressively on the Company's broadcast package.

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

•

enhancing internal controls;

•

improving debt collection activities;

•

improving corporate decision-making processes;

•

reorganizing the Company so as to simplify its legal and operational 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 September 30, 2002, approximately 62.2% of the Company's subscribers received its basic package. The individual subscriber receiving basic package is charged, in average, a monthly subscription fee of $9.90 (including 22% VAT). For the nine months ended September 30, 2002, approximately 94.5% of the Company's revenue was derived from monthly subscription fees. For the nine months ended September 30, 2001, 97.7% 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 invest in development of this service, it intends to expand its internet service offering in the future. Revenue of $1.0 million and $2.8 million for the three and the nine months ended September 30, 2002 as compared to $0.4 million and $0.9 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 $43.20 and $53.50, respectively, for internet and cable TV services combined (rates as of September 30, 2002, including 7% VAT on internet service part). The standard installation fee is approximately $59.00 for existing cable customers and approximately $71.10 for new customers (rates as of September 30, 2002, including 22% VAT). However, the Company frequently offers promotional installation fee at the nominal price of approximately $0.20.

        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 and Wizja Sport (from March 2001 until December 2001 Wizja Sport was included in the basic service package but in December 2001 Wizja Sport ceased 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 a definitive long-form channel carriage agreement for distribution of Canal+ Multiplex. The Company offers HBO Poland and Canal+ Multiplex for approximately $8.40 and $9.40 per month, respectively (rates as of September 30, 2002, including 22% VAT). The Company also offers these channels as a package at approximately $14.20 per month (rates as of September 30, 2002, including 22% VAT).

        The Company divides operating expenses into:

•

direct operating expenses,



•

selling, general and administrative expenses, and



•

depreciation and amortization expenses.

29

        During the nine months ended September 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 consist 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. For a detailed discussion on the application of critical accounting policies 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.

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. 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 a same or similar name reported by other companies. Not all companies and analysts calculate EBITDA in the same manner.

30

SEGMENT RESULTS OF OPERATIONS
(UNAUDITED IN THOUSAND 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 and nine months ended September 30, 2001.

        REVENUE. Revenue decreased $15.5 million, or 45.2%, from $34.3 million in the three months ended September 30, 2001 to $18.8 million in the three months ended September 30, 2002 and decreased $48.1 million, or 44.7%, from $107.6 million in the nine months ended September 30, 2001 to $59.5 million in the nine months ended September 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 have remained at a similar level of $18.6 million for the three months ended September 30, 2001 and 2002 but increased by $1.2 million, or 2.1%, from $57.5 million to $58.7 million in the nine months ended September 30, 2001 and 2002, respectively. This increase was attributable to a number of factors. Revenue from internet subscriptions increased from $0.4 million for the three months ended September 30, 2001 to $1.0 million for the three months ended September 30, 2002 and from $0.9 million for the nine months ended September 30, 2001 to $2.8 million for the nine months ended September 30, 2002. This increase was partially offset by a decrease in the number of basic subscribers. In addition, during the nine months ended September 30, 2002, the Company obtained revenue of $2.1 million from certain call center services such as billing and subscriber support and IT services, provided to TKP. There were no such revenues generated during 2001 and the Company does not expect that any additional services will be provided to TKP to generate such revenue for the remainder of 2002.

31

        Revenue from monthly subscription fees represented 94.5% and 97.7% of cable television revenue for the nine months ended September 30, 2002 and 2001, respectively. During the three and the nine months ended September 30, 2002, the Company generated approximately $0.9 million and $2.8 million, respectively, of premium subscription revenue as a result of providing the HBO Poland movie channel and the Canal+ Multiplex channels to cable subscribers as compared to $1.0 million and $3.3 million for the three and the nine months ended September 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 in December 2001 it was discontinued. Therefore Wizja Sport did not generate premium revenue after April 2001.

        Revenue from installation fees amounted to $105,000 and $266,000 for the three and nine months ended September 30, 2002 as compared to $136,000 and $566,000 for the three and nine months ended September 30, 2001, respectively.

        DIRECT OPERATING EXPENSES. Direct operating expenses decreased $14.6 million, or 59.6%, from $24.5 million for the three months ended September 30, 2001 to $9.9 million for the three months ended September 30, 2002 and decreased $54.9 million, or 64.2%, from $85.5 million for the nine months ended September 30, 2001 to $30.6 million for the nine months ended September 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 $1.9 million, or 16.1%, from $11.8 million for the three months ended September 30, 2001 to $9.9 million for the three months ended September 30, 2002 and decreased $6.3 million, or 17.1%, from $36.9 million for the nine months ended September 30, 2001 to $30.6 million for the nine months ended September 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 71.4% of revenues for the three months ended September 30, 2001 to 52.7% of revenues for the three months ended September 30, 2002 and decreased from 79.5% of revenues for the nine months ended September 30, 2001 to 51.4% of revenues for the nine months ended September 30, 2002. Direct operating expenses relating to cable operations decreased from 63.4% of revenues for the three months ended September 30, 2001 to 53.2% of revenues for the three months ended September 30, 2002 and decreased from 64.2% of revenues for the nine months ended September 30, 2001 to 52.1% of revenues for the nine months ended September 30, 2002. The decreases in direct operating expenses as a percentage of revenues in such periods occurred primarily for the same reasons that resulted in the decreases in direct operating expenses during such periods.

        SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased $10.5 million, or 66.0%, from $15.9 million for the three months ended September 30, 2001 to $5.4 million for the three months ended September 30, 2002 and decreased $27.9 million, or 58.5%, from $47.7 million for the nine months ended September 30, 2001 to $19.8 million for the nine months ended September 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 decreased $3.4 million, or 49.3%, from $6.9 million for the three months ended September 30, 2001 to $3.5 million for the three months ended September 30, 2002 and decreased $5.0 million, or 26.9%, from $18.6 million for the nine months ended September 30, 2001 to $13.6 million for the nine months ended September 30, 2002. This decrease was attributable mainly to a decrease in bad debt expense (of approximately $2.1 million) and improved operating efficiency.

32

        As a percentage of revenue, overall, selling, general and administrative expenses decreased from 46.4% for the three months ended September 30, 2001 to approximately 28.7% for the three months ended September 30, 2002 and decreased from 44.3% for the nine months ended September 30, 2001 to approximately 33.3% for the nine months ended September 30, 2002. As a percentage of cable operations revenue, selling, general and administrative expenses relating to cable operations decreased from 37.1% for the three months ended September 30, 2001 to approximately 18.8% for the three months ended September 30, 2002 and decreased from 32.3% for the nine months ended September 30, 2001 to approximately 23.2% for the nine months ended September 30, 2002. The decreases in selling, general and administrative expenses as a percentage of revenues in such periods occurred primarily for the same reasons that resulted in the decreases in selling, general and administrative expenses during such periods

        DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense decreased $24.1 million, or 77.2%, from $31.2 million for the three months ended September 30, 2001 to $7.1 million for the three months ended September 30, 2002 and decreased $74.6 million, or 77.5%, from $96.3 million for the nine months ended September 30, 2001 to $21.7 million for the nine months ended September 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 91.0% for the three months ended September 30, 2001 to 37.8% for the three months ended September 30, 2002 and decreased from 89.5% for the nine months ended September 30, 2001 to 36.5% for the nine months ended September 30, 2002.

        Depreciation and amortization expense relating to cable operations decreased $5.5 million, or 43.7%, from $12.6 million for the three months ended September 30, 2001 to $7.1 million for the three months ended September 30, 2002 and decreased $18.4 million, or 46.1%, from $39.9 million for the nine months ended September 30, 2001 to $21.5 million for the nine months ended September 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 67.7% for the three months ended September 30, 2001 to 38.2% for the three months ended September 30, 2002 and decreased from 69.4% for the nine months ended September 30, 2001 to 36.6% for the nine months ended September 30, 2002, principally for the same reasons that resulted in the decrease in depreciation and amortization expense in such periods.

        OPERATING LOSS. Each of the factors discussed above contributed to operating losses of $3.6 million and $12.7 million for the three and the nine months ended September 30, 2002, respectively, compared to operating losses of $47.5 million and $141.4 million for the three and the nine months ended September 30, 2001, respectively.

        Operating losses relating to cable operations amounted to $1.9 million and $7.0 million for the three and nine months ended September 30, 2002, respectively, as compared to $12.6 million and $37.9 million for the three and the nine months ended September 30, 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.

33

•

Intermediate service generally does not require programming charges (mainly 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 guarantee 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 and continues in 2002 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 (and in December 2001 it was discontinued), resulting in higher programming costs to the Company since the channel was made available to a larger group of subscribers.



•

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 THIRD PARTY. Interest expense increased $1.9 million, or 14.6%, from $13.0 million for the three months ended September 30, 2001 to $14.9 million for the three months ended September 30, 2002 and increased $5.7 million, or 15.2%, from $37.5 million for the nine months ended September 30, 2001 to $43.2 million for the nine months ended September 30, 2002. These interest expense relates mainly to interest accrued on the Company's 14¹/2% Senior Discount Notes due 2008, Series C Discount Notes due 2008 and 14¹/2% Senior Discount Notes due 2009 (together, the "UPC Polska Notes") and 9⁷/8% Senior Notes due 2003 (the "PCI Notes") of UPC Polska's subsidiary, Poland Communications, Inc. ("PCI"). The increase in interest expense occurred due to accretion of the principal of the notes.

        INTEREST EXPENSE CHARGED BY UPC AND ITS AFFILIATES. Interest expense increased $0.6 million, or 5.4%, from $11.1 million for the three months ended September 30, 2001 to $11.7 million for the three months ended September 30, 2002 and increased $2.7 million, or 8.2%, from $32.9 million for the nine months ended September 30, 2001 to $35.6 million for the nine months ended September 30, 2002. The increase in interest expense occurred 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 $0.9 million and $0.3 million for the three months ended September 30, 2002 and 2001, respectively and $2.4 million and $0.8 million for the nine months ended September 30, 2002 and 2001, respectively. The increase for the nine month periods relates to interest on bank deposits.

        EQUITY IN LOSSES OF AFFILIATED COMPANIES. The Company recorded zero and $18.4 million of equity in losses of affiliated companies for the three and the nine months ended September 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 September 30, 2002. In addition, the Company will review the carrying value of its investment in Fox Kids Polska ("FKP") by the end of 2002 and record any necessary adjustment, once FKP audited financial statements are received.

        FOREIGN EXCHANGE GAIN/LOSS, NET. For the three months ended September 30, 2002, foreign exchange gains amounted to $0.3 million, as compared to the loss of $8.7 million for the three months ended September 30, 2001. For the nine months ended September 30, 2002, foreign exchange

34

gains amounted to $7.4 million, as compared to the loss of $3.1 million for the nine months ended September 30, 2001. These gains were attributable to the significant depreciation of the U.S. dollar against the Euro during second and third quarter of 2002 (the majority of the Company's cash deposits were held in Euros until July 2002 when they were converted into U.S. dollars). These foreign exchange gains were partially offset by the depreciation of the Polish zloty against the U.S. dollar during the nine months ended September 30, 2002 as compared to Polish zloty appreciation against the U.S. dollar during the first and second quarter of 2001 and significant depreciation during the third quarter of 2001.

        INCOME TAX EXPENSE. The Company recorded $5,000 and $94,000 of income tax expense for the three and the nine months ended September 30, 2002, as compared to $79,000 and $162,000 for the three and the nine months ended September 30, 2001.

        NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common stockholders decreased from a loss of $82.2 million for the three months ended September 30, 2001 to a loss of $29.6 million for the three months ended September 30, 2002 and decreased from a loss of $215.8 million for the nine months ended September 30, 2001 to a loss of $101.2 million for the nine months ended September 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 14¹/2% 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 $256.8 million aggregate principal amount at maturity of its 14¹/2% 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 UPC Polska Notes and PCI Notes the Company and its affiliates 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.

35

        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") the UPC Polska Notes, Series C Notes, Discount Notes and the PCI Notes. The Offers expired on November 2, 1999.

        In accordance with the terms of the indentures governing the UPC Polska Notes 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 are 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 and third quarters 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 September 30, 2002 and December 31, 2001, the Company had, on a consolidated basis, approximately $903.3 million and $865.6 million respectively, aggregate principal amount of indebtedness outstanding, of which $452.5 million (including $35.6 million of accrued interest for nine months ended September 30, 2002) and $444.5 million (including $44.3 million of capitalized interest for 2001), 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. The loans from UPC include loans with an aggregate principal amount of $150.0 million that 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 positive cash flows from operating activities of $10.4 million for the nine months ended September 30, 2002 and negative cash flows from operating activities of $35.1 million for

36

the nine months ended September 30, 2001, primarily due to repayments of its creditors and foreign exchange gain on conversion of a Euro denominated cash balance into U.S. dollars. As of September 30, 2002, the Company had negative working capital of $375.1 million and a stockholder's deficit of $340.3 million. The Company experienced operating losses of $12.7 million and $141.4 million during the nine months ended September 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 $3.2 million for the nine months ended September 30, 2002 and $46.0 million for the nine months ended September 30, 2001. Cash used for the purchase and expansion of the Company's cable television networks was $3.2 million and $9.0 million for the nine months ended September 30, 2002 and 2001, respectively.

        The Company has approximately $107.1 million of cash as of September 30, 2002, of which $75.7 million has limitations imposed by the Company's indentures. The $75.7 million represents the remaining net cash proceeds from the Canal+ merger. During the nine months ended September 30, 2002, the Company used its net cash proceeds from the Twoj Styl assets sale ($7.0 million) to repay part of an unsubordinated promissory note in principal amount of $7.0 million owed to Reece Communications, Inc. ("RCI"), a former minority stockholder of a subsidiary of the Company, Poland Cablevision (Netherlands) B.V. ("PCBV"). During the nine months ended September 30, 2002 the Company used its net cash proceeds from the Canal+ merger to repay part of an unsubordinated promissory note in principal amount of $4.0 million owed to RCI and for further development of the cable television and internet network of $3.2 million. The Company is still evaluating how to use the remaining part of the net cash proceeds from the Canal+ merger (of approximately $75.7 million as of September 30, 2002) prior to December 7, 2002, the date 12 months from the Canal+ merger. At the date of the filing of this Quarterly Report on Form 10-Q the Company has not made a final decision on how it will use such funds.

        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.

        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.

        On September 30, 2002, the Company was committed to pay at least $69.0 million in guaranteed payments (including but not limited to payments for programming and rights) over the next sixteen years of which at least approximately $2.6 million was committed through the end of 2002. In addition, the Company has a variable obligation in relation to programming agreements, which is based on an actual number of subscribers in the month for which the fee is due. 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

37

September 30, 2002, management estimates the potential exposure for contingent liability on these assumed contracts to be approximately $50.7 million.

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

        As of September 30, 2002, the Company had negative working capital, due to the classification of loans to UPC and its affiliates as current liabilities. As of September 30, 2002, the Company had approximately $6.0 million in outstanding notes payable to RCI, a former minority stockholder of PCBV. The note bears interest of 7% per annum and matures in August 2003. 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. At December 31, 2002 the PCI Notes will be classified as a short-term liability. 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. At September 30, 2002, the unpaid interest owing to UPC and its affiliate aggregated to $35.6 million. In prior years UPC and its affiliate have permitted the Company to defer payment of interest due to UPC and its affiliate. As of the date of filing of this Quarterly Report on Form 10-Q, UPC and its affiliate have agreed to permit such deferral until March 31, 2003. The Company, however, has no assurances that UPC and its affiliate will permit such deferral going forward.

        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 Holding B.V. ("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 potential cross defaults exist under the Company's loans owing to UPC and Belmarken as a result of the potential

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defaults under the Belmarken Notes and the default under the RCI note, these potential cross 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 earlier of (A) March 31, 2003 or (B) the occurrence of certain events, none of which, to the knowledge of the Company, has occurred as of the date of the filing of this Quarterly Report on Form 10-Q, 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 affiliate ceases to allow deferral of interest payments or 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 UPC Polska Notes were accelerated as a result of such a cross acceleration or another event of default, the Company would have limited funds or available borrowings to repay these notes. In any such circumstances 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 borrowings needed to repay such amounts 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 the date of filing of 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 $444.7 million have been reflected as long-term liabilities in the Company's financial statements as of September 30, 2002.

        Over the long term, the Company must meet substantive repayment obligations on its indebtedness, including approximately $430.2 million under the UPC Polska Notes, $14.5 million under the PCI Notes and $452.5 million due to UPC and its affiliates and related interest as summarized in the table below:

        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.

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        On February 1, 2002, May 1, 2002, August 1, 2002 and November 1, 2002 UPC failed to make required interest payments on its outstanding debt securities, which caused potential cross defaults on certain other debt securities and loan agreements of UPC and its affiliates, including the Belmarken Notes. 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 with respect to such securities. UPC and its affiliates have obtained waivers to the potential cross defaults on their other debt securities and loan agreements, which are subject to certain conditions.

        On September 30, 2002, UPC announced that it had entered into a restructuring agreement with its parent company, UnitedGlobalCom, Inc. ("United"), certain affiliates of United and certain holders of UPC's outstanding debt securities. The restructuring agreement contains:

•

a plan for the restructuring of UPC's debt and equity capital and the filing by UPC of a voluntary case under Chapter 11 of the United States Bankruptcy Code and a voluntary provisional moratorium petition and plan of compulsory composition (Akkoord) under the Dutch Bankruptcy Code, and



•

an agreement by the security holders to forbear from exercising rights and remedies relating to the defaults while the restructuring agreement remains in effect.

The restructuring agreement may be terminated for a variety of reasons, including UPC's failure to make bankruptcy filings by December 31, 2002 or the lapse of a period of nine months from the date the bankruptcy filings are made. To the Company's knowledge none of the termination events has occurred as of the date of the filing of this Quarterly Report on Form 10-Q.

        On September 30, 2002, UPC also announced that it had received an extended waiver to its principal loan agreement. The extended waiver expires on the earlier of (A) March 31, 2003 or (B) the occurrence of certain events, none of which, to the knowledge of the Company, has occurred as of the date of the filing of this Quarterly Report on Form 10-Q.

        Consummation of the restructuring contemplated by the UPC's restructuring agreement is subject to various conditions. The Company cannot make any assurance that these conditions will be satisfied or that the restructuring will be consummated. In addition, even if the restructuring agreement is consummated, there can be no assurance that UPC will be able 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 and, if applicable, UPC and United.

        Moreover, if the Company's plans or assumptions change, if its assumptions prove inaccurate, 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

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